MediaTek Inc

TWSE:2454

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the MediaTek 2020 Third Quarter Investors Conference Call. Financial results and presentations for today's conference are available on the Investors 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 proceed.

[Jessie Wang, executive]

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

As a reminder, today's presentation will provide forward-looking statements based on our current expectations. These statements are subject to various risks and factors, which may cause actual results materially different from those statements. The presentation material supplement non-TIFRS financial measures. 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, all contents 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 would like to turn the call to our CFO, Mr. David Ku, for the third quarter financial results.

[David Ku, executive]

Thank you, Jessie. Good afternoon, everyone. Now let's start with the 2020 third quarter financial results. The currency here is all in NT dollars.

Revenue for the quarter was TWD 97.3 billion, up 43.9% sequentially and up 44.7% year-over-year. Gross margin for the quarter was 44.2%, up 0.7 percentage points sequentially and up 2.1 percentage points year-over-year. Operating expense for the quarter were TWD 28.4 billion compared with TWD 22 billion in the previous quarter and TWD 21.3 billion in the same period last year.

Operating income for the quarter was TWD 14.6 billion, up 97.3% sequentially and up 108.1% year-over-year. Non-TIFRS operating income for the quarter was TWD 15.5 billion. Operating margin for the quarter was 15%, increased 4 percentage points from the previous quarter and increased 4.5 percentage points from the year ago quarter. Non-TIFRS operating margin for the quarter was 15.9%.

Net income for the quarter was TWD 13.4 billion, up 82.8% sequentially and up 93.7% year-over-year. Non-TIFRS net income for the quarter was TWD 14.1 billion. Net profit margin for the quarter was 13.7%, increased 2.9 percentage points from the previous quarter and increased 3.4 percentage points from the year ago quarter. Non-TIFRS net profit margin for the quarter was 14.5%.

EPS for the quarter was TWD 8.42, up from TWD 4.58 in the previous quarter and up from TWD 4.38 in the same quarter last year. Non-TIFRS EPS for the quarter was $8.86. A reconciliation table for our TIFRS and non-TIFRS financial measures is attached in our press release for your reference. That concludes my comments. Thank you.

[Jessie Wang, executive]

Thank you, David. Now I would like to turn the call to our CEO, Mr. Rick Tsai, for prepared remarks.

[Lih Shyng L. Tsai, executive]

Good afternoon, everyone. Today, I'm delighted to report a record quarter of sales and earnings for MediaTek. Our third quarter revenue grew 44% sequentially to TWD 97.3 billion. This is not only ahead of original expectations, but also a record high for quarterly revenue.

It's also worth mentioning that our 3 product groups all had approximately 40% or higher sequential growth rates. The structured growth of our balanced product portfolio is a good foundation to underpin MediaTek's sustainable development.

Furthermore, we once again demonstrated very good operating leverage by achieving record-high operating income and net income. Our third quarter operating income grew strongly at 97% sequentially and more than doubled from a year ago. Operating margin also increased to 15%, the highest since the first quarter of 2015. The solid financial numbers reflect the strength of our business portfolio and the result of our well-executed corporate strategy.

Now let me elaborate on our 3 business for our third quarter results. First growth area, which consists of IoT, PMIC and ASIC, accounted for 27% to 32% of third quarter revenue. All major products had a robust sequential growth in the quarter. For IoT, demand for AI speakers, streaming device and Bluetooth PWS all increased in the third quarter due to [ Amazon ] AI speaker launches and market demand recovery.

Besides, work from home and spec migration trends continue to drive strong WiFi 5 demand and accelerate WiFi 6 adoption. Competitive WiFi 6 solutions and early participation in the market enable us to enhance market share in higher-end segment and further expand into new markets.

MediaTek WiFi 6 chips are already in numerous high-end broadband routers and consumer devices. We are making inroads to the notebook market with initial revenues by end of the year.

Power management ICs demand remains very strong across the board, including notebook, PC, TV and smartphone. This leads to certain supply tightness in the near term.

For ASIC, products for the new generation gaming console continue to ramp in the third quarter. On the enterprise side, product development of AI accelerator and new switch IP is tracking well. Despite the recent COVID demand slowdown, we remain positive on its mid- to long-term market opportunities.

Next, Smart Home and other. Primarily TV and other traditional consumer electronics accounted for 22% to 27% of revenue in the third quarter. The demand recovery in the third quarter was better than expected, especially digital TV. Demand in North American, European and emerging markets all increased strongly. We are confident in our industry-leading comprehensive TV product portfolio. With more advanced feature upgrades such as AI integration, we will be able to sustain our leadership in global TV market.

