Realtek Semiconductor Corp
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Realtek Semiconductor Corp
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Good afternoon, everyone. Welcome to Realtek's 2021 First Quarter Earnings Call. This call will be chaired by Realtek's spokesman, Yee-Wei Huang. The presentation will be available on the company website before 6 p.m. today.
At the beginning, our spokesman will report our first quarter results and give management's remarks. After that, we will have a Q&A session. [Operator Instructions] During the call, you can run through the pages of the presentation anytime.
Now I will pass the call to our spokesman, Yee-Wei.
Good afternoon, everyone. You are now listening to first quarter 2021 webcast earnings release by Realtek Semiconductor Corp.
Well, first, a brief note on the April results that was announced this morning. April revenue was TWD 7.81 billion, a 3.0% decline from March, but a 41% increase from the same month last year. We encountered some delay in factory output toward the end of the month. Therefore, a slight month-over-month decline. Otherwise, the demand remains strong.
Now let us go through first quarter 2021 operational results. On first quarter revenue, it was TWD 23.3 billion, amount is 5.7% quarter-over-quarter increase, but a significant 46.5% increase compared to the same period in 2020. The Q-on-Q increase reflects the continuing strength in the demand for Realtek products. The large Y-on-Y increase [ is still develop ] low market performance in first quarter 2020 when the COVID-19 outbreak first started.
Our first quarter gross margin was 44.8%, compared to 43.0% in first quarter last year. The higher-than-normal gross margin is a result of product mix.
Our operating expense in the first quarter was TWD 7.36 billion or 34% of revenue. An increase in the OpEx ratio is a reflection of additional engineering efforts to move certain products to new process nodes and our foundry [ overheads ] in face of supply shortage.
First quarter operating profit was TWD 2.99 billion or 12.8% of revenue. This is an improvement over fourth quarter due to better gross margin.
The non-op income in Q1 was TWD 119 million. We had a net non-op income in spite of the unfavorable foreign exchange rate for a strong New Taiwan dollar in the first quarter.
The net profit in the first quarter was TWD 3.05 billion or 13.1% of revenue. This is a 1.2 percentage point increase quarter-over-quarter. As a result, first quarter EPS was TWD 5.98. This is better than TWD 5.15 last quarter or TWD 3.21 in the first quarter of 2020.
Regarding inventory, Q1 inventory turnover days was at 66 days compared to 61 days in Q4. A slight increase in inventory was mainly due to the uneven supply of raw materials, thereby giving rise to an increase in WIP, work in progress.
We also have the balance sheet and cash flow statement for your perusal and your convenience.
This concludes Realtek first quarter 2021 financial report. Forward-looking, we see that the market demand remains strong and the prospect of operation is continuously positive -- is cautiously positive in Q2 2021, although the semiconductor supply is still in shortage.
We will also now run down the top 5 product lines at Realtek. On Ethernet, as market demands and customer orders remain strong in the face of supply shortage, the business growth comes from both directions: One, over increase; and 2, product mix favoring 2.5 gigabit Ethernet and gigabit Ethernet. Many applications include PC and IP cam for surveillance.
For Switch, we see steady growth in demand in both [ down and managed ] switches. The supply will be the limiting factor in the final 2021 results. 2.5 gigabit switch presents a welcome spec upgrade, but the deployment may delay to 2022 due to supply constraints. All things considered, we expect the growth for Realtek switches nonetheless.
On WiFi, we see strength across the board with the demand far exceeding supply. To this end, we will have plans to place priority on PC, AP/Router, broadband, TV and IoT. WiFi's deep penetration continues its cause, although supply shortage may hinder [indiscernible] [ or even and ] in some cases.
On Bluetooth, the strong demand for Bluetooth comes from many directions. For example, BLE SoC for various types of wearable and [indiscernible] for remote controllers in many applications. The TWS market using BT SoC is also expected to grow in 2021. Realtek is one of the very few suppliers with a full range of Bluetooth solutions, which positions the BT product line well for growth this year.
On TV, retail TV business is expected to stay at about the same level as last year. The market is currently challenged by supply shortage and price increase in [ charger ] ICs and panels. Overall, the PC market -- the TV market is expected to stay flattish compared to 2020.
For the smaller of our growing product lines, we continue to see strong growth momentum for automotive Ethernet [ phone ] and set-top box SoCs. This is my remarks for now.
[Operator Instructions]
Now the first question is from Daniel, Morgan Stanley. This question is related to the gross margin. Looking at your peers, MediaTek's gross margin guidance in Q2 has reached 45% range, Nova Tech also approaching your gross margin label. How do you see your gross margin trend onwards? Do you think the IT design houses should charge higher return from the customer, given the increasing value creation?
