MediaTek Inc

TWSE:2454

Earnings Call Analysis

MediaTek Q3 Revenue Beats Guidance

In Q3, MediaTek's revenue was $110.1 billion, up 12.2% from Q2 but down 22.6% from last year. Gross margin was 47.4%, a slight dip from previous periods. Operating income soared 21.7% sequentially to $17.9 billion, despite a year-over-year drop of 45.7%. Net income reached $18.6 billion, up 15.9% sequentially. Key growth drivers included stronger smartphone sales (49% of total revenue) and record WiFi shipments as part of the Smart Edge Platform, which forms 44% of their revenue. For Q4, they expect revenue to rise between 9% to 15% sequentially, with a gross margin target of around 47%. Amidst this, MediaTek announced their first semi-annual dividend payout of $24.6 billion, to be distributed on January 31, 2024.

Third Quarter Financial Highlight

For the third quarter, MediaTek reported a revenue of $110.1 billion, representing a 12.2% increase from the previous quarter but a 22.6% decline from the same quarter last year. Gross margins were slightly down to 47.4%, marking minor adjustments both sequentially and on a yearly basis. While operating income showed sequential growth, rising 21.7% from the previous quarter to $17.9 billion, it was significantly lower by 45.7% in comparison to last year's figure. This has caused a dip in the year-over-year net profit margin by 5%, despite a modest improvement from the immediate past quarter. An EPS of $11.64 was reported, which although higher than the preceding quarter's $10.07, was much lower than the $19.54 reported a year ago.

Inventory Management and Business Environment

MediaTek's ability to slightly surpass its revenue targets can be attributed to an improving business environment and beneficial foreign exchange rates. Efficient inventory management has led to a steady decrease over five consecutive quarters, culminating in a balanced inventory level of 90 days. This demonstrates prudence and adaptability in operations, catering to the dynamic demands of the smartphone industry.

Outlook for the Fourth Quarter

Looking ahead, MediaTek has set an optimistic forecast for its fourth-quarter revenue, projecting a figure between $120 billion to $126.6 billion. This indicates an expected sequential growth of 9% to 15% and a year-over-year increase of 11% to 17%. Keeping in sync with the maintained performance, gross margins are predicted to hover around the 47% mark, with a possible variation of 1.5 percentage points.

Operating Efficiency and Profitability

In terms of operational efficiency, operating expenses for the quarter tallied at $34.2 billion, positioned between the figures from the previous and the same quarter last year. Despite these sustained expenses, MediaTek has managed to achieve a higher operating margin sequentially, increasing it by 11.3 percentage points. This financial prudence extends to net income, which improved by 15.9% from the previous quarter to $18.6 billion, strengthening the non-TIFRS net profit margin to 17.4%.

Dividends and Shareholder Returns

MediaTek's commitment to delivering shareholder value is further established through the announcement of its first semi-annual cash dividend payment at $24.6, consisting of a regular cash dividend and a special cash dividend, marking the introduction of a new semi-annual dividend distribution strategy appreciated by shareholders. The scheduled payment date for this dividend is January 31, 2024.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the MediaTek 2023 Third Quarter Investors Conference Call. Financial results and presentations for today's call are available on Investors section of company website at www.mediatek.com.And 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. Rick Tsai, MediaTek CEO; and Mr. David Ku, MediaTek 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. The statements are subject to various risks and factors which may cause actual results to be materially different from the statements. The presentation materials 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 contents 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 2023 third quarter financial results. The currency used here are all in NT dollar. Revenue for the quarter was $110.1 billion, up 12.2% sequentially and down 22.6% year-over-year. Gross margin for the quarter was 47.4%, down 0.1 percentage point from the previous quarter and 1.9 percentage point year-over-year.Operating expense for the quarter were $34.2 billion, compared with $31.9 billion in the previous quarter and $37 billion in a year-ago quarter. Operating income for the quarter was $17.9 billion, up 21.7% sequentially and down 45.7% year-over-year. Non-TIFRS operating income for the quarter was $18.6 billion. Operating margin for the quarter was 16.3%, up 11.3 percentage points in the previous quarter and down 7 percentage points year-over-year. Non-TIFRS operating margin for the quarter was 16.9%.Net income for the quarter was $18.6 billion, up 15.9% sequentially and down 40.3% year-over-year. Non-TIFRS net income for the quarter was $19.1 billion. Net profit margin for the quarter was 16.9%, increased 0.6 percentage points from the previous quarter and decreased 5 percentage points year-over-year. Non-TIFRS net profit margin for the quarter was 17.4%.EPS for the quarter was $11.64, up from $10.07 in the previous quarter and down from $19.54 in the year-ago quarter. Non-TIFRS EPS for the quarter was $11.97. A reconciliation table for our TIFRS and non-TIFRS financial measure is attached in our press release for your information as well. And that concludes my comments. Thank you.