Now on to mobile computing, which includes smartphone, tablet and Chromebook, accounted for 43% to 48% of the third quarter revenue. Mobile computing revenue grew substantially in the quarter, as we saw stronger-than-expected demand in tablet and Chromebook as well as smartphone orders in both 4G and 5G.

Chromebook market is growing fast this year, thanks to remote learning demand. MediaTek provides competitive product to support all major global [ work ]. Ranked #1 in ARM-based Chromebook SoC, we expect our market share to further increase in the future with a broadened product offering.

For smartphone, MediaTek outperformed the industry this year with share gains in both 5G and 4G smartphones. On 5G, major smartphone makers all embrace 5G aggressively. With the faster migration to 5G, we now believe global 5G smartphone shipments in 2020 will be around 200 million, at the high end of our prior estimate, and it could be more than doubled in 2021.

The fast-growing market presents exciting opportunities for MediaTek. Right now, we have 5G engagements with all major Android smartphone brands in different product segments. We are confident to secure reasonable market share across segments in 5G, regardless of the potential market share shift amongst smartphone brands due to recent uncertainties caused by the global trade dispute.

Moreover, our 5G footprint has been expanded to more global markets. MediaTek high-end Dimensity 1000 series was adopted by LG and launched in the U.S. market in the third quarter for the first time. Together with LG, we teamed with T-Mobile to complete the first ever 5G stand-alone new radio carrier aggregation datacore. Although Dimensity 800 models will hit European market in the fourth quarter, next year we expect more models shipping to global markets.

On the product side, smartphones adopting next Dimensity 5G high-end SoC will start mass production early next year. MediaTek's commitment of a complete 5G product portfolio remains intact and we will continue our efforts in providing more competitive high end solutions in the future. For mass market, we expect Dimensity 720 models to ramp strongly in the fourth quarter. In addition, we will start shipping another SoC by end of 2020, enabling 5G smartphone in more segments.

Millimeter wave product development remains on schedule for further market expansion. In addition, 5G SIM modem business is gaining good traction. First project for Intel platform notebook PC is expected to mass produce in the first half of 2021 with more projects to come. For 4G, demand continues to rebound in the second half of the year and remains a sizable market. With market share gains, we expect our 4G shipment to grow this year.

In summary, third quarter of 2020 marked a milestone for MediaTek in terms of financial performance as well as business development. With a strengthened global market position, we believe we are a strategic relevant partner to global customers. Our products and market share in 5G, WiFi 6 and Chromebook products are some clear evidence of our global position. These positions are built upon our dedication to key technology investments.

With ongoing investments, we believe we are on the right track to capture opportunities on multiple fronts, such as 5G, WiFi 6, enterprise ASIC and PMIC. Our diversified IP and business portfolio are unique competitive advantages, enabling us to create value and future growth opportunities. With the depth of our business portfolio, MediaTek powers your everyday life.

Now turning to fourth quarter outlook. Following a strong third quarter, overall demand stayed solid in the fourth quarter. We expect another quarter with significant year-over-year revenue growth. On a quarter-over-quarter basis, we expect revenue for mobile computing and growth area to be better than normal seasonality even with an unfavorable exchange rate.

For Smart Home, we will exclude MediaTek revenue starting November, upon the completion of the divestment transaction. Gross margin is expected to be stable at the current range. We expect fourth quarter revenue to be in the range of TWD 89.5 billion to TWD 97.3 billion, flat to down 8% sequentially, yet up 38% to 50% year-over-year, and a forecasted exchange rate of TWD 28.8 to USD 1.

Excluding FX and [ TIFRS ] impact, our fourth quarter revenue guidance range would have been up 5% to down 3% sequentially. That implies the revenue momentum is stronger than traditional seasonality, even after record high quarterly revenue in the third quarter.

In addition, we are forecasting gross margin at 43.5%, plus or minus 1.5 percentage points, and quarterly operating expense ratio to be at 29%, plus or minus 2 percentage points. That concludes my prepared remarks. Thank you.

[Jessie Wang, executive]

Thank you, Rick. We are now ready for Q&A session. May we please have the first question, operator?

[Operator]

[Operator Instructions] The first to ask questions, Randy Abrams of Crédit Suisse.

