Letter to Shareholders
The world started leaving two years of COVID-19 behind in 2022 and getting ready for the new norm. Looking back one year later, we had a year of even more chaos and uncertainties. A war that broke out in February, a series of supply chain disruptions, raw material and energy crises, inflation, and unprecedented market volatility created one challenge after another for LITEON and pushed the company to grow more resilient and more innovative. LITEON held fast to the set targets despite external changes and relied on best judgment to act and advance toward the ultimate goal.
New operation, new profit model, new LITEON
In 2022, LITEON continued to increase both depth and width of digital transformation and implemented digital transition on various levels in various operations. The company embraced new possibilities and worked closely with suppliers, employees, and other partners to achieve targets amid challenges. The result was profitable growth where profit increase exceeded sales increase. In 2022, LITEON's annual sales rose by 5% while the gross profit and the net operating profit rose by 9% and 16%, respectively. New strategies implemented over recent years gave a significant boost to LITEON's high growth and high value core businesses. The gross operating profit margin rose from 13% in 2018 to 19% in 2022, while the net operating profit margin rose from 3.6% to 8.7%. The EPS increased from NT$3.42 to NT$6.19. LITEON is now a transformed company in every way from product mix, business model, and operational structure.
LITEON's own cloud power solutions, advanced opto-electronic semiconductors in industrial control and green energy applications, electric vehicle charging, LED automotive lighting and sensors, and 5G AIoT all displayed impressive growth momentum in 2022. In particular, Cloud & AIoT business accounted for 33% of total sales and the Opto-electronics business segment delivered 20% of total sales. The gross profit margins of high-end products of these two business segments exceeded 25% and 30% respectively. LITEON is working actively to shift to an optimized 4/3/3 sales makeup with 40% of sales from Information Technology & Consumer Electronics business, 30% from Cloud & AIoT, and 30% from optoelectronic automotive products.
To provide incentives for executives and to attract and retain key talent while aligning closely with overall business targets, LITEON launched restricted stock awards (RSAs) in 2022. The terms of issuance requires increased annual profitability. Furthermore, for the purpose of focusing more on long term development of core businesses while coordinating corporate resources and improving business performance, competitiveness, and shareholder value, LITEON completed the transfer of the image business segment to LuxVisions by the end of 2022.
R&D to accelerate growth in cloud computing and electric vehicle business
LITEON enhances product mix and overhauls the business model by increasing the size and scope of strategic R&D. In 2022, revenue from system products and solutions accounted for a fast growing percentage, straying from the previously component and module-centric business model. In 2022, the ratio of R&D expenditure to revenue rose to 4.3%, up by 22% compared to 3.7% in the previous year.
LITEON cloud power systems provide a perfect example. They demonstrated solid power system developed over years of high-end R&D and enabled the company to start designing and offering the latest competitive system products to meet each customer's needs. Efficiency in time-to-market led to technological advantages, which, combined with maneuverability, flexibility, operational resilience, and supply chain management, were transformed into competitive advantages. As a result, LITEON secured a leading market share in new models and projects with major target customers worldwide in 2022. LITEON also started shipping the company's own new integrated high-end power supply and battery backup unit power management systems to large data center customers around the world. Going forward, LITEON will introduce Open Rack 3.0 compatible power solutions and data center power management and cooling systems and provide green and sustainable products and services to meet the demand for green data centers. Faced with the shift to high wattage, high efficiency, and high density cloud power and the growing demand for green energy, we are confident that fast growth in the cloud power business will continue.
Besides increased demand in the electric vehicles (EV) and automotive electronics markets, growth in the automotive electronics was supported mainly by industry-leading time-to-market, highly automated and efficient production, and smooth shipment of various high-end products. Products such as DC fast chargers, integrated cooling modules for high-end LED automotive lighting, and automotive imaging modules for advanced driver assistance systems (ADAS) all delivered excellent results. In particular, revenue from EV chargers more than quadrupled. In addition to continuing growth with existing American EV customers and increased supply to major European and American charging network operators, LITEON won new customers and secured EV orders from traditional North American automakers, thereby entering the high-end commercial EV fleet market.
