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Edited Transcript of 2454.TW earnings conference call or presentation 31-Jul-19 9:30am GMT

Q2 2019 MediaTek Inc Earnings Call

Hsin-Chu City Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of MediaTek Inc earnings conference call or presentation Wednesday, July 31, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Ku

MediaTek Inc. - Corporate Executive VP, CFO & Spokesman

* Tienyu Tseng

MediaTek Inc. - Senior Manager of Finance Division

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Conference Call Participants

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* Brett William Simpson

Arete Research Services LLP - Senior Analyst

* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* Gokul Hariharan

JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech 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, everyone, to MediaTek's 2019 Second Quarter Investors Conference Call. Your speakers today are David Ku, MediaTek's CFO; and Tienyu Tseng, MediaTek Senior Manager of Finance Division. Mr. Tseng will prepare -- will report second quarter results and Mr. Ku will provide prepared remarks. After that, we will open for Q&A.

Now I would like to turn the call over to Mr. Tseng. Mr. Tseng, go ahead, please.

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Tienyu Tseng, MediaTek Inc. - Senior Manager of Finance Division [2]

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Good afternoon, everyone. Welcome to MediaTek's Second Quarter 2019 Conference Call. As a reminder, all content provided on this year's conference is for informational purposes only, not intended for investment advice. Neither the issuer nor any of the independent tender providers is liable for any actions taken in reliance of content contained herein.

MediaTek provides non-TIFRS financial measures as supplemental information. Earnings distribution is made in accordance with financial statement base of TIFRS.

Unauthorized recording or redistribution of the media, audio, text and presentation content 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 2019 second quarter financial results. The currency here is in NT dollar. Revenue for the quarter was $61.6 billion, up 16.8% sequentially and up 1.8% year-over-year. Gross margin of the quarter was 41.9%, up 1.2 percentage points sequentially and up 3.7 percentage point year-over-year.

Operating expenses for the quarter were $19.6 billion compared with $18.3 billion in the previous quarter and $19 billion in the same period last year. Operating income for the quarter was $6.1 billion, up 93.9% sequentially and up 15.1% year-over-year. Operating margin for the quarter was 10% compared with 6% in the previous quarter and 6.8% in the same period last year.

Net income of the quarter was $6.5 billion compared with $3.4 billion in the previous quarter and $7.4 billion in the year-ago quarter. Net profit margin for the quarter was 10.6% compared with 6.5% in the previous quarter and 12.3% in the year-ago quarter. EPS for the quarter was $4.11 compared with $2.17 in the previous quarter and $4.72 in the same quarter last year.

We also provide non-TIFRS financial measures which exclude share-based compensation, amortization of acquisition-related assets and tax effects. Please refer to earnings press release and presentation for details.

For the third quarter of 2019, we expect revenue to be in the range of $65.3 billion to $70.2 billion, up 6% to 14% sequentially, and a forecast exchange rate of TWD 31.2 to USD 1. We are forecasting the gross margin at 41.5%, plus or minus 1.5 percentage points; and quarterly operating expenses ratio to be at 31%, plus or minus 2 percentage points.

And now I would like to turn the call to CFO, Mr. David Ku, for prepared remarks.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [3]

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Thank you, Tseng, and good afternoon or good morning, depending on where you are.

A quick update for our second quarter's performance before I dive into by 3 major sectors. And overall for the second quarter, even though we see a pretty uncertain macroeconomic situations out there, I think overall we still deliver a stable and good result for our Q2, second quarter's performance. Especially if you're judging from a gross margin perspective, that will be the fourth consecutive quarter, so continuing to improve our gross margin. And now our gross margin reached to 41.9% in Q2, mainly due to a strong product road map and also a much more balanced business portfolio.

With that, I will just go through -- quickly go through the 3 major business line, which including mobile computing; growth sector, which including IoT, PMIC and ASIC; and also our smartphone-related product.

For mobile computing, in Q2, the overall revenue contribution from mobile computing was around 30% to 35%. We see a strong core growth, mainly driven by our P90, a new product in Q2. And we believe that our growth momentum will continue into Q3.

Overall I guess for this year, starting from P60, P65 also P90. And also recently, we just announced a new series called G90. That's a new product portfolio designed especially for gaming-related platform with upper CPU and GPU, and also our APU, which stands for AI process units. And we have a pretty good customer buy-up and [sign in] for the G90 product. Overall, we see strong growth in Q2, and also we believe the growth will continue in Q3 on mobile computing sector.

