Parade Technologies, Ltd. (4966) Earnings Call Transcript & Summary

Welcome, everyone, to Parade Technologies 2020 Second Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2020 second quarter financial results first. [Operator Instructions] After the presentation, there will be a question-and-answer session in English by CEO, Dr. Jack Zhao; and CFO, Ms. Judy Wang. And we will also reserve the last 15 minutes for the attendees who would like to ask questions in Chinese. [Operator Instructions] [Foreign Language] Now I would like to introduce Mr. Yo-Ming Chang, Investor Relations of Parade Technologies. Mr. Chang, please begin. [Foreign Language]

Thanks, [ Wang Che ]. Welcome everyone to Parade Technologies 2020 Q2 Webcast Investor Conference. Parade Technologies second quarter 2020 consolidated revenue was USD 121.54 million and the net income was USD 28.22 million. Its both basic and fully diluted after-tax earnings per share was USD 0.36 and USD 0.35, respectively. These results compared to consolidated revenue of USD 90.7 million and a net income of USD 17.57 million or USD 0.23 and USD 0.22 per basic and fully diluted in the year ago quarter. In U.S. dollars, the second quarter revenue increased 23.57% sequentially and was up 34% year-over-year. The gross profit in the second quarter of 2020 was USD 53.81 million, an increase of 22.57% from the previous quarter and an increase of 41.22% compared to the same quarter of last year. On May 6, 2020, Parade announced the mass production of the PS8925 PCI Gen 4 retimer for enterprise system deployment. The device has completed rigorous testing and validation in enterprise-level network and storage systems now entering production. The PS8925 is a 4-lane device within Parade's family of PCI Gen 4 retimer IC products that support up to 16 bi-directional lanes using 32 high-speed data channels operating at 16 gigabits per second. On June 2, 2020, Parade announced the completion of its acquisition of Fresco Logic. Parade believes the synergy of Fresco's USB expertise with Parade's proven high-speed data transport experience will greatly benefit Parade's USB4 product integration development. Leveraging the intellectual property portfolio of each company should serve to position Parade as a key supplier of integrated solution for USB4 host, hub, docking and device applications. As an established dealer in enterprise device for USB, PCI and DisplayPort, all of which will now be supported through the high-speed USB4 interface, the acquisition of Fresco Logic presents an evolutionary growth opportunity for Parade. On June 16, 2020, AIC and Parade Technologies jointly announced that the 2 companies will align on PCI Gen 4 retimer technologies to enable the launch of a pioneering PCI Gen 4 appliance. AIC's server hardware, supporting multiple PCI Gen 4 slots in a single rackmount chassis, is a flexible and compact extension box accommodating accelerators such as GPUs, NIC, FPGA and the nonvolatile memory express drives. Utilizing Parade's PCI Gen 4 retimer chip, AIC's high-density PCI Gen 4 appliance provides stable data transport of the doubled data rate of PCI Gen 4 at 16 gigabits per second compared to 8 gigabits per second of PCI Gen 3. And this partnership provides a gateway for early entry into the PCI Gen 4 market for both companies. On June 14, 2020 (sic) [ July 14, 2020 ], Parade announced 2 new eDP Tcon devices developed for high-performance PC gaming applications along with new complementary LCD source drivers. The new Tcon device, the DP808 and DP807, enable resolution support up to UHD while providing a faster 120-hertz refresh rate and even higher refresh rates at lower resolutions. The DP808 and DP807 provide high-speed SIPI outputs to the source drivers that drive the LCD display. To support the higher pixel rate capabilities of the DP808 and 807, Parade has also introduced the TC2082, TC2090 and TC2101 SIPI source drivers. Based on the current business outlook, Parade is providing the following guidance for the third quarter of 2020: revenue is between USD 135 million to USD 149 million; gross margin is between 41.5% to 44.5%; operating expense is between USD 26 million to USD 27 million. [Foreign Language] It is my presentation for the 2020 Q2 financial results. Now I transfer to CEO, Dr. Jack Zhao, to answer your questions. [ Wang Che ], you may begin.

Yes. Thank you, Yo-Ming. We'll now begin our English question-and-answer session. [Operator Instructions] The first to ask questions is Daniel Yen from Morgan Stanley.

Congratulations for the great results and your guidance. So my first question is regarding your result and guidance for your second quarter revenue is above your guidance. So I would like to ask which part are surprise to the upside. And entering into third quarter, I recall last time, Jack mentioned that the momentum for PC -- your -- or your Tcon and also your high-speed interface along with your driver IC can continue into third quarter. So it looks like your third quarter, in terms of the revenue growth, the midpoint is at around 17% Q-o-Q, which is very strong. So I also would like to understand which parts are the major growth drivers.

