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

Good afternoon, everyone. Welcome to Realtek 2026 Third Quarter Earnings Call. This call is hosted by Realtek's spokesperson, Yee-Wei Huang; and Deputy Spokesperson, Ivy Chen. The presentation materials will be available on the company website before 6:00 p.m. today. At the beginning, our third quarter financial results will be reported by our Deputy Spokesperson. Management's remarks will be presented by our spokesperson. After the prepared remarks, we will proceed to the Q&A session. [Operator Instructions] During the call, you can browse through the pages of the presentation materials at any time. Please note that portions of what are 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 those expressed or implied in such statements. Investors should not place undue reliance on such statements. Now I'll turn this call over to our Deputy Spokesperson, Ivy.

Good afternoon, ladies and gentlemen on the line. You are currently participating in the third quarter 2026 webcast earnings release hosted by Realtek Semiconductor Corporation. Now let's go through the third quarter 2026 financial results. Third quarter revenue reached TWD 37.7 billion, which is up 0.5% quarter-over-quarter and rising a noticeable 27.9% year-over-year. Overall, customer demand remained stable in the third quarter, led by solid momentum in the networking segment. Soft demand in some end markets, including PC, had no material impact on our overall revenue. Following the 2 consecutive quarters of growth, third quarter revenue held a high level, which differs from the seasonal pattern we saw last year, but it began to drop noticeably in the third quarter. The higher average selling price driven by a favorable product mix of higher spec products and pricing adjustments that partially pass through rising cost offset softer unit demand in certain end markets. Third quarter gross margin was 47.4%, up 0.4 percentage points from the previous quarter, but down 2.3 (sic) [ 2.2 ] percentage points year-over-year. As we noted during our second quarter 2026 earnings call, we expected gross margin to recover greatly in the second half of 2026 through a more favorable product mix and disciplined pricing. The third quarter result was largely in line with our expectation. Third quarter operating expenses amounted to TWD 13.8 billion, representing an OpEx ratio of 36.5%, down 0.6 percentage points quarter-over-quarter and 2.6 percentage points lower year-over-year. This reflects our balanced approach of continuing to invest in new products and new market opportunities to support long-term growth, while maintaining disciplined operating expense control. These results underscore our focus on driving revenue growth and improving operational efficiency and effectiveness. Third quarter operating profit was TWD 4.1 billion, representing an operating margin of 11%, up 1.1 percentage points quarter-over-quarter and up 0.4 percentage points year-over-year. The sequential improvement reflects a higher gross margin and a lower OpEx ratio. Year-over-year, the lower OpEx ratio more than offset the decline in gross margin. Third quarter nonoperating income was TWD 606 million, a TWD 39 million decline quarter-over-quarter and a TWD 326 million drop year-over-year, mainly due to the FX loss and financial asset valuation loss. Third quarter net profit was TWD 4.1 billion or 10.9% of revenue, a 0.8 percentage point increase quarter-over-quarter, but a 0.7 percentage point decrease year-over-year. Third quarter EPS as a result was TWD 10.05 (sic) [ TWD 8.05 ] compared to TWD 7.42 in second quarter 2026 and TWD 6.69 in third quarter 2025. Moving on to the inventory. The third quarter inventory turnover days were 136 days compared to 107 days in the second quarter. The increase mainly reflects a build of Known Good Die inventory for customers. This is a deliberate decision to ensure supply continuity for our customers amid ongoing supply chain uncertainties. We will continue to maintain appropriate inventory level as needed while closely managing our overall inventory health. This concludes Realtek's third quarter '26 financial results.

Thank you, Ivy. Now our spokesperson, Yee-Wei, will give the management's remarks.

