Welcome to the MediaTek 2018 second quarter investors conference call. Your speakers today are David Ku, MediaTek CFO and Spokesman, and Jessie Wang, MediaTek's Manager of Investor Relations. Mr. Jessie Wang will report first quarter results. Mr. David Ku will provide prepared remarks. After that, we will open for Q&A. Now, I would like to turn the call over to Ms. Jessie Wang. Ms. Wang, please go ahead.
Good afternoon, everyone. Welcome to MediaTek second quarter 2018 conference call. As a reminder, all content provided on this teleconference is for informational purposes only. Neither the issuer nor any of the independent providers is liable for any actions taken in reliance on content contained herein. MediaTek provides non-IFRS financial measures as supplemental information. Earnings distribution is made in accordance with financial statements based on IFRS. Unauthorized recording or distribution of the video, audio, text, and presentation content of this teleconference is strictly prohibited. By participating in this teleconference, you agree to accept the foregoing terms and conditions. Now, let's start with the 2018 second quarter financial results. The currency here is in USD. Revenue for the quarter was $60.5 billion, up 21.8% sequentially, and up 4.1% year-over-year. Gross margin for the quarter was 38.2%, down 0.2 percentage points sequentially, and up 3.2 percentage points year-over-year.
Operating expenses for the quarter were $19 billion, compared with $17.2 billion in the previous quarter. $18 billion in the same period last year. Operating income for the quarter was $4.1 billion, up 112.1% sequentially, up 73.5% year-over-year. Operating margin for the quarter was 6.8%, compared with 3.9% in the previous quarter. 4.1% in the same period last year. Net income for the quarter was $7.5 billion, compared with $2.7 billion in the previous quarter. $2.2 billion in the year-ago quarter. Net profit margin for the quarter was 12.4%, compared with 5.4% in the previous quarter. 3.8% in the year-ago quarter. EPS for the quarter was $4.75, compared with $1.69 in the previous quarter. $1.51 in the same quarter last year.
Please note that net income, net profit margin, and EPS this quarter include one-off non-operating disposal gains, which were not included in the previous quarter and the same period last year. We also provide non-IFRS financial measures, which include share-based compensation, amortization of acquisition-related assets, and tax effect. Please refer to earnings press release and the presentation for details. For the third quarter of 2018, we expect revenue to be in the range of TWD 52.3 billion-TWD 57.1 billion, up 3%-11% sequentially, at a forecast exchange rate of 30.4 TWD to one US dollar. We are forecasting the gross margin at 38.2% ± 1.5 percentage points. The quarterly operating expense ratio to be at 30% ± 2 percentage points. For shipments, we expect shipments of smartphone together with tablets to be 100 million-110 million units in the third quarter.
I would like to turn the call to CFO, Mr. David Ku, for prepared remarks.
Good afternoon, everyone. I think before we get into Q&A, I would like to spend some time to talk about providing a few comments about our three major business product segments. First one, we'll talk about mobile computing. In general, I think mobile computing, including smartphone and tablets, which account for 37%-42% of our Q2 revenue. Smartphones, especially with the new product lineup for P60 being quite successful in Q2. That's why you see for Q2, our revenue is somehow slightly exceeds our original guidance. On top of the successful P60 launching and also engagement with the key customer, we also launched two new products in Q2, which include the Helio P22 and also we have the Helio A22. P22 is slightly lower compared to P60, and A22 is slightly lower than P22.
In general, I think right now the Helio cover pretty well, both for the mainstream and also for the entry-level. Also, I think one of the key strategies we have on the A22, Helio A22, is Xiaomi new product, which we launched in Q2 already. From the shipment perspective, overall, for the mobile computing product, we shipped around 100 million-110 million in Q2, which is slightly exceeds original guidance. When we're talking about the shipment, which includes the smartphone and tablet shipment in total. Also, from the marketplace perspective, we still see the consolidation trend among the tier 1s continue. For this year, we see the tier 1 guys or the big China brands continue to consolidate the market shares.
In consequence, we see the second-tier brands or the smaller brands turn somehow conservative in the second half. Which really is part of the reason we see a slight less seasonal growth in third quarters. On the product portfolio side, in addition to the P60, we also expect to launch the new product, which is equivalent of our Category 12 and also Category 6 plus modem capability, SOC, before end of this year. We do believe with the new product coming out before end of this year, we will continue to extend our product portfolio and also further enhance our technology competitiveness into the next generation products. The last one of these for the smartphone product is, as we announce our 5G plan in, I think that's around June this year.
I think I just want to reassure everyone that we are actually among the leaders for 5G product portfolio, and based on our current product portfolio, we are fully ready for commercial launch for 2020 5G market. The first few Helio M70 modems will be up and running next year, the first 5G SoC will be up and running by end of next year, end of 2019 and beginning of 2020 as well. In general, I think our product portfolio is fully ready for big pickup for 2020 for 5G business. I think that concludes about the mobile computing business updates. Let's move on to the next sector, which is the growth sectors. Growth sectors including IoT, PMIC, power management IC, and ASIC. For this quarter, the growth sectors account for 25%-30% of our overall revenue.
