Realtek Semiconductor Corp

TWSE:2379

Earnings Call Analysis

Resilient performance amid market changes positions Realtek for growth.

Realtek's Q3 2024 revenue reached TWD 30.75 billion, a slight increase of 15.3% year-over-year. Gross margins improved to 51.4%, bolstered by inventory write-backs contributing 2-3 percentage points. Operating expenses rose by 2.2% due to R&D costs, while net profit remained flat at TWD 4.38 billion. Despite challenges in consumer segments, networking and automotive sectors showed growth. Looking ahead, a rebound is anticipated in Q1 2025, with focus on mid- to high-end products. A modest overall growth of 4.3% is forecasted in the PC market for 2025, but margins may decline slightly due to changing product mixes and competitive pressures.

Financial Performance Overview

In the third quarter of 2024, Realtek Semiconductor Corporation reported revenues of TWD 30.75 billion, essentially flat compared to the previous quarter but a notable 15.3% rise year-over-year. Gross margins improved to 51.4%, benefitting from a 9.4 percentage point increase since Q3 2023, largely due to better product mix and a reversal of slow-moving inventory write-off that added 2-3 percentage points to margin performance. Operating expenses increased marginally by 2.2%, reaching TWD 11.89 billion, reflecting higher R&D expenses for compensation. Overall, net profit was TWD 4.38 billion, yielding earnings per share (EPS) of TWD 8.53, slightly down from TWD 8.55 in Q2 2024.

Sector Performance Insights

The revenue composition remained stable with 33% from PC-related products and 67% from non-PC categories. Despite growth in networking and automotive segments, a decline in the consumer market affected overall performance. Notably, Ethernet products showed strong resilience, with ongoing demand for gigabit and multi-gig Ethernet solutions projected to drive revenue growth in 2025, owing to increased specifications and applications.

Guidance on Future Growth

Looking ahead, Realtek's management expressed optimism about a recovery in demand across all sectors, particularly for AI and high-performance servers. They forecast a rebound in Q1 2025 after a seasonal downturn in late 2024. Overall, revenue in the networking and automotive sectors is expected to manifest steady growth, fueled by advancing technologies such as Ethernet, Wi-Fi 7, and automotive Ethernet, which is anticipated to grow significantly as advanced networking requirements in vehicles increase.

Operating Expenses and Margin Guidance

Operating expenses are expected to stabilize at current levels, allowing for potential reductions over the mid to long term. Realtek's ratio is targeted to drop to the mid-30s over time. Despite the anticipated decrease in favorable inventory write-offs impacting gross margins, the company is focusing on premium product offerings to sustain profitability. Gross margins in 2025 are expected to decline slightly but should remain better than pre-pandemic levels due to improved product mix.

Market Strategy and Product Development

Realtek is actively enhancing its product lineup with a focus on mid to high-end specifications, particularly in the realms of Wi-Fi 6, Wi-Fi 7, and automotive networks. Development efforts in AI-enabled products, including PCs and cameras, signal a strategic shift towards more sophisticated solutions that interact seamlessly within advanced human-machine networks. Realtek's commitment to integrating innovations like Arm-based architectures further positions it to capture emerging high-performance markets.

Challenges and Competitive Landscape

While Realtek faces fierce competition in the Chinese market, particularly on entry-level products, its focus on high-performance segments may offset pricing pressures. The expected trend in 2025 points towards more robust market participation resulting from increased connectivity demands. Realtek is preparing to leverage its historical strength in high-margin segments while adapting to changing market conditions.

Conclusion andInvestor Insight

Realtek Semiconductor stands at a pivotal moment with promising growth trajectories across various market segments, particularly as technology standards evolve. While near-term challenges such as slow inventory turnover and competitive pricing persist, the company's strategic emphasis on high-value solutions, strong R&D initiatives, and well-positioned product offerings bodes well for long-term shareholder value. Investors should consider both the potential growth areas and the external pressures that could influence performance moving into 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, everyone. Welcome to Realtek's 2024 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 6:00 PM today. At the beginning, our spokesperson will report our third quarter financial results and give a management's remarks. After that, we will have a Q&A session. [Operator Instructions]

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 third quarter 2024 earnings release webcast hosted by Realtek Semiconductor Corporation.