Okay. Thank you, and good afternoon, everyone. Yes. The first question was what are the driver for Q2 to allow us to exceed the guidance, yes. So work from home, the demand -- the surge demand within the quarter, Q2, from Chromebook, from notebook and also the -- our bundled sales for panel solution, which is source driver Tcon, all are -- exceed our expectation. So that's as a consequence, and we see the Q2 result and it was better than what we had expected. And we got a market with a pretty strong Q3 growth. And the same remain unchanged as majority of the growth from work from home in notebook, in Chromebook and panel side and demand, also very strong. And that -- we see currently. And also, the growth strength remain pretty clear for us for -- continue the -- grow our business. And in some area, for example, on the panel side, as I indicated last time, and our bundled sales solution gained market shares, and that's pretty clear to us.

I see. So if I look at your inventory level, in the second quarter, comparing to your revenue upside, your inventory is still maintained quite well in terms of absolute amount. And even comparing to last year, when your revenue scale is smaller, your inventory level is actually higher than the current level. So I would like to ask, Jack, your opinion on the inventory. Are you seeing your customers building up inventory? Or are you seeing overall supply chain, especially from your customers, that inventory is still quite lean? So that's the reason or -- like you can have a very strong third quarter. And even entering the fourth quarter, if the inventory is lean, there will still be some inventory stocking demand. So overall, I would like to ask what's your opinion on your customers' inventory and also your observation.

Okay. Thank you. And yes, comparing with our revenue growth and our -- as you indicated, our inventory level in fact was -- is lower than the last year. And we wish we will have more inventory. And the strong demand from our customer actually cause us -- make us pretty challenging to speed up our manufacturing and to gain more manufacturing capacity. So that's the reason for ourselves and our inventory is pretty lean. And moving to the -- on the field side, which -- our DC, our distributor and our customers, and the current issue really is people are -- searched for more part and want us to ship early. And our DC inventory actually are also quite lean. So that's the current theme. And really, the challenge for us is how will we gain manufacturing capacity and capability to meet our customers' strong demand.

I see. Yes. Just last question. Could you give us a breakdown of your second quarter revenue?

Okay. Yes. Our DP segment is about 50%. Our high-speed or PS product line is about 30%. Our source driver, what we call TC product line, is about 10%. Our touch solutions, or we call TT, is slightly below 10%.

The next to ask question is Jerry Su from Crédit Suisse.

I just want to follow up on the comments around the third quarter of inventory. I think if we look at the -- this kind of notebook demand, I think clearly, the third quarter, the confirmation seems to be still quite strong. I think it's also evidenced by, I think, the comment on other part of the supply chain. But I want to ask, Jack, what is your view on going to 4Q? Are we going to see a certain correction because of the -- once deployment is completed? That's my first question.

Okay. Thank you. Q3, the demand way exceed our expectation. And also -- and as I said, it poses a huge challenge for us to gain the manufacturing capability and capacity. And looking to Q3 and Q4, as the question you have and -- we kind of see -- at this moment, it's -- we see the pretty normal seasonality of notebook and tablet seasonality, which means that work from home made a big driving force or big tailwind to push the Q3 as well as the Q4 business to high. So that's what we see and -- however, Q3, Q4 were like traditional normal PC seasonality.

Okay. And then next question probably around PCIe 4, I think you have made a few announcements in the past couple of months about launching new products. I want to know -- because Intel's currently new chipset is coming out later this year or early next year. What is your expectation on the overall revenue contribution of PCIe 4 in 2021? And also how will the delay of the 7-nanometer chipset impact your longer-term revenue?

Thanks. We announced with Tier 1 customers, our PCI Gen 4 into mass production, and that was a couple of months ago. And we continue working with a Tier 1 customer in the U.S. and in other areas to design our PCI Gen 4 solutions. And the design activity is actually pretty heavy. And we expect to see more models, more assistance entering production. And so moving to 2021, we think that the PCI Gen 4 retimer solution will become one of our revenue source to -- as our -- one of growth area as we win more customers and as a customer into the -- they have mass production. The current one, when we do the design of system, mainly are the disc side or the other support, multi-graphic chips, those kind of thing, is really not that much dependent on whether it is an Intel platform or it is AMD platform. So we are -- so far, we have been designing the system or the subsystems and is not on the motherboard or those kind of things. So it's in the data-center-type application. So it's less dependent with whether -- which system it is. And that's so far what we observed. And I think that we certainly hope the Intel will catch up to announce their system into the market on time and -- such that more system vendor can adopt the PCI Gen 4 solution. However, we're going to see quite a lot is independent with -- whether that's Intel or AMD. And in fact, the first when the customer intends to [ deploy ] the -- in the data center the whole study, it is AMD systems. And that's what we see in the first [ word ]. So I hope I explained the -- your questions.

