Good afternoon, everyone. I would like to extend a warm welcome to everyone for joining Novatek 2025 Third Quarter Online Earnings Call. This is David, Vice President and Company Spokesperson. I'll be the host for today's conference. Joining me on the call, our Vice Chairman, Mr. Steve Wang, and our AVP, Mr. Chou, and our IR Director, Tony and Yvonne. The agenda for today's event is as follows. First, Tony will report on Novatek's third quarter results in English. Following that, our Vice Chairman, Steve, will provide further details on our Q3 results and guidance for the fourth quarter of 2025. Next, we'll proceed with the Q&A sessions. We've already received some of the questions from our investors. If you have any further questions, please feel free to submit them online. Tony will review and read them one by one in both Chinese and English.
Afterward, we'll try our best to answer all your questions in Chinese and later on translate them into English. We encourage your active participation and look forward to addressing your concerns. Now, I'll hand over the time to Tony to report our Q3 results.
Thank you, David. Good afternoon. This is Tony. First, please take a look at our safe harbor notice. Now, this page shows our consolidated sales for quarter three. Our quarter three revenue of NTD 24.57 billion down slightly quarter- over- quarter and also year- over- year, but in the high end of our guidance of NTD 23.7 billion-24.7 billion. Next. In terms of gross profit, our gross profit of NTD 8.9 billion in quarter three is also down quarter over quarter 6% and 19% year- over- year. Next. Now, moving to our gross margin trend. For quarter three, our gross margin of 39.29% was flattish compared with 33.3% in second quarter, but down from 39.74% a year ago. Sorry, flattish compared with 36.3% in the second quarter, but down from 39.74% a year ago. But again, that's actually in line with our guidance of 34%-37%. Next.
Now, moving to our operating expense. Operating expense of NTD 5.06 billion increased both quarter- over- quarter and year-o ver-y ear by 8% and around 5% year- over- year. Next. Now, moving to the operating income. For quarter three, operating income of NTD 3.86 billion decreased 20% quarter- over- quarter and 38% year- over- year. Next. Now, let's take a look at our operating margin. For quarter three, our operating margin of 15.7%, down from 18.44% in second quarter and 22.4% a year ago, but still in line with our guidance of 15%-18%. Now, let's take a look at our net income. For net income of NTD 3.66 billion in quarter three, it's down 2% quarter- over- quarter and also down from NTD 5.26 billion a year ago. Now, let's take a look at our EPS.
For quarter three, our EPS of NTD 6.01 is down from NTD 6.14 in quarter two and also down from NTD 8.64 a year ago. This page shows our income statement for quarter three compared with the figures in the second quarter as well as a year ago. As we highlighted earlier, you can see the revenue, gross profit, operating expense, operating income as well as net income and EPS at this page. This page shows our income statement for the first three quarters compared with the same period a year ago.
Overall speaking, the revenue is flattish year over year, gross profit is down slightly year- over- year, and operating expense is roughly flattish, but operating income and the net income are down slightly over 10% year- over- year with NTD 20.8 EPS for the first three quarters. Now, this page shows our revenue breakdown for three key business groups.
For the quarter three, the small, medium-sized driver remained a largest group with 41% of revenue, slightly up from 40% the second quarter. SoC business still accounted for 37% of quarter three, flattish compared with the second quarter in terms of percentage. Lastly, in terms of the large-sized driver, the percentage came down to 22% quarter three from 23% in the second quarter. We are also reporting our October revenue. October revenue of NTD 7.88 billion is down both year- over- year and the month-to-month in single digits. For the first 10 months, the cumulative revenue of NTD 85.7 billion is roughly flattish compared with the same period a year ago. And also, the table also shows the revenue breakdown for October for both SoC and the driver IC. The next page shows the monthly revenue trend for 2024 and the first 10 months of 2025.
This page shows some key figures for our balance sheet. The cash and the cash equivalent of NTD 39.6 billion is down both quarter- over- quarter and year- over- year. The sequential decline mainly caused by the distribution of cash dividends. Accounts receivable and the inventory is roughly flattish both quarter over quarter and year over year at a healthy level. Now, let me pass the call back to David. Thank you.
Thank you, Tony. The following slides is a recap of our recent major events. Novatek MSCI ESG rating has been upgraded from BB to BBB, a triple B. Mainly because of the recognition of our efforts in corporate governance and particularly board practices, and Novatek has also been awarded the Excellence in Corporate Social Responsibility Award, advancing from last year's 18th position to number nine this year, and we have also received the following awards from CommonWealth Magazine, like the Talent Sustainability Award, Family Friendly Workplace Award, and its various other awards. Please visit our website for more information on our ESG achievements, and now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on our Q3 results and Q4 guidance. [Foreign language] Please, Steve.
