Hello, everyone. Welcome to Compal's Q2 2024 result call. I'm UBS Tech Analyst Grace Chen. It is a pleasure to invite Compal's top management to join today's call. Now let's welcome the speakers from Compal, including Compal's new CEO, Mr. Tony Bonadero, CFO and spokesperson, Mr. Jack Wang, and also IR director, Ms. Tina Chang. We will first invite Tina to do a presentation on Compal's Q2 results and the business outlook, and then we'll invite Tony to join us in the Q&A session. Now let's welcome Tina. Tina, please go ahead. Thank you.
Thank you, Grace. Thank you everyone joining today's call. This is Compal IR, Tina. Now I will present the financial results, and then follow with the business outlook guidance. Firstly, please look at our presentation page two, the safe harbor notice for today's call. Please be noted. Now we turn to presentation page four. Compal's second quarter revenue were TWD 237.2 billion, grew 19% quarter-over-quarter, but declined 3% year-over-year. The sequential growth of the revenue was driven by the increase of both notebook PC and the non-PC business, including smartphones, wearables, and the servers, all delivered the sequential growth. Second quarter product mix for PC and non-PC was 73% and 27%, stayed at a similar level as Q1.
Compared to a year ago, n on-PC revenue contribution a little bit declined. The reason why is that company shifting the focus to be more enhanced on the product mix, so we are reducing the low profit non-PC products. Now we turn to next page for the income statement. Second quarter, given the company's continued efforts on product portfolio enhancement, efficiency improved and expenses control. Compal's second quarter gross margin further increased to 5% and operating margin improved to 1.7%, both increased quarter-over-quarter and year-over-year. After the non-operating items and the income tax, net income to the parent company in second quarter were TWD 2.88 billion, up 52% compared to Q1 and up 38% compared to last year Q2. This is all mainly driven by the operating line.
Now we turn to next page on the first half performance. You can see that despite the top line contracted over 4%, the company's profit focus strategy lead to the operating profits increased by 38% year-over-year, and the net income to the parent company increased by 37% year-over-year. First half, the EPS is about TWD 1.1 compared to TWD 0.8 a year ago. Now we look at the non-operating breakdown. Second quarter, the company recognized the higher investment gains at TWD 108 million is mainly contributed by the dividend incomes, largely offset the forex losses in the second quarter to make up the total non-operating gains of TWD 186 million in second quarter, slightly improved quarter-over-quarter compared to Q1.
Now next page on balance sheet. At the end of the second quarter, the company's total cash and the cash equivalent were TWD 86.6 billion, stayed at a healthy level and accounts for 19% of the company total assets. For the working capital, the company managed to further reduce the inventory level in Q2, both for the finished goods as well as for the raw material components. Inventory days reduced to 35 days compared to 49 days in Q1 and 40 days a year ago. Therefore, the total CCC, cash conversion cycle, days further shortened to 50 days in Q2. For the liability ratio, we stayed at 70%, the stable level, and the book value per share in second quarter increased to TWD 28.7. Okay, that's the presentation for the financial result. Now let's talk about the business outlook guidance.
Firstly, for the Q3 guidance, PC. We expect PC to remain relatively flattish quarter-over-quarter into Q3. Non-PC side, we continue to focus on the product mix improvement, so we will see the EMS business reducing. However, the server auto parts business on track to deliver the growth year-over-year. For the full year, PC, we expect PC to be about flattish year-over-year in 2024. Margin wise, we continue to keep our target to deliver the margin improvement on the year-over-year basis is company target on the profitability. Above is the presentation for the business outlook. Now we turn back to Grace Chen for the Q&A session. Thank you, Grace.
Okay. Yes. Thank you very much, Tina, for the presentation. Let's move on to the Q&A session. For the participants online, if you wish to ask a question, please use the raise hand function in Zoom and wait for your name to be announced. Now while we're waiting for the questions from the audience, please let me kick off a few questions first. Tony, congratulations on your new position as Compal CEO. As a new CEO, would you share with us your strategy about how to transform Compal? For example, what's your business focus, and are you planning to continue to reduce the low profitability product segments? Thank you.