In addition to 4G product portfolio, I mean, currently, a lot of major focus is really 5G. We kind of announced our 5G product, the first product on the high-end product side. And I think recently, especially for the last quarter, there are some other market movement. For example, China has issued a 5G conversion license. This gives us in the quarter a pre-commercial ramp, directly go to the commercial ramp. We believe that it is actually a strong signal to show even, strong 5G demand in China for next year.

And also recently, China Mobile test all major 5G chipset vendors' product performance, which including the product, high consistency, the MIMOs, basically all the different technology attributes; and also for dual mode assay. And also, I can say on all from basically the MediaTek performance, is actually leading bench in the China Mobile's testing that.

And we are targeting to send a -- our 5G SoC sample out in the third quarters. And based on the current deciding situation, we believe we'll be catching the first wave of 5G product next year. And if everything went well, it's very likely, I think, our product will start to ship in the first quarter next year. So you -- we will be able to see, with MediaTek inside 5G smartphone in the market in first quarters next year. I think that's a quick update for the mobile computing sector.

Move on to the next sector, which is the growth sector. Again, growth sector, which is including IoT, PMIC and also ASIC. I think for Q2, we also see strong double-digit growth for IoT, especially growth based on a quarter-over-quarter perspective or year-over-year perspective. I think for the IoT, it's mainly driven by strong smart speaker demand; and also TWS, standing for true wireless sectors.

And on the PMIC side of things this year, as we see the platform synergies start to kick in. What do we mean by the smartphone -- the platform synergies? Is mainly on the smartphone side, because right now, a lot of our smartphone product that's equipped with some MediaTek own [PMIC]. So we see double-digit growth year-over-year and also Q-o-Q on the PMIC side.

The last one on the list is -- which is the ASIC sector. For the ASIC sector, I think we have a consumer ASIC and also we have an enterprise ASIC. Enterprise ASICs, as we've previously disclosed, we start seeing the first revenue in Q2/Q3. Currently, the revenue level is still very small, but we do believe that actually the enterprise ASIC open a new address -- a sizable addressable market for MediaTek. And we actually getting more design-in this year. And we believe that would be translated into more revenue into the next 2 to 3 years.

The next one is really our smartphone-related product, which including TV, set-top box, so the other products. I think we see a steady growth. Compared to mobile computing and also growth sectors, relatively is weaker, but we still see a steady growth in Q2 specially for TV. But looking forward for second half, there are some macro uncertain -- macroeconomic uncertainty. I believe that actually the TV growth may be slowing down. So Q2 overall on a Q-o-Q basis, I think probably we're relatively weak on the smartphone sector.

But if we put the short-term macroeconomic situation aside, I think we still feel fairly comfortable for our overall TV SoC position, both from a technology perspective and also from -- technology perspective. Currently, we're trying to incorporate more and more AI technologies into our TV SoC product. For example, currently, we just launching our flagship TV SoC, they call it the SoC S900. The S900 is supporting 8K decoding, high-speed edge AI computing for picture quality. And also, we have face recognition, scenes detections, voice recognition and then voice assistant functions on the TV platform. We will update more for the TV product within the next few quarters.

I think that conclude my quick update.

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Tienyu Tseng, MediaTek Inc. - Senior Manager of Finance Division [4]

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Thank you, David. We are now ready for Q&A session. May we please have the first question, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First, we're having 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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I wanted to ask a first question just on your view for the 5G market for next year. I'm curious more for the ramp-up, if you expect much coverage to support volume ramp in the first half, or if you expect it to be mostly second-half weighted.

And with your sampling of the first chipset now and then targeting first quarter, I'm just curious. If it does pull into first half, if you think your market share could be up to the levels you had in 4G, or it might take a few more quarters to kind of reach the speed you're at in 4G?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [3]

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Really, I think, for 5G market, especially for China, our view is that the overall market demand could be around 100 million plus. And with 100 million plus, most likely, our view is for 5G sectors from segmentation perspective, they will be on the high end and also need to go down to the mainstream as well. So if we express that or interpret that from a slightly different perspective, say what's the end product selling price? I think maybe for the first half next years, the 5G product is still going to be RMB 3,000 above, most likely maybe be RMB 3,500 and above. But once we get into second half, I think the 5G sector probably will go down to below RMB 3,000 sectors.

