Welcome to the MediaTek 2025 Third Quarter Investors Conference Call. Financial results and presentation for today's call are available on the Investor section of the company website at www.mediatek.com. I would like to turn the call over to Ms. Jessie Wang, the Deputy Director of Investor Relations. Ms. Wang, please go ahead.
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 our 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. The statements are subject to various risks and factors which may cause actual results to differ materially from the statements. The presentation materials supplement non-TFRS financial measures. Earnings distribution will be made in accordance with financial statements based on TFRS. For details, please refer to the Safe Harbor statement in our presentation slides. In addition, all contents 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 contents 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. Now, let's start with the 2025 third quarter financial results. The currency used here is NTD. The foreign exchange rate applied to the quarter was 30 NTD to 1 USD, representing a 2.8% NTD appreciation compared with the foreign exchange rate of 30.8 in the second quarter. Every $1 of NTD appreciation against USD will reduce our NTD revenue by 1%. With that, revenue for the third quarter was $142.1 billion, down 5.5% sequentially and up 7.8% year-over-year. If we exclude the FX factor in USD, third quarter revenue was down 2.6% sequentially and up 16.2% year-over-year. Gross margin for the quarter was 46.5%, down 2.6 percentage points from the previous quarter and down 2.3 percentage points from the year-ago quarter.
Please be reminded that gross margin in the second quarter benefits from a one-time item, which increased second quarter gross margin by roughly 1.9 percentage points. Operating expense for the quarter was $43.9 billion, compared with $44.5 billion in the previous quarter and $40.5 billion in the year-ago quarter. Operating income for the quarter was $22.2 billion, down 24.5% sequentially and down 7% year-over-year. Non-TFRS operating income for the quarter was $22.8 billion. Operating margin for the quarter was 15.6%, down 3.9 percentage points from the previous quarter and down 2.5 percentage points year-over-year. Non-TFRS operating margin for the quarter was 16.1%. Net income for the quarter was $25.5 billion, down 9.3% sequentially and down 0.5% year-over-year. Non-TFRS net income for the quarter was $26 billion.
Net profit margin for the quarter was 17.9%, down 0.8 percentage points from the previous quarter and down 1.5 percentage points year-over-year. Non-TFRS net profit margin for the quarter was 18.3%. EPS for the quarter was $15.84, down from $17.5 in the previous quarter and down from $15.94 in the year-ago quarter. Non-TFRS EPS for the quarter was $16.18. A reconciliation table for our TFRS and non-TFRS financial measurement is attached in our press release for your information, and that concludes my comments. Thank you.
Thank you, David. I would like to turn the call to CEO, Dr. Rick Tsai, for prepared remarks.
Thank you, Jessie. Good afternoon, everyone. MediaTek's third quarter revenue in USD came in at the high end of our guidance range, thanks to better-than-expected Dimensity 9500 demand. Quarterly revenue in NTD exceeded our guidance range, mainly due to a more favorable foreign exchange rate of $1 to $30 NTD, compared to our assumption of $1 to $29 NTD. During the quarter, we observed exciting developments in ubiquitous AI. Ongoing innovations in agentic AI and AI applications across industries are fueling demand for AI computation. As a result, several hyperscale companies have announced plans to significantly increase capital expenditure to build substantial AI computing power, which will be deployed through multiple years. We believe this drives a virtuous cycle for long-term AI growth, and we are still at the very early stage of the AI megatrend.
Underpinned by our leading key technologies and strong execution capabilities, MediaTek stands firmly to capture growing opportunities brought by ubiquitous AI. Here are some recent progresses. In the cloud, improving data center total cost of ownership, TCO, has been crucial for hyperscale companies. Customized solutions that are optimized for CSP-specific workloads are well-suited to add value to data centers. Our first AI accelerator ASIC project is well-executed. We are on track for our $1 billion cloud ASIC revenue in 2026 and expect multiple billions of revenue in 2027. The achievement reflects our ability in integrating our world-class interconnect IP to custom DLNAs and managing the advanced nodes and advanced packaging supply chain. Our solid execution, optimizing technology, and scale have gained increasing recognition in the market. Follow-on project that is more complex than previous DLNAs is already underway, with revenue expected in 2028 and beyond.