[Jessie Wang, executive]

Thank you, David. Now let me turn the call to our CEO, Dr. Rick Tsai, for prepared remarks.

[Lih Shyng L. Tsai, executive]

Thank you. Good afternoon, everyone.MediaTek's third quarter revenue slightly exceeded the high-end of our guidance, mainly due to an improving business environment and a more favorable foreign exchange rate. Third quarter gross margin was in line with our guidance. In the last few months, we have observed improvements on overall channel inventory, particularly with respect to smartphone. With prudent inventory management, we have reduced our inventory for 5 consecutive quarters. And at the end of the third quarter, our days of inventory has reached a healthy level of 90 days. We expect the overall inventory environment to continue to improve in the coming quarters.For the future, the increasing computing capabilities, the proliferation of edge AI and higher adoption of semiconductor content, automotive will provide strong growth opportunities for MediaTek. For AI, we believe the increasing demand for cloud AI will create a complementary demand for edge AI. And the more edge AI, the better cloud AI. Today, MediaTek is one of the very few edge AI providers that have the capability to incorporate edge AI into SoCs to support a wide range of devices across many major applications. For automotive, MediaTek also offers a full range of solutions together with NVIDIA to serve global customers in areas such as smart cabin, connectivity and auto drive.We will continue to enhance our capabilities by investing in key technologies such as advanced computing, next-generation wireless and wired connectivity, high-speed data transmission and edge AI, so that we are better prepared to capture the growing market opportunities. In addition, we recently announced our first 3-nanometer tape-out at TSMC for our flagship Dimensity SoC, shipping in the second half of 2024. This represents an important step for us as we expect to expand our product portfolio to the higher-end segments in automotive, computing and enterprise ASIC. We believe with our ever-increasing capabilities and strong execution in R&D, we are able to create strategic value to our global customers and pave the way for future growth.With that, now let me talk about the recent business performance of our 3 revenue groups. Mobile phones accounted for 49% of total revenue in the third quarter and grew 19% quarter-over-quarter. The sequential growth was mainly due to inventory restocking and new model launches for both 4G and 5G. With the industry-leading 4G and 5G SoC portfolio across segments, MediaTek offers best-in-class product quality to support our customers, strengthened by the strong partnership with a leading foundry. We believe we will continue to benefit from 5G upgrades by effectively catering to the sizable and long-term 4G market.For the fourth quarter, we expect mobile phone revenue to grow faster than the third quarter, mainly driven by the shipment of our new flagship SoC, Dimensity 9300, which will be unveiled in early November. Dimensity 9300 further elevates CPU and GPU performance and equips with a powerful APU, AI processing unit which is optimized to run large language models for generative AI. For example, we have recently demonstrated the industry-leading capability to run 7 billion parameter, large language models on smartphone powered by Dimensity 9300. We expect smartphones powered by Dimensity 9300 to hit the market by the end of this year.We also plan to expand generative AI capabilities to more smartphone segments next year. We are confident that our strong APU support will facilitate the industry in developing increasingly useful generative AI features for end users. And the rising trend of adopting more powerful APUs will not only stimulate smartphone replacement demand, but also enhance our product mix.Now let me move on to Smart Edge Platform. This group grew 6% sequentially in the third quarter and accounted for 44% of revenue. In the third quarter, demand for our wireless and wired connectivity improved sequentially, with WiFi shipments reaching a quarterly record. Meanwhile, our Wi-Fi 7 solutions have been adopted by high-end retail routers, premium notebooks and broadband devices this year, with more to come in 2024. However, for the fourth quarter, due to seasonality and cautious overall consumer electronic market outlook, we expect Smart Edge Platform's revenue to decline sequentially. That being said, we have been gaining share in several major operators globally. MediaTek's rich wireless and wired connectivity product portfolio has brought strong value propositions to these global operators.Now moving on to Power IC, which accounted for 7% of total revenue in the third quarter and grew 11% quarter-over-quarter. Among all applications, PMIC for smartphone and PC performed better in the third quarter, due to restocking demand. We expect our IC revenue to be flattish in the fourth quarter. For fourth quarter, we expect the strength in our mobile phone to more than offset the seasonal decline of Smart Edge Platforms. We will continue to execute our strategy for balancing among market share, revenue and profitability.With that, we expect our fourth quarter revenue to be in the range of $120 billion to $126.6 billion, up 9% to 15% sequentially, and up 11% to 17% year-over-year at a forecasted exchange rate of [ TWD ] 32 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.Lastly, in the AGM held on May 31, our shareholders approved a proposal to change our earnings distribution from an annual basis to a semi-annual basis. In accordance with this resolution, our Board has approved our first semi-annual cash dividend payment of $24.6 today. The amount consists of [ $16.6 ] of regular cash dividend and $8 of special cash dividend. The payment date is expected to be January 31, 2024.This concludes my prepared comments. Thank you.

