Novatek Microelectronics Corp. (3034) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, everyone. I would like to extend a warm welcome to everyone for joining Novatek 2025 Fourth Quarter Online Earnings Call. This is David Chen, Vice President and Company's Spokesperson. I'll be the host of today's conference. Joining me on the call are Vice Chairman, Steve Wang; and our IR Director, Tony Tseng and [ Ivan ]. Today, we would like to extend a special welcome to our newly appointed CFO, Ms. Jane Chen. Jane, would you please say hello again for those who didn't understand what we said earlier in Mandarin?

Hi, everyone. This is Jane.

Okay. Thank you, Jane. Welcome on board.

Thank you.

The agenda for today's event is as follows: First, Tony will report on Novatek's fourth quarter results in English. Following that, our Vice Chairman, Steve Wang, will provide further details on our fourth quarter results and guidance for the first quarter of 2026. Next, we'll proceed with the Q&A session. We have already received some questions from our investors. If you have any additional questions, please feel free to submit them online. Tony will review and read each question in both Chinese and English. Afterwards, our Vice Chairman, Steve Wang; and CFO, Jane and myself will try to answer all your questions in Chinese. I'll later translate them into English. We do encourage all of you to participate actively and look forward to addressing your concerns. Now I'll hand over the time to Tony to report our Q4 results.

Thank you, David. This is Tony. First, please take a look at our safe harbor notice. Also from this page, we will show our quarter 4 financial figures. But please bear in mind all these figures are unaudited and will be reviewed by the auditors and also our Board of Directors. Let's first look at our revenues. For quarter 4, our consolidated revenue of TWD 22.8 billion were down 7% quarter-over-quarter and also down 10% year-over-year, but at the high end of our guidance of TWD 22 billion to TWD 23 billion. Now this page shows our gross profit for quarter 4 and also the comparison. Gross profit of TWD 8.7 billion in quarter 4, also down 32% quarter-over-quarter from quarter 3 2025, also down 13% year-over-year from a year ago. Now let's look at our gross margin. For quarter 4, gross margin of 38.2% was down from 39.5% a year ago, but improved from 36.9% in quarter 3 last year and also exceeded our guidance of 35% to 38% range. Now let's look at our operating expense. For quarter 4 operating expense of TWD 4.85 billion was down 4% quarter-over-quarter and also 4% year-over-year, showing our good cost control. Now let's move down to see our operating income. For quarter 4, our operating income of TWD 3.86 billion was flattish quarter-over-quarter, but down from TWD 4.9 billion a year ago. Now this page shows the operating margin trend. For quarter 4, the operating margin of 16.92% was down from a high level of 19.46% a year ago, but improved from 15.70% in quarter 3 and also made the guidance of 14.5% to 17.5%. Now let's look at our net income. Net income in quarter 4 reached TWD 3.69 billion, increased 1% year-over-year, but down from -- quarter-over-quarter, but down from TWD 4.08 billion a year ago. This page shows our EPS. For quarter 4, our EPS of TWD 6.07 increased from TWD 6.01 in quarter 3, 2025, but down from TWD 7.89 a year ago. This page shows the overall income statement for quarter 4, along with the comparison with quarter 3 and also a year ago 2024. Now this page shows the full year of 2025 results compared with those for 2024. For revenues, we reached TWD 100.7 billion, down 2% quarter-over-quarter. Gross -- year-over-year gross profit of TWD 37.9 billion was down around 9% year-over-year. Operating expense of TWD 19.67 billion was flattish year-over-year. Operating income of TWD 18.24 billion was down from TWD 21.81 billion. Net income of TWD 16.35 billion was also down from TWD 20.34 billion a year ago. As for EPS, 2025 reached TWD 26.87, down from TWD 33.43 a year ago. This page shows our product mix for our 3 business groups. Small medium drivers, SoC and the large-size drivers represented 43%, 35% and 22% of quarter 4 revenues. This compared with 41%, 37% and 22% in quarter 3, 2025 and also 21%, 36% and 22% in quarter 4, 2024. Basically, the percentage has been relatively stable across the quarter. We are also reporting the general revenues now. General revenue of TWD 7.62 billion, increased 4% month-on-month but down 10% year-over-year due to a high base a year ago due to the China subsidy policy. The next page shows the monthly revenue trend for 2025 and 2024. For here, you can see the monthly trend for 2025. Again, due to the China subsidy program particularly in the first half for last year, our first half revenue was higher than in the second half. This page shows our key financial figures in our balance sheet. For our cash position, basically, our cash increased sequentially due to our positive earnings from operations, but quarter 3 is always down quarter-over-quarter due to distribution of cash dividend. Our account receivable inventory dollar has been relatively stable. Now let me pass the call back to David on our ESG activity.

