Good afternoon, everyone. Welcome to twenty twenty Second Quarter Earnings Call. This call will be chaired by Realtek's spokesman, Yi Wei Fang. The presentation will be available on the company website before six p. M.
Today. At the beginning, our spokesman will refer our second quarter results and give the 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 page of the presentation anytime. Now I will pass this call to our CEO, Yiwei.
Good afternoon. This is Yiwei Huang of Now ladies and gentlemen, you are listening to the Q2 twenty twenty webcast earnings release by Realtek. A surprise against COVID-nineteen continues to be a global effort. Realtek will save a webcast for our quarterly earnings release. At Realtek, our business operations are normal, while the company is vigilant about face mask wearing and safe social distancing.
Now let me turn your attention to Realtek Q2 operational results. Q2 revenue was NT17.3 billion and eight point nine percent Q o Q growth and 14.2 increase compared to the same period in 2019. The results clearly reveals that Realtek business momentum did not slow down in the face of COVID-nineteen. This can be attributed to the demands for more and better connectivity solutions from work from home. It is worth noting that products revolving around PC, notebook, Chromebook, their peripherals and devices connecting to them are the primary beneficiaries from work from home.
This gives rise to a PC and non PC split shifting from 27 to 73 in Q1 to 34 to 66 in Q2. Q2 gross margin was 44.8% compared with 42.2% in Q1 and 44.3% in Q2 twenty nineteen. The gross margin is on the high side of our historical range. This is due to product mix favoring products with high gross margin. Q4 operating expense was $790,000,000 or 33.4% of revenue.
This is a slight Q o Q increase of 0.3 percentage point and Y o Y increase of 0.1 percentage point. Such result is within company's expectation. Q2 operating margin was billion or 11.4% of the revenue, a 2.3 percentage point increase Q o Q and 0.4 percentage point increase Y o Y. Better operating margin is a result of higher gross margin and improved RDE operational leverage. Q2 non op was million, a smaller non op compared to $287,000,000 in Q1 and $290,000,000 in Q2 twenty nineteen.
Smaller non op was due to unfavorable foreign exchange rate for the Taiwan dollar. Q2 net profit was TWD2 billion and eleven point seven percent of revenue. This is a 1.5 percentage point increase Q o Q plus 0.5 percentage point decrease Y o Y. Q2 EPS as a result was dollars better than NTT3.21 dollars in Q1 and NTT3.63 in Q2 twenty nineteen. Regarding inventory, Q2 inventory turnover days were at eighty nine days compared to eighty days in Q1.
The increase was mainly due to increasing uncertainty in the market and Realtek's careful planning to have flexibility to cope with the uncertainty in face of the tightness of the supply chain. Now note that the unaudited consolidated balance sheet and cash flow statement are appended in the presentation for your reference. This concludes Realtek Q2 financial report. Forward looking after a solid Q2, we are cautiously optimistic about Q3 as the momentum of customer demand for various Realtek products is expected to continue in the third quarter. Nonetheless, we must pay close attention to the changes in COVID-nineteen pandemic as well as international tension and their impact on the macro economy and end market.
Now let's run down the top five product lines at Realtek to help you with more insight of Realtek's performance. First, Wi Fi overall performed above corporate average in Q2. It did particularly well across PC, AP router and broadband set top box segments. Although not so well in consumer electronics and IoT. For Q3 nonetheless, we see steady demand increase in all segments.
WiFi will continue to be a growth driver for Realtek in 2021. Ethernet demand was higher than expectation in Q2 to facilitate better work from home experiences. This includes Ethernet for PC, notebook as well as bundles and boxing devices. We expect the demand momentum to continue in Q3. Further out, we are seeing the steady picking up of 2.5 gigabit per second Ethernet both in PC and broadband related applications in 2021.
Third, switch performed strongly in Q2 in both gigabit Ethernet switches and unmanaged switches for Realtek. We expect steady growth of Switch product lines in Q3 and even in 2021. Thanks to robust demand for more connectivity, faster connectivity and better manageability. Fourth, TV. TV performed below corporate average in Q2 due to the impact of COVID-nineteen on non essential consumer products.
