Good afternoon, everyone. Welcome to Realtek 2026 third quarter earnings call. This call is hosted by Realtek Spokesperson, Yee-Wei Huang, and Deputy Spokesperson, Ivy Chen. The presentation materials will be available on the company website before 6:00 P.M. today. At the beginning, our third quarter financial results will be reported by our Deputy Spokesperson. Management's remarks presented by our Spokesperson. After the prepared remarks, we will proceed to the Q&A session. You are welcome to type your questions in the box at the lower right corner on the screen. We will address the questions accordingly.
During the call, you can browse through the pages of the presentation materials at any time. Please note that portions of what are presented in this call contain forward-looking statements. Investors are cautioned that forward-looking statements involve risks and uncertainty. Actual results may differ materially from those expressed or implied in such statements. Investors should not place undue reliance on such statements. Now, I'll turn this call over to our Deputy Spokesperson, Ivy.
Good afternoon, ladies and gentlemen on the line. You are currently participating in the third quarter 2026 webcast earnings release hosted by Realtek Semiconductor Corporation. Now, let's go through the third quarter 2026 financial results. Third quarter revenue reached NT$37.7 billion, edged up 0.5% quarter-over-quarter, and rising a noticeable 27.9% year-over-year. Overall, customer demand remained stable in the third quarter, led by solid momentum in networking segments. Soft demand in some end markets, including PC, had no material impact on our overall revenue. Following the two consecutive quarters of growth, third quarter revenue held a high level, which differs from the seasonal pattern we saw last year when it began to drop noticeably in the third quarter.
A higher average selling price, driven by a favorable product mix of higher spec products and pricing adjustments that partially passed through rising cost, helped offset softer unit demand in certain end markets. Third quarter gross margin was 47.4%, up 0.4 percentage points from the previous quarter, but down 2.3 percentage points year-over-year. As we noted during our second quarter 2026 earnings call, we expected gross margin to recover gradually in the second half of 2026 through a more favorable product mix and a disciplined pricing. The third quarter result was largely in line with our expectations.
Third quarter operating expenses amounted to NT$13.8 billion, representing an OpEx ratio of 36.5%, down 0.6 percentage points quarter-over-quarter, and 2.6 percentage points lower year-over-year. This reflects our balanced approach of continuing to invest in new products and new market opportunities to support long-term growth while maintaining disciplined operating expense control. This result underscores our focus on driving revenue growth and improving operational efficiency and effectiveness.
Third quarter operating profits was NT$4.1 billion, representing an operating margin of 11%, up 1.1 percentage points quarter-over-quarter, and up 0.4 percentage points year-over-year. The sequential improvement reflects a higher gross margin and a lower OpEx ratio. Year-over-year, the lower OpEx ratio more than offset the decline in gross margin. Third quarter net non-operating income was NT$606 million, a NT$39 million decline quarter-over-quarter, and a NT$326 million drop year-over-year, mainly due to the FX loss and financial asset valuation loss. Third quarter net profit was NT$4.1 billion, or 10.9% of revenue, 0 percentage points increase quarter-over-quarter, but a 0.7 percentage points increase year-over-year.
Third quarter EPS as a result was NT$8.05 compared to the NT$7.42 in second quarter 2026 and NT$6.69 in third quarter 2025. Moving on to the inventory. The third quarter inventory turnover days were 136 days compared to 107 days in the second quarter. The increase mainly reflects a build of known good die inventory for customers. This is a deliberate decision to ensure supply continuity for our customers amid ongoing supply chain uncertainties. We will continue to maintain appropriate inventory level as needed while carefully managing our overall inventory health. This concludes Realtek's third quarter 2026 financial results.
Thank you, Ivy. Now our Spokesperson, Yee-Wei, will give a management remark.
Thank you. Looking ahead to the fourth quarter, Realtek maintains a prudent and steady outlook for its operations and will closely monitor the impact of external factors, including supply chain capacity allocation and continued increases in upstream costs. Now, let's examine the key market segments Realtek serves. The networking market. Networking demand remained fundamentally resilient in the third quarter, supported by steady infrastructure upgrades and an ongoing transition toward higher bandwidth solutions. Our multi-gigabit Ethernet solutions deliver healthy growth as adoption expanded across routers, PON, SMB networks, and servers.
Our managed switches continue to gain share across enterprise, SMB, and server control plane applications, narrowing the gap with our unmanaged portfolio. In Wi-Fi, the Wi-Fi 7 penetration in PCs and routers has progressed as expected and is on track to approach approximately 30% this year. While 2027 design-ins are increasingly shifting to Wi-Fi 7. Looking further ahead, development of our next generation Wi-Fi 8 solutions remain on track for mass production in the second half of 2027. The automotive market. While overall vehicle shipments remain broadly flat, automotive Ethernet adoption continues to expand steadily in new car models.