Thank you. Looking ahead to the fourth quarter, Realtek maintains a prudent and steady outlook for its operations and will closely monitor the impact of external factors, including supply chain capacity allocation and continued increases in upstream costs. Now let's examine the key market segments Realtek serves. The networking market. Networking demand remained fundamentally resilient in the third quarter, supported by steady infrastructure upgrades and an ongoing transition to higher bandwidth solutions. Our multi-gigabit Ethernet solutions delivered healthy growth as adoption expanded across routers, PON, small medium business networks, and servers. Our managed switches continue to gain share across enterprise, SMB, and server control plane applications, narrowing the gap with our unmanaged portfolio. In WiFi, the WiFi 7 penetration in PCs and routers has progressed as expected and is on track to approach approximately 30% this year, while 2027 design-ins are increasingly shifting to WiFi 7. Looking further ahead, development of our next-generation WiFi 8 solutions remains on track for mass production in the second half of 2027. The automotive market. While overall vehicle shipments remain broadly flat, automotive Ethernet adoption continues to expand steadily in new car models. Realtek's automotive revenue is growing steadily, supported by structural increases in more Ethernet ports per vehicle and higher dollar content as automakers transition towards zonal and software-defined architectures. Our industry-first Ethernet switches with ASIL-D functional safety certification are securing steady design-ins with leading global OEMs and Tier 1 suppliers, strengthening our leadership in automotive network ecosystem. The consumer electronics market performance across the consumer segment varied in the third quarter. Realtek's IoT business posted solid quarter-over-quarter and year-over-year growth, supported by resilient demand, our strong position in smart home devices, and expanding end market applications. Our IoT platform solutions, which integrate multimodal AI, WiFi, audio, and imaging, continue to gain traction across smart home and connected edge devices. TV shipments slowed after the midyear FIFA World Cup replenishment, and amid persistent component cost pressures. Although Realtek's TV SoC business remains competitively positioned, game console hardware shipments also faced near-term headwinds from elevated memory and storage prices. Nevertheless, Realtek outperformed the broader market as our products gained wider adoption across major gaming platforms and peripherals. The PC market. In the third quarter, our PC and non-PC products accounted for approximately 30% and 70%, respectively. The broader PC market continued to face challenges in the third quarter. Against this backdrop, shipments of desktop and notebook solutions declined sequentially, while peripheral demand held up better. Preliminary data from IDC and Gartner indicate that worldwide PC shipments fell 20.1% and 22.4% year-over-year in the third quarter, respectively. The decline reflected persistent component inflation, particularly in DRAM and CPUs, which raised retail prices and weighed on consumer and entry-level purchasing power. Early order pull-ins also distorted normal seasonality, IDC projects full year 2026 PC shipments to decline by 11.3% with weakness potentially extending into 2027. Despite these short-term headwinds, Realtek continues to outperform the broader market through higher content value and specification upgrades, including 2.5-gigabit Ethernet, 5-gigabit Ethernet, and 10-gigabit Ethernet, advanced audio codecs, and AI camera controllers. Now mid- and long-term growth engines. In this, we see while supply chain and cost uncertainties limit near-term visibility, we remain confident in our multiple medium- to long-term growth prospects. Key drivers include specification upgrades and market share gains in our core networking segment, high-performance computing as a new growth driver engine, and edge AI opportunities across automotive, unmanned vehicles, robotics, and broader AIoT applications.

Thank you, Yee-Wei. Now we are entering the Q&A session. [Operator Instructions] The first question is from Astoria, CLSA, regarding demand outlook. Fourth quarter is traditionally a slow season. Should we expect a quarter-over-quarter decline as usual for the early pull-in in the first half? Or are you seeing end consumer demand hold up better than expected?

Well, overall, order momentum remains stable heading into the fourth quarter. We are working with OSAT partners to ease capacity constraints and better meet customers' demand. While the fourth quarter is typically seasonally softer, we may not see the usual revenue slowdown this year, supported by higher ASPs from a more favorable product mix and pricing adjustments. Within this generally stable demand environment, the PC end market remains relatively soft. We saw a notable year-over-year decline in the PC end market in the third quarter and expect further weakness in the fourth quarter, consistent with our initial outlook for a full year decline. Despite this near-term softness, we continue to expect growth across all key segments we serve in 2026, including our PC business.

The second question is from Haas Liu, Bank of America, on 2027 initial outlook. Could you discuss the end market outlook into 2027 compared to your view 3 to 6 months ago? Are you seeing incremental strength or softness?

Now looking ahead to 2027, we expect steady top line growth, in line with our view 3 to 6 months ago, driven by higher ASPs, ongoing product specification upgrades, and new product launches. At the same time, we remain mindful of potential cost increases across the semiconductor supply chain. We believe that our broad and balanced end market exposure and our diversified product portfolio position us well to capture growth opportunities. Within our existing product portfolio, we expect wider adoption of WiFi 7, multi-gigabit Ethernet, and 10G PON to support a more favorable product mix. We are also gaining additional design-ins in higher-end managed switches. Our automotive business is expected to grow steadily, supported by wider adoption of automotive Ethernet and switch solutions as well as new product ramps. Last but not least, we are advancing in both AI server and general server applications, while expanding our presence into a broader range of AIoT applications.

The next question is from Kevin Wang, Mizuho, about the gross margin outlook. How should we expect gross margin ramp in fourth quarter 2026 compared with third quarter 2026? How should we expect your gross margin outlook after factoring foundry and OSAT cost hikes and your price adjustments in 2027?

