AU Optronics Corp. (AUO) reported an increase in Q3 net sales to NT$77.7 billion, marking a 4.6% rise from the previous quarter, primarily driven by gains in the display and mobility solutions segments.
Despite a net loss of NT$930 million for the quarter, the company remains optimistic about future growth, particularly through its consolidation with BHTC, which is expected to yield significant cost reductions.
AUO is also focusing on enhancing its product lines, with expectations of a steady revenue stream from mobility and vertical solutions and a projected increase in global car sales.
Key Takeaways
- Q3 net sales increased by 4.6% to NT$77.7 billion, with growth in display and mobility solutions.
- Gross profit rose by NT$100 million, but gross margin decreased slightly.
- Operating loss reported at NT$300 million due to higher R&D expenses.
- Net loss attributable to owners stood at NT$930 million, with an EBITDA margin of 10.6%.
- Cash and cash equivalents totaled NT$63.3 billion; total debt reached NT$115.7 billion.
- Anticipated cost reduction of $50 million through BHTC consolidation.
- Company aims to focus on ESG initiatives and expects strong demand for mobility and vertical solutions.
Company Outlook
- Display segment revenue expected to decline in Q4 due to seasonality.
- Mobility solutions revenue to remain stable, supported by robust Asian demand.
- Anticipated cost reductions from BHTC integration, aiming for $50 million savings.
- Strategic investments and acquisitions to bolster ecosystem and industry capabilities.
- Expectation of double-digit CAGR growth in mobility and vertical solutions segments.
- Forecast of healthier supply-demand dynamics in 2024.
Bearish Highlights
- Decline in vertical solutions due to weaker solar module demand.
- Gross margin dipped by 0.3 percentage points.
- Operating loss attributed to increased R&D expenses.
Bullish Highlights
- New projects secured, including a display HMI solution for a European commercial car maker.
- Significant progress in North American market with direct engagements with OEM customers.
- Positive impact on TV panel prices expected from Chinese government's appliance trading subsidy.
Misses
- Net loss of NT$930 million for the quarter.
- Decreased gross margin despite a rise in gross profit.
Q&A Highlights
- Management discussed higher profit margins in mobility and vertical solutions versus traditional display business.
- Plans to improve average selling price per area and move away from traditional revenue estimation methods.
- Micro LED production moving to Gen 4.5, targeting automotive markets by 2026-2027.
- Global car sales projected to exceed 90 million units, with strong EV growth, especially in China.
- Low penetration rate of AIPCs expected to rise, boosting demand for power-efficient LTPS displays.
AU Optronics Corp. (ticker: AUO), a leader in display and mobility solutions, has released its financial results for the third quarter of 2024. The company has navigated a challenging economic landscape to report a 4.6% increase in net sales, driven by its display and mobility solutions segments. Despite facing a net loss and a slight dip in gross margin, the company remains focused on strategic growth through consolidation and innovation.
The company's partnership with BHTC has been a focal point, with expectations to achieve significant cost reductions. AUO's presence in the automotive sector was highlighted at a Detroit exhibition, and the company is making strategic investments to enhance its ecosystem and capabilities across various sectors.
AUO executives expressed confidence in the company's strategic direction, emphasizing the higher profit margins of mobility and vertical solutions compared to the traditional display business.
They also noted anticipated growth in TV panel demand and IT segments, driven by promotional events and Windows 10 upgrades.
The company is advancing in the micro LED sector, with plans to transition to more efficient production methods and applications in automotive markets within the next few years. Additionally, AUO is focusing on the EV market, where global car sales are projected to show robust growth, and on AIPCs, which are expected to see increased demand for power-efficient displays.
AUO's forward-looking strategy involves positioning itself as a total solutions provider, aiming for stronger profitability across its product lines and adapting to evolving market demands. The company invites further inquiries to its investor relations department for additional information.
InvestingPro Insights
Complementing AU Optronics Corp.'s (AUO) recent financial report, InvestingPro data provides additional context to the company's current market position and financial health. As of the latest data, AUO's market capitalization stands at $3.92 billion, reflecting its significant presence in the Electronic Equipment, Instruments & Components industry.