[Jessie Wang, executive]

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

[Operator]

Yes. We are now in question-and-answer session. [Operator Instructions] And our first question is coming from Gokul Hariharan, JPMorgan.

[Gokul Hariharan, analyst]

Congratulations on the good result. Pretty strong recovery in mobile. So, just wanted to ask, how do you think about the market potential for going into next year? Given that we've seen pretty good restocking recently, do we see that the momentum is likely to continue? And I think, China market especially has been fairly disappointing until very recently. Recently, I think there seems to be a little bit of a turnaround. How do we expect China market to be shaping up next year? And any thoughts on continued 5G penetration also? I think, this year, I think the 5G adoption seems to be a little bit slower compared to the last few years. And within the China market, maybe, any comment on what you're seeing, given this rising market share that Huawei seems to be cornering, especially in the last several months with their 5G solutions, the in-house 5G solutions.

[Lih Shyng L. Tsai, executive]

Okay. First of all, for 2024, I think we still have some time to observe the overall market dynamic. But based on what we see here, we do believe 2024, overall speaking, should be a year of growth for MediaTek. That's first thing first.Talking about the market penetration of 5G or in general, maybe we talk about sell-out on end market demand for next year. Again, that's similar to our earlier comment about 2024. We do believe next year for the overall smartphone shipment globally, from the end market demand perspective, should be a year of growth, maybe in the low single-digit, but at least from the trend should be favorable.The last question you talk about, Huawei. I guess from our perspective, in general, it's our policy. We didn't really comment about a specific company. But on the other hand, overall, I guess we pretty much focus on the exclusion and deliverable. Like our CEO talked about earlier, we're going to announce our third generation flagship. We do believe along the year and also we will continue that our momentum. We will continue to put out the good technology and the great product, and also leveraging whatever process technology we have. And we do believe as long as we can focus on that and plus, we will continue to invest aggressively for new growth opportunities, and that will be our overall strategy.

[Gokul Hariharan, analyst]

So David, just to follow up on this, on the 5G adoption for next year, do you expect a meaningful pickup given you just launched your lower cost 5G solution as well? I think we have been, I think, kind of stagnating around early to mid-50% for a few quarters now. Are you seeing a meaningful step-up in terms of 5G adoption next year?

[David Ku, executive]

Yes, I think the overall 5G adoption or penetration will definitely increase next year. Again, based on what we see right now, the number may be changing in the next quarter, but overall we should be looking for 5G global shipment year-over-year double-digit growth next year, the market and market demand.

[Gokul Hariharan, analyst]

My second question is more broad-based and longer term in terms of the MediaTek strategy of entering new markets. I think you've talked about automotive. There is some progress in enterprise ASIC. There's also a lot of interest in ARM computing, especially for Windows-based PCs. My observation has been typically, MediaTek has made meaningful profits in markets where it has emerged as the top 2 or a top 3 player like mobile SoC, TV, Wi-Fi, et cetera. In these markets, there are already very strong incumbents right now. So just want to understand, how do you prioritize investments in these markets? Is there any rank order in terms of which markets you think are more promising from a potential market share perspective and profitability perspective? So just wanted to understand like what is the strategy to kind of try and break into these markets which have pretty much all of them have pretty strong incumbents right now and MediaTek is still at a pretty early level in terms of the starting point. So just wanted to understand the longer-run strategy rather than the more nitty-gritty details.

