MediaTek Inc

TWSE:2454

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to the MediaTek's 2017 Fourth Quarter Investors Conference Call. Your speakers today are David Ku, MediaTek's CFO and Spokesman; and Jessie Wang, MediaTek's Manager of Investor Relations.

Now I would like to turn the call over to Ms. Jessie Wang. Ms. Wang, please go ahead.

[Jessie Wang, executive]

Good afternoon, everyone. Welcome to MediaTek's Fourth Quarter 2017 Conference Call. As a reminder, all content provided on this teleconference is for informational purposes only, not intended for investment advice. Neither the issuer nor any of independent providers is liable for any action taken in reliance on content contained herein.

MediaTek provides non-TIFRS financial measures as supplemental information. Earnings distribution is made in accordance with financial statements based on TIFRS. Unauthorized recording or redistribution of the video, audio, text and presentation contents of this teleconference is strictly prohibited. By participating in this teleconference, you agree to accept the foregoing terms and conditions.

Now let's start with the 2017 fourth quarter financial results. The currency here is in NT dollars. Revenue for the quarter was $60.4 billion, down 5.1% sequentially and down 12% year-over-year. Gross margin of the quarter was 37.4%, up 1 percentage point sequentially and up 2.9 percentage points year-over-year.

Operating expenses for the quarter were $21.3 billion. If you include the expense recognition of $1.5 billion resulting from the disposal of these shares. Excluding this one-time effect, operating expenses would have been $19.8 billion compared with the $18.2 billion in the previous quarter and $19.7 billion in the same period last year.

Operating income for the quarter was $1.3 billion. It would have been $2.8 billion following the aforementioned expenses. Compared with $5 billion in the previous quarters and $4 billion in the same period last year.

Operating margin for the quarter was 2.1%. It would have been 4.7% excluding the one-time expenses, compared with 7.8% in the previous quarter and 5.8% in the same period last year.

Net income of the quarter was $10.2 billion, up 100.8% sequentially and up 97.7% year-over-year. Net profit margin for the quarter was 16.8%, increased from 8% in previous quarter and they increased from 7.5% in the year-ago quarter.

EPS of the quarter was $6.5 compared with $3.26 in the previous quarters and the $3.23 in the same quarter last year. We also provide non-TIFRS financial measures financial measures which is basically share based compensation, amortization of acquisition related assets and tax effect. Please refer to earnings press release and the presentation for details.

For the third quarter of 2018, we expect revenue to be in the range of $48.3 billion to $53.2 billion, a before tax exchange rate of $29.5 to USD1. We are forecasting the gross margin at 37%, plus or minus 1.5 percentage points, and the quarterly operating expense ratio to be at 35% plus or minus 2 percentage points.

For the shipment guidance, we expect shipments of smartphone together with tablets to be 75 million to 85 million units in the first quarter.

That concludes my comments. And now I would like to turn the call to CFO David Ku for Q&A session. Maybe we please have the first question please?

[Operator]

[Operator Instructions] The first one to ask questions is Randy Abrams, Credit Suisse.

[Randy Abrams, analyst]

The first question I had was on the gross margins with good improvement you saw. Could you talk about how much came from mix shift toward the non-mobile product versus how much came from the new modem platforms? And then as you look ahead to second quarter with some of the new product like P40, P70 and growth products getting back towards the high season, if you see potential further improvement or even start to approach 40%.

[David Ku, executive]

Randy, our Q4 last year operating -- the gross margin improvements are mainly due to the better gross margin coming out from the new smartphone products. If you -- actually in fourth quarter last year when you consider about smartphone presence to non-smartphone product mix is actually in favorable of gross margin because in Q4 last year compared to Q3, I think actually it's smartphone's revenue contribution is slightly higher. So overall, I think for Q4 last year the gross margin improvement are mainly coming off from the smart -- gross margin improvement on smartphone product sales. Likewise for Q1, I think for Q1 versus the Q4, the product mix between the smartphone versus non-smartphone are pretty similar. The main reason actually was due to gross margin continuing to improve, mainly due to the fact that new products still continue to ramp up. For Q1, particularly due to the unfavorable foreign currency movement, actually that brings down our gross margins somehow. So even consider that negative impact due to the negative -- due to the NT dollar appreciation, again we still see pretty decent gross margin improvements in Q1. Again, that's mainly due to the gross margin improvement on smartphone space.

[Randy Abrams, analyst]

And I guess the follow up, I was looking ahead to second quarter, I think you have the new P40, P70, more mid-range and then a higher type modem first type of modem, plus the shift, I guess, to growth products get back to high season. So is it expectation at this stage more improvement or -- I mean, now we are up to the 37%, 38%, if we start moving towards 40%?