Despite the reported net loss in Q3, AUO's revenue growth remains strong, with InvestingPro data showing a 23.22% increase over the last twelve months as of Q2 2024. This aligns with the company's reported 4.6% quarterly increase in net sales and supports their optimistic outlook on future growth, particularly in the mobility and vertical solutions segments.
InvestingPro Tips highlight that AUO is trading at a low Price / Book multiple of 0.83, which could indicate potential undervaluation, especially considering the company's strategic investments and consolidation efforts. Additionally, AUO pays a significant dividend to shareholders, with a current dividend yield of 5.14%. This may be attractive to income-focused investors, despite the recent 13.89% decline in dividend growth.
However, the InvestingPro data also reveals some challenges. The company's gross profit margin is low at 6.66%, which corroborates the "weak gross profit margins" mentioned in the InvestingPro Tips. This aligns with the company's reported slight decrease in gross margin for Q3.
It's worth noting that while AUO reported a net loss for Q3, the company has shown a strong return over the last five years, according to InvestingPro Tips. This long-term performance, coupled with the company's strategic focus on high-margin segments and cost reduction initiatives, may provide some optimism for investors looking beyond current market challenges.
For readers interested in a more comprehensive analysis, InvestingPro offers 7 additional tips for AUO, providing deeper insights into the company's financial health and market position.
Full transcript - AU Optronics Corp (AUOTY) Q3 2024:
Jerry Su: Ladies and gentlemen, good afternoon. I'm Jerry Su, Senior Director for Investors Relations. On behalf of the company, I would like to welcome you to participate in our 2024 Third Quarter Financial Results Conference. Due to the typhoon, today's results conference is being pre-recorded. I'm joined by four executives, Mr. Paul Peng, Chairman and our Group's Chief Strategy Officer; Mr. Frank Ko, CEO and president of AUO; Mr. James Chen, Senior VP of our Display Strategy Business Group; and Mr. David Chang, our CFO. The agenda is of today is as follows. First of all, our CFO will go over third quarter financial results and provide you with the guidance for Q4. Then our chairman and our CEO will respectively have an opening remark. After that, we will proceed to Q&A's. We have collected questions from analysts before the meeting, and we will address those questions in the Q&A session. Due to the prerecording format, there will not be live Q&A's today. If you have any questions, please feel free to contact us after the meeting. This is the agenda for today. Now before I turn over to CFO, 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 number 2. David, please.
David Chang: Good afternoon. I'm David. I would like to go over our Q3 financial results. Our Q3 net sales came in at NT$77.7 billion, up by 4.6% from previous quarter, mainly driven by the growth of display and mobility solution businesses. The panel business was boosted by the increased demand from branded customers in advance of the year end peak season, thus leading to an increase in shipments and revenue. The revenue of mobility solution business was buoyed by the steady growth in end user customers purchasing. However, the vertical solution business was affected by the completion of large scale solar PV projects in the previous quarter and weaker than expected demand for solar modules in the current quarter, which offset some of the revenue growth in the display and mobility solution businesses. In terms of the gross profit, the effect of the increased revenue and loading rates was partially offset by TV panel ASP decreases and the revenue recognition for a large scale solar PV project in the last quarter, resulting in an increase of only NT$100 million in the absolute number of gross profit. Gross margin lowered slightly by 0.3 percentage points. OP expenses increased by NT$500 million in Q3, mainly due to the investment in advanced technologies, including micro LED, R&D expenses. Thus, the OP loss amounted to NT$300 million. Q3 net loss was mainly attributable to the company's loss of NT$200 million from the provision of idle equipment due to the disposal of the Tainan plant and income tax expense of NT$300 million. Therefore, net loss attributable to the owner of the company was NT$930 million and the EBITDA margin decreased to 10.6%. Next balance sheet. In Q3, cash and cash equivalent was around NT$63.3 billion. Short -term and long-term debt combined was NT$115.7 billion. Gearing ratio was 33.4% at the end of the quarter, up slightly Q-on-Q, mainly due to a decrease in cash as a result of cash distribution from capital surplus and continued debt repayment. Inventory turnover was 44 days with the inventory remaining at a healthy level. Next, cash flow. We generated from operating activities NT$9.4 billion in Q3. Depreciation and amortization was about NT$8.5 billion. Cash outflow from investing activities was NT$3.8 billion. CapEx was NT$5.7 