Welcome to AUO Corporation 2026 third quarter financial results conference. Before the meeting starts, all lines are being muted. After the presentations and remarks by the management team, there will be a questions and answers session. Now I would like to hand over to Ms. Julia Chao, AUO's IR Officer. Julia, please.
Ladies and gentlemen, good afternoon. I am Julia Chao, AUO's IR Officer. On behalf of the company, I would like to welcome you to participate in our third quarter financial results conference. I am joined by four executives, Paul Peng, our Chairman and CEO, David Chang, our President, James Chen, President of Display Business, and Richard Lee, Senior Director of Finance. The agenda of today's conference is as follows. First of all, Richard will provide the results of our Q3 and provide you with our guidance for Q4.
Then Paul and David will provide opening remarks on behalf of the company. After that, we will proceed to questions and answers. We have collected questions from the analysts before the meeting, and our executives will address those questions in the first part of the Q&A session. Afterwards, if there are still more questions, we will open the line to take your calls. That was our agenda. Now, I would like to remind you that all forward-looking statements contain risks and uncertainties. Please spend some time to read the safe harbor notice on slide number two. Richard, please.
Good afternoon, everyone. I am Richard, Senior Director of Finance. Next, I will present a summary of AUO's results for the third quarter of 2026, as well as the business outlook for the fourth quarter of 2026. Starting with the income statement.
Our revenue for Q3 came in at TWD 66.9 billion, down by roughly 5.7% QoQ. Within the display pillar, the supply of key components such as memory and driver ICs remained tight during the quarter, resulting in higher costs. In addition, branded customers raised end market selling prices, which dampened demand for IT products, and the decline in demand was greater than anticipated. As a result, overall display revenue decreased by 10.7% QoQ, lower than our expectations. For Mobility Solutions, revenue was roughly flat QoQ and was in line with expectations. For Vertical Solutions, supported by steady demand for commercial and industrial displays, overall, revenue increased by 1% QoQ, meeting our expectations. Now, for our gross profit and expenses. Gross margin declined to 10.1% in Q3, down by 2.9 percentage points QoQ.
The decrease was mainly attributable to product mix changes, weaker notebook demand, and a one-time loss recognized in Green Solutions. OPEX ratio increased by 1 percentage point to 13.7% on the back of the continued advancement of automotive and new business R&D projects. OP margin was -3.5% in Q3, down by 3.8 percentage points QoQ, with an OP loss of TWD 2.4 billion for the quarter. Non-op income was TWD 400 million in Q3, mainly attributable to dividend income from investee companies. Net loss attributable to owners of the company was TWD 2.5 billion in Q3, translating to a loss per share of TWD 0.33.
EBITDA amounted to TWD 4.9 billion this quarter, with the margin declining to 7.4%. Now, let us take a look at the balance sheet. Cash and cash equivalent was TWD 56.5 billion at the end of Q3, up by TWD 2.7 billion QoQ, representing a healthy cash position.
I will provide more details when we review the cash flow statement on the next slide. Inventory levels increased in Q3, with inventory turnover rising to 61 days. This was primarily due to softer demand for IT products, resulting in higher inventory levels, as well as the company's prudent inventory buildup to mitigate supply risks associated with certain key materials. Total short-term and long-term borrowings amounted to TWD 101.5 billion in Q3, a slight increase of TWD 900 million from the previous quarter. Gearing ratio continued to decline and reached 27.2% at the end of the quarter. Now let's move on to the cash flow statement. Cash inflow generated from operating activities was approximately TWD 3.9 billion in Q3, including depreciation and amortization expenses of TWD 7.3 billion during the quarter.
Cash outflow from investing activities was TWD 600 million, primarily reflecting CapEx of TWD 3.6 billion, partially offset by cash inflows of TWD 4.2 billion from the disposal of plant facilities. Cash outflow from financing activities was TWD 1.3 billion, mainly due to cash dividend payout totaling TWD 3 billion during the quarter. Free cash flow was approximately TWD 300 million in Q3. We have now achieved positive free cash flow for three consecutive quarters. Moving on to revenue by pillars, due to lower shipments of IT products, Display pillar's contribution declined by 2% QoQ to 46% of our revenue.
