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

Welcome, everyone, to Parade Technologies Limited 2020 Third Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2020 3rd 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 also will remain last 15 minutes for the attendees who'd like to ask questions in Chinese. [Operator Instructions] [Foreign Language] And now I would like to introduce Mr. Yo-Ming Chang, the Investor Relations of Parade Technologies; and Mr. Chang, please begin. [Foreign Language].

Thanks, Jason. Welcome, everyone, to Parade Technologies 2020 Q3 Webcast Investor Conference. Parade Technologies third quarter 2020 consolidated revenue was USD 150.15 million and net income was USD 36.75 million. Both basic and fully diluted after-tax earnings per share were $0.47 and $0.46, respectively. These results compared to consolidated revenue USD 101.45 million and a net income of USD 21.87 million or $0.28 and $0.28 per basic and fully diluted share in the year-ago quarter. In U.S. dollars, the third quarter revenue increased 23.53% sequentially and was up 48% year-over-year. The gross profit in the third quarter of 2021 USD 66.07 million, an increase of 22.80% from the previous quarter and an increase of 51.67% compared to the same quarter of last year. On August 13, 2020, Parade announced the mass production of the PS8926 PCIe Gen 4 retimer for enterprise system deployment. This integrated device has completed rigorous testing and validation in enterprise-level network and storage systems now entering production. The PS8926 supports up to 16 bi-directional PCI Gen 4 lanes using 32 high-speed data channels operating at 16 gigabits per second. Parade Technologies PCIe Gen 4 family of retimer devices, including the PS8925, PS8926 and the PS8926A all support Parade's exclusive Protocol Aware Bit-level Retimer mode that reduces latency to 2 nanoseconds, well below the typical 43 nanoseconds expected for spec-compliant PCIe Gen 4 retimer, increasing data throughput and greatly reducing memory access time. Based on the current business outlook, Parade is providing the following guidance for the fourth 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 27 million to USD 28 million. [Foreign Language] It is my presentation for the 2020 Q3 financial results. Now I transfer to CEO, Dr. Jack Zhao to answer your questions. Jason, you may begin.

[Operator Instructions] And the first question is coming from Martina Huang of Fubon.

My first question is regarding the mini LED. We haven't talked about this for a long time. So could you please give me the current status?

Okay. Thank you, everyone. Good afternoon. Yes. We have developed with our standards-plus customer our mini LED technology and product for several years and the first one to power up the XDR monitor that has been in the market since last year. So it's a fantastic monitor, and the display is gorgeous. The display -- and it's a professional one. The price also is pretty hard. So -- and repositioning, we develop with our standards-plus customer to redeploy the similar technology to the more common platform people use daily. For example, the notebook, pad and so on and so forth. So we have been completely developed the second-generation similar technology. And now we think -- I don't know when the customer will put a device into the market and I hope so soon, and let's wait for it. I think the display itself is a fantastic and a high-quality display, and it will be pretty common platform for consumer products.

How can we expect mini-LED eDP Tcon's ASP?

We are repositioning the system so that the second-generation marry off mathematical calculations right into the main chip or CPU chip, and depending on the mix-match and some of the system need another device to support. So consumer space, the chip will be a lot more simpler compared with the first generation of resolution, which powered the XDR monitor, even though the functionality are similar.

And my second question is, we know you're working on USB4 IT. So how are you progressing with this?

USB4 is a very important high-speed interface solution for next generation, whether the notebook, tablet or almost everywhere will be used for high bandwidth data transactions, right? So we have been working on the USB retimer -- USB4 retimer. We are developing USB4.0. They call it a new name, the router -- or in fact, it's originally called a hub. However, USB4 hub, or a new name called router, is much more complicated than the USB3 hub and has a lot more functionality there. So while developing those solutions, we also develop more simpler USB4.0 solutions. And so it's a set of a device offering for the market.

And the next question is coming from Jerry Su of Crédit Suisse.

Dr. Zhao, I think the first question I have is, can you provide us some color about your revenue mix in the past quarter? And also, what do you think about the growth of -- by each segment into the fourth quarter.

