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

Welcome, everyone, to Parade Technologies Limited's 2023 Second Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2023 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 Vice President of Finance, Mr. Kuowei Wu. And we also will remain last 15 minutes for the attendees 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 Q2 Webcast Investor Conference. Parade Technologies second quarter 2023 consolidated revenue was USD 104.18 million, and the net income was USD 13.98 million. Its both basic and fully diluted after-tax earnings per share were USD 0.18 and USD 0.18, respectively. These results compared to consolidated revenue USD 216.7 million and a net income of USD 60.94 million or USD 0.76 and USD 0.75 per basic and fully diluted share in the year ago quarter. In U.S. dollars, the second quarter revenue increased 4.19% sequentially and was down 51.93% year-over-year. The gross profit in the second quarter of 2023 was USD 45.8 million, an increase of 3.98% from the previous quarter and a decrease of 55.26% compared to the same quarter of last year. On May 24, 2023, Parade announced the availability of the PS8833 USB4/ Thunderbolt 4.0/DP 2.1 retimer and PS8836 USB 3.2/DP 2.1 retimer for commercial and consumer PCs, host systems and peripherals. PS8833 features full capabilities of USB4, DisplayPort 2.1, and Thunderbolt 4.0 with 50% reduction in power consumption. Its pin compatibility with PS8830 USB4/Thunderbolt 4.0 retimer currently shipping in customer systems, greatly simplifies OEM design for product longevity. PS8836 offers USB 3.2 Gen 2 by 2 with DP 2.1 and is pin compatible with PS8833. The PS8833 / PS8836 pin compatible solutions allow OEMs to easily offer a full range of USB4 and USB 3.2 product offerings. On July 26, 2023, Parade has demonstrated the lowest latencies in the industry with its new PS8936 PCIe/CXL retimer solution. PS8936 retimer chip developed for PCI 5.0 and CXL, supporting sixteen bidirectional lanes. In addition to supporting the 32 gigabits per second data rate offered by the PCI 5.0 specification, it also supports all lower data rates, to provide backward compatibility with earlier PCIe revisions. The promise of CXL is to enable scalable, high-performance coherent memory. While CXL can rely on the continual advances in PCIe to address its ever-increasing bandwidth needs, access time is an equally critical factor for memory performance. As larger CXL architectures are built, they will inevitably encounter situations where signal integrity places limits on both scale and flexibility, and retimers will be needed. With Parades patented low-latency retimers, these systems can be built without compromising signal integrity or performance. Based on current business outlook, Parade is providing the following guidance for the third quarter of fiscal 2023. Revenue is between USD 107 million to USD 119 million. Gross margin is between 43% to 47%. Operating expense is between USD 30 million to USD 33 million. [Foreign Language] It is my presentation for the 2023 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 will be coming from Jerry Su of Credit Suisse.

My first question is about the second quarter revenue breakdown. Can you provide some color on that? And then the -- I think you have provided a guidance of potential single-digit growth. So I want to know for each different segment, what is the growth outlook among the 4 major segments for the third quarter? That's the first question. And then the second question is regarding the USB4 product line. Can you give us more update and color about how is this progressing? And then when should we expect to see more meaningful revenue contribution for the USB4?

Okay. The first question, I think, on the DP product line in the Q2 is lower than 40%. Our high-speed product line or PS product line is higher than 40%. Our source driver or TC product line is slightly above 15%. Our TT or touch product line is lower than 5%. I believe the second quarter, the -- is [indiscernible] on the growth in Q3. Q3, we just provided guidance. And in the Q2, the major driving force to have growth is mainly related to our high-speed product and we do experience the [ CMO ] demand increase in the Q3 for our high-speed products and that's the major driver for us. And along the way, we also see some of our DP product line has uptick there. So that's the major theme for the current quarter, which is Q3. The next question is on the USB4. And we have been successfully develop and deliver to our customer our USB4 product line. And just was announced, we also introduced our second-generation USB4 retimer for lower power and lower cost. And I believe we are in today's -- we are dominating the market in the AMD platform or the Qualcomm platform. And I believe that we'll have a sizable increase in Q3 -- 2023 versus 2022, and we expect that 2024 will have a more increase on the USB4 retimer demand. That's really because USB4 getting more broader adopted in the notebook, in some number of cases, not only have a 1 UBS4 port and some of them have 2 USB4 port there. So we are pretty confident and pretty happy to see that our USB4 solutions got broadly adopt and help the customer to push their notebook into the market, yes.