First, let us go through the third quarter 2024 financial results. Q3 revenue was TWD 30.75 billion, up 0.3% or practically flat compared to the last quarter. It represents nonetheless, a 15.3% increase compared with the same quarter -- same period last year. This is in line with our expectation after a stronger-than-normal Q2 performance.

Third quarter gross margin was 51.4% 0.5 percentage point Q-o-Q increase, while a 9.4 percentage point increase over third quarter 2023. The reversal of the slow-moving inventory write-off was comparable in magnitude to the previous quarter. When excluding this reversal, the gross margin performance accurately reflects the product mix for the reporting quarter.

Third quarter operating expenses were TWD 11.89 billion or 38.7% of revenue or a 0.8 percentage point increase in OpEx ratio compared to the previous quarter. The absolute dollar increase in OpEx was TWD 257 million or 2.2%, primarily driven by increase in R&D expenses for employee compensation. This aligns with our expectation that operating expenses may fluctuate around the current level in the short term. Nevertheless, we remain committed to seeking operating leverage to reduce the OpEx ratio in the mid- to long-term where feasible.

Q3 operating profit was TWD 3.91 billion or 12.7% of revenue, slightly lower than the previous quarter of 13%, owing to a slightly higher operating expenses. Q3 non-op income was TWD 759 million, which same as last quarter came mainly from interest income.

Third quarter net profit was TWD 4.38 billion or 14.2% of revenue, flattish compared to the last quarter. As a result, Q3 EPS was TWD 8.53 compared to TWD 8.55 in the previous quarter and TWD 5.01 in Q3 2023.

Regarding inventory, Q3 inventory turnover days were 85 days. While this represents a 10-day increase compared to the 75 days in the second quarter, the inventory turnover days are deemed healthy, particularly given the uncertainties anticipated in the fourth quarter.

Overall, the inventory levels at Realtek and within the channel remain generally robust. We also have the third quarter '24 balance sheet and cash flow statement for your reference and your convenience. This concludes Realtek's third quarter 2024 financial results. Entering the fourth quarter, we must prudently navigate the industry's cyclical off-season and stay vigilant to market changes.

Now, let's review the top product lines at Realtek. Firstly, it is observed that the revenue split between PC and non-PC categories remains unchanged at a ratio of approximately 33 to 67 in the third quarter mirroring the pattern observed in the previous 2 quarters. The third quarter experienced growth in the networking and automotive sectors, which was largely neutralized by a decline in the consumer segment.

It is important to highlight that, the consumer market exhibited exceptional performance in the second quarter, driven significantly by orders that were pulled in from the latter half of the fiscal year.

On Ethernet, the Ethernet business in the third quarter demonstrated consistent strength delivering a comparable quarter-over-quarter growth seen in the second quarter. This robust performance is driven by: first, gigabit Ethernet inventory replenishment from various applications, including printers, docks and game consoles; second, 2.5 gigabit Ethernet for motherboards and tender projects; and third, 5-gigabit Ethernet for high-end motherboards.

Realtek's comprehensive Ethernet product portfolio, along with our established shipment and service track record, continues to provide a competitive advantage in the market. Despite the anticipated seasonal slowdown in the fourth quarter, both shipment and revenue of Realtek Ethernet products are expected to grow in 2025. This growth will be fueled by the specification upgrade to 2.5 gig Ethernet for various applications such as PCs, docking stations and telecommunications tender projects.

Our ability to adapt to evolving market demands and maintain a diverse product range ensures that we stay ahead of the competition and continue to meet customer needs effectively.

On switch, the networking market is all but certain to witness a substantial improvement this year compared to the last. We project stronger performance in the second half compared to the first, driven by ongoing global communication tenders, which are bolstering the demand for switches.