Thank you. Thanks everybody for joining. Yes, the strategy going forward is to continue to invest in the PC business and grow the PC business, but to reduce it overall as a percentage of revenue and drive diversification. Our short term target is to get to 60/40 PC revenue versus non-PC revenue by 2026. Diversification is one key thing. Looking at our businesses and making sure that we pursue high margin, high growth businesses. We will continue to look at opportunities to reducing EMS and other low margin businesses for us, and investing in non-PC businesses, again, higher margin, higher growth, server, automotive, 5G, healthcare, industrial are kind of the five key areas that we're focused on and w e'll drive that organically and via M&A as appropriate.
Okay. Got it. So that's very clear. For the second question, I think it's a big topic, it's a big thing about AI PC. I'm sure Compal is one of the key players to enable AI PCs. What would Compal do to differentiate from others, and what's your view for the future growth outlook of the AI PC market? Thank you.
Thank you. Yes, we have, we've played a key role in the development of several AI PC platforms. We're very close partners with Qualcomm, Intel and AMD, all of which will have AI PC offerings by the end of this year. AI PC sometimes can be a definition game. Is it a Copilot+ PC, which is an AI PC, or is it an AI capable PC in terms of the number, the computing power that the PC has? I think overall, you know, we've seen significant interest in AI PCs. We think that, you know, Qualcomm first, Intel, AMD in the second half, and consumers are learning more about it, very excited. We think 2025 will be a big year for AI PCs.
The forecasts say that by 2027 we expect 60% of PCs to be AI PCs, so that growth will continue strong. The overall PC market is recovering. It's recovering nicely. Q2 was the second consecutive quarter of year-over-year growth after eight quarters of contraction and decline. You know, we saw commercial be a bright spot in Q2. It was about 55% of the mix and accounted for basically all of the growth versus consumer. This is according to IDC data. You know, we are seeing the commercial refresh.
As everybody knows, Windows 10 will go end of life in Q3 of 2025, and historically 18-24 months prior to an end of life of a major operating system release, you see the refresh start to happen. We're seeing stronger commercial sales, but we think this refresh cycle will be condensed a little bit because of AI PC, right? Because corporations that are buying PCs that'll keep them for three or four years, maybe more, they want to make sure that they're future-proof for the hardware. They may be waiting for AI PCs this year to launch, and then we'll see, you know, a really robust refresh cycle from now until the end of 2025, until Q3 of 2025.
Okay. Do you see that the corporate segments a bit of deferred procurement in that sense?
I think some are waiting for sure. Because they wanna, again, future-proof that hardware and make sure that they're ready for the future, any AI applications that they roll out. There's also been, you know, a lot of economic uncertainty. There's been priorities and competition for CapEx priorities.
Yes.
Where they're spending their money. Some of that has been placed on AI servers and other things and kind of PCs have been deferred a little bit. I think a lot of it is because of the AI PC. Waiting for the AI PC.
Got it. That actually will lead to my third question. Originally I was trying to, I was hoping to seek your view about corporate PC replacement cycle. I think the prior one was in January 2020 when Microsoft ended support of Windows 7.
Yeah.
2019 was a big year. 2020 was a good year too for corporate PCs. Do you have any estimate about the corporate PC replacement? You just touched a little bit in terms of strength and timing, stuff like that. Yeah. Thank you.
Yeah. You know, that was the last refresh and it was strong and then COVID happened. It got even strong, like notebook sales got even stronger. The shift from desktops to notebook went very heavy notebook. I think during the, I'll just call it the COVID years. I think we shipped about 350 million notebook PCs into commercial accounts. A lot of those are ready for refresh, and it's a substantial number. This should be pretty good.
Okay. Got it. Okay. Let me take a pause here and hand it over to operator to take questions from the audience. Operator, please. Thank you.
Sure. I see Irwin Yen is raising hand right now. Irwin, please go ahead.
Hi, this is Howard from Morgan Stanley. First, a couple of housekeeping questions. Well, actually before that, congratulations on the margin improvement in the second quarter. The first couple of housekeeping questions for me is I maybe didn't quite catch the guidance for the third quarter. Could you please repeat the guidance in terms of the PC and non-PC businesses, please?
