Realtek Semiconductor Corp

TWSE:2379

Earnings Call Analysis

Robust Growth and Positive Outlook Amidst Market Challenges

In Q2 2024, Realtek's revenue surged 19.7% sequentially to TWD 30.67 billion, driven by solid growth across all segments, particularly automotive. The company posted a gross margin of 50.9%, an improvement of 9.2 percentage points year-over-year. Operating profit rose to TWD 3.97 billion, reflecting enhanced operating leverage. Inventory turnover days decreased to 75, indicating efficient stock management. Despite robust performance, Realtek remains cautiously optimistic about Q3 due to limited order visibility. Key growth drivers include Ethernet, WiFi, and Automotive Ethernet, with WiFi 6 maintaining its lead over WiFi 7 due to cost factors. The company expects continued strength in automotive and networking applications.

Overview of Strong Q2 Performance

Realtek Semiconductor Corporation reported solid financial results for the second quarter of 2024, with revenue reaching TWD 30.67 billion, marking a 19.7% increase compared to the previous quarter and a 16.7% year-on-year rise. This impressive growth was driven by strong performances across various segments, particularly in the automotive sector. The gross margin was 50.9%, a significant improvement from last year's 9.2 percentage points lower, reflecting the company's strategic shift towards higher-margin products with enhanced features.

Managing Operating Expenses

Operational efficiency remains a focal point for Realtek. The operating expense for Q2 stood at TWD 11.63 billion, accounting for 37.9% of the revenue, which is a 2.2 percentage point drop from the previous quarter. The increase in absolute operating expenses was primarily due to higher R&D costs and employee bonuses. However, Realtek aims to leverage growing revenue to reduce the OpEx ratio further where feasible.【4:0†source】.

Profitability and Inventory Management

Realtek reported an operating profit of TWD 3.97 billion, representing 13.0% of the revenue, and a net profit of TWD 4.39 billion or 14.3% of the revenue. This resulted in an EPS of TWD 8.55, up from TWD 6.10 in Q1 2024 and TWD 5.08 in Q2 2023. Moreover, the company managed to decrease its inventory turnover days to 75, down from 80 days in the first quarter, indicating healthy inventory levels both within the company and across the distribution channels.【4:0†source】.

Revenue Contribution by Segment

The company's revenue split between PC and non-PC sectors was approximately 33% to 67% in Q2. The Ethernet business showed steady growth driven by the increasing demand for 2.5 gigabit Ethernet in networking and PC markets, and the anticipation for 5 gigabit Ethernet adoption later in the year. Networking products like switches also saw growth, particularly in emerging markets like India. WiFi products witnessed substantial demand, especially WiFi 6, while WiFi 7 penetration remains low but is expected to grow modestly in the coming years.【4:1†source】【4:3†source】.

Automotive Sector Growth

Automotive Ethernet showed impressive performance, significantly outpacing corporate average growth rates. The robust growth is expected to continue as Realtek solidifies its presence in major automotive markets. The company recently announced an award-winning 5x5 QFN package Automotive Ethernet Transceiver, further cementing its position in this high-barrier-to-entry market.【4:4†source】.

Outlook for Future Gross Margins and Operating Expenses

Looking ahead, Realtek indicated that the impact of inventory write-off reversals on gross margins is decreasing gradually. The company plans to focus on enhancing its product portfolio to prioritize high-margin products. Operating expenses are expected to maintain at current levels in the short term, with mid-term targets to bring the OpEx ratio down to mid-30% levels.【4:2†source】【4:2†source】.

Expansion in Advanced Connectivity

Realtek is investing in the future of connectivity, including advancements in Ethernet, WiFi, and USB4 technologies. The company is working on silicon IPs that cater to higher speeds and better performance, signifying a commitment to staying at the forefront of technological advancements. These initiatives are aimed at strengthening Realtek's competitive edge and opening new revenue streams in the coming years.【4:8†source】【4:6†source】.

Market Dynamics and Strategic Guidance

The second half of 2024 presents uncertainties, including market conditions and geopolitical factors, but Realtek maintains a cautiously optimistic outlook. The company is well-positioned to capitalize on the continuous demand for upgraded connectivity solutions driven by the proliferation of AI and the need for enhanced network infrastructure. Realtek's strategic focus remains on leveraging technological advancements to drive growth and maintain market leadership across its product segments.【4:14†source】【4:16†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone. Welcome to Realtek's 2024 Second 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 PM today. At the beginning, our spokesperson will report our second quarter financial results and give a management's remarks. After that, we will have a Q&A session. You are welcome to type your questions in the box at the lower right corner on the screen. We will answer the questions accordingly. During the call, you can browse through the pages of the presentation anytime.

