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

Welcome, everyone, to Parade Technologies Limited's 2023 First Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2022 -- 2023 first 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 Vice President of Finance, Mr. Kuowei Wu. 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] And now I would like to introduce Mr. Yo-Ming Chang, Investor Relations of Parade Technologies. Mr. Chang, please begin. [Foreign Language]

Thanks, Jason. Welcome everyone to Parade Technologies 2023 Q1 webcast investor conference. Before my reporting Q1 2023 financial results, it is my pleasure to introduce our new VP of Finance and Accounting Mr. Kuowei Wu. Kuowei joined Parade in 2015, and brings over 12 years of experience in finance management. In March 2023, Kuowei was appointed as the company's Head of Finance and Accounting, responsible for managing the company's finance, accounting, cash, treasury and general and administration. Please join me in welcoming Mr. Kuowei Wu for his new position. Now I start to report our financial results. Parade Technologies first quarter 2023 consolidated revenue was USD 99.99 million and net income was USD 11.62 million. Its both debt and fully diluted cash earnings per share was USD 0.15 and USD 0.15 respectively. These results compare to consolidated revenue USD 210.72 million and the net income of USD 59.919 million or USD 0.75 and USD 0.73 per basic and fully diluted share in the year ago quarter. In US dollars, the first quarter revenue decreased 1.44% sequentially and was down 52.55% year-over-year. The gross profit in the first quarter of 2023 was USD 44.04 million, a decrease of 1.42% from the previous quarter and a decrease of 56.30% compared to the same quarter of last year. On February 22, 2023, Parade announced a new offering in its high-speed connectivity product category, the PS5510, which is an updated version of the FL5500 USB hub controller, featuring ultra-low power operation and hardware-accelerated secure firmware updates. PS5510 is compliant with the USB 3.2 specification and offers 5 SuperSpeed+ ports, each capable of providing 10 gigabits per second data connectivity. The upstream port and the 2 downstream ports support the features required for USB-C connections while all of the ports may be used for legacy USB Type-A connections. One additional USB 2.0-only port is provided for additional hard-wired device, often needed in the target applications. With its ultra-low power operation and on-chip RSA/SHA-256 hardware to support secure in-field firmware upgrades, PS5510 is ideal for port expansion on USB4 and Thunderbolt docking solutions as well as monitors and mini-docks/dongles. On March 22, 2023, Parade announced a new offering in its eDP Timing Controller with Embedded Driver product category. The TC3230 features support for higher resolutions as well as the most advanced Embedded DisplayPort features for power savings. TC3230 is compliant with the eDP 1.5 standard and supports MSO, Panel Self-Refresh, DSC 1.2a, ALPM, Advanced Link Power Management and more. The TC3220 is configurable to support all panel resolutions up to QHD using an 18 or 24-bit color format. Adding a second TC3230 in MSO+DSC mode enables panel resolutions up to 4K 2K. With support for the standard based embedded video interface protocols offered by major CPU, GPU and SoC vendors, system implementation is straight-forward. The integrated source drivers support up to 2562 output channels with support for dual-gate or MUX2/MUX3 sub-pixel driving structures. The TC3230 is designed for Chip on Glass application on LTPS, Amorphous or Oxide type TFT panels. It requires no external crystal or timing interface and a timing reference, includes a programmable gamma buffer, as well as Parade's exclusive Smart-Backlight feature for additional color and power optimization. The fully programmable row and column driver timing enables the TC3230 to serve a broad range of panels types, and it provides synchronization signals that support a wide range of touch controllers. On March 29, 2023, Parade announced the availability of the PS8838 USB 3.2/DP 2.1 MUX and PS8839 USB 3.2/DP 2.1 DeMUX for commercial and consumer PCs, host systems and peripherals. PS8838 features a DisplayPort 2.1 and a USB 3.2 Gen 2x1 MUX with retiming, targeting USB-C host systems and docks. PS8839 is a DeMUX/Retimer device optimized for sink applications including docks and peripherals. The PS8838 and PS8839 are fully compliant with USB-IF USB 3.2 specification supporting up to Gen 2x1 or 10 gigabits per second and VESA DP 2.1 standard up to UHBR20. The devices support low power consumption for standby and low power states, greatly extending the battery life of mobile device and enabling system EnergyStar compliance. Based on the current business outlook, Parade is providing the following guidance for the second quarter of 2023. Revenue is between USD 98 million to USD 110 million; gross margin is between 43% to 47%; operating expense is between USD 29.5 million to USD 32.5 million. [Foreign Language] This is my presentation for 2023 Q1 financial results. Now I transfer to CEO Dr. Jack Zhao to answer your questions. Jason, you may begin.

