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

Welcome, everyone, to Parade Technologies Limited's 2024 Second Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2024 Second 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 Vice President of Finance, Mr. Kuowei Wu. [Operator Instructions] And now I would like to introduce Mr. Yo-Ming Chang, Investor Relations of Parade Technologies.

Welcome, everyone, to Parade Technologies 2024 Q2 Webcast Investor Conference. Parade Technologies second quarter 2024 consolidated revenue was US$120.87 million and the net income was US$17.58 million. It's both basic and fully diluted after-tax earnings per share were US$0.22 and US$0.22, respectively. These results compared to consolidated revenue US$104.18 million and a net income of US$13.98 million or US$0.18 or US$0.18 per basic and fully diluted share, in the year ago quarter. In U.S. dollars, the second quarter revenue decreased 0.34% sequentially and was up 16.02% year-over-year. The gross profit in the second quarter of 2024 was US$51.28 million, a decrease of 1.31% from the previous quarter and an increase of 11.97% compared to the same quarter of last year. On June 26, 2024, Parade announced PS8830 USB4/TBT4 retimer shipping in key OEM customer Copilot+ PCs based on Snapdragon X Elite and Snapdragon X Plus platforms which offer game-changing AI performance and efficiency. The PS8830 USB4/TBT4 retimer is optimized for use with the Snapdragon X Elite and Snapdragon X Plus platforms. The PS8830 is compliant with USB-IF USB4 specification supporting up to Gen 3×2 40Gbps (2x 20Gbps) and Thunderbolt 4 featuring TBT 3.0 up to 41.25Gbps (2x 20.625Gbps). USB4 tunneling of DP 1.4a and USB 3.2, and DP 2.1 alt mode up to UHBR20 are supported. Customer implementations with Snapdragon X Elite and Snapdragon X Plus platforms may also include Parade PS185 DP-HDMI 2.0 converter for adding HDMI connectivity, PS8719 USB 3.2 Gen 1 redriver and PS8811 USB3.2 Gen 2 retimer for USB-A connectivity, benefiting from their proven performance and industry leading compatibility. On July 31, 2024, Parade announced the availability of the PS8778 USB4 Gen 3 x2 / TBT4 / DP 2.1 Alt Mode linear redriver for NB/PC, mobile workstation and active cable solutions. The PS8778 supports up to USB4 Gen 3 x2 or 2x 20Gbps, TBT4 2x 20.625Gbps, and DP 2.1 UHBR20 Alt Mode. It implements USB4, USB 3.2 and DP 2.1a power management including Modern Standby (<1mW) and DP 2.1a Advanced Link Power Management (ALPM). The low power design greatly extends the battery life of mobile devices as well as minimizing power use in USB4 active cables. PS8778 comes in a very small package, ideal for space constrained designs. PS8778 extends the overall system channel length by providing additional loss compensation when placed between the SoC (USB4 router) and USB4 retimer such as the PS8833, in a cascade configuration. PS8778 also enables USB4 cables much longer than the 0.8 meter or 2.6 feet limit for a USB4 Gen 3 passive cable, without degrading the performance. On August 5, 2024, Parade announced PS8833 USB4/TBT4 retimer shipping in AI PCs powered by AMD Ryzen AI 300 Series processors, which feature the new "Zen 5" high performance CPU cores and integrated AI engine for enhanced AI performance. USB4 is becoming ubiquitous on notebook and desktop PCs. The PS8833 USB4/TBT4 retimer is optimized for AMD's new AI enhanced processor platform. It also allows OEMs to easily upgrade existing platforms from the PS8830 USB4/TBT4 retimer to extend product longevity. The PS8833 is compliant with USB-IF USB4 specification up to Gen 3 or 40Gbps (2x 20Gbps) and Thunderbolt 4 featuring TBT 3.0 up to 41.25Gbps (2x 20.625Gbps). USB4 tunneling of DP 1.4a and USB 3.2, and DP 2.1 alt mode up to UHBR20 are supported. PS8833 features low power consumption in USB4 operation and low power states, greatly extending battery power operations. Customer implementations of AMD Ryzen AI 300 Series processor platform may also include Parade PS8419/PS8219/PS8210 HDMI 2.1 pin compatible retimer/redrivers for enhanced HDMI connectivity, and PS8811 USB3.2 Gen 2 retimer for USB-A connectivity, benefiting from the proven performance and industry leading compatibility. Based on the current business outlook, Parade is providing the following guidance for the third quarter of 2024. Revenue is between US$130 million to US$144 million. Gross margin is between 42% to 46%. Operating expense is between US$32.5 million to US$35.5 million. It is my presentation for the 2024 Q2 financial results. Now I transfer to CEO, Dr. Zhao to answer your questions.

