Realtek Semiconductor Corp
TWSE:2379
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Realtek Semiconductor Corp
Earnings Call Analysis
Q3-2023 Analysis
Realtek Semiconductor Corp
In their recent third-quarter financial report, the company recorded a revenue of TWD 26.68 billion, marginally increasing by 1.47% quarter-over-quarter. However, this figure represents a significant 10.4% decline when paralleled with the same quarter in the previous year. This juxtaposition suggests a recovery from the first quarter's lows, with some demand from the third quarter even getting preponed to the second. The gross margin displayed modest improvement, a signal that the previous quarter trend of shrinking gross profit might be stabilizing. Operating expenses increased mainly due to additional research and development costs, which reduced the operating profit marginally.
Despite observable stability, the company retains a conservative outlook owing to the murky demand forecast flustered by macroeconomic instabilities and geopolitical vagueness. The management is particularly guarded about the immediate future, suggestive of the first quarter next year. This timidity stems from both the historical seasonality of the semiconductor space and the current unpredictabilities.
Looking ahead, the company is not expecting any significant deviation in operating expense (OpEx) ratios in 2024 as compared to 2023. Historically, the OpEx peaks in the fourth quarter; however, the management anticipates a 'steady recovery in both market demand and our own performance,' instilling a sense of optimism that might resonate well with investors who value prudent expenditure alongside growth.
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Good afternoon, everyone. Welcome to Realtek's 2023 Third 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 p.m. today.At the beginning, our spokesperson will report our third quarter results and give management's remarks. After that, we will have a Q&A session. [Operator Instructions]Now that portion of what's presented in this call contains 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'll pass this call to our spokesperson, Yee-Wei.
Good afternoon, ladies and gentlemen on the line. You are currently participating in the third quarter 2023 webcast earnings release hosted by Realtek Semiconductor Corporation.Let us go through the third quarter 2023 operational results. Q3 revenue was TWD 26.68 billion, a 1.47% Q-o-Q increase, but a 10.4% decline compared to the same period in 2022. If we take into account that part of the demand in the third quarter have been pulled into the second quarter. The market in the third quarter showed a steady growth after hitting the bottom in the first quarter. Q3 gross margin was at 42%, a 0.3 percentage point improvement compared to the previous quarter. The trend of gross profit decline for the past several quarters may be stabilizing. Q3 operating expense was TWD 9.22 billion or 34.3 -- 34.6% of revenue. OpEx ratio increased 0.8 percentage point, mainly due to an increase of TWD 300 million in R&D expenses, including employee salary and compensation compared with the last quarter. Q3 operating profit was TWD 1.99 billion or 7.5% of revenue. Higher operating expense led to a drop in operating profit.Q3 non-op income was TWD 680 million, a mild increase from the last quarter, thanks to higher interest income. Q3 net profit was at TWD 2.57 billion or 9.6% of revenue, a 0.3 percentage point decrease quarter-over-quarter. Q3 EPS as a result was TWD 5.01. Regarding inventory, Q3 inventory turnover days were at 111 days, another 22-day drop compared with the 133 days last quarter. In terms of dollar amount, Q3 inventory decreased by 20% compared to the last quarter. We expect inventory days to continue to fall in the fourth quarter. We also have third quarter balance sheet and cash flow statement for your reference and your convenience.Yes, this concludes Q3 third quarter financial reports. Despite steady operations in the third quarter, the end market demand visibility remains very limited due to uncertainty in macroeconomy and international state of affairs. Additionally, considering the seasonality of the semiconductor industry, we maintain a cautious and conservative view towards the first quarter operation.Next, let's review the top product line at Realtek. Before that, we estimate the PC versus non-PC revenue to be approximately at 33% to 67% in the third quarter. The ratio towards the PC-related revenue reduced the relatively steady demand in the PC segment in the third quarter compared to the second quarter. Now, on internet, the market demand for MultiTech ethernet solution is clear. In spite of some third quarter orders pulled into the second quarter, the ethernet orders held up generally well in the third quarter. Nevertheless, the demand visibility is very limited as we move into fourth quarter. In general, we expect a seasonal slowdown towards the end of the year, followed by a steady recovery in 2024 as various markets demand 2.5 gigabit per second and 5 gigabit per second ethernet. In PC and other LAN-based connectivity solutions to support the performance of 10G PON, Wi-Fi 7, and even 5G CPE namely consumer premise equipment.Now on Switch, the global telco projects kept delaying although the market still believes some tender awards should be imminent with the delivery to start in the first half of 2024. To say it differently, the Switch market is almost certain to stay muted in the fourth quarter. Assuming the macro economy does not further deteriorate due to the global geopolitical affairs, we expect the