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

Welcome, everyone, to Parade Technologies Limited 2021 Second Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2021 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 also will remain last 15 minutes for the attendees who would 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. Mr. Chang, please begin. [Foreign Language]

Thanks, Jason. Welcome, everyone, to Parade Technologies 2021 Q2 Webcast Investor Conference. Parade Technologies second quarter 2021 consolidated revenue was USD 175.25 million and net income was USD 45.07 million. Its both basic and fully diluted after-tax earnings per share were USD 0.57 and USD 0.56, respectively. These results compared to consolidated revenue USD 121.54 million and net income of USD 28.22 million, or USD 0.36 and USD 0.35 per basic and fully diluted share in the year-ago quarter. In U.S. dollars, the second quarter revenue increased 14.47% sequentially and was up 44.19% year-over-year. The gross profit in the second quarter of 2021 was USD 83.49 million, an increase of 21% from the previous quarter and an increase of 55.17% compared to the same quarter of last year. On June 15, 2021, Parade announced the TC3400 and TC3402, the world's first highly integrated eDP timing control devices with embedded source drivers and touchscreen controller for the notebook LTPS and Oxide in-cell LCD panel markets. Both devices target the latest notebook platforms by Intel and others by supporting Embedded Display Port 1.4b with features such as Multi-SST Operation and Panel Self-Refresh. The TC3400 device supports TrueTouch in-cell capacitive touch and active stylus functionality for commercial notebook applications, while the TC3402 provides a robust TrueTouch touch-only solution for mainstream notebooks. The TC3400 combines Parade's broad portfolio of patented display and touchscreen technology as well as proven display processing and high-speed signal technology to provide a low-power, highly integrated display and touchscreen solution for notebook in-cell displays. On June 21, 2021, Parade announced the availability of its PS8461 retimer device in an automotive grade, the PS8461V. Using a retimer function, the PS8461V provides jitter cleaning of a DisplayPort video transport to increase signal reach, improve data reliability and increased resilience to crosstalk and other electrical interference. The PS8461V is AEC-Q100 grade 2 certified with a negative 40 degree to 105 degree Celsius operating temperature range. The PS8461V is one example of a high-performance, consumer-oriented display product that Parade is making available for the automotive industry, and we plan to continue the roll-out of such automotive grade product options. On August 3, 2021, Parade announced the availability of the PS195 and PS196 DisplayPort 2.0 to HDMI 2.1 protocol converters for computer system motherboards, docking stations, and protocol converter dongle applications. The PS195 and PS196 products are fully compliant with the VESA DisplayPort 2.0 and HDMI 2.1 specifications. The DP receiver supports up to 4 lanes at the HBR3 8.1 gigabits per second link rate, and supports optional DSC compression, both in decoding of the DP input or pass-through to the HDMI output. The HDMI output supports up to 4 lanes of FRL at 12 gigabits per second data rate per lane, enabling display resolutions up to 10K when using DSC pass-through. The HDMI output also provides backward compatible with HDMI 2.0 and the earlier versions, providing TMDS signaling up to 6.0 gigabits per second. Parade's PS195 and PS196 DP 2.0 to HDMI 2.1 protocol converters offer the best power performance available on the market. The very low power consumption during standby and low power states greatly benefits portable system battery life. Based on current business outlook, Parade is providing the following guidance for the third quarter of fiscal 2021. Revenue is between USD176.5 million to USD 194.5 million. Gross margin is between 44% to 48%. Operating expense is between USD 32.5 million to USD 35.5 million. [Foreign Language] It is my presentation for the 2021 Q2 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 from Jerry Su, Crédit Suisse.

Congratulations on the good results. I think my first question, I want to ask Jack is that I think the second quarter revenue and also the gross margin has been quite stronger than what you have guided. Can you give us some color on what has caused the stronger revenue and also the gross margin? And then secondly, into the third quarter, I think the -- yes, can you give us some comments about the growth rate for each segment? Which area are you seeing a stronger growth or which area is going to turn softer? And then similar things for the gross margin because I noticed that your gross margin has continued to improve into the third quarter. And then just wondering what is the main reason behind that.

