Why did third-quarter profit beat expectations by such a wide margin?

  • Win Semiconductors reported third-quarter revenue of 5.859 billion New Taiwan dollars, close to the Bloomberg market consensus. Operating profit was 1.416 billion New Taiwan dollars, exceeding Goldman Sachs’ forecast and the market consensus by 49% and 41%, respectively.
  • The profit improvement came mainly from the product mix: high-margin infrastructure business rose from 34% of revenue in the second quarter to 39%, lifting overall gross margin by 9.2 percentage points quarter on quarter to 37.4%; capacity utilization also rose from 65% to 75%.
  • Net profit was 1.93 billion New Taiwan dollars, 67% above Goldman Sachs’ forecast. Non-operating income of 698 million New Taiwan dollars accounted for 33% of pretax profit and made a significant contribution to the net profit beat.

Can fourth-quarter margins hold up?

  • The company expects fourth-quarter revenue to rise by a low-single-digit percentage quarter on quarter: handset cellular revenue is entering its seasonal low and declining quarter on quarter, while infrastructure, Wi-Fi and optical businesses combined are expected to be flat to slightly higher.
  • The company guided for gross margin to remain near 40%, above Goldman Sachs’ previous forecast of 31.8% and the Bloomberg consensus of 31.4%; capacity utilization is expected to be close to the third-quarter level of 75%.
  • On that basis and given the higher share of infrastructure business, Goldman Sachs raised its gross margin forecasts for 2026, 2027 and 2028 by 3.8, 2.1 and 1.6 percentage points, respectively, and raised its earnings per share forecasts by 47%, 6% and 7%, respectively.

When can new optical communications products make a larger contribution?

  • New photodiode (PD) products began ramping up in the second half of 2026, and the company expects their contribution to increase in 2027 as new capacity comes online. However, overall optical business revenue grew only by a high-single-digit percentage quarter on quarter in the third quarter, and the PD contribution remained very limited.
  • Progress is slower than Goldman Sachs expected: the bank cut its forecast for data communications optics as a share of 2026 revenue from a high-single-digit to a mid-single-digit percentage.
  • New laser diode (LD) products remain in customer qualification. The company expects a more noticeable contribution in 2028; Goldman Sachs estimates that reliability testing will take more than six months, and whether optical companies will outsource LD production to Win Semiconductors by then remains uncertain.
  • The company maintained its 2026 capital expenditure guidance of 2 billion to 3 billion New Taiwan dollars, with most directed toward new indium phosphide and gallium nitride capacity needed for its data communications optics and infrastructure businesses.

Why does Goldman Sachs maintain its sell rating as the handset foundry market expands?

  • Goldman Sachs expects smartphone shipments to fall 10% year on year in 2026, but handset power amplifier foundry shipments to grow 11%: rising production costs and design complexity are prompting design companies to give foundries more new projects. The bank expects Win Semiconductors’ power amplifier foundry revenue to grow 31% in 2026.
  • As the market expands, the company’s share faces pressure. Goldman Sachs expects its share of the power amplifier foundry market to fall from 74% in 2020 to 57% in 2026, and further to about 50% by 2030; the bank believes lower-cost competitors can win share through more competitive pricing.
  • Goldman Sachs estimates handset-related businesses will still account for more than 50% of company revenue in 2026, while data communications optics will contribute little in the near term. The bank considers the share price high, maintains its sell rating and raises its 12-month target price from 142 to 162 New Taiwan dollars; the share price listed in the report is 540 New Taiwan dollars.