Good afternoon, everyone. I would extend a warm welcome to everyone for joining Novatek 2026 first 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 Vice Chairman Steve Wang and our CFO, Jane, and our IR Director, Tony Tseng, and Yvonne. Thank you so much for joining in and good to see you all online. The agenda for today's event is as follows. First, Tony will report on Novatek's first quarter results in English. Following that, our Vice Chairman, Steve, will provide further details on our Q1 results and guidance for the second quarter of 2026. Next, we'll proceed with a question and answer session. We've already received some questions from our investors. If you have any additional questions, please feel free to submit them online.
Tony will help to bring up the questions in both Chinese and English. Afterwards, our Vice Chairman, Steve, and Jane and myself will try to answer all your questions in Chinese, and I'll later translate them into English. We do encourage your active participation and look forward to addressing your concerns. Now I'll hand over the time to Tony to report our Q1 results. Yes, Tony, please.
Thank you, David. Good afternoon. This is Tony . Let me report our first quarter result in more details. The first page, please take a look at our safe harbor notice. As for consolidated sales, first quarter TWD 23.15 billion increased 1.4% quarter-over-quarter from TWD 22.82 billion, but decreased 14.7% year-over-year from TWD 27.12 billion in first quarter 2025. Next. Moving to the gross profit. First quarter of TWD 9.04 billion increased 3.8% quarter-over-quarter from first quarter, but decreased 16.2% year-over-year from TWD 10.78 billion in first quarter 2025. Moving to the gross margin.
First quarter gross margin of 39.06% increased 87 basis points from 38.19% in first quarter, but decreased 70 basis points from 39.76% a year ago. Next. This is exceeding our guidance of 36%-39%. Next. Now, moving to the operating expense. First quarter of TWD 5.01 billion increased 3.3% quarter-over-quarter from TWD 4.85 billion, but decreased 1.5% year-over-year from TWD 5.09 billion. Next. As for operating income, first quarter of TWD 4.03 billion increased 4.3% quarter-over-quarter, but decreased 29.3% from TWD 5.70 billion a year ago. Next. Let's take a look at our operating margin.
Our first quarter operating margin of 17.4% increased 48 basis points quarter-over-quarter from 6.92% in quarter four last year, but decreased 360 basis points from 21% a year ago. This is meeting our guidance of 15%-18%. Next. As for net income, first quarter of TWD 3.77 billion increased 2.1% quarter-over-quarter from TWD 3.69 billion in quarter four, but decreased 28.4% year-over-year from TWD 5.26 billion a year ago. Next.
As for EPS, first quarter of TWD 6.19 increased TWD 0.12 quarter-over-quarter from TWD 6.07, but decreased TWD 2.46 from TWD 8.65 a year ago. Next. This is our income statement summary for first quarter compared with quarter four last year and also first quarter 2025. On this page show our revenue breakdown for our three business groups. For first quarter, SoC business accounting for 44% of overall revenue, which is one of the highest level in our history and up from 35% in quarter four last year. As for small, medium-sized drivers, this business accounted for 33% of revenue in first quarter, down from 43% in quarter four last year.
Lastly, as for large-sized driver, this business accounted for 23% of revenue in first quarter, compared with 22% in quarter four. Next. We are also reporting our April revenue. April revenue of TWD 9.23 billion increased 1.16% from TWD 9.12 billion, and also increased 8.93% month-over-month. For the first four months, the combined revenue of TWD 32.37 billion decreased 10.68% from TWD 36.24 billion a year ago. As for the revenue breakdown for the April, we like to highlight our SoC business hit a record level in terms of percentage of revenue, reaching 53.7% in April revenue. Next. This page shows our monthly revenue from January 2025 until April 2026.
As you can see from here, we are turning year-over-year growth from April this year. This page show some key summary for our some financials and the balance sheet. For cash, in first quarter reached TWD 48.92 billion, increased 15.32% quarter-over-quarter from TWD 42.42 billion, but decreased 8.10% year-over-year from TWD 53.23 billion. Account receivable, first quarter of TWD 17.92 billion decreased 15.05% quarter-over-quarter from TWD 21.10 billion, and also decreased 12.03% year-over-year from TWD 20.38 billion. Inventory.
First quarter of TWD 10.85 billion increased 25.58% quarter-over-quarter from TWD 8.64 billion, and also increased 13.05% year-over-year from TWD 9.60 billion. Okay. Now, I handing back the call to David.
Thank you, Tony, for the report on our Q1 results. Here we have some recent major events. We would like to share with you our latest achievement on corporate governance. Novatek has once again been ranked among the top 5% in corporate governance for the fourth consecutive year. On our board of directors also proposed a cash dividend of TWD 23 per common share with total amount of TWD 13.995 billion, which resulted in a payout ratio of 85.61%. We would also like to give you a heads up. Novatek Board of Directors also approved the date of our AGM, which will be held on May 29th, Friday, 2026. We are also pleased to share an update on the status of our Novatek's 2025 ESG report.
