Good afternoon, everyone. Welcome to twenty twenty one First Quarter Earnings Call. This call will be chaired by Realtek's spokesman, Yi Wei Huang. The presentation will be available on the company website before six p. M.
Today. At the beginning, our spokesman will report our first 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 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 anytime. Now I will pass the call to our spokesman, Yi Wei.
Good afternoon, everyone. You are now listening to first quarter twenty twenty one webcast earnings release by Realtek Semiconductor Corporation. Well, first, a brief note on the April results that was announced this morning. April revenue was New Taiwan dollar $7,810,000,000 a 3% decline from March, but a 41% increase from the same month last year. We encountered some delay in factory output toward the end of the month, therefore a slight month over month decline.
Otherwise, the demand remains strong. Now, let us go through first quarter twenty twenty one operational results. On first quarter revenue, it was TWD23.3 billion, a modest 5.7% quarter over quarter increase, but a significant 46.5% increase compared to the same period in 2020. The Q o Q increase reflects the continuing strength in the demand for Realtek products. The large Y for Y increase is due to the low market performance in first quarter twenty twenty from the COVID-nineteen outbreak first started.
On first quarter gross margin, it was 44.8% compared to 43% in fourth quarter last year. The higher than normal gross margin is a result of product mix. Our operating expense in the first quarter was billion dollars or 32% of revenue. An increase in the OpEx ratio is a reflection of additional engineering efforts to move certain products to new process nodes and our foundry offset in face of supply shortage. Third quarter operating profit was $2,990,000,000 or 12.8% of revenue.
This is an improvement over fourth quarter due to better gross margin. The amount of income in Q1 was New Taiwan dollar 190,000,000 We have had a net non op income in spite of the unfavorable foreign exchange rate for a strong New Taiwan dollar in the first quarter. The net profit in the first quarter was NT3.05 billion dollars or 13.1% of revenue. This is a 1.2 percentage point increase quarter over quarter. As a result, first quarter EPS was NT5.98 dollars This is better than NT5.15 last quarter or 3.21 in the first quarter of twenty twenty.
Regarding inventory, Q1 inventory turnover days were at sixty six days compared to sixty one days in Q4. A slight increase in inventory was mainly due to the uneven supply of raw materials, thereby giving rise to an increase in WIP work in progress. We also have the balance sheet and cash flow statement for your brief hold at your convenience. This concludes RioCan's first quarter twenty twenty one financial report. Forward looking, we see that the market demand remains strong and the prospect of operation is continuously positive, is cautiously positive in Q2 twenty twenty one, although the semiconductor supply is still in shortage.
We will also now run down the top five product lines at Realtek. On Ethernet end market demand and customer orders remain strong in the face of supply shortage. The business growth comes from both directions. One, over increase and two, product mix favoring 2.5 gigabit Ethernet and gigabit Ethernet. Many applications include PCs and IP cam for surveillance.
For switch, we see steady growth in demand in both down and managed switches. The supply will be the limiting factor in the final 2021 result. 2.5 gigabit switch presents a welcome spec upgrade, but the deployment may delay to 2022 due to supply constraints. All things considered, we expect a growth for Realtek switches nonetheless. On WiFi, we see strength across the board with a demand far exceeding supply.
To this end, Realtek plans to place priority on PC, AP router, broadband, TV and IoT. WiFi six penetration continues its course, although supply shortage may favor in other ADC or even in other N in some cases. On Bluetooth, the strong demand for Bluetooth comes from many directions. For example, BLE SoC for various types of wearable and BT NIC for remote controllers in many applications. The TWS market using BT SoC is also expected to grow in 2021.
Realtek is one of the very few suppliers with a full range of Bluetooth solutions, which position the DG product line well for growth this year. On TV, real time TV business is expected to stay at about the same level as last year. The market is currently challenged by supply shortage and price increase in driver ICs and panels. Overall, the PC market the TV market is expected to stay flattish compared to 2020. For the smaller but growing product lines, we continue to see strong growth momentum for automotive Ethernet, PON and set top box SoCs.
This is my remark for now.
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.
This question is related to the gross margin. Looking at the Europe peers, MediaTek's gross margin guidance in Q2 has reached 45% range. NovaTech is also approaching your gross margin level. How do you see your gross margin trend onwards? Do you think the IC design houses should charge higher return from the customer given the increasing value creation?
Real time third quarter gross margin increase comes from favorable product mixes. Low margin products tend to have low priority during supply shortage. This tends to favor gross margin performance. We do not forecast gross margin per se. Nonetheless, we observed that the price increases at various parts of the supply chain may continue in the foreseeable future.
