Asustek Computer Inc

TWSE:2357

Earnings Call Transcript 2019-Q4

[Unknown Executive]

Good afternoon, and welcome to the Fourth Quarter 2019 Earnings Conference Call for ASUSTeK.

This conference call is divided into 2 parts. First, Mr. Nick Wu, our CFO, will brief you on the financial results of 2019, followed by the remarks from our co-CEOs, S.Y. Hsu and Samson Hu, on operations and outlook. The second part is the Q&A. [Operator Instructions]

First, we'll hear from the CFO of ASUS. Thank you.

[Nick Wu, executive]

Thank you. First, apologies. Everyone here is going to speak through a mask. If later on you find the audio unclear or the volume too low, please do let us know. Our staff will adjust the volume accordingly.

First, please turn to Slide 5. This is the fourth quarter 2019 brand P&L. In the fourth quarter 2019, the net revenue was TWD 89.3 billion, up 1% Q-o-Q, also up 1% year-over-year. In the fourth quarter, gross margin was around 13.1%. Operating margin was at 1.1%. In the fourth quarter, operating profit was TWD 991 million. Net profit was TWD 2.64 billion. EPS for this quarter was TWD 3.6 per share.

The revenue in the fourth quarter exceeded our expectations. This was driven by good performance from our gaming PC, thin and light notebook and board and graphics. In the fourth quarter, this segment had good shipment growth. Europe also did quite well in the fourth quarter with very good year-over-year growth. These factors all contributed to our revenue growth.

The operating margin in the fourth quarter trended down slightly due to several factors. First, in the fourth quarter, we suffered from a shortage of chips. Second factor is due to the operations in China. We tried to trim down our operations in China that also had some impact on our financial results. Finally, by the end of 2019, ASUS already proposed our aggressive growth goals for 2020, and we started making preparations in the fourth quarter in terms of channel marketing. This was to make preparations for long-term growth and value creation. Because of these factors, net profit and operating margin in the fourth quarter went down slightly.

Now please turn to Slide 6. This is our brand P&L, a pro forma brand P&L excluding phones. In fourth quarter, with old models, operating loss went down to TWD 372 million. This continues to go down. For new models, revenue and profit all went up. Net revenue was TWD 3.4 billion, and gross margin turned positive at 1.7%. If we exclude all phones, brand revenue was about TWD 84 billion. Compared to the same period last year, this is a 6% growth. Operating profit was about TWD 2.1 billion. Net profit, TWD 3.8 billion. Excluding phones, operating margin was about 2.6%.

Now please turn to next slide for non-op items. Interest income, TWD 280 million; investment income, TWD 490 million, including TWD 123 million from Askey. In the fourth quarter, we had a good exchange gain at TWD 1.05 billion. Other income, TWD 342 million. Total non-op items, TWD 2.16 billion.

Next, our brand balance sheet. In terms of inventories, in the fourth quarter, the level was about TWD 69 billion, down 6% quarter-over-quarter or 20% year-over-year. This is because we continue to optimize and increase our operational efficiency. However, it just so happens that in 2020, COVID-19 occurred, and our low inventory level is now creating some headwind for our operations in the first half of 2020. Having said that, our long-term goals remain the same. We believe it's all about having better operational efficiency. Once the abnormality goes away, we believe these operations will go back to normal. Cash conversion cycle days in the fourth quarter were 87 days. So that was a summary for balance sheet.

Now Slide 9, the brand P&L for the entire year of 2019. Net revenue, TWD 332 billion, down 6% year-over-year. Operating profit reached TWD 7.25 billion, growing at 161% year-over-year. Net profit, TWD 12.1 billion or growing at 187% year-over-year. EPS for the year was TWD 16.3.

Looking at major non-op items, several major differences between 2018 and 2019. First, investment income improved from negative TWD 284 million to a positive TWD 814 million. This was primarily driven by Askey. In 2018, Askey lost TWD 2.2 billion, but in 2019, Askey broke even. Second difference, exchange gain in 2019. We have an exchange gain of TWD 2.61 billion. Dividend income remained relatively flat, TWD 2.48 billion in 2018 and TWD 2.3 billion in 2019.

