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Edited Transcript of 2454.TW earnings conference call or presentation 28-Apr-17 8:00am GMT

Thomson Reuters StreetEvents

Q1 2017 MediaTek Inc Earnings Call

Hsin-Chu City May 14, 2017 (Thomson StreetEvents) -- Edited Transcript of MediaTek Inc earnings conference call or presentation Friday, April 28, 2017 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Ku

MediaTek Inc. - CFO and Corporate SVP

* Jessie Wang

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Conference Call Participants

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* Brett Simpson

Arete Research Services LLP - Senior Analyst

* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* Donald Lu

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Gokul Hariharan

JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst

* Michael Chou

Deutsche Bank AG, Research Division - Semiconductor Analyst

* Randy Abrams

Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

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Presentation

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Operator [1]

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Welcome to the MediaTek 2017 First Quarter Investors Conference Call. Your speakers today are David Ku, MediaTek CFO and spokesman; and Jessie Wang, MediaTek Manager of Investor Relations.

Now I would like to turn the call over to Ms. Jessie Wang. Ms. Wang, please go ahead.

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Jessie Wang, [2]

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Good afternoon, everyone. Welcome to MediaTek's First Quarter 2017 Conference Call. As a reminder, all content provided on this teleconference is for informational purposes only, not intended for investment advice. Neither the issuer nor any of inspector and providers is liable for any actions taken in reliance on content contained herein. MediaTek provides non-TIFRS financial measures as supplemental information. Earnings distribution is made in accordance with financial statements based on TIFRS. Unauthorized recording or redistribution of the video, audio, text and the presentation contents of this teleconference is strictly prohibited. By participating in this teleconference, you agree to accept the foregoing terms and conditions.

Now let's start with the 2017 first quarter financial results. The currency here is in NT dollars. Revenue for the quarter was $56.1 billion, down 18.3% sequentially and up 0.3% year-over-year. Gross margin of the quarter was 33.5%, down 1 percentage point sequentially and 4.6 percentage points year-over-year.

Operating expenses for the quarter were $17.6 billion compared with $19.7 billion in the previous quarter and $16.9 billion in the same period last year.

Operating income for the quarter was $1.2 billion, down 69.6% sequentially and 72.5% year-over-year. Operating margin for the quarter was 2.2%, decreased from 5.8% in the previous quarter and 7.9% in the year-ago quarter.

Net income for the quarter was $6.6 billion, up 29.2% sequentially and up 48.4% year-over-year. Net profit margin for the quarter was 11.8%, increased from 7.5% in previous quarter and 8% in the year-ago quarter. EPS for the quarter was $4.29 compared with $3.23 in the previous quarter and $2.79 in the same quarter last year.

In addition, in order to provide a more comparable valuation basis with global semiconductor peers, from this quarter, we try to provide supplemental non-TIFRS financial measures, excluding share-based compensation, amortization of acquisition-related assets, tax effect [and other items]. A reconciliation table between TIFRS and non-TIFRS results is included in the earnings press release and the presentation.

For the first quarter of 2007 (sic) [2017], non-TIFRS operating income was $1.8 billion, down 60.5% from previous quarter and 62.6% year-over-year. Operating margin was 3.2%, lower than 6.6% of previous quarter and 8.5% in the year-ago quarter. Non-TIFRS net income was $7.1 billion, up 27.2% from previous quarter, and up 48.9% from same period last year. Net profit margin was 12.7%, higher than 8.2% in previous quarter and 8.6% in the year-ago quarter. Non-TIFRS EPS for the quarter was $4.60 compared with $3.53 in the previous quarter and $3 in the same period last year.

Looking forward. For the second quarter of 2007 (sic) 2017 , we expect revenue to be in the range of $56.1 billion to $58.6 billion at a (inaudible) exchange rate of TWD 30 to USD 1. We are forecasting gross margin at 34%, plus or minus 1.5 percentage points and the quarterly operating expense ratio to be at 30% plus or minus 2 percentage points.

For shipments. We expect shipments of smartphone together with tablets to be around 110 million to 120 million units in the second quarter.

That concludes my comments. And now I would like to turn the call to CFO, David Ku, for Q&A session. May we have the first question please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is coming from Randy Abrams, Credit Suisse.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [2]

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First question I wanted to ask, I guess, a quick clarification if you gave the first quarter smartphone and tablets. I think second quarter is 110 million to 120 million. And the second part for this, the second quarter guidance, if you could maybe talk about relative strength, relative to that guidance or relative weakness, like maybe which product areas may outgrow the company average or if any area is kind of lagging that overall guidance.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [3]

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Randy, I think for the first quarter is the passing quarter, so the guidance we gave out for the smartphone and tablet shipment was 105 million to 111.5 million units. Second quarter basically is -- the volume actually is pretty much the same size, is 110 million to 120 million. If you take a look by the 3 category we talk about, basically the mobile computing segment, the growth segment and also the stable segment, I think from a growth rate perspective, probably the growth segment was (inaudible) segment's strongest growth rate. We're talking about among and on a q-on-q basis, I would say a couple digit. And the next one, in second quarter, I think the (inaudible) probably has the second strongest growth rate in second quarter. For the mobile computing, I think we're still looking for a (inaudible) gross, our internal growth rate I think is relatively mild.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [4]

