MediaTek Inc. (2454) Earnings Call Transcript & Summary

Welcome to the MediaTek 2024 Q4 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's CFO. Mr. Ku will report our fourth 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 materials supplement non-TIFRS financial measures. Earnings distribution will be made in accordance with financial statements based on TIFRS. 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 the fourth quarter financial results.

Jessie, thank you. Good afternoon. Now let's start with the 2024 fourth quarter financial results. The currency used here is NT dollar. Revenue for the quarter was TWD 138 billion, up 4.7% sequentially and up 6.5% year-over-year. Full year 2024 revenue totaled TWD 530.6 billion, up 22.4% from 2023. Gross margin for the quarter was 48.5%, down 0.3 percentage points from the previous quarter and up 0.2 percentage points from the year ago over-quarter. Gross margin for 2024 was 49.6%, up 1.8 percentage points year-over-year. Operating expense for the quarter were TWD 45.6 billion compared with TWD 40.5 billion in the previous quarter and TWD 37.9 billion in the year ago quarter. Full year 2024 operating expense was TWD 161 billion compared with TWD 135.6 billion in 2023. Operating income for the quarter was TWD 21.4 billion, down 10.3% sequentially and down 13.4% year-over-year. Non-TIFRS operating income for the quarter was TWD 22 billion. Full year 2024 operating income was TWD 102.4 billion, up 42.6% year-over-year. Non-TIFRS operating income for the year was TWD 104 billion. Operating margin for the quarter was 15.5%, down 2.6 percentage points in the previous quarter and down 3.6 percentage points year-over-year. Non-TIFRS operating margin for the quarter was 16%. Operating margin for the 2024 was 19.3%, up 2.7 percentage points year-over-year. Non-TIFRS operating margin for the year was 19.6%. Net income for the quarter was TWD 23.9 billion, down 6.4 percentage sequentially and down 6.9% year-over-year. Non-TIFRS net income for the quarter was TWD 24.5 billion. Full year net income was TWD 107.1 billion, up 38.8% year-over-year. Non-TIFRS net income for the year was TWD 108.5 billion. Net profit margin for the quarter was 17.3%, down 2.1 percentage points from the previous quarter and down 2.5 percentage points year-over-year. Non-TIFRS net profit margin for the quarter was 17.7%. Net profit margin for 2024 was 20.2%, up 2.4 percentage points year-over-year. Non-TIFRS net profit margin for the year was 20.5%. EPS for the quarter was TWD 14.95, down from TWD 15.94 in the previous quarter and down from TWD 16.15 in the year ago quarter. Non-TIFRS EPS for the quarter was TWD 15.26. Full year 2024 EPS was TWD 66.92, compared with TWD 48.51 in 2023. Non-TIFRS EPS for this year was TWD 67.75. A reconciliation table for our TIFRS and non-TIFRS financial measure is attached in our press release for your reference and that concludes all of it.