Global expansion and green transformation to strengthen supply chain resilience
As more and more businesses around the world start shortening their supply chains, LITEON starts expanding globally at a faster pace. In 2022, the company announced the official opening of Vietnam Factory Phase II and groundbreaking for Zhonghe Digital Building. Construction of the building is expected to be completed in 2025. Furthermore, the board of directors passed the budget proposal for Kaohsiung Factory Phase II. The factory will be the production base in Taiwan for cloud computing, high-end power management systems, EV chargers, and 5G network and communications products. The US Dallas Factory will expand capacity in 2023 to support the data center power management system and EV chargersbusiness segments. It will enable the two business segments to produce locally and have a nearby supply for North American customers.
While the transition to zero carbon becomes a global consensus today, LITEON set clear SBTs for carbon reduction in 2019 and started working actively to reduce the impacts of GHG emissions on the environment. The LITEON Corporate Sustainability Committee, led by the chairman, is in charge of carbon management and related governance practices through the Environmental Sustainability Subcommittee and the Sustainable Product Design Subcommittee. The company will continue to reduce environmental impacts every year through product design, process improvement, and supply chain energy conservation projects. Overall carbon emissions have met thetargets every year since the projects were implemented. In addition, an aggressive target has been set to reach net zero emission by 2050.
In 2021, we launched a three-year project, "Sustainable Supply Chain and Green Transition Plan", to perform carbon inventory, set carbon reduction targets, and manage carbon reduction for the supply chain in phases. 2022 wasset to be the first year of carbon reduction for the supply chain. LITEON continued to extend the scope of supply chain carbon inventory and set clear carbon reduction targets based on the inventory result. The company accelerated the effort to help suppliers reach net zero and create mutual benefit for LITEON and the supply chain in carbon reduction. Furthermore, we brought together external resources and pushed for energy conservation assistance programs via facilitators. We worked with suppliers to develop the LITEON energy saving system and completed energy saving potential assessment and support. The process moved LITEON's green supply chain further toward sustainability.
People instead of numbers
We redefined LITEON's brand values in 2022. The intention was to revisit the company's origin and vision and to continue to give back to the community in technology and sustainability. A people-oriented approach and a desire for mutual benefit take us out of the conventional framework for employee welfare and implement instead a local sharing program, LITEON Family. A town hall meeting is held semiannually to bring the management team and the employees face to face for indepth discussions. Other benefits include free employee lunches and subsidy for children 0to 6years old. In terms of charity and giving back to the community, LITEON takes action by participating in beach cleanups, support for pomelo farmers, and shoe drives. These activities are ways for us to work as a group outside work and spread good in the world. Guided by the learning organization philosophy, we work with digital transformation programs, innovative design courses and good read recommendations, and invite external experts from various fields and successful businessmen to hold internal seminars. These events encourage LITEON employees to make a habit of learning and sharing and follow the mutual benefit spirit in working and growing together.
Marching towards our vision
The global economy remains highly volatile and its future uncertain in 2023. LITEON is going to monitor the global industry closely and respond quickly to political and economic changes as well as developments in the financial markets in order to maintain operational resilience and flexibility. The company will invest in digital transformation on an ongoing basis regardless of favorable or unfavorable conditions. The continuous effort pushes LITEON forward in developing smart technologies and achieving business goals while succeeding in the digital economy amid different challenges and opportunities. The transformation encompasses everything from the global network, organization, culture, talent, and processes, and builds up core competitive advantages over the long term.
Looking forward, the urgency in the global demand for energy efficiency signals a dire need of smarter, more efficient, and more business oriented system solutions. LITEON has utilized world-leading data center and electric car energy management to consistently prove itself in energy management systems and applications. Going forward, the company will focus on cloud computing, automotive electronics, and new energy management to provide efficient energy solutions in the end market. The company will also make plans for medium- and long-term growth and strategies. These key fields will remain center stage in R&D, capital expenditure, and business partnership. Meanwhile, high-end product design and smart manufacturing capabilities are two more keys for LITEON to open doors to upcoming growth industries such as EV, 5G and AIoT, green data center power management systems, and smart grids. We try to reduce product volume and use less materials to be more environmentally friendly. We also use recycled materials to complete the sustainability cycle and increase energy conversion efficiency to save energy. LITEON will take advantage of core optical and electric technologies and develop effective energy conservation and management systems in order to facilitate optimal utilization of precious energies in the future.
LITEON's transition and transformation is a race to surpass itself. Every change is accomplished by hard work and relies on a lot of trust and teamwork. We would like to give thanks to all of our partners for their support. We would also like to welcome all of our shareholders and partners to be a part of LITEON's rebirth and journey into a brighter future.