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

Welcome, everyone, to Parade Technologies Limited's 2024 First Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2024 first quarter financial results first. [Operator Instructions] And after the presentation, there will be a question-and-answer session in English by CEO, Dr. Jack Zhao; and VP 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 the time if you would like to ask the 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 2024 Q1 webcast investor conference. Parade Technologies first quarter 2024 consolidated revenue was USD 121.28 million, and the net income was USD 18.21 million. Its both basic and fully diluted after-tax earnings per share were USD 0.23 and USD 0.23, respectively. These results compared to consolidated revenue USD 99.99 million and a net income of USD 11.62 million or USD 0.15 and USD 0.15 per basic and fully diluted share in the year ago quarter. In U.S. dollars, the first quarter revenue increased 0.96% sequentially and was up 21.29% year-over-year. The gross profit in the first quarter of 2024 was USD 51.96 million, an increase of 0.09% from the previous quarter and an increase of 17.97% compared to the same quarter of last year. Based on the current business outlook, Parade is providing the following guidance for the second quarter of 2024. Revenue is between USD 110 million to USD 122 million. Gross margin is between 42% to 46%. Operating expense is between USD 32.5 million to USD 35.5 million. [Foreign Language] It is my presentation for the 2024 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 will be coming from Eric Chen of UBS.

Yes. My first question is on your margin profile. So it seems from your reporting gross margin and guidance, the overall profitability seems to [ bias lower ]. Could you talk about the impact? I mean, whether it is from the foundry cost trend and any measure to mitigate through, let's say, like more allocation to type of Chinese suppliers? And aside from cost, could you also talk into pricing? And where do you see the broad pricing pressure coming from?

Okay. The first question was on the Q1 gross margin. Yes, the gross margin as what we observed, there are 2 factors. One is the manufacturing cost. I think the manufacturing cost is a continued trend, especially for the foundry in China. It could reduce the price, and that be less for the foundry in the Taiwan side. And that price is pretty sticky there. In terms of particular, the -- our Q1 gross margin, I think it was impacted by a couple of things. One was by the competition from the panel side on the low cost and low -- the low-end model, and I think people may have more inventory there. So the price has become very competitive in the Q1, and that's what we observed. And the [ secondary ] really, on the Q1, the impact was slightly, we as many others will evaluate our -- each quarter, our inventory, the aging inventory, the situation has to written down based on the rule for the inventory. And that's the -- also the part of impact to our overall gross margin.

Yes. Maybe a quick follow-up to that. So I think you talked about the Q1 margin. But I think from Q2 margin, I think it's also quite lower. You used to guide around 47% to -- 43%, 47% for the margin target. But now it seems everything is like coming down one notch lower. So could you also like -- I mean, so what's the variable that drives it, I mean your margin guidance being lower than prior guidance?

I would think that we just tried to be conservative to evaluate the situation we're facing. And -- but I don't see the dramatic change in market force that impair our margin significantly, besides what I just have said, in the panel low-end side, we did see the price pressure there. Other than that, I don't have much to add on. And of course, we are working very hard with our supply side and try to -- and persuasive to reduce our cost. But the supply side reduction to improve the margin will take a few months because the wafer will not come out until a quarter later and so on and so forth. So we are doing the best, try to do the best to adjust to meet our -- the gross margin range, that's the gross margin target. And yes, that's what we do, the sensitive adjustment to make sure we will be able to hit the range, hit our target.

All right. And my second question is on your standard-plus customer. Could you talk about your recent -- I mean, the recent demand stages for your major U.S. customer and maybe like talk into the rumor of share loss in the IP OLED side? And it would be great if you could quantify the impact? And how should we think about the future relationship with this customer and like what's your puts or take for [ '24 to '25 ]? I think, yes, some people may say the impact would be limited given the low adoption of OLED in those like premium tablets, but what if the OLED [ pressure ] continues to go up? And how should we think about the impact if OLED pressure really goes up in the high-end IP models?