Meanwhile, we continue to aggressively engage with the second hyperscale company for new data center ASIC projects. With high confidence, we believe in our value propositions for cloud AI customers and expect rapid growth in the future. At the edge, we build powerful edge AI chips to enable more on-device AI innovations across smartphones, tablets, PCs, automotive, and more. In the third quarter, we launched our latest flagship mobile SoC, Dimensity 9500. It features the industry-leading dual-core NPU architecture, with one performance NPU to handle more complicated AI instructions and one efficient NPU to run light AI models for always-on AI experiences. Customers have utilized this powerful architecture to enhance user experience in applications such as photo shooting and AI assistant. On the other hand, GB10, the edge AI chip that we co-designed with NVIDIA, has recently begun mass production.
GB10 powers the world's smallest AI supercomputer, DGX Spark AI supercomputer, which can run inference on AI models with up to 200 billion parameters and fine-tune models with up to 70 billion parameters locally. Looking ahead, we believe that advanced process technologies and packaging solutions will unleash more AI innovations and usage cases across multiple industries. MediaTek is one of few companies capable of making continuous investments. We completed our first 2-nanometer tape-out at TSMC in the third quarter and will be a front-runner in launching 2-nanometer chips starting in 2026 for customers across industries. With that, now let me talk about the recent business performance for our three revenue groups. Mobile phones accounted for 53% of total revenue in the third quarter and grew 4% year-over-year and declined 4% quarter over quarter. In USD, this revenue group grew 13% year-over-year and declined 1% sequentially.
Demand for our Dimensity 9500 has been stronger than expected. The first wave of customers has launched flagship smartphones such as the Vivo X300 and Oppo X9 series in China and plans to expand into more regions such as India, Southeast Asia, and Europe by the end of the year. For the fourth quarter, thanks to the strong ramp of Dimensity 9500, we expect mobile revenue to grow strongly quarter over quarter. The flagship smartphone revenue for the year has been tracking above our expectations. We are confident of exceeding $3 billion of flagship smartphone revenue in 2025, representing more than 40% of year-over-year growth. Now, let me move on to smart edge platforms. In the third quarter of 2025, this group grew 14% year-over-year and declined 6% sequentially, accounting for 42% of revenue.
In USD, smart edge platforms grew 23% year-over-year and declined 4% quarter over quarter. The year-over-year growth was mainly driven by a better mix in tablets with strong AI adoptions and global share gains across connectivity products. The sequential decline was mainly due to certain demand being pulled forward to the first half of the year. For the fourth quarter, we expect smart edge platforms' revenue to decline seasonally. However, we expect automotive to grow strongly in the quarter. Several of our e-cockpit customers in China will launch new car models across high-end and mid-range segments, driving our auto revenue to more than double year-over-year in the fourth quarter. We expect the trends to extend into 2026. In addition, our premium cockpit solution, CX-1, is also expected to begin volume production in late 2026, adding momentum for future growth.
Now, moving on to Power IC, which accounted for 5% of total revenue in the third quarter, declined 4% year-over-year and declined 10% quarter over quarter. In USD, Power IC grew 3% year-over-year and declined 7% quarter over quarter. For the fourth quarter, Power IC revenue is expected to decline seasonally quarter over quarter. Moving to the guidance in the fourth quarter, we expect revenue from our flagship smartphone, GB10 project, and automotive business to grow sequentially. These revenue strengths are expected to more than offset the seasonally weaker consumer electronics demand. With that, we expect our fourth quarter revenue to be in the range of NT$142.1 billion to NT$150.1 billion, flat to up 6% sequentially, and up 3% to 9% year-over-year at a forecasted exchange rate of $30.6 NTD to $1.