So with that understanding, I think we can answer your question. I think most likely, from the overall volume to our own shipment perspective, most likely it will be the second half heavy. I mean first half, while we do expect some of the shipment for 5G, both for high-end or also for mainstream. But in terms of overall volume, I believe actually the 5G shipment will be the second half heavy pattern for next year.

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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. Great. Okay. And if I can follow up, maybe an initial view, if you can gauge the competitive landscape. The start of 4G, it seemed like an aggressive pricing between yourselves and Qualcomm for market share and even ended up impacting their margin. If you could take a view how you're seeing, like, the early stage ramp-up if it could play out differently. And also how you're viewing Samsung. They may not be the first choice because they also compete. But if you see them having any impact both on share or pricing.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [5]

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I think overall for 5G SoC, is quite a competitive dynamics out there. So like you say, when we [compare] Qualcomm and also Samsung and MediaTek right now. But overall, we do believe both from the product portfolio perspective and also from a timing perspective, and on top of, I think the performance, I think we have quite confident that we should be able to: A, not just catch the first wave; B, I think we should be able to get a reasonable market share for that. In terms of a competitive landscape, I think this value -- as you know, I mean for 4G, it's been quite competitive out there. For 5G, our view is probably will be similar competitiveness. We don't think it will be either -- even intensified.

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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. I guess the follow-up, then -- I guess on the profitability, because you spent a lot of time through the 4G cycle redesigning to get the optimal cost structure. I guess factoring in a similar or even tougher competitive landscape, is there a range you're kind of expecting as you hit this first-wave inflection margin? If it's kind of the similar 40%, 43% as a base case, or plus or minus?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [7]

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It's hard for me to provide sort of the gross margin guidance right now because, like I say, it's still a moving target out there, especially given the competitive dynamic sellers. But overall, I think we feel, A, comfortable -- very comfortable that ASP is going to be a bit aggressive compared to our current 4G product portfolio. So regardless the gross margin ratio, I think the gross margin dollar, which will be translated into the operating margin dollar ratio, should be very impressive. But in terms of the exactly gross margin ratio, we probably still need to wait for the next few quarters. Because as you know, it's quite the dynamics out there.

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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. And then I think on the operating side, you've had some ability to get some leverage or not need to grow much in OpEx. Do you see that, I guess, now factoring in you've got the 5G millimeter wave and then some of the networking auto? Or do you think, given the base you already have, you could kind of continue that just modest increase on the OpEx side?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [9]

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Well, I think for the OpEx side. First of all, for this year and compared to last year, I think the OpEx, operating expense, only increased moderately. And given the fact I think the first product is ready now. We have our first 5G product, is ready now. We'll give our sample out in third quarters, and a few more products on the way as well. I think the heavy lifting part for 5G is pretty much done. We don't really expect, in order to expand or extrapolate our 5G product portfolio, we will increase substantially our operating expense. I think definitely, it will increase a bit. But I don't think you're going to be much greatly. That's one point to think about that.

Another point actually is, I think the last few years, what we did is we do a redistribution of our overall resource. And to be precise really, just, we move a lot of resource from 4G and also 3G into 5G right now. So I guess our goal is trying to increase the 5G investment, but on an overall scale, we can still contaminate -- or control the operating expense to a mild or low single-digit growth. I think that's our target.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [10]

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Okay. Great. And then just the last question I want to ask is an initial view, fourth quarter, there's usually a seasonal pullback. And this year, we're kind of late-stage 4G. But wondering if there's any swing factors that -- either product launch or share, that could swing that? Or if at this stage, you're expecting kind of that normal seasonal. or any risk of a worse-than-seasonal?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [11]

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I probably don't have detailed visibility for fourth quarter right now. But in general, I think fourth quarter is, based on the normal seasonality, should be coming down overall. But it might be a bit too early and premature to talk about by sector. I think -- I guess one of your concerns or things you're trying to sort out is really on the smartphone side. But I probably would not give my comment right now for the fourth quarter.

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Operator [12]

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Next the line is open to Gokul Hariharan, JPMorgan.

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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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Congratulations on good, consistent delivery on margins. First of all, you mentioned more mainstream 5G SoCs also coming next year. Could you outline what is the timing? If I heard you right, you probably have it already in Q2 next year results. Could you also talk about, even for mainstream 5G SoCs, are you still going to maintain that kind of price premium to comparable 4G product? I think for the premium, obviously, you're expecting a meaningful price premium to the 4G comparable products. But when you get into mainstream 5G SoCs also, is the price premium still going to kind of sustain?