[Lih Shyng L. Tsai, executive]

Yes. You're quite right in saying the MediaTek has been many companies which we have done really well in mobile SoCs, in TVs, in Wi-Fis, et cetera. And we certainly will continue investing appropriately for those very successful segments we already have.And as we also said, we are now investing aggressively in new markets such as automotive, such as AI, either edge AI or cloud AI, such as computing, ARM computing. You're also certainly correct in saying there are strong incumbents in those areas. I think from a fundamental point of view, actually if you look at MediaTek's investment over the last three years, which we put in for the flagship mobile SoCs, now we don't have the third-generation Dimensity 9300. And if you look at the computing capability from that chip in their CPU, in their GPU, in their APU computing capability, we are very proud and we are very confident in our capability that we build. And all those capabilities are now, of course, being leveraged. And not just leveraged, really being applied to our new growth initiatives, not to mention the capability and the relationship we have built with our leading foundry partner in utilizing the most advanced process technology and advanced packaging technology. These are all very necessary conditions for the market segments that we want to go in. And we have, for instance, in automotive case, we have already built partnership with NVIDIA, which by itself is a strong incumbent with extremely strong capabilities, both hardware, software, AI. So, you see, we're doing this. We're going in understanding the difficulties, but we're also not only accumulating, we're already building to our capability and we're building with strong ecosystem partnership. And in addition, we are more, we believe versatile and flexible business model partners for some large, shall we say, tech companies. With all that, we understand the challenges, but we are quite confident that we are making headways, in some cases, fairly soon, in some cases, it will take some time, but we will get there.

[Gokul Hariharan, analyst]

Maybe 1 follow up if I may. Like what is your measure of success or KPI, Rick, in some of these new ventures? Is it like getting to a $1 billion revenue or like 10% of revenue or just wanted to understand how the management thinks about the KPIs on some of these new initiatives?

[Lih Shyng L. Tsai, executive]

In general, profitable growth, we need, I would say, the major KPIs, pretty high CAGR for revenue, but with a good profitability. The profitability must be there, but it may not be as strong as some of our very competitive existing product line. But on the other hand, what I want to say is, we will not just pursue revenue with very low profitability. So, a high CAGR of profitable revenue growth, that's our KPI in the next 3 years to 5 years.

[Operator]

Next one, Nicolas Baratte, Macquarie.

[Nicolas Guy Gabriel Baratte, analyst]

Yes, hello. When we think about next year, you know, since you're mentioning better phone demand, I mean, you know, low inventory for smartphone and some growth coming back in both 4G and 5G. Do you have a view, an estimate, the range of the 4G to 5G mix for 2024?

[Lih Shyng L. Tsai, executive]

Nicolas, I think we don't have the detailed view yet. Again, we still got a few more, you know, months to get into 2024. But in general, I think the mix in terms of 4G versus 5G, our view is actually 5G will continue for our own shipment perspective. 5G probably will increase and 4G will decline in terms of shipment compared to this year, 2024 versus 2023. Because 5G again next year, obviously, the overall market still grow double-digit. 4G probably will be flattish to slightly down from the market demand perspective. And by the way, that's actually due to 4G, 5G upgrading cycle. In general, it's actually is a good situation or migration from our business perspective.

[Operator]

Sorry, Nicolas just dropped the line and maybe we'll just go on to take the next caller. And then the next one on the call is Sunny Lin, UBS.

[Sunny Lin, analyst]

Congrats again on the very solid performance and also pretty good Q4 guidance. So, my first question is on edge computing for smartphone. And so, based on your current engagement with the supply chain, including the hyperscalers and also the software developers, what kind of the applications could smartphone better support versus cloud? I think that's a key question that a lot of investors wonder. And also when we think about the upside for your silicon content for smartphone SoC with better support for edge computing, now that you have completed the development for 3-nanometer smartphone SoC for second half of next year, how should we think about the upside from here?

