Good afternoon, everyone. Welcome to Realtek's twenty twenty one Second Quarter Earnings Call. This call will be chaired by Realtek's Boardman, Yi Wei Huang. The presentation will be available on the company Web site before six p. M.
Today. At the beginning, our spokesman will report our second quarter results and give management's remarks. After that, we will have a Q and A session. You are welcome to type your questions in the box in 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 anytime. Now I'll pass the call to our
Good afternoon, ladies and gentlemen on the line. You are listening to the second quarter twenty twenty one webcast earning release by Realtek Semiconductor. First, let's go through second quarter twenty twenty one operational results. On Q2 revenue, it was TWD25.8 billion, a 10.7% Q o Q increase and a 49% increase compared to the same period in 2020. The Q o Q and Y o Y increases reflect both the continuing demand trends and the increase in product ASP.
PC related businesses performed strongly in the second quarter, resulting in a thirty six sixty four split of PC versus non PC revenues. On gross margin, second quarter gross margin was 50.4% compared to 44.8% in first quarter twenty twenty one. The higher than normal gross margin is mainly a result of better product mix, favoring products with better profitability given a supply limit. Q2 operating expense was NT8.72 billion dollars or 33.8% of revenue. An increase in the OpEx ratio is a reflection of continuing engineering and other investments to expand and secure supply for the future.
Our current operational priority is to meet our customers' expectation in supply the best we can while maintaining competitiveness in cost performance. The operating result of second quarter I'm sorry, the operating profit of the second quarter was NT4.3 billion dollars or 15.6% of revenue. Higher operating margin is mainly a result of better gross margin. Q2 non op income was $184,000,000 remaining stable compared to the first quarter with NT27 million dollars foreign exchange gain from successful hedging in this quarter. Q2 profit was US4.31 billion or 16.7% of revenue, a 3.6 percentage point increase Q o Q.
As a result, Q2 EPS was US8.43 dollars better than the US5.98 dollars in the first quarter this year or the 3.97% in the second quarter last year. Regarding inventory, Q2 inventory turnover days were at eighty two days compared to sixty six days in Q1. With work in progress, constitute the major portion of the inventory as a result of uneven availability of various materials in the supply chain, which remains a real challenge. We also have balance sheet and cash flow statement for your perusal and your convenience. This concludes Realtek 2Q twenty twenty one financial report.
Picking into the third quarter, the current market for Realtek products still face supply shortage. We need to pay close attention to changes in the upstream supply as well as end market demand. We are cautiously optimistic about the operations in the third quarter. Now let's run down the top product lines at Realtek. On Ethernet, market remains for 2.5 gig Ethernet, gigabit Ethernet and fast Ethernet, all outpaced supply significantly in the second quarter, which is expected to be the same in the third quarter.
Many applications include PC notebook, IP cam, surveillance cameras, broadband CPEs, etcetera. In spite of supply constraints, the adoption of 2.5 gigabit Ethernet in the high end segment of selected applications such as gaming and motherboard kicked off successfully in the first half this year. The continuing constraint is now hampering the growth of the new fab for mainstream applications. As a result, the penetration of 2.5 gigabit Ethernet may be limited in 2021, For example, less than 10% in PC. So still a lot of headroom for growth.
Switches business is limited by supply, although there's no shortage of demand for both dumb switch and managed switch. We believe that demand trends will suspend post pandemic. For Dump switches, the expanded installed base due to work from home and remote learning is expected to enter into a regular refresh and technology upgrade cycle. For managed switch, we will continue to expand customer base and win new projects. WiFi Applications performed the best in the second quarter were consumer electronics and IoT, but demand remains strong across the board, including PC, routers, broadband.
Sales is still led by 11ac and 11n for real tech. The growth for WiFi six has been suppressed by supply shortage, although its growth is inevitable. 30% penetration of WiFi six for PC and routers may still be achievable this year, while the broadband and other applications may be forced to slow down their WiFi six adoption. WiFi 6E MP shipment is expected in 2022. BlueFood, in this segment, we choose to allocate supply fairly across the unique BTSOC and BOE SOC.
The demand outstripped supply for all three segments. Main applications include broadband boxes and PC bundles for BTE NIC, wearables and remote controllers for BLE SoC and PWF for BT SoC. Due to supply limit, we have focuses on performance and brand new customers for TWS. On the TV, the price and supply of LCD panels and DRAM continue to impact TV growth negatively. We expect TV worldwide TAM to drop a little wider wide this year.