[Randy Abrams, analyst]

Okay. I want to congratulate you on a good result and also outlook. Maybe just the first question on the constraints. I think you mentioned a little bit there, like, power management. But could you talk on your overall business? I noticed your inventory level down quite a bit. Is any area now limited by tightness?

And if there's any impact from either on the wafer-level or the recent -- one of the suppliers had a substrate issue. So if you could talk about that constraint. And then flip side, also if you're benefiting, say, from your competitor, where I think there's some constraints they may be facing.

[Lih Shyng L. Tsai, executive]

Randy, I think it is widely reported in the press about the supply situation in the industry. We certainly face a similar situation, as we also mentioned, in our PMIC business. Leading-edge process wafer supply is tight. However, we have been able to secure our needs for the leading-edge processes despite a really, as you can tell, a surge of demand on our [ pointless ] 5G SoCs in the third quarter and fourth quarter.

On the other hand, we also noticed some tightness in the back end, too. Again, due to our strong relationship and the long-term partnership with our ASIC suppliers, we -- again, we have been able to resolve most of the supply difficulties. We -- the recent accident doesn't really have any material impact on our business. We remain, of course, very cautious about the supply situation. We spend a lot of effort in working with our partners in foundry and ASIC.

The -- we -- but we believe, we are confident that we can manage the situation, albeit by tight, but we can manage the situation well, and we can supply our customers also well. Thank you.

[Randy Abrams, analyst]

Yes. Okay. If I could ask -- I'm curious how you're managing the -- it's been complex dynamics with the late notice, not to supply the China customer. So I'm curious where that caused other customers to come in, how you feel their incremental business has been? And if you saw any nervousness, whether they might be all going after the same market share? Or if you think it looks relatively reasonable at this stage?

[Lih Shyng L. Tsai, executive]

Randy, I think the key -- I'd say the first quarter number that we will look at is the sell-through numbers of the 5G phone. And if you -- I think we talked about that before also. The sell through -- the 5G phone sell-through numbers, in China especially, remain not only on track, but also, I would say, strong.

I think the sell-through 5G phones in China is on track to reach north of TWD 120 million, close to TWD 130 million. Well, I believe TWD 120 million was our estimate before. With that kind of a sell through, we are confident that the 5G penetration is good, is strong. And we have a strong portfolio of 5G SoCs.

So there are variations from customer to customer, from brand to brand. From trade dispute or not, no trade dispute. But the key thing for us is to have a strong portfolio so we can supply a growing, a fast-growing 5G market as we have demonstrated in the third quarter and as we are forecasting for our fourth quarter. Thank you.

[Randy Abrams, analyst]

Yes. Great. And maybe just one other demand question. The Chromebook, which you're now citing a lot more, is there a rough way you're thinking about in terms of volume opportunity? And also how you kind of size up the content you're getting in this relative to a smartphone or tablet?

[Lih Shyng L. Tsai, executive]

Good question. Up to now, I think Chromebook, well, certainly -- well, certainly, that's become kind of a shock in this year of pandemic. And the -- but we also understand the -- most of the -- a lot of the demand, at least new demand, come from the more entry-level for students starting at home, et cetera, et cetera. However, as we said in our remarks, we are #1 in the [ embedded ] SoC for the Chromebook.

And we are working very closely with the global brands in not only using our current SoC, but also we work with them to upgrade the SoC. We have some higher-end, much higher-end SoC that we have ready for the more advanced Chromebook, and we expect that to happen sometime next year.

[Operator]

Next to ask questions, Sebastian Hou, CLSA.

[Sebastian Hou, analyst]

My first question is that if you look at your third quarter's margin, it's very good numbers. But I'm just curious, if I look at your revenue, it's beat by more than 10%. Gross margin also beat that midpoint guidance, but the OpEx ratio seems to be just in line with the midpoint guidance of OpEx ratio.

So -- and it's still good numbers. Just curious about that it doesn't seem that there is a lot of incremental operating leverage that flows through the operating line when your gross margin and revenue both beat on the upside and how do we think about this going forward?

[David Ku, executive]

Sebastian, probably the best way to look about operating expense in total, which also including the profit sharing, is by looking at the operating expense ratio. For example, for Q3, the total number right now compared to revenue is around 29.2%. And compared to the previous quarter or in the past few quarters, roughly we talked about 32%, maybe some time for the third quarter, is closer to 33%. So not actually improving by basically 3 to 4 percentage points.