And lastly, what are you seeing from your competition? There's a lot of noise about Qualcomm trying to do RF bundling this year as well as going into next year for their 5G products, especially in China. What are you seeing and hearing from your clients on this? And how are you kind of trying to circumvent this?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [14]

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Okay. I think for the timing for our product portfolio, I guess probably, this will help if we describe our 5G product strategy. First of all, I think we have more than 1 product. It's going to be a product portfolio which covers different segments. We're starting from the high end, but we will gradually -- not gradually, basically within the year, I think we'll would expand to different sectors.

But in terms of exactly timing, I probably would not be able to disclose that yet. But during the Chinese call, kind of talking about at least, okay, at least 1 more product will come in first half next year. And -- but in terms of the other product timings, I probably will not give disclosures right now. But we would certainly disclose these maybe some time earlier next year. That would be your first question on timing side.

The second question will be on the ASP side. I guess your question is, even for -- your question is for the mainstream product, for the mainstream 5G product, on the up for comparison, whether or not we'll still see ASP accretion compared to 4G product. I think the answer is short yes. Because overall, we see on a like-for-like comparison -- what do we mean by like-for-like, actually on a similar sectors, we all see a pretty good ASP accretions on 4G versus 5G. Because simply put, I think 5G, when you just put in a lots of new function over the years, you purely base them from the cost of material perspective or [die cast] perspective, it's going to be -- need to be increased. So I think fiscally, at least in the near term, there's no way we're going to sell on a similar ASP. I think ASP need to be higher on a like-for-like comparison. So for the ASP perspective, basically on a like-for-like basis across all different sectors, that we all feel fairly comfortable it should be accretive. I think that's your second question.

I think the third question is on RF bundling question. I think overall currently, we didn't really involve the RF bundling business. But on the other hand, we work very closely with all different [supplier], which include but not limited to people like [Ardent], Qorvo and all other like. Based on the current -- sort of both from a product portfolio and also from the price competitive perspective as the total solution, by working with our partner, I mean overall, we feel fairly comfortable in competing with these other companies.

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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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Okay. Great. So it looks like 5G expectations have clearly gone up in China in terms of the volumes. So David, I know that you don't want to volunteer exact market share expectation, et cetera. But when you say a reasonable market share of that 100 million, what does that mean? Is it a 10 million number -- 10% number? Is it a 30% number? Like, could you give us a little bit more clarity about how you're thinking about it? Because sub-RMB 3,000 market is kind of more mainstream. And you clearly have a reasonable share of that market in 4G. That's my first part.

And second, could you also talk a little bit about getting down to sub-RMB 3,000 price range for 5G phones in second half next year? What is the kind of feedback you are receiving from your customers in terms of the ability to get down to that bill of material without any carrier subsidies? Or do you feel that carrier subsidies are going to be essential to get down to that kind of consumer price point?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [16]

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Answering the first question is with our view for our 5G market shares. I mean internally, we do have a target and we're working pretty hard on it. But I don't think it's the right timing for us to disclose it. I think we will -- like in our Chinese call and our CEO talked about, we probably will kind of talk about it may be either late this year or early next year. Because right now, there's still a lot of sort of tasks or moving targets ongoing. It may be a bit premature to talk about the market share right now. So that's your first question.

The second question is what's the sort of customer view and also what's the potential market feedback for the 5G segment being pushing down to different segment, below RMB 3,000. I think in general, based on the feedback we got both from the customer side and also from the potential end-customer side, I think in general, that's -- they are all fairly positive about that trend, even with our huge subsidy by our China operators. But with the caveat, with this assumption is actually, is the end customer willing to pay a little bit more, okay, for the 5G phone? Okay.

So if you try to sell a 5G phone with the same price as the 4G phone, I guess it will not really happen. So I guess from the phone maker perspective, I guess, one of their view is hopefully, through the 5G phone upgrade cycle, if you like, they can actually somewhat increase their ASP as well on phone side. Or at least they can increase or change this with a segment allocation. For example, maybe in the past, I just make it up, say, maybe 50% of the phone being under like RMB 1,000 or maybe RMB 1,500 sectors. But now with the 5G phone, are customer willing to migrate from the RMB 1,500 sector to RMB 2,000, maybe RMB 2,500. I think that's the assumption, if you like. But overall, I guess people feel -- both the end customer and also the phone makers, are feel -- are positive about working toward this direction or assumptions.

