MediaTek Inc

TWSE:2454

Earnings Call Analysis

MediaTek's Strong Q2 2024 Performance and Future Outlook

In Q2 2024, MediaTek reported revenue of TWD 127.3 billion, a 29.7% increase year-over-year, despite a 4.6% sequential decline. The gross margin increased to 48.8%, exceeding expectations due to a better product mix. Although operating income dropped 22.4% sequentially, it surged 69.2% year-over-year. CEO Lih Tsai highlighted the strategic growth driven by 5G, WiFi 7, and AI adoption. MediaTek expects Q3 revenue to range between TWD 123.5 billion and TWD 132.4 billion, with gross margins around 47%. For 2024, the company predicts mid-teens percentage revenue growth and gross margins between 46% and 48%, eyeing significant growth opportunities in the AI and IoT sectors.

Financial Performance Highlights

MediaTek's second quarter of 2024 delivered a mixed bag of results. Revenue stood at TWD 127.3 billion, which was up 29.7% year-over-year but down 4.6% sequentially【4:1†source】. The dip in sequential revenue primarily reflected a normalization post-pandemic rather than any structural issues. Gross margin remains robust at 48.8%, an increase from 47.9% in the same quarter last year and slightly exceeding the company's guidance, thanks to a favorable product mix【4:1†source】.

Future Revenue Guidance

For the third quarter, MediaTek projects flattish revenue across all three major revenue groups, with a guidance range of TWD 123.5 billion to TWD 132.4 billion, representing a cyclical decline of 3% to an increase of 4%【4:3†source】. Full-year 2024 guidance remains robust, with revenue growth expected in the mid-teens and gross margin stable between 46% and 48%【4:3†source】.

Mobile Segment Insights

The mobile segment registered substantial growth with revenue climbing 52% year-over-year but declining 15% sequentially【4:11†source】. MediaTek's long-term outlook for mobile remains healthy, driven by the upcoming launch of its flagship Dimensity 9400 SoC, which promises a significant performance leap with ARM's v9 architecture and AI optimizations. The company remains confident in achieving more than 50% revenue growth in this segment for 2024【4:12†source】.

Strength in Smart Edge Platforms

The Smart Edge Platforms segment, which includes connectivity and computing solutions, grew by 11% year-over-year and 12% sequentially, crucially contributing 40% to the total revenue【4:11†source】. This growth is driven by new project awards in WiFi 7 and 10G PON technologies. For the next quarter, MediaTek expects this segment to remain stable with moderate growth in computing applications【4:11†source】.

ASIC and AI Accelerators Progress

MediaTek is staking a lot on its AI and ASIC capabilities. CEO Dr. Rick Tsai emphasized the importance of AI in driving future growth, highlighting the company's advances in AI accelerators and the flexible ASIC business model that aims to meet the customized needs of data center companies【4:0†source】【4:2†source】. The ASIC business is on track to contribute to revenue from the second half of 2025, and MediaTek continues to secure new design wins in this domain【4:6†source】.

R&D and Strategic Investments

MediaTek is heavily investing in R&D to stay ahead in the market. They have onboarded new talents and are shifting resources towards AI-related developments【4:17†source】. The R&D spending is expected to slightly increase as a percentage of revenue but is deemed essential for achieving long-term growth objectives.

Automotive and NVIDIA Partnership

MediaTek's strategic partnership with NVIDIA is progressing well. The first collaborative chip is on schedule to be launched early next year【4:10†source】. Besides automotive, both companies are exploring collaboration opportunities in data centers, indicating a significant diversification potential for MediaTek.

Challenges Ahead

The company is cautious but optimistic about the fourth quarter and beyond, aiming to navigate a challenging environment marked by wafer cost increases from TSMC【4:18†source】【4:19†source】. However, MediaTek believes it can maintain its gross margins through effective cost pass-through strategies.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome everyone, to the MediaTek 2024 Second Quarter Investors Conference Call. Financial results and presentations for today's call are available on the investor section of the company website at www.mediatek.com. Now I would like to turn the call over to Ms. Jessie Wang, Deputy Director of Investor Relations. Ms Wang, please go ahead.

[Jessie Wang, executive]

Good afternoon, everyone. Joining us today are Dr. Lih Tsai, MediaTek CEO; and Mr. David Ku MediaTek's CFO. Mr. Ku will report our second quarter results, and then Dr. Tsai will provide us with the remarks. After that, we will open for Q and A.

