Delta Electronics 3Q26 Earnings: Parts Shortages Stranded NT$29bn of Extra Inventory

Delta Electronics is a Taipei-based maker of power supplies, cooling systems and power infrastructure. Its largest segment, power and components, makes power supplies (including server power supplies for AI data centers), fans and liquid cooling, and electronic components. Infrastructure covers data-center and telecom power systems and energy equipment such as electric-vehicle chargers. Automation and mobility (electric-vehicle powertrain parts) are the two smaller segments. Management said about half of revenue is now AI-related. Delta owns more than 60% of Delta Electronics (Thailand), which is listed separately in Bangkok.

Delta reported 3Q26 revenue of NT$197.1bn, up 7.5% QoQ and 31.1% YoY, a quarterly record. Monthly filings had already set the quarter's revenue: NT$67.1bn in July, NT$64.6bn in August and NT$65.4bn in September. Revenue was 5.4% below the NT$208.3bn pre-print consensus reported by ETtoday, and management attributed the gap to component shortages and delayed data-center construction.

Operating income rose 6.7% QoQ to NT$32.6bn, and net income attributable to shareholders fell 6.5% to NT$23.5bn. The gap opened below the operating line: non-operating income fell to NT$1.0bn from NT$4.4bn, mainly because investment gains dropped with stock-market volatility. EPS was NT$9.04, against NT$9.68 in 2Q26 and NT$7.16 a year earlier. Nine-month EPS reached NT$26.64.

Against our preview, operating income of NT$32.6bn and operating margin of 16.6% landed inside our ranges. Gross margin of 34.1% fell below our 34.5-35.5% range. Net income sat at the bottom of our NT$23.5-26.0bn range, and EPS at the low end of our NT$9.0-10.0 range.

Power and components, 54% of revenue, grew revenue 10% QoQ and 40% YoY to NT$105.9bn, but its segment profit fell 1% QoQ to NT$19.9bn, an 18.8% margin. Infrastructure revenue rose 5% QoQ to NT$65.9bn and its profit rose 7% to NT$12.1bn. Together the two segments that sell into data centers made up 87% of revenue.

Management did not say where the write-down was booked. Power and components, the segment that holds server power supplies and liquid cooling, added about NT$9.6bn of revenue but about NT$0.2bn less profit. At its second-quarter margin of about 20.9%, its profit would have been about NT$2.2bn higher, roughly two-thirds of the NT$3.4bn provision. Infrastructure's margin rose to 18.3% from about 18.0%.

Automation turned a NT$0.77bn profit on revenue up 19% YoY as shortages of its parts eased, and the mobility loss narrowed to NT$0.14bn.

Gross margin fell 1.6pp QoQ to 34.1% and 0.8pp YoY. Management put the inventory valuation loss at about 1.7% of revenue, roughly NT$3.4bn on 3Q26 revenue. Without it, gross margin would have been about 35.8%, against 35.6% in 2Q26. The NT$13.8bn of added revenue brought only NT$1.8bn more gross profit.

Management gave four causes for the stock it could not ship: customers batching orders, design specification changes, supplier shortages, and deliveries where some parts arrived and others did not. It said write-downs reverse once the goods ship and expects the stock to clear by 1Q27. It also expects such swings to recur more often, so it will hold more buffer stock. Delta Electronics (Thailand) reported a 27.3% gross margin and a net inventory write-down of about THB1.8bn for its third quarter, and that subsidiary is consolidated into Delta.

We expect part of the provision to reverse in 4Q26 and 1Q27 as the stock ships, which should take reported gross margin back toward 35-36%. A fourth-quarter gross margin below 34.1%, against management's statement that it should be no worse, would mean the write-downs are recurring.

Inventory reached NT$168.2bn at 30 September, up 20.7% from June and 94% from a year earlier. Since December, Delta has added NT$66.7bn of inventory. Stock now equals 1.29 times third-quarter cost of sales, up from 1.18 times in 2Q26 and 0.89 times in 3Q25.

Suppliers and customers carried part of the build. Payables rose NT$16.6bn in the quarter, and current contract liabilities, which are advance payments from customers, rose NT$4.7bn to NT$18.2bn. Other current liabilities rose NT$21.4bn to NT$52.5bn; the statements do not break this line down. Receivables rose 6.1%, slower than revenue.

Inventory is the main swing factor for the fourth quarter. Brokers expected component supply to normalize by November. If it does, the stock should ship and lift 4Q26 revenue toward the top of our range. A fourth quarter that ends with inventory above NT$168.2bn would mean the parts mismatches are lasting longer than management expects.

Nine-month revenue was NT$539.7bn, up 37.2% YoY, and nine-month net income was NT$69.2bn, up 61.7%. FMP consensus of NT$764.3bn for FY26 revenue implies 4Q26 revenue of NT$224.7bn, up 14.0% QoQ and inside the NT$220-230bn range in our preview. FY26 revenue consensus has fallen from NT$776.4bn earlier this month.

FMP consensus FY26 EPS of NT$38.6 implies 4Q26 EPS of NT$12.0, up 33% on the third quarter's NT$9.04. FMP's FY26 net income consensus of NT$113.1bn includes minority interests, like its reported history; against nine-month net income of NT$77.1bn on that basis, it implies 4Q26 net income of NT$36.0bn, up 38% QoQ.