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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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Okay. Just one follow-up, David, on that, on the market share. If I ask the question a slightly different manner. Do you feel more comfortable about your 5G volumes expectations for next year, given that the marketplace has also gone up? I think at the beginning of the year, I think you guys were expecting some 5G next year, but really, I think, mainstream -- hitting mainstream in 2021. That definitely seems to have pulled in by a significant margin. So does that also mean that MediaTek phone 5G shipment aspirations or expectations are also kind of moved up in that same time frame?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [18]

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Again, unfortunately, it's maybe too premature, too early to talk about our view regarding market share. But I guess, let me answer your questions from a different perspective. I guess with our preparations, and especially for both from a product portfolio -- 5G product portfolio perspective and also from the timing and performance perspective, I guess we do have a pretty high expectation on market share, okay? So we use the words some market share, I guess, internally and this is now our goal.

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Operator [19]

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Next on, we're having Charlie Chan from Morgan Stanley.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [20]

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David, so back to near-term trends. Can you give us some comparison of different segment growth in third quarter? I mean for smartphones and also the growing segment, which product or division is growing faster in 3Q?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [21]

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I think in Q3, among the 3 product segments, then the mobile computing, growth sector and also smartphone-related, I think that the one with the strongest growth is really the mobile computing. The second one is really the growth sector. The last one will be smartphone-related.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [22]

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Okay. And then can you give us some color about the blended ASP trend in 2Q and third quarter?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [23]

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Charlie, I didn't hear you completely. Can you say it again, about your question?

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [24]

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Sure. Blended ASP for smartphone in 2Q and 3Q.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [25]

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Blended ASP. I think for -- so Q2 or for Q3?

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [26]

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Both.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [27]

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I think both for Q2 and Q3, we see that blended ASPs are the increasing trend, I think mainly due to, for Q2, we start to ship P90. Q3, we will see more P90 come in. And likewise actually for Q3, we're starting to see some G90 come in. And from blended ASP perspective, they are all on the accretive side. In terms of magnitude right now, we didn't really disclose the magnitude of ASP.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [28]

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Okay. Got you. And then, on gross margin guidance again. I mean the midpoint of the guidance is at 41.5%. So again, it's kind of down slightly from 2Q actual margin. So any implication here?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [29]

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Well, I think probably the fair comparison is if you compare to the Q2 guidance versus -- the midpoint guidance versus third quarter midpoint guidance. Because like you say, as you know, sometimes, gross margins will be within the range. So the guidance I gave you now, 41.5% of a midpoint doesn't mean that's the target, right? It's after what we need to consider about the different dynamics. So again, I don't really think that's a signal of weakening about the gross margin, that's point number one.

Point number two actually, the gross margin after all, like we talk about, like we explained in the beginning. Right now, we have a 3 rather balanced product portfolio and different product portfolio have different gross margin profiles. So I guess within a range, wouldn't be able to guide it on the gross margin with a range. You also need to take consideration about the potential different sort of revenue pie movement among different sectors. Overall, probably the best way to describe our view about gross margin, I will say it's steady, stable and with some upside potential. Maybe that's the best way to think about that, put the actual numbers aside.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [30]

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Okay. And lastly, I think the question was already raised in Chinese call, right, but what was your thoughts about Huawei's share gain, David? So they kind of gaining share quite aggressively in second quarter and that may continue in the second half, right? So how do we reconcile your very strong smartphone shipment growth in third quarter versus Huawei's market share extension? And if there will be any risk of market share loss of your customers, would it be more like a fourth quarter or a third quarter risk?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [31]

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Charlie, first of all, when I commenting about sort of the growth for third quarters, I was commenting from a revenue perspective, not exactly from a shipment perspective. Because starting from I guess a year ago, we start to provide the forward-looking shipment numbers. So that's point number one, it's really the revenue growth.

Point number two, how do I reconcile that? I probably would not give you comment directly from a single customer because you asked me about Huawei. But maybe I'll explain from -- take one step actually from a different perspective, is on the blended ASP side is increasing; and also on the market share side, we do believe from an addressable market perspective, we increased addressable market -- we increased the market shares within the addressable market as well. And plus the ASP or prices, I think this is the major drivers for the revenue growth on a quarter-over-quarter basis.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [32]

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Okay. One quick follow-up, right? So with the market share gain, do you think it is kind of related to U.S.-China tension? Or is there something else that help you to keep growing your market share?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [33]

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I think hard to [contribute] to one single factors. I guess maybe it is a multiple factors. And also, it's hard for me to quantify from different sectors. I will say, I think on the combination of a strong product portfolio, I think getting more customer traction and also customer confidence, especially now we see our 4G product and also 5G product portfolio and plus the macroeconomic situations, it's really a combination of all those factors.