[David Ku, executive]

I think for -- from a visibility respectively, I think we do have Q1 visibility that too for gross margin it is really a combination of new product portfolio and also to be more precise basically was a revenue contribution from new product portfolio and also the ASP profile versus our cost profile. So for Q1 we have all the detail visibility, so that's why we feel very comfortable to give out the guidance. For Q2, we've got some visibility, not necessarily back in Q1, but we still have some visibility. And based on what we see for Q2, probably we are still looking for high 30% to mid-40%. For second half this year, to be honest, we don't have [indiscernible] information or visibility to make a maybe full distinction about what the gross margin looks like. But apart from all, I guess, we still feel comfortable for the high 30s gross margin for guidance. But in terms of the [ known ] value will be even higher or lower. I guess, it will depend on how the land space is second half this year. So probably the best way to explain that is we wait until the second quarter when we have more visibility getting into second half this year.

[Randy Abrams, analyst]

I wanted to ask on the mobile, just your view on the market share. I think your guidance for 75 million to 85 million, if you could give a view kind of where your market share first quarter. And then based on the design activity, you can see if you have a view on market share recovery or maybe another way relative to the 5% growth you're projecting for the China brands if you think you could actually get to the point you are gaining market share now growing your overall China brand this year.

[David Ku, executive]

I think for 2017, in general, we are in the trend of losing market share last year. But starting from Q4 last year, I think we -- especially with the new design-in and design-win, we feel we are still watching the market share and also should be able gradually increasing market share starting from -- maybe starting from Q2. So I would say Q4 and also by and large Q1, our market share is pretty flattish. But if you kind of see the [ payment ] conservation of our -- the design-in and design-win situation, especially for the future market, I think we feel fairly comfortable we should be able see quarter-over-quarter market share gains starting from second quarter this year.

[Randy Abrams, analyst]

And question on the AI on device, the compute. I mean, could you talk if you are starting to see these new emerging and deep learning engines driving any change in the platform pricing? And then also, I'm curious on the cost structure, if putting in these features may require more aggressive silicon, whether technology node or we may start increasing dot size. But hopefully, a cost you can pass on with the new features.

[David Ku, executive]

I think for the next generation Helio P products, we will have something we call APU which just stand AI combination units, similar to CPU and GPU. So far we see some preliminary applications based on those APU basically [indiscernible] units, which including but not limited to like face recognition, picture quality. You can view beautiful pictures moving through a computer vision, the AI VR, and that's really combination of our smartphone customer and trying to pull all the unique features and also some third party service providers trying to pull various service based on that enhanced hardware. But overall, we are really still in the preliminary stage. So in terms of competition requirements, again we see a huge competition requirement coming up here. Maybe we probably still need to see some kind of learning curve basically for either end customers or for the app developers or feature developers trying to gain more about this APU functionality and also think about what sort of new functions on end user side. But so far I guess face recognition, picture quality, taking beautiful picture more easily, that's maybe the top 3 requirements for phone majors and also from end customer side.

[Randy Abrams, analyst]

If you could talk on the ASIC designs, if -- how your visibility beyond the game console and if your expectation these projects could ramp in 2018 or more of the new projects are timed to, like, in next year or the following years.

[David Ku, executive]

I think for ASIC business for beyond game console, we probably won't be able to comment any further detail. Probably the best way to describe that is actually is currently we -- I think we especially penetrated into sort of non-game console ASIC business. I think, that's why it's comforting. And so far based on the designing and also the tape-out schedules, so far looks okay. But in terms of ramping out schedules and forward orders details, we probably need to wait probably later this year.

[Randy Abrams, analyst]

And then last just housekeeping with the new -- actually I have couple of things. The tax policy, if any change in the tax rate? And then also if you could provide -- if you have for full year last year the tablet and feature phone?

[David Ku, executive]

I think for tax rates, the guidance we give out last year full year is probably 10% to 12%. I think for this year, 2018, I think the guidance we give out for the effective tax rate for the company should be around 14% to 16%. I think that increase on tax rate is mainly due to the minimum tax requirements in Taiwan and also in the past, we still have some tax sort of benefit programs, but gradually with time most of the tax benefit programs being expired. So we gradually see the effective tax rate for 2018 will be further hike from last year 10% to 12% to this year 14% to 16%.

[Randy Abrams, analyst]

And do you have the feature phone and tablet or can you still disclose those figures for the full year?