I think that was a way to think about operating leverage. And on top of that, I guess, also during the CEO remark, we keep talking about we will continue to invest in technology and also to the future new product. Especially for the 5G, we have talked about -- keep talking about both for high end, also for entry level to extend the whole bandwidth of our product portfolio. I think that will all come down into the operating expense, which is the R&D expense.

But by including all of that, we're still seeing operating leverage coming in. Again, the key number is really the overall OpEx ratio coming down to 29% compared to previous few quarters, only 33% to 32%.

[Sebastian Hou, analyst]

Great. Just one follow-up is that now we are at about 15% mid-teens of the operating margin. David, are you confident in or do you have the expectation that we can -- we may be able to achieve higher in the next 2 years?

[David Ku, executive]

Sebastian, maybe let me -- even when you're asking about operating income, but I think [ one worth ] commenting about the gross margin first, then talking operating income, which are all related. I think if you guys still recall earlier this year, I think the CEO [ detailed ] the guidance talking about the gross margin will be stabilizing around 42 to 43 percentage range. There will be -- I believe that was actually -- we gave out the comment in first quarter this year. Now the gross margin is close to 44% plus.

So with all those new products coming out and also with our diversified product portfolio, and we feel comfortable right now our gross margin will stabilize within slightly higher range. Again, first half this year, we're kind of talking about 42% to 43%. Now we feel comfortable the gross margin should be able to stabilize within 43% to 44%, within this range. And whether or not we can continue to improve that, I think that's our goal. But I will say, probably we will just withhold that, wait until the right moment and we also need to consider the overall market dynamic.

But overall, I guess, I think the improvements, both on the gross margin and operating margin, is our goal. I think that has been a very important growth objective for MediaTek. And so far, I guess, we feel comfortable and happy to see basically the gross margin and also operating margin all being all well ahead of our original plan.

[Sebastian Hou, analyst]

Okay. My second part of the question is on ASIC. Do you have rough numbers about how much of the revenue is -- in terms of percentage terms, is coming from ASIC this year? And what's the possible target you have, let's say, in 2, 3 years from now?

[David Ku, executive]

First of all, we didn't really break out -- so the revenue competition by individual product line. We only break out by business group. So we probably will not be able to comment any on that. But overall, I guess, we're still looking for another year of growth. But in terms of magnitude, we probably will not be able to disclose right now.

[Sebastian Hou, analyst]

Okay. No problem. Within ASIC, I think the -- we have been doing very, very well and very strong IP in the SerDes and high-speed interface IP. So then we have -- that enable us for our enterprise switch business and also cloud AI accelerated business. I wonder how the extendability of this IP. And how much more of the opportunity beyond this network can switch and AI accelerator?

[Lih Shyng L. Tsai, executive]

Well, certainly, there's opportunity, for instance, in the 5G infrastructure space of which we require also high-speed interfaces as well as other IP. Some of our -- and the -- I think it is also important to know that MediaTek has demonstrated our capability in utilizing the leading edge products as well as the leading-edge package technology, which most of those really large system kind of ASIC require. But we believe, actually, there are other opportunities which requires our IPs, but we're not at liberty to disclose those potential opportunities.

[Sebastian Hou, analyst]

I think -- so it is fair to say that there is actually quite a lot of the other opportunities and for this SerDes IP can be applied to. And we may be exploring that. Or maybe even already doing that already. It's just that it's not at a mature time to disclose yet. Is that fair to say?

[Lih Shyng L. Tsai, executive]

Yes. I would say so. Yes.

[Operator]

Next we're having Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

Congrats on the great result. My first question is about margins. Could you talk a little bit about gross margins as we look at -- since David, you mentioned that we are comfortable about a higher level of margin. What are the portfolio of products which are likely to help us to move up in terms of gross margins? Is it mainly ASIC and high-end 5G?

And the second question related to gross margin itself is on -- there has been some concern about potential margin pressure, potential pricing pressure. As we think about the 5G portfolio, as Dr. Tsai mentioned, moving to more affordable price levels for 5G smartphones, should we expect that there could be some margin dilution coming through? Or are we still comfortable that we will be able to hold our margins in this early to mid-40s kind of levels even with 5G portfolio moving down to more affordable price ranges?

[David Ku, executive]

Yes. I think overall, we just consider everything basically part of the thing [ here like we're talking ] about the expansion into different segmentations. I think you're mainly referring to into the entry-level 5G. And also, I think also in the beginning remark, we're kind of talking about we're growing the revenue, not just on the mobile device, but also on other parts as well. So it [ really comes ] with everything.