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Operator [34]

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The next in line, Brett Simpson, Arete Research.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [35]

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David, I just wanted to get your perspective. If you'll go back to 2014 when China Mobile launched 4G. Within the first 12 months, they pulled in 100 million subs. So quite an aggressive ramp from China Mobile in the start firstly to 4G. How do you think the sort of launch of 5G plays out for them? Do you think they're going to be more aggressive? And I just wanted to get your perspective on how the sort of relative ramp-up might play out for China Mobile.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [36]

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Currently -- Brett, currently, our views would be either similar like the 4G ramp up, and maybe even slightly faster. That's our current view based on our conversation with all related parties. So -- but based [on our sale] it will be on a similar fashion, at least.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [37]

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Interesting. Okay. And then just from an ASP perspective, if we look at 5G versus 4G on a sort of like-for-like basis, what do you think the premium that MediaTek gets selling a 5G device at the same handset price point versus 4G?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [38]

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So the suite -- or premium, you're talking about, like, 4G versus 5G ASP, is what remains?

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [39]

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Yes, exactly.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [40]

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Again, it's hard for me to quantify that, but let me answer your question from this way, okay. I think currently, if you're judging from our competitors' ASP price position, it actually is -- again, it's a dual solution for this year. It is really just the baseband plus a modem. It's really baseband plus a modems. I think their ASP right now is actually sort of 3 digit, it's $100 plus. And given the SoC, I think the number will be lower, will not be 3 digit, but overall I guess currently, people are still looking for at least $50 kind of to start with for the high end. But in terms of what's the final numbers, again, it's a moving target. But overall, I think as people are 5G -- especially the high-end products, should be a pretty high ASP versus our current ASP on the 4G side. Because on 4G, we don't have high-end product, our product mainly on the mainstream and also on the entry level. I think the blended ASP which has been the range, say USD 10 to USD 13 or USD 15. So if you use this range versus the 5G, I think it should be a pretty good ASP accretion.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [41]

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Great. That's helpful. And is your expectation that we're going to see aggressive handset subsidies in China next year to try to stimulate the market to adopt 5G?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [42]

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Currently, we don't have detailed visibility for the handset subsidy. I believe, actually for next year, there will have some -- maybe we don't need to wait for next year. Maybe in the next few quarters, we will see the operators, all 3 major operators, will give some kind of incentive or subsidized programs. But currently, we don't have that visibility yet.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [43]

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Okay. And then just on 5G customers, are you planning to sell to Huawei? And do you have design wins with Huawei for 2020 in 5G?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [44]

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I would not be able to commenting on the customer side. But in general, I guess, currently 4G product, 4G customer, they all are our potential 5G customer. But currently, I would not be able to commenting on 5G customers specifically.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [45]

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Okay. Okay. And then maybe just switching gears a little bit to the PMIC business. You mentioned in your prepared remarks that PMIC is starting to shift into smartphones. Can you give us a sense as to how big that business is today? So what typical penetration are you seeing for the PMIC when you sell smartphone chips today? And how do you think this plays out over time?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [46]

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First of all, for the PMIC business, there are 4 major segments out there, which is the computing, the display, mobile-related and also AC to DC converter. And normally, we don't break down specifically for mobile. So when I talked about PMIC, I'm talking about all 4 sectors altogether. I think all 4 sector altogether is right now, for this year, it's not just any given quarter, but full year, our view is broadly it probably will account for close to 10% of our overall revenue. And in terms of growth rate year-over-year, we're looking for double-digit this year. For next years, again, too early to tell. But at least for this year and on the last years, they've been all been growth, double digit.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [47]

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Okay. That's great. And just on the same division, WiFi. So I think you've mentioned earlier that you plan to start shipping WiFi 6 in Q1 next year. Is that still the case? And what sort of pricing premium do you get from WiFi 6 versus your typical WiFi AC today? Just to get a sense for that transition that's going to happen.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [48]

