Welcome to the MediaTek 2020 Third Quarter Investors Conference Call. Financial results and presentations for today's conference are available on the investor section of the company website at www.mediatek.com. I would like to turn the call over to Miss Jessie Wang, Deputy Director of Investor Relations. Ms. Wang, please proceed.
Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek CEO, and Mr. David Ku, MediaTek CFO. Mr. Ku will report our third quarter results, and then Dr. Tsai will provide prepared remarks. After that, we will open for Q&A. As a reminder, today's presentation will provide forward-looking statements based on our current expectations. These statements are subject to various risks and factors which may cause actual results materially different from these statements. The presentation materials supplement non-GAAP financial measures. Earnings distribution will remain in accordance with financial statements based on GAAP. For details, please refer to the Safe Harbor Statement in our presentation slides. In addition, all content provided in this teleconference are for your reference only, not intended for investment advice. Neither MediaTek nor any of the independent providers is responsible for any actions taken in reliance on content provided in today's call.
Now, I would like to turn the call to our CFO, Mr. David Ku, for the third quarter financial results.
Thank you, Jessie. Good afternoon, everyone. Let's start with the 2020 third quarter financial results. The currency here is all in NT dollars. Revenue for the quarter was TWD 97.3 billion, up 43.9% sequentially and up 44.7% year-over-year. Gross margin of the quarter was 44.2%, up 0.7 percentage points sequentially, and up 2.1 percentage points year-over-year. Operating expense for the quarter was TWD 28.4 billion, compared with TWD 22 billion in the previous quarter and TWD 21.3 billion in the same period last year. Operating income for the quarter was TWD 14.6 billion, up 97.3% sequentially and up 108.1% year-over-year. Non-TIFRS operating income for the quarter was TWD 15.5 billion. Operating margin for the quarter was 15%, increased four percentage points from the previous quarter and increased 4.5 percentage points from the year ago quarter. Non-TIFRS operating margin for the quarter was 15.9%.
Net income for the quarter was TWD 13.4 billion, up 82.8% sequentially and up 93.7% year-over-year. Non-GAAP net income for the quarter was TWD 14.1 billion. Net profit margin for the quarter was 13.7%, increased 2.9 percentage points from the previous quarter and increased 3.4 percentage points from the year ago quarter. Non-TIFRS net profit margin for the quarter was 14.5%. EPS for the quarter was TWD 8.42, up from 4.58 in the previous quarter, and up from TWD 4.38 in the same quarter last year. Non-TIFRS EPS for the quarter was TWD 8.86. A reconciliation table for our TIFRS and non- TIFRS financial measures is attached in our press release for your reference. That concludes my comments. Thank you.
Thank you, David. Now, I would like to turn the call to our CEO, Dr. Rick Tsai, for prepared remarks.
Good afternoon, everyone. Today, I'm delighted to report a record quarter of sales and earnings for MediaTek. Our third quarter revenue grew 44% sequentially to TWD 97.3 billion. This is not only ahead of original expectation, but also a record high for quarterly revenue. It's also worth mentioning that our three product groups all had approximately 40% or higher sequential growth rates. The structured growth of our balanced product portfolio is a good foundation to underpin MediaTek's sustainable development. Furthermore, we once again demonstrated very good operating leverage by achieving record high operating income and net income. Our third quarter operating income grew strongly at 97% sequentially and more than doubled from a year ago. Operating margin also increased to 15%, the highest since the first quarter of 2015. The solid financial numbers reflect the strength of our business portfolio and the result of our well-executed corporate strategies.
Let me elaborate on our three pillars for our third quarter results. First, growth area, which consist of IoT, PMIC, and ASIC, accounted for 27%-32% of third quarter revenue. All major products had a robust sequential growth in the quarter. For IoT, demand for AI speaker, streaming device, and Bluetooth TWS all increased in the third quarter due to Amazon AI speaker launches and market demand recovery. Besides, work from home and spec migration trend continue to drive strong Wi-Fi 5 demand and accelerate Wi-Fi 6 adoption. Competitive Wi-Fi 6 solutions and early participation in the market enable us to enhance market share in higher end segments and further expand into new markets. MediaTek's Wi-Fi 6 chips are already in numerous high-end broadband routers and consumer devices. We are making inroads to the notebook market with initial revenues by end of the year.