As a reminder today's presentation will provide forwarding looking statements based on our current expectations. The statements are subject to various risks and factors which may cause actual results materially different from the statements. The presentation material supplement TIFRS financial interest. Earnings distribution will be made in accordance with financial statements based on TIFRS. For details, please refer to the safe harbor statement in our presentation slides. In addition for content provided in this teleconference are for your reference only not intended for investment advice. Neither MediaTek, nor any of independent providers is responsible for any actions taken in reliance on content provided in today's call.

Now I like to turn the call to our CFO, Mr. David Ku, for the second quarter financial results.

[David Ku, executive]

Thank you, Jessie. Good afternoon, everyone. Now let's start with the 2024 second quarter financial results. The currency used here is all in NT dollars. Revenue for the quarter $127.3 billion down 4.6% sequentially, and up 29.7% year-over-year.

Gross margin for the quarter was 48.8% down 3.6 percentage point from the previous quarter, and up 1.3 percentage point from the year ago quarter. The quarter-over-quarter change in gross margin was mainly attributed to a one-time item in the first quarter. Excluding the one-time item, our second quarter gross margin improved from 47.9% in the first quarter to 48.8% in second quarter.

Operating expense for the quarter were $37.2 billion compared with $37.7 billion in the previous quarter and $31.9 billion in the year ago quarter.

Operating income for the quarter was $25 billion, down 22.4% sequentially, and up 69.2% year-over-year. Non-TIFRS operating income for the quarter was $25.3 billion. Operating margin for the quarter was 19.6%, down 4.5 percentage point in the previous quarter, and up 4.6 percentage points year-over-year. Non-TIFRS operating margin for the quarter was 19.9%. Net income for the quarter was $26 billion down 18% sequentially, and up 62% year-over-year. Non-TIFRS net income for the quarter was $26.2 billion.

Net profit margin for the quarter was 20.4% decreased 3.3 percentage points from the previous quarter, increased 4.1 percentage points year-over-year. Non-TIFRS net profit margin for the quarter was 20.6%.

EPS for the quarter was $16.19, down from $19.85 in the previous quarter, and up from $10.07 in the year ago quarter. Non-TIFRS EPS for the quarter was $16.36.

A reconciliation table for our TIFRS and non-TIFRS financial management is attached in our press release for your reference. And that concludes my comments. Thank you.

[Jessie Wang, executive]

Thank you, David. And now I would like to turn the call to our CEO, Dr. Rick Tsai for further remarks.

[Lih Shyng L. Tsai, executive]

Good afternoon, everyone. MediaTek had delivered for the second quarter results with revenue TWD 127.3 billion coming in at around the midpoint of the guidance range, and gross margin of 48.8% exceeding the high end of the guidance range due to a better product mix.

For the first half of the year, our revenue registered TWD 250.7 billion which grew 35% year-over-year, driven by increasing adoptions of 5G, WiFi 7 and AI across products. MediaTek's commitment to technology leadership and strong execution has strengthened our global position and facilitated our strategic expansions to capture opportunities for the mid- to long-term growth. For example, numerous opportunities are fueled by the AI mega trend which is unfolding rapidly, both at the edge and in the cloud. For data center companies, there are strong needs to customize chips in order to minimize total cost of ownership. We are able to address their needs through our flexible ASICs business model, by providing our leading 112G and 224G SerDes IP on top of our strong capabilities in complex IoT integration, advanced process nodes and advanced avenues.

Equipped with those key capabilities, we are actively in discussion more AI accelerators on the CPU opportunities. At the edge, we also recognize industries needs to lower implement cost and energy consumed to connect between cloud and edge, as well as users needs for better privacy, and improved latency. We believe these trends will support robust demand for a broad base of AI capable edge computing devices such as smartphone, laptop, tablet, automotives, robot, et cetera.

MediaTek has the world's broadest footprint in edge devices, and coupled with our leading edge computing SoCs, we are the perfect partner for edge computing players. Today our advanced 3 nanometer SoCs helps support applications across smartphone, tablet, automotive and more. Our SoCs will integrate MediaTek's powerful and power efficient MCU processors dedicated for AI tests at the edge. Furthermore, we closely work with all the popular large language model providers with easy to use toolkits such as our NeuroPilot to enable AI applications, including AI agents and a variety of productivity enhancement tools.