Next slide. Slide 10 is the pro forma brand P&L for 2019, excluding phones. Net revenue was about TWD 309 billion, operating profit about TWD 12.4 billion, translating into a operating margin of 4%. Net profit was TWD 16.7 billion. EPS, TWD 22.5 per share.

Now please turn to the next slide, revenue breakdown. In the fourth quarter of 2019, PC accounted for 74%. Component and open platform products accounted for 26%. Revenue breakdown by region: Europe, 38%; Asia Pacific, 41%; Americas, 21%. If we look at the whole year of 2019, PC accounted for 71%; component and others, 29%. By region, Europe, Asia and Americas accounted for 34%, 45% and 21%, respectively.

Slide 14 is our guidance on shipments for the first quarter of 2020. So far this year, COVID-19 has been having an impact on the supply chain as well as the demand. Right now, our outlook for the first quarter of 2020 is that PC shipment will go down by 40% quarter-over-quarter. Component shipments will go down 5% quarter-over-quarter. Consolidated revenue for the first quarter were down by 30% compared to the same period last year. Of course, we need to cope with this short-term changes in terms of supply and demand. Having said that, we are committed to pursuing long-term growth. We're also quite confident about achieving those goals. Later on, our co-CEOs will paint a clearer picture for you regarding that.

Now I would like to add 2 pieces of financial information. In addition to shipment outlook, we can also expect that due to financial volatility in the first quarter, we are going to see significant exchange rate fluctuations. So in terms of non-op items, we may be experiencing some exchange loss in the first quarter. This is a pressure that we need to manage and control. Now once the abnormality goes away, our goals remain the same. We want to create long-term value and have stable operations. Finally, our Board of Directors approved our fourth quarter financial report. The Board has also approved our cash dividend at TWD 14 per share. Later on, we are going to publish this information on TWSE.

So that wraps up the financial results section. Next, we would like to invite our co-CEO, S.Y. Hsu, to brief us on operations.

[Hsien-Yuen Hsu, executive]

Hello, analysts and media friends. Good afternoon. My name is S.Y. Hsu. I'm going to give you an update on our operations.

This year, the biggest black swan event is, of course, COVID-19. I'm sure you are -- this is on top of your mind, so let's talk about that first. Regarding the COVID-19 pandemic, our strategy is that we prioritize the health of our employees and we also prioritize the demand of our customers. We want to meet customer demand while ensuring employee health. This pandemic can be a crisis for the business, but we also see some silver linings and opportunities. For example, now people are working from home and learning from home. These create opportunities, and we are going to create relevant programs to meet that demand. Without a doubt, COVID-19 is going to have some short-term impacts. For our mid- to long-term goals, though, these goals remain the same, and we are committed to pursuing those goals.

COVID-19 is having an impact on both supply and demand. Take demand, for example. Right now, there are restrictions on traveling, so brick-and-mortar stores are going to be affected. In the midterm, we see some demand emerging. For example, as people learn and work remotely, this demand is going to be strong. For example, we already see the strong demand in China, and we already have created some progress to meet that demand. We also need to keep an eye on the demand. Different countries have implemented different measures to contain COVID-19. Consumer behaviors are also restricted by these measures. Of course, we do not know how long this pandemic will last. If it lasts for a significant period of time, of course, it will create a tremendous impact on the economy. If that is the case, of course, it will also affect demand. This is something we will continue to monitor, and we will adjust accordingly.

Moving on to supply. The outbreak created significant impact on the supply chain in China. However, the supply chain is now returning to normal. By the end of March, we believe the supply chain will recover to 100% capacity. In the mid to long term, we will make some adjustments, for example, have some adequate inventory level and asking our suppliers to automate to improve efficiency. In the future, we may also require suppliers to supply to us from different regions so that one event in one region will not affect our overall business operation.

Next slide. Continuing with the priorities we announced last year, we remain focused on 3 keys in operations: first, manage market dynamics; second, expand addressable market; third, focus on areas of growth. Industry risks include, for example, the COVID-19 pandemic and the U.S.-China trade war and its accompanying economic uncertainty as well as dampened consumer confidence. Also, there's a price war in Europe and rising component prices in the second half of the year. It is with product innovation, enhanced product quality and highly efficient precision marketing that ASUS will adapt to industry changes and competition.