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 and belated Happy Lunar New Year, everyone. MediaTek closed 2024 with a robust fourth quarter. Our quarterly revenue exceeded the high end of our guidance, mainly driven by the strong ramp of our flagship SoC, Dimensity 9400. Gross margin for the quarter was above the midpoint of the guidance range. For full year 2024, our revenue grew 19% in U.S. dollars, exceeding our original target of a mid-teens percentage growth. Our net income and earnings per share in NT dollars increased 39% and 38% year-over-year, respectively. The solid results demonstrated our technology leadership, strong execution of our market expansion strategy. In 2024, our leading AI flagship SoCs continue to gain share in both smartphone and tablet market, particularly for smartphone, we doubled our flagship SoC revenue to approximately USD 2 billion. In addition, our strong connectivity product portfolio including WiFi 7, 5G thin modem and 10G-PON has successfully expanded into several global telecom operators. Connectivity revenue for global operators grew strongly by 30% in 2024. Moreover, for automotive, our Dimensity Auto platform including cockpit, telematics and power management IC solutions, secured several major design wins with leading Chinese and European car OEMs in 2024. The premium cockpit SoC that we codesigned with NVIDIA has also received good customer traction and is on track for assembling in 2025. For enterprise ASICs, the demonstration of our capabilities for the next generation ASIC design such as CPO solutions and a 224G SerDes technology attracted very positive attention at several global trade shows. We believe these notable track records and milestones achieved in 2024 have laid a solid foundation for our future market expansion globally. In the mid- to long term, the trend of ubiquitous AI continues to unfold more market opportunities. For example, the recently released models such as DeepSeek-R1 and Qwen 2.5 Max showcase different approaches and techniques for training AI models more efficiently, complementing the traditional Scaling Law. Together with Llama and other open source models, we believe the trend will better democratize AI and accelerate AI penetration. On the other hand, the industry's continuous pursuit of AI capabilities for AGI and Super AI still requires high computation for the world. We are positive on these developments and firmly believe MediaTek has the right technology to benefit from the AI democratization trend, both at the edge and in the cloud. At the edge, we are the powerhouse of edge AI computing. Building on the key technologies we have accumulated over the years, we offer a series of optimized edge AI SoCs, integrating powerful CPU, GPU and NPU. We leverage our industry-leading road map and the trend of using simpler models to proactively engage with global customers to enable more edge AI devices and grow our flagship smartphone, automotive, ARM computing and IoT businesses. As we forecasted, some of the new projects will begin volume production by end of this year. For example, at CES, we announced the collaboration with NVIDIA to empower the CPU of GB10 on the world's first personal AI supercomputer, which will be available in May. The supercomputer offers petaflop of AI computing performance, capable of running large AI models up to 200 billion parameters locally. In addition to CPU and SoC design, we bring our expertise in connectivity, multimedia, and power management technologies to GB10, once again, showcasing our robust design capability to enable powerful edge AI devices and there will be more devices to come. In the cloud, the trend of pursuing more optimized data center AI computing remains strong. We are on track to execute our enterprise ASIC strategy by developing industry-leading solutions for data center AI accelerator. We have a exceptional SerDes IP portfolio up to 224G to support the need for faster speed. Moreover, in addition to our outstanding design capability for complex SoC and chiplet architecture, we have built strong and strategic partnerships with Tier 1 suppliers to deliver 2-nanometer and 3-nanometer processes, as well as multiple of CoWoS 2.5D and 3D advanced packaging technologies. These capabilities helps us provide unique value to customers and scale up our business. We expect our AI accelerator ASIC business to have the potential to contribute a sizable annual revenue starting in 2026. To address ubiquitous AI opportunities, the industry needs advanced solutions in wafer processing as well as packaging. And MediaTek is one of the very few fabless companies that have the capability to continuously invest in the advanced processes such as 2-nanometer and 3-nanometer, advanced packaging, 448G SerDes and CPO for the advancement of our technology roadmap. With that, now let me talk about the current -- the recent business performance and outlook of our 3 revenue groups. Mobile phone accounted for 59% of total revenue in the fourth quarter and declined 1% year-over-year and grew 14% quarter-over-quarter. The strong sequential growth was contributed by the successful ramp of our flagship SoC, Dimensity 9400. OPPO and Vivo's Dimensity 9400 AI smartphones have been highly recognized by the market, which has led us to double our total flagship SoC revenue in 2024, exceeding our prior expectation of more than 70% of growth. We expect to see more Dimensity 9400 and 9300 series models to come in 2025. For 2025, global smartphone shipment is expected to increase at a similar pace as 2024 with 5G penetration rate increasing to high 60% from mid-60%. The leading product portfolio empowers MediaTek to gain share and maintain the leading position. We expect our blended ASP to continue to benefit from the ongoing mix shift towards 5G and higher-end AI cable models. For the first quarter of 2025, we see better than seasonal demand amid the smartphone stimulus program in China. We expect mobile revenue to grow moderately quarter-over-quarter. Now let me move on to Smart Edge platforms. In the fourth quarter of 2024, this group grew 24% year-over-year and declined 7% sequentially, accounting for 35% of total revenue. The strong year-over-year growth was mainly driven by both share gains and a better mix towards higher end products across connectivity and computing devices. The sequential decline in the fourth quarter was mainly due to seasonality. We believe the trend of connectivity technology upgrade and higher AI adoption in computing devices will extend into 2025, which are expected to help enhance our product mix and blended ASP. For example, we expect WiFi 7 adoption to accelerate in 2025 across broadband, notebook and router customers. Our WiFi 7 revenue is estimated to more than double in 2025. We also see strong growth momentum in tablets as we see almost all Android tablet brands introducing [indiscernible] AI tablets powered by MediaTek. In automotive, we continue to expand our business. With the current cockpit and telematic project pipeline, we expect our automotive revenue to grow quarter-by-quarter throughout this year. For the first quarter of 2025, healthy demand and an enhanced product mix for both connectivity and computing devices are adding momentum to revenue. We expect Smart Edge platforms revenue to grow sequentially. Now moving on to Power IC, which accounted for 6% of total revenue in the fourth quarter and grew 1% year-over-year and declined 1% quarter-over-quarter. In the fourth quarter, the data center business in Power IC grew robustly, while revenue from broad-based consumer electronics remained flattish. For 2025 in Power IC, we will continue to expand in new areas such as automotive and data center. In the first quarter of 2025, Power IC revenue is expected to seasonally decline. Overall, for the first quarter of 2025, we see healthy smartphone demand, thanks to China's stimulus program as well as some pull-in demand for products, including TV, WiFi, tablet and Chromebook due to global tariff uncertainty. Therefore, we expect the first quarter revenue to grow sequentially better than the normal seasonality. Corporate gross margin is expected to be stable in the current range. With that, we expect our first quarter revenue to be in the range of TWD 140.8 billion to TWD 151.8 billion, up 2% to 10% sequentially and up 6% to 14% year-over-year at a forecasted exchange rate of TWD 32.5 to USD 1. Gross margin is forecasted at 47%, plus or minus 1.5 percentage points. Quarterly operating expense ratio to be at 29%, plus or minus 2 percentage points. For 2025 and beyond, generative AI will continue to bring industry innovation and business opportunities both at the edge and in the cloud for MediaTek. Our leading product road map is well suited to capture AI opportunities and drive revenue growth. The GB10 superchip is one of the growth projects that we have in the pipeline. There will be more to come in areas such as edge AI, enterprise ASIC, computing and automotive. As we said before, 2024 is the beginning of our next growth phase. We are solidly on track in our journey for 2025 and fully dedicated to executing our mid- to long-term growth strategies. This concludes my prepared remarks. Thank you.

