Thank you, Kathy. Good afternoon.

Welcome to Compal's Q2 2026 results conference call. I am Randy Abrams, Head of Taiwan Research at UBS, and I'm joined here by Mr.

Tony Bonadero, CEO; Mr. Jack Wang, CFO and spokesperson; and Ms.

Tina Chang, Senior Director and Head of IR. Just to note, too, as the operator mentioned, 2:30 there will be a Taiwan drill that the cellular speed may come down.

For better connection, you can join Wi-Fi at that time from 2:30 on. With that, I'll turn it over to Tina.

She'll start with a financial review followed by Tony for the business update and guidance, and then we'll be happy to open up to questions. With that, over to Tina.

Thank you, Randy. Thank you, everyone, for joining today's call.

This is Tina from Compal IR. Before we move to the details, please help us turn into page 2 for the safe harbor notice.

Please take a moment to review the statement. Okay.

Now let's move to page 5 on the product mix. Compal second quarter revenue grew substantially to $238.3 billion.

Non-PC contribution continued to stay around at 35% level, up about 5 percentage points year-over-year and on path to the 40% goal. The non-PC growth was primarily driven by the ramp-up of our AI server business.

Next page for the income statement. Second quarter gross margin was 4.6%, impact by the rising component cost, particularly memory prices.

While cost to pass-through supported ASP expansion, the expanded revenue basis also diluted the gross margin ratio. However, through our continued product mix optimization and enhanced operational efficiency, the second quarter gross profit dollar increased by 4% quarter-over-quarter as well as a 4% year-over-year.

Operating profit at the $2.8 billion grew 8% quarter-over-quarter and 9% year-over-year, outpaced the gross profit growth, reflecting the benefit from our expanded operational leverage. On the non-operating line, we booked a small amount of interest income in second quarter.

However, the major contribution came from about $1.8 billion in the mark-to-market valuation gains on the financial assets. All in all, the second quarter net profit was $3.1 billion, increasing 59% quarter-over-quarter and substantially year-over-year.

EPS was $0.73. Next page for the first half P&L.

For the first half, the overall trend was similar with the continued growth of server business, ongoing product mix optimization, and gradual realization of the benefit from our transformation. Compal's operating scale and profitability both improved compared to the same period of last year.

The net profit for the first half was $5.1 billion, grew 91% year-over-year, with the EPS of $1.18. Let's turn to next page on the balance sheet.

For the balance sheet, end of the second quarter, our cash position was around $83 billion. We have invested in working capital investment, with cash conversion cycle days lifted slightly to 52 days.

Given our business expansion, the liability ratio slightly up to 71%, but still maintained at relatively healthy level. Lastly, book value per share in the second quarter was $31.30, both improved quarter-over-quarter as well as year-over-year.

This concluded financial review session. Now I would like to hand over to Tony for the business update.

Tony, please.

Yes. Thank you, Tina.

We've talked a lot in the past about the transformation that Compal is going through, and so I thought I'd give you an update on the Compal AI transformation as we call it AI inside and out. If you look at the pie chart, everything on the right side is external, PC, it's basically the businesses and customers that we serve.

Everything on the left side is internal AI transformation we're doing. A, AI devices, we're positioned very well to capture AI PC refresh super cycle.

There's still some Windows 10 end of life. We see a lot of focus on future-proofing these replacement purchases with NPU-capable silicon and AI PC offerings.

We see a premium AI PC mix lifting revenue and margin. First half unit margin improved if we strip away ASP effect and volume impact.

B, on AI server, Q1 '26 server revenue already equaled all of FY '25, with AI servers over half of our server mix. Additionally, we're dedicated to delivering an end-to-end solution, and are now building back-end service capabilities coupled with regional production advantages to stand out in a crowded market.

We are starting to see the lift of the AI server business with these results today. C are the five businesses, the 5+1 we've been talking about: focus growth engines, dedicated portfolio of early growth engines converting from bets to scale: 5G UE; IPC, grew about 106% year-over-year; MedTech CDMO; physical AI hospital robotics with strategic alliance with NVIDIA and currently four Taiwan leading hospitals with U.S.

hospitals plan and ready to follow. Then D, on the left side, is our margin inflection from AI transformation.

Unit margin improved year-over-year. Non-PC mix was up plus 5% year-over-year, percentage points year-over-year, as the next transformation boosted efficiency, diversified revenue mix, and restructured the low-margin portfolio.

Computex 2026 was an exciting event for us. It was really one of our first large kind of coming out showing what the brand is all about, and it got incredible reaction.

