Good afternoon, everyone. Welcome to twenty twenty Third Quarter Earnings Call. This call will be chaired by Realtek's spokesman, Yiwei Bong. The presentation will be available on the company website before six p. M.
Today. At the beginning, our spokesman will report our third 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 this call to our spokesman, Yi Wang.
Yes. Thank you, Ivy. Yes, good afternoon, ladies and gentlemen on the line. You are listening to the third quarter twenty twenty webcast earnings release by Realtek. We moved the time to start at 3PM this time in response to your feedback, especially back from our overseas investors and attendees.
We hope the new time works well for all of you. As we speak, COVID-nineteen is resurfacing in some part of the world. We wish you all well and healthy by practicing mask wearing and safe social distancing. Now let me turn your attention to RealTest third quarter operational results. First, on Q3 revenue, it was in Taiwan dollar 22,400,000,000.0, a 29.2% Q o Q growth and a 39.7% increase compared to the same period in 2019.
All three business groups contribute to the growth. This result clearly reveals that RealPet business momentum sustained, benefiting from both continuing demand for mono and better connectivity solutions from work from home and a strong refund of consumer activities and other market segments in Q3. Such results result in a PC non PC split of 31 to 69 in the third quarter compared to 34 to 66 in the second quarter. Q3 gross margin was 41.4% compared with 44.8% in Q2 and 42.9% in Q3 twenty nineteen. The gross margin is on the low side of our historic range.
This is due to unfavorable product mix. We believe gross margin is likely to improve from here, if not in Q4. Q3 operating expense was TWD6.7 billion or 29.9% of revenue. A drop in OpEx percentage to revenue is indicative of Realtek's improvement in operating leverage as our business scales up. Q3 operating margin $2,570,000,000 or 11.5% of revenue, which is about the same as the operating margin percentage in the second quarter.
Q3 non op income was million dollars This smaller non op compared to previous quarter was due to lower deposit interest rate as well as unfavorable foreign exchange rate for New Taiwan dollar. Q3 net profit was billion dollars or 11.2% of revenue. This is a 0.5 percentage point decrease Q o Q. So this leads to the EPS of $0.92 better than the NT3.97 dollars in Q2 and NT3.78 dollars in Q3 twenty nineteen. Regarding inventory, Q3 inventory turnover days was at sixty two days compared to eighty nine days in Q2.
The significant reduction in inventory is a tale of two things. First, very strong market demand and second, tightening supply capacity. We also have the balance sheet and the cash flow statement for your doing so at your convenience. So this concludes VIOTAC Q3 financial report. Forward looking, we see the momentum of customer demand for various product applications continue in Q4.
Nonetheless, we have to watch closely as the supply chain capacity constrain the changes in international affairs as well as COVID-nineteen pandemic may impact the macro economy and end market supply demand. Now, I'll run down the top five product lines at BuildTech. On Ethernet, after a slow second quarter outside of the PC segment, customers and the market seem to be eager to make up the loss. We call that rebound with the benches. The strength in 3Q is expected to continue in Q4.
The end applications include PC, IP cam, network video recorder for surveillance and USB NIC. On switch, fast Ethernet, gigabit Ethernet and managed switches were all in high demand in the third quarter, expected to continue in the fourth quarter. Driving process including demand for surveillance, security, work from home and Wi Fi six upgrade. PON demand are also strong in 3Q and 4Q as second half will be the peak season for Telco tender project award this year. Our WiFi Q3 was strong in many fronts, including tender projects, PCs, routers, TVs, IP cams and IoT.
The strength is expected to continue in the fourth quarter and last at least until first quarter twenty twenty one. On Bluetooth, in addition to TWS whose demand has been picking up since late Q2. Other applications such as phone found in TV, OTT, smart speakers using we call it, BT NIC, all our remote controllers and wearables using Bluetooth low energy were in high demand in Q3 and expected to continue in the fourth quarter. Last but not least on TV after a peak in the third quarter. The TV demand is expected to slow down seasonally in the fourth quarter.
Nonetheless, the drop is expected to be mild. Lastly, let me briefly come back on the supply chain capacity. We observed capacity tightness on a global scale. As previously commented, we have to dig into our inventory in some cases of the current capacity is insufficient to meet the demand. Such tightness may continue until at least Q1 twenty twenty one.
We have to watch closely as it might impact our final product delivery and revenue. Thank you.