Note that portion of what is presented in this call contain forward-looking statements. Investors are cautioned that forward-looking statements involve risks and uncertainty. 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.

[Yee-Wei Huang, executive]

Good afternoon, ladies and gentlemen on the line. You are currently participating in the second quarter 2024 webcast earnings release hosted by Realtek Semiconductor Corporation.

Now let us go through the second quarter 2024 financial results. Q2 revenue was TWD 30.67 billion, up 19.7% Q-o-Q and 16.7% increase compared to the same period in 2023. All segments, including PC, consumer, networking and automotive delivered growth at varying degrees with automotive showing the strongest growth. Q2 gross margin was 50.9%, practically the same as the previous quarter, but a 9.2 percentage points improvement over second quarter 2023. The magnitude of the reversal of the slow-moving inventory write-off was at about the same level as the previous quarter. Excluding the inventory write-off reversal, the gross margin performance reflects Realtek's effort to shift the product mix to that favors more products with differentiating features. Operating expense of Q2 was TWD 11.63 billion or 37.9% of revenue, a 2.2 percentage point OpEx ratio dropped compared to the previous quarter. In terms of the absolute dollar amount, the operating expense increased TWD 1.35 billion or 13.1%. The increase came mainly from R&D expenses for employee bonus. As revenue grows, we still seek operating leverage to reduce OpEx ratio where possible. Q2 operating profit was TWD 3.97 billion or 13.0% of revenue. Revenue growth and OpEx ratio decrease led to the improvement of both operating profit and operating margin. Q2 non-op income was TWD 725 million, which came mainly from interest income. Q2 net profit was TWD 4.39 billion or 14.3% of revenue. Q2 EPS, as a result, was TWD 8.55, an improvement over TWD 6.10 in Q1 2024 and TWD 5.08 in Q2 2023.

Regarding inventory. Q2 inventory turnover days dropped to 75 days, another 5-day reduction compared with 80 days in the first quarter. The drop in inventory turnover days partially reflected the higher quarterly sales. The inventory level at Realtek as well as in the channel remain generally healthy at this time. We also have second quarter 2024 balance sheet and cash flow statements for your reference at your convenience.

This concludes Realtek second quarter 2024 financial results. The strength of the second quarter is likely to extend into the third quarter. The order visibility nonetheless, is still limited. The outlook of Realtek operations is prudently stable.

Now let's review the top product lines at Realtek. First, we observed that PC versus non-PC revenue stays approximately at [33% to 67%] in the second quarter. Now on Ethernet, Ethernet experienced steady growth in the second quarter after a strong first quarter, driven by the growing need of 2.5 gigabit Ethernet in the networking and PC market. The demand for gigabit Ethernet was still solid in the networking and consumer segments. We anticipate that Ethernet will continue to be strong in the third quarter this year, while 5 gigabit Ethernet adoption may pick up the tempo in late third quarter or the fourth quarter. The completeness of the Ethernet product portfolio and our long-standing shipment and service records will continue to give Realtek a competitive edge in this market.

On Switch, the networking market seem to be growing steadily in the first half of 2024 for both some and managed switches as the market restarts after a slow 2023 and as Realtek gained market presence in emerging markets such as India. The strength is likely to continue in the third quarter, while the order visibility for the fourth quarter is limited. It is worth noting that Multi-Gig switches are natural complements to WiFi 7 as WiFi 7 gains traction in various applications.

WiFi enjoys a good run in the second quarter, not only in networking applications, but also in PC, consumer and IoT segments. WiFi 5 and WiFi 6 lab in shipment quantity with WiFi 6 showed the greatest growth momentum. The trend is expected to continue in the second half of 2024 and even 2025. Consistent with the recent wireless connectivity market report, we observed that WiFi 7 penetration is likely to be less than 5% in both PC and router this year, partly due to the high price, almost doubling the price for the price of WiFi 6. Audio Codec. The ITC report suggests that the PC market, including Apple and Chromebook shipped around 125 million units in the first half of this year. It reflects a small 2.4% year-over-year growth compared to the same period in 2023. Throughout the first half of the year, there did not appear to be any PC shipment increase that were boosted by AIPC, Windows on Arm or Window 10's decommissions. Nevertheless, Realtek PC codec shipment in the first half was stronger than the PC shipment as customers restock and build up stocks for the 618 shopping days in both the first and the second quarters.

