Realtek Semiconductor Corp. (2379.TW) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Realtek 2025 Fourth Quarter Earnings Call. This call is chaired by Realtek's spokesperson, Yee-Wei Huang. The presentation will be available on the company website before 6:00 p.m. today. At the beginning, our spokesperson will report our fourth quarter and 2025 full year financial results and give management's remarks. After that, we will have a Q&A session. You are welcome to type your questions in the box at the screen. We will answer the questions accordingly. During the call, you can rev through the pages of the presentation at any time. Note that portions of what is presented in this call contain forward-looking statements. Investors are cautioned that forward-looking statements involve risks and uncertainties. Actual results may differ materially from the results forecasted or implied in such statements. Investors should not place undue reliance on such statements. Now I'll pass this call to our spokesperson, Yee-Wei.

Yes. Thank you. Good afternoon, ladies and gentlemen on the line. You are currently participating in the fourth quarter 2025 webcast earnings release hosted by Realtek Semiconductor Corporation. Now let us go through the fourth quarter 2025 financial results. Q4 revenue was TWD 26.28 billion, representing a 10.9% decrease from the previous quarter and a 0.3% decline year-over-year. This result was in line with expectations as the market typically experiences a slowdown and customers adjusted their inventory level towards the end of the year. Q4 gross margin was 48.1%, marking a decrease of 1.6 percentage points from the previous quarter and 0.2 percentage points from the same quarter last year. This decline was mainly due to product mix as well as some write-offs associated with slow-moving inventory. So these write-offs were relatively minor and well controlled. Q4 operating expenses totaled TWD 10.30 billion, accounting for 39.2% of revenue. This reflects a slight increase of 0.1 percentage points in the OpEx ratio, but a 10.7% decline in absolute OpEx dollars compared to the previous quarter. These quarter-over-quarter fluctuations in operating expenses are expected as we maintain disciplined expense control while ensuring we continue to invest across Realtek products and operations. Q4 profit was TWD 2.34 billion, which accounted for 8.9% of revenue. The operating margin shows a decline from the previous quarter's 10.6%, largely attributable to a reduced gross margin. Q4 non-op income was TWD 651 million, a 30.1% drop from the prior quarter, primarily due to lower government subsidies and some foreign exchange losses. Q4 net profit was TWD 2.65 billion or 10.1% of revenue. Q4 EPS as a result was TWD 5.17 compared to TWD 6.69 in Q3 2025 and TWD 6.63 in Q4 2024. Turning to inventory. Q4 inventory turnover days were 127 days, up from 105 days in the third quarter. This rise is mainly due to lower business volume in the fourth quarter. This also reflects our proactive steps to support customers who have indicated plans to substantially increase orders after the new year, both for restocking purposes and to address ongoing uncertainties in the supply chain. Overall, we are confident that inventory levels at both Realtek and across our distribution channels remain well managed. This concludes Realtek's fourth quarter 2025 financial results. Next, we will briefly go through Realtek's 2025 full year operational results. 2025 net revenue reached TWD 122.71 billion, an 8.2% Y-o-Y growth setting another new record high for the company. 2025 gross margin was 50% compared to 50.4% in 2024. 2025 operating expenses were TWD 47.01 billion or 38.3% of revenue. The OpEx ratio came down 0.2 percentage points compared to 38.5% in 2024. 2025 operating income was TWD 14.36 billion or 11.7% of revenue compared to 11.9% in 2024. 2025 nonop income was TWD 2.90 billion, compared to TWD 2.84 billion in 2024. 2025 net income after tax was TWD 14.75 billion or 12% of revenue compared to TWD 15.29 billion or 13.5% of revenue in 2024. Note that Realtek started implementing the 15% global minimum tax in 2025. 2025 EPS as a result was TWD 28.77 compared to TWD 29.82 in 2024. We have the fourth quarter 2025 as well as 2025 full year balance sheet and cash flow statement for your reference at your convenience. This concludes Realtek fourth quarter 2025 and 2025 full year financial results. Looking ahead to the first quarter of 2026, Realtek maintains a cautiously optimistic outlook for its short-term operations, supported by customers' inventory restocking and prestocking in response to supply chain uncertainties. The company will continue to closely monitor the external environment and development across all markets -- all end markets. Now let's examine the key market segments Realtek serves. The PC market, according to IDC, the global PC market of all platforms shipped 76.4 million units in the fourth