Okay. 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 Yan, Morgan Stanley. His question is how do we see the demand from PC market in both fourth quarter twenty twenty and 2021? From Realtek's view, do we see any risk of inventory adjustment?
Thank you. So we expect a strong demand from the PC market to continue in 4Q twenty twenty. But the actual shipment may be limited by the supply chain capacity. Overall, the PC market is expected to grow in 2020. The growth mainly comes from the demand of work from home and education.
The PC market trend is expected to continue in at least first quarter twenty twenty one or even second quarter twenty twenty one. Beyond that, the prospect for the PC market is unclear for the second half next year. The inventory level for the PC market is generally low now. We do not see the risk of inventory adjustment at this time. Thank you.
Okay. Thank you. The next question is from Randy Auburn, Credit Suisse regarding supply tightness and own inventory. How is Realtek's own inventory days now? And do you have any product line seeing tightness limiting your revenue?
How much are you going short of demand now if FFO, if not at all?
So Q3 inventory turnover day, as we just reported, is now at the low sixty two days. In general, supply chain capacity constraint is a limiting factor now to revenue. In third quarter, a good portion of the shortage was fulfilled by prior inventory. This will face increasing pressure in the fourth quarter but the inventory level drops. Thank you.
Thank you. The next question is from Edward Chang, Endasco. Do we see any progress on the foundry support? How many wafers are from SNC? Are you planning to transfer to other foundries?
Foundry costs are increased now. If yes, can we pass the cost to the clients? Yes.
Again, foundry capacity in general is tight. We use several foundries including SNAICC. And as our demand as a company continue to grow, scale up, and the demand is tight. We are looking for expanding our foundry partners, exploring some foundry we haven't used before. So in terms of foundry cost or price, We always say price is a result of negotiation.
So what's different now is that there are cases where we involve our customers to join the discussion with the foundry together to decide price, quantity in a way that's acceptable to all concerned parties. So this way, we manage the supply demand with manageable impact to real tech margin. Thank you.
Okay. Thank you. The next question is raised by Arun Chao Nomura. Could you give us some colors on your set top box SoC products, including the percentage of revenue contribution to customers and regions? Also the margin compared to the company average.
Yes. Well, as a matter of policy, we do not break down revenue contribution by product line. Neither do we comment on the names of our customers. All we can share is that our set of thoughts as the customers are mainly in North America and Asia at this time. As to the margin impact, it is still negligible as the product line is small in scale.
So far as to say similar to other major product lines, We continue to better our cost structure of the product line growth. Thank you.
The next question is raised by Bruce Du, Goldman Sachs on TWS product line. Here,
he
would like to know the year end demand push on the phasing of the new ANC projects and the competitive landscape change and price trends.
So we see CWS demand rebounded in third quarter in both China e commerce and global brands. ASP pressure on non ANC products resumed as the demand rebounded. Nevertheless, some TWS customers now choose quality and profit over quantity and market share. BluTag is maintaining a solid position in balancing profitability and market share in new design wins. And we see AAC still not mainstream yet by its preferred feature for 2021 TWS project.
The price gap between ANC and non ANC is still big today, more than 2x difference. As competition pick up the tempo and as the market pick up the tempo to resume, so do competitor competition. The main competitions are still among what we call the ABC today. What we observe is that second or lower tier competitors may be challenged in securing supply capacity at the present time. Thank you.
Okay. There's a follow-up question by Bruce. He said the OpEx ratio is down a lot in Q3 due to the operating leverage. As Realtek is going to maintain current revenue level, can we expect that OpEx ratio can be below 30% moving forward?
So we have certainly to try for further operating leverage. But we don't really have a firm schedule or target to share. And we do see room for further improvement. Thank you.
The next question is from Kevin Wong, Mizuho. This question is regarding the development status of our automotive Ethernet related products. Do you have any plan to launch any new products or enter new markets in near future?
Okay. Well, the automotive industry seems to in China. And real time automotive Ethernet product shipment is expected to continue the steady growth in the next few years. This is because the typical automotive design win will run for five to six years. And we are testing a well for design wins up to now.
Now we are bidding for twenty twenty five models and beyond. And in terms of new product, the Ethernet switches and five still the main staples of automotive Ethernet product line. The new spec automotive multi gig and the low speed 10 megabit per second technology are ready at Realtek. Although we see large scale deployment in the industry may not stop until 2025.