Okay. So the -- for the standard-plus customer, we remain pretty good relationship with them and to fulfill their needs and to whether they are the current -- the LCD or future AMOLED and we are playing significant role there and provide the key product. However, the AMOLED is very subject to which AMOLED foundry you will use, right? So there is a particular foundry they may think differently, they're persistent to use what they have and that the change of the customer may not be able to persuade they to use. And -- but having said that, I think we are -- regardless whether the AMOLED or LCD, we have, I think, a dominant market shares and [ USC ] and most of the iPad, when they introduce to the market, the dominant percentage will remain as the Parade supply the Tcon. And things may change as we go in. But we try our best to satisfy the customer, at the same time, satisfy those foundry, but -- and yes, the foundry with the -- AMOLED foundry with the standard-plus customer, there's some agreement that beyond we can do, okay. So I don't think there impacts that too much, frankly speaking. And let's see how the AMOLED adopt in the marketplace. We are also excited and we have been shipping AMOLED Tcon for a long time. And we would like to see the -- what is the -- because the system will be introduced to market early next month as we observed. Now I would like to wait to see. But one thing it is -- I try to tell the [ investment ] that we are on the dominant percentage for the AMOLED supply or even for the current solutions.

Next one, Tiffany Yeh, Morgan Stanley.

Okay. So my question is regarding the PCIe [ fact on ] AI server side. So is it possible that you can update also same estimates for PCIe-related products on AI server? And I also have a follow-up.

Okay. On the PCIe AI server, we are -- continue shipping our PCIe, the Gen 4 retimer in the MP volume and both on the 4 channel and the 16 channels. And we recently, as we started the PCIe Gen 5 retimer in the volume shipment, and we work with the Tier 1 customer and try to win more models. And we also -- as the community noticed, we introduced our silicon germanium by CMOS-based, the PCIe redriver, whether Gen 4 and Gen 5 and the future might be go to the Gen 6. And we observed silicon germanium by CMOS performance are extremely good. So we would like to be noticed. We -- Parade is the company could supply both retimer, qualify the retimer and redriver at the same time. And yes, recently, we have a more sort of design wins with the workstation level of PCIe Gen 5, both Gen 5 and the Gen 5 -- Gen 4 and the Gen 5 retimer and the redrivers. And system customers start to see the value of the redriver and both retimer/redriver and the value of that. So we continue to drive the design win and the designing and hopefully, we can have a more meaningful revenue. And we measure by every quarter to deliver the result to the companies.

Thanks, Jack, for the sharing. So my follow-up is that as we are seeing some architecture changes on retimer on the [indiscernible] design, will we see the situation being reversed again when PCIe Gen 6 retimer is introduced?

I would think the retimer itself remain has its value there. And however, the power consumption of retimer is getting significant and the retimer become a more complicated device, and so for -- become a certain burden for the system integrator. And we do find out it become less burden to the customer, and where your redriver performance can achieve the retimer performance, and that's what find out. And especially, our silicon germanium, the performance achieved, the power, the performance and it's a surprise on that. So, yes, let's see how it goes, but we provide both to the customer. And we do think that moving forward, the cable solution might become very critical to the data center, and that's probably, as you noticed, for the data center architect change. And within [ WAP ], you probably need many, many high-speed, the cable, and those cable probably all needs sort of the signal, the condition there to make that happen. And so in those cable, probably redriver become very convenient.

Very clear. And my next question is that can you share with us your USB4 penetration estimates for this year and next year? And how much of the content value is expected per PC for the USB4 product?