There are some positive factors on operations. For example, CPU shortage problem has been soft. Our adjustment for cryptocurrency-related graphic cards is now completed. We are entering a new product cycle, and orders for gaming phones are exceeding expectations. Our operational strategy will focus on fast-growing markets. It is about differentiating our products. We will be very aggressive with gaming PC, thin and light laptop as well as the creator-related segment that we started positioning in 2011. We have a sub-brand called ProArt that is serving creators. Also, we will focus on display monitors, desktop and notebook. We are going to create a comprehensive product offering for creators. Through product innovation, quality and consumer insights, we can create our competitive edge.

Our market strategy is about creating value and differentiation for the industry. In selective regions and markets, we will create teams for commercial PC to better serve professional users, enterprise users and the education segment. Commercial PC has been a weak link for us. This year, we've adjusted our resource allocation. We expect to see results in this area.

This slide is about the Q4 performance of our major product categories. The open platform products revenue grew by 7%. System products revenue grew by 5%. Gaming PC shipment grew 28% year-over-year, outperforming the market substantially. This shows our growth-focused strategy has paid dividends.

In addition to our forte, the PC market, at the end of 2018, we also announced that we would put more resources on developing AIoT. A while ago, we established the business group of AIoT. Now I would like to brief you on AIoT. Right now, we have a team of hundreds of people developing AIoT and AI solutions. This team includes our best hardware team and AI talent. We've also set very aggressive 3-year goals. We would like to achieve great results in this segment.

In many domains, we are already seeing great results. For example, our computer vision inspection solution for smart manufacturing has achieved over 98% accuracy. This solution has been adopted by many of our supply chain partners. In smart healthcare, we collaborate with hospitals on multiple solutions such as disease classification codes, predictors for readmissions. Many such solutions have outperformed those from large U.S. software companies. In Taiwan and Southeast Asia, we've introduced smart retail solutions, enabling new retail.

This slide shows the 3 categories: smart manufacturing, smart healthcare and smart retail. The biggest pain point in implementing AIoT is fragmentation. In terms of clients and application, differences across vertical domains and value streams hamper the evolution of AIoT. At ASUS, to create the biggest differentiation, we developed standardizable, implementable AIoT solutions by combining state-of-the-art AI and deep expertise from domain experts. We will remain practical. We will keep focusing on our existing industrial computing segment. At the same time, we will create more AI solutions to create value and better solutions for industries and users. This is another way that ASUS is evolving. In the past, we focused on hardware. Going forward, with the development of AIoT, software is going to play a greater role.

Now I would like to hand it over to our co-CEO.

[Samson Hu, executive]

Dear friends from media and analysts, my name is Samson Hu. Next, I will brief you on our product strategy. On consumer PC, it's about fundamentals. We are now ranked #3 worldwide in terms of consumer laptops. On that foundation, we will continue to improve our quality, user experience and the evolved innovation. We will capitalize on all growth drivers, including creator PC, gaming PC and thin and light laptop. This year, we are going to launch various products that impress consumers.

Next slide. In terms of commercial PC, as S.Y. mentioned earlier, we didn't put too much attention on commercial PC before, but we believe commercial is going to be an important growth driver. Starting from last year, we put more resources in this part to enhance our products to make our product offering and solutions more comprehensive. For example, we will have desktop and Chromebook. Starting from the second half of the year, we started to work with Google extensively for Chromebook. We also try to develop B2B distribution channels and clients. We are going to be selective and focused. We will focus on SMB, education and government. In addition, the AIoT is also another growth priority for ASUS. As for strategy and updates, CEO Hsu already gave you that update. I won't repeat what he said.

Next slide. Allow me to share with you some important business indicators from 2019. In terms of gaming notebook, the market shipments grew by 11%. At ASUS, our shipment grew by 20%, outperforming the market by 9 percentage points. In terms of thin and light notebooks, the market grew 28% year-over-year. At ASUS, we grew by 32%, 4 percentage points higher than the market.

Next slide. In terms of our market share in gaming notebook, in all major markets across the globe, we have maintained our year-over-year growth and our market-leader position. In EMEA, North America and Asia Pacific, our market shares were 24%, 23% and 35%, respectively. In 2020, we will continue to enhance the competitiveness of our products. We will also continue to enhance our marketing channels and keep growing our gaming ecosystem to maintain our leadership.

