Good afternoon everyone. Welcome to Realtek's 2024 Q2 Earnings Call. This call is chaired by Realtek's spokesperson Yee- Wei Huang. The presentation will be available on the company website before 6:00 P.M. today. At the beginning, our spokesperson will report our Q2 financial results and give a management's remark. After that we will have a Q and A session. You are welcome to type your questions in the box at the lower right corners on 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 risks 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.
Good afternoon ladies and gentlemen on the line. You are currently participating in the Q2 2024 webcast earnings release hosted by Realtek Semiconductor Corporation. Now let us go through the Q2 2024 financial results. Q2 revenue was TWD 30.67 billion, up 19.7% quarter-over-quarter and a 16.7% increase compared to the same period in 2023. All segments including PC, Consumer, Networking and Automotive and deliver growth at varying degrees with Automotive showing the strongest growth. Q2 gross margin was 50.9%, practically the same as the previous quarter but a 9.2 percentage point improvement over Q2 2023. The magnitude of the reversal of the slow moving inventory write-off was at about the same level as the previous quarter excluding the inventory write-off reversal. The gross margin performance reflects Realtek's effort to shift the product mix to that favors more products with differentiating features.
Operating expense of Q2 was TWD 11.63 billion or 37.9% of revenue. A 2.2 percentage point opex ratio dropped compared to the previous quarter. In terms of the absolute dollar amount. The operating expense increased TWD 1.35 billion or 13.1%. The increase came mainly from R&D expenses for employee bonus. As revenue grows, we still seek operating leverage to reduce OPEX ratio where possible. Q2 operating profit was TWD 3.97 billion or 13.0% of revenue. Revenue growth and OPEX ratio decrease led to the improvement of both operating profit and operating margin. Q2 non-op income was TWD 725 million which came mainly from interest income. Q2 net profit was TWD 4.39 billion or 14.3% of revenue. Q2 EPS as a result was TWD 8.55, an improvement over TWD 6.10 in Q1 2024 and TWD 5.08 in Q2 2023.
Regarding inventory, Q2 inventory turnover days dropped to 75 days, another five-day reduction compared with the 80 days in the Q1. The drop in inventory turnover days partially reflected the higher quarterly sales. The inventory level at Realtek as well as in the channel remained generally healthy at this time. We also have Q2 2024 balance sheet and cash flow statement for your reference at your convenience. This concludes Realtek Q2 2024 Financial Results. The strength of the Q2 is likely to extend into the Q3. The order visibility nonetheless is still limited. The outlook of Realtek operations is prudently stable. Now let's review the top product lines at Realtek. First we observe that PC versus non-PC revenue stays approximately at 33 to 67 in the Q2. Now on Ethernet, Ethernet experienced steady growth in the Q2.
After a strong Q1 driven by the growing need of 2.5 Gigabit Ethernet in the networking and PC markets, the demand for Gigabit Ethernet was still solid in the networking and consumer segments. We anticipate that Ethernet will continue to be strong in the Q3 this year, while 5 Gigabit Ethernet adoption may pick up the tempo in late Q3 or the Q4. The completeness of the Ethernet product portfolio and our long-standing shipment and service records will continue to give Realtek a competitive edge in this market. On switches, the networking market seemed to be growing steadily in the first half of 2024 for both dumb and managed switches. As the market restocked after a slow 2023 and as Realtek gained market presence in emerging markets such as India, the strength is likely to continue in the Q3.
While the order visibility for the Q4 is limited. It is worth noting that multi-gig switches are natural complements to Wi-Fi 7 as Wi-Fi 7 gains traction in various applications. Wi-Fi enjoyed a good run in the Q2, not only in networking applications but also in PC consumer and IoT segments. Wi-Fi 5 and Wi-Fi 6 led in shipment quantity where Wi-Fi 6 showed the greatest growth momentum. The trend is expected to continue in the second half of 2024 and even 2025. Consistent with the recent Wireless Connectivity Market report, we observed that Wi-Fi 7 penetration is likely to be less than 5% in both PC and router this year, partly due to the high price, almost doubling the price for the price of Wi-Fi 6. Audio codec.