Hi, Howard. The guidance for Q3 PC is that we expect flattish quarter-over-quarter. Non-PC, we will continue to focus on the profitability, so we're gonna just see some reducing in the EMS business. On the server and the auto parts business, we continue to manage to grow year-over-year. This is the guidance for Q3.
Got it. Thank you. In terms of your guidance on year-on-year growth, that means server and auto, does that imply that it will be down sequentially?
No. Well, they'll be up sequentially. For full year guidance, we see pretty strong growth in server, greater than 20%. Automotive, you know, high single digit. Those are businesses we like, higher margin businesses that we'll continue to invest in.
Got it. Thank you. Can we get a sense of how much server and automotive is in terms of revenue contribution in Q2?
Server revenue accounts for about 2% of total revenue, a number that we are intent on growing, but about 2% today.
Got it. Would you say automotive is higher or lower than server today?
Automotive is lower. Automotive is a growing business, but it's a significantly lower business at the moment.
Hi, Howard, this is Tina. I think we never disclosed publicly, as Tony mentioned, that comprises the total of the five important high margin businesses, servers, auto, medical, 5G, and industrial. Put all together, it's about roughly 5% of the company revenue. This is what we have.
Got it. Thank you.
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Just last question from me is, so we've seen, you know, AI server demand picking up, and we've seen some of your competitors talk about higher inventory levels ending Q2 to support that kind of ramp in the second half of the year or going into 2025. Can you talk about what you guys are seeing in terms of AI server exposure? Because I noticed you guys have inventories that are down on a sequential basis in Q2. Thank you.
Yeah. For AI server, as we stated in the past, we're behind on AI server, and we're catching up, so we don't really have an inventory position there to speak of. You know, we've seen some of the announcements from Google and Microsoft, AWS, Meta, all very strong. We also see their CapEx growing 52% in 2024, another 8% next year. I think, again, there's some global economic uncertainties, but I think that those inventories for the industry, I think will be taken care of in the short term.
Got it. Thank you. That's all my questions for now.
Thank you.
Okay. Thank you, operator. Do you have any further questions?
No, not yet.
Could you remind us of how the participant can ask questions?
Sure. If you wish to ask a question, please press the Raise Hand button, and then wait for your name to be announced and unmute yourself to proceed with the questions. We have s econd question comes from, Albert Hong. Albert, please go ahead.
Hello. Thanks for taking my question. Congrats on the great result. My first question is, may I know was there any one-off factor in second-quarter margin, such as inventory reversal? Could you also share the driver behind all this margin beat while the PC market is not growing? Thank you.
Yeah. I think the inventory position helped us certainly, but we've also seen higher ASPs in the PC business. A stronger commercial mix. Again, 55% of the industry in Q2 was commercial, so the refresh is happening. We've seen stronger ASPs from that perspective.
Just to double confirm, you're saying there was inventory reversal help in second quarter or not? If yes, could you help quantify the impact, please?
Yes. Hi, Albert, this is Tina. For your question on the inventory reversal, yes, later on, if you look at our financial report, you're gonna just see second quarter we also have some reversal on the inventory. For the past two, three quarters, you see the inventory reversal for Compal. The key reason is that a year ago and two years ago, during the COVID time, we have a more provision on the inventory. When the inventory situation getting better, and then we then we have some reversal for the past one, two, three quarters. Overall, the margin improvement is not the major reason from the inventory reversal, inventory reversal.
The major reason for the gross margin improvement for Compal is mainly because of the product mix to bring the result, of course, as well as the overall efficiency improvement. Hopefully this answers your question?
Yeah, that's very clear. Thank you, Tina. My second question, i f I look at the OpEx trend, it seems like Compal has been controlling OpEx very prudently. How could you share some colors, how to reconcile the lower OpEx and the rising investment in new business such as server, auto, et cetera? How should we look at the OpEx trend in the following quarters?