Thank you, Rick. Operator, we are now waiting for Q&A. Can we please have the first question?

[Operator Instructions] And our first question will be coming from Laura Chen from Citi.

Appreciate, Richard, your highlight for the growth opportunity across the board and particularly for the AI space. First of all, just wondering that we know MediaTek already working on the AI space from the edge and also at the cloud side. Could you elaborate more on the current order visibility or what projects you are going -- you have right now for the growth outlook into the next few years. I recall, previously Rick, you mentioned about the market size could be USD 45 billion. But since we see that AI still evolving, so do you have any more updates in terms of the market size or how big or what kind of the projects we have now engaging with clients to fuel our future growth opportunity? That's my first question.

Laura, it's difficult to hear you clearly here somehow somewhat scrambled. But I'll try to answer as I understand your part. In terms of AI market, we remain very positive with this recent DeepSeek phenomena. We actually -- we are getting more optimistic because not only -- basically, as I said in the remarks, I think the trend is democratizing the AI and it will spread more for the more average users. And that's good from the edge devices point of view. And also, it will -- I think, will continue to enhance the need for the data center computing capabilities. So we are quite positive. On the other hand, we have not updated our TAM estimate for the data center accelerator business. We remain right now about TWD 45 billion. If anything and also as you probably all have read from the news media and some of the discussion we have, we see the major CSPs or major user of the data centers, they are increasing their -- well, I wouldn't say doubling down but almost like that in their data center investment. So what we are very positive about is the continuing increasing data center computing capability requirement as well as the opportunities from the edge devices brought about even more so by the DeepSeek for instance. And if you notice, MediaTek, has a edge -- well, we have been, of course, very, very strong in the edge devices. But then if you look at the spectrum of the edge devices, all the way from the flagship or premium SoC for the mobile phone to the most recently announced GB10, of course, announced by NVIDIA, where we contribute the CPU part as well as the connectivity and the ISPs. The model size across the spectrum can range from easily 1.5 billion, 7 billion, up to 200 billion parameters. So that -- as you can imagine, provide a huge flexibility for the more -- not only the everyday users but also for the professionals who work at home or for the small and medium enterprises. So that's -- I hope I'm answering some of your questions.

