MediaTek Inc. (2454) Earnings Call Transcript & Summary

Welcome to the MediaTek 2023 Second Quarter Investors Conference Call. Financial results and presentations for today's call are available on the Investors section of the company website at www.mediatek.com. Now I would like to turn the call over to Ms. Jessie Wang, Deputy Director of Investor Relations. Ms. Wang, please go ahead.

Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek's CEO; and Mr. David Ku, MediaTek CFO. Mr. Ku will report our second quarter results, and then Dr. Tsai will provide our prepared remarks. After that, we will open for Q&A. As a reminder, today's presentation will provide forward-looking statements based on our current expectations. The statements are subject to various risks and factors, which may cause actual results materially different from the statements. The presentation material supplement on papers financial majors. Earnings distribution will be made in accordance with financial statements based on papers. For details, please refer to the safe harbor statement in our presentation slides. In addition, all contents provided in this teleconference are for your reference only not intended for investment advice, neither MediaTek nor any of independent providers is responsible for any actions taken in reliance on content provided in today's call. Now I would like to turn the call to our CFO, Mr. David Ku, for second quarter financial results.

Thank you, Jessie, and good afternoon, everyone. Now let's start with the 2023 second quarter financial results. The currency here are all NT dollar. Revenue for the quarter was $98.1 billion. up 2.6% sequentially and down 37% year-over-year. Gross margin for the quarter was 47.5%, down 0.5 percentage points from the previous quarter and 1.8 percentage points year-over-year. Operating expense for the quarter were $31.9 billion compared with $31.5 billion in the previous quarter and $37.6 billion for the year or quarter. Operating income for the quarter was $14.8 billion, up 2.7% sequentially and down 62.4% year-over-year. Non-TIFRS operating income for the quarter was $15.4 billion. Operating margin for the quarter was 15%, the same as the previous quarter and down 10.2 percentage points year-over-year. Non-First operating margin for the quarter was 15.7%. Net income for the quarter was 16 billion, down 5.2% sequentially and 55% year-over-year. Non-TIFRS net income for the quarter was $16.6 billion. Net margin for the quarter was 16.3%, decreased 1.4 percentage points from the previous quarter and 6.6 percentage points year-over-year. Non-TIFRS net profit margin for the quarter was 16.9%. EPS for the quarter was $10.07, down from $10.54 in previous quarter and $22.39 in the year ago quarter. Non-TIFRS EPS for the quarter was $10.42. A reconciliation table for our TIFRS and non-TIFRS financial information is attached in the press release for your information. And that concludes my comments. Thank you.

Thank you, David. And now I would like to turn the call to our CEO, Dr. Rick Tsai, for prepared remarks.

