MediaTek Inc. (2454) Earnings Call Transcript & Summary

Welcome to the MediaTek 2026 Third 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. And 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 third quarter results, and then Dr. Tsai will provide our prepared remarks. 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 to be to differ materially from the statements. The presentation material supplement not tier's financial measures. 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 the third quarter financial results.

Thank you, Jessie. Good afternoon, everyone. Now let's start with the 2026 third quarter financial results. The currency used here is NT dollar and the average exchange rate for this quarter was TWD 31.99 to USD 1. Revenue for the quarter was TWD 168.1 billion, up 10.4% sequentially and up 18.3% year-over-year. Gross margin for the quarter was 46.3%, up 0.1 percentage points from the previous quarter and down 0.2 percentage points from the year ago quarter. Operating expense for the quarter were TWD 50.7 billion compared with TWD 47.4 billion in the previous quarter and TWD 43.9 billion in the year ago quarter. Operating income for the quarter was TWD 27.1 billion, up 18.5% sequentially and up 22.2% year-over-year. Non-TIFRS operating income for this quarter was TWD 27.9 billion. Operating margin for the quarter was 16.1%, up 1.1 percentage points in the previous quarter and up 0.5 percentage point year-over-year. Non-TIFRS operating margin for the quarter was 16.6%. Net income for the quarter was TWD 28.2 billion, up 14.6% sequentially and up 10.8% year-over-year. Non-TIFRS net income for the quarter was TWD 28.9 billion. Net profit margin for the quarter was 16.8%, up 0.6 percentage points from the previous quarter and down 1.1 percentage point year-over-year. Non-TIFRS net margin for the quarter was 17.2%. EPS for the quarter was TWD 17.5, up from TWD 15.28 in the previous quarter, and up from TWD 15.84 in the year ago quarter. Non-TIFRS EPS for the quarter was TWD 17.92. A reconciliation table for TIFRS and non-TIFRS financial measures is attached in our 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.