We have to continue to work with our suppliers and customers to manage the impact. Note, nonetheless, the impact to gross margin by price adjustment is minimal during supply shortage. Once supply catches up, the familiar market competition is expected to kick back in, thereby giving pressure to gross margin.
Thank you. Next question is from Randy, Private Suisse. This question is related to second quarter and second half of the growth outlook. What's your sales outlook for the second quarter? How much is the supply limited growth?
What's your view on the second half and how you see foundry and back end supply improving in the second half to grow further if demand is there?
Okay. Second quarter sales outlook is cautiously positive, although supply remains the key limiting factor. The supply shortage at both foundries and all sets is not expected to go away, if not worsen in second half this year. Note, nonetheless, Realtek is improving its operational efficiency along with other measures to cope with the supply shortage. With strong demand but lean supply, the extra product shipment will be regulated by factory output.
To this end, the seasonality this year may not be obvious. Okay.
Thank you. Followed by the previous question, Randy also want to ask how's management view on the OpEx to sales ratio in 2021?
Okay. We will try to maintain the OpEx to sales ratio at about the one first quarter level Comparing to the normal time, we are spending extra R and D efforts to evacuate certain products where applicable out of crowded factories. We also invest engineering resource to qualify additional foundries and all sets. Such efforts to enable future capacity will result in additional operating expenses. Okay.
Thank you. Next question is from William J. P. Morgan. What's the visibility for 2022?
What can Realtek prepare in advance for delivering growth in 2022?
First, look at the demand side, the strength this year seems to continue in at least the front half of 2022. At the same time, on the supply side though, we share the observation that the shortage may continue in at least the first half of twenty twenty two. The technology migration such as 2.5 gigabit Ethernet, 1.66 E 10 gs PON may speed up next year. So to maintain growth, we will have continued investments in first new product introductions for new as well as existing markets and qualification for new foundries and offsets. Note that new foundries will include new process at existing foundries.
And actions taken to optimize the usage of limiting capacity include: one, improve operational efficiency, for example, reduction of part number of skill two, give priority to long time partners three, focus on products building better operational results top line and or bottom line. Okay.
Thank you. Now the next two questions is from Rick Daiwa. His first question is about the foundry supply. Could you share us a rough idea of the increase of foundry cost? The second question is that compared to the competitors in WiFi, Bluetooth and TV areas, does Realtek have better capability to secure foundry capacity and does lead to market share gains or the capacity situations of the major players are similar?
Please comment.
Okay. Well, other than acknowledging price increase is happening in almost every part of supply chain, including foundries, we cannot comment on specifics. In terms of capacity secured by different players in the market, large companies tend to fare better. RealPar, very much the largest in the industry is among the top players. The fact is that no one can secure all the needed capacity.
Meanwhile, market time is expanding, while supply lags behind demand. Everyone is looking for second source during supply shortage and acts aggressively in placing orders. How to tell the exact change in market share when market is very dynamic?
The next question is from AGI Benson. In terms of supply chain management, does prepare a higher price to secure the capacity support for the future? If yes, how does Realtek manage both the cost hike and the gross margin?
Well, we try to explain before to work with our supplier in face of the supply shortage is more than one way to do that. But we prefer not to comment on specific means that we use prepaid or otherwise. We will not comment on the specifics. I will only say many possibility to do that. And we also commented before, all different means at the end translate to cost one way or the other, even if it doesn't go directly to the cost of goods sold, it may go to other column of the accounting report.
They are all costs of various types. And we already commented that how we cope with that, even though we do not dictate how we price our product, market will decide the pricing. But we will acknowledge that in our pricing, we will take profit and gross margin into consideration.
Thank you. The next question is raised by Bruce, Goldman Sachs. He would like to ask whether what is the best index for Realtek's follow-up lead time? We understand that Realtek has enormous product lines with various lead times. Which product has the longest lead time and what is the typical lead time now?
The root cause of this problem is on capacity. When the available capacity is lean, people need to wait in a queue for service, therefore, long lead time. The availability of substrate for certain IC packaging, for example, DGA in particular seems to be a very big challenge nowadays from what we can see. Therefore, for certain products using this particular packaging type tend to have longer lead time. And also another factor, for example, maybe manufacturing priority, this can vary from month to month.
So much to say that lead time management is one area everyone in the semiconductor industry, including Realtek is trying to address. The
next question is from Martina Fubang. She would like to ask about management's thoughts regarding the migrations from eight inches wafer to 12 inches process node. You will as you would like to know the split between eight inches and 12 inches of Realtek's products. And could all the products migrate from eight inches to 12 inches? Will it help the gross margin by migrating on process nodes?