Now as we noted on our earnings call last quarter, we expect gross margin to gradually recover in the second half of 2026, and that remains our expectation. In 2027, our goal is to maintain a stable growth, while balancing revenue growth, market share, and profitability. With foundry and OSAT costs remaining fluid, we will take a measured approach to pricing rather than pursue price increases solely to lift gross margin. We are working closely with our supply chain partners and customers to find mutually acceptable solutions to manage these cost pressures.

Next question is from Haas Liu, Bank of America, about OpEx trend. Given the high portion of your revenue growth coming from price expansion rather than unit demand growth, how should we think about the operating expense growth versus your sales growth?

Well, first, our growth actually comes from both price expansion and unit growth. As you see from our third quarter results, our OpEx ratio declined slightly from the second quarter. While keen on investing in new product development, we are maintaining disciplined operating expense management. In the near term, we expect this ratio to remain broadly stable at current levels. Longer term, as we expand our value-added solutions and enter higher-end market segments, we expect to achieve greater operating leverage, allowing revenue to grow faster than operating expenses.

The next question is from Rick Hsu, Daiwa, regarding inventory across the value chain. What is the current channel inventory level? Could you also share your perspective on customers' inventory management?

Based on our current visibility, inventory levels across the value chain of our customer base remain generally healthy with no signs of intentional customer inventory buildup in fourth quarter '26.

The next question is from Daniel Yen, Morgan Stanley, on supply conditions. Could you comment on recent pricing trends and industry supply conditions across mature node foundries, memory, and OSAT? And OSAT specifically, have OSAT allocation bottlenecks and lead times improved in the third quarter, and did the elevated work-in-process convert into finished goods as planned?

Well, true, overall supply chain conditions remain challenging with no near-term relief in cost pressures. The prioritization of AI servers continues to create bottlenecks in supply chain capacity. To mitigate these constraints, we have been diversifying our supply base by qualifying additional upstream partners. Because supplier qualification and production transition takes time, these efforts will continue throughout the remainder of 2026. We expect more meaningful supply improvements in 2027. From an engineering perspective, we are also applying Design for Availability principles to reduce reliance on constrained materials where it is feasible. Cost increases have exceeded what we can reasonably absorb. Since June, we have, therefore, begun engaging with customers to discuss price adjustments on a case-by-case basis, taking into account product categories, supply conditions, and long-term relationships. Looking ahead to 2027, we will continue to closely monitor cost trends, taking appropriate actions as needed and optimize our product mix with the aim of maintaining stable profitability while pursuing healthy revenue growth.

The next question is from Sunny Lin, UBS, on WiFi 7 penetration. As we are heading towards the end of the year and with WiFi 7 penetration for 2026 at 30%, how about the outlook for 2027?

Well, with adoption gaining momentum in 2026 and most major new customer designs now based on WiFi 7, we are increasingly optimistic about the outlook of WiFi 7 in 2027. As these platforms ramp, we expect WiFi 7 penetration to rise meaningfully to around 40% in 2027.

The next question is from Rick Hsu, Daiwa, related to WiFi 8. Market expectations for WiFi 8 commercialization appear to be moving forward with major chipset vendors preparing mass production in late 2026 (sic) [ 2027 ]. Does management believe the industry could enter a meaningful WiFi 8 upgrade cycle in 2027? And how well-positioned is Realtek to capture this opportunity related to the WiFi 7 penetration?

Well, the WiFi Alliance has locked in the following key milestones for WiFi 8. After the global PlugFest interoperability trial, the first large-scale precertification test event took place simultaneously in Beijing, Taipei, and California during September 7 to 11. The key milestones include next year, by June, WiFi Alliance targets completion of the certification test plan. And by September 2027, official WiFi 8 certification will be launched. With that understanding, while expecting and preparing for additional rounds of WiFi 8 PlugFests, we are actively working with customers on WiFi 8 design-ins and expect our WiFi 8 products to begin ramping up in the second half of 2027. We expect customer products based on these solutions to become more widely available in 2028 after the official WiFi 8 certification launch, with broader adoption developing more meaningfully thereafter. Building on WiFi 7, WiFi 8 focuses on ultra-reliability and lower, more consistent latency in real-world conditions. We believe these enhancements give WiFi 8 the potential to become a widely adopted platform and have a long product life cycle. Our WiFi 8 solutions are being developed with industry-leading specifications, combined with our active engagement with customers on design-ins. This positions us well to benefit from the transition and create opportunities for further market share gains. In the meantime, we continue to capture the growing WiFi 7 opportunities in 2027.

The next question is from Sunny Lin, UBS, on managed switches. What's the latest progress of your share gain in managed switches? What's the split between managed and unmanaged switches for your switch sales and shipments?