Realtek first quarter gross margin increase comes from favorable product mixes. Low-margin products tend to have low priority during supply shortage. This tends to favor gross margin performance.
We do not forecast gross margin per se. Nonetheless, we observed that the price increases at various parts of the supply chain may continue in the foreseeable future. We have to continue to work with our suppliers and customers to manage the impact.
Note nonetheless, the impact to gross margin by price adjustment is minimal during supply shortage. Once supply catches up, the familiar market competition is expected to kick back in, thereby giving pressure to gross margin.
Next question is from Randy, Credit Suisse. This question is related to second quarter and second half, the growth outlook -- your sales outlook for the second quarter. How much is the supply limited the growth? What's your view on the second half? And how do you see foundry and [ back end ] supply improving in the second half to grow further if demand is there?
Okay. Second quarter sales outlook is cautiously positive, although supply remains the key limiting factor. The supply shortage at both foundries and OSATs is not expected to go away, if not worsened in second half this year.
Note nonetheless, Realtek is improving its operational efficiency along with other measures to cope with the supply shortage. With strong demand but lean supply, the actual product shipment will be regulated by factory output. To this end, the seasonality this year may not be obvious, okay?
Followed by the previous question, Randy also wanted to ask of management's view on the OpEx to sales ratio in 2021.
Okay. We will try to maintain the OpEx to sales ratio at above the 1 -- first quarter level. Comparing to the normal time, we are spending extra R&D efforts to evacuate certain products where applicable out of crowded factories. We also invest engineering resource to qualify additional foundries and OSATs. Such efforts to enable future capacity will result in additional operating expenses. Okay.
Next question is from William, JPMorgan. What's the visibility for 2022? What can Realtek prepare in advance for delivering growth in 2020?
Well, first, look at the demand side. The strength this year seems to continue in at least the front part of 2022. At the same time, on the supply side though, we share the observation that the shortage may continue in at least the first part of 2022.
The technology migration such as 2.5 gigabit Ethernet [indiscernible] will speed up next year. So to maintain growth, Realtek continues investments in new product introductions for new as well as existing markets and qualification from new foundries and OSATs now that new foundries will include new process at existing foundries.
And actions taken to optimize the usage of limiting capacity include: One, improved operational efficiency, for example, reduction of plant number of skill; two, the priority for long-time partners; three, focus on products using better operational results, top line and/or bottom line. Okay.
Now the next 2 questions is from Rick, Daiwa. His first question is about the foundry supply. Could you share us a rough idea of the increase of foundry cost?
The second question is that compared to the competitors in WiFi, Bluetooth and TV areas, does Realtek have better capability to secure foundry capacity and thus lead to market share gains or the capacity situations of the major players are similar? Please comment.
Okay. While other than acknowledging price increase is happening in almost every part of supply chain, including foundries, we cannot comment on specifics. In terms of capacity secured by different players in the market, large companies tend to fare better. Realtek, though not the largest in the industry, is among the top players.
The fact is that no one can secure all the needed capacity. Meanwhile, market [ time ] is expanding where supply lags behind demand. Everyone is looking for second source due to supply shortage and act aggressively in placing orders. [ How to tell ] the exact change in market share, the market is very dynamic.
The next question is from AGI, Benson. In terms of supply chain management, does Realtek prepay a higher price to secure the capacity support for the future? If yes, how does Realtek manage both the cost hike and the gross margin?
Well, We try to explain before, to work with our suppliers in face of the supply shortage, there's more than one way to do that. But we prefer not to comment on specific means that we use, prepaid or otherwise. We will not comment on the specifics. I will only say many possibility to do that.
And we also commented before, all different means at the end translates to cost one way or the other, even if it doesn't go directly to the cost of goods sold. It may go to other column of the accounting report. They are all costs of various types. And we already comment that how we cope with that, even though we do not dictate how we price our product, market or design the pricing, but we will acknowledge that in our pricing, we will take profit and gross margin into consideration. Okay.
The next question is raised by Bruce, Goldman Sachs. He would like to ask whether the [ West ] is the best index for Realtek's follow up lead time. We understand that Realtek has enormous product lines with various lead times. Which product has the longest lead time? And what is the typical return now?
The real cause of this problem is on capacity. When the available capacity is nil, people need to wait in the queue for service. Therefore, a long lead time. The availability of fast trade for certain IC packaging, for example, VGA in particular, seems to be a very big challenge nowadays from what we can see. Therefore, for certain products using this particular packaging type tend to have longer lead time.
And also another factor, for example, maybe manufacturing priority, this can vary for month to month, so much to say that lead time management is one area everyone in the semiconductor industry, including Realtek, is trying to address. Okay.