telco project should recover in 2024. This cause a push for 10G PON and Multi-Gig switches in the market to match the growth in Wi-Fi 7, AI servers, and data centers. We hold a cautiously optimistic view of the Switch market in 2024. Regarding Wi-Fi, it is generally well in the third quarter with Wi-Fi 6 deployment, continuing its strength in PC and routers. Consumer electronics using Realtek Wi-Fi-based IoT solutions also fell well in the market.Wi-Fi 6 penetration overall uncertain to reach 70% plus for PC, about 60% plus for routers by year-end. Wi-Fi 7 prospects is expected to conclude in the first quarter of 2024 with an official kickoff of the Wi-Fi 7 local program in the second quarter of 2024. It will be considered a great success for Wi-Fi 7 to have a 5% market penetration in 2024. Realtek's first Wi-Fi 7 will target high-end routers and PCs. On audio codec, the PC market in the third quarter experienced a 10% Q-o-Q growth, according to IDC. It should be noticed nevertheless, some of the PCs' shipment was using semiconductor components with prudent delivery in the second quarter. As per IDC, the PC market up to the end of the third quarter is down about 17% Y-o-Y. Most of the PC makers are expecting a seasonal soft in the fourth quarter, thereby leading to a full-year of PC decline of about 15%, the same as what we forecast in the second quarter earnings call.For CE Codec, we stay focused on gaming and high-end mobile phone markets, which are also having a seasonal soft in the fourth quarter. Last but not least, TV market reached its peak this year in late Q2, early Q3. The weakness in the price of panels and DRAM further dampened the TV production in the near term. Overall, the PC shipment in 2023 is expected to reach about 200 million units, a slight Y-o-Y increase. Realtek TV is expected to outperform the market. It is expected that 2024 Olympic games might stimulate some demand for the TV market.
[Operator Instructions] The first question is from Daniel, Morgan Stanley. Could you provide more color on fourth quarter outlook? Also, is there any preliminary outlook for 2024 that you could share?
Well, despite steady operations in the third quarter, the end market demand visibility remains very limited due to uncertainties in macro and international state of affairs. Further, given the seasonality of the semiconductor industry, we maintain a cautious and conservative view towards the fourth quarter operation. To say it differently, we expect the market may hold back some in the fourth quarter, but prepare for a recovery in 2024, barring any uncontrollable surprises. Generally, the market is right to spend -- to expand applications exploiting AI and big data with intelligent audio and video and machine interfaces, running on state-of-the-art managed switches, PON, Wi-Fi, Bluetooth, USB, et cetera. The opportunities for Realtek are many.
The second question is from Bruce, Goldman Sachs. How should we think of our long-term gross margin when everything return to normal? We know that all the spec technology migration product mix improvement might help. But is there any way we can provide a more quantitative target, for example, comparing to historical high, and how are we going to achieve the target, if any?
While we are cautiously optimistic about Realtek's long-term gross margin with an initial goal to approach the high end of our historic gross margin range, the optimism comes from our incessant efforts to improve our product mix towards mid- and high-end applications while maintaining our focus on cost down to not enable the AI deployment.
Next question is from Sunny, UBS. How is the inventory level at Realtek and at channel? What's your latest inventory management strategy? When will you -- or inventory get back to normal level?
Well, currently, the inventory is outside of Realtek, that is with Realtek's distributors and customers. It is healthy to the best of our knowledge, especially in PC and consumer segments. For networking segment, it is also moving in the right direction. Inside Realtek, the short-term inventory target is less than 100 days. To cope with the low order visibility and high market uncertainty, we will adjust our inventory target dynamically depending on the market situation.
Next question is from Justin, CLSA. How should we expect the OpEx in the fourth quarter '23 and 2024?
The OpEx ratio normally peaks in the fourth quarter based on our experience. For 2024, we expect the OpEx ratio to be roughly the same as that in 2023 as we expect a steady recovery in both market demand and our own performance.
Next question is still from Justin, CLSA. Regarding the competition, how is market competition in Wi-Fi, networking, and PC market? Can we gain market share from other players? If we can, how to take more market share?
Quite important to note is that Realtek embraces various international standards in our solutions. While international standards enable mass deployment of ubiquitous connectivity, they most certainly, at the same time, guarantee the entry of competition. For Wi-Fi controllers, for example, following IEEE 802.11 standards, we serve the global market along with the global markets such as Intel, Qualcomm, and MediaTek for Wi-Fi PON routers, PC, and consumer products. There are also indigenous Chinese companies entering Wi-Fi, mainly in the Wi-Fi-based IoT markets today. Realtek is consistently among the top solution suppliers in every field we play. Our market share in every field grows slowly but surely in time. We won by solid interoperability, best cost performance and perhaps most importantly, second to none customer support.
