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Dear investors, analysts, and media, good afternoon. Welcome to Novatek 2021 second quarter online investor conference. This is David Chen, Vice President and Company Spokesperson. I'll be the host for today's conference. Hope everyone is doing well, healthy and happy. Even though Taiwan pandemic situation has improved, but for security reason, we have decided to maintain online, and this enable our foreign investor to be able to join in too. Please be reminded that all questions can be sent in by text. The agenda for today's event will be as follow: first, I'll be reporting Novatek second quarter results in English. After that, our Vice Chairman, Mr. Steve Wang will provide more details on our Q2 results and Q3 guidance. Following that will be our Q&A session. As mentioned earlier, if you have questions, you can send them to us by text.
Our IR Director, Mr. Tony Tseng will be processing and reading out investor questions one at a time, both in English and Chinese. Our Vice Chairman, Steve Wang, CFO, Mr. Chou, and myself will answer all questions in Chinese and will be translated into English later. As usual, please take a look at our Safe Harbor notice. Let's start with our 2021 Q2 financial highlights. Our net sales in Q2 was TWD 34.11 billion, up QoQ 29.37% from TWD 26.37 billion, YoY up 83.29% from TWD 18.61 billion in Q2 2020. Net gross profit in Q2 was TWD 17.17 billion, up 49.19% from last quarter TWD 11.51 billion, up 175.52% from TWD 6.23 billion in Q2 2020. Our gross margin in Q2 was 50.33%, up 6.69 percentage point QoQ from 43.64%, YoY up 16.85 percentage point from 33.48%. Our operating expense in Q2 was TWD 5.18 billion, up 20.45% QoQ from TWD 4.3 billion, YoY up 68.84% from TWD 3.1 billion.
Q2 operating income was TWD 11.99 billion, up QoQ 66.31% from TWD 7.2 billion, YoY up 278.8% from TWD 3.17 billion. Our OP margin in Q2 was 35.16%, up 7.81 percentage point QoQ from 27.35%, YoY up 18.15 percentage point from 17%. Q2 net income was TWD 9.79 billion, up QoQ 66.57% from TWD 5.88 billion, YoY up 282.76% from TWD 2.56 billion. Overall Q2 EPS was TWD 16.08 versus last quarter, TWD 9.66, a Q2 increase of TWD 6.42, and last year Q2 EPS was TWD 4.2, a YoY increase of TWD 11.88. Please take a look at our Q2 consolidated income statement. Next slide is our first half consolidated income statement. Our net sales in first half was TWD 16.48 billion, YoY up 70.35% from TWD 35.5 billion in first half of 2020. Net gross profit in first half was TWD 28.67 billion, up 142.2% from last year, TWD 11.84 billion. Our operating expense in first half was TWD 9.47 billion, up 55.97% from TWD 6.07 billion.
2021 first half operating income was TWD 19.2 billion, up YoY 233% from TWD 5.77 billion in 2020. First half net income was TWD 15.66 billion, up YoY 228.48% from TWD 4.77 billion last year. Overall first half EPS was TWD 25.74 versus last year first half, TWD 7.84, YoY increased by TWD 17.9. Next is our sales breakdown by product line. SMDIC, which is the small and medium driver, accounts for 36% of our sales. SoC, which is all non-driver, accounts for 34%. The LDDIC, which is the large driver IC, accounts for 30% of our total sales. We have just released our July sales, which is TWD 12.5 billion, month-on-month up 7.94%, YoY up 85.35%. SoC accounts for 34%. Driver accounts for 65% of the total revenue. 2021 accumulated revenue, January to July, is TWD 72.98 billion, YoY up 73%.
