Good afternoon, everyone. Welcome to our twenty twenty Fourth Quarter Earnings Call. This call will be chaired by Realtek's spokesman, Yiwei Fang. The presentation will be available on the company website before six p. M.
Today. At the beginning, our spokesman will report our fourth 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 lower right corners on the screen. We will answer the questions accordingly.
During the call, you can browse through the pages of the presentation anytime. Now, I will pass the call to our spokesman, Yi Wei.
Good afternoon, ladies and gentlemen on the line. You are listening to the fourth quarter twenty twenty webcast earnings release by Realtek Semiconductor Corporation. So this is the first earnings call we have online. It also marks a full year of Realtek online earnings call since the fast spreading of COVID-nineteen in early twenty twenty. We wish everyone staying healthy and wish we will meet in person sometime this year.
Also, we would like to take this opportunity to wish everyone a very bullish year of the blue, which will start on Friday next week on February 12. Now let me turn your attention to RealPal's fourth quarter operational results. On revenue, real time, did a top line revenue New Taiwan dollar $22,100,000,000 This is a small 1.42% Q over Q drop, but a significant 32.4% increase compared to the same period in 2019. The small Q o Q drop reflected the year end shipment control in light of the supply constraint. Otherwise, the demand remained strong in Q4.
Also, the demand of the PC related products remained strong in the fourth quarter. Nonetheless, the non PC segment outgrew the PC segment by a small margin in the fourth quarter, resulting in a PC non PC split of thirtyseventy as opposed to 30 one:sixty nine in the third quarter. Q4 gross margin was 43% compared with 41.4% in Q3 and 43.9% in Q4 twenty nineteen. 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 NT6.84 billion dollars 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 TWD2.65 billion or 12% of revenue. This is a small improvement over third quarter due to better gross margin. Q4 non op income was $139,000,000 Retail Finance continued to manage well in spite of the unfavorable foreign exchange rate for the NT dollars in 4Q. Q4 net profit was $630,000,000 or 11.9% of revenue.
This is a 0.7 percentage point increase quarter over quarter. So this leads to the EPS as a result was Taiwan dollar $5.15 This is better than $4.91 in Q3 and $3.23 in Q4 twenty twenty. Regarding inventory, Q4 inventory turnover days was at sixty days compared with sixty two days in Q3. The continuing reduction in inventory is a reflection of continuing market demand and continuing supply constraint. So with that, let's go through RealPet's 2020 full year operational results.
We will quickly run through the number for each quarter we have explained the results for individual quarters. So overall, 2020 revenue was TWD77.8 billion, a strong 28% Y o Y growth, delivering another year of record high revenue. And 2020 gross margin was 42.8% compared to 43.4 in 2019. 2020 operating expense was billion dollars or 31.7% of revenue compared to 33.3% in 2019. 2020 operating profit was billion or 11.1% of revenue, an improvement over the 10.4% in 2019.
2020 non op income was $717,000,000 compared to $9.00 $5,000,000 in 2019. 2020 net profit was $790,000,000 or 11.3% of revenue compared to 11.2% in 2019. As a result, 2020 EPS was TWD 17 0.24 better than TWD $13.36 in 2019. We also have the balance sheet and cash flow statement for you for your free flow and your convenience online. So this concludes Realtek 4Q and twenty twenty financial report.
Forward looking, we see that continuing the momentum in Q4 twenty twenty. The demand in 1Q twenty twenty one remains steady. Nonetheless, we still need to pay close attention to the output capacity in the semiconductor supply chain and changes in the COVID-nineteen 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, upgrading network infrastructure and continuing demand in security, surveillance, IP cam and LED public displays.
Technology migration to 2.5 gigabit Ethernet further contributes to the growth. On switch, it's driven by WiFi six deployment and continuation of work from home. We are seeing steady demand growth in switches. On WiFi, in addition to means of go from home and WiFi six 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 Bluetooth 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 six. On TV, we expect Vueltaq 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, 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 Credit Suisse's Randy.
His question is related to supply tightness and own inventory. How is RealPact's own inventory days at the end of first quarter twenty twenty? And 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?
We have inventory turnover days as we reported dropped further to sixty days in fourth quarter from sixty two 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 demand in the first quarter.
The second question is from Morgan Stanley, Daniel. He has a couple of questions. Last time, you mentioned that RealPack is trying to do the boundary diversification. Could you share the progress now? And can we expect quarter over quarter improvement in 2021?
And the second question is, what is your view of the first quarter revenue quarter over quarter?
