Ladies and gentlemen, good afternoon. I'm Damon Zeng, Ennostar Group's IR officer. On behalf of the company, I would like to welcome you to participate in our 2023 second quarter results conference. I'm joined by five executives: Paul Peng, Chairman of Ennostar; Patrick Fan, Chairman of EPISTAR; Terry Tang, Chairman of Lextar; Wei Shi, Chairman of Unikorn Semiconductor, and B.Y. Chang, Ennostar's CFO. Before we begin, I would like to inform you that due to the typhoon today, this earnings call was pre-recorded, so there will be no online Q&A sessions today. The agenda for today is as follows. First of all, our CFO will go over 2023 Q2 results, and Chairman Paul Peng will have an opening remark. The chairman of each company will talk about their Q3 outlook respectively. Finally, we will provide feedback to several questions of interest to our investors and analysts.
That was our agenda for today. I would like to remind you that all forward-looking statements contain risks and uncertainties. Please also spend some time to read the safe harbor notice on slide two. I'll hand over to B.Y. for the Q2 results.
Hello, everyone, I'm B.Y. I'll briefly go over Ennostar's Q2 results. First of all, Q2 net revenue came in at TWD 5.84 billion, up by 23.6% from Q1, mainly driven by a recovery in demand for TV backlights, display panels, and mini-LEDs. Q2 gross margin reached 4.8%, up by 6.9% QoQ, mainly thanks to the increased revenue and loading rates. After deducting OpEx and non-GAAP items, net loss attributable to the parent company lowered from Q1, totaling TWD 912 million in the second quarter.
Loss per share was TWD 1.22. EBITDA margin improved to 2.7% compared to -2.9% in Q1. Moving on to EPISTAR's comprehensive income. Q2 revenue was TWD 3.58 billion, up by 18% QoQ. The gross margin loss narrowed to -1.9%. Next, let's take a look at EPISTAR's revenue by application. EPISTAR's revenue rose by 18% in Q2, with the main growth momentum coming from the IT segment, specifically mini-LED. IT's revenue share increased to 19% in Q2. The second growth driver was the Display segment, whose share grew from 22% in Q1 to 27% in Q2. The third growth driver was Sensing, as the segment saw stronger seasonal demand, and it took up 8% of the revenue in Q2. Next, Lextar's Q2 results.
The company's revenue reached TWD 2.128 billion, up significantly by 30.6% from Q1. Gross margin also rose slightly to 20.6%. The sharp revenue growth in Q2 was mainly due to the significant recovery in demand for TV backlights, whose revenue share rose to 30% from 23% in Q1. In addition, Sensing and automotive also posted steady growth, accounting for more than 15% of the revenue. Moving on to Ennostar's balance sheet. At the end of Q2, cash and cash equivalents was TWD 17.3 billion. After deducting bank borrowings, net cash increased slightly to TWD 11.3 billion. We continued to prudently control our inventory level amid the uncertain economic conditions. As a result, at the end of Q2, our inventories continued to drop, reaching TWD 4.46 billion.
Inventory turnover days also declined further to 76 days. Cash flows. In Q2, we generated TWD 960 million from operating activities. CapEx was TWD 428 million. Accounting for the net change in loans, the net change in cash in Q2 was a net inflow of TWD 1.207 billion. Ending balance was TWD 17.3 billion. This was an overview of Ennostar's Q2 results.
Next, we have Paul to give an opening remark .
Ladies and gentlemen, good afternoon. Since I assumed the role of the Chairman of Ennostar on May 31st, this is the first time that I participated in the company's earnings call. Because of today's typhoon, classes and offices are closed in Taipei. We are pre-recording the briefing instead. I hope this typhoon will not cause any major damages, while also helping to relieve the drought in Taiwan.
Of course, we also hope that you are all safe and sound. Now, I'd like to briefly run through our Q2 results. Our net revenue surged 23% QoQ. We came back to black at the gross margin level compared to negative gross margin in Q1. Due to the continued inventory clearing in the market and the slow recovery of the consumer market, we registered a sharper year-over-year gross margin slide. Our trough for the year will be in Q1, and we expect our performance to improve quarter by quarter, with the second half of the year being better than the first. As the recovery of the market is relatively slow, the growth rate in the second half will likely be muted.
Due to a bigger drop in high-end products and product mix related reasons previously, the improvement in profitability lagged behind that in revenue. Moreover, due to the decline in demand and hence the lower loading, idle capacity was higher. Nearly 80% of our OP loss was attributable to the idle capacity. Improving our order visibility and lowering idle capacity will be our highest priority. We hope that with the order volume growing, we will improve our performance, thereby lowering the burden of idle capacity to our finances. As demand for consumer panels rose, IT and TV backlights saw bigger increases in Q2. As for our balance sheet, our cash and cash equivalent in Q2 was TWD 17.3 billion, far exceeding our financial liabilities, so we had net cash. We've been prudently controlling our CapEx too.