The IDC report suggests that the PC market, including Apple and Chromebook, shipped around 125 million units in the first half of this year. It reflects a small 2.4% year-over-year growth compared to the same period in 2023. Throughout the first half of the year, there did not appear to be any PC shipment increase that were boosted by AI PCs, Windows on ARM or Windows 10 decommission. Nevertheless, we have PC codec shipment in the first half was stronger than the PC shipment as customers restocked and built up stocks for the 618 shopping days in both the first and the Q2s. On TV shipment was strong in the Q2, partly thanks to the 2024 Eurocup. The result of the 618 e-commerce festival, however, was below expectation.
Further, the dropping panel price and the heightening shipping costs are slowing down the PC demand in the Q3. The full year global TV shipment at this point is expected to be flattish compared to 2023 at around 195-200 million units. Realtek is expected to maintain steady a bit small market share gain in this year and the next. Automotive Ethernet. Though still not among the top five, Realtek Automotive Ethernet PHY and Switch have been growing consistently at a rate far exceeding the corporate average. The growth in the Q2 delivered another testament to its strength and placed Automotive Ethernet as one of the leading product lines in Realtek and growing. We expect this momentum to hold. It is worth reemphasizing that Automotive Ethernet has a high barrier to entry.
Realtek reaches where we are today with more than 30 years of solid experiences in Ethernet and the completion of numerous automotive grade certifications under our belt. Realtek Automotive Ethernet now has a strong and vibrant presence in all major automotive markets: Europe, America, Asia, including China. In 2024 Computex, we announced the smallest 5.5 QFN package Automotive Ethernet transceiver that can support 2.5 Gbps while being compatible with different 10 BASE- T1 and 1000 BASE- T1 Ethernet transceivers on the same PCB layout. This product received a 2024 Computex Best Choice category award.
Thank you, Yee- Wei. Now we are entering the Q and 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 Daniel Yang, Morgan Stanley regarding the business and gross margin outlook for Q3 2024. Could you please give some preliminary outlook for Q3 2024 forecast and any guidance for gross margin? What could be the most important contribution to revenue in Q3?
Okay, the Q2 this year was stronger than most other Q2s we saw in the past. Instead of seasonality, the market strength in the Q3 may be propped up by the ongoing spec upgrade in wired and wireless connectivity as well as in feature rich AI added video and audio applications. In terms of applications, network applications and Automotive Ethernet may hold up better than other segments in the Q3. From what we can see now, the order visibility nonetheless is limited. We do not expect big changes in gross margin in the Q3 compared to the second.
Next question is from Sunny Lin, UBS, related to the seasonality into the second half. Should we expect a moderation post a strong Q2? And before 2023 we had peak season in Q2, but starting from last year we have been observing strength in Q2 and a moderation in Q3 post a strong build. What is your latest thought on the business seasonality or do you think this pattern is rather attractive? Did you see any earlier builds or pull-ins due to the Middle East shipping issues?
Well, as we just commented, although people still talk about seasonality, the pace of the business at any given time may be impacted by a wide spectrum of events that have no precedent. The fact is, the traditional seasonality has not been apparent in the past few years. This year may be no different. The events giving rise to the strong first half this year included restocking coming out of a weak 2023 and all the pull-ins in anticipation of major sports events and 618 e-commerce shopping festival, to name a few. Entering the second half of the year, the market is facing uncertainty in panel and memory prices, rising Red Sea shipment costs, and unpredictable U.S. Presidential election among other things, the backdrop of these days. Nevertheless, there is solid progress in science and technology leading to an insatiable demand for semiconductor-based solutions.
At Realtek we see seasonality just for reference. We track all mega events carefully and work with customers closely to take one quarter at a time.
The next question is from William Yang, J.P. Morgan. He would like to ask about the inventory loss reversal amount in Q2 2024 and how to model in second half.
Well, the magnitude of inventory write-off reversal was at about the same level as that in the Q1. Now we expect to see inventory write-off reversal to continue in the second half of this year and even in 2025 with a decreasing impact quarter by quarter.