Mobility Solutions accounted for 30% of the revenue, up by 1% QoQ. Vertical Solutions accounting for 20%, up by 1% QoQ. Next, profitability performance by pillars. In Q3, the OP margin of Mobility Solutions 1%, Vertical Solutions 1.3%, Display pillar, -8.5%. Next, I would like to walk you through the company's outlook for Q4 2026.
First, for the Mobility Solutions pillar, the company expects our automotive team to continue securing new business opportunities and meeting customer demand. Revenue from the Mobility Solutions pillar is expected to remain roughly flat compared with Q3. For the Vertical Solutions, while demand remains relatively stable, revenue is expected to decline by a low to mid-single digit percentage point compared with Q3, as the energy business will no longer be consolidated in the company's financial statement starting October 1st. Lastly, for the Display pillar, seasonal inventory replenishment has largely come to an end, and branded customers have become more cautious in their panel procurement. As a result, revenue is expected to continue declining compared with Q3. That concludes my presentation. Thank you.
Thank you, Richard. Now we would ask Paul to have an opening remark.
Good afternoon, investors and friends from the media. I'm Paul. Looking back at Q3, consolidated revenue was TWD 66.9 billion, down by 6% from Q2. The decline mainly came from the Display pillar, particularly notebooks, due to shortages of memory and CPUs, and market prices increased significantly, which in turn weakened end-user demand. In addition, notebook customers and channel inventories increased, resulting in softer panel demand in the second half of the year. However, the other two pillars remained relatively steady.
Mobility was flat, while Vertical Solutions grew by 1%. Although the New Taiwan dollar depreciated by 1% against the USD, providing a favorable foreign exchange impact, profitability remained under pressure. This was mainly because the decline in the revenue outweighed the forex benefit, resulting in lower gross profit QoQ and OP loss for the quarter. Our OPEX did not decrease along with the revenue during the quarter.
Instead, they increased by more than TWD 100 million, mainly due to development expenses for new automotive programs and investments in advanced technologies. These expenditures need to be incurred ahead of future business opportunities. Managing OPEX remains a key strategic objective for the company. In the short term, we aim to maintain the OPEX ratio within the range of 11%-12%. Over the medium to long term, our goal is to reduce it to below 10%, and the management team will continue working toward this target. This quarter, both total inventory and inventory turnover days increased. The primary reason was strategic inventory preparation in anticipation of potential component shortages. In addition, at facilities undergoing asset revitalization, we began production preparations earlier in order to meet customer requirements. As a result, total inventory is expected to remain at a relatively elevated level over the next two years.
However, we expect inventory levels to begin declining gradually after the second half of the next year. Aside from these strategic considerations, we continue to follow a build-to-demand policy and avoid inventory accumulation whenever possible. As for the operating performance of the three pillars and the outlook for next quarter, our President, David Chang, will provide further updates shortly. Turning to the overall economic outlook, forecasts from major research institutions regarding global economic growth suggest that the market is not pessimistic about economic conditions in 2027. However, war, oil shortages, memory shortages within the semiconductor industry, and rising raw material costs will continue to be important factors affecting economic conditions. In addition, industry related to information and communication technology that rely heavily on memory are being impacted by memory costs that have risen several-fold, and in some cases, by supply constraints. As a result, customers are experiencing pressure.
We will continue to monitor market developments closely and respond with agility. Let me also briefly share with you the organizational restructuring that we announced on July 1st. In addition to the three operating pillars, we established the Institute of Innovation and New Venture. Today, I would like to share what the Institute of Innovation and New Venture is focused on. The first area is semiconductors. AUO has in fact been building our semiconductor-related footprint for some time now. Our subsidiaries, AUO Crystal and AET Corporation, have cultivated key positions within the semiconductor supply chain over the years. Combined revenue from these semiconductor-related businesses exceed US $100 million last year, and we expect double-digit growth this year. If we also include our affiliated companies, such as Raydium Semiconductor and Daxin Materials, the total revenue contribution would be even greater.
At the same time, we are extending the manufacturing expertise and product strengths developed over the past three decades in the display industry into the AI supply chain and ecosystem. Dedicated teams within the institute are driving the associated R&D and technology development. Currently, the institute is actively developing technologies in AR waveguides, glass antennas for low Earth orbit satellites, optical communications, and advanced semiconductor packaging, with the goal of becoming an important strategic supplier in these industries. With respect to optical communications, there has been some inconsistency in how the market refers to the technology. Therefore, I would like to clarify that AUO is developing optical engines for interconnect. This is a critical component required for optical interconnect applications. The optical interconnect applications referred to cover short, medium, and long-reach connectivity, as well as a broad range of use cases, including scaling, scale-up, and scale-out architectures.