The demand for more powerful edge computing SoCs, and the shortened replacement cycle certainly strengthen our business outlook. Very excited about the growing business opportunities for the mid to long-term, and we'll continue to invest strategically and work with global partners to bring advanced, and leading products to customers.

With that now let me talk about the recent business performance of our 3 revenue groups. Mobile phones accounted for 54% of total revenue in the second quarter, growing 52% year-over-year and declining 15% sequentially. In the third quarter, we see healthy demand for our 4G SoCs from emerging markets offered by the decline of 5G SoCs.

We expect our mobile business to be sequentially flattish in the third quarter. We continuously expect [ full use ] smartphone market to grow low single digit percent. In shipment our global 5G penetration rate is on track to reach low 60%.

MediaTek continues to lead smartphone market, with leading products empowering smartphones across all segments. In the flagship segment, our Dimensity 9300 enabled several AI smartphones this year. The highly anticipated Dimensity 9400 which will be our next flagship SoC is expected to hit the market in October. Our Dimensity 9400 utilizes the industry's most advanced 3 nanometer process and ARMs most powerful v9 core, with MediaTek's proprietary 4 core architecture to deliver substantial enhancement in both performance and power efficiency.

Moreover, Dimensity 9400 is further optimized with Gen-AI functions. We see ecosystem players aggressively developing Gen AI features, which could be catalyst to shorten smartphone replacement cycle in the future. We have received very positive customer feedback on Dimensity 9400 compared with Dimensity 9300, they are more model adoption in the first wave of Dimensity 9400 customers. We are confident to deliver flagship revenue growth of more than 50% in 2024.

Now let me move on to Smart edge platforms. This grew 11% year-over-year and grew 12% sequentially in the second quarter, accounted for 40% of total revenue. During the second quarter, our strategic wireless and wired connectivity solutions, including WiFi 7 and 10G PON, continue to secure more project awards among operators in Europe and the U.S.

The 5 product mix of our computing devices such as tablet was further enhanced due to increasing adoption of Gen-AI SoCs. For the third quarter, we expect Smart edge platform's revenue to remain flattish. Connectivity is expected to be flattish quarter-over-quarter. Computing and ASIC-related applications are expected to grow moderately offset by the decline in TV following customers going for global sports events in the first half of the year.

With a broad base of product offerings in Smart edge platforms, we are confident that we will continue to elevate our overall value proposition to customers with our continued technology arrangement and global market expansions.

Now moving on to Power ICs. Power IC accounted for 6% of total revenue in the second quarter, growing 9% year-over-year and growing 12% quarter-over-quarter. The growth was mainly driven by seasonal demand for most of the major platforms in the second quarter. We expect a moderate growth for the business in the third quarter.

For the third quarter, we expect our revenue to be flattish across all 3 revenue groups to reflect a stable market demand. With that, we expect our third quarter revenue to be in the range of TWD 123.5 billion to TWD 132.4 billion, down 3% to up 4% sequentially and up 12% to 20% year-over-year at a forecasted exchange rate of TWD 32.3 to USD 1.

Gross margin is forecasted at 47%, plus or minus 1.5 percentage points. Quarterly operating expense ratio to be at 30%, plus or minus 2 percentage points. For 2024 full year, our financial targets remain unchanged. Revenue in U.S. dollars is expected to grow in mid-teens percent, and gross margin excluding onetime items to be between 46% and 48%.

With that, we reiterate our confidence in our mid- to long-term strategy. We are well positioned in the AI interface for both cloud and edge. Our new projects are tracking well to contribute revenue from the second half of 2025, with 2024 being the beginning of our next growth phase.

Thank you.

[Jessie Wang, executive]

Thank you, Lih. Great we're now ready for Q&A. And we're pleased to have the first question.

[Operator]

[Operator Instructions] The first to ask questions, Chia Yi Chen from Citi.

[Chia Yi Chen, analyst]

My first question is about the demand outlook. We know that actually, MediaTek delivered quite a decent result for the first half. And if you look at the first half and also considering that the Q2 even like a moderate revenue growth, for the full year outlook, Rick, you just mentioned you still maintained the full year guidance, maintained. Do you see that any uncertainties ahead into Q4, given the demand outlook? And also since we launched the most high-end Dimensity 9400 series, the performance seems to be quite good. And also we know that definitely we'll get a lot of attraction. So just wondering that for the second half in terms of the product mix, how would that impact our revenue outlook? And also since we already defer even without the onetime effect for Q2, the gross margin is also quite decent. So I'm just wondering in terms of the revenue outlook and also the margin trends, how would the product mix will further impact our financial results. That's my first question.