[David Ku, executive]

We didn't really bring out feature phone, but certainly for the smartphone and tablet for the full year last year the shipment range should be around 430 million to 450 million. For Q4, specifically, I think the guidance we give out is 110 million and 120 million. I think we basically fall into this range.

[Operator]

Next we are having Gokul Hariharan from JP Morgan.

[Gokul Hariharan, analyst]

First of all, let me -- just wanted to ask couple of questions on the smartphone side. First of all, could you give a little bit more detail in terms of the market share confidence that you have? Are these share gains primarily coming for the Helio P series chipsets or are you also seeing share gains at the more mainstream area as well, where also I think last year there were some share losses, especially in markets like India?

[David Ku, executive]

I would say both, both for P series and for entry level, internal market shares we gain.

[Gokul Hariharan, analyst]

And also could you comment about -- since last year P series contribution was quite small, what kind of ASP increase should we expect in the smartphone portfolio this year given Helio is kind of like probably the fastest growing part of the smartphone portfolio? And second, could you also comment about, since you've been gaining some share in the sockets and Qualcomm has had a pretty strong year last year, what is the price dynamics, ASP competition dynamics that you are seeing at the margin from Qualcomm? Is -- are things changing? Is there any let up in competition or are we still in the same kind of mechanics as maybe 6 to 9 months back?

[David Ku, executive]

Maybe let me comment in for the second question first. In terms of competitive landscape, I would say at least for the first quarter or if we look into second quarters, by and large it's pretty similar like what we see last year, which means it's not very pleasant. It's still very competitive and you see 2 major players in all areas still trying to compete in both for market share and presenting same stuff and the ASP pressure is still out there. So when we give out the gross margin guidance, not just for Q1, but when we talk about high-30s for full year, we all factor in about reasonably aggressive competitive landscape always. So point #1 to answer your question, strictly or directly, we didn't really see the competitive landscape ease out all areas or slowing down at all. So that's what we see here. For your first question, talking about the Helio products, and also we should relate it to blended ASP, I think for the Helio product last year the guidance we gave out was roughly the Helio will be probably account -- from a similar perspective will be 10% to 15%. I think last year we pretty much was hitting on the low end of this guidance range. This year based on -- again, based on -- right now it's only Q1 2018, but the overall, I guess, the view or the forecast we have that Helio should be increasing in terms of Helio contribution. From the shipment perspective, we are kind of expecting the Helio contribution this year from a shipment perspective to be in the range of 15% or 20%. And also last year that we had P23. This year, I think we will continue to build something we call the mainstream also maybe do slightly higher range of P series. So ideally that should be helpful is the 40 for the blended ASP. However, if you link to the earlier point we talked about because for the competitive landscape, it's still also quite dynamic out there -- to be strange, and actually it's still quite tough out there. So I probably won't able to give out the full year's sort of blended ASP guidance. But if we only focus on Q1 this year, I would say pretty flattish, maybe low single-digit up. Because for Q1, the new Helio P series products is not ramping yet. We still need to offer Q2. So in the Q1, we still see basically the ASP -- the blended ASP coming down a little bit.

[Gokul Hariharan, analyst]

Just focusing on some of the growth segments, I think in the Mandarin call, I think Rick had called out Wi-Fi as the potential growth driver a couple of times. Could you talk about what are the dynamics happening on Wi-Fi? Are these broad platform related wins outside of non-smartphone or are there growth areas within smartphone itself you are seeing on the Wi-Fi side?

[David Ku, executive]

Well, Rick commenting about Wi-Fi business, to be clear, I think we are talking about non-smartphone Wi-Fi. Because for anything -- for any Wi-Fi business to do with smartphone, we call this as smartphone Wi-Fi ready. So point #1, when we talk about the Wi-Fi business, which is [indiscernible] we're talking about the non-smartphones Wi-Fi business which include this Wi-Fi maybe for the retail broadband, basically routers. Wi-Fi GO! is the customers product, so maybe which is in M2M modules or still the Wi-Fi. So that's the Wi-Fi we talk about. So with that understanding basically, I think Wi-Fi we see a pretty robust demand profile along the different user profile. For example, for consumer products, we see more and more Wi-Fi attachments on, say, digital TV or set-top box or ADSL or maybe [indiscernible] modems. And also we see basically Wi-Fi on lot of smartphone device. So in general, I guess, from the demand profile perspective, we do see a pretty healthy demand profile out there for Wi-Fi. And more importantly, I guess, we are also -- on top of with the diversification of the Wi-Fi business portfolio, we are also interested in more for something we call the high-end Wi-Fi, for example 2X2 HD Wi-Fi which we will be using on the high-end throughput product, which including but not limited to phone side or the consumer product side. So I guess that's the background of our -- the Wi-Fi business and that's why we feel fairly comfortable about Wi-Fi demand profile. In terms of competition, I guess getting into the Wi-Fi business [indiscernible] dependent from MediaTek's side so -- Wi-Fi is -- I won't say it's a relative business, but we have the big smartphone business with a R&D portfolio. So from our perspective, I think from a cost perspective, also from a feature perspective, I guess it -- we actually have some advantage when we are competing others on Wi-Fi only [ paring ]. So in general, both from a demand profile perspective and also from a supplier of technology or competitive landscape perspective, I think we feel fairly comfortable about having more growth into the Wi-Fi business.