We see the seven quarters revenue on growth sectors on a quarter-over-quarter basis, actually it's growth in line with our whole company growth. For third quarter, we see a much stronger growth compared to the whole company growth in third quarter because for the third quarter, normally is a pretty strong seasonality for growth sectors. Especially, I think for the IoT market, we see a fairly strong pickup for the VAD, which stands for voice activated device, pickups in China. We have a new product coming out for AI audio integrated device. In general, I think we see pretty strong growth for the growth sectors in third quarter this year. Other than IoT product, I think PMIC, power management IC, continue to grow our revenue in multiple platform, which including smartphone and VAD.
The last one in the growth sector is really our ASIC business. I think right now, ASIC business is mainly coming out from the consumer products revenue, consumer product segment. Right now we have a pretty good design win into the networking product, and based on the current design win and also tape-out situation is all been pretty smooth and successful. We do expect we will see some networking product revenues, hopefully coming out starting from next year in 2019. That concludes the update on the growth sectors. The next one is really our harvest product, which including digital TV, feature phone, optical storage, and DVD. For the harvest product sector in Q2, revenue-wise, which account for around 25%-30% of our whole revenue.
I think the growth rate in third quarter in harvest product is pretty healthy and is actually stronger than the entire year quarter average, mainly driven by seasonal demand. Especially, I think for the digital TV, right now we're in process of our fully integrated MediaTek DTV chip and M-Star DTV chip. We do expect the consolidation plans will have some synergy coming out next year. I think overall, both from the operating expense perspective and also hopefully from the margin perspective, we will see some further improvement next year after we realize our operating synergies. I think that's a quick update for all three product segments.
Before getting into Q&A, we are also trying to highlight, due to the relatively weak third quarter seasonality, right now for the full year perspective, we expect the full year revenue, basically 2018 versus 2017. The full year revenue may be just coming down a little bit year-over-year basis. I would say very low single digit down, you can consider it small fraction coming down a little bit. As we explained earlier this year, the focus of this year is really trying to have a profitable growth. If you focus on the gross margin, operating margin, and more importantly, operating margin dollars, you will see pretty strong year-over-year growth for this year. That's the overall strategy for this year.
On top of the gross margin and also operating margins improvement, when we talk about the profitable growth, we are also commit to looking for diversification of blended business growth across multiple platforms. Mobile computing this year account for roughly 35%, 40%. Growth sectors will account for another 30%, and also the cash cow business or the harvest business. The strategy is really trying to reallocate the resource among ourselves without increasing the overall resource, but trying to invest more resource for growth sectors. Also we accelerate our 5G investment. We do believe for the medium to long term, we should be able to create a much more balanced growth portfolio, on top of our getting healthy or recovery business on the smartphone side.
In the meantime, having a profitable growth Especially on the gross margin and also operating margin side, is also a very clear evidence to see the first stage goal is like being fulfilled. That concludes my quick update, we can get into Q&A right away.
Thank you, David. We are now ready for Q&A session. Can we have the first question, please?
Yes, thank you. We are now in question and answer session. If you would like to ask questions, please press 01 on your keypad. Please ask your question after your name is announced. To cancel your question, please press 02. 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. Please press 01 to ask questions. Thank you. First, we are having Randy Abrams from Credit Suisse. Go ahead, please.
Okay. Yes. Thank you, David, Jessie. The first question I had, maybe two clarifications from the Chinese conference. First, on the ASP trend, I think you made a comment about the Helio ASPs. If you could give a sense of the overall smartphone ASPs, for both second quarter and then outlook for third quarter. The other clarification was on seasonality for the mobile products in fourth quarter. I guess your expectation at this stage, I think you're expecting the growth, but maybe what's driving that, whether it's new product launch, or market share, or a view on the market?
Okay, Randy, thanks for asking this clarification. I think during the Chinese call, when we talk about ASP, we're actually talking about the blended ASP, not just the Helio ASP, first of all. When we're talking about it's going to be 0%-5% down, we're actually talking about the third quarters. Because after the earnings call, some people call and ask about the second quarter. I think for the second quarter, due to the higher P60 contribution, for the second quarter, ASP is actually coming up a little bit. I would say for Q2, blended ASP, due to higher P60, this overall would be 0%-5% up. For Q3, because we see more of the P22 and also A22 coming up, the blended smartphone ASP will coming down a little bit, obviously 0%-5% down.
I think that's on the smartphone ASP front, that clarification number 1. I think for the second question, talking about the third quarter's growth. I think the overall for third quarter right now, for the whole company, I think we are looking for 3%-11% quarter-over-quarter growth. Among three different product segments, I would say both growth sectors and also the harvest sectors have a higher growth rate than the corporate average. I think for the smartphone, it's relatively weaker compared to the corporate growth rate.