[Foreign language]
The Q3 revenues reached NTD 24.57 billion, quarter- on- quarter declined by 6%, and the decrease by 6% basically still reached the upper end of our guidance. This is mainly due to the appreciation of NTD and as well as the fading effects of China's subsidies policy and U.S. tariffs. The Q3 gross margin was 36.29%, quarter on quarter kind of flat. Q4 is a low season for consumer product and IT industry. Therefore, we expect Q4 revenue to decline. Basically, we are also seeing the panel makers, they are controlling the production.
In the first half, the consumer electronics market benefited from early purchase driven by China's government subsidies and advanced shipments in response to U.S. tariff policy, and this has basically changed the normal seasonality, resulting in the second half weaker than the first half, and based on the above, our 2025 Q4 guidance will be as follows. Revenue will be from the range of NTD 22 billion-NTD 23 billion, with the exchange rate of $1 to NTD 30.5 , and gross margin will be between 35% range, and operating margin will be around 14.5%-17.5% range. Thank you, Steve. Now, we'll move on to Q&A sessions. Please be reminded if you have any questions that you would like to ask, you can send them online, and we'll proceed with some of the questions we already received. Tony, please go ahead with some of the questions that we already have.
Thank you. [Foreign language]
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Could management share a view on the sequential trend across major applications in terms of order flow into quarter four this year?
The following is the major applications demand in Q4 based on the panel production. What they're seeing is that TV is slightly down, and monitor due to the low season will also be down quarter- on-q uarter. Demand on notebook is down a little bit more after the inventory buildup in third quarter, but with the limited replacement. But we are seeing the tablet QoQ up. As for the demand for mobile phones in China is basically flattish, as we are also seeing the sequential increase of TDDI, but it's offset by the downtrend of the OLED orders. As for the automotive, we are seeing it's kind of flattish QoQ.
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Could you also provide your quarterly revenue trend across three business groups?
The small and medium driver IC in Q4 will decrease at a mild rate, basically supported by smartphone TDDI, and also we've seen the tablets also, as mentioned earlier, is expecting to grow QoQ. While OLED smartphone we expect to decrease quarter on quarter. Revenue from automotive will be flat, but we are seeing the automotive TDDI shipment will increase quarter- on -quarter.
Following the small medium driver IC will be the SoC, basically it is affected by inventory adjustment of TV SoC and also the gaming monitors. But we are expecting imaging related SoC to increase quarter- on- quarter, basically because of the multiple applications demand that we are seeing at this moment. As for the large driver IC, this product line will decrease the most. This is basically due to the boost from subsidies and tariffs has tapered off and has led to lower demand for large sized panels.
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Could you also provide a preliminary outlook for first quarter or next year in terms of the revenue or major product?
Given the multiple challenges from geopolitics and tariffs, demand on consumer electronics remains uncertain and needs to be monitored carefully. Novatek will be launching numerous new products next year, and hence we believe our revenue will grow steadily in 2026. Furthermore, demand for edge devices with AI capability is beginning to emerge, and replacement demand is projected to occur in 2026 with the integration of touch functions and various other functions.
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Given your latest agreement with Arm last year, could you also share with us ASIC progress in terms of direction on node projects, applications, and the customers?
Well, as mentioned previously, the cooperation with Arm at Neoverse platform, it is the extension of Novatek's ASIC business in preparation for customers' future needs.
Novatek is to complete the 4nm HPC POC demo system by the end of 2025, but we do not expect any revenue contribution this year. What we are aiming at is to leverage the Arm CSS ecosystem and TSMC's advanced process and packaging support to offer flexible ASIC design services, basically customized for various applications and fulfilling customers' diverse requirements.
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What percentage of SoC revenue do AI-enabled products account for at this moment? Could you also provide some color on how they can differentiate your product or enhance the competitiveness?
What Steve just mentioned is that by integrating our proprietary high-performance, low-power AI accelerator like the TPU and NPU, and also the touch, tool chain into our various SoCs, we provide customers with improved audio-visual experience and user engagement while enabling edge AI applications, including machine vision, smartphone, and surveillance backends. And these are some of the AI-related functions that we have designed into our SoC product. And product with integrated AI functions at this moment roughly accounts for 20% of our SoC revenue, and we are anticipating the future revenue to continue to grow related to the AI product.
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Given the popularity of the social media, along with various new form factors of cameras, where these make contributions to your image SoC business?
Driven by the surge in the social media usage, demand for vlog AI camera basically has increased, and our imaging division has been working very closely with numerous brand partners, and unit shipments are gaining momentum at this moment, and we expect related product revenue to grow in 2026.
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For smartphone OLED TDDI, first question: do you still maintain a shipment target of over 10 million units for 2025? Two, could you also update the progress at the customers' expansion? And three, will this be positive to your market share among handset OEMs in China?
Well, our customers have started the OLED TDDI mass production as scheduled, and we mentioned earlier it's pretty much on track, and we expect this year's shipment to exceed 10 million, and there shouldn't be any problem. We're also expecting new clients to commence evaluation and deployment next year, and we also anticipate that the OLED TDDI adoption will have a favorable impact on Novatek's market share within the China smartphone segment, and this should be a very positive trend for Novatek.