The next question is from Kevin Wang, Mizuho. Regarding the OPEX operating expense increased along with stronger sales, do you expect operating expense to continue to increase strongly or do you have any plan for controlling operating expense especially after your new projects for ARM-based processor?
As revenue grows, we seek operating leverage to reduce the OPEX ratio where possible. Specifically, we have a plan to improve product portfolio mix favoring products with enhanced values, for example by embedding intelligent audio video based man-machine interfaces into products that connect the world with faster speed, more flexibility and better manageability. This entails maximal IP reuse and therefore greatest operating leverage. We expect the OPEX ratio to stay at approximately the current level this year. In mid-term we target OPEX ratio to be around mid-30s.
Next question is from Sunny at UBS related to inventory situation and strategy. How about the inventory level at Realtek and tech channels? What is your latest inventory management strategy? Given the last quarter your DOI went down to 80 days versus target 100 days and following a strong sell end in Q2 the balance like further came down well.
The inventory level at Realtek and in the channels are generally healthy at this point. To cope with the low order visibility which is where we are today, we consider Turnover days around 75 days to be normal.
Next question is from Jason Tang, CLSA, relating to PC demand. How should we expect for PC demand in second half 2024 and 2025?
As we shared our observation earlier, there did not appear to be any PC shipment increase that were boosted by AI PC's Windows on ARM or Windows 10 decommission throughout the first half of the year. Entering the second half of the year, we expect that the market will continue to have plenty of stories to spin around AI PCs WOA and 2025 Windows 10 retirement. Despite all these, we seem more likely than not that 2024 PC shipment may end at around 260 million to 270 million units, flattish to a very mild growth compared to 2023. Better PC growth may be within expectation in 2025 because what do not happen in the second half of 2024 may simply delay to 2025. We may add that the refresh cycle is due for PCs purchase during the pandemics. Realtek continues to have ready new generations of PC related products.
We are well positioned whenever stronger PC growth returns.
Next question is from Goldman Sachs. How should we expect AI PC trend to increase our dollar content per PC versus regular PC or what is the 10 difference?
The so-called AIPC trend implies that PCs mid- to high-end in particular will continue to evolve into computing devices with greater computational power and more memory capacity. These PCs are all but certain to be equipped with high-end peripherals such as Wi-Fi 7, 2.5G and/or 5G Ethernet, AI audio codec, and AI camera. To this end, the AI PC trend may not necessarily increase the PC time. However, it is expected to increase the dollar content per PC thanks to the high-end specifications.
A follow-up question for AI PC by Sammy Lin, UBS. Based on your engagement with PC OEMs, what are some of the new applications that could be pushed or what are their product planning? Do you see Qualcomm or MediaTek bringing native Wi-Fi to layer on base CPUs to affect your content opportunities?
Okay, finding new applications for AI PCs is the challenge of the day for all PC brands and makers. Current thinking tends to revolve around features promoted by Microsoft Copilot such as creating drafts, translating tests, summarizing documents, meetings, and producing presentations. Unlike smartphones where a hardware turnkey is often taken as a package, major PC OEMs tend to maintain control over the selection of key hardware components and modules of their products, Windows-based or Chrome-based or otherwise. Case in point, Intel CPU and Wi-Fi never stop marquee PC makers from selecting Realtek Wi-Fi when a broad market. While a broad market acceptance of ARM-based PCs is yet to be seen, it may be important to track the progress at two fronts.
First, the optimization of software not only operating systems but also development tools to fully leverage the capability of ARM processors while creating minimum to no hurdle to application developers and users. Second, the conviction of PC market leaders to maintain their position and control of their future. VITA continues to work closely with all key PC ecosystem stakeholders to offer PC peripheral solutions that are too good to turn away from.
Next question is from Bruce Lu, Goldman Sachs on USB4. How should we expect your USB4 product such as Hub Controller Retimer to contribute to your revenue earnings in 2024? Have we already secured design wins now?