quarter of 2025, remaining relatively stable compared to the 75.5 million units shipped in the previous quarter. This steady performance reflects ongoing efforts by companies to balance year-end inventory controls with market demand driven by enterprises upgrade for Windows 11 and strategically front-load inventory ahead of potential supply risk in 2026. As a result, Realtek experienced soft PC-related shipments in the fourth quarter with the split between PC and non-PC segments shifting approximately to 33% to 67% versus 35% to 65% in the previous quarter. Looking ahead to the first quarter of 2026, the industry is poised for significant volatility due to a global memory shortage, primarily driven by strong AI server demand. This shortage is anticipated to elevate component prices and result in PC retail price increases. Consequently, full year 2026 PC unit shipments are projected to decline by roughly 2.4% according to IDC, reflecting ongoing supply constraints and a slowdown following the recent refresh cycle. This projection could change depending on how severe the supply constraints become. Despite these challenges, the market is expected to shift rapidly towards high-value hardware featuring advanced AI capabilities, positioning Realtek to capture emerging opportunities in the coming year. Next, the global consumer electronics market appears to be relatively flat in 2025 compared to the previous year. Looking ahead to 2026, modest growth may be anticipated in the segments where Realtek is most active, including TV, gaming and home appliance as several emerging trends warrant attention. The upcoming 2026 FIFA World Cup is expected to spur a replacement cycle for large screen OLED and mini LED TV. The gaming console market is projected to expand, fueled by next-generation devices such as Nintendo Switch 2 and blockbuster releases like GTA6, which are likely to increase hardware demand despite increases due to memory shortages. Meanwhile, the IoT sector continues to evolve steadily with a significant focus on energy-efficient, AI-powered, intelligent appliances, leveraging edge computing and universal interoperability standards such as the Matter protocol. Additionally, the industry is prioritizing human-centric design, emphasizing product longevity, sustainability and practical utility over simple innovation. These market trends are closely aligned with Realtek's value proposition and product strategy. Networking infrastructure market is experiencing a significant inflection point, fueled by a strong uptick in AI-driven automation in late 2025. This momentum is most notable in the PON segment, where high-speed technologies exceeding 10 gigabit per second are emerging as the preferred backhaul solution for 5G and Wi-Fi 7 networks. As we look toward 2026, industry trends point to a close alignment between advanced wired infrastructure and wireless innovation with the adoption of Wi-Fi 7 accelerating globally. This convergence enables multi-gigabit fiber connections to deliver the high-speed, reliable performance required by next-generation wireless technologies. Realtek remains at the forefront of this evolution, focusing on higher-speed solutions and next-generation switches with regional telco projects in India, China, North America and Southeast Asia, driving adoption of new standards such as Wi-Fi 7 and advanced PON configurations. Next, the global automotive market experienced considerable volatility in 2025, marked by events such as Infineon's acquisition of Marvell's Automotive Ethernet business, ongoing disputes involving Nexperia, rising geopolitical tensions and an industry-wide focus on high-performance AI. There was also a renewed customer preference in gasoline and hybrid vehicles, coupled with a noticeable slowdown in electric vehicle demand and sales with November 2025 recording the smallest monthly increase since February 2024 due to a China slowdown and U.S. decline per Reuters report. Despite these headwinds, Realtek's Automotive Ethernet business delivered exceptional results, achieving growth that significantly outpaced our overall corporate performance. Looking ahead to 2026, the automotive industry is undergoing a pivotal shift towards software-defined vehicles. This transition is accompanied by a cooling EV market and rising demand for high-bandwidth network solutions. While local -- while global light vehicle production in 2026 is expected to stay flat or down slightly compared to 2025 according to S&P Mobility, the value of electronics in each vehicle continues to climb with innovation like the smart cockpit featuring AI integration, high-resolution display and seamless connectivity becoming key differentiators for OEMs. Realtek is well positioned to capitalize on these trends expanding our automotive offerings beyond Ethernet to include Wi-Fi, Bluetooth, audio DSP, smart cockpit SoC and display retimer solutions, supporting the evolving needs of our customers.

