Good afternoon everyone. Welcome to 2024 third quarter earnings call. This call is chaired by Realtek spokesperson Yi Wei Huang. The presentation available on the company website before 6:00 P.M. Taiwan time will be open today. At the beginning our spokesperson will report our financial results and give management's remarks on our third quarter financials. After that we will have a Q&A session. You are welcome to type your questions in the box at the lower right corner on the screen. We will answer the questions accordingly during the call. You can browse through the pages of the presentation at any time. Note that portions of what is presented in this call contain forward-looking statements. Investors are cautioned that forward-looking statements involve risks and uncertainties. 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'll pass this call to our spokesperson Yi Wei.
Good afternoon ladies and gentlemen on the line. You are currently participating in the third quarter 2024 earnings release webcast hosted by Realtek Semiconductor Corporation. First let us go through the third quarter 2024 financial results. Q3 revenue was TWD 30.75 billion, up 0.3% or practically flat compared to the last quarter. It represents nonetheless a 15.3% increase compared with the same quarter same period last year. This is in line with our expectation after a stronger than normal Q2 performance. Third quarter gross margin was 51.4%, a 0.5 percentage point QoQ increase, while the 9.4 percentage point increase over third quarter 2023. The reversal of the slow-moving inventory write-off was comparable in magnitude to the previous quarter. When excluding this reversal, the gross margin performance accurately reflects the product mix for the reporting quarter.
Third quarter operating expenses were TWD 11.89 billion or 38.7% of revenue or a 0.8 percentage point increase in OpEx ratio compared to the previous quarter. The absolute dollar increase in OpEx was TWD 257 million or 2.2%, primarily driven by increase in R&D expenses for employee compensation. This aligns with our expectation that operating expenses may fluctuate around the current level in the short term. Nevertheless, we remain committed to seeking operating leverage to reduce the OpEx ratio in the mid to long term where feasible. Q3 operating profit was TWD 3.91 billion or 12.7% of revenue, slightly lower than the previous quarter of 13% owing to a slightly higher operating expenses. Q3 non-Op income was TWD 759 million, which same as last quarter came mainly from interest income. Third quarter net profit was TWD 4.38 billion, or 14.2% of revenue flattish compared to the last quarter.
As a result, Q3 EPS was TWD 8.53 compared to $8.55 in the previous quarter and $5.01 in Q3 2023. Regarding inventory, Q3 inventory turnover days were 85 days. While this represents a 10 day increase compared to the 75 days in the second quarter, the inventory turnover days are deemed healthy, particularly given the uncertainties anticipated in the fourth quarter. Overall, the inventory levels at Realtek and within the channel remain generally robust. We also have the third quarter 2024 balance sheet and cash flow statement for your reference and your convenience. This concludes Realtek Third Quarter 2024 Financial Results. Entering the fourth quarter, we must prudently navigate the industry's cyclical off season and stay vigilant to market changes. Now let's review the top product lines at Realtek.
Firstly, it is observed that the revenue split between PC and non-PC categories remains unchanged at a ratio of approximately 33– 67 in the third quarter, mirroring the pattern observed in the previous two quarters. The third quarter experienced growth in the networking and automotive sectors, which was largely neutralized by a decline in the consumer segment. It is important to highlight that the consumer market exhibited exceptional performance in the second quarter, driven significantly by orders that will pull in from the latter half of the fiscal year. On Ethernet, the Ethernet business in the third quarter demonstrated consistently delivering a comparable quarter-over-quarter growth and strength seen in the second quarter.
This robust performance is driven by, first, Gigabit Ethernet inventory replenishment from various applications including printers, docks, and game consoles, second, 2.5 Gigabit Ethernet for motherboards and tender projects, and third, 5 Gigabit Ethernet for high-end motherboards. Realtek's comprehensive Ethernet product portfolio, along with our established shipment and service track record, continues to provide a competitive advantage in the market despite the anticipated seasonal slowdown in the fourth quarter. Both shipment and revenue of Realtek Ethernet products are expected to grow in 2025. This growth will be fueled by the specification upgrade to 2.5 Gigabit Ethernet for various applications such as PCs, docking stations, and telecommunications tender projects. Our ability to adapt to evolving market demands and maintain a diverse product range ensures that we stay ahead of the competition and continue to meet customer needs effectively. On switch.
