Good afternoon, everyone. I would like to extend a warm welcome to everyone for joining Novatek Microelectronics Corp. 2025 Second Quarter Online Earnings Call. This is David Chen, Vice President and Company Spokesperson. I'll be the host for today's conference. Joining me on the call are our Vice Chairman, Steve Wang, our CFO, Sheng-Cheng Chou, and our IR Director, Tony Tseng, and Ivan. The agenda for today's event is as follows: First, our Investor Relations Director, Tony Tseng, will report on Novatek Microelectronics Corp.'s second quarter results in English. Following that, Steve Wang will provide further details on our Q2 results and guidance for the third quarter of 2025. Next, we'll proceed with the question and answer session. We have already received some questions from our investors. If you have any additional questions, please feel free to submit them online.
Tony Tseng will review and read each question both in Chinese and English. Afterwards, our Chairman Mr. Wang , Sheng-Cheng Chou, and CFO, and myself will answer all questions in Chinese. These answers will then be translated into English. We encourage your active participation and look forward to addressing your concerns. Now, I'll hand over the time to Tony Tseng to report on our Q2 results.
Thank you, David. This is Tony Tseng. Let's first take a look at our page 4, our safe harbor note. Thank you, David. Now, the next page shows our consolidated sales of NT$26.2 billion in the second quarter, which is down 4% quarter over quarter, mainly due to the impact from NT$ appreciation, but still managed to grow around 4% year over year, mainly due to our strong growth at the OLED driver ICs. Next, this page shows our gross profit. Our gross profit of NT$9.5 billion in the second quarter is down 12% quarter over quarter, and also around 9% year over year, mainly due to the lower gross margin. This page shows the gross margin trend for the second quarter this year, as well as the first quarter and a year ago, the second quarter last year.
The second quarter gross margin of 36.3% is down 3.5% quarter over quarter. Again, it's due to some impact from currency appreciation and some higher material costs. The year-over-year declined by 4.8%, also affected by panel pricing and the product mix impact. Our operating expense of NT$4.67 billion in the second quarter is down 8% quarter over quarter, and also 4% year over year due to the implementation of some cost reduction. Now, let's take a look at our operating income. Our operating income of NT$4.8 billion in the second quarter is down 15% quarter over quarter, and also 12% year over year, largely due to the lower gross margin. This page shows also the operating margin trend for the second quarter this year, compared with the first quarter this year as well as the second quarter last year.
The second quarter operating margin of 18.4% is down 2.6% quarter over quarter, and again, largely due to the FX impact, and also down 3.4% year over year. It's also overall impacted by lower gross margin, but through our cost reductions, the decline has been relatively resilient. Now, let's take a look at our net income. Our net income of NT$3.7 billion in the second quarter is down around 29% quarter over quarter, and also a similar magnitude year over year. It's affected by lower operating profit, but also FX loss, and also higher tax rate in the second quarter. Our second quarter EPS of NT$6.14 is down NT$2.5 quarter over quarter, and also NT$2.7 year over year. This page is a recap for our overall income statement for the second quarter compared with the first quarter this year, as well as the second quarter last year.
This page shows the results for our first half results compared with the first half last year. Our revenue in the first half reached NT$ 53.3 billion, up 7% year over year. Our gross profit of NT$ 20.3 billion, operating expense of NT$ 9.76 billion, and operating income of NT$ 10.5 billion were roughly flattish year over year. Our net income of NT$ 9 billion in the first half is down 12% year over year, mainly due to the FX loss impact. The first half EPS reached NT$ 14.8 compared with NT$ 16.9 a year ago. This page shows our revenue mix for the second quarter this year. In terms of the percentage range, our small-medium size SoC and the large-size driver each accounted for 40%, 37%, and 23% of the second quarter revenue. This percentage is the same as what we delivered in the first quarter.
