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Realtek Semiconductor Corp
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Good afternoon, everyone. Welcome to Realtek's 2024 First Quarter Earnings Call. This call is chaired by Realtek's Spokesperson, Yee-Wei Huang. The presentation will be available on the company website before 6:00 p.m. today. At the beginning, our spokesperson will report to our first quarter financial results and give a management's remarks. After that, we will have a Q&A session. [Operator Instructions]
During the call, you can browse through the pages of the presentation anytime. Note that portions of what is presented in this call contain forward-looking statements. Investors are cautioned that forward-looking statements involve risks and uncertainties. Actual results may differ materially from the results forecasted or implied in such statements. Investors should not place undue reliance on such statements. Now I will pass the call to our spokesperson, Yee-Wei.
Thank you. Good afternoon, ladies and gentlemen on the line. You are currently participating in the first quarter 2024 webcast earnings release, hosted by Realtek Semiconductor Corporation. Now let us go through the first quarter 2024 financial results. Q1 revenue was TWD 25.62 billion, up 13.5% Q-o-Q and a 30.6% increase compared to the same period in 2023.
Customer restocking and rush orders across all market segments contribute to the better-than-expected top line performance. Q1 gross margin was 50.8%, a 6.1 percentage point improvement, compared to the previous quarter and a 7.7 percentage point increase, compared to first quarter '23.
The main contributor to the increase is the reversal of the slow-moving inventory write-off. Q1 operating expense was TWD 10.28 billion, or 40.1% of revenue. The operating expense ratio increased slightly by 0.5 percentage points from the previous quarter, mainly because of more spending on engineering resources and R&D projects to prepare for the potential growth opportunity related to AI and servers.
However, as we are seeing revenue growth, we will also focus on achieving operating leverage to reduce our OpEx ratio where possible. Q1 operating profit was TWD 2.74 billion or 10.7% of revenue. Higher revenue and gross margin led to the improvement of both operating profit and operating margin.
Q1 non-op income was TWD 593 million, which came mainly from interest income. Q1 net profit was TWD 3.13 billion or 12.2% of revenue. Q1 EPS, as a result, was TWD 6.1, an improvement over TWD 4.25 last quarter or TWD 3.5, same period in 2023.
Regarding inventory, Q1 inventory turnover days dropped to 80 days, a 24-day reduction compared with 104 days in Q4. The notable drop in the inventory turnover days is a result of significantly higher quarterly sales and lower average quarterly inventory level.
To the best of our knowledge, the inventory level at Realtek, as well as in the channel, is generally normal at this time. We also had the first quarter '24 balance sheet and cash flow statement for your reference at your convenience.
This concludes Realtek's First Quarter '24 financial results. The Q1 business momentum is expected to continue in the second quarter. Nevertheless, semiconductor industry continues to be affected by global geopolitics and macro economy yielding limited demand visibility. Realtek sees the Q2 operations prudently sound.
Now let's review the top product lines at Realtek. First, we observed that PC versus non-PC revenue to be approximately [ 33% to 67% ] in the first quarter, reflecting a strong PC restocking. On Ethernet, we see steady growth in the first quarter, driven both by inventory replenishment and a growing need for the 2.5 gigabit Ethernet, in telco projects that use 10G PON.
We anticipate that 2.5 gig Ethernet will continue to be strong in 2024, while 5 gigabit Ethernet may pick up pace, a bit slower than we previously forecasted. Overall, the transition to [ multi-gig ] Ethernet is underway, and Realtek has a competitive edge in this market.
On switch, the demand for switches is picking up as telco infrastructure projects are warming up in different regions of the world. However, the actual delivery and deployment of the projects that have been awarded may face some challenges due to the very aggressive price competition during the bidding stages.
Nevertheless, consistent with what we see in Ethernet, 2.5 gig switches, both [ thumb ] and managed, are gaining more market share. In the long run, 10G PON and Wi-Fi 7 will also boost the demand for multi-gig switches.