billion. Advance receipts from disposal of assets were NT$2.5 billion each. Other outflow for financing activities was NT$14.7 billion as a result of repayment of bank loans of NT$7.1 billion at cash distribution from capital reserve of NT$6.9 billion. Next revenue breakdown. The revenue share of display rose 2 percentage points mainly due to the increased TV and notebook shipments amid higher market demand during the peak season. The share of mobility solution was flat Q-o-Q but the absolute amount of the revenue increase Q-o-Q growing steadily. Vertical solutions slid by 3 percentage points mainly due to the completion of large-scale projects in the last quarter and the decreased shipment of solar PV modules in the current quarter. Next visit outlook. First about mobility solution Q4 sales is usually affected by the holidays in Europe and the U.S. but we are seeing stronger demand from customers in Asia. Therefore, the revenue of the mobility solution segment is expected to be flat Q-o-Q. Revenue of vertical solution is expected to be flat Q-o-Q on the back of the recognition of Alphacore and stronger energy business revenue. Displaced revenue is expected to slip Q-o-Q due to seasonality while it is expected to be flattish worldwide. Thank you, David. Now we would like to ask Paul to give an opening remark.
Paul Peng: Good afternoon. In Q3 on the back of stronger than expected panel purchasing from customers -- from consumer electronics brands for the year end peak season, the display revenue grew by 9% Q-o-Q exceeding our estimate. The mobility solution business also grew by 4% Q-o-Q. However, vertical solution was affected by the engineering revenue recognition timing of the energy business posting a lower revenue Q-o-Q. However, driven by the other two pillars, the overall revenue of the company grew by 5% Q-o-Q reaching the highest single quarter revenue of $77.7 billion year-to-date. In terms of our profitability, the gross profit and OP margin were on par with the previous quarter, while OP loss was NT$300 million mainly due to an increase in OP expenses including the final payment of professional fees relating to the BHTC transaction. Expenses of moving equipment back to Taiwan after the closure of our Singapore Lab fab and expenses associated with repairing the fab in time prior to the sale and R&D expenses. These items are, of course, all unnecessary expenses for the company's operation. These are also unnecessary, but we believe there is still room for improvement, so the management team will focus on improving these items in the future. The company's overall financial structure remains robust, with inventory turnover of 44 days and yearly ratio of 33%, maintaining a relatively healthy level. Looking into Q4, branded customers' restocking activity for the year end shopping peak has basically come to an end. Some customers have made advanced procurement, so demand will likely weaken slightly. Meanwhile, on the back of China's appliance trading program, customers' procurement will be more active, but the display segment is still entering the off season. Therefore, we estimate the display revenue to be flat by Y-o-Y in Q4. Macro economy wise, although there are no major changes, some key points deserve our attention such as the situation in the Middle East, the ongoing Russia-Ukraine War, the result of the U.S. presidential election, which will soon come to an end. And after the election result is finalized, some uncertainties will disappear. However, the U.S. cut -- rate cut will weaken the U.S. dollar. These may have favorable or unfavorable impacts on market demand, so we have to continue to pay attention to global dynamics. The demand for the other two pillars, mobility solution and vertical solution, in Q4 will also be affected by the macro economy and seasonality despite performing more steadily than the display segment. Although Q4 is typically a slower season, there are some favorable aspects in the environment. First, panel industry players continue to produce products according to demand and are dynamically adjusting their local rates. And with the closures and sales of fabs in the industry, the industry supply will likely be more disciplined for the year ahead and the year after. In the IT segment, we are slightly more optimistic about the demand outlook for next year as more companies are asking their employees to return to the office. Moreover, after the rate cut, we expect corporate spending budget to gradually recover and commercial model demand will start to pick up. During COVID, the PC installed base expanded significantly and next year will enter the four to five year replacement cycle plus factors such as AI PCs win 10 end of life and the launch of new gaming graphics cards. We think IT demand will likely strengthen next year. As for TV, size migration is continuing. During the October first holiday, sales of large sized TVs above 75 and 85 inch were very strong. We are also optimistic about the supply and demand of the industry next year. As China's policy supporting TV trade is stimulating the growth of the customer segment. Regarding asset