Realtek is experiencing a steady rise in demand for our managed switches as well as our multi-port 2.5 gig switches. Overall, the demand for managed switches and new products such as high port count 2.5 gig, 10 gig, 25 gig switches is expected to maintain robust growth in Realtek switch business in coming years.

On Wi-Fi, building on a robust second quarter, Realtek Wi-Fi business maintained its stability in the third quarter, closely mirroring the performance of the previous quarter. In the PC sector, Wi-Fi 6 continued its steady rise, progressively replacing Wi-Fi 5. In the consumer market, despite a quarter-over-quarter drop in shipments and revenue in the consumer market due to the high pull-in in the second quarter, there was a noticeable up-tick in demand for televisions and home appliances driven by economy stimulus package unveiled in China in September.

For the networking segment, Wi-Fi saw benefits from new global telecommunications project awards. Furthermore, Wi-Fi is expanding into additional applications, indicating its versatility and growth potential.

Looking ahead, we anticipate sustained growth in Realtek Wi-Fi business, driven by both specification upgrades and expanding addressable markets. On audio codec, the IDC reports a 2.5% year-over-year decline in PC shipments for the third quarter, following a modest 2.4% year-over-year growth in the first half of the year.

Consequently, year-to-date PC shipments by the end of the third quarter are roughly equivalent to the same period last year at 193 million units. Realtek's third quarter PC codec shipment and a slight set back following a robust performance that outpaced the market during the first half of the year. It has become evident that a portion of the PC codec demand anticipated for the latter half of the year was fulfilled earlier.

Currently, most of our PC customers do not foresee growth in the PC market until next year. In the consumer electronics audio codec segment, we are concentrating our efforts on Chromebooks and gaming and making progress. Additionally, our development in audio solutions for the automotive market is proceeding as planned.

On the TV market, it witnessed robust performance in the first half of the year, driven by 2 major sports events as well as increased panel prices and shipment costs. However, as the second half unfolded, the market began to exhibit signs of weakening due to the absence of a new buying incentive and more critically falling panel prices.

Although, we have been seeing some increase in demand following China's announcement of an economic stimulus package in September, it is unlikely to reverse the overall trend. At the current trajectory, we anticipate the pay TV market will close the year with approximately 200 million units, representing a modest rise from last year's 197 million units.

During this period, Realtek has also managed to capture additional market share. Automotive Ethernet, last but not the least, always leading foundries and top global automotive semiconductor chip companies have all indicated a slowdown in the automotive end market, particularly in the latter half of this year. We observed a similar trend despite this Realtek automotive Ethernet chips continue to show robust growth.

In the third quarter, the automotive Ethernet growth rate, both quarter-over-quarter and year-over-year have once again outpaced the corporate average. Currently, only about 50% of new vehicles are equipped with automotive Ethernet, indicating significant potential for growth in the coming years.

As the automotive Ethernet market evolves, Realtek is confident in repeating our success in the IT Ethernet sector and achieving a leading market position.

[Operator]

Thank you, Yee-Wei. Now, we are entering the Q&A session. Please type your questions in the box at the lower right corner on the screen. We will reply accordingly. The first question is from Brad Lin, Bank of America. Regarding the seasonality of Realtek's business. Compared to last quarter, is Realtek more optimistic or less optimistic on each application? Can you share some early outlook on seasonality pattern for 2025?

[Yee-Wei Huang, executive]

Sure. Our current outlook for all applications is more optimistic than it was a quarter ago. In the short term, we are witnessing a gradual recovery across all sectors, evolving steadily and assuredly. It is important to note, however, that demand recovery might slow down as year-end inventory control takes precedence.

Looking ahead to the mid- and long term, the demand for AI and high-performance servers remains robust. While some may argue that these investments could become futile should the AI bubble burst. We at Realtek concur with the prevailing industry consensus. AI and high-performance servers represent genuine and enduring advancements.

These technologies are set to drive innovation and generate new demand for edge devices and edge servers, all of which stand to benefit from Realtek's connectivity solutions. Our technology facilitates seamless interfaces between devices as well as between humans and devices.