On Wi-Fi, the Wi-Fi shipment started to pick up after the Lunar New Year holiday. The demand in consumer and IoT, in particular, are better than expected. The resumption of telco projects will presumably also give Wi-Fi demand a boost in the networking segment. Wi-Fi 7 is on track to start ramping up in the second half this year. Its penetration in PCs and routers may be less than 5% in 2024. While 80% to 90% of new PC models are expected to come with Wi-Fi 6 or 6E this year. And more than 70% of new routers will be equipped with Wi-Fi 6, 6E this year.
On Audio Codec, the IDC report shows that PC sales in the first quarter were flat compared to the same period last year with around [ 60 million ] units shipped. However, this was a significant decline of about 12% from the fourth quarter last year, when around 67 million units were sold.
Although PC shipment remained soft in the first quarter, what was different this time was that there were generally no inventory congestion in the channel. To this end, we saw strong restocking of PC-related components in the first quarter, resulting in a better-than-expected PC Audio Codec shipment in the first quarter.
Despite the short-term trend, nevertheless, most PC makers are maintaining a conservative view of the PC market for 2024 full year, expecting a very mild growth perhaps 3% year-over-year, citing poor visibility for the second half of the year. Stated differently, the impact of Windows 10 Enterprise and Education retirement or [ AI PC ] high, if any, has not been failed by the PC industry.
Meanwhile, we continue to invest AI in various audio-based solutions for both PC and non-PC applications. This is expected to provide mid long-term growth opportunity for Realtek Audio Codec business. TV shipment in the first quarter was solid. The main drivers appear to be, first, restocking to compensate for the low market confidence in the last quarter last year. And second, the ongoing panel -- rising panel price.
Overall, nonetheless, the TV industry in 2024, by and large, is expected to be very similar to that in 2023, despite the market push for mini LED TVs and the 2 major sports events this summer, namely 2024 Summer Olympic Games in Paris and EURO 2024.
For Realtek, nonetheless, we plan for steady market share gain in TV in 2024.
[Operator Instructions] The first question is from William, JPMorgan. Could you provide the first quarter sales mix by networking, PC and consumer. For the last quarters of 2024, may we rank the growth rate by applications?
Okay. Realtek achieved quarter-over-quarter growth in all segments in the first quarter '24, with automotive and PC segments leading the way, followed very closely by networking and consumer segments. However, this may not reflect the full year trend for 2024. Our first quarter was influenced by the strong restocking that offset the cautious outlook of the industry in 2023, especially in Q4. This is not a typical pattern for the first quarter. Although orders remained strong in the second quarter, the demand visibility is very low at the moment. Therefore, it is too early to assess the relative performance of different market segments in the second half of the year.
The second question is from Daniel, Morgan Stanley. If the order visibility for Realtek still in a short-term point of view, if not, which product lines see the most improvement?
Okay. The low demand visibility is really across the board. Arguably, the Automotive segment tends to have a relatively more reliable full year forecast. For now and for reference purposes only, Realtek Automotive Ethernet product line is forecasting a notable growth in 2024. Same as what we have seen in the past few years. Please understand that such forecast is subject to change depending on the actual market dynamics.
The next question is from Brad, Bank of America. With improved demand momentum, post the inventory corrections, does Realtek see eased pricing pressure from the key product lines?
Yes. The pricing pressure returns to what we may call "normal state" now, that the inventory corrections are generally done. Know that normal means that customers will ask for price reduction, every opportunity they have. Stated differently, we do not see ease in price pressure now, perhaps not until a significant improvement in end demand or until market acceptance of [ spec ] upgrade speeding up. Pricing is something that Realtek must work with our customers on a continuing basis. It's something that we managed reasonably well in the past, and we are confident that we can manage it now and in the future.
Next question is from Randy, UBS. How is your view to grow OpEx in line with the revenue this year? If you grow 10%, would OpEx be similar? Or could you have operating leverage?