[Gokul Hariharan, analyst]

And I think on consumer IoT, I think you had couple of big hits last year with the smart bike as well as the [ voices ] devices. Are there any -- I know that's a fragmented market. But are there any segments you feel are looking quite promising from a initial adoption pickup perspective? Because I think it's probably helpful for us as well given that it's a very fragmented market in terms of seeing where the adoption is really picking up.

[David Ku, executive]

I think for the near term -- let me take one step back. I think on the IoT, basically we have, let's just say, 3 major sub-segment which -- the first one is VAD, Voice Assistant Device. The second one Wi-Fi business, personal home Wi-Fi business. The third one is M2M modules. In terms of near term, near term defines within a year, I would say probably Wi-Fi present -- for 2018 specifically, both Wi-Fi and also VAD present pretty strong growth opportunity with different rational. I think Wi-Fi might kind of be showing that. Nowadays you see pretty much every device people trying to have Wi-Fi in theirs due to the IoT trend and also due to the future AI trend and also the data transmission chip. So that's a pretty solid, so healthy demand profile out there. For VAD, we do believe it's for last years I think overall we issued more than 30 million of VAD device from MediaTek side. So our experience is, for any device when you are reaching, globally you are reaching, say, more than 30 million a year, which mean that's the tipping point for our -- for the end-user demand. So that's why we see not just in U.S. but also in China, lots of company or vendors who are trying to jump into this area. So do believe we should be able to see another wave of VAD's demand growth. Bear in mind, I think for VAD, which is slightly different from Wi-Fi. For Wi-Fi this is more of a straightforward push market, which mean from the device market -- from the device vendor perspective or OEM vendor perspective, once they design for their device -- end device, they're trying to have the Wi-Fi in their stack and if we put it in. But for VAD, that device normally it will require a lot of service being attached to that device. So for end device which is -- going to be a requirement attached to service, sometime the big upgrade will be really slower. So for the VAD, I think for the sort of demand profile, it looks good. But in terms of timing, I guess it would probably still need to wait for the ecosystem to be either more ready to provide more rich service content somewhere based on the VAD platform, so -- which sometime will take a quarter or 2 quarters. But in general, we still feel positively about the demand profile for the VAD product. For the M2M, I think last year, we got obviously a very strong M2M demand surge, many thanks to the bike share business in China. And so -- I think for this year, we believe the bike share business has actually has gone through something we call the consolidation stage. So the demand on that probably in the near term we will see some flat -- flattish demand on sharing bike side. But the good thing about the M2M is actually is maybe sharing bike pick on fast this year, so we'll start to see order demand coming from M2M. So for M2M, our view is, that from MediaTek side is, we focus on something we call narrowband IoT. We have the product up and running and also we work very closely with China Mobile. We have several products that are joining us with China Mobile signing from last year. We -- based on the current view, we do believe we should be able to see more clear demand picking up, speaking also hopefully by second half this year. But right now, the demand in IoT is still relatively weak. So that's about the 3 segments, say, VAD, Wi-Fi and also M2M under this IoT.

[Gokul Hariharan, analyst]

My last question is on the margin. So David, how should we think about -- I think you mentioned that 10% operating margin target. How do we get there? Do we need gross margins to be significantly above 40% to get there given the OpEx investments? Or given you have to pan on revenue growth, we could get there even with their current gross margin targets?

