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

Welcome everyone to Parade Technologies Limited's 2022 Second Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2022 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. Please follow the instructions given at that time, if you would like to ask a question. [Foreign Language] Now I would like to introduce Mr. Yo-Ming Chang, Investor Relations of Parade Technologies. Mr. Chang, please begin.

Thanks, Jason. Welcome everyone to Parade Technologies 2022 Q2 webcast investor conference. Parade Technologies second quarter 2022 consolidated revenue was USD 216.7 million and the net income was USD 60.94 million. Both basic and fully diluted after-tax earnings per share were USD 0.76 and USD 0.75, respectively. These results compare to consolidated revenue USD 175.25 million and a net income USD 45.07 million or USD 0.57 and USD 0.56 for basic and fully diluted share in the year-ago quarter. In U.S. dollars, the second quarter revenue increased 2.84% sequentially and was up 23.65% year-over-year. The gross profit in the second quarter of 2022 was USD 102.36 million, an increase of 1.57% from the previous quarter and an increase of 22.6% compared to the same quarter of last year. Based on the current business outlook, Parade is providing the following guidance for the third quarter of 2022. Revenue is between USD 150 million to USD 166 million. Gross margin is between 44.5% to 48.5%. Operating expense is between USD 35 million to USD 38 million. [Foreign Language] It is my presentation for 2022 Q2 financial results. Now I transfer to CEO, Dr. Jack Zhao to answer your questions. Jason, you may begin.

And ladies and gentlemen, we will now begin our English question-and-answer session. [Operator Instructions] And our first question is coming from Carol Juan of HSBC.

Congrats on the great results. So my first question would be, may I know the reason of the Q-o-Q decline in the third quarter? Is it mainly due to the PC demand weakness or any inventory correction? This is my first question.

Yes. I think the first question will be why the Q3 and Q2, the decrease, right? And I [indiscernible] and Shanghai lockdown and the sudden global inflation really depressed the PC and mobile market. And we experienced in the -- since May or June a demand decrease and so that created inventory issue in the -- our customer side and so as the [indiscernible] And I think that is reflecting our industry and the PC and notebook and experienced the second half the demand decrease and our industry leaders and also many research report already report this. I think we are reflecting where we are placed on the current market situation.

Okay. So depending on the PC market uncertainties because your standards-plus customers just released new models in second quarter. So just wonder whether the big customer would provide a better momentum in second half or do you think the Windows-based customer are seeing more serious inventory issue? So that would offset the momentum from the standards-plus customers in second half?

Yes. Standards-plus customer is [indiscernible] and we are very appreciative in the current environment that there are continuous [indiscernible] had a forecast with a good momentum through the business as usual I would say and so the [indiscernible] pretty well and at the price and [indiscernible] and mainly the [indiscernible] in the -- what we call the more normal or Windows-based or outside of that weak demand and yes, I think that it's -- and also that depend on the component in which segment and [indiscernible] high-speed device [indiscernible] decreased for the momentum is much less and a lot of products is coming to the panel industry. I think many people probably would know and as well the peers or competitors had experienced earlier. I think the panel industry has more inventory issue than others and hopefully that will work through in couple of quarters and that will continue to be [indiscernible] for the notebook PC demand in the [indiscernible]

Okay. That's very clear. And sir, my last question will be, could you provide the product mix in second quarter?

Yes. On the product mix, on the DP, it is below 40% and our PS is about 30% and our TT is below 5% and TC is below 30%.

Next question is from Daniel Yen from Morgan Stanley.

I also want to follow up on your third quarter guidance. So maybe because the signal is a little bit unclear, but I want to confirm again. Jack, you mentioned about the third quarter guidance, basically the weakness is mainly coming from Windows-related applications. You also mentioned about there is inventory digestion from the panel supply chain. So you are mainly referring to your CP business weakness. Is that correct?

Yes. [indiscernible] more Windows based panel more on the panel side, whether we see the CP based because we are in the [indiscernible] sale, right, and where you said CP [indiscernible] and at the same time, your total solution [indiscernible] got impacted.

Okay. So based on your guidance, there is -- I think at the midpoint of your 3Q guidance, it would imply around high-20s Q-o-Q decline on U.S. terms -- USD terms, but you still maintained gross margin range. So could I ask, is that because the shortfall is mainly coming from volume? At the same time, have you seen any pricing pressure coming from the customers? I recall last time, back in April, you mentioned that you don't see any pricing pressure, but incrementally, after 3 months, do you see any change, especially on pricing or gross margin outlook?