Gross margin is forecasted at 46%, plus or minus 1.5 percentage points, quarterly. Operating expense ratio to be at 31%, plus or minus 2 percentage points. With the midpoint of our fourth quarter revenue guidance, 2025 is expected to be a record year of more than $19 billion of revenue. For 2026, we continue to see great growth opportunities. Amid a tight capacity environment, we will strategically adjust our pricing and allocate our capacity among different product lines to reflect the increasing manufacturing costs. For the mid to long term, we are firmly on our growth journey. We're well-positioned with our leading key technologies and strong execution capabilities to capitalize on business opportunities brought by the ubiquitous AI. We believe our major growth drivers, including flagship SoCs, automotive, computing, and data centers, will continue to bear fruit in the future. This concludes my prepared remarks. Thank you.
Thank you, Rick. Operator, we are now ready for a Q&A session. May we please have the first question?
Yes. Ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press star key and 1 on your telephone keypad. Please ask your questions after your name is announced. Please limit your questions to two at a time to allow more participants to join the discussion. After two questions, we will move on to the next quarter. Should you have more questions, please press star key and 1 again to come back to the queue. If you would like to cancel your question, you may press star key and 2. 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 star key and 1 if you would like to ask questions. Thank you.
The first one to ask questions, Sunny Lin from UBS. Go ahead, please.
Hi, Rick, David, Jessie, thank you for taking my questions. My first question is on cloud ASIC. Obviously, last few months, stronger industry developments across the board. What's your current expectations on the addressable market compared with your prior $40 billion expectations for accelerators by 2028? How's your progress on expanding your client and project base? I know you mentioned you are engaging with the second project. How's the overall implication to your market share in the space?
Yes, we did talk about about $40 billion TAM for the data center ASIC revenue. I think about two years ago, with the current, or actually starting from last year, the CapEx increase from the CSP companies, we now are looking at, I believe, at least $50 billion TAM for the data center ASIC revenue. We certainly strive to gain a lot of new businesses, and I would say at least right now, we strive for 10% - 15%+ market share going forward in the next two years plus. Thank you.
Thank you very much. Two years meaning by 2028. If we use $50 billion total addressable market value, that would imply over $5 billion type of opportunities. Does that imply that you are on good track to expand your project base to more than one by 2028?
Yes, we have projects at hand. We feel quite confident that we certainly need to execute, and we will execute to get those products to our customers and to their data center. In addition, we believe we will be able to gain some other projects from different CSP companies. Thank you.
Thank you very much. Sorry, maybe just a follow-up. Given what you just shared, Rick, seemed pretty encouraging. For the new projects, because you talked about the first project going to mass production in 2026, and that's on track to $1 billion sales, how should we think about the other projects? What's the timing for revenue contribution? Will that be in 2027 or mostly from 2028?
As I said in the remarks, we believe the first project will generate multiple billions in 2027. Another project will start delivering revenue starting 2028 and beyond. Thank you.
Thank you. Sorry, my second question, if I may, would be on gross margin. Maybe for David. How should you think about the gross margin from here, based on the guidance for Q4? It seems like the midpoint is down a bit versus the prior 47% - 48% type of range. What's the decline, and for 2026, how should we think about the puts and takes?
I think for the fourth quarter, gross margin movement is mainly driven or impacted by the product mix or revenue mix in the fourth quarter. For next year, I think we are still strategizing about our overall capacity allocation and pricing strategy. I think given the overall semiconductors industry background, which I think everybody knows, for the leading edge node, which is A, it's actually somewhat limited capacity, and because the demand is very strong, and also B, the cost of those leading nodes are increasing. With that industry background, we need to allocate our capacity strategically to those higher value-added segments. In the meantime, we're actually working in the direction to basically pass on that increase of cost to our customers as well. For the gross margin next year, please give us some more time. We'll update later.
For fourth quarter, again, that's actually mainly due to the product mix and industry mix in the second quarter.
Got it. Thank you very much.
Next one to ask question, Laura Chen from Citi.