Good afternoon, everyone. Thank you for joining us today. MediaTek third quarter revenue exceeded our guidance range again, achieving TWD 168 billion, with an 18% year-over-year growth. This was primarily driven by the better-than-expected customer demand and improving supply. Gross margin for the quarter was in line with our prior expectations. During the quarter, we successfully completed an overseas convertible bond offering of USD 3.9 billion with participation from NVIDIA and Alphabet. This not only strengthened our partnership with key AI infrastructure partners, but also enhanced our ability to secure capacity for critical components for business expansion. In addition, we continue to drive solid progress in our data center and device businesses. For Data Center Demand for our first AI accelerator remains very strong. We have already commenced initial shipments in September and are confident of delivering USD 2.5 billion revenue in the fourth quarter. For 2027, we expect this program to achieve the high end of our revenue target range of approximately USD 16 billion, representing around 20% of the total AI-accelerated ASIC market. This confidence is underpinned by our solid supply outlook. We are working closely with our supply chain partners with additional capacity to meet strong customer demand. Successful ramp of our first AI accelerator marks an important milestone, demonstrating our ability to integrate industry-leading into the net IP, advanced process and advanced packaging technology, together with our capabilities to orchestrate global supply chain. We are now able to deliver a highly competitive custom silicon for data centers. Our second AI accelerated project, the development is progressing well, and we are on track for high-volume production in the first quarter of [ 2027 ]. This trip is purpose built to power our customers' next-generation AI infrastructure. MediaTek incorporates cutting-edge technologies across every critical aspect of the design to deliver multiple times, higher performance [indiscernible] significantly lower TCO. We expect this project to further strengthen our market position and contribute substantially to our revenue growth. Meanwhile, we continue to make solid progress across key enabling technologies, including 448 gig, 33.5G advanced packaging and co-packaged optics. We are also broadening our customer base as we expand our business scope beyond silicon to offer more comprehensive system and rack solutions. We connect custom HPUs to the NVLink Fusion ecosystem through our NVLink Fusion partnership with NVIDIA and we also support NVLink for Ethernet-based AC architecture. This creates significant value to our customers by greatly reducing the complexity of deploying AI infrastructure for different architectures and substantially accelerating customers in to market and time to revenue. We continue to expand engagement with several customers and deepen our collaboration with major industry players across the AI ecosystem. With our proven track record and the substantial value we offer, we believe we will be a trusted long-term partner with data center customers in years to come. On the edge computing side, RTF Spark, IPC, our [indiscernible] integrating NVIDIA GPUs with MediaTek associates became commercially available in mid-October through major PC OEM partners. [indiscernible] brings powerful on-device agent AI capabilities to users and has received strong market interest. Building on this momentum, development of our certain generation SoC is already underway, further expanding our long-term collaboration with NVIDIA. In addition, our flagship Dimensity 9500 is featured in the latest Samsung Galaxy [indiscernible] AI tables. This marks the third infective generation of Samsung AI tablets powered by MediaTek flagship SoC. All of these developments underscore the strength of MediaTek comprehensive AI compute back from edge to cloud. With our established technology portfolio and strong market presence, we aim to capture the exciting growth opportunities across advanced AI compute, physical AI, automotive and AI infrastructure market in the future. With that, I will now talk about the recent business performance for our 3 revenue groups. In the third quarter, Mobile Phone declined 1% quarter-over-quarter and declined 17% year-over-year, accounting for 37% of total revenue. Flagship outperformed in the third quarter as our customers began to introduce new AI flagship smartphones. Our MediaTek associates including our first 2-nanometer Dimensity 9600 grow. Moving on to the Smart Edge platform. This group grew 20% quarter-over-quarter and grew 63% year-over-year in the third quarter, accounting for 58% of total revenue. The significant year-over-year growth was partially driven by the volume production of several new projects including 5G sim modem or a new smartphone customer, new AI tablets, AIPC and automotive [indiscernible]. Our TV associate revenue also improved, reflecting higher DRAM content than a year ago. Moving on to Power IC. This group grew 1% quarter-over-quarter at 18% year-over-year in the third quarter, accounting for 5% of total revenue. The year-over-year growth was mainly driven by share gain in data center-related business. Moving to guidance, driven by the ramp of our AI accelerated business, we expect strong sequential revenue growth in the fourth quarter despite a high [indiscernible] in the third quarter. Our underlying growth would have been even stronger without the seasonal softness in consumer electronics. Quarterly gross margin is expected to be within the current range. We expect our fourth quarter revenue to be in the range of TWD 210.1 billion to TWD 221.8 billion, grew 25% to 32% sequentially and up 40% to 48% year-over-year at a forecasted exchange rate of TWD 31.7 to USD 1. Gross margin is forecasted at 45% plus or minus 1.5 percentage points. The operating expense ratio is forecasted at 26%, plus or minus 2 percentage work. Based on our fourth quarter guidance, we now expect our full year revenue growth to exceed our previous target of high single-digit percentage growth in U.S. dollars. This again showcases the solid foundation MediaTek has built for the AI era, including our diversified Edge AI portfolio and our strong capability to deliver value in data centers. We believe our expanding presence across edge and cloud will pave the way for MediaTek sustainable growth in era of ubiquitous AI. This concludes my prepared remarks. Thank you.

Thank you, Rick. Operator, we are now ready for Q&A session. May we please have the first question. .

[Operator Instructions] First one to ask questions, Gokul Hariharan from JPMorgan.

Rick, David and Jessie, congrats on your start of your data center ASIC shipments as well. My first question is actually on your second-generation data center ASIC, there's been a lot of talk in the market about potential delays in design and tape-out, so you just reaffirmed your previous guidance that you are ready for HPM in early 2028 or Q1 2028. Could you talk a little bit about any changes in schedule you have seen? And what exactly are the potential kind of milestones that you're watching all here? And could you also take a quick stab at what your revenue and the market share or TAM and market share potential is going to be in 2028 as you ramp up the second generation ASIC, which is definitely higher ASP and higher performance?