Thank you. Good afternoon, everyone. MediaTek's second quarter revenue and gross margin, both were above the midpoint of our guidance ranges, with 3 revenue groups growing sequentially. In the first half of the year, the semiconductor industry, including MediaTek was affected by weak global demand, which led to a lengthened inventory digestion cycle. Recently, we observed the customer and channel inventories across major applications have gradually reduced to a relatively normal level. Recent demand from our customers has shown certain level of stabilization. However, our customers are still managing their inventory cautiously as global consumer electronics end market demand remains soft. For the near term, we expect our business to gradually improve in the second half of the year, and I will discuss each of our 3 revenue group's business outlook in a moment. Before that, I'd like to say a few words about some of our recent developments, the industry trends that will fuel MediaTek mid-to long-term growth. We are very excited this will enable MediaTek to offer an entire spectrum of smart cabin and cockpit functions with cutting-edge graphics AI, safety and security features. In addition to the full range of smart cabin solutions, our Dimensity, auto platform also includes connectivity, auto drive and components. We have recently received heightened interest from automotive customers during the partnership announcement 2 months ago. We believe our industry-leading low-power processors and 5G WiFi connectivity solutions, combined with NVIDIA's strong capability in software and AI cloud will help us become highly competitive in the future connected software-defined vehicle market and shorten our time to market to accelerate our growth. Given the long design cycle of the automotive industry, we anticipate a more significant revenue contribution from 2026. Another example of the digital transformation trend is the increasing popularity of generative AI. Today, the majority of the generation AI processing is only performed by cloud computing. However, we believe that they will -- towards distributing generation AI influence workloads to edge devices like smartphones and IoT for better privacy, lower latency and lower operating costs. By doing so, edge prices can support generated AI on devices for seamless AI capabilities. They also connect larger generative AI models in the cloud by prompting more compensated AI functionalities. Therefore, edge device makers will need to adopt high-computing, low-power AI processes and faster, more reliable connectivity to enhance computing capabilities and lower connection latency. As the leader in various edge devices, MediaTek powers approximately 2 billion connected edge devices in the market every year. Our leading product portfolio, investments in advanced nodes as well as next generation connectivity, [indiscernible] MediaTek well to capture this increasing trend as a key enabler and beneficiary of edge AI. With that, now let me talk about the recent business of our 3 revenue groups. Mobile accounted for 46% of total revenue in the second quarter and grew 3% quarter-over-quarter. The result was slightly better than our prior expectations as customers' demand for 5G SoCs improved during the quarter. With relatively normal customer and channel inventory levels, we anticipate the growth to continue in the third quarter. On the product side, we recently announced the mainstream 5G SoC Dimensity [ 6100 plus ], which belongs to a new 5G segment with more affordable price points to cater to global 5G demand transitioning from 4G model. Mobiles incorporating Dimensity 6100 plus will begin to ramp up starting from the third quarter. For the flagship segment, we are on track to increase our shipment and revenue this year. Multiple Dimensity 9200-plus smartphones have been well received by the market and contributing robust revenue in the third quarter. Our next-generation flagship SoC to be introduced in the upcoming months, we will further advance the overall performance and integrate our latest APU with the capability to perform generative AI features on the device. We have been closely working with our customers for relying and expect smartphones, powered by our next generation flagship SoC to hit the market by the end of the year. In fact, not only the flagship SoC, but all the 5G smartphones SoCs across all tiers, we are shipping today are equipped with MediaTek APU to perform various AI features. The trend of more complex AR instruction is likely to be a catalyst for smartphone replacement demand, which will enhance our product mix and support by thread. Now let me move on to Smart Edge platform. This group grew 2% sequentially in the second quarter and accounted for 47% of revenue. [indiscernible] demand was stable in the second quarter and will improve moderately in the third quarter. Notably, MediaTek WiFi service solutions have been adopted across various levels. For example, in retail routers utilizing our WiFi service have been available in the market since the second quarter. Premium notebooks and broadband devices are scheduled for release in the third and fourth quarter, respectively, with a stronger ramp-up in 2024. For TV, due to customers' inventory previewed to take advantage of more favorable panel prices in the first half, the demand in the third quarter has slowed down. As for ASIC, we recently see growing enterprise ASIC business opportunities in AI and data center markets. With our strong IP and SoC integration capabilities, we aim to continue to grow this business in the future. Overall, as most of the consumer electronics demand remains soft, we anticipate Smart Edge platform business to remain flattish in the third quarter. Now moving on to Power IC, which accounted for 7% of total revenue in the second quarter and grew 4% quarter-over-quarter. We expect our IC demand in smartphone to improve in the third quarter. In summary, as we stated in the beginning of the call, we expect our business to gradually improve in the second half of the year. For the third quarter, we expect revenue to improve in smartphone, connectivity and PMIs offsetting the decline in TV and other consumer products. During this demand cycle, we continue to execute our strategy of balancing among market share, revenue and profitability. With that, we expect our third quarter revenue to be in the range of TWD 102.1 billion to TWD 108.9 billion, up 4% to 11% sequentially and down 23% to 28% year-over-year at a forecasted exchange rate of TWD 30.7 to USD 1. Gross margin is forecasted at 47%, plus or minus 1.5 percentage points. Quarterly operating expense ratio to be at 32%, plus or minus 2 percentage points. We are on track to reduce the full year total operating expenses by mid-single-digit percentages year-over-year by maintaining the investment in the key technologies and key projects for the mid- to long-term growth. This concludes my prepared comments. Thank you.