Okay. David, I wanted to also ask, I think you made a comment also about fourth quarter. If you could clarify your expectation, whether fourth quarter you expect mobile to grow, and what may drive that growth for fourth quarter?
Okay. I think for first quarters, again, for QoQ, we will not be able to provide fourth quarter guidance. During the Chinese call, we're kind of talking about, we're only commenting about from the market perspective or market demand perspective. We do believe right now, based on what we see, we should be able to see relatively stronger quarters, basically the growth quarters on the smartphone side, fourth quarter versus third quarter, based on the visibility or data point we have right now. I would say it's mainly due to, I think, two reasons. First of all, for P22 and also A22, even though we start to launch end of second quarters, beginning of, some of actually in middle of third quarters, I think sometimes takes some time to ramp it up. The new design win, we will see more ramping up in fourth quarter.
I think that's reason number 1. Reason number 2 is actually, you can assume we will have one or two new product coming out in the second half of this year. Hopefully, that will transfer this few up to the growth on the smartphone side.
Okay, great. The second question on the margins. You mentioned the target to still get to 40% as a medium-term goal. Could you talk, I guess, about the two elements, one within mobile, with the cost down, I think, reaching or the new architecture about 70% by year-end? I guess your expectation from there, if mobile, before 5G, if it's more stability, and to get to 40%, it's more from the non-mobile products.
Well, I think for the gross margin goal, if you like the CEO, Rick, talked about during the Chinese call, we still put 40% gross margin, to be precise, should be 40%+ and also 10%+ as the mid to long-term goal as our possibility. Given the current gross margin profile, I think for the second quarter will be like 38.2%. For third quarter, we say pretty much within this range, plus minus 1%. It really depends on, at any given quarter, it really depends on the BG, or business group, mix. On top of that, I guess fundamentally, we're still looking for next year, I guess, still looking for opportunity to further grow gross margins on our smartphone side. I think that's the plan; that's the strategy.
In terms of the detailed strategy, I think it will be the combination of the different or the higher product mix. Like during the Chinese call, we talked about for next year for Helio, even for third quarter, we have Helio P22 and also Helio A22, which is all relatively speaking, is actually on a lower segment new product coming out as the higher segment compared to P60. Hopefully, the premium or higher sub-product segmentations will have some help on the gross margin side. That's one of the reasons. Another reason, another strategy, actually, which will continue to improve our cost elements, or basically, the cost architectures on the smartphones. I think that will be an ongoing pursuit.
Okay, great. One feature, I think you've been marketing at some of the conferences, is the 3D sensing, which is more a lower-cost solution. Could you maybe talk about your potential outlook for that, and if it's an angle you see in terms of gaining either ASP or market share through offering that platform?
Well, I think to be precise, that should be something we call 2D or 2.5D sensing. The general idea is actually we use two cameras, two strong cameras, which are performing very similar function as the 3D sensing. From the phone maker perspective, the benefit of that is actually we can have the, I would say, extend 3D sensing capability, but at a much lower BOM cost alternative. So far, I think we got a few customers started adopting that, in terms of whether or not it will become a major feature still needs some time to see the final market demand. Just from the performance perspective, we feel very comfortable with our solution, and hopefully, that will lead to a slightly higher ASP, or at least we can maintain the current ASP. I think that covers the 2D or 2.5D recognition functionality.
Okay. One quick final question. Your inventory ended at, I think, 90 days off of ending balance. If you could give a view, expectation into second half, where you see your inventory trending.
I think for Q2, the days of inventory is around 86 days. For Q3, I think we will pretty much maintain the same level of days inventory. I would say in the range of maybe 85 to 100 days, maybe that's a wider range, but I think most likely, probably, will be very similar to Q2.
Okay. All right. Thanks a lot, David.
Next, we're having Stephen Kang from Maybank. Go ahead, please.
Hi. Thank you, David and Jessie, for taking my questions. Just three quick ones. The first is also about some clarification. I remember in the Chinese call, you also mentioned about the full-year smartphone shipment could be up slightly year-over-year. It is based on the last year number and the first half number as well as Q3 guidance. I think that implies that Q4 could be up by at least 10%-20% sequentially. I just wonder if the take is correct. Actually, also a follow-up on this, because if the smartphone implies Q4 seasonality like this, based on the full-year revenue slightly decline guidance, I think Q4 revenue could be roughly similar to Q3 midpoint. Does that mean the other business will go down in Q4? This is my first question.
First of all, right now, we will not be able to give out exactly the guidance for Q4 on the whole company perspective, so you will just need to bear with us. Just the trend-wise, I think for the smartphones, I think Q1, on a year-over-year basis, I think shipment is actually coming down. For Q2 and Q3, I will say it is pretty flattish if you compare it on the YoY basis. Q4, again, on 2018, based on the current visibility, we do foresee on both on volume and revenue perspective, actually, for smartphone, not only from the smartphone, we actually have a pretty good opportunity to see a further bump. I think that is probably the only information we can provide for the time being.