[Lih Shyng L. Tsai, executive]

Sunny, generative AI capability in an edge device, the way we look at it is a must capability we need to have in our offering. As I said earlier in my comments, we have already demonstrated with our customer in a customer phone of having a 7 billion parameters [indiscernible] model, which our customer is developing various applications for their end customers.I think, some of the usual applications that you can imagine or you can think of obviously, for instance, the natural language, user interfaces, the camera, picture improvements, et cetera, et cetera. These are obvious ones, but not obvious ones. Of course, not obvious right now. I'm not joking. But I think, we believe with the building capability in those high-end edge devices such as our Dimensity 9300, the users worldwide will then explore the capability and come up with applications that will excite. That will be very exciting, very interesting and very fun. It's not just useful. But that would take, I believe, a year or a couple of years to establish. Just like you will see, for instance, when the 4G LTE technology and capability ramped up about a decade, yes, about a decade ago. People after a couple or three years, some people came up with all kinds of applications and built many profitable business models.So, seeing all that, at this time, we are investing heavily in building those capability in, I believe, not just mobile phone, mobile phone being the first obvious ones, but all the various kinds of edge devices. This is the time that we believe that will create new demand, the extent of which I think will take a couple of years to really realize. One thing we know is if we do not invest, we will be left out. And we will not be left out.

[Sunny Lin, analyst]

So a quick follow-up is, how should we think about the silicon content upside for smartphone SoCs from here? And so, if you look at your 3-nanometer smartphone SoC coming out in second half of next year, would that be able to drive any ASP increase versus this year's?

[David Ku, executive]

Sunny, actually, like our CEO explained, right now, it's in the beginning of the product cycle. So they will have some support. But I think more importantly is actually looking at probably due to the new features and function. You know, customer will like to buy the new phone, so we'll shorten the replacement cycle. I think that was the cycle, the beginning of the cycle. Then people demanding from higher performance, then we put into more semiconductor content. Right now, actually it's the overall semiconductor content, especially for the current product we've talked about here has been basically pricing in already. But for the trend, we do believe we'll continue to demanding for more competitive power for AI-related.

[Sunny Lin, analyst]

That's very clear. My second question is on your collaboration with NVIDIA. And so, any latest progress that you could share with us in terms of the product pipeline? I think 3 months ago, you shared you have already secured about 1 billion pipeline for your automotive business. Any update there? And also for this collaboration, any potential to expand to other product segments like ARM-based computing?

[Lih Shyng L. Tsai, executive]

First of all, our partnership with NVIDIA is only with automotive. I understand right now, there are some rumor or speculation talking about that partnership could be extended to other areas. But I just want to clarify right now, the partnership between NVIDIA and MediaTek is only on automotive. And that's actually the same statement we made basically a few months back during our announcement back to Computex in Taiwan around June.In terms of design pipeline and also product pipeline, it's actually the same like we updated everyone during the Computex period. The only difference will be because in the last few months, both companies being getting on a world tour, talking to different customer and formally disclosed our product portfolio for the next few years. The overall feedback are fairly positive, fairly positive. So there's a lot of activity going on. We're probably not going to update in the pipeline yet, but I probably just say the overall momentum and also customer feedback are all positive and give us much more confidence compared to three months ago.

[Operator]

Next one, Laura Chen of Citi

[Chia Yi Chen, analyst]

I'm curious about the MediaTek's current progress in the high-end segmentation in terms of the market share or the current revenue contribution or the shipment, et cetera. Because we know that it's actually quite important, actually MediaTek got very good progress on Dimensity 9000 and also 8000 series since management already talked a lot about how the performance goodness and also how the benefit can deliver to your customers. So, just wondering that in particular for the flagship SoC, what kind of the contribution or market share or the shipment you are now right now and also what the growth potential or the target you may have, can you share with us?

[David Ku, executive]

I think in terms of revenue contribution, I think for this year, 2023 is sizable. I would say in the range of $1 billion. So, it's progressing well. And that's actually in line with our earlier guidance. For going forward, again, with our third-generation product, by the way, we are going to do a formal product announcement in November 6 with a lot of demos which including the earlier questions, many people are interested about the GAI. We're going to do a lot of demo, and we're going to show our performance leadership. With third generation Dimensity 9300 product coming out, we do believe next year will be another strong growth year for our flagship product.

[Chia Yi Chen, analyst]

So if you're assuming that for the global 5G smartphone to be growth double-digit year-on-year, so since the ASP is much higher for your flagship SoC and also your market share again, so supposedly that will be even stronger than what you look at the overall market. Is that correct?

[David Ku, executive]

I think, again, we're not able to give out the 2024 detailed guidance, but trend-wise, direction wise, I think that's the direction.