Okay. Thank you. In the Q3, which was a pretty strong based on demand. And our DisplayPort solution is lower than 50%. Our peer's high-speed solutions, which include Fresco Logic that we acquired, finished the acquisition in June, is more than 35%. Our source driver or TC product line is about 10%. And our touch or TT product line is lower than 10%. And during the Q3, the demand for our product is almost very strong for all of the segments. And moving to the Q4, we'll continue to see the strong demand for our products. And now a lot of it came from our enterprise customers and continuously the Chromebook solution demand. And our -- we just announced the PCI Gen 4 solution. We're drawing our Q4 to good revenue to provide some actual growth on the Q4.

Then speaking on PCI Gen 4. I don't know if you can help us understand what should we think about this revenue contribution this year and next year. And then have you seen any other peers no matter in U.S. or in China has been able to compete with you or to potentially challenge your market share in PCI Gen 4 in next year?

I think PCI Gen 4 is pretty unique device and need a lot of long-term -- I mean, high-speed expertise and need to work in the rigid qualification for enterprise environment or data center environment. We have been working with Tier 1 customers, whether you can think of [indiscernible] with respect to all of the Tier 1 customers. And we qualify many systems and we also work with a few of our key solution provider in China as well. And now we think the PCI Gen 4 will be one of our growth point for the 2021, which we're happy to see and becoming one of our growth point there. And there are still competitors, and what are we aware of there was U.S. start-up [indiscernible] that came out of the TI and the leading founder. And actually I personally know him well. He used to work with me before. So -- and I think that's probably one of our credible competitor. And I don't know others because we see that some of our system providers may want to have a split share for the 2 supplier. However, major system providers still stick with us pretty well for the -- few of the key one and a few of big ones. And so we are pretty happy. And I'm confident we'll grab a significant share of PCI Gen 4 retimer solutions. And that's -- we have been working more than 2 years. And I don't think anybody could jump into immediately to attract customer solutions seriously in data center or the quality, the critical device. Besides, this will also provide our customers the road map for the PCI Gen 5 retimer solution. And our -- both Gen 4 and the Gen 5 retimer carry one of unique feature to improve the system performance significantly. We call this the bid level, the retimer, and has been adopted by the Intel with specific software support. And Intel started to deploy their software support for a unique feature there. So we already see customers just because there's an improvement to use our retimer device.

Okay. And then just one follow-up. Regarding the revenue contribution, how should we think about that this year and next year? Should we be modeling 10% or still single-digit of revenue coming from PCIe in 2021?

Yes. I think the 2021, certainly, you have a lot of uncertainty. However, we are pretty positive for the 2021 growth. As we said previously, the PCI Gen4 retimer will be a wonderful contribution to our revenue stream, which is high-speed solution. USB4.0 retimer will be another, a key bright point for high-speed solutions. We also doing the innovative panel solution, which is a source driver, plus the Tcon, together in the high-end space for the gaming, for the [ signal one ] and those kind of things. And so we are pretty positive to look at our design cases. And we are winning cases, and we think we are pretty comfortable for our growth in 2021. And we all know we had a -- with today's guidance, we had a good growth in 2020. But we think on top of it, we will have a pretty healthy growth again in 2021.

And next we'll have [ Jamie Yu ] of KGI for questions.

Jack and Yo-Ming, congratulations for the third quarter results. I have 2 questions. One -- first one is you guided fourth quarter will be like 1% to 10% Q-o-Q decline. I think it's better than previous seasonal, but kind of mismatched with our, I think, market understanding about the notebook demand. Because I think work-from-home end demand is still pretty strong, and some of related suppliers guided like flattish kind of guidance. So I don't know which parts that you think may decline. And then -- or you just be conservative in terms of maybe foundry supply or something like that? And then also regarding to the guidance, that you lift your gross margin profile by 0.5 percentage. Is that because product mix or any special reasons? And can we expect that this can -- I mean, this range can continue to carry out into 2021?