Okay. Albert, let me give you the number first, and then the management team can give you the more color. Overall, if you look at the OpEx in Q2, TWD 7.7 billion. On the marketing and the main expense is about like TWD 3 billion. And R&D expense is about TWD 4.7 billion. Compared to a year ago, the total OpEx is TWD 7.8 billion. The marketing and the main expenses also keep at TWD 3 billion. Which means that we keep the marketing and the main expenses stable year-over-year. But R&D expenses will be reduced from a year ago is TWD 4.8 billion, and we slightly reduced to TWD 4.7 billion.
That we manage on the expenses control side to do the more efficiency on the R&D testing sampling to reducing on some R&D costs. Tony, over to you.
Yeah, we have a pretty significant effort underway. It's been underway for some time to do a pretty significant transformation around our operations, our supply chain, our R&D, both in terms of implementing digitalization, automation, AI, GenAI, ML in various parts of the company, which is helping us generate savings, which we will in the future and now and in the future will continue to take that and invest in these five new areas of businesses that I pointed out. We will continue to focus on OpEx optimization, utilization in our factories, and just continuing to drive efficiency across the business.
Understood. Thank you. My third question is, Tony, you mentioned that Compal will continue investing PC and grow PC industry. We know PC industry is relatively saturated. May I know your assumption of growing PC revenue is based on the industry growth or market share gain, or just content growth in PC? Thank you.
Yeah, we hope to do both, right? We think this year, again, PC is kind of flattish. We think next year there's a good opportunity for growth. Lots of economic uncertainty. You know, a few weeks ago, we had a, you know, a stock market issue, and everybody thought, oh my god, you know, things are gonna maybe 2025 isn't gonna grow like it is. Now things look back. It's a little shaky right now, but we believe next year has some good growth opportunities. We also believe that driving the transformation and the efficiencies in our business makes us more competitive from an R&D perspective, from a supply chain perspective, from an operations perspective, and overall quality.
We hope to leverage that into winning additional market share.
Understood. Thank you. My last question is a side-to-side topic. On AI PC trend, would you mind sharing some view, your view on the Windows on Arm? How do you see the penetration and what's the bottleneck? Is there any difference for, say, ODM in terms of BOM? Thank you.
Yeah, no, I think Windows on Arm, you know, with the Copilot+ PCs now, I think you know, Qualcomm had a first mover advantage in that space. I think the AI PC is taking a lot of interest in consumers and commercial alike. I think that we'll continue to see a trend of user demand that is looking for, you know, low power, higher performance, low power, more battery life. Of course, Windows on Arm delivers that. At the same time, Intel and AMD are coming out with very aggressive parts that also aim for those goals as well.
I think it's always nice to have competition in that space, and now we have three between Qualcomm, Intel, and AMD, you know, really good suppliers that are providing choice and competition.
Got you. Thank you. I'll go back to the queue.
Thank you, Albert.
There's no other question yet. Back to you, Grace.
Okay, sure. Tony, I have a follow-up question in terms of margin performance. 'Cause obviously we see Compal starting to show quite substantial margin improvements, I think on operating margin starting from second half of last year. I think could you help us, is there like structural changes going on? For example, like we're getting out the low margin EMS business, that's a fundamental change to help you improve margins and also cost efficiencies. Could you let us know what's the. 'Cause I know it's quite obviously margin continue s hows potential growth versus a year ago. Also at the same time, are you, what's your target for the margins? Do you have a margin target as we go forward? Thank you.
Target is higher, always higher. It's a number of things actually. We, you know, certainly we are looking to move away from some of those lower margin businesses. Especially EMS businesses where we don't really add a whole lot of value in those. That's definitely some of that. I believe that across the company, we have also worked very hard to get more efficient in our operations, in our R&D, our design centers, leveraging AI tools and GenAI tools to reduce the time of everything from testing to motherboard layout and design and things like that are really helping a lot. Driving efficiencies, getting out of certain businesses and putting an emphasis on the higher growth, higher margin businesses is kind of working and will continue to drive in that direction.
Thank you. Got it. My next question is on the clients' interest in your view about the potential tariffs, how Compal is going to reduce or mitigate the impact? Or what kind of. Well, first of all, maybe give us an update about your production size globally.
