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Realtek Semiconductor Corp
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Good afternoon, everyone. Welcome to Realtek 2020 Fourth Quarter Earnings Call. This call will be chaired by Realtek spokesman, Yee-Wei Huang.
The presentation will be available on the company's website before 6:00 p.m. today.
At the beginning, our spokesman will report our fourth quarter results and give the management's remarks. After that, we will have a Q&A session. [Operator Instructions] During the call, you can browse through the pages of the presentation anytime.
Now I will pass the call to our spokesman, Yee-Wei.
Good afternoon, ladies and gentlemen on the line. You are listening to the Fourth Quarter 2020 Webcast Earnings Release By Realtek Semiconductor Corp.
So this is the first earnings call we have online. It also marks a full year of Realtek online earnings call since the fast spreading of COVID-19 in early 2020. We wish everyone staying healthy and wish we will meet in-person sometime this year.
Also, we would like to take this opportunity to wish everyone a very bullish year of the bull, which will start on Friday next week, on February 12.
Now let me turn your attention to Realtek fourth quarter operational results. On revenue, Realtek delivered a top line revenue of TWD 22.1 billion. This is a small 1.42% Q-over-Q drop, but a significant 32.4% increase compared to the same period in 2019. The small Q-o-Q drop reflected the year-end shipment control in light of the supply constraints. Otherwise, the demand remained strong in Q4.
Also, the demand of the PC-related products remained strong in the fourth quarter. Nonetheless, the non-PC segment outgrew the PC segment by a small margin in the fourth quarter, resulting in a PC-non-PC split of 30-70 as opposed to 31-69 in the third quarter.
Q4 gross margin was 43% compared with 41.4% in Q3 and 43.9% in Q4 2019. The gross margin is staying within our historic range as expected. It fluctuated from quarter-to-quarter due to variations in product mix.
Q4 operating expense was TWD 6.84 billion or 31% of revenue. A small increase in OpEx compared to Q3 in terms of the percentage to revenue was anticipated as a normal seasonal fluctuation.
Q4 operating profit was TWD 2.65 billion or 12% of revenue. This is a small improvement over third quarter due to better gross margin.
Q4 non-op income was TWD 139 million. Realtek finance continued to manage well in spite of unfavorable foreign exchange rate for the NT dollar in 4Q.
Q4 net profit was TWD 2.63 billion or 11.9% of revenue. This is a 0.7 percentage point increase quarter-over-quarter.
So this leads to the EPS, as a result, was TWD 5.15. This is better than TWD 4.91 in Q3 and TWD 3.23 in Q4 2020.
Regarding inventory. Q4 inventory turnover day was at 60 days compared with 62 days in Q3. The continuing reduction in inventory is a reflection of continuing market demand and continuing supply constraints.
So with that, let's go through Realtek's 2020 full year operational results. We will quickly run through the numbers for each quarter. We have explained the results for individual quarters. So overall, 2020 revenue was TWD 77.8 billion, a strong 28% Y-o-Y growth, delivering another year of record high revenue. And 2020 gross margin was 42.8% compared to 43.4% in 2019.
2020 operating expense was TWD 24.6 billion or 31.7% of revenue compared to 33.3% in 2019.
2020 operating profit was TWD 8.64 billion or 11.1% of revenue, an improvement over the 10.4% in 2019.
2020 non-op income was TWD 717 million compared to TWD 905 million in 2019.
2020 net profit was TWD 8.79 billion or 11.3% of revenue compared to 11.2% in 2019.
As a result, 2020 EPS was TWD 17.24, better than TWD 13.36 in 2019.
We also have the balance sheet and cash flow statement for you -- for your perusal and your convenience online.
So this concludes Realtek's 4Q and 2020 financial reports.
Forward-looking, we see that, continuing the momentum in Q4 2020, the demand in 1Q 2021 remains steady. Nonetheless, we still need to pay close attention to the output capacity in the semiconductor supply chain and changes in the COVID-19 pandemics.
Now let's run down the 5 top product lines at Realtek for 2021. Ethernet outlook is strong as driven by work from home, upgrade in network infrastructure and continuing demand in securities, surveillance, IP cam and LED public displays. Technology migration to 2.5-gigabit Ethernet further contributes to the growth.
On Switch, it's driven by Wi-Fi 6 deployment and continuation of work from home. We are facing steady demand growth in switches.
On WiFI, in addition to [ need ] of work from home and Wi-Fi 6 technology migration, we are also seeing continuing expansion of consumer and IoT applications.
On Bluetooth, TWS is expected to regain growth in 2021 with an expansion in the deployment of the ANC features. Also significant are the new opportunities in BLE, Bluetooth Low Energy, SoC for remote controllers, wearables, toys and many new applications as well as BT NIC for expanding applications to pair with Wi-Fi 6.