We basically were able to show what Compal's future is. If you will, Computex 2026 was the trailer of what Compal plans to achieve over the next 18 months or so.

Creativity, the future of PC, this is our bedrock, and we continue to bring innovative concepts like agentic PC solutions and others. Acceleration, AI infrastructure, this is server, and new use cases to demonstrate such as quantum AI applications and others.

Future care and connectivity are growth engines across MedTech, 5G connectivity, and audio. As we go into the revenue highlights, revenue again was $238.3 billion.

34% of that revenue was non-PC, basically flat, 1 percentage point down quarter-over-quarter, basically flat. Year-over-year, we saw growth of 32% total, 52% in non-PC revenue growth.

We're not just a PC company anymore. I said that at Computex, we're really not.

We're starting to expand beyond that. Non-PC revenue share again up 5 percentage points year-over-year and has been staying there, well on our path to 40%.

We're growing across both PC and non-PC, but obviously non-PC growth has been really significant for us. The notebook PC segment, notebook revenue was $156 billion, 20% growth quarter-over-quarter, 23% growth year-over-year.

Notebook shipments were up 5% sequentially on seasonality, while minus 13% year-over-year due to component supply constraints and price increases. Q2 is a kind of prime seasonality for some Chromebook, and there was a lot of Chromebook shortages with the lack of small core availability.

A shift toward premium and AI PCs lifted average selling prices supporting a higher-value product mix. In FY '26, PC shipments are expected to decline at a mid-teens rate, broadly in line with the market.

Surprisingly, we saw the first half was almost flat, 133 million last year, 132 this year, almost flat. We think the second half is a very different story.

We think the second half is probably 15% to 17% down as we continue to see higher component costs weighing on consumer demand. Overall unit profitability is constant despite volume drop, and underlying unit profitability is improving if we strip away the effect of buy-sell inflation and volume impact.

The improvement is due to a more focused portfolio, higher-margin product mix, and transformation efficiency. The non-PC segment, an $82 billion revenue, quarter-over-quarter growth of plus 15%, year-over-year of plus 52%.

Vast majority of this growth was driven by our AI server business or our server business. Non-PC revenue again plus 52% year-over-year led by servers, with contribution from smart devices and intelligent systems.

AI servers ramped to 70% to 80% of server revenue in 2Q 2026. New Neocloud wins expanded the growth pipeline, and our FY '26 non-PC mix targets to approach 40%.

It's 34%, we're well on our way. We think by the end of the year we will be there.

To look at the server and AI infrastructure, some of these, everything on the left there we've announced. We're gaining a lot of momentum with AI cloud wins across three different regions: Europe, Asia, and U.S., focused on Compal's value proposition of delivering end-to-end solutions, our global manufacturing expansion, our addition of a lifecycle management component to this, and bringing our efficiencies to supply chain and operations.

Aside from entering more parts of the value chain, we are now building back-end service coupled with regional production service advantages to stand out in a crowded market. Server and AI infrastructure, we have two new sites coming online, Taiwan and the United States, and expanded capacity across four countries, ramping by the end of 2026 are all of these facilities.

One capability standard, close to demand, resilient, up to full rack scale L11 integration. In Taiwan, we have a facility which will be an NPI facility, AI server and cooling manufacturing, full rack level integration, and an in-house R&D hub.

In the U.S., we'll have on-shore base for U.S. customers.

We'll have board assembly through full rack L6, L10, L11, and full stack U.S. center including R&D.

China and Kunshan will still play an important part of this, serve China and Asia demand, group NPI knowledge base as well. In Vietnam, we continue to ramp up mostly PCBA production, PCBA scale hub.

It's really one of our highest-volume board sites that we have. Next, one of the biggest highlights of our Computex showing was in the physical AI space as we rolled out PolymedX, which is a concept of physical AI for healthcare spanning across arrival, treatment, surgery preparation, tracking, and training.

This is obviously playing to a huge need that we have today. You've heard a lot about robotics in healthcare.

Most of that is a humanoid robot walking into your hotel room and sticking a thermometer in your mouth. We think that's probably sometime before that actually happens, and so this we believe now this technology is available immediately, right?

It's available technology that can roll out and scale today. Our whole goal around this is to develop an operating system and a deployment system for hospitals to make it easy to own, control, operate physical AI within their facilities.

Lastly, transformation gains to sustain and fund external growth. The transformation has been pretty amazing.

We've been doing it for about 18 months. We've been planning it and doing it for about two year, a little over two years.

We've identified 70-plus use cases for digital. We've implemented those across the company.