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Okay. And I wanted to ask on the mobile outlook where it's like relatively mild. Maybe just talk how much you think is a overall market or maybe a second inventory overhang issue in the market. And the other side, I guess, like if you're seeing any incremental -- maybe it's just a short-term issue about whether it's either high-end share loss or if at the low end, you're seeing any impact yet from Spreadtrum on kind of low-end 4G. So if it's any issue of share and how much is kind of market or inventory.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [5]

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Yes. Well, I think from all perspective, also combined with all of the input we got from our customer, I think what we see about second quarter is, compared to first quarter, we see some signal of recovering. But it's really, I would say, pretty weak and slowing recovering. And so that's why you see in the second quarter, if you only focus on mobile computing sector, I think growth rate is relatively weak. But if you're judging from the full year perspective, I think most people in this industry, including us and also our customer, were kind of expecting that the second half this year, we should be able to see the demand coming back, maybe starting from the beginning of the third quarter. So for the full year perspective, we're still looking for another year of end-market growth. And hopefully, our market share growth will be in line with end-market growth. But just from first half, second half perspective, this year, obviously, first half is relatively weak. And I think everyone is still quite optimistic about the second half demand profile. But in terms of inventory -- or channel inventory issue, we don't see any major issues out there because starting from first quarter, I think all major cellphone players are all cautious about inventory issues. So I think the relative weak demand somehow is basically is -- I think for the relative weak demand, first quarter and second quarter, most of the smartphone players is aware of that. So when they're building the channel inventory, actually they're having a pretty mild one, cautious about building the channel inventory. So I guess that's why we didn't really see any big problems about the channel inventory. It's mainly on the demand side.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [6]

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Okay. And on your own balance, I think on the prior call, you mentioned it would stay around 90, 95 days. I'm curious if there's any areas you have maybe a concern about your inventory levels or maybe also how you'd view kind of normal levels like say by second half or end of the year like what the right level for inventory should be given the cycle times and everything.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [7]

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Well, I think, in general, I will see the days of inventory as relatively high, here, within normal range. Because as I explained in the Chinese call, for the first quarter, the inventory days we've got was roughly 88 days is close to 90 days. And in the second quarter, I would say it's pretty much the same. But don't forget the way -- the accounting ways of our calculating the inventory days is actually pretty much based on the Q2's revenue. But in reality, when we manage our inventories in Q2, we also need to take into consideration about what the potential revenue ramp in the third quarter. So if you take that into consideration and a couple would say in second quarter, in terms of accounting ways, calculating the inventory days stay the same. But if the third quarter demand coming up, I think the inventory issues is less of an issue from our perspective.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [8]

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Okay. Then one last question. This year, I think it was a big development like having -- finally getting into Samsung. I'm curious as -- in your first half guidance is there much from that customer or do you also -- at least based on what you see, could that be a potential first half to second half where maybe more of the models are tied to second half? So I'm curious what we could expect if there's much incremental boost as we go through the year from that.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [9]

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Well, I think, in general, we won't be able to comment on a specific customer. But in general, I think let me try to answer your question from a different perspective. Well, first of all, yes, Samsung is our customer right now starting from last year. And I would say that overall, the partnership to the customer, all the customer relationship between MediaTek and Samsung is working out smoothly. So we do expect we can continue to gain more market share within this account. Third quarter -- first quarter numbers, and also including the second quarter numbers, they are part of the -- part of that, the revenue actually is coming off Samsung for sure. I think we do expect we should be able to get actually more to this account maybe in second half this year based on the current design in and the end design win status.

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Operator [10]

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Next we're having Gokul Hariharan, JPMorgan for questions.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [11]

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David, first thing I wanted to ask is, I think after this whole 10-nanometer X30 development, et cetera, it looks like the volume has not really been as high as you expected. Any change in terms of the approach in terms of targeting the really flagship segments because looking at that market, it seems like there's only like 1 or 2 customers who really need that kind of silicon and don't do it themselves. So is there any change in terms of the approach, in terms of what MediaTek would want to do in the future product cycles on this, like, really high-end flagship chips, given that I think the OpEx cost, market cost, development cost, et cetera for that is really high? And at least based on this year's evidence, I think the output has not been that great.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [12]