We are -- I think we guided pretty much similar. If you compare guidance to guidance, we have guided pretty similar as Q3. And I could see that Q3 is pretty better than we guided. It's really because our manufacturing is able to accomplish more in Q3. And in Q4 we will see the strong demand. However, for PC -- and people kind of view Q4 is at even lower than Q3. But I think Q4, we feel it's pretty strong. Let's see how the number will come out and the inventory. And kind of we guide on that range, exactly where we are hard to say at this moment. I think in terms of gross margin, we remain comfortable at a range, what we are doing. And I don't expect we continue to make gross margin higher. And whatever the current one is really just because of the fact that the product mix in the quarter and that's where we are. And I have been here with the investor community a couple of times, and we treated the gross margin very seriously. And I hope that we give the market clear picture of where we are and that's the thing in there. And yes, so just looking at the guidance, I wouldn't think that neither too much you should be think -- you should think the same as the guidance for Q3.

So as for with more maybe PCIe Gen4 for contributions in the coming quarters, I think at least we can be, I mean, staying with this margin guidance for a while. And maybe we can expect -- maybe at some time, you make again for the gross margin?

I hope so. And certainly, I hope so. So we just shared with you -- with our investment community that we are always trying to improve our quality of our business. And moving towards the high-speed data center solution is a wonderful initiative we took and to improve our quality of our business. And we also did another thing in a couple of years -- about couple of years ago, we requalified our high-speed products, tried to penetrate it into the automotive market. So I'm happy to report one of our convert -- high-speed converter chip, we first started mass production in one of Tier 1's automotive solution. And we start to ship the mass production in the fourth quarter as well. So those efforts added together has really tried to strengthen the company like Parade to be high-quality, not only working -- capable work on the notebook, tablet solution, we are capable to work on the data center, automotive, and we have our team. And after a couple of years understanding of the requirement of automotive processes, we are into that market and we have a few of the high-speed device and currently engaged with the high -- the Tier 1 automotive solutions. So those efforts is try to assure our investors that we are the company able to bring this -- not only to bring the business to grow, and we try to grow in the high-quality segment.

My second question is about your cash cow business, which is standards-plus, the customers that, I think, there is always market chatters about its units, I mean, plan. Some people talk about that they will launch new products. And some people talk about they will be aggressive on their tab -- not tablet, the notebook segment because of their own AP. I am wondering if you can share with us about whether this customer will continue to upgrade in terms of the display specs and also our Tcon. And then whether they -- whether you are confident on the units -- continued unit gain, I mean, in terms of demand. And then lastly, about the competitive landscape, whether you think there could be potential threats or entries from other companies that share our -- market shares on Tcon or maybe of IC. And of course, I think people also worry about the foundry partner, whether you are confident that you can secure enough capacity starts you plan to deliver for next year?

Okay. Thank you. I think the first one is really related to the standards-plus solutions, our Tcon. And just like you asked, a lot of report that -- and because they changed to their own the AP process as a key point, and they may be able to grab more shares because of the system. I really don't know exactly what the equation is. I think I -- probably we read the same thing. I do see we have a strong demand from our end customers on the newer solutions. And we are keeping developed with them with multiple display device on multiple directions. And I think we are pretty confident we will be sort of in the next few years for the -- provide a display solution or Tcon solutions for our customers and really not because our -- earned our performance on the high-speed side, and earned our quality device to provide a solution to them. So it's not only one direction, but multiple directions. And if you understand that customer, they very much care about the quality of their device. And in the end of the day, and then you have multiple suppliers, your quality will always go with the lowest supply quarterly. In terms of capacity, I think we are comfortable. We have been working on a capacity plan since this May -- or the past May. And I think we are comfortable to have secured enough capacity to support our 2021 growth.

Okay. I think, if I may ask one question. When you talk about healthy growth for 2021, can I think that you implied double-digit growth for next year?

I think you know me enough the -- know us enough or the language. And I think pretty much, we are looking for pretty healthy growth. And what do you kind of expect for consumption? It should be our target or our -- the sort of nominal, we think we should do at least.

And the next question is coming from Daniel Yen of Morgan Stanley.

So my first question is regarding your 3Q number. So you talk about your enough demand. And I noticed that although your absolute level for inventory goes up in 3Q because of your larger scale in terms of revenue, your inventory day actually goes down to below 40 days, which is the lowest level in the past 7 years. So I want to ask, what's your observation from the customers and also from your side. When do you think the inventory level will go back to the normal or healthy level? And also what's your observation from your customers regarding the channel inventory and, et cetera. Are you still seeing some tightness from your customers? What's the feedback from your customer right now?