Therefore, our balance sheet was relatively healthy, and the inventory turnover days went down by 15 days from Q1. In terms of our Q3 or second half outlook, we expect panel-related applications and horticulture lighting and special lighting to enjoy stronger growth. With automotive lighting growing steadily, we are now actively engaging customers in automotive application deployments, including display backlights, lighting fixtures, car interior lighting, and sensors. We've been getting many more customer requests for automotive micro-LED, so we are also initiating more projects with customers. The demand for panels is expected to rise in the second half. Unikorn's performance is growing steadily, with optoelectronic components being the main driver in the first half, and microelectronics products projected to post a more substantial growth in the second half.
Overall, Unikorn's performance in the second half of the year will outpace that in the first half, and the company will also strive to enhance the proportion of value-added products in the product portfolio. For micro-LED, we will leverage the group synergies to pre-prepare for mass production. Meanwhile, we will strictly control the CapEx and expenses in hopes of further improving our profit. This concludes my talk and a recap of our Q2 performance. Thank you very much.
Thank you, Paul. Now, we will have each chairman of the three subsidiaries to go through their business outlook for the third quarter, respectively. We'll first have Patrick to share with us his outlook. Thank you.
Ladies and gentlemen, good afternoon. As Paul mentioned, due to the suppressed market demand, our performance in Q3 will likely be flattish or slightly weaker than Q2.
Due to the rising adoption of OLED, traditional TV and smartphone backlights were under big pricing pressure. Paul just said that there are signs of recovery on the consumer market. We will actively identify new opportunities as they arise. Amid the rising inflationary pressure around the world and weak economic conditions in China, landscape lighting growth has been weaker than expected, which have been originally projected to see robust demand, so that took us by surprise. However, as said, in terms of the Display segment, the two leading display makers are important customers of EPISTAR's. Post the peak of coronavirus pandemic in mainland China, the economic activities haven't been as strong as before, but there are already signs of recovery. As a result, indoor display demand will continue to increase, which will translate to steady growth of display as a share of our revenue.
As for mini-LED IT applications, on the back of persistent inventory corrections across the supply chain, market demand in Q3 and Q4 will likely rebound slightly. Besides mini-LED backlights for IT applications, our mini-LED backlights for automotive applications and in-vehicle RGB ambient lights are being deployed extensively and are expected to make visible contribution to our revenue in two to three years. In our last results conference, we told you that wearables, sensing, and horticulture lighting will experience higher seasonality in Q3. We are maintaining our outlook for Q2, and as B.Y. told you earlier, we expect to see growth in Q3 as well. That means we will see more growth in Q3 from Q2. In Q2, we originally expected there was some growth from the automotive segment. However, the growth momentum wasn't really strong in Q2.
We are now seeing growth momentum to pick up in Q3. We will continue to observe the trend as it emerges. We'll also assess whether the trend will continue into the fourth quarter or even carry into next year. At the same time, we will communicate with our customers actively to understand the market demand. The needs for automotive lights are not limited to just mini-LED interior backlights, but also exterior turn signals and tail lights. We've been actively applying mini-LED to headlights, which only accounts for a small share, but has very strong growth momentum. Overall, in the high-end segment, automotive wearables, Sensing, and horticulture lighting saw growth. Together, they are likely to post a contribution of more than 40% of our revenue in Q3, and we hope that the performance will be better in the second half.
Overall, in Q3, the applications that I mentioned all have experienced growth. Some of our projects which have been slated for mass production in Q3 are being put on hold due to global economic downturn, and will not enter mass production until Q4, causing Q3 performance to be flat or weaker than Q2. Overall, our second half performance will outperform that of the first half. That was my business outlook for Q3. Thank you very much.
Thank you, Patrick. Now we will have Terry to go over the business outlook for Lextar in Q3.
Ladies and gentlemen, good morning. I'll go over the business outlook for Lextar in Q3. Currently, we expect our revenue to be on par with that of Q2. In Q3, system demand hasn't been as strong for traditional backlights.