Thank you for the question. Let me first address the second ASIC product that's [indiscernible]. It is -- as I said in my remarks, it is on track, on schedule. We understand there's some noise about the tape-out schedule. What I want to say, clearly, I cannot say how many guys are on the trip, but for these very, very advanced HPUs, you all know there are multiple dies on the chip. And I can say, clearly, also a couple of dies app being [indiscernible] out already. The big obviously, much more complex die will take out also on schedule, which. Because it's big and complex, it will take a couple of 3 weeks longer than the other die. So we are very happy with the progress. I think both our partners, our customers and our team are performing tremendously well, and they have been collaborating tremendously well so that -- these tape-outs of such complex die is a very challenging and those guys in my head of for them, they are making the schedules.

About the revenue guidance actually for second quarter. Maybe I'll take that normally, actually, we don't give the detail for '28. But I think -- the better way to think about that is actually is -- I think we're kind of talking about for '27 like risk guidance. Right now, we are aiming for the high end of the TWD 16 billion range. And year 2028, we're looking for another year of strong growth. So I think probably the better way to think about that because the reason we don't want to give out the detail is actually '28, so many moving pieces on the supply chain situation. We are still in the process of finalizing the supply chain situation. But overall, it's going to be another year of strong growth for '28 versus '27 based on the demand profile.

Got it. Maybe also on the second generation. I think there have been so many discussions about the packaging choices you are making with the U.S. IDM vendor. How confident are you now in terms of the packaging choice? Or do you think that you will still need to hedge your bets a little bit given the supply chain situation that you mentioned? And do you think that is the primary limiting factor in terms of your ability to service the demand from your customers given in that second generation chip you will be the primary vendor for that customer when you need [indiscernible]? .

Gokul, by now, we are working this U.S. IDM packaging process that's our absolute [indiscernible]. We are -- actually, we now have a very strong manufacturing team within MediaTek. We're led by actually some very experienced fab operating in productive, I would say, retired. But we are working very closely with the IDM partner and uptake suppliers. First and foremost, on the yield improvement, I'm glad to say that -- and many of you know my background, I came from manufacturing. I have seen the progress. I have witnesses the clear identification of the key difficulties and also the way people are working together to resolve the problem and improvement in the fab in the factory. I have confidence -- very high confidence that the yield will go up very quickly because once we figure out a couple of 2 or 3 key problems, once they're implemented, the yield will go up quite quickly. Then we will continue to export the net level of sources of effect. But these are the things that we have came before we have done before. I'm very happy that our own team, we are working with the Japanese supplier where we're working with Taiwanese supplier. And we're going to make the second generation of ASIC with great success.

Next one to ask questions is Sunny Lin from UBS.

Congrats on the very good progress for your key ASIC programs. So my first question is on maybe the -- even the third-generation ASIC, I know it's a far away, but it's also pretty essential for us to think about your ASIC revenue sustainability in the coming few years. So for that one, maybe ramping in late 2028, any progress that you could share with us? How is MediaTek positioned against the competition? And how should we think about the overall TAM for MediaTek to grow into 2030.

We [indiscernible] speak for our customers. But we can say we are working very closely with them on that next-generation ASIC. Again, our customer is very aggressive in moving forward and upward in the performance downward for the TCO, I guess. So this is going to be another challenging chip. So I think it takes some time to define to finalize the definition. So we are right now, as you said, we are banking business in getting our first one right now in mass production, a second one to into production. And we will happy to discuss with you about the next one when time is right. But, as I said, I'd like to remind you, as I said in my remarks, the second-generation ASIC is a very powerful chip from both performance per watt point of view and also from the lower TCO point of view. Thank you.