Power management IC demand remains very strong across the board, including notebooks, PC, TV, and smartphone. This leads to certain supply tightness in the near term. For ASIC, products for the new generation gaming consoles continue to ramp in the third quarter. On the enterprise side, product development of AI accelerator and new switch IC is tracking well. Despite the recent server demand slowdown, we remain positive on its mid to long-term market opportunities. Next, Smart Home and others. Primarily TV and other traditional consumer electronic accounted for 22%-27% of revenue in the third quarter. The demand recovery in the third quarter was better than expected, especially digital TV. Demand in North American, European, and emerging markets all increased strongly. We are confident in our industry-leading comprehensive TV product portfolio.
With more advanced feature upgrades, such as AI integration, we will be able to sustain our leadership in global TV market. Now on to mobile computing, which includes smartphone, tablet, and Chromebook, accounting for 43%-48% of the third quarter revenue. Mobile computing revenue grew substantially in the quarter as we saw stronger than expected demand in tablet and Chromebook, as well as smartphone orders in both 4G and 5G. Chromebook market is growing fast this year, thanks to remote learning demand. MediaTek provides competitive products to support all major global brands. Ranked number one in Arm-based Chromebook SoC. We expect our market share to further increase in the future with a broadened product offering. For smartphone, MediaTek outperformed the industry this year with share gains in both 5G and 4G smartphones. On 5G, major smartphone makers all embrace 5G aggressively.
With the faster migration to 5G, we now believe global 5G smartphone shipments in 2020 will be around 200 million, at the high end of our prior estimates, and it could be more than doubled in 2021. The fast-growing market presents exciting opportunities for MediaTek. By now, we have 5G engagements with all major Android smartphone brands in different product segments. We are confident to secure reasonable market share across segments in 5G, regardless of the potential market share shift among smartphone brands due to recent uncertainties caused by the global trade dispute. Moreover, our 5G footprint has been expanded to more global markets. MediaTek's high-end Dimensity 1000 series was adopted by LG and launched in the U.S. market in the third quarter for the first time. Together with LG, we teamed with T-Mobile to complete the first-ever 5G standalone New Radio carrier aggregation data call.
All those Dimensity 800 models will hit European markets in the fourth quarter. Next year, we expect more models shipping to global markets. On the product side, smartphones adopting next Dimensity 5G high-end SoC will start mass production early next year. MediaTek's commitment of a complete 5G product portfolio remains intact, and we will continue to providing more competitive high-end solutions in the future. For mass market, we expect Dimensity 720 models to ramp strongly in the fourth quarter. In addition, we will start shipping another SoC by end of 2020, enabling 5G smartphone in more segments. Millimeter Wave product development remains on schedule for further market expansion. In addition, 5G thin modem business is gaining good traction. First project for Intel platform notebook PC is expected to mass produce in the first half of 2021, with more projects to come.
For 4G, demand continues to rebound in the second half of the year and remains a sizable market. With market share gains, we expect our 4G shipment to grow this year. In summary, third quarter of 2020 marked a milestone for MediaTek in terms of financial performance as well as business development. With a strengthened global market position, we believe we are a strategic relevant partner to global customers. Our progress and market shares in 5G, Wi-Fi 6, and Chromebook products are some clear evidences of our global position. These positions are built upon our dedication to key technology investments. With ongoing investments, we believe we are on the right track to capture opportunities on multiple fronts, such as 5G, Wi-Fi 6, enterprise PC, and gaming. Our diversified IP and business portfolio are our unique competitive advantages, enabling us to create values and future growth opportunities.
With the depth of our business portfolio, MediaTek powers your everyday life. Turn to fourth quarter outlook. Following a strong third quarter, overall demand stays solid in the fourth quarter. We expect another quarter with significant year-over-year revenue growth. On a quarter-over-quarter basis, we expect revenue for mobile computing and growth area to be better than normal seasonality, even with an unfavorable exchange rate. For Smart Home, we will exclude MediaTek revenue starting November, upon the completion of the divestment transaction. Gross margin is expected to be stable at the current range. We expect fourth quarter revenue to be in the range of TWD 89.5 billion- 97.3 billion, flat to down 8% sequentially. They are up 38%-50% year-over-year at a forecasted exchange rate of TWD 28.8 to $1.00 .