It has been almost five years since USB4 specification was introduced in August 2019. Nevertheless, the number of products with USB4 ports is limited. The reasons are many. For starters, USB4 is not simply a faster version of USB 3.2. Rather, USB4 terminals, USB 3.2 DisplayPort, PCIe and optional host-to-host traffic in one transport. USB4 docks and devices extract terminal, USB PCIe or DisplayPort traffic as needed. The richness of USB4 makes its implementation challenging and proliferation slow because of the oftentimes complex and confusing marketing messages. At the present time, not many notebooks and PCs are equipped with USB4 ports when the number of USB ports is very limited, just one in many cases, making a USB4 hub a logical peripheral.
Although some argue that USB4 is the generation that needs a retimer physically close to every port in all but the smallest form factors, this has not been the case, partly due to the cost consideration. With its support of a rich set of high speed data transfer protocols and data transfer speeds upward to 40 Gbps or higher, USB4 is an ideal technology for connecting devices within a shortest possible time. To this end, USB4 docks, USB4 router hubs, PCs and external storage for example SSD may be the ideal first wave of USB4 devices, some of which may hit the market in the second half this year, with more to come in 2025 and beyond. At Realtek we have USB4 router hub controllers, redriver and Retimer in different stages of customer design-ins and design wins.
We expect revenue contribution from these products to start in late 2024 or early 2025.
Next question is from Aaron Zheng of Nomura. Please provide updates on China Tender projects and observations on networking chips. Demand outlook in second half 2024 as.
We share our observations in various occasions. Both China Telecom and China Mobile have respectively announced their tender awards in the Q1. No new award was announced in the Q2, although some expect China Mobile may still have additional awards to be announced later this year. Regardless, the overall China Telco infrastructure deployment this year is all but certain to be an improvement compared to the last year. From what we know, over 80% of the telco awards in China went to solutions employing China local SOC after fierce price competition. Nonetheless, China infrastructure tender awards stimulate tender projects overseas and spurred opportunity in spec upgrade for 10G PON, multi-gig Ethernet and switch, Wi-Fi 6 NIC and routers in China as well as overseas.
Next question is from Lucas Liu, KGI. Considering the 10G PON upgrade in the U.S., Europe, China and other regions, what is the company's outlook for 2024 and 2025?
We estimate that the 2024 global TAM for PON is about 148 million. China still accounts for over 60% of the 2024 TAM. In terms of technology, 32% or about 48 million cells are using XGS-PON. It is worth noting that FTTR, fiber to the room and Wi-Fi 7 among others may further push spec upgrade beyond 10G PON. It should be noted that U.S. and Europe are leading the way to develop high-speed PON. Realtek currently is the only company in the market that had a silicon-ready 25G PON chip. We have a few design-ins with some leading telco operators to deliver 25G PON solutions.
Next question is on Wi-Fi. The analyst from UBS would like to ask what is your latest estimation about Wi-Fi 6 penetration in both 2024 and 2025? Are customers accelerating the Wi-Fi spec upgrades into 2025? Given the normalizing inventories, what would you expect to see more meaningful and product ramp up for Wi-Fi 7 and what is your market penetration assumption from 2024 to 2026? What's Realtek's latest product planning?
Well, for PCs and routers, Wi-Fi 6 is the mainstream Wi-Fi solution this year and is expected to remain mainstream in 2025 for PCs and routers. Wi-Fi 6 penetration is estimated to be both at 70%-80% this year. It may gain another 10 percentage points of penetration in 2025 for Wi-Fi 7. We believe the penetration will be less than 5% for PCs and routers this year and may rise to around 10% in 2025. We may have to wait until 2026 to see a more popular Wi-Fi 7 adoption. Realtek Wi-Fi 7 is in production today. Our Wi-Fi 7 4x5 single chip solution for routers is a 2024 Computex Best Choice category award winner which is designed to increase our wireless network coverage and improve the quality of long-range connections.
Next question is from Jason, CLSA, related to the optical applications. Does the company have exposure or plans for optical application?
Realtek focuses on providing solutions, among other things that must enable wired and wireless connectivity. As the speed of wired networks continues to increase, the traditional copper cables used to transmit the data become shorter, thicker and heavier. In contrast, optical cable thickness remains ultra thin no matter how high the data rate. Maybe stated differently, wired connectivity is certain to cross into the optical domain as the transmission speed keeps increasing. Realtek is well aware of this trend. We are developing silicon IPs and products that cross into the optical domain. We will share more information as we progress.