I think the next 3 months, [indiscernible] changing very significantly, right? And many things happened and [indiscernible] got a change as a result. I don't think the gross margin depend on the product mix and where you're seeing the gross margin will have a big difference from the coming quarter or in future because of the product mix we have, high-speed device will have penetrated other highlighting area, that help us to navigate through the panel side of the difficulties. And we do see that panel side, because there are in fact price difficulties, because they are customer [indiscernible] and they do ask the -- start to ask, and we actually just experienced, start to ask the price reduction. And in the same time, manufacturing cost, especially the foundry in the -- different area foundry, also more at the same time negotiate the price now. And so just like we used to do and we have strongly increased price that we -- increased as the -- we are -- strategy really is. Yes. Customer ask us, we may go back to ask the foundry and others and see whether they -- or we can negotiate [indiscernible] as well. And secondly, you see some foundry side, and especially China side, and -- were more really into entertain this kind of idea. So that's the overall, the current situation. The important thing for us is the overall -- the gross margin we maintained our -- whatever the -- we have gained and we also -- the margin outlook we have guided, and that's the -- that's important. Of course, the product mix is helping us on the gross margin side.

I see. So just last one, following up on supply chain, have you started to adjust the wafer placement at the foundry? Because I noticed that your inventory days remained healthy by 2Q, but sounds to me that your inventory days will go up quite substantially by 3Q. So do you have any change on your supply chain strategy?

We have been -- start to adjust wafer price since May or maybe even April, start to adjust and we are in fact adjusting in a pretty significant way to [indiscernible] the current market situation. So that's kind of important. And as I said at the [indiscernible] more flexible way to negotiate in order to keep the market share [indiscernible] and they all understand that semiconductor or our industry start to face different time and they are waiting for more to negotiate, especially it took the foundries to provide solutions for panel industry.

Next question Aaron Jeng of Nomura Securities.

Jack, I wonder if you look beyond third quarter, how to think about first quarter and beyond? And current inventory correction that is hurting 3Q a lot? How long will it last? That is my first question.

Aaron, we are -- the longer term, still are not changing, and we think that the [indiscernible] you can take correction as a result of the growth in the 2020 and 2021. [indiscernible] on the high-speed side for the speed, to the 20 gigabit per second after a while, which is like a USB 4 and USB 5, or what we call the USB 4.2, we're exactly [indiscernible] and for the [indiscernible] really because not only the ASP went up because of complexity of the chip for us, the application, the broadness of application and the high speed there. So we are pretty positive as it was and even though we are facing the current the headwind. On the panel side, in fact the integrated solution, our CD, LCD, and TFT with integrated touch and a fast driver, and receive a lot of interest in the customer side. So as for [ automotive ] solutions to integrate together and they receive a lot of the interest on the new technology. So overall, we think the trend to go to a high speed, to have a high resolution display will high dynamically [indiscernible] the support and work in many areas for the continued growth for our business. So we think we are positioned pretty well to support that trend.

Maybe I'll ask in this way, if we look at one which is panel and the other one is the high-speed, look at the coming correction -- the correction that is -- that we are seeing -- going to happen in third quarter, are you seeing a different pattern of recovery of these 2 different applications like maybe panel will take longer to correct it -- to be corrected versus the high-speed or vice versa? Yes.

I think the high speed, because it's shortened the manufacturing cycle because [indiscernible] motherboard in the ODM, but capacity -- I mean inventory situation is a lot better than the panel industry such that the -- yes [indiscernible] sort of correction, but it's not that [ during winter ]. And on the other side, the panel, the cycle is long and panel smart, they probably hold more inventory than the PS high-speed portion. They may take a steeper correction, but it's not necessarily longer because -- if you look at it today, the panel guys, they've got a very significant, not like the PS parts or those ODMs, they're not -- that continue moving. The panel guys got a very [indiscernible] but maybe they will rebound quickly as well. So on the period of time, I'm not sure whether that has much difference, but the cut -- at this moment is a panel industry cut a lot deeper than the high speed area. I think I explained to you clearly. And related to your -- sort of the manufacturing cycle, the panel has its own -- the panel, even though they are -- the components [indiscernible] and take a longer time to build those panels. So that is different from the ODM side.