We assume revenue of NT$220-230bn, gross margin of 34.1-35.5%, operating expenses of NT$36-38bn, and the third quarter's 22.6% tax rate and 9.8% minority share. That gives 4Q26 operating income of NT$37.0-45.7bn, net income attributable of NT$26.5-33.3bn and EPS of NT$10.2-12.8, so FY26 EPS of NT$36.8-39.5. Consensus sits in the upper half of that range.

At consensus revenue and NT$37bn of operating expenses, the consensus EPS needs gross margin of about 35.6%. That is close to the 35.8% the third quarter would have shown without the write-down, so consensus assumes no repeat of it. Another provision of similar size in 4Q26 would put EPS near the bottom of our range.

Delta does not give numerical guidance. At the 29 October meeting, management said fourth-quarter revenue will be higher than the third quarter's, and that gross margin should be no worse than 34.1%, while declining to guarantee it. Operating expenses will rise in absolute terms as research and deployment spending continues.

Material costs have risen about 2% since January. Delta is negotiating prices with customers and expects part of the increase in selling prices from 4Q26 and the rest in 1Q27. Management also said it will review some intangible assets at year-end, without sizing the review. Intangibles were NT$74.3bn at 30 September, 19.3% of equity.

The intangible review could move FY26 earnings furthest outside our range. Our FY26 EPS range of NT$36.8-39.5 includes no impairment, and any charge would land in 4Q26.

Management said AI-related revenue, across its power supply, thermal, components and ICT business groups, is now about half of total revenue. Liquid cooling was about 13% of revenue, roughly NT$25bn in 3Q26. In July management had put AI at more than 25% of 2026 revenue on a narrower count.

Management named shortages of semiconductors and passive components, of grid power and of licensed electricians as limits on data-center construction. HVDC installation needs specific licenses that take about 4-5 years of training. It said revenue will not follow a smooth curve, but it remains confident in cloud operators' 2027 capex and expects data-center building to continue through 2030.

On high-voltage DC (HVDC) power, partial shipments of +/-400V systems began in 3Q26. The 800V systems, driven mainly by NVIDIA, are moving more slowly.

The US International Trade Commission opened a Section 337 investigation on 9 October into vertical power delivery products, on a patent complaint by Vicor that names Delta among 20 companies. Management sees no short-term impact on shipments or customers and said a preliminary determination may come next year.

The board approved a large production base in Penang, Malaysia, with a five-year target of capacity equal to Delta's Thailand operations; a US$120m capital injection into the Malaysian subsidiary was approved on 28 October. Solid oxide fuel cells enter mass production in 2027, with a first line of about 100MW.

Operating cash flow was NT$27.1bn in 3Q26, against NT$43.2bn in 2Q26 and NT$16.7bn a year earlier. Capex rose to NT$17.6bn, so free cash flow fell to NT$9.4bn from NT$27.0bn. Over nine months, inventory absorbed NT$66.6bn of cash and higher payables returned NT$38.8bn.

Nine-month capex was NT$44.9bn. If management's July frame of about NT$70bn for 2026 holds, 4Q26 capex would be about NT$25.1bn, the largest quarter of the year.

Cash rose NT$26.7bn in the quarter to NT$209.0bn, helped by NT$18.6bn more bonds outstanding. Gross debt was NT$84.2bn, so net cash was NT$124.9bn, up from NT$118.0bn in June. Dividends paid over nine months were NT$30.1bn.

At NT$1,335, the 30 October close, Delta trades at 34.6x FMP consensus FY26 EPS of NT$38.6, and at 33.8-36.2x our FY26 EPS range of NT$36.8-39.5. FY27 consensus net income is NT$159.1bn, 41% above FY26 consensus on the same basis.

The peer forward P/E median is 27.2x: Vertiv trades at 32.9x, Eaton at 27.2x and Lite-On at 22.6x. On forward EV/EBITDA Delta trades at 17.6x, below the 19.7x median. The premium on forward P/E rests on 2027 growth of about 41% carrying through.

The shares fell 4.5% on 29 October, the first session after the results filing, when the Taiex fell 1.4%, and 9.8% on 30 October, after the meeting, when the Taiex fell 2.5%. They are down 35% from the 6 October close of NT$2,050 and 47% from the 27 May record close of NT$2,520. We do not rate Delta and carry no target price. A fourth quarter in which inventory turns into revenue and gross margin returns toward 35.8% would support the FY27 consensus; another quarter of inventory growth would put it at risk.

Inventory. Stock of NT$168.2bn equals 1.29 times quarterly cost of sales. If the parts mismatches persist, further write-downs would hit gross margin again in 4Q26.

Earnings forecasts. FY26 EPS consensus needs 4Q26 EPS up 33% and gross margin near 35.6%. Another write-down in 4Q26 would leave EPS near the bottom of our NT$10.2-12.8 range and below consensus.

The year-end intangible review. Intangibles of NT$74.3bn equal 19.3% of equity. Management has not sized the review, and an impairment would reduce reported 4Q26 net income.

Data-center build delays. About half of revenue is AI-related, and management named shortages of power, components and electricians as limits on construction, so quarterly revenue can swing with build schedules.

The ITC case. A preliminary determination may come next year. An adverse final ruling could restrict US imports of the products named in Vicor's complaint.