Good afternoon, everyone. Welcome to Realtek 2024 first quarter earnings call. This call is chaired by Realtek spokesperson, Yee-Wei Huang. The presentation will be available on the company website before 6 P.M. today. At the beginning, our spokesperson will report our first quarter financial results and give a management remark. After that, we will have a Q&A session. You are welcome to type your questions in the box at the lower right corners of the screen. We will answer the questions accordingly. During the call, you can browse through the pages of the presentation anytime. Note that portions of what is presented in this call contain forward-looking statements. Investors are cautioned that forward-looking statements involve risk and uncertainty. Actual results may differ materially from the results forecasted or implied in such statements. Investors should not place undue reliance on such statements.
Now, I will pass the call to our spokesperson, Yee-Wei.
Thank you. Good afternoon, ladies and gentlemen on the line. You are currently participating in the first quarter 2024 webcast earnings release, hosted by Realtek Semiconductor Corporation. Now, let us go through the first quarter 2024 financial results. Q1 revenue was TWD 25.62 billion, up 13.5% QoQ, and a 30.6% increase compared to the same period in 2023. Customer restocking and rush orders across all market segments contribute to the better than expected top line performance. Q1 gross margin was 50.8%, a 6.1 percentage point improvement compared to the previous quarter, and a 7.7 percentage point increase compared to first quarter 2023. The main contributor to the increase is the reversal of the slow-moving inventory write-off.
Q1 operating expense was TWD 10.28 billion or 40.1% of revenue. The operating expense ratio increased slightly by 0.5 percentage point from the previous quarter, mainly because of more spending on engineering resources and R&D projects to prepare for the potential growth opportunity related to AI and servers. However, as we are seeing revenue growth, we will also focus on achieving operating leverage to reduce our OpEx ratio where possible. Q1 operating profit was TWD 2.74 billion, or 10.7% of revenue. Higher revenue and gross margin led to the improvement of both operating profit and operating margin. Q1 non-Op income was TWD 593 million, which came mainly from interest income. Q1 net profit was TWD 3.13 billion, or 12.2% of revenue.
Q1 EPS, as a result, was TWD 6.1, an improvement over 4.25 last quarter, or TWD 3.5, same period in 2023. Regarding inventory, Q1 inventory turnover days dropped to 80 days, a 24-day reduction compared with the 104 days in Q4. The notable drop in the inventory turnover days is a result of significantly higher quarterly sales and lower average quarterly inventory level. To the best of our knowledge, the inventory level at Realtek, as well as in the channel, is generally normal at this time. We also have the first quarter 2024 balance sheet and cash flow statement for your reference at your convenience. This concludes Realtek first quarter 2024 financial results. The Q1 business momentum is expected to continue in the second quarter. Nevertheless, semiconductor industry continues to be affected by global geopolitics and macroeconomy.
yielding limited demand visibility, Realtek sees the Q2 operations prudently sound. Now, let's review the top product lines at Realtek. First, we observe that PC versus non-PC revenue to be approximately 33-67 in the first quarter, reflecting a strong PC restocking. On Ethernet, we see steady growth in the first quarter, driven both by inventory replenishment and a growing need for the 2.5 Gb Ethernet. In telco projects that use 10G-PON, we anticipate that 2.5 Gb Ethernet will continue to be strong in 2024, while 5 Gb Ethernet may pick up pace, a bit slower than we previously forecasted. Overall, the transition to multi-gig Ethernet is underway, and Realtek has a competitive edge in this market. On switch, the demand for switches is picking up as telco infrastructure projects are warming up in different regions of the world.
However, the actual delivery and deployment of the projects that have been awarded may face some challenges due to the very aggressive price competition during the bidding stages. Nevertheless, consistent with what we see in Ethernet, 2.5 Gb switches, both dumb and managed, are gaining more market share. In the long run, 10G-PON and Wi-Fi 7 will also boost the demand for multi-gig switches. On Wi-Fi, the Wi-Fi shipment started to pick up after the Lunar New Year holiday. The demands in consumer and IoT in particular, are better than expected. The resumption of telco projects will presumably also give Wi-Fi demand a boost in the networking segment. Wi-Fi 7 is on track to start ramping up in the second half this year.