[Operator Instructions] And our first question is coming from Carol Juan of HSBC.

The first one [indiscernible] I wondered could you provide the product mix in first quarter?

For the product mix, on the DP, it's about 40%; PS or our high-speed device is about 40%; TC, that's our source driver segment is higher then 15%, and [ TP ] that's our touch, is lower than 5%.

My second question would be, it seems that high-speed interface product line, the product mix was higher than the fourth quarter last year. So just wondering why has there been more -- was there any inventory crash in other product lines that made the gross margin still similar to the last quarter? And is there any potential upside into second quarter due to the end of inventory correction of your top product lines in 2Q this year?

We are facing market quite different from a year ago, or even high than 6 months ago. And today's market remains challenging, even though it will be improving. And then the -- just like what you said, we have some -- the inventory and the write-off and so on and so forth, but compared with our revenue, it's a small amount. But those will still impact our gross margin. And on the other hand, as we are -- there are more IC supplier are -- especially on the lower end are quite aggressively using price to compete. So those are the 2 factors and we are managing it. And on the -- overall, our gross margin and we are happy for us in such challenging environment, we can maintain our gross margin in our corporate target. That's the -- I would like to say.

And just wondering, into 2Q this year, what product lines do you think that will see the stronger growth into the rest of the year? Also just wondering, in terms of high-speed interface, which interface do you expect to see the most significant migration in this year or even next? What application you will see the faster migration?

What we observe now, the notebook segment has more general uptick of demand and we see the pocket of demand increase with rush order and pull-ins. More distinguishable is the demand for our high-speed devices and increase quite quickly and with good amount of volume. So that we're happy to see this. And in terms of technology migration, we see 2 kind of important trends. One is, the notebook adopt USB 4.0 solution has increased. And so that the speed of demand for our -- of the USB 4.0 [ the timer ] are increasing. And also the HDMI, DisplayPort HDMI start to move to the HDMI 2.1 with higher speed DisplayPort start to go to the 2.1 with higher speed. So those are the trends and we have our device ready to support those advanced trends. And noticeably, the gaming market, notebook gaming market also has recovered nicely and the demand of those high-speed are increased.

Next question, Daniel Yen from Morgan Stanley.

My first question would be on the second quarter outlook. Jack, you just mentioned that you have seen some uptick on [indiscernible] front and that increase of demand for your high-speed based product line. I am wondering how do you think about your DP product line. Especially could you also give a sense that -- what's the growth trajectory for your standards-plus versus your standard customers on the DP side into second quarter? That would be my first question.

The high-speed products -- our high-speed products have benefited from the new trend notebook that newer device and the newer standard. And those previously, the market does not have inventory because it's a newer device. So that's the trend. That's the record order to us and that's we think we are happy to see it. On the DisplayPort side, on the panel side, you have mentioned basically on the TCON side, we observed a different trend. Different customer has different phase of recovery. And on the general notebook side, and it has uptick, and the panel demand, panel solution, especially from the Taiwan panel vendors are recovering very nicely, and in some case, you have a more rush order or pull-in orders. On the other hand, on the China side, I believe they had more inventory than their counterpart in the Taiwan side. So their recovery seems slower. However, if you look at the recent few weeks, there are still recovery. Okay, those are the general PC or general notebook market. One of our customer, they are into the sort of reduction of that demand, was later than the general market and they are still behind the recovery than others as well. So we believe those trends probably they also will follow up with general notebook market, but just timing is different. Maybe one quarter earlier, one quarter later. So yes, we think we are [ fighting ] for the market stress and we'll be patient to see how they will recover and hopefully they can recover quickly.