Okay. Yes. And then one follow-up on this. So looking to 2021, how should we think about the contribution from PCIe 4? Is this going to be approaching like the [ OSDP ] kind of in scale? Or it still takes time for that to happen?

I think we continue to focus on the design win and system design win, and it will be better we -- in the later quarter, we may give you a better estimation for the next year's -- what the scale would be. As I explained many times, the PCI Gen 4 -- or continue PCI Gen 5. For us, one is technology win. And one is the new area we come in to. And we look at different segment into the more data center, industrial, and we hope those segments will give us much better stability for the gross margin and -- driven and so we play pretty long in that sense. But in the next year, it will be meaningful revenue contribution in 2021.

Next, we have Martina Huang, Fubon.

I just saw our announcement about the PCI Gen 4 for laser retimer in mass production for enterprise system. Could you give some more detail on this product line, especially like -- for which areas and applications. And when will 16-lanes [ of production ]?

Yes. The first system into the production is for data center, right. As I explained previously, it's for the storage core and when data -- those are -- it connect to many SSD cards and with -- for channel solutions. With this customer, and very soon, we will have a 16-channel solution to -- system solution into the production quite soon, yes. And then with other customers, also, we have a 16-channel into the production.

So can we expect 16-channel will be mass production in second half of this year?

Yes, yes. Someday in the second half, yes.

Also, I have another question on PCI Gen 5 retimer. Could you give us some update on PCI Gen 5 development?

Okay. Thank you very much, yes. PCI Gen 5, that's 32-gigabit per second, the solutions. It's a big leap -- jump in terms of speed. And we expect in PCI Gen 5, usage of retimer will have much more applications. And even when we used to say that [ richer ] material motherboard may also require the retimer. So for PCI Gen 5, you will see more usage for the retimers. Having said that, we are very -- worked very hard to develop PCI Gen 5 retimer. And then we expect we will then put to our customers in the second half.

Next one to ask questions, Steve Huang from Yuanta Research.

Congrats on the good results. My first question is regarding your comment about -- we're going to have a normal seasonality into Q4. Could you make it clear, what do you mean by normal seasonality? Because when I take a look at your previous number from 2013 to 2019, I look at every Q4, sometimes Q4 is up, sometimes Q4 is down. So I'm not quite sure what do you mean by normal seasonality into Q4.

So I was saying -- I had said that the normal PC seasonality, right, and the standard PC, notebook seasonality. And I'm not really saying our own seasonality, right?

All right.

So yes, I think you are very experienced on this PC, notebook demand. Typically, Q3 is peak. Q4 may be slightly lower. But Q1, Q2 is lower, right? So that's the typical, what I call, seasonality of PC and notebook. I'm not saying our own seasonality.

Okay. So Q4 -- Q3 will be peak, Q4 will be soft, and you also say Q1, Q2, also soft, right?

That's just observation. I'm not saying our next year Q1 will be softer or those kind of thing. And Q1 sometimes -- not necessarily, but typical Q2 for notebook, PC is a lower season. That's just observation from the PC, notebook demand sort of a trend. And because Q3, Q4, you have mainly the holiday season and Christmas, Chinese New Year that cause -- the notebook, PC demand goes up. That's typical, what I observed for many years.

Yes. And this year is kind of different because when you say like Q1, Q2 also a typical low season for PC, notebook, but actually, ex this year, you significantly outgrew that seasonality. And you also mentioned recently now you're getting share. You're gaining the bundled solutions. So if we assume Q4 is the normal down season for PC, notebooks, do you still think that you can outgrow the industry into Q4?

Very much sure. So I would like to add this. If you compare with year-over-year Q4 from -- at this moment, I think we will have a reasonable good growth in there. That's what I -- at this moment, what I would see.

Okay. So when you say normal seasonality for Q4, can we expand in this way that we are not going to see a big decline, I mean, for Parade into Q4?

Okay. So...

Recall that in the previous -- in a previous call, you mentioned inventory is not an issue for Q2 or even for Q3. And you say if there is any impact for COVID-19, that could be in Q4. So I would just like to get your comment regarding this issue because right now, COVID-19 seems to have a second wave across the globe. And -- yes, I'm not sure. Last time, we say if that happened, that could be in Q4. And I just would like to have your updated view regarding this issue.

I would like to repeat it again. The -- if you would like to look at Q4, it was still a pretty strong quarter and -- for us, compared year-over-year, right? That's what we see at this moment. And whether sequentially, that's a different story. And as you observed, our previous question was -- and then I answered our inventory remains very low. And it's a huge challenge for us to meet our customers' demand in terms of manufacturing capability and capacity. And I would think we are already into the manufacturing parts for Q4. And Q4 remains a big challenge for us to meet customer demand in terms of our manufacturing capability.