Although four ks TV series sales regained momentum. Real time TV shipment in 2021 is expected to maintain at about the same level as last year.
Thank you. Thank you, Yiwei. 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.
Now the first question is from Daniel Morgan Stanley. The company reported second quarter revenue to be up to 11% quarter over quarter. Could you provide a split of the 11% quarter over quarter growth? For example, how much from shipment and how much from ASP hike? Also, what's the reason behind better than expected gross margin?
Are we still maintaining 42% to 44% guidance into second half this year?
Okay. Both quantity shift and ASP increase Q o Q. But ASP was the primary contributor to the higher revenue and Q o Q growth in the second quarter. Note that there are two factors giving rise to higher ASP. One, product mix and two, price increase.
Regarding gross margin, there are also two contributing factors. One, ASP. Two, ASC. For example, wafer cost impact on sales costs. It should also be noted that some of the costs to secure supply may not be included in the cost of goods sold and impact gross margin directly.
For example, engineering investments to qualify additional production lines or vendors or investment on long term partnerships. Changes in ASP and ASC are both very dynamic, and they do not align with each other. As to the factors impacting gross margin, ASP and ASC are expected to change continuously but independently to a large extent in the second half. We cannot predict where gross margin may land quarter by quarter. Nonetheless, the supply shortage does impact product mix to tilt forward but favor higher ASP and profitability.
Thank you. The next question is from Goldman Sachs, Cindy. Will real tax ASP and gross margin decline back to previous level when labor supply is no longer an issue? Okay.
At least not anytime soon, I think the key will appear is when supply is no longer an issue. When that happens, the only factor to determine ASP will be market competition. And we will see how the market dynamics drive this competitive landscape. That will be the determining factor. But for the supply to go away and not an issue that doesn't seem to be possible in the foreseeable future.
Thank you.
The next question is from Kevin Wang, Mizuho. Is it possible to see even higher gross margin in second quarter this year?
You mean second half?
Second half, yes.
Okay. As we said, we cannot predict where gross margin may land quarter by quarter. So higher, lower, both are possible. Thank you.
Okay. The next question is from Randy, Credit Suisse. His question is related to OpEx. What is Realtek's target to grow OpEx? And what target ratio should we use for OpEx ratio in the second half?
Okay. Compared to normal time, OpEx in this and coming quarters will include engineering investments to qualify additional vendors and also investment on long term partnerships. Such additional engineering investment is necessary, although its benefits may not be visible this year. OpEx ratio, always dominated by R and D expense this year, is likely to be higher than that of 2020. Thank you.
The next question is from Erin or Mona. Next, Realtek will respond to the rising wafer cost into second half this year and 2022? Will Realtek be able to pass on rising costs continuously? Or will Realtek need to bear the cost with gross profit margin taking to 2022?
Although, when the price increases in second half twenty twenty one and even 2022, our expectation is demand continues to outgrow supply. As we reminded everyone in the past, Vueltaq does not pass on price increase in the supply chain in a straightforward manner. We will review the necessity of price increase on our part regularly. Both profitability and market acceptance competitiveness are important factors in our decision.
The next question is from Morgan Stanley. Daniel, could you provide the rough revenue split of first half versus second half this year?
All we can say is the second half is very likely to be higher than the first half. That will be as much as we can comment.
Thank you. Followed by the question, supply situation for the second half and 2022 and inventory level? How is Realtek's own inventory versus the target level? How do you see your foundry supply growing for the second half this year? And do you have comfortable capacity availability in 2022?
The supply remains tight and very challenging in the second half and also most, if not throughout 2022, from what we can tell at this time. No new capacity is expected from foundry and offset in the second half this year and most part of 2022. Spot opportunities for fewer wafers may come and go. Will have tried our best to capture some. Inventory of finished goods remains low in real time, with nonetheless increase due to unevenness in supply chain process.
We do not see real time finished goods inventory returning to normal in the near future.
Thank you. Next question is from Martina Fuban. Do you see other components shortage impact in the second half of this year?
So we see supply chain shortage occur in many cases in addition to wafer, for example, offset, PCBs, substrate, memory, they are all good examples.
The next question is from Brian CLSA. Could you elaborate the growth magnitude by product line? Realtek has been relatively conservative to the TV SoC growth this year due to higher panel and DRAM price. These prices are even higher in the second quarter and third quarter twenty twenty one. Do you see the same impact to the PC as well?
What's the difference between now and the three months ago?