Okay. Thanks. Good afternoon for everyone. The first question was in the Q2, whatever was the revenue exceeded our guidance and also the gross margin. And in the past Q -- in past quarter, in Q2 -- and we had said previous in the conference that our manufacturing is a constraint for our revenue or for our delivery. During the quarter, our manufacturing -- operating team improved the manufacturing efficiency and increased the capacity so that we can deliver more product to our customer. And so that's the good improvement to make our revenue higher than the -- whatever the guidance we provided. And second one is on the gross margin side. And as we told the investment community that previously that we are -- as we see the manufacturing cost increase, and we also adjust during the quarter for our product price. And while we adjust the product price, we also saw or observed our competitors adjusted the price as well. So we get 2 things: one is kind of pass through the manufacturing cost increase; and another thing is we try to match or align with the market, the price. And so basically, that's what we did. And in the end -- and because the survey is favorable, our product mix. So in the end, our gross margin also than we had expected. And I believe the second question is asking there for Q3, the coming quarter, what are the driver and what will be the gross margin. And in the coming quarter -- and again, the demand remains quite strong. And even though there is some area get a little bit weaker, but overall, the demand remains quite strong. And we are continuing behind the demand curve. So we're trying to work very hard to improve the manufacturing efficiency and to increase the capacity. And that's probably also the good result we try to match, try to deliver more product to our customer. So the Q3, we may see pretty strong, the demand side, and we're able to try to do our best to deliver. On the gross margin side, I think we already provided guidance. And we think that the product -- the market still remains quite strong, quite high demand on our newer products and with more favorable gross margin. And so let's see how the gross margin will be in the coming quarters, but we remain pretty positive on our gross margin. We already provided the gross margin guidance to the -- in the report.

All right. Just one follow-up. As you mentioned that some areas could be weaker and some are stronger. Can you give us some color on which area you are seeing some softness? And I think recently, there's also some news about the notebook brands are reducing the order or forecast. How is this impacting your outlook?

Yes. I think there has been reported quite a lot that we see some softness on the Chromebook side. And however, the commercial notebook and the gaming notebook, so on and so forth, remain extremely strong, and we are behind the demand curve. And so that's what I meant. Also on the panel side, the demand is very strong as well. And I think that's probably more related to whether we gain market share and so on and so forth. I think in general, the notebook overall still remains quite strong. I think the theme of the notebook become more individualized and the device for individual remains remain true for coming years. So pretty positive for the market share and pretty positive for our business.

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

Congratulations on the great results. So my first question will be still regarding your gross margin trend. Jack you mentioned that you are trying to match the pricing with your industry peers. Could I ask with you that how much gap do you think right now for your products versus your peers, especially on products like TT and TC? Because you mentioned before that the industry peers are raising the price. But apparently, you are not raised -- yes, you were not raising the price as early as your peers. So how do you think about the pricing hike potential going forward into the second half?

I think as far as the shortage will remain and the demand is high, I think the price will remain elevated. That's what I feel because the customer just try to get the parts as much as they can and especially for the parts on the low end and middle-end segment, okay? So however, on the high-end segment, the customer take a time to desire. But that part is less relevant because the high-end segment, your original has pretty good gross margin. I think the low-end and the middle-end because of a shortage, you continue to see the prices elevated. And for us, really is we are try to align with the market, the trend. Otherwise, it's too much demand and we don't have capacity to support so much demand. And not only the TT and the TC, in the other areas, our high-speed side, also we see the similar trend and you start to see all the parts become a high demand and so on and so forth. So I think this kind of trend, very much subject to the capacity. And I think besides this, well, my own opinion is the industry now see IC or see hardware has its unique value and so on, the customer willing to pay more for their device and for their system. And that's a good thing for the chip companies, I would think.

I see. So can I follow up asking about your revenue breakdown for this quarter?

Yes. I think there's not much change from the Q1. On the DP side, it's slightly lower than 45% and PS side is above 35% and the TC or source driver is about 15% and TT remain at about 5%.

I see. Yes. So also on the gross margin side for your 4 product segments right now, your -- for your TC and TT, are both products still below your corporate average? Or is it very similar right now?

Again, the -- our high speed and our -- this report because the DP segment, we have a unique value in the high end. The gross margin is slightly high. And our source driver and the TT improved significantly in terms of gross margin. And frankly speaking, our TC parts, especially source driver now handle much higher speed and with our unique approach for gaming, for high refresh rate, and the source driver similar parts as our gross margin is very respectful now. And what I meant is that some of them may above our corporate margin. And -- but in general, the source driver is kind of in line with our corporate margin was -- the previous our corporate margin. And I think that yes, TC and TT, the market change and it's improved quite a bit. But again, the -- in terms of our segment, our -- still our high-speed device, our DisplayPort device have a better gross margin, especially newer device.

I see. So second is on your capacity because you mentioned that you are managing to increase or improve the supply from your supply chain. So I guess, that's referring to the foundry side. So could I ask how are you managing the supply chain? And how do you see the capacity support entering into the second half? And also regarding your inventory levels for this quarter came down slightly Q-o-Q. How do you feel about your inventory? Is it enough to support customers entering into the second half?