On TV, TV shipment was strong in the second quarter, partly thanks to the 2024 Euro Cup. The result of the 618 e-commerce festival, however, was below expectation. Further, the drop in panel price and heightening shipping costs are slowing down the PC demand in the third quarter. The full year global TV shipment at this point is expected to be flattish compared to 2023 at around 195 million to 200 million units. Realtek is expected to maintain steady albeit small market share gains in this year and the next.

Automotive Ethernet, though still not among the top 5, we have Automotive Ethernet 5 and Switch have been growing consistently at a rate far exceeding the corporate average. The growth in the second quarter delivered another testament to its strength and place automotive Ethernet as one of the leading product lines in Realtek and growing. We expect this momentum to hold. It is worth reemphasizing that Automotive Ethernet has a high barrier to entry. We have reached where we are today with more than 30 years of solid experiences in Ethernet and the completion of numerous automotive grade certification under our belt. Realtek Automotive Ethernet now has a strong and bi-lens presence in all major automotive markets, Europe, America, Asia, including China. In 2024, COMPUTEX, we announced a smallest 5x5 QFN package, Automotive Ethernet Transceiver that can support 2.5 gigabit per second while being compatible with different 10-base Q1 and 1000-base Tier 1 Ethernet transceivers on the same PCB layout. This product received 2024 COMPUTEX's Best Choice Category Award.

[Operator]

Thank you, Yee-Wei. Now we are entering the Q&A session. Please pack your questions in the box at the right-hand corner on the screen. We will reply accordingly.

The first question is from Daniel Yen, Morgan Stanley regarding the business and gross margin outlook for third quarter 2014. Could you please give some preliminary outlook for third quarter 204 forecast and any guidance for gross margin? What could be the most important contribution to revenue in third quarter?

[Yee-Wei Huang, executive]

Okay. The second quarter this year was stronger than most other second quarters we saw in the past. Instead of seasonality, the market strength in the third quarter may be propped-up by the ongoing spec upgrades in wired and wireless connectivity as well as in feature-rich AI aided video and audio applications. In terms of applications, network applications and automotive ethernet may hold up better than other segments in the third quarter from what we can see now. The order visibility nonetheless is limited. We do not expect big changes in gross margin in the third quarter compared to the second.

[Operator]

Next question is from [Samye Ling], UBS, related to the seasonality into the second half. Should we expect moderation post a strong second quarter? And before 2023, we had peak season in Q2, but starting from last year, we have been observing strength in second quarter and a moderation in third quarter posted a strong build. What is your latest bolt on the business seasonality or do you think this patent is right, correct story? Did you see any earlier views or [cons] due to the middling issues?

[Yee-Wei Huang, executive]

As we just commented, although people still talk about seasonality, the pulse of the business at any given time may be impacted by a wide spectrum of events that have no precedent. The fact is the traditional seasonality has not been apparent in the past few years. This year may be no different. The event giving rise to the strong first half this year included restocking coming out of a weak 2023 and all the pull-in in anticipation of major sports events and 618 e-commerce shopping festival to name a few. Entering the second half of the year, the market is facing uncertainty in panel and memory prices, rising less shipment costs and unpredictable U.S. Presidential Election, among other things. The backdrop of all this, nevertheless, is a solid progress in science and technology, leading to an unsatisfiable demand for [indiscernible] based solutions. At Realtek, we see seasonality just for reference. We track all mega events carefully and work with customers closely to take 1 quarter at a time.

[Operator]

The next question is from Wei Lun Yang, JPMorgan. He would like to ask about the inventory loans reversal mass in second quarter 2024 and how to model in second half.

[Yee-Wei Huang, executive]

While the magnitude of inventory write-off reversal was at about the same level as that in the first quarter. Now we expect to see inventory write-off reversal to continue in the second half of this year and even in 2025, with a decreasing impact quarter-by-quarter.