Realtek made a strategic decision at the beginning of 2024 to invest in chip design using advanced wafer processes to prepare for the company for the next phase of growth that may derive from AI and servers. This requires, as a budget, for engineering talent, EDA tools, computational power and more. The first quarter OpEx ratio has risen to 40.1% as a result. We believe the investment is well justified and the paid-off is within expectations when the new products are ready in 3 to 5 years. In the meantime, we expect the OpEx ratio to stay around the current level. Needless to say, as the company is returning to top line growth, we will keep a keen eye on attending operating leverage to lower OpEx ratio where applicable.
Next question is from Jason, CLSA. [indiscernible] Realtek reverse inventory write-off and how long do they last? Its Realtek inventory that has reached to normal level?
The reversal of inventory write-offs is happening as we speak. The strong top line performance has triggered a notable write-off reversal in the first quarter. We expect such a reversal to continue in the coming quarters. Depending on the strength of the market, the reversal may continue for another 2 quarters or more.
Next question is from Kevin, Mizuho. Similar to the previous question, he would like to ask what is the net amount of the inventory write-off or reversal in first quarter? Will we see further positive impact from the inventory write-off or reversal in second quarter? Do you expect that the GP margin to maintain at high 40s or close to 50% label in the rest of 2024?
The inventory write-off reversal is notable in the first quarter. The actual magnitude will be available in the detailed quarterly financial statement, when it is released. We prefer not to predict the gross margin level in the coming quarters, with or without inventory write-off reversal. Suffice it to say, nevertheless, the write-off reversal will be a positive factor for the gross margin in the coming quarters. Moreover, Realtek's gross margin strategy had 2 components: first, shifting the company product portfolio from low- to mid-end to mid- to high-end; and two, reducing cost timely for mainstream products where applicable.
Next question is from Bruce, Goldman Sachs. What is the current market demand momentum in China? Have we seen tender market recover yet? You guided last time, you'd expect the shipment to double in 2024 versus 2023, but how is that compared to historical normal years?
The market demand in China in the first quarter is generally an improvement compared to the previous quarters. Nevertheless, it is still weak compared to the historic normal as the economy in China has not yet recovered. Meanwhile, a phenomenon known as involution, neijuan seems to be switching through every part of China, resulting in, among other things, pricing war with our limit. Taking PON as an example, worldwide TAM for PON may be 135 or 155 units this year, with China accounting for more than 2/3 of the worldwide TAM, that is China TAM for PON may be around 90 million to 100 million units this year, higher than we previously heard and basically close to the historic normal. It should be noted, however, that most, but not all PON-tendered projects in China were awarded in the first quarter.
There are 2 things we have to watch closely. First, whether the remaining PON-tendered projects will be awarded as planned and two, whether the delivery of the awarded tenders will be on schedule, neither can be taken for granted. We will update you as it progresses.
Another questions from Bruce on Wi-Fi 7. Could you comment on Wi-Fi 7's competition last gap, the difference in product offering, segment focus and pricing strategy versus your peers. How is the momentum so far and the initial view on the penetration for next year.
In general, Wi-Fi 7 will start to ramp up in the second half this year with increasing adoption next year. Other than mobile phones, the first wave of Wi-Fi 7 is expected to find its way into high-end PCs and routers, which will be Realtek-focused application. The volume could be limited this year. Both PC and routers may see less than 5% Wi-Fi 7 penetration this year.
Assuming no black swan, Wi-Fi 7 penetration in PCs and routers could double or more in 2025. High cost could be one of the reasons for the limited Wi-Fi 7 deployment at the present time. The ASP of Wi-Fi 7 is about twice as much as that of Wi-Fi 6. In time, however, entry-level Wi-Fi 7 may gradually replace Wi-Fi 6 which may be another year or 2 away. In terms of competition, we believe Wi-Fi 7 is on par with our competitors' solution today. The war on Wi-Fi 7 has just begun. We believe that Realtek will prevail as we always did in every generation of Wi-Fi.