[David Ku, executive]

I think, during the Chinese call when we talked about the 10% operating margin, so I try to make it clear. So we are not talking about that as this year's goal, I think we're talking about the near-term goal. But near term doesn't mean this year. So first of all, we're trying to clear that. Secondly, let me try and answer your question. I think our view is, if we can -- based upon OpEx perspective, I think overall the guidance we give out for 2018 on the absolute dollar terms, I think OpEx should be pretty flattish to slightly up, let's just say 0% to 5%, in terms of the absolute dollars. And from the growth margins, again for the full year, the guidance we give out is high 30s. And if you compare to last year's, for 2017, as an overall we're talking about 2% to 3% collective on the gross margin side. And we don't know how we can do better. If we can, it will depends on the second half, this year's competitive landscape, whether to say for the time being based on the current proceed, it's just still 2% to 3% margin [ depression ] on the gross margin side. Assuming if we can somehow have a flattish revenue or maybe even going up little bit, I feel we -- theoretically, we should be able to see quite substantial uptick in revenue gross. So -- but, again, that would depend on what's the growth -- the revenue profile this year is -- sorry, quarter by quarter. But if we just look beyond the quarters voluntarily for the full year perspective, say 2017 versus 2018, I think we feel fairly comfortable that the operating margin dollar -- in terms of dollar, we should be able to see pretty healthy growth 2018 versus 2017. But in terms of the operating margins, we should raise -- again, it will depend on the revenue profile. But in terms of operating margin dollar, I think so far we feel really confident to see a healthy growth this year.

[Operator]

Right now we are having Brett Simpson from Arete Research for questions.

[Brett Simpson, analyst]

David, can you just clarify the smartphone, tablet numbers again? It's a bad line. So I'm just wanting to clarify, for Q4 you said 110 million to 120 million units, is that right and that's going to fall to 75 million to 85 million in Q1?

[David Ku, executive]

That's right. I think for Q4 last year, the smartphone and tablets, altogether we are talking about 110 million or 120 million. For 2017 full year, again that's including smartphone and tablet, we're talking about 430 million to 450 million units. For Q1, the number is actually coming down to 75 million to 85 million. I think why we see a downfall is mainly due to the sluggish demand or the demand profile is pretty weak in China basically in Q1.

[Brett Simpson, analyst]

And you are also expecting declining ASP sequentially for smartphone and tablet?

[David Ku, executive]

So I would say we should see maybe low single digit down this year Q1.

[Brett Simpson, analyst]

For Q1. And just so it's clear. Q1, 2017 that was -- for smartphone tablet, number was about 105 million, is that right? Just start sort of giving your count.

[David Ku, executive]

Q1 last year that was 105 million to 115 million.

[Brett Simpson, analyst]

I mean, when do you think MediaTek returns to year-on-year growth in units and how do you think 2018 might play out from an overall unit perspective? If you could do -- if you did 430 million to 450 million in 2017, how do you see 2018 shaping up overall for the year?

[David Ku, executive]

I think for 2018 for the full year in terms of shipment, I think we are still looking for year of growth because as we plan earlier, we do see a pretty healthy designing that win situation. Hopefully by second half this year, maybe -- hopefully we starting from a second half of second quarter, we should be able to see some demand picking up. So I guess the answer to question about shipment in 2018 versus 2017, we do expect that the shipment will grow this year.

[Brett Simpson, analyst]

And just so I'm clear on the dynamics, if I look at the domestic demand overall for smartphones, that was down in 2017 -- just slightly down I suspect. Are we looking for the same outlook overall for the domestic shipments in 2018 or do you think we are going to see some growth in domestic demand for smartphones?

[David Ku, executive]

Let me explain what's our definition about domestic, okay. Our domestic defines the China operating plus OEM, okay. And so with that definition our views for domestic market this year, it should be up -- overall demand should be up high single digit, okay. And especially we see a lot of OEM, which we view in China are shipping to emerging market. That one will grow to pretty healthily. We see double-digit growth. But we are combining this to the China markers, which mean China branded and also the OEM, we believe 2018 versus 2017 should be high single digit growth. But on the other hand, you are only talking about the China consumption, okay. Let's say for China consumption our view for this year versus this last year was still growth, but would be on a low to mid-single-digit growth.

[Brett Simpson, analyst]

Low to mid-growth, okay. And then just in terms of your market share with big brands in China, the Oppos, Vivos, the Xiamois. We had QUALCOMM's presentation last week where they are clearly suggesting in the next couple of years they are going to see material growth -- revenue growth out to that type of customer. How do you feel about your market share with these big brands? Do you think 2018 is a year where you're going to clearly take share or do you see QUALCOMM maybe continuing to be quite strong in those accounts?

[David Ku, executive]

Based on the current design-in and design-win situation, I think we feel fairly comfortable, at least for the current design-in and design-win situation, which pretty much are comfortable. First half, also slightly getting into the third quarter this year as well cost achievement, we could be able gain market share -- some market share back this year.