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Okay. I think in terms of product portfolio strategy, we do have -- I won't say, change of strategy, but I would say some revision of our product portfolio strategy. So as you can tell, for this year, especially for second half this year, our focus right now is really on the Helio P series product and also on the non-Helio product, basically the entry levels and the mainstream product. I think we put a lot of focus of ours, especially for the next -- the P series products, which is a better constructed product and ideally, we have the gross margin coming up on this new product. I just want to clarify. When new product we talk about here, it's not (inaudible) P25, P30 we talk about, it's actually the next-generation product which the customer started shipping [third] quarter this year. So given the overall limited resource, R&D resource we have, we do re-prioritize our product portfolio this year. I think the earliest this year will come X30. Right now, actually, we had several design-ins going on. But in terms -- so the major resource allocation this year is really the P series, so the entry-level product. So we do believe given the limited resource we have, maybe that's the top priority we should focus right now, given the competition's landscape [solid] and also given the course element, the pressures internally we have. So it is revisions about the overall product portfolio, but it doesn't mean we're giving up Helio. I understand some people are out there talking about we might have given up Helio. I think that's probably going to be the wrong interpretation. I think the better interpretation should be, we still keep the Helio and non-Helio product, right. And we think the Helio we'll still have the X series and the P series. It's just a matter of the re-prioritize. Right now, at least for this year, we put the Helio P series as priority; we put the non-Helio products, as the entry-level products, a priority. For the X series, I think we got X30, we believe with the strategy, it should be good for the full year. And the next generation of X product will be coming out for next year, rather than this year. So we make some shift about the project, the sequence basically.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [13]

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Okay. And just to kind of (inaudible), so you mentioned the P series that will have that new cost structure and potentially better gross margin is the model beyond the P25 and P30, right?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [14]

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Right.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [15]

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It is the last step.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [16]

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Yes.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [17]

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And what is the timing, is it Q3 then you expect that to come out or…

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David Ku, MediaTek Inc. - CFO and Corporate SVP [18]

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No. I think the first revenue basically, the first customers start to ship we're looking for is end of Q3 basically.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [19]

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Okay. Okay, Okay, understood. The other question I had is, looking at the numbers from Qualcomm as well, it looks like there is a little bit of a share loss for MediaTek. I think you had flagged that before last year itself. I just wanted to kind of, I think, just a corollary to Randy's question itself. Is that happening mostly at that flagship segment where you had a lot of market share with P10 last year, with some of the Chinese brands and that seems to be kind of going away a little bit? Or is there any share loss that you see in the mid-end and entry-level segment also? And from what you see in terms of the product cycle, is that -- should we expect that the stronger products, therefore, go back over MediaTek should start kind of coming back when you have this new post P30 kind of P series models coming in towards the end of the year? Is that kind of the realistic timing when we should see more share gains for MediaTek again?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [20]

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I think for first half this year, we do have some market share loss, as we explained in the previous -- in the last quarter's earnings conference, and for the following reasons. First of all, one of the reasons is actually our product portfolio because we -- I think for the mainstream products, software products, doesn't really have category 7. We only have category 6. So for basically [2,000 R&Ds] of the product, right now, is required category 7. So due to the spec issue, I think we lose some of the market share due to that particular spec. I think that's reason number one. Reason number two is actually when you look at the X series product, basically that's our flash product, I think in the past, for people like Xiaomi, and also people like Meizu and also for people like (inaudible), there are probably 3 others that are -- is probably the 3 most aggressive customer who actually is promoting our X series product. But due to the financial issues on (inaudible) side and also due to the channel strategy on Meizu and Xiaomi side, I think the market share we have, especially for the X series market share we have, on that 3 customer, I'd say it's getting -- is you're losing some market share. So I would say it's actually 2 reasons. The X series product, we're losing some market share; and also due to the category 7, we lose some market share as well. But we do believe with the new product portfolio coming out, starting from second half this year, we should be able to gradually get those market shares back, starting from third and fourth quarter this year.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [21]

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Understood. Can I also ask, I think Q4, we did see some pressure from, I think, India market being pretty dramatic slowdown because of all the changes in the policy and demonetization. Feelings like that is not really coming back in terms of demand. Is that a fair assumption? Have you seen any recovery in some of those entry-level markets? Or is it something that needs to wait for the typical big seasonality to kick sometime in Q3?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [22]

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Well, when we talk about for the second quarter, the overall end-market demand is relatively weak, even though we see some early signs of recovery (inaudible) and recovery and some 3D recovery, it's actually across different geographic markets, which including China, India, Southeast Asia, or even Africa. So I would say it's a global event rather than a regional event.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [23]

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Okay, okay. And when you talk about recovery in second half, is that recovery also anticipated mainly at the mid-end and entry-level kind of segment or is it across the board?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [24]

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Well, I think what we can have, actually -- is our view is actually the entry level and also the midstream product probably is the sectors with the strongest growth, yes.

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Operator [25]

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Next in line, Donald Lu from Goldman Sachs.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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David, just a few follow-ups from the earlier meeting. The growth area has IoT power management IC and there is something else that (inaudible) mentioned.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [27]

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Yes. Well why don't I walk you through, so one by one. I think that in terms of revenue contribution, in terms of size, the largest one of them is the growth engine or the growth sector is really the WiFi business, okay? So that's the first one. The second one is the Richtek, the power -- the [premium] business. The third one is actually the IoT, which including the wearable, the smart home and also the new, something we call the voice-assisted device, basically the Amazon-like device. So that's all included in IoT is the third one. The fourth one is set-top box, okay? The last one is the customer ASIC business. So all those segments, all those business product lines are in the growth segments.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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What kind of ASICs you're making? I haven't heard about that.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [29]