For other sectors, in general, fourth quarter, as we explained earlier, for third quarter in general, it is a pretty strong quarter for growth sectors and also for the harvest sectors. For Q4 in general, there is a normal seasonality down for growth sector and also harvest sectors.
Okay, this is very clear. Thank you. Also, the second question is about the follow-up on smartphone ASP. Again, I think based on the released number and also the sales mix, it looks like this year so far, the smartphone ASP is declining year-over-year. I just wonder if this is due more to the product mix or because of the competition. If you look at the next year, I understand you mentioned about some even higher-end products. How do you view the combined impact from the competition as well as product mix and the impact to the ASP in the next year, if you can give any broad color?
I think for the full-year blended ASP, first of all, we start from the full-year blended ASP. I think for this year versus last year, it should be pretty flattish, because after all, this year, we see a lot of the Cat 16, relatively higher-end product coming out. The ASP should be pretty flattish and maybe even up a little bit, especially judging both from the Q1 and Q2 ASP. If you recall, we just gave out a guidance. We just gave an update for Q2 ASP. It's really up year-over-year by 10%. If I remember, for Q1, actually, we provided similar guidance. At least for the first half, always on the quarter-over-quarter perspective, actually up a little bit.
I just want to clarify, say, for 2018, the full year, it should be pretty flattish, if not up a little bit. For next year, it really depends on how successful we can continue to push for the high-end product, which means the higher end is higher than the Cat 16. Right now, it's a little too early to tell, the general idea is
Asked by Randy, basically. From product portfolio planning perspective, we do try to introduce a much more balanced portfolio, which also includes new segments, which is higher than Cat 16. We also need to consider about the overall competition landscape next year. Right now, it's a little bit too early to comment on that. The general idea is it will be new product higher than Cat 16 next year and continuing to enhance on the entry-level, and hopefully by adding new features, we can somehow either have a flat-ish on the entry-level and also mainstream, or maybe just a slow decline as the entry-level and also mainstream.
Yeah, understood. Thank you. I guess last year base probably altered by the Q1, I understand where you come from, and that is very clear. Probably one last quick question is about, again, on the operating margin. I think the company has already done a very good job in gross margin improvement. So far, operating margins look still volatile, probably due to the revenue scale. I'm just wondering, when you mentioned about the midterm goal for the gross margin and operating margin, what is the timeframe do you define the midterm?
We don't have the fixed timeframe. Hopefully when we say midterm, normally, hopefully that should be two years+, I guess.
Okay, that's good. Yeah. Thank you for taking my question. Again, appreciate it.
Right now, we're having Gokul Hariharan from JPMorgan. Go ahead, please.
Thank you. Hi, David and Jessie. Thanks for taking the questions. First of all, could you talk a little bit about the ASIC business? Could you give any details about how this ASIC business is looking like? You mentioned that you're starting to have some success beyond consumer and networking. Could you talk a little bit about what kind of wins are you having, and what does the pipeline look like beyond networking? Do you have engagements in more data center, AI-related stuff, or it's still going to be mostly consumer-centric kind of projects?
maybe broadly, you could talk a little bit about what are the criteria that you are applying in terms of resource allocation in ASIC, as well as criteria to pick up some of these projects, given, I think, there seems to be a lot of ASIC projects coming to the market, as well as to you guys.
I think first of all, before I get into any detail of the ASIC business, the one thing I want to remind, actually, because for a lot of our ASIC customers, they are all global Tier 1s, by the service contract, we will not be able to provide any sort of customer-specific information. I can only provide general direction-wise information. First of all, currently, most of the revenues, not all the revenues, are pretty much all coming out from the consumer product, mainly basically the game console-related product, and also a little bit of multimedia-related product. I think that's a majority of our revenue. The good news is actually, both for the game consoles and also for the multimedia, which including VRs and AR, to some extent, are all still growing.
The overall strategy of our ASIC business is we're trying to further enhance our growth and also revenue size based on consumer product, again, which includes, but not limited to the game consoles, AR, VRs, and some multimedia product. For this year, gross rate looks solid. For next year, we still believe that we have a growth opportunity, even based on consumer product. That's strategy number 1. Strategy number 2 is currently based on the design win and also the engineering development. We actually get into a new sector, which is called the data switch. Basically, we try to leverage our high-end and very successful SerDes technology. I think maybe it's news we just announced, we're probably worldwide number 1 to officially announce SerDes technologies on 7 nanometers. We believe we are probably one of the leaders on that front.
That one, with that technology, I think we will probably start with data switch business first. When you think about the high-speed SerDes, I think there are also other applications. I think there will be some other area we would explore opportunities as well. The problem for the ASIC business is it sometimes takes the design-in and the design wins factor is actually pretty long. Normally, the design win versus the revenue coming out is, in general, we're talking about one year plus, sometimes actually even 1.5 years to two years. Even if we have any plan to looking for beyond the networking switch business, I guess we probably still need to wait, if you're counting from now, I would say probably two plus years. We do have plans to base on the similar IP, to looking beyond the network switch business.