Excluding FX and IliTek impact, our fourth quarter revenue guidance range would have been up 5% to down 3% sequentially. That implies the revenue momentum is stronger than traditional seasonality, even after a record high quarterly revenue in the third quarter. In addition, we're forecasting gross margin at 43.5%, 1.5 ± percentage points, and quarterly Operating Expense Ratio to be at 29%, 2 ± percentage points. That concludes my prepared remarks. Thank you.
Thank you, Rick. We are now ready for Q&A session. May we please have the first question operator?
Yes. Thank you, Jessie. Ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press zero one on your telephone keypad, and please ask your questions after your name is announced. To cancel your question, please press zero two. As a reminder, it is greatly appreciated that you turn off the speakerphone mode of your device to prevent possible echo effect. We thank you for your cooperation. Now please press zero one if you would like to ask questions. Thank you. The first to ask questions, Randy Abrams, Credit Suisse.
Okay. Yes, thanks. Want to congratulate you on a good result and also outlook. Maybe just the first question on the constraints. I think you mentioned a little bit of area like power management. Could you talk on your overall business? I noticed your inventory level down quite a bit. If any area now limited by tightness. And if there's any impact from either on the wafer level or the recent, one of the suppliers had a substrate issue. If you could talk about that constraint. And then, flip side, also if you're benefiting, say, from your competitor, where I think there's some constraints they may be facing.
Randy, I think it is widely reported in the press about the supply situation in the industry. We certainly face a similar situation, as we also mentioned in our channel business. Leading-edge process, the wafer supply is tight. However, we have been able to secure our needs for the leading-edge processes, despite really, as you can tell, a surge of demand on our, for instance, 5G SoCs in the third quarter and fourth quarter. On the other hand, we also noticed some tightness in the back end, too. Again, due to our strong relationship and the long-term partnership with our ASIC suppliers, again, we have been able to resolve most of the supply difficulties. We— the recent accident doesn't really have any material impact on our business. We remain, of course, very cautious about the supply situation.
We spend a lot of effort in working with our partners in foundry and ASIC. We believe and we are confident that we can manage the situation. It might be tight, but we can manage the situation well, and we can supply our customers also well.
Thank you. Yeah. Okay. If I could ask, I'm curious how you're managing the— i t's been complex dynamics with the late notice not to supply the China customer. I'm curious where that caused other customers to come in, how you feel their incremental business has been, and if you feel any nervousness whether they might be all going after the same market share, or if you think it looks relatively reasonable at this stage.
Randy, I think the first-order number that we look at is the sales through numbers of the 5G phone. I think we talked about that before, also. The 5G phone sales through numbers, in China especially, remains not only on track, but also, I would say, strong. I think the sell-through 5G phones in China is on track to reach north of 120 million, close to 130 million. I believe 120 million was our estimate before. With that kind of a sell-through, we're confident that the 5G penetration is good, is strong.
We have a strong portfolio of 5G SoCs. There are variations from customer to customer, from brand to brand, from trade dispute or no trade dispute. But the key thing for us is to have a strong portfolio so we can supply the fast-growing 5G market, as we have demonstrated in the third quarter and as we are forecasting for our fourth quarter.
Thank you. Yeah. Great. Maybe just one other demand question. The Chromebook, which you're now selling a lot more, is there a rough way you're thinking about in terms of volume opportunity, and also how you size up the content you're getting in this relative to a smartphone or tablet?
Good question. Up to now, I think Chromebook, well, certainly.. Well, certainly h as become a kind of a star in this year of pandemic. And we also understand a lot of the demand, at least the new demand, comes from the more entry-level for students studying at home, et cetera. However, as we are starting our remarks, we are number one in the Arm-based SoC for the Chromebook. We are working very closely with the global brands in not only using our current SoC, but also we work with them to upgrade the SoC. We have some much higher-end SoC that we have ready for the more advanced Chromebook, and we expect that to happen sometime next year.
Great. Thanks a lot. Thanks for writing. Good result.
Thank you.
Next to ask questions, Sebastian Hou, CLSA.