Its penetration in PCs and routers may be less than 5% in 2024, while 80%-90% of new PC models are expected to come with Wi-Fi 6 or 6E this year, and more than 70% of new routers will be equipped with Wi-Fi 6, 6E this year. On audio codec, the IDC report shows that PC sales in the first quarter were flat compared to the same period last year, with around 60 million units shipped. However, this was a significant decline of about 12% from the fourth quarter last year, when around 67 million units were sold. Although PC shipment remained soft in the first quarter, what was different this time was that there were generally no inventory congestion in the channel.
To this end, we saw strong restocking of PC-related components in the first quarter, resulting in a better-than-expected PC audio codec shipment in the first quarter. Despite the short-term strength, nevertheless, most PC makers are maintaining a conservative view of the PC market for 2024 full year, expecting a very mild growth, perhaps 3% year-over-year, citing poor visibility for the second half of the year. Stated differently, the impact of Windows 10 Enterprise and Education retirement or AI PC hype, if any, has not been felt by the PC industry. Meanwhile, we continue to embed AI in various audio-based solutions for both PC and non-PC applications. This is expected to provide mid, long-term growth opportunity for Realtek audio codec business. TV shipment in the first quarter was solid.
The main drivers appeared to be, first, restocking to compensate for the low market confidence in the last quarter last year. And second, the ongoing panel, rising panel price. Overall, nonetheless, the TV industry in 2024, by and large, is expected to be very similar to that in 2023, despite the market push for Mini LED TVs and the two major sports event this summer, namely 2024 Summer Olympic Games in Paris and Euro 2024. For Realtek, nonetheless, we plan for steady market share gain in TV in 2024.
Thank you, Yee-Wei. Now we are entering the Q&A session. Please type your questions in the box at the lower right corner on the screen. We will reply accordingly. The first question is from William, J.P. Morgan. Could you provide the first quarter sales mix by networking, PC, and consumer for the rest quarters of 2024? May we rank the growth rate by application?
Okay, Realtek achieved quarter-over-quarter growth in all segments in the first quarter 2024, with automotive and PC segments leading the way, followed very closely by networking and consumer segments. However, this may not reflect the full year trend for 2024. The first quarter was influenced by the strong restocking that offset the cautious outlook of the industry in 2023, especially in Q4. This is not a typical pattern for the first quarter. Although orders remain strong in the second quarter, the demand visibility is very low at the moment. Therefore, it is too early to assess the relative performance of different market segments in the second half of the year.
The second question is from Daniel, Morgan Stanley. Is the order visibility for Realtek still in a short-term point of view? If not, which product line sees the most improvement?
Okay, the low demand visibility is really across the board. Arguably, the automotive segment tends to have a relatively more reliable full year forecast. For now, and for reference purposes only, Realtek Automotive Ethernet product line is forecasting a notable growth in 2024, same as what we have seen in the past few years. Please understand that such forecast is subject to change, depending on the actual market dynamics.
The next question is from Brad, Bank of America. With improved demand momentum post the inventory corrections, does Realtek see eased pricing pressure from the key product line?
Yeah. The pricing pressure returns to what we may call, quote, unquote, "normal state now," now that the inventory corrections are generally done. Note that normal means that customers will ask for price reduction every opportunity they have. Stated differently, we do not see easing price pressure now, perhaps not until a significant improvement in end demands or until market acceptance of spec upgrades speeding up. Pricing is something that Realtek must work with our customers on a continuing basis. It's something that we managed reasonably well in the past, and we are confident that we can manage it now and in the future.
Next question is from Randy, UBS. How is your view to grow OpEx in line with the revenue this year? If you grow 10%, will OpEx be similar, or could you have operating leverage?