Hello. Hi. Thank you. Good afternoon. Thank you for taking my questions. My first question is also on the ASIC business. I'm just wondering how would MediaTek manage your R&D resource to work on the scalar AI growth? In particular, we have a great potential for the second customers. Will MediaTek consider any potential joint venture or investment? Also, I'm just wondering, we see that scale-up and scale-out are very important for AI data center buildup. What MediaTek can provide to gain more market share going forward? Thank you.
From an R&D point of view, we are definitely not only, we have been moving our R&D budget, which certainly includes the people and the financial means, into data center technologies, IPs, and execution capabilities. This has been going on for a while, but we continue to increase the investment. We have strengthened significantly our talents in the U.S. so that we can have also not only technical capability, but also the efficiency of the communication directly in the U.S. We are embarking on numerous IPs, certainly in the high-speed interconnect area, either across the chip or from chip to the rack. We're including the silicon photonics. We also certainly are working on the 2-nanometer process technologies, the 3.5D, very large reticle size chips for the packaging.
The company is fully committed to building the technology and the IP capability so that we can not only build the chips for our customers next year and 2027, 2028, but also the capabilities that we can provide for 2028 and beyond timeframe. And that's.
Thank you.
Thank you.
Thank you, Rick. Yeah, because it sounds quite encouraging for the next few years' growth. Just wondering, will those new technologies be developed by MediaTek internally, or are you also seeking other partnerships outside the company?
We do both ways. Many of the IPs we develop internally. In the photonics, for instance, area, we have strong partnerships with other major IP suppliers, not to mention TSMC on the packaging plus the technology, process technology. We are also certainly looking at opportunity acquiring talents outside of the company. If we do something, we'll let you know later. Thank you.
Thank you. My second question is about the smartphone demand into next year. As we see that the resource in the tech supply chain has been moved to the AI data center, including foundry, memory, substrate, etc., do you see any impact on your customers' order pooling momentum into next year or product portfolio planning? Would that also impact MediaTek indirectly, given that inflationary environment? How should we look at the smartphone shipments outlook, and how would MediaTek help your customers mitigate the risk at the same time to maintain your gross margin and also shipment outlook?
We've been maintaining our position about the smartphone shipment, unit shipment. Overall, about low single-digit growth, and we have not changed that view. The changes, of course, happen mostly in the distribution of those shipments among, from the very high, from the flagship premium to the mainstream entry. As we have said before, there is no question about a bit of the moving toward both ends of the spectrum. We have been very successful in building our position in the flagship and the premium, like I said. We will continue doing that. What we have seen so far is our OEM customers, they have been able to also still moving very good quantity in their sale out using our latest SoC, flagship SoC 9500. They are also, I think, making adjustments in their pricing, and by that, I mean moving up in their pricing.
We recognize also some of the challenges in the DRAM supplies and the other pricing environment. What we believe is with our value brought by the 9500 chips and our overall system advantages, we will get our value for our chips, as David just kind of outlined in his answers a few minutes ago. Thank you.
Okay. Great. Thank you.
Next one to ask question, Gokul Hariharan, JP Morgan. Go ahead, please.
Yeah. Hi. Good afternoon, Rick, David, and Jessie. My first question is on the data center ASIC as well. Recently, there have been so many announcements coming through on data center ASIC project win. So far, it seems like it's very much a winner-take-all kind of market, given one vendor seems to be getting pretty much all the newly announced projects so far. What are you observing here talking to some of these? I think you're already talking to a couple of TSPs, if not more. What is the feedback you were getting from these companies that gives you the confidence to kind of have a more balanced kind of market share profile in this market? Secondly, also for this first project, could you update a little bit on what is the exact status? Given we've had a bit of kind of delay, it looks like.
What is the exact status right now? Has the chip already been kind of taped out? When we talk about a billion-dollar revenue next year, is that all turnkey-related revenue, or does it also include some of the NRE revenues that you would be looking? That's my first question. Thank you.