[Operator]

The next question is from Kevin Wang, Mizuho, regarding the OpEx. Operating expense increased along with stronger sales. Do you expect operating expense to continue to increase strongly or do you have any plans for controlling operating expenses, especially after your new projects for on-base processors.

[Yee-Wei Huang, executive]

At revenue growth, we seek operating leverage to reduce the OpEx ratio where possible. Specifically, we have a plan to improve product portfolio mix favoring products with enhanced value. For example, by embedded intelligent audio-video-based man machine interfaces into products that connect the world with faster speed, more flexibility and better manageability. This entails maximum IP reels and therefore, greatest operating leverage. We expect the OpEx ratio to stay at approximately the current level this year. In mid-term, we target OpEx ratio to be around mid-30s.

[Operator]

Next question is from Samye, UBS related to inventory situation and strategy. How about the inventory level at Realtek in tech channels. What is your latest management strategy, given the last quarter Win down to 80 days versus target 100 days and the following a strong sales gain in the second quarter, double balance like further came down.

[Yee-Wei Huang, executive]

Well, the inventory level at Realtek and in the channels are generally healthy at this point to cope with the low order mix visibility, which is where we are today. We consider turnover base around 75 days to be normal.

[Operator]

Next question is from Jason Tsang, CLSA, relating to PC demand. How should we expect our PC demand in second half '24 and 2025.

[Yee-Wei Huang, executive]

As we shared our observation earlier, there did not appear to be any PC shipment increase that were boosted by AI-PCs, Windows on Arm or Windows 10 decommission throughout the first half of the year. And during the second half of the year, we expect that the market will continue for plenty of stories to spin around AI-PCs with WoA and 2025 Windows 10 retirement. Despite all these, we see more likely than not, that 2024 PC shipments may end at around 260 million to 270 million units, flattish to a very mild growth compared to 2023. A better PC growth may be within expectation in 2025 because what did not happen in the second half of 2024 may simply delay to 2025. We may add that the refresh cycle is full for PCs purchased during the pandemics. Realtek continue to have ready new generations of PC-related products. We are well positioned whenever stronger PC growth returns.

[Operator]

Next question is from Zheng Lu, Goldman Sachs. How should we expect AI PC trend to increase our dollar content per PC versus regular PC or what is the 10 difference.

[Yee-Wei Huang, executive]

The so-called AI PC trend implies that PCs mid to high end, in particular will continue to evolve into computing devices with greater computational power and more memory capacity. These PCs are all, but certain to be equipped with high-end peripherals such as WiFi 7 2.5 Gig and/or 5 Gig Ethernet, AI Audio Codec and AI Camera. To this end, the AI PC trend may not necessarily increase the PC TAM. However, it is expected to increase the [indiscernible] content per PC, thanks to the high-end specifications.

[Operator]

Follow-up question for AI PC by Samye, UBS. Based on your engagement with PC OEMs, what are some of the new applications that could be pushed or what are layer product planning. Do you see Qualcomm MediaTek bring the native WiFi to their own base CPUs to affect your content opportunities.

[Yee-Wei Huang, executive]

Okay. Finding new applications for AI PCs, it's the challenge of the base for all PC brands and makers. Current thinking tends to revolve around features promoted by Microsoft co-pilots such as creating drops, translating tests, summarizing documents, meetings and producing presentations. Unlike smartphones, where a hardware turnkey is often taken as a package, major PC OEMs tend to maintain control over the selection of key hardware components and modules of their products, Window-based or Chrome-based or otherwise. Case in point, Intel XTU and WiFi never-stop marquee PC makers from selecting Realtek WiFi. Acquire a broad market acceptance of on-based PCs is yet to be seen. It may be important to track the progress at 2 fronts; first, the optimization of software, not only operating systems, but also development tools to fully leverage the capability of Arm processors while creating minimum to no hurdle to application developers and users. Second, the conviction of PC market leaders to maintain their position and control of their future. Realtek continues to work closely with all key PC ecosystem stakeholders to offer PC peripheral solutions that are too good to turn away from.

[Operator]

Next question is from Bruce, Goldman Sachs on USB 4. How should we expect your USB4 products such as top controller retirement to contribute to your revenue earnings in 2024. Have we already secured decent wins?