[David Ku, executive]

Yes, so basically the revenue is out and we just gave the third quarter guidance. For fourth quarter, this thing I want to make clear is the -- basically, we believe now into the second half or maybe second quarter of this year, we are now moving into a more normal pattern in terms of the seasonality. Our pandemic during -- I mean, we're going back quite a bit. But basically, pandemic really has caused major stir in the supply demand and the inventory situation either inventory buildup, inventory depletion then the restocking.

Even after about 6 quarters of the end of the pandemic, we went through those fairly abnormal pattern. And we believe now that now we are in the second half of 2024, the patterns really -- the season pattern is getting more like the -- well, shall we say before the pandemic years. For fourth quarter, basically, as you know, represents mainly depending on most of the products in the consumer area, low quarter after usually a more robust third quarter. Most people have prepared for the holiday season in the U.S. or in China, like a double, 11 festivals have prepared their inventory back in the second quarter and third quarter.

So the fourth quarter basically followed that pattern in general, other than the 4G -- I'm sorry, the 9400 flagship announcement, which, of course, will bring in uptrend from that point of view. But overall, if you look at our total revenue and the total portfolio, I think 4G, I'm sorry, again. Fourth quarter, we'll -- in our current forecast represents lower quarter -- fourth quarter. And so we are now maintaining our outlook for the whole year as a result.

As to the gross margin, we remain, our forecast for quite a while, we expect our way to meet between 46% and 48% going forward also.

[Chia Yi Chen, analyst]

And also, can you give us more update about the currently ASIC business progress. I recall that last time which you mentioned, we probably will see the contribution starting from the second half of 2025. Is it still the target? And other than the AI accelerators, do we also have other opportunities some -- like a CPU or any other different type of ASIC business.

[Lih Shyng L. Tsai, executive]

Okay. ASIC business execution is going well quite well. And our forecast remains on track for the second half of 2025 revenue. Albeit, of course, that will be at the beginning of the -- that ASIC business. And as I, I think, stated back in early June, the COMPUTEX talk, we are definitely moving into AI accelerators with the CPU, when needed. I mean, it's really -- if you look at, basically, this business is very customer-specific. Different customers have different kind of architecture shall we like. So we meet our task, the important thing for us is to -- we have the capability, both in 4G IPs from computing CPU GPU, MCU and the interconnectivity, process and advanced packaging. We -- and most importantly, we have built a strong relationship and partnership with the ecosystem players. So we are in addition to the current ASIC business, which is in execution. We are working toward more opportunities, which will present itself, I hope, in the next few years. I remain very optimistic. We are investing also heavily and strategically in this area of the business opportunities.

[Operator]

Next one to ask questions, Brett Simpson, Arete.

[Brett Simpson, analyst]

Rick, I wanted to ask on the smartphone business. It sounds like 5G sales are going to bottom out from MediaTek in Q3, which is unusual because normally seasonality is quite strong for MediaTek in Q3. So can you maybe just sort of frame this in terms of how much is Q3 being dampened by industry cleaning inventory ahead of an AI product cycle? And how should we think about Q4? Because you have obviously a big product cycle ramp with the 9400 coming. How should we anticipate Q4? Is it going to be a period where you see a big channel fill? Any color would be very helpful.

[Lih Shyng L. Tsai, executive]

Okay, Brett? As I said just now. Well, first quarter 2024. First quarter represents the final quarter for the so-called restocking. That explain quite a bit of the fairly high revenue from a quarter-over-quarter and a year-over-year point of view. And after that, I think the customers are consuming some of those inventory. And so I don't basically the first quarter effect is, as we stated in our opening remarks is the actually smartphone in 2024 is doing, in a relative sense, nicely. We expect low single-digit growth, and it is happening. And in China, we are seeing also maybe about 3% growth year-over-year in 2024. We are seeing just, I think, considering the smartphone overall market. We really believe this is a reasonably good year for smartphone. The changes over the quarters mostly from the inventory build, inventory digestion and flagship, 5G flagship as we see launch cycle. If you put them all together, it's really not something we worry about, to put it frankly, around it. We are seeing revenue being flattish in the third quarter as well, because the customers feel consuming some of their inventory, but their inventory level at their hand, in the channel, their channel, I think, remains fairly healthy. So that's what we're seeing, we feel reasonably good. The thing for us is to really execute on our 9400, Dimensity 9400 launch. And build a momentum to have good growth.