At present, we anticipate a rebound in the first quarter of 2025 as we emerge from the seasonal low of the last quarter of 2024. As for the seasonality for the full year of 2025, it is too early to make definite comments.

[Operator]

The next question is from Bruce Lu, Goldman Sachs, regarding gross margin outlook in 2025. As we expect foundry pricing would trend down toward mature notes into 2025, should we expect some upside to our gross margins in 2025?

[Yee-Wei Huang, executive]

Okay. Gross margin is typically influenced by 2 main factors: the average sales price and the average manufacturing cost. While lower foundry pricing can contribute positively to enhancing our gross margin. The erosion of sales prices due to competition can counter and exert pressure on our margins.

Realtek diligently negotiates and manages prices with our foundry partners on the supply side and with our customers on the demand side. We have managed this dynamic effectively in the past and remain confident in our ability to continue doing so, thereby maintaining a reasonable gross margin.

It is important to note that, we anticipate 2 additional factors impacting our margin in 2025, a receding reverse inventory write-off and changes in product mix. The reverse inventory write-off has positively contributed to our gross margin in the first 3 quarters of the year. Its influence will begin to lessen in the fourth quarter and become relatively insignificant by 2025.

Simultaneously, Realtek has been strategically focusing our product offerings on solutions with mid- to high-end specifications, which generally yield improved gross margins.

In summary, taking all factors into account, we expect our gross margin in 2025 to be lower than the current level, but likely better than our historic performance prior to the pandemic and the resulting supply shortages.

[Operator]

The next question is from Jeffrey Ohlweiler, Macquarie, on inventory write-back. How much extra gross profit margin did you get in third quarter '24 because of inventory write-backs? When will the major write-backs end?

[Yee-Wei Huang, executive]

Okay. In general, we have commented on this impact on the gross margin. Regarding the extent of these write-backs in the third quarter, they accounted for approximately 2 to 3 percentage points.

[Operator]

The next question is from Kevin Wang, Mizuho related to OpEx. Do you expect operating expense to be maintained at a similar amount into 2025? Do you have any plan for controlling operating expense, especially after your new project for ARM-based processor?

[Yee-Wei Huang, executive]

Well, we expect the OpEx ratio to stay at approximately the current level this year. In midterm, we still target OpEx ratio to be around mid-30s. Our commitment to managing these expenses diligently remains unwavering. As we continue to seek and recruit talent to fuel our growth, particularly in the field of AI, very high-speed service and very high-performance SoC development using advanced process nodes.

We encourage managers to enhance performance management practices to align the right talent with the appropriate tasks. Our objective is to achieve operating leverage and reduce the OpEx ratio in the mid- to long term wherever feasible.

[Operator]

Next question is from Rick Hsu, Daiwa. What are the key revenue growth drivers for 2025? Could you also share the long-term factors supporting Realtek's business expansion?

[Yee-Wei Huang, executive]

Okay. We are seeing a steady market recovery in all market segments in 2025, led by networking and automotive. Realtek is committed to leverage its core expertise in ubiquitous connectivity to drive the advancement of the AI world. We anticipate that Ethernet switch, PON, Wi-Fi router, Bluetooth and USB technologies will remain crucial for ensuring seamless device-to-device connectivity and will be instrumental in driving Realtek's growth in 2025 and beyond.

It is evident that intelligence or artificial intelligence can be an emerging property of a highly interconnected systems, much like biological intelligence arises from the interconnectivity of neurons. We foresee that audio and video or sound and sight, representing the most intuitive human machine interfaces will play pivotal roles in the AI world.

Consequently, Realtek's audio codec display and camera solutions, along with high-speed streaming technologies such as HDMI and display port are expected to enhance human interaction with AI and contribute to our growth trajectory 2025 and beyond.

Realtek is also expanding its technological capabilities to broaden its application scope. By integrating with the Arm Neoverse Compute Subsystems, Realtek is positioning itself to enter the high-performance server market in addition to strengthening its presence in the PC, consumer networking and automotive sectors, where we already have a substantial footprint.

