Good afternoon, everyone. Welcome to Realtek, our 2020 fourth quarter earnings call. This call will be chaired by Realtek Spokesman, Yee-Wei Huang . The presentation will be available on the company website before 6:00 P.M. today. At the beginning, our spokesman will report our fourth quarter results and give the management's remark. 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 anytime. Now, I will pass the call to our spokesman, Yee-Wei .
Good afternoon, ladies and gentlemen on the line. You are listening to the fourth quarter 2020 webcast earnings release by Realtek Semiconductor Corporation. This is the first earnings call we have online. It also marks a full year of Realtek online earnings calls since the fast spreading of COVID-19 in early 2020. We wish everyone staying healthy, and wish we will meet in person sometime this year. We would like to take this opportunity to wish everyone a very bullish Year of the Bull, which will start on Friday next week, on February 12th. Let me turn your attention to Realtek fourth quarter operational results. On revenue, Realtek delivered a top-line revenue of TWD 22.1 billion. This is a small 1.42% Q-o-Q drop, but a significant 32.4% increase compared to the same period in 2019.
The small QoQ drop reflected the year-end shipment control in light of the supply constraint. Otherwise, the demand remained strong in Q4. The demand of the PC related products remained strong in the fourth quarter. The non-PC segment outgrew the PC segment by a small margin in the fourth quarter, resulting in a PC, non-PC split of 30/70, as opposed to 31/69 in the third quarter. Q4 gross margin was 43%, compared with 41.4% in Q3, and 43.9% in Q4 2019. The gross margin stayed within our historic range as expected. It fluctuated from quarter to quarter due to variations in product mix. Q4 operating expense was TWD 6.84 billion or 31% of revenue. A small increase in OPEX compared to Q3 in terms of the percentage to revenue, was anticipated as a normal seasonal fluctuation. Q4 operating profit was TWD 2.65 billion or 12% of revenue.
This is a small improvement over third quarter due to better gross margin. Q4 non-OP income was TWD 139 million. Realtek Finance continued to manage well in spite of the unfavorable foreign exchange rate for the TWD in 4Q. Q4 net profit was TWD 2.63 billion or 11.9% of revenue. This is a 0.7 percentage point increase quarter-over-quarter. This leads to the EPS as a result, was TWD 5.15. This is better than TWD 4.91 in Q3 and TWD 3.23 in Q4 2020. Regarding inventory, Q4 inventory turnover days was at 60 days, compared with 62 days in Q3. The continuing reduction in inventory is a reflection of continuing market demand and continuing supply constraints. With that, let's go through Realtek's 2020 full-year operational results. We will quickly run through the numbers for each quarter. We have explained the results for individual quarters.
Overall, 2020 revenue was TWD 77.8 billion, a strong 28% Y-O-Y growth, delivering another year of record high revenue. 2020 gross margin was 42.8%, compared to 43.4% in 2019. 2020 operating expense was TWD 24.6 billion or 31.7% of revenue, compared to 33.3% in 2019. 2020 operating profit was TWD 8.64 billion or 11.1% of revenue, an improvement over the 10.4% in 2019. 2020 non-OP income was TWD 717 million, compared to TWD 905 million in 2019. 2020 net profit was TWD 8.79 billion or 11.3% of revenue, compared to 11.2% in 2019. As a result, 2020 EPS was TWD 17.24, better than TWD 13.36 in 2019. We also have the balance sheet and cash flow statement for your perusal at your convenience online. This concludes Realtek 4Q and 2020 financial report. Forward-looking, we see that continuing the momentum in Q4 2020, the demand in 1Q 2021 remains steady.
Nonetheless, we still need to pay close attention to the output capacity in the semiconductor supply chain and changes in the COVID-19 pandemic. Now let's run down the five top product lines at Realtek for 2021. Ethernet outlook is strong as driven by work from home, upgrade in network infrastructure, and continuing demand in security, surveillance, IP cam, and LED public displays. Technology migration to 2.5 Gb Ethernet further contributes to the growth. On switch, it's driven by Wi-Fi 6 deployment and continuation of work from home. We are seeing steady demand growth in switches. On Wi-Fi, in addition to needs of work from home and Wi-Fi 6 technology migration, we are also seeing continuing expansion of consumer and IoT applications. On Bluetooth, TWS is expected to regain growth in 2021 with an expansion in the deployment of the ANC features.
Also significant are the new opportunities in BLE, due to low energy SoC for remote controllers, wearables, toys, and many new applications, as well as BT NIC for expanding applications to pair with Wi-Fi 6. On TV, we expect Realtek TV SoC to perform at about the same level as 2020. While the overall TV market may drop slightly in 2021. The supply capacity and the price of panels and DRAM may affect the final result. Last but not the least, we note a few product lines that we expect to grow steadily in 2021, although they are still small compared to the major product lines. Examples are PON, automotive Ethernet PHY and switches, as well as set-top box SoCs. Thank you.