[Brett Simpson, analyst]

And just on QUALCOMM, I mean they've presented a story for the next couple of years where RF is going to become a material part of that business in China. They're going to be selling based on with RF. And you guys -- you recently acquired Airoha. How do you feel about RF as a business? Is it something you think you can address internally or will you continue to work with RF partners, not getting into the RF space specifically?

[David Ku, executive]

I think the major rationale -- strategic rationale behind our acquisition of Airoha is truly trying to consolidate IoT resource. So the focus about Airoha is truly for IoT. On top of that Airoha, it does have a small peer business. I think we'll continue that peer business. But on top of that, I guess we're still working quite closely -- on the MediaTek side, we are quite closed and opened flow for different PA [indiscernible] partner, which including but not limited Airoha.

[Brett Simpson, analyst]

And then maybe just last question on 5G. How do you feel about MediaTek's timeliness in entering that the 5G market? I mean it seems like China is going to be quite aggressive in launching 5G relative to previous generations. When do you think you'll have a commercial available 5G modem? And then thinking about the OpEx spend, to get you into the sort of commercial ramp up, do you think we're going to see OpEx continue to sort of creep up so -- or do you think your 5G investments in R&D are well sized right now within the overall sort of OpEx budget?

[David Ku, executive]

I'll take the second question first. I think for the 5G investments, actually during the Chinese call, Rick, our CEO explained. Internally, we do a lot of carefully sort of resource reallocations. So the 5G investment basically is that we are seeing the overall OpEx guidance, which including the overall guidance about the OpEx guidance, which is flattish to low single-digit up, which including 5G investment already. So that's the second question. The first question is on the timing for our 5G. I think we are -- we will be pretty aggressive about matching the China's 5G schedule. So, so far, I guess, we're talking about 2020 as a commercially available product with the 5G.

[Brett Simpson, analyst]

And maybe just final question, David, on the cash. I mean you have really healthy cash position. In fact, you have had that healthy cash position for a couple years now. But pretty good free cash flow quarter and that pile is rising. Any thoughts about what you want to do with that cash? Is there going to be a change of strategy here in 2018? Maybe some higher return to shareholders or perhaps acquisitions with that money in 2018? How do you think about that?

[David Ku, executive]

I think for the cash dividend policy, we still need to discuss and review with our board. But I think in general to the minimal, I guess we will at least maintain the cash payout ratio which is actually roughly in the range of 60% to 70%. I think it's [indiscernible] more than 10. Whether or not we will increase that, I think that will depend on our discussion with board. I think we should be able to have a final announcement around beginning of March. Internally, use of the cash, I guess our general policy, which we're trying to maintain the past -- sort of cash dividend payout ratios to shareholders. The second use of the cash will be, we're still trying to use all of the cash [indiscernible] cash for the future specific M&A.

[Operator]

Next in line for questions Charlie Chan, Morgan Stanley.

[Charlie Chan, analyst]

So first of all, I want to clarify your comments on second quarter gross margin. Did you say that it could be further improved, even get close to 40%?

[David Ku, executive]

No, I think that's not what I said. I think I just tried to respond to some of the questions talking about whether or not it's possible to see 40% gross margin in second half of this year. And my response is, because for the gross margin you will depend on the ASP basically on competition profile. For first half, say Q1, Q2, we do have the visibility. For Q2, we don't -- unfortunately, we don't have the visibility. So I would not be able to commenting about whether or not we can reach, say, beyond 40% gross margin. At least for our earlier comments on guidance, we're talking about high 30s. We feel fairly comfortable. That's why we talk about earlier.

[Charlie Chan, analyst]

And for also your Chinese call, Rick mentioned about 10% OP margin growth. Do you have any timeframe for this 10% OP margin target?

[David Ku, executive]

I think the trend we are talking about the -- sort of the near-term lending [indiscernible] we're talking about say -- I will say 2 to 3 years basically.

[Charlie Chan, analyst]

2 to 3 years. Okay. And also the top line, right. I understand you don't provide a full year guidance. But you also mentioned that your key address market here in smartphone will grow around the mid-single digit. I would say like 5%, right? And I'm curious about your market share assumption. Are you going to outgrow this 5% and in terms of market share improvements and give us some numbers to refer to?

[David Ku, executive]

I think our goal is to gain market share this year. I guess we have to sort of outgrow the market growth basically.

[Charlie Chan, analyst]

So you are assuming it will be better than 5% at least?

[David Ku, executive]

Yes.

[Charlie Chan, analyst]

And on your AI -- sorry, another question on your product roadmap. And so I think your new P23, P40, the low end 4G chip are gaining great tractions. So into the second half, right, because of your 7-nanometer product seems to be out in mid-year and maybe in marketplace in 2019, right. So for the second half, do you have any product roadmap or just kind of direction of your product planning for second half this year?

