Good afternoon, everyone. I'd like to extend a warm welcome to everyone for joining in to Novatek's 2026 second quarter online earnings call. This is David, Vice President and company spokesperson. I'll be the host of today's conference. Joining me on the call are Vice Chairman, Steve Wang, our CFO and VP, Jane, and our Director, Tony. Thank you so much for joining in, and good to see you all again. The agenda for today's event is as follows. First, Tony will report on Novatek's second quarter results in English. Following that, Steve will provide further details on our Q2 results and guidance for the third quarter of 2026. Next, we'll proceed with the Q and A sessions. We have already received some questions from our investors, and we'll start with those questions first later on.
If you have any additional questions, please feel free to submit them online, and we'll review and read each question in both Chinese and English. After that, we'll try our best to answer all your questions in Chinese, and I'll later translate them into English. We encourage your active participation and look forward to addressing your concern. Now, I'll hand over the time to Tony to report on our Q2 results.
Thank you, David. Good afternoon and good morning. This is Tony. For the next page, please take a look at our safe harbor notice. Now let's start to look at our second quarter financial results. First page is the net sales of TWD 28.66 billion in the second quarter, + 23.8% quarter-over-quarter from first quarter, and also rose by 9.6% year-over-year from a year ago. Next. Let's look at our gross profit. Gross profit of TWD 12.16 billion in the second quarter, + 34.5% quarter-over-quarter from first quarter, and also + 28.1% year-over-year from second quarter 2025. Next. This page shows our gross margin trend. Second quarter gross margin of 42.42% + 3.36 percentage from first quarter, and also 6.12 percentage from second quarter 2025. This result also exceeded our guidance of 38%-41%. Next. This page shows our operating expense.
Second quarter operating expense of TWD 5.69 billion + 13.5% quarter-over-quarter from first quarter, and also 21.6% year-over-year from second quarter 2025. Next. Now moving to the operating income. Operating income of TWD 6.47 billion in the second quarter + 60.5% quarter-over-quarter from first quarter, and also 34.1% year-over-year from second quarter 2025. Next. The next page shows our operating margin trend. Second quarter operating margin of 22.56% + 5.16 percentage from first quarter and also 4.12 percentage from second quarter last year-over-year. This result of 22.56% also exceeded our guidance of 16%-19%. Next. Now moving down to the net income. Second quarter net income of TWD 6.33 billion jumped by 68% quarter-over-quarter from first quarter, and also 69.2% year-over-year from second quarter 2025. Next. Now on the EPS.
Second quarter EPS of TWD 10.4 increased TWD 4.21 quarter-over-quarter, and also TWD 4.26 year-over-year from second quarter last year. This is the summary page for our income statement for the second quarter compared with first quarter 2026 and the second quarter 2025. The next is the consolidated income for our first half. First half revenue of TWD 51.8 billion, slightly down 2.75% year-over-year. Gross profit of TWD 21.2 billion + 4.54% year-over-year. Operating expense of TWD 10.7 billion + 9.69% year-over-year. Net income of TWD 10.095 billion + 12.13% year-over-year. As for EPS, it reached TWD 16.59 in the first half, compared with TWD 14.8 a year ago. Let's look at our revenue breakdown for the second quarter. In the second quarter, SoC BC accounted for 52% in the second quarter revenue.
Which is up from 44% in the first quarter and 37% a year ago. For the large size driver, which accounted for 20% of second quarter revenue, compared with 23% in the first quarter and 20% in second quarter 2025. Lastly, on the small medium size driver, which accounted for 28% of second quarter revenue, down from 33% in the first quarter, and compared with 14% a year ago. We are also reporting our July revenues. July revenue of TWD 10.296 billion + 26.8% year-over-year, and also up 2.73% month-over-month. For the first seven months, total revenue of TWD 62.1 billion also + 1.15% year-over-year. We also released our revenue breakdown for July revenue, and we can see good momentum from our driver IC business. The next page show our monthly revenue trend since January 2025 until July 2026.