Okay. Thank you. Good observation. I think it's a very good observation. And it is true that we come out of September and had a pretty low inventory level. And now we wish we would have the higher inventory. I think that also reflects the strong demand from our customers, or you may think in Q3, we might be behind some of customer demand. However -- and I would think that -- we hope we will improve in Q4, but I'm not sure we will be able to reach the nominal, which is like 50, 55 days, the day of inventory in the end of December, since the demand remains pretty strong and it remains pretty strong. We are working very hard with our foundry -- wafer foundry, also the back end, also the testing costs to meet our customers' demand. And that, in the current semiconductor environment, it is a challenge to our operating team. And we are basically trying to meet our customer demand. And I think that's -- what you observe is true, that we hope we will have a higher the inventory. In terms of channel inventory, we modeled our DC and our customer inventory very carefully. And by the end of September, I don't see any inventory buildup in the channel at all. And so I would think that this is not a concern or issue at this moment at all. And we -- so our parts shipped to our DC and they leave our DC to warehouse very quickly. And we don't see the buildup of inventory at this moment. And that's as much as we can share. Yes.

I see. That's very clear. Just a follow-up. So recently, I think there is some pricing adjustment at the foundry side, no matter at 8-inch or the legacy 12-inch. So would it be a concern from you? Or as you mentioned, you already worked with the customers since May this year. So there's no such change or such concern. How would you address the foundry cost in the next few quarters?

I think you're right that many people reported, and we also explained a similar thing that because our foundry has a capacity shortage and needing to invest for future capacity, so they have to raise the price. And we experienced the same thing, and as the media reported whether the 8-inch or 12-inch. I think we are able to accommodate the price change. And in some case, we also adjust our product price to the end customer and so -- with our product mix. And we think in the next year, we should be net-net. Probably we're okay at this moment because just as I said, we have a better mix -- the product mix in the next year. So it's not that a concern to us. And however, the capacity -- the secured capacity is more critical than the price itself at this moment.

It's very clear. So the second question, regarding your outlook into next year. So I remember in your earnings call last time, which is, I think, 3 months ago, you mentioned the 4Q overall will follow the seasonality and you will be better than the industry. So I also would like to ask, from now, how would you think about especially the PC industry entering into 2021? Do you think there will be more like inventory digestion entering into 2021 because the demand pooling ahead? Or do you think working from home already becomes the norm, as you mentioned last time? So the trend will continue, and everyone would need a PC entering into 2021. What's your view on this?

I think the notebook PC had a good growth in 2020 because of work at home. And work at a home will become the new normal even the COVID may finish. And because we have made -- soon we have the vaccine. We all hope COVID, this pandemic will be finished as soon as possible. But work at home may become a new normal. So the demand for the PC, especially for those professional one may continue to last. So as those supporting those work at home, whether the data center or whether the -- demands more electronics to support them. And so I would think that -- I do not know what exactly it will be, but I'm kind of positive for notebook and the tablet and that segment in 2021. And that's my basic view to us. And we think that not only the demand -- number of unit increase, that's the one thing. We also really, based on our technology, to win more market shares for more new things. And those are the key things. If we have a unit growth that's great. Otherwise, our new technology, new design wins demand will carry us to achieve our goal. For example, you used to have the notebook, you don't have a USB4.0. And the newer notebook will have USB4.0 or high-end system will have it or gaming system will have it. We would like to be the participant or become one of supplier for those systems. And those systems, the ASP will be higher and the early demand will be higher. So our plan or our strategy is to remain on those kind of angle rather than just based on the number of units.

I see. Just one follow-up. So regarding first quarter, do you think the PC will follow the normal seasonality?

I think the PC market will follow the seasonality. However, for us, we were -- the Q1 likely compare year-over-year, we still will have, as we said, the -- positively the growth. I mean, quarter-to-quarter -- the year-over-year quarter-to-quarter model sequentially, right?