Next question is from Randy, UBS. How is the supplier pricing looking going into 2024? Is it still firm or getting more favorable? Also, how is the competitor pricing versus normal?
The pricing pressure from the customers in the market today is very high. A supplier cannot ignore the request from his or her customers. We are currently in discussion with suppliers regarding production plans and prices for 2024, aiming to achieve a mutually satisfactory consensus. We do not comment on pricing strategy of competitors. However, in times of relatively sluggish market condition, price sensitivity is indeed higher, and the pressure from customers and peers on pricing is also greater than usual. Realtek response to various price challenges by launching products that are most suitable for different markets and implement flexible pricing strategy.
The next question is from Lucas, KGI. What initial insight does the company possess about global PC shipment for 2024? And what are the primary catalysts for the growth in shipments?
Most of the customers we talk to are expecting the PC market to return to growth in 2024 after a very challenging 2023. The growth drivers often cited are: one, strong fundamentals of the PC usage, two, refresh cycle for PC notebook bought during the pandemic. Three, discontinuation of Windows 10, and four, the emergence of AIGC.
The next question is from Rick, Daiwa. Do you think Microsoft Win 12 is accelerating replacement cycle?
Well, we know -- well, Microsoft seem to follow a 3-year cadence in Windows major releases until Win 10. Win 10 was released in July 2015. That's 3 years after Win 8. There is no Win 9. Win 11 -- Windows 11 was released in October last year, October 2021. That's 6 years after Windows 10. This and whatever other reasons make Windows 10 the most installed Windows in Windows history, accounting for 70% plus share of all Windows. Now, it is set to reach end of support in October 2025 announced by Microsoft. So some are assumed back to the 3-year cadence. Win 12 is a rumor for release in 2024. Nonetheless, it may be worth noting that there's no confirmed date for Win 12 release. As far as we're concerned, the catalyst to accelerate PC refresh may be more from the corporate PC upgrade due to the end of support of most installed Win 10 and the emerging refresh cycle for PC notebook bought during the pandemic.
Next question is from Kevin, Mizuho. He would like to know what is the current outlook for the telco project in the fourth quarter '23 and first quarter '24. Should we expect strong growth for the telecom project in 2024?
As mentioned earlier, telco tender projects have been continuously delayed worldwide although the market still believes that some projects are imminent and will start delivering in the first half of 2024. Overall, this market has been sluggish for a year. With a low base in 2023, we expect to a gradual recovery in infrastructure deployment in 2024. After all, the development of artificial intelligence, 5G, autonomous electric vehicles, and other areas require expanded network infrastructure and specification upgrade.
Next question is from Sunny, UBS. She would like to know when will you expect to see more meaningful in product ramp-up for the Wi-Fi 7. What's Realtek's latest product planning?
Well, as previously explained, Wi-Fi 7 prospect is not expected to conclude until the fourth quarter next year. The official kickoff phase for the Wi-Fi 7 local program is set in second quarter 2024. So the ramp-up for Wi-Fi 7 will take time. It will be considered a great success for Wi-Fi 7 to have a 5% market penetration in 2024. Realtek's Wi-Fi 7 will target high-end routers and PCs with our customers developing their product as we speak.
Next question is from Rick, Daiwa. Please comment on automotive revenue contribution and when to expect significant automotive revenue to ramp.
Realtek continues to see automotive an important and necessary long-term investment. Our first wave of investment on automotive Ethernet and Switch has performed exceeding our expectations. Its growth rate has been outperforming corporate average by a large margin since its first year of production nearly 5 years ago. While Realtek's automotive Ethernet team will continue to focus on in-vehicle network connectivity, its success has attracted automotive OEM and Tier 1 to other Realtek solutions. In the next 2 to 5 years, we are expecting additional Realtek solutions, such as Wi-Fi and audio DSP to spur a second wave of expansion of automotive-related revenue contribution.
Next question is from Bruce, Goldman Sachs. Please give us some color about Realtek's PC content value. For example, for one notebook, what's the theme that Realtek can reach? As more and more people are talking about AI and PC, are we expecting better business opportunity or incremental TAM to Realtek?
Sure. Now around the PC notebook in the peripherals today, we can count audio codec, card reader, camera controllers, SSD controller, USB hub controller, ethernet controller, Wi-Fi Bluetooth controller, monitor display controllers, video hub controllers, and so on and so on. That is, we can count 10 or more Realtek's products today. The list and its value are expected to upgrade during -- due to the end of -- sorry. So this and the value are expected to grow further in time, reflecting both spec upgrades and expanded PC applications, including AI.
Next question is about Wi-Fi 6 penetration. What's your latest estimate about Wi-Fi 6 penetration in 2023? Are customers accelerating the Wi-Fi spec upgrade into 2024 given the normalizing inventories?