As you can see, the year-over-year growth on a monthly basis start to happen from April this year, and we continue to see this trend in May, June, and also July. So July alone, the year-over-year growth reached 27% year-over-year. This page shows our summary for our key items at our balance sheet. On the cash side, cash of TWD 53.99 billion, up 10.37% quarter-over-quarter, but slightly down 1.33% year-over-year. Account receivable of TWD 20.4 billion, up 13.79% quarter-over-quarter and also 2.46% year-over-year. Lastly, inventory of TWD 13.31 billion also + 22.66% quarter-over-quarter and also 45.02% year-over-year. 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 has once again been awarded the 1.5 Degree Climate Action Certificate by the Commonwealth Magazine for the fourth consecutive year in recognition of our effort in keeping global warming within the 1.5 degree threshold. We also have completed the 2025 ISO greenhouse gas inventory across our global operations, not just the headquarters. Novatek has also achieved ISO 26262, the ASIL B compliant product certification, marking a new milestone in automotive functional safety.
We also have been selected and included into various indices, like the Taiwan Sustainability Index for a seventh consecutive year, and also the Taiwan Employment Creation 99 Index for the fifth year, and also as a Taiwan High Compensation 100 Index for 13 consecutive years. Our 2025 ESG report has also been published and is available for review and download, provided via a link as see above. Now I will turn over the call to our Vice Chairman, Steve Wang, to provide us more details on our Q2 results and Q3 guidance. [Non-English content ]
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OK, Steve. Good afternoon to everybody. As Tony already reported our Q2 results, you can see that the revenue in Q2 QOQ increased by 23.83% and thus exceeding our guidance. This is mainly due to increase in early pull-in demand. All the three main product lines experienced growth, which resulted in a significant QOQ growth for both the revenue and profit. As for Q2 margins, Q2 gross margin is 42.42%, up by 3.36 percentage point quarter-over-quarter. This also exceeded our guidance too. Since the beginning of this year, the shortages of certain components and materials, especially memory chips, have led to higher input costs. Our end product prices have also been raised accordingly while customers are accelerating purchases in the first half of the year. As a result, consumer electronics demand has shown some moderation in the second half.
Despite this, Novatek expects Q3 revenue to maintain sequential growth. Basically, it is driven by solid expansion in Edge AI vision related chip business and stronger inventory build-up demand from smartphone customers. Based on the above, our 2026 Q3 guidance will be as follow: Revenue TWD 30 billion- TWD 31.2 billion at an exchange rate of 1 - 32. Gross margin is expecting to be around 38.5%-41.5% range. Operating margins between 19%-22% range. Thank you, Steve, for the Q3 guidance. Next, we will move on to Q and A sessions. Please be reminded to send in your questions.
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Tony.
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Could management share the view on the sequential trend across major application in terms of order flow into third quarter 2026?
Based on panel production data for third quarter, we observed the following demand trends across major applications. Looking at TV demand, it is expected to be slightly down quarter-over-quarter. As monitor production is entering a seasonal slowdown and is also expected to decline. Due to customer pull-ins in the first half of the year, notebook demand is expected to decline, while tablet demand should see modest growth. As for mobile phone demand, it is improving among customers outside China. Whereas demand from Chinese customers remains soft. As for automotive demand, it is expected to remain largely flat quarter-over-quarter.
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Therefore, could you also provide your quarterly revenue trend across your three business groups?
Looking at our three major product categories of business group, we expect the following: the small medium driver IC revenue is expected to increase significantly QOQ, basically driven by seasonal inventory replenishment from smartphone customers. SoC revenue is expected to remain relatively stable. A growth in Edge AI vision-related products should largely OSAT lower shipments associated with large panel applications. As for large driver IC revenue, it is expected to decline quarter-over-quarter as demand for large size panels softens and panel manufacturers are reducing production accordingly.