Thank you.

[Unknown Executive]

We will now start the Q&A session. [Operator Instructions]

First question is from Morgan Stanley. In March, the supply chain will start to recover. However, in terms of the first quarter guidance, March revenue is remaining flat. Why is that?

[Unknown Executive]

Allow me to take this question. In the fourth quarter, basically, January and February revenue and shipment reflect the production in the previous 2 months, in December and January. And in December and January, the pandemic wasn't a pandemic yet. So in December and January, production was normal. And in January and February, the revenue was not affected. However, in March, the revenue relies on the production in February. As you know, in February, the coronavirus started to have significant impact on the supply chain in China.

[Unknown Executive]

Another question from Morgan Stanley. Operating expenses in the fourth quarter 2019 went up significantly. Why is that?

[Unknown Executive]

Two reasons. First, marketing expenses, we mentioned this earlier. At ASUS, we set really aggressive goals for 2020. And that is why in the fourth quarter of 2019, we started some early investments in preparation for better channels and business plans. And we expect that investment will have a positive impact on our marketing.

The second factor is an accounting one. It has to do with bonus expenses and personnel expenses. In the fourth quarter of 2018, we reorg-ed our mobile phone business unit, and we also recognized a onetime loss of TWD 6.0 billion. Because of that loss, we also recalculated bonuses, and that was recognized in the fourth quarter of 2018. So compared to 2019, the bonus expenses in 2018 were low. And because we started from a low base, 2019 personnel expenses seemed higher. Those are the 2 reasons.

[Unknown Executive]

Next question is from KGI Securities. What's your take on the impact of COVID-19 for the first half of the year? Are we seeing greater demand because people are working from home and we have greater gaming demand? Or are we seeing declining demand because of volatility in the macro environment?

[Unknown Executive]

I'll take this one. We can think about the impact of COVID-19 in terms of 2 stages. In the initial stage, the impact was primarily on the supply chain, especially in China. Our EMS suppliers and our supply chain are primarily in China. And when the disease broke, Chinese government put in place very stringent lockdown measures, and that had a tremendous impact on our supply chain. While we do not have a lot of suppliers in Wuhan, the stringent measures put in place by the Chinese government lead to slow recovery in factories after the Chinese New Year. Usually, workers will return to factories after the Lunar New Year. However, this time around, it's only in late March that we're seeing factory capacities returning to 100%. That is why the shipments in the first quarter is quite different from last year. I think the biggest impact is on the supply chain.

As for remote learning and remote working, yes, we do see increased demand in these areas. We also mentioned, in China, although physical shops are not operating, e-commerce is running quite smoothly. We also see greater demand from e-commerce, and that growth is quite significant. In view of these new demands, we have put in place relevant programs, for example, to bundle relevant software in our products and to provide promotions to meet that demand.

Now the pandemic is raging outside China. In the midterm, if people cannot go to work, we can expect the same demand arise in other parts of the world as well, just as that demand rose in China. As for how big an impact COVID-19 is going to have on the economy, this is something we need to monitor. As we mentioned before, different governments are implementing different measures. These measures are having an impact on economic activities. If these measures only last for several months, perhaps that is okay. But if these measures last for a prolonged period of time, then perhaps SMEs will not be able to survive. And in turn, that may cause an economic downturn. And of course, that will significantly impact the overall demand. And once recession is in place, it's very difficult or it takes a long time to turn that around. So this is something we will keep an eye on. And nobody can predict how the pandemic will drop. We just have to keep monitoring it.

[Unknown Executive]

Next question is also from KGI. On gaming PC, the revenue breakdown -- or contribution from gaming PC, what is the revenue growth of gaming PC year-over-year and the growth target for 2020? And the gross margin of gaming PC, is that over 10%?

[Unknown Executive]

I'll take that one. In 2019, gaming PC contributed about 15% to 16% of revenue. Revenue growth year-over-year is close to 20%. In 2019, our gaming PC segment performed quite well. Looking at 2020, we also set very aggressive growth goals. We would like to maintain the same growth level. We would like to grow at 20%. That is our target for 2020.