Each application scenario has different requirements in terms of power consumption, bandwidth, transmission speed, and reliability. The industry is still at the relatively early stage of development. Different players are actively exploring various architectures and technology roadmaps, each with its own challenges and complexities. At present, no single dominant solution has emerged. AUO will leverage the expertise in optoelectronics together with the group's long-term investments and partnerships throughout the supply chain to develop optical interconnect solutions tailored to different application requirements. As for whether optical engines will eventually be co-packaged with AI chips or CPUs, that direction will largely be determined by chip makers and advanced packaging providers. Regarding the progress of these new initiatives, AR waveguides and LEO satellite antennas have already entered the customer assembly stage.
Optical engines and advanced semiconductor packaging processes are still in the specification definition stage, although the relevant technologies have already been incorporated into our technology development roadmap. At this point, these opportunities remain at an early stage of development, and therefore, we have not established specific operating targets for them. That said, we expect these initiatives to begin making meaningful contributions to overall revenue within the next two to three years. This year, the board has already approved more than TWD 24 billion in additional CapEx, and today it approved a further TWD 5.7 billion. Part of the investment will be allocated to new technology development and the CapEx required for small volume production. As partnerships advance and technologies mature, we will gradually move toward mass production. Naturally, additional investment plans will be required once these programs enter mass production.
In addition, the board approved the disposal of phase two of our Taichung site, including a Gen 5 Fab and a Gen 7.5 Fab, to TSMC. Since the beginning of the year, the company has announced asset disposal involving facilities in Kaohsiung, Huaya, Singapore, and Taichung. Regarding the proposed sale of the Huaya facility to Quanta, which was approved by the board at the end of July, the parties were unable to reach agreement on facility specifications and the delivery schedule. As a result, the board resolved today to terminate the transaction. The company will continue to seek suitable buyers for the property. Based on our overall assessment, the remaining facility space has reached an appropriate level. Therefore, the company's asset optimization and revitalization program will largely come to a close. The proceeds generated from these asset disposals will be redeployed into strategic and future-oriented investments.
To summarize, the three operating pillars will continue focusing on driving revenue growth and profitability within the existing businesses. Meanwhile, the Institute of Innovation & New Venture will focus on developing new growth opportunities in areas such as the four AI arrows that we outlined and the advanced semiconductor packaging. Through this approach, the company will balance short-term operating performance with long-term strategic investments and continue progressing steadily towards sustainable growth. With that, I would now like to hand the session over to our President, David, who will walk you through the operating performance of our three major pillars. Thank you.
Good afternoon, investors and analysts. I am David. Paul has just provided an update on the progress of the Institute of Innovation & New Venture. I will walk you through the business overview of our three pillars.
For the display pillar, looking back at Q3, we continue to see some seasonal inventory replenishment demand for TV products. However, demand for IT products remained relatively weak, particularly notebooks, which were more significantly affected by memory shortages and price increases. Brand customers had already pulled in demand during the first half of the year, and after end-market pricing reflected higher costs, consumer purchasing willingness has been impacted. As a result, brand customers became more conservative in panel procurement starting in Q3. As a result, display revenue declined by 11% QoQ in Q3, below our expectations. Looking into Q4, seasonal inventory replenishment for TV products has largely come to an end. However, due to rising memory prices, we have observed brands shifting their TV product portfolios toward larger sizes and more premium offerings, which is beneficial to the panel industry.
As for IT products, demand conditions continue to follow the trends seen in the previous quarter, with weak end-market demand and relatively conservative panel procurement by brand customers. As a result, display revenue is expected to continue decreasing compared with Q3. We have also observed that key components such as memory have experienced price increases and supply shortages due to the demand being crowded out by AI-related applications. From our current perspective, these constraints are unlikely to ease in the near term, and they will have some impact on demand for consumer electronics. The company will continue to closely monitor market developments, respond flexibly, and carry out production based on demand. For the Mobility Solutions pillar, looking back at Q3, our automotive team continued to deepen collaboration with customers, and revenue remained roughly flat QoQ, in line with our anticipation.