revitalization, the Thailand plant is expected to complete the transfer by the end of this year, bringing NT$4.2 billion in profit for us. We will continue to vitalize our assets, which is part of our transformation strategy. In the future, we will continue to review the operational efficiency of different generation lines and we will continue to manufacture our products at the most appropriate lines. In addition, through asset revitalization, we will optimize the space utilization of our fabs to move towards an asset light manufacturing model and achieve the goal of reducing capital expenditures. We will also revitalize idle plans. In addition to sorting out the old outlet and exchanging them for higher value products or production lines, we will also sell them when appropriate. The funds will be used to support the company's overall working capital deployment to spur the development of the three pillars. Of course, the money will also be used to maintain a stable return for our shareholders. Finally, I would like to update you on our recent progress in ESG. In August we organized the 5th CSR Prosperity Conference, inviting 70 suppliers. We have declared 2023 as the first year of plastic reduction and we hope to achieve the goal of plastic neutrality by 2013. This year we have joined hands with several manufacturers to organize the first ecosystem exhibition on plastic reduction to demonstrate how to recycle and reuse plastic waste and show our achievement in plastic reduction. We're also happy to announce that the second phase of our carbon reduction target has passed the [SEDI] order this year and we are working to move actively for carbon emissions going forward. EU is committed to the 1.5 degrees Celsius ratio and proposed to use 2021 as the phase to achieve an absolute carbon reduction of 42% for Scope 1 and Scope 2 emissions by 2030. In terms of Scope 3 emissions, we aim to meet the goal of 25% reduction or below 2 degrees Celsius. This concludes my update of this quarter and then I'll hand over to Frank to provide more updates on the company's operations. Thank you.
Frank Ko: Thank you, Paul. Paul has just talked about our outlook and perspectives about the discipline business. I will talk about our perspectives about our other two pillars, mobility and vertical solutions. Now about mobility solution, I think one of the questions that we often get from investors is the synergies that we expect from the consolidation between AU and BHTC and what the current progress. I think there are two points that I would like to share with you, in terms of our consolidation with BHTC over the past six or seven months we have been focusing on several aspects. First, consolidation and coordination across both organizations as we hope to advance core competency development and our positions in the industry as well as deliver most advanced services and solutions. In the past quarters, we have won new orders and new critical customers and we have embarked on integrated field application designs. There have been some very encouraging results, as shared in the last investor conference. With the consolidation of BHTC, we secured a display HMI solution project from a new European commercial car maker and similar progress is being made with other customers during this past several months. For example, before the consolidation, BHTC was unable to enter the supply chain of existing customers of AU in North America, where we are developing very well. Through the collaboration between our business teams, this new customer in North America has awarded us big project, which will integrate the traditional mechanical interface with displays. While there were projects that AUO and BHTC alone could not clinch in the past, today changes are happening as synergies emerge. Over the past two quarters in the critical markets around the world and emerging markets, in terms of display HMI solutions, customers are reaching out to us more actively and we have been opening up new opportunities allowing us to transition from a Tier 2 supplier in the supply chain unable to negotiate and engage with OEM customers directly to becoming a player that is able to serve a more active role discussing directly with carmakers to deliver total solutions. With this development, we can envision that in terms of the speed of our customer base expansion and the diversity of our customer profile, we can continue to expand the added value of our products and continue to make more contribution to our profit as well as opening up a better market landscape for our company. Moreover, 10 of our joint marketing campaigning activities in September this year, BHTC and AUO participated jointly in the vehicle display and interface exhibition in Detroit. This is a special trade submission in the automotive field and an exhibition that AEO wasn't able to participate very actively in the past. By participating in this kind of trade shows exhibitions, we expect the AUO Group will be able to get better development opportunities in the automotive segment. So these are some of the examples that we have seen serializing from the