[Operator]

The next question is from Sunny Lin, UBS, related to inventory situation. How about the inventory level at Realtek and App channels? What is your latest inventory management strategy, given that last quarter, your days of inventory further went down to 75 days compared to target 100 days. And following a strong sell-in in second quarter, the balance like further came down. You mentioned 75 days is healthy level.

[Yee-Wei Huang, executive]

Well, despite a 10-day increase in inventory turnaround time compared to the second quarter, we maintain a positive outlook regarding the inventory levels at Realtek and across our distribution channels. The conservative approach taken by customers and distributors is understandable given the current market conditions with low visibility and the anticipation of a potential slowdown as the year-end approaches.

At Realtek, our strategy is centered on proactive planning to ensure success not only for our company, but also for our valued customers. We are committed to maintaining an inventory that can swiftly adapt to sudden surges in demand, thereby providing seamless support and ensuring continuous supply without disruptions.

[Operator]

The next question is from Brad Lin, Bank of America. What is the firm's current China revenue exposure? Have we seen improving China demand, including CE and tender yet after this recent stimulus?

[Yee-Wei Huang, executive]

While China plays dual roles in the global market as a consuming market and a world factory, the consumer market in China has experienced a downturn for over a year. However, recent signs of recovery have been observed, particularly following the introduction of the 2024 economy stimulus package in September.

In terms of tender projects, we have noted increased delivery for projects awarded earlier this year. China's prominence as a manufacturing powerhouse is particularly notable in the automotive industry nowadays. Despite the difficulties in quantifying its scale, China remains an essential market for Realtek.

Concurrently, nonetheless, Realtek is expanding its global presence. Case in point, we are seeing significant rise in business opportunities in India, particularly within telecommunications and consumer sectors.

[Operator]

The next question is from Aaron Jeng, Nomura, related to PC demand. What's the PC demand outlook into Q4 2024 and 2025, and what's your view compared to 3 months ago?

[Yee-Wei Huang, executive]

Well, industry pundits forecast that PC demand for the entirety of 2024 will marginally surpass that of 2023 at best. This projection has remained consistent since the start of the year and has not changed over the past 3 months. As previously noted, year-to-date PC shipments stand at approximately 193 million units, according to IDC, mirroring last year's figures for the same time frame. Consequently, it is expected that PC shipments in the fourth quarter will either be at best comparable to, or slightly lower than those of the corresponding period last year. Meanwhile, IDC projects a modest 4.3% year-over-year growth in the PC market for 2025, and we believe it's a good reference.

[Operator]

A following-up question related to PC from Sunny Lin, UBS. How should we think about the dollar content increase driven by AI in PC? And based on your engagement with PC OEMs, what are some of the new applications that could be pushed, and what are their product planning?

[Yee-Wei Huang, executive]

Well, most modern PCs are equipped with a CPU and GPU, each incorporating some level of AI acceleration capabilities. However, a common definition of an AI PC stipulates the inclusion of a Neural Processing Unit, NPU. Another definition encompasses 3 core components, a copilot key, the ability to run copilot offline, and a dedicated NPU.

Yet another report suggests that there is also an NPU requirement of 45 TOPS tera or trillion operations per second for an AI PC. Each of these definitions contributes to the increased dollar content of an AI PC. It should be noted that the above definitions largely reflect the perspectives of Intel, AMD, Qualcomm, and Microsoft. Beyond CPU, GPU, and NPU, additional supporting hardware and software are essential to make an AI PC functional and beneficial.

For instance, an increased number of memory chips is crucial. Furthermore, an AI PC that processes only text-based information may not meet user expectations. Therefore, it is logical to equip an AI PC oftentimes through adding peripherals with enhanced audio and video capabilities to enable interaction through sound and vision.

Higher bandwidth, wired or wireless connectivity is also necessary to ensure smooth streaming or transmission of multimedia data. These enhancements present opportunities for Realtek solutions and contribute to the overall dollar content. Realtek is notable for its in-house audio, video, and connectivity solutions.