So basically for your guidance, you assume your standards-plus customer probably will not show significant recovery in this quarter. But from your observation, I think just kind of lapping that, maybe the timing will be somewhere by 2Q or 3Q. Is that a fair commentary?

Yes. That's basically is what we think and the scenario most likely.

I see. Got it. Second, I want to ask about the inventory. So I do notice that your inventory value, absolute value, did go down in 1Q, and the same as your inventory base. Could I ask us when do you think your inventory base or the DOI will be back to normal? Are you targeting either by 2Q or by 3Q? And when you reduce your inventory, are you also trying to maybe discuss the foundry wafer costs with your partner? Yes. That will be my second question more on the supply chain management and inventory outlook.

Okay. We -- in the Q1, we managed to reduce our inventory overall where mainly contribution is for the general notebooks demand increase. We would have to reduce more if our biggest of customer did not change their forecasts, but unfortunately they did reduce quite a lot. I think in the general market, people already report it and you will see a lot of news sites report the reduce of the output significantly. We still think Q2, our inventory will continue to reduce and that's what we -- expectation, but how much it will reduce will be related to how much our biggest customer can pull, okay? And coming to Q3, Q4, and we think that we are positive for business itself and -- but we also expect to see how the -- how significant improvement will be and we as a company are pretty caution about the manufacturing site. And yes, we don't want to be caught under the times. That's the current mindset. And we are managing those things aggressively. In terms of the foundry price, as I explained last time, there are 2 different scenarios, and because of geopolitical tension there, and that some of the foundry would like to reduce the wafer price significantly. On the other side, you will see the people still at least try to make the wafer price not change or in some case, they want to increase. So it is the challenge for IC company like us to manage it. The good thing is we have multiple device has both side of support. So we would like to balance out, and depend on the customer to achieve overall our gross margin, reach our -- the corporate target.

So just one follow-up, because you talk about some outlook for 3Q and 4Q as well. I think maybe still a little bit early, but when you look at the full year 2023, in terms of the quarterly revenue pattern, do you think we will likely to see more recovery in second half, especially when a lot of your -- when your standards-plus customers recover, more new products to USB 4.0 into second half? How would you think about the seasonal pattern for this year versus the past year?

Historically, the Q2 for notebook or consumer business should be better than -- I mean, second half should be better than first half except last year. Last year we had a very strong first half, but had a really bad second half. I think this year, the second half, we'll have more recovery in the second half. First half, we are still in the sort of a bottom process to consume the inventory, to manage the inventory, and we certainly hope the second half, with our new device and with the customer, end customer, already gone through their inventory correction. So it will be more normalized and we clearly see a normal PC guy already -- a normal notebook guy already gone through that phase and we hope our biggest of customer will -- gone through that phase as well. And as already you had said, our newer device with higher speed and more functionality still will stand out to occupy more market share. So that will be exciting too for the second half of 2023 and the first half of 2024. We think after that big collection in the second half 2022 to the first half 2023 and we should be able to kind of move more smoothly back to the normal demand pattern.

The next question is from Jerry Su of Credit Suisse.

Jack, just want to follow up on your previous comment about [ note ] segment, you are seeing pricing pressure. Could you give us some idea, what -- which product segment is that and then how will this impact your margin into the second half of the year? Because I think most of the investor understanding is that Parade is more on the premium segment. So I'm just wondering how are you -- why are you seeing competition on the pricing from second tier vendors.