As we said in the previous conference calls that our USB4 retimer in our addressable market, we are doing very well and with pretty high market shares. And upcoming the AIPC or AI notebook from the system based on the San Diego, the application processor, and we are the sole source to provide those retimers. And so retimer, USB4 retimer made a pretty significant contribution to our revenue stream, and we expect it will continue to be significant from this year to next year as well. And yes, I think the adoption rate will increase for each notebook, it depends on how many port will be USB4. And recently, Microsoft set up a rule there for -- I think, a notebook for 2025 or 2026, once one port is USB4 and the rest of port has to be the USB4. And that will increase adoption of using USB4 timer. So one notebook could have a 2 or could have a 3, and so the content -- our content may increase. We -- from the AIPC, what we observed and the coming system will be introduced, hopefully, next month. And we see the -- it's a common, there were -- there are 2 USB4 under each notebook, so which demanded 2 for retimer chips there.

Next one, Al Wang of HSBC.

Jack and Yo-Ming, this is Al from HSBC. So my first question is regarding the second quarter guidance. It seems that the revenue comparing to the first quarter is flat. I would kindly ask which product line is under pressure and the margin outlook for each product line?

Yes, on the Q2 typical for PC is a weak quarter. And now we got a pretty much flat -- flattish, the revenue. However, more recently, what we observed, the customer price appeal are very short, which means the price appeal, you have to deliver within 3 weeks or 4 weeks or sometimes 2 weeks. So we observed quite many those kind of POs. And so the -- if you ask me this week or last week, I will be more encouraged to see a lot of those, the short lead time, the POs. And having said that, in terms of overall, the market situation, I would think that the DP were doing good because we have the -- our -- the standard-plus customer, the introduction of new systems and demand will go up. The panel guy -- general panel guy remain sort of not that optimistic. And the PS guy on the high-speed part is a lot more stable and demand is quite healthy. That's what we see in there.

Okay. And my second question is regarding what's the expectation on revenue contribution from AMOLED Tcon this year? And which kind of product do you see faster adoption? And what's the trend of AMOLED's Tcon penetration rate in notebook in this year and next year?

I don't think the notebook this year to be very small, right? The iPad will be introduced really subject to what the price of the iPad would be. And it seems to me the current iPad market is very sensitive to the price as we observed. And the -- whenever the low price, you can say a lot when the price go to the thousands, it's kind of -- yes, it's become a -- I don't know how much become the issues, right? So it's really subject to the price, and that's like notebook or anything else as well. It's really depending on the price. And I hope our standard-plus customer can sell more and we can benefit from it. And we remain to see. And we have a big hope, hopefully, the AMOLED can do better and can have exciting sales. And that's what we hope because the Tcon with the support of AMOLED, the price is higher. So we certainly would like to see the more sales and especially unit sales, but it's very much subject to the price. The market -- in the current market, the economic environment seems the prices become sensitive to the market.

Next question, Vivian Yang, Nomura.

I think you kind of mentioned some retimer and redriver used in AI server. Can you elaborate the usage like when -- can you elaborate more about the redriver use in cable? And when should we use retimer and when should we use redrivers in the system?

The cable probably very hard to use the retimer because the retimer power is so high, we need a heat cycle -- heat sink there, and the cable is not allow you to put a heat sink. So it become a kind of desirable to have a redriver. It's pure the cable application, and we do have a fuel for design win on the PCIe Gen 5 and cables. And it's interesting to see that how the people doing this, and the retimer tend to be used on the system, who don't know on the another side will end up with because they have to leave a good margin to -- can work with whatever the chip to put on to the PCIe slot, so -- because they don't know what's the next. So they typically either put a big margin there. So that's more towards the server with switch and so on and so forth. And yes, previously, of course, the graphics card, they put some retimer on the graphics card, but I'm not sure in the future, they will do that as well. And -- but we do see interesting for those -- the graphics card to graphics card link. And my -- also we kind of service to help to make a link, and whether redriver or retimer, that would never make it work, that would be great. So -- because Intel had -- they want to preference to gather to the retimer, and early system adoption used quite a lot of retimer there. And the data show as we go, that seems the redriver performance is getting pretty good, and let's see how the customer -- system customer to view how to take advantage of all redriver. But I don't talk about the typical redriver. We -- on the CMOS-based, the redriver we're talking about the silicon [ germanium ] and high-powered, those redrivers. So the process is very different and -- versus what we traditionally talk about redriver, those are CMOS-based.