Thank you, Rick. Operator, we are now ready for Q&A. Are we pleased to have the first question?

[Operator Instructions] And our first question is coming from Randy Abrams, Credit Suisse.

I want to ask the first question just with all the attention on AI. 2 parts to it. First, I want to see if you can give an update if you're seeing potential upside yet to the content per device from that AI engine, both in smartphone and Smart Edge. And if you could also talk on the ASIC, I think in the prepared remarks, you talked about some opportunity on AI and ASIC. So if you could give a bit more update if you're seeing more breakthroughs that could make this a more meaningful contributor? And how you feel your IP around AI, SerDes, networking suits you to get some of the larger hyperscale sockets?

Okay, why don't I talk about a device at first because your question basically a device AI and also the ASIC opportunity. So what do I updating about the ad device. Actually, reality right now is most of our -- all of our smartphones, especially the flexi smartphone, we have actually the generative capability in there already, basically, that's the transformer model and fuel function of feature already in lending in our previous generation flagship. And for the coming third generation flagship, I think we will just basically put more function on that. And we will have some demo basically in the coming months. So we're going to update you guys more about that firm. But your question specifically asking about the dollar content. So far, it's actually really just at the function. I think in terms of the dollars, it's not a huge content increase yet. But our view is actually going forward, when more and more distributed AI being performed on the smartphone. I think the requirement for more competition power on AI will increase. But so far, we probably won't be able to provide any sort of tier content on that. But trend is definitely positive. So that's definitely one.

Yes, I might add that, Randy, other than smart phone platform. We basically the OEMs, the customers are really also working very diligently to implement the various models to 2, I would say, explore the applications in their edge devices to the smartphone or, for instance, automotive, the EV. I think we are -- actually, we have seen some demonstration by some of our customers, which I think as David just said, will then we'll induced, we enable much more much higher interest from the end users. I said that's the key. And then we I think in a virtual cycle that will induce the demand and the shortened replacement cycle. As to the ASIC opportunities, what can I cannot be very specific. But what I can say is quite obvious and quite natural for all the hybrid scale guys, data center to accelerate their chip development to -- for the generative AI enablement. So we are seeing certainly a heightened activity levels. And we are -- we have all the IT portfolio available. for instance, high speed service 224G. We are -- we have obviously a very advanced node design capability and the packaging capabilities. So we expect to -- we are in deep discussion with people, and we'll see how it goes, hopefully, positively in the future.

And I'll just have one quick follow-up on that part. I think in prepared remarks, you mentioned it's an enterprise ASIC. I just wanted to clarify it enterprise versus cloud where you're seeing the initial traction?

Randy, actually, we hear some background noise. So can you repeat your question again?

Yes. The question was the ASIC traction. Is it enterprise or I think that's in the prepared remarks? Or are you seeing traction with the cloud providers on their ASIC?

Okay. Then for enterprise, we continue -- because we have certain ASIC products, which enterprise customers, mostly in the switching Asia. But for the new opportunities mostly rely with the hyperscalers.

The second question, the margin outlook has remained very resilient. And I think that's how you've been trying to guide it balancing share and pricing. If you look ahead at the margins, do you think as we go through continued slow environment, some of your competitors have inventory. How do you see margin range if you think these levels continue to hold from what you can see? And do you see any help coming through from input supply pricing? Or is that still inflationary?

Randy, first of all, I think before we're commenting about the gross margin, maybe we can probably provide some color about the current -- the competitive landscape or competitive situations out there. Well, first of all, the loans to short. We didn't really see any material change about the competition landscape right now. And on the other hand, as you can see, both from the balance dedicated balance actually is that we are aiming for, but among revenue, margin and market share. I think -- and also another, I would say, the good news from a margin perspective is both from the channel side, the customer side and the channel side and also from the vendor side, I think it's all inventory levels been coming down to a pretty heavy healthy level. So you won't see any players trying to rush out the inventory by taking aggressive pricing. So with that, I guess, the guidance we give out for third quarter. Even though we can't not provide the guidance for fourth quarter, but most hit, I think that should be a good reference for the fourth quarter's gross margin heads-up as well. Okay.