Thank you, Tony. The following slide is a recap of our recent major events. Regarding the biodiversity, we have signed MoU with Yushan National Park to support Formosan Black Bear Conservation Education. We've been collaborating with Yushan National Par for the past 2 decades, and we are just expanding our collaboration to biodiversity, which is a good move. And as for the CDP for 2025, we are delighted to show you that our climate change has moved from B to A- and maintaining a water security at B level. We have also completed our product carbon footprint inventory verification for our SoC chips. And our renewable energy have reached 24.2% in 2025. And we also achieved an outstanding enterprise for promoting workplace gender equality. And we have also received excellent Leadership Award for 2025 Buying Power. And also the Novatek Foundation also wins the Ministry of Education 3rd Youth Volunteer Award for outstanding promoter. And we also passed the TIPS, Taiwan Intellectual Property Management System for the third consecutive year. And for more information on our ESG, please visit our website. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on our Q4 results and Q1 guidance.

[Foreign Language]

Hello, everyone. Tony has already reported our Q4 results. And our Q4 revenue were TWD 22.82 billion, Q-o-Q declined by 7.15%. And this revenue decreased by the 7.15% is mainly due to the consumer market low season, but actually, it reached the upper end of our guidance. And as for Q4 margins, it reached 38.19%, which is up Q-o-Q by 1.9 percentage points. Also, this exceeded our guidance. And this is mainly due to favorable ForEx and positive product mix. Looking ahead of 2026, tight memory supply and rising memory price will require close monitoring as they may lead to higher end product pricing for consumer electronics and a potential impact for market demand, especially on the smartphone and PC product line. And as for Novatek, we'll continue to diversify beyond driver applications with a particular focus on image and machine vision products integrated with the AI capabilities for numerous edge AI applications. And we have invested quite resources into all these areas. And in Q1, due to the traditional Lunar New Year holidays and the reduced number of working days, Novatek expects our revenue to be as follows: the revenue will be TWD 22.2 billion to TWD 23.2 billion, and this is at an exchange rate of USD 1 to TWD 31.2. And the gross margin is expected to be around 36% to 39%. The operating margins between 15% to 18% range.

Thank you, Steve, for the Q1 guidance. Next, we'll move on to Q&A sessions. Please be reminded if you have any questions that we'll be covering. And if it's not included there, and you can send them to us online. Okay. Now I'll hand over the time to Tony. Please go through some of the questions that you already have on hand.

[Interpreted] Could management share the view on the sequential trend across major applications in terms of order flow into first quarter?

[Foreign Language]

[Interpreted] According to the panel production base across major applications into Q1, what we see here is that TV is slightly down and monitor is also expected to be down Q-o-Q. And as for notebook, it is expected to be up as brand OEMs are pulling in earlier, while tablets are flattish. As for mobile phone, we are expecting it to be down Q-o-Q. This is mainly due to the tight supply of memory and the rising price. And as for automotive, it should be flattish.

[Interpreted] Consequently, could you also provide your quarterly revenue trend into first quarter across 3 business groups?

[Foreign Language]

[Interpreted] As for the 3 main business groups, what we are seeing here is the SoC will be up the most. This is mainly due to strong demand on imaging and machine vision, edge AI related. And following that will be our large driver IC, which will also increase quarter-on-quarter, and this is mainly due to the demand from notebook products. As for the small, medium-sized driver, we are expecting it to decrease, as mentioned earlier, mainly due to the high memory price, which really impacted the smartphone demand. And while for the tablets and automotives, we're expecting it to be flattish.