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As for your effort in customer diversification, could you also provide updates on your customer interests in terms of smartphone OLED driver IC shipments or revenue contribution?
It is our goal to continue to diversify customer space and applications, and the mobile OLED TDDI shipment and new project development are very much on track, and basically it is a long-term strategic partnership.
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Additionally, could you also provide updates on your customers' panels in Korea or handset OEMs outside of China?
As mentioned earlier, for us, we will continue to expand our customer base and applications, and as for the progress with the panel customer in Korea and the non-China handset OEM, at this moment it is proceeding smoothly and positively, and as a result, shipments are expected to begin in early 2026.
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Could you provide updates on the deployment or shares at OLED product outside of smartphone, and any thoughts on the adoption of OLED panels next year after the mass production of new 8.5 generation OLED panel lines?
Smartphones remain at the primary OLED applications, and the penetration to other areas such as TV, notebook, gaming monitor, automotive is still low and concentrated at the high-end products. However, Novatek has developed related products, and some of them are already in mass production, and they expect the shipment to increase next year, and then we have some new products that are still under development.
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Third quarter gross margin was at the high end of the guidance, and the flattish quarter over quarter, by how much has FX affected your gross margin and any other factors?
The Forex continued to appreciate in third quarter versus second quarter, and then stabilized later on, and it's reducing its effect on gross margin for the quarter. The other factors that impacted our margins were the increase in gold price.
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According to the gross margin guidance for quarter four, how much is affected by FX and any other factors?
We expect Q4 gross margin to be between 35%- 38%, and given the recent stable exchange rate, we do not anticipate any material impact from the foreign exchange movement. The further rise of gold price and the KGD, which is called the Known Good Die, will be negative to gross margin.
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Do you expect the gross margin to improve in 2026 and what are the major swing factors for your gross margin? Could you also provide trends for foundry and packaging costs into 2026?
The revenue growth and gross profit margins basically are the two key index for Novatek's management that we really focus on, and factors influencing our gross margins are basically the currency appreciation if there's any, and the gold price trend, and the shortage of certain raw materials like the Known Good Die or the substrate.
At this moment we are working closely with our suppliers to jointly manage the rising wafer and packaging and testing costs, and at the same time we also seek our customers' understanding and to pass on the increasing cost of raw materials to our customers at the right timing.
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What are major items for the non-operating income of NTD 518 million in quarter three compared with loss of NTD 221 million in second quarter?
The non-op income of NTD 518 million in third quarter actually came from Forex gain of NTD 249 million and interest income of NTD 222 million.
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Inventory dollar of NTD 9.2 billion dollar in quarter three increased slightly from the level of second quarter. What are your inventory days in quarter three? Could you also provide some comments into the quarter four?
Inventory days for third quarter were 59 days, up by one day from 58 in second quarter, and we are expecting inventory dollar at the end of fourth quarter to be at the same level as third quarter and should be still at the healthy level.
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What are the major factors for operating dollar up by 8% quarter- over- quarter in quarter three? Also given the 1% year-over-year increase for operating dollar for the first three quarters, will operating expense in 2025 increase year-over-year?
The operating expense dollar in third quarter increased sequentially by NTD 391 million from second quarter, and basically it is due to higher R&D spending and based on the fourth quarter revenue guidance, our operating expense dollar in 2025 should be similar to those in 2024.
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What are major factors for higher tax rate of 16.5% in quarter three, slightly up from 16.2% in first half? Do you maintain the tax rate guidance of 16% to 17% for the full year of 2025?
The tax rate of 16.46% in third quarter was marginally higher than 16.2% in the first half, and the tax rate guidance for 2025 is unchanged and should be around 16%-17% range. Tony, is there any further questions? We have covered most of them and see if there's any other questions that we haven't yet covered.
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There is some follow-up question about the progress of Novatek AI- related ASIC. Could management provide more color on this business?
And basically as you know the AI- related ASIC is pretty much very broad application, there's a lot of applications and we're working very closely with our customers and we are targeting various applications not just the server side. So currently we're working with various customers to explore various opportunities.
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Also there is some follow-up about the cost structure particular for the key material such as memory. Could management also tell us how you react to the recent surge on the memory price and other related key components?
As you know, the KGD pricing going up is basically it's a result of supply and demand issues, and for us we'll work closely with our customers and to manage the cost together, and at a proper appropriate time we'll pass on the cost.
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The next question is about the smartphone OLED Driver. Could you also give more color in terms of the ASIC trend and the competition?
Well, for the OLED driver. The low end product line we do see some pricing pressure in that area but for Novatek what we are doing is we are trying to add value to our product. For example, OLED TDDI and also adding some extra functions to our driver to add value to our customers and also for example the foldable OLED phone. Okay it seems that there aren't that many other questions that we didn't cover so we'll end our investor conference at this point. Thank you so much for joining in, see you next quarter.