Also consider about a reasonable competitive landscape, that actually still gives us the confidence that the gross margin should be able to stabilize within the 43% to 44% range. So that's -- I guess, is a quick answer from me.

[Lih Shyng L. Tsai, executive]

Maybe I can add a few words. Margin improvement -- gross margin improvement, [ as you all mind ], it's not a one-shot deal. It involves the whole company effort among different business units. I think critical that all the business units are committed to improve the gross margin within their business, their individual businesses, either through a better product mix or through yield improvements, cost structure improvement or both.

What we have done through the last quite a few quarters, were actually -- those improvements are cumulative in nature. I think people tend to think that a certain product that will bring us a higher margin. Yes, there are some, but we have so many products and in quite a few different businesses. It really takes the whole company to focus on that. And the -- I think, that's really at the core of the improvement we have been able to make up to now, and we are certainly working very hard to continue that trend. Thank you.

[Gokul Hariharan, analyst]

Okay. That's very helpful. My other question is, as you mentioned now in 5G, you have basically pretty much all the Android customer base. Now the other operating system, iOS, is something MediaTek has really had not much exposure.

Given the catch-up in terms of 5G technology that MediaTek has achieved, you've already started developing and far along in terms of SIM modem deployment for PC applications, et cetera. Is it realistic to expect some breakthrough with this particular operating system for this particular customer? Or is it -- should investors think of it as more of an unlikely [ out? ]

[David Ku, executive]

Well, I think overall, given the fact this time around, I think we are among the leaders in the 5G product portfolio, both from the SoC and also from the SIM modem. I [ explained ] earlier, the SIM modem shipment with Intel coming out next year. I guess from our perspective, we are aggressively preparing for any possibility. So I guess -- but for the time being right now, probably Android 10 is -- in terms of the first wave of product, it will be our focus there.

[Operator]

Next to ask question, Roland Shu from Citigroup.

[Roland Shu, analyst]

First, I think earlier, we talked about the supply constraint at the foundry OSAT. And also we have [ listed ] your fire this incident for this structure. So it sounds like, I think, the supply of the capacity for this option will be very tight.

And I think, yes, you have a very good relationship with this foundry and OSAT. You probably still will be able to secure good capacity. But how about the price, the cost? I think that the cost for this foundry and OSAT and even for structure, that will be increased substantially. How are you going to manage for this cost increase from your suppliers?

[Lih Shyng L. Tsai, executive]

Roland, we have come across some cost impacts. Really, I would say not significant. Yes, it's just like -- well, I cannot speak for our suppliers. For sure, I cannot. I can only say that in our case, again, with the long-term and the substantial scale that we have, relationship with our suppliers, the impact is not significant and certainly quite manageable. So it's not I don't worry about it, but it's something we must manage, and we have been able to manage.

[Roland Shu, analyst]

Okay. This is fair enough. And how about the price competition or price pressure from competition across all platform of the product in 4Q and going forward?

[Lih Shyng L. Tsai, executive]

It's going to be a standard answer. There's competition always. I think, again, this is [indiscernible]. I mean, we have read all the story on the press about certain products from certain competitors that may cause some price pressure.

Again, we really believe our product from performance and the cost structure point of view, can compete very effectively. What's the pressure? Again, we just -- we compete. And so far, you can -- I think the numbers speak for themselves. We have been able, I think, to manage margins reasonably well.

[Roland Shu, analyst]

Okay. And then for your mass market 5G SoC, how is the ASP and the gross margin for your mass market SoC compared to your 4G high-end product?

[David Ku, executive]

I think we will not be able to spill out a detailed ASP. In general, I think the 4G versus 5G on ASP, we're still talking about a big accretion for 5G versus 4G ASP. Unfortunately, we will not be able to provide detailed ASP.

In terms of gross margin, as we said earlier, even with -- actually starting from the third quarter, we'll start to ship a very small volume of entry-level [ phones ] already. And in the fourth quarter, I think we were going to ship more.

But even with that, just like the earlier gross margin guidance we gave out, we still feel the gross margin should be stabilized within the range, i.e., 43% to 44%. So that actually is [ indirectly ] talking about we feel comfortable about the gross margins, even when we're getting to the entry-level 4.

