Good afternoon, everyone. Welcome to Accton's 2024 Annual Conference Call. My name is Derrick Y ang. I'm the Tech Analyst at Morgan Stanley. Today, it's our honor to have Accton senior management with us to discuss the figures out, the 2025 industry outlook and some other industry dynamics. With us today, we have the CEO, Jun Shi, CFO, Fanny Chen, and Spokesman, Edward Lin. Without further ado, let me pass it to Lin for the opening remarks.
[Non-English content] Derrick. Edward. Good afternoon, ladies and gentlemen. Welcome to Accton 2024 Investor Conference. This is Edward, Accton Spokesman. Today, we are hosting our conference with the support from Morgan Stanley. For all global investor consideration, today's presentation discussion will be proceeded in English and also will be recorded. Thank you for your cooperation. Next. For today's conference, Accton management team, we have our CEO, Jun Shi, our CFO, Fanny, and myself. The agenda is as follows. First, our CFO will go through our financial results with more background explanations. Secondary, our CEO will present our corporate highlights and future outlooks for you to better understand our strategies. For the final part, we will proceed a Q&A to go through your questions and suggestions. Next.
Before our presentation, we'd like to remind everybody, today's discussion may contain the forward-looking statements that are subject to significant risks and uncertainties, and this may cause actual results to differ from those contained in such statements. Please ensure you have fully acknowledged the safe harbor notice on this page. Next. As we proceed our conference online, we'll put the photos of management team here for your reference. Thank you. Next. First, I want to turn the call to our CFO, Fanny. Please.
Thank you, Ed. Good afternoon, everyone. Let's start with the financial highlights for the third quarter 2024. The third quarter revenue was NTD 28.9 billion as compared with the Q2 growth rate is 15%. Three quarters revenue was NTD 71.4 billion and a 15% growth rate year-over-year. The third quarter gross margin was 19.9%, a 1.3 percentage point decrease compared with Q2. The major reason is the product mix. The operating expense was NTD 2.1 billion. It's near the second quarter. Operating margin in the third quarter was 12.3%, 0.2 percentage point decrease compared to the second quarter. The third quarter net income was NTD 2.65 billion, EPS was NTD 4.75, and the three quarters EPS was NTD 13.39. Next page. About the balance sheet. End of Q3, our cash balance is NTD 12.8 billion. Inventory was NTD 17.8 billion, 8% increase compared with Q2.
Mainly due to the increase of the half-finished goods. In Q3, the inventory includes NTD 8.3 billion finished goods and the NTD 7.7 billion raw material. Let's move to the key financial ratios. Q3 end of debt ratio is 57.98%. The cash turnover days decreased, 8.93 days- 42.8 days. The major due to the account receivable turnover days reduced, and the inventory turnover days reduced. Next page. This is the revenue by segment. Our major business come from the switch. It's 58% of total revenue for the three quarters of this year. The networking network application product revenue is 34% of total revenue for the three quarters of this year, increased 74% year-over-year. The metro access switch revenue is 5% of total revenue for the three quarters of this year. Next page. The revenue by region. Our major revenue contribute from America.
It's 72% of total revenue for the three quarters of this year. Revenue from Asia and the Europe area increased. The year-over-year increase rate for Asia is 28% and the Europe is 1%. I will now turn to hand over to Ed.
Thank you, Fanny. Now I would like to turn the call to our CEO, Jun. Please go ahead.
All right. Thank you, everyone. I try to focus on the conversation around three topics. Firstly, I try to give a recap around 2024 and give a little bit of outlook view about the end of the year, then focus on our investments for the future sustainable growth. Last on the list that I will touch the number is the outlook around the 2025 business. Before I talk about anything about numbers, I try to share a view about what we have done in the past year. There are six major focus areas as investment. Definitely beyond just the product itself. As a company, we have been restructuring and reshaping quite much of the company strategy really towards a technology and a service company.
Secondly, since I joined the company about a year and a half ago, last year and this year as well, we have been restructuring quite much of the organization and formalize the business unit, to get ready to scale for further growth. Actually, it turned out very well this year as evidence as a proof. It turned out to be a very growth engine for us to scale out the business based on its operating infrastructure. The next one is really definitely everything about the business growth, right. Since the year before we went through the post-COVID and market coming down to a new area for the growth, there was some of the challenge for sure, as I mentioned last year. I will recap some of the discussion I had last year exactly this time. We have been focused on the four major areas.
Number one, stabilize some of the business and continue to drive our way of farming of the existing business to drive further growth and meanwhile hunting for the new logo and the new business development, new partnership and a new service model. To drive the organization and especially around the growth, definitely how to drive the execution will be the key, right. A strategy without execution is nothing. From the execution perspective, we really focus on the efficiency from operation. We drive a lot of transparency. Transparency in terms of the communication, the management and operation, and set up the clear ownership and definitely define the accountability, right.
Eventually to enable, for example, the business unit or the task or the task force, whatever the owner, right, really have accountable delivery as a key, turned out to be a supporting force to turn the strategy into the reality. Meanwhile, if you have been following Accton for a long time, in general in the past we don't do much of the marketing. This year we invest quite much, we even hired a global head of the marketing, and we turn to a more of the present in the market, not simply because of branding development by itself. It's really about repositioning to fit into the new market demand and the new market opportunities and including our new service model and operation model change for the new revenue generations. Okay.