Thank you. My first question is that if we look at your third quarter's margin, it is very good numbers, but I'm just curious if I look at your revenue, it beat by more than 10%. Gross margin also would beat at midpoint guidance, but the OpEx ratio seems to be just in line with the midpoint guidance of OpEx ratio. I think still a good numbers. Just curious about that it doesn't seem that there is a lot of incremental operational leverage that flows through the operational line when your gross margin and revenue both beat on the upside. How do we think about this going forward? Thank you.
Sebastian, probably the best way to look at about operating expense in totals, which also including the profit sharing, is by looking at the operating expense ratio. For example, for Q3, the total number right now compared to the revenue is around 29.2%. Compared to the previous quarter or in the past few quarter, roughly talking about 32%, maybe even sometime for certain quarter is closer to 33%. Now actually improving by basically three to four percentage point. I think that one's a way to look about the operating leverage. On top of that, I guess also during the CEO remark, we keep talking about we will continue to invest in technology and also for the future new product, especially for the 5G. We keep talking about both for high-end also for entry-level to expand the whole bandwidth of our product portfolio.
I think that will all come down into the operating expense, which is the R&D expense. By including all of that, we still see the operating leverage coming in. Again, the key number is really the overall OpEx ratio coming down from [audio distortion] compared to the previous few quarters, only 33%-32%.
Great. Thank you. One follow-up is that since now we are at 15% mid-teens of the operating margin, David, are you confident in— or do you have the expectation that we may be able to achieve higher in the next two years?
Sebastian, maybe let me, even though you ask about operating income, but I think why not I commenting about the gross margin first, then talking about operating income, which are all related. I think if you guys still recall earlier this year, I think the CEO gave all the guidance talking about the gross margin will be stabilizing around 42%-43% range. I believe that was actually we given a comment in first quarter this year. Now the gross margin is close to 44+%. So with all those new product coming out and also with our diversified product portfolio, and we feel comfortable right now with our gross margin will stabilize within slightly higher range. Again, first half this year, we're talking about 42%-43%. Now we feel comfortable the gross margin should be able to stabilize within 43%-44%, within this range.
And whether or not we can continue to improve that, I think that's our goal. I will say probably we will just withhold that, wait until the right moment, and also, we also need to consider about the overall market dynamic. Overall, I guess, I think the improving both on the gross margin and operating margin is our goal. I think that have been a very important goal and objective for MediaTek. So far, I guess we feel comfortable and happy to see basically the gross margin and also operating margin overall were ahead of our original plan.
Okay. Thank you. My second part of the question is on ASIC. Do you have rough numbers about how much the revenue is in terms of percentage terms is coming from ASIC this year? What's the possible target you have, let's say, in two, three years from now?
Sebastian, we didn't really break out sort of the revenue contribution by individual product line. We only break out by the business group, so we probably will not be able to comment any on that.
Okay.
Overall, I guess we're still looking for another year of growth. In terms of magnitude, we probably will not be able to disclose right now.
Okay. No problem. Within ASIC, I think we have been doing very well and very strong IP in SerDes and high-speed interface IP. So then, we have that enable us for our enterprise switch business and also cloud AI accelerator business. I wonder how the extendibility of this IP and how much more of the opportunity beyond this network can switch and AI accelerator?
Well, certainly, there's opportunity, for instance, in the 5G infrastructure space, which requires also high-speed interfaces as well as other IPs. I think it is also important to know that MediaTek has demonstrated our capability in utilizing the leading-edge process as well as the leading-edge package technology, which m ost of those are really large system, kind of ASIC required. We believe, actually, there are other opportunities, which requires our IPs, but we're not at liberty to disclose those potential opportunities.
So, thank you, Dr. Tsai. I think, is it fair to say that there is actually quite a lot of the other opportunities, and for the SerDes IP can be applied onto, and we may be exploring that or may be doing that already. It's just that it's not at the mature time to disclose yet. Is that fair to say?
Yes, I would say so. Yes.
Okay. That's great. Thank you.
Thank you.
Next, we're having Gokul Hariharan from JPMorgan.