Thank you, Yee-Wei. Now we are entering the Q&A session. Please type your questions in the box at the lower right corner on the screen. We will reply accordingly. Now, the first question is from Credit Suisse, Randy. This question is related to supply chain and own inventory. How is Realtek's own inventory days at the end of fourth quarter 2020? Do you expect that to start to increase by the end of first quarter? How much are you falling short of demand, if at all?
Well, Realtek inventory turnover days, as we reported, dropped further to 60 days in fourth quarter from 62 days in the third quarter. We do not expect the inventory to increase in first quarter. As we see, supply overall is still clearly behind demands in the first quarter.
The second question is from Morgan Stanley, Daniel. He has a couple questions. Last time you mentioned that Realtek is trying to do the foundry diversification. Could you share the progress now? Can we expect quarter-over-quarter improvements in 2021? The second question is, what is your view of the first quarter revenue quarter-over-quarter?
Okay. Foundry diversification is a work in progress. It should be noted that qualify a new foundry is a work that takes time. We are making progress, but from the beginning, we are not expecting this is something to deliver results short term. This is more of a mid, long-term preparation planning. This year, we have secured the capacity to ensure a growth. We do expect 2021 to be another growth year for Realtek. We do believe we have secure capacity to support that. Whether the capacity will increase quarter by quarter, I would say that's also work in progress. The demand, how long will the demand continue? Whether we are seeing, making any forecast of Q1 revenue, we do not comment quantitatively.
Qualitatively, as we say, we do see the demand strength in first quarter pretty much is a carryover and a continuation of what we see in the fourth quarter. In terms of supply tightness, it's also a continuation of the last quarter. That would be what we can share at this time.
Thank you. The next question is raised by Kevin, Mizuho. He would like to ask about our view on 2021's margins, both the gross margin and operating margin. Do we see better product structure this year compared to last year?
Okay. We still target at maintaining our gross margin within our historic range. For operating margin, we expect to deliver at least at the current level. In terms of product structure, it's almost a living thing changing over time. Contrary to 2020 where Bluetooth was the latter and TV SoC a leader in sales, for this year, we reported that TV is expected to be flat in terms of growth this year, while the growth may be led by Wi-Fi and Bluetooth as the front runners.
Okay. Thank you. The next question is from Bruce, Goldman Sachs. His question is about our initial view on 2021. Given the strong consumer replacement cycle for last year, what we are seeing now in consumer demand, is it possible for a much weaker second half 2021?
It appears that the impact of COVID-19 may not go away anytime soon. We expect consumer demand will continue in the foreseeable future. Additionally, note that the market has been suppressed by supply constraint for a while, thereby creating a sizable demand backlog, which may bleed into the second half this year. Overall, there may not be a dramatic turnaround in consumer behaviors. We still need to pay close attention to the market development.
Okay. The next question is from Aaron Nomura. Similar to the consumer-related markets, he would like to ask about the demand from work from home. Does Realtek see continuous trends into the first half of 2021, and even on the second half of 2021?
Well, for now, we can only be certain that work from home will sustain in the first quarter. Nevertheless, the effect of work from home goes beyond the demand for PC notebook and home routers. It is actually one of the drivers for the industry-wide infrastructure upgrade, which will last longer than the normal consumer seasonality cycle.
Okay. The next question is from UBS, Sunny. Her question is that the timelines in the supply are serving your product migration to Wi-Fi 6, given the higher ASP and margin. What's your targets on the penetration of Realtek this year? The latest ASP comparison versus Wi-Fi 5 on industry with some of your peers like MediaTek being more aggressive on Wi-Fi 6 and beyond, are you seeing more competition in this area?
Okay. The penetration of Wi-Fi 6 is maintaining its technology migration path. For example, we observe that Wi-Fi 6 in PC notebook may grow from less than 20% in 2020 to more than 30% in 2021. In home routers, it may grow from less than 15% in 2020 to greater than 30% in 2021. The ASP for Wi-Fi 6 nowadays is still more than double of that of Wi-Fi 5. In terms of competition, we see aggressive behavior from competitors as always. Nevertheless, Realtek is confident that we are very competitive against any players in the market segment at which we are targeting. We see Wi-Fi 6 to be the main growth driver for Realtek's Wi-Fi business in the next few years. Our Wi-Fi 6E solution will be ready this year at about the same time compared to our competition.