Very helpful. So my second question is, earlier, you talked about potential for new clients and several engagements for cloud ASIC. So any color you could share with us in terms of the progress that you're making for new projects? How should we think about maybe the combined addressable market for new projects and the potential sales that you could recognize maybe in '27?

Sunny, I think we just confirm we do have the second customer, okay? The new project right now is kicking off and working on right now. We're talking about going to see the first revenue coming in, in 2028. Again, normally [indiscernible] close more detail later on, but this is just confirmed. We do have a second customer, and MP, the [indiscernible] in 2028.

Got it. Also second customer is a different customer from the key projects that you are referring to, right?

Yes, second customer, so a different customer. .

Now we have Haas Liu from Bank of America.

I would like to start with your near-term ASIC outlook. You provided a new USD 2.5 billion guidance for [indiscernible] contribution for this year, which is better than your previous guidance of slightly higher than USD 2 billion. I was just wondering what drives the incremental strength? Is it because the smooth production rent driving the unit upside or the trip set pricing outside reflecting the cost hike. And relatedly, with cloud ASIC reaching 30% of your quarterly revenue in fourth quarter this year, I was just wondering, it is, of course, very encouraging to see that your gross margin is still kept at 44 to 46 percentage range. But just wondering if you could provide more detail on the factors keeping your margins [indiscernible] during the quarter?

Well, our latest today's guidance for fourth quarter USD 2.5 billion indeed comes from a very robust customer demand. And with the robust customer demand, actually, we have been working very hard with our supply chain partners. And I'm also very glad to say that although you probably understand how are nowadays to get the right amount of supply in order to meet the demand, and I'm very happy that our team has been successful in rounding up multiple various suppliers, such as [indiscernible], for instance, a subject which is usually one of the most difficult things to do. So we continue to perform our team and I certainly hope and expect, we do that going forward. Yes.

Okay. For the gross margin, actually, so we kind of gave out the guidance earlier on for the blended gross margin on the data center side, currently is still below the corporate average, so that's why you see for our guidance, actually, we guide down not 1 percentage point. And on top of the side of that, we also have some price adjustments in order to reflect about the cost increase for the whole supply chain. So on a blended basis, that's actually the guidance we give out. And again, we do want to highlight the focus for the new data center business. I think we really see this as a very accretive on the operating margin side. And as you can see, starting from fourth quarter and likewise starting from next year, I think that will be the focus.

Okay. Got it. So just a quick follow-up on that one, the commentary that your operating margin for the ASIC business is already going to be upgraded as compared to your corporate average starting from fourth quarter. Is that the correct understanding?

Yes. Starting from fourth quarter, the operating margin will become accretive to the overall company.

Okay. Got it. And my second question is just a follow-up on the second customer for the ASIC business that you mentioned that some production timing or the revenue contribution from production for the projects, new projects, new customer is going to kick up in 2028. Does that suggest that the chipset is already under design milestone? Or how should we read it?

Yes. Actually, I think the drilling side kick off already. Again, we will provide more detail later on. .

Next one to ask question, Charlie Chan from Morgan Stanley.

I actually have several follow-ups, if I may. So first of all, on the operating margin implication, right? I mean, the guidance imply first quarter operating margin to be around 19%. So if I think about the data center revenues like 30% of your total revenue and it seems to be like your AI data center operating margin is like 10% above corporate average. Is that the right way to think about it? Or you'll be even more accretive when the project goes for higher scale?

I'm sorry, Charlie, can you repeat you say I didn't hear you clearly. You say our operating margin for data center was 10% or 10% higher.

10% higher than corporate reach based on your fourth quarter revenue mix and your first quarter operating margin guidance.

Okay. So first of all, I think it's higher. We probably won't be able to quantify that because actually, as I explained, in fourth quarter, we also have the effect of our price adjustments starting from third quarter for nondata center business as well. Overall, it's higher, but we will not be able to comment on the magnitude about the operating margin for the other segments.