Hi. Congrats on the great result. My first question is about margins. Could you talk a little bit about gross margins as we look at, since, David, you mentioned that we are comfortable with a higher level of margin. What are the portfolio of products, which are likely to help us to move up in terms of gross margins? Is it mainly ASIC and high-end 5G? And the second question related to gross margin itself is on, there has been some concern about potential margin pressure, potential pricing pressure. As we think about the 5G portfolio, as Dr. Tsai mentioned, moving to more affordable price levels for 5G smartphones.
Should we expect that there could be some margin dilution coming through, or are we still comfortable that we will be able to hold our margins in this early to mid-40s kind of levels, even with 5G portfolio moving down to more affordable price ranges?
Yeah. I think overall, we just consider everything. Part of the thing you're talking about, the expansion into different segmentation, I think you're mainly referring to into the entry level of 5G. I think also in the beginning remark, we're kind of talking about, we're growing the revenue not just on the mobile device but also on other sectors as well. If you consider everything, also consider the reasonable competitive landscape, that actually still gives the confidence that the growth margin should be able to stabilize within the 43%-44% range. So that, I guess, is the quick answer from me.
Maybe I can add a few words. A margin improvement, gross margin improvement, in our mind, it's not a one-shot deal. It involves the whole company effort among different business units. I think critical that all the business units are committed to improve the gross margin within their individual businesses, either through a better product mix or through yield improvements, cost structure improvement, or both. What we have done through the last quite a few quarters were actually those improvements are cumulative in nature. I think people tend to think that there's certain product that would bring us a higher margin. Yes, there are some. We have so many products in quite a few different businesses.
It really takes the whole company to focus on that. I think that's really at the core of the improvement we have been able to make up to now. We are certainly working very hard to continue that trend. Thank you.
Okay. That's very helpful. My other question is, as you mentioned, now in 5G, you have basically pretty much all the Android customer base. Now, the other operating system, iOS, is something MediaTek has really had not much exposure. Given the catch-up in terms of 5G technology that MediaTek has achieved, you already started developing and far along in terms of thin modem deployment for PC applications, et cetera. Is it realistic to expect some breakthrough with this particular operating system, this particular customer, or should investors think of it as more of an unlikely outcome? Thank you.
I think overall, given the fact this time around, I think we are among the leaders in the 5G product portfolio, both from the SoC and also from the thin modem, as explained earlier. The thin modem shipment with Intel is coming out next year. I guess from our perspective, we are, aggressively preparing any possibility. For the time being right now, probably Android can give into the first wave of product that will be our focus right now.
Okay, thank you.
Next to ask questions, Roland Shu from Citigroup. Go ahead, please.
Hi. Thanks for taking my question. Earlier, we talked about the supply constraint at the foundry, OSAT, and also we have this fire incident for this structure. It sounds like the supply or the capacity for this option will be very tight. And I think you have a very good relationship with this foundry and OSAT, you probably still will be able to secure good capacity. How about the price, the cost? The cost for this foundry and OSAT, and even for structure, definitely will be increased substantially. How are you going to manage for this cost increase from your suppliers?
Roland, we have come across some cost impacts, but really, I would say, not significant.
Again, it's just like, well, I cannot speak for our suppliers, for sure. I cannot. I can only say that in our case, again, with the long-term and the substantial scale that we have a relationship with our suppliers, the impact is not significant and certainly quite manageable. It's not I don't worry about it, but it's something we must manage, and we have been able to manage. Thank you.
Understood. Okay. This is fair enough. How about the price competition or price pressure from competition across all platforms of the products in 4Q and going forward?
You're going to hear a standard answer. The competition is always there. I think, again, this is a situation We have read also the story on the press about certain products from certain competitor, and that may cause some price pressure. Again, we really believe our product, from performance and the cost structure point of view, can compete effectively. Was there pressure? Yeah, we compete, and so far, I think the numbers speak for themselves. We have been able, I think, to manage our margins reasonably well. Thank you.
Understood. Okay. For your mass market 5G SoC, how is the ASP and the gross margin for your mass market SoC compared to your 4G high-end product?