Yes. Yes, very clear. Also, following on these questions. I was just wondering that how should we look at the impact on our profitability, since these new opportunities, we may need to invest more in terms of the IPs or the R&D effort. So how should we look at our revenue profile and also the margin profile given the potential mix change in the next 2, 3 years?

Laura, we're actually having problem hearing you. That should fix our problem. So operator, maybe you can help. [indiscernible]. You're sounding scrambled. Can you hear us well, Laura?

Yes, I can hear you very clearly. I can hear you very clearly. So yes, my second question is about the profile for this ASIC business ramping up, how would that impact the profitability and also the revenue outlook? I believe we need to invest more in R&D and also some of the new areas like IT or like networking, like CPO, Rick just mentioned. So I'm not sure if you are hearing me clearly, but that's my second question.

Laura, sorry, we cannot hear you. Can we move on to the next one and maybe we'll just get you back. Okay? Let's [indiscernible]

We promise you, after the hour, we can still definitely share. We'll answer your question. We'll work on it.

I'm sorry about that, Laura. Then we'll take the next one. Then next one will be coming from Arthur Lai, Macquarie.

First, congrats on the good results. I have a follow-up question on the cloud project. So recall last 2 quarters, we actually ask management team on the resource allocation to the cloud business. And I think after now we got a better visibility on those opportunities. So Rick, can you share with us did you put more resources on this business versus 2 quarters ago? And second question is, when we think about your cloud business, when you include HBM revenue into the project operation as well as supply chain management type of a challenge to us?

The first question about resource. We definitely are increasing through a major hiring of key technical and business, senior managers and executives, #1, mostly almost all in the U.S. And #2, we are definitely moving our internal resources towards the ASIC project. Now that we are now in the execution mode, we have organized, streamlined our organization to -- so that we can serve the enterprise ASICs for the data center AI in such a way that we have team just for that because the operations for data center ASICs can be quite different from that of the ASSPs. So from resources point of view, we are really on top of it and the company has focused certainly for such big opportunities. For the revenue -- HBM...

Yes. Currently, actually, it's the most -- it really depends on case by case. But more -- big part of that actually [ HBA ] is not being account for positive revenue. But going forward, may be a new opportunity for the [ HBA ] base side, basically the [indiscernible]. So that's still evolving. But currently, we don't include [ HBA ] in our revenue.

So the small follow-up is, so how investors think about the OP margin going forward if this business kicking in and in a meaningful contribution to our future revenue?

I think overall, we see this new business should be operating margin accretive.

Next one, Jason Tsang, CLSA.

My first question is in terms of your yearly outlook. It seems like you have a very positive tone on your smartphone and the Smart Edge side, wondering if you can give a quantified yearly growth on your revenues for year '25? Or did you -- can you also give us our revenue outlook for coming years?

I think for smartphone for 2025, I think overall, I think we are positive about the overall development, especially for Q1, we see some -- due to the China simulation program. I think the overall demand is pretty healthy. So overall -- plus, I think we are still continue to expanding our flagship market share. So overall, I think we still think it is going to be a healthy growth year for the smartphone business for 2025.

Okay. Understood. So my second question is in terms of your bottom line. I think news suggests that TSMC probably want to raise their wafer cost or wafer price. So then other news also suggest that Arm is trying to probably raise their IP fee. So wondering if those kind of increasing costs will impact our cost of goods sold or probability of gross margins in this year or in next year or your gross margin guidance already includes those kind of impact already?

Well, I think for the gross margin, if you look at our history in the last 6 to 8 quarters, we've been pretty much stabilizing in our guidance range, which was 47%, plus/minus 1.5%. I think for this year, I think that's our goal as well, especially for the fact we just gave out the first quarter guidance. I think we were working through with the supply chain. And more importantly, I think we're working along with the different product segmentation and product mix to stabilize the gross margin within this range.

Next one, Felix Pan, KGI.