There's core use cases already deployed in R&D, manufacturing, procurement, and supply chain that are actually providing significant savings, significant operating savings to us today. Also helping us fund the external growth, the future growth, scaling growth from AI devices into server and intelligent system.

Foundation remains PC and smart devices, scale remains server and infrastructure first and foremost, and then 5G connectivity, and the businesses we're developing on frontier: MedTech, continue automotive, physical AI, and hyperscale. Thank you.

Okay. All right.

Thank you, Tony, for the remarks. I'll kick off, but I'll turn it to the operator just if you want to give instructions, and then maybe I'll start with a first question.

We can turn it over to Max just to give the instructions for the Q&A.

Okay. Thank you.

I'll start with a first question, I think just to start with an outlook. Maybe an initial view coming off second quarter.

We could start with the notebook business, how you saw kind of your order trend, if there was any pull-in activity just ahead of rising memory price, and a follow-up to the second half where you're expecting a kind of a weak market overall. How much it's limited by supply, a shortage of certain constraints, versus demand impact?

I'll start just with notebook, and then we can broaden to other parts of the business.

Okay. I think we're facing kind of a fundamental margin reset in the PC industry.

Component costs are rising faster than the market will tolerate price increases. That's just a fact.

It's turning what used to be a volume and efficiency business into a battle to protect every basis point of gross margin. It's kind of overseeing.

We think that the growth in the second half, most of the replacement cycle probably underway, probably has happened already. We think that, on the commercial side, those customers are thinking very carefully about where they're spending their CapEx, and a lot of it's going to AI-type resources.

We do believe in the future, even today, that AI PCs can represent one of the lowest costs of AI computing out there, right? It's one way to look at it.

We believe that that market is down kind of mid-teens, yeah. We think corresponding consumer markets are similar.

Yeah. As I mentioned earlier, just we continue to monitor as component costs continue to weigh on consumer demand, but we see wearables, tablets, PCs, other things.

It's just constantly impacted. Overall, we think for Compal, the third quarter growth continues, driven by AI servers, with server revenue expected to increase by high double digits quarter-over-quarter.

PC units are expected to remain flat for us basically, while continued ASP increases should provide additional support to revenue growth. Smart device revenue is expected to decline, like I just talked about with basically watches and tablets and things like that, all under pressure, right?

Consumers all going, "Yeah, I'll wait till next year. This is too expensive right now."

That may not be a great strategy, because next year might be worse than this year.

That's

kind of what we think. 2027 may actually have more memory pressure, more memory inflation, and in a lot of cases, you just can't get what you need, right?

Then we think 2028 returns back to 2026. Then looking ahead in fourth quarter, AI server momentum, again, to remain healthy.

PCs and other consumer products will continue to monitor that impact.

Okay. That's great.

Let's turn it to the operator just to see if you're showing any questions. Otherwise, we can ask a few follow-ups from the floor here.

Okay. Actually, I'll ask a question because you mentioned 2027 could be a continued headwind from all this memory.

When you're doing the initial bidding for 2027 projects in notebook, how's the competitive environment? You talked about fighting for every dollar, just how does it look from an environment and what's your strategy?

Is it in terms of trying to maintain market share, unit share, dollars, or focus on certain mix? Kind of more how the industry looks and your strategy.

Yeah. I think it's not every dollar.

It's

every penny actually. Every penny.

I think, as we look ahead to what we think is going to happen in the rest of this year and in 2027, there's a problem just with the memory inflation, right? That's going to continue for us, I think.

What our strategy is to continue to compete for the higher-margin-type products, to look for the AI PCs, where we're very well positioned there already. Our mix is I think ahead of mix.

About, yeah,

around 50% of our shipments is AI PC related in the first half, right? In terms of the revenue contribution, even higher because high ASP, right?

Dollar-wise is about around 60% first half on AI PC side.

With everyone focused on AI, when it comes to the competition side, there's two parts here: traditional competitors, how they're approaching the market, and a year ago it felt like there's a bit more coming from China. How do you see those two, your traditional competitors and the China competitors now?

Yeah.

There was a lot of noise last year around the Chinese ODMs. Still formidable competition.

We took a step back and kind of analyzed what we do versus what they do, and some of the perceptions that maybe people had about why they're able to achieve such aggressive pricing wasn't necessarily true, right? It was, well, maybe they're subsidized, maybe there's other things that we don't know about.

We believe that, especially with the big three tier 1 PC OEMs, there's a very specific AVL stack that you have to deal with. When you look beyond that stack, and you say, "Well, if I don't build it your way, but I build it my way, then I price you Okay, here's your quote on what you want, but I can do this if you let me,"

right?