collaboration between AUO and BHTC as a one team and our joint development has been delivering very substantial results. This will also help us achieve our goal of achieving double-digit CAGR growth for the mobility solution. Moreover, I think everyone is very interested in the cost synergy. We are gradually seeing meaningful results materializing. If you recall, last quarter in the investor conference, Ben shared with you that we have been making a stock of the resources on the both sides, and we have recognized some items that we can save costs further, including consolidation of manufacturing sites for synergy creation, improving product designs, and expanding our procurement scale as well as reducing overlapping investments in R&D and manufacturing, and financially, we can also save some interest expenses. These are all the assets that we can strive for, and this is also an ongoing major project that we are conducting. Based on our current estimate, over the next few years, we are convinced that we are able to achieve a cost reduction of $50 million. And, of course, we'll continue to save more so that we can bring the cost savings to a bigger scale and to advance further. We will continue to share with you more details when they come out. Also, in terms of the advancements in the vertical solution, we are seeking to apply AUO's core display technologies and our competencies into the entire ecosystem and value chain so as to strengthen our capabilities to produce soft and hardware integrated solutions. For the past several years we've been working very hard on building a comprehensive ecosystem built upon our field application capabilities and we are very convinced that we have to work with our partners to accelerate the development of integrated solutions. To accelerate this progress, we have been making strategic investments. We have invested in or acquired ComQi, JohnRyan, ADLINK, [Jakter] and Rise Vision companies specialize in different specific applications and industry sectors. They are in strategic look positions in the value chain and they have been working with ecosystem partners in different countries. They help us to enhance our own domain knowledge across different industry sectors and to build our presence in different channels, including the channels for hardware and software. In September this year we made another acquisition. We have acquired Evercore and as a 100% stakeholder of the company, we will be leveraging this company to build cross country brand sales and channel capabilities. By leveraging these professionals and domain knowledge of this company, we will be able to accelerate the internationalization of our talents and the diversity of our talents in AUO and AUO display plus ADP. Moreover, today our Board of Directors has passed a decision to make adjustments to the stockholding structure of vertical solution. AUO has made investments in JohnRyan and ComQi. We are going to transfer these two companies to ADP so that they will become 100% subsidiaries under ADP. This will help us to accelerate the resource integration progress that we are having in North America and continue to benefit our development progress in the retail sector as well as allowing us to build a better and more comprehensive footprint in North America. So besides strategic partnerships, we are also spurring transformation with our branded customers and suppliers to build an ecosystem. This is a very important priority of our company. We're very happy to report to you that last week ADP just concluded a very successful partner conference in the education and enterprise market sectors. ADP gathered its critical suppliers and customers across the enterprise and education segments. It is able to listen to the voices and feedback from different customers and partners based in different locations and regions at the same time through this platform, its ecosystem partners are able to engage further with ADT in the development of products and find more opportunities. So this is a very important and critical benefit that we're seeking through building an ecosystem path. In addition to managing our relationships with our enterprise partners, it is also very crucial for us to retain and attract talents to help us spur and advance transformation. This is also very critical for us to manage our ecosystem partnerships. Here, I would like to share with you latest updates to our talent acquisition. Recently, ADT appointed doctor [CC Lee] as its Chief Technology Officer. Doctor Lee previously has been working at ETRI for more than 25 years, having been the Deputy Director of DTC and Deputy General Director of EOSL at ETRI. He is very, very skilled and very familiar with various technologies in the display technology aspect. We are also hoping that he will be able to lead -- we're also hoping that he will be able to help us to drive transformation across DTC's, R&D team based on his successful experience in leading DTC and EOSL in developing new technology solutions, we will be relying on doctor Luis Ortiz helping us to align the technology product development between ADP and AUO. At the same