Realtek made a strategic decision at the beginning of 2024 to invest in chip design, using advanced wafer process tools to prepare the company for the next phase of growth that may derive from AI and servers. This requires added budget for engineering talent, EDA tools, computational power, and more. The first quarter OpEx ratio has risen to 40.1% as a result. We believe the investment is well justified, and the payoff is within expectations when the new products are ready in three to five years. In the meantime, we expect the OpEx ratio to stay around the current level. Needless to say, as the company is returning to top line growth, we will keep a keen eye on attaining operating leverage to lower OpEx ratio where applicable.
... Next question is from Jason, CLSA. When can Realtek reverse inventory write-off, and how long could it last as Realtek inventory day has reached to normal level?
The reversal of inventory write-off is happening as we speak. The strong top-line performance has triggered a notable write-off reversal in the first quarter. We expect such a reversal to continue in the coming quarters. Depending on the strength of the market, the reversal may continue for another two quarters or more.
Next question is from Kevin from Mizuho. Similar to the previous question, he would like to ask, what is the net amount of the inventory write-off or reversal in first quarter? Will we see further positive impact from the inventory write-off or reversal in second quarter? Do you expect that those gross margin to maintain at high 40s or close to 50% level in the rest of the 2024?
The inventory write-off reversal is notable in the first quarter. The actual magnitude will be available in the detailed quarterly financial statement when it is released. We prefer not to predict the gross margin level in the coming quarters, with or without inventory write-off reversal. Suffice it to say, nevertheless, the write-off reversal will be a positive factor for the gross margin in the coming quarters. Moreover, Realtek's gross margin strategy had two components. First, shifting the company product portfolio from low to mid-end, to mid to high-end. And two, reducing costs timely for mainstream product where applicable.
Next question is from Bruce, Goldman Sachs. What is the current market demand momentum in China? Have we seen tender market recovery yet? You guided last time you expect the shipment to double in 2024 versus 2023, but how is that compared to historical normal years?
The market demand in China in the first quarter is generally an improvement compared to the previous quarters. Nevertheless, it is still weak compared to the historic normal, as the economy in China has not yet recovered. Meanwhile, a phenomenon known as involution, neijuan, seems to be sweeping through every part of China, resulting in, among other things, pricing war without limit. Taking PON as an example, worldwide TAM for PON may be 135-155 million units this year, with China accounting for more than two-thirds of the worldwide TAM. That is, China TAM for PON may be around 90-100 million units this year, higher than we previously heard, and basically close to the historic normal. It should be noted, however, that most, but not all, PON tender projects in China were awarded in the first quarter.
There are two things we have to watch closely. First, whether the remaining PON tender projects will be awarded as planned. And two, whether the delivery of the awarded tenders will be on schedule. Neither can be taken for granted. We will update you as it progresses.
Okay. Another question from Bruce on Wi-Fi 7. Could you comment on Wi-Fi 7's competition landscape, the difference in product offerings, segment focus, and pricing strategy versus your peers? How is the momentum so far, and the initial view on the penetration for next year?
In general, Wi-Fi 7 will start to ramp up in the second half this year, with increasing adoption next year. Other than mobile phones, the first wave of Wi-Fi 7 is expected to find its way into high-end PCs and routers, which will be Realtek's focus application. The volume could be limited this year. Both PCs and routers may seem less than 5% Wi-Fi 7 penetration this year. Assuming no black swan, Wi-Fi 7 penetration in PCs and routers could double or more in 2025. High cost could be one of the reason for the limited Wi-Fi 7 deployment at the present time. The ASP of Wi-Fi 7 is about twice as much as that of Wi-Fi 6. In time, however, entry-level Wi-Fi 7 may gradually replace Wi-Fi 6, which may be another year or two away.
In terms of competition, we believe Wi-Fi 7 is on par with our competitors' solution today. The war on Wi-Fi 7 has just begun. We believe that Realtek will prevail, as we always did in every generation of Wi-Fi.