Okay. So foundry diversification is work in progress. It should be noted that qualified new foundry is a work that takes time. So we are making progress, but from the beginning, we are not expecting this is something to deliver result short term. This is more of a mid long term preparation planning.
And 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. And whether the capacity will increase quarter by quarter, I would say that's also work in progress. And demand whether the demand how long will the demand continue and whether we are seeing making any forecast of Q1 revenue, we do not comment quantitatively.
But qualitatively as we say, we do see the demand trends in first quarter pretty much is a carryover and a continuation of what we see in the fourth quarter. And in terms of supply tightness, it's also a continuation of the last quarter. That will be what we can share at this time.
Thank you. The next question is raised by Kevin Mitsuho. He would like to ask about our view on 2021 margins, both the gross margin and operating margin. Do we see better product structure this year compared to last year?
Okay. We still target and maintaining our gross margin within our historic range. But for operating margin, we expect to deliver at least at the current level. And in terms of our product structure, it's almost a living thing changing over time. Contrary to 2020 where Bluetooth was a lagger 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 WiFi 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 the last year, what we are seeing now in consumer demand, is it possible for a much weaker second half twenty twenty one?
It appears that the impact of COVID-nineteen may not go away anytime soon. We expect consumer demand will continue in the foreseeable future. Additionally, know 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. So overall, there may not be a dramatic turnaround in consumer behavior, but we still need to pay close attention to the market development.
The next question is from Aaron Nomura. Similar to the consumer related markets, you would like to ask about the demand from work from home. Does Realtek see continuous trends into the second the 2021 and even the second half twenty twenty one?
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.
The next question is on UBS. First question is that the tightness in the supply of serving your product migration to WiFi six, given the higher ASP and margin. And what's your target on the penetration of Realtek this year and the latest ASP comparison versus WiFi five industry with some of your peers like MediaTek being more aggressive on WiFi six and beyond, are you seeing more competition in this area?
The penetration of WiFi six is maintaining its technology migration path. For example, we observed WiFi six 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 six nowadays is still more than double of that of Wi Fi five. 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 WiFi six to be the main growth driver for Realtek's WiFi business in the next few years. And our WiFi 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 percent of your mix is ANC TWS? And how is your market share on ANC now versus the earlier generation products?
And how well are you seeing the price premium around $2 or more holds up? What do you think the market growth is in 2021?
Our comment will be outside of Apple. So the ANC penetration was low outside of Apple in 2020. We estimate that to be less 10%. And 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.
And we target ANC penetration to reach at least 15% to 20% this year. And the ASP of ANC TWS today at the second level is still at least double. At the product level, it could go as high as four times difference there. So this is indicative of the technology barrier of ANC. So we believe the price premium will hold up in the foreseeable future.
And today to the best of our knowledge many TWS product still have yield issue. But we have accumulated quite a bit of experience with our customers. We believe will take a strong position in the TWS market this year.
Okay. Thank you. The next question is from Rick Daiwa. His question is about the outlook of telecom projects this year. Will this year be stronger given the WiFi six upgrade and some projects related to the COVID-nineteen last year?
So consistent with the need for better connectivity in 2021, specifically 2.5 gs PON is still the mainstream in China and emerging markets such as Southeast Asia and South America. And you will reach worldwide TAM of about $110,000,000 to $130,000,000 in 2021. While 10 gs PON is growing fast in Europe and U. S. And of course, China is also a big market.
Together, the 10 gs PON market may reach 15,000,000 tons this year. Also telco operators are rolling out mesh routers for better home experience And real time WiFi 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 twenty twenty. What's real tax 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?
So the TV market, we have said we expect to remain flattish this year. But the market, we believe, will slightly drop 3% to five percent in 2021. So everything equal, we continue to do cost improvement. In addition, we continue to improve 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. So we have touched a few things. Wi Fi is the the the upgrade. You know?
Once I see price difference. We talk about Blue Group with ANC. We talk about Ethernet with 2.5 gigabit Ethernet. And also in terms of managed switch, continuing expansion, 2.5 gs PON and 10 gs PON. Those are upgrade of the GPON in the past.
So those are examples of upgrading different segment.
Okay. The next question is from Martina Pupang. He would like to ask how does the capacity shortage in auto market impact Realtek's auto related business? And at the same time, do we see new opportunity?
Well, Realtek Automotive Ethernet product line is expected to see strong CAGR from this year at least up to 2024. As we speak, we continue to uncover more 24 projects, and we are working on it. Currently, the automotive industry is badly hit by shortage in both wafer supply and offset capacity. Since real time 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. And in terms of new opportunities, in addition to traditional car vehicles, some non conventional platform developers are proposing new solutions for next generation vehicles.