A lot of our products are in the premium segment and we still have some more product in the sort of mainstream product line. And more competition we see are on the source driver, more on the panel side of solutions and probably you would be noticed as well, some of our big customers or big competitors, they had gone through their gross margin all the way to 56%, then suddenly dropped to 30% and the market price with those kind of move will impact a lot of people. So we have to, on those segments, appear to be while still there, we have to compete and that's what I will refer to.

And the second question is on the second quarter seasonality. I think you mentioned that standards-plus customer seems to be given the adjustment, but I think based on some of the supply chain indications, there will be some new model launched during the quarter. So I think the expectation for the standards-plus demand from a notebook side at least should be seeing some recovery. I'm just wondering why there is such a disconnection for Parade, your DP versus what the market's seeing on the notebook side.

You will see that the --- see, I don't know when our customer will announce a new product or new notebook, I don't know. And I think the things you have to notice, whether our panel solution has a significant change. So if the panel remains the same, our -- the device and we shouldn't hope the new notebook typical will certainly get a lot of sales, right? So that will have the best hope. But I don't know when they will announce and how much they will go, but I can only say what we experienced, especially in the Q1. And as I had said, we had hoped they will gradually improve and hopefully they will recover to normal and that's what we think, but you have to observe the panel, how they do and which panel they kind of use. And they introduce a new notebook, not necessarily they introduce new panels, right? So that's what it is.

Okay. So if there's no new -- no changes on the panel side, has -- the previous product you have shipped can continue to be [indiscernible].

Yes, that might be already received the inventory, right?

And then last question. Can you give us some update on the PCIe 4 as well as PCIe 4 retimer for the server market?

Yes. We announced our PCIe Gen 5 solutions, and we are working with fewer big customer to design our Gen 5 retimer solutions. And we continue to ship the PCIe Gen 4, the retimers. Yes, that's the -- we feel our PCIe Gen 5 retimer status is better compared with the time -- at that time, we introduced the PCIe Gen 4 retimer. So the solution is more solid and customer kind of like it, our solutions and -- but we'll see, how much the revenue could generate in that space.

And next question will be Eric Chen of UBS.

Good afternoon, Jack and Yo-Ming. So my first question is regarding the sustainability of the rush orders. I think during your prepared remarks, you talked about the -- -or during the Q&A, you talked about the rush orders supporting the near term, [ somewhat ] momentum. So may I ask about what's your observation about the stability of rush orders? And also on, are you see any shift to more stable order placement into Q2 or even second half of the year? And how much is the rush order affecting your near-term guidance?

Well, in the rate of Q1 and early of Q2, we observed a lot of [ employees ], and we've been asked to deliver the product with order placed like 2 weeks, 3 weeks or 4 weeks. So we typically have a lead time before the pandemic ask the customer 14 weeks, 16 weeks, right? So yes, in some case, we have to do [ high loss ]. We have to do -- we have to -- we will become behind the delivery. So while we have higher inventory on the other side, we are working very hard to deliver those rush orders and especially on the high-speed side. I think those rush order or [indiscernible] factor is our end customer have kind of short-term sort of behavior, and until they are very cautious about the business until they see the market demand increase. Otherwise, they don't want to place orders, or another side, their own end product inventory are above [ the period ]. So that is a positive trend. Typically, those kind of trends will deliver -- developed become a stable increase of business.

May I have a quick follow-up. So do you have any update regarding your, I mean, your demand visibility? And also, like you talked about an extended inventory digestion into Q3. So what's your observation about your inventory, as well as inventory at the customer site like -- and also for your own inventory level like versus the expected digestion by the end of Q2 based on prior expectation. What's the incremental difference versus what you guided in early February?