This year's automotive market was also affected by geopolitical conflicts and shortages of key components such as memory. In particular, domestic demand in mainland China has been more muted than in previous years. In addition, mainland China automakers have shifted their focus toward exports, which has also created market challenges for European automotive OEM customers. Despite these macroeconomic headwinds, our Mobility Solutions team has maintained stable revenue momentum overall. Therefore, we expect Q4 revenue to remain broadly flat compared with Q3. At present, oxide and LTPS remain the mainstream technologies in automotive displays, which are also areas where our company holds competitive advantages. When combined with mini LED backlighting, LTPS can deliver contrast and image quality comparable to OLED while offering higher brightness and better power efficiency.
This year, AUO Mobility Solutions has successfully secured a number of new mini LED projects, and the revenue contribution from related products is expected to continue expanding over the coming years. In addition, automotive OEMs have recently shown strong interest in AUO's most advanced Micro LED displays. At the Beijing and Paris Auto Shows this year, customers showcased smart cockpit solutions equipped with AUO transparent Micro LED displays. Currently, our automotive team is working with multiple automotive OEMs on POC projects, and several OEMs are actively evaluating adoption opportunities, further reinforcing AUO Mobility Solutions leadership in next generation cockpit technologies. Lastly, for Vertical Solutions, stable growth in retail, medical, and industrial and commercial display applications drove revenue to increase by 1% QoQ in Q3, in line with our expectations. Presently, Vertical Solutions has continued to secure new projects and customer engagements across industrial, retail, healthcare, and entertainment verticals.
In industrial applications, driven by increasing needs related to industrial automation and AI data center deployments, demand continues to grow as customers invest in more efficient and reliable industrial equipment and upgraded operator interfaces. In retail, we continue to deepen cooperation with major international customers and have secured opportunities to support their retail and commercial expansion projects in Europe and North America. In healthcare, we have recently begun working with major North American medical device manufacturers and are rolling out new high-end medical display products. In addition, for e-paper applications, AUO provides a one-stop solution covering e-paper modules, electronic shelf labels, e-paper digital signage, and content management platforms. We remain optimistic about the long-term growth opportunities in this segment. We are currently advancing related projects in Europe, Japan, and Taiwan while working with ecosystem partners to expand applications from retail into transportation, public information services, and culture and entertainment sectors.
Looking ahead to Q4, demand from industrial and healthcare applications is expected to remain relatively stable. However, as mentioned earlier, following the completion of the energy business separation, the business no longer consolidated into AUO's financial statements starting October 1st. As a result, total revenue is expected to decrease by a low to mid-single digit percentage compared with Q3. Excluding the impact of the energy business, the Vertical Solutions pillar revenue would decrease by a low single-digit percentage QoQ. Finally, let me summarize our outlook for Q4. For the display pillar, seasonal inventory replenishment has come to an end, and brand customers are expected to be more conservative in panel procurement. Revenue is therefore expected to continue declining compared with Q3. For AUO Mobility Solutions, the automotive team will continue securing new business and meeting customer requirements, with revenue expected to remain roughly flat compared with Q3.
Last, demand for Vertical Solutions remains relatively stable, with revenue expected to decrease by a low to mid-single digit percentage compared with Q3. This concludes my remarks. Thank you.
Thank you, Paul and David, for your remarks. We will now move on to addressing the questions that we have collected from analysts before the meeting. The first question is related to finance. Investors have asked whether there are any changes to the company's expected depreciation expense and CapEx for 2026, as well as management team's view on future CapEx. Richard will address this question.
Thank you. Let me address this question. Depreciation expense for 2026 is still expected to be approximately TWD 28 billion, while cash outflows for CapEx have been revised downward to no more than TWD 15 billion. This adjustment is mainly attributable to project acceptance timing.
As a result, a portion of the related CapEx is expected to be deferred to 2027 for payment. With regard to future CapEx planning, the company will continue to build upon the three pillars while leveraging the R&D capabilities of the Institute of Innovation and New Venture. We will allocate resources and make investment decisions in a way that balances short to midterm business growth with long-term competitiveness considerations. The company will also adjust CapEx levels as appropriate, based on the progress of bringing new technologies into mass production. This concludes my response.