We have technologies uses more 12 inches than eight inches wafers, but not by a large margin in terms of wafer count. Not all products using eight inches wafer can be moved to 12 inches wafer because such movement often involves process node migration, Analog heavy design and high voltage applications, for example, often do not benefit or cannot be ported to advanced node. So products stay at eight inches fab and older process mode often for a good reason. But now that we decide to move product from eight inches to 12 inches nowadays, it is because we need to secure more capacity, not because of margin. Nonetheless, we do take gross margin into consideration when we move the design in from eight inches to 12 inches.
Okay. The next question is from Aaron Nomura. Given the continuous supply shortage and the strong end demand for Realtek's end markets, can management provide pricing outlook for the major product lines, for example, WiFi, Bluetooth, switch, TPSOC,
Ethernet and codec? Any directional guidance will be helpful. This actually this question is similar to what we say. We do not decide price, market does. But price nonetheless must appropriately reflect the cost.
In the end each product being lead needs to plan for and deliver growth and profitability. We will acknowledge though during the supply shortage, price pressure compared to so called normal time is relatively low.
Thank you. Next, both Randy and Daniel have questions related to PC demand. What percentage of sales was PC in the first quarter? And how do you see that trading in the rest for the rest in 2021? How's current inventory level and market visibility?
Okay. So we have PC, non PC split stood around 34 to 66 in the first quarter. This compared to 37 last quarter. Know that the strength here include PC and PC peripheral. And we expect that trend to remain for the rest of 2021.
This is because by now PC is considered an essential device after COVID-nineteen for education, for work from home. And for the whole market, we will make reference to IDC who say the PC local market this year may go as high as three fifty two million units or about an 18% growth compared to last year.
Followed by the question related to PC demand, Sony from UBS would like to know what management like to feel on the work on home demand for TV in 2021. What's the current visibility for orders into the second half this year?
We actually just comment on the PC. And on the TV, TV market currently is experiencing shortage in driver ICs and panels that's limiting its growth. Although the demand appears to be at about the same level as last year, both PC and TV customers, they are quite aggressive in sending in purchase orders at this time.
Thank you. The next question is from Kevin Mitsuho. He would like to ask management's view on the WiFi six penetration rate in 2021. If the price of WiFi six is still more than double compared to the previous generation, if the gross margin of WiFi six better than corporate average?
Okay. So we expect WiFi six penetration to be over 30% in both PC and AP routers this year. Wi Fi six price is still about twice of 11ac in the first quarter. And in terms of gross margin, let me say that 156 is still in ramping up stage. Quad 11ac is in a stable and mature stage at the present time.
Thank you. How is your next question is also from Randy and related to the WiFi 6E. How's your solution for the WiFi 6E sampling? And then do you get a further ASP premium and expect faster adoption?
At Realtek, we still plan to deliver 6E samples for customers in second half this year. We do expect 6E to have a modest ASP premium over six. The current supply shortage may delay the actual broad adoption of 6E.
Thank you. Next question is from Brian and CLSA. During the last earnings release, was optimistic to TWS recovery in 2021. What's Realtek's TWS revenue growth target for this year? Does Realtek worry about the component shortage will cap TWS shipment this year?
Yes. So supply shortage is indeed very real and is promising everyone to yield a priority. For the TWS market, we have this year chosen to focus on brand, quality and performance during supply shortage. Overall, we do expect TWS market to grow in 2021. But further, we still need to make special note that in BT and Bluetooth, low energy SoC and Bluetooth MIG products are expected to grow healthy this year despite the supply shortage as explained before.
So overall, the Bluetooth product line this year, we expect a strong growth this year.
Next is following questions from Randy. How much momentum are you seeing for spec upgrades like 2.5 gig Ethernet, 10 gig PON, WiFi six, mesh routers, management switch and new PC surveillance IP CAM solution?
Okay. Well, the technology upgrades in general technology upgrades in general are hampered by supply shortage. While those are named technology upgrades, they are happening, but generally at a slower rate than originally expected. The upgrade speed is expected to pick up when the supply constraint is removed.
Okay. The next question is related to the telecom projects. How is the project momentum for 2021, both within China and overseas? How is Refx positioned and what opportunities do you have to gain content? Which quarter will be the peak of the tender project business this year?
Do we see any pull in or push out in this year?
Okay. On the tender margin, okay. There's a supply shortage and price increase in the supply chain are putting pressure on the telecom tender projects. New tender projects tend to delay, thereby giving opportunity to the existing projects to expand or even to renegotiate the price. Nevertheless, the demand for infrastructure upgrade remains strong in both China and overseas.