Additionally, it is important to recognize that PC OEMs make general-purpose computers, and an AI PC maintains this versatility. With a powerful GPU and NPU, it can efficiently process complex graphics and large-language models. This makes an AI PC well-suited for advanced applications such as sophisticated immersive gaming, real-time text-to-speech, speech-to-text conversion, and real-time translation. These applications will be developed by third-party software developers, not by PC OEMs themselves.

[Operator]

The next is a question from Jih Sun Investment, regarding the development of the AI-enabled camera for PC. Please elaborate the ASP expansion benefits to our business and the adoption rate of the customers.

[Yee-Wei Huang, executive]

For the AI-enabled camera PC, the ASP does have a significant jump compared to a regular camera. And Realtek has been shipping this customer-designed in on our AI camera. We anticipate our camera business to have a pretty good growth in the coming year, and the adoption rate currently is rising. You can all anticipate the new generation of AI. Many of them will be equipped with Realtek AI-enabled cameras.

[Operator]

Okay. The next question is from Wei Lun Yang, JP Morgan, related to networking projects. Have you seen more meaningful spec upgrade trends in networking projects in the second half of '24 or 2025? If yes, what are the upgrades?

[Yee-Wei Huang, executive]

By networking projects, I assume you are referring to telecommunication tender projects. The ongoing specification upgrade for these projects worldwide encompasses many PON advancements from 2.5 gig to 10 gig and to 25 gig, 50 gig, 100 gig in the coming years, as well as Wi-Fi enhancements from Wi-Fi 5 to Wi-Fi 6 and eventually to Wi-Fi 7. The pace of these upgrades varies by region and has generally been slower than anticipated due to current macroeconomic conditions. We expect upgrade process to gain momentum in 2025.

[Operator]

The next question is from Lucas Liu, KGI, related to PON market. Given the expansion by India's networking operators and the U.S. shift from copper networks to fiber, how should we think about the additional TAM in the PON market? What opportunities do we have in this market?

[Yee-Wei Huang, executive]

We estimate that the global total addressable market or TAM for PON technology in 2024 will be approximately 150 million units, with over 60% of these demands originating from China. In the following year, we anticipate the TAM will increase to 160 million units, maintaining a similar distribution in China. The PON market is currently serviced by a limited number of players, including those from China and the United States.

Geopolitical tensions have restricted market access for solutions from both China and the U.S. in different places, thereby creating additional opportunities for Realtek. Notably, Realtek has pioneered the introduction of 25 gig PON technology, which is designed to integrate seamlessly with existing infrastructure. This innovation offers a cost-effective upgrade path from the 10G PON within the next 2 to 3 years. Furthermore, Realtek can capitalize on potential opportunities related to PONs, such as routers, multi-gig Ethernet, and Wi-Fi.

[Operator]

The next is a question related to Wi-Fi from Brad Lin, Bank of America. Does Realtek see Wi-Fi 7 penetration accelerate post-iPhone 16 launch? Did the AFP come further down for Wi-Fi 7, 6C, and 6? What's the ASP ratio in fourth quarter?

[Yee-Wei Huang, executive]

Well, we will address this question by examining the usage of Wi-Fi technology in PCs and routers. Firstly, it is observed that the introduction of the iPhone 16 has not significantly accelerated the adoption of Wi-Fi 7 in PCs or routers. However, considering that the iPhone 16 has only been available for slightly over a month, it is prudent to continue monitoring this trend closely.

Currently, approximately 70%-80% of both PCs and routers are equipped with Wi-Fi 6, while less than 5% are anticipated to have Wi-Fi 7 capability by the end of the year. The prices for these technologies remain relatively stable in the third quarter compared to the second. The primary reason for the sluggish adoption of Wi-Fi 7 is a substantial price difference, with Wi-Fi 7 still cost him at least double that of Wi-Fi 6?

[Operator]

Another Wi-Fi 7 question addressed by Daniel Yen, Morgan Stanley. On Wi-Fi business, do we feel price pressure in terms of Chinese competition? How's customers' feedback on our new Wi-Fi 7 products?