Well, Wi-Fi's 6 market penetration keeps increasing as we speak. It is all certain to reach more than 70% for PC and more than 60% for routers by year-end. This is stronger than we forecasted in the beginning of the year. Moving forward, Wi-Fi 6 market penetration may grow readily around 10% -- 10 percentage points more in key application areas in 2024 and further expand into new applications.
Next question is from Yiho Liu, Capital Investments. Please disclose the price ratio among Wi-Fi generations from Wi-Fi 4, 5, Wi-Fi 6, and Wi-Fi 6E, also Wi-Fi 7.
Assuming Wi-Fi 4 to be 1, roughly 6 -- Wi-Fi 5 and Wi-Fi 6 will be about 2.4 -- 2.5 and 4.2. And for Wi-Fi 7, since it's not in mass production yet, but roughly from what we can see, it could double the price of Wi-Fi 6 today.
Next question is about the competition in automotive industry. What's current market share of auto ethernet products? And what's your view on the competition? Do you see it's rising from China? Also, please comment on the trend of the technology development on the auto ethernet.
Realtek does not comment quantitatively on product market share. Suffice it to say, nonetheless, Realtek is oftentimes among the top contenders in the fields we place. Regarding automotive ethernet competition, we do observe potential new entrants from China. In the fifth year of mass deployment, automotive ethernet may be set to move from a novelty to standard solution in a car. As the technology matures in cars, that performance becomes as important to us if not more important than the pursuit of higher specification, a trend that plays into the hands of Realtek. Make no mistake, however, this does not mean automotive ethernet has no further technology advancement. Higher spec namely, higher speed, lower power as well as heightened safety and security will continue to drive the automotive ethernet roadmap.
Next question is from Sunny, UBS. He would like to know how would AI drive the networking upgrades and would Realtek be a beneficiary. Any opportunity to work with the hyperscalers?
Simply put, there's no AI without connectivity. A complete AI ecosystem consists of cloud servers or data centers, connectivity, and edge devices. As AI upgrades or scale, each within the ecosystem must upgrade or scale in tandem. Realtek oftentimes benefits as a solution provider for connectivity and edge devices. To this end, there are certainly opportunities to work with hyperscalers such as Google, Microsoft, and Alibaba.
Next question is from Daniel, Morgan Stanley. How do we see the edge AI development to contribute to Realtek? If it could, when do you think you can make a progress?
Again, it's afoot. Examples of edge AI may be found in AIoT and AIGC. Realtek is an active player in both. In 2023, Realtek has released AI Super Resolution Fidelity Recovery IC that's for TV application, Wi-Fi 6 AP Router Solution with AI QoS, Intelligent Automotive Noise Suppression Technology with Voice Following, Low-Power USB AI Vision Sensing Camera Chip to name a few.
Next question is from Sunny, UBS. What's the split of your product that's made by 8-inch foundry versus 12-inch? And how will this change in the next 2 to 3 years? Will the process migration drive any cost benefits or is it more driven by supply sufficient point of view?
Well, as time goes by, Realtek is using more and more 12-inch wafer as opposed to the 8-inch one. This trend is expected to continue in the coming years. The main driving force behind process migration at Realtek is oftentimes low-power requirement or the flip side of that, high-power, high-voltage, usually, we stay at 8-inch.
Next question is from Brad, BofA. Does Realtek see any defect trend for Wi-Fi, Switch, Ethernet, PON products amid macro weakness?
Indeed. The market tends to favor products with basic configuration when the economy is slow. The adoption for the new specs are often likely to be suppressed if not seeing defects.
Next question is from Daniel, Morgan Stanley. How is your initial view on Realtek's TV share and content growth as you bid for the project for 2024?
Suffice it to say that Realtek's TV SoC continues to gain market share slowly but surely, although facing challenges during the shortage. We expect to continue the momentum in 2024. In terms of silicon content in a TV, Realtek focuses on opportunities in Wi-Fi, Bluetooth, and camera at the present time.
Next question from Rick, Daiwa. Can you talk about the company progress and roadmap in the USB 4, also the PCIe 5.0? Presumably, your focus is on the host end.
Realtek's multiport USB 4 hub controller has been with customers for product development since the third quarter. It is a full-feature, the only full-feature USB 4 solution in the market other than by Intel. Full-feature, meaning it can be used on the host end or the device end. Realtek's PCIe 5.0 will be ready by the end of the year.
Next question, an investor would like to know about the corporate tax.
Our corporate effective tax rate is roughly around 4% and probably it will stay at this level.
Thank you, Yee-Wei. We have no further questions, and we will conclude the meeting now. 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 p.m. today. Thank you, and have a good afternoon.