Thank you. The next question is from Randy, Credit Suisse. This question is related to TWS. What % of your mix is ANC TWS? How is your market share on ANC now versus the earlier generation products? How well are you seeing the price premium around TWD 2 or more holds up? What do you think the market growth is in 2021?
Our comment will be outside of Apple. The ANC penetration was low outside of Apple in 2020. We estimate that to be less than 10%. Realtek expects to see our TWS resume growth. For that matter, the market, the whole industry growth in 2020. We will place our emphasis, our priority, to the development of ANC and brand penetration. We target ANC penetration to reach at least 15%-20% this year. The ASP of ANC TWS today at the silicon level is still at least double. At the product level, it could go as high as four times difference they are. This is indicative of the technology barrier of ANC. We believe the price premium will hold up in the foreseeable future. Today, to the best of our knowledge, many TWS products still have yield issue.
Realtek has accumulated quite a bit of experience with our customers. We believe we will take a strong position in the TWS market this year.
Okay. Thank you. The next question is from Rick, BMO. This question is about the outlook of telecom projects this year. Will this year be stronger given the Wi-Fi 6 upgrade and some projects delayed due to the COVID-19 last year?
Consistent with the need for better connectivity global basis in 2021. Specifically, 2.5G PON is still the mainstream in China and emerging markets such as Southeast Asia and South America. It will reach worldwide TAM of about TWD 110 million-TWD 130 million in 2021. 10G PON is growing fast in Europe and U.S., and of course, China is also a big market. Together, the 10G PON market may reach TWD 16 million TAM this year. Telco operators are rolling out mesh routers for better home experience, and Realtek Wi-Fi, both five and six, have good design wins in PON and mesh routers.
Okay. Thank you. The next question is raised by Brian, CLSA. The TV demand recovery looks stronger in the second half 2020. What is Realtek's assumptions on TV market this year and the target for this year and for next year? How do you balance your TV shipments and margin?
The TV market, we have said we expect to remain flattish this year. The market, we believe, will slightly drop 3%-5% in 2021. Everything equal, we continue to do cost improvement. In addition, we continue to provide new value-added features. Thank you.
Thank you. The next question is from Richard Chen, AIA Taiwan. He would like to ask, could you share the content upgrades and ASP potential in each segment for Realtek?
Each segment? Yeah. We have touched a few things. Wi-Fi is the upgrade. Wi-Fi 6 drives difference. We talked about Bluetooth with ANC. We talked about Ethernet with 2.5 Gb Ethernet. Also in terms of managed switch, continuing expansion and 2.5G PON and 10G PON. Those are upgrades of the GPON in the past. Those are examples of upgrading different segments.
Okay. The next question is from Martina, Fubon. He would like to ask, how does the capacity shortage in auto market impact Realtek's auto-related business? At the same time, do we see a new opportunity?
The Realtek Automotive Ethernet product line is expected to see strong take-up from this year, at least up to 2024. As we speak, we continue to uncover more 2024 projects, and we are working on it. Currently, the automotive industry is badly hit by shortage in both wafer supply and OSAT capacity. Since Realtek Automotive business scale is still relatively small at the present time, we expect no problem to achieve our growth goal in 2021 through operational optimization. In terms of new opportunities, in addition to traditional car makers, some non-conventional platform developers are proposing new solutions for next generation vehicles. Realtek is participating in those discussions with those new comers. Thank you.
Thank you. The next question is from Bruce, Goldman Sachs. Regarding Ethernet switch, what are the market migration trends we are seeing? Do we sense more opportunities from China in the near term?
Right. The trend for the market segment we play in, the consumer small medium business switches, the trend is to adopt 2.5 Gb Ethernet. This is expected to be a global trend. It pair nicely with Wi-Fi 6. Also for managed switch, Realtek have new design wins from multiple customers. We are expecting to see ramp-up this year. Thank you.
Thank you. The next question is from Edward Su, Grand Alliance. Have we secured the capacity for longer term? How often do we negotiate price with our foundries partners and also partners?
Realtek is making ongoing effort, those are work in progress, to expand Realtek supply capacity in long-term planning. We place priority on foundries with expanding capacity and process migration capability. We also invest engineering resource to pick up new foundries that we have not used before. Nowadays, we may discuss more often on a needed basis when our customer raise their demands.
Okay. The next question is from Warren, Prudential. How's the order visibility we are seeing now? How does the company allocate the strong demands from every front?
We do see strong orders. Visibility, as we always say, we usually believe the reliable one are pretty much only one month. Having said that, nowadays, with orders coming from every direction, at times, we do need to make some decision. Our decision usually, in addition to what you may think, we do care about price margin. We care and emphasize even more on long-term partnership and strategic marketing position in our allocation.