Comparing our 2021 and 2020 monthly sales, you can see that there is a significant YoY growth for the first seven months of this year. Next, let's look at other key financial numbers. Our cash and cash equivalent in Q2 was TWD 36.11 billion, increased QoQ by 24.21% from TWD 29.08 billion. YoY increased by 63% from TWD 22.15 billion. Account receivable, Q2 was TWD 21.4 billion, increased QoQ 32.8% from TWD 16.11 billion, and YoY up 64% from TWD 13.05 billion. Inventory, Q2 was TWD 10.82 billion, QoQ up 11.55% from TWD 9.7 billion. YoY up 14.41% from TWD 9.46 billion. Short-term loans, Q2 was TWD 7.5 billion, QoQ increased by 415% from TWD 1.46 billion, and increased YoY by 565.54% from TWD 1.13 billion. Basically, mainly for the natural hedge. The following slide is a recap of our recent major events.
AGM approved the distribution of a TWD 15.6 per share cash dividend, ex-dividend record date on August 23, and the dividend will be paid on September 11, 2021. Novatek was selected as a constituent stock of FTSE4Good TIP Taiwan ESG Index, and also the TWSE RAFI Taiwan High Compensation 100 Index, and also the TWSE RAFI Taiwan Employment Creation 99 Index . Now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q2 results and Q3 guidance. [Foreign language] Steve.
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Thank you, Steve. Regarding the 2021 Q2 revenue, after experiencing above seasonality in Q1, Novatek Q2 business continued to grow and has exceeded our Q2 guidance high bar. The main reason as follow: our SoC related products unit shipment increased significantly, and also our driver IC demand continued to be strong due to Covid work from home demand, and this includes the large, medium and small sized driver. As for the Q2 margins, Q2 margin was 50.33%, up 6.69% for Q2. This is mainly due to the ASP adjustment to reflect our rising costs, and also the strategically adjusted our product mix. Looking at Q3 outlook, as we can see that most countries have speed up the vaccination process. Hopefully the pandemic will soon be contained and our lives return to normal, and economy can be back on track for positive growth.
As we enter Q3, which is normally a high season, we expect overall demand to continue to grow. We see that the overall foundry supply is still very tight with limited expansion. Currently, we are still unable to fulfill the market demand. Both our driver IC, SoC lines are expected to maintain growth momentum. Based on this, our guidance for Q3 is as follow: revenue will be TWD 37.8 billion-TWD 38.8 billion at an exchange rate of 1 to 28. The gross margin will be from 48%-51% range. Operating margins 33%-36% range. If you look at more in details, we are expecting both SoC and driver to have similar teens growth. The large panel driver will be a little bit stronger than the small and medium size.
The overall SoC will be similar to this medium and small size driver. Next, we'll switch to Q&A. I'll turn the call to Tony. Tony will be reading out the questions our investors have for us.
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Management mentioned about your gross margin, could you provide the amount for your NRE in the second quarter, also provide some explanation for your reduced operating expense ratio in second quarter?
OK, the second quarter NRE is around TWD 90 million, nine zero million. OK. The question for the OpEx. Basically, if you look at our OpEx, even the percentage seems to be down, but if you look at QoQ, the absolute amount has increased by TWD 878 million QoQ, YoY increase by TWD 2.1 billion, and a lot of these are mostly on R&D.
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You had impressive growth from SoC in the second quarter in terms of both quarter-over-quarter and the year-over-year. Would you like to provide more color among your individual major product line at the SoC in terms of the contribution from the shipment versus ASP as well as the gross margin trend across different lines?
Basically what we are seeing is that in Q3, I mean Q2, SoC lines, all the product line, no matter whether it's the revenue or gross margin has improved.
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Would you also like to provide some shipment number for your OLED driver and the TDDI in the second quarter in terms of quarter-over-quarter? How about the year-over-year growth in the first half for these two products and any view for your whole year shipment target?
Our OLED DDIC has returned to normal momentum. We are expecting 2021 to outgrow 2020 in terms of unit shipment. We are expecting second half to be stronger than the first half. Q3, we are expecting our unit shipment to have a record high for the OLED DDIC. As for TDDI, as everybody knows that in 2021, there is a wafer constraint, so the growth will be limited.