[Chia Yi Chen, analyst]

And also on the HAI space, we know that MediaTek has done very well in the HAI potential in the smartphone space. So just also curious about your view about what can we see the trigger of Windows on ARM overall market. Because we are talking about in the industry for probably more than a decade, but seems like the portion of Windows on ARM still quite small at this moment. But looking forward, what kind of the trigger you may looking for to see this market becoming bigger and MediaTek is already well-positioned in terms of a different kind of technology. So, at earliest, any timeline you are looking for it can be becoming bigger.

[Lih Shyng L. Tsai, executive]

This market, depending on how you look at it actually the MacBook processor, the ARM-based CPU. In our view of the industry, this is purely from industry trend point of view. This trend will certainly continue and grow. There's no doubt in our mind from industry point of view. And we expect players to go in also.

[Operator]

Next question, Brett Simpson, Arete Research.

[Brett Simpson, analyst]

Rick, can you maybe just share your perspective on the impact of Huawei's chip ramp-up on your TAM specifically in China Android? I mean, it looks like they are coming up with multiple chips and they're going to address the mid-range fairly soon and there's been a lot of commentary about the ramp-up that we're going to see from Huawei next year. Can you just talk a bit about how you think this is going to impact overall the China Android market and your business specifically and whether or not this leads to, you know, a structural challenge from Huawei?

[Lih Shyng L. Tsai, executive]

I understand the question, Brett. The way I will respond to your question is, I mean, we have been in this smartphone market for long enough to know how the dynamics play. And one obvious data point was when I guess sometime in 2019, Huawei kind of not totally exited but yes, certainly exited 5G smartphone market, the market share change which company or which device benefits the most. Yes, you know that. And then, you can kind of imagine when Huawei comes back at certain price points, they will take certain shares back.As to our customer TAM, in my mind, we are very good, very strong with our portfolio from flagship premium [indiscernible] to entry. If you look at our product portfolio and their capability, their performance, their power consumption, the use of the leading edge process, user experiences, we have no question in our mind that we are enabling our customers to compete effectively against whoever coming into the market because we have great products.At the end of the day, emotion can work for some time, but I would expect rational consumer behavior will prevail fairly soon.

[Brett Simpson, analyst]

Yes, appreciate that, Rick. And maybe just to follow on, you've talked a lot about Gen AI coming to smartphones. And I think you mentioned the ability for the 9300 to deliver a 7 billion, run a 7 billion model on board of smartphone. But can you maybe talk a bit about what this means commercially, the content step up that this leads to for MediaTek? You know, what would that type of capability be? You know, how do you sort of benefit from a value perspective delivering this capability? And then when do you think the AI ecosystem is ready to drive applications for Gen AI on smartphones? Because I think that seems to be the big unknown at this point.

[Lih Shyng L. Tsai, executive]

Actually, I probably can give you a bit of details, but what I want to say first is, as I said earlier, this is the beginning of, I don't know, an era maybe too much of an overstatement, but people are really working to find the values. The values I think not just because of not just the productivity values, even more important probably consumer values because that's where the volume will be. And our customers, they realize that. And for the smartphone, most of our market, especially our flagship market relied in China and Chinese. I believe Chinese consumers can be very innovative in coming up with applications.But David, do you have any more kind of a detailed thing for Brett?

[David Ku, executive]

Yes, Brett. We do about [ 400 ] because like I say, some of our customers who have NDA, they're going to do some [Technical Difficulty] and also join the [indiscernible] event to get more information. But I can probably just share without the detail is, the general idea is actually right now most of the Gen AI have been demo on the edge side, probably show some not so great resolution, stable diffusion, picture generation. But I think, on the China side, especially for a lot of our customers, they've been pretty much focused on the large language model application. So the general idea is actually consider, if the Gen AI can become your truly personal assistant on your phone, okay, actually on the edge side. So, you know, you have a personal assistant who can read all your information on your phone because that's on your palm, not going to cloud. So you have the 100% trust and confidentiality and privacy. And if you have a small AI agent on your phone, what you can do with this phone. I think that's the general idea.Another idea that of course on the picture side right now, on the taking pictures, on the camera side, a lot of the new function being deployed based on generative AI. In the past, maybe just simple beautify, but now actually you can consider, you can do some kind of a Photoshop function with a very simple natural language instruction, a few touch and being up there on your phone. Again because that's your picture, that's your phone, you don't want to send your picture into a cloud and you don't know who will have access to cloud, but you can do some editing, you know, beautifying or maybe modify on your phone. I think that's the direction.Again, like Rick say, that's just the beginning of the cycle. It's really just a chicken and egg issue. Once you have a more computation power on your palm on a smartphone, then you will see more developer and our customer in this case as well, trying to use less computation power to generate more user-friendly and interesting features to help them to sell more phone or shorten the replacement cycle of the smartphone.