I'm going to try to answer your first question. I think there is, I mean, we all have seen the announcement, either from multiple TSP companies, plus OpenAI, etc., etc. I certainly don't need to repeat, simply because that scale of the CapEx. I think it is pretty, I think, natural for the TSP companies to look at their risk exposure, plus the TCO requirements for their investment. The ASIC design, which can optimize their own workload, plus the flexibility of the business model that we provide to enable, to gain our business and also enable their capabilities, I think it's also a very good business model and a business decision for them. We feel comfortable. We understand this is a very difficult and challenging task, but we are confident that we can execute well. For the second question, we're talking about?
I think for the second question, like our CEO said, we feel fairly comfortable. We're passing a certain key milestone. Basically, we've been taking our test photo already. The revenue we're talking about next year is not including NRE. It's purely the revenue for the shipment.
Understood. That is very clear. Thank you very much. Second question is, in terms of the business model, I think previously for data center ASIC, you had outlined you want to do. Second as well as previous two-in kind of projects. Is there any thinking about potentially trying to move down the curve and also start thinking about taking some role in some purer backend design projects to build up scale? Given the number of projects available are probably still quite few in number, is there any thinking strategically to kind of go down to those kind of projects as well, even if margin threshold might be a little bit lower, but still gives you a lot of dollar profit from those kind of engagements?
We understand the different business models. I must say, in our foreseeable future, we will focus on our current business model, which we believe provides a really good balance between a very, sometimes very high-cost or technology-provided or design-provided business model and a very kind of a much lower value-added backend turnkey service. I think we have the right balance that will benefit our customers and ourselves, MediaTek, for quite a while. Of course, there's some really special situation we can consider. Right now, I must say we are pretty fully occupied to deliver what we are already awarded. Thank you.
Just on a follow-up on that, do you think, let's say, a customer goes to GDS2 in kind of projects from currently they are basically full spec in to the largest ASIC vendor out there? Do you think the customer stops there, or do they continue to insource more and more of the IP and basically convert that into a purely backend service kind of model like one of the TSPs already doing?
Again, this is a strong function of different companies and different companies' philosophy. They're denying complexity. I cannot give you a definitive answer as to which models each customer would like. I'm sure the customer would like to be able to contribute more values through their own means. Overall, at the end of the day, we understand that. We also understand from a customer point of view, there are certainly some pretty high, still strong value-added areas that they are. They probably decide not to do it themselves because, again, you have to weigh the investment and the timing. The schedule at the end of the day also is not only critical, but it's probably the most important factor. I think, again, our model provides the balance of the capability, TCO, and the schedule. Thank you.
Perfect. Thank you.
Now, asking question is Charlie Chan from Morgan Stanley.
Hi. Good afternoon, Rick, David, and Jessie. My first question is about your AI smartphone. It was great to hear that the selling was very strong. Actually, I attended your product launch events in Shenzhen, and your presentation and marketing was great. I'm wondering what is the so-called sale through so far? You mentioned that you hope to gain some value from your customers, right? We're also hearing some price competition from your U.S. competitor into next year in high-end segments. Can you help us to understand, one, you said whether AI smartphone really has that demand? Two, you said whether they can really offset some so-called pricing pressure from your U.S. competitor in high-end? Thank you.
Yeah. Charlie, I think what we see, the AI smartphone, especially for the flagship smartphone demand, is very solid. I would say it's good, especially with our new product launch. I think we are still seeing we continue to gain market share. Taking fourth quarter, for example, right now, the fourth quarter guidance we give out is actually 0% to 6% growth. I think this anti-seasonal growth, a big part of the reason is actually we see a fairly strong smartphone shipment starting in fourth quarter this year. Of course, that actually leads to some of the gross margin movement due to the product mix. As far as for the competition you talk about, the competition has been there for actually forever. We've been dealing with that kind of competition for a long time.
Especially given the overall supply situation, we actually think there's an opportunity for us to manage the overall capacity allocation and also balancing the pricing going forward. It's challenging. It's not easy, but I think that's the direction we are driving so far.