If you go to our website last year, including this year, you will see a lot of messaging, much more than I, in a way, for the messaging positioning and to be more relevant. Definitely, it will be helpful for the lead generation. The last not least one is all back to people, right. My job is, to be honest, we're only looking to the few areas. The first one definitely will be measured by the number. The second one is really about the culture of the company. The last not least one is for the people. One of the missions for me, is really try to grow the next generation, younger generation of the leadership, make them accountable, let them drive the decision, take the ownership. That is a different way or in a way to support the business growth from an organization perspective.
With those efforts in place, this is a picture as I explain and walk through to many of you, to publicly to our customers, we call a four-pillar strategy, right? Quickly recap. If you look into the right bottom, that was the ODM business. That is our bread and butter, our core business in the past 35 years- 36 years. If you move up to the top right, that is the technology investment, not only through the technology partnerships. We have a small venture. We do the technology invest pretty much as well. As you may have paid attention, even the news went out yesterday. We did some technology investment into some technology components. We try to acquire pretty much of the technology to enable our future growth, right? Move all the way to the left top. That is really about the JDM of the business.
We leverage a lot of cutting-edge technology to acquire our leadership from technology business perspective. Work very closely with the hardware scaler in particular. We have a different bar for the quality design criteria because the magnitude about the performance is at a very different level. At the end, we apply those acquired know-how and advantage onto our White-Box, because open networking is always our belief, to drive innovation with both hardware and software. If you look into this like a flying wheel as an innovation cycle for us, not only just for technology, but from go-to-market business as well. By leveraging our White-Box for open networking, we can help dramatically reduce our customers' time to market for the technology adoption. Meanwhile, we still offer a very flexible ODM and JDM model, to help our customers for the longer term investment as well.
It is quite flexible in a way. This paid out very well. This is I feel very pleased through the past one year execution. This one we landed quite a decent new logos, especially, to drive the business growth as I will share some more details in the later slides. We definitely need to hunt some new business. We call it big whale. It is quite successful. I see we acquired quite a few top brands in the market. That is where we hold up the growth for our future. This is a picture actually I showed last year. It is just a little bit different format. On the left top of the top left, is really trying to show the picture, if you recall, for whoever attended session last year, that was a projection about a network equipment provider.
About the trajectory last year, we projected it could follow different patterns, right? Some of these network equipment providers actually continue to go through the struggle. Some really start to see the bottom and start to pull it back. Some pull back early, some pull back late, and some of them are still struggling. It is quite of a mix. This comes down to the product mix that Fanny mentioned from the financial report perspective. At the bottom is really about a projection last year we made about AI/ML of the trends. From the market perspective, we are looking to four customer mix, from open networking, hyperscaler, network as a service, and network equipment providers.
We are quite, I would say, happy in a way, not necessary of time, talk more about our understanding of the market and the confidence level of our execution. We set up quite a few strategy last year. It turned out it comply with what we have projected very well. The inline we demonstrate our performance from the execution level inline with the market. If you look into the market perspective, a quick takeaway here is, anywhere from our customer base, if anyone catches the AI wave, anywhere, whoever catches the AI wave, we see the growth from them. Most of the people, I cannot say 100%, but most of the people, if they miss the AI wave, especially from the telco area or like the enterprise area, SMB area, still, the slope is still over there.
Definitely there are some good signs from some of the sectors to start to show the pull back a little bit. There's a little bit of confidence, especially from Q3 across some of the market segments. From our perspective, I think because we made several of the strategic decision last year from the investment, turning out our business keep growing. However, if you do recall, in January, February in Q1, because the transition from the pullback of the AI/ML from the adoption cycle vs the drop from the enterprise or telco areas, Q1, we indeed saw a dip, we pull back all the way from market, and we keep the growth all the way until right now. Not only about the growth, as we expand our market segments as acquisition as well. Whatever the new segment, I call it emerging AI.
This emerging AI is not only about everyone talk about everything in the spotlight about like a large language model or ChatGPT, this training. There are a lot of new use cases. The flying algorithm, there are quite many of the excited movement over there, start to adopt the AI/ML, not only the training, but inference into the market segment into, for example, the retail or manufacturing or the other locations as well. From other than this new area, the network as a service, that segment is expanding because become a more enriched in a way beyond networking. Like a security as a service, like a network as a service or even like a cloud-based campus as a service. There are quite a few of the areas. We acquired quite a few leading logos from there. That's why you see the color code.
I just try to demonstrate every single sector that we see the growth. In addition to that, as I mentioned, the brand development definitely is something I put some investment over there to demonstrate our leadership, right? The picture here is we just took recently. We had a good presence at OCP, in the Bay Area in the U.S. If you look at the far left, that is our 51.2T switch, Tomahawk 5 switch. We have our own software, open networking software, SONiC on it. If you pay attention to the picture on the left side, there's a rack. On that rack, we put quite a few of the new technology demonstrations. There are three racks over there, and the people block it. There are quite a few new technology other than just the traditional classic high-speed switch.