The networking market is all but certain to witness a substantial improvement this year compared to the last. We project stronger performance in the second half compared to the first, driven by ongoing global communication tenders which are bolstering the demand for switches. Realtek is experiencing a steady rise in demand for our managed switches as well as our multiport 2.5G switches. Overall, the demand for managed switches and new products such as high-port combo 2.5G 10G 25G switches is expected to maintain robust growth in Realtek switch business in coming years. On Wi-Fi, building on a robust second quarter, Realtek Wi-Fi business maintained its stability in the third quarter, closely mirroring the performance of the previous quarter.
In the PC sector, Wi-Fi 6 continues its steady rise, progressively replacing Wi-Fi 5 in the consumer market. Despite a quarter over quarter drop in shipments and revenue in the consumer market due to the high pull-in in the second quarter, there was a noticeable uptick in demand for televisions and home appliances driven by economic stimulus package unveiled in China in September. For the networking segment, Wi-Fi saw benefits from new global telecommunications project awards. Furthermore, Wi-Fi is expanding into additional applications, indicating its versatility and growth potential. Looking ahead, we anticipate sustained growth in Realtek Wi-Fi business driven by both specification upgrades and expanding addressable markets. On audio codec, the IDC reports a 2.5% year over year decline in PC shipments for the third quarter following a modest 2.4% year over year growth in the first half of the year.
Consequently, year to date PC shipments by the end of the third quarter are roughly equivalent to the same period last year at 193 million units. Realtek's third quarter PC codec setback following a robust shipment and a slight performance that outpaced the market during the first half of the year, it has become evident that a portion of the PC codec demand anticipated for the latter half of the year was fulfilled earlier. Currently, most of our PC customers do not foresee growth in the PC market until next year. In the consumer electronics audio codec segment, we are concentrating our efforts on Chromebooks and gaming and making progress. Additionally, our development in audio solutions for the automotive market is proceeding as planned.
On the TV market, it witnessed robust performance in the first half of the year driven by two major sports events as well as increased panel prices and shipment costs. However, as the second half unfolded, the market began to exhibit signs of weakening due to the absence of a new buying incentive and more critically falling panel prices. Although we have been seeing some increase in demand following China's announcement of an economic stimulus package in September, it is unlikely to reverse the overall trend at the current trajectory. We anticipate the TV market will close the year with approximately 200 million units, representing a modest rise from last year's 197 million units.
During this period, Realtek has also managed to capture additional market share. Automotive Ethernet. Last but not the least, on this. Leading foundries and top global automotive semiconductor chip companies have all indicated a slowdown in the automotive end market, particularly in the latter half of this year. We observe a similar trend. Despite this, Realtek Automotive Ethernet chips continue to show robust growth in the third quarter. The automotive Ethernet growth rate both quarter over quarter and year over year have once again outpaced the corporate average. Currently, only about 50% of new vehicles are equipped with automotive Ethernet, indicating significant potential for growth in the coming years. As the automotive Ethernet market evolves, Realtek is confident in repeating our success in the IT Ethernet sector and achieving a leading market position.
Thank you, Yi 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 Brad Lin, Bank of America. Regarding the seasonality of Realtek's business compared to last quarter, is Realtek more optimistic or less optimistic on each application? Can you share some early outlook on seasonality pattern for 2025?
Sure. Our current outlook for all applications is more optimistic than it was a quarter ago. In the short term, we are witnessing a gradual recovery across all sectors, evolving steadily and assuredly. It is important to note, however, that demand recovery might slow down as year end inventory control takes precedence. Looking ahead to the mid and long term, the demand for AI and high performance servers remains robust. While some may argue that these investments could become futile should the AI bubble burst, we at Realtek concur with the prevailing industry consensus. AI and high performance servers represent genuine and enduring advancements. These technologies are set to drive innovation and generate new demand for edge devices and edge servers, all of which stand to benefit from Realtek's connectivity solutions. Our technology facilitates seamless interfaces between devices as well as between humans and devices.