I think we will not be able to spell out the detailed ASP. In general, I think the 4G versus 5G on ASP, we are still talking about a big accretion for 5G versus 4G ASP. Unfortunately, we will not be able to provide detailed ASP. In terms of gross margin, as we mentioned earlier, actually, starting from third quarter, we start to ship a very small volume of entry-level phone already. In the fourth quarter, I think we were going to ship more. Even with that, just like the earlier gross margin guidance we gave out, we still feel gross margin should be stabilized within range, i.e., 43%-44%. So, that actually is indirectly talking about we feel comfortable about the gross margins, even once we get into the entry-level phone.
Yeah. Okay. Yeah. Understood. Lastly, for the 4G product, I think early this year, you expected your 4G shipment this year will be bigger than last year. I think three months ago, you toned down to be probably flat as last year. Today, now again, you are seeing your 4G total SoC shipment will be bigger than last year. Why is the change, and also, how do you expect this overall 4G shipment next year? Thank you.
Roland, I think, first of all, I didn't really recall we kind of talked about the 4G year-over-year would decline, we didn't really change our view. I think 4G this year, we're still going to see— I guess we talked about earlier, from the global 4G shipment perspective, from the global demand perspective, that will decline. From a MediaTek perspective.
Yeah.
Again, mainly due to the market share gain, also we benefited geographic penetration. I think we'll still see year growth for 4G this year.
Okay. How about next year?
I think next year, maybe it's a little too early to tell. I think by first quarter next year, we're going to probably give you guys some preview of our view.
Okay, okay. Thank you. Yeah. That is all my questions. Thank you.
Now the line is open to Bruce Lu from Goldman Sachs.
Hi, good afternoon. Thanks for taking my question. For the great result, that is way ahead of the guidance. I understand management usually provide a conservative guidance, this time it's way ahead of the guidance. Can you tell us which part of the business is the main reason for the upside surprises?
Bruce, first of all, it's really just across the board. If you recall in the CEO opening remark, we talked about our third quarter's overall revenue growth, 44%, pretty much all three major business lines grew close to 40%. So it's not.. I think the really strong growth, even higher than our earlier guidance, it's not really caused by any single business line. It's really just across the board. So, first of all, it's all three major business lines really got pretty good growth and are all close to 40%. It's not like one business line grew 70%, the other only grew 20%. All close to 40%. I think that's the situation. If you really want to drill into the detail, I guess that's maybe something to do with the supply tightness, because when we give the guidance, everything's actually the supply is still really tight.
But just along the line, actually, our manufacturing team did a pretty good job. They're just trying to provide more supply. Once we got more supply, once we got more wafer out, we can just ship it out. I think that's the situation. And I think another number you can take a look, which is another evidence about our days of inventory. I think for second quarter, our days of inventory, it was 83 days. Once we march into the third quarter, the days of inventory become 57 days, which is below 60 days. In the fourth quarter, I think our view is actually overall the days of inventory will be below 60 days as well. So, again, right now, actually, I think the supply tightness is still the situation we're facing right now.
So let me make it clear. So last— three months ago, when we provided guidance, it was 25%, quote-unquote, quarter growth for the midpoint. All three businesses growing 25% at that moment, which is the forecast at that moment, but now everything goes up to 40%.
Correct. Let me just repeat what we're talking about. We say that our three product groups all had approximately 40% or higher sequential growth.
I see. Understand. Another question I want to ask is that, you know, even though with a very strong revenue growth, our revenue ranking globally is actually coming down. It's not because MediaTek is not doing— not well, but because of a lot of global M&A major deals. So in contrary, MediaTek is divesting in [E-DAC]. What do you think about the new competitive landscape after all these M&As done, all the industry consolidation, will that impact our future growth, you know, in terms of the competitive landscape?
I don't believe so. I think MediaTek, as we said in our remarks, our strength is from our very strong and very broad IP and technology portfolio, resulting in, again, a broad and strong product platform. We have a rather diverse business portfolio. We have worked really hard during the last two, three years. And this year, if you count take into the guidance we give for the fourth quarter, we're now looking at the NT level, really high 20%, very high 20% year-over-year growth. This is all organic. This all organic growth. We're very proud of that. We have looked into the market potential of which we are serving.
We have the confidence that we will have a strong future with our current portfolio. Having said all that, of course, if there are opportunities that we believe that can fit our future, we would not hesitate. Up to now, if you look at our numbers, I don't know how we calculate the ranking. I think our ranking is not bad. It's where we are, we're quite a bit above $10 billion for this year already.