Okay. Could you talk a little bit about any quantifiable numbers in terms of number of design wins or something like that? I think I understand that customer-specific revenue numbers are quite sensitive given it's a custom product. Could you talk about the number of engagements that you have and how that has changed over the last 12-18 months or something like that?
Unfortunately, I probably will not be able to provide any more colors on that.
Okay. No worries. Just sticking with the growth engine segments, David. I think, in the Mandarin call, you guys highlighted ASIC Voice assisted devices in China, NB-IoT, and probably PMIC as the key areas. Could you talk a little bit about where is the growth likely to be the strongest in these categories? Is it more the consumer IoT, like NB-IoT, VAD kind of products where the growth is going to be strongest, or you think ASIC is also going to come in as a big growth driver going into next year?
In terms of growth rate, I would say NB-IoT is probably the one with super strong growth rate, because right now, the NB-IoT base is very low. By looking to the second half of this year and also with the visibility we have for next year, I would say it's probably the one carrying with the strongest growth rate. On the absolute scale, I think NB-IoT this year still relatively small . For next year, we do expect NB-IoT will become one of the meaningful revenue on the IoT. In terms of growth rate, I think that's the strongest. Other than the growth rate, I guess if you focus on Wi-Fi, focus on VAD, voice and device, and also focus on M2M, I would say the growth rate is somewhat similar.
Maybe VAD is higher, because after all, obviously, a pretty strong pick up VAD. I think last year was in U.S. and Europe, this year is in China. I think relatively speaking, VAD probably has the higher growth rate. Wi-Fi looks good and also machine-to-machine, and also sometimes actually Bluetooth looks pretty solid for internal growth rate.
Okay, understood. When you talk about your 5G plans, I think, if I jog my memory and remember correctly, I think for 4G, your standalone modem and your SoC pretty much came out around the same time, and we didn't hear much about the standalone modem. 5G looks like you're going with a standalone modem next year, and SoC is following in 2020. Is there a reason for the change in strategy in terms of the timing gap? Is there a credible standalone modem business that could be had either in mobile or in other kind of end markets, given that historically, you guys have not really had a meaningful standalone modem business?
Well, first of all, I guess currently, we are not looking aggressively for standalone modem business. The standalone modem is really, I think the overall strategy about having the standalone modem first, when we have the SoC, just like what we did for 4G, is really for the IoT task, basically the carrier certification.
Every time we have a new generation of modem coming out, it will be relatively easy and faster to certify a standalone modem. Afterwards, the SoC, just the standalone modem plus AP, and we feel fairly comfortable for our AP technology. For the modem, especially from 4G to 5G, I guess, given the fact right now that even the sort of the industry standards are still in a moving target, it would be better to have a standalone modem first to work closely with the equipment vendor, the base station equipment vendors, plus the carrier, then come our SoC. I think that's the smart strategy. I guess my point is, we are not trying to, using that standalone modem, to aggressively looking for standalone modem business. Okay, that's point number one.
Point number two, I think, based on your description, it sounds like we have different strategy in 5G versus 4G. I would say yes and no. Basically, the major difference is when you think about for 4G versus 5G. Even for 4G, by the time we have a 4G, regardless of standalone modem or SoC, from the absolute industry perspective, we are probably, sometimes, some people say a year, some people say two years behind the overall industry development. For 5G, I guess we are among the leader group, because, for next year, even from the operator perspective, next year will be the pre-commercial launch of 5G, which means
In general, we will not see a huge 5G smartphone taking off. You will see a few coming out, but it's not going to be mainstream. Overall, even the most aggressive view, we're talking about 2020, you will see some, I won't say meaningful, it's like meaningful small volumes coming out in 2020. Our overall product flow is aiming for that, especially ready for that. For me, that's probably the major difference when you talk about 4G versus 5G. To make a long story short, I think 5G, we are ahead of the curve. We are much more ready for the first wave battle for the 5G. Also, actually, the 5G modem, the standalone modem versus SoC, is really coming out the same year. Because, when we talk about end of next year, beginning of 2020, we're really commenting from the customer manufacturing perspective. Okay?
It's not from the taping out perspective. I mean, taping out is normally like 6 months ahead of the customer shipping. It's really just the same time frame. The only difference, once you have a standalone modem, we can just much better complete the IoT task, the carrier verification. I think that's the situation.
Okay, understood. One related question on 5G, David. Your competitor, Qualcomm, has been talking about pre-baked 5G RF solutions, kind of like bundling the RF with the baseband processor for 5G to reduce the potential design time and complications. Any thoughts on how MediaTek is going to address this? Is there a closer partnership with some of the existing RF vendors? Does MediaTek think about getting into potentially RF? I think you guys have some initiative outside of smartphone. Is there any thoughts on that?