At present, we anticipate a rebound in the first quarter of 2025 as we emerge from the seasonal low of the last quarter of 2024. As for the full year of 2025, it is too early to make the seasonality definite. Comments.
The next question is from Bruce Lu, Goldman Sachs, regarding gross margin outlook in 2025. As we expect foundry pricing would trend down for mature nodes into 2025, should we expect some upside to our gross margins in 2025?
Gross margin is typically influenced by two main the average sales price and the average manufacturing cost. While lower foundry pricing can contribute positively to enhancing our gross margin, the erosion of sales prices due to competition can counter and exert pressure on our margins. Realtek diligently negotiates and manages prices with our foundry partners on the supply side and with our customers on the demand side. We have managed this dynamic effectively in the past and remain confident in our ability to continue doing so, thereby maintaining a reasonable gross margin. It is important to note that we anticipate two additional factors impacting our margin in 2025: a receding reverse inventory write-off and changes in product mix. The reverse inventory write-off has positively contributed to our gross margin in the first three quarters of the year.
Its influence will begin to lessen in the fourth quarter and become relatively insignificant by 2025. Simultaneously, Realtek has been strategically focusing our product offerings on solutions with mid to high end specifications which generally yield improved gross margins. In summary, taking all factors into account, we expect our gross margin in 2025 to be lower than the current level, but likely better than our historic performance prior to the pandemic and the resulting supply shortages.
The next question is from Jeffrey Oh, Macquarie on inventory. How much extra gross profit margin did you get in Q3 2024 because of inventory write-backs? When will the major write-backs end?
Okay, in general we have comment on this impact on the gross margin. Regarding the extent of these writebacks. In the third quarter they accounted for approximately two to three percentage points.
The next question is from Kevin Wang, Mizuho. Related to OpEx, do you expect operating expense to be maintained at a similar amount into 2025? Do you have any plan for controlling operating expense, especially after your new project for Arm-based processor?
We expect the OpEx ratio to stay at approximately the current level this year. In mid-term we still target OpEx ratio to be around mid-30s%. Our commitment to managing these expenses diligently remains unwavering as we continue to seek and recruit talents to fuel our growth, particularly in the fields of AI, very high speed SerDes and very high performance SoC development using advanced process nodes. We encourage managers to enhance performance management practices to align the right talent with the appropriate tasks. Our objective is to achieve operating leverage and reduce the OpEx ratio in the mid to long term wherever feasible.
Next question is from Rick Hsu, Daiwa Capital Markets. What are the key revenue growth drivers for 2025? Could you also share the long term factors supporting Realtek's business expansion?
Okay, we are seeing a steady market recovery in all market segments in 2025 led by networking and automotive. Realtek is committed to leverage its core expertise in ubiquitous connectivity to drive the advancement of the AI world. We anticipate that Ethernet switch, 10G Wi-Fi router, Bluetooth and USB technologies will remain crucial for ensuring seamless device to device connectivity and will be instrumental in driving Realtek's growth in 2025 and beyond. It is evident that intelligence or artificial intelligence can be an emerging property of a highly interconnected system, much like biological intelligence arises from the interconnectivity of neurons. We foresee that audio and video or sound and sight representing the most intuitive human machine interfaces will play pivotal roles in the AI world.
Consequently, Realtek's audio codec, display and camera solutions, streaming technologies such as HDMI along with high speed and DisplayPort are expected to enhance human interaction with AI and contribute to our growth trajectory 2025 and beyond. Realtek is also extending its technological capabilities to broaden its application scope by integrating with the Arm Neoverse Compute Subsystems. Realtek is positioning itself to enter the high performance server market in addition to strengthening its presence in the PC, consumer, networking and automotive sectors where we already have a substantial footprint.
The next question is from Sunny Lin, UBS, related to inventory situation. How about the inventory level at Realtek and end channels? What is your latest inventory management strategy given that last quarter your days of inventory further went down to 75 days compared to target 100 days and following a strong sell in in second quarter, the balance like further countdown you mentioned 75 days is healthy level well, despite.