Sure. Just a quick follow-up. I think previously, you've guided that maybe an annual revenue for PCIe Gen 4, Gen 5 retimer would be maybe less than USD 10 million. Is there any expectation for this year's revenue from this product line?

We probably will report when retimer/redriver added together as a category for the data center. And I think that probably is a good goal to achieve. And we do see a little bit acceleration there. And hopefully, the -- because the investment community ask a lot. We put a lot of focus on the segment. And hopefully, yes, we could do better, but let's wait to see. I think that the USD 10 million still is a good goal to achieve. But as I said, we will consider the retimer/redriver for the data center as one category. We probably cannot separate them because the customer might pick and choose and especially for Parade, we may have a retimer/redriver pin-compatible and those kind of things. They can easily to choose which one to use.

Sure. And my second question is about gross margin. I think you've talked about that inventory write-down effect. So I would like to ask like how much is the impact on gross margin? And also, if removing the impact from inventory write-off, what's our gross margin outlook for this year?

I don't have a detailed number. I think you probably have to -- need to talk to Yo-Ming, and talk to our financial guide, but I do know since the Q3 of '22, every quarter, we evaluate the aging profile to written down the aging parts. And -- but however, those aging parts not saying got scrapped, those parts have not got scrapped. And sometimes those aging parts will still sell it and become 0 cost. So it's a little bit kind of convoluted in some way, and sometimes it hurt margins, sometimes they help you, and -- because you might appear to be -- sell those written-off parts in the 1 quarter, right, particularly this Q2 and -- Q1, and I don't remember, I do know we'll return some off and impact our margin. But in the detail, you probably have to talk to Yo-Ming. And I would like to emphasize one more time, those so-called return of inventory in one quarter might be bad, but maybe later on other quarters, it will become helpful because you happen to sell those written-off parts.

Next one, Lucas Liu, KGI Securities.

So the first question is regarding to the first quarter product mix. Can you give us the updates for the first quarter product mix?

Okay. The DP product line was below 40%, PS product line was above 40%, and the PC, and that's our source driver is above 15%, and the TT is -- was below 5%.

Okay. Very helpful. And my next question is regarding to the PS product line. And so for the 2024 PC and NB shipment outlook and what's the company's thoughts and the penetration rate for the USB4 this year and maybe next year?

I didn't catch your first question. I caught your second question was PCIe -- PC -- USB4, the market share, right?

Yes. So my first question is regarding to the 2024 PC and NB shipment outlook. Yes.

Okay.

And the next question is for the USB4 penetration rate this year and maybe next year?

Okay. I think the -- we are using the model, the 2024 versus 2023 have shown a 5% -- a little bit above 5%, the unit increase okay? And that's the current model we use. And in terms of the USB4 retimer penetration, I would think the -- now if you consider both Intel platform or NB platform and others, you would think probably 40% to 50% -- 40% probably. And maybe next year, we'll go even higher to eventually will go almost all will be USB4. And while next year or a year after, you will have [ USB4.2 ], the 80 gigabit per second will show up. And we -- as reported before that, we already have USB4.2 80 gigabit per second test chip, and it's functional and we are testing with our customers. And so the -- even USB4, the current one is 40 gigabit per second. The USB4.2 will move to the 80 gigabit per second. So now it start to getting, I think, less than 30%, 40% type of range. And then we'll move up more, then we'll move up another speed upgrade to the [ 4.2 ]. So that's what we view. And so that market itself are pretty healthy. We'll continue to go a speed higher and with adoption rate increase.

Okay. So my follow-up is in addition to NB and Qualcomm's platform, what's the current progress for penetrating into the Intel's platform for Parade?