Thank you, Yee-Wei. Now we are entering the Q&A session. [Operator Instructions] The first question is from Bruce Lu, Goldman Sachs related to growth outlook and first half 2026. Following customer year-end inventory adjustments in fourth quarter 2025, what is Realtek's revenue growth outlook in first quarter 2026? Are you seeing any signs that customer restocking activity is coming in stronger than previously expected? And do you believe this momentum can be sustained into second quarter 2026?

Okay. As commented earlier, following the inventory adjustment in the fourth quarter of 2025, we hold a cautiously optimistic outlook for the first quarter '26 supported by customer inventory restocking alongside strategic prestocking in response to ongoing supply chain uncertainties. Overall, we project a robust first half 2026. However, we remain vigilant regarding the potential impact of rising inventory costs and are closely monitoring end and demand and the spec upgrade cycle across our key applications.

A second question from Bruce Lu regarding gross margin outlook. With respect to gross margin, how does management expect gross margin to trend in 2026? Should we anticipate further improvement driven by product mix optimization and which product lines are expected to be the most meaningful contributors to margin expansion?

Yes. Several market dynamics are influencing our gross margin outlook. We observe a growing preference among OEMs and ODMs for silicon solution with embedded DRAM and/or flash as this relieves them of the complexity of managing memory supply. However, embedding memory components tend to exert downward pressure on gross margin for us, as OEMs and ODMs generally expect nothing but at most a direct pass-through. In light of these factors, Realtek remains focused on cost and performance optimization to ensure we deliver the most competitive products in the market while striving to maintain the current gross margin level.

The next question is from Wei Lun Yang, JPMorgan. What is the cost outlook for 2026 for foundry, package and testing service?

The lost outlook -- the cost outlook for 2026 in the semiconductor foundry, package and testing service sectors is being notably influenced by both the direct and indirect impacts of AI. These impacts are clearly evident, particularly in how production capacities and materials allocations are being squeezed and reallocated to accommodate AI-related demand. For Realtek's market offering, which primarily focus on mature process nodes and packaging technologies, capacity utilization at a macro level is still not at full load. This gives us some flexibility and room to adapt to market changes as they arise. However, this adaptability can be challenged when foundry and packaging houses reallocate a significant portion of their workforce and resources toward more advanced technologies. Such shifts can create ripple effect, leading to increased price pressure throughout the supply chain, as highlighted by TrendForce. Our long-standing strategic partnership with suppliers built on mutual benefit and coexistence give us strong confidence that we can manage to secure supply at competitive costs, maintaining our strong market position in 2026.

The next question is from Astoria Chen CLSA. Regardless of memory substrates and other raw materials, can Realtek pass this incremental cost on to clients?

As we discussed previously regarding embedded memory, our OEM and ODM customers typically expect us to pass through any changes in many -- in memory costs directly without markup. This expectation also applies to increases in substrate and other raw material costs. In more challenging scenarios, customers may even pressure Realtek to absorb certain upstream cost increases. Nevertheless, we are actively collaborating with both customers and suppliers to navigate these pressures and find balanced solutions.

Next question is from Kevin, Mizuho, on demand risk. Do you see demand risk for PC, networking and consumer in 2026, given potential price hike after memory cost increase?

Well, while we acknowledge that rising costs could potentially weigh on demand, current feedback from major customers in these sectors does not indicate an imminent sharp contraction in volume. However, we remain cautious and will continue to closely monitor the trajectory of memory pricing and its broader impact on market dynamics such as deferred upgrade or prolonged replacement cycle.

The next question is from Sunny Lin, UBS, regarding OpEx. How would your OpEx and OpEx ratio trend in the first quarter and 2026? Will OpEx be elevated due to more advanced node designs in 2026?

As we discussed in our third quarter 2025 earnings call, our operating expense ratio has remained stable, including in the fourth quarter of 2025. Looking ahead, we expect our OpEx ratio to continue remaining at current level as we maintain disciplined expense management while driving the mass adoption of AI technologies.