2024, as I said also earlier, in the flagship SoC revenue, we are very confident to create our 50% year-over-year growth in flagship revenue. We, of course, are forecasting higher. This momentum, we hope and expect to continue into 2025. I hope I'm answering your question, Brett?

[Brett Simpson, analyst]

Yes. That's a great perspective. And maybe just a follow-on. I wanted to ask about the 9400 specifically. Can you maybe just talk about the content growth of the 9400 versus 9300? I mean typically, we would expect a 10% or 15% increase in price, just given the feature sets of the 9400, particularly for AI are quite a big jump on 9300. So what sort of content growth can we expect versus 9300?

And I wanted to ask about the non-China customer opportunities for next year. We know you've done well in China, ramping flagship. Is 2025 a year where you can start to penetrate non-China customers, particularly in Korea?

[Lih Shyng L. Tsai, executive]

Okay. The content growth, Brett, I assume you first asked about the capability that we can deliver in 9400 compared to the previous generation. Basically, all the computing capabilities from CPU to GPU to, of course, especially MCUs will increase quite a lot. The CPU core, we are using ARMv9 core, which is -- which represents, I think, at least 15% a better performance jump. MCU, I think I said that I hope I remember correctly, back in June, we can the MCU by itself in 9300 is delivering 48 up. And for 9400, you can expect, I don't want to steal the show in October totally, but I think you can expect fresh definitely 40% something increasing the MCU, which is nowadays, if you look at the trend in this AI world, MCU represents a huge element of the overall content. And MediaTek, I'm very proud and happy to say that -- I'm fairly sure we are leading in the MCU for the flagship SoC, both on the performance from TOPS and TOPS per watt point of view. This will give us really a strong competitive edge, plus our effort to work with the ecosystem players in U.S. and in China to build an ecosystem so that the AI -- G-AI developers or application developers can be much more easily use our capability.

So Brett, I hope I answered your question. In addition, certainly, we expect ASSP to increase from our previous generation that goes without saying.

As to the non-China customers, we were engaging. That's what I can say. We are having some good progress in certain devices, but I cannot really disclose more than that. We have strong confidence in our capability, in our flagship SoCs. And by the way, the other thing which is not widely publicized is basically, we are also being quite successful in expanding our flagship SoC into different segment verticals, such as, for instance, automotive and tablet, sometimes Chromebook. And these also do not represent a higher volume as smartphones, but they do represent very nice incremental revenue and profits.

[Operator]

Next one we have Yu Jang Lai from Macquarie.

[Yu Jang Lai, analyst]

First, I would like to congrats in COMPUTEX. You give us a maybe a great speech. And my question is to follow up regarding your long-term planning. It's about MediaTek's cloud market ASIC SerDes strategy and IP. So I recall you show a slide in talking about the SerDes IP. Besides that, can you quantify how many important so-called edge IP we have on hand for the cloud CSP clients? That's my first question.

[Lih Shyng L. Tsai, executive]

Okay. Well, we -- as I said, in the data center AI accelerator, segment the major capabilities the first being computing IP, the second being the high-speed interconnect. The third and fourth, are respectively, leading-edge process node and really advanced very large area packaging capabilities. From computing, what we are seeing is we are through using ARMv9 core, and of course, they're following CPU cores. Our capability not only to work with them and working ourselves to build those cores into a data center specific CPU subsystem. I think we have that capability. We have done something. We have actually through other segments such as automotive, we'll build a really much higher number of core CPU subsystem. GPUs, we have both ARMs and we have partners in NVIDIA. MCU, again, as I said, we both in TOPS and TOPS per watt, which are the 2 critical factors, MediaTek has already put in so many years of investment and each generation, we have made major progress. The key, of course, is to scale it up to the level.

For that, our initiative in automotive aspect will actually -- will enable us to build really high TOPS MCU capability because that's what ADAS will require. High-speed interconnect SerDes is our homegrown, 112G, 224G. SerDes they are 224G is now being proven internally. We are also investing in the next-generation SerDes technology capability as well as the optical capabilities. As you know, where we are putting pretty well to the 3-nanometer, 2 nanometers. Of course, before we focus on mobile application now we are moving full speed to HPC through working again very, very closely with TSMC. Packaging also [indiscernible] we add potentially other leading packaging capabilities. So I remain very confident and optimistic because we also are very flexible. And we have advanced capabilities also with flexible business models. We want to work with our customers so they can get their more specific, application-specific chips.