And supply side, how is the inflation or deflation? Be inflating the patients about the financial market or... Sorry, like foundry and back-end and some of your cost structure.

Well, I think next year, the foundry cost actually is still in discussion. But overall, given the market situation, we are seeing probably, hopefully, it's going to be flat or slightly up. In general, actually, it's a manageable situation. So it won't be a big swing factor so far.

Next one, Brett Simpson from Arete.

I want to just ask a bit more about AI and your APU in...

Your voice are all breaking up.

Okay. sorry, I'll dive back from you.

The next one is from Laura Chen of Citi.

My first question is also about the AI-related opportunity in the ASCI business. I'm just wondering that other than current consumer-related application, I think Rick already mentioned that your progress in the enterprise side. So I'm just wondering that the -- other than that proprietary IP and also the advanced node design capability, MediaTek also provide OS design service for the AISC project, we see that actually for this kind of AISC probably the advanced packaging together with a lot of like interface or hint memory is also quite important. That's my first question.

Yes, we do. we are in deep discussion with potential customers, of course, includes the advanced packaging capability such as [indiscernible] And also [indiscernible], or should I say, into ICs interconnect capability. We -- as I said earlier, we have a very complete IP portfolio, and we have the advanced node and advanced managing at, of course, through working with our key supplier the answer is affirmative to your question.

Yes. So for the kind of advanced packaging. So for MediaTek's current potential project, will you leverage that kind of open IP? Or do you tend to focus more on your proprietary solution?

We actually -- we work most closely with FMCG TSMC. -- but also we also look at the alternative sources when they are technically competent.

Got it. And any idea like when will we see that probably more mature or this kind of a project to start to bear fruit?

Usually, this kind of project takes at least 1.5 to 2 years.

And also my second question is also about the edge AI. We know that for current our smartphone so solution, we already embedded like APU or a new engine. So do we need to see that a provider like Google to really enable the application to see that edge AI getting more mature? Or any other trigger you close watch?

Yes. Laura, actually, in addition to our own APU. I think right now, especially for the GI [indiscernible] model, is very important. We're actually falling of the open AI model on our smartphone. I think currently, we've been [indiscernible] model, [indiscernible] model, Berkley open AI LAMA, open mama and also stable diffusion. I think that adding up and running is actually in portable on our cash device. I'm sure actually there will be more model in running. So overall, I think the cycle is actually -- we have the hardware ability. We make sure that certain appropriate model can be run prop plans, mostly on our device, they will provide that together with our development tool to our customers so they can develop the feature and function they are looking for the generic AI. Right now, actually, it's, again, like I said, for the third-generation flagships, we've been in serious discussions with our customers, trying to have some lending features, GI on the phone. But before that, we will definitely demo a few possible ideas in, I think, October, November time frame.

Next one, Gokul Hariharan, JPMorgan.

My first question goes back to smartphone. Could you talk a little bit about what is the demand sentiment among your customers? Is there any improvement on China smartphone demand? And do we feel that China smartphone market is likely to remain at these depressed levels given Huawei is kind of like the one brand, which is kind of coming back and growing quite nicely in China. My understanding is that MediaTek currently doesn't have a license to sell into Huawei. Do you think that is something that could change over the near to medium term given the share of the high-end market in the recent quarters? That's my first question.

On the demand for the smartphone so we're said in our remarks. Basically, what we are seeing I would say, a good improvement in the shipment of the smartphone. Well, the inventory lowered, I think both actually pretty well inventory going down pretty well in the second quarter. We believe that inventory reduction will continue into third quarter at a very healthy pace. As such, the reordering of the SoCs has moved up in its page also. The end market demand, I think, we still remain cautious. We also believe that's the case. However, we don't believe the end demand is going to get worse. It probably will grow at a moderate rate going forward. So that's how we view the smartphone outlook. As to the impact of the Huawei, I want to be very clear that we do not have a license to ship to Huawei of smartphone SoC or we [indiscernible] Huawei. And the impact of Huawei in the market, I think the most important part is to look at the segment they are playing in. And most importantly, in the very high end, they made and the core -- there are 2 series, very high end. And so I think we believe the competition directly against our chips remain fairly far apart. We do not see a major impact from Huawei from that point of view.