Today, we also released our July revenue of NT$ 8.1 billion, which is down 12% year over year and 4% month over month. We also have the breakdown for SoC and driver. SoC business accounted for 38% plus of July revenue, which is slightly up compared with the percentage in the second quarter. This page shows the monthly revenue trend since the beginning of 2004 until we just released the July revenue this year. This page shows three key financial items for our second quarter results. Our account receivable of NT$ 19.9 billion and inventory of NT$ 9.2 billion both decreased slightly quarter over quarter, and both still at a very healthy level. Our cash increased to NT$ 54.7 billion, up from NT$ 53.2 billion in the first quarter this year. Already we finished the financial part. Now, let me pass the call back to David.
Thank you, Tony. The following slides is a recap of our recent some of the major events. First of all, we're happy to announce that Novatek has achieved comprehensive greenhouse gas inventory, not just for Scope 1, 2, but also for Scope 3, and has been verified by a third party across all our global operations. Novatek has also been awarded the 1.5°C climate action certificate by Commonwealth Magazine. We have also received the Sustainalytics ESG ratings, and our 2024 results have improved from 17.9 low risk to 12.8 low risk. This ranks Novatek among the four among the 245 companies in semi-design and manufacturing. Recently, we have also published our latest 2024 sustainability report. All of you are welcome to visit our website to download our latest report. 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].
Thank you, Steve. Tony just reported our Q2 results, and the revenue in Q2, basically Q2 decreased by 3.75%, missing our Novatek guidance. This is mainly due to the sharp appreciation of NT$ . In terms of U.S. dollars, our revenue reached $843 million, which is in line with our guidance range of $828 million - $866 million, which represents a 1.9% increase quarter over quarter. As for the Q2 margins, our Q2 margin is 36.3%, and Q2 down by 3.46 percentage points. It's also missing our guidance. This is all mainly due to the sharp NT$ and the continuous rise in gold price. Looking forward to Q3 outlook, what we see is that the tariff rates have been largely determined, and close attention will be paid to the effects on both the industry and the broader economy in the future.
In the first half of the year, the consumer electronics market basically benefited from early purchase driven by China's government subsidies and also the advanced shipments in response to U.S. tariff policies. However, as we enter the third quarter, both effects have gradually faded, which are leading to a more cautious attitude among the customers and more conservative order placements. In addition, as the NT$ is expected to continue appreciating against export currency quarter over quarter, the Novatek U.S. dollar denominated revenue is expected to decline in the third quarter. Based on the above, our 2025 Q3 guidance will be as follows: revenue will be from a range of NT$23.7 billion to NT$24.7 billion at an exchange rate of 1 to 29.5. If you look at this exchange rate compared to the first quarter, the second NT$ appreciated around 5% Q2.
As for the gross margin, our guidance will be 34% - 37% range, and operating margins will be 15% - 18% range. Next, we'll move on to Q&A sessions. Please be reminded, if you have any additional questions, please submit online. Okay, Tony, please.
[Foreign language].
[Foreign language].
Could management share the view on the sequential trend across your major applications in terms of demand into the quarter three?
The demand trends on the production basis for the major applications in Q3 are generally as follows. The TV is expected to be kind of flattish quarter on quarter, with the increasing mix towards a smaller size, especially the smaller than 50 in. As for Notebook, we're expecting it to be slightly up, while a tablet and monitor are expected to be down. As for the mobile phone demand, basically the demand in China is expected to decline as the national subsidy boom has passed. However, the seasonal stocking has started in the non-China market. As for the automotive, we are expecting it to be flattish.
[Foreign language].
[Foreign language].
After providing the sequential trend across major applications, could you also provide your quarterly revenue trend across three business groups?
At the forex rate of 29.5, revenue for all the three product lines will decrease quarter on quarter into the third quarter. As for the small-medium driver ICs revenue, we are expecting a relatively milder decline, and this is mainly due to reduced demand for the mobile phones and tablets in China, as well as the decreased demand for LCD TDDI. However, the shipments for OLED TDDI driver will increase, and automotive-wise, this segment remains stable. The next one will be the SoC line, which is also affected by inventory adjustment of TV SoC and gaming monitor. As for the large-size driver IC, it will decrease the most, given the earlier pooling from subsidies and tariffs.