Yes. The capacity, we will have a short term and have a long-term management, right? The short term, yes, sees demand overwhelming. And our entire semiconductor industry are in the shortage on the manufacturing capacity, not only on the foundry side or wafer side as well on the substrate side. And in some case, the package substrate has become very worse. Well, we work very hard to try to work with our foundry to gain more supply and -- but just like many IC guys similarly work very hard to try to get more supplies. And of course, there are different nodes. And some nodes, we get more -- the supply in some nodes, we get lower supply. And so the short-term issue is pretty dynamic. And the move to the Q3 or second half, Q3 and Q4, I think we're largely already secured the capacity as what we -- guidance provided, right? So I try to distinguish the guidance provided versus the customer demand, and the customer demand is very overwhelmed. And however, we -- whatever provided guidance and we have kind of capacity to support that. And so I would think the Q3 and the Q4, we will addressed this, and we -- probably into the Q4, we may have more improvement in terms of wafer capacity, and also the back-end side, on the substrate side. So I think towards Q4, we may see better supply. In terms of long term, in terms of the launch in the 2022 or beyond, we have been working with the foundry side and multiple foundry to secure the capacity for our growth, and we work very hard on each node to analyze it and to kind of commit to the long-term supply and to fulfill our growth. Nowadays, the big customer and all want to know what is the capacity moving forward to have and whether their product can be sufficiently supported. So yes, I think probably the 2022, the capacity will still remains kind of short and still we have a gap between the supply versus the demand side. Hopefully, it will be improved much better than the 2022, I think -- much better than 2021. We think it will be able to support our growth. However, the demand is even higher. And the very critical thing is you have to kind of find your capacity, especially for newer device to make sure that you have a capacity to support for long term. So we work on both side of short term and long term. I think the short-term, we definitely will be able to support our guidance with sufficient capacity.

And the next question is coming from Bruno Cheng, Nomura Securities.

Great result and great guidance. My first question is about gross margin as well because I think -- I some of the companies already said pretty clearly that the pricing will be further improving, I mean, for the rest in 2022. And following your last week -- earlier guide that the chip prices will also be elevated further. So may I -- you mentioned that the gross margin trend of your company will also continue to appreciate over the next couple of quarters as one of the trend remains unchanged from it is today. That's my first question.

Okay. I think the right way to look at this and -- whether the manufacturing cost increase and you tried to accommodate that manufacturing increase to pass through the customer or the action you take to match your market price or competitor price. Those are the things that is a little bit short term. I think the longer term to look at this is you have to continue to innovate your new device and continue to mix your device supply to increase your margin. And you -- for us, we start with our PC and tablet and more consumer-oriented segment. In the longer term, we think that really the driver for our gross margin improvement as we move to the more server, automotive and so on and so forth to improve our gross margin. So there's a short term first there. And the company has a long-term strategy there to improve our gross margin. So there are -- that's the intrinsic side is really our product is getting more in favor for the high gross margins. So I don't know whether that's the answer to your question. But I would like to get the investment community more focus on the longer term for our product mix in favor of better gross margin.

Yes. Okay. Okay. And you -- I think over the last few quarters, you have maybe yourself pretty clear on the long-term trend of notebook, right? You have been quite positive. And over the last maybe a quarter time frame, there were some noises about like notebook inventory in the channel. I'm sure if you notice the same trend, but recently, we also see very sharp reversal of the U.S. cases, COVID-19 cases. Are you seeing the U.S. consumer behavior changing along with the COVID-19 rising cases number? Or, yes, any observations from you?

As we talk to OEM customer and pretty frequently, I think the OEM customer for notebook are pretty positive for coming years. I think the driver is -- we used to hear a lot of work from home to drive the notebook business. And now we hear more on demand from the commercial notebook or who typically use for the company and those kind of things. And yes, pretty much -- of course, we are pretty positive. The only thing that has a short-term setback for the Chromebook. In fact, I still believe long-term, Chromebook will continue to come up. But the major thing, as I said previously, I think the notebook will become more individualized, which is more people, individuals might need their own one. That probably the intrinsic force to push the notebook, the growth. And they might -- that kind of trend may take several years and certainly, the coronavirus thing accelerated that trend and then make it more obvious.

Okay. And sorry, my last question is could you give us the commentary on the PCIe Gen4 retimer and also USB4.0 retimer outlook into the next 6 to 18 months?