We do demonstrate, for example, the new technology from CXL for memory pooling and for GPU cluster, and we have our own GPU server over there as well. I will show you in the next picture on the next few pages. We showed our liquid cooling rack-based solution. Overall, we focus on premium design, high quality, and our yield is quite high, and it's quite recognized by many of the people. Our 51.2T, from 400G and 800G adoption perspective, it definitely shows quite much of the deployment. Still, the market keeps growing, and we definitely want to work hard to grab more market share over there. Again, the design, the quality, definitely will be our core competence over there. Continue to help our customers to drive the, reduce the time to market with more value. We can think beyond just networking still.
That's why, from our position perspective, we try to introduce ourselves as a game changer, really from both networking and computing infrastructure together. Last year, I met many of the customers and the investors and partners. Everyone definitely has been asking, which direction we are heading for. We could try to give you a very high level, 10,000 ft level of picture about our investment. On the left side, that is maybe a very high-level picture about the AI cluster. If you look into the top, there's a switch. That's our bread and butter. We have been doing that one in the past 30 years- 35 years. We have our open networking software, SONiC, as well. We formalize our small company. It's 100% owned by ourselves, called GoldiLink. We develop our own 800G optical transceiver.
We don't intend to try to turn ourselves to be an optical transceiver company. That is not the point. Acquiring the capability, especially focused on the high speed, like 800G or even above, the optical transceiver will help enable us to grab the market quickly with our switch, because we develop our switch with high quality much faster compared to many of our competitors. That six to nine months lead time for us is very critical. We cannot simply wait for people come, let's say, wait for the market ready to get optics. We definitely want to enable a total solution over there. The next one is about accelerator. Accelerator definitely has been one of the major contributions to our overall business. This will be one of the areas very critical from an AI cluster perspective.
I think early this year, we start to launch our own GPU. As many of you know, we have been building the UBB or OEM for our ODM or JDM customers. Given the trend from the market, it has a very clear sign. The line between the compute and switching right now is blurring. We don't intend to try to become just another server company. There definitely is a good incubation for us to drive the knowledge and the technology. Definitely we need to make ourselves ready into that market. There is quite much of the learning, for sure. Because simply from the server vs the switching, there's still quite much of the difference from the manufacturing, the production, and even the go-to-market perspective. Given a lot of new involvement. Given the GPU, definitely.
Beyond that one, look into a lot of good momentum about the new technology from, for example, the CXL or PCIe next generation, and our investment into several of the startup company as a partner to drive the server business. Definitely, it's one of the directions we are investing to. The last but not the least one. To formalize the cluster, definitely we need to think about interconnect. The interconnect from optical interconnect density or copper or hybrid. Meanwhile, it's really about a back-end network from AI cluster perspective about interconnect. That is one of the areas for us to look into the investment as total solution as well. To put everything together, the market trend and the signal is quite clear. As we demonstrated at OCP, we're definitely looking to a rack-based solution. Given the power, the deployability, given all the liquid cooling.
From the deployability perspective, the whole market is moving to the rack-based solution. We have been investing in this one from Level 10, Level 11, to aid the adoption and deployment for the AI/ ML cluster. The takeaway here is that definitely we are investing, and we'll continue to do so from end-to-end perspective rather than just focus on one single component of the whole solutions to drive the adoption and help our customer to adopt the new technology quickly to generate the revenue return. Going beyond, right? Simply just to get a solution as a sale, not just to tie that up bunch of the hardware component over there. We need to stick everything together from the underlying networking and computing infrastructure. The top is about the network operating system, right?
Because we drive the open networking, we partner a lot with the third party. Our partners about network operating system together. Above, definitely we want to look into as a solution. We want to make it easy as an out-of-the-box deployable solution to our customer. Again, customer can run the application that is above. We don't look into the application right now, but just to try to show you the focus from the solution perspective, really about the networking infrastructure, computing infrastructure, the network operating system, and the solution play. Not only try to build everything by ourselves, because we are a very strong believer about open networking disaggregation. We will own whatever is a core competence to ourselves, and then we partner with our technology partners. All right. Now let's take a moment to look into the number.
This is a picture I shared exactly. I didn't touch anything, right? I didn't change anything. This is a picture I presented last year. We project from 2023 to 2024 as a double digit growth. We still hold that outlook as a projection. Again, around 2024, as I showed towards to 2025, what's happening exactly follows what we projected. That's why we are quite happy in a way about our predictability, our forecast, and our understanding of the market. Now we're moving to 2025. It's really at our projection falling into that rank. I didn't change anything. Oh, by the way, don't waste your time trying to measure how much of the picture I put over there. I just randomly draw a picture to drop in the middle. Okay? The guidance and direction is definitely we continue to hold the double digit growth for next year. Okay?
The rebound, the new business rolling in, the acquisition of new logo, have been happening exactly like we have been planning. In the beginning of the year or end of last year when I came over here, back then we did the 2024 planning about this new customer, the target. I cannot say we 100% close them, but it's very decent in a way. It achieved the most. I cannot say all of our expectations. Okay. Again, that's why from a 2025 perspective, the growth, we continue to hold our cautious but definitely optimistic view about the growth. However, the market definitely has a dynamic, right? The dynamic majority is being driven by the market from the expectation. I believe almost everyone worldwide has been asking the same question, how long this AI hype cycle will continue to last, right?