The next question is from Martina of [indiscernible]. She would like to ask about management's thoughts regarding the migrations from 8-inch wafer to 12-inch process node. She would like to know the split between 8-inch and 12-inch of Realtek's products. And could all the products migrate from 8-inch to 12-inch? Will it help the gross margin by migrating on process nodes?
Realtek's technology uses more 12-inch than 8-inch wafers, but not by a large margin in terms of wafer count. Not all products with 8-inch wafer can be moved to 12-inch wafer because such movement often involves process node migration. Analog can be designed and high-voltage applications, for example, often do not benefit or cannot be supported to advanced node. So products stay at 8-inch fab and older process node often for a good reason.
But now that we decide to move product from 8- to 12-inch nowadays. It is because we need to secure more capacity, not because of margin. Nonetheless, we do take gross margin into consideration when we move the design in -- from 8-inch to 12-inch.
The next question is from Aaron of Nomura. Given the continuous supply shortage and the strong end demand for Realtek's end markets, can management provide pricing outlook for the major product lines, for example, WiFi, Bluetooth, Switch, BT SoC, Ethernet and codec? Any directional guidance will be helpful.
It's actually -- this question is similar to what we say. We do not decide price, market does. But price, nonetheless, must appropriate, it reflects the cost. The end -- each product that you need, need to plan for and deliver growth and profitability. We will acknowledge though, during supply shortage, price pressure compared to so-called normal time is relatively low. Okay.
Next, both Randy and Daniel has questions related to PC demand. What percentage of sales was PC in the first quarter? And how do you see that trading in the rest -- for the rest in 2021? How's the current inventory level and market visibility?
Okay. So we have PC -- PC split stood around 34 to 56 in the first quarter. This compared to 30/70 last quarter. Know that the strength here include PC and PC peripheral, and we expect that strength to remain for the rest of 2021. This is because by now, PC is considered an essential device after COVID-19 for education, for work from home. And for the whole market, we will make reference for IDC wholesale, PC, mobile market this year may go as high as 352 million units or about an 18% growth compared to last year.
Followed by the question related to PC demand, [ Sunit ] from UBS would like to know if management [ right this view ] on the work-from-home demand for TV in 2021? What's the product visibility for orders into the second half this year?
We actually just comment on the PC. And on the TV, TV market currently is experiencing shortage in [ charger ] ICs and panels that's limiting its growth, although the demand appears to be at about the same level as last year. Both PC and TV customers, they are quite aggressive in sending in purchase orders at this time.
The next question is from Kevin, Mizuho. He would like to ask management's view on the WiFi 6 penetration rate in 2021. If the price of WiFi 6 is still more than double compared to the previous generation, is the gross margin of WiFi 6 better than corporate average?
Okay. So we expect WiFi 6 penetration to be over 30%, 30% in both PC and AP/Routers this year. WiFi 6 price is still about twice of 11ac in the first quarter. And in terms of gross margin, let me say that WiFi 6 is still in ramping-up stage, while 11ac is in a stable and mature stage at the present time. Okay.
How is your -- next question is also from Randy and related to the WiFi 6. How's your solution for the WiFi 6E sampling? And then do you get a further ASP premium and expect faster adoption?
[indiscernible] we still plan to deliver 6E [indiscernible] for customers in second half this year. We do expect 6E to have more ASP premium over 6. The current supply shortage may delay the actual broad adoption of 6E. Okay.
Next question is from Brian, CLSA. During the last earnings release, Realtek was optimistic to TWS recovery in 2021. What's Realtek's TWS revenue growth target for this year? Does Realtek worry about a component shortage will cap TWS shipment this year?
Yes, so supply shortage is indeed very real and is forcing everyone to review their priority. For the TWS market, we had this year chosen to focus on brands, quality and performance during supply shortage.
Overall, we do expect TWS market to grow in 2021. But further, we still need to make special note that in BT, in Bluetooth, low energy SoC and Bluetooth [ link ] are expected to grow healthily this year despite the supply shortage as explained before. So overall, the Bluetooth product line this year, we expect a strong growth this year.
Next is following questions for Randy. How much momentum are you seeing for back upgrades like to Home 5 gig Ethernet can get on WiFi 6 mag routers, management switch and new PC surveillance IP cam solutions?
Page break
Okay. Well, technology upgrades in general -- sorry, technology upgrades in general are hampered by supply shortage, while those main technology upgrades are happening, but generally at a slower rate than originally expected. The upgrade speed is expected to pick up when the supply constraint is removed.
Okay. The next question is related to the telecom project. How is the project momentum for 2021, both within China and overseas? How is Realtek positioned? And what opportunities do you have to gain content? Which quarter will be the peak of the tender project business this year? Do we see any pull in or push out in this year?