Okay. And let me switch the gear, and on the gross margin and the pricing front, probably I didn't hear very clearly, the display customers, they are asking for price reduction. Okay. They are under high pressure and you are saying foundry -- your counterpart in foundry -- those foundry companies, they are willing to negotiate with the new price with you or they are unwilling to do so?

Yes. I think the panel -- the foundry related to the panel industry more flexible on the price negotiation in terms of wafer price.

Next question is from Jerry Su of Credit Suisse.

I think I just want to follow up on the comment about your pricing and also margin. I know that Jack has mentioned that you can still try to keep the margin in a similar range. But if we look at the CPIC, this is particularly a product, the pricing and margin have -- saw some pretty good improvement compared with 2 years ago before COVID. So what are you seeing right now on the pricing and also margin trend for CPIC in next couple of quarters? Do you think that this segment, the margin will be going back to the previous level or is there any way you can sustain the margin at the level? That's my first question.

Yes. I think what I tried to point out that our product line mix help us to improve the margin along the way in the pandemic period. It's really your high speed and quite high and we would have a better gross margin. Of course because of a shortage in the panel side that may also help a little bit, but in the longer term, we see that moving forward, and I don't think the margin, it may change something, but not that significant, but [indiscernible] I had to point out, one is the high-speed [indiscernible] higher and the technology in order to develop or introduce the price to the market and it is getting more difficulty and those are the things that help us for the margin side. And besides, we are penetrating into the automotive and server market and those areas tend to have a better margin than others. So that's the picture. And also in the panel side, if we are -- indeed the newer devices and [indiscernible] ECL panel with [indiscernible] solution, you can maintain a reasonable good margin there as well and that's what I tried to point out. I don't think we see the thing will go back to the -- before the pandemic I don't think that gross margin will go that direction.

Okay. You meant that the overall margin won't be back to the pre-pandemic or for source IC is not going to be back to pre-pandemic?

I think that the gross margin will likely favor the, we think, 3 quarters, current quarter or current 3 quarters similarly. That's what I tried to say.

Okay. Got it. And the next question is more on the your standards-plus customer. I think they have been announcing some new products this year and perhaps maybe in the next 1 or 2 years. So for Parade, we know that you have been supplying the ETP. Is there any other opportunities you are seeing that could help to increase your content in the next 1 or 2 years?

Yes. Our standards-plus customer also we are using the high-speed device. So we will see -- and we penetrate the high-speed device and see pretty significant volume there. And yes, this also will help us in terms of gross margin, in terms growth. Yes, not only the panel device, our high-speed device are also penetrating into the platform. And yes, because they all know, we are doing pretty well on the high-speed side and they appreciate the product for high-speed solutions.

Okay. Got it. That's very helpful. And maybe lastly, I think Jack, you previously mentioned about automotive and also server. Can you give us some update on your progress on digital front? Maybe especially for automotive, what is your opportunity and what's the revenue contribution at this moment?

Okay. Yes, automotive is -- I think, yes, very exciting for Parade for the EV related opportunity for us. So the EV, the next 3 years is changing the perspective of automotive. And we're glad we're engaging with the customer pretty broadly and the solution we have, really there are 3 areas. One is our high speed device where we're shipping our converter to the automotive customers for almost a year now. And then we have a converter device to designing our high-speed converter designing to the other multiple, the automotive, the customers, really this converter is related to the display side and [indiscernible] customer or the panel -- the panel solution are going through, whatever the -- notebook [indiscernible] they start to interesting using the DisplayPort or eDP because [indiscernible] because they can remove the experience related -- like SPD link type of thing. And so we have provided that the conversion [indiscernible] to their current LDDS connectivity and we have a high-speed support. The other area, for example, you will have seen the [indiscernible] display and also the regular display and [indiscernible] they need those converter chips. However, the automotive take a longer time to [indiscernible]. I think the auto industry [indiscernible]. Secondly, we see the significant interest or we are installing a lot of RFQ, RFR is probably you have noticed, the newer car or newer model will have those longer panels or the longer panel means they have higher resolution of the so called 6k by 1k, 5k by 1k, or 8k by 1k, those kind of panel. And first of all, those panels [indiscernible] because of damage. Secondly, they want to touch, they want a mini LED backlight. So we provide total solutions indeed with multiple levels of customer, whether the panel guy or whether the car integration guy and the original OEM guy. The third one, actually we are designed to multiple automotive side on the touch side, and some of the solution on the touch side is really related to the AMOLED, related to the [indiscernible] and it's pretty global. You have a customer in Europe, you have a customer in China, and the high multiple there. And some of the projects started with the -- last year, they had a shortage and were quantified it and those kind of things. So that are the 3 areas. And as we said, the automotive take a longer time to become a sizable business. At this moment, we have a [indiscernible] and we think we are going to do more in 2023 and work on it a lot more in 2024. That's what we see the harder automotive [indiscernible] and we are exciting for both new area and it's pretty interesting to see the grid there, and also on the high-speed side, we are also striving towards the type C, the type C. We have a hub -- type C hub and the [indiscernible] and they have become a [indiscernible] recommend and also promote to the automotive customers.