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For example, right now, for the global 2 major players for game consoles, actually, we have provided ASIC to all 2 major game console players. That's just white demo because we actually start from something we call the upload storage ASIC, then we turn down from -- expand that from article storage to Bluetooth and WiFi and also including the southbridge and also into the controller. And another example is actually we're working with some leading consumer product companies, the VR device as well. So actually there are few customers out there, but are all the global leading customers.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Okay, great. Another question I have is can you give us -- just review the schedule for the new P series products, the ones with the new modem architecture and the dual timer, et cetera? The P25, P30, P35, like when is the launch and when is the shipment?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [31]

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I think for -- why don't I explain it this way, okay? For the P25 and P30, P25, I think the customer will start shipping third quarter. And P30, customer will start shipping fourth quarter, maybe first quarter next year depending on how soon or how late they get ready. I think that's 2 new products coming out. But that 2 new products, by the way, this is all on the high-end. When I say high end, I'm talking about basically the category -- it's all category 10 and above. But we also have one more P series product coming out in third quarter this year. I think that's a category 7 on the modem side and also it's a pretty decent CP performance. I think that one will be coming out with the new modem architectures. But for P25 and P30, that's still on the previous generation's modem architecture. So for this year, if you're judging based on what product are coming up on the new modem architecture, there'll be 2 products coming out, one's actually the Helio P product coming out in third quarter; another one is the entry-level product, the non-Helio 4G product coming out in the fourth quarter this year. So that new product are all based on the new modem architectures.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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Okay. So the P series is the new modem will be launched in Q3 and shipping in Q4?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [33]

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Yes, yes.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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And the entry-level will be launched in Q4 and shipping in Q1 or also in Q4?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [35]

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No, it's -- yes. I think we'll be shipping the end of Q4. It's very small volume coming in Q4, starting revenue in Q1.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Okay. So those are -- the P25, P30 are the old modem architecture and they're (inaudible).

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David Ku, MediaTek Inc. - CFO and Corporate SVP [37]

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Yes, I think probably the better way is actually the different modem architectures, because when we try to optimize the modem architectures, for the new product this year, well, actually both are category 7 and below. But for P25, P30, I think they actually is beyond category 7, so it's different modem architectures.

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Operator [38]

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(Operator Instructions) Next, we're having Charlie Chan from Morgan Stanley.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [39]

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David, I just want to clarify. Do you have P35 in your product road map? P35?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [40]

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We have one new P series coming out. But we haven't finalized what the product name will be. Internally, we have a code name, but internally, it can be P35, P25 -- or 27. It's not even finalized yet. The better way to think about that is, actually, we will have a new P series coming out this year. It probably start shipping the third quarter and they will be coming out with the new modem architecture. Okay. For P25, P30, the product people know out there, they're actually still on the old modem architecture, probably that's the easy way to think about that.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [41]

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Okay. So for the new P series, you're looking at new modem architecture. Do you intend to replace the [650T] products that are mid-end 4G or you intend to replace the P35? Because the 2 product seems to be (inaudible) at the same time. How would you differentiate?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [42]

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Probably start with the mid-level 4G because P25, after all, is just coming out. Because P25 and also the new P series are coming out pretty much on the same time frame, so it's try on different segmentations. Both products should be coming out -- the customer start the shipping in third quarter.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [43]

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Okay. Okay, that's clear. And I wanted to follow -- go through the question regarding the emerging handset market demand because I think when emerging markets demand slow down, some smartphone makers plan to currency, plans to key components shortage. But going into second quarter, we see some ease of -- at least for smartphone display, now projects (inaudible). And currency seems to be stabilized, right? So besides those macro issues, component issues, do you see other reasons that why year-end smartphone demand continue to be slow? Because as you commented before that 4G replacement should continue, right, why is sales so slow?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [44]

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Well, I think, overall, when we talk to our customers and also we talk to the specialty retail chain with the different site geography -- the retail chain are in different geographic area. To be honest, we don't have a good picture about why the demand both in first quarter and second quarter is kind of slow. Because if you look at the currency issue, [regardless] for first half this year, at least for first quarter, is we're getting our first quarter ready, by looking forward into the second quarter, this year, we didn't really see any big currency movement or currency issue in most of the emerging markets. So unless we know, currency may not be one of the major reasons which behind that so the demand's sluggish in first quarter and second quarter. So showing this, actually, we don't have good answers as to what's behind that, so with the relatively weak demand. But the weaker demand in the first quarter and second quarter somehow is a factor yes.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [45]

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Okay. And do you -- would you agree the comments that for China, for instance, for those high-end segments, they are facing some challenges, making up new features? Do you see any feedback like that, like this, that those customers' smartphone can't get sold because of lack of new features?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [46]

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Maybe the better way to answer your question is by saying when we talked about the demand weakness, right, it's really across all segments. So we didn't really see, say, the high-end product with really strong demand or likewise actually, it's a low-end product, entry-level product which is strong. It's really just across the whole segments. So again, to answer your question, whether or not it's because there's no new features or purely in features, again, so far actually, we don't have a good handles on that.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [47]

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Okay, yes. And lastly, again, on gross margins trend. I'm not going to (inaudible) your margin trends, but for third quarter, it seems like you are expecting the low-margin smartphone business to pick up again. Is that fair to say that (inaudible) margin would decline again and where will be the bottom for your third quarter gross margin?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [48]