[Foreign language].
[Foreign language].
Given the slow generality into quarter three, will revenue in quarter four still follow the generality?
As mentioned earlier, the tariff rate is pretty much determined. Regarding the Q4 revenue, it is necessary for us to continue to monitor the subsequent impact of U.S. tariffs on the industry and the economy, the future trend of the NT$ exchange rate, and the demand from China's promotional activities in the fourth quarter.
[Foreign language].
[Foreign language].
Given the negative impact to your revenue under the recent appreciation of NT$ against US dollar, wonder if the company will implement some action to alleviate impact from the currency volatility?
the NT$ appreciates, revenue will be negatively affected because selling prices are denominated in U.S. dollars. In order to alleviate the NT$ appreciations, we need to introduce new products and also try our best to expand the revenue base.
[Foreign language].
[Foreign language].
For your smartphone OLED TDDI, could you provide your shipment in the second quarter or your target for the whole year 2025, and also any update on the progress at the customer's extension?
During our last conference call, I did mention that our customer has introduced the new model in April as scheduled, and the mass production has kicked off since the second quarter in 2025. Currently, the mass production is proceeding pretty smoothly. More models will be adopting OLED TDDI in the second half of the year, and customer feedback has been very positive. Shipments are expected to continue to increase. For 2025, the unit shipment, we are expecting the shipment to exceed 10 million units for the OLED TDDI in 2025.
[Foreign language].
[Foreign language].
You have mentioned about the efforts at diversifying your clientele, particularly for smartphones. Could you comment on the progress as new customers at either panels or handset OEM?
As we have mentioned many times, to further diversify customer base and application is one of our main management targets. The progress on panel customers in Korea or non-China handset OEM are currently progressing smoothly and are moving in a positive direction.
[Foreign language].
[Foreign language].
Will you migrate the node process from 20 nanometer into 22 nanometer during 2026 for your smartphone OLED driver? How about the timetable for the FinFET?
Novatek has already adopted the 22nm high-voltage process design for our OLED product in 2025. As for the FinFET hybrid node process, this will be based upon our customer specification requirements, and we'll proceed accordingly. For Novatek, it is always open for us to evaluate any competitive node process available in the market.
[Foreign language].
[Foreign language].
Could management provide your view on the penetration of foldable smartphone? Also, comments on the impact of foldable phones to the driver IC technology resolution and the selling price. Also, wonder if OLED TDDI has more advantage in the foldable smartphone. Lastly, also could you provide the percentage of shipment from foldable DDIC out of your overall DDIC shipment?
Novatek estimates the penetration rate of the foldable smartphone will be around 1.6% in 2025, so around 19 million units. The inner panels of the foldable phones are usually of higher resolution and thus have a higher ASP. In the foldable phone, OLED TDDI not only reduces the number of components, but also offers space-saving advantages, which is beneficial for creating thinner smartphones. As for the foldable phone DDIC, a percentage of our OLED DDIC currently still remains low, given the current limited penetration rate at this moment.
[Foreign language].
[Foreign language].
Could you provide your timetable and the projects on four and five nanometers in the CoWoS?
The introduction of the fast nodes process and packaging is very critical to Novatek's long-term product development and expansion of our ASIC business. Currently, the projects are still under development.
[Foreign language].
[Foreign language].
Could you management provide comments on the impact of geopolitics to your operations and your adjustment in the future?
Regarding the geopolitical issues, in recent years, Novatek has implemented a strategy to diversify our customer base, our markets, and also our supply chain to address these potential impacts. The implementation and development of these strategies, currently, we're seeing that we are in the right direction and also progressing pretty smoothly.
[Foreign language].
[Foreign language].
We noticed your second quarter gross margin was below your original guidance. Just wondered by how much FX has affected your gross margin and any other major factors.
The gross margin of 36.3% in the second quarter, which decreased by 3.46 percentage points. This is mainly affected by the sharp appreciation of the Chinese yuan, with negative impacts of around 2.5 percentage points. In addition, the increase in gold price is also negative to our gross margins.