time, he will be helping us to incubate more business opportunities and develop vertical market opportunities. Earlier this year, we have also appointed Professor Manfred Wang as the Chief Design Officer at AUO Innovative Design Research Institute. Professor Wang is a very famous celebrity in the industry. He is currently a professor at the design department at National Taiwan Normal University. And before that, he was a designer at Porsche in Germany. And after he returned to Taiwan, he had been the design director at Acer, helping BenQ to design a portfolio of products. We hope to rely on the expertise of professor to help us advance the development of our vertical and mobility solutions, not only allowing us to deliver more creative and innovative designs to our customers, but also to help our design and applications to better align with the actual needs of our customers, therefore, allowing us to become a total solution provider rather than just a component provider. So if you look at the ecosystem of the vertical solution, through our efforts over the past few years, we have been building an ecosystem that is increasingly more comprehensive. Going forward, we hope that our vertical solution business will also be able to achieve double-digit CAGR growth and to deliver stronger profitability. We believe its margin will likely steadily exceed that of the mobility solution and the display segment. So to sum up about the outlook for the three major pillars. First of all, in Q4 we will be seeing display entering an off season as the seasonality demand weakens. However, for the other two pillars, currently we are enjoying higher order visibility and more steadier revenue streams. This will help to upset the impact of a slower seasonality for the display segment. As for the next year, we expect to enjoy healthier supply demand for the display industry and our mobility solution vertical solution will continue to provide us with higher order visibility. We expect to see these two pillars continue to grow in terms of its revenue. This concludes my remarks. Thank you.
A - Jerry Su: Thank you, Paul and Frank for your remarks and now we'll proceed to the questions that we collected from analysts before the meeting. The first group of questions are financial related questions. Could you provide an update on the D&A and CapEx for this year? Do you expect your CapEx and D&A to visibly reduce next year? However, could you talk about your Q -- and your utilization rate for Q3 and Q4? David, would you please?
David Chang: First of all about depreciation and amortization in Q3 the amount was $8.5 billion for the entire year of 2024, we are maintaining our guidance of NT$34 billion. CapEx in Q3 was NT$5.6 billion. Recently, we have reviewed our expenses and our projects and we have decided that for the full year of 2024 CapEx will lower to NT$31 billion, down by approximately NT$2 billion as we shared with you last quarter. Secondly, about the CapEx and D&A for next year as they are still subject to our Board of Directors approval, we will share more with you in our investor conference next year. However, one thing I would like to note is that as we talked about in the last quarter and based on our discussion this quarter, we have shared with you that more and more our resources will be allocated to mobility solution and vertical solution. So we will be shifting from heavy investments in panels to light asset investment based investment models. So long-term and short-term wise our CapEx and depreciation and amortization will continue to lower sequential. As for our loading rates, our Q3 loading rate was better than the quarter – than the previous quarter. We will dynamically adjust the loading rates based on market demand in Q4, which will cease lower seasonality as well as the home appliance replacement demand in China.
Jerry Su: Next question. Are the returns of vertical and mobility solution segments higher than that of the traditional display business? Could you also provide some color around your shipment area and ASP per area for Q4?
David Chang: Vertical and mobility solution segments are flight asset investments, as we told you before mobility and vertical solutions profit margin margins are higher than that of the display business. So overall speaking, the ROIs of vertical and mobility solutions are indeed higher than that of the traditional display business. That is for sure. Moreover, we will be expanding our magnitude in our development efforts in the ASP per area. And the main end growth drivers of these two pillars are integrated solutions not from pure panel business. As we have shared with you last quarter, it will no longer be meaningful to estimate AUS revenue and profit margins using the traditional methods of capacity utilization, panel shipment area and ASP per area.
Jerry Su: Thank you, David. Moving on to questions relating to the display market. What is the TV and IT product sell through in 2024 Q4 and 2025 to provide some color? Also, what is the impact of China's promotion of home appliance trading on TV panel prices and demand? James, would you please?