[Yee-Wei Huang, executive]

It has been almost 5 years since USB4 specification was introduced in August 2019. Nevertheless, the number of products with USB4 port is limited. The reasons are many. For starters, USB4 is not simply a faster version of USB 3.8, rather USB4 turns USB 3.8, display port, E and optional hose-to-hose traffic in one transport. USB 4 tops and devices extract terminal, USB, PCI-E or display port traffic as needed. The richness of USB4 made its implementation challenging and proliferation slow because of the often time complex and confusing marketing messages. At the present time, not many notebooks and our PCs are equipped with USB4 ports. When there are the number of USB port is very limited, just 1 in many cases, making a USB4 hub a logical peripheral. Although some argue that USB4 is the generation that need a retirement physically close to every port in all but the smallest form factors. This has not been the case, partly due to the cost consideration, with the support of a rich set of high-speed data transfer protocols and data transfer speed upwards to 40 gigabits per second or higher. USB4 is an ideal technology for connecting devices within a shortest possible time. To this end, USB4 ports, USB4 router hubs, PCs and external storage, for example, SSD may be the ideal first wave of USB4 devices, some of which may hit the market in the second half this year with more to come in 2025 and beyond. At Realtek, we have USB4 router, USB4 Router Hub Controllers, drive and retirement in different stages of customer design yields and design wins. We expect revenue contribution from these products to start in late 2024 or early 2025.

[Operator]

Next question is from Aaron Dan of Nomura. Please provide updates on China tender projects and observations on networking chip demand outlook in second half 2024.

[Yee-Wei Huang, executive]

As we share our observations in various occasions, both China Telecom and China Mobile have respectively announced their tender awards in the first quarter. No new award was announced in the second quarter, although some expect China Mobile may still have additional awards to be announced later this year. Regardless, the overall China telco infrastructure deployment this year is all but certain to be an improvement compared to the last year. From what we know, over 80% of the telco awards in China went to solutions employing China local SoC after fierce price competition. Nonetheless, China infrastructure tender awards stimulate tender projects overseas and spurred opportunity in spec upgrade for 10GPON Multi-Gig Ethernet and switch WiFi6 NIC and routers in China as well as overseas.

[Operator]

Next question is from Lucas Liu, KGI. Considering the 10GPON upgrade in the U.S., Europe, China and other regions, what is the company's outlook for 2024 and '25.

[Yee-Wei Huang, executive]

We estimate that the 2024 global TAM for PON is about 148 million. China still accounts for over 60% of the 2024 TAM. In terms of technology, 32% or about 48 million specs are using 10GPON. It is worth noting that FTTR fiber to the room and WiFi 7, among others, may further push spec upgrade. Beyond 10GPON, it should be noticed that U.S. and Europe are leading the way to develop high-speed PON. Realtek currently is the only company in the market that has a silicon-ready 25GPON chip. We have a few design-ins with some leading telco operators to deliver 25GPON solutions.

[Operator]

Next question is on WiFi. Samye, UBS would like to ask. What is your latest estimations about WiFi6 penetration in both 2024 and 2025. Our customers are accelerating the WiFi stack upgrade into 2025, given the normalizing inventories, while we do expect to see more meaningful and product ramp-up for WiFi 7? And what is your market penetration assumptions from 2024 to 2026. What's Realtek's latest product line?

[Yee-Wei Huang, executive]

Well, for PCs and routers, WiFi6 is the mainstream WiFi solution this year and is expected to remain mainstream in 2025. For PCs and routers, WiFi 6 penetration is estimated to be both at 70% to 80% this year. It may gain another 10 percentage points of penetration in 2025. For WiFi 7, we believe the penetration will be less than 5% for PCs and routers this year and may rise to around 10% in 2025. We may have to wait until 2026 to see a more popular WiFi 7 adoption. Realtek WiFi 7 is in production today. Our WiFi 7 4X5 single-chip solution for routers is a 2024 COMPUTEX's best choice category award winner, which is designed to increase wireless network coverage and improve the quality of long-range connections.

[Operator]

Next question is from Jason Tsang, CLSA, related to the optical applications. Does the company has its folder or plans for optical applications.

[Yee-Wei Huang, executive]

Realtek focuses on providing solutions, among other things, that must enable wired and wireless connectivity. As the speed of wired network continue to increase the tradition of copper tables used to transmit the data become shorter, thicker and heavier. In contrast, optical cable thickness remains ultrathin no matter how high the data rate may be. Stated differently, wired connectivity is certain to cross into the optical domain as the transmission speed keeps increasing. Realtek is well aware of this trend. We are developing silicon IPs and products that cross into the optical domain. We will share more information as we progress.