A follow-up question on Wi-Fi 7. Brad from Bank of America would like to ask about the penetration of Wi-Fi 7 in the coming years, including '24, '25 and even '26. Do we expect fierce competition in the new area?
It may be worthwhile to review what is Wi-Fi 7? The IEEE 802.11be standards [indiscernible] Extremely High Throughput, EHT, when its initial drop was released in 2021. A final version of IEEE 802.11be, now designated Wi-Fi Certified 7 or Wi-Fi 7 in short by Wi-Fi Alliance is expected by the end of the year. Although the final ratification is not expected until the end of 2024, the technical requirements are essentially complete. Clearly, 2024 is the first year of Wi-Fi 7.
Nonetheless, a few products were introduced into the market as early as 2022, based on the draft standards. Among the key features of EHT or Wi-Fi 7 are; one, 330 megahertz channel width; two, multi-link operations; three, 6 gigahertz support. These features aim at enhancing capacity, increasing throughput and lowering latency. Generally, video use-cases require high-performance connectivity, which Wi-Fi 7 provides in abundance to allow for ultra high-definition streaming video conferencing and AR/VR/XR connection. So clearly, not all Wi-Fi 7 features are needed in all applications or are relevant in all parts of the world. It may take time for the market to adopt Wi-Fi 7 with the right configuration for the right applications. This is what Realtek excels, in mass enabling the market by introducing new technologies with the right configurations.
From Realtek's vantage point, we see Wi-Fi 7 ramping up slowly in its first year of market debut with perhaps less than 5% market penetration. Our -- in our focused segment of PCs and routers, barring black swan surprise, the market penetration may readily double every year in 2025 and 2026. It is well within expectations that the rich features of Wi-Fi 7 will attract competition. It may be worth mentioning that the number of marquee Wi-Fi 5 players is not that many, each with their market focus while the entry barrier for the newcomers can be high. To this end, it is our most important to have a deep understanding of both the technology and the application to mass-enable Wi-Fi 7 in the market. Again, this is when Realtek has an edge over others.
Next question is from Jason, CLSA. Does the company target for IT or asset business opportunities?
We believe the question is about providing silicon IPs as opposed to chip on doing custom-made products as opposed to standard products. To this end, Realtek has experience in and is fully capable of, [indiscernible]. As the company prepares for sales for the next level of growth, we are more receptive than ever to consider offering silicon IPs or tailor-made products for interested customers. Make no mistake, nonetheless, Realtek's main business focus is still offering semiconductor chips solutions.
Next question is from Bruce, Goldman Sachs. Regarding the recent view on AI PC, how is customers' aptitude and development of AI PC recently? We see more positive order forecast [indiscernible] from customers and how much higher dollar content per AI PC to us versus the regular PC?
One point we want to make clear is that the demand for PC-related products has not been affected by the hype around AI PC and it is not according to our customers or market analysts. The current focus on souping up personal computers with high-performance CPU, GPU, NPU, tailor-made accelerators and more memory may be meaningful to arouse heightened interest in bringing AI into PCs.
However, it is not as necessary for sufficient condition for having AI in the PC. Case in point, Microsoft Copilot can leverage the power of AI to boost productivity on existing PCs without adding any hardware. Realtek's Edge AI Human Sensing USB Camera Controller has been mass-produced and launched in market leading PC notebooks, providing users with the best video conferencing, video image quality along with innovative AI human-centric perception capability for the most convenient and comprehensive user experience. This product has won a CES 2024 Innovation Award.
Realtek sees AI PC as an evolution or a natural progression of PC development of each generation of PC evolves with more sophisticated and higher performance hardware, more AI applications will emerge for PCs, some leveraging the ever-increasing performance of the native hardware and other come in the form of peripheral with independent Edge AI computing. For clarity, Realtek Edge AI solutions can enhance the user experience of a wide spectrum of PCs, AI PCs or otherwise, each solution adds value to the PC and therefore, the dollar content or at least sense of price erosion.