James Chen: In terms of the display market and business outlook, in terms of TV, this year, we've had major sports events and many customers; many companies have procured panels in advance in Q2, Q3, which have helped boost demand. However, in Q4, we are entering the traditional off season. At the same time, in China, the government is introducing home appliance move trading subsidy program, and the October 1st phase through was also very robust, growing by 14%. With the upcoming Black Friday sales and holiday season sales, it is expected that customers will be able to digest their stock, which they have procured in the events of the holiday season. Before this year, the TV panel segment will likely enjoy slight growth. As for the next year, during the Q4, those promotions will mainly focus on 75H, 85H, 98H, and 100H segments. So on the back of the strong site migration, the demand for area will also slightly grow. In terms of next year, demand will also be relatively steady, helping to sustain panel prices. In terms of IT, desktop monitors due to promotions, especially in the segment of gaming products have enjoyed growth for three quarters year-over-year consecutively. However, with conservative enterprise demand, replacement cycle and demand on the enterprise side is not that visible. These two factors combined, we are expecting to see low single-digit growth for the entire year of 2024. However, with the upgrades of Windows 10 and the launch of new GPUs, demand will likely increase helping to drive low single-digit growth. In the notebook market, the segment has been posting growth for two quarters consecutively and the panel purchasing momentum has been very strong over the past two quarters aided by the launch of AIPCs. We are expecting to see that the segment to post low single-digit growth for next year. On the back of the demand for Windows 10 upgrade as well, we are projecting that the market demand continues to be healthy for the notebook segment.
Jerry Su: Thank you, James. Next question about micro LED. Could you please update us on the progress that you've made with the R&D for micro LED and the market performance? Chairman Paul, would you please?
Jerry Su: In terms of micro LED, we are mass producing wearable large size and TV panels. Last week, we announced that we are transitioning from Gen 1 line to Gen 4.5 line. The purpose is to expand our production scale to be able to manufacture panels -- micro LED panels as large as 41.6 inch. Let me give you an example. To assemble a micro LED panel as large as 127 inch in the original size we would have to assemble 100 sheets. But today we only need to -- in the future we will only need to assume sample eight sheets. This will help us to significantly improve our cleaning technology and mass transfer as well as have a better control of our yield rates. We are also hoping to see our cost structure to improve significantly. Going forward, we will be transitioning into Gen 4.5 mass production aided by the better efficiency for wafer and mass transfer. We are seeing some drastic improvements in our EU rates. So we are going to maintain our original prediction. That is we are going to lower our cost by half every two years. In addition, besides wearables, we are having more customers working with us or we are building more product models. In terms of automotive customers, they are actively discussing micro LED applications with us. We expect to see by 2026 or 2027 there will be micro LED automotive applications on the market. So we expect that after the deployments of micro LED technology in the segment. Extensive application of micro LED will be materializing and we are very optimistic about this. Thank you.
Jerry Su: The next question is about panel PLP. What is your perspective on panel PLP and glass substrates packaging? And what are the strengths of panel makers in this aspect? Frank, would you please.
Frank Ko: I think packaging is really a hot topic in the industry and panel PLP is still in the spotlight among panel makers given the expanded size of the substrates and the potential benefits of panel production process. Existing mature process such as that of power ICs can be supported by the existing process and has been certified, which is of interest to the industry right now. While the process of glass substrates offers opportunities, it also has limitations. Therefore, the industry needs to consider the application of panel PLP more holistically, including the use of more diverse substrates for panel level packaging. The strengths of panel makers are the expertise in the process of glass substrates, including flexible and OLED related metal substrates as well as capability of manufacturing devices on various substrates. This has been the core competency of panel makers and as substrates get larger, specific flat panel process like thin film process becomes more relevant. As Paul mentioned, micro LED transfer process, for example, is being developed in the panel industry. I think these are the capabilities of panel makers that can potentially align with the emerging packaging needs.
Jerry Su: Thank you, Frank. Well, the next question is about Silicon photonics alliance. Could you please provide some color around your participation in the alliance? Do you have any strategic plans for the silicon photonic business? Frank, would you also please answer this question?