My first question is regarding to -- on the financial. For the fourth quarter, actually, we see the surge for the sales expense and also R&D expense. Can you please provide some color about the R&D surge? Is that related to the AI project, how do we think about the OpEx going forward with the growing AI exposure? I have a second question.

I think for the fourth quarter, R&D spending, is really the combination of the project schedule and also normally for the year-end, the billing schedule. So if you take a look about the full year, I think there will be probably the better guidance for last year's full year's ratio should be the full year for this year as well. For example, for Q1, the guidance is actually lower, much lower compared to the fourth quarter. I think for the full year, overall, I guess, we are still looking for roughly 30% OpEx ratio for 2025.

Okay. So I can take the full year '24, as a benchmark for '25's OpEx?

Yes, in terms of ratio, Yes, OpEx ratio.

Okay. My second question regarding the guidance. First of all, congrats for your very strong guidance. And Rick also mentioned there is some pull in demand because of simulation and subsidies program in China. Actually, we see a pretty strong sales sell-out numbers, especially for the last week of January. So I just wonder but the full year, it seems like still quite just low single-digit growth, like for global smartphone. So are we -- do we expecting a very front-end loaded pattern for the smartphone this year? Or we see there's -- actually there's some organic revenue recovery in China. Can you just provide how you think about the seasonal pattern and also how much new demand generated from the subsidies?

Well, the stimulus program usually, I mean, I maybe a bit of philosophical but people are attracted to make their purchases, pooling their purchases. We -- so we're trying to be somewhat cautious maybe right now. I think after another month or 2, we will have a better outlook. But it's suffice to say, we are -- as David just said just now, we are -- we feel actually good about our smartphone business in 2025, which, of course, is highly concentrated in China. Saying all that, I think -- we believe with the stimulus program, with the market share gain at the high-end phones within China market and our own SoCs, we remain fairly positive for the smartphone business, 2025.

Okay. Maybe just my follow -- just a quick follow-up because you mentioned the market share expansion for the flagship model. Last year, we also gave the guidance for the full year flagship models revenue. So do we have the guidance for the flagship model revenue growth in '25?

Well, I think because this is beginning of the year, I think the overall goal is actually continue to increase the market share. So we probably need to weigh way for 1 more quarter to give out the full year guidance for the flagship's market share. But for last year, I think for the full year, we already gave out -- it was a very good increase year-over-year.

Next one, Sunny Lin, UBS. Go ahead, please.

So my first question is on full year 2025. Rick, would you have a target for growth in revenue that you could share with us? I also want to follow up on the seasonality question. So if we look at the last 2 years, seasonality for the industry has been quite different versus before. Especially now for the company, flagship is becoming a larger portion of business and seasonality could be quite different and so now with Q1 being such a strong quarter, should we expect some growth moderation into Q2, just like in 2024?

We -- actually, we look at this case quite well, in some details ourselves. Of course, we have our numbers, of course. But I would say right now, we will give quarterly guidance probably until what we -- may be into the next -- until quarter. The reason being -- I think it is probably a commonly accepted thing for everybody is the uncertainty in the macro picture remains quite high for everybody, not just MediaTek, for, just for everybody and we all know why. So with that in mind and we -- that's why we want to -- despite the -- we also agreed despite quite good first quarter guidance. We are not pessimistic but I think it's just better right now for us to look at our data, to look at our sales input a bit more, give us a couple or 3 months. Thank you.

No problem. I think you're right. I think that's totally understandable. But just in the short term, just initial view for Q2? Any color would be greatly appreciated.

Yes. I think for Q2, right now, we probably will be more cautious and conservative because within in Q1, like in Rick's opening remarks, we will see the result of pooling orders due to the global -- unstable global situation. So once we take that factor away, maybe we'll have some consequences for Q2. So for Q2, so far, again, visibility is low. But overall, we will be more prudent and cautious for that.

Got it. My second question is on your collaboration with NVIDIA. So Jensen at CES, he talked about MediaTek now has this NVLink technology and could serve the market. And so I wanted to understand what's the background for this collaboration and how will that benefit MediaTek? Have you started to serve that technology to your own products like cloud ASICs?