Realtek's automotive revenue is growing steadily, supported by structural increases in more Ethernet ports per vehicle and higher dollar content as automakers transition towards zonal and software-defined architectures. Our industry first Ethernet switches with ISO 26262 functional safety certification are securing steady design-ins with leading global OEMs and Tier 1 suppliers, strengthening our leadership in automotive network ecosystem. The consumer electronics market. Performance across the consumer segments varied in the third quarter. Realtek's IoT business posted solid quarter-over-quarter and year-over-year growth, supported by resilient demand, our strong position in smart home devices, and then expanding end market applications.
Our IoT platform solutions, which integrated multimodal AI, Wi-Fi, audio, and imaging, continue to gain traction across smart home and connected edge devices. TV shipments slowed after the mid-year FIFA World Cup replenishment, and amid persistent component cost pressures. Although Realtek's TV SoC business remained competitively positioned, game console hardware shipments also faced near-term headwinds from elevated memory and storage prices. Nevertheless, Realtek outperformed the broader market as our products gained wider adoption across major gaming platforms and peripherals.
The PC market. In the third quarter, our PC and non-PC products accounted for approximately 30% and 70%, respectively. The broader PC market continued to face challenges in the third quarter. Against this backdrop, shipments of desktop and notebook solutions declined sequentially, while peripheral demand held up better. Preliminary data from IDC and Gartner indicate that worldwide PC shipments fell 20.1% and 22.4% year-over-year in the third quarter, respectively.
The decline reflected persistent component inflation, particularly in DRAM and CPU, which raised retail prices and weighed on consumer and entry-level purchasing power. Early order pulls in also distorted normal seasonality. IDC projects full year 2026 PC shipments to decline by 11.3%, with weakness potentially extending into 2027. Despite these short-term headwinds, Realtek continues to outperform the broader market through higher content value and specification upgrades, including 2.5GB Ethernet, 5GB Ethernet, and 10GB Ethernet, advanced audio codecs, and AI camera controllers.
Now, mid- and long-term growth engines. In this, we see while supply chain and cost uncertainties limit near-term visibility, we remain confident in our multiple medium to long-term growth prospects. Key drivers include specification upgrades and market share gain in our core networking segment, high-performance computing as a new growth driver engine, and edge AI opportunity across automotive, unmanned vehicles, robotics, and broader AIoT applications.
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. The first question is from Astoria, CLSA regarding demand outlook. Fourth quarter is traditionally a slow season. Should we expect a quarter-over-quarter decline as usual for the early pull-in in the first half, or are you seeing end consumer demand hold up better than expected?
Well, overall, order momentum remains stable heading into the fourth quarter. We are working with OSAT partners to ease capacity constraints and better meet customer demand. While the fourth quarter is typically seasonally softer, we may not see the usual revenue slowdown this year, supported by higher ASPs from a more favorable product mix and pricing adjustments. Within this generally stable demand environment, the PC end market remains relatively soft. We saw a notable year-over-year decline in the PC end market in the third quarter, and expect further weakness in the fourth quarter, consistent with our initial outlook for a full year decline. Despite this near-term softness, we continue to expect growth across all key segments we serve in 2026, including our PC business.
The second question is from Paslo, Bank of America, on 2027 initial outlook. Could you discuss on the end market outlook into 2027 compared to your view three to six months ago? Are you seeing incremental strength of softness?
Now looking ahead for 2027, we expect steady top-line growth in line with our view three to six months ago, driven by higher ASPs, ongoing product specification upgrades, and new product launches. At the same time, we remain mindful of potential cost increases across the semiconductor supply chain. We believe that our broad and balanced end market exposure and our diversified product portfolio position as well to capture growth opportunities. Within our existing product portfolio, we expect wider adoption of Wi-Fi 7, multi-gigabit Ethernet, and 10G PON to support a more favorable product mix.
We are also gaining additional design wins in higher-end managed switches. Our automotive business is expected to grow steadily, supported by wider adoption of automotive Ethernet and switch solutions, as well as new product ramps. Last but not least, we are advancing in both AI server and general server applications while expanding our presence into a broader range of AIoT applications.
The next question is from Kevin Wang, Mizuho, about the gross margin outlook. How should we expect gross margin range in fourth quarter 2026 compared with third quarter 2026? How should we expect your gross margin outlook after factoring foundry and OSAT cost hike and your price adjustments in 2027?