Okay. And how about for the server side?

On the server side, [indiscernible] PCIe Gen 4, getting through the more momentum and on the [indiscernible] side and you will see that we have another new device coming out and beside the PCIe Gen 5 [indiscernible] will introduce soon and also we have recently developed a new technology based on the CK by CMOS solution. So PCIe Gen 4, the driver and remain to [indiscernible] many customers and people just see the requirement is too expensive, too high-end and too complicated to use. And however, the clear CMOS and the smart have [indiscernible] to do the analog design so we -- almost 2 years ago, we started to introduce to use a CK by CMOS to do those and the [indiscernible] we are happy to see our equipped device [indiscernible] and so we are getting exciting to introduce to the customer and I hope we can address the more broad solution with those kind of device to increase our -- the current -- the market price, but people know [indiscernible] used to be [indiscernible] and for people in the workstation, desktop side, like [indiscernible] driver because the performances are reasonably good, and the automotive guys start to [indiscernible] they see that [indiscernible] type of device and they want to [indiscernible] device. I think those will [indiscernible] much of a lot of LT there.

[Operator Instructions] Next question is coming from Bruce of Goldman Sachs.

So I want to go back to the third quarter guidance. Can you rank the strength of your 3 or 4 major business for the third quarter, which one is the strongest and which one is the weakest one?

Okay. Yes. I think a good question. The -- our standards-plus definitely is strongest. I would say that the -- yes, in the current [indiscernible] environment, I think the standards-plus customer is the strongest. Our high-speed device on the USB 4, requirement related [indiscernible] speed pretty healthy and the high end customers. Our high-speed device related to other more -- the Windows-based solution probably are the third. The panel is where most of the sort of difficulty environment, ranking experiment for you.

Yes. That's pretty much similar with what we think too, but April was doing okay with our new product in the third and fourth quarter, which means that your Windows-based business and the panel-based business, the revenue declined by 30% to 40% quarter-on-quarter. That brings out the base to be extremely low. So theoretically, this kind of orders -- or inventory correction shouldn't last more than 2 quarters, right? Is that the reason...

Yes. Definitely. I think similarly, and I've said it before, and panel customer put more throughput than the industry, and I think they maybe also will recover after they [indiscernible]. So that's what we expect, but others are in the standards-plus customer is pretty much being far reasonably well and the high speed [indiscernible] in the range of industry [indiscernible] and the more deeper is on the panel side. Yes.

Okay. Then another question is regarding to the margins. I mean, if you look at the driver IC peers, the gross margin declined -- 5%, 10% gross margin erosion, but your guidance in third quarter suggests that you have limited impact. Is that the way we can think that your product is substantially better than your peers in high end, which you don't have a lot of ASP pressure or how can we reconcile that?

I think probably we have less pressure because it's more related to high end side of it. And our sales driver is not exchangeable with others, right? It's a bundled structure with our [indiscernible] with our CPIC. We cannot have other -- others enter to the process at all [indiscernible] the interface there. And for those high end or most of our high end, I think we are formally negotiating with our customers, but we don't see [indiscernible]. So that's the -- I want to explain to the analyst community. That's not [indiscernible] only can talk to our own, right?

I see. So you have to explain to investors that the entire industry, even for the mid to higher end one, gross margin down by 10%, but CP base can still hold up the margin pretty well because of the...

Yes. It's proprietary.

I am just saying that...