Currently, I think RF front end is actually not our product focus, because right now, I think the focus really is just getting 4G healthier. We're trying to launch new product portfolio. We're trying to accelerate 5G development. On top of mobile device, I guess, we're also trying to allocate or reallocate some of the resource, get into the growth sectors, which includes IoT, TV, ASIC. I think that's the overall strategy. Bear in mind, like we explained in the earnings call, is with all new products, new technologies to be coming out from MediaTek, the overall R&D resource has been kept as the same. We didn't really increase that.
We really need to prioritize and also be strategized about which area we want to go to, which area we're not getting into. For RF, front end is actually the area we decide not get into at current stage, given the overall consideration. On the other hand, we do work very closely with our RF partner, and basically just the two or three major RF partners out there. We all working very closely with both for 4G and 5G RF front end. We don't really see that as a disadvantage for us to promote 4G and 5G. After all, RF front ends, as long as it work and also as long as it's cost competitive, we do believe actually, it's probably the best strategy, given our current situation, to work with this vendor rather than trying to turn everything in-house.
Okay, fair enough. That's all my questions. Thanks, David.
Next one to ask question, Brett Simpson, Arete Research. Go ahead, please.
Yeah, thanks very much. David, can you perhaps maybe talk a bit about the entry segment of the mobile phone market, of the smartphone market? I just wanted to get your sense for the competitive environment here, because it seems like Qualcomm is not a successful player in entry. They're not a big player in that part of the market, and I think it's well-known that Spreadtrum has been struggling. It sounds like you must have a very strong market position in this segment of the market. I'm just trying to understand, whether there's scope to see a much higher gross margin returns as you are able to sort of leverage more the position you have in that segment of the market.
I think so far for the entry segment, in general, I think our market share, because we have a market share in the entry segment. From the gross margin perspective, I think overall, we feel comfortable. Like you say, I won't say we leverage that market position, it's really just, right now, we have a much better cost structure product. Overall, I think the gross margins among all segments, which include entry-level and also the mainstream, are all getting better. Given the customer's needs, I should say, the customer's full needs for the entry-levels, I guess our turnkey solution and also our huge operation in China, does give us some unique advantage in supporting this group of customer. We will definitely try to capture that going forward.
If you take one step back, when you think about the smartphone competitive landscape perspective, I'm not talking about from a chipset perspective, I'm talking about from a phone perspective. There's another big trend is, the big brands actually getting more and more market shares. Basically, top 5 or top 6 brands, you name it, are just getting more and more market shares every years. We also need to take that into consideration as well, because when the big brands are trying to get into taking more market share, chances are they're trying to, from their perspective, they're also thinking of a way to increase their phone ASP. Chances are, they are just promoting more mainstream products.
In general, I think from our perspective, that's actually a good news because right now, especially for this year, for the first half this year, our market shares for the top 5, top 6 brands, are all getting up meaningfully. If the overall market trend is actually the top-tier guys, they're just consolidating more market share. On top of that, the top-tier guys trying to sell more mainstream product or mainstream plus product. I think that should be a positive trend from MediaTek perspective, both from the ASP perspective and also from the overall revenue perspective. I think that's the update.
Okay, thanks for that, David. Just in terms of the consolidation process, can you just give us a sense, where we are in that process? I know the top 4 have been clearly structurally taking share, but what portion of the market has the top 4 sort of taken in your count today, and where was it a couple of years ago?
I think for last year, if we talk about top 6 or top 7, okay. The top 6 or top 7, I would say, probably account for a good 70%-80% of overall market share from the smartphone perspective last year. This year, I would say, it's similar, but it's definitely getting higher. I'll say like, 80+. I think that's almost 80. Both for China-- When I say the market share, I'm talking about basically, it's not just China, it's really China and also emerging market.
Got it. Okay, super. Just in terms of your ASP as a percentage of the selling price of phones in China, we're at record low levels today. We're structurally seeing phone ASPs go up. We're seeing your ASPs fall. I'm just wondering, do we see this situation reverse at some point? Is this the new normal where you will continue to see your ASPs as a percentage of your customers' concept price continue to fall, or how should we think about that?
I would say probably to just say, in terms of the ASP, actually, in terms of chipset value or chipset ASP versus the overall margin cost, basically, to answer your question. I would say it's actually holding up okay. Again, in general, if you focus on the top 5 or top 6 guys, downwards, actually holding up pretty well, sometimes even keep going up with it, because, as I explained earlier, they're also trying to upgrade their product portfolio, and chances are, getting the mid to high-end SoC is probably one of the important factors for the phone maker to upgrade their product or upgrade the ASP. Tier 1 is actually holding up quite well, maybe even with opportunity going up.
For the other players, basically more of a entry-level focused players, I would say these maintainers are probably coming down with it, because most players actually competing very aggressively with, what's that called, the top six, or top five, top six guys, so they need to be aggressive on the pricing. In general, they will turn around, push down, basically, everything down like BOM cost.