Sure.
How would you improve further, in case there's tariffs?
Yeah. Starting in, I guess, 2018 timeframe, thanks to President Trump, we saw a big push in this area, right? A big focus. Our strategy remains to have about 70%-30% mix of capacity, 70% in China, 30% elsewhere. I don't wanna comment or try to get into the game of guessing elections coming up forward.
You know, we've heard various things come out of both campaigns in the U.S., one is a 10% on everybody, you know? So there's not much you can do about that. Nothing you can do about that really. Maybe a heavier tariff on China, in which case I think we're well-positioned to serve U.S. demand o ut of that 30%. We can in pretty short order, I think we can expand that if needed. There are certain ways that you can mitigate that country of origin, things that we are prepared to do. Many of our customers asked about that, have been for years. I think we're well-positioned to help mitigate those tariffs.
Got it. Does the 7%, 30% mix, is that current mix or the mix we're working with?
That's current base, yeah.
Current base.
Yes, that's current.
Okay. Do we plan to move further outside of China or that's basically the U.S. mix, right?
No.
We did not, yeah.
Yeah. That's a good mix for us right now based on just U.S. demand. Of course, if there were tariffs in other countries or regions or EU, something like that, it might be a different story. China is a very important part of our supply chain and a very good partner with us. We have no plans to change that.
Got it. If there is needs for further diversification, we're ready as well, right? In the Southeast Asia or elsewhere.
Sure. Yeah. We have some affiliate capacity in Thailand. We have our own facilities in Vietnam. We have contingencies to expand that capacity in Vietnam. We have smaller facilities in Brazil and so forth. Yeah, I think we can expand that if needed. I don't believe, hopefully, we don't see tariffs go beyond the U.S., and hopefully we don't see them in the U.S. We're prepared to handle that.
Is that because the customers are already prepared too? This kind of precautions have already done.
Yeah, we've been through this drill once before. Yeah.
Yes.
Several years ago.
Several years ago.
We know the updated, you know. What the U.S. considers country of origin. We know how to do it. You know, in 2018 everybody's like, wait a minute, o h, we had to figure it out. Now I think we're pretty seasoned at it.
Yeah. How about the cost comparison of production cost in China versus production cost outside of China? What is the difference between the two? If there's additional cost from the diversification, who is gonna pay for the additional cost?
Yeah.
Yeah.
Well, I think, you know, initially, of course, any time you bring up a new country, a new manufacturing facility, you're gonna have a cost bump, right? You have a supply base issue. You don't have suppliers there. In Vietnam where we are, that's developed nicely. The cost between the two is very close actually. You know, customers who see the potential of tariffs, you know, there's a slight premium they may be willing to pay, right? To be able to keep shipping product, if you will, so i t's a different story now than what it was in 2018, 2019 when we started opening those facilities. There's more sub-tier suppliers in place, t here's more capability in the country itself. The costs are very close.
Very close. Close, meaning that in the cost in Vietnam may be overall still a bit higher, but very close to the efficiency in China right now?
You have a strong sub-tier supply base that has come not everybody's there.
Okay. Got it.
You still have to ship in some components from not just China, but from elsewhere, right?
Got it.
From other places as well.
Okay. Got it. That's clear. That should be okay 'cause a lot of investors were concerned about whether the potential additional tariffs will lead to, like, further diversification and then lead to higher costs.
For consumers. Yeah. Yeah.
Yeah, for consumers. Yeah, because brands maybe pass on additional costs to consumers and ASP will be higher.
Yeah. I think that's what we've seen. Of course, notebook PCs where we primarily specialize did not see those tariffs last time, right? We were prepared to deal with it. In case the next wave of tariffs were implemented, but we didn't have to deal with that. On the other goods that the tariffs were placed on, I think we did see a lot of that cost being passed to the consumer. That's what a lot of, you know, economists are saying, is that, okay, this is just gonna pass through, and with inflation and everything, it's just gonna continue to make a challenging environment for consumers and their share of wallet.