Frank Ko: Silicon photonics is different from packaging because the packaging industry is very comprehensive. It's very mature as well. For panel makers to enter this field, besides the technical capabilities, we would also need to consider how we are going to position ourselves and how we are going to how we are going to work with our industry partners. However, in terms of silicon photonics, we have observed new opportunities as the rise -- with the rise of AI, there are new issues in the intercom between servers and high speed computing modules. Currently, for example, the use of copper wire for GPU chips and memory would cause bottlenecks for the bandwidth and heat dissipation. This is why silicon photonics or optics based communication has become a new topic that everybody is very interested in. From the perspective that a panel maker, photonics has always been part of our expertise and we're seeing that we should perhaps explore opportunities in this new market. The reason that we want to get to be a part of the silicon photonics industry alliance is that we want to join hands with our alliance partners together for new opportunities to enter the market or to stimulate new specifications or road maps for technologies going forward. We also hope that, potentially, we can develop ecosystem partnerships in advance. At the same time, we want to leverage our core competencies in best technology such as micro LED to expand our footprint in the silicon photonic area.
Jerry Su: Next question. What is the gross margin of your each of your three pillows? David, would you please?
David Chang: About the gross margins, as we have shared with you, the margin of vertical solution is higher than that of the mobility solution, which is higher than the display pillar, excluding someone off factor. Some analysts have estimated that over these few quarters, the gross margin of our vertical and mobility solution ranges in the high teens percentage to low 20s percentage, and the margin of the display pillar is ranging around single-digit percentage. That estimate is reasonable. However, over the long horizon, we will continue to improve the profitability of each of our product line.
Jerry Su: Thank you, David. Next question, could you please provide an update on the EV market conditions and provide an outlook for the 2025 automotive market? Frank, would you please?
Frank Ko: For this year, global car sales is going to be about 88 million units, up by 1% or more by IO[ph] this year. Of course, the momentum of EVs is very, very strong. However, there's some decline because of a wider application in different areas under different weather conditions. Some places may not have adequate charging facilities and this has affected the penetration growth of EVs to some extent. However, we are still seeing very high growth rate in China in terms of the EV segment with Y-o-Y wide growth exceeding 30%. Looking ahead, the Chinese market is continuing to grow, whereas the U.S. market will likely be flattened. And in some regions with colder weather, the use restrictions will increase. For example, in Europe, sales of EVs will likely experience some decline. So this is an overall outlook for the EV market. As for the next year, we are expecting the global crisis to continue to grow, surpassing 90 million units. Today EVs and internal combustion engine cars are increasingly digitized and interconnected. Plus they're also using more and more smart copy solutions with bigger displays. Moreover, increasingly smart copy solutions will be applied in different kinds of mobility platforms, including EVs, internal combustion engine cars and hybrid cars. At AUO, we will continue to advance our smart copy solution technologies and to develop and as well as advance our strategic goals. Thank you.
Jerry Su: Thank you, Frank. The last question is about the demand and market outlook for AIPCs. Could AUO please talk about whether you have secure new orders from your customers in this aspect? James, would you please?
James Chen: This year the NPU of AIPCS is still limited. There are only a few models that can achieve for [4T tops]. So the penetration rate of AIPCs should be smaller than 5%. However, going forward, the penetration rate of new AIPC products will continue to increase. This means that the panels that AIPC adopt will have to be more power efficient as the AIPCs will consume more power for computing. The low power consumption panels will be produced by LTPS technology at AUO, which we believe will be much more efficient than OLED panels. Moreover, AUO is driving designing advancements steadily. Today, we have secured more than 80% coverage across different brands, so we are expecting that with AIPC driving penetration -- improving its penetration rate, our designing projects will continue to increase as well. With the increased penetration rate of AIPCs, power efficiency requirements will also increase significantly to achieve a full day application and use without charging. Because of this, the demand for LTPS displays will continue to increase.
Jerry Su: This concludes our Q&A session. Thank you all for your listening. Also, this concludes today's investor conference. If you have any other questions after this conference, please feel free to contact us at the IR department of AUO. Thank you very much. We'll see you next quarter.
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