If you allow me to go bring more vendors, different vendors and variety into the AVL, while we were cost competitive and have won deals based on that. We believe we've kind of figured that out.

We could not have started the transformation at a better time than we did, because last year, 2025, across all of our manufacturing facilities in nine countries, the average productivity improvement, UPPH improvement, was 28%. That's unheard of in our industry, right?

A lot of great work went, and that provides a lot of operational efficiency that allows us to be more lean in our RFQ and other responses to customers.

Yeah. Okay.

I'll ask one more, then we'll go back to the line. Actually, to clarify the notebook, I think where you said double-digit you're flat year-to-date, it sounds like, for the industry.

Is that double-digit decline more just in second half over second half, or second half falling off even more to get to down teens for the year?

Market-wise, second half '26 over second half '25, we think is about 15% down.

Okay. Your expectation is to be, actually you might have mentioned it, but is it to be tracking line broadly, or to mix up and kind of outperform the market?

It sounds like you're stable into third quarter.

Pretty stable.

More to your resilience, I think, with being able to take back some share.

That's right.

Good. Let's go back to the line to see if there's some questions.

Okay. I'll have my email if you want to send, if you don't want to ask.

Send it to my email, [email protected], and then I can take some from the floor. I'll look out for them here.

Okay. Go ahead.

Okay. Go ahead, Irene.

Hello. Can you hear me?

Yes.

Yes.

Hi. Hi, Tony, Tina, and also Jack.

Maybe two questions from me. First is on I see that you showed some Neocloud customers in your presentation slides.

Just wondering, within your AI server business, what is their contribution today? What's the expected mix heading to 2027 from the Neocloud customers?

That's the first question. The second question is on your CapEx.

Appreciate if you could share your CapEx guidance for 2026 with us. Maybe also some preliminary colors on the CapEx in 2027.

Yeah.

Maybe we start with the server side. Server, maybe I give you some numbers, maybe Tony later can have more details.

Server actually account for even for first quarter is around 5%, right? We elaborate that before, right?

Second quarter server is roughly high single digit of our total revenue. As you can see on the slide, among our server revenue, it's roughly 70% now is all driven by the AI server, right?

If you recall, Compal we ever say that we target about 10% the server contribution for 2026, right? We are on track of our path to our goal for this year on our server side.

This is some data for you. Tony, maybe you can

elaborate. I think the Neoclouds, some of them we publicly announced.

Some of them they've asked for that kind of press material to go out. The Neoclouds, I would say, provided a lot of the growth that we saw in Q2.

We expect that to continue for the balance of 2026 while we ramp up enterprise customers and we move into more diversified business when our facilities in Texas and here in Taiwan are ready. I think next year we'll see a pretty healthy mix of Neocloud, of tier 1 cloud service provider hyperscalers, and of at least one large enterprise business.

We'll see a hopefully very well-diversified customer portfolio in our server business.

Oh, there's

the 2:30.

There's

the

2:30. If everyone's still online.

Okay. Should we do the CapEx?

Irene wanted CapEx question, right?

Sure. Right.

For the CapEx, I think we ever give the guidance for this year the CapEx is 18 billion, NT$18 billion, right? Is the guidance for this year.

We are roughly tracking in line, because if you look at the financial report details for the first half, we spend around 9 billion. We spent roughly half of that, right?

We are on track toward to the 18 billion for the full year. Then some additional color here is that among the 9 billion in the first half, we are spending around 6 to 7 billion related to server-related, right?

As Tony mentioned that right now we have the expansion in Taiwan, in Daxi, right, and Vietnam for the SMT line as well as in U.S., Texas, right? From SMT to the L10, L11.

Overall our spending on the 6 to 7 billion is to the server, right? This is the color on our CapEx side.

As for the question on is any color for 2027 CapEx, we haven't yet have the number. Overall as you can see that if the server continue to be the very high gross potential for Compal as a big growth pillar, right, for the next few years, and we continue need to have the capacity support.

We think this year and next year definitely will be the expansion year, capacity year for Compal. Yeah.

Okay. Was that 6 to 7 out of the 9 billion or out of the total full-year CapEx for server?

7 to 6 to 7 is just as a

first half,

right? Second half, we continue spending for Taiwan, for Vietnam, and for

Texas,

yeah, for U.S., right?

Okay. Irene, do you have a follow-up question?

Max, are you showing other questions? Go ahead, Irene.

Oh,

sorry. Yep.