Got it. Okay, that's very clear. The next question I've got through emails is about your new business. Tina, I think has mentioned the five areas. Could you elaborate a little bit about these five areas, and what's the business opportunities there, and what do you plan to grow in these five business areas? What are Compal's advantage? Yeah, what's the plan there? Yeah.
Yeah. The five areas we mentioned are. We're laser focused on those and investing to grow those servers and AI servers. Of course, we have a server business today that's gonna grow greater than 20% this year. We're working hard on progress towards getting into the AI server business in a bigger way than we are today. We're also looking for what's next in kind of AI as it relates to servers, and that's inferencing, right? You know, that's kind of the next wave because in you know in a number of years or two, three years we'll see that a lot of the models are getting smaller and more specialized. A lot of the large language models will be trained, and inferencing will be huge.
Does that require a different type of compute, different type of specialty, chips? We're working with a number of partners to understand that. Automotive, you know, cars have gone from being pretty dumb to being really smart, having amazing amount of components and sensors and cameras in them. We like that business. We see that it's trying to standardize a little bit, software-defined cars type of things. We're very focused on that business. 5G, we have a good 5G module business. We'll continue to try to drive scale in that space and see that grow. And then healthcare and industrial, we like those opportunities. You know, healthcare is a tough field to crack.
We think there's opportunity to do potentially M&A to look at healthcare. It's a high growth, high margin field, but it's also very specialized and fragmented set of what we call CDMOs or manufacturers in that space. Industrial is a huge opportunity, and we're working with a number of partners on that as well.
Got it. Let me just dig into a little bit on server side. You just mentioned overall server revenue will be greater than 20% year-over-year growth. Could you share with us what's the mix in terms of general servers and AI servers right now, and how do we project that to evolve in the future?
Yeah. We don't talk about customers, right? Mostly today we serve an ODM model business. AI server mix is very low. Overall server revenue as a percentage of total revenue a s we mentioned earlier, is about 2%. AI servers, you know, clearly, as we've stated before, we're behind in that space. We hope to catch up rapidly. The mix of AI servers today is very small. It's less than 10%.
Less than 10%? Okay. What's the target customer then for both general servers and AI servers?
Well, as I mentioned earlier, it's today we're at an ODM model. We're serving ODMs in that space, and we continue to evaluate, you know, the potential to move beyond that. You know, ideally, Tier 1, so the hyperscalers, and we know that's a heavy lift. You know, we have some thinking and some strategies that we think we can make some progress there.
Okay. Got it. Okay. The other big focus is on. You mentioned the interesting point on inferencing opportunities. Could you elaborate a bit about that? Are you.
Well, yeah, as the adoption of AI just continues, and more and more applications continue. You know, from a large language model perspective, you know, it's almost in a different way, but similar, it's almost like maps. You know? You had a bunch of different maps, then you had a few, right? You got Google Maps, you got Apple Maps, you got a few others, and you got tons of applications that leverage those maps, right?
Whether it's Uber or other delivery services and other services, and other applications that leverage that. We'll see the same with the large language models that become the standards of the future and t he standards today, and we'll see the user base just continue to grow huge, and so inferencing is gonna be. It's gonna be significant. We have to understand, w hat are the changes between an AI server today and really optimizing inferencing versus AI servers for training models and so forth. We're looking at that very closely right now. Working with a number of partners who have said inferencing is kind of the next phase.
Interested to learn from their perspective. We're doing that now.
Got it. Are they the partners, maybe you mean customers or suppliers?
No, mostly tech partner.
Tech partners
Mostly suppliers.
Suppliers. Okay.
Some semiconductor companies.
[crosstalk]
Yeah. Right.
Okay. Got it. That's very interesting. The follow-up is on auto business as well, 'cause I think ODMs are all targeting the auto opportunities. Your peers are talking about that as well. Some of them are working directly with the auto brands, some of them are working with Tier 1 suppliers, and we're wondering what's Compal's strategy here in terms of auto business. What's your existing customers, and what's your target customers in the future?
Yeah. Well, we don't talk about specific customer mix or customers by name. We have a mix today of both, right?
A mix of both?
A mix of both. Working directly with some of our large car companies as well as some Tier 1 suppliers. You know, our goal is to position ourselves in that Tier 1 space. We're working our way to that goal now.