Thank you, Richard. The next question is related to display market. Investors and analysts are asking about the end market demand and channel inventory conditions for TVs, monitors, and notebook PCs in Q3, as well as our outlook for Q4 and next year. James, would you please?
Hello, everyone. As the Chairman and President have already mentioned, let me provide some additional comments on the consumer electronics market. For TVs, in particular, after FIFA World Cup concluded in July, much of the demand had already been front-loaded into Q2 and early July. In addition, beginning in Q3, rising memory prices led brands to pass through higher costs to end market pricing, which in turn caused end user demand to soften. As a result, global TV unit demand declined by about 5% YoY in Q3. However, due to rising memory costs, brand customers have strongly shifted toward larger screen size products. Consequently, area shipments actually increased. Average screen size expanded by about 1.5 inches, which has been very helpful in supporting a more balanced supply-demand environment.
Looking ahead to Q4 and next year, we believe TV shipment volumes will continue to be affected by higher memory prices and are likely to experience a single-digit decline. However, demand by shipment area is still expected to achieve single-digit growth. Overall, we remain relatively optimistic that supply-demand conditions in the TV industry will remain stable. Now, let's turn to IT products. The monitor market was also affected by higher memory prices and shortages, as well as price increases of scaler ICs, resulting in an approximately 5% YoY decline in demand during Q3. Looking into Q4, brand customers are still expected to carry out traditional seasonal inventory replenishment activities. However, due to rising costs, monitor sale through in Q4 is expected to decline by low single-digit percentage.
Moving into next year, memory pricing pressure is expected to continue, and therefore, demand is also expected to decline by a low single-digit percentage. As for notebook PCs, demand declined by 18% YoY in Q3. This was mainly driven by increased DRAM content and higher CPU prices, which pushed ASPs up by approximately 30%-40%, resulting in a more significant impact on demand. Looking ahead to Q4, customers remain relatively cautious in their procurement activities, and channel inventory levels for notebooks continue to stay elevated. Customers are actively working through inventory correction efforts. As a result, notebook sales are expected to continue softening in Q4, with shipment volumes likely to remain on a downward trend. That concludes my comments. Thank you.
Thank you, James, for the response. We will now start taking questions from online participants. To ensure equal opportunity for each participant, please be reminded to limit the number of your questions to three per call, and please state them all in one go. Thank you.
We now start taking questions. The first caller is Vivi Huang from Morgan Stanley.
Thank you very much for giving me the opportunity to ask questions. I have two questions. First, could you elaborate further on your future CapEx plans? In particular, what is the current status of the CapEx plans related to optical communications and new technologies such as GCS? The second question is regarding automotive applications. A few days ago, it was mentioned that your smart cockpit solution has already begun shipping. Could you provide us with more updates on that? Thank you very much.
Thank you, Vivi, for the question. Regarding optical communications, we are developing optical engines for interconnect.
We will use Micro LED or Micro VCSEL as the key components on the transmitter side. At the same time, we are leveraging the group's resources, including in Micro LED and VCSEL technologies for transmitter, leveraging capabilities from Ennostar's in Micro LED and VCSEL, and Tyntek's capabilities in photodiode for developing receiver components. Of course, we will also leverage AUO's know-how in glass processes and optoelectronic technologies to develop optical engines. We are currently discussing specs with customers, and we have already invested in a small scale R&D production line. As for investment in mass production lines, that will likely take place when the technology reaches a more mature stage, possibly in one or two years. At that point, you will also see our CapEx for this area increase more significantly over the following one to two years.
Similarly, for other new technologies including other AI-related technologies, we continue to invest steadily. Our CapEx budget up to July this year was originally around TWD 24 billion, and with the additional TWD 5.7 billion announced this time, the total is close to TWD 30 billion. Over the next three years, we will continue to make investments based on market demand and the progress of tech development. At present, our efforts are mainly focused on development and preparing for small volume production. Once the technologies are mature, we will invest in larger scale production lines. We have already made the necessary preparations in terms of manufacturing capacity and funding resources. Therefore, we will continue to invest in these areas according to market demand. For the smart cockpit business, I will ask David to provide further details.