[Interpreted] Could you maintain your 2026 revenue outlook with a positive growth, if any major growth driver? Also, you have mentioned about memory price. Could you also comment on the impact?

[Interpreted] Given the current memory shortage and price increase, we definitely should closely monitor the effects on electronic end user price and also the market demand. And for Novatek actually, we will launch new products across different lines, particularly high-end devices such as the OLED TDDI for foldable phones and imaging and machine vision for edge device, AI device and also the high-end gaming monitor. So we are expecting these products to contribute to the revenue growth in 2026.

[Interpreted] For your advanced ASIC progress, given your 4-nanometer test chip was released in quarter 4 last year, could you update the progress of time table? Could you also recognize revenue either by the end of this year or sometime next year?

[Foreign Language]

[Interpreted] Our [ 4-nano HPC POC ] demo system is basically still under development. And we do not expect any revenue contribution from advanced node ASIC in the near term. But we do aim to leverage the ARM CSS ecosystem together with the leading process technologies and also the advanced packaging and to integrate the high-speed interface and also the system integration expertise altogether to offer flexible ASIC design services for the various applications that meet our customers' diverse requirements.

[Interpreted] Could you provide some update on your view regard with Edge PC and notebook PC?

[Foreign Language]

[Interpreted] Demand for Edge AI PC and notebook has not picked up as fast as we expected. But Novatek believes that maximizing AI application with AI PC and notebook is still the future trend, especially as we see that in future we will have the human and machine interaction will become more and more important. And a lot of these features will be integrated into the AI PC and notebook.

[Interpreted] About SoC product lines, which one has the best visibility of growth opportunity for your company in 2026? And also, could you give us a little bit more color on the growth driver?

[Foreign Language]

[Interpreted] We are continuously introducing imaging and machine vision products with the embedded AI for multiple edge AI cases of, for example, smart home, vacuum robots, drones, action cameras, smart glasses, et cetera. The customers' reactions have been pretty favorable, and these offerings are likely to bolster future SoC revenues. And we do expect the portion of SoC revenue related to AI-enabled products should grow each year.

[Interpreted] About driver IC product line, which one has the best visibility of growth opportunity for the company in 2026? And could you also give a little bit more color in terms of growth drivers?

[Foreign Language]

[Interpreted] As for the DDIC product line, we're launching numerous new products in 2026, including OLED TDDI for foldable phones, OLED DDIC for high-end smartphones and also OLED driver IC for IT product line and also the automotive TDDI, all of which will definitely generate revenue momentum.

[Interpreted] As for your efforts in customer diversification, could you also provide update on DDIC in terms of opportunity and the challenge particularly about your OLED product?

[Foreign Language]

[Interpreted] To further diversify customer base and application is one of our major and long-term targets. And regarding OLED, the development and shipment of projects related to the new customers basically are progressing smoothly, and they are expected to contribute to near-term 1 to 2 years DDIC product revenues.

[Interpreted] With multiple OLED TDDI, could you give us the shipment units for 2025? And also any shipment target for this year 2026? Could you also update us on the progress and the customers' expansion?

[Foreign Language]

[Interpreted] The shipments for OLED TDDI for 2025 actually exceeded 10 million units, higher than our expectation. Given the addition of new customers and new model launch, shipment for 2026 are expected to grow Y-o-Y.

[Interpreted] Quarter 4 gross margin exceeded the guidance of 35% to 38% and increased by 190 basis points sequentially. While those are positive factors, could you also comment on the impact on gold and the memory side?

[Foreign Language]

[Interpreted] Yes. I mean our Q4 margin did improve by 1.9 percentage points. And this sequential improvement came from favorable ForEx and also positive product mix.

[Interpreted] According to your positive gross margin guidance for the first quarter, what are the major positive factors, particularly given the rising cost pressure on gold and memory prices?

[Foreign Language]

[Interpreted] Yes, the rising gold price and memory price does have impact on our cost. And despite this, we are taking multiple actions to improve our gross margin, such as the reduction of gold consumption, the replacement of gold with alloy and also negotiations with customers to reflect higher costs. And last but not the least, we are also trying to improve our product mix and also new product launch to improve our margins.