And the next question is coming from Steve Huang of Yuanta Research.

I just have some follow up. Because when, Jack, you are talking about the Q4 momentum, you mentioned that first, standards-plus, second, Chromebook and third is PCIe 4.0. My question is the PCIe 4.0 momentum still very strong in the platform or you see initial adoption from Intel platform?

Well, [indiscernible] and the Intel.

So the answer is yes to both?

Yes. AMD already in the shipment and the Intel will join in the Q4.

Intel will join in the Q4? Okay. All right. And then regarding the 2021 growth driver, you also mentioned such as PCIe 4 and USB4 and bundled solution. But you are not talking about mini-LED. I'm just wondering why because people are talking about mini-LED all the time, but -- and I think you are one of the key players.

Okay. Don't get us -- don't get me wrong here. Maybe sequence is not correct. And I had said that our standards-plus customer will be one of our growth engines in 2021, okay? And also that -- somehow, we're very clear about this and there will be a growth engine in 2021. And on top of it, we have the PCIe Gen 4 for our high-speed device, USB4.0, and our channel bundle solutions and so on and so forth. Yes, that is our standards-plus customer in the 2021 will be one of our growth areas.

Okay. So all right. So the 3 growth driver, first, standards-plus; second, high-speed; third, bundle solutions. Is that correct?

Not in the percentage, I'm just saying in the each area, yes.

Okay. Sure. That's very clear. In terms of bundled solution, I'm just curious because right now, our bundle solution still in the TFT display, right? I'm wondering if Parade has some kind of product road map to offer like bundle solution for AMOLED display or for mini-LED display in the future?

We have a TFT LCD, right? Amorphous LCD, we have Aquos LCD solutions, right? And we developed, as I shared before, AMOLED, the eDP Tcon with Tier 1 customer. And that's the second one and will be start with production in Q4 as well, okay? Yes, you're right. We are thinking the strategy how to bundle sales into that area as well, okay, and so on so forth, to look at what you just said, the mini LED solutions. The mini-LED for general market, I mean, notebook or tablets, need to overcome a hurdle, how to repositioning the system, whether the CPU or whether the display system so that the overall system cost remain in check, okay? Listen, that's very critical. So I'm not sure we see the AP -- current AP CPU system in the general market has this kind of capability or into that direction leader, okay? So rather, we are developing mini-LED for general market for high-end solutions, which we think a system vendor can afford. Okay? Is it clear?

Yes.

Okay. I don't think that every system in general market will be able to do it. Until -- if your cost is not in check, right? So otherwise, you have to have their own -- the calculation IP in some way, you could do this.

Okay. Got it.

Okay. So we'll see the differentiation once it's in the market. And I think it's fair.

All right. So basically, for the bundle solution, AMOLED display is already in discussion and in your road map. But mini-LED, probably not yet.

Probably in the road map, yes, we are thinking into that direction.

Thinking into that direction, cool. And you also...

With our technology into that direction, yes, for the eDP Tcon. AMOLED eDP Tcon is there.

Okay. Okay. Yes. And previously, you just mentioned your first high-speed converter is already adopted by one of the Tier 1 auto vendor. And that's going to meet production in Q4. My question is, is that high digit for display in car or for data interconnection in car?

It's a display data. It's a display data.

So basically a Tcon, right?

It's a converter chip.

Converter chip inside the display?

Yes. Inside the car connectivity for display data.

Okay. So that's still based on -- like is that based on eDP display?

Yes, our current device. And we just qualify for automotive use and the customer are happy. We are continuing to qualify a few of them.

Got it. The interface is the eDP interface, right?

Yes. Yes. DP interface converted to [indiscernible].

DP interface? DP interface?

Yes. And if you look at consumer device of this device, there will be a very high volume.

Okay. And --

So that's the strategy we're adopting, right? We are adopting our high-volume consumer device requalified to become automotive device to marketing to automotive customers. We're not inventing any new thing. And the customer acceptance are pretty good, I will say. And we see multiple opportunities in this, and some of them will be into the production next year as well.