Understand. I just.. I just want to follow on that, in terms of the current serviceable available market, where will be the major growth driver moving forward beyond 2020?
Well, I think some I'll give you example. The compute, if you look at it, we have really a strong t his year, from compute, Arm-based compute. Chromebooks, tablets, and we also have very strong growth in the connectivity, which we believe it's not one kind of a short-term phenomenon, because as the world is going towards the new normal, that fits our strength particularly well. Again, I don't think I can give you all the details of our future look for our service available market. Our internal study shows us we have a good, at least three years and beyond, growth in front of us. In the meantime, we continue investing in our technology capability and the product portfolio. Thank you.
Thank you.
Right now we're having Brett Simpson from Arete Research. Please proceed.
Yeah, thanks very much. David, first question on OpEx spending. This is probably the biggest sequential increase in OpEx I've seen at MediaTek. You're now spending TWD 1 billion a quarter. Can you just lay out exactly why you needed to spend such an increase? Can you give us an update on headcount and how it grew sequentially, and what specifically the increase in OpEx is going to be targeted on, and whether there's any one-times within that spending hike? Thank you.
First of all, when you talk about over TWD 1 billion, I think this is actually also including something we call the employee profit sharing. You guys have 40 number. As you can tell, in Q3, we had a record year both for revenue and also for earnings. Actually, that somehow was a boost to operating expense as well. If you take that out, we also disclose the number. I think the number is on operating expense is well below TWD 1 billion. Even so, like you say, we still continue to invest aggressively in the right directions, basically aiming for the mid to long-term growth, which including increased OpEx and also including, we have a lot of new taping now in third quarter.
That all contribute into the increase on the operating expense. As I explained earlier, overall, from the ratio perspective, it's still coming down. A nd also, marching into the fourth quarter, we expect that in terms of absolute dollars, the operating expense will be pretty flattish, maybe even coming down a little bit.
What did headcount do sequentially? Given your OpEx grew, whatever, 30% or so sequentially, how much did headcount grow in the quarter?
Brett, we didn't really disclose the quarter-over-quarter the headcount movement.
Okay. Thank you. Maybe just on Huawei. Can you just clarify, in your Q4 guidance, are you planning to book any sales? I know there's been some commentary recently in the media about the U.S. government issuing 4G licenses to suppliers. Are you part of that, and are you going to have any sales to Huawei in Q4? Thanks.
In our Q4 guidance, there's no revenue to Huawei at all.
Okay, great.
It's not putting any revenue to Huawei at all.
Okay, okay. Thank you. That's great. Maybe for Dr. Tsai, just on 5G. When we look into 2021, the conditions for MediaTek look exceptional. You've got consolidation in the market, which you're going to clearly benefit from. The demand, you said yourself, will more than double for 5G next year. You're introducing 6 nm, 5 nm platforms. Supply is tight. These are excellent conditions for margin accretion or for pricing, given it's largely a two-player market for 5G. Exynos seems to be more captive-focused. Even there, they don't supply everything to Samsung. So, you know, aren't these conditions where you'd expect pricing to start to become less pressurized, and how do you see this playing out next year? Thanks.
I guess the straight answer is no. I always assume our competitor will compete fiercely, which they do. I still expect the pricing competition to be fierce. Although, as I said earlier, we also believe our performance, our cost structure, are strong enough to withstand that competition, and we can still deliver a gross margin that we said we would. As David mentioned earlier, we intend to stay at a 43%-44% range. My, my, my— as I said earlier, too, there are so many products and businesses in our portfolio We have, I think, plenty of opportunities to improve our gross margin, and we continue to do so. But I don't promise you a one shot that can improve by one point or two points. That doesn't happen very easily. Thank you.
Maybe just a follow-up as well on 5G. I guess, i guess over the years, we've seen the Chinese government, you know, give significant support to companies developing, developing 5G. And I think now in the U.S., we're seeing significant government support around 5G, building an ecosystem that's U.S. based, and Qualcomm is certainly benefiting from this. There's a lot of DARPA funding that's happening right now. Are you concerned at all that Qualcomm may start to see substantial government support, and that creates an unfair advantage for MediaTek? And I'd just be curious as to whether the Taiwanese government is also looking to develop support for its own companies in Taiwan around 5G. Thank you.