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We notice your inventory dollar continue to rise quarter-over-quarter to a new record $10.8 billion, which is up 12% quarter-over-quarter. Could you provide some color on your inventory?
This is basically because of the SoC line, has a very good momentum growth. As you know, the SoC lead time is relatively longer than the DDIC. Basically, this will turn out the inventory level will go up because of the lead time.
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It makes wonder why you expect to enjoy higher quarter-over-quarter growth from large size driver than your small medium size driver into Q3.
Basically, if you compare the large and the small-medium driver, the small-medium driver is relatively weaker than the large. Because of the large size TV, there's some shortage on some of the components and some mismatch. Basically, a lot of the panel makers are moving their panel to the high-end product. That's basically helping the high-end product to go up.
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Just wondering, can you give more color on your gross margin trend in Q3, as well as about the price hike for your major product line?
As Steve just mentioned, for DDIC, our cost has gone up. Going forward, we'll be reflecting the cost to our ASP.
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First question is about overall demand across different major applications. Particularly, we heard some weakness from smartphone and TV over the past couple of months. Where are some potential slowdown from the PC or tablet space?
What just Steve mentioned is that, we can see that the smaller size TV is relatively weak, but the larger size TV demand is very healthy. What we are seeing now is that the Chromebook demand has weakened a bit, but commercial notebook and the automotive are still strong. Smartphone in China, India, Southeast Asia were weak in Q2 due to COVID and some of these issues. We are seeing that new models are ramping up in Q3. Also as mentioned earlier, the current situation is that the supply is still very tight and we are still not able to fulfill the total demand.
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Just wonder if the growth momentum is slowed down, how will Novatek to react to reduce the potential impact? Well, the core value of IC design house is technology and quality. Besides short-term profitability, Novatek is working hard to enhance our long-term position in a few areas. In technology-wise, we are developing our core technologies to support our customer. In product-wise, we are expanding our product lines and applications and bundle solutions and to enhance the customer long-term stickiness. In terms of customer-wise, we try to establish long-term and stronger partnership with our suppliers and our customers, and also expand our market to various areas. Maintaining long-term health of a market is of utmost importance for Novatek. Novatek is committed to support our customers and dedicated to work alongside with our customer to face the challenges, to gain the support and trust.
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We noticed two of your major coin panel companies just reported their numbers. Just wonder if you can share their inventory situation as well as the correlation between their panel price and your key components, such as driver IC price trend going forward.
We think the panel inventory currently is still very healthy, so we're not very worried about that. As you know that for the panel maker, they are also very dynamic in terms of adjusting their production line, allocating to different products. Basically, if there's any changes, for example, if the smaller size is weak, they will relocate their capacity for the larger size. In terms of driver IC ASP, this is basically more related to the foundry tightness. In case if the foundry price goes up, basically that will directly impact our ASP.
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You just provide some update on foundry supply in second half as well as the 2022. Also had a lot of discussion on the potential impact on the Nexchip expansion. Could you also provide some update?
Looking at the driver IC process, it is usually 8-inch and also 12-inch, the legacy process below 28 nanometer above. Basically, the legacy process, no matter 8-inch or 12-inch, currently is still very tight, and we don't see it will be eased till the end of this year. We don't see any chance of becoming loose. Regarding 2022, the supply, we are already working very closely with our supplier. So far, what we are seeing that is that even in 2022, the supply is still tight, and we don't think it will be able to fulfill our customer demand at this moment. As we look at the other question that asked about the Nexchip, we don't think there will be any major impact in short period of time, because as you can see, all major product lines are experiencing shortage, not just DDIC.