Whether and how the 2025 will show the trajectory about the growth. We definitely see the AI/ML continue will be the driving force for 2025. However, around the second year, next year, definitely there will be mixed signal over there, given quite much of the uncertainty, given the global geopolitical situation, given especially if you remember or Steve presented quite much of large of our market customers' contribution comes from North America and Asia, right? The geopolitical situation for us to really force us or drive us in a way to stay agile, to be flexible and be adaptive. To present this on the left hand, this is our new manufacturing location in Zhubei, in Taiwan. After it's up and running, we'll have an opening ceremony there.
On the right hand, just to try to show you a picture from our global expansion and the strategy to basically position ourselves as a global footprint. Right now we have a five 100%. Well, I see 100% owned our own manufacturing facility. On the right bottom to show, actually we are working on the number seven. But let's say six to seven of this joint venture approach for the manufacturing service, not only at a manufacturing capability, but help our partners to really deal with the geo-locations situations in every single continent. Because if you're really looking too carefully about every single country icon over there, if you open the map, right, every single continent as an entry country or the gateway over there, we have our presence. Net-net, right? We try to stay agile, adaptive. It will not be easy.
2025 definitely there will be a lot of exciting moment upcoming. The AI is still there, but the challenge is definitely as everyone can see. We will stay in a way for our commitment for the investment, drive the growth, and definitely contribute back to our shareholders. Okay. That is all I have.
Thank you, Jun. This is the end of our presentation. Now we can move on the Q&A section. Derrick, p lease.
Sure. Thanks, Jun and Edward. Right now, we will start our Q&A session. If you would like to ask a question, please use the Raise Hand button, we will read out your name. Please remember to unmute yourself before speaking.
Our first question comes from [Paul from Cathay]. You can unmute yourself and ask your question. Thank you.
Okay. Hello. I'm [Paul from Cathay], there's some questions to ask. Before I ask the question, I would like to thank you for taking my question. The presentation is crystal clear for us to understand the company's operation status and the future strategies. We are very impressed by the growth of AI accelerators and achieving such operating results in a complex and competitive market, it's not easy as we know. Also, congratulations for Accton to achieving this new record high performance this quarter under the leadership of the outstanding management team. I still have some questions for the management team, I am eager to learn more about the AI accelerators and their influence on our business. First, how does Accton evaluate the development of the AI accelerator in the new generation data center infrastructure?
The second question is about what potential growth does this present for Accton's future operations? That's my questions. Thank you.
Regarding the first question. Paul asking about is the AI, I would say, evolutions for the AI infrastructure. The DC infrastructure. The data center in general, actually has a classic, traditional, I would say, a workload data center and the AI DC or AI data center. That's where the AI cluster, there's a different momentum over there. From what we have been experiencing and contributing over there, the AI data center or AI cluster contribution, we indeed, I would say, take advantage and benefit from quite much of the investment from there, from the large customers and definitely for training and some of inference over there. We participated quite heavily into many of these customers. The customers not only from the hyperscaler, Fortune 500, but there are quite many of the newcomers who are providing the GPU as a service.
It's quite different from the, I would say, the classic data center for the IT workload. Okay? I definitely that one may not be 100% accurate for the definition.
Of course.
Yeah. Looking to from their perspective, if you see the picture I draw on my slide. End-to-end AI cluster from the server all the way to the connectivity from the cable to the switch, and even including the software together. Actually, we had a very early customer adoption. We moved very fast, grabbing some opportunity much early in a way. Some of our earliest, like AI/ML, like deployment went back all the way to last year. Right. Again, we start to experience good adoption, but definitely, it's still in the middle. The market is still growing. The investment is still quite much. Actually, the most of the challenges people are facing other than just how to build up the infrastructure. As everyone has been talking, I will not talk too much about the power, the cooling, all the other.
To be honest, really about a shortage of the GPU, right. We definitely have been working closely with our partner and the customers to continue to drive our innovation into the AI-based data center infrastructure. We are not ignoring the traditional data center over there. It's still growing. It's just the amount of the budget spending between our customers are very small because the GPU cost is quite expensive. That is where from the piece has come down to your second question about a future growth level. I would say it's really about the lifespan, about the outlook, how far look into the future. 2025 definitely is a year we see a very strong signal and a clear forecast view from our field and from our customer partners. 2025 will still continue to be a strong year for AI/ML.
Turning towards to certainly next year, just come down to a lot of expectation or different opinion about how this return will look like, given people's comfort level about continuously investing into this heavily loaded infrastructure. Right now, everyone knows, right. The return vs the investment still come down to the point that people expect it, but no one, I would say few people dare really try to miss this investment cycle and a growing cycle. We definitely see this quite much of sustainable growth engine upcoming. Actually, we are still in the middle, at the early stage. We do have a high hope. Given the risk from the non-technology of a tech business perspective, right. Given the geolocation, geopolitical situation globally, that introduces definitely quite much of uncertainty. We have to watch it very carefully. Hopefully I addressed your question.
