Record-High Third-Quarter Profit, Cost Pressures Weigh on Gross Margin
MediaTek subsidiary IC design company Airoha posted third-quarter revenue of NT$69.4 hundred million, up 10.4% quarter-on-quarter and 23.3% year-on-year, with a gross margin of 49.3% and after-tax EPS of NT$6.15, a post-listing high. Benefiting from new application deployments including high-end business headsets, networking infrastructure, and AI data centers, revenue performance met expectations. However, due to rising raw material costs such as memory and packaging costs, with product pricing not yet reflecting higher upstream costs, gross margin was below the originally estimated 51.2%, and profit also missed the estimated NT$7.24. The local investment advisory noted that related pricing constraints will remain until the second half of 2027 before a significant recovery in gross margin can be seen.
Fourth-Quarter Revenue Seen Rising, Broadband and Optical Communications Remain Strong
Looking ahead to the fourth quarter, the investment advisory is optimistic about continued growth in broadband, optical communications DSP, and Ethernet businesses, plus mass-production contributions from business headset projects, with only a limited decline in wireless business. It therefore revised up fourth-quarter revenue forecast to NT$73.5 hundred million. However, as product price adjustments still cannot fully reflect costs, it lowered the gross margin forecast from 51.5% to 49.7%, forecasting after-tax EPS of NT$6.75. Overall, networking infrastructure specifications and demand continue to increase, and the subsequent profit growth trend remains optimistic, maintaining a Buy recommendation.
DSP Volume Growth, Rising Share of Wired Business
Optical communications business is the main growth driver. Airoha shipped small volumes of 100G SerDes DSP paired with TIA in the third quarter, and the overall TIA attach rate will continue to increase. The company's DSP focuses on sub-200G specifications and Scale-out applications, having entered the world's top ten module makers, with end applications mostly Chinese cloud operators, and using 12nm process, offering a cost advantage over the industry's mostly 6nm. DSP business is expected to account for 6.6% of revenue in 2026, and with 100G DSP volume ramp-up in 2027, revenue will grow about 200% year-on-year, with revenue share rising to 16.3%, becoming the largest source driving wired business growth. Wired business share is expected to further increase to 60% in 2027.
On valuation, considering specification upgrade demand for networking infrastructure, with optical communications moving toward 200G per lane, broadband continuing to upgrade to 10G PON, and Ethernet upgrading toward 5G PHY, growth in wired business will help profit growth. The investment advisory revised up Airoha's 2026 and 2027 revenue forecasts to NT$260.4 hundred million and NT$312 hundred million respectively, forecasting 2026 after-tax EPS of NT$22.61 and maintaining 2027 after-tax EPS at NT$30.07, and with a 30x P/E valuation, raised the target price from NT$750 to NT$900.