If you look at the capacity as a whole, the shortage will not be resolved in short period of time. Foundry supplier will also be thinking about adjusting to more variable in a product mix for various different applications. At this moment, we also notice that besides foundry, there are also other materials or components like some substrate, PCB, all these are also in shortage. This is also some of the reason why we think that for our foundry partners, they'll be always very dynamic to adjust some of the extra capacity for other, if there is any shortage in other area, they will do some adjustment. We don't think there will be any impact.
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Okay. Steve just mentioned that looking at quarter four, we don't think the supply tightness will be resolved. Especially on the wafer side, it will be tight, and we don't expect it to be resolved in a short period of time. In 2022, that's for next year, I think the situation will continue. The tightness will still be there, and currently, we don't think we'll be able to 100% fulfill our customer demand based on the numbers that we have received at this moment.
[Non-English content]. Management mentioned about the outlook from the supply side, but just wonder how about on the demand side, which imply a quite stunning price trend as well.
Yes, as we mentioned earlier, besides supply, the demand is still very strong and steady, so we are expecting the ASP should be solid.
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You mentioned about TDDI briefly earlier, but would you provide more color on particular on the OLED side?
Yes. I mean, we talked about the TDDI, as regarding OLED, everybody knows that the China OLED panel capacity is increasing. Because of that, I think a lot of the smartphone players will be willing to adopt OLED panels more and more. Therefore, we are expecting the penetration rate of OLED panels to increase as we move forward. For Novatek, what we'll be doing is we'll be increasing our R&D into the OLED product line, try to develop more products for our customers. As we mentioned earlier, we are expecting the second half of this year, the unit shipment for OLED driver will be greater than the first half. We are expecting this coming quarter, Q3, will have a record high unit shipment for OLED drivers.
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On the OLED driver side, I have some follow-up questions, such as your progress at the 28 nanometer, as well as TDDI, or for the competitive landscape, such as HiSilicon in China.
Well, looking at our OLED TDDI, currently we already have our sample ready, and we are working very closely with our panel maker to develop this technology and to have it in mass production. Currently, we are working closely with our customer. As for us, we'll continue to enhance our technology, not just the IC chip design, but also in terms of the process. Currently, we will continue to use more 28 nanometer and to enhance our chip performance moving forward to support our customer in the OLED space.
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FTDI。
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OK. As for small media side driver, could you also provide an update on your auto driver as well as new products such as under display, OLED fingerprint, your wearable OLED driver, and also your FTDI?
Okay, I'll explain one by one. Regarding the auto pure driver, currently the demand is still very healthy and strong. Because of the foundry capacity shortage, we aren't able to fulfill the demand 100%, so we're still working on it. As for the automotive TDDI, we are already engaging with our customer, designing in and fine-tuning those solutions. We are expecting end of this year it will go into mass production. As for the wearable device, currently our wearable solution is designing in, and we are expecting in Q3 it will be in small volume production. As for the fingerprint, because of the module player delay, it has delayed a little bit, but it's already in mass production now. We're expecting to have huge volume production in Q4 this year. Regarding the FTDI, since the panel maker is using LCD, and they need more mask layer.
What we are seeing now is that FTDI still has its value, so we are working very closely with our customer to design those solutions into their panels.
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We switch to the SoC lines. You have already delivered very impressive growth for the first seven months in 2021. Could you provide some outlook for 2022, particularly on the surveillance side?
Well, as mentioned about surveillance, we are making very good progress both in the front end and the back end, we are engaging very closely with our customer, we are expecting this product line to grow moving forward. As I've mentioned earlier, we still face a wafer shortage, the capacity constraint for all the product line, including surveillance. Nevertheless, we are expecting our surveillance product line to grow moving forward. On the other product line, for example, recently, we are seeing the LED public display, the large format display, is also picking up momentum, we are expecting this business to grow. Besides that, our TV product line, we have share gain this year, market share gain. Moving forward to next year, I think the demand will still be very healthy.