Yes, yes. It's very clear answer. Thank you. That's my question. Thank you.
Yeah. Maybe, the second question I can ask is about the 800G network switch. It seems that we are in the middle of this transition, and the migration seems to be a bit slower than expected back in early this year. Jun, could you share with us your view on the current status of this 800G network switch migration and what we expect that to play out in 2025? Also, a small question is, I think really during this kind of technology transition, there could be opportunities for share shifts among different players. I was wondering whether you could share with us, about the potential share allocation at our major customers or at other major hyperscalers?
Okay. Just give me a second. Making notes. Okay. Firstly, I would say when you look into 800G, when people have the expectation, always think about it, follow the pattern about 100G, 40G- 100G to 400G- 800G. Very unfortunate, this kind of methodology does not apply. That's our opinion. The reason is the 800G, I will not say 100%, but the majority are driven by the AI/ML. Because if you just think for a second, just like the previous question I tried to address, that the traditional classic data center primary driven one by the hyperscaler, but still about a non-AI/ML workload. If you follow the trajectory about generation by generation, depends on the new technology you see coming in on top of the existing infrastructure. That is a migration cycle.
However, when we move to 800G of the switch, actually to be honest, right, because 800G GPU, like a Blackwell is just coming around the corner. All last year is really about a 400G. Even for 800G switch, people use a breakout cable, like about 400G adoption because of GPU size. If you think for a second, right, because almost majority of the deployment for AI/ML for 800G switch are for AI/ML, not for classic IT workload or the regular data center. That migration cycle, if you just apply to whatever the trajectory in the past, does not work out very well. That's why if people say, "Hey, I expect the 800G trajectory to follow the patterns of 100G- 400G." Unfortunately not, for another reason.
If you look into every single IP, every single enterprise company, your budget every single year pretty much is fixed, more or less. AI/ML investment is quite expensive, to be honest, right? If you take a majority of the share of the investment into AI/ML, the remaining of the budget from the customer perspective for continue to drive the regular data center investment, which really drive the previous trajectory from a 40G, 10G, 40G, 100G is a different pattern. These two pattern right now is not coming to a same trajectory say, "Hey, how much of the enterprise adoption infrastructure really are under the pressure to move from 100G- 400G and 400G- 800G?" No, that's not an investment focus right now.
The majority of the people really do not have the need or demand much to really look into 800G or post 51.2T kind of switch is still too much. All right. That is hopefully address the first question. The second one is definitely market is shifting, and that creates the opportunity and challenge for every one of us. It's really about the strategic decision and execution in a way say, "Hey, we take the chance to win the new market and grab a new share from it." Eventually, even the AI/ML cluster is still from technology perspective, they still have quite much of the leverage can be applied back to the data center, traditional or classic data center as well. That is definitely opportunity for us to get more shares from the market.
From our perspective, as I mentioned from our customer acquisition, the big whale hunting, I will not share too much of the detail. Overall, from our acquisition from hyperscaler, from Fortune 500, from this new player, DCI service, it all have a very different growth. We do believe our 51.2T is saturated for the 800G is in a leading position based on the customer feedback and based on even customer just turn over from our competitor back to us. I think, yeah, this is the opportunity to us.
Great. Thank you.
Our next question comes from [Edward Yen]. Please unmute yourself.
Can you hear me?
Yes.
Yeah. Perfect. Yeah, appreciate it. Thank you for taking the time to take my questions. I have two, but I'll start with the first one. Just looking at your presentation, and thank you for that. It kind of feels as though there's a lot of growth opportunity, right? There's a lot of revenue growth opportunity. My question is more on the cost side. Maybe if you can talk a little bit of how your strategy will affect the cost. Then the second thing that I wanted to also talk about is also on the cost side. It feels as though there's a lot of cost inflation going on right now, right? Whether if you move into AI, naturally, there's shortages there. The cost is probably going to be relatively high for some of these components.
At the same time, geopolitical factors, that probably also factors quite a bit into the cost equation as well. Then lastly, utilities, we know that has gone up as well. I'm just curious as to how you take this into consideration with regards to your strategy, one, and then how would you tackle some of these cost inflation challenges?
Right. Thank you. I try to address your question from more from a product point of view rather than from a component point of view. Any about a new product adoption or new solution adoption at a very early stage, it always follows the cost curve. When you enter into a new market, bring a new product to the market, the cost curve at the initial is always high. It's always in that way. However, whenever you have a new technology try to address the same issue existing before, the new technology always dramatically reduce the cost per bit or cost per, well, whatever the measurement over there. We are now from AI/ ML in particular, at the early stage right now, this moment, right?
That's why the cost factor, if I look into this one, whether it's under AI/ML or not under AI/ML, to be honest, because I build a lot of product before, but still in my different role. I don't think it's dramatically different from when you open a new market, the cost curve. Definitely have a different challenge to manage, right. Component level. You mentioned about a quite a few factors from a geopolitical situation. Yes. If you put it into that factor, that is a big deal, right. Because globalization in the past decades, actually, everyone has been benefiting from it. That one is a cost factor we need to consider.