[Foreign language].
[Foreign language].
Your gross margin guidance for third quarter is below the level of 37% to 40%, which you used to provide. Just wonder how much FX impacts your quarter three margin guidance, and also any other factors. If FX is fairly stable at the current level into quarter four, adjust where your gross margin bounced quarter by quarter in quarter four.
At this moment, the gross margin in Q3 is still negatively affected by the forex movement. Other factors include further rising gold price and also the ASP adjustment for certain products. If the forex and the gold price remain stable in Q4, the gross margin for Q4 should improve sequentially from Q3.
[Foreign language].
[Foreign language].
Could management also provide which products have experienced more gross margin correction year to date, and also those with more resilient trends?
Basically, the gross margin for the driver ICs has decreased more than the SoCs as year to date.
[Foreign language].
[Foreign language].
What are major items for your non-grading loss of NT$221 million in second quarter compared with income of NT$445 million in first quarter? Could you also provide your net net USSA at the end of second quarter as well as first quarter?
The non-offering loss of NT$ 221 million in the second quarter was largely dragged by the forex loss of NT$ 669 million. However, we also have some interest income of NT$ 313 million and also a dividend income of NT$ 90 million. The net U.S. assets decreased to NT$ 160 million at the end of the second quarter, down from NT$ 200 million in Q1.
[Foreign language].
[Foreign language].
Your inventory dollar of NT$ 9.1 billion at the end of second quarter came down from NT$9 .6 billion in first quarter. What are your inventory days as of second quarter? Could you also provide the comments on the trend into quarter three?
The inventory days for the second quarter were 58 days, down by two days from 60 days in Q1. Expected inventory dollars at the end of third quarter will be at the same level as in second quarter, which should be still maintaining at the healthy level.
[Foreign language].
[Foreign language].
What are major factors for your operating expense dollar down quarter by quarter in the second quarter? Also, given the year-over-year flat operating expense in the first half, will your operating expense dollar in 2025 still increase year over year?
The operating expenses in the second quarter decreased quarter on quarter. This is mainly due to the reduction in R&D expense. However, we're expecting the long-term R&D project spending will continue to increase. The OpEx dollars in 2025 will decrease yearly from 2024, and the growth will be subjected to the revenue momentum, likely at single digits.
[Foreign language].
[Foreign language].
Your tax rate in the second quarter increased to 18.8% from 14.3% in the first quarter. What are the major factors? Could you still maintain the tax rate guidance of 16% for 2025?
The higher income tax rate in the second quarter was mainly due to a lower amount of R&D investment tax credits. The tax rate guidance for 2025 is now around 16% to 17%. We have covered most of the questions that we see, but we'll wait a few more minutes and see if there's any further questions online.
There's a couple of questions about the competition from China as well as the pricing competition. [Foreign language].
The question is...
[Foreign language].
[Foreign language].
Investors, are there any particular interest in the comments on competition from China, particularly for both large-size driver as well as the OLED driver for smartphone? Could you also comment on the impact to your ASP and also gross margin from these two products?
As you all know, the large-size driver IC has been a long-term competition going on for a long, long time. What we are doing is we're trying to improve our technology and also trying to control the cost. So far, we've been doing a good job in that area, also by enhancing the function of the display quality and display technology. As for the smartphone, as everybody knows, the LCD TDDI, there's been a fierce competition, and we don't see really too much new functions added to that. We'll be more focusing on cost control. As for the trend, it is the OLED smartphone displays moving towards OLED. From here, we can see that we're able to enhance the technology, and we're also seeing that it's moved from LTPS to LTPO Xtra. We're also seeing that on the OLED side, we also have introduced our OLED TDDI.
We are the first one to launch that kind of product. We also mentioned earlier, it's already designed in and in mass production, expecting to exceed 10 million units this year. As for the market, we also have mentioned that earlier that besides China, we are also putting a lot of effort on the ex-China market. So far, we're also making good progress in that area. I think we have pretty much covered most of the questions. Thank you all for your time, and see you next quarter.