[Interpreted] Could management provide a sensitivity analysis of gold and memory price on your gross margin?

[Foreign Language]

[Interpreted] Basically, the -- each product cost structure actually differs. And Novatek will dynamically negotiate with customer to reflect the cost.

[Interpreted] Would you share the situation in the supply chain, such as which part is in tight supply, such as the foundry, packaging and other parts?

[Foreign Language]

[Interpreted] Yes, you're right. I mean KGD, Known Good Die, substrate materials and also the logic testers and also the ABF substrate are currently tight in supply and have longer lead times. And that said, Novatek has long-standing partnerships with the supply chain to deal with these changes.

[Interpreted] Could you update the pricing mechanism of the supply chain at this moment? How about the growth trend into the second quarter compared with first quarter? And could you also even share some preliminary view for your gross margin in 2026 compared with 2025?

[Foreign Language]

[Interpreted] Well, due to the current tightening in the supply of certain materials and rising costs, Novatek will continue to negotiate dynamically and with our customers, and we'll try to pass on the cost and based on the market supply and demand conditions. And also, we'll continue to take actions to reduce the cost.

[Interpreted] Major items for nonoperating income of TWD 554 million in quarter 4 compared with TWD 518 million in quarter 3.

[Foreign Language]

[Interpreted] The nonoperating income of TWD 554 million in the fourth quarter came from ForEx gains of TWD 176 million, dividend income of TWD 93 million and also interest income of TWD 219 million.

[Interpreted] What are your inventory days in quarter 4 compared with those in quarter 3. Could you also provide the trend into the first quarter? Could you also provide more color on the inventory days or trend for some key raw materials at this moment, such as KGD, gold and even other key components?

[Foreign Language]

[Interpreted] Inventory days for fourth quarter were 59 days, flattish compared with the third quarter. And we expect inventory dollars at the end of Q1 to be slightly up Q-o-Q due to selective component rising costs, but should be still at the healthy level. And as for these selective key components, Novatek will continue to manage inventory level and costs through a long-term sourcing strategy and supply chain management and also product optimization.

[Interpreted] Given your operating expense dollar in 2025 was similar to that in 2024, how about the trend into 2026 compared with 2025?

[Foreign Language]

[Interpreted] The OpEx dollars in 2026 is expected to grow slightly from 2025 last year. And this is due to the increase in R&D and also the reinforcement of key talent.

[Interpreted] Given your tax rate of 16.3% for 2025, in line with your earlier guidance of 16% to 17%, what's your guidance for first quarter of 2026 for tax rate?

[Foreign Language]

[Interpreted] The tax rate guidance for 2026 is at the range of 16% to 17%, which should be similar to 2025. Tony, did you cover all the questions? So we'll just go through and see if there's any further questions that we haven't yet covered.

I think the first question, as we mentioned about a very good momentum in both first quarter and 2026 coming from some image and the machine vision device. So investors wonder if this is existing product or is coming from new product launch.

[Foreign Language]

[Interpreted] Okay. As Tony already used [indiscernible] to ask the questions. And basically, the momentum that we just mentioned about the imaging and some machine vision, some of these products, actually, we've been working on it for a while. And some of the products that we mentioned earlier, it's already in mass production. And what we are doing is we are adding our imaging product and add to it some of the AI functions for some of those edge devices. And we are launching more new products in the future.

[Interpreted] The question is more about the impact on DRAM price on TV SoC. Wanted to know how we can mitigate the DRAM cost inflection on our TV SoC products.

[Foreign Language]

[Interpreted] Well, as you know, for the TV SoC, the KGD is supplied by our supplier. And so we'll try to reflect the cost to our customer. On the other hand, at the same time, we're also trying our best from the system level to minimize the memory size to reduce the cost. I think we have covered most of the questions that -- okay. Thank you so much, and we'll end our Q4 investor conference here. And thank you, all of you, for joining in and wishing you all a very happy and fruitful year of the horse. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]