The gaming market is growing. Maybe it's plateauing a little bit. But in 2020, we see CPU and GPU vendors continuing to launch new products. We work very closely with these CPU and GPU vendors. We have always led the pack in terms of introducing new products. Also, millennials are very into gaming. This is a very important growth driver for the industry. Given the overall environment and given our ASUS operations, we are quite optimistic on our gaming PC business.

[Unknown Executive]

Next question is also from KGI. They are related to financial results. First, there is significant difference in terms of other income between 2018 and 2019. What is the reason behind that? Second question is about OP margin guidance for the first quarter of 2020.

[Nick Wu, executive]

Regarding your first question, you are probably referring to Slide 9. In 2018, the other income was a negative TWD 1.7 billion. In 2019, it was a positive TWD 1.2 billion. The biggest difference is because in 2018, if you remember, there was a European Union antitrust probe against ASUS. For that, we earmarked EUR 65 million for settlement, about TWD 2.3 billion to TWD 2.4 billion, and that's driving the difference between 2018 and 2019.

As for our guidance for operating margin, based on what we're seeing so far, in the short term, we are seeing supply and demand being affected. Undoubtedly, COVID-19 is going to impact the first quarter, even the second quarter of 2020. However, at ASUS, we remain committed to long-term value creation. We will make the necessary adjustments. For example, we may fine-tune our product launch schedule. We will also manage our marketing expenses to adequately allocate resources so that when demand recovers, we can meet that demand. Ultimately, it's about long-term value creation and accumulation. But of course, COVID-19 is going to have an impact on revenue and profitability. This is just something we have to bear with and the challenge that we must overcome.

[Unknown Executive]

Next question is from JPMorgan. Component prices have been going up, such as MLCC and memory. Can ASUS reflect that rising cost on increased prices? Or perhaps this cannot be transferred to end users, and thus, it will create more pressure on profitability?

[Unknown Executive]

Regarding memory, solid-state or MLCC, regarding these components, yes, indeed, at the beginning of the year, due to market expectations, as market expect greater demand from servers and 5G, the component prices went up. Actually, at the end of last year, we prepared safety inventory of these components. Now with COVID-19, the component prices have stopped climbing. Of course, going forward, prices are going to fluctuate. If the pandemic can be contained relatively shortly, then 5G and server demand will come back in the second half of the year and component prices will rise accordingly. We are in close contact with the suppliers that we work with. We're keeping a close eye on the industry as well as on COVID-19. We will adjust as needed.

[Unknown Executive]

If the component prices go up too much, can we adjust product prices accordingly?

[Unknown Executive]

Well, this is a process of dynamic adjustment. It depends on the level of component price increase. In the Western world, in PC segment, the price band is by EUR 50 or USD 50 per band. If component prices do not go over EUR 50 or USD 50, then it's going to be difficult for us to increase the prices of our products. Again, this is a dynamic process. We will keep a close eye on component prices. We will also look at industry developments.

[Unknown Executive]

Next question is also from JPMorgan. Can you provide financial guidance on the smartphone business in 2020? Will the inventory adjustments of old smartphones be completed by the second quarter 2020, as planned, given the influence of COVID-19? For new smartphones, the operating loss was TWD 2.8 billion last year. Can you further reduce it in 2020?

[Unknown Executive]

We'll take this one. Our CFO talked to you about the smartphone business. We talked about the old models versus new models. As planned, by the second quarter of this year, we are going to -- we will complete the sales of old models. Even if we do not clear out all the inventory, the remaining stock is so low that it will have minimal impact. With new phone models, last year, the loss was still significant. Internally, for this year, we've set very aggressive goals. We definitely need to improve the situation.

Now in light of this big black swan event, COVID-19, right now, we have not adjusted our goals or targets. Our targets remain the same. We will try to minimize the loss. We want the loss this year to be lower than that of last year. That's our goal so far.

[Unknown Executive]

Next question from JPMorgan. In terms of revenue guidance for the first quarter of 2020, component guidance is a 5% decline quarter-over-quarter. What's driving that?