Okay. The next question is from Nero two, mature waste. You mentioned that 4Q will see the momentum from the various product lines to continue. Does this mean the fourth quarter sales will see quarter over quarter growth? How will the product mix shift into fourth quarter?
Will we see the gross margin back to 43% to 44%? And the funding cost impact in fourth quarter is a long question.
Okay. Yes. I think we have actually touched upon a little bit here and there, but let me go through this. So the 4Q momentum, we do see it continues. And but whether there will be a Q o Q group or not, as we mentioned, supply will be a constraint.
So we will not be able to tell you for sure at this time as we work hard to fulfill our customers and market demand. The product mix here, again, sometimes it's not exactly up to us. It depends on how our customers put in their order. And so it really is premature to comment on the product mix, not along the gross margin level. Sometimes to repeat that, we say we believe the gross margin, we do believe will come back, if not in Q4.
And in terms of the cost, also we mentioned that in special cases, we will involve our customers to negotiate with the foundry on price versus quantity. So to minimize the impact solely on real time. Hope this answers the question.
Thank you. The next question is from Rick Su, Daiwa. His question is our initial outlook for the top five product line in 2021 and the main growth drivers of the company.
Among the top five product line for 2021 we see growth drivers led by WiFi and Bluetooth. Although we are also say for Ethernet, there's possible opportunity for the new spec 2.5 gigabit Ethernet deployment and for switch, there's opportunity like to manage switches. While TV menu will stay flattish after two consecutive years of strong growth. We should also comment that other growth opportunities beyond the top product line, those may include Quebec, PON, automotive Ethernet, set of phones and IP cam. Thank you.
Okay. Now is the question from Sunny UBS. The question is related to WiFi six. What is the current penetration rate of WiFi six in different applications? And how does Realtek compete with the market leaders who have launched their solution in early twenty twenty?
And which segment do we expect to see more share gain?
So when we talk about Wi Fi, we usually exclude mobile phone. So outside of the mobile phone, the Wi Fi six penetration is still modest as far as we can tell. Contrary to some reports, real time estimates, the WiFi six penetration, for example, into the PC market is about 10 to 20% this year. This may go up to 20% to 30% in 2021. Though later than some competitors, Zupec five fifty six solution are pending, we believe, considering that the interoperability test standard was not set until the third quarter of twenty nineteen.
And now hold on for meeting all WiFi six spec requirements, we have WiFi six solution with the competition in latency reduction by dual band concurrent and we also have technology to do range expansion. Above all, Realtek always provides second to none engineering service and support our customers. This is definitely a strong competitive edge of Realtek. Realtek one point six is expected to grow steadily in 2021 in PC, notebook, phone calls, AP routers, broadband, etcetera. Thank you.
Okay. Thank you. The next question is from our CLSA, Brian. This question is that TSMC specifically mentioned IoT being one of the broad drivers in third quarter twenty twenty. How does Realtek compete with MediaTek and others with WiFi Bluetooth solution?
So we can compete in general to very unique perspective for IoT, it will pretty much follow the same direction. First, it's through our technology competency in high level of integration and low power design. We have as many in house connectivity IPs that complement one another. So with proper combination, we offer solutions such as IoT audio and IoT video. The former enables voice control interface to IoT devices.
The latter enable battery power camera devices such as body cam and doorbells. These are product will very hard for our competitors to follow. Second, again, we will have win second to none customer services. In IoT, this includes thinking ahead of our customers' needs and to have ready not only a full suite of reference designs, but also we make ready solution partners who can bridge customers' application with a cloud service of their choice. For example, Google, Amazon, Ali Cloud, etcetera.
These are our competitive edge. Thank you.
Okay. We have two questions from Warren to Prudential. The first question is, due to the foundry tightness issue, will you migrate your more production products from eight inches to 12 inches or from 40 nanometer to 20 nanometer? And the second question is, do you have any USB four point zero or PCIe Gen four products? If yes, can you talk more about this?
Okay. First part is about foundry, eight inches versus 12 inches. I'm sure the 12 inches capacity is even more limited than the 12. And when you utilize 12, most of them, they are 40 nano or more advanced. So do we take this into consideration?
Most definitely, yes. So for new product design, we definitely will put that as a consideration. And further the existing product or migration, that is not an easy question, case by case, very different. So I have to say that these are all the possibility. We leave no stone unturned to try to optimize our product production.
