What improved in the third-quarter results, and why did they still fall short of expectations?

  • FOCI 3Q26 revenue was 600 million New Taiwan dollars, up 40% quarter over quarter and 18% year over year, in line with Goldman Sachs’ forecast. Gross margin rose from 0.2% in 2Q26 to 10.6%, but was below Goldman Sachs’ forecast of 16.8% and market consensus of 22.2%. Goldman Sachs attributed the shortfall to testing costs during the CPO FAU mass-production preparation phase.
  • Over the same period, the expense ratio fell from 21.4% to 15.1%, and net loss narrowed from 28 million New Taiwan dollars to 10 million New Taiwan dollars; however, the loss remained above market consensus of 5 million New Taiwan dollars. In other words, improved revenue and the lower expense ratio had not yet offset the impact of the gross margin falling short of expectations.

When does Goldman Sachs expect CPO FAU to start contributing to revenue?

  • Goldman Sachs expects FOCI 4Q26 revenue to reach 1.234 billion New Taiwan dollars, up 106% quarter over quarter, mainly driven by a larger revenue contribution from CPO FAU. Its monthly model estimates revenue of 258 million New Taiwan dollars in October 2026 and 309 million New Taiwan dollars in November, up 15% and 20% quarter over quarter, respectively; the estimate for December is 666 million New Taiwan dollars.
  • Looking ahead, Goldman Sachs expects continued volume growth in AI server racks and the expansion of CPO switch applications from scale-out to scale-up to further accelerate CPO FAU revenue in the second half of 2027 and in 2028, increasing its share of revenue and supporting gross-margin expansion.

How are cost pressures changing earnings forecasts and valuation?

  • Goldman Sachs lowered its earnings forecasts for 2026E to 2030E by 49%, 2%, 1%, 1%, and 1%, respectively, mainly because CPO FAU production preparation costs weighed on gross margin. For 2026E, for example, the revenue forecast was maintained at 2.644 billion New Taiwan dollars, while the gross profit forecast was lowered from 484 million New Taiwan dollars to 435 million New Taiwan dollars, a reduction of about 10%. The revisions are concentrated on the profit side, rather than the revenue outlook.
  • Goldman Sachs maintained its Buy rating but lowered its 12-month price target from 900 New Taiwan dollars to 866 New Taiwan dollars. Its valuation is still based on 2030E earnings, using a price-to-earnings ratio of 16.4 and discounting at a cost of equity of 12.6% to 2027; therefore, future revenue contributions and gross-margin improvement are important supports for its valuation thesis.

What factors could constrain this growth trajectory?

  • The immediate constraint is that testing preparation costs have already left third-quarter gross margin notably below Goldman Sachs’ and market consensus expectations. Goldman Sachs also lists intensifying market competition, changes in optical-network technology migration trends, and a slower-than-expected capacity ramp-up as downside risks. These factors relate respectively to product demand, technology roadmaps, and supply timing, and could affect CPO FAU volume growth and gross-margin improvement.