Throughout 2025, Novatek has made significant progress across multiple ESG areas. We are on track to publish our report in June. We warmly invite you to download or review the report upon release and welcome your valuable feedback. Now, I'll turn over the call to our Vice Chairman, Steve, to provide us more details on Q1 results and Q2 guidance.
[Non-English content] Our Q1 revenue reached TWD 23.15 billion, increased by 1.44% quarter-on-quarter, and the revenue increased reaching the upper end of our guidance, and this is mainly due to growth in the SoC and large display driver IC business, despite the negative impact of the weak smartphone demand.
As for the Q1 margins, our Q1 gross margin reached 39.06%, quarter on quarter increased by 0.87 percentage point. This is also exceeded our guidance, and this is mainly due to variable product mix.
[Non-English content] Regarding our second quarter outlook, in the second quarter, memory supply remains tight, and price continues to rise.
As a result, price of some end products, for example, smartphones, PC and notebooks, the price has been adjusted upward. Consumer demand trends in the second half of the year will need close monitoring. Amid expectations of price increase, system customers pulled in orders, resulting in a stronger demand in Q2. Accordingly, Novatek Q2 operating guidance is projected as follows: Revenue will be between TWD 27.5 billion to TWD 28.5 billion at an exchange rate of $1 to TWD 31.3. Gross margin will be between 38%-40% range, 38%-41% range.
Operating margins is expected to be around 16%-19% range. The top line will be around the quarter-on-quarter growth by 19%-23%. We will move on to Q&A sessions. Please be reminded if you have any questions that you would ask, please send it online. I'll hand over the time to Tony. Tony will try to read out some of the questions that we already have on hand and we'll answer them one by one.
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Could management share the view on the sequential trend across major applications in terms of order flow into second quarter?
According to the panel production across a major application into second quarter, TVs are expected to be slightly up quarter-on-quarter. Monitor productions are to be flattish. As for notebook demand, we're expecting it to improve quarter-on-quarter, mainly driven by early order pull-ins from brand OEMs, in anticipation of rising memory price. Tablet demand is largely unchanged and mobile phones are flattish, but demand for LCD TDDI is increasing quarter-on-quarter. As for automotives, demand in the China market, we are seeing a slight increase while other regions remain flat.
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Could you also provide your quarterly revenue trend across three of your business groups?
Based on the earlier guidance that we gave you, all the three of Novatek's major product lines are expected to deliver meaningfully quarterly growth in Q2. As for our SoC, we are seeing the revenue is projected to grow the most, driven primarily by rising demand for machine vision edge related AI chips, along with selective ASP adjustment for certain product because of the memory price. As for the large panel driver and small medium-sized driver, we expect it to have a similar quarter-on-quarter growth rate. As for the large driver IC, growth will be mainly supported by early pull-ins of notebook and on the panel orders. The small medium-sized growth will be driven by increased shipment of LCD TDDI for tablets, flattish demand for OLED smartphones, and a slight increase in automotive applications.
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Could management also share the view on the second half across major application? Also, could you also highlight your major product launch in the second half?
Well, amid the expectations of price increase, consumer electronics demand has seen order pull-ins and coupled with geopolitical factors, including tensions in the Middle East and uncertainties in the second half of the year have increased. Accordingly, Novatek will closely monitor the consumer and market demand strength. In the second half, we do plan to launch a number of new products, particularly in high-end applications such as machine vision, edge AI solutions, OLED TDDI for foldable smartphones, OLED for notebook, and also gaming monitor products. As a result, we expect full year revenue to grow year-over-year.
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Could management also update the progress on advanced ASIC project over the past three months?
Regarding our 4-nanometer HPC PoC demo system, it is still under development, and we don't expect any revenue distribution from this advanced node ASIC in the near term. We'll be more focusing on the edge AI, which we think should have more contribution in the short term.
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As management mentioned the positive outlook on your image SoC for 2026, could you also provide the year-over-year or quarter-over-quarter revenue growth on this product line in first quarter? Could you also elaborate the major growth driver for this business?
Well, as the industry enters into the era of AI agents, edge device with embedded AI capabilities are expected to become a key structural growth trend. The demand for Novatek edge AI image or vision solutions has remained pretty strong, particularly in market outside China because of the geopolitical reasons, supported by expanding adoption across a broad range of emerging applications. We remain confident in the long-term growth potential of this business.
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As for your driver IC lines, Novatek has penetrate into the tier 1 customers, particularly on the smartphone over the past two years. What are major factors behind this breakthrough? Will Novatek continue to grow revenue from these customers year-over-year in 2026 and even next year?
Well, the Novatek's new product development programs and projects and also shipments with the international tier 1 customers basically are progressing pretty smoothly. As a result, meaningful revenue contribution from these initiatives to the driver IC product line are expected for the next one or two years. This progress reflects our customers' strong recognition of Novatek's technological capabilities, and this includes design expertise, advanced process nodes, along with our product quality and services. Currently Novatek is highly regarded by our customer as a trusted long-term strategic partner. Continued expansion of the customer base in the application portfolio remains a core long-term strategy or focus for the company.