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First of all, I think on a corporate average side, the gross margin, it really depends on what's the -- I would say, the product mix or the [units] if you like. For example, like for this quarter, right, we try to give out the break down for the revenue for the mobile platform, which accounts for 40% to 45% -- 45%, 50%. In second quarter, I think the numbers -- the revenue contribution from mobile computing I would say is pretty much in line with what we have in first quarter, maybe slightly less. But in third quarter probably was just slightly more compared to first quarter. And that will definitely just put some more pressures on the blending gross margin from the corporate side. But I think that we're also kind of expecting even for the smartphone on mobile computing sales by third quarter, actually, we should be able to see some support on the gross margin side. So on a net-net basis, I would say, so far, we still feel comfortable to see gross margins at least stabilize, if not coming back a little bit, starting from third quarter. Or another way to look at this, actually, if you're only judging on the first quarter versus the second quarter, I think right now, the second quarter gross margin compared to first quarter is pretty flattish, mainly I think even with opportunity coming up a little bit when we come through the second quarter.

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Operator [49]

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Next in line, Gokul Hariharan, JPMorgan.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [50]

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Just a couple of follow-ups, David. I just wanted to understand. Is there any meaningful changes in the breakdown of how you're allocating your R&D spending and OpEx? I think -- if I'm right, I think you said about 40%, 45% of the OpEx is going to smartphone. Could we compare that with what it was last year? I think it was more than 50% and how should we think about it going into the next few quarters or maybe even into next year? What is kind of like -- you've talked about, like, for some product priority changes. Does it also encompass spending less money on smartphone and moving on to some of the growth areas as well?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [51]

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For R&D spending amount difference product segments with means the mobile computing, the growth sector and also the stable sector. I would say for this year, it's going to be, say, starting from first quarter to fourth quarter, the ratio will be pretty similar. It's normally when we're allocating or readjusting the RD resource probably it's going on an annual basis rather than on quarterly basis, especially for smartphone this year. We've still got a few more product need to coming out. So on the quarter-over-quarter, basically I think we foresee we're going to do any rather dramatic or (inaudible) adjustments among different business segments, okay. But if you compare this year versus last year, at end of the year, actually, the resource being allocated to smartphones is actually coming down a little bit. I would say it's pretty flattish, to be honest, maybe coming down a little bit, but it's pretty flattish. But for the full year, I kind of explains, we probably spend, again, roughly 50% of R&D resource on the smartphone side. Because this year is still a crucial year for us because we need to secure this R&D resource on the smartphone side to make sure we migrate most of our products into the new modem platforms. This year, only 2 products are coming out. Obviously, they are (inaudible) so we will continue to migrate into the new modem platform. I think based on the current product portfolio, the next wave of others product which are not being upgrading into the new modem platform yet, will be upgraded starting from second half -- second quarter next year. So hopefully, by third quarter next year, all our smartphone products will be migrating to the new modem architecture. So before -- unless that's happening, I guess, the resource we allocate into smartphone will probably stay probably largely the same.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [52]

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Okay, great. What are you seeing from a pricing perspective? Is there any change in the nature of the pricing behavior, both in China as well as in emerging markets? I mean, last year it has been very competitive. Is it still going -- are you still continuing in that manner or do you see any changes there?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [53]

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Well, I think for the competitive, I would say, landscapes or situations out there, it's -- let me see what's the best way to describe it. It's pretty much the same, okay. I was trying to use the word stabilize, but I don't think that's the right way to describe it. It's probably stayed the same, which is actually pretty (inaudible) out there. It is basically core companies, they still competing quite aggressively in this space. It isn't really slowing down, but on the other hand, digital (inaudible) are getting digital ratings. So I would say stay the same, but it's still pretty competitive (inaudible).

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [54]

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Okay. And any initial directions in terms -- given the management changes up there, any major initiatives that we should think about? Also, could you talk a little bit more about -- I think there is -- there seems to be a little bit of a reshuffle in terms of MediaTek parent versus MediaTek holding companies in terms of restructuring the businesses as well. Could you talk a little bit about what is the objective beyond that and how does that help you prioritize your resources going forward?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [55]

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Okay. Well, probably your second question first, okay? I think one of the major reason why now actually we're trying to put more focus in also allocating some more resource into the group company really only on MediaTek, is because if you, by looking at MediaTek (inaudible) portfolio, like what I explained to Donald earlier on, for the growth segment, we have WiFi business, we have Richtek business, we have (inaudible) business which is coming now for MStar. We have IoT business; we have ASIC business. So it's truly -- for me, it's truly a well planted of MediaTek internal business units. And also as a company basically within group. For example, Richtek is one of the group company; MStar obviously is another group of company. And also WiFi business right now is internal BU, but it's coming out from the MA of Ralink. So we do believe actually, that we should be able to create a [soundless] synergy among different, so that the group companies by allocating some more resources. So while the initiative basically is a -- I think that's also in line, somewhat relates to your earlier question. The first question is through this new management team on board, for the new leadership team on board, Rick basically will be the co-CEO. In the same time, we also expand our management bandwidth by now actually with more resource to focus on the group company really and only focus on MediaTek alone. I think that's (inaudible). Again, we do believe if we can somehow create a synergy among -- we can create more synergy among the group company, I think there will be more of the growth driver is also maybe -- really [the answer] as well from the group company perspective.