Okay. Zhao, just one follow-up on that. You mentioned that you're dominating the USB4 in AMD and also Qualcomm platform. May I just follow up, when do you think you can have a better breakthrough into other chipset platform, perhaps like the Intel or -- and also your standard-plus customers?

Okay. So the -- in the Intel platform, Intel, in fact, use their own and that we all know OEM customer pushing Intel to adopt the other people solution, include employee solution since we have been incompatible. I'm not convenient to comment our standard-plus customer and solutions.

Okay. So for these 2, perhaps in the next foreseeable future, this is something that would also happen to [Technical Difficulty] solution. We shouldn't be ruling out these possibilities?

Well, as I said, we are in a dominant position for AMD platform, so as the Qualcomm platform.

Okay. All right.

Next question from Danny Yen of Morgan Stanley.

My first question, maybe following Jerry's question on USB4. Could you elaborate in terms of competitive edge [Technical Difficulty] your second-generation USB4 retimer, where do you see you are better than your peers? Is it power consumption? Is it speed? Or anything you can highlight? Also, you mentioned you have a dominant position in AMD and Qualcomm platform. Does that mean that you have more than 50% market share? How high it could be? Just my first follow-up question after Jerry.

Okay. The -- our second chip -- or just announced, the chip actually now has been designed to [indiscernible] customer models and also the -- into the -- on the next-generation or current-generation AMD platform so-called the favorable list or so and so forth. And really because our retimer would support DP 2.1 and we have a much mature compatibility test and also have a much lower power. And the DP USB4 is a pretty complicated protocol because it's embedded DisplayPort there, embedded Thunderbolt there. So you need to go through all the rigid test in order to serve for your customers. I think just basically our solution is a lot more mature and has been gone through rigid tests in the AMD platform. So as the -- going through the Qualcomm's platform and not only the hardware as well as your software, your drivers or your firmwares. So it's a lot of work to go through this. And in terms of market share, I'm not sure exactly the percentage. However, I do know the major customer -- the major PCIe customer has a significant model to our -- the -- using our USB4 either its first-generation or second-generation retimer.

I see. I'm still wondering because for USB4 retimer, as you mentioned, it's a very complicated product in embedding a lot of different interfaces and power consumption is also a very important factor on a customer's perspective. But on competition, do you see any new newcomer, especially...

I can only say that older competitor, the improvement should -- is gone, right, for the older competitors. And we hear there are quite a few new competitors, but we have not seen in customer price really pass through everything or into the market to sell it. And we know we have many notebooks with our USB4 retimer on the market. We're not talking about few hundred, we're talking about millions notebook with our USB4 retimer in the market.

I see. And another follow-up is that, Jack, you mentioned that, right now, Intel has their product, the USB4 retimer. But in the future, in the long run, will -- do you think Parade have the possibility to also tap into Intel's platform because it is not Intel's strength on these products. So just wondering what's your view?

We know that major customers are pushing Intel to allow us on their platform and OEM are pushing. And I think we have the opportunity to do this and -- because OEM, what I mean is people like HP, Dell and Lenovo, Asus are pushing. That's subject to Intel, so whether they open up the platform to allow us to do. We couldn't qualify on Intel, what they call, the embedded systems, our retimer didn't qualify Intel embedded systems. But of commercial notebook system, they are [indiscernible] for themselves. We'll wait to see USB4 in coming years will move to the so-called USB4 part 2 or original USB5 and the significant [indiscernible] again and the significant [indiscernible] have to support the multilevel, so-called [ PONs, ] the signal. So from price standpoint, we already invest significantly, and that will also a big part of first our chip for USB4.2 -- part 2 retimer chip, and we worked with the CPE vendor already started doing the setup plan for the [indiscernible] for system ratification. So USB4 is not only the current generation, it will move on to higher speed to higher bandwidth. And so that's kind of has its own life, and we will think that UBS4 or future USB [indiscernible] into the -- many of the PC got adopt the system. So it's a pretty big size of market there.

I see. Maybe my last one still on USB4. Jack, could you give us your view what's the penetration rate for USB4 on PC in 2023 and 2024? Or do you have any estimate or assumptions on the revenue mix from USB4 retimer in 2023 or 2024?

Let me see how to phrase this -- the answers. From our perspective, we think the USB4 adoption rate from 2023 to 2022, the number of -- the adoption rate doubled. And we believe 2024 versus 2023 will have another double in terms of how many ports or how many retimer is shipped. And the higher or mid-end of 2024 notebook most likely will adopt USB4 retimer or USB4 port or at least one of them is USB4.

