Vanguard's Earnings Call: Q2 EPS at NT$1.56, Targeting 34.5% Gross Margin in Q3! AI Power Management Demand Remains Strong, Capacity Utilization Expected to Rise Further in Q4

Demand for power management chips driven by AI servers continues to heat up, and Vanguard International Semiconductor Corporation (VIS; 5347) delivered stronger-than-expected results in the second quarter, with a quarterly post-tax EPS of NT$1.56—up 32.2% sequentially and 41.8% year-over-year. Gross margin also rebounded to 32.3%. Looking ahead to Q3, the company forecasts wafer shipments to grow by 1% to 3%, average selling price (ASP) to increase by 2% to 4%, and gross margin to potentially reach 32.5% to 34.5%. General Manager Wei Chi-Shih stated that demand for AI server power management products remains strong, with capacity utilization around 90% in Q3. If demand holds, capacity utilization in Q4 is expected to be even higher than in Q3.

Q2 profits rose over 30% quarter-on-quarter, driven by growth in shipments and ASP, which helped lift gross margins. VIS reported consolidated revenue of NT$14.245 billion in Q2, up 13.7% sequentially and 21.8% year-over-year. Net profit attributable to owners of the parent reached NT$2.975 billion, up 32.4% sequentially and 45.6% year-over-year, resulting in an EPS of NT$1.56—higher than Q1’s NT$1.18 and last year’s NT$1.10. Gross margin improved from 29.3% in Q1 to 32.3%, while operating margin rose to 20.4%.

CFO Huang Hui-Lan explained that Q2’s growth was driven by seasonal customer demand and inventory restocking, leading to an approximately 11% sequential increase in wafer shipments. Combined with ongoing cost-pass-through pricing adjustments and improved product mix, ASP increased by about 3%, contributing to a 3-percentage-point expansion in gross margin. She noted that despite rising production costs, these were offset by higher capacity utilization and optimized product mix, aligning with the financial guidance provided during the May earnings call.

AI power management demand continues to grow, with Q3 gross margin targeting 34.5%. For Q3, VIS maintains a cautiously optimistic outlook. Wei emphasized that overall customer demand for power management wafers continues to rise. Assuming an average exchange rate of NT$32 per USD, the company expects wafer shipments to increase by 1% to 3% and ASP to grow by 2% to 4%, with gross margin projected between 32.5% and 34.5%.

The continued ASP improvement stems not only from cost adjustments but also from an ongoing optimization of product mix, with AI server-related power management products remaining a key growth driver. The company anticipates that as customer demand persists, the revenue contribution from 0.18-micron and more advanced mature processes will continue to rise, along with the overall proportion of power management products in total revenue.

Order visibility remains stable at around four months, supported by sustained growth in AI server power management demand and seasonal inventory buildup. Q3 capacity utilization is estimated at around 90%. When asked by analysts whether there is room for growth in Q4, Wei responded that current demand continues to increase, and based on current observations, Q4 capacity utilization is expected to exceed Q3 levels. Although the company still faces constraints from certain bottleneck equipment and cannot fully meet all customer demands, overall demand remains very strong. Therefore, VIS will continue investing in equipment and optimizing capacity to alleviate bottlenecks and capture more orders.

Capital expenditure remains unchanged at NT$60–70 billion, continuing to expand 8-inch and 12-inch capacity. To meet growing demand for AI and mature-node applications, VIS maintains its capital expenditure plan for the year. Wei stated that CAPEX for 2026 will remain at approximately NT$60–70 billion, with about 85% allocated to equipment investments in 8-inch and 12-inch wafer fabs, and the remaining 15% dedicated to annual maintenance, equipment optimization, and capacity improvements at existing 8-inch facilities.

In addition to upgrading existing 8-inch capacity, the company will invest in equipment for BSMC, its Singapore subsidiary’s 12-inch fab, to meet long-term customer demand for mature processes. VIS will also phase out some coarse-line-width processes and shift toward finer-line-width products to improve production efficiency and product competitiveness.

On depreciation, Wei noted that full-year depreciation expenses are expected to reach approximately NT$9.25 billion, up about 8% from last year. Q3 depreciation is estimated at NT$2.34 billion, up about 5% sequentially, primarily due to increased depreciation from 8-inch capacity optimization and the phased ramp-up of the 12-inch new fab.

Continued upgrades of 8-inch mature processes to support AI demand through finer line widths and capacity optimization. In addition to building new 12-inch capacity, VIS is also strengthening its 8-inch process footprint this year. Wei stated that the company will continue converting part of its coarse-line-width capacity into fine-line-width processes to meet customer demand for high-value-added mature-node products. Q3 8-inch monthly capacity is expected to increase by about 1% to 27,900 wafers, with total annual capacity reaching approximately 330,600 8-inch wafers.

Regarding market inquiries about expansion potential for 8-inch mature processes, he revealed that the company is actively seeking suitable equipment sources and leveraging existing factory space and equipment upgrades to increase effective capacity to support growing customer orders.

GaN has entered mass production, SiC trial production by year-end, samples in Q1 2024. Beyond existing mature processes, VIS is also advancing in compound semiconductors. Wei stated that gallium nitride (GaN) products have officially entered mass production, with applications spanning AI data centers, high-voltage power supplies, and automotive electronics. High-voltage GaN products can support 400V and 800V data center power architectures. The company is collaborating with key customers to develop next-generation products and advancing related process technology transfer.

For silicon carbide (SiC), VIS is co-developing processes with Hanli. Although the timeline has been slightly delayed from the original plan, trial production is expected to begin by the end of this year, with functional samples to be delivered to customers for validation in Q1 2024, expanding the company’s footprint in the compound semiconductor market.

AI demand remains the core driver for second-half operations, with capacity optimization supporting growth momentum. Overall, VIS believes that AI-server-driven power management chip demand will remain the primary growth engine for the second half. With customers continuing inventory restocking, increasing AI application penetration, and ongoing price adjustments, capacity optimization, and equipment investment, after revenue and gross margin growth in Q3, there remains room for further improvement in capacity utilization in Q4. In response to rapidly growing mature-node demand driven by AI, the company continues to lay the foundation for future growth through 8-inch process upgrades, 12-inch new fab construction, and strategic investments in new technologies like GaN and SiC.