Okay. That's very clear. My second question, could you talk a little bit more detail on the NVIDIA partnership in auto? What will be the structure of this partnership? Is it going to be like a JV structure or you would be selling the chips, but you will be paying some kind of IP or a royalty fee to NVIDIA for the IP and the chiplets that use from NVIDIA. Also NVIDIA already has their own stand-alone auto business with a fair number of autonomous drive and some ADAS-related design wins also. So in those areas, how does MediaTek enter? Like does it mean that MediaTek doesn't really participate in that ADAS autonomous drive market? Or is that structure also going to change for NVIDIA as well that they will kind of partner with you for many of their future autonomous drive and ADAS-related design wins also.

Okay. There is no joint venture structure. I want to say that clearly, -- it is a partnership structure. By that, we mean at first from a technology point of view, as you just said, we integrate the IP, the key IPs, such as GPUs, such as their AI capability and their software technology into our SoCs. We provide the other computing capabilities and the multimedia functions or the interconnect. And the chips made this way will be marketed and by MediaTek. We know NVIDIA has already their product portfolio and their customer base already. So we work basically in a partnership manner to go to the customers because in that way, together, we can provide a full spectrum of automotive in cabin solutions from the very high end to the mid entry and to our customers -- potential customer base. Of course, in addition, we provide the other connectivity capability such as 5G, WiFi and some other component typology for a full portfolio. Made us, I think that's one area we will work together on. But right now, the first thing is to have a very successful, very competitive in cabin solutions for the market as soon as we possibly can. Thank you.

Next one, Charlie Chan of Morgan Stanley.

So my first question is also about the AI on the phone. So first of all, do you envision that generally GAI can be a Killer app on the phone? Or is just a nice to have a feature? Can I get some insights from the management.

Charlie, I think [indiscernible] actually right now still in the early stage of GAI, but we will already see how powerful it is. But also show, we do believe that could be -- I won't use the word AI. I think there will be a really nice features, which could increase the dollar content of the some conductor or to the minimal shorten the replacement cycle. They go actually there's lots of useful functions out there. But I think the key word here is not really GI only on a smartphone. It's something we call the distributed AI for certain functions, for example, right now, for stable division, you can do some photo shop on your phone with the natural language on the hash. So sometimes it's the privacy issue, you don't really want to send all your pictures, which you want to do some Photoshop activity on that, both to the cloud and so on process accessing furnished and coming back. So that's actually one example. Another example is actually what we're talking to our phone customer, they are continue so phone assistant to help you net through different applications. And that actually is not as powerful as strategy, probably not even in the same , but it's become very handy personal assistant. So the key word should going forward is the distributed AI model. So the phone maker and also we actually provide a tool, we will figure out what's the right functionality, which will be performed on the edge. And for certain functionality will be performed on the cloud, and it will be seamlessly connected. And with that, we do believe actually there will be a very key driver to either increase the semiconductor contracts or to the minimal, but that's the new features show in the great.

I've been thinking about that not on meaning I'm working on that. So I have talked to quite a few people. The feeling is this generative AI through cloud and the edge devices, be they smartphone or PC or automotive and then provide another platform not the same, but the nature being kind of similar to the 4G to the 4G era, which I mean, which provides this platform and enable and excite a lot of the developers and the entrepreneurs to come up with new executions and new business models. But of course, I think, well, if you think about 4G, 4G was launched back in about 2011 time frame. And then when then one obvious example being, for instance, TikTok it just came out of nowhere, and it became a huge success. I cannot say there will be a TikTok I think GAI provides such a powerful capability that the many entrepreneurs will take advantage of that [indiscernible]. That's just by -- just my thoughts.