The -- I had on the early February had a more positive view to customer. I thought at that time, our -- the biggest of customer could be -- follow their forecast and end up with their -- made a big correction during the quarter, right? And -- but we still managed to reduce our overall the Q1 inventory. And on the Q2, we still think our inventory will go down, and I don't want to give another -- the number there, but we think it will go down quite meaningfully, and that's where we are. And [indiscernible] I will hope, our biggest of customer will pull more products, and then our inventory will go down further.

And my second question is regarding like your high-speed interface. So could you talk about your position in USB4 and show the latest observation about the competition and penetration? And are you seeing a slower migration to USB4 given current sluggishness [indiscernible].

Yes. The USB 4 retimer, that's what you referred to? And -- yes -- the -- we are designing to sort of a pretty dominant position on the AMD platform, so as on the Qualcomm platform, and that's our first generation of the USB 4 retimer. And we are about to introduce second-generation our USB 4 retimer, which will have a much lower power and which will have a much lower cost. And we already communicated or promote to the major OEM and the ODMs and the people are very happy to see our solution, and we are in the process to designing our second generation of retimer on the USB 4 side. We knew there are competitor on the market. However, USB 4 is quite complicated systems. You have to have a Thunderbolt for support, and more tricky, you have to have a DP2.1 support. And I'm not sure that our competitor capable to do this. And yes, and besides this, we think our second generation is a lot more uphand in the competition environment. And having said that our HDMI retimer, DP retimer have fewer -- I mean, less competition or we have a huge market share on those market side. And we are very happy to support our customer on the HDMI retimer or DP retimer, and those we are doing very well.

Next question is from [ Bruno Cheng ] of Allianz.

Can you hear me?

Yes.

Okay. Cool. My first question is regarding the margin guidance for second quarter. Just want to understand that the margin guidance range include any kind of further inventory write-off?

Assuming we already tackled into.

Okay. So there is still some kind of inventory write-off goes into the second quarter margin, right?

[ I'd say that ], we already take into consideration.

And my second question is regarding the new hub controller you just mentioned during the press release. Could you help to maybe describe the competition environment here? And maybe what are the competitive advantage of this chip compared to our competitors, please?

You mean the -- on the USB 4 retimer side?

Sorry, I mean, the new USB hub controller, the -- there is [indiscernible] yes, yes.

Yes. USB hub, which is our extension of our basic logic, the USB 3.2 the hub, right? So on the -- that we have so called security, the update and improved performance. And that has already designed to fill for customer assistance in the dark and also in the mono side. But more importantly, we are very busy to develop our USB 4 hub, and that hopefully we will announce in the second half.

And my last question is regarding the automotive market. Could you give us an update on our product schedule or maybe some kind of design progress here?

We made a few [ of changes ] to the automotive segment, mainly on the EV market. And one of the things, where I feel exciting is the EV car on the Type C connection now start to take video beside as a charging port in the car. Then our solution, we have PS8742V or PS8743V has become a de facto solution for EV car, they call it video box. Basically, they have a Type C [ ring ] speed HDMI and the DisplayPort to go to a 2 face and after the -- that video box, they have to combine together to become a top C, right? So we have a feel for EV vendor, especially in the China all start to adopt our 8742, 8743, plus our PS186V solutions. We have [ shipping ] our PS186V, that's the DisplayPort to HDMI converter to the automotive on the EV SUV side. And there, we have our DP2, our latest converter commoner to the biggest of the EV customer. And I think we have almost every car that -- manufacturer will have it. We're also changing our [ touch ] solution to one of the world brand known in the Europe on one of their models and that will be production entry in the Q3 or early Q4. Automotive is a segment, we are very excited and spend a lot of effort on that. However, automotive each model, the volume cannot compare with the PC volume. So that volume, each month talking about [ 20,000 to 30,000 ] rather than the PC, we are typically talking about [ 200,000 to 300,000 ]. And so that's the difference. And some of our model bigger -- has a more higher volume, some of them smaller, but we are happy to see the automotive start to adopt those Type C related high-speed device.