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Operator [56]

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(Operator Instructions) Now we're having Michael Chou, Deutsche Bank.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [57]

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Just some housekeeping questions. So for your Q1 smartphone shipments, should be in line with your previous Q1 guidance, right. So should be...

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David Ku, MediaTek Inc. - CFO and Corporate SVP [58]

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Correct. Well, I think for Q1, again smartphone plus tablets, the guidance we gave out was 105 million to 111 million -- 111.5 million. I think basically somehow in the middle of that point basically.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [59]

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Okay. Sure. Second thing is when you say the new modems, so you're referring to cat 10, right?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [60]

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The new modem is cat 7.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [61]

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Cat 7.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [62]

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The [cost down] version modem basically is coming out this year is actually is cat 7.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [63]

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I see. Yes, sure. Okay. So you say the new modem to see initial revenue from the end of Q3, right?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [64]

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End of Q3. Yes.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [65]

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Okay. So in theory, your smartphone gross margin just may start to pick up in Q4. But if you can see the (inaudible) cost-down solution, everything together.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [66]

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Right. But overall speaking, I think that the number we have here, especially the new product -- let's define new products and new cost-down product. The new cost-down product contribution in third quarter I would say is less than 5%, 5% in smartphone revenue. In fourth quarter, I would say the revenue contribution from new modems will be greater, but overall, I guess, is still going to be less than 20%. I think that's the focus we have right now.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [67]

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Okay. That's very clear.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [68]

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So we will get some benefit out the new modem architecture. But overall, I guess the magnitude is still not big enough, but at least on the right track.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [69]

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So should we expect the overall gross margin to pick up from Q4, I mean, for -- compared to gross margin?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [70]

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Well, I think if everything goes well, we should be able to see some picking up, that is starting from Q4, yes. Stable in Q2 and Q3 and picking up a little bit in Q4.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [71]

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Okay. So for all your new cost-down cat 7 [or 10]. Would that be all based on sales nanometer 12?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [72]

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Currently, it will be based on 16 and 28. The entry-level will be -- because we have 2 new products coming out this year based on the new modem architecture. One is on the Helio P series, that will be a 16 process node. The entry-level one will be still on 28, which will be coming out in third quarter this year.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [73]

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Okay, okay. So you won't use a 20-nanometer for cost-down solutions. So is it a feeder?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [74]

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Not this year. Not this year.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [75]

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Not this year, okay. So if you can see the Qualcomm's pricing strategy based on 14-nanometer, so do you think your cost structure is very [composite]. Is it fair to say that?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [76]

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Based on what we see here, because I think one of the reason why we're still insisting in 28 is because if we're trying to have the revenue in third quarter and fourth quarter, you can assume that both products been [tape] already. Right now, it's being stabilized on the software side. So the product's already been tape out, so we will not be able to switch to the other process node. And also, based on the current cost structure analysis, I think we feel comfortable about our 16 versus their 14s.

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Operator [77]

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(Operator Instructions) Next, we're having Charlie Chan, Morgan Stanley.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [78]

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So David, so in the early call, you mentioned that AFC declined 0 to 5% in 2Q. So is there any cost-reduction efforts that can offset the AFC erosion in 2Q?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [79]

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I think we normally, each quarter, we got our support from the back-end side, which including on limited foundry. So -- but in terms of -- that's normally what we can get on the cost-reduction side. But in terms of new, your cost reduction's coming up on 2 way, right. One is actually the back-end supply chain support; another way is actually by introducing the new product portfolio. I think the second quarter, we don't have new product portfolio, so most of the support, the cost-down support, is actually coming out on from the back-end support, from back-end side.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [80]

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Okay. If I remember correct, I remember within your product portfolio, the entry level 4G carries lowest margin. So into the third quarter, it seems like low-end 4G would be the strongest growth segment and you believe that the margin can stabilize, right. So what I mean to say here, I mean, your lowest margin product grows fastest and your margin can stabilize. What is the differentiator?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [81]

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Well, I think product is not the way to look at this, right. First of all, I think if entry-level 4G in terms of revenue contribution is the largest segment, I think the answer is yes, okay. But as I explained earlier, basically, is the new cost-down product will come in an Helio P series. That's probably the second-largest revenue contribution segment as well. So while we're expecting that actually starting from third quarter, we start to fix the second-largest revenue (inaudible) first. Once we get into the fourth quarter, we start to fix the largest revenue contribution sector which is the entry-level 4G. I think that's why for this year, we put -- the focus would be on the this Helio P product, the entry-level, really and the X product.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [82]

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Okay, understood. And for the new entry-level 4G that you're going to launch in fourth quarter, which more then will use, I mean, do you think Cat 6, Cat 7 or Cat 4?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [83]

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That's all Cat 7.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [84]

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All Cat 7. And next year, you will introduce a new higher-end product with more than -- I'm sorry, Cat 12 or Cat 6.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [85]

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Cat 10 or Cat 12 cost-down version, maybe it's easier to use this name, right. This year, it's really the low-cost Cat 7 modem. Next year, will be a lower cost, actually it's the Cat 10 or Cat 12 modem.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [86]

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Okay. No Cat 15?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [87]

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Yes. Well, no, we won't have actually higher Cat 12, Cat 15 or maybe even Cat 16 modems. But that's actually on the different modem architectures.