Nonetheless, we are seeing a clear rebound in both TV supply and demand in Q3, especially in North America. For the twenty twenty full year worldwide TV TAM is still expected to drop mildly although Realtek twenty twenty full year TV shipment is expected to grow healthy by the way through share gain. Last but not the least, Q2 also performed below expectation in Q2, especially in TWS due to both its labor intensive nature in manufacturing and COVID-nineteen impact on non essential consumer products. However, with what we are seeing in TV, we expect the demand for consumer oriented Bluetooth products to rebound in second half of this year. And we expect Bluetooth to be a 2021 growth driver with technology migrations including ANC and Bluetooth and BLE low energy Bluetooth audio and more end applications.
This sum up my operation summary.
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.
There's a supply chain tightness. Does this mean the pricing erosion for Realtek's product? For example, the WiFi and TV SoC will be less into second half twenty twenty. And the second question is, which product drove the inventory days higher in Q2? When will this come down to the healthy level?
Thank you.
Okay. The first question about supply chain tightness vis a vis pricing erosion of products, Vuelta products. My understanding these two really have no correlation or very, very weak correlation. Supply chain tightness it boils down to either you get the capacity you need or you don't. It rarely in our experience you can come in and throw in money and say I pay you this much more, give me the capacity.
In most cases, it doesn't work that way. So the price erosion really has to do with market oriented economy and competition. So my observation is a very weak correlation if any there. Regarding the inventory in Q2, which one tends to be higher and when will they come down? The one that's higher in Q2, what we see is more so called non essential consumer products.
Their forecast really is at times theoretical. So we expect this challenge will pretty much continue until this more stable outlook for the pandemic.
Okay, thank you. The next question is raised by Aaron Zhang Nomura. Could you give us an update regarding your ANC TWS product, including the revenue up percentage of revenue contribution by the year end and the competition less GAAP changes?
Well, the entry barrier of ANC TWS product is much higher than that of the previous generation product. And also due to the impact of COVID-nineteen, the rollout of the ANC product is slower than expected. We expect a smaller number of competitors in both product and IC component level moving forward. For Realtek, the leading ANC customers are already in mass production shipment in the first half this year. And now we are seeing more customers getting to entry stage in the coming quarters.
So we expect ANC shipment to increase slowly but surely in the second half this year. As for the whole TWS market, we saw Apple TWS outperform Android camp so far, but such time may turn in the second half of the year.
Thank you. The next question is from Randy Abrams, Credit Suisse regarding the WiFi spec upgrade. How does the dollar content changes moving from 11n to 11ac and to 11ax? How do you see your position on WiFi six versus the prior generation?
Well, first, in terms of the price ASP on average, we're still observing a significant gap. If N being one, AC would be two and AX would be 4.5, still a significant gap between each generation. And it is worth noting that COVID-nineteen seems to accelerate the migration of 11N to 11AC. In Q2, Ryutec shipment split of 11AC versus 11N was about sixty-forty on revenue basis. The ramping up of 11.8x may still take time as we predicted in the beginning of the year.
For example, we still estimate only 10% to 20% of notebook will have 11AX in 2020, perhaps growing to 20% to 30% in 2021. Real time is picking up on rolling out 11AX. Our first generation 11AX 100 product is currently in MP. And we have the R2, the next generation Wi Fi six under development and with the MP schedule roughly the same as our competitors. So we do see ourselves remain a strong competitor in the overall Wi Fi market.
Thank you. Next question is from Martina from Hubeiang. She would like to ask about the addressable market of automotive Ethernet in two to three years and the market share Realtek is targeting.
Okay. In terms of automotive Ethernet, currently our team are pretty much working on 2023, twenty twenty four projects. Our assessment observation assessment is that more than 50% of the new cars by 2023 are expected to equip with Ethernet, while each car may have 20 to 40 Ethernet ports per car. So hopefully that gives you an idea of the size of the available market. And we expect, Realtek expect to command market share as strong as our competitors.