Next question is from William on Automotive Ethernet. Could you provide updates on the order momentum, any pricing pressure in the space now? What is the market share we can assume in the mid to long term?
Automotive Ethernet PHY and switch orders were very strong in the first half of this year, outpacing our expectation. We expect the order momentum will remain strong in the Q3, although not to the same extent as what we saw in the first and Q2s because some orders were certain clearly pull in purchases. In Automotive Ethernet we compete against both global well entrenched Ethernet veterans such as Broadcom and Marvell as well as ambitious newcomers, especially those in China. Most automotive OEMs and Tier 1s stay with the vendors with a complete product portfolio and time tested few application records. To this end, Realtek Automotive Ethernet is unmistakably a market leader as strong as if not stronger than any competition regarding the price pressure. It is all in a day's work, nothing we cannot manage.
Next question is from Donna Liu from Asia Technology Advisors. Her question is what is your auto revenue exposure right now and what is the growth driver for Realtek to outperform overall auto market?
Okay, short of answering the question quantitatively, as we briefly mentioned, the Automotive Ethernet revenue today is becoming one of the revenue leaders, although it's still not among the top five the growth driver. The reason our Ethernet growth outperformed the market again is because our long year of record and very strict this compliance to all the automotive grade certification and that attracts both automotive OEMs and Tier 1 to take on this Realtek solution. In a broader sense, we will have more automotive products other than Ethernet in the days to come. Everybody can stay tuned for that.
Actually, it's a follow-up question from Jeffrey at Macquarie regarding our other auto business. Management mentioned that Realtek is developing auto products for automotive beyond Automotive Ethernet, PHY and switch, but not in MPE stage yet. Could you please share with us some more details regarding the type of the product within the time frame?
Okay, as we just briefly mentioned, beyond Automotive Ethernet, Realtek Wi-Fi, Bluetooth and audio codec teams have been working on automotive-grade solutions. Each product has secured their own design wins. Those projects for the aftermarket may go into production in early 2025. Those for OEM models will normally take longer before mass product.
Next question is from Daniel Yang, Morgan Stanley, on foundry pricing. How do we see our foundry partners' pricing strategies now and toward 2025? Do we see any risk of being impacted by any potential pricing hike?
Okay, now pricing really is not something to be decided through press releases or open discussions in the semiconductor industry. Still, we acknowledge that there were news pieces about wafer prices where the prices for advanced node, namely those below 10 nanometer may increase to reflect their values and production costs. While the prices for mature nodes may be softening due to oversupply and Chinese competitions, Realtek today does not have products in mass production that are in process node below 10 nanometer and we stay closely engaged with our foundry suppliers to attend the best possible wafer prices. At the same time we continue to seek cost down by optimizing design and test time.
Next question is from Sunny. How would the Gen AI drive networking upgrade and would Realtek be a beneficiary? Any opportunities to work with the hyperscalers? How has it been the interest and engagement since you joined ARM big ARM design product lines?
Okay, the advancement of AI generated AI based on various large language model in particular is clearly driving a very visible growth of the server and network infrastructure market as higher data bandwidth and lower latency communication are critical for an efficient and practical use of GAI. To this end we see opportunities from two perspectives. First, never ending better connectivity from the edge devices to the cloud. This is what Realtek has been doing for almost 40 years. Then second, components such as high throughput, Smart Ethernet and Hub that complement various high performance computing units GPU, CPU and DPU to name a few in a server. This pertains to what we are committed to do upon joining ARM Total Design to deliver scalable performance for wired 5G 6G infrastructure, DPU and edge of network markets.
We are currently feverishly developing key silicon IPs in advanced process nodes and will share our progress in due course. Nonetheless, what we are doing for ARM Total design has a very positive spillover effect on strengthening, excuse me, on strengthening Realtek's core competency and its application. For example, the very high speed server grade SerDes may fundamentally lift our communication network solution to the next level. Another example, the development of high performance computing using advanced process nodes is expected to enrich our edge AI solutions.