Okay. The car business system has always been regarded as a tough business to get in because it's very closed ecosystem. The lead time to get orders or penetrate that segment is longer. What do you think Compal's position right now? What does Compal stand right now in terms of getting into penetration into that auto business?
Yeah. We've been working at this for a long time.
Yeah.
We've had an automotive business for a very long time, and we've been working at that. It is a very long lead time to get in. It's a very difficult supply chain to break into. It's very demanding, of course, because people's lives are at stake. Especially now with some of these systems that, you know, provide safety and braking and, in some cases, you know, self-driving. Clearly you have to have the right level of quality. We've been at it a long time, and we're starting to see that pay off.
Got it. I see some more questions coming in. Let me hand over to operators. Operator, would you please take the question from the audience?
Sure.
Thank you.
Yes. Next question comes from Albert. Albert, please go ahead.
Yep. Thanks for taking my follow-up question. I remember last year, one year ago, Compal management provide some numerical guidance to grow their emerging business to 10% of total revenue in three years versus 5% last year. Tina just mentioned that this new emerging business is around 5% of total revenue right now. It seems that it doesn't change that much versus, like, one year ago. May I get potential update on this target emerging business? Thank you.
Yeah. As Tina mentioned earlier, so let's.
Yeah. Albert, firstly let me elaborate that. Yes, actually company definitely mentioned that we are putting in more resources on the new emerging business, right? As Tony mentioned, that five business c urrently 5% of revenue, and we are targeting about 10% the contribution, right? Also in line with what Tony said previously, 60/40, the contribution, like 60 from PC and 40 from the non-PC, still the big picture goal of the company, okay, on the non-PC contribution. Of course, so far, if you look at the presentation, our non-PC right now, the contribution is about, like, 20%, 30%. To further drive to 40%, definitely the growing area is from these, the five important emerging new business. Tony, would you like to add on that?
Those five, as Tina said, make up 5% of our revenue today. Outside of those five, you know, in Q2, we had about 27% of the revenue non-PC. The other 22% coming from smart devices, mobile, tablet, wearable, et cetera. We'll continue to focus on both those areas, as well as the five that we mentioned.
Understood. I must miss the timeframe. 60/40 mobile non-PC target is by which year?
Our target has been, I think we stated last year our target was by 2026. With the focus of kind of shifting away from some of that EMS business, we may see that that may push out another 12 months. We hope no more than that. For the goal and the strategy to drive to higher margin and higher margin businesses, we think that trade-off is the right thing to do.
Understood. Specific on AI server, could you elaborate more on the strategy as Compal being a latecomer, how to make sure that we make decent, or justified return as in this new business for AI server? For end customer, who did you think have more chance? Is enterprise or hyperscale? Thank you.
Yeah, w ell, definitely for the hyperscalers, that's a heavy lift, right? That's a tough area to get into. Our focus on AI servers is to, you know, basically with NVIDIA and AMD and Intel is to make sure that we have competitive platforms. But our focus will be on quality. Quality of design, quality of our supply chain, and quality of our product. We have excellent quality in our current server business and design capability, and we will continue to focus on that, hopefully leverage that as a key strength to carry over from enterprise servers today, ODM enterprise servers today to the AI server business.
Understood. I remember last year, Benjamin also mentioned that likely companies to get some design win from Tier 2 European or even U.S. CSP hyperscale. We could ship the full system to those Tier 2 CSP. Could I get an update on that, please?
Yeah, y ou know, we continue to have a component of the server business, call it white box, if you will, non-ODM business that we have been developing a speculative server roadmap and pursuing those opportunities. Going forward, we'll continue to evaluate that roadmap, make sure we have the right product mix, and go after those opportunities.
My last question is on margin. Second quarter margin was fantastic. It seems that Compal is improving their product mix in second half. Should we expect gross margin to sustain at least that level or even higher level in second half?
Albert, this is Tina. As we mentioned earlier that to continue to keep the gross margin improve on a year-over-year basis is continue to target for the company. Yes.
Understood. Thank you. I'll go back to the queue.