Realtek is participating in those discussions with those newcomers. Thank you.
Thank you. The next question is from Bruce from Goldman 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, say consumer, small medium business switches, the trend is to adopt 2.5 gigabit Ethernet. And this is expected to be a global trend. It pair nicely with Wi Fi six. And also for managed switch in the real time, have new design wins from multiple customers.
And we are expecting to see ramp up this year.
Thank you. Thank you. The next question is from Edward Su on ground alliance. Have we secured the capacity for longer term? And how often do we negotiate price with our foundry partners and outside partners.
Realtek is making ongoing effort, those are work in progress to expand real time supply capacity in long term planning. We face priority on foundries with expanding capacity and process migration capability. And we also invest engineering resource to pick up new foundries that we have not used before. And in terms of price discussion, normally there's annual price discussion usually held in the middle of the year for the coming year. But nowadays, we may discuss more often on a needed basis when our customer raise their demand.
Okay. The next question is from Warren Prudential. How is the older disability we are seeing now? And how does the company allocate the strong demand from every front?
We do see strong orders. From visibility, we always say, we usually believe the reliable one pretty much only one month. Having said that, nowadays, with orders coming from every direction, at times, we do need to make some decision. And our decision usually, in addition to what you may think, we do care about price margin. But we care and emphasize even more on long term partnership and strategic marketing position in our allocation.
Okay. Thank you. The next question as a follow-up question is from Kevin Wang, Mizuho. And the demand momentum continues into the first quarter twenty twenty one, but the supply remains tight. Could we expect sales to grow quarter over quarter in the first quarter after affecting the supply tightness?
Again, we can only comment that big picture wise is carrying what we see in the first quarter is pretty much a continuation or a bleed over from the fourth quarter. So 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. So we will not predict end result of the first quarter prematurely. Thank you.
Okay. Thank you. The next question is from Chen Han Zai, 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 maybe Wi Fi and Bluetooth. So I guess that left the other two in the middle. So I guess that answers your question. Thank you.
Thank you. The next question is from Raymond Ku of Yandan. He has two questions. The first one is, are there any products in PC field due to the foundry's insufficient production capacity leading a decline in the market share? And the second question is, will foundry and OSAT have sufficient production capacity in 2021 and will it limit the company's growth momentum?
Okay.
Any particular product, PC fuel or not, whether we lose market share because of insufficient supply capacity, we do not comment on market share. But we will say that earlier we believe we say in terms of prioritization in light of supply constraint 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. And foundry and all set their capacity overall, I think we have commented that overall, they are still falling behind of the demand.
But as we say, we have believed that we have at least secured the portion that give 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 Chang. He has a few questions. The first one is that, do we have any plan to join NIH league?
And the second question is do we have any plan to acquire some companies like our peers? And 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 nonconventional newcomers trying to promote automotive platform solutions. And we have commented earlier that there are several platform, non conventional platform provider try to enter the automotive market. It's suffice to say that we are in discussion in all of those. And in terms of acquisition, it is one of the things we constantly pay close attention to opportunities, although we do not still do not have anything to report.
And 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 grow strongly in last year and it's back to have the continuous growth this year. So 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 of difference. The difference between Chromebook and notebook are more on CPU, panel, and OS. And in terms of peripherals, in general, not a whole lot different. So for real time, they are pretty much treated the same in terms of design win opportunities.
Okay. Thank you. The next question is from Li Xing Zhou from Huanang. This question is about the shipment status of our WiFi six chips. What percentage does it stand for currently?
And what is our expectation for the full year this year?
We do not comment on percentage of particular product line or even sub product line within the sub product line. So we will comment that WiFi overall is a top product line and we just comment that it is an important driver or even front runners for this year among the front runners in terms of growth driving. And Wi Fi six 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 Zhong Zhang, Cathart. Because we have mentioned the 2.5 gig Ethernet for a while, So can we ask about what's the percentage of the revenue contribution it already accounts for? And what is the 2.5 gig penetration in the market?
And what's the difference of ASP compared to the one gig?
Yes, 2.5 gig Ethernet has been in progress for a few years. And now we see the momentum gaining. But we will not comment on the split on some product line or some product lines. But we will say in terms of overall penetration of 2.5 gig into, let's say, the PC notebook market, This year overall, it will be still in probably the 10% or less. But bear in mind, we are talking about 300,000,000 all PC notebook altogether.
Thank you. Due to the time constraints, 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 six p.
M. Thank you, and have a good afternoon.