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Revenue for SoC product in second quarter increased by 40% quarter-over-quarter and around 50% year-over-year and accounting for 50% of total revenue. Could you provide the ranking in terms of revenue mix and growth in the first half? Also, in addition to the ASP inflation from higher memory prices, any other factors behind this robust growth? Also, what percentage of revenue from AI related products in the first half?
Within the SoC product line, Edge AI related product actually achieved the highest year-over-year revenue growth in the first half of this year. In addition to reflecting higher memory prices, the shipment volumes also grew substantially. Edge AI related product continue to account for a growing proportion of revenue within the SoC product line, during the first half of the year.
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As demand on auto product has been less affected by higher memory prices, what is the year-over-year growth rate for auto related product in first half? Any major factor for this growth? How about shipments or growth for the auto TDDI product? What percentage of revenue from TDDI product in auto, and what percentage of company overall revenue now comes from automotive business?
The overall revenue from automotive related product actually posted solid year-over-year growth in the first half. This is largely due to market share gains, and particularly given the robust growth of TDDI product, TDDI business, the touch and drive integrated solution. Based on the current status, we are expecting 2026 revenue in the automotive area to outgrow 2025.
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For your DDIC product, could you also provide update on the ASIC product status?
Well, in the driver IC related ASIC projects, Novatek is actually actively engaged with customers across a diverse range of applications like the automotive, IT, gaming, a lot of them. Given the broad scope of these engagement, we do believe that it has the potential to become meaningful revenue contributor in the future.
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For SoC product, could you also provide the update on ASIC and also on related to advanced node products?
Well, regarding to the SoC ASIC area, we will continue to invest in advanced node product development and trying to broaden our footprint in agentic like the Edge AI, machine vision applications like including smart home devices, AI enabled NVRs, Flock cameras, smart glasses, drones, security surveillance systems. We are actively pursuing ASIC opportunities in these markets and project execution is progressing steadily and according to plan.
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Given the penetration of OLED DDIC for smartphone into first-tier customers recently, your management mentioned last time that the revenue from the customers will grow year-over-year in both 2026 and 2027. How about the visibility into 2028? Also, in addition to smartphone products, are you working on with other product lines?
Novatek's OLED driver IC product development and shipment programs with some of the smartphone customers are progressing very smoothly. We believe these products have the potential to become meaningful contributor to future revenue. Beyond smartphone applications, the development projects across a variety of other applications are also advancing as planned.
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As for the node process of FinFET OLED driver IC for smartphone, has the timetable been decided? Do you have the timetable for the mass production of FinFET OLED DDIC for smartphone?
Our smartphone OLED display driver IC products are currently being mass-produced on a 22 n high-voltage process. As for the FinFET technologies, we will adopt them in line with our customer specification requirements and also product development plans. In general, Novatek will continue to evaluate and adopt process technology that offers strong competitiveness.
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Now the questions are shifting to related to gross margin. A few investors are very surprised by the good second quarter gross margin result. Therefore, they wonder why second quarter gross margin exceeded the guidance and also increased by 336 basis points quarter-over-quarter. What are those factors?
The reasons for the increase in Q2 gross margins are as follows. First of all, in response to the rising cost of certain materials such as KGD wafers substrates, as well as the higher outsource packaging and testing costs, Novatek has implemented corresponding selling price adjustments. Secondly, a more favorable product mix, particularly the increased revenue contribution from SoC products, has been beneficial to gross margin. Last of all, the lower inventory costs have also provided support to profitability.
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Given the gross margin guidance for third quarter, what major factors compare with those in second quarter? Could you particularly provide comments on the cost increases and the sales price adjustment?
Well, as for the Q3 gross margins, it is pretty similar to Q2. As for the cost for certain materials and OSAT services, we are expecting to continue to increase in Q3. Novatek will continue to work closely with our supply chain partners and customers, and evaluate pricing adjustments while taking into account the long term and healthy development of the industry. The positive impact from lower cost inventory is expected to diminish compared with Q2. The product mix will continue to remain an important factor influencing our gross margin performance.