As we noted on our earnings call last quarter, we expect gross margin to gradually recover in the second half of 2026, and that remains our expectation. In 2027, our goal is to maintain a stable growth while balancing revenue growth, market share, and profitability. With foundry and OSAT costs remaining fluid, we will take a measured approach to pricing rather than pursue price increases solely to lift gross margin. We are working closely with our supply chain partners and customers to find mutually acceptable solutions to manage these cost pressures.
Next question is from Paslo, Bank of America, about OpEx trend. Given the high portion of your revenue growth coming from price expansion than unit demand growth, how should we think about the operating expense growth versus your sales growth?
Well, first, our growth actually comes from both price expansion and unit growth. As you see from our third quarter results, our OpEx ratio declined slightly from second quarter. While keen on investing in new product development, we are maintaining disciplined operating expense management. In the near term, we expect this ratio to remain broadly stable at current levels. Longer term, as we expand our value-added solutions and enter higher end market segments, we expect to achieve greater operating leverage, allowing revenue to grow faster than operating expenses.
The next question is from Rick Hsu, Daiwa regarding inventory across the value chain. What is the current channel inventory level? Could you also share your perspective on customers' inventory management?
Now, based on our current visibility, inventory levels across the value chain of our customer base remain generally healthy, with no signs of intentional customer inventory build-up in fourth quarter 2026.
The next question is from Daniel Yen, Morgan Stanley, on supply conditions. Could you comment on recent pricing trends and industry supply conditions across material foundries, memory, and OSAT? On OSAT specifically, have OSAT allocation bottlenecks and lead times improved in third quarter? Did the elevated work in process converted into finished goods as planned?
Well, true overall supply chain conditions remain challenging. With no near-term relief in cost pressures, the prioritization of AI servers continues to create bottlenecks in supply chain capacity. To mitigate these constraints, we have been diversifying our supply base by qualifying additional upstream partners because supplier qualification and production transition takes time, these efforts will continue throughout the remainder of 2026. We expect more meaningful supply improvements in 2027.
From an engineering perspective, we are also applying design for availability principles to reduce reliance on constrained materials where feasible. Cost increases have exceeded what we can reasonably absorb. Since June, we have therefore begun engaging with customers to discuss price adjustments on a case-by-case basis, taking into account product categories, supply conditions, and long-term relationships. Looking ahead to 2027, we will continue to closely monitor cost trends, taking appropriate actions as needed, and optimize our product mix with the aim of maintaining stable profitability while pursuing healthy revenue growth.
The next question is from Sunny Lin, UBS, on Wi-Fi 7 penetration. As we are heading towards end of the year, and with Wi-Fi 7's penetration for 2026 at 30%, how about outlook for 2027?
Well, with adoption gaining momentum in 2026 and most measured new customer designs now based on Wi-Fi 7, we are increasingly optimistic about the outlook of Wi-Fi 7 in 2027. As these platforms ramp, we expect Wi-Fi 7 penetration to rise meaningfully to around 40% in 2027.
The next question is from Rick Hsu, Daiwa, related to Wi-Fi 8. Market expectations for Wi-Fi 8 commercialization appear to be moving forward, with major chipset vendors preparing mass production in late 2026. Does management believe the industry could enter a meaningful Wi-Fi 8 upgrade cycle in 2027? And how well-positioned is Realtek to capture this opportunity related to the Wi-Fi 7 penetration?
The Wi-Fi Alliance has locked in the following key milestone for Wi-Fi 8. After the global PlugFest interoperability trial, the first large-scale pre-certification test event took place simultaneously in Beijing, Taipei, California during September 7th- 11th. The key milestones include next year, by June, Wi-Fi Alliance targets completion of the certification test plan. And by September 2027, official Wi-Fi 8 certification will be launched. With that understanding, while expecting and preparing for additional rounds of Wi-Fi 8 PlugFest, we are actively working with customers on Wi-Fi 8 design wins, and expect our Wi-Fi 8 products to begin ramping up in the second half of 2027.
We expect customer products based on these solutions to become more widely available in 2028, after the official Wi-Fi 8 certification launch, with broader adoption developing more meaningfully thereafter. Building on Wi-Fi 7, Wi-Fi 8 focuses on ultra-reliability and lower, more consistent latency in real-world conditions. We believe these enhancements give Wi-Fi 8 the potential to become a widely adopted platform, and have a long product life cycle. Our Wi-Fi 8 solutions are being developed with industry-leading specifications. Combined with our active engagement with customers on design wins, this positions us well to benefit from the transition and create opportunities for further market share gain. In the meantime, we continue to capture the growing Wi-Fi 7 opportunities in 2027.