Another question is raised by Sunny: what is your forecast on TV shipment in 2024 and the initial view on the shares of the design wins for next year's models? Could you talk about the demand this year? How it actually fares given sporting events? Also, could you elaborate more on the competitive landscape of TV SoC, particularly for China markets?
Well, TV shipment was strong in the Q2 partly thanks to the 2024 Euro Cup. The result of 618 E-commerce Festival, however, was below expectation. Further, the dropping panel price and the heightening shipping cost are slowing down the TV demand in the Q3. The full year global TV shipment at this point is expected to be flattish compared to 2023 at around 195-200 million units. Realtek is expected to maintain steady although small market share gains this year and next. The three key SOC suppliers from Taiwan including Realtek remain the top global TV SOC contenders but are now facing challenges from China TV SoC company as LCD TV appears to be in the list of electronic products subsidized by the Chinese government to encourage the adoption of semiconductor components that are made by Chinese local vendors following their localization policy.
To this end, Realtek continues to innovate and introduce new features that attract both TV makers and consumers.
Another competitive landscape gap, especially for Chinese competitors, especially for Wi-Fi and Ethernet. Competition is intensifying for Wi-Fi Ethernet in China in recent six-nine months. Our Chinese competitors catching up Wi-Fi 6 capabilities.
Now in the area of Wi-Fi, the local competitions in China in general are active in Wi-Fi 4 and IoT solutions. Based on that, some have launched Wi-Fi 6 based solutions targeting mostly entry level Wi-Fi 6 IoT chips with limited success in market penetration. IoT solution providers or for that matter connectivity solution providers generally prefer Wi-Fi chip vendors with a complete product portfolio and solid field proven track records similar to the case of Wi-Fi. There's no shortage of Chinese local challenges for the Ethernet chip market in the wake of China's focus on information technology application innovation known as Xin Xi, Jisu, Yin, Yongchuangxin or Xinchuang. In brief, with a goal of enabling China to make and control its own advanced technology, become self reliant and terminate dependence on foreign companies.
Also same as the case of Wi-Fi communication network customers generally prefer Ethernet chip vendors with a complete product portfolio and solid deal-proven track records. Realtek tracks the competitor landscape closely and maintain our leadership in connectivity solutions including those based on Wi-Fi and Ethernet. We offer product portfolios with the greatest breadth and depth and Wi-Fi Ethernet chips that have the smallest footprint, best interoperability and lowest power.
Next question is from Kevin Lin, Taiwan Life. What's your view on gross margin next year after the inventory reverse? Can we expect OPEX ratio going down next year.
Going into next year or gradually this inventory write-off reversal impact is decreasing. Some impact will be within expectation on gross margin. However, as we mentioned, Realtek continue to focus on our effort to ride on the advancement of science and technology to move our product portfolio to the one that favor product with better features and presumably better margin. Now, in terms of OPEX ratio next year, we have just mentioned, you know, short-term goal. Short-term, you can expect OPEX ratio at about the current level. Mid-term, we look at OPEX ratio at around mid-30s.
Next question is from Bruce Lu. What was the FX gains in Q2 2024 and could you give us some colors about the utilization rate of your foundry partners?
Okay. For foreign exchange effect? Our estimate that there may be an upside of about TWD 23 million impact now in terms of foundry utilization to the best of our knowledge entering the second half of the year now the major foundry tend to step back from what we may have heard a quarter or even a month ago that claiming the utilization may be increasing now what we heard they may step back step back on that. We will continue to track the progress.
The last next question for the call is from Kevin Mizuho on company's initial view for 2025 what business or product lines will be the major growth drivers for Realtek in 2025?
Well, moving forward we see the market relentlessly demands back upgrades in practically every product that Realtek is involved in, namely Wi-Fi, Ethernet switch, PON, USB4 intelligent audio and video solutions including audio, codec and camera, to name a few. In terms of market segment, we see PC, communications, network, consumer and automotive all continue to be filled by the quest for ubiquitous connectivity and AI. Realtek maintains a cautiously optimistic view of 2025.
Due to the time constraints. We will conclude the meeting now. Thank you 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 6:00 P.M. today. Thank you and have a good afternoon.