[David Ku, executive]

I think maybe it will be easier -- let's talk about from the base production perspective. We don't commenting about in our perspective because again during the Chinese call Rick was talking about we will have basically 7 -- so little bit of cost that's taken out. But that doesn't mean the base production -- I think, Rick was also talking about for the base product most likely about 2019. So from -- for the sake of classification, maybe you will easily understand talking about how many new product will be in the market with mass production this year. I think we will have basically 2 new key product first half this year. Both [indiscernible] containing 12 process. And second half this year, I think we will have 2 or maybe even slightly more than 2 new products coming out this year. So for the full year, basically we're talking about 2 new product first half this year, another 2 new products second half this year and all plans in terms of mass production products we will be giving out on the 12-nanometer process.

[Charlie Chan, analyst]

So I'm wondering for the new products in second half, right? So what will kind of new features or cost structure you want to achieve? Do you aim for more features or do you want to further optimize your cost? What's the key targets for those second half new products?

[David Ku, executive]

I think for the first half, the focus will be going higher after Helio segment. So there will be -- last year it was P90 -- P23, right? So this year will be -- in terms of performance, we will bet on P43. So first half 2 products will be like P43. So you can see the [ products ]. [indiscernible] I think the half this year's, I think we'll have probably obviously post production because for the entry levels, we trying to have a new entry level product which is [indiscernible] wise we should differentiate better cost in the same time. We also kind of upgrade our service about our performance and also adding some AI product, which we do believe AI functions will be important. And also have -- maybe another Helio product as well just going to have this year.

[Charlie Chan, analyst]

And the AI products, so I think it's quite a broad portfolio, but just on that smart speakers, do you expect your smart speaker will embed any so-called APU or Deep Learning Accelerator in the new chip? Because now it seems like it is a tablet like processor that doesn't have any AI computing units, right?

[David Ku, executive]

Right. Well, I think for this year's product, I think by and large will be the AP based solution. But based on product portfolio, we do have a plan about getting some more AI computation units into the AP. Again, probably the easier way to think about that is actually because of the VAD products we've leveraged a lot of a smartphone product portfolio. So as you can tell, basically the smartphone portfolio which is starting having more and more APU which again is the AI computing units into our smartphone portfolio. So you can assume for our next generation VAD product, we will have -- provide some kind of AI based calculation unit. But for VAD, I think it's already [indiscernible] because right now most of the AI calculation is done on the VAD is still up in the cloud side. So whether or not the VAD vendors will pledge that, I think we'll still need to see so whether or not people trying to adopt like the hybrid AI computation which means [ South ] AI computation for AI device side, [ South ] AI computation will be on the cloud side. But regards, I think from -- to how we are providing perspective, that's actually for the moment.

[Operator]

Next we are having [indiscernible] for questions.

[Unknown Analyst]

Just a couple of questions, follow-up on the product mix side. So David, when you said that last year 10% to 15% product mix is from Helio, the base is smartphones standalone or is it smartphone plus tablet chips?

[David Ku, executive]

That's smartphones standalone.

[Unknown Analyst]

Standalone. And then does that include all the Helio, including the old P series like P10, P20 and then the new ones, P23 and maybe a little bit of X, it's all altogether, right?

[David Ku, executive]

Yes. Altogether, which including is -- we do not call it old Helio business, the old Helio products which include P and X.

[Unknown Analyst]

P and X, and no matter it is old products or the new products or like cost out version or not, right?

[David Ku, executive]

Right.

[Unknown Analyst]

Okay, I see. And is that the correct understanding that over your -- within your current portfolio, then on Helio products the simple cut is maybe below USD10 ASP?

[David Ku, executive]

Well, I think in general, that is yes.

[Unknown Analyst]

In general, it is below $10, it's not Helio?

[David Ku, executive]

Right. In general, but somebody has actually seen the boarder-like charges, so that's why [indiscernible].

[Unknown Analyst]

I see, because some of the end products might be -- like, some cases might not be that. Okay.

[David Ku, executive]

Right.

[Unknown Analyst]

Understand. And then also one follow-up on the new product that you mentioned for second half. So 2 products are for the Helio series and one is for the entry 4G and the other one you mentioned is for mid-end or for...

[David Ku, executive]

So another one I think was -- again that will be mid-end Helio product.

[Unknown Analyst]

Mid-end Helio product?

[David Ku, executive]

Yes, mid-end product. One for entry level, one for mid-end Helio product.