Thank you. A follow-up question on Wi-Fi 7. Brad from Bank of America would like to ask about the penetration of Wi-Fi 7 in the coming years, including 2024, 2025, and even 2026. Do we expect fierce competition in the new area?
It may be worthwhile to review what is Wi-Fi 7. The IEEE 802.11be standard was dubbed Extremely High Throughput, EHT, when its initial draft was released in 2021. A final version of IEEE 802.11be, now designated Wi-Fi Certified 7, or Wi-Fi 7 in short, by Wi-Fi Alliance, is expected by the end of the year. Although the final rectification is not expected until the end of 2024, the technical requirements are essentially complete. Clearly, 2024 is the first year of Wi-Fi 7. Nonetheless, a few products were introduced into the market as early as 2022, based on the draft standards. Among the key features of EHT or Wi-Fi 7 are: one, 330 MHz channel width. two, Multi-Link Operation. three, 6 GHz support.
These features aim at enhancing capacity, increasing throughput, and lowering latency. Generally, video use cases require high performance connectivity, which Wi-Fi 7 provides in abundance to allow for ultra-high definition streaming, video conferencing, and AR/VR/XR connections. So clearly, not all Wi-Fi 7 features are needed in all applications or are relevant in all parts of the world. It may take time for the market to adopt Wi-Fi 7 with the right configurations for the right applications. This is what Realtek excels in mass enabling the market, by introducing new technologies with the right configurations. From Realtek's vantage point, we see Wi-Fi 7 ramping up slowly in its first year of market debut, with perhaps less than 5% market penetration. In our focus segment of PCs and routers, barring Black Swan surprise, the market penetration may readily double every year in 2025 and 2026.
It is well within expectations that the rich features of Wi-Fi 7 will attract competition. It may be worth mentioning that the number of marquee Wi-Fi players is not that many, each with their market focus, while the entry barrier for the newcomers can be high. To this end, it is utmost important to have a deep understanding of both the technology and the application to mass enable Wi-Fi 7 in the market. Again, this is where Realtek has an edge over others.
Next question is from Jason, CLSA. Does the company target for IP or asset business opportunities?
We believe the question is about providing silicon IPs, as opposed to chips, or doing custom-made products, as opposed to standard products. To this end, Realtek has experience in and is fully capable of both. As the company prepares herself for the next level of growth, we are more receptive than ever to consider offering silicon IPs or tailor-made products for interested customers. Make no mistake, nonetheless, Realtek main business focus is still offering semiconductor chip solutions.
Yeah. Next question is from Bruce, Goldman Sachs, regarding the recent view on AI PC. How's customers' attitude and development of AI PC recently? Are we seeing more positive order forecast attitude from customers? And how much higher dollar content per AI PC to us versus the regular PC?
One point we want to make clear is that the demand for PC-related products has not been affected by the hype around AI PC, and it's not according to our customers or market analysts. The current focus on souping up personal computers with high performance CPU, GPU, NPU, tailor-made accelerators, and more memory, may be meaningful to arouse heightened interest in bringing AI into PCs. However, it is not a necessary or sufficient condition for having AI in a PC. Case in point, Microsoft Copilot can leverage the power of AI to boost productivity on existing PCs without adding any hardware. Realtek's edge AI human sensing USB camera controller has been mass-produced and launched in market leading PC notebooks, providing users with the best video conferencing, video, image quality, along with innovative AI human-centric perception capability for the most convenient and comprehensive user experience.
This product has won a CES 2024 Innovation Award. Realtek sees AI PC as an evolution or a natural progression of PC development. As each generation of PC evolves with more sophisticated and higher performance hardware, more AI applications will emerge for PCs. Some leveraging the ever-increasing performance of the native hardware, and others come in the form of peripherals with independent edge AI computing. For clarity, Realtek edge AI solutions can enhance the user experience of a wide spectrum of PCs, AI PCs or otherwise. Each solution adds value to the PC, and therefore, the dollar content, or at least sense of price erosion.