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Now we switch the question to the large size driver. Investors also wonder what are the reasonable gross margin for large size driver going forward, given the recent across-the-board amount, price hike and margin rise. Also, could you provide some color on your competitive landscape, particularly from China?
Well, as mentioned earlier, the large panel driver product line is also facing the wafer shortage issues, a constant limitation. Even though there is a limitation, but we are still maintaining our market share in 2021. From competitive side, what we are now doing is that we are bundling our solution and we are trying to supply a total solution for our customer so that they can resolve their mismatch issue. As you know, there are a lot of different components or different IC chips required for a display. Novatek is one of the very few that can supply the total solution, all the various IC chips required for the display system.
What we are doing is we are trying to supply them the bundle solution so that they won't be caught up in the mismatch situation. From the system level, we are able to supply them value-added differentiation solution so that they can have a better performance, better cost, better competitive solution. If you look at the large trend driver, we no longer look at it as just a pure driver, it's more like a system solution. Moving forward, we'll work very closely with our customer, not just drive pure driver, but as a system level solution. For example, a lot of the high speed interface, eDP 1.4, even the power consumption, we add all these into the solution to help our customer to compete in the market.
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OK. We got a lot of question about the gross margin trend in Q3. Because the mean point is that 49.5% is lower than the 50.3% in the second quarter. They just wonder if our price hike could cover the cost increase, and the gross margin on individual product will at least maintain into the Q3.
Well, the question is whether the ASP can cover our cost. OK. Basically, if our supply cost goes up, we will work very closely with our customer to reflect the cost. Of course, the whole process is a rolling process, so it's difficult to give a very exact number. Basically, we don't think the third quarter margin will be lower or anywhere getting worse. We do expect to work very closely with our customers, so the margin should be okay.
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OK. The next question also about the third quarter guidance. Because based upon your guidance for gross margin on the Operating expense, Operating margin looks like Operating expense ratio will be stable quarter-over-quarter. Would you provide more color please?
Well, basically OpEx will increase. I mean, in actual term it will increase, but the growth rate will be lower than our revenue growth.
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Any more questions?
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Just wonder if the management could provide more overview for 2022 outlook. You mention about some way to improve your competitiveness, could you also provide more color on that?
Well, we are not worried about the demand, but we are worried about the supply more than worrying about the demand, because currently the wafer shortage is a constraint, is the main thing that really impacts the growth. We are aggressively working with our foundry partners to try to increase the supply, and we are still working on it. As for the other growth, we mentioned earlier, OLED definitely will grow, and there's no doubt about that. TDDI, basically, the growth will depend on the wafer supply. Currently, I think we still have some wafer constraint on the TDDI.
You mentioned about your positive outlook for your OLED driver. Over the past couple of months, we also heard some discussion for potential outsourcing from Korean customer in the future. Novatek as a leader in this area, could you also provide some color here?
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[Foreign language]. Well, the question was about the potential Korean customer on the OLED. Well, Steve just mentioned that for Novatek, our target is all the major smartphone tablet players. We aggressively working with everybody. It's very difficult for us to specifically talk about a specific customer.
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Not just the smartphone that will be adopting the OLED display. What we are seeing now is that even the tablet, and even moving forward, notebook, potentially will be adopting the OLED solution also. Any more questions?
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OLED TDDI.
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Again。
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Some follow-up on OLED. First, wonder if you can give some quantitative guidance for your OLED driver shipment growth next year? Two, could you also talk about the potential contribution or penetration for your OLED TDDI next year?
One thing for sure, our OLED TDDI will grow next year, no doubt about that. As to what extent, how much, or how many percent, it's difficult. It all depends on the wafer supply. We are working on it. As for OLED TDDI, it really depends on the panel maker, the progress. We are working very closely with our customer, engage with them in developing that technology.
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We would like to wish everyone healthy, stay safe during this pandemic, and hope everyone will be outperforming the market and getting better. Okay, we'll end our investor conference today. Thank you so much for joining in.