So I believe the MediaTek in 4 markets far before the 4G era. I remember you kind of enable those emerging markets, a lot of interesting features. So based on the comments you just made Rice in the TV. So 2 realistic questions. First for the emerging markets, especially China markets, do you think policy control is kind of a restriction to your future application development? And also, to David's point, I really appreciate that distributed AI computing. But who should be this kind of a location of computing? You said MediaTek, the play former to decide what kind of computing will be done by cloud? What should be done by phone or it should be AI developers or OEM makers. Can you give us some color?

Yes. There, I think most likely will be a combination of all those parties you mentioned. For example, when we talk about the state fusions, some of our phone customers are talking about some functions provided by phone in that case, they probably don't we need to work with the cloud guys. They can consider that actually for them. And for certain an Internet player, of course, they have the cloud capability, but they are also talking about whether or not they can offload some computation on the phone. Bear in mind that every AI calculation on the cloud, the cloud guys or Internet guys need to pay funeral expense. But if they can show distribute part of that on for, then they will be free from the service provider perspective. So there are also some incentives even from the cloud service or generative AI cloud service guys. So again, I answer your question directly, it will be a combination of all those parties you mentioned.

I'm sorry. But also it really depends on the edge what we call edge device, I think here is the spectrum of edge devices, not just smartphone actually being probably the smallest form factor one. Despite the power, the smartphone had but smartphone does has is limitation in form factor and along with, for instance, some limitation in the memory side, the phone can carry. But then if you move to automotive, then the memory size, for instance, can go up quite drastically. And the size of the model that can be implemented in that kind of device much different from a -- let's say, 7 giga 7 billion kind of a model. So Again, the thing is so new. Remember, Chat GPT came up in November last year, and it's already amazing that how much work has been already done, both at the cloud and the edge devices. I think people are working to try to find that balance or [indiscernible] from different devices. He also has my again, my fourth. Your question on government, I think that's, of course, out of our league. I -- we cannot comment really directly. Hopefully, the government also the successes, you mentioned China -- China, the subsystems, the China had with their Internet economy provides a good guidance for them and the GAI will prosper all over in the world.

So let me switch gears to second topic, if that's okay. So it's about the smartphone replacement cycle because the company just introduced your mainstream 5G SoC. Do you think that can bring down the price points of smartphone to sweet spots? And do you think that replacement cycle will restart anytime soon because the replacement has been sale, right, for almost 2 years. And last point is really about the secondhand markets, right? Do you think the new phones from your mainstream 5G SoC can compete with the secondhand phone in terms of the pricing points.

I think earlier this year, we kind of provide our view or the global smartphone shipment. It's actually coming down in the past, roughly 1.4 billion to 1.2 billion. I think part of the reason, I would say, a big part of the real is actually the resistant for. So what we're talking about 1.2 billion has already been taken into consideration of the replacement for, especially for the -- maybe the IOS system. For the Android side, actually, we didn't really see a big impact on the refurbishment on at that point. But on the replacement on the replacement cycle of the phone, on the other hand, in general, in the past, roughly is 18 months. But this time, actually, is the cycle extend to almost 2 years. We do believe actually -- they've spent a lot of time, people still trying to get a new for people still going to get a new phone. So very fact next year, we feel in terms of the placement cycle, it should be on the [indiscernible] actually still waiting on that.

Next one, Sunny Lin, UBS.

So my first question is on our long-term outlook. It's been a while since the last time the company provided the adjustable market forecast by segment. So I wonder if now is a good time that the management could provide your latest expectations on the long-term addressable market by mobile, ASIC, automotive and the others?

We probably normally provide that long term in the year-end. So maybe we delayed the questions to the fourth quarter. Normally, in the year end when we do in the annual planning, we will take a look about the long term bias addressable market. So why don't we delay that to the next quarter's conference.

Got it. No problem. Well, so perhaps, if I may, given lots of investor interest in your collaboration with NVIDIA and automotive does have a lot of potential in terms of the market opportunities. You mentioned revenue will become more significant from 2026. So I think if you have any visibility at this point that maybe in a 4- to 5-year time frame, how many automotive account for your total revenue?