[Operator]

Next one, Bruce Lu of Goldman Sachs.

[Zheng Lu, analyst]

I want to know that, what if AI smartphone is widely adopted by the consumer? How fast can you render that? I mean that, what is the incremental barrier for you to proliferate the AI function to Dimensity 8000 even to a 1000 series? What's the tech requirement? Is that incremental cost or process speed or anything like that? You know, how fast it's going to be if you want to further proliferation?

[Lih Shyng L. Tsai, executive]

Bruce, currently, actually, the HAI has been performing part of our APU function, which is part of our application processor. So in terms of the cost incremental, I think it's actually all been pricing in and we don't see it's a huge cost increase so far based on the current AI demand or generative AI demand. But going forward, again, depends on what kind of applications or how soon those applications will be adopted. And then we will talk about what's the right cyber connected content people put in. But so far based on what we see in the marketplace and more importantly, a lot of research being conducted by our customer, they're all trying very aggressively to promote this new direction because they do believe that the new wave of function features upgrading through the GAI. Sorry, please. No, the question I will try to ask is, you know, is that the technical constraint for the certain speed or certain thing to prevent you to further proliferate to Dimensity 1000, or is a business decision?

[David Ku, executive]

1000? What is 1000?

[Zheng Lu, analyst]

Dimensity 1000, meaning that mid to low-end of your chips.

[David Ku, executive]

To the low end. GAI could be low end.

[Zheng Lu, analyst]

Yes.

[David Ku, executive]

Okay.

[Zheng Lu, analyst]

Is there any technical requirement?

[David Ku, executive]

There's no technical limitation because right now, actually once we announced flagship, our Generation 8000 series will adopt GAI as well. Okay, we're going to announce that in the same time in November. So it's more of an economical decision if you like, like how much is the pricing point and how much GAI related value we can put in rather than technical difficulty or technical limitations.

[Zheng Lu, analyst]

So the second question I still want to ask about the ASIC. You know, I think a lot of investors do have the concern about ASIC growth or the profitability. I think Rick just mentioned that the profitability is going to be good. But I just want to that, you know, do we maintain a similar value add for the ASIC moving forward? I mean, what's the growth outlook for our ASIC business in the coming years? I think, Rick also mentioned about the ASIC addressable market 2 years ago. Do we see an enlarging ASIC business at this moment?

[Lih Shyng L. Tsai, executive]

We see ASIC market to be growing even better compared to 2 years ago, the tab. Well, because all these changes in the AI field, it's pretty obvious, which also we see, I'm sure, as you do too, the behavior or the silicon behavior by the key cloud AI or cloud data center providers, not to mention the still rapid improvement in process technology and packaging technology from a power consumption point of view, et cetera. So, all those changes, again, I believe provide MediaTek actually a better entry into this market. This market can be very big and certainly dynamic.And also, the profitability question relates to also the business model. But what I said earlier remains certainly valid. Whether we go into ASIC or the multiple ARM computing is that we need profitable growth. We can have very good revenue, but also we will still have very good operating margin for that revenue. That's the way we're going to.

[Zheng Lu, analyst]

A quick follow-up, that, you know, because talking about hyperscaler, they are trying to develop the chip by themselves. You can see that from many hyperscalers. So what's the value proposition for MediaTek in this business?

[Lih Shyng L. Tsai, executive]

At the end of the day, they have become your competitor or customer.

[David Ku, executive]

Well, that's where my comments earlier about the flexible business model comes in. We will be their partner. We don't compete against them. We have the ability that we have in leading edge process capability, the packaging capability, the high speed like service capability. All these, I think, are very valuable and complementary to many of the data center providers. I'm sure I missed a couple. My guys gave me quite a few more, but yes, but that's okay, you get a point. I think at the end of the day also, this flexible and open-minded approach, the collaborative approach with potential customer will also prove very valuable.

[Operator]

Next question, Charlie Chan of Morgan Stanley.