Panel and DRAM prices now are higher than those three months ago. Panel price is still high at the present time, although the momentum for further price hike seems to be tapering. There are even rumors that the panel price may drop in the near future, although we have not seen it. DRAM price is also at a high point at the present time. The price impact mentioned above is expected to suppress the TV market this year.
For real time, we still expect a flattish year for TV. The price trend for panel and DRAM for PC is no different from that for TV. Thank you.
Next question is raised by William J. P. Morgan. What was the product mix of the second quarter twenty twenty one? And how would it change in the second half year?
The second quarter revenue growth was led by PC related, including Ethernet, audio codec, WiFi. Moving forward, we still expect sale products giving better business results, while fulfilling customers' demands the best we can.
The next question is from Morgan Stanley, Daniel. What's the WiFi six in the first half and the second half of this year? Are we seeing slowing down of WiFi six penetration versus our earnings call three months ago? What's our progress for the WiFi 6E and also when WiFi seven will come?
WiFi six demand are strong, but constrained by supply. PCs and routers are expected to achieve 30% WiFi six penetration, but broadband related market may delay WiFi six adoption this year. Realtek restarted WiFi six MP shipment at the 2020 last year. We expect to ship more WiFi six in the second half compared to the first. For WiFi 6E, the MP is expected in 2022 next year.
High end PC are likely the first adopters. For 01/1957, it is under development. Product availability may be at least two to three years out. Thank you.
Followed by the previous question, Brian from the CLSA would like to ask our initial expectation of the WiFi six penetration in 2022.
Well, suffice to say, we expect WiFi six penetration in 2022 will be stronger than that this year.
Okay. Still a question on WiFi six. William from JPMorgan would like to ask whether the company has the confidence to replicate WiFi four and five success in the WiFi six cycle?
For real time 30, we are confident to be a leader in WiFi six. As we always do, real time WiFi six solutions will enable mainstream adoption of the technology. Our strength includes: one, completeness of product portfolio two, small form factor through integration. Three, low power design. Four, and probably most important, our customer support.
The next question is from Kevin Mizuho. What is the current PC demand outlook from customers for the second half this year?
We can take a look for some market reports. Overall, PC demand outlook remains strong in the second half. According to data provided by ITC, the PC market may grow 10% up in the second half versus the first half, yielding a total of 58,000,000 units of worldwide PC shipments this year. This represents an 18.3% Y o Y growth. We believe such data provides a reasonable reference.
Thank you. The next question is from Goldman Sachs Group. He wants to know what's your PT shipment product breakdown by enterprise and consumer. Do you expect the recovery in enterprise market to offset the demand concerns from the consumer next year?
It appears that people stop tracking PC commercial consumer split for a while. Still, it is generally believed that consumer purchase may dominate during the pandemic when people work from home and study from home. Nonetheless, a large portion of PC Chromebook for educational use is through kind of projects managed by school systems, which are considered commercial projects. If and when pandemic subsides, Consumer purchases may shift to products and services other than PC notebook. However, corporate PC notebook refresh cycle may resume.
Further, the new norm post pandemic may involve a mix of work from home and back to office. Overall, the new norm may bring PC notebook annual TAM to a level higher than pre COVID-nineteen as far as we can see. Thank you.
The next question is from Rick Daiwa. In the TWS market, the growth is probably capped a bit due to the capacity constraints. What's your expectation for the TWS market growth in 2021 to 2022? Also, do you see any meaningful change to competition landscape?
TWS growth by 10 appears to be flattish this year as far as we can see. The TAM may go back to the growth mode in the future with the next growth opportunity in LE audio. Bluetech has decided to focus only on high performance segment and focus on brand customers for TWS. On ANC, it still constitutes only a small percentage of the TWS market due to the engineering challenges. We want to emphasize Rutab Bluetooth product line, maintain a healthy growth as we see strong demand in BT NIC, BT BLE SoC and BT SoC.
Thank you.
The next question is from Randy, Credit Suisse. How is the project momentum for the second half this year within China and overseas?
For the tender process, we see OTT PON demand in China remains strong. Those in overseas are strong for PON and DSL. We see the fulfillment rate to be less than 50%, nonetheless. Just very recently, we see new kind of projects open in China. And in terms of the market potential, see the OTT specs changes from WiFi Bluetooth combo to BG only due to supply constraints.
We have fared well in this change. And for optic routers, we still see market potential of around 45,000,000 per year. The market size for PON worldwide, 10 is about more than 190,000,000. China alone has about over $100,000,000 We have found it's expected to grow in this segment. Thank you.