All right. Thanks, David. Just a very quick follow-up on your first question's answer. I do have a second question. You mentioned that the flagship kind of shipment is going well. Is that kind of dilutive to your corporate margin? Because your corporate margin is slightly down to 46%. You mentioned about a product mix. The question number one is a follow-up. My second question, maybe to Rick, is that you mentioned about the second big customers in ASIC. Is this project win confirmed, or there's still some uncertainty? The second project is more like your kind of hope or plan, but it is not like a done deal yet. Thank you.
Maybe answer the first question first. Yes, actually, Charlie, I think like we explained, the gross margin movement in the fourth quarter is partially due to the product mix, i.e., the smartphone. Yes.
Thank you.
Second question. I really cannot elaborate too much, but as I said in my opening remarks, you are engaging with high confidence. Thank you.
Yeah. Rick, what would MediaTek's key differentiation be besides the TCO? Following Gokul's kind of question, it seems like there's a dominant player kind of winning essentially almost all the high-end projects. Can you elaborate a bit recently? What gives you confidence, and what is MediaTek's key differentiation? Thank you.
I think I kind of articulate our business model and our capabilities. I probably don't want to spend too much time again, but I really think the best evidence is what we're doing now, what we're executing. We are getting good projects and with really strong revenues to come. We have done that in, I would say, a fairly short two years' time. I believe from that point of view, we have gained a lot of credibility in the market among different customers. Thank you.
Sure. Thank you. Thanks, Rick.
Next one to ask question, Bruce Lu from Goldman Sachs.
Hello. Thank you for taking my question. I'm happy to hear that you guys have pretty good progress on the GB10 projects. Can you tell us a bit more about the business model you have with NVIDIA, the user case for GB10, and what kind of impact it's going to be when NVIDIA invested in Intel, which theoretically they can do more in x86 architectures in this specific domain?
Yeah. Bruce, I think GB10, basically in the business model, we provide the CPU and also the overall system integration and getting a GPU chiplet. The final product go to market will be managed by NVIDIA. There's a long way to explain. This is actually the NVIDIA product. We are their design service and ASIC partner. In terms of segmentation, I believe GB10 right now is being considered about the supercomputers. You can run it on a single GB10. You can run more than 200 billion parameters. You can even stack it together to run a 400 billion parameter. Probably that's the best workstation-like personal computer, personal supercomputer you can get. The product is actually in the market, up and running already. I think both from the product segmentation perspective and also from time to market perspective, we actually have the advantage.
I think the second-generation product right now, the partnership is also ongoing. We do believe both from the technology perspective and also the speed, i.e., the time to market perspective, we are actually very competitive as a partnership with NVIDIA. I hope we did also. Ask about the NVIDIA Intel announcement. Number one, of course, we cannot really answer such questions. We're not the party. On the other hand, we read, and from what we understand, you just heard from David, the chip that we collaborate with NVIDIA, the GB10, or there may be a different name for other different applications such as in the PC field. The segment is quite high. This is a really powerful chip. We don't really believe the chips that we build together, the segment of which that we can pursue, will be impacted by the other announcement. Thank you.
A quick follow-up. What is the addressable market for this product in 2026 and 2027?
It's really, what do they call that, professional.
Professional user.
Yeah. Professional to high-end, very, very high-end. Yes.
I see. Okay. My second question is going back to the profitability, right? If you exclude the one-off impact from third quarter, the company's gross margin has sequential decline for like five quarters already. We understand all the pros and cons for the product. If you look at your gross driver, which is flagship models, autos, even for the ASIC, which might have a billion or multibillion dollar revenue in 2027, which are non-margin accretative, when can we see the stabilization of gross margin? Given that the gross driver are all margin dilutive, or we need to shift focus to focus on operating margin in the future?
Bruce, I think we kind of explained that before, especially for the ASIC business model. The key for the ASIC business model, which is very operating margin accretative starting from day one, because the business model is natural and also sometimes actually it's a different arrangement. Judging from the gross margin ratio, probably that's not the best way. It's really just the operating margin ratio, or in another way, which is ROI, is actually the enhancement. Once we start to revenue, especially with the meaningful revenue. On the other product line, on the other hand, we're just dealing with about the increasing cost for the supply chain and also the limited capacity. We just need to strategically allocate our capacity and also try and do our best to pass on that increased cost to our customer. We are working on this direction.