Okay. So in terms of automotive application, right now, you are talking about video data running by DisplayPort. And what's your view about the mainstream high-speed interface in car in the future? Whether that's for data, for example, that could be USB or that could be PCIe or that could be ethernet?

Okay. That's a big topic that we're used to. And I think that both USB and PCIe will be one of the car key interface just in the different areas. And arguably ethernet will be as well. Just the system in the different places using the different ones. In more personal engaged area, which is, you can touch it, right? It has to be USB. Now you already see many USB things in the car, right? You can plug in your phone. You can see that it's -- so USB, just [indiscernible] USB as a key thing. That's -- so one of our things we form our strategy why we did this because we see the USB has become one of critical components there, so as the display data. And the PCIe will be in the mission-critical area to connect memory, other systems. I will think ethernet will also create a readable longest connection. For example, you want a biometer, those kind of range, the ethernet will have its own space there. So those types of things will coexist in the car. You don't -- I don't believe any customer would think you have a ethernet product in the car, right? It will be standard as USB plug and the Type-C plug in the car. I think in your car all use the Type C. So as we see this -- and we start to play on -- promote our solutions to that segment almost 2 years ago. And now we see some results.

Okay. So are we likely to see the USB high-speed adoption for auto next year?

You probably saw the USB early this year as well. And some of them already, is some -- a lot of them only for charging purpose, right, charging purpose. And USB for the discrete purpose or other purpose pretty soon. So makes sense to you. right?

And the next question is coming from Mike Yang, Bank of America.

Jack, Judy, and Yo-Ming, congratulations on a very good result once again. My first question is regarding to the PCIe retimer. I would like to know, could you share more color on the content value for Intel server versus AMD, if anything to share?

It's subject to customer. And first of our customer and the Tier 1 customers were based on the AMD robot systems. And we -- the current customer -- and we, in fact, see their working based on the Intel systems. And the first customer also has a few other current model based on the Intel. I don't know what other saturation or technical market share for that. We're just working with our -- the customer. And certainly, our low latency and the path, the Intel-specific support with their [indiscernible] will enable it. And that will become a unique to improve the system performance significantly. So that's what I know and already started exploring.

And just a follow-up, beyond the server CPU, could you provide us some update or sharing with regard to the adoption to other cores, such as GPU in the future for data transmission with regard to the PCIe retimer?

I think not only we work with GPU, we also work closely with fabric switch. And often for our device is right after the fabric switch, right? So the most recent one we are after fabric switch was our PS8926. You think about PS8926 system channel, and they are 8 of them there. So yes, we are working with -- and also there solution for -- with CPU there, and so we're okay. And things with our competitor with them are pretty good. And we already did pretty intensive stress test that we did, so we're okay.

So regarding the 2021 growth momentum. You just say the PCI retimer to grow mainly on the server CPU side instead of switch and GPU, which could be longer-term drivers.

Pretty difficult for me to distinguish. But I think the PCIe Gen 4 will be one of our growth areas in the 2021 and one of our [ multi-floor ] area. And that's what I would like to share with the investment community. The detail, which system and what the percentage are not that clear.

Okay. And probably my last question is what's your view with regard to the long-term impact of AMD and Xilinx sale? Will that be a positive in terms of high-speed data transmission? Yes.

You noticed that Xilinx Chairman of Board is in our Board, right, Dennis Segers, okay. And I think it's interesting. And I happen to share with him -- discuss with him yesterday on our Board meetings. I think it's a good thing for AMD to provide a complete solution that -- to using the FPGA to provide acceleration in certain applications, just like we have our low-latency mode become a very unique to some systems. I think that's a good direction for AMD and is a similar strategy or similar thinking Intel had bought the Altera few years ago, right? So I think it's a good thing. And now AMD has a pretty complete solution, can head-to-head compete with Intel Altera solution. So that's as much as I know,

And ladies and gentlemen, we will now move on to the Chinese question-and-answer session. [Foreign Language]

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[Foreign Language] We thank you for all your questions. That concludes our conference for today. Thank you for your participation in Parade Technologies 2020 Third quarter Webcast Investor Conference. You may now disconnect. Goodbye.

Okay. Thank you, everybody.

Thank you, everybody. Bye.

Thank you.

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