And the second part about EFT four and PCIe Gen four product, the short answer is yes. They are in planning. These are all relatively new specs. And since these are work in progress, I do not have too many details to share, but we'll share with you that, yes, we are working on products with USB four and PCIe Gen four.
Okay. Thank you. The next question is from Eric Chen, KGIS Securities. Could Realtek talk about its opportunities in Chromebook? How was the contribution in Q3?
Are we seeing any margin dilution from more Chromebook shipments?
So Chromebook definitely has quite significant growth this year. And for Realtek, all we see really Chromebook versus notebook in terms of the solution we provide, there's not a whole lot of difference there. So most of the components, for example, callback, for example, PC cam, you know, they applicable to Chromebook as to notebook. And if you take into consideration, many of the OEM or ODM for that matter, we have been selling callback to this ODM who has been purchasing our callback or notebook, and they find the same is applicable to Chromebook, well, you assume there will be no two prices. There's only one price.
Okay. So in general, my answer is not a whole lot of difference there. For real time, the opportunity for notebook and Chromebook, that equally good. Thank you.
Okay. Thank you. The next question is from William Young, JPMorgan. Please comment on the TV business. The TV SoC business growth looks impressive in 2020.
Do you expect further growth of high base or continue share gains?
So well, first, we definitely see headroom for growth for real time TV products. Although earlier, we say the growth from here is expected to be mild in the coming year compared to what we have seen in the past two years. We have to also take a look at the market landscape. The global TV market appears to be flat this year even with a strong rebound in the second half. And from what we can tell, we are not expecting growth in the overall TV market in 2021, even though as current planned Olympics will be held next year.
Another important thing is the migration to four ks slowdown this year because during pandemic, when people buy the TV, they are more cost sensitive and may not choose the high end one. As a result, we are seeing that the four ks penetration pretty much stay at the 50% level this year, same level as last year. And eight ks ramp up is even slower than we originally expect due to other than the same factor causing lower four k Other than that, also due to in the case of eight k component shortage, panel memory. So companies will rather use the limited resource in the product that they believe that will sell better. But I will tell, of course, our technology already.
So we stand by to capture opportunities when they are open. Thank you.
Okay. The next question is from Spectrum, Bill SA. Which IC product does Realtek have the most severe supply constraints? It's Chromebook related IC or something else?
Probably the best way to answer this one is that, you know, products using eight k I'm sorry, eight inch wafer tend to be hit harder than those 12 inch wafer. That really is the deciding factor there, not particularly in terms of application. Thank you.
Okay. Thank you. The next question is from Edward Hsu of Grand Alliance.
Do we see any overbooking? If yes, in which segment? Well, overall market supplydemand is not in balance as we speak. And supply shortage tends to bleed overbooking. But nevertheless, market inventory is generally low at this point.
Therefore, it is hard to tell where the overbooking may be. We will need to wait until mid first quarter twenty twenty one to have a better view.
Okay. So the next question will be from an individual investor. Its question is how many percent are from China split of China or non China? And is the product line unstable by COVID-nineteen?
Product line from China, not China. I assume the question is about where our customers are, where we ship the product to. So in general, we ship our product to the ODM. And the ODM, up to now, still a good percentage in China. Although, I'm sure you have all read that various ODM as a matter of risk management moving their facility outside of China.
So I don't have the exact percentage, but I can tell you that the percentage in China in time is reducing. And in terms of production, in general, we don't see that hit by COVID nineteen. Most of our product, our ODM, our supplier, they maintain pretty much full operation other than for a very short period of time in February. Otherwise, from what we know, they've been in full operation, so not hit by COVID-nineteen. Thank you.
Okay. Due to the time constraints, the following will be the last question for the call. Martina Huang, Fuhuang would like to ask the status of China Telecom building this year and outlook for next year.
In terms of China Telecom bidding tender project, the momentum seems to be clear is resuming in second half this year. And for next year, we believe the plan will be about the same. So three segments, three types of the set of box, the annual TAM is about $40,000,000 These are low cost products from the Wi Fi. Up in low router, the TAM here is 25,000,000. We are moving to WiFi six in the second half this year and expect to grow in 2021.
PON maybe the largest segment with a TAM of 90,000,000, although the actual deployment this year seems to be a mere 40,000,000 due to the COVID-nineteen. The new spec we are seeing for PON is shifting to 10 gs PON and WiFi six in 2021. Thank
you. Due to the constant trends, we have to 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 6PM.
Thank you and have a good afternoon.
Thank you.
Thank you.