A 10-day increase in inventory turnaround time compared to the second quarter. We maintain a positive outlook regarding the inventory levels at Realtek and across our distribution channel. The conservative approach taken by customers and distributors is understandable given the current market conditions with low visibility and the anticipation of a potential slowdown as the year-end approaches. At Realtek, our strategy is centered on proactive planning to ensure success not only for our company but also for our valued customers. We are committed to maintaining an inventory that can swiftly adapt to sudden surges in demand, thereby providing seamless support and ensuring continuous supply without disruptions.
The next question is from Brad Lin, Bank of America. What is the firm's current China revenue exposure? Have we seen improving China demand including CE and tender yet after this recent stimulus?
While China plays dual roles in the global market as a consuming market and a world factory, the consumer market in China has experienced a downturn for over a year. Recent signs of recovery have been observed, however, particularly following the introduction of the 2024 economic stimulus package in September. In terms of tender projects, we have noted increased delivery for projects awarded early this year. China's prominence as a manufacturing powerhouse is particularly notable in the automotive industry nowadays. Despite the difficulties in quantifying its scale, China remains an essential market for Realtek. Concurrently, nonetheless, Realtek is expanding its global presence. Case in point, we are seeing significant rise in business opportunities in India, particularly within telecommunications and consumer sectors.
The next question is from Aaron Jeng, Nomura. Related to PC demand, what's the PC demand outlook into fourth quarter 2024 and 2025, and what's your view compared to three months ago?
Industry pundits forecast that PC demand for the entirety of 2024 will marginally surpass that of 2023 at best. This projection has remained consistent since the start of the year and has not changed over the past three months. As previously noted, year to date PC shipments stand at approximately 193 million units, according to IDC, mirroring last year's figures for the same time frame. Consequently, it is expected that PC shipments in the fourth quarter will either be at best comparable to or slightly lower than those of the corresponding period last year. Meanwhile, IDC projects a modest 4.3% year over year growth in the PC market for 2025 and we believe it's a good reference for 2025.
A follow-up question related to PC from Sunny Lin, UBS: How should we think about the dollar content increase driven by AI in PC? And based on your engagement with PC OEMs, what are some of the new applications that could be pushed and what are their product planning?
Most modern PCs are equipped with a CPU and GPU, each incorporating some level of AI acceleration capabilities. However, a common definition of an AI PC stipulates the inclusion of a neural processing unit NPU. Another definition encompasses three core components, a Copilot key, the ability to run Copilot offline, and a dedicated NPU. Yet another report suggests that there is also an NPU requirement of 45 TOPS, tera or trillion operations per second for an AI PC. Each of these definitions contribute to the increased dollar content of an AI PC. It should be noted that the above definition largely reflects the perspectives of Intel, AMD, Qualcomm and Microsoft. Beyond CPU, GPU and NPU, additional supporting hardware and software are essential to make an AI PC functionally beneficial. For instance, an increased number of memory chips is crucial.
Furthermore, an AI PC that processes only text-based information may not meet user expectations. Therefore, it is logical to equip an AI PC oftentimes through adding peripherals with enhanced audio and video capabilities to enable interaction through sound and vision. Higher bandwidth wired or wireless connectivity is also necessary to ensure smooth streaming of multimedia data or transmission. These enhancements present opportunities for and contribute to the Realtek solution over all data content. Realtek is notable for its in-house audio, video and connectivity solutions. Additionally, it is important to recognize that PC OEMs make generative AI and large language models. This makes an AI PC well suited for advanced applications such as sophisticated immersive.
The next is a question from Tim Kung Capital Securities regarding the development of the AI-enabled camera for PC. Please elaborate the ASP expansion benefit to our business and the adoption rate of the customers, okay.
For the AI-enabled camera PC have a significant jump comparing the ASP desktop to camera and Realtek has been shipping already. This has a customized engine on our AI camera module. We anticipate our camera business to have pretty good growth in the coming year and the adoption rate currently is rising. You can all anticipate the new generation of AI. Many of them will be equipped with real-time AI-enabled camera.
Okay, the next question is from William Yang, JPMorgan. Related to networking projects, have you seen more meaningful spec upgrade trend in networking projects in second half 2024 or 2025? If yes, what are the upgrades?