[Unknown Executive]

With components, they have a longer inventory cycle days, so we have a larger buffer. We can better manage the impact of disruptions in the supply chain brought by COVID-19. Also, with components, our supply chain is more diversified. Due to these reasons, we can better manage the disruptions brought by COVID-19. Those are our brief answers.

[Unknown Executive]

Next question is from Business Next. Have border control measures by various countries caused problems in terms of logistics? What's your inventory level in overseas markets? That's the first question.

[Unknown Executive]

I'll take this one. Right now, these border control measures are directed at people. There are no specific measures for good -- no new restrictions. But of course, there are some side effects coming from restricted travel, for example, airfreight. Some aircraft carries both passengers and goods, but now airlines are being impacted. Some routes are suspended. Because of this, we now have fewer dual aircraft, and this has pushed up airfreight cost due to lowered capacity. So that's one of the side effects. To cope with that, we need to adjust. For example, we may increase the portion of shipping and land-based transportation. Of course, these transportation methods may take longer, and we need to cope with that as well.

As for our overseas channels, in Europe, as of now, our channels look pretty healthy. In China, the inventory level is relatively low. However, as our supply chain returns to normal, since most of our EMS vendors are in China, we expect they will be able to supply to channels in China pretty soon.

[Unknown Executive]

Second question from Business Next. Amazon has announced the suspension of consumer electronic product sales. They are now prioritizing selling daily necessities. What's our take on -- what's ASUS' take on this?

[Samson Hu, executive]

I'll take this one. Indeed, Amazon, in response to COVID-19, has announced the suspension of electronic goods sales. It's now prioritizing daily necessities and medical supplies. Regarding the U.S. market, when the trade war was raging on, we actually adapted already, for example, adjusting our inventory level. Right now, regarding the U.S., what worries us right now is whether COVID-19 is spreading out of control in the U.S., and if so, what kind of impact it will have on the U.S. In the short term, as S.Y. mentioned earlier, people are now working from home and learning from home. This creates new demand. This kind of demand has increased.

While Amazon is an online channel right now in the U.S. market, physical channels still play a greater role. Will physical channels do the same? That's something we need to pay close attention to. If physical stores also suspend the sales of consumer electronics, that's going to be serious. However, we don't think that's likely. Consumer electronics are important for people staying at home. Whether they are working from home or learning at home, they all need these electronic devices. So we don't think it's likely that physical stores will stop the sales of consumer electronics. That's our initial take. Of course, we will keep a close eye on that, and we will adjust as necessary.

[Unknown Executive]

Next question is from UBS. Considering the current situation, could you give us more color around the 2020 development policy?

[Nick Wu, executive]

Allow me to repeat, our Board meeting today approved the financial report for the first -- for the fourth quarter 2019. The Board has also approved cash dividend of TWD 14 per share. Our EPS last year was TWD 16.3, translating into a payout ratio of 86%. Last year, we already announced our mid- to long-term dividend policy. From 2020 to 2022, our cash dividend will be over TWD 10 per share. We will have better payout ratio and better yield than our competitors. We will provide better returns than the market average to give back to our shareholders.

[Unknown Executive]

Next question is from Nikkei News. Will the launch of new products in 2020 be delayed? How does the company plan to work around it?

[Unknown Executive]

For PC products, our launch time line will be aligned with upstream chipset vendors' schedule. Whether it's Intel or AMD, they will have official launch dates for new products. And vendors will also launch system products aligned with these launch dates. If you launch new products too slowly, of course, that will have a negative impact on your sales. In terms of product launch time line, we will be aligned with chipset vendors. Of course, COVID-19 is having an impact on supply chain as well as material, and this is going to, in turn, affect our product launches.

Here's our internal response strategy. We will focus on a few key products, say, originally, our plan might be to launch 5 products. Now with restrictions on resources, we may select 3 products. However, we are going to still launch those 3 products on time. In Suzhou, China, we have an R&D team. Right now, employee at our headquarters cannot travel to China to look at new products to see how ready these new products are, but we can ask our Suzhou colleagues to inspect our products. We can also work around through video conferencing and the mailing samples. There are these workarounds. We don't want to affect product launch schedules. We will put resources on key products to ensure they are launched on time.

[Unknown Executive]

Next question. After the outbreak of COVID-19, has ASUS taken stock of its supply chain? And does ASUS plan to decentralize the manufacturing operation? And what is the proportion of China and outside China production for now?