And maybe a follow-up question on the automotive side. Maybe can you share the -- maybe the potential sales mix, I mean, in maybe second half this year? Or what kind of range are we going to see from this segment?

I think the -- if we look at the runway for yearly, right, runway for yearly, and we expect to see [ 5 million, 10 million ] type of thing, but we will have more in the 2024.

And next one is Aaron Jeng of Nomura.

Jack, just want to clarify. So by your different business product lines comparing the outlook today versus 3 months ago, only one of your business product line, which is dominated by your largest customer is weakening than you saw 3 months ago, but all the other 3 or the other 3 businesses are progressing better than you expected 3 months ago? Is that a right understanding of how your different business moving over the last 3 months?

I think the -- if you look at today versus a few months ago, the general notebook or the demand for our products are stronger and the pattern are getting better. Yes. If you asked that question and in general, we are getting better, yes.

I'm not sure if this is the right question to follow up. So if we can exclude this largest customer from our comparison, just look at the other revenue, excluding this largest customer, what is the growth rate for 2Q compared with 1Q?

I wish I could answer this, but I don't have the data in front of me. And I think you might want to talk to Yo-Ming afterwards.

Yes. Sure. No problem.

Yes. I wish I have -- I think then probably Yo-Ming can -- you can talk to Yo-Ming about this.

Another question is that you earlier already mentioned that the status, where you are at PCIe Gen 5 today is better than the status, where you were when you launched Gen 4, right? So could you elaborate more because -- yes, sure.

I mean, the stability of our device on the customer system perform a lot more better. That's what the -- the first gen, at that time, similar time, and we have more technical question to resolve, then today, we have much less technical issues.

Following up to these, so your product today is better than Gen 4 product probably like 4 years, 5 years ago.

I said technically, technically.

But speaking of competition, we -- a lot of companies are saying that they are going to enter Gen 5, right? But in Gen 4, they were not being there. So yes, yourself is doing better, but how would you compare the competition landscape today in Gen 5 versus maybe 3 years, 4 years ago in Gen 4?

Frankly speaking, in the customer system, I -- beside Astera Labs, I don't see many people really the -- as many vendor, as you had said to competing. And yes, I don't know how many -- how to comment on this and people probably knew, and we hear people has [ taken a check ] already promote to the customer. And recently, the auto customer come to us, and we want to see -- see [indiscernible] we are not aware and we ask customer, you can ask them to show the demo [ board ] and show you the [indiscernible] work system and eventually to walk past, oh, they have a [indiscernible] chip is not real chip.

My final question is...

Yes. I heard a lot, but I don't think people [indiscernible] walking [ silicon ] is now like a people [indiscernible], it's not -- not a lot of people think because I knew, there is a lot of people [indiscernible] this thing.

My final question is that, would you have any thought on gross margin trend? And yes, I'm not asking the revenue trend, but in terms of gross margin trend, would you be more comfortable about improving into second half versus first half?

We certainly hope so, but the situation now, as I at the beginning said, when I started and we are -- the competition on the low end is -- on the price side is more. However, we do have our newer product on the high-speed side holds reasonably well, I would say. And we also see back in the manufacture side, what I meant is the packaging, testing, [ both place ] manufacturing side more willing to reduce their price than the [indiscernible] side. And so it's a difficult thing to manage and -- but we are working very hard to manage the gross margin side. Yes. But I think I will add on one thing. You observe our -- some of our competitors and the gross margin changed dramatically, right? So we definitely won't do this, and that's not a -- not our -- the style, at a good time, when the shortage, we did not make a gross margin like go to the very high either. So we try to stabilize our gross margin and has expectation there, where they are.

Thank you. And ladies and gentlemen, we are now moving on to the Chinese section of the Q&A session. Thank you. [Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language]

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language].

Okay. Thank you, everybody.

Thank you.

Thank you