Maybe just a question on OpEx. It's growing faster than sales is growing on a year-on-year basis. I'm trying to get a sense, what portion of your OpEx would be mobile today, particularly with 5G now under development. What portion of OpEx is smartphone?
I would say it's pretty much in line with the revenue contribution. Smartphone right now accounts for 40% of our overall revenue. Even though right now there's no revenue from 5G. For 4G plus 5G, the overall resource we spend company-wide is actually pretty much in line with the overall 4G resource right now we have.
Right. Okay. Maybe just last question, David. Your name is always mentioned as a beneficiary of AI, and we're starting to see in your Helio series, both the A series and the C series, we're seeing AI as a feature more and more in your portfolio. How should we think about the revenue opportunity for MediaTek? Today it seems like it's embedded inside the die of the SoC, there's no specific revenue that you can attribute to AI. How should we think about the requirements going forward and some of the other segments you play in, like TV? How should we think about AI as an opportunity for MediaTek over the long haul?
From revenue perspective, maybe it's easier to understand or explain that concept. From the revenue perspective, AI brings two opportunities. The first one is really we see AI as an enhanced features. Maybe one idea, just for the comparison, is more like in the past, we have VGA all the way to upgrade to HD and even 4K. AI, basically, from our perspective, for our last product, which including but not limited to smartphones, and also TV, will become a new features. For us, AI, in terms of revenue impact, actually, new features sometimes is even higher ASP or better ASP maintenance. That's one opportunity for AI, combine AI with existing product portfolio. Well, another one, actually, we are working on right now, but currently there's no revenue yet, is really just AI as a new revenue stream. Arguably, I think, or AI as a new applications.
For example, for the VAD, for us, which is AI applications, even though for the VAD, we only process part of AI, not the full AI. That, because of that new AI features, we can just somehow link that, there's a meld in the AP functions into the VAD feature. Again, I think the quick summary is, in general, I think we do see AI as a positive opportunity for MediaTek, both for existing business perspective and also from new business perspective. The only problem is, the existing business coupled with AI is relatively easier, it's much faster, because after all, nobody will get the idea about better functionality for existing products. For AI, a brand-new revenue, or some use the term like zero low revenue, I think there are some product we're still working on that right now.
Currently, we don't have any revenue at this scale on AI yet.
Do you think, just from the point about ASPs declining in mobile, when you look at 5G and you look at where AI is going, do you think these are technologies that will absolutely reverse your ASP decline? It may be that ASPs for APU will start to rise meaningfully because the penetration of these technologies becomes much more at scale. How should we think about the ASPs in your, particularly in your smartphone business, over the medium term?
I would say for the smartphone business, the biggest drivers, both for the revenue and also for the ASP, the crushing perspective is really 5G. For AI, I would say it's more of a function enhancement, and it will help from the ASP perspective, but not at the big time. Not like from 4G to 5G, we will see pretty big jump from ASP perspective. Okay, that's great. Thank you.
Right now, we're having Callum Hughes, Indos. Go ahead, please.
Hi. Just going on what you were saying about 4G to 5G. One would be the ASP going up, but seeing that you're going to be in a much more competitive position than you were before, would you say your market share is more likely to be higher than it is for 4G?
On the like comparison, say, initial 5G versus initial 4G, we do believe our initial 5G market share should be higher than our initial stage of 4G that was like roughly four years ago.
What about 5G versus current 4G?
5G versus current 4G, we also believe we have opportunity to continue to grow the market share in general. Basically, I guess, when we talk about 5G versus 4G, probably the better way to think about that is through just our overall market share on the smartphone. We do believe with 5G coming out, the overall market share on smartphone, we still have opportunity to continue to grow.
Okay, cool. Now for your new modem, you were saying 70% by the end of the year. Is that for the number of units or is that the revenue for mobile, 70% have the new modem?
Units. Revenue. Sorry. Revenue.
Okay. Sorry, just got one more. ZTE, did that end up having any effects on you?
I'm sorry, say it again. I didn't get it.
The ban on ZTE, did that impact you at all?
I think ZTE has no impact to us, especially right now. They pretty much got off their own baseband .
Okay, cool. Thank you.
The next question is coming from Michael Zhou, Deutsche Bank. Go ahead, please.
Hey, David. Just a follow-up question. Is it fair to say your smartphone gross margin should be flat to improve slightly in quote-unquote, in Q3?
Flat and upside, yes.
Yes. Because you mentioned your new modem should account for more than 70% of the total smartphone shipment by year-end, is it fair to say your smartphone gross margin could continue to improve, quote-unquote, in Q4 this year?
Yes and no, because, again, it's on a quarter-over-quarter basis. Also, one of the major functions usually just the product mix. If you take a look at Q1 and Q2, at least we continue to ship more P60. That actually is a big supporter to the growth margin enhancement. Starting from Q3 and Q4, especially for Q3, like our earlier explanations, we will start to ship more P22 and also A22. That somehow offset a little bit about the gross margin enhancement. For 4Q, you would really depend on what's the segmentation mix. Let me take one step back to explain about the gross margin. I guess, probably the better way to think about that actually is, as long as we can continue to enhance our cost structures, in general, we definitely have opportunity to continue to enhance the gross margin.