[Operator]

Next question is from William, on Automotive Ethernet. Could you provide updates on the order momentum? Any pricing pressure in the space now? What is the market share we can assume in the mid to long term?

[Yee-Wei Huang, executive]

Automotive Ethernet 5 and Switch orders were very strong in the first half of this year, outpacing our expectations. We expect the order momentum will remain strong in the third quarter, although not to the same extent as what we saw in the first and second quarters because some orders were certain, were clearly pooling purchases. In Automotive Ethernet, we compete against both global well-entrenched Ethernet reverence such as Broadcom and Marvell as well as ambitious newcomers, especially those in China. Most automotive OEMs and Tier 1 stayed with the vendor with a complete product portfolio and tightest fuel application records. To this end, Realtek Automotive Ethernet is unmistakably a market leader, a strongest, if not stronger than any competition. Regarding the price pressure, it is all in a day's work, nothing we cannot manage.

[Operator]

Next question is from Ronald Lu from Asia Technology Advisors Hi question is, what is your auto revenue exposure right now? And what is the growth driver for Realtek to outperform overall auto market?

[Yee-Wei Huang, executive]

Okay. Short of answering the question quantitatively, as we briefly mentioned, the automotive ethernet revenue today is becoming one of the revenue leaders, although it's still not among the top 5. The reason our Ethernet growth outperformed the markets again is because our long year of record and very strict compliance to all the automotive grade certification, and that attracts both automotive OEMs and Tier 1 to take on this Realtek solution. In a broader sense, we will have more automotive products other than Ethernet in the days to come. Everybody can stay tuned for that.

[Operator]

Actually, a follow-up question from Jeffrey, Macquarie regarding our other auto business. Management mentioned that Realtek is developing other products for automotive Ethernet 5 and Switch, but not in NPE stage yet. Could you please share with us some more details regarding the type of the product growth in the time frame?

[Yee-Wei Huang, executive]

Okay. As we just briefly mentioned, beyond automotive ethernet, we will have WiFi, Bluetooth and audio codec teams have been working on automotive grade solutions. Each product has secured their own design wins. Those projects for the aftermarket may go into production in early 2025. Those 4 OEM models will normally take longer before mass production.

[Operator]

Next question is from Daniel, Morgan Stanley on foundry pricing. How do we see our funding partners' pricing strategy now and toward to 2025? Do we see any risk of being impacted by any potential pricing hike.

[Yee-Wei Huang, executive]

Okay. Now pricing really is not something to be decided through press releases or open discussions in the semiconductor industry. Still, we acknowledge that there were news pieces about wafer prices where the prices for advanced nodes, namely those below 10-nanometer, may increase to reflect their values and production costs. While the prices for mature nodes may be softening due to oversupply and Chinese competition, Realtek today does not have products in mass production that are in process nodes below 10-nanometer. And we stay closely engaged with our foundry suppliers to attend the best possible wafer prices. At the same time, we continue to seek cost down by optimizing design and test time.

[Operator]

Next question is from Samye. How would the Jet.AI drive new working upgrade? And would Realtek be a beneficiary? Any opportunities to work with the hyperscalers. How has it been the interest and engagement since you joined on the designed product alliance?

[Yee-Wei Huang, executive]

Okay. The advancement of AI generated AI based on various large language model, in particular, is clearly driving a very visible growth of the server and network infrastructure market as higher data bandwidth and lower latency communication are critical for an efficient and practical use of J.AI. To this end, we see opportunities from 2 perspectives: first, never ending better connectivity from the edge devices to the cloud. This is what Realtek has been doing for almost 40 years. Then second, components such as high throughput smart ethernet and hubs that complement various high-performance computing units, GPU, CPU and DPU to name a few in a server. This pertains to what we are committed to do upon joining or total design to deliver scalable performance for wired 5G 6G infrastructure, DPU and edge of network markets. We are currently feverishly developing key silicon IPs in advanced process nodes and will share our progress in due course. Note, nonetheless, what we are doing for Arm total design has a very positive spillover effect on strengthening Realtek's core competency and its application. For example, the very high-speed further grade service may fundamentally lift our communication network solution to the next level. Another example, the development of high-performance computing using advanced process nodes is expected to enrich our edge AI solutions.