Hello, this is David. In the mobility sector, AUO has continued to build on the original panel business while expanding into display HMI, and going forward, smart cockpit-related business. At present, revenue from the display HMI business accounts for more than 40% of the mobility business. In terms of the smart cockpit solutions, in addition to the existing climate control business, we have gradually introduced our solutions into commercial vehicle markets in Taiwan and Japan through automotive computing platforms. Going forward, we will continue expanding into additional commercial vehicle customers. Overall, as of now, smart cockpit revenue should already account for a double-digit percentage of our mobility business. This concludes my explanation.
The next question comes from Jerry Su of UBS. Please go ahead.
Hello, management team. This is Annie from UBS. I have three questions on behalf of Jerry. First, with the recent increase in raw material prices, could management comment on the impact of the gross margins of the various business groups? For the display mobility solutions and vertical solutions businesses, are you able to pass these increased costs to customers?
The second question is about the progress of Micro LED applications in transparent displays, automotive applications, and watches, as well as their approximate revenue contribution. Does the company have a clear target, and when do you expect these applications to begin making a more meaningful contribution? My third question is related to the fab in Central Taiwan Science Park, or CTSP, that will be sold to TSMC. When do you expect the ownership transfer to be completed? Is there any possibility that it could happen this year? In addition, regarding the cash inflow generated from the sale, what will be the company's capital allocation strategy? For example, are there any target ranges for net debt equity and shareholder returns? These are our three questions. Thank you.
Thank you, Annie, for the questions. This is David Chang. For your questions, I will address the questions regarding raw materials, the CTSP fab, and the capital allocation. Paul Peng will answer the second question regarding Micro LED in a comment. First, regarding rising raw material prices beginning in Q3, increases in raw material costs have indeed increased some cost pressure for our company. For Q3, thanks to our long-term relationships with suppliers and existing contractual arrangements, the overall impact has remained generally manageable. For Q4, price increases have expanded to include PCB, driver ICs, and even glass. We continue to negotiate with the suppliers on these issues.
These increases will indeed place some pressure on our gross margins in Q4, but we are doing our best to manage the impact. At the same time, across our Vertical Solutions, AUO Mobility Solutions, and display businesses, we continue to communicate customers and seek opportunities to pass through part of the raw material cost increases. Currently, discussions are still underway. The second question concerns the Taichung fab to be sold to TSMC. The facility is still running, so it will take some time before it can be formally handed over to TSMC. Accordingly, the process will include capacity ramp-down, production shutdown, site handover, and completion of all administrative procedures, and ultimately the recognition of gains from asset disposal. We can say with certainty that the disposal gain will not be recognized this year.
Whether this will be completed next year or the year after that will depend on the progress of the overall administrative procedures. Finally, regarding capital allocation, AUO's asset revitalization program will essentially reach a milestone on the phase II disposal of the Taichung fab is completed. With respect of the allocation and reutilization of our manufacturing spaces, we believe that the portfolio has now reached a near optimal state. Therefore, this phase of asset revitalization will largely come to an end. Going forward, the funds generated from this round of optimization will first be invested in new businesses, new technologies, and new platforms, including investments in display technologies such as oxide, LTPS, and Micro LED, among other new technologies. The second area will be investments in AI-related opportunities, as well as new technology platforms involving advanced packaging and glass core substrate technologies.
After these investments, the next priority will be to further improve AUO's financial structure. Third, we will continue to maintain a stable dividend policy. This concludes my response to Annie's questions. Thank you.
Paul Peng speaking. Now, regarding Micro LED in display applications, particularly transparent displays, business progress been quite encouraging. At the Paris Motor Show in October, one customer incorporated our Micro LED transparent display into a vehicle. As a result, we have also gained additional business opportunities. In addition, in the watch segment, we continue to work with customers on the development of new products. We remain actively engaged with customers in developing solutions for the high-end watch market. As such, some media reports suggesting that Micro LED is no longer being used in watch applications are misleading. Because Micro LED offers high brightness, high reliability, and long operating life, it is an excellent solution, particularly for outdoor applications.
Accordingly, we will continue to expand our investments and application development efforts in this area. At present, we continue to see progress in watches and various portable devices. The automotive sector remains the fastest growing area. Within the automotive sector, in addition to the concept vehicles David mentioned earlier, Micro LED has also begun to be introduced into commercial vehicles that are preparing to enter the market. Therefore, in the near future, we expect to see production vehicles using Micro LED technology officially on the road. We have also committed to our customers that we will reduce costs by 50% every two years. At present, this effort remains on track. The primary drivers are improvements in product yield, optimized product design, and the transition of our production lines from first generation to Gen 4.5, all of which have enabled substantial cost reductions.