[Unknown Analyst]

And then last question is on Wi-Fi side. So mentioned that -- so the handset related Wi-Fi is being included in the revenue mix of mobile devices, is that correct?

[David Ku, executive]

Correct.

[Unknown Analyst]

Okay. And so when Rick talked about potential share -- market share gain in Wi-Fi chips, this is only referring to the non-smartphone Wi-Fi chips or both smartphone and non-smartphone Wi-Fi chips?

[David Ku, executive]

It's mainly non-smartphone Wi-Fi chips. Because for smartphone Wi-Fi chips, basically when we increase our market-share of smartphone, it's just consequently we increase our market share on smartphone Wi-Fi market share as well. But to be precise when Rick talked something about the Wi-Fi business, he was only referring to the non-smartphone Wi-Fi business.

[Operator]

Next in line we have Michael Chou, Deutsche Bank.

[Michael Chou, analyst]

Because you mentioned for 12 nanometer product this year, so can we say you will have a cost out solution for your P23 in the second half this year? Because P23 is based on 16 nanometer. Now so ideally you should try to use 12 nanometer to reduce cost. Is that right?

[David Ku, executive]

I think yes, because this year the major product all come from 12.

[Michael Chou, analyst]

Second question is, if you have a new product -- so do you expect that your gross margin for your smartphones would be even better in the second half this year versus first half this year? I mean, in terms of product mix improvement, new product revenue, right. So do you think that the improvement pace will be able to, let's say, maybe accelerate in the second half this year or do you think that the pace -- the improvement pace would be similar to the second half in 2017?

[David Ku, executive]

To be honest, because I don't only have the detailed visibility for second half this year, so I keep saying in terms of gross margin profile highly depends on the ASP competitive landscape. So unfortunately, I don't have the visibility for second half this year. But let me try to answer your question from slightly different perspective. I think based on the reasonable assumption about competitive landscape, that's point number one. Point number 2 is, for any new product revenue odd still becomes high. So overall, I probably would not categorize as -- for second half this year, even [indiscernible] mostly, I don't only see the gross margin pick up [indiscernible]. Most likely, we will still be on a sequentially and smoothly or my way coming up because, again for any new product coming out it depends on the customer sign-in and the customer to start the revenue product.

[Michael Chou, analyst]

In Chinese call, you mentioned your new product would be more than 50% of the total smartphone shipment. Is that right or...

[David Ku, executive]

Yes. But let me just the clarify it. I think in Chinese call we talked about the product was new models, not necessarily the Helio product. Because, again, for the entry-level products we also placed the entry-level product with a new modem, again which is a better performance and also is very competitive both on performance and also from the cost structure perspective. So when you are thinking about the gross margin for group profile, I think Helio is definitely one all over that one factor when you think about gross margin improvement. But second point I think we also need to highlight is, for any product which is defined as non-Helio product, but once we replace that with our new model architectures, I think that still provides us for the gross margin improvement. So with the new models shipments, we do believe actually we'll be more than 50% on a quantum basis once we reach second half this year.

[Michael Chou, analyst]

Maybe I put it another way. So can we say your new product, the gross margin will be above the comparative gross margin in the second half this year?

[David Ku, executive]

Again, second half this year, I don't have visibility.

[Michael Chou, analyst]

Second thing is regarding your AP, for this year, do you think your smartphones' ASP will be able to go up year-on-year or stay flat year-on-year?

[David Ku, executive]

You mean ASP or...

[Michael Chou, analyst]

Smartphones' ASP, yes.

[David Ku, executive]

Smartphone ASPs.

[Michael Chou, analyst]

Smartphone ASP, yes.

[David Ku, executive]

Because for the ASP competitive landscape, I honestly don't have the second half visibility. Probably the best way is I guess right now is will be for the first half -- first quarter because we didn't always see too many new products, especially the Helio -- the new Helio product. I think we still have the P23 coming out. We're starting to see more higher end of the P series coming out maybe starting from second quarter. So in the first quarter specifically, I think we see the ASP maybe flattish to slightly down. Second quarter, so ideally we see more mid to high range Helio coming out. We should be able to see the ASP coming out of it. But for the second half, I do not have visibility right now.

[Operator]

Ladies and gentlemen, we thank you for all your questions. I'll pass it over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.

[Jessie Wang, executive]

Ladies and gentlemen, this conclude MediaTek's 2017 fourth quarter conference call. We would like to thank you for your participation. And you may now disconnect.

[Operator]

Thank you for your participation in today's conference. You may now disconnect. Thank you and good bye.