Thank you. The next question is raised by Lu Su, Goldman Sachs on the company's initial view on 2021. Given the strong consumer replacement cycle for this year, is it possible for a weaker coming year?
So previously, we touched upon a few main product segments. And if you remember, we were generally optimistic about 2021. That's what we see. We see multiple technology migrations and new end applications taking place as we speak and into 2021. In technology, you have Wi Fi six, two point five gigabit per second Ethernet, managed switch, 10 gs PON, BLE audio.
In terms of new applications, we continue to be amazed by different type of IoT products, wearables and also in broadband application to provide faster and more connectivities.
Okay. Thank you. Next question is from Kevin Wang, Mizuho. Please provide some colors on the status of China telco bidding. Do we see potential share gain in the near future?
Will it be technology migration from WiFi five to WiFi six next year?
Yes, we do see new tender projects coming out in China in the second half of this year. It should be also mentioned that the first half of the year even though China tender project was quiet not so in the rest of the world. So overall the tender project still very much alive and kicking. And Wi Fi six upgrade for this segment is well within expectation, especially to pair with 10 gs PON and routers.
Thank you. Next question is from Warren Chu, Prudential. Please comment on the status of the IP Chem product development, even though it's still small to the company.
Well, indeed, it is still small in the company. So the development is ongoing progress steadily. We do look forward to better sales results in the days to come. For now, suffice to say, the progress is steady and looking good.
Okay. Thank you. Next question is from Ed Woo Soo, Brand Alliance. Recently, we are seeing the TV supply chain start to build up inventories. Do we also benefit from it?
How do we expect the four ks penetration compared to 2019 and the first half twenty twenty? Indeed,
we are seeing our customers increasing their orders for the second half of the year. Note that though we see stronger demand in full HD over four ks during COVID-nineteen. As a result, now we expect four ks penetration to slow down a bit in the near term, perhaps reaching fifty five percent in 2020.
Thank you. Next question is from Rick Su, Jaiwa. For margin side, could we expect that third quarter twenty twenty gross margin to be below 2,000 Q2, labeled as the TV SoC recovering in third quarter and also on the new Taiwan dollar appreciation impact on the margin?
Well, although we have said that TV is picking up in second half and we did say before TV has lower gross margin, but a single product line wouldn't decide the final gross margin for Q3. So we'll have to wait and see, wait for the final product mix when the quarter is over to see that. And in terms of impact of Taiwan dollar appreciation on gross margin, there should be none because BuildTap buy and sales are all down in U. S. Dollar.
Okay. Thank you. Now is the questions from Sebastian Hu, CLSA. Realtek is focused on the smartphone IoT applications. So is it mainly home appliance consumer in China?
Or what are the target customer profile look like? Who are the key competitors in IoT market competing on Wi Fi plus Bluetooth solutions with Realtek?
In terms of the IoT, indeed, a few years ago, we started from the China market, but by now, we pretty much are all over the world. Suffice to say that most of the well known consumer home appliance brand are all adopting Realtek IoT solution by now. We have a pretty solid position in this segment. In terms of competition, IoT competition, certainly we do run into media tech now and then, but overall we have different focus in our end market application. And also we do run across a few Chinese indigenous players in this segment IoT segment.
So it's safe to say that real time IoT solution has much more proven record and broader product portfolio. So we do have a much stronger position compared to with our competition.
Thank you. Next question is from William Yang of JPMorgan. Please comment on the automotive Ethernet progress. Who are the major competitors and what are the ages of Realtek?
We just mentioned that our automotive sales team are working on 2023, 2024 design wins and we are expecting good results. In terms of competition, we still see the stronger ones on avail and broadband. Having said that, we are happy to say that we have a very obvious competitive edge against our competition. It's in reliability. After more than a year of NP shipment to our customers, our RMA fuel return any problem from our customers or the Tier one, we have zero report of problems.
This really delight our OEM and Tier one customers. So this is becoming our competitive edge.
You. The next question is from Yi Ho Liu, capital investment. There are two questions. The first one is, could you provide the revenue guidance for the third quarter twenty twenty? And the second question is, excluding the Chromebook related application, the revenue of the PC application still increased in third quarter?