[Unknown Executive]

This is a key issue for the supply chain. When the U.S.-China trade war was going on, we already took stock of our supply chain. Now with COVID-19, supply chain is taking another hit. Back when the trade war was raging, we already talked to partners in Taiwan, Vietnam and Indonesia. We had some discussions and plans with these partners. At the time, we also did some pilot runs focusing on important models. Our preparations have been complete. Now with COVID-19 having an impact on the supply chain, we are also talking closely to our partners.

Going forward, indeed, we will accelerate the plan to further distribute our supply chain across the globe. For some high-end notebook models, we are already manufacturing those laptops in Taiwan. Going forward, we will further explore how we can put the manufacturing of high-end models outside of China. Now when you have manufacturing outside of China, you are faced with higher labor cost and also higher shipping cost. Since you don't have a comprehensive cluster or ecosystem in that manufacturing base, then you have to ship components there. These are issues and factors that we need to overcome if we want to manufacture outside of China. And that is why we're starting with high-end models to move the manufacturing of those models outside of China first.

[Unknown Executive]

Next question is from Economic Daily. How is the supply situation of CPU? Is there still a shortage of CPU?

[Unknown Executive]

I think you're talking about Intel CPU. Starting from 2 -- about 2 years ago, Intel CPU has been in shortage for quite some time. Now with COVID-19, first quarter and second quarter are going to be affected. So the shortage problem, to some extent, has been soft because of lower demand. Now in the second half, Intel is going to launch its new generation of CPU. The new-generation CPU will be on the 10-nanometer process node. What they were running short on, the CPU was on 14-nanometer process, so the shortage problem will be solved.

[Unknown Executive]

Next question is from Citibank. NVIDIA has canceled its GTC event. Will that affect the growth outlook of gaming PC or the component business?

[Unknown Executive]

I'll take this one. The cancellation of GTC, I personally think it will have a minimal impact on the gaming PC market. Because GTC is an event for hardware and software developers, it has little impact on end users.

[Unknown Executive]

Currently, many countries are implementing lockdown measures following the Chinese government. Now when people stay at home, what can they do? And what kind of companies will benefit?

[Unknown Executive]

Well, companies like Netflix and online gaming companies are definitely winners. We believe such demand is going to increase. Why? One indicator is the sales of our ROG phones in China. Originally, we had some residual stock of ROG phones in China. However, after COVID outbreak, we sold our older models. And towards the later stage, the daily activation number exceeded previous growth numbers significantly. So that's one piece of evidence. The demand for gaming is going to increase. Perhaps people are staying at home, and suddenly they realize, they cannot play mobile games smoothly on their current phone model, so they would switch or upgrade to a better model. And the same thing can apply in the PC market as well. So I think that will provide a lift to gaming PC sales.

[Unknown Executive]

Next question is from Nikkei. We've heard that there is a shortage on laptops and tablets. Will ASUS consider to increase the pricing of these products?

[Unknown Executive]

At ASUS, we put customers first. We take consumer rights seriously. Even though there is some shortage situation, in the short term, we don't plan to increase the prices. In the future, even if the situation requires us to increase the price, we will only do so when we launch a new generation of products with better spec, creating better value. When that price increase is more palatable to consumers, we'll only do that when that is the case.

[Unknown Executive]

Next question is from KGI. If we consider the worst-case scenario, will ASUS experience a loss in the first quarter of 2020? Second question, is the seasonality in 2020 going to be different from the past? Will we see a quarter-over-quarter revenue growth?

[Nick Wu, executive]

Right now, we think COVID-19 is going to have the greatest impact on March and April. If the pandemic does not get worse, then our initial expectation is that the second quarter revenue will be greater than the first quarter revenue. And perhaps the second quarter revenue will be flat year-over-year compared to last year. Of course, the pandemic situation is changing rapidly. We can only plan based on the information received so far. If the situation changes significantly, we will update you monthly as we report our monthly revenues.