Thank you.
Thank you, Albert. The next question comes from Angela Hsing. Angela, please go ahead.
Hi. Thanks for taking my question. I still have a question regarding to the server business. Actually, what Tony said that about 2% of the total revenue from server currently, implying around TWD 4.5 billion-TWD 5 billion a quarter. Wondering that the sales trend going forward or sales growth target for this year. I know that this is over 20%, but can we say a longer term, like this year, next year, or the long-term target, how much percentage you seek, you pursue to see the value-wise or the sales contribution-wise? I think if I'm not wrong, are you saying that the product mostly is component-wise, which is like a L6 level?
Would you like to share with us that will you go to level ten, the system level, afterwards? Or, when can we see more products like this level? Regarding to server business, what's the OP margin level currently? Thank you for taking my question. Thank you.
Yeah, currently in the ODM model, we are at L6 or below, right? Board business and moving to L10 with an ODM model is a lot of pass-through revenue. It's a lot of buy-sell, the old traditional model. You know, in some cases, you know, that can actually kind of dilute the margin a little bit. But if you add a higher margin server to a notebook business, it'll actually help the gross margins overall, anyway. There's different type of L10, which is the approach, you know, whether it's Tier 1 hyperscalers or Tier 2 market doing L10 directly. We're looking at all of the above.
Okay. Are you saying that now probably components and below L6 and mostly focused in enterprise segment, I mean, the client base? If more like system base probably will from the CSP, the hyperscale, the CSP level. Is that right?
Yeah, c urrently, it's mostly enterprise. As we said, AI is less than 10% of the mix. It's mostly enterprise server, with the goal being able to shift to more CSP type business in the future.
I see. As I remember that, probably in the earnings of this year, you mentioned that the AI server will take around 20%-25% of total server revenue this year. Is this target remains or do we do any revision on this trend?
No, t hat's not realistic for this year at all. It will still be, you know, below 10%.
Below 10%, is below 10% of the total revenue or the server revenue?
Server revenue. [crosstalk]
Server revenue. [crosstalk]
Okay, I see. Server revenue. Oh, sure. Yes. Based on current server revenue level, what's the OP margin level? Can we take this for reference?
What we only can say is higher than the corporate average margin.
Oh, okay. I see. Once the system level becomes more, probably we'll have some dilution, but still we'll see maybe much higher sales contribution.
Depending on how you do the L10. You do the L10 for an ODM customer, you're in a traditional buy-sell model. If we do the L10 directly ourselves to end customers, not as much.
Okay. Last question is that, when can we expect for the L10 level or more CSP clients [18.2]? What's your target o r schedule? Thank you.
Our overall target is to drive to about TWD 100 billion revenue by the end of 2027, in the next three years. In terms of when we're gonna get to L10, when we're gonna do Tier 1 CSPs, we don't have any comment on that right now.
I see. Great. You say TWD 100 million by year 2027? Sorry.
TWD 100 billion.
TWD 100 billion by year 2027.
Yes.
Thank you. That's all my question.
Thank you.
Sure. I think we are running out of time. It's really a pleasure to have Tony Bonadero to join today's meeting. This is your first result call, and this is a great result. As we end the session, would you like to share any closing remarks with us? Thank you.
Yeah. Again, thanks everybody for joining today. Again, our focus is to kind of shift things around a little bit here, get away from low margin business, EMS, as I said earlier, invest in critical areas, for non-PC revenue growth. We like the PC business. We'll continue to invest in it. We wanna grow it, but we also want it to become a smaller percentage of revenue. As I mentioned, the 60/40 target is short term, and then we'll see once we achieve that, where we can go from there.
Investing in the five areas that we mentioned earlier and a plus one, which is research and making sure that when big trends come in the future, that we see them, we bet on them carefully, and we invest in those, build teams and build those businesses. Changing things up a little bit and hopefully we can continue to drive, you know, higher margin, higher growth results. That's our focus for the next three years.
Okay. Thank you very much. Thank you Tony, Jack, and Tina, and thank you all for your participation, and this concludes today's call. Thank you all. Bye.
Thank you. Bye