Okay. Well, basically, the partnership with NVIDIA is a fairly natural one in my mind because both companies, we are very much -- we are very complementary to each other. If you look at their product road map, our product road map, they're -- and I think both Jensen and I recognize that and we kind of quickly arrived at the agreement that both companies should collaborate and work on the edge devices. And the outcome for the GB10 is obvious. It's obvious. I think we serve not only -- we will serve definitely for now the AI -- well, how should I say, desktop AI applications but I'm sure we will serve other applications also as we move into 2025. For MediaTek, of course, all the IPs and the technology developed, we can use ourselves for other applications. But for now, I think the collaboration with NVIDIA has done really very well. Remember, we also have automotive collaboration which also is moving well, following similar technical models. So I'm quite positive about the relationship with our 2 companies and we expect really many, many good things to come in the short and midterm future.

Next one, Gokul Hariharan, JPMorgan.

First question, just on the overall revenue growth. I think you've seen some pull in and good stimulus. But if I look at the midpoint of the guidance range, we're still growing about 9% to 10% in Q1 on a year-on-year basis. Do we think we accelerate from here? Do we think we pretty much maintain this growth rate into the rest of the year? I know that you don't have a guidance but your competitor seems to be saying that they're going to decelerate from here in terms of their own core revenues in the next couple of quarters. Is that consistent with what you see in terms of the core business? That's my first question.

Well, Gokul like [indiscernible] because there are still lots of global unstable factors out there. So, so far, it's hard for us to give a -- give out the full year's guidance. Internally, we definitely have our view but we rather probably just go quarter-by-quarter, okay? But the good news is, at least so far, the first quarter looks pretty solid.

Okay. Okay. So do you think you can maintain this? Is that kind of like the potential kind of expectation that you have? Like -- or maybe ask it a different way. What needs to change? Like what are you watching really to kind of become more bullish on the growth rate? Because last year you grew 19%, Q1, the growth is like 9%. So it's definitely a deceleration compared to last year's growth. So what do you need to see for you to get more positive on overall growth for MediaTek in the next couple of quarters, given that you don't have a full year guidance?

Well, I think probably 2 factors. The first one is still by end of the day, it really just the market demand. So that's the first one. The second one is actually, hopefully, there are some swing factor will be removed or settled up.

So what is the swing factor that settled down? Sorry, David, I didn't catch that one.

For example, the global tariff situation, geopolitical situation. Yes, that's still a big factor, again, to everyone, not just to us.

Tariff. Okay. Okay. Understood. Okay. Got it. We can revisit in April. My second question is on...

I'm sorry, just 1 word. Saying all that, we are not pessimistic. We are being cautious but not pessimistic. There's a difference. It can be [indiscernible]. I just want to add color on that. Please continue.

Yes, definitely. Just wanted to move to the enterprise ASIC, data center ASIC portion of the business. I think previously, we had talked about potentially the data center ASIC business starting to contribute revenue in early 2026. Is that still our expectation? And secondly, Rick, you mentioned sizable revenues from enterprise ASIC in 2026. Could you help us understand about sizable kind of means for you from your definition? Is it like 10% of your total revenue is sizable, reaching TWD 1 billion run rate is sizable? Just wanted to kind of quantify it a little bit or kind of understand a little bit from a quantification perspective.

Yes, we're -- the projects ongoing in full throttle. [indiscernible] of course. We expect the revenue to come in certainly 2026, early to -- I think, I would say, first quarter, second quarter time. And the size definitely should be exceeding TWD 1 billion size, yes.

Next one, Charlie Chan, Morgan Stanley.

[Foreign Language] So, sorry for the background sound about the lion dance. It's in our office right now. But anyway, my first question is really the DeepSeek impact, right? So we know that the MediaTek chip can already supports DeepSeek 1.5 billion model on the chipset. So my question maybe to management is that whether and how that's going to change the user experience, what kind of killer apps that you have to have a small model on the edge side? That's my first question.