[Yee-Wei Huang, executive]

The price pressure in China is unbelievably high, with a relentless pursuit of lower prices without limit. However, such competition primarily targets entry-level products with basic specifications. Regarding Wi-Fi 7, the current competition in China remains minimal, concentrating on specific configurations for specific market segments. This competitive landscape is expected to remain unchanged due to the very high technology entry barriers associated with Wi-Fi 7.

The market demand for Realtek Wi-Fi 7 has surged dramatically since the formal launch of the Wi-Fi Certified 7 program early this year. Realtek solutions are recognized as enablers for the mass market. Presently, numerous PC and router manufacturers are actively developing their products using Realtek Wi-Fi 7. The ascendance of Realtek Wi-Fi 7 in the market appears inevitable. It is important to know that Wi-Fi 7 specification is highly sophisticated.

Currently, we are witnessing the initial wave of Wi-Fi 7 implementations focusing on specific configurations. In due time, Realtek will offer the most comprehensive product portfolio, supported by unparalleled customer service, to cater to diverse market segments and applications. This tried-and-true strategy will continue to meet market and customer demands effectively.

[Operator]

The next question is from Kevin Wang, Mizuho, related to auto. What percentage is the current sales contribution from automotive? Do you expect strong growth for your automotive business? Other than Ethernet, do you see any additional automotive product lines to contribute meaningful sales in 2025?

[Yee-Wei Huang, executive]

Well, as shared during our second quarter earnings call, automotive Ethernet has emerged as a significant product line for Realtek. We anticipate that automotive Ethernet will continue to outpace the corporate average in growth over the next few years.

In addition to Ethernet, several of our other product lines, Audio DSP for example, are making their way into the automotive sector. It is important to know that the ramp-up of our automotive business will occur gradually.

[Operator]

Another question on automotive Ethernet business from Jason Zhang, CLSA. Who are your major clients now? Can we expect there is back migration leading to a higher ASP? How's the completion with Broadcom and Marvell in this area?

[Yee-Wei Huang, executive]

Well, Realtek automotive Ethernet clients are distributed evenly globally, encompassing major automotive OEMs and Tier 1 suppliers in Japan, Korea, China, Europe, and North America. As automotive Ethernet emerges as the preferred in-vehicle network, it mirrors the evolution of IT Ethernet in 3 significant aspects; higher speed, lower power consumption, and optimal speed configuration alignment with specific applications.

Historic trends indicate that a gradual, a bit modest, increase in ASP. More crucially, as vehicles advance towards higher levels of autonomous driving, there arises a need for more sophisticated in-vehicle networks with enhanced safety and security capabilities. This trend almost ensures the adoption of an increasing number of automotive Ethernet controllers and switches equipped with advanced management features, thereby boosting the dollar content of automotive Ethernet in a car.

Regarding competition, Realtek along with Broadcom and Marvell stands as one of the most seasoned and formidable contenders in the industry. We are confident that over time, Realtek will outlast its competitors as we have accomplished in the IT Ethernet market.

[Operator]

The next question is from Sunny Lin, UBS, regarding TV. What's your forecast on TV shipment in second half '24 after a strong second quarter with many sporting events? Also, could you elaborate more on the competitive landscape of TV SoC, particularly for China market?

[Yee-Wei Huang, executive]

Well, with the conclusion of major sports events, TV shipments have begun to decelerate as we enter the later half of the year. Although, there has been a slight uptick in demand following China's announcement of an economy stimulus package in September, this is unlikely to significantly alter the overall downward trend for the rest of the year.

In the context of competitive landscape, the leading players remain the 3 Taiwan-based TV design houses, including Realtek. It is important to note that TV solutions are increasingly becoming platform-based applications. The winning solutions will be those built on OS platforms with broad support from content providers and advertising channels. Our strategy is to secure a solid position on selected major OS platforms, and we are on the right track to accomplish so.

[Operator]

The next question is from Jason Zhang of CLSA. Any new project or product for server or data center? Do you have optical switch-related products? Up to what speed can your product provide for the connection?