[Operator]

And now there are questions raised by Samye. What is your forecast on TV shipments in 2024 and the initial view on the shares of defined wins for next year's models. Could you talk about the demand this year while it actually fair given our sporting events. Also, could you elaborate more on the competitive landscape of TV SoC, particularly for China market.

[Yee-Wei Huang, executive]

Well, TV shipment was strong in the second quarter, partly thanks to the 2024 euro cost. The result of 618 e-commerce festival, however, was below expectations. Further, the drop in panel price and the hiking shipping costs are slowing down the TV demand in the third quarter. The full year global TV shipment at this point is expected to be flattish compared to 2023 at around 195 million to 200 million units. Realtek is expected to maintain steady although small market share gains this year and the next. The 3 TV SoC suppliers from Taiwan, including Realtek remains the top global TV SoC contenders. All are now facing challenges from China TV SoC company as LCD TV appear to be in the list of electronic products subsidized by the Chinese government to encourage the adoption of semiconductor components that are made by Chinese local vendors following their localization policy. To this end, we will have continued to innovate and introduce new features that attract both TV makers and consumers.

[Operator]

Another conditional landscape, especially for Chinese competition, especially for WiFi and Ethernet. Are competition is intensifying for WiFi Ethernet in China in recent 6 to 9 months, are Chinese competitors taking up WiFi 6 capabilities.

[Yee-Wei Huang, executive]

Now in the area of WiFi, the local competition in China in general are active in WiFi 4 and IoT solutions based on that. Some have launched WiFi 6 based solutions, targeting mostly entry-level WiFi 6 IoT chips with limited success in market penetration. IoT solution providers or for that matter, connectivity solution providers generally preferred WiFi chip vendors with a complete product portfolio and solid few proven track record. Similar to the case of WiFi, there's no shortage of Chinese local challenges for the Ethernet chip market in the way of China's focus on information technology, application innovation, known as [Foreign Language] with the goal of enabling China to make and control its own advanced technology becomes self-reliant and terminal dependence on foreign companies. Also same as the case of WiFi, communication network customers generally prefer Ethernet chip vendors with a complete product portfolio and solid proven track records. Realtek tracks the competitor landscape closely and maintain our leadership in connectivity solutions, including those based on WiFi and Ethernet. We offer product portfolios with the greatest breadth and task and WiFi Ethernet chips then have the smallest footprint, best interoperability and lowest power.

[Operator]

Next question is from Kevin Lin Taiwan Life. What's your view on gross margin next year after the inventory reserves? Can we expect OpEx ratio going down next year?

[Yee-Wei Huang, executive]

Into next year or gradually this inventory write-off reversal impact is decreasing. Some impact will be within expectations on gross margin. However, as we mentioned, Realtek continue to focus on efforts to rise on the advancement of science and technology to move our product portfolio to the one that favor product with better features and presumably better margins. Now in terms of OpEx ratio, next year, we have just mentioned, short-term, you can expect OpEx ratio and above the current level mid-term, we look at OpEx ratio at around mid-30s.

[Operator]

Next question is from Bruce, Goldman Sachs. What was the FX gain in second quarter '24? And could you give us some colors about the utilization rates of your foundry partners?

[Yee-Wei Huang, executive]

Okay. For foreign exchange effect, our estimate there may be an upside of about TWD 23 million impact. Now in terms of foundry utilization to the best of our knowledge, entering the second half of the year, now the major foundry tends to step back from what we may have heard a quarter or even a month ago that claiming the utilization may be increasing now when we heard they may step back on that. We will continue to track the progress.

[Operator]

Okay. The last question for the call is from Kevin, Mizuho, on company's initial view for 2025. What business or product lines will be the major growth drivers for Realtek in 2025.

[Yee-Wei Huang, executive]

Well, moving forward, we see the market relentlessly demands back upgrades in practically every product that will tap is involved in, namely WiFi, Ethernet, Switch, PON, USB4, intelligent audio and video solutions, including audio codec and camera, to name a few. In terms of market segment, we see PC, communications network, consumer and automotive, all continue to be fueled by the quest for ubiquitous connectivity and AI. Realtek maintains a cautiously optimistic view of 2025.

[Operator]

Due to the timing constraints, we will conclude the meeting now. Thank you 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 PM today. Thank you, and have a good afternoon.