On TV, we expect Realtek TV SoC to perform at about the same level as 2020. While the overall TV market may drop slightly in 2021, the supply capacity and the price of panels and DRAM may affect the final results.
Last, but not the least, we note a few product lines that we expect to grow steadily in 2021, although they are still small compared to the major product lines. Examples are PON, Automotive Ethernet 5 and switches as well as set-top box SoCs. Thank you.
Thank you, Yee-Wei. Now we are entering the Q&A session. [Operator Instructions]
Now the first question is from Crédit Suisse, Randy. His question is related to supply tightness and own inventory. How is Realtek's own inventory days at the end of fourth quarter 2020? And do you expect that to start to increase by the end of first quarter? How much are you falling short of demand, if at all?
Well, we've had inventory turnover days, as we reported, drop further to 60 days in fourth quarter from 62 days in the third quarter. We do not expect the inventory to increase in first quarter as we see supply overall is still clearly behind demand in the first quarter.
The second question is from Morgan Stanley, Daniel. He has a couple of questions. Last time, you mentioned that Realtek is trying to do the foundry diversification. Could you share the progress now? And can we expect quarter-over-quarter improvement in 2021?
And the second question is, what is your view of the fourth quarter revenue quarter-over-quarter?
Okay. So foundry diversification is a work in progress. It should be noted that to qualify a new foundry is a work that takes time. So we are making progress. But from the beginning, we are not expecting this is something to deliver results short term. This is more of a mid, long-term preparation -- planning.
And this year, we have secured the capacity to ensure growth. We do expect 2021 to be another growth year for Realtek. We do believe we have secured capacity to support that. And whether the capacity will increase quarter-by-quarter, I would say that's also work in progress.
And the demand, whether the demand -- how long will the demand continue and whether we are seeing making any forecast of Q1 revenue, we do not comment quantitatively. But qualitatively, as we say, we do see the demand trend in first quarter pretty much is a carryover and a continuation of what we see in the fourth quarter. And in terms of supply tightness, it's also a continuation of the last quarter. That will be what we can share at this time.
Thank you. The next question is raised by Kevin, Mizuho. He would like to ask about our view on 2021's margin, both the gross margin and operating margin. Do we see better product structure this year compared to last year?
Okay. So we still target in maintaining our gross margin within our historic range. So for operating margin, we expect to deliver at least at the current level.
And in terms of our product structure, it's almost a living thing changing over time. Contrary to 2020 where Bluetooth was the lagger and TV SoC a leader in sales, for this year, we reported that TV is expected to be flat in terms of growth this year, while the growth may be led by WiFi and Bluetooth as the frontrunners.
Okay. Thank you. The next question is from Bruce, Goldman Sachs. His question is about our initial view of 2021. Given the strong consumer replacement cycle for the last year and what we are seeing now in consumer demand, is it possible for a much weaker second half 2021?
It appears that the impact of COVID-19 may not go away anytime soon. We expect consumer demand will continue in the foreseeable future. Additionally, know that the market has been suppressed by supply constraint for a while, thereby creating a sizable demand backlog, which may bleed through the second half this year. So overall, there may not be a dramatic turnaround in consumer behavior, but we still need to pay close attention to the market development.
The next question is from Aaron, Nomura. Similar to the consumer [ reversed ] market, he would like to ask about the demand from work on home. Does Realtek see continued strength into the second -- the first half of 2021 and even on the second half 2021?
Well, for now, we can only be certain that work from home will sustain in the first quarter. Nevertheless, the effect of work from home goes beyond the demand for PC notebook and home routers. It is actually one of the drivers for the industry-wide infrastructure upgrade, which will last longer than the normal consumer seasonality cycle.
Okay The next question is from UBS, [ Sunny ]. First question is that the tightness on industry supply are serving your product migration to Wi-Fi 6, given the higher ASP and margin. What's your target on the penetration of Realtek year-on-year and the latest ASP comparison versus Wi-Fi 5 industry with some of your peers like MediaTek being more aggressive on Wi-Fi 6 and beyond? Are you seeing more competition in this area?
Let me think. The penetration of Wi-Fi 6 is maintaining its technology migration path. For example, we observed a Wi-Fi 6 in PC notebook may grow from less than 20% in 2020 to more than 30% in 2021. In home routers, it may grow from less than 15% in 2020 to greater than 30% in 2021.
The ASP for Wi-Fi 6, now there is still more than double of that of Wi-Fi 5.
In terms of competition, we see aggressive behavior from competitors as always. Nevertheless, Realtek is confident that we are very competitive against any players in the market segment at which we are targeting. We see Wi-Fi 6 to be the main growth driver for Realtek's WiFi business in the next few years. And our Wi-Fi 6E solutions will be ready this year at about the same time compared to our competition.