For the modeling purpose, given that you have multiple billion revenue coming from ASIC in 2027, we should model sequential margin decline for the gross margin, but it should be accredited for the operating margin. Is that a right understanding?
Yes. I think the big revenue for 2026, we're talking about $1 billion from the ASIC. For 2027, we just give out the guidance, it's going to be multibillion dollars. For 2027, because we still have some time, we will provide some guidance or heads-up probably sometime in 2026. In general, that's the right direction.
Understood. Thank you.
Next one to ask question Hess Liu from Bank of America. Go ahead, please.
Yes. Hi. Good afternoon, Rick, David, and Jessie. Thank you for taking my questions. My first question is regarding your profitability for next year. With growing competition pressure in the mid to low-end smartphones, I'm just wondering if you are able to fully pass on higher manufacturing costs to your customers, or if you could just share your smartphone strategy. Would you prioritize sales growth or margin stability when you face more pressure from both your suppliers and competitors? Thank you.
I think our overall strategy is actually trying to find the best value for our limited capacity. With your question, basically, we're trying to prioritize the profitability over the market share. I think that's our goal.
Okay. We could actually assume that your smartphone business on the profitability, on the margins next year would actually be more stabilized into 2026 versus what we have been seeing in the past few quarters for 2025, right?
I think for next year's gross margin and also the pricing, right now we are still in a stage working with the market and the customer directly. We will provide the guidance next quarter.
Okay. Just a quick follow-up on the margins questions. With much higher design and also manufacturing costs on the advanced nodes, so beyond 2-nanometer, will you still consider to migrate as aggressively as before? If you could share your known migration strategy going forward. Thank you.
That's being looked at very, very closely and carefully. I mean, it is no secret that the more slow, at least from a two-dimensional point of view, is slowing down. Each generation still provides values, but it's not as strong as before. As in 2-nanometer, certainly we believe the right thing to do. The next node, we're working closely with also our foundry partner to see what is the best way for both parties. It's not fully decided yet. Thank you.
Should we consider if your design service products or your own products will be the one migrating the earliest to the most advanced nodes? Would you give some indicator on that?
Up to 2-nanometer, yes. After 2-nanometer, as I said, it's being looked at very closely and carefully. We cannot comment definitively yet.
Okay. My second question is just regarding your long-term strategy. The traditional market demand growth could still be pretty mild in 2026, and ASIC would be the next key growth driver for the company. I was just wondering if you could share your target for the next two to three years. How much of your revenue is going to come from the edge applications versus the cloud business?
Yeah. I think for next year, 2026, I think we already gave our guidance for the new revenue. I should say for the data center revenue, because next year will be the first year we start to run. It will be $1 billion, which means next year, a big part of the revenue on the growth side still will be on other revenue as well. Overall, if you only see about the gross incremental revenue, if I use this term, a big part of that will be data center, and also the rest of that will be the traditional or the existing business. I think that's the guidance. Once we get into 2027, most likely, I think the data center will start to pick up. It will become one of the major incremental revenue contributors.
Yeah. Just a quick follow-up to my second question is that if you could share your R&D intensity, which means your R&D expense as % of your sales to each of the business. For cloud versus edge, I would assume probably in your cloud business, the R&D intensity will be higher, right? In the mid to longer term, two to three years view, do you think your R&D expense as % of your sales will actually be higher than what we are seeing now?
No, actually. I think the R&D spending in terms of the revenue ratio, I think, will stay, probably even will come down a little bit, mainly due to the revenue growth, yeah, sales growth.
Okay. Thank you.
Thank you, Hess. Our next one to ask question, Brett Simpson from Arete.