Being not a AI expert myself, but I'll try to -- of course, we -- I ask my people quite a bit -- quite a lot of questions. #1, our -- just talking about our own 9400 and beyond SoCs, we are more than capable of 7 billion to 13 billion parameters. And with the distillation capability from the DeepSeek, I mean, that would, if you in [indiscernible] predict, that will include -- you probably by a factor of 5 of the capability. So that's why we are quite excited. And not to mention the, if you look at the GB10 case, which can already manage 200 billion, if you utilize the DeepSeek techniques. I mean, the big, big model can be processed locally at a GB10-powered workstation, for instance. My feeling is -- and the reasoning capability as far as I have read, I have read myself is pretty amazing. I think that it is opening up in China, probably more quickly -- that's my -- what we have learned from our customers directly, now that now the AI applications in China for China smartphone sales has jump up to the top 3 priorities for the users in China. So I'm -- from that point of view, I'm positive, we are positive. It's just open up -- reminds us of Internet days after 2000, things just break loose -- broke loose. Well, I don't know exactly how. If I do, I probably will be somewhere else but we're -- I'm very positive and confident it's igniting using this soon.

Yes. So if I can think about kind of justification, maybe [indiscernible] servers or service crash kind of time. So if you have some proper compute OEM they can provide some generative AI service with the Internet connection, maybe that's kind of one argument. But then to link that to your business, right, I think you assume this year's smartphone growth rate will be similar to last year. I'm not sure if I got that wrong. But what would be your assumption about the sort of AI smartphone replacement cycle, the timing? And also, what does it mean to the industry growth rate from this kind of AI replacement cycle?

I don't have a very specific numbers. What I'm looking forward to is what -- you, of course, know that we're mostly in China. The Chinese consumers I think they will move to higher-end phones more quickly and more so, just like the -- I think just in the recent uptick from the stimulus program, I think the ASP for those new sales actually are more in the RMB 3,500 and above. That's kind of a range. That's very encouraging. Saying all that, I do not -- I think it is also very important to know or to understand this is not just a smartphone thing. It goes to home. I mean we have talked to multiple key big customers. People are working -- all working on that. This thing is moving into the home, not to mention to the automotive and to the desktop supercomputers. So we're talking about a range, a spectrum of AI devices at the edge. MediaTek is, I think, fully equipped. And with a really strong and a great partner, I think we can do many great things for our investors.

Next one, Brad Lin, BoA Merrill Lynch.

Congrats on the strong 1Q guidance. I have 2 questions. The first question would be about the RedCap 5G modem, reduced capability of the, well, 5G modem chip. Would you please share with us the breakthrough in this product? And how large is the potential TAM? And can this success open doors for MediaTek's broader product portfolio into those global key clients?

I think for the RedCap, which stands for reduced capability modem has been up and running. And the first product will be on the wearable side and we see a very strong pipeline for the similar product. I think that's actually part of what we talked about earlier when the 5G product cycle start to ramp. We said actually the 5G has all different features and functions and that's actually one of it. So we probably won't be able to give out the market size yet since actually just the beginning. But we do believe going forward for all wearable and a lot of IoT will be equipped with the RedCap modems because actually provide -- leverage the 5G benefit and also provide a power saving and still enjoy a decent transmission speed.

That's helpful. And a follow-up is that, well, since we penetrate into some of the key clients with this kind of the, well, modern chip, while MediaTek definitely has a lot of very good technology and IPs that some of the clients can, well, make use of those. So do we expect that we can do some kind of the bundle sales or leverage this kind of a relationship to, well, sell more kind of -- more chips like a WiFi or even multimedia kind of IPs into those clients?

We probably won't be able to comment future speculation. But overall, I think the key issue is, if you think about from a modem technology perspective, we are really the leading player, not just for the 5G but for the RedCap as well. We do believe if we continue to invest on this front, we will continue to give us more opportunity. I think another example is just a flagship, a few years ago, where we start from 0 market share, now with a very decent market share. I think the key is we will continue to be the technology leader and keep it flowing new opportunities.

That's quite clear and very helpful. And then my second question, would like to follow up on the enterprise ASIC. So we have learned that a very good progress at the ASIC project and which is on track to contribute from 2026 in sizable kind of a way. And then while -- well, most of the investors talk -- maybe talking about just some specific clients. So would you please share that does MediaTek also receive more customer engagement or projects for the coming years beyond, well, this 2026 one, especially given the proliferation of the ASIC demand?