Next question is from Daniel, Morgan Stanley, regarding the auto, automotive business. How's the inventory digestion situation in the automotive market now? Could you provide some colors on the auto market into second quarter or the second half of this year?
Okay. We see the global passenger cars forecast is 92.2 million units in 2024, a small 2.6% year-over-year growth, according to a market research report. We do not feel qualified to comment on the automotive inventory in the market, although we read reports saying that entering 2024, the automotive retail industry has near normal, meaning around 60-day vehicle inventory levels. The challenge, however, is the imbalance in the market. Base models are experiencing brisk sales, while highly optioned and luxury vehicles are facing challenges. Stated differently, pricing pressure is in the play as we speak. For automotive Ethernet, however, we are seeing better than expected demand in the first quarter from our customers, who are aggressively expanding the use of automotive Ethernet products. This momentum is expected to continue in the second quarter.
Similar to other market segments, the visibility for second half is limited, although the current forecast is generally healthy.
... Next question is from William, J.P. Morgan, related to foundry allocation. What was the foundry allocations to our top two foundry suppliers in 2023, and what is the percentage, in 2024? Or in other words, do we consider to increase the percentage of allocation to the so-called non-top two foundry suppliers in 2024 or beyond? What is the cost benefit, assuming similar technology note?
Okay, now, figuratively speaking, for as far as we can remember, Realtek foundry allocation can be described as following the 80/20 principle. The majority, or 80% figuratively, between the top two foundries, while the minority, or 20% figuratively, among the remaining foundries. The allocation did not change in the past up to the present day, and it is not likely to change in any significant way in the foreseeable future. It may be worth reiterating that foundry selection is based on many factors. Besides pricing, we must consider time to market, quality, reliability, technology roadmap, and sometimes customers' preference.
Next question is from Brad Lin from Bank of America, related to USB4. Please discuss the applications and the penetration rate of USB4 in 2024, 2025 and 2026. Do we expect fierce competition in those areas?
Okay, now, with data transfer speeds of up to 40 Gbps, USB4 is an ideal technology for connecting multiple monitors and external video displays, or for transferring very large files between devices within a shortest possible time. To this end, USB4 docks, USB4 hubs, PCs, and external storage, for example, SSD, would be the ideal first wave for USB4 devices, some of which may hit the market in the second half this year, with more to come next year and beyond. Also, because of the very high speed, USB Implementers Forum, USB-IF in short, mandates the use of a retimer chip in front of every USB4 port. Realtek USB4 hub controller will go into mass production this summer, while USB4 retimer in the third quarter. As in the case of any new technology, it takes time for USB4 to gain traction in market penetration.
Also, like all other technologies, good technology with mass appeal, we do expect competition, but nothing we cannot manage.
Okay. Next question is from Daniel, Morgan Stanley, on TV business. Do we see continual momentum in TV rush orders into second quarter? Company's views on TV business in 2024 in general?
Okay. We saw solid TV SoC orders in the first quarter, mainly due to the restocking to compensate for the low market confidence in the fourth quarter last year. There were also continuing rush orders in response to the ongoing rising panel prices. The rush orders are likely to continue in the second quarter, at least until the panel prices ease. Worldwide, TV panel is expected to stay flat in 2024 compared to last year. Realtek, nevertheless, plans for steady market share gain in 2024.
Next question is from Randy, UBS, on Chinese competition and spec upgrade. Could you discuss the areas that you are seeing China competition, and where do you see the highest depreciations for your products? Are you seeing China competition expand into some of the higher spec areas, like, managed switches, 2.5 Gb, gigabit Ethernet point, 10G-PON or Wi-Fi 6 and 7?