Next question is from Daniel, Morgan Stanley regarding the Automotive business. How's the inventory digestion situation in the automotive market now? Could you provide some colors on the auto markets into second quarter or the second half of this year?
Again, we see the global passenger cost forecast is 92.2 million units in 2024, a small 4.6% year-over-year growth according to a market research report. We do not feel qualified to comment on the automotive inventory in the market, although we read reports saying that entering 2024, the automotive retail industry has near normal, meaning around 60-day vehicle inventory levels. The challenge, however, is the [indiscernible] in the market. Base models experiencing brisk sales while highly option and luxury vehicles are facing challenges, Stated differently, pricing pressure is in the play as we speak.
For Automotive Ethernet, however, we are seeing better-than-expected demand in the first quarter. From our customers who are aggressively expanding the use of Automotive Ethernet products. This momentum is expected to continue in the second quarter. Similar to other market segments, the visibility for second half is limited although the current forecast is generally healthy.
Next question is from William, JPMorgan related to foundry allocation. What was the foundry allocation to our top 2 foundry suppliers in 2023? And what is the percentage in 2024? Or in other words, do we consider to increase the percentage of allocation to the so called [indiscernible] top 2 foundry suppliers in 2024 or beyond. What is the cost benefit assuming similar technology node?
Okay. Now figuratively speaking, for as far as we can remember, Realtek foundry allocation can be described as following the 80/20 principle. The majority or 80% figuratively between the top 2 foundries [indiscernible] a minority of 20% figuratively. Among the remaining foundries, the allocation did not change in the past up to the present day, and it is not likely to change in any significant way in the foreseeable future. It may be worth reiterating that foundry selection is based on many factors. Besides pricing, we must consider time-to-market, quality, reliability, technology road map and sometimes customers' preference.
Next question is from Brad, Bank of America related to USB 4. Please discuss the applications and the penetration rate of USB 4 in 2024, '25 and '26. Do we expect a serious competition in those areas?
Okay. Now with data transfer speeds of up to 40 gigabit per second, USB 4 is an ideal technology for connecting multiple monitors and external video displays or for transferring very large file between devices within a shortest possible time. To this end, USB 4 [ box ], USB 4 Hubs, PCs and external storage, for example, SSD would be the ideal first wave for USB 4 devices, some of which may hit the market in the second half this year with more to come next year and beyond.
Also because of the very high speed, USB [ implementors ] for USB-IF in short, maintains the use of a [ Re-Timer ] chip in front of every USB 4 port. Realtek USB 4 Hub Controller will go into mass production this summer. While USB 4 Re-Timer in the third quarter. As in the case of any new technology, it takes time for USB 4 to gain traction in market penetration. Also like all other technologies, good technology with mass appeal. We do expect computation, but nothing we cannot manage.
Next question is from Daniel, Morgan Stanley on TV business. Do we see continued momentum in TV rush orders into second quarter? Company's views on TV business in 2024 in general.
Okay. We saw solid TV SoC orders in the first quarter mainly due to the restocking to compensate for the low market confidence in the fourth quarter last year. There will also continuing rush order in response to the ongoing rising panel prices. The rush orders are likely to continue in the second quarter, at least until the panel prices ease. Worldwide TV TAM is expected to stay flat in 2024 compared to last year. [indiscernible] can nevertheless plans for steady market share gain in 2024.
Next question is from Randy, UBS. Chinese competition and spec upgrade. Could you discuss the areas that you're seeing China competition? And where do you see the highest depreciation for your products? Are you seeing China competition extend into some of the higher-spec areas like mainly switches, 2.5 gigabit Ethernet point, 10G PON or Wi-Fi 6 and 7?