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By how much will foundry and packaging costs increase in the second half compared with the first half? Also, could you provide any indication for the cost increases into 2027?
Due to the continued resource crowding out effect driven by the strong AI related demand, costs for certain wafer foundry OSAT services are still trending upward in second half of the year. We are actively discussing and negotiating with suppliers to address these cost increase in 2027.
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Given surge in memory cost, could you reflect those cost to your selling price for your SoC product ready? In addition, as price for part of DDIC product were raised to reflect higher cost in the second quarter, how about other DDIC product lines in the third quarter? If yes, how about the price increase magnitude?
For certain SoC products, it has KGD in it. As you know, memory supply remains tight and prices have risen significantly. While striving to fully support customer demand, Novatek is also working closely with customers on appropriate pricing adjustment. At the same time, we are also working on new solution to deal with such impact. Following the pricing adjustment implemented for certain DDIC back in second quarter, we will continue to negotiate with customer in Q3 based on supply chain conditions and market dynamics.
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Could you provide ranking of gross margin for your three product group in the second quarter. Will this ranking change during third quarter?
Basically, the SoC related products enjoy higher gross margin and this won't change in Q3.
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Top major items for non-operating income of TWD 1.316 billion in second quarter compared with TWD 396 million in the first quarter 2026.
The non-op income of TWD 1.32 billion in the second quarter mainly came from investment income of TWD 860 million and interest income of TWD 240 million and dividend income of TWD 108 million.
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The company book investment income of over TWD 300 million income from Marvell in the second quarter. Could management provide more detailed amount and also comments on your strategic investment?
Well, following Marvell's acquisition of an investee company of Novatek recognized approximately TWD 700 million of investment income in second quarter, including both realized and unrealized gains associated with the Marvell shares received in the transaction. Novatek will continue to invest in innovative external companies to gain early access to key technologies and strategic collaboration opportunities, and to enhance company's long-term competitiveness and also the corporate value.
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What are your inventory days at the end of second quarter compared with those in the first quarter? Could you also provide the comments into the third quarter? Also, in particular, could you also give some color on your inventory on the memory side?
Well, the inventory days for the second quarter were 77 days, up by three days from 74 back in first quarter. This is mainly due to the rising raw material costs. But if you look at the numbers, it is still at the healthy levels.
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Your operating expense of TWD 5.69 billion in the second quarter increased quarter-over-quarter about TWD 5.01 billion in the first quarter and TWD 4.6 billion a year ago. Is your operating dollar in 2026 still on track your moderate increase guidance from 2025? Also, how about your operating expense ratio in 2026 compared with 2025?
The operating expense increased sequentially in the second quarter. Primarily, it is due to the higher R&D investment. Our 2026 operating expense guidance remains unchanged, and the operating expense ratio is expected to remain broadly in line with last year's level.
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Why is the tax rate of 18.68% in the second quarter higher than the ratio of 14.2% in the first quarter? Will you also maintain the full year guidance of 16%-17% for 2026?
The tax rate in the first half was about 17%, and the full year target of 16%-17% remains unchanged. I think we have covered most of your questions, and we still have a little bit time for one or two questions. See if Tony, if there's any questions that you would like to pick out if we haven't yet covered.
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Given the surge in memory prices, how will your company cope with this trend? If there are cheaper providers from China with lower selling price, will you adopt the product from China?
As mentioned earlier, regarding the memory price issues, we will continue to work with our customers, with our supplier, to deal with such issues. At the same time, we also are bringing out new solution to reduce the impact by this price hike. As for whether we will use any other supplier, I mean, for us, it is always an open issue. As long as it is competitive, we will use. I think we have covered most of the questions. Thank you so much for joining in, and wish you all the best, and have a good evening.