Maybe also a housekeeping question for me. I see that OpEx ratio was down in second quarter.

You mentioned it's primarily from the operating leverage. I'm wondering how should we model for the OpEx heading to second half or even to 2027?

Right. This is Tina.

Let me give you some color on the OpEx. OpEx actually is 8 is 8.1, $8.2 billion, right, is absolute dollar in second quarter, right?

Actually sequentially it's growth. Ratio-wise definitely this decrease is because we enjoy operating leverage, right?

We have expansion on the top line, the revenue side, right? The company actually we give the guidance for the OpEx is on the absolute dollar, right?

We ever say that the company will be managed well on overall the spending to have a more efficiently to use our overall resources. We are targeting about roughly the single-digit growth, right, year-over-year on the OpEx, the dollar-wise.

This is continue to be our target and our goal for this year. If you look at the first half the number, the year-over-year growth is around 3% year-over-year growth on the OpEx.

It's roughly in line with our target in overall the company target.

Okay. Great.

Thank you. Max, if Irene's finished, is there another question on the line?

Okay. A few follow-ups on the server.

Actually one start with the traditional server business. There's been a lot of this serve from the agentic AI.

Do you see that it looks like a lot of the investment is AI server, but is there potentially you see in terms of more volume to go after in the traditional server market?

I think so. We're not seeing that translate into demand just yet, but yes.

The agentic stuff is very interesting. We were talking before the call that the article I just read said that the world's built one less than 1% of the compute power that we need to and especially when you're talking agents and a software programmer goes from an agent to managing 50 to 100 always on, alive, active agents, the silicon, yeah, just isn't there.

We see all kinds of interesting opportunities for inferencing, for agent, for agentic compute, if you will, and other data center infrastructure.

Okay. Turning to the AI business, talk about the transition.

Is most of the business still L6, and when you start to bring up the Taiwan and the Texas site, how does that transition over to L10? It sounds like it's a customer base and also a mix-up where you can get more content per server.

The the L6 business the L10, L11 businesses overtaking our L6 business is where you see the the the significant revenue growth. Tina, any other comment on that?

Actually if you look at the first half the number we have, the major contribution on the AI server actually is already L10.

Yeah. About 80%?

It's

about 70, about 70%.

About 70%.

The rest of that is the the general purpose, so that will be the L6, that was the L6.

Most of that revenue is from B300 and most of that being L10 manufactured here in Taipei today. When the other facilities get ready, of course we'll have much more capacity, and we'll be able to do more regional customer service.

Okay. How are you thinking on product transition?

We're getting a little bit later in the Blackwell family starting to get into Rubin, how do you see just the continued B300 just continue to go into year-end, early next year? Is there any transition pause and then when do you see us kind of moving up to the Rubin generation?

Rubin's, yeah, I think these product generations move so quickly by the time you get a platform and get it debugged and get it producing tokens, you're already on to the next generation, yeah. We don't see that slowing down.

We don't see much overlap between those products. We think B300 runs strong.

The demand is very strong through this year, and as the Vera CPU comes in, we'll start to see that take over. That transition will happen, I think, pretty quickly.

Okay. Then as you transition, it looks like from market all this high component cost, the ASPs, the pricing of these systems, should be much higher.

How's the thought in terms of margin percent? Is kind of strategy keep when you're negotiating dollar margin, like at notebook, one of the ODMs remarked it was a dollar margin, but try to move toward a percent margin, but should we think of it as dollars so components inflate, it's a good dollar profit, but it's a lower gross margin, or just if there's a way to think since there's a huge ramp-up in the price of these systems, Blackwell, Rubin, or just in general with these AI servers?

More not percentage-based. Not percentage-based.

Like what we're seeing with with notebooks, you're seeing, the margin compression actually happen because of the ASP increasing. It would be great if it were percentage.

If it were percent, yeah. That would be good.

When we thought that's a little optimistic on that. Then in terms of components, it sounds like it's really demand pressure in PC, but how much is supply, whether it's CPU supply or memory supply, actually limiting shipments, and is it an issue for some of the server ramps, like getting components,

or

is there enough prioritization to those that there's less issue with ramping up the servers?

Depending on what customer we're talking to or dealing with, the buy-sell components may be different, they manage a lot of that, or some of that relationship. It's everything.

If you don't do the supply chain dance very carefully with PCB and even just wiring and connectors and everything, if you don't have that planned and have enough DSI, have enough POs to secure supply, you're going to be short of something for sure. We've seen, for the most part, in Q2 for example, we had a dip in May only because we couldn't get the parts, but then we had a very strong June because we got the parts.