By networking projects I assume you are referring to telecommunication tender projects. The ongoing specification upgrade for these projects worldwide encompasses many PON advancements from 2.5G– 10G and to 25G, 50G, 100G in the coming years as well as Wi-Fi enhancements from Wi-Fi 5– Wi-Fi 6 and eventually to Wi-Fi 7. The pace of these upgrades varies by region and has generally been slower than anticipated due to current macroeconomic conditions. We expect upgrade process to gain momentum in 2025.
The next question from Luke Lin at KGI related to PON margin is from Luke Lin. Given the expansion by India's networking operators and the U.S. shift from copper networks to fiber, how should we think about the additional TAM in the PON market? What opportunities do we have in this market?
We estimate that the global total addressable market, or TAM, for PON technology in 2024 will be approximately 150 million units, with over 60% of these demand originating from China. In the following year, we anticipate the TAM will increase to 160 million units, maintaining a similar distribution in China. The PON market is currently serviced by a limited number of players, including those from China and the United States. Geopolitical tensions have restricted market access for solutions from both China and the US in different places, thereby creating additional opportunities for Realtek. Notably, Realtek has pioneered the introduction of 25G PON technology which is designed to integrate seamlessly with existing infrastructure. This innovation offers a cost-effective upgrade path from the 10G PON within the next two to three years.
Furthermore, Realtek can capitalize on potential opportunities related to PONs such as routers, multi-gig, Ethernet and Wi-Fi.
The next is a question related to Wi-Fi from Brad Lin, Bank of America. Does Realtek see Wi-Fi 7 penetration accelerate post iPhone 16 launch? Did the ASP come further down for Wi-Fi 7, 6E and 6? What's the ASP ratio in fourth quarter?
We will address this question by examining the usage of Wi-Fi technology in PCs and routers. Firstly, it is observed that the introduction of the iPhone 16 has not significantly accelerated the adoption of Wi-Fi 7 in PCs or routers. However, considering that the iPhone 16 has only been available for slightly over a month, it is prudent to continue monitoring this trend closely. Currently, approximately 70%-80% of both PCs and routers are equipped with Wi-Fi 6, while less than 5% are anticipated to have Wi-Fi 7 capability by the end of the year. The prices for these technologies remain relatively stable in the third quarter compared to the second. The primary reason for the sluggish adoption of Wi-Fi 7 is a substantial price difference with Wi-Fi 7 still costing at least double that of Wi-Fi 6.
Another Wi-Fi 7 question addressed by Daniel Yen, Morgan Stanley on Wi-Fi business. Do we feel price pressure in terms of Chinese competition? How's customers' feedback on our new Wi-Fi 7 products?
The price pressure in China is unbelievably high with a relentless pursuit of lower prices without limit. However, such competition primarily targets entry-level products with basic specifications regarding Wi-Fi 7. The current competition in China remains minimal, concentrating on specific configurations for specific market segments. This competitive landscape is expected to remain unchanged due to the very high technology entry barriers associated with Wi-Fi 7. The market demand for real-time Wi-Fi 7 has surged dramatically since the formal launch of the Wi-Fi Certified 7 program early this year. Real-time solutions are recognized as enablers for the mass market. Presently, numerous PC and router manufacturers are actively developing their product using Realtek Wi-Fi 7. The ascendance of Realtek Wi-Fi 7 in the market appears inevitable. It is important to note that Wi-Fi 7 specification is highly sophisticated.
Currently, we are witnessing the initial wave of Wi-Fi 7 implementations focusing on specific configurations. In due time, Realtek will offer the most comprehensive product portfolio supported by unparalleled customer service to cater to diverse market segments and applications. This tried and true strategy will continue to meet market and customers' demands effectively.
The next question is from Kevin Wang, Mizuho. Related to auto, what percentage is the current sales contribution from automotive? Do you expect strong growth for your automotive business? Other than Ethernet, do you see any additional automotive product lines to contribute meaningful sales in 2025?
As shared during our second quarter earnings call, Automotive Ethernet has emerged as a significant product line for Realtek. We anticipate that Automotive Ethernet will continue to outpace the corporate average in growth over the next few years. In addition to Ethernet, several of our other product lines, Audio DSP, for example, are making their way into the automotive sector. It is important to note that the ramp up of our automotive business will occur gradually.