The respective segment by PON, PON router, the PON maybe still at about 60,000,000 to $70,000,000 this year. Mesh router maybe 40,000,000 to 50 set top box around 70 to 80,000,000. So the demand for the 10 gs pump appears to be stronger than the gs the 2.5 gs PON tends to be appears to be stronger than 10 gs PON. Now 10 gs PON now we see mostly in U. S.
And EU. Also, what we see in the tender market is because of the supply shortage, some telecom projects choose to be featured to improve supply and control costs. Example may include using 11N combo or even only Bluetooth. While Realtek with a very comprehensive product portfolio, we are well positioned to support very telecom project needs.
Next question is related to the Ethernet product line, especially in the IP cam market. Do you see any more traction in the IP chem market now? How should we think about the growth this year?
So for the surveillance IP this is a main application for Ethernet. Currently, we see demand exceeds supply greatly. So this is servicing customers to seek second forces. So real time Ethernet shipment for surveillance IP cam maintains growth nonetheless. And we are confident the growth will continue even after supply catches up.
Thank you. The next question is from UBS, Sunny, about the latest update on our auto Ethernet business. Current expectation for the content per car, sales contribution, industry penetration, client base extensions, etcetera, is the ramp up being affected by the auto chip shortage?
Real time automotive e commerce shipment is impacted by the supply shortage. The impact though is relatively manageable for Roentec as the volume is low compared to many other products. Also the shortage of MCUs and power ICs appear to be a bigger problem for the automakers. We have also Ethernet customers started in Europe, but by now has grown to spread over U. S.
And Asia. And we expect more than half of the new cars in 2024 to have in vehicle Ethernet. Regarding dollar content, while that may range from dollars to US50 dollars per car depending on the models. That translates to roughly 20 to 70 Ethernet ports. And at the end of revenue contribution at Realtek currently is still small as the company is growing fast, but the automotive Ethernet is also growing steadily and strongly as planned.
Thank you.
Okay. Thank you. The next question is from Jiho Wang, Simon Asia Capital. Please share with us the rank can you rank the order outlook by different segments, for example, PC, TV, TWS, CE, codec and auto?
Well, the reality is that the demand far exceeded supply and customers are aggressive in placing orders. So it actually is almost impossible to rank them because they are all very strong, they are all very aggressive. Thank you.
Okay. Thank you. The next question is from Wudi Lei, makeup profit. Can you share with us the current status of our Type C or USB four point zero development and also the current revenue contribution for both two products?
A little bit difficult to answer this one. USB four point zero or actually it's USB four. USB four solution is still in development. So there's no revenue from USB4 today and this is not from Realtek. Type C wise is spread in several product lines.
So it's also difficult at least I do not have the party on hand. At real time, we do have quite a few product lines using Type C.
Okay. And the investors also want to ask about the product roadmap or planning of our WiFi six and LTE NB IoT.
11ax or WiFi six we have commented the next step upgrade will be 6E and after 6E there will be 11B, C or call Wi Fi seven that's also in progress. NB IoT is totally different. This product development. We have first half engineering effort on NB IoT, but not in shipment yet. Thank you.
Okay. There's some other questions regarding the worry about the overbooking. Recently, the market has worried the overbooking situation. Could management win the current situation and how we can react.
Okay. As we say, customers are very aggressive in placing order, but the reality is supply is lacking demand by a significant margin. So whether the aggressive booking include overbooking, while we do not rule out the possibility, what we say is that we pay close monitoring to the inventory buildup in the channel in our distributor, in our end customers. Currently, we will report that we still have not seen any sign of inventory build up in the channel. In that sense, the worry about overbooking, we tend to say is irrelevant at this time.
So we will pay close attention to the inventory situation. Once the inventory start building up, the overbooking can become a real concern. Thank you.
The next question is from Keiko Li, UBS. Is the company be able to pass through all the cost up to the customers?
All or not, that's very difficult to answer. As we say, the market had its way to determine the price. All we can say is to emphasize again that in our pricing we have to reflect the cost take that into consideration for a healthy long term operation, long term growth. Thank you.
The final question is from the investor, Kevin Chan. His question is whether Realtek has the plan to increase the cash dividend payout?
Okay. Yes. Okay. So the cash dividend payout, we feel at a high level, I think this year you will see the results soon. So yes, I think with a good business result, we should see that.
Thank you.
Okay. Due to the time constraint, we will conclude the meeting now. Thanks for your participation today. Thank you, and have good afternoon.