That's a good question. We have been working with our OEM customers, try to persuade the Intel open the door for the second source for their retimer, right? So Tier 1 customer pushed pretty hard, and -- but so far, we have not seen the Intel open the door yet. Hopefully, it will happen, and -- because it's kind of strange, why would they care that more retimer chip for the Intel, such bigger companies. And -- but -- that's the current situation. I know we work with OEM and OEM is pushing very hard to try to have a second source for the Intel retimers. If they succeeded, we will be the candidate. I'm pretty much sure.

Sure. Very clear. And my last question is the strategy in the PCIe business, especially in the service sector. It seems that your competitors have licensed third-party IPs for product development. So I'm curious about the strategy and outlook for Parade's PCIe-related business?

When you -- our competitor most likely to license the IPs, high-speed IPs for the Synopsys people. But Parade has been historically, we would like to develop our own IP to understand well for this particular market, right? So we're continuing to develop those things to strengthen our R&D and technology road map. And I think we are pretty long, and we're not kind of look at the 64 gigabit per second. We have an eye looking for 128 gigabit per second. And we believe as a competition power of demand, more competition, our interface, especially PCIe will continue going up to the highest speed. And so you own your own IP, and you have your own strength to capable develop those high-speed device become very unique or become very high value to deliver that to our investors. Having said that, we are very much open our mind to do the both. And as we said, the silicon germanium based, the high performance by CMOS device, and it happened to be very successful. I think under performance wise, it looks awesome, and that's the -- that's what we said. We continue to develop and we are doing the 64 gigabit per second for the retimer, at the same time, doing the redriver.

Next one, Mike Yang, Bank of America.

I have a question regarding to the gross margin outlook. As you mentioned that first quarter, we are having some competition in the low-end market for the panel solutions. But I'm just wondering, have your second quarter gross margin guidance reflected the lingering or ongoing impact coming from this? And also what about the inventory issue regarding to any kind of evaluation gain or loss baking into the second quarter guidance for gross margin? That's my question.

Yes. Good question. I think we're already baking into, and -- because Q1 caught us a shock, and we're already baking into the -- all the factors into our Q2. And hopefully, Q2 is -- continue going and hopefully, we'll reach our goal. And yes, the -- it is the sort of panel on the low-end side of the competition. And we did or we do develop our own, the sort of strength to develop an integrated solution for TED and tTED. And I'm proud to report our TED solution and the tTED solution got a lot of market traction, not only because the -- it's predeveloped really is that we provide value to our customers. Those TED or tTED device will provide much lower power and much narrower borders or the lower [ business ]. And more importantly, customer or panel customers start to figure out to actually decrease the cost. So we see more and more customer like to entertain our TED solution. And we all believe by doing those kind of things, we can differentiate with the low-end Tcon source driver provider and to provide our unique value to the panel customers.

Thanks for your answer, Jack. That's very clear. And I just want to have a follow-up also on the gross margin. So beyond second quarter, how should we think about the long-term trend? I mean, if you look back at the history, most of the time, you meet your guidance and then it's quite stable. And if there is continuous strength by the PS segment, then gross margin should be also better. And then as you mentioned, you have a TED, tTED to fend off the competition. And so probably, the upside is still there for the gross margin trend. Is that the case?

That's what we try to achieve. And that's our direction to fine-tune our gross margin and why we continue to maintain our market share there. And yes, that's our direction.

Next one, Jason Tsang, CLSA.

Just wonder, how do we look at gross momentum in second half this year? Because it seems like your gross margins stayed at similar levels since Q4 last year to Q2 this year. So which drivers or which catalysts can be considered as growth drivers or catalysts to sustain your momentum in second half this year?