We are all off giving revenue guidance here. Realtek does not give revenue guidance. But as I said, we say we are optimistic about Q3. In terms of PC segment excluding Chromebook whether it's still an increase or not. This one actually I do not have data, we do not quite do when we compare the data we do not separate that out.
We consider Chromebook part of the PC segment. We acknowledge that some of the research reports they do separate that out. But in real time, we group them together. So I'm not able to comment on separating out what would it be look like.
The next question is from Alex Chu. This question is about the PON controller. When do we see the 2.5 gig PON will migrate to 10 gs PON? And the impact of China U. S.
Trade war on China phone controller competition, do we see more
opportunity to grow in the future? So 2.5 gs to 10 gs migration is happening as we speak, but slower than our expectation. As to when it may speed up, It is a little bit hard to be precise, but we do believe it will happen sooner than later. Regarding the impact of U. S.-China trade war on power controller supply, I guess the answer here is whenever a company decide to exclude certain suppliers who are Realtek competitors then it opens up opportunities for Realtek.
In that sense, yes, Realtek will be our beneficiary is because of the trade war certain buyer will want to exclude some existing supplier.
Thank you. The next question is also from Randy, Credit Suisse. He would like to ask, do we see any areas of slowdown in the third quarter?
Any area of slowdown? At this moment, because the continuous strength in PC segment, communication segment and even consumer segment are coming back. Those are the three major segment Realtek plays in. Of course, the whole industry has more segment than these three, but at least for the three major segment Realtek plays in, it pretty much is all good news at this moment. But we do acknowledge maybe some other area Realtek is not so strong a player.
There may be sudden slowdown. But I guess we are now all overwhelmed by what's happening in terms of customer demand. Okay.
There's only one question left. It's also from Randy from Credit Suisse. This question is related to the telecom projects. What is the outlook for growth in telco projects this year? And how many for other new opportunities like the managed switch and mesh routers?
Managed switch and mesh routers are very, very meaningful for Realtek. They are very real demand growing. What's the first part of the question again?
The first part of the question is the outlook for growth in the telco project.
Okay. The outlook of the telco project overall, we believe it's all part of the equation to provide more connectivity worldwide. I think we mentioned earlier even when China data project was more or less quiet in the first half of the year, it wasn't so for the rest of the world. So long answer short here, I would say the outlook for the telco tender project is still a very important part of growth for Realtek.
The last question is from Rick Daiwa. The question is related to the PC outlook. Would Realtek expect that PC market to have a correction in fourth quarter or expect a normal seasonality in fourth quarter twenty twenty?
That actually is a very frequently asked questions. And currently, we tend to look at this problem more on overall yearly basis because Q4 is a little bit hard to comment at this time. So when we try to gauge what may happen in Q4, we look at overall PC market maybe. And we believe the overall PC market will be about the same as last year. And the first half we have seen the result is roughly the same as last year as well.
And since last year, the second half is bigger than the first half. We can only go as far as to expect the second half of this year will be larger than the first half even after a very strong growth in second quarter. But of course we already say third quarter is also very strong. So you can put all those together that's how we try to gauge it. But beyond that it will be very difficult to pinpoint what may happen on Q4.
Okay. Thank you. I think we still have one more time for one more question. It's also from Randy Credit Suisse. He would like to ask how's your view to sustain 42% to 44% gross margin and also grow OpEx in line with the sales in the near future and longer term?
The intention of the goal to maintain 42 to 44 is not a new goal, not a new target. We have been taking that challenge year after year. We've been able to maintain that. So I want to say that moving forward we accept the same challenge. At this point, we really find no reason to give up on this goal or say the goal is becoming impossible.
We find no reason to say that for the gross margin and for the operating OpEx. For OpEx, earlier we say we have been roughly at the 33% range for a couple of quarters, for a couple of three quarters around that. That seems to be a reasonable range there. Having said that, we will continue to look for this operational leverage as we continue to scale up. And of course, the major area for that to do is in the R and D is a category of the OpEx.
So that will be our continuing focus to apply or to expect operational leverage.
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.