Thank you. The next question is from Randy, Crédit Suisse. This question is related to TWS. What percent of your mix is ANC TWS? And how is your market share on ANC now versus the earlier-generation products? And how well are you seeing the price premium around $2 or more hold up? What do you think the market growth is in 2021?
Our comment will be outside of Apple. So the ANC penetration was low outside of Apple in 2020. We estimate that to be less than 10%. And Realtek expects to see our TWS resume growth, for that matter, the market or whole industry growth in 2020. We will place our emphasis or priority to the development of ANC and brand penetration. And we target ANC penetration to reach at least 15% to 20% this year.
And the ASP of ANC TWS today at the silicon level is still at least double. At the product level, it could go as high as 4x difference there. So this is indicative of the technology barrier of ANC. So we believe the price premium will hold up in the foreseeable future. And today, to the best of our knowledge, many TWS products still have yield issue. But we have accumulated quite a bit of experience with our customers. We believe we will take a strong position in the TWS market this year.
Okay. The next question is from Rick, Daiwa. His question is about the outlook of telecom projects this year. Will this year be stronger given the Wi-Fi 6 upgrade and some project delay due to the COVID-19 last year?
So consistent with the need for better connectivity for work from home, telecom tender projects are expected to be strong on a global basis in 2021. Specifically, 2.5G PON is still the mainstream in China and emerging markets such as Southeast Asia and South America. And you will reach worldwide TAM of about $110 million to $113 million in 2021.
While 10G PON is growing fast in Europe and U.S., and of course, China is also a big market. Together, the 10G PON market may reach $15 million TAM this year.
Also telco operators are rolling out mesh routers for better home experience and Realtek WiFi, both 5 and 6, have good design wins in PON and mesh routers.
Okay. Thank you. The next question is raised by Brian, CLSA. The TV demand recovery looked stronger in the second half 2020. What's Realtek's assumptions on TV market this year and the target for this year. And for next year, how do you balance your TV shipments and margin?
Well, TV market, we have said we expect to remain flattish this year. But the market, we believe, will slightly drop 3% to 5% in 2021.
So everything equal, we continue to do cost improvement. In addition, we continue to improve -- we continue to provide new value-added features. Thank you.
Thank you. The next question is from Richard Chen, AIA Taiwan. He would like to ask, could you share the content upgrades and ASP potential in each segment for Realtek?
Each segment, yes. So we have touched a few things. WiFi is the upgrade. Wi-Fi 6 price difference, we talked about Bluetooth with ANC. We talk about Ethernet with 2.5-gigabit Ethernet. And also, in terms of Managed Switch, continuing expansion and 2.5G PON and 10G PON. So those are upgrade of the GPON in the past. So those are examples of upgrading different segments.
Okay. The next question is from [ Martin ] of Fubon. He would like to ask how does the capacity shortage in auto market impacts Realtek's auto-related business. And at the same time, do we see new opportunity?
The -- well, Realtek Automotive Ethernet product line is expected to see strong CAGR from this year at least up to 2024. As we speak, we continue to uncover more 2024 projects and we are working on it. Currently, the automotive industry is badly hit by shortage in both wafer supply and OSAT capacity. Since Realtek Automotive business' scale is still relatively small at the present time, we expect no problem to achieve our growth goal in 2021 through operational optimization.
And in terms of new opportunities, in addition to traditional car vehicles, some nonconventional platform developers are proposing new solutions for next-generation vehicles. Realtek is participating in those discussions with those newcomers. Thank you.
Thank you. The next question is from Bruce, Goldman Sachs. Regarding Ethernet switch, what are the market migration trends we are seeing? Do we sense more opportunities from China in the near term?
Right. The trend for the market segment we play in, the consumer small/medium business switches, the trend is to about 4.5-gigabit Ethernet. And this is expected to be a global trend and paired nicely with Wi-Fi 6. And also for Managed Switch, Realtek have new design wins from multiple customers and we are expecting to see ramp-up this year. Thank you.
Thank you. The next question is from Edward Su, Grand Alliance. Have we secured the capacity for longer term? And how often do we negotiate price with our foundry partners and outside partners?
Well, Realtek is making ongoing efforts, those are work in progress, to expand Realtek supply capacity in long-term planning. We place priority on foundries with expanding capacity and process migration capabilities. And we also invest engineering resource to pick up new foundries that we have not used before.
And in terms of price discussion, normally it's annual price discussion usually held in the middle of the year for the coming year. But nowadays, we may discuss more often on a needed basis when our customer raise their demands.
Okay. The next question is from [ Warren, Prudential ]. How's the order visibility we are seeing now? And how does the company allocate the strong demand from every front?