Yes. But for people who are familiar with the PC market will also know the seasonality for the second half will be stronger [ for ] the first half. So the seasonality will play the major role there. The [ secondary ], we had a high hope or all the ODM and OEM had a high hope for the upcoming AI notebook introduction. And yes, we're surprised to see the forecast for that segment continue going up. And however, the notebook has not been in the market yet. So we're really very excited, especially for second half, the AI notebook will help us to drive the revenue up, because that typical, the AI notebook, not only we have a retimer there, we also -- for many systems also have our the DP2HDMI converter there. So it's quite small amount there. So that's the second one. We had a hope and can sell well. And once introduced, it seems everybody from the ODM to OEM are working very hard and try to make the introduction very successful. So then the next one is really driven by the AMOLED Tcon, which if our standard-plus customer can do well, sell those iPad well, so we'll be very excited as well. So we do see a few of the driving force for our second half, but let's see how to materialize this.

Got it. So you mean in the second half, some of the seasonality will drive the end demand to boost our shipments? And the second one is we do expect some of the [ spare ] migrations or the new product will...

Yes, new category product, right? So the -- particularly the AI, the notebook has become a new thing for the customer, particularly that notebook or the San Diego AI, the chip base, the performance -- for AI performance is very, very good, and let's see how the market acceptance for those type of AI machine. And I think I'm not sure the community here that's not -- the people start to have a new name called Hybrid AI. And that's different from the -- what do we say the AI typical based, cloud-based AI. And then with those AI notebook, AI function, and you will see the -- a lot of the AI-directed modeling in the notebook itself. You don't need to connect to the cloud to perform those -- achieve those performance. So that's pretty exciting, and which really is make the AI to the large population to [ take ] out what is the impact of AI to the real society and then let's see how that goes. And I know the OEM and ODM are very excited for -- to waiting for those products into the market.

Yes. Understood. So my next question is in terms of your competition, because it sees like Realtek announced that their USB4 retimer will also ramp up in the second half. And you mentioned that for USB4 retimer, you got meaningful market shares. So I know we were dominating this kind of new markets. So how do you look at these new competitions in the future?

Yes. You are saying that Realtek is new to us. And I think the people into the retimer market for USB4, all think that's a simple one, but in fact, it's a really tough one. Even for you do a sort of certification or the qualification test, because USB4 carry many, many different standard there, because it carries Thunderbolt, carry DisplayPort, carry USB3.1, USB3.2. Each one of them you have to do the certification test. To run through a certification test will take at least 2 weeks for each model. I'm not sure the company who like AMD or [ Corp ], the San Diego company will have a bandwidth engineering time really to qualify new vendors and -- because people are very busy. And what we are looking for the battle is not a current generation anymore. And we are looking for the battle is USB4.2 80 gig. And so it's kind of very strange to continue to introduce the USB4, the current one. I thought that, that already, it's way too late. And we have a second-generation already in the production now, and the people talking about just try to be new to introduce that market. Once they qualify, probably it take a year to qualify, market already start to move to the USB4.2.

Got it. So my last question is in terms of your auto business. I think in the past, you mentioned that you do see a meaningful potential market for Auto Connections segment. So how do look at -- how do we look at this kind of gross momentum in this year or what kind of market competition is right now? So I wonder if you can give us more color on it.

Yes. With the successful, our display converter chip into the Silicon Valley, the electric vehicle, and we have 2 chips there, one is the DP retimer, another is the converter chip, and we had second-generation, the converter chip to support the display side and successfully be qualified to their system. And I think the second -- the newer chip adoption rate in that particular company is much -- will be much high. So that's exciting. And that converter chip, in fact, also being used in the China EV guys. So we do see the -- our automotive for the solution get more adoption. And another interesting we experience and design with many, many car OEMs is what they call the USB box. And each car has several USB box there and they're for the charging. And now everybody wants to send the display data or the USB data through that USB box. We are -- we are the USB provider and so as the display provider, so our solution has been -- we have many design opportunities and working with them and sort of become a standard there. And those one will generate revenue start from next year, and there are just too many people doing this. And I kind of lost track which one is which. So there's too many people doing those USB box now.

And ladies and gentlemen, there appears to be no further English questions at this point. We will now begin our Chinese question-and-answer session. [Foreign Language]

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Okay. Thank you very much, and thank you.