The next question is from Daniel Yen, Morgan Stanley, about order visibility. How long is the order visibility for our products in the near term? Which product line is seeing the most improvement or the most decline?

As part of our long-established best practices, Realtek asks customers to provide a 12-month rolling forecast twice each month. This process enables us to generally align supply with anticipated demand. However, actual order visibility remains limited as customers often adjust order schedule pulling in or pushing out orders to react to changing market conditions even while keeping their overall long-term forecast steady. Currently in response to supply chain uncertainties, we are seeing customers pulling in their orders particularly from the second quarter to the first quarter.

Next question is from Rick Hsu, Daiwa. What is the current channel inventory situation and how are we managing it?

Although Realtek inventory turnover days were elevated for 127 days by the end of the fourth quarter of 2025, we understand that inventory levels across the channel are generally healthy. As previously noted, the high inventory at Realtek was primarily due to seasonal softness in the fourth quarter and our proactive inventory build of strategy to support customers, who have signaled significant order increases after the new year. These orders are intended for restocking and to manage persistent uncertainties in the supply chain. We anticipate a planned increase in inventory levels within the channel during the first quarter, but remain confident that inventories at both Realtek and our distribution partners are well managed.

A question raised by [indiscernible]. The fourth quarter '25 revenue dropped around 11%, but inventory levels surged to TWD 19.5 billion. Is that because the old products such as Wi-Fi 6 digestion is lower than expected? Are we expecting more severe write-offs in the coming quarters? How about Wi-Fi 7 inventory level?

Okay. I do not have the details of inventory breakdown, although suffice it to say, the inventory buildup, as we mentioned, is targeted for the order -- dramatic order increase in the fourth quarter. In terms of the write-offs, it is really a minor part of the total business. We do not expect a frequent recurrence than what we encountered during the COVID period.

Thank you. Yee-Wei. The next question is from Aaron Jeng. Please provide an update on your AI exposure and related product development. Specifically, what are your strategies and future plans within the AI domain?

Realtek's strategic vision focuses on enabling mass adoption of AI in edge devices by making them more user-centric and interactive, recognizing that edge devices are integral components of the broader AI ecosystem, including network infrastructure and AI servers, both on-premise and in the cloud. Realtek is committed to developing connectivity solution that are faster, more flexible and easier to manage. In doing so, our AI solutions aim to unify edge computing, connectivity and cloud computing into a seamless experience. AI is also deeply integrated across all aspects of Realtek operations. We leveraged AI to enhance our daily business processes and drive innovation in product design and testing, enabling us to deliver advanced silicon solutions with built-in AI features. These capabilities empower our customers to seamlessly incorporate AI into their own products. For example, at CES early this month, we showcased a range of innovation, including AI-powered TV and intelligent displays, IoT full color low light, ultra low power multimodal AI SoC, a comprehensive agentic AI ecosystem for smart homes, among others. Beyond integrating AI into Realtek products for a more natural audio visual machine interface, we are seeing increasing adoption of our solutions by data and AI server peripherals. Looking ahead, we are launching an edge optimized AI processor design for industrial and commercial applications as well as ultra high-speed connectivity solution for data and AI servers.

The next question is from Sunny Lin, UBS related to SSD controller. Could you provide an update on the latest development in SSD controller particularly regarding opportunities in NVIDIA AI servers? How many for SSD controller contribute in terms of percentage of sales?

Well, the SSD controller market for NVIDIA AI servers is experiencing rapid change. To seize emerging opportunities, it is essential to accelerate the adoption of PCIe Gen 5, provide customer customization for industrial and edge applications and incorporate advanced management features such as I3C hub. The market remains dynamic presenting substantial potential in both mainstream and specialized sectors. Several industrial clients have already implemented Realtek SSD controllers and I3C hubs in their servers, often requiring various levels of customization. However, Realtek cannot disclose details about specific customers or comment on the contribution of individual product lines.

The next question is from William Young. Regarding optical module, which specific ICs will Realtek provide? Is it a DSP? What is the current status? Do you have any design ins or design wins? Who are the main competitors in the space?