I think if you look at the 5G landscape, there are really not many reliable and competent suppliers, be they Android or iOS. MediaTek, I think, has established itself as a reliable and competent supplier in the 5G arena. With our financial performance, I'm confident that we will be able to continue investing for our capability and the products. Of course, everybody can read about what the different governments are doing. For instance, as far as I understand, in the U.S., the government's funding are probably more fundamental and usually, it should be a more pre-competitive funding rather than for certain companies. We believe U.S. being a liberal, I don't know, liberal, but yeah, they are a capitalistic country, and we in Taiwan are also the same. We expect pretty much a fair and level playing field landscape for us. Thank you.
Okay. Thanks very much.
Next to ask questions, Sunny Lin from UBS. Go ahead, please.
Hi. Thank you very much for taking my question, and congratulations for your good results. So my first one is really quick on your 5G market share. I think in last quarter, management talked about 40% plus in terms of volume for China smartphones by end of this year. So, wonder if we could have an update on this and your expectation into 2021. That's my first question.
Sunny, I think for the market shares for third quarter and fourth quarter, we are looking for the similar market share. For next year, again, it may be a little bit too early to tell, but overall, based on our product portfolio and also the pretty good feedback from our customers, we do expect some positive trends. Again, it may be too early to tell or give out any guidance or comment on that.
Sure. No problem. Thank you. And for my second question is regarding your thin modem business. Wonder if you could share with us a bit more color on your addressable market. So are.. You mentioned that the first project is for notebook, but I would imagine more connectivity demand as IoT further develops. How should we think about the potential applications for your thin modem beyond notebook?
Well, I think a good example being a CPE. We have a project going in that area also. We will announce that when the time is appropriate. That's another good example.
Right. Any other applications that you could share with us?
Maybe not right now. I think we will announce actually when it's appropriate.
Sure. No problem. Thank you very much.
Right now, we're having Laura Chen from KGI for questions. Go ahead, please.
Hi. Good afternoon, and thank you for taking my questions. My first question is about the Millimeter Wave progress. I'm just wondering, what's the schedule now? Do we plan to introduce the thin modem first or SoC as one? I'm just wondering for the Millimeter Wave solution, does MediaTek will also provide the RF front-end antenna solution along with the SoC or modem? That's my first question. Thanks.
Okay. For our Millimeter Wave program, it is progressing well, on track. We were planning our announcement sometime in the near future. We do expect to see samples next year, 2021. We also expect the Millimeter Wave technology being used in both 5G SoC and the SIM modem devices. As to the antenna module, I think our plan is to develop the capability to build the antenna module, but the antenna module. Yeah. I think we're in antenna packages as well. Yeah. Oh, okay. Yeah.
We will come out with the total solution from the baseband modem to the RF front-end, right?
Yes.
That's great. Can we expect that will be more for the 2022 story, is that we are sampling sometime later next year?
Yeah. From a manufacturing, mass production point of view, 2022 is what we are looking at. Yes.
Okay, thank you. Also, just a follow-up on the Chromebook business. We know the demand is quite strong this year. From MediaTek perspective, we can leverage our previous products and also our current technology. So, assuming that, we should be able to have a better growth margin on the Chromebook business, right? I'm just wondering, do we have any estimation of our current market share now in the Chromebook market, and also next year growth outlook?
I think first of all, we generally disclose gross margin by product line, a single product line. Overall, I guess Chromebook carries a pretty decent gross margin that we could describe. I think in terms of market share, we believe right now we should be the market share leaders on Arm camp, on Arm-based Chromebook. I think market share range should be in the north of 30%.
Okay, great. Thank you. That's all the questions I have.
We thank you for all your questions, ladies and gentlemen. Because we're running out of time now, I'm going to hand this over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.
Ladies and gentlemen, this concludes MediaTek's 2020 third quarter conference. We would like to thank you for your participation, and you may now disconnect.
Yes, ladies and gentlemen, thank you again for your participation in today's conference. You may now disconnect. Thank you, and bye.