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First quarter gross margin exceeded the guidance of 36%-39% range and also increased by 87 basis points quarter-over-quarter. What are those positive factors?
Basically, there are two reasons for the improve in our margin. Number one is a favorable product mix that really helps us better margin. The second one is because the KGD price hike, some of our selective product ASP has been adjusted accordingly.
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Given the gross margin guidance for the second quarter, what major factors to compare with your result in first quarter? Could you also provide a comment on cost increase and the selling price adjustment?
Well, there are two key factors that are driving the impact on our margins. Number one, the rising cost across certain materials and OSAT services, including KGD, the known good die, gold, wafers, substrates. These all prompting Novatek to continue discussions with our customers to reflect these cost increases. Secondly, as I mentioned earlier, the favorable product mix, supported by higher contribution from our SoC product shipments, that really helps to improve our margins in the second quarter.
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Given ASP adjustment for your SoC product post surging memory cost, how will your gross margin for SoC change?
Well, certain SoC products has KGD in it, but not all of them, but a certain portion do have KGD in it. Given the tight supply and rising price of memory, we are making every effort to meet the customer demand while also engaging with our customer on pricing adjustment. However, such price adjustments are not expected to fully offset the impact on our product gross margins.
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What raw material will continue to rise price in the second half? Would you also comment on the magnitudes potentially in the second half compared with those in the first half?
Looking at the second half, driven by the strong AI-related demand, which resulting in capacity allocation effect, cost for certain materials, packaging testing service, as mentioned earlier, are expected to remain elevated in the second half of the year. Given the continued uncertainty surrounding consumer electronics demand in the second half, we are maintaining ongoing discussions and negotiations with our suppliers.
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Among your three product lines, could you provide the status on selling price adjustment? Could you also roughly maintain your gross margin into the second half?
Considering the rising cost and the tight material supply, Novatek will prioritize supply stability and make every effort to ensure reliable product deliveries. As for pricing adjustments, where applicable, will be made in a timely and appropriate manner, and it will be based on market demand through close communication with customers and supplier, with the aim in mind of navigating the challenges together.
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What major items for your non-operating income of TWD 362 million in the first quarter compared with TWD 554 million in quarter four last year?
The non-op income of TWD 362 million in the first quarter mainly came from interest income of TWD 228 million and forex gain of TWD 84 million.
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While your inventory days as of first quarter 2026 compare with those in quarter four last year, c ould you also provide the comments into second quarter this year?
The inventory days for first quarter were, 72 to four days, up from 59 days in the fourth quarter, increased by 15 days. This is mainly due to the rising raw material costs, but it is still at the healthy level though. We do expect the inventory days at the end of second quarter to increase slightly from first quarter, due to further rising raw material costs.
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Operating expense of TWD 5.01 billion in first quarter was similar to the amount in both quarter four last year and also first quarter last year, where operating expense in 2026 still increased year-over-year from 2025.
We expect our operating expense to increase modestly in 2026, primarily driven by higher R&D investments, particularly in the advanced process technologies and also the recruitment of key talents.
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Why is the tax rate of 14.2% in first quarter lower than the guidance? Could you also provide the guidance for the second quarter? Will you maintain the full year guidance of 16%-17% of tax rate for 2026?
The tax rate of 14.2% in first quarter was lower than guidance, mainly due to higher tax credits from Industrial Innovation Act implemented in 2024. The tax rate guidance for 2026 is unchanged at the range of 16%-17%, which is similar to 2025. I think we have covered most of the questions that we collected and that we've seen. Give us a few more minutes to re-review some of the other questions on mic.
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Could management also provide your strategy and the product development for your upcoming edge AI chips?
The application for edge AI is pretty broad. Besides what we already know about surveillance, we also have other, for application for drones, for robotics, and also the v-block camera, there's lots. We are exploring all these areas, and especially all these applications are related to machine vision and also related to edge AI.
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We noticed you recently announced a CapEx investment plan for your data center. Could you also provide more color in terms of the purpose and also your expected return on this investment?
In order to support our revenue growth, we need more advanced nodes. Using all these advanced nodes, we definitely need more computing power and storage. Therefore, we need to, you know, build our own data center to support all these needs.
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We noted even the legacy wafer capacity, foundry capacity and the packaging capacity has been pushed or getting more tight from the strong demand on the AI and the memory. Could you also provide in the recent capacity status, c ould you also secure enough capacity in the second half of this year?
Yes, you're right. I mean, the strong AI related demand did, you know, resulted in the capacity location effect. We are currently working very closely with our supplier to secure our capacity. Our main purpose is to make sure that we have a stable supply and make the deliveries to our customer.
Okay. Thank you so much. We have covered nearly all the questions that we have on hand. Thank you once again for joining in, and wish you all the best.