[Yu Jang Lai, analyst]

Can I follow up one question? On the resources part, you need a good team, right? So how many R&D engineer we are going to add globally? And roughly how much percent team we need to -- we can internal transfer from other teams? And also, can we also give the global investor guidance of the R&D spend and OpEx trend followed by this long-term planning?

[Lih Shyng L. Tsai, executive]

All right. Thank you. Good question. Your thoughts -- you sound like our Board. The investment as such, we are investing strategically heavily. There are 2 facets of investment from that point of view. One being we put in definitely a new not just headcount, really key talent we're hiring, and we have hired several key talents in the data center area from architects all the way to packaging. We are certainly increasing our resources in the computing area. We certainly -- and MediaTek is very strong in executing our chips [ delay ] and integration. We are certainly reallocating those resources into -- which means prioritizing into the AI-related chip development. But I expect I say our R&D now is about 22% plus of our revenue, about. I expect this ratio not to -- even as we continue to grow in our revenues, this R&D ratio will not go down. It may go up somewhat. That is kind of a dynamic as we move forward.

[Operator]

Next one, please, welcome Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

First of all, maybe ask a bit on the expanded partnership with NVIDIA. Could you talk a little bit about the extent of the partnership now, especially in auto. I think we've already started to see some of those signs also in other areas of compute that you've talked about and there is more coming in this area. And related to that, could you also talk a little bit about the extent of design wins that you have secured in the automotive side, given that you have new Dimensity auto products that you've launched over the last 2 to 3 months. I think about 4 to 5 quarters ago, we got an update of $200 million revenues from auto in 2023 and $1 billion of backlog. David, any update on those numbers, either on revenues for this year or for the updated backlog given you seem to have a lot more progress on the auto side?

[Lih Shyng L. Tsai, executive]

Okay. Boy, it's a long question. Let me go -- start with the partnership and NVIDIA partnership. So the automotive partnership is executing. We are executing the first chip on track, right on track. We expect chips to be out early next year. We have -- this is a very good chip with all the computing power from NVIDIA's GPU and from our CPU and the ISPs. But it's really -- I would think it's a very competitive chip. In addition, we are also penetrating the automotive market with our -- I said earlier, in the flagship SoC or the premium SoC from our mobile business. They are -- we are making good inroads also -- and also in China. I cannot really -- because of designs, we do have good design wins in execution. I cannot disclose them as of now, but when a customer -- so automotive, when they launch their cars, then we can share more hopefully soon. So -- and again, automotive is a long-term business, it takes time. We all know that. And we are -- as I said many times, we are committed, we're putting the resources, and we look forward to '27, '28 be on time for the major fruits. Collaboration with NVIDIA goes beyond automotive in other area, computing related. We -- during the COMPUTEX time, I think we had an exchange with [ Jensen ] on the stage, and we also agreed that both company should also explore the opportunity in the data center area. And we certainly working through with that. The other part, David if you want to?

[David Ku, executive]

I can probably commenting about our earlier comments both from the addressable market, the revenue target and also the backlog. I think first and first, I think for the revenue target for this year, I think we are fairly comfortable we can achieve that, probably even with some upside, just like Rick's talking about there's several new design wins also overall the shipment situation. And due to the new design win right now, I think the backlog compared to the last time it's actually better. But we probably will not announce that one this quarter. But what we're going to do actually probably by the end of this year, we're going to announce the new backlog numbers. So we withhold that and we're going to announce that next time.

[Gokul Hariharan, analyst]

So my second question is on the enterprise and data center ASIC. So MediaTek has been in this business for a while. I think you had some success that kind of did not come through in the last time around. This time around, I think, looks like better chances of success. Rick, could you help us understand what is the MediaTek's edge right now compared to the dominant market leader? It feels like that's the market leader that you're kind of competing for, for many of these sockets. I just wanted to understand how is MediaTek kind of creating a niche for itself compared to this dominant player. Also, just wanted to understand, when you talk about flexibility in terms of the -- you did from the business, what does that actually mean? Do you mean that is it a flexibility on profitability terms? Or is it a flexibility in terms of business model that you could potentially tackle different parts of the chip manufacturing and design process that the market leader may not be willing to tackle?