Okay, on a quarter-over-quarter basis, there are still a lot of other factors you need to consider. Based on the current visibility, both on the three quarters and four quarters, probably the better way or easier way to think about it, that is actually flattish to slightly up.
Okay.
Better way to think about that.
Okay. Thank you so much. I have no question. Thank you.
Next one, we're having Charlie Chan, Morgan Stanley. Go ahead, please.
Thanks for taking my follow-up question. I already learned a lot from the previous discussion. That was very helpful. Just some clarification. First of all, in 2Q, you booked around TWD 3.6 billion-TWD 3.8 billion gain from the AutoChips sales, right? I thought that you mentioned it should be TWD 5 billion, right? Will there be any amount to be recognized in the following quarters?
Exactly how much we're going to recognize every year, it will also depend on the business situation. Some of that will be pushed to the next year basically.
Okay. Can you quantify how much it will be for next year, David?
I probably won't be able to quantify right now. I would say probably let's provide a number by end of this year because it will be much more clear to us.
Okay.
In general, the business which is coming out next year.
Right. Thanks. I think, also mentioned several new features. For example, K15, kind of a new product to compete with the 700 series. Do I understand this right? You will have a new product that will be K15, maybe 7nm, and that is going to be competing with the 700 series. Can you double confirm that the spec is right?
Let's confirm one by one. First of all, we will have a Cat 12 and Cat 16 product before the end of this year. That's confirmed.
Also it's confirmed that actually, we will have a product coming out on the 7nm process, but that not necessarily mean the 12 and Cat 16 will be on seven.
Okay. They could be separate products.
Right.
Okay. Yeah. You also mentioned the potential silicon content upside for next year high-end products. Right. If it is not for AI, what are the key features that you want to enable for those higher-end smartphones by those that you mentioned?
I think the modem is one thing. I didn't say modem were coming down. I just say it's a modem is one thing. Also definitely, the application processor is another, and plus AI. I guess right now, if we talk about smartphone, that's between the three factor or three drivers can adjust. Base modem, application processor, which includes CPU and GPU, and plus AI. If everything goes well, we should be able to basically operate all three fronts.
Okay. Recently there are some industry development regarding using the CD-ROM chip to store those code data. Right. You see the kind of big demand for a company like Ritek, right? Your company supplying the control IC for those optical storage. Do you see any upside in this business unit?
I think from volume-wise, first of all, actually, I don't believe we involved directly in the supply chain yet because our DVD players and all the Blu-ray players, actually, it's still on the traditional consumer front, really on the corporate front. Okay. Secondly, I guess, even for the corporate front, I think the overall volume right now is still relatively small.
Okay. Yeah. Lastly, regarding that new modem mix, can you confirm this as revenue mix or shipment mix, the 70% mix?
It's revenue mix.
Oh, revenue mix. Right. Yeah, I'm just wondering, because if you look at both your new products on the roadmap, P60, P22, A22, even the low-end 4G, MT6739, those are the new modems, right? Do you have any old modem inventory on hand now that you want to sell in the first quarter?
Well, I think we still have some, but if everything goes well, most likely, in slightly more than a quarter, actually, the old modem will pretty much will be all out of stock. Yeah. It will be all sold out.
Okay. Yeah. I just want to get a sense, whether that new modem tailwind can sustain into first quarter next year, right? Because I thought the new modem would be maybe 90% or 95% of your revenue for the end of this year. Just wondering how you're going to further improve your cost structure. Can you give us some comments on that? Yeah.
I'll speak for two things. First of all, for next year, right? New modems compared to last year, right? For next year, you can rest assured we'll have a new product coming out, and not necessarily we upgrade overall the modem's architecture because this year's, and also by and large last year, we need to overhaul architecture because we need to have a big saving on modem side.
Right.
We're pretty much getting there already, by seeing the result. Doesn't mean there's no further room. I think the further improvement will be much smaller.
We will continue to improve that. Point number one, even for the modem itself, even though some of the new modem versus, I would say, old modem, last year's modem, we've been quite successful. We ramp into a high percentage this year. Doesn't mean next year, we don't have new modem coming out. Once we have a new modem coming out, they always provide some benefit to that. That's point number one, why we still see gross margin have opportunity to go up. Number two is really to product mix. Like I say, I mean, this year's, the flagship product will be D60. Next year's, recent show, we have a new product coming out, which is even on a higher specification compared to D60. Hopefully, that will bring some positive influence on the gross margin as well. Something that's a strength.
Okay. Yeah. Just one last one, right. The crypto mining ASIC, you mentioned that last quarter. Is that still going to take place, for this project?
I think there was a report recently on the newspapers. I think our explanation is we will not be able to comment on specific product or customer.
On the other hand, I guess we do have products, and we do believe we will ship these products-
for the crypto mining