We derive our revenue mainly from automotive backlights, mini-LED TV backlights, and Sensing, as well as wearables and security segments. Currently, performance of the automotive backlights has been on inline with expectations, and the revenue, as expected, have been growing sequentially. All the automotive products, including automotive backlights, automotive lighting, and Sensing, together are accounting for about 10% of Lextar's revenue. As we expect to secure more projects from more car makers in the U.S. and Europe, we are projecting our automotive revenue to account for 15%-20% of our overall revenue next year. In terms of Sensing applications, with the additional projects in the security and wearable segments, which help to boost our revenue, making the segment a key growth driver in Q3. We expect that Sensing will post QoQ and both YoY growth in the third quarter.
That was our outlook for Lextar. We project that the performance will be better in Q3 than in Q2. Thank you.
Thank you, Terry. Now we will have Wei to talk about the business outlook for Unikorn in Q3.
Ladies and gentlemen, good afternoon. I would like to briefly go over our business outlook in Q3. First of all, let's look at VCSEL in the Optoelectronics segment. In the first half, the segment was affected by weaker demand for smartphones in the consumer market. Starting from Q3, there has been signs of improvements gradually, and we are also working with customers to deploy new designs targeting high-end smartphone applications. We expect that in Q3 and Q4, VCSEL will post more visible growth.
Now, by micro-LED, Unikorn Semiconductor has been working with a very important client on micro-LED projects, and the project has been posting visible improvements recently, be it in product quality or in yield rates. We are working more closely with that customer recently, and we have been preparing for mass production in Q3 and Q4. We will go through very critical times, so we will work in full steam to make sure that our missions are completed. We project that micro-LED will account for a very important proportion to Unikorn's revenue in the second half. Unikorn is engaged in many development projects with smaller-sized chip makers, which specialize in making AR and/or VR devices. The engineering qualifications will take a longer time, but related work is underway. We can expect that these projects will make meaningful contribution to our business in a year or two.
Now, let's take a look at our microelectronics business. First up, about gallium nitride. Gallium nitride power applications have been facing steep competition in the fast-charging consumer market, so customers have been more conservative in their progress with projects. We've been supporting some customers to develop high-end applications, for example, server applications, which have stricter requirements for specifications and special applications. However, special applications happen to be our niche, and we have the advantage of our group synergy. So we will continue to work with our customers on product validations and development. While the revenue growth rate hasn't been as expected, we are working at full steam. In the first half, we achieved qualifications with several RF customers. However, the order momentum was somewhat muted. The RF demand has also been affected by slower smart demand. However, in the second half, order streams have been strengthening.
While the recovery has not been very strong, it is growing steadily. In terms of BAW filter, like in Q1 and Q2, the market has been affected by slower application demand in the end market, the demand has been slower than usual. We have been expanding our footprint in high-end applications and overseas markets. In the fields of high-end base fields, we are getting more requests from customers, we are working on product qualifications as well. We expect that in Q3 or in Q4, there will be more order streams. At the same time, we will be able to gradually lift our BAW filter performance. At the moment, we expect that the Q3 will maintain relative better performance than Q2. That was our quick update on the Q3 business outlook. Thank you very much.
Thank you.
That was our business look for the entire group. Now we will proceed with questions and answers. Due to the typhoon today, we are not able to take your questions. However, we have collected questions from our analysts before the meeting. We will address these questions. Thank you. The first question is about mini-LED purchasing and inventory adjustments by customers in the second half. Would Patrick please address this question?
I think mini-LED has been a center of attention. In the past, we have been focusing mainly on the IT segment for mini-LED applications, namely tablets and notebook computers. The IT market has seen weaker market demand post the pandemic. Demand has gone down visibly.
Starting from last year, the downward corrections range between 20%-50% across brands, causing our loading rates to lower and resulting in a much higher idle capacity, thereby causing us more operating pressure. As we just told you earlier, in other areas, in terms of mini-LED displays, TV backlights, and automotive applications, we have been performing as expected. In terms of IT, we expect to see recovery in the second half, and we will watch closely how fast the recovery would be. As for our loading rates, given the increasing display TV backlights and automotive projects, we should not be worrying about our loading rates in two to three years. Over the course of the next two to three years, we will also leverage our internal resources available to meet the demand for high-end applications, including automotive mini-LED, automotive headlights.
Thank you, Patrick.
The second question is about the mini-LED's market share and application market. Would Patrick also please take this one?
As B.Y. mentioned earlier, mini-LED IT has been a very important application. The decline of the IT demand has been putting some pressure on us. As what we also told you, we expect to see growth in the second half of the year. In other areas, we are also working on project engagements, and we expect that in Q4, displays and TV backlights will post visible growth. We have told you earlier that some of our projects that were slated for mass production in Q3 are being put on hold until Q4. Those projects include mini-LED display and TV Backlight display projects. In Q4, we project that mini-LED revenue will grow visibly.