[Lih Shyng L. Tsai, executive]

Okay. Thank you. I think, yes, we've been in this market for a while, for several years. Right now, what we are seeing is a clear and large TAM going forward up to '27, '28 and beyond. And I think everybody kind of followed a similar number like $45 billion at the end of -- in 2028, sooner maybe. And that TAM is very large. And what we are working towards with our -- I do not plan to repeat what I just said earlier about our capabilities to compete with our technical capabilities as well as our flexible business models to grab a significant share of that TAM. We understand the competition is strong. But this business, this TAM is big enough to have more than a couple or 3 major players as the customer requests, basically request. So I think opportunity is certainly are there for us to grab. And MediaTek, as far as I can see has one of the best will -- we're one of the best equipped companies to fight for that very large TAM. And now our flexibility in terms of business model, we will not insist on certain just only one way of doing sales. It is building our DNA that we can be -- we will be flexible where we deliver whatever we commit to deliver. That is how we -- really no secret formula, I don't think. It's investment in technology capability, build partnership, provide value to our customer and execute.

[Operator]

Next one to ask a question, Charlie Chan from Morgan Stanley.

[Charlie Chan, analyst]

My first question is about the AI smartphone repayment cycle because we all see Apple introduce Apple Intelligence, looks like a great potential. So Rick, do you think your China cell phone partners can really deliver a similar level of user experience with kind of acceptable efficiency? And when do you think they can get to that level? Because my concern is that for China domestic, they may not be able to use Gemini Nano. But if you look at Apple, right, they have their own foundation [ AION ] integrate with their own iOS, own processor. So I'm a little bit concerned that the integration of those stuff for China Enjoy smartphone could be pretty challenging. I wanted to get your thoughts.

[Lih Shyng L. Tsai, executive]

Yes, I understand your concerns. I think your concern at least is part of which is quite valid. However, certainly, I think the China market -- or our customers are not sitting idle. You talk about model building. The Llama 3 open source Llama 3, is very, very good as far we can tell. And our customers are really adopting that, of course, very rapidly. And the people -- I think in China, there's no lack of model development startups and the large company. My view here is this is so new. And if you look at the offering of the applications by different, including iOS, many of the application are fairly similar between the different, say, AI smartphone suppliers. There may be some small distances, but with our customers' market share and the vast size of the China market, I remain very optimistic. I think the pie, the first thing is whether pie is big enough. And there's no question the pie is big enough. And as far as I -- we can tell, our customers and our team are working very closely to build the ecosystem. And my feeling is that -- my understanding is they are building applications that will not only competitive on their own but also very competitive in the China market. And that's a very large market.

[Charlie Chan, analyst]

My second question is about your foundry costs, right, because TSMC showed their intents, probably to reflect their semi cost increase? And I think a couple of weeks ago, with TSMC you said the negotiation so far, so good, right? I am not sure if there's really good news for your company. But first of all, do you expect the wafer price cost to go higher for next year? And secondly, how do you justify those costs increase by your foundry partner? And lastly, how would that impact to your gross margin in 2025? Can you really pass through those additional costs, if any?

[David Ku, executive]

Charlie, David here. I think for -- I think TSMC may be mainly quite public that they're going to adjust the wafer pricing to everyone to the industry. So you can consider that price hike or inflation in the marketplace. So I think everyone in this industry or just having the same level of ratio. So I think that's the backdrop. But with that, I think given this is the industry is unknown. So what we will do, we will definitely try to reflect the cost increase through our pricing -- especially with our new position to -- basically to the industry. So I think that's an ongoing process. But overall, I guess, we will reflect the industry-wide cost increase to the back actually to the market. I think that's the goal.

[Charlie Chan, analyst]

Is that a 47% margin can sustain in that case?

[David Ku, executive]

I think for next year, again, actually we haven't given on the 2025 guidance yet. But this -- for this year, I think overall, 46%, 48%, that was our earlier guidance remain on tap.

[Operator]

Next one, we have Bruce Lu from Goldman Sachs.

[Zheng Lu, analyst]

So Rick, when you talk about what edge AI, you talked about MCU, a lot of IPs. But when you talk about current ASIC project, the key focus was SerDes, it seems to me that your value proposition for your edge AI and customer ASIC are a little bit different. Does that mean that your profitability is different? Or does that mean that your current stage for the customer ASIC is only temporary, you are going to move into a more complete [ mentoring ] or it's more completed solution for the customer ASIC in the future? Or you talked about like NVIDIA collaboration since NVIDIA doesn't want to do the customer ASIC, is it possible that you work with them for the customer ASIC for the data centers?