[Roland Shu, analyst]

Yes. Okay. Understood. Lastly, for the 4G product. I think earlier this year, you expected your 4G shipment this year will be bigger than last year. And then I think 3 months ago, you bring down to be probably flat as last year. And today, now you are -- again, you are seeing your 4G total SoC shipment will be bigger than last year. So why is the change? And also how do you expect this overall 4G shipment next year?

[David Ku, executive]

Yes. So Roland, I think, first of all, I did recall we kind of talked about 4G year-over-year will decline. So we didn't really change our view. I think 4G this year is still going to see -- I guess we talked about earlier is that from a global 4G shipment perspective, for the demand -- from a global demand perspective, that we declined. But from a MediaTek perspective, I guess, mainly due to the market share gain, also we penetrated -- geographic penetration, I think we'll still see growth -- yield growth for 4G this year.

[Roland Shu, analyst]

Okay. How about next year?

[David Ku, executive]

I think next year is maybe a little too early to tell. But I think by first quarter next year, we're going to probably give us -- you guys some preview about our view.

[Operator]

Now the line is open to Bruce Lu from Goldman Sachs.

[Zheng Lu, analyst]

For the great result that is way ahead of the guidance. I understand the management usually provide a conservative guidance. But this time, it's way ahead of the guidance. Can you tell us which part of the business is the main reason for the upside surprises?

[David Ku, executive]

Bruce, first of all, it's really just across the board. If you recall in the CEO opening remarks, we're talking about our third quarter's overall revenue growth of 44%. And pretty much all 3 major business lines grew close to 40%. So it's not -- I think, the really strong growth, even higher than our earlier guidance, it's not really caused by any single business line. It's really just across the board.

So first of all, is all 3 major business lines really got pretty good growth and are all close to 40%. So it's not like [ what you ] -- or one business line grew 70%, the other only grow to 20%. So it's all close to 40%. So I think that's the situation.

And if you really want to drill into the detail, I guess there's something -- maybe something to do with the supply tightness because what we give for the guidance, everything is actually the supply is still really tight. But just along the line, actually, our manufacturing team did a pretty good job. They're just trying to provide more supply. And once we have more supply, once we got more wafer out, we can just ship it out. I think it's really just -- that's the situation.

But I think another number, you can take a look, which is another evidence of our days of inventory. I think for second quarter, our days of inventory, it was 83 days. But once we march into the third quarter, the days of inventory becomes 57 days, which is below 60 days. In the fourth quarter, I think our view is actually overall the days of inventory will be below 60 days as well. So again, right now, actually, I think the supply tightness is still the situation we're facing right now.

[Zheng Lu, analyst]

So let me make it clear. So 3 months ago, when we provided guidance, it was like 25% "quarter growth" for the midpoint. So all 3 businesses growing like 25% at that moment, which is the forecast at that moment. But now everything goes up to 40%.

[David Ku, executive]

Correct. Again, let me just repeat what we're talking about. We say our 3 product group all had approximately 40% or higher sequential growth for the quarter.

[Zheng Lu, analyst]

Understand. Another question I want to ask is that even though with a very strong revenue growth, our revenue ranking globally is actually coming down. It's not because MediaTek is not doing -- not well, but because of a lot of global M&A major deals. So in contrast, MediaTek is divesting in [ E-deck ]. So what do you think about the new competitive landscape after all this M&A is done? So all the industry consolidation, will that impact our future growth in terms of the competitive landscape?

[Lih Shyng L. Tsai, executive]

I don't believe so. I think MediaTek, as we said in our remarks, our strength is in our very strong and very broad IP and technology portfolio, resulting in, again, a broad and a strong product platform. We have a rather diverse business portfolio. We have worked really hard during the last 2, 3 years.

And this year, if you count out -- if you take into the guidance we give for the fourth quarter, we are now looking at NT level, really high 20 --very high 20% year-over-year growth. This is all organic. This is all organic growth. And we're very proud of that. And we have looked into the market potential which we are serving. We have the confidence that we will have a strong future with our current portfolio.

Having said all that, of course, if there are opportunities that we believe that can fit our future, we would not hesitate. But up to now, if you look at our numbers, I don't know how we accrue the ranking. I think I'll -- our ranking is not bad. It's the -- where we're up -- we're quite a bit of above USD 10 billion for this year already.

[Zheng Lu, analyst]

I understand. I just -- I want to follow-on that in terms of the current service available market, where will be the major growth driver moving forward beyond like 2020?