Ladies and gentlemen, we will now begin the English question-and-answer session. [Operator Instructions] The next question is from [ Anthony Lau of Vinda. ]

So first of all, despite there are some noises about the PC market this year, but our guidance seems solid in third quarter, hence, I have 2 questions. First of all, what's -- like the momentum in the third quarter is mainly from DP or the PS product line? And second question is, can we see the same or even better momentum going to fourth quarter of this year?

Yes. I think the Q3 is a traditional hot season for PC, and 2024 remains very similar. And for particular, we see the new momentum for AI PC and coming on board, being introduced in the last month in June. So in terms of our business, the momentum driven for Q3 business largely getting much better is our high-speed PS parts. So as our -- the standards customer has a little pickup as well. And moving to Q4, we think that Q4 will be similar as the Q3 and hopefully, that's what we experienced. And maybe Q4 could be depending on the momentum of the acceptance of the AI PC and holiday season, the shopping and that it's the way to see. But in general, we think the second half of 2024 in terms of PC should be or notebooks be better than the first half, and that remained true for many years for PC demand.

So a follow-up, I also want to ask a question about the overall PC market outlook. And this year and next year, like do you think – again, next year, the PC or even like notebook market shipments will have like a better growth? And do we have any accurate numbers for the Y-o-Y growth for the PC market in this year and next year?

We have been talking to our OEM customers and some of the customers already provide us the guidance or what do they think for the 2025. And I think that so far, they are pretty consistent, people indicate that they see that their business in the 2025 will be high single-digit growth into the 2025. The remaining is everybody wait to see what is the momentum of those AI PC be adopt in the business environment. And the people hope those, the new feature, new capability will trigger the new wave of adoption or upgrade phase for notebook. And frankly speaking, those AI PC will have a capability to do many influencer application for the AI type of thing instead of people go to the data center now because the performance of those neuro unit processor and should be able to do many of influencer applications. So those are the new feature might [indiscernible] the new wave. But baseline, people think it will be the high single digits of growth.

And below, I will ask about the high-speed product line questions. So previously, we said that the USB4 penetration in like Intel and non-Intel platform is about 40% to 50% now. And is there any changes for these numbers? And can we also share our views or accurate numbers for the USB4 penetration in next year?

Yes. I would think the USB4 notebook become necessary and adoption rate will increase quite quickly. And we saw the more and more notebook adopt USB4. And I think Microsoft also announced and when you have USB4 and every connector has to be USB4 Type C type of thing, you cannot mismatch. So that helped quite a lot of adoption. So we do see the notebook will have 2 or 3 USB4, the connector there. So yes, the momentum is increased. If I would think the adoption rate for the notebook, moving forward, will go to the 60% or 70% type of thing and moving to next year. And many of them will have 2 USB4 there. So that's good for us because we are the credible one beside Intel for all the support from us and the difference between we and Intel, we solidly support DP 2.1. I wouldn't think the Intel has [ planned ] support DP 2.1 yet. And we passed all of the rigid CTS test. And then regardless USB4, Thunderbolt, DP 2.1, USB 3.0., I think where probably has been most compatible and complied to the standard, and we're happy to work through with our existing customer and OEM customer. We just had an announcement with [indiscernible] Microsoft took us almost 1.5 to 2 years to make it happen. So those are a lot of hard work to make everything pass through the CTS and pass through the other compliance test.

So talk about the [ USB4 ] product line, like how is our certifications progress for USB4.2 retimer? And will it be the maturity in the USB4 retimer shipments in 2025?

For USB4.2, as we work with 80 gig, what do they call the CTS 80 gig, right? So we have a test chip as we report in our lab, and we are working with the CPU or AP process vendor now. We think the later of 2025, you will see those systems to the market, but the majority of adoption for USB4.2 will be in the 2026. That's what we think. But we already have a chip and already doing the development. And the more important USB4.2 work internally through the PCI Gen 4 and we'll enable that DPU outside of notebook for those AI function. So it will enhance notebook AI function greatly. So USB4.2 is another big step jump for towards notebook, towards the capability of AI.

So 4.2 or 4.0 seems next year, 4.0 will still be the mainstream. So my question talking about the competition side, do we see other vendors, other [indiscernible] are going to get into 4.0 or 4.2 in next year? And will it then impact our market share in this market?