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Operator [88]

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Next follow-up question is from Brett Simpson, Arete Research.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [89]

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David, just on 10-nanometer, I mean you must have had significant burden from upfront costs in getting 10-nanometer to market. We all know it's a significant NRE and you must have had minimum wafer commitments as part of that to be a lead customer for TSMC. Can you maybe just talk through how this gets booked in the P&L? Is this an OpEx item, or is it also flow-through COGS? And is it fair to assume that in the second half of 2017, you won't have the same level of fixed-cost burden around 10-nanometer, so maybe that's a source of leverage that we can look for? I don't know if you could help sort of frame all that for us.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [90]

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For us, basically, it just all goes to the OpEx line. So for example, for the mass of the tape-out expense, it all go to the OpEx line.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [91]

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Okay. And so no wafer commitments that would be sort of enlarging the COGS burden for you guys?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [92]

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Well, we probably won't be able to comment in detail, but even if there's any wafer commitment, normally it'd be approved in the first and second quarters basically on the cost of goods, obviously, even at the end.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [93]

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And that OpEx burden around the 10-nanometer, was that largely Q1? Or has that been booked pretty evenly through the last 2 or 3 quarters?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [94]

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It's been spread pretty evenly, I would say, Q4 and Q1. Q4 last year and Q1 this year.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [95]

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And that should be a minimal investment for you guys in second half?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [96]

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Yes.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [97]

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Okay, okay. And then just on FX. Can you maybe just sort of talk about the impact on both revenue and gross margins? And I'm assuming you buy wafers from your foundries in U.S. dollar, but I don't know whether that's a Taiwan dollar purchase or a U.S. dollar purchase. Maybe you can just clarify that for us.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [98]

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I think for -- on the FX side, normally our accounts payable is all U.S. dollar. So we're basically -- the purchase wafer from TSMC are all paying U.S. dollars. On the other hand, when we see our product out, they're all being (inaudible) and priced as U.S. dollars. So from a revenue versus cost perspective, it's been all naturally hedged. So we don't have to worry about FX in terms of profitability perspective, probably with a few exceptions because some of the back-end expense, it's actually been accrued in NT dollars. So overall, I guess the FX fluctuation has a relatively mild impact to the gross margin. On the other hand, the FX impact basically will have relatively big impact for the revenue recognition. For example, when I see one product which is USD 100, when exchange rate is TWD 30, I can recognize, like, TWD 3,000, but when exchange rate comes down to 28 for dollars, my revenue when I'm reporting NT dollars should be getting me towards. So first quarter actually is we have been talking about the stronger NT dollars. So when we convert our U.S. revenue into the NT dollars, actually the NT dollar becomes less. So that's why when we give out the revenue guidance, right, we actually have the FX rate assumptions and you can compare that with the assumption which is actually much higher than the actuals of the FX rate. So that's why the first quarter revenue somehow fall into the mid- to low end of our guidance range. I think that's another reason why the first quarter number is actually relatively below the average guide.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [99]

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Okay, that's helpful. And maybe just on the mix of revenue. You always give a rough range between smartphone revenue and non-smartphone. Am I right in assuming in Q1 and Q2, that mix has started to strengthen for non-smartphones? So non-smartphones is rising as a percent of sales and maybe you could just give us some context there.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [100]

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Yes. I think your assumption is correct. I mean in first quarter, the smartphones -- for the smartphones, roughly 45%, 50%. For the second quarter, I would say it's a similar range but probably will be the low end of this range. So the non-smartphone sector in second quarter will grow actually stronger than the smartphone on a q-on-q basis.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [101]

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Yes. That's great. And then just on Helio and non-Helio. Can you maybe just help us understand I mean, if you go back a couple of quarters ago when Helio was firing both the X series and the P series and where it is sort of looking at first half, what is non-Helio as a percent of sales in smartphones versus Helio? And what did that look like 2 or 3 quarters ago when the business was very different?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [102]

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Well, I think for the last year, basically for the Helio product in terms of shipment, it was very close to 20%. It's basically the revenue driven (inaudible) but I would say more on the high end. This year, I would say actually that in terms of shipment on the Helio side, probably coming down to roughly 10% to 15%. So it will be shorter 5 percentage points compared to last year. But in terms of revenue because Helio, in general, is still carrying a slightly higher ASP, so when the shipments is like down to 10% to 15%, the revenue contribution, I would say roughly 15% to 20% this year.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [103]