Okay. Thank you. The next question is a follow-up question from Kevin Wong, Mizuho. As the demand momentum continues into the first quarter 2021, but the supply remains tight, could we expect sales to grow quarter-over-quarter in the first quarter after factoring the supply tightness?
Again, we can only comment that big picture-wise, it's carrying what we see in the first quarter. It's pretty much a continuation or a bleed over from the fourth quarter. That includes both on the demand side and on the supply constraint side. But at the end, the final result, we have to hold on until the end. We will not predict the end result of the first quarter prematurely. Thank you.
Okay. Thank you. The next question is from Chen Han Dai, Taiwan Insurance. His question is about the growth drivers for 2021. Could you rank the growth of our top five product lines?
I think we did mention this year, the TV will be pretty much at about the same level of last year, meaning it's kind of flattish. We also mentioned this year, the leader may be Wi-Fi and Bluetooth. I guess that left the other two in the middle. I guess that answer your question. Thank you.
Thank you. The next question is from Raymond Kuo of Yuanta. He has two questions. The first one is, are there any products in PC field due to the foundries insufficient production capacity, leading a decline in the market share? The second question is, will foundry and also have sufficient production capacity in 2021, and will it limit the company's growth momentum?
Okay. Whether any particular product, PC or not, whether we lose market share because of insufficient supply capacity, we do not comment on market share. We will say that earlier, we believe we say in terms of prioritization in light of supply constraints, other than price margin, we place even more emphasis on long-term partnership with our customers. Suffice to say that most of the PC customers are in this category. They are long-term partners. Foundry, and also their capacity overall, I think we have commented that overall, they are still falling behind of the demand. As we say, we believe that we have at least secure the portion that gives us the comfort to say we believe this year will be still a growth year. Thank you.
Okay. Thank you. The next question is raised by individual investor, Kevin Tong. He has a few questions. The first one is that, do we have any plan to join MIH Alliance? The second question is, do we have any plan to acquire some companies like our peers? The third question is, do we have any chance to get more capacity in 2021?
Right. In terms of MIH, I will only say they are one of the non-conventional newcomers trying to promote automotive platform solutions. We have commented earlier that there are several non-conventional platform providers trying to enter the automotive market. It's suffice to say that we are in discussions in all of those. In terms of acquisition, it is one of the things we constantly pay close attention to opportunities, although we still do not have anything to report. In terms of getting more capacity, it is other than saying that we believe at least we have some baseline capability to support our growth goal. We also say part of the mid, long-term planning and also in response to customers' ever-increasing demand, trying to get more capacity is an ongoing work in progress. Thank you.
Okay. Thank you. The next question is a follow-up question from Morgan Stanley, Daniel, about the Chromebook. As we saw that the Chromebook has been growing strongly in last year, and it is expected to have the continuous growth this year. We would like to know what is the content per box difference between the Chromebook and traditional notebook for Realtek?
Short answer, not a whole lot difference. The difference between Chromebook and notebook are more on CPU, panel, and OS. In terms of peripherals, in general, not a whole lot difference. For Realtek, they are pretty much treated the same in terms of design win opportunities.
Okay, thank you. Next question is from Li Xingzhou from Hua Nan. This question is about the shipment status of our Wi-Fi 6 chips. What % does it stand for currently, and what is our expectation for the whole year this year?
We do not comment on percentage of particular product line or even sub-product line within the sub-product line. We will comment that Wi-Fi overall is a top product line, and we just comment that it is an important driver or even front-runner for this year among the front-runners in terms of growth driving. Wi-Fi 6, within Wi-Fi, we have also just commented that it is important to drive the growth of Wi-Fi in the coming years. Thank you.
Okay. Thank you. I think we will take this last question from Yong Jung Jang, Cathay. We have mentioned the 2.5 Gb Ethernet for a while, can we ask about what the % of the revenue contribution it already accounts for? What is the 2.5 Gb penetration in the market, and what's the difference of ASP compared to the 1 Gb?
Yes. 2.5 Gb Ethernet has been in progress for a few years. Now we see the momentum gaining. We will not comment on the split on sub-product line or sub-sub-product lines. We will say, in terms of overall penetration of 2.5 Gb into, let's say, the PC notebook market. This year overall, it will be still in probably the 10% or less. Bear in mind, we are talking about 300 million all PC notebook altogether.
Okay. Thank you. Due to the time constraint, we will conclude the meeting now. Thanks for your participation today. Please feel free to contact our IR team if you have further questions after the meeting. The replay will be available on the IR page of the company website before 6:00 P.M. Thank you, and have a good afternoon.