[Yee-Wei Huang, executive]

Currently, Realtek does not offer products specifically designed for servers or data centers. However, we are in various stages of developing solutions. Some are optical-based, tailored for server applications. As this initiative is still in its early phases, it is premature to provide detailed information at this time.

[Operator]

Another question raised by Jason, CLSA. How should we plan in new technologies such as CPO or silicon photonics?

[Yee-Wei Huang, executive]

Well, the R&D Center and the Central Technology Centers, alongside with relevant BU and Realtek, are actively investigating and monitoring progression of silicon photonics and co-packaged optics technologies. We are committed to integrating these advancements into our operations as and when requirements emerge, ensuring our solutions remain at the forefront of innovation.

[Operator]

The next question is from Wei Lun Yang, JPMorgan. USB4 retimer opportunities in terms of penetration platform adoption by AMD, Intel, and ARM. What's Realtek's competitive edge in this market and potential market share?

[Yee-Wei Huang, executive]

Well, of the 3 platforms mentioned, Intel appears to favor using its own USB4 retimer. Non-Intel USB4 retimers are generally found on platforms such as AMD and ARM. Realtek's USB4 retimer solution is currently available in the market and we are actively promoting it to our customers. It is important to note that USB4 requires the use of the USB-C connector and supports both video pass-through and power delivery. USB4 product developers often encounter engineering challenges related to power delivery and video application.

Realtek addresses these challenges with a comprehensive USB4 solution that includes USB4 controllers, USB4 power delivery, USB4 retimers, and USB4 routers and video hubs. This gives us a significant competitive edge in serving our customers.

[Operator]

The next is a question on competition. Bruce Lu, Goldman Sachs would like to ask, what's the pricing trend into 2025? Are we seeing more intensified competition from local China vendors? Which products are we facing more pricing pressure and what's our strategy to mitigate this?

[Yee-Wei Huang, executive]

Well, as mentioned in our discussion on growth margin, pricing trends can be quite complex. Ideally, consumers gravitate towards the lowest priced option when all else is equal. But in reality, numerous factors influence purchasing decisions. Every product in the market seeks to differentiate itself, offering customers diverse choices at varying prices. We know that mature products or those with basic specifications often face intense price competition in China. This trend is expected to persist and potentially intensify.

Additionally, in response to current geopolitical tensions, there is increasing collaboration among Chinese companies in selecting semiconductor solutions. Consequently, a strategy focused solely on price is not sustainable in the Chinese market.

At Realtek, our goal is to transition our product portfolio toward mid to high-end offerings. We aim to lead the market in this direction, particularly at a time when global connectivity and advanced man-machine interfaces are more crucial than ever. Realtek stands out as one of the few companies capable of providing seamless machine-to-machine connectivity and intuitive man-machine interfaces with in-house solutions.

[Operator]

The next question is from Brad Lin, Bank of America, on talent acquisition and retention strategy. Eyeing on the business expansion, what is Realtek's strategy for talent acquisition and retention, particularly in a highly competitive semiconductor industry?

[Yee-Wei Huang, executive]

Well, at Realtek, human capital is regarded as our most valuable asset. Consequently, talent acquisition, retention, and development are consistently highlighted as significant sustainability issues in our annual ESG report, including for 2023. Beyond offering competitive benefits and compensation, we are committed to upholding a policy of diversity and equal opportunity, alongside providing ongoing professional education and training.

Realtek fosters a nurturing environment that empowers Realtek employees to grow and excel collectively, underpinned by the culture of self-confidence and trust in people. From my observation, I have yet to encounter another organization, whether it be a Fortune 500 company or a Silicon Valley startup, that boasts such a high rate of repatriation. Employees will return to Realtek after exploring other opportunities outside. At Realtek, our workforce operates as a cohesive unit, driving innovation and growth. This familial approach is integral to our strategy for attracting and retaining top talent.

[Operator]

Due to the time constraint, 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 reply will be available on the IR page of the company website before 6 PM. Thank you, and have a good afternoon.