We hear many of them say they have a device, but we did not hear from our customer who has passed rigid CTS certification yet. We knew some of our models, notebook models, shipping with computer parts without logo there, without USB4 logo or Thunderboard logo there. Yes, that is still on the market. We understand that for those low end but a serious customers, we have not seen a lot of the competition much at all. And for the Microsoft [ Tcon ] platform because the software control with the firmware control with our AP process device, I don't think that's a way you could get into and without the software change on the AP processor.

Next one, Jason Tsang of CLSA.

My first question is, can you share the product mix in Q1? And I wonder if you can share any expectations for those kind of product lines in coming quarters or in second half? I mean can you share the revenue breakdown, I mean, product mix.

And for the revenue breakdown in the past quarter, and we see DP is about 40%. And high-speed parts is close to or more less than 45%, and our [ source ] driver is below 15%. And our [ TT ] is about a few percent, and that's our total breakdown.

Can you also share those kind of product outlook for coming quarters?

I think there should be similar, but the high-speed maybe percentage could be higher because of over shipment of our USB4 retimer.

So my second question is in terms of your gross margin. So what kind of factors impact our gross margin in Q1? And what kind of growth drivers for gross margin can we expect that to generate probably higher gross margin in coming quarters? So I think because your guidance for gross margins is between 42% to 46%. So I mean, what kind of drivers can sustain gross margin to above 45%, to that kind of levels?

Yes, our product -- on the gross margin is rarely related to our product mix, right? So we have high momentum on our high-speed side. As I said, we have competition on the panel solutions. And that mainly from the soft driver and a low side. And the competition, in particular on the panel side, the people you see the price to compete. So that's the unfortunate situation there. And as we said, for us, we have to come out integrate solution to compete, but we still have quite traditional architecture parts shipment there. So those are the competition on the price side. In addition, as we come through the inventory correction and a reduction and inevitable, we have ageing inventory, which we quarter-by-quarter, as I shared the investment community, quarter-by-quarter based on the ageing, we write off those things. In the previous quarter, we continue to write off those ageing parts. And that's the -- I think that's 2-side negative side impact our margin, but the positive side, our high-speed side have contributed a better margin.

So you mentioned about the inventory correction or write-off, right? So how kind of levels is it's impacting our Q2?

I don't know exactly the number, but you need to share with Yo-Ming. I think a couple of minutes, a quarter type of thing, but I don't know exactly, okay.

So have we seen any price reductions on our wafer cost? Or do we have plan to probably diversify our foundry supply leading to a lower wafer cost?

We negotiated quite a lot with our foundry side to reduce the wafer price, and we achieved some already and our foundry did work with us to reduce the price. However, in today's geopolitical situation, our customer demand certain foundry, avoid certain foundry. That makes the negotiation getting difficult. And I probably investment community here, what a customer wants, what the customer demand is, right, particularly for some U.S. customers really demand the part came from which fab and so on and so forth. But we did work with the foundry service and they understand the competition and reduced price. As we have said that we are moving to more [ deep micron ] FinFET type of technology because of high speed. And inevitable, we will use more expensive wafers. So as our high-speed side, we use Silicon-germanium from the GlobalFoundries, also pretty expensive wafers.

Next one, Tiffany Yeh of Morgan Stanley.

So, I know you just addressed the inventory questions earlier, but we noted that exiting the second quarter, the inventory levels or inventory days is still at around 150 days. Do you think this is a healthy level? If not, what level we would feel more comfortable with?

We have been achieved the inventory reduction quarter-by-quarter. And we push very hard to continue to reduce it, however, what we think for the size of a company like us, we would like to keep the 3 months or a little bit above 3 months, the inventory or the full inventory. I think we are in the -- depending on how you calculate it. And we are in the 115 days at this moment. And we're looking for by Q3 and Q4, we're probably getting to the level what we think we would like to. And we had negotiated quite heavily with our foundry side to reduce our long-term agreement, as I shared with the investment community, and we achieved a few of the negotiation. And just past quarter, we also achieved another type of reduction of our quarter to use those long-term -- the agreement quarters. And we would think that the inventory will continue to reduce to the level we would like to, which is 3 months or a little bit above 3 months.

And my second question is that how do we see the demand for our PCI Gen 5 retimer for the data center or the service side looks like right now? And during the previous earnings call, you mentioned a target of US$10 million for both retimer and redriver. How do we see that achievement rate right now?