[Lih Shyng L. Tsai, executive]

Yes. Well, I think so. I'll give you an example. The compute, if you look at it, we're up. We have really strong business this year from compute, our base compute, Chromebooks, tablets. And we also have very strong growth in the connectivity, which we believe it's not one kind of a short-term phenomenon because I think the world is going to -- going towards a new normal that fit our strengths particularly well.

So we -- again, I don't think I can give you all the details of our future look for our service available market. But our internal study shows us that we have a good at least 3 years and beyond growth in front of us. And in the meantime, that we will continue investing in our technology capability and the product portfolio.

[Operator]

Right now, we're having Brett Simpson from Arete Research.

[Brett Simpson, analyst]

David, first question on OpEx spending. It's probably the biggest sequential increase in OpEx I've seen at MediaTek. You're now spending $1 billion a quarter. Can you just lay out exactly why you needed to spend such an increase? Can you give us an update on headcount and how it grew sequentially? And what specifically the increase in OpEx is going to be targeted on and whether there's any one-times within that spending hike?

[David Ku, executive]

First of all, when you talk about over $1 billion, I think this is actually also including something we call employee profit sharing. It has a [ 40 ] number. As you can tell in Q3, we had a record year both for revenue and for earnings. So actually, that somehow boosted operating expense as well.

If you take it out, because we also disclosed the number, I think the number is on operating expense well below $1 billion. Even so, like you say, we still continue to invest aggressively in the right direction, basically aiming for the mid- to long-term growth, which includes increased [ ECOM ] and also including we have a lot of new taping out in third quarter or that all contributing to the increase on the operating expense.

But as I said earlier, overall, from a ratio perspective, it's still coming down. And also marching to the fourth quarter, we expect that in terms of absolute dollars, the operating expense will be pretty flattish, maybe even coming down a little bit.

[Brett Simpson, analyst]

And what did headcount do sequentially given your OpEx grew, whatever, 30% or so sequentially. How much did headcount grow in the quarter?

[David Ku, executive]

We didn't really disclose the quarter-over-quarter headcount movement.

[Brett Simpson, analyst]

Okay. Okay. And then maybe just on Huawei. Can you just clarify in your Q4 guidance, are you booking -- are you planning to book any sales? I know there's been some commentary recently in the media about the U.S. government issuing 4G licenses to suppliers. Are you part of that? And -- is Huawei -- have any -- are you going to have any sales to Huawei in Q4?

[David Ku, executive]

In our Q4 guidance, there's been no revenue to Huawei. So it's not putting any revenue to Huawei at all.

[Brett Simpson, analyst]

Okay. That's great. And maybe for Dr. Tsai, just on 5G. I guess when we look into 2021, I mean, the conditions for MediaTek look exceptional. You've got consolidation in the market, which you're going to clearly benefit from. The demand, you said yourself, will more than double for 5G next year. You're introducing 6-nanometer or 5-nanometer platforms, supply is tight.

These are excellent conditions for margin accretion or for pricing. Given it's largely a 2-play market for 5G, [ ex Nos ] seems to be more captive focused and even there, they don't supply everything to Samsung. So aren't these conditions where you would expect pricing to start to become less pressurized? And how do you see this playing out next year?

[Lih Shyng L. Tsai, executive]

I guess the straight answer is no. I always assume our competitor will compete fiercely, which they do. And the -- I expect -- I still expect the pricing competition to be fierce. Overall, as I said earlier, we also believe our performance on our cost structure are strong enough to extend that competition, and we can still deliver the gross margin that we said we would.

As David mentioned earlier, we intend to stay at 43% to 44% range. My -- and as I said earlier, too, there are many, so many products and business in our portfolio. We have, I think, plenty of opportunities to improve our gross margin, and we continue to do so. But I don't promise you a -- kind of a one-shot that can improve by 1 point or 2 points. That doesn't happen very easily.

[Brett Simpson, analyst]

Okay. And maybe just maybe just a follow-up as well on 5G. I guess, over the years, we've seen the Chinese government give significant support to companies developing 5G. And I think now in the U.S., we're seeing significant government support around 5G building an ecosystem that's U.S.-based and Qualcomm is certainly benefiting from this. There's a lot of DARPA funding that's happening right now.

Are you concerned at all that Qualcomm may start to see substantial government support, and that creates an unfair advantage for MediaTek? I'd just be curious as to whether the Taiwanese government is also looking to develop support for its own companies in Taiwan around 5G.