We do see strong orders. But visibility, as we always say, we usually -- it is a reliable one, pretty much only 1 month. Having said that, nowadays with orders coming from every direction, at times, we do need to make some decision. And our decision usually, in addition to what you may think, we do care about price margin. But we care and emphasize even more on long-term partnership and strategic marketing position in our allocation.
Okay. Thank you. The next question is a follow-up question from Kevin Wang, Mizuho. The demand momentum continues into the first quarter of 2021, but the supply remains tight. Could we expect sales to grow quarter-over-quarter in the first quarter after affecting the supply tightness?
Again, we can only comment that big picture-wise, it's carrying what we see in the first quarter is pretty much a continuation or bleed over from the fourth quarter. So that includes both on the demand side and on the supply constraint side. But the end, the final result, we have to hold on until the end. So we would not predict the end result of the first quarter prematurely. Thank you.
Okay. Thank you. The next question is from [ Chen Hang Dai ], [ Taiwan Insurance ]. His question is about the growth drivers for 2021, could you rank the growth of our top 5 product lines?
I think we did mention this year that TV will be pretty much at about the same level of last year, meaning it's kind of flattish. We also mentioned this year, the leader may be WiFi and Bluetooth. So I guess that lets the other pool in the middle. So I guess that answers your question. Thank you.
Thank you. The next question is from [ Raymond Koh ], [indiscernible]. He has 2 questions. The first one is, are there any products in PC field due to the foundries' insufficient production capacity leading a decline in the market share?
And the second question is, will foundry and OSAT have sufficient production capacity in 2021 and will it limit the company's growth momentum?
Okay. For any particular product, PC field or not, [ quite a reversed ] market share because of insufficient supply capacity, we do not comment on market share. But we will say that earlier we believe we say in terms of by authorization in light of supply constraint, other than price margin, we place even more emphasis on long-term partnerships with our customers. So that's to say that most of the PC customers are in this category. They are long-term partners.
And foundry and OSAT, their capacity overall, I think we have comment that, overall, they are still falling behind of the demand. But as we say, we have believed that we have at least secured the portion that give us the comfort to say we believe this year will be still a growth year. Thank you.
Okay. Thank you. The next question is raised by an individual investor, [ Kevin Chang ]. He has a few questions. The first one is that do we have any plan to join MIH league?
And the second question is, do we have any plan to acquire some companies like our peers?
And the third question is, do we have any chance to get more capacity in 2021?
Right. In terms of MIH, I will only say they are one of the nonconventional newcomer trying to promote automotive platform solutions. And we have commented earlier that there are several platforms, nonconventional platform provider trying to enter the automotive market. It's suffice to say that we are in discussions in all of those.
And in terms of acquisition, it is one of the same. We constantly pay close attention to opportunities, although we do -- still do not have anything to report.
And in terms of getting more capacity, it is -- other than saying they would deliver, at least we have some [ verified ] capability to support our growth goals. We also say part of our mid-, long-term planning and also in response to customers' ever increasing demand, trying to get more capacity is an ongoing work in progress. Thank you.
Okay. Thank you. The next question is a follow-up question from Morgan Stanley, Daniel, about the Chromebook. As we saw that the Chromebook has been growing strongly in last year and expect to have a continuous growth this year, so he would like to know what is the content per box difference between the Chromebook and traditional notebook for Realtek?
Short answer, not a whole lot difference. The difference between Chromebook and notebook are more on CPU, panel and OS. And in terms of peripherals, in general, not a whole lot difference. So for Realtek, they are pretty much treated as same in terms of design win opportunities.
Okay. Thank you. The next question is from [ Li Shing Cho ] from [indiscernible]. His question is about the shipment status of our Wi-Fi 6 chips. What percentage does it stand for currently? And what is our expectation for the full year this year?
We do not comment on percentage of particular product line or even sub-subproduct line within the sub-product line. So -- but we will comment that WiFi, overall, is a top product line. And we just comment that it is an important driver or even frontrunner for this year among the frontrunners in terms of growth driving. And Wi-Fi 6 within WiFi, we have also just commented that it is important to drive the growth of WiFi in the coming years. Thank you.
Okay. Thank you. I think we will take this last question from [ Yong Jung Chang ], [indiscernible]. Because we have mentioned the 2.5-gig Ethernet for a while, so can we ask about what's the percentage of the revenue contribution it already accounts for? And what is the 2.5-gig penetration in the market? And what's the difference of ASP compared to the 1 gig?
Yes, 2.5-gig Ethernet has been in progress for a few years and now we see the momentum gaining, but we will not comment on the split on subproduct line or sub-subproduct lines. But we will say in terms of overall penetration of 2.5 gig into, let's say, the PC notebook market, this year, overall, it will be still in probably the 10% or less. But bear in mind, we are talking about 300 million all PC notebook altogether.
Okay. Thank you. Due to the time constraints, 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's website before 6 p.m.
Thank you, and have a good afternoon.