The answer is yes. We are, just as I responded to the earlier question about resources, the company is investing in this area very heavily, moving resources, hiring key talent. And we certainly aim to -- is very large. The TWD 45 billion TAM, I think, I believe is some kind of a underestimate. It's a very large market and we aim to gain well, good share. We have made very good progress during the 18 months about. But again, our aim is to broaden our business -- I think prospects, I should say.

Got it. Got it. And the -- well, more than TWD 45 billion kind of the TAM is very exciting.

Next one, Brett Simpson, Arete.

Yes. Rick, I wanted to clarify your relationship with Arm because on their earnings call, they're claiming MediaTek is one of their strategic CSS licensees in smartphones. And this implies that your royalty rates are pretty high. I think they've defined v9 at about 4% rates and CSS would be double that level. So I wanted to understand if that's really the case. And I ask this because, obviously, the court case with Qualcomm and Arm has played out now and it looks like Qualcomm is paying v8 rates for their business going forward using the Oryon core. And that would imply a pretty big cost difference between yourself and your nearest competitor. So any thoughts, any perspective you could share would be very helpful.

Okay. Yes, it's a complicated question. #1, I firmly believe MediaTek and Arm are strong partners, technology-wise and they provide really very good IPs for us as evidenced obviously from smartphone flagship SoC all the way to GB10. So we are good. We are happy with this relationship. I will not comment on the royalty rate in my response but I also want to clarify something. We are using v9 as CPU IP. And we are doing very well with that. Again, we are happy about it. Our engineers, our technical people have done a tremendous job, tremendous job with v9, Again, as I said, all the way from the mobile to the GB10. But we use v9. We are not using CSS. So it's our own. I mean I will not take anything away from our engineers who have worked so well internally and also with Arm. So I hope I'm answering your question clearly, Brett.

Yes. That's very clear. That's very clear. So it's v9 and obviously, you're not CSS. Okay, that's clear. And the second question was really just trying to understand, I mean, theoretically, what impact tariffs might have on your business. So if we saw a U.S. tariff applied to Taiwan, can you share the framework or anything in terms of how that might impact your business, if any? I think it would be helpful just to put things in perspective.

Well, there are 2 sides of it -- 2 aspects. The first aspect is, we don't know much about it. We know it's very unpredictable. And well, that's -- really we don't know. But the second aspect is, of course, we're not just sitting here doing nothing. We are making our own assumptions, doing some simulations. My quick -- roughly, may not be precise enough estimate, at least for 2025 is manageable. It's manageable. You can define manageable by many different ways. But from my end, I think it's manageable for us for 2025. We look at our revenue base from different regions and -- but there are so many variables. So it's very difficult to give a accurate estimate now. It's very complex. Yes, that's all I can say.

Ladies and gentlemen, we are taking the last one. The last question, Laura Chen, Citi.

Yes. Okay. That's great. I think some of my questions has been answered. So just wondering that for the AI areas, other than the accelerator, what kind of the ASIC we are working now? And also, I'm wondering that since there are a lot of opportunities, are we looking for potential like a joint venture, no matter it's like in the front end. I'm not sure if NVIDIA's case could be kind of ASIC, or are we looking for some of the partners on the back end, the CoWoS design, something like that? That's my final question.

Okay. Laura, we -- I think in some way, I commented. We are broadening our business prospects in the enterprise -- [indiscernible] -- I'm sorry, in the data center AI area. The -- of course, we have to prioritize, each one of them takes quite a bit of resources from technology and business development point of view. So we are -- and not to mention the fast-changing environment, just look at what happened in 2 weeks after DeepSeek came up with this R1 thing. That changed the dynamics quite drastically. We are definitely evaluating, for instance, with the most current phenomenon and we are prioritizing or reprioritizing our focus and the resources. But suffice to say, we are definitely working to broaden our prospects. Joint venture, I think that's a very -- well, I can say there's no plan. There is no plan for any of that. We welcome certainly collaboration and other partnerships. And I believe back last year in COMPUTEX, NVIDIA, where Jensen and I were, where we discussed certain potential collaboration, for instance, in the ASIC area also. That's a good example.

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 2024 Fourth Quarter Conference Call and an audio replay will be available in 1 hour after the call at the Investors section of MediaTek website. We would like to thank you for your participation and you may now disconnect.

Thank you. And we thank you for your participation in today's conference. You may now disconnect. Thank you and goodbye.