As a result, we aim to accelerate the overall development of the Micro LED ecosystem, covering conventional and transparent displays and future optical communication applications. These will all be key growth drivers for us in the future. Therefore, we remain highly confident in the long-term prospects of Micro LED. We will continue investing in Micro LED and leveraging the group's long-term strategic positioning across multiple application areas with the goal of achieving strong results in these market segments. Thank you.
The next question comes from Lisa Chen of Yuanta Securities. Please go ahead.
Hello, can you hear me?
Yes. Please speak a little louder.
Hello, management team. Thank you for taking my questions. My questions are mainly focused on the semiconductor-related business. We were very impressed by the product that AUO and Corning jointly showcased earlier.
My first question is whether the development of both glass core and carrier technologies is currently being pursued in parallel. The second question is about the progress of glass core. Have preparations for a pilot production line already begun? In addition, for glass-based semiconductor products, whether carrier or glass core, where do your technical advantages lie, and what are the key technological breakthroughs you aim to achieve? This is something we are very interested in understanding. Has the company determined which generation of production lines will be used for these products, and what are the target applications will be? Besides Corning, have you already started product development projects with one or more additional customers? These are my questions related to glass-based semiconductor production. In addition, some media reports seem to have treated optical communications and glass semiconductor products as part of the same development project.
My understanding is that they are actually two separate projects. Could you provide further clarification on this point? That's all from me. Thank you.
Thank you, Lisa. This is Paul speaking. Regarding the front-end processes for advanced semiconductor packaging, including glass processing technologies and what we refer to as the process flow from TGV to glass core substrate, we already possess the relevant core technologies, whether it is copper plating or the formation of RDLs and related process technologies. AUO has comprehensive capabilities in these areas. Therefore, we have strategic deployments in glass core substrate and carrier technologies. At the same time, we are working closely with our partners to explore the most suitable collaboration models. Regarding the glass sizes you mentioned, we are working with both 510 mm by 515 mm and 310 mm by 310 mm formats, corresponding to different development stages and application requirements.
There is still some relationship with the generation structure of existing LCD production lines, but many portions still require reconfigurations. Therefore, if you ask exactly which generation line will ultimately be used, I cannot provide a direct answer today. However, what I can say is that the production lines will require significant reconfigurations. That said, some existing equipment can be reused, and we will convert and leverage such assets wherever possible. As for our advantages in glass technology, AUO has accumulated more than 30 years of experience in glass processing within the industry. I believe we possess comprehensive capabilities in creating circuits and carrying out various manufacturing processes on glass substrates, and other competitors may not necessarily have the same depth of our understanding when it comes to processing glass materials. Regarding the relationship between glass core substrate and optical communications, frankly speaking, they are indeed two separate initiatives.
In the optical communications field today, there are several different architectures under discussion. The simplest is the transceiver in a pluggable form factor. Another area being discussed is near-package optics. Ultimately, the industry may move toward CPO, or co-packaged optics. From a long-term perspective, optical communications and glass core substrate technologies may eventually converge at certain points. However, from AUO's current standpoint, they represent two separate business development directions and are not being managed as a single integrated project.
Thank you. That is very clear. I would like to follow up by asking whether, given your technical advantages in glass processing and the fact that some processes can be shared, the current development approach involves first acquiring testing equipment and then gradually setting up pilot production lines.
It is not limited to testing equipment. Certain process tools also need to be purchased. Of course, the basic infrastructure, such as factories and utility systems, is already in place. As for manufacturing equipment, some will need to be newly acquired, while others can be converted from existing smaller generation production lines. In addition, back-end testing and repair and maintenance capabilities differ from those required for our previous products, so we will need to invest in related equipment.
Could you provide us with an update on the current progress?
The proposal submitted to the board this year on CapEx did include plans for development lines and pilot production lines. However, the required equipment has not yet been delivered, so it will still take some time before the pilot line can be fully established.
Regarding your partnership with Corning, will future cooperation primarily focus on prototype products? Or is it also possible that you will collaborate with other glass companies?