Another question on Automotive Ethernet business from Jason Zhang, CLSA. Who are your major clients now? Can we expect their ASP migration leading to a higher ASP? How's the competition with Broadcom and Marvell in this area?
Realtek Automotive Ethernet clients are distributed evenly globally encompassing major automotive OEMs and Tier 1 suppliers in Japan, Korea, China, Europe and North America. As Automotive Ethernet emerges as the preferred in vehicle network, it mirrors the evolution of IT Ethernet in three significant higher speed, lower power consumption and optimal speed configuration alignment with specific applications. Historic trends indicated a gradual, a bit modest increase in ASP. More crucially, as vehicles advance towards higher levels of autonomous driving, there arises a need for more sophisticated in vehicle networks with enhanced safety and security capabilities. This promotes ensures the adoption of an increasing number trend of Automotive Ethernet controller and switches equipped with advanced management features, thereby boosting the data content of Automotive Ethernet in a car. Regarding competition, Realtek, along with Broadcom and Marvell, stands as one of the most seasoned and formidable contenders in the industry.
We are confident that over time Realtek will outlast its competitors as we have accomplished in the IT Ethernet market.
The next question is from Sunny Lin of UBS. Regarding TV, what's your forecast on TV shipment in second half of 2024 after a strong second quarter with many sporting events? Also, could you elaborate more on the competitive landscape of TV SoC, particularly for China market.
With the conclusion of major sports events, TV shipments have begun to decelerate as we enter the later half of the year. Although there has been a slight uptick in demand following China's announcement of an economic stimulus package in September, this is unlikely to significantly alter the overall downward trend for the rest of the year. In the context of the competitive landscape, the leading players remain the three Taiwan-based TV design houses including Realtek. It is important to note that TV solutions are increasingly becoming platform-based applications. The winning solutions will be those built on OS platforms with broad support from content providers and advertising channels. Our strategy is to secure a solid position on selected major OS platforms and we are on the right track to accomplish so.
The next question is from Jason Zhang of CLSA. Any new project or product for server or data center? Do you have optical switch related products? Up to what speed can your product provide for the connection?
Currently Realtek does not offer products specifically designed for servers or data centers. However, we are in various stages of developing solutions. Some are optical based solutions tailored for server applications. As this is still in its early phases, it's premature to provide detailed information at this time.
Another question raised by Jason Zhang: how should plan in new technologies such as CPO or silicon photonics?
The R&D center and the Central Technology Centers, alongside with relevant BU and Realtek, are actively investigating and monitoring progression of silicon to integrating these advanced optics technologies. We are committed to our operations.
The next JPMorgan USB4 client platform adoption by AMD, Intel and all client opportunities in terms of penetration, what's Realtek's competitive edge in this market and potential?
Market share engineering challenges related to power delivery and video applications. Realtek addresses these challenges with a comprehensive USB4 solution in our customers.
The next is a question on competition. Bruce Lu, Goldman Sachs, would like to ask what's the pricing trend into 2020?
Trends can be quite complex in margin pricing. Ideally, consumers gravitate towards the lowest priced option. Numerous factors influence purchasing decisions. Every product in the market seeks to differentiate itself. Offerings in supply chains often face intense price competition. In China, this trend is expected to persist and potentially intensify among Chinese companies in selecting semiconductor solutions. Consequently, a strategy focused solely on price-matching in this direction, particularly at a time when global connectivity and advanced human-machine interfaces are essential in interfacing with in-house.
The next question is from Brad Lin of Bank of America on talent acquisition and retention strategy, particularly in the highly competitive semiconductor industry.
At Realtek, human capital is regarded as our most important asset. Acquisition, retention and development are consistently highlighted as significant sustainability issues in our annual and ongoing professional education and training. Realtek fosters a nurturing real-time environment that empowers employees to grow and excel, collectively underpinned by the culture of self-confidence and trust in people. Whether it be a Fortune 500 company or Silicon Valley startup that boasts such a high rate of repatriation, this familial approach.
Thanks for your participation today from the IR Team. If you have further questions after the meeting, please feel free to contact our IR Team. The replay will be available on the IR page of the company website before 6:00 P.M. Thank you and have a good afternoon.