I think that dance continues forever, it seems like.

Okay. It sounds like I should go back to what big server high double-digit growth is the outlook.

When you think high double, is there a way to think it's because I've heard different things for high double. It could be 30% to 50%, but it could actually be closer to triple digit.

Like the type of acceleration and how you see that. It'll be a higher and higher base.

It feels like you start to get to 10% if your year-end target was 10%, it could pull in. Does it look like it kind of continues in the year-end or there's some gate on the supply side?

Yes. It depends.

It just depends on how people If a lot of it is truly material-based, right, and again it's customer you're dealing with, and can they get the parts that they're bringing to you from a buy-sell perspective, and do we get enough early warning on the demand that we can go secure the parts that we're responsible for?

Yeah. Then I'll take it back to the line in a second, maybe just one follow.

Do you have a strategy midterm to go after? It would take a different amount of working capital to do the bigger racks, like this NVL72, that's one side.

I'm curious too if you see opportunity I think at Computex you showed MI, like AMD boards,

they're

also moving up to rack scale. Do you see on both camps kind of that opportunity to go after bigger rack scale?

We believe the larger rack manufacturing will start in the Q1 timeframe of 2027.

Okay.

Yeah.

Good. Actually, I'll go back to Max if questions on the line.

Thank you for taking my question, and I have a quick question regarding the server business, especially on the margin side. How do you see this server profitability given that you already really on track on the 10% of total sales scale to this year?

How do you see this server margin trend going forward given the say dynamics between the traditional server and AI server, and also the mix between L10 plus say Prada versus L6 board-level? How do you see this margin trajectory and could you share some color for us?

Right, maybe I give some number first, and Tony can follow up with more color, right? Right now if we look at the server margin, right, if compared to few quarters ago we're doing the L6, right?

L6 is more module level, the margin definitely is a bit higher, right? When we moving to the L10 system, right, we have a higher ASP.

If you look at the Q1, Q2, what currently we have in the first half for server side, server still enjoying very healthy gross margin. Server gross margin at the first half is still higher than our corporate average, right?

Afterwards, but of course we're going to have the different customer to come in, different project to come in, so that will be definitely depends on the different projects and customers on the margin profile. Tony, if you want to add?

No, I think that's right. I think the margin profile of the customer will vary.

I think Neoclouds and what we're shipping today, B300 and other things, can have more profit than others. If you look at the large racks, this is what we were just talking about, given that the GPU silicon providers take home such a huge portion of the BOM, right, it is what it is, right?

It is what it is. We believe that our strategy is to make sure that we execute well in the factory, that we have high yield rates, that we make sure we're not spending money or letting margin leak, if you will, where we don't need to, but also making sure our offering includes lifecycle management and all the back-end stuff that we believe has some significant profitability to it as well.

Yeah.

Good. Anthony, do you have a follow-up question?

Yes, I do have. Thank you.

Follow-up on this server margin. When you talk about the healthy margin and higher than corporate average, does that refers to both gross margin level and OP level?

A quick follow-up will be if we look at just 70% of AI server in the first half, does that also apply to your comment on the higher than corporate margin?

Yes, Anthony, you're right. Yes.

Got it. Thank you.

Back to queue now. Thank you.

Thank you.

Thank you.

Okay. A couple follow-ups on the server margin.

There's been some talk about industry consignment models where certain things like memory you can not off the balance sheet, but not showing up in your buy and sell.

Right.

Is there any negotiation going on already potential some of these cost shift to consignment, or it still looks like a lot of the AI server what you're doing, but mostly going to stay buy and sell model?

I would say most people are comfortable with what they know, and so the buy and sell seems to be the most thing. However, I will also say that we're in an age of very creative finance tools and other things.

People have had lots of discussions about how you can do that. We've had a lot of those discussions, and it will vary customer by customer of course, but right now we don't have a consignment model.

We don't have an operational customer in the consignment.

Okay. To blend the margin where it's above corporate, is it a thought you go through a little bit of a transition period as you bring up the U.S.

and Taiwan site, it maybe goes toward corporate and then in the mid long term relative to notebook business accretive to margin? Is there kind of a thought maybe it's a flow where it could come down a bit or come toward corporate or below corporate and then matures?

Randy, I think for the margin thing, I think what's important for Compal is that still look at the absolute dollar-wise, right? The margin ratio could be different like depends on the customer's business model as well as you asking about buy and sell, consignment, right?

It will be a lot of different arrangement. Even on the L6, L10, L11, but what's all important is that which is EPS accretive to the company, right?