[Lih Shyng L. Tsai, executive]

Well, that -- indeed, that's why we talk not only our technical capabilities, but also our flexible business models. Again, you have to also -- this -- of course, the data center ASIC business has been there quite some time. But the Gen AI [ excited TAM ] is very new. And different customers are there large and small having different needs from their own requirements or their own TCOs. We -- again, in some cases, as we said, we focus providing leading-edge interconnect capability together with customer's capability. But don't forget we are to -- our way of working with TSMC on the leading-edge process and packaging is a very critical capability also. But I would expect in some of the cases, there will be need for our other IP expansion. But that will be more kind of like a case-by-case basis.

[Zheng Lu, analyst]

I'm sorry, but you should charge whatever you provided, right? So when you provide different services, the profitability will be different. What is your threshold for your business though?

[Lih Shyng L. Tsai, executive]

Well, what I can say is the -- right now, we are seeing very good returns for such business. Our ROI is good. The -- I have no -- really no major concern from that point of view. The improvement on our operating income will be very -- will be, in my view, very good. And certainly, I mean, you mentioned also NVIDIA potential. Yes. That's certainly something we would like to reach for.

[Zheng Lu, analyst]

So my second question is about the dollar content increase for the edge devices moving to AI. You have exposure to PC, smartphone, a lot of consumer devices as well. So TSMC is talking about like 5% to 10% increase in terms of the die size. Do you see that as a general understanding for all the dollar content increase for the edge AI, when they adopt AI, we should expect to see 5% to 10% ASP expansion across the board? Or is that like different from -- is that very different for different devices.

[Lih Shyng L. Tsai, executive]

I think for now, the smartphone, especially the high-end smartphone is probably the best reference we have for high volume and certainly also a longer history. I cannot give you a specific number, obviously. But what I can say is the blended ASP is definitely improving. Actually, there's some data, third-party data in China, but overall ASP for the smartphone is toward the high end. And we are also enjoying part of that shift into the, I would say, a significant shift towards the high end and which also shows up in our ASP, blended ASP.

[Operator]

Thank you, ladies and gentlemen. With the interest of time, we are going to take the last caller for questions. And the last one will be Sunny Lin from UBS.

[Sunny Lin, analyst]

Also, my first question is on the cloud ASICs. Obviously, the addressable market is large in terms of the revenue. But how should we think about the addressable market for profits. Where I'm coming from is some of the new projects from the hyperscalers appear to be low margin for CPU or for networking. And so I just wonder for MediaTek, given you may have a higher threshold for margin, will there be a good number of new projects with good profits?

[David Ku, executive]

Well, I think like Rick, our CEO explained, overall, the key was with ROI is actually for the ASIC projects, sometimes the accounting may be different depends on how you recognize the revenue. The key is really whether or not because it's case by case, whether or not that project have provided positive ROI, is improving operating margin and enhance EPS. I think that's the key. Selectively, we feel confident actually for those projects we pick, we'll provide very justified ROI, which improves operating margin and enhance the EPS overall.

[Sunny Lin, analyst]

A quick follow-up is for CPU. Will the product mostly tie to ASIC efforts? Or would you also look to come up with your own server CPUs that you could sell to hypescalers?

[David Ku, executive]

Right now, I would say as far as we can see the requirement from customer large or small, fairly kind of a custom -- semi custom type of requirements and ASSP type of offering is I think -- I'm not saying it's not doable, but it's not easy. So right now, we are not -- at least right now, we are not planning on that business model.

[Sunny Lin, analyst]

My second question is on the foundry supply. Clearly, TSMC is leading edge, including 5 and 3-nanometer is entire supply through the second half and may continue to be the case through 2025. And so would that be a potential bottleneck for you to grow significantly in 2025?

[David Ku, executive]

I think so far, I think we'll be secure for 2025 capacity what we need. So there will not be a bottleneck for us.

[Operator]

Okay. Thank you again, ladies and gentlemen, for all your questions. Now I'll hand it over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.

[Jessie Wang, executive]

Ladies and gentlemen, this concludes MediaTek 2024 second quarter conference call. And an audio replay will be available 1 hour after the call at the Investor section of MediaTek's website. We would like to thank you for your participation, and you may disconnect.

[Operator]

Once again, we thank you for your participation in today's conference. You may disconnect now. Thank you, and goodbye.