If you just consider as a cost factor anyhow, due to whatever uncertainty introduced to drive the component level or cost level, it's just in a way for us, I take it for granted. It's our life, right. We have to manage it through, consider all the factors. It's just maybe a different practices. I will call it maybe the old wine in the new bottle or the other way. I don't want to underestimate the amount of challenge about the cost. The cost down, the cost optimization, the design for cost, definitely has been the core component we have been introducing into our premium design. From overall practice perspective, it's just part of our challenge in daily life. We have to manage through anyhow.
The AI/ ML just introduced more of the factor from limited supply, because the GPU over there, and meanwhile more new mature, high grid level of the CPLD. And then power, the cooling is new, right. This new factor in today's context compared to 10 years ago, for example, when we introduced another new technology, it's just a different dimension of the issues we have to address. I think it's just an everyday challenge, right. Hopefully I did share my thoughts with you, I don't know whether I address your question.
No, it's very good. I guess just one follow-up from me, then I'll get back into the queue, is also if you can talk around longer-term growth framework. I know you already gave your thoughts on 2025, right. Apparently, one of your networking peers, also just concluded the call, and it feels as though the visibility is actually quite solid. It feels as though your peer is looking even into more of a teen type of growth into 2026. I just wanted to talk around that. Maybe get your view as to how, or maybe talk around the pushes and pulls that might allow you to maybe even reach or maybe even outperform that type of growth beyond maybe 2025. Maybe even doing teens again in 2026 to 2027. Just trying to get an idea of your longer-term kind of growth framework?
Okay. A new factor in the AI/ML compared to the past 10 years or 20 years, we have been in the market for so long. The new factor AI/ML introduced compared to the previous generation, actually really thanks to the GPU. I think NVIDIA has done a good job. It really keeps the patents about every year, try to deliver a generation of the silicon that push up the whole cycle from generation of the new technology comes in the market of going much faster than before. I mean, the iteration of the new technology.
Given the iteration of the new technology coming in, one of the different factors or the result of the pattern definitely is different than from before, just building a switch, because the life cycle from the switch, from the adoption, easily will take two years, three years to stabilize, kind of go into life cycle, right? Given the AI/ML, the life cycle is much shorter. The iteration of the AI engine, the inference, the training, actually is running much faster. That's why year by year, let's say looking to 2024, look back on 2023, 2024 looking to 2025, we definitely will of course see another generation of the split of the new technology come in because 800G GPU is coming, right?
The new deployment. It fall back into a normal pattern. Basically, whenever you go through a product transition, the previous generation of the product starts to sink down, right? Going down. The new generation starts to pick up. The new generation almost double, triple, whatever the X amount of the capacity growth over there. That means either from the material, from the supply perspective, it will drive a different curve. That means the transition period introduced, that transition period, the impact will definitely be bigger than the previous technology because amount of the capacity, bandwidth, connectivity we are talking about is a different magnitude than before. That means one month or one quarter of this transition, the impact can be amplified compared to before, because before may take about a half year, six to nine months to do the transition.
Very, very clear. Thank you. Thank you so much, Jun. Thank you, Fanny. Thank you, Edward.
Thank you.
Our next question comes from [Jerry from Citi]. Please unmute yourself. Thank you.
Hi. Sorry, is this for me, Alex? It says Alex in front of me. Can you hear me?
Yes. Yeah.
Oh, good.
Alex, you can hear me.
Sorry. Okay. Thanks a lot for taking my question. Hi, Jun. Hi, Derrick. Maybe one question I would have is if you could comment a bit more on the customer diversification in general. Maybe start with as far as you can talk about in the AI accelerator space, if you can put a bit any numbers on how many customers you could gain or maybe how well the new facility in Vietnam is booked and, also on the switch side, how you see your progress in growing business with, say, the less prominent hyperscale customers or potential to add new. That would be one or two questions I have?
All right. Thank you. Customer diversification, I mentioned a little bit in my slide. As I mentioned, we grow from four major customer mix, right? Open networking, hardware scalers, network equipment providers, and then network as a service. Right now, we definitely grow the area about the AI. When I was mentioning about AI, it's not only about, as I mentioned, it's not only about the switch itself. Definitely switch is one of the core of our business. At appliance level, you saw the growth from our appliance that were really from accelerator. One of the pattern or the thinking we need to, at least from our investment or purchasing perspective, pay attention is what is different from before is in the past, we can sell a switch, we can sell a transceiver, we sell a cable, or we sell a software.
People put them together, someone will put together SI, or VAR or whoever. AI and ML buying pattern is people want to buy end-to-end. It's one, because the time to them is very important, because the GPU is very important. No one wants to leave the GPU sitting idle over there, because every single second about the depreciation of the GPU is very expensive. That's why people always want to try to get an end-to-end solution quickly. That turned out to be a new buying pattern, that they want to buy everything. From the server switch and the connectivity and the software, and quickly route it up and again, start to run the workload. That's why from the accelerator, you mentioned about accelerator, the switch side, the progress. There are a couple.