Generally speaking, Realtek sees competitions in China targeting mostly established technologies. Some are trying to go after the latest specs, such as 2.5 Gb Ethernet and Wi-Fi 6.... We are watching their progress closely. As technology advance, the gap between the new and old generations is becoming wider than ever. That is, the barrier to advance into the next spec upgrade is bigger as the technology progress. We believe that the best strategy is to keep innovating and pushing the mass market to the next spec upgrade in a timely manner. This is one of the reasons why Realtek made a conscientious decision to boost our investment in chip design using advanced wafer process nodes.
Okay. Another follow-up question from Randy, related to ESL. We have noticed more news of partnership on e-reader and electronic shelf labels. What components are you supplying in, and could this be a meaningful product line in terms of the percentage of sales?
So actually, Realtek provides BLE SoC, Bluetooth Low Energy SoC, for e-paper applications. We have been working on this application for the past years, and expect it to make a decent contribution to Realtek revenue in due course.
Okay. The next question is from Bruce, Goldman Sachs, on China localization trend. Are we seeing China using more local CPU suppliers, to accelerate the chip supplier localization in PC networking and even the server side? What is the potential impact on Realtek?
Okay, we see regulations, written or implied, that mandate local content percentages in goods sold in China to promote local manufacturing over imports are widespread. For example, a very high percentage of total telco tender project awards went to solutions with maximal local content in the first quarter, as far as we know. However, this does not mean that Realtek will be shut out from the opportunities in China, which has a very large market TAM in many areas. Oftentimes, we do see opportunities opening up when there's a shift in platform solutions. To better serve the valuable customer in China and to better position Realtek for continuing growth, we are pursuing two strategies simultaneously. First, provide spec upgrade solutions to distance ourselves from local competitors, where applicable. And two, develop and capture business opportunities outside of China.
The next question is from Aaron, Nomura, on dividend. Since Realtek is the constituent Taiwan stock in the major high dividend yield ETFs in Taiwan, what is the company's plan on dividend payout in this year?
Our dividend payout this year will be announced today. We have always maintained a high payout ratio and intend to continue to do so.
Okay, there's a question by [Fion on Daiwa]. She would like to ask about what role does Realtek play in Arm Neoverse alliance? Do we only participate in front-end design? And what kind of IP or design service do we provide? Could you explain in more details on the process of this cooperation? How do we see the potential earnings upside from this cooperation, and when do we see it start to contribute?
Okay, this is a long-term planning, a strategic partnership, and the host of this partnership is Arm. So Realtek's role, we are an Arm Neoverse alliance ecosystem member. So the way we participate in this alliance is to offer, including possibly IP, possibly the whole chip design, for interested customer who may want to use Arm Neoverse as the core to develop solutions for AI server applications. The potential earnings could be still three to five years away.
Okay. There's another questions from Richard, AIA. You just mentioned the higher R&D for AI and server. Could you elaborate more color for Realtek's products and the strength for server area? How is the progress, and how should we think sales contribution? Many thanks.
Okay, so we just mentioned sales contribution could be another three to five years away, so this is not a short-term project. Our product strength clearly is in high speed connectivities and sophisticated SoC design. This is, you know, what attract Arm to include Realtek in their Neoverse alliance.
Okay. There's another question is from Nan Yun from GPIM. How many percentage of the gross margin improvement came from the reversal of inventory write-offs? And will it continue to see the improvements in the following quarter?
Sort of repeating what we have just reported, the, you know, actual magnitude of the write-off reversal will be available on the financial statement when it is released. We do believe, depending on the market strength, the write-off reversal should continue another couple quarters or more.
Okay. And then there's another, follow-up questions from Nan Yun. In terms of your inventory level, may I assume you will start to place new wafer orders?
Most certainly. In fact, new wafer orders has started pretty much, you know, after the Lunar New Year, as we see the business strength started to build up.
Okay. Since there's no other questions online, I think we will conclude the meeting now. Thanks for your participation today. Please feel free to contact our IR team if you have further questions after the meeting. The replay will be available on the IR page of the company website before 6 P.M. today. Thank you, and have a good afternoon.