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And I guess looking at non-Helio. You've sort of said 2 things that's coming for the business. One is that you have a seasonally stronger second half and I think you talked about emerging markets being weak at least in the first half. That starts to turn around and recover in the second half, so that's a driver. But you also talk about share gains and new product. So I'm just wondering whether you can sort of walk us through any more detail as to the seasonality and what level of share gains you might expect for that segment, the non-Helio segment, going into the second half of the year.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [104]

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Okay. Well, I think maybe the easy way to think about that is actually if you think about the transitional 3-tier product segment, right, the Helio X series, the Helio P series and the others, or the all just entry level. I think for this year, for entry-level, our market share maintains actually relatively well. So within reason, good market share for the entry level. What we're suffering this year is really for the losing market share, both for Helio X series and then also for Helio P series for different reasons. I think for the Helio P series, for the P series, we didn't really have -- it's down to product, we didn't really have category 7 products the (inaudible). So -- but unfortunately, some of our customer decide to use their Helio P series product to [media] segment which is [a 2,000 R&D] and so some of our product (inaudible) due to the delay of category 7 capability, so that's why we're losing some market share here. But I also explained, starting from third quarter this year, the new Helio P series is coming out, we have, a, the category 7 solution ready; b, more importantly, I think, that is based on the new modem architecture, which carries much better cost structure. So we -- based on the current design-in and design-win situation, we feel fairly comfortable we should be able to gain some market share back on the Helio P series, okay. Now for the Helio X series because this year, we reallocated our R&D resources, we put most of R&D into Helio P series and the second product coming out is actually not X series, it should be just the entry-level product. So this year, other than the X30 product, we don't have the new X series product. So basically this year, we're losing -- the market share loss on the X series product, we probably won't be able to get it back until the new X series product coming out next year.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [105]

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Great, great. And just one clarification, David. The Amazon products that you're shipping today, the Echo, the Fire, we're seeing some significant volume here. Do you guys bring that into the tablet business? Is that part of the wireless disclosure smartphones and tablets or is that non -- is that booked elsewhere the way you kind of categorize that?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [106]

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No, actually, for the -- so with the Amazon product, we categorize this as an IoT product. So it's really underneath the growth sector. And this year, by the way, I think the voice assistant device actually has a pretty strong growth. I think from a volume perspective this year, we actually were looking for maybe 25 million plus, maybe even 30 million plus units this year. And the growth profile for the voice activated assistant, in fact, is actually looking pretty good. And we are the market share leader in this space right now.

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Brett Simpson, Arete Research Services LLP - Senior Analyst [107]

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And then maybe just one final question, David. China Mobile is talking about a pretty big launch around NB-IoT, so LTE-based IoT service offerings coming out second half this year. What's your readiness to address these types of solutions? Will we see industrial IoT or consumer IoT products based on release 13 NB-IoT from MediaTek?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [108]

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Well, I think with the NB-IoT product, our product will be ready before end of this year. Basically, the first customer started shipping in the fourth quarter.

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Operator [109]

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Next, we're having Michael Chou, Deutsche Bank.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [110]

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David, when you mentioned the new cost-down for (inaudible), so do you have the spec for Uplinq? Will that based on Cat 13 or Cat 10? For (inaudible) it's Cat 7, right, so -- because Qualcomm is using Cat 7 -- I'm sorry, Cat 13 for the Uplinq. So what is your strategy?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [111]

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I think it will be a comparable spec.

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [112]

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Okay, sure. And how about the split between first half and second half, did you have some color for that?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [113]

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You mean the revenue split?

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Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [114]

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Yes, yes.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [115]

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We don't have a clear view right now because this year, actually, I think the visibility is low, but I would say it's transitionally like 45% versus 55%. This year, maybe I will say second half heavy. Maybe 43% first half, the rest go to the second half.

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Operator [116]

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Ladies and gentlemen, we are now running out of time so we are taking the last call for questions. The last one will be Donald Lu, Goldman Sachs.

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Donald Lu, Goldman Sachs Group Inc., Research Division - Equity Analyst [117]

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David. You just mentioned that your voice-activated SoC shipment could be 25 million to 30 million this year. Can also give a guidance for like other, like, IoT stuff, like for the bikes and also wearables all kind of that (inaudible)?

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David Ku, MediaTek Inc. - CFO and Corporate SVP [118]

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We don't have the details, but I think for the bikes, basically, for the (inaudible) we're talking about 10 million [parts] for this year. For IoT, there are lots of other products. We offer, for example, some of the wearable products, some of the smartphone products, they are all very fragmented. But I will say, from the volume perspective, [2-body] segment, one is actually the voice-activated system device, which is 25 million plus this year. The bike-related or the GPS tracker/2G module, I would say is actually 10 million plus this year.

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Operator [119]

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Ladies and gentlemen, we thank you for all your questions. Now I'll hand it over to Ms. Jessie Wang for closing commons. Ms. Wang, please go ahead.

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Jessie Wang, [120]

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Ladies and gentlemen, this concludes MediaTek's 2017 First Quarter Conference Call. We would like to thank you for your participation, and you may now disconnect. Thank you.

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David Ku, MediaTek Inc. - CFO and Corporate SVP [121]

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Thank you.

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Operator [122]

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And thank you for your participation in today's conference. You may now disconnect. Goodbye.