Definitely our customer have acquired a balanced mix. For the switch here, we serve hardware scalers. They pretty much is as a driving force for the solution. For enterprise or GPU as a service, we definitely offer them a solution as a play. That is, I would say, a shift, or you mentioned about a new space as a buying and offering as different from before. From the cost per gig level, to be honest, I don't have anything in my mind I can directly share to you. There's tons of study and research over there. We just are right on top of that curve in a way. From the growing business perspective, definitely we have been growing across all the dimensions I shared. From hardware scaler, from even including the ODM business there's a newcomer, there's new emerging business.
Definitely it's a positive. That is, hopefully I share the view that you are looking for.
Yeah, thanks a lot. Just maybe specifically on the new facility in Taiwan, can you say if you have basically sold out the capacity already to customers or how that looks like?
I really cannot share that number, but I can tell you it's very highly occupied.
Okay. Thanks a lot. Just one follow-up also on the switch side, if I may. I think an important factor for you to grow market share in the switch space and hyperscale customers is your software capability. How do you see the momentum there? The traction for basically gaining potentially new customers or new business on the switch side?
I just want to make sure it's clear, right? Anything we drive. There are many strategies, but there are two clear strategies. Firstly, we do open networking. Okay? We drive disaggregation. That is our belief. That is the value we bring in. We support our customer, the networking equipment provider through the ODM, JDM. We support the hardware scalers through the JDM as well. We provide our own open networking white box through the open networking software, right? Everything we drive is open networking because we have many of the different customer form. We definitely don't want to compete with them. We partner with them. The partnership is the very big key. I want to make sure that one is clear. Secondly, from the switch perspective, from the market share, we don't have exactly the same, the number coming back.
It's still in the middle, right? Hopefully, year-end, we'll get a more clear picture from the market. Hopefully our, like analyst even have a better view to share. We overall think positive about our competence level from our switch into the market. As I just demonstrated, I showed that our OCP is present over there, right? Definitely our competence is over there. We do believe. If not believe, as we just think about sales, it's a lot of feedback positive from our customers, with evidence from our large customers deployment adoption. It has been in production and for large cluster deployments and quite many still in the early stage about a PoC and a pilot. I would see that all, yeah, it's good to set up the foundation and its growth for next year.
Excellent. Thanks very much for the color. If I maybe other question would be like a bit, before I move back into the queue, just quickly, on the margins trend and outlook, if you could comment a bit how the switch upgrade trend and the new product introduction from AI cards, basically how that impacts the margin trends, maybe initial dilution vs uplift potential further out and timing and also these new strategic pushes that you mentioned and how far that has a material impact on the margins? Yeah. Thanks so much.
Thank you. As I just briefly mentioned, right, the buying pattern, deployment pattern, and even the life cycle for AI/ML has been driven primarily because it's by the GPU cycle, right? Because the pace about NVIDIA to deliver their generation by generation of the GPU, the pace definitely is much faster than a traditional or classic enterprise-based switch fabric, in term of the different generation. The following pretty much is a common pattern, right? It's from the product point of view, every single generation, when you start to turn to a shifting of switch between the generation, the cost curve, the margin curve starts running a different pattern. This GPU is really happening, to be honest, this curve is really across the year or two, right?
A lot of the pattern right now still being formalized in a way, whatever we can see is the margin from the amortization from one generation of the cost curve is running much faster compared to the other non-AI/ML based one, because the pace for the iteration is much faster. On the other hand, it brings the downside because you haven't got enough chance to try to monetize from the volume perspective and then the next generation started coming up. It turned out to be a pressure not only from the product level, from our supply chain level, because how to amortize the investment into every single one generation. In general, in the past, you take a year, right? It's a long curve, how to get a return back to recoup cost. Right now, the cycle is much compressed.
That introduce the pattern about a margin curve pattern is quite different. Okay. The essence of the nature about the margin shifts is not much different, to be honest. It's just kind of condense everything, faster switchover. Now given the margin erosion perspective. Especially from the, I would say from the deployability and even from the supply chain perspective, the curve, it just kind of much more condensed in a shorter frame. If you pull them out, release them out, it's still the same thing. Just everything you got to do faster, think faster, and react faster. The design philosophy perspective, how to catch up the wave, keep up the pace, that is one of our advantage because how to keep up the pace with multiple iterations so fast.
That is the competence actually we continue to hold. Then from margin perspective, that fall into our expectation, there's not much of a surprise, but definitely we need to work harder in a way try to monetize and recover the cost quickly, right? That's the life.
Okay, got it. Thank you. Basically, like for next year, we should expect margins rather more under pressure, from this kind of initial compressed curve, rather than move up with higher ASPs of new products?
Well, if I would only have one business about AI/ML, I would say that's the answer. However, we have a very balanced product mix and a customer mix, especially from product perspective. The strategy, continuous strategy, as mentioned last year, we will not put everything into one single basket. It's not because this year everything's AI/ML, then we rush everything to AI/ML because we have a ton amount of the balance over there for enterprise and still for data center of the investment. It's still growing. Don't get me wrong. It's just not growing as fast just like the AI/ML that occurred, but it's still a very healthy business. Yes, some of the market is still, as I mentioned, like a telco for example. As you can see our portfolio from acceleration from the metro area.