[Charlie Chan, analyst]

First of all, congratulations for greater results. So, I have two parts of question. One is on your new business. So there were some discussions before I want to clarify some part of that.And second topic will be on your smartphone competition. So, first of all, on that partnership with NVIDIA, I do search the website and both MediaTek and NVIDIA back in 2021, announced some partnership in the kind of a notebook. And MediaTek, sorry, Jensen, the NVIDIA CEO, even said that with MediaTek's technology, you guys can make the best or most excellent notebook experience. So, I'm wondering, you know, any progress in this partnership in the late up? So please correct me if I'm wrong, I do see you have this partnership since 2 years ago.

[David Ku, executive]

Chan, it's David here. Yes, we did announce the partnership and we kind of explained to everyone a few years back that partnership basically works on the Chromebook side. And the idea is actually we have a pretty good CPU and we incorporate basically, when I say incorporate, basically put out from the system level, not on the chipset level. We leverage the NVIDIA high-end GPU back to one of the initiatives NVIDIA are trying to drive is to see whether or not we can find something with a gaming Chromebook, if you like. And that one actually is still ongoing, but didn't really proliferate well into other segments. And this actually is not quite like people speculating right now this direction. But just to get back to your point, we did have that announcement and that was what I explained. That was the nature of this announcement and also the policy.

[Charlie Chan, analyst]

So the second part of the first topic is about the ASIC. I think Bruce just asked a few questions around it. So, my question is also a clarification. I remember a quarter ago, Rick mentioned that there could be some good news come or to announce around the year-end. So, I'm wondering whether there's any progress? And if there is some progress, do you expect any big revenue ramp no matter in 2024 or 2025 from the major projects?

[David Ku, executive]

We just checked the record, we didn't really see anything say, our CEO kind of talking about some announcement before end of this year. And also in general, that's actually, it is not possible, we probably don't disclose the users' names.

[Charlie Chan, analyst]

Okay. Rick, do you have anything to add or I can jump to the next topic?

[Lih Shyng L. Tsai, executive]

I think I said just now, I am very confident that we will be making good progress in this very large and high growth market with our capabilities and the business models.

[Charlie Chan, analyst]

Okay. Anyway, wish you a success. So my last question is really about Huawei impact. This is more open-ended question. I really want to get your kind of opinion because the concern is that the Huawei Mate 60 Pro. They seems to use an older generation process like 7-nanometer, you know, process, but they can still sell, okay. Personally, I play with the phones for a few minutes. I think it runs as smoothly. So, my question is to Rick, right, how do you justify your smartphone customers or end users to migrate to 4-nanometer or even 3-nanometer which will cost more money? What kind of killer apps or kind of features that you have to migrate to 3-nanometer?

[Lih Shyng L. Tsai, executive]

Some of the application, obviously, the high power gaming for the heavy gamers, well, I'm sure a 7-nanometer processor and a 3-nanometer processor will behave very differently, very differently. Then the generative AI which we have spent so much time on today and also, I'm sure in the months and years ahead, you need those leading-edge process to provide you all those computing power for the mobile part of the low power computing power. So, there's no question in my mind that the 3-nanometer will beat the heck out of 7-nanometer.

[Charlie Chan, analyst]

Would that the large language model is going to be a key differentiator for 3-nanometer chip?

[Lih Shyng L. Tsai, executive]

Charlie, yes and no. Actually, maybe another way to answer your question more directly. If the world only needs 7-nanometer, maybe the global phone maker will stay in that age. In that process, no one will migrate. But you actually see quite the opposite for the global phone leaders. So, unless you believe, the global phone leader are all wrong, and your five-minute test, especially can demonstrate and be a good rep for all customers. Otherwise, I think the world is still demanding a better process though and better performance. But maybe for certain customer group, when they have certain usage behavior, you don't need a leading node, okay. But for most of the customer or big population of customer, they probably still need better sub-processor, which means better process nodes.

[Charlie Chan, analyst]

Got it. Okay. Great answers, gentlemen. Hope the rationale can prevail.

[Operator]

Thank you. Ladies and gentlemen, we are running out of time and that will be the end of the Q&A session. We thank you for all your questions. I'll hand it over to Ms. Jessie Wang for closing comment. Ms. Wang, please go ahead.

[Jessie Wang, executive]

Ladies and gentlemen, this concludes MediaTek 2023 third quarter conference call, and an audio replay will be available in 1 hour after the call at the Investors section of MediaTek's website. We would like to thank you for your participation, and you may now disconnect. Goodbye.

[Operator]

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