I see. It's very clear.

Next question, Richard Chen from AIA.

I have 2 parts of questions. Sorry, it might be a bit long. My first part question is for PCIe Gen 5 retimer. I think the overall concept is still quite new to investor. Could you share how many areas that the server could use your PCIe Gen 5 retimer, especially amid the current growing need for machine learning and AI, such as connector switch or connector accelerator or it connects to SSD or even connect to other FPGA. And I would like to have better understanding that the total opportunity for Parade PCIe Gen 5 retimer in the server. Maybe could you roughly share how many PCIe Gen 5 that we might need and potential dollar content.

Okay. I could only answer that question with whether we are working with our customer. The current -- the high percentage of customers develop that server are [indiscernible] so-called [indiscernible] or machine learning-related systems, which is you have a multiple and you will have likely of using eight of the -- PCI Gen 5 retimer chip for 8 slots for graphics chip or graphics card to user. So this is a pretty typical system that you would have the -- on a one system and you will need to have 8 graphics card there and each slot need a one of the 8936 like by 16-channel chip to support this. That's the first application. And then we have a second application is using our retimer chip to talk to the switch chip, and which means the fabric switch type of thing. So this is the second application. We do work with a memory vendor and who are very keen or very -- in the development phase for so-called CXL, the memory, the board, which also need our -- the PCI Gen 5 retimer chip. And that's because the speed is 32 gigabits per second and the memory virtually talk to the PCIe, and we have told that's the most efficient way to have a huge amount of the memory to connect those servers or they were called [indiscernible] server, which means you have a memory in the box, on the rock, just many memory there through the CXL interface to talk to the system. Okay, those are the probably the major application or system we are working with our customer, the application. So if we start to have both on the AI machine or the servers with the switch and the CXL memory, yes, that's quite a lot of application, especially the CXL become a new application for the retimer chip.

Could you -- could we have a roughly idea that if we consider that these 2 major products that you have mentioned, shared with us, there is roughly a range of there how many PCIe that we might have. I understand there might be some mid-end or high-end server that might be different, but wondering could you share some [Technical Difficulty] that investors could think?

We had previously gave us some estimation, not on the number of chips, we think the market size with PCIe Gen 4, Gen 5 retimer or -- is around $200 million, that's the -- what we initially estimated. In the coming years, when CXL for memory become -- start to become popular or become the major force in the data center, you might want -- you might see the total number spend from the $200 million.

Got it. And maybe one -- still follow-up on the PCIe. Regarding the PCIe Gen 5 retimer, regarding the competition, I think that previous period had mentioned that you mainly use in-house IP versus peers that use the outsourcing third-party IC -- IP. And could you share that your current maybe technology advantage compared to peers? And how is your progress among all the major ODMs. And we -- currently, it seems that in the market only have one major peers are providing such products. So perhaps from a supply chain management perspective and potential lower costs or better technology as you mentioned at your opening remarks, I think you add a new sentence, which is that low latency in the industry compared to your press release in the beginning of the year. So how should we investors think the potential -- roughly market share that Parade might have and the contribution in longer-term, maybe in 2024 or 2025.

Yes, what we show to the investor for a long time, and we view these high-speed IP is our core competence. And unlike our competitor, we develop all the IP, all the high-speed IP in-house. So that provide us a lot of flexibility, also provide a lot of confidence when you support to your customer because it's obvious, in some way, you have to deal with very deep in your design. And if you licensed the IP from third-party, you are now able to go into the -- inside to change or share your design with your customers. So that's a huge advantage, and we think that's our [indiscernible] core competence. Certainly, our PCI Gen 5 retimer all in-house design using our own IP. This is one of the reasons we have achieved the lowest latency and that appeared to be very critical for the CXL memory type of application because memory, any latency you had on the memory interface is the negative to the system performance. That's why our solution got so attractive with the memory vendor. I think that's we view very critical. And so our low latency also, as we reported, we have a patent already associated with it. So we have a pretty high confidence that we are pretty unique to achieve this. So that's about our core competence as we share with our investors for a long time that for us the most critical technology.

Got it. My second part of the question...

Excuse me. We would like to move on to the next caller. The next question will be from [indiscernible], Daiwa Securities.