Thank you, Patrick. Next? What is our view about automotive application demand?
Terry, would you please?
Currently, our automotive products include automotive backlights, lighting, and Sensing, with automotive backlights being the main contributor to our revenue. Specifically, four array local dimming, or FALD. It has seen rapid adoption in the cluster and CID applications. Currently, the performance of our automotive backlights business has been in line with our expectations. Its revenue is growing sequentially. We expect that with the increasing number of new projects with European and American car makers in 2024-2026, the segment will likely register a CAGR of up to 46%. Moreover, our car interior lighting, including ambient lights and exterior lights or signals, which include mini-LED and RGB applications, we are actively engaging tier one customers in Europe and the America, and we expect that this business segment will post increasing contribution to our revenue sequentially.
As mentioned, today, our automotive products account for about 10% of revenue and will likely expand its revenue contribution to 15%-20% next year. We will have Patrick to provide more information as well in terms of our automotive applications. While Lextar is more geared toward backlights, EPISTAR has a wider range of automotive applications, and the proportion of car exterior lights is actually quite high. In the areas of exterior red and yellow lights, turn signals, brake lights, and tail lights, EPISTAR is one of the only two chip providers around the world. Therefore, our market share is relatively high. At the same time, this also makes us more susceptible to ups and downs of the automotive market. However, as we told you earlier, we are seeing the overall market growing in Q3.
Moreover, there's a new rising star in the automotive market, which is the electrical e-vehicle, EV. The raw material qualifications for EVs have been very different from those of traditional vehicles. The pace is much faster. EPISTAR is also making adjustments in line with the requirements of the EVs. We are adjusting our process to align with EVs' requirements, which are more IT-oriented than fuel vehicles. We need to adjust our pace to really go faster and to be able to capture the opportunities of growth. Overall, we are seeing opportunities in the exterior car, automotive applications and also interior areas. As mentioned, car interior backlights and ambient lights in vehicle are seeing increasing adoption. Of course, Sensing is also one of them. These are the growth segments that we are seeing in the automotive application market.
Thank you, Terry and Patrick.
The next question is about our progress with micro-LED. Could Patrick, please talk about micro-LED progress?
Micro-LED makes a long and midterm plan for EPISTAR Group, and this year there's already a company that made announcements for mass production. Initially, the capacity requirements is relatively small, so we have adjusted our projection for the overall market demand accordingly. We have pushed back our ramp schedule slightly and hope we will complete the plan as scheduled. We are watching the developments closely, and we'll also assess the overall size of the market and to determine the ways for us to build up our new capacity. Basically, we hope that by 2026 or 2027, we will have more specific capacity planning to support mass production. We will update you with more information as they materialize.
The last question that we have is, starting from August 1st, China restricts exports of gallium and germanium. Will the new measure affect EPISTAR? Patrick, would you please answer this one?
On July 3rd, the Chinese government announced export controls on gallium and germanium-related products, effective August 1st. The impact on EPISTAR will mainly come from the ban on gallium. We use gallium arsenide to make the substrates for red and yellow infrared lights, and gallium arsenide falls under the scope of the control. Since we learned of the announcement, we have been closely discussing with the supply chain to identify the measures to take to deal with it. While we waited more details on the policy, our first emergency measure was to increase the inventory of gallium arsenide substrates in July.
As of today, August 3rd, we have successfully completed the inventory increase that we had planned to secure in July. This is the first thing that we'd like to update you on regarding this matter. Secondly, after knowing the measure would come into effect in August, we applied for the export license in July, for which we will have to wait for the response from the Chinese government after August 1st. Before we know how big the actual impact will be, however, as said earlier, we have increased the inventory of gallium arsenide substrates in July, so the pressure on operations has been greatly reduced. From today till the end of this year, it shouldn't cause a big problem for us.
We also hope that through working with the trade associations and through the support of the government, we may still be affected to some degrees, and we will also need to negotiate with the Chinese government further. Meanwhile, besides these activities, we are also working on recycling of the materials. In the past, some of the materials recycling was not done in Taiwan, but today we will accelerate the setup of recovery mechanisms for gallium in the supply chain in Taiwan, so as to build up an entire supply chain. These are the things that we are already discussing and haven't been really pushing forward due to considerations of cost. Today, due to the controls of exports from mainland China, we will accelerate the setup of gallium recovery mechanisms in Taiwan as soon as possible.
Thank you very much. This concludes our second quarter results conference.
Due to the typhoon today, we didn't have the virtual earnings call, but if you have any questions, please feel free to contact us at the IR department of Ennostar's Group. This concludes our meeting today. We will see you next time. Thank you very much.