The next question is about China competition. Expressive recently also mentioned they have the WiFi six product. What's your observation? And how about any other vendors in China?
Well, competition from China always exists. Expressive has been a competitor in IoT for a few years. Wi Fi six, which is the three key improvements over the previous generations of Wi Fi. One, high throughput. Two, mass connectivity.
And three, power management through target wait time. Two and three are both very important to the ubiquitous adoption of IoT solution. So Wi Fi six is expected to become an important choice for IoT in time. But same as other segments, we have wins on the solid steel proven technology, completeness of product portfolio, level of integration, low power and customer services. We should also know that Wi Fi six for IoT seems to be best to support, among other things, voice control.
We have IoT solutions integrate voice, codec, among other IPs. And we have IoT focused on global appliance brands and also solution providers. Thank you.
The next question is SPAC migration. How much is supply constraint changing the pace of spec migration? And in which areas of the business?
Okay. Supply shortage appears to slow down the development of new generations of spec as engineering resources may be diverted to port existing products to expand supply base. For products that are already in MP stage, spec migration proceeds. The deployment of the new spec oftentimes slowed down due to supply shortage. Thank you.
Next question is related to the other Ethernet. Could you give us some colors on it?
Sure. Auto Ethernet is growing at a healthy rate than this expectation and significantly above corporate average for the past two point five years. We are currently busy working on new design wins. The next wave of RFQs for year 2025, 2026 car models are not expected to arrive until the end of this year. Supply shortage does impact auto Ethernet business, but the situation is manageable due to the relatively small scale of the business.
Realtek Automotive Ethernet business covers customers in all major global carmakers in EU, U. S, Korea, China and Japan. We want to share that real time automotive switches lead in high Qualcomm supporting gigabit PHY and PCIe interface. The innovative design enables Fuel Tech automotive switches to pass many global OEM stringent EMC tests and to be designed into a wide range of car models. RealPack is keeping up with the automotive Ethernet trend to emphasize in safety and security.
Ethernet PHY and switches may account for US $15 upward to over US $50 in one car in the coming year. Thank you.
And the next following question is from Zhong Hin Tai. Could you share the current auto related revenue contribution of the company, the revenue contribution in the three to five years? Well,
we will say as we say the relevancy is scale is still small. So we don't particularly comment on the single particular product line ratio of that to the company. But suffice to say, currently, it's still overall low compared to the corporate scale. But it has been growing very impressive in the past two point five years, and we expect it in the next two, three years to continue to grow at a very significant rate. Thank you.
The next question is from Kevin Wang Mizuho. Should we still expect the company to grow at least 10% year over year in 2022? What are the major growth drivers?
We don't really give growth guidance there. Although we shared in the past, every product line leader will set a target for themselves to maintain the growth momentum that we have achieved before. The major growth driver in the coming years or maybe I say next year because to come in too far out will be a pure guess. So in the coming year, we'll still say for the top product line, Ethernet, Wi Fi, Bluetooth, switches, etcetera, we can still continue to contribute significantly. For smaller product lines, we still expect product lines, automotive Ethernet, PON, still will lead the growth in a smaller product line.
Thank you.
The next question is from James Qi. What are the major challenges the company faced in the second half this year?
The biggest challenge, of course, continues to be the supply. It is very hard to expect new additional supply, meaning that the shortage we have done on the first half of the year likely is going to continue, and that's the biggest challenge. Thank you.
The next question is from Kevin Young, UGFont. We heard that the foundries are encouraging their customers to migrate more products to 28 nanometer. Could you please grow the 28 rating this year and expectation of the twenty twenty two?
We actually are not aware of our foundry encourage customer to go any particular direction. Overall, foundry tightness to our understanding very much is across the board. Arguably, maybe the most advanced mode, Blu Tech, we are not there. Today, we use multi advanced node up to 12 nanometer. And what we can say is from 12 nanometer down all the mature nodes, including 28, the supply, they are all very tight.
Having said that, overall, continuing technology migration appears to be a trend. So we do expect in time, there may be more products moving to the 28 nano in terms of the mature node. Thank you.
The last question is from DBS Evelyn Chew. Why did the salary expense increase significant in 2020 compared to 2019? Well, salary
expense usually also reflects the result of company operations. We have performed well, we a certain percentage of the profit will be allocated for salary. I assume salary here actually means salary plus bonus overall compensation. So usually, as we fare well in our business results, the compensation amount will increase. Thank you.
Thank you, Yi Wei. Due to the time constraint, we will conclude the meeting right 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 six p.
M. Thank you, and have a good day.