I have 2 questions for me. And the first one is regarding your auto business. Can you talk about the revenue contribution now? And what kind of products will contribute to the auto business? And maybe any color on the future [ then ] of the auto segment?

Okay. Good question. And we're glad to report, and we have our -- the chip on one of the most known EV cars. And I think there are 2 chips there. And if we happen to be compared by those cars using our chips, and we've already been told about other EV cars, they [ tear down ] those cars and saw our chips and they come to us to ask the same solutions, so on and so forth. And in 2023, our auto revenue probably is around a few millions, and it's not a big number because we just start to -- some of them just start to ship. In terms your next question is, where you see our chips, what are our applications, right? And there are 3 areas. The first area, we are -- you all know we have a converter chip, right? So we have the DP to HDMI converter. We have a DP to LVDS converter. We have many different converters. And we successfully used DisplayPort to replace some of the [ further ] solutions, who are very popular in the auto, right, so that same customer [indiscernible] and for display application. That's the first one, the converters for display applications. The second one is pretty popular. And the USB-C or Type-C is getting very popular in the car that [indiscernible] for charging purpose. And we're in more EV car or advanced car. We're using USB-C for video application. So that's why our USB-C solution has become pretty de facto for whatever they call the video box. They call it video box, and just putting into the USB-C, and whoever has the phone [indiscernible] the video -- the backside of the chair has a display that you can see it. So that's the second application. And the third application, and we have our touch chip, in fact, designed in one of the tier 1 Europe -- the automotive, and very soon will be on the market, and I think the MT will start Q4. So those are the current -- our 3 areas. And we look at all the design opportunity, and we have a design opportunity in the so-called Mini LED controller. That's our DP720, so is our TDDI, working with our converter chip together to achieve the displays. So those are in the design pipeline to work with customers. And having said that, the automotive has its own quality requirement. And now, because of geopolitical situation, you will have a supply chain requirement. So it's getting a little bit more complicated and takes time to fulfill all the opportunities.

That seems like there are several applications on it. So can you like give us a picture or maybe quantify like the growth rate in the auto segment in several years after...

You mean, in several years?

Yes. I mean, the growth rate of the auto sector.

Yes. The automotive -- [indiscernible] we've got an initiative, and we spend a lot of time on this. And [indiscernible] used to be or has to be -- has dominated the PC vendor -- PC area vendor. All the PC vendors now, we are one of the [indiscernible] the supplier. I think now we have been talking to most of automotive OEMs, and automotive OEMs now start to [indiscernible] for our solutions. And we hope [ down to ] the 2 years and our solution can create revenue $10 million, $20 million of kind of thing or more. It's really dependent on how quickly do we adapt. But however, the auto design will take a longer time. Think about the -- what I just mentioned in the beginning, our auto solution is already on one of the well-known EV car vendors. The car is already on the street. It took us 4 years from beginning to now. So the automotive is not like a PC. So it takes a longer time to achieve revenue, but we do have an opportunity in the pipeline to get it on. So yes -- but it's exciting to work with them and try to solve auto's unique issues and working with a set of customers who used to -- we don't know them and they don't know us, and now, we know each other and try to solve that problem.

The second question is from the -- on the margin side. Can you just share with us how are we seeing the pricing transform from our foundry supplier and maybe some color about our near-term and long-term gross margin trends and the rationale behind it?

You mean the price competition, right?

I mean, the cost perspective from our foundry supplier.

Okay, from the cost perspective. I think that if you look at a few -- the back-end side, because demand is lower and the back end of packaging and testing side, and people are willing to lower the price to gain the business. So I would think the back-end side is pretty consistent and rational to address the current related demand situation. On the front-end side, which is the wafer side, we experienced a [ difference ], and some of the fab guys are willing to cut the price to gain market share and quite aggressively, and especially those fab guys from the China side. And there are other foundries and they're not willing to change anything, and the price is pretty stable, and they don't want to change anything. And so, that makes us very difficult. We try to explain to them that the market is getting very cold and you have to reduce the price and try to gain the -- try to gain our business. So however, this geopolitical situation makes the things complicated. And many of our products, we can run in multiple fabs. However, some of our customers are willing to pay a little more to stay in some fabs. So it's a complicated situation. And we do have a little bit of leverage because our products can run in multiple fabs. And so, that's the way we control our manufacturing costs. Certainly, the [indiscernible] as the market goes, the downturn as we experienced the -- you expect the price pressure, especially on the display side. So that's the way we manage -- satisfy our customer. At the same time, we manage our manufacturing costs so that we think we will manage our gross margin stable, and we think we should be -- hold on our guidance and would like to keep our stable gross margin. We think that's very important for the investors and for us.