I think total revenue this year for automotive, we are looking for 200 million to 300 million per range. It depends on how we go in the end of this year. Relatively speaking, I think absolutely scale, I think it's still sizable, but on relative scale, it's still small. Currently, we don't have actually -- we didn't really provide actually the forecast guidance. But another way we can kind of talk about for the design pipeline, the sub pipeline revenue right now is over $1 billion.

And that will start to be realized after 2026?

Yes, it will be beyond '26. [indiscernible] the SOP cycle will be probably 2 plus year.

My second question is on platform. How should we think about the [ Paramax ] over the next maybe 12 to 18 months? I think on one hand, China plan could start to see a bit of improvement on the volume side. But to drive that volume, I think some people wonder if that could be coming from lower end. But I think on the other hand, if we look at the new product launch by smartphone makers in China, I think there is increasing focus on high end as they pursue better profitability. And so based on your engagement with China smartphone makers, how should we think about your 5G [indiscernible] maybe in second half of this year and into 2024?

So probably the better way to think about that is actually think about 4G smartphone as a total, which including 4G and 5G, we actually right now promoting pretty heavily for transforms or convert from 4G to 5G entry smartphone. So that's why actually is, I mean, earlier, I think the other analysts are asking about the new entry-level 5G. So on a blended basis, actually, when you think about the product portfolio segmentation as a whole, 4G in the bottom, you actually see 4G being converted upgrade into 5G. I think that's point number one. So when you look at the totality of the smartphone, it should be getting better. If we're only looking at 5G, okay, I think we normally separated flagship high-end and mainstream. I think for high-end part will stay there, okay? And right now, we are making good progress on the flagship. Currently, for this year, I think our sort of market share of the flagship, we focus to be 20% plus. And that one actually with our new portfolio and also getting more and more market traction. We believe actually it's the market share. Our own contribution from the flagship should be increasing. On the high end right now, actually, we see be stabilizing. So I think from a segmentation perspective, I would say it's actually it's a pretty -- unlike the life is stabilizing and 4G completion to 5G entry, and that should be positive to the overall smartphone product mix.

Next one, Brad Lin, BoA Merrill Lynch.

I have 2 questions. One is on AI and another is on the automotive. So while we learned the up comments on the AI proliferation beyond sure AI, also by some many other [indiscernible] and Intel. So for near term, would you please share the current contribution and are the key offerings? And how fast do you expect it to grow for MediaTek maybe in the next 2 years? And should we expect the [indiscernible] to come earlier than smartphone AI.

Sorry, can you again, sorry about -- there's some background noise. Can you just repeat your first question again? You're talking about smartphone AI or you're asking something else?

Yes. So basically, for the near term, I just want to ask a current contribution from the overall AI for MediaTek? And what are the current offering right now? And how fast you expect AI...

Only have in the revenue for AI [indiscernible].

So do you have a, well, SMA when the HAI will take off?

We don't have a fixed plan, but probably the bad way thing about that is actually is that all products right now have the AI function in there. And even though we're only taking smartphone, for example, we talked about, we've been supporting a lot of the open AI model on the smartphone because actually we are doing something similar on other platforms as well. So I think probably the between because after all, we are not just on the cloud training side. So if you think about it's a separate data to ship only for AI, probably not the best way to take a look about our revenue, our revenue contribution from AI. The AI be a driver for demand and driver for more computation for AP in general. So probably that's the better way to look at that.

So my second question will be on automotive. So I was glad enough to be able to attain MediaTek and Media Express conference during the [indiscernible] pretty encouraged to learn the partnership. So we follow up the progress of the development. And also, I remember the firms say that the partnership will target every single chip in an automotive and provide test shopping platform for clients. So would you please share with the target markets how the target market will expand. Should we also expand our power management IC also penetrate into some of the automotive as well in the next few years too. And well, maybe a slight follow-up is on the -- I know we are not going to build a JV. So -- and then that will be marketed by...