I think we are getting to the level as the target we shared with the investment community. We are in the data center and with our USB or PCI Gen 5 retimer. And more we are designed to the workstation and high-end workstation and with our customers. And we're also designing our PCI retimer to the storage and that quite a bit. And having said that, as we talk to data center customers and why we develop the PCI Gen 6 retimer and the customer start to share with us and they start change their taste of those high-speed retimer or redriver, they might want to use more redriver than retimer and just because the retimer burn too much power and it's quite heavy for them and [indiscernible] and so on and so forth. So you will see very soon we will have a class of redriver PCIe Gen 6 will come out before our PCIe Gen 6 retimer and Tier 1 customers share with us in the data center. And on their own, they have a lot of PCIe Gen 5 retimer in their inventory. And also customer share with us the data center in the future might -- will use a lot of high-speed cables, so we have shared with the investment community. Our redriver already designed to the first Tier 1, the cable application. And so the dynamic of PCIe retimer to driver are changing. And we are working with the Tier 1 customer very closely. And hopefully, we will have more to share, but definitely the number of retimer, the demand could reduce as our customers told us.

Next one, Lucas Liu, KGI.

I have follow-up questions on your standard [ plots ] customers like Tcon business. And what is the current shipment mix between Parade and your peer? Is there any chance for Parade shipment mix to further increase?

You are talking about the newer -- the Tcon for AMOLED, I'm assuming. And yes, we probably occupy the majority of the shares since our competitor only can, at this moment, use for their own 11 inch. We share with another [ leg ] with 11 inch and 30-inch, and we have been informed our competitor has issue on their 30-inch and we were -- the end customer will use our Tcon for -- that they're -- to replace our competitor for the 30-inch, the platform. And that's what we think the current dynamic is. And so we're pretty confident we have high shares. And having said that, I would like the investor community to notice our customer reported a very healthy or big momentum for their [ pad ] sales and just in the past quarter. And we saw a lot of -- the sales is not under high end but more massive the original parts and that quite big volume there. That's we're talking with different momentum, different things there. And so the major shipment is on the median of solutions, which would have been shipped many, many years.

And another question is regarding USB4 retimers. And many of your peers claim they have offered such products. And what is the current competitive landscape in the USB4 retimer market and your current market share status? And is there any chance for Parade to penetrate Intel's platform at this moment?

Yes. That's interesting. I think I explained to the previously, we think outside of Intel, we're probably quite dominant. And we have the competitor without totally passed through the certification or compliance test but customer may still use it without a logo for those notebooks and without certification logo, that's what it is, right. Yes, it's very, very tough to pass those certifications, frankly speaking. And we have been working with customer for many years, and that's what -- we had 2 announcements and all get approval by the [ CPU ] or existing customers and so have been doing a long time work. In terms of Intel thing and under the strong request of our end customer, I've been told the story is start to change. Previously, the intel -- has to forcefully bundle their retimer with their CPU and for their system. Now I've been told, possible as far as the machine, does not [ carry ] Thunderbolt or does not put a Thunderbolt logo there. If only USB4, then the other parties' parts like Parade can be used on the Intel platform, okay? That's been told just a month ago. So let's see how it goes because our end customer pushed very hard. And our end customer does or did not use the Thunderbolt logo at all. And like many other system vendor, they don't use the Thunderbolt. So if it is true, then it does open a window for us to gain more market shares. But at this moment, I don't know yet. I heard about the story as I visit our -- the headquarter of our OEM customer, and they share with me and that's what they pushed. But I don't know yet and let's see how that goes.

And can you provide some insight into your future opportunities in the high-speed interface, like the automotive market? And what's the current sales weighting from the automotive products?

In terms of automotive, we have about 3 – a couple of front side, right? The first front side is our converted chip to replace the service of automotive service, and we are pretty successful in the first -- the first shipment or volume shipment is with the Model 3. There at our second generation USB were coming, the tested big volume model. And another side of work with multiple customers to adopt our solution for the automotive as so-called the USB box, right, previously is for charging purpose. Now those USB box become data or display box. And we have working with many the car vendor to use our solutions. And in Europe, in China, in the U.S. and attempt to adopt our solutions because we have a very strong USB solution. And the third one is the display side and recently, we worked with Europe and the U.S., the OEM vendor and they like our display solutions. And hopefully, those will become shipment and large volume shipments too. And then we also work with a touch customer and OEM touch solution for automotive. And then you see a lot of the car actually use our touch solutions and it's on the street. So those are the few fronts. We are pretty getting to deep and a deeper with automotive OEMs and from the people who don't know us to now many people know who is Parade and they are looking for our solutions whether in the Europe, whether in the U.S. So that's a good thing, and we ship a reasonable volume for the automotive now.