[Lih Shyng L. Tsai, executive]

Again, I think if you look at the landscape of the 5G landscape, there are really not many reliable and competent suppliers, be they Android or iOS. MediaTek, I think, has established itself as a reliable and competent supplier in the 5G arena. With our financial performance, I'm confident that we will be able to continue investing for our capability and products.

I -- of course, everybody can read about what the different governments are doing. For instance, as far as I understand, in the U.S., government funding are probably more for more fundamental and more pre -- usually, it should be a more pre-competitive funding rather than for certain companies. We believe U.S., being a liberal -- I don't know if liberal, but [indiscernible] country, and we, in Taiwan, also the same. We expect pretty much a fair, a level playing field landscape for us. Thank you.

[Operator]

Next to ask question, Sunny Lin, UBS.

[Sunny Lin, analyst]

And congratulations for your good results. So my first one is really quick on your 5G market share. I think in last quarter, management talked about 40% plus in terms of volume for China smartphones by end of this year. So I wonder if we could have an update on this and your expectation into 2021. That's my first question.

[David Ku, executive]

Sunny, I think for the market shares for third quarter and the fourth quarter, we are looking for the similar market share. And for next year, again, it's maybe a little bit too early to tell, but overall, based on our product portfolio right now, so pretty good feedback from our customers. We do kind of expecting some positive trend. But again, it's maybe too early to tell or give out any guidance or comment on that.

[Sunny Lin, analyst]

Sure. No problem. And my second question is regarding your SIM modem business. So I wonder if you could share with us a bit more color on your addressable market. So you mentioned that the first project is for notebook but I would imagine more connectivity demand as IoT further develops. So how should we think about the potential applications for year SIM modem beyond notebook?

[Lih Shyng L. Tsai, executive]

Well, I think a good example being CPE, where we have a project going in that area also. We'll announce that when the time is appropriate. That's another good example.

[Sunny Lin, analyst]

Right. Any other applications that you could share with us?

[David Ku, executive]

Maybe not right now. I think we will announce it when it's appropriate.

[Operator]

Right now, we're having Laura Chen from KGI for questions.

[Laura Chen, analyst]

My first question is about the millimeter wave progress. I'm just wondering what's the schedule now. Or do we plan to introduce the best band modem first or SoC? And that's one. And also, I'm just wondering for the millimeter wave solution, does MediaTek will also provide the [indiscernible] antenna solution along with the SoC or modem? That's my first question.

[Lih Shyng L. Tsai, executive]

Okay. For our millimeter wave program, it is progressing well on track. We are planning our announcement sometime in the near future. We do expect to see samples next year, 2021. And we also expect the millimeter wave technology being used in both 5G SoC and the SIM modem devices. As to the antenna module, I think we -- I think our plan is to develop the capability to build the antenna module for the --.

[David Ku, executive]

Yes. I think [indiscernible] the antenna package [indiscernible]. Yes.

[Laura Chen, analyst]

So we will come out the total solution from the [ best SIM modem ] to the [ antenna foundry ], right?

[David Ku, executive]

Yes.

[Laura Chen, analyst]

That's great. So can we expect that will be more for like a 2022 story, is how we are assembling sometime later next year?

[Lih Shyng L. Tsai, executive]

Yes. From a manufacturing, mass production point of view, 2022 is what we are looking at, yes.

[Laura Chen, analyst]

Okay. And also just a follow-up on the Chromebook business. We know the demand is quite strong this year. So -- and from MediaTek perspective, we can leverage our previous products and also our current technology. So assuming that, so we should be able to have a better gross margin on the Chromebook business, right? So I'm just wondering, do we have any, like, estimation of our current market share now in the Chromebook market and also next year growth outlook?

[David Ku, executive]

I think, first of all, we didn't really disclose gross margin by product line, [indiscernible] line. But overall, I guess, our Chromebook carries a pretty decent gross margin that we described. And I think in terms of market share, we believe, right now, we should be the market share leaders on ARM [ CAM ] -- ARM-based Chromebook. And I think it should be in market share range should be in the north of 30%.

[Operator]

We thank you for all questions, ladies and gentlemen. Because we are running out of time now, I'm going to hand this over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.

[Jessie Wang, executive]

Ladies and gentlemen, this concludes MediaTek 2020 Third Quarter Conference Call. We would like to thank you for your participation, and you may now disconnect.

[Operator]

Yes, ladies and gentlemen, thank you again for your participation in today's conference. You may now disconnect. Thank you, and so long.