Yes. Okay. We are in the volume shipment or mass shipment on the PCI Gen 4 and our continue design to the customer and that's -- it's already into the market. And USB4 retimer is -- to the platform to us is we have a chip already in the testing with the CPU customer. And the good thing is the 20-gig traffic, everything looks good, and we'll continue to qualify very far with our customer. And we're pretty positive for the U.S. before retimer market, and we think that will be sizable. And at this stage, we are testing on the non-Intel platform with the CPU guys.

When you say this retime -- sorry, the USB4.0 retimer market going to be sizeable, you referred to notebook or desktop or both?

I think both. I think both, yes.

And the next question is coming from Carol Juan, HSBC.

Also, congrats on the great results. You just mentioned that you expect -- you have secured the long-term capacity. So regarding to next year, which product line do you expect to have a stronger growth or a more significant contribution increase in 2022? Is that more -- will there be a contribution from the high-speed interface products in 2022? That's my first question.

Okay. So I think we expect 2022 still will be a pretty good growth year for us. And the reason being is our new device will start to deploy in high volume, okay? And those newer devices tend to be in the most advanced node, right? So those devices are tend to be in the most advanced node, whether those are the high-speed device or whether those are the high-end Tcon device, so those are in the more advanced node. And in the case of the Tcon device and were associated with it because of bundled sales we are associated with our own high-speed source driver to cover along with it. So that's what we see that trend for next year, and we're pretty positive. And just look at that we in the beginning of conference call, we just announced our PS195, 196 and those high-speed devices all are in the most 20-nanometer type of thing. And so it will -- next year will become a pretty high volume shipment. And so those are the growth engine and coupling with our high-end of Tcon, those are our growth engine. And the good thing is that we kind of secure good amount of the high-end capacity, but it's not enough. And we still work with our foundry. We still see the gap. We still work with our foundry to improve it in the case of those Tcon devices. And we need a more source driver to support. We are -- will also secure a quite amount of source driver capacity.

Okay. Just a follow-up on PCIe. Just trying to quantify the usage and demand for retimer for PCIe Gen 4. And next, that how many retimer we need in average for 1 server motherboard? And do we only have to put the retimer chips on the riser that connects SSD and motherboard? Or will there be any change in the design or the usage of retimer in PCIe Gen 5?

Okay. What we -- for the PCIe Gen 4, the system, we see less on the motherboard but more so on the riser card talk to the switch ship or talk to the storage. And that's why most of our shipments on the PCIe Gen 4 or the demand is our 16-channel device, right, the PCIe, the 16-channel device. And that's currently what we see mainly for the data center application. And towards the PCIe Gen 5, as the speed goes high, we may see more demand, much towards the motherboard as well. But at this moment, we don't know yet. I think the assumption remains most of the riser card to the storage, we need the PCIe retimer device there.

Okay. So do you mean that most of the retimers are for 16 channels or 4 channels instead right now, your contribution...

Most of the active ones, yes, all are 16 channels. And we ship some of 4 channels and 16 channels really for connect to the network switch and connect to the storage and so on and so forth.

Okay. And my question is a little bit more prices difference between yours and competitors PCIe Gen 4 retimer products. And how do we compete with the existing competitor in the market?

I think the competitor we see mainly Astera there -- Astera Labs there. And we are competing with them in several customer places. And I think we're doing well. And a lot of the systems, the design is finished in the -- early of this year, and we continue to see some cases in the model to designing and that's the current situation. But I think that the most -- a lot of focus now into the PCIe Gen 5 and the retimer device.

Okay. And also, my last question is regarding to USB4. Could you give us more color on parts kind of IC chips that you're making for USB4? And whether this progress has been tapped out already? And do we already have some visibility and/or the order contribution maybe in first half next year?

Yes. PCIe Gen 4 retimer is an exciting market and a 20-gig device. And as I just mentioned, we already have a chip, and we are testing with customer, CPU customer pretty intensively. And hopefully, we will qualify. And by early next year, we will start to -- early next year or maybe first half, will be start of MP status. And those ones, the shipment or unit demand will be massive. And so we have a pretty good contribution there for our revenue, and we are positive from this. And yes, that's one of the new devices, we are very much focused on. And that's what we mean. We very interested -- very focused on for the new innovative device, and that's one of them.

Okay. Got it. So you mean that we already have retimer ready, but is there any product maybe leveraging the Fresco Logic technology as well in 2022?

On this, the USB retimer, so far is not. But we have a second device we call the USB4 Hub, which is -- we are underdeveloped. That's the device we intend to work with the Fresco Logic IPs and their teams to design that device.

And the next question comes from Sangam Iyer from Consilium.