Yeah. Thanks very much. I have a two-part question on MediaTek's kind of structural profitability. First of all, in the near term, if I just look at the guidance for Q4, you have flagship smartphones rising in the mix. You have a solid premium automotive ramp-up. I mean, it feels like the mix within the business is getting richer in Q4. You have an FX tailwind sequentially, yet you're guiding down gross margins. I just want to understand the dynamics as to why this is happening. Are you driving pricing aggressively in flagship? Is that why we're seeing profitability sort of decline sequentially? Any help there would be useful. The second part, kind of looking more longer term at MediaTek's structural profitability. If I just sort of step back, you have a relatively low gross margin and a high OpEx to sales versus your large fabless peers.
If I look ahead, we have a structural wafer price hike coming from TSMC. You're moving flagship smartphones to 2-nanometer. You have rising ARM royalty rates. It feels like we're heading into a period of high inflation in a price-sensitive smartphone market. Are you able to pass on these cost hikes? How should we think about structural profitability given all these dynamics that we see long-term? Thank you.
Yeah. I think for fourth quarter, like you say, both for smartphone and automotive, we see a pretty strong growth. Just in terms of the magnitude or contribution, the big part of that still belongs to the smartphone. The gross margin movement is, like I explained earlier, for fourth quarter specifically, mainly due to the mix, i.e., actually the smartphones bring down the gross margin a little bit. I think that's actually for the fourth quarter. For next year and ongoing, like you say, we see the inflation on the semiconductor supply chain. On the side of the inflation, we also see some supply constraint, actually very tight supply along the whole supply chain. We are in the process to decide about the capacity location and also passing on the inflation to our customer. We're in the process of doing this right now.
Sorry, David, just to clarify, when you say smartphones is lower gross margin than corporate average, is flagship lower than corporate average gross margins? Thank you.
Yes, for the fourth quarter, yes.
Okay. I had a second question for Rick. I think there's some confusion in the market about MediaTek with the Dimensity 9500 SoC specifically, whether or not MediaTek is a CSS licensee with ARM. I ask because ARM is certainly signaling that you are a CSS licensee, and that would imply a 10% royalty rate is being paid or something in that general vicinity, which is structured a lot higher than we've seen historically. I'm just wondering if you can clarify this position because we're a little bit confused here. Thank you.
The confusion is not from us, Brad. It's from our supplier. As far as we understand, we are not a CSS licensee. We are not. I just want to be very clear. Thank you.
Okay, thank you.
Thank you, ladies and gentlemen. In the interest of time, we are going to take the last one to ask questions. The last one will be Arthur Lai, Macquarie. Go ahead, please.
Can you hear me?
Yes.
Thank you, Rick and David and Jessie. First, congrats on the big win in the ASIC tape-out. I sense that the investor actually underappreciates your company has a very unique position. Number one, the strong partnership with NVIDIA, and also, second is ASIC XPU and scalability. This question is to Rick. Can you share with us how you get the leverage between these two camps, among NVIDIA and also the TPU? I hope you can give us some viewer strategic thinking in the next two to three-year time horizon. Thank you.
Of course, I'm sure you understand. The nature of the relationship MediaTek has with NVIDIA, which focuses on actually both on the edge side. For one, it's the high-performance CPU, GPU, chiplet design, and application in the computing and automotive side. They are most, they are in the edge side. There is certainly now effort between the two companies to see whether NVIDIA's very strong networking IPs can be utilized in the ASIC business model. That work is ongoing. We certainly cannot comment further. Again, from MediaTek's point of view, the ASIC data center, ASIC business, and the business model are ongoing, and we are reaping fruits in the near future, as you said in your question. That strategy was formulated in the last two, three years, Andy, and that strategy continued to progress. We feel actually really much more confident now compared to before. Thank you.
Thank you. No more questions.
Yes, ladies and gentlemen, we thank you for all your questions. I will hand it over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.
Ladies and gentlemen, this concludes MediaTek 2025 fourth quarter conference call. An audio replay will be available in one hour after the call at the investor section of MediaTek's website. We would like to thank you for your participation, and you may now disconnect.
Yes. Thanks again for your participation in today's conference. You may now disconnect. Thank you again, and goodbye.