It's still going through some of the struggles on the market, we will not give up on them. In a longer term perspective, you always need to keep the balance about investment, because the market will not only go into one direction. There always will be just a self-correction here or there. That's why from the margin it more compound together, not only about one single dimension just by AI/ML, but definitely AI/ML contribution right now is much higher, have a high weight of the business contribution. We will not only looking to or prevent that one single factor to show our margin.
The other businesses would mitigate the margin pressure from AI/ML next year?
No. Well, that's why it's not an easy answer. It's a multi-dimension answer because, if you remember, as I mentioned, I didn't touch too much about DP, because last year when I mentioned about the new business rolled in. When we start to win a deal, start to build a system, start to help our customer to, let's say, buy Innosilicon to ramp up the business, it always takes time, right? In general, it will take more than, let's say, 12 months- 18 months from there. That's why, the new business coming in, some will come in too early, some will come in too late. It's always been a dynamic situation. I don't think this is the easy answer about a yes or no answer.
Okay, got it. Thank you so much.
Thank you.
Due to a matter of time, we will take our last question coming from [Karen Tai]. Please kindly unmute yourself.
Thank you. Hi, Jun and Fanny and Edward. Thank you for taking my question. My question, number one will be on Trump's election. After he was getting elected as U.S. President earlier this week, there has been talks about potential increase in tariffs or other strategic moves to increase production in the U.S. What's our thoughts about the potential impact to the industry and our capacity planning? What's our production capacity breakdown by region as of now and going forward?
I think this is a tough question because everyone right now has their own crystal ball. It's still early, right? This is just happening. From whatever we learned, years ago, the last term and through the past year, there are always the geopolitical situation from the de-globalization perspective, the trending has been very clear. With the new term coming in from Trump's election, everyone, I believe not only us as a company, but from different countries, even like whatever, not only from, let's say, Asia, China, but from Europe perspective, is quite a dynamic. We cannot just plan for plan, right? Definitely, we need to make our own adjustments.
As you can see from our agility and our agile adoption from our thinking, is always try to drive the diversification into different locations, because we have our global presence and have a global business for sure. Given not only the tariff conversation, but about a restriction, about a GPU or from China or from Europe perspective, the tax one, I leave to Fanny from our finance to look into that one. From the business strategy perspective, it's definitely we need to consider, because given this further accelerated de-globalization and this new business model and a new barrier between the countries. We have been thinking about this one. I believe many of the people just don't wait until the elections down to make decisions, right?
We have been planning, in the past, even now, always try to stay agile in the way try to cope with the situation more proactively. It's multi-dimensions of the consideration. It's not only about the tech itself. Definitely from the product level, solution level, customer level, service model perspective, there are a lot of challenges, but it always come with a lot of new opportunities. We stay positive, but yeah, we have to stay very cautious in a way about thinking about where to invest. We continue investing to new technologies. That is the key driver for us to stay as a technology company, but have to be flexible enough to deal with the global situation.
Thank you. Very clear. If I may follow up on your earlier comments on 800G adoption. You mentioned that it should be mainly for AI/ML applications, not for general data centers. Could you give us more color on the adoption rate for 800G in next year and going forward? Is there early indication of 1.6T adoption maybe two years later? If you have any color of that.
The 800G adoption, actually because there's a one about the market trend overall and one is about our sales. For our 51.2T of the system for the 800 G solution, we brought our solutions to market quite early, far early than many of our customers. We have our first customer shipment last year with our 800G solution already. If you're looking at adoption this year, definitely majority being driven by our GPU side, right? Because given the AI/ML cluster, the topology deployment, we definitely see the curve. This year still, other than the hyperscaler, other than many of the people see the spotlight from this large cluster, but there are a lot actually, under the radar, about smaller clusters. For that one, quite many still in the pilot, still in the talk. We do believe next year the 800G will continue.
This is a pattern not only in enterprise or the new player, but at hyperscaler too. 800G definitely I would think the next year will take the lead, from the ramp up and growth perspective. Now talk about 1.6T, as a next generation. As everyone knows, if you are familiar with technology from 51.2T, the next one is a double. We have been working on that one for a while already. Definitely there's dependency about the silicon timeline. We are not a chip. We use chip from our partners, the technology providers. There's a dependency over there. Definitely we are at a sufficient stage working on it. From the adoption level, to be honest, I do believe this will follow the adoption cycle about 800G and 400G. That's a dependency on the GPU.
If the GPU, the iteration of the new generation keeps the pace in that one in the similar way, I think from the adoption, from the switching line perspective will follow a similar pattern. Timing-wise, just like any new product introduction, it's just a matter of the dependency. It's really from in our control, many have dependency with our technology provider. The momentum and development and investment definitely is heading into that direction. I think it will only go higher.
Very clear. Thank you.
For the interest of time, we will conclude the Q&A session here. Jun, would you like to make any closing remarks?
All right. I just want to thank you. Thanks for all of your attention and consideration about Accton. Always appreciate the support. Hopefully we can all enjoy this journey and experience another growth year for next year. All right. Thank you for the support again.
Okay, we will conclude the call here. Thank you everyone for joining. Thank you, Jun, Fanny, and Edward for the call. Thank you.