NVIDIA is ongoing as well. To be precise, I think that product will be carrying MediaTek right in and MediaTek will sell their product. And within that product, we are getting GPU chiplet from Media, but the whole thing will be MediaTek revenue. I think we are targeting to have the first-time revenue somewhere towards the end of 2025, first product. And there will be a few more product right now is on the planning and kicking off. So overall, I guess, for the revenue through this partnership, probably will start to ramp in 2025. I think that's 0.1%, mainly on the common side, mainly on the common side. In addition to that, like our CEO explained, we will also leverage a partnership work together on unit existing business portfolio. For example, they have ADAS, they have high-end cabin and all those solutions or platform will have MediaTek opportunity. For example, it could be 5G thematics -- it could be connected, it could be mic, it could be something else with some but even for display related. So we were also trying to realize those synergies as well. So overall, like we explained during the company that I think this partnership is very synergetic and complementary and both from technology and product portfolio. So either we do think of the cabin is one product for other parts, we will not be joint product portfolio or joint product development, but we'll be joining go-to-market and joint business platform. I think that's probably the better way to think about that.

Just one slide follow-up is that should we expect some portfolio road map.

So I cannot say we don't collaborate further. But now we just want to make sure this automotive part where we need that success. Thank you. We're definitely looking forward to that. Thank you very much for the color.

And the last one is from Brett Simpson, Arete.

Rick, I wanted to just come back on the AI side, the smartphone AI strategy. Can you talk about what size of model MediaTek can support with their APU next year? And I guess when I sit back and look at this whole strategy for MediaTek, developers that can offload AI workloads onto the phone, they save a lot of money not having to run their application in the cloud. So how does MediaTek get paid for enabling these models to run locally on your APU, on your software stack. Is this something you can monetize beyond selling a chip?

Well, the models, actually, I think David brought it up earlier. Usually 6 billion, 7 billion model, such as [indiscernible] stable diffusion, et cetera, et cetera, for the smartphone. And as I said, I believe the larger model -- a larger size model will be implemented into PC and the automotive. I said right now. Again, this is very new. And we are all just working very hard to enable to generate AI to work well with the edge devices without which I think is just very shaky. So I must say we haven't -- what we believe at this first order is the one people on the users and some of you probably what you call KOLs, once they find out how to use generated AI for new applications and to appeal to the general public. I think the most important replacement cycle being shortened. And then the TAM will get back to a more better growth pattern. That's the first quarter thinking that we have. I hope I'm answering your question.

And I guess maybe just to follow on from that. Can you give us your perspective on how APUs drive up silicon content in phones? I guess, it's difficult for us to understand the extent to which this drives up your ASPs and smartphones. But I mean, are we talking about this going up 50%, 100%, 10%? Any sense as to how you think AI contributes to your ASP expansion over the next 1, 2, 3 years?

This is a very good question. And again, Brett, you have to bear in mind any of the smartphone chips that we're discussing here today for this year and for next year, I don't -- just us other people, too, are already [indiscernible] actually, this year, we have token out already. And next year is well very much in design, and it was planned just about a year ago when generated AI was not very prominent in people's mind at all. So anything that you hear right now is because we're already putting a quite powerful APUs in our SoC and we certainly are still working with our customers trying to implement, but generate AI with these already defined, I should say, APUs -- my feeling is for the generation, maybe 2025 phone chips, there will be more another -- the hierarchy of the processor architecture. You see there is a CPU, GPU and the APUs and the proportion of which should be implemented to optimize the GI applications, I think, needs some work. We have to make that work so that both we have the capability and computing power for the GI applications, why we do not necessarily increase the cost by too much any of the silicon space takes money. So distribution of the silicon area among CPU/GPU and APU is a very difficult subject, but that's what we're working on now. But one thing is quite sure APUs size of the circum will increase by quite a bit.

And ladies and gentlemen, we thank you for all your questions. I'll hand it over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.

Ladies and gentlemen, this concludes MediaTek 2023 second quarter conference call and an audio replay will be available in 1 hour after the call at the Investors section of MediaTek's website. I would like to thank you for your participation, and you may now disconnect.

Thank you. We thank you for your participation in today's conference. You may disconnect.