Okay. On the per margin -- okay, this supply shortage and price increase in the supply chain putting pressure on the telecom tender projects, new tender projects tend to delay, led by giving opportunity to the existing projects to expand or even to renegotiate the price. Nevertheless, the demand for infrastructure upgrade remains strong in both China and overseas.
So respective segment by [indiscernible] may be still at about 60 million to 70 million this year. Short term, maybe 40 to 50. Set-top box, around 70 million to 80 million. So the demand for the 10G [ phone ] appears to be stronger than the 10G -- the 2.5G [indiscernible] appear to be stronger than 10G [ phone ]. 10G, from now we see mostly in U.S. and EU.
Also, what we see in the tender market is, because of the supply shortage, some telecom projects shown to feature to improve supply and control costs. Examples may include using a combo or even only to improve. When we look at -- with a very comprehensive product portfolio, we are well positioned to support very telecom project needs.
Okay. Next question is related to the Ethernet product line, especially in the IP cam market. Do you see any -- do we see more traction in the IP market now? How should we think about the growth this year?
So the surveillance IT cam, it's a main application for Ethernet. Currently, we see demand exceeds supply greatly. So this is facing customers to seek second forces. So real-time Ethernet shipment for surveillance IT cam maintains growth nonetheless, and we are confident the growth will continue even after supply catches up.
The next question is from UBS [indiscernible] about the latest update on our auto Ethernet business. Current inspection on for the content per car sales contribution industry penetration, client-based extensions, et cetera, is the ramp-up being affected by the auto chip shortage?
Retail automotive shipment is impacted by the supply shortage. The impact is relatively manageable for Realtek because the volume is low compared to many other products. Also, the shortage of MCU and power ICs appear to be a bigger problem for the automakers. We will have auto Ethernet customers starting in Europe, but by now has grown to spread over U.S. and Asia. And we expect more than half of the new cars in 2024 to have in-vehicle Ethernet.
Regarding other content, while that may range from USD 15 to USD 50 per car, depending on the model. That translates to roughly 20 to 70 Ethernet ports. And the revenue contribution at Realtek currently is still small as the company is growing fast, but the automotive Ethernet is also growing steadily and strongly as planned.
The next question is from [indiscernible], [ Simon Asia ] Capital. Please share with us the rank -- can you rank the order outlook by different segments, for example, PC, TV, TWS, CE, codec and auto?
Well, the reality is that the demand far exceeds supply and customers' aggressive in placing orders. So it actually is almost impossible to rank them because they are all very strong. They are all very aggressive.
Okay. The next question is from [indiscernible]. Can you share with us the current status of our Type C or USB 4.0 development and also the current revenue contribution for both 2 products?
A little bit difficult to answer this one. USB 4.0 or actually is USB 4. USB 4, the solution, is still in development. So there's low revenue from USB 4 today, and this is not from Realtek. Type C-wise is split in several product lines. So it's also difficult, at least I do not have the [ party ] on hand. At Realtek, we do have quite a few product lines using Type C.
And the investors also want to ask about the product road map or planning of our WiFi 6 and LTE IoT.
[indiscernible] on Wi-Fi 6, we have commented when we start upgrade will be 6E. And after 6E, there will be 11ec or called WiFi 7, that's also in progress.
Now LTE IoT is totally different this product development. We had both engineering effort on NB-IoT, but not in shipment yet.
Okay. [ There are ] other questions regarding the worry about the overbooking. Recently, the market has worried the overbooking situation. Could management explain the current situation and how we can react?
Okay. As we say, customers are very aggressive in placing order, but the reality is supply is lagging demand by a significant margin. So whether the aggressive booking include overbooking, while we do not rule out the possibility, what we say is that we pay close monitoring to the inventory buildup in the channel, in our distributor, in our end customers.
Currently, we will report that we still have not seen any sign of inventory buildup in the channel. In that sense, the worry about overbooking we tend to say is irrelevant at this time. So we will pay close attention to the inventory situation. Once the inventory start building up, the overbooking can become a real concern.
The next question is from [indiscernible] UBS. Is the company be able to pass through all the cost up to the customers?
All or not, that's so very difficult to answer. As we say, the market had its way to determine the price. All we can say is to emphasize again that, in our pricing, we have to reflect the cost, take that into consideration for a healthy long-term operation, long-term growth.
Okay. The final question is from the investor, [ Kevin Chang ]. His question is whether Realtek has the plan to increase the cash dividend payout.
Okay. Yes. Okay. So the cash dividend payout, we still -- at a high level, I think, this year, you will see the results soon. So yes, I think, with a good business result, we should see that.
Due to time constraint, we will conclude the meeting now. Thanks for your participation today. Thank you, and have a good afternoon.