The products we have showcased publicly so far were developed in collaboration with Corning. The glass used in the applications is semiconductor grade glass, which is different from the alkali-free glass commonly used in display applications. In the sample that we previously demonstrated, Corning was responsible for glass modification and drilling, while AUO handled plating and the subsequent circuit formation processes. That was the collaboration model used for the demonstration sample. As for the model that will ultimately be adopted for mass production, discussions are still ongoing with our partners, including downstream ecosystem partners.
There are multiple upstream partners as well as multiple downstream customers involved. Is that correct?
Yes, we have multiple partners across both the upstream and downstream segments of the supply chain.
Ladies and gentlemen, we will now take one last question in the interest of time. The final question comes from Karen Huang of Citi. Please go ahead.
Good afternoon, management team. Thank you very much for taking my questions. I have two questions. The first question is still focused on Micro LED optical communications. You just mentioned that mass production lines could be established within the next one to two years, with large-scale mass production potentially becoming a reality within the next two to three years. Could you share whether the company has established any key milestones and corresponding timelines for the next two to three years? In addition, since some level of customer validation appears to have been completed, I would like to understand what the biggest technical challenges and bottlenecks have been during the validation processes? At the same time, you will have noticed that there is still some debate in the market regarding the adoption of different optical communication solutions.
Under the same transmission distance and bandwidth requirements, how does the Micro LED solution compare with other optical engine technologies in terms of system bandwidth, power consumption, data transmission rate, and module controllability? Could you provide some quantitative metrics to help us make a comparison? My second question concerns the traditional display business. You previously commented on demand trends and supply chain challenges. Based on the discussions with both suppliers and customers, how do you view the supply situation for certain key materials headed into 2027? Do you believe the constraints would ease by then? If challenges persist into 2027, when do we think supply-demand imbalances and component shortages might begin to improve? Thank you. That is all from me.
Regarding Micro LED display, we currently have several large projects under discussion. At the same time, we are continuing to build out our manufacturing capacity.
For example, our Gen 4.5 high-resolution production line is expected to be completed in the first half of next year. This will provide us with significantly greater capacity to support future volume production. For larger opportunities, including watches, new AI devices, and automotive applications both inside and outside the vehicle, we expect to see significantly higher shipment volumes from the second half of next year through the following year. As a result, we expect related revenue to grow by several times over the next one to two years. There are also additional opportunities ahead. The advantages of Micro LED are quite clear, including ultra-high brightness and free-form design capabilities, which are difficult for other display technologies to achieve. Therefore, customers that are developing advanced display applications actively approach us for collaboration, as AUO's progress in the Micro LED field is also among the most advanced in the world.
As for optical engines, different technology solutions are designed to address different transmission distances and use cases. For example, short, medium, and long-distance transmission applications each have their own optimal technologies. One important advantage of Micro LED is its ability to withstand relatively high operating temperatures, reaching approximately 125 degrees Celsius. Many alternative solutions encounter rising temperatures and bandwidth degradation under high-speed transmission conditions, whereas Micro LED performs exceptionally well in this regard. In addition, our technology architecture has the potential to substantially reduce power consumption. Based on current estimates, power consumption may be only around 5%-10% of the existing optical communication solutions. Therefore, we are highly optimistic about the prospects of the technology. At the same time, beyond Micro LED, our group also has investments in other related technologies, such as Micro-VCSEL. Going forward, we will provide different solutions according to customer-specific requirements.
Hi, Karen, this is James. Let me address the LCD-related question. At present, demand from AI data centers remains very strong, which continues to drive robust demand for memory and related components, such as PCBs. Therefore, we do not yet see any signs of cooling demand from AI data centers in the near term. Under the circumstances, I believe supply tightness for items such as DRAM and PCBs is likely to continue. We continue to communicate with customers regarding these cost increases and pricing dynamics in an effort to maintain a healthier supply chain environment. However, we do not expect any significant change in the near term. We will continue to discuss pricing adjustments with customers in order to reflect rising costs appropriately.
Thank you, James, for the response. We would also like to thank all the participants who joined us online today. This concludes AUO's online investor conference for this quarter. If you have any other questions, please feel free to contact us at IR department after the meeting. Thank you all for your participation, and we look forward to speaking with you again next quarter.