Now the next question will be coming from Carol Juan of HSBC.

My first question will be for [indiscernible] just mentioned that you have been seeing an uptick in 3Q DP. So I was just wondering that do mean that this overall Tcon product? Or does that mean that your standards-plus customer is seeing a stronger point in the second half on your products? This is my third question. And also my second question would be the overall inventory [ suggestion ], how does the update right now that -- what kind of product lines are you seeing still above the normal inventory levels right now? And any expectation on when will be the end of the [indiscernible]?

Okay. I want to repeat what I said, in the Q3, we see more uptick on high-speed PS product demand. We see some uptick on the DP line, but not as strong as the PS. The PS high speed, we do see kind of normal seasonality and Q3 is strong. But on the Tcon DisplayPort, we don't see as strong as our PS line. We are not convenient to comment on our standard-plus customer, the demand. However, you -- they just had a conference call, quarterly conference call last week. And from the higher side, whether their pad, whether their MacBook or their notebook sales did not sell as well as people would like to. Certainly, we are very disappointed to see those numbers and especially compared with last year. And that comes back to our -- the inventory. Our inventory accentuates that sort of mobile PC side is reduced and [indiscernible]. However, the inventory associated with our standard-plus customer, because they had a pretty big forecast at the beginning of the year, and so that's still there. And however, those parts are long-life parts and those parts just started the new models. So we don't worry about the consumption of those parts. And so that's the current situation. And yes, the -- you read your -- the last quarter we reported, you will know what are they -- on the hardware side, what are they going through, and we have a huge association with them, right?

Okay. My last question will be regarding to what do you think -- you have rising adoption rates in the Windows notebook or any other applications. You're seeing more OLED to come in the future? And is there any further upgrade from your customer side that they are migrating -- upgrading their eDP Tcon into the next generation? Yes, this will be my last question.

Yes. As we shared with the investor community, we have been shipping OLED Tcon for notebook since 2 years ago with a tier 1 Korean customer, right? So the OLED Tcon for us has been many years. I would think that in the normal notebook, whether ASUS and Lenovo, you will find our DP809 there and for those AMOLED panels. For 2024, I'm very sure we will ship a lot more of AMOLED Tcons, and we have been developing those AMOLED Tcons for many years. And it has been there for a long time. And I think even we don't -- I don't know when they would come in the market, but I believe -- I hope that 2024, we're shipping a lot in both AMOLED and Tcon. Yes, those are good things because AMOLED Tcon has a big pie and has a higher ASP, and I hope the end customer will like it. And yes, we do upgrade those Tcons to AMOLED.

Next question, [indiscernible] of Nomura.

I just want to get a view on the overall PC market for this year and next year. I think previously, we are talking about a 10% unit reduction for this year. Are we seeing any changes? And what magnitude of recovery are we expecting for next year?

For this year, I think I view PC market will have a sort of L-shape recovery. And unfortunately, we had a view that PC market may have a V type of recovery because we -- since the last year third quarter, we see significant reduction of the PC market. And now, we expect the kind of L-shape recovery, and recovery is limited. It's not like 20%, 30%, but an L-shaped [ recovery ]. My view into 2024, there are -- a few things will happen. One is the last significant PC or consumer PC or commercial PC upgrade happened in 2020 or 2021. There was a huge demand that time in the pandemic. By 2024, those notebooks are 3 years, is due for replacement. So that's what we hope. On the larger scale, you will the replacement cycle will start. That also is shared by -- if we would read a research report and people start to say, in 2024, you will see the PC mobile replacement. So particularly ourselves, we are getting excited is really our PS parts. As we [indiscernible] this question on the USB for [ retimer ] will be adopted significantly into the 2024 model. And we're also excited to see that our HDMI 2.1, 2.0 [ with retimer ] getting adopted in a large scale. So -- and that's why we kept positive in 2021. We think we're getting more opportunity for us to grow, and USB4 definitely is one of the things to be -- I think the market will have a strong demand there.

Ladies and gentlemen, we will now move on to our Chinese question-and-answer session. [Foreign Language] Ladies and gentlemen, we thank you for all your questions. That concludes our conference for today. We thank you for your participation in Parade Technologies' 2023 second quarter webcast investor conference. You may now disconnect. Thank you, and goodbye.

Okay. Thank you very much.