The reason why we highlight that, right now even though if you look at the second quarter, we have some margin ratio dilution, right, because we have the different product mix, right, the customer mix. If you look at the absolute dollar-wise, actually Compal is turning back to the growth, right?

This is what the company focus on, right? I think that is still our focus.

Yes. Let's see if we have a question from the line.

Okay. I'll just ask a couple final ones, then we'll go back to the line one more time just to see if any questions.

Actually, since you brought up the financing, not to say creative financing, but when you start to go toward rack-scale business, just how you see in terms of different working capital requirements if you think kind of debt or additional financing or you feel like there's pretty good headroom to grow the business with the resource you have?

Yes. I think we've looked at the cash we need to run that business, and you don't need it all on day one, right?

It ramps over time, but we have facilities to take care of that.

Makes sense. Then a question on other growth pillars, like a lot on server, but just between auto, medical, 5G, smart device, it seems like the consumer side probably headwinds because of the kind of inflation, but other sides are kind of more growth areas.

We're really interested in this PolymedX thing that we did, the physical AI. We've been talking about robotics and we've been talking about MedTech and healthcare for a long time, something our chairman is very passionate about, the healthcare space.

We started this project about a year ago, and many members of our innovation team have spent months in hospital wards with clinicians, understanding their pain points and their problems, and then turning them into use cases and solutions for this physical AI. We're really excited about that.

We think it's something that, again, can be deployed now. Technology is available today, not waiting for it.

We're kind of leaning into that business, we like that one a lot. Automotive, we've kind of pivoted away from not very attractive at all EMS business, and looked at developing point solutions directly for OEMs.

We have an infrared solution for cars to meet a requirement in 2029 about pedestrian detection and avoidance that we think is a winner, and we're getting that same feedback from a lot of automotive companies. Like the segment, don't like where we were playing, kind of moved higher up into the higher-margin businesses for providing value and real point solutions for global automotive OEMs.

We'll continue to invest in the consumer stuff. It's just not a great year to have a consumer debut.

We need COVID. That's the one time we needed COVID.

No, not a great year due to components.

I'll ask one final and then we'll see on the line. Initial take looking toward year-end fourth quarter, I know not necessarily a guidance time, but it's a big step-up on server.

If you kind of see there we're still in that phase where each quarter it should be stepping up. Then it sounds like we should expect outside of server nothing exciting into year-end like for the notebook and the consumer business, but server just should we get another step-up, what actually could bring up the whole company outlook looking beyond third quarter?

In 4Q, we see the AI server momentum to remain healthy,

yeah,

and it should start building

on that.

One of the toughest obstacles for us to overcome was, yeah, we love you guys on the device side, on the consumer side, commercial, PC side, et cetera, but you haven't done this before. Now we're doing it, and we're doing it at scale, and we're about to start doing a whole lot more.

I think that gives a lot of confidence, and so we expect that to continue in Q4.

Sure. I said that's one more, but is any a very competitive bidding environment for servers, it feels like it's strong environment, everyone's trying to get these data centers up.

Notebooks feel they're somewhat always competitive. How does it feel, competitive intensity as you're coming into the market, everyone's kind of fighting for share or everyone grabbing a lot of opportunity?

I think it varies, right? I think some of the cloud providers have very aggressive deployment plans and need capacity, right?

They need capacity. It's not like you can really go shop these things around and then say, "Oh, this guy's $10 cheaper.

I'll let them build it," because there's so much enablement that needs to happen for an ODM to serve as a cloud service provider. They have to come in, look at your factory, make sure you're capable, et cetera, do all that type stuff.

Then they have a whole set of requirements that you have to adhere to. Then you have to handshake.

You have to have an IT connection. That's not insignificant.

Once you're in, competition among the established ODMs can be tough, for

sure. They'll

all stay within a certain margin range. To get in is very hard.

We found ourselves at a very fortunate time in the industry where people were looking for more capacity, and therefore, more trusted partners. They like not only the facilities we're bringing online, but the quality of the facilities, the quality of what we're putting inside those buildings, the investment in automation that we're making, and the team that we've built, the humans that are running this.

We've built a really, really good team from all over the industry that does have that experience, and so it continues.

That's great. Actually, Max, I'll see if any final questions from the line.

Thank you for taking my final question. I have a couple of follow-ups, sorry still about the server side.

Just want to double-click on your server customer. If I heard it right, you mentioned you may have one new tier 1 Neocloud and also a large U.S.

enterprise as customer. Is it into next year or that will start to contribute in the second half this year?