Last quick follow-up for the payout ratio. And for recent years, you have maintained around 50% payout ratio. Will you consider to raise this ratio going forward?

Those are our board decision, and we have not talked too much about this. And we think a 50% having served good for the balance for our development, so as for reward our return to our investors. So we have to reach the balance -- for capital demand for [ cruise ]. So as the sort of return from dividend return to the investor. We have not talked about that much and has been staying the 50%. But yes, we would like to see what is the -- whether we need to do some adjustment there.

Next one, Vivian Yang, Nomura.

I would like to ask about your Tcon product line. So previously, we know you are developed some more advanced Tcon such as integrated solutions. And also, we heard that you also developed some Tcon with AI features. Can you update us with this data?

We developed quite many of the integrated solution, we call it TED or TTD and we touch there. And we just tried to provide a new solution to lead us the -- take a leadership for the mass low-price or competition market. So that's our strategy and to use more advanced technology node to rearchitect the panel solution and to be unique and to the panel solutions. And it works quite well. And we hope customer adoption rate could increase. I'm not exactly sure what the AI, the panel solution and I'm not sure we talk about AI Tcon, so on and so forth but we do work on the, for example, AMOLED type of the Tcon. And we're also searching for more deeper integrated with deep -- the fine technology, for example, using the 12-nanometer or older we use a 6-nanometer for the power saving. So those are the things we are developing right now.

And my another question is a follow-up from a previous question. I think you mentioned that you will have PCIe Gen 6 redriver coming out first. Can you provide us with a rough time line?

That will be -- coming quarter will come up, and we will have 4 channel, a channel 16 channel come out at the same time because chip already [ taped ] out and we have good confidence and end customer also would like to see those chips for their solutions. And so let's see the higher goals. And so we're exciting for this. But follow up on this, we will have a retimer come out as well. And we just let the customer to choose which one is the best solution for them.

So can I assume that the retimer will coming out [indiscernible] several quarters on the redriver?

A couple of -- yes, that's the good assumption, yes.

Next on Tiffany Yeh, Morgan Stanley.

So as we are a major partner of the [indiscernible] AI PC, could you share with us some of the initial sell-through feedback if possible? Do we see the [indiscernible] model forecast to have the possibility to be revised up again in this year or even next year?

We are very interested on this topic. We constantly talk to OEM customers. And last talked to the AP process guy, the partner. Even though we have a very good relationship with them and are working together for quite years, but we think that the system sell-through, that's the more important. So far, the feedback after now is 1.5 months and we've been told it exceeded their expectations. And so as the shipment and the same it has exceeded expectations. So the next year, people are exciting because there will be a new more powerful the AP processor come out. And hopefully, -- as people familiar with those AI features on the Copilot+ and the adoption rate will increase and will, as I said, triggered a new upgrade, the wave in the corporation. And that's what I heard. And in fact, we are visited our customer and that day and told me and okay, we got a few of big corporation to adopt those things. And yes, people getting in general, are very excited about this.

My second question is that as several of our peers are stating that [indiscernible] is still undergoing inventory correction, do we see this having any impact on us? Or we just continue to see like share gain or new opportunities in all profiles?

I think for ourselves, inventory is getting better and better every quarter. I don't think we in the inventory correction phase anymore. And I would think the PC for notebook probably already over on the inventory correction. I don't know about the data center. And we heard the -- yes, they are quite inventory there. And that's what we heard. And -- or at least on the retimer side of it but I think those inventory probably is not that big deal and semiconductor always boom buster and the type of thing. And we just walked through the big boom on the 2021, 2022 and 2023 was the correction phase. 2024 is about getting balanced. So yes, I think a PC notebook, I don't see the inventory overhead issue anymore.

So for all [indiscernible] you share with us like what is the roughly percentage of revenue contribution to us right now?

Right now as I said, it's about lower than 10 minutes, but will accelerate.

Do we have a time line for the exceeding time or the accelerating time?

One of the major model will start to ship in the Q4.

And my final question is that we addressed a lot about the PCIe Gen 6 earlier. So could you share with us, do you have a roughly [ TAM ] number for this?

I don't know. I think until I see that we are in the system. Otherwise, as still discounted. It's a technology and those are good until I see our chip in the system and those kind of things and perform well and those kind of things. Just like our USB4 retimer we have been developed with OEM, 3 parts together, almost 1.5 or 2 years. So it's -- yes, now I thought we see the results. Previously, we don't want to talk too much because we have been working together for a long time already.

And there appears to be no further English questions at this point. We will now move on to the Chinese part of the question-and-answer session. [Foreign Language]

Okay. Thank you, everybody.