The next question is from Sunny Lin, UBS, on managed switches. What is the latest progress of your share gain in managed switches? What is the split between managed and unmanaged switches for your switch sales and shipments?
Well, we have seen healthy growth in both our managed and unmanaged multi-gig switch products this year. We expect this momentum to continue into 2027 as we expand our customer base and broaden our presence in router, SMB, and enterprise networks and servers. Within our switch portfolio, managed switch revenue is narrowing the gap with unmanaged switches. Beyond gaining market share with existing products, we are expanding our portfolio to offer higher speeds, greater bandwidth, and more sophisticated features to meet increasingly demanding market needs. As we have previously highlighted, we believe our switch business will continue to be one of Realtek's growth drivers over the foreseeable future.
The next question is from Daniel Yen, Morgan Stanley, on multi-gig Ethernet. How does demand tracking for high bandwidth 2.5G , 5G , and 10G Ethernet controllers and multi-gig Ethernet switches enhance networking deployments?
Well, as our Ethernet business expands beyond PCs into a broader range of networking applications, including routers, PON, and servers, we are seeing shipment growth and a more pronounced shift toward higher speed connectivity. Rising adoption of 2.5G , 5G , and 10G Ethernet in these applications is supporting revenue growth. Our multi-gig Ethernet solutions account for more than 40% of our Ethernet revenue. At the same time, 1Gb Ethernet products continue to see healthy demand as our application coverage broadens.
In client computing, bandwidth demand from local on-premises LLM processing is accelerating the transition toward multi-gigabit connectivity. We are seeing 5G Ethernet broaden its footprint on desktop motherboards, while 10Gb Ethernet is gaining traction in AI-capable desktops, studio PCs, and next generation prosumer systems, where handling massive model checkpoints and large files demands near instantaneous network throughput.
The next question is from Nicholas Lai, Citi, on AI server related progress. Could you share any progress on your AI development or any AI angle Realtek might have? Any AI sales exposure number you can share with us?
As AI expands across infrastructure and edge devices, Realtek sees growing opportunities to increase our content through connectivity, peripheral, and high speed interconnect solutions. Today, we are making concrete progress in expanding our server presence with products supporting management, connectivity, and peripheral functions, including Ethernet and switch solutions, xPON, SSD controllers, IO bridges, and USB hub controllers. Building on this foundation, we are moving into higher speed SerDes-based interconnects, targeting opportunity in SmartNICs, PCIe retimers, redrivers and switches, optical controllers and active optical cables. This expansion opens higher value opportunities in AI infrastructure.
On the customer side, we are making inroads into major cloud service providers' AI server platforms, while also engaging with leading traditional server brands and emerging system vendors. These engagements provide multiple avenues to expand our presence across the server ecosystem. In terms of revenue exposure, HPC-related businesses and edge AI-related business, including automotive and robotics, currently account for a high- single- digit percentage of our total revenue. Our medium to long term target is for these businesses to collectively contribute more than 30% of Realtek total revenue by 2030.
The next question is from Michelle, Fubon on 100 G and 400 G and also 800 G optical solutions. Please provide color on the ramp-up progress on our 100 G optical PHY and the product development progress on 400 G and 800 G transceiver DSP.
Well, we are currently working with customers to qualify our 100 G optical PHY solution, and expect a more meaningful production ramp next year. In parallel, development of our 400 G and 800 G solutions is underway steadily, with launches planned for the second half of 2027.
Next question is from Pat Wu, Bank of America, regarding AI ASIC opportunity. Could you update us the latest development of your potential opportunity in AI ASICs? How many projects are in the pipeline, and if any of the project completes NRE stage and moves into mass production, which nodes would this project be designed or manufactured on? What would be the use of this chipset? Training, inference, CPU or networking switches?
Our AI ASIC opportunities are currently at the early stage of customer engagement, building on our strength in high speed connectivity and interface IPs. Given confidentiality requirements, we are not disclosing specific project counts, applications or customer details. At this stage, our focus remains on disciplined execution against key design milestones rather than providing mass production timelines. As we advance to leading edge technology nodes, we see three nanometer as a key platform for developing high speed interconnect products for server applications and for creating synergies across our broader product portfolio.
The next question is from Jennifer Xie, J.P. Morgan, related to edge AI. When do we expect more meaningful product upgrades driven by edge AI demand? Given the very weak PC market, are we still seeing AI PC demand in next 6- 12 months?
Now we view edge AI, including on-premises servers or edge servers, as a structural opportunity to drive specification upgrades and increase our content per device rather than as a growth driver depending solely on a PC demand recovery. Our connectivity and peripheral portfolios enables devices to communicate among one another and supports how users interact with them in the most natural manner. As edge AI advances, evolving requirements for higher bandwidth, lower latency, and optimal power efficiency, and richer multimodal interactions can create opportunities for higher value solution across our portfolio.