Is that an L10-plus kind of products or like a VR200 kind of product?

To be conservative, I would say that we will prepare for it in the second half of '26, and we will ramp it in very early Q1 '27, and we will see the business expand from kind of what we're doing today with B300 and other things into full rack solution. We'll see that volume, the OEM volume really in 2027.

Got it. Yeah.

I've seen some news and in your Daxi factory announcement opening, chairman mentioned some 30% to 40% AI revenue contribution next year. We can confirm it as a guidance or that is not your official comments?

No. That's the guidance, right?

We believe that 2027 that we'll see 30% to 40% of Compal's revenue generated from the server business and a vast majority of that generated from AI server.

Got it. In that case, the PC mix should dip below 50% next year, right?

Because you still have other business in the non-PC business.

Yeah. Certainly, if we hit those numbers, that's true, because we have other smart device businesses, phone business, other businesses that revenue.

Our percentage of revenue in PCs will dip below 50%, yes.

Got it. And

We still like that business. We're still investing in that business.

We want to grow that business, but we want it to continue to become a smaller portion of revenue only because the others are obviously growing.

More balanced than before.

Yeah.

Understood. Makes sense.

My final question will be, to support this very strong AI server revenue growth next year, and in terms of your balance sheet now I think it's almost going to say a little bit into net debt area soon. How do you see your capital plan?

Will say announce any convertible bonds, and how do you look at your capital structure? Will you leverage more on debt or say equity increase?

Yeah. I think, Tony, I give a answer first, all right?

Overall, Anthony, I think you're right. If you look at the cash flow-wise, definitely we're spending, right?

The spending on the cash flow definitely support for business growth. As we said, a bank facility, we still quite have a capacity there.

If we look at our liability ratio, 71%, compared to right now the industry average, we're still relatively at a healthy level. Bank facility-wise, we still have some good support over there.

Of course, what we're going to prepare, right, for the future if the business continue to have the very high growth potential. We are also at the same time to look at the different funding vehicles, right?

We are not exclude the possibility, right, for the other vehicles like everyone talking about ECB or the other equity financing, but we are all pay attention on that. What will be really, really depends on how is the further progress of the business.

Okay. All right.

Good. Actually, I'll just squeeze one final and then I'll turn it to Tony for closing remarks.

I'm actually curious because you brought up the 30% to 40% revenue. Tina, you talked OpEx is kind of growing single-digit this year.

Next year, do you get leverage or to support that kind of growth, we shouldn't be accelerate the OpEx growth? Kind of early, but do you need to start growing more double-digit OpEx just to handle that kind of big server expansion?

Tony, I think rather than to give a specific number guidance of that, I think the rationale behind is that of course for the growing business where we give the extra resources, right? We're spending OpEx on that, right?

The other part, we also doing the reallocation of resources, how to spending our OpEx more effectively, efficiency. We are doing that kind of balancing.

That's the reason why you see the result, right? The company, we can still manage overall the OpEx growth on still the reasonable level.

Great. With that, I'll turn it over to Tony to give some closing remarks.

Thanks.

Yeah. Again, perfect timing, hey, guys?

Thanks for joining the call. Hopefully you see the effects of our transformation, what that's done for Compal so far.

Again, we've been at it for about two years. Took about six to seven months to do the diagnostics and to get the mobilization ready, and then we've been at it for about 18 months doing the transformation.

Now we're really starting to see it pay off. We've made the bets, we made the investments.

We have the facilities coming online in the second half, hired the teams and the right people to manage them. Across acceleration, future care, connectivity, creativity, everything we showed at Computex, kind of what I termed our trailer, and what I say is we're not just a PC company anymore, it's true.

We are now executing, we're not just talking about those businesses. We are making bets, executing on those bets, writing checks, building buildings, hiring people.

We are very encouraged by what we think is ahead-of-schedule results for the server business, which we, again, continue to see through the remainder of 2026. Then we think 2027 could be a really, really bang-up year for us.

The transformation continues. Schedule right now is through 2027.

We aim to be the most digital-enabled ODM on the planet. We have seen firsthand the impacts of GenAI, and now in the last quarter or so agentic AI as we start rolling that out in certain areas and how that's driving operational efficiencies.

We're excited about what the future brings. Thank you very much.

Okay. All right.

Want to thank everyone for joining. Look out for the replay link.

At this time, I think everyone can disconnect. Thanks, everyone, for joining.

Thank you to Tony, Tina, and yeah, we'll join you again next quarter. Thank you.

Thanks, everyone.

Thank you, everyone. Bye.