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I think for WiFi, yes, yes. I think that's still the plan and we're starting to ship to plant. I think the product actually will be ready this year and we will start to ship next year. In terms of ASPs, I probably don't have the detailed visibility right now. I think it will be higher, that's for sure. But in terms of magnitude, I guess, again, it's still actually [early] right now. What we -- probably, we will not be able to provide detailed information for this question.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [49]

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Okay. Okay. And then just maybe final question on ASICs. So I guess your consumer ASIC business today is more around game console, and there's a big upgrade in game console for next year coming. Can you talk a little bit about that, what that means for MediaTek? And then on the enterprise side, help us understand how the ramp of that opportunity -- I think you mentioned multiple design wins on ASICs for enterprise. Can you help us with sort of how this might translate to revenues in 2020?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [50]

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For this year, also for next year as well, I will say majority of the ASICs revenue probably will still be on the consumer side, i.e., the games stations, the 2 major platform and also some related product. Even when we start to ship on the enterprise ASIC side starting from this years, our view is for next year, I think in terms of revenue contribution, if I quantify that as a percentage of overall revenue, it's going to be still very low, low single percentage, if you like. I think that's on the revenue contribution side.

But in terms of the potential market size or potential addressable market, maybe that's the better way to describe that. We believe, actually, based on the current technology we have and also based on the current applications areas, we should be talking about close to $2 billion addressable market. And the good news is actually that addressable market should be growing as well, given the fact actually right now, gamer just craving more and more data. The much faster transmission to be high resolutions for contents, when you put all those together, right -- nowadays, consumers have become a data craving for that. Then that would translate into more and more demand for the enterprise ASIC side.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [51]

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(technical difficulty)

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [52]

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Brett, your voice are breaking down. So maybe you need to repeat again because we can't really hear your question at all.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [53]

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[Okay -- the corporate average gross margins.] Can you confirm the gross margin opportunity here? Because it sounds like this might be an accretive story for the business overall, but just wanted to get your sense for that.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [54]

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Brett, sorry, actually, it's -- for some reason, your voice is breaking out. Can you just repeat your question again?

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [55]

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Yes. So just looking at all the new products you have here. You mentioned WiFi 6 and 5G and PMICs ramping up and ASICs, et cetera. Are these new product areas all higher than corporate average gross margins for MediaTek?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [56]

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I think in general, again, because none of those products are shipped yet. So the ASP, again, is still a moving target. But in general, we are looking for it should be similar, if not higher. Okay. But again, like I say, I think for WiFi product probably it's relatively common because the trend is pretty clear. 5G right now is a pretty heated debate, like pretty heated in the top -- out there. So in term of final gross margin up, I think we still need to wait for second half this year to finalize that. But in general, based on currently available information, it should be better. But again, we'll know what ASP profile would look like once we get into the second half of this year.

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Operator [57]

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The next one to ask questions, Gokul Hariharan, JPMorgan.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [58]

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David, just one question on both gross margin and operating margin. I think we have done a very good job in the last few years of improving the gross margin pretty steadily. How should we think about further improvements for gross margin? And then kind of tagging along to Brett's previous question, should we expect that gross margin improvement from here on is not going to be that big? Like you're probably going to stay around these levels?

At the same time, could you also talk a little bit about operating margins, given that I think you reached 10% operating margin after quite some time and some operating leverage is starting to come through? Next year, obviously, you're expecting revenues to -- looks like revenue growth is likely to happen with 5G and some ASIC products also coming through. So could we talk a little bit about the operating margin dynamics as well?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [59]

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Well, I think for the operating margins for Q2, as you can see, right now, we get actually like 10%. In the last few years or that multiple quarters, our operating margin are below 10%. Again, our overall goal in last 2 years, or for next 2 years, we're actually trying to improve the profitability. And when we're talking about profitability, again, it's really just both from the gross margin and also operating margin perspective.

In the last 2 years or 4 or 6 quarters. I think the major focus will be increase the gross margin because we come out from a relatively low base. But once we get into 40-something, I would say, even though there's still room to grow, but in terms of pace, will be -- the growth pace will be much more slower compared to what we had in the last few years. But doesn't mean there's no room to improve.

But again, I'm really careful when I answer this question. But neither to indicate, we will continue to see quarter-over-quarter growth, of improvement on the gross margin. Because after all, gross margin has something to do with our product portfolio or product mix. Every quarter is different. So in the last few quarters, there is all on the rising trend, but doesn't mean the next few