The traditional PC market outlook remains uncertain. Our focus over the next 6- 12 months is on specification upgrades and content gains in AI PCs, edge servers, and other AIoT devices, rather than relying on a broad-based increase in PC shipments. Beyond PCs, we are seeing opportunities in wearables, home appliances, edge servers, and a wide range of smart devices, as well as in the broadband infrastructure supporting these applications. Over the longer term, we also see potential in physical AI applications, including automotive, unmanned vehicles, and humanoid robots. Overall, we view edge AI as a broad multi-year growth opportunity with the pace of upgrades varying across applications.
There are two questions related to automotive business. First, Daniel Yen from Morgan Stanley asks, "Could you provide an update on auto Ethernet adoption and the broader automotive business, particularly regarding new design wins for your ASIL-D integrated Ethernet switch as OEMs migrate towards zonal architectures?
Currently, we estimate that automotive Ethernet has achieved over 50% penetration in new vehicle production. While global automotive shipments remain flattish, our growth is not reliant on higher vehicle volumes. Instead, it is fueled by structural increases of Ethernet port counts per vehicle, alongside our continuous penetration into new OEM customers and steady design win momentum. As OEM EE architecture evolve, their requirements naturally shift toward higher density, safety-critical solutions.
Our product roadmap aligns closely with these trends. We are expanding our portfolio with more integrated higher port count automotive switches and developing advanced gateway controllers to address the demands of future software-defined vehicles. These high integration solutions not only broaden our design win pipeline across global OEMs and Tier 1s but are also expected to increase our content per vehicle. Looking ahead, we expect to maintain our leadership in automotive Ethernet and switches. We are using this strategic position to accelerate adoption across our broader product portfolio and further expand our presence in the automotive market.
Next, Sunny Lin from UBS would like to ask, what is Realtek's current market share for auto Ethernet globally and in China? Any new design-ins for the Tier 1 OEMs, and are there updates from the Japanese auto OEMs?
Well, while we do not comment on specific market share figures, we are confident on our strong leading position globally in the China market. In terms of new customers traction, we are making encouraging design-in progress with Tier 1s and global OEMs, which continues to broaden our footprint across key regions, including Japan's and China's supply chain. Our focus remains on deepening penetration across diverse international markets to maintain a balanced and resilient customer base.
Next question is from Michelle Huang, Fubon. She would like to ask, when can we expect revenue contribution from robot-related products?
As shared previously, our wired and wireless connectivity solutions are already deployed in the first wave of major commercial robots. It is worth repeating that robotics and automotive products share great many technical requirements. For example, automotive one pair Ethernet is well suited for the robot's in-body networking, thanks to its lightweight, high quality, and safety emphasis. Humanoid robots, nevertheless, demand an additional level of sophistication. Humanoid robots have drawn significant market attention.
Though we believe market deployment will take time. We are actively collaborating with world-leading humanoid developers and already shipping solution to support their prototype builds and early-stage deployment. This early involvement positions our products for integration into their next generation platforms. In parallel, we continue to expand our presence in the broader industrial and commercial robotics market to capture near-term business momentum.
The next question is related to PC demand from Aaron Jeng , Nomura. The PC industry demand seems to deteriorate throughout the year. What's an initial view for next year?
Well, the latest industry data points to continued pressure on PC demand. IDC and Gartner reported year-over-year declines of 21% and 22.4%, respectively, in worldwide PC shipments in the third quarter of 2026. For 2027, IDC's September forecast projects a further 4.1% decline in worldwide PC shipments following an expected 11.3% decline this year, citing persistently high memory prices as a headwind. Against this backdrop, we remain cautious about a broad-based recovery in PC demand next year.
We have also seen a noticeable slowdown in PC sell-through compared with the first half of the year. Consequently, PC customers are adjusting year-end inventory in the fourth quarter, which is largely in line with our expectations. As noted earlier, we remain confident in our ability to outperform the broader PC market through specification upgrades and higher content per device.
Beyond the traditional PC market, we are also seeing opportunities across the broader on-premises computing landscape. These efforts provide additional avenues for growth rather than relying solely on a recovery in traditional PC demand. Realtek has weathered downturns in individual market segments many times before and has emerged stronger each time. Barring a broad-based global downturn, we are confident in our ability to navigate sector-specific weakness, such as what we are currently seeing in traditional PCs.
Thank you, Yee-Wei Huang. Since there is no further questions, 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.