Regarding the other question about the first quarter revenue, at ASUS, we have very good foundations. COVID-19 is one abnormality. Of course, it's creating a lot of pressure for us. But at ASUS, we have the resilience and resources required to cope with the impact of COVID-19. In Q1 and Q2 of this year, of course, our revenue and profitability will be affected by COVID-19. But our goals remain the same, we want to maintain stable operation, and we're still quite confident that we can achieve these goals.

[Unknown Executive]

I think we have addressed all the questions submitted on the web page. [Operator Instructions]

Next question is from CNS, about the overall outlook for Q2 2020.

[Unknown Executive]

Q1, the Chinese supply chain was impacted heavily, so our shipment was lower than expected. In the second quarter, from the point of view of our business unit, we'd like to make up for lost time. We've asked our EMS vendors to increase their capacity. We would like them to deliver what they failed to deliver in Q1. We also ask our frontline sales reps to gather information from clients regarding Q2 orders. As of now, Q2 orders are still slightly lower than the combined number of Q1 and Q2 from last year. It showed a slight decline. And that is why we're asking EMS vendors to increase their capacity. The information gathering was conducted last week.

Now as the pandemic situation changes quickly, in the Western world, COVID-19 wasn't a serious problem, but now government had put in place a lot of control measures. Now how will these measures affect demand? Perhaps we need to take a second survey. Based on the current information that we have, in the first half of the year, we don't expect significant difference from our expectation. Of course, we will continue to monitor and respond as the COVID-19 situation develops.

[Unknown Executive]

Next question is from DIGITIMES. What was the profit of gaming phone in 2019? Secondly, Tencent has started collaborating with other phone vendors on gaming phones. How does that affect ASUS? And when will you launch the third-generation ROG phone?

[Unknown Executive]

I will take this one. We started the gaming phone business as we changed our strategy. At the end of 2018, we set 3-year goals for this business. And back then, the goal -- well, actually, our performance in 2019 was in line with the goals that we set back in 2018. Perhaps I understand you might be concerned about the negative profitability and the impact on the company, but actually, this is in line with our expectations. We wanted to enable power users and gamers. Right now, we see competitors one by one joining the gaming phone segment. This means that people actually recognize the potential of the gaming phone segment, and that is why companies are joining the fray.

Tencent is now working with other companies on gaming phones. I think this is also part of their effort to grow the segment. Our positioning is quite different from the other vendor that Tencent is working with. Our ROG phone is positioned as a premium, high-end model. We want to provide the best user experience, best performance, the best gaming phone. I think with the new suppliers or vendors for gaming phones, that's only going to grow the market. Because we don't compete in the same segment, it's not going to impact us.

[Unknown Executive]

I think we have addressed most of the questions. We have compiled similar questions together. That is why we have not answered questions individually. We hope we have provided sufficient information, and thank you for participating in our conference call today.

Now to close this call, we would like to ask our co-CEOs to give us the closing remarks.

[Unknown Executive]

COVID-19 is having a big impact on the industry. What we tell our colleagues is that in the face of this crisis, we not only see the clouds, we also have to see the silver lining. For example, earlier, we talked about increased demand from working and learning remotely and new demand on -- from video conferencing. Right now, travel is restricted, but we can use tools such as video conferencing. Right now, we are forced to get used to these new tools and new ways of working.

In the future, as the situation returns to normal, perhaps we can apply the lessons learned during this period to further optimize how we work. This is something we tell our colleagues to encourage them. In the face of such a pandemic, poor companies, poor-quality companies won't be able to survive. Good companies will survive. And excellent companies will not only survive but emerge stronger.

With this sudden event, it provides ASUS another opportunity to take a hard look on our operation, in particular, our supply chain, whether our supply chain can respond efficiently. We have reviewed our supply chain processes and our supply chain strategy. Earlier in your questions, you also asked about whether we need to diversify our manufacturing bases or whether we need to move some manufacturing outside of China. That's just one important example.

In terms of our operations, we need to be able to cope with sudden incidents. In addition to that, we are still committed to our long-term goals. For example, we need to capitalize on growth drivers such as creator PC, gaming PC, commercial PC as well as AIoT. These strategies remain unchanged by COVID-19 or other black swan events. With our mid- to long-term strategy and goals, we are going to remain aggressive and we will gradually, step by step, move towards our goal, and we count on your support in this journey. Thank you.

[Unknown Executive]

Thank you for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]