Generally speaking, Realtek sees competition in China, targeting mostly established technologies. Some are trying to go after the latest spec such as 2.5 gig Ethernet and Wi-Fi 6, we are watching their progress closely. As technology advanced, the gap between the new and old generation is becoming wider than ever. That is the barrier to advance into the next spec upgrade is bigger as the technology progress. We believe that the best strategy is to keep innovating and pushing the mass market to the next spec upgrade in a timely manner. This is one of the reasons why Realtek made a contentious decision to boost our investment in chip designs using advanced wafer process nodes.
And now there are follow-up questions from Randy related to [ ESL ]. We have noticed more news of partnership e-reader and electronic shelf labels. What components are you supplying [indiscernible]? And could this be a meaningful product line in terms of the percentage of sales.
So actually, Realtek provides BLE SoC, Bluetooth Low Energy SoC for e-paper applications. We have been working on this application for the past year and expect it to make a decent contribution to real-time revenue in due course.
The next question is from Bruce, Goldman Sachs. On China localization trend, are we seeing China using more local CPU suppliers to accelerate the chip supplier localization in PC, networking and even the server side. What is the potential impact on Realtek?
Okay. We see regulations written or implied that mandates local content percentages in goods sold in China to promote local manufacturing over imports and wide spread. For example, a very high percentage of telco tender project awards went to solutions with maximum local content in the first quarter as far as we know. However, this does not mean that real cap will be shut out from the opportunities in China, which has a very large market TAM in many areas.
Oftentimes, we do see opportunities opening up when there's a shift in platform solutions. To better serve the valuable customer in China and to better position Realtek for continuing growth, we are pursuing 2 strategies simultaneously. First, provide spec upgrade solutions to distance ourselves from local competitors where applicable; and two, develop and capture business opportunities outside of China.
The next question is from Aaron, Nomura, on dividend. Since Realtek is the constituent stock in the major high dividend yield ETF in Taiwan, what is the company's plan on dividend payout in this year?
Our dividend payout this year will be announced today. We have always maintained a high payout ratio and intend to continue to do so.
Okay. There are questions by [ Jan ], Daiwa. She would like to ask about what role does Realtek play in Arm Neoverse alliance? Do we only participate in front-end design? And what kind of IP or design service do we provide? Could you explain in more details on the process of this cooperation? How do we see the potential earnings upside from this cooperation? And when do we see it start to contribute?
Okay, this is a long-term planning, a strategic partnership. And the host of this partnership is Arm. So Realtek real -- we are an Arm Neoverse alliance ecosystem member. So the way we participate in this alliance is to offer, including possibly IP, possibly the whole chip design for interested customer, who may want to use Arm Neoverse, the core to develop solutions for AI server applications. The potential earnings could be still 3 to 5 years away.
Okay. There's another questions from Richard, AIA. You just mentioned the higher R&D for AI end server. Could you elaborate more further for Realtek's products and the strength for server area. How is the progress? And how should we think sales contribution?
Okay. So we just mentioned sales contribution could be another 3 to 5 years away. So this is not a short-term project. And our product strength clearly is in high-speed connectivity and sophisticated SoC design. And this is what attracts Arm to include Realtek in their Neoverse alliance.
Okay. There is another question from [ Manguin ] from GPIM. How many percentage of the gross margin improvement came from the reversal of inventory write-offs and will it continue to see the improvements in the following quarter?
Sort of repeating what we have just reported, the actual magnitude of the write-off reversal will be available on the financial statement when it is released. And we do believe depending on the market strength, the write-off reversal should continue another couple of quarters or more.
And then there is another follow-up question from [ Manguin ]. In terms of your inventory level, may I assume you will start to place new wafer orders?
Most certainly, in fact, new wafer orders has started pretty much after the Lunar New Year as we see the business strength started to build up.
Since there's no other questions online, I think we will conclude the meeting now. And thanks for your participation today. Please feel free to contact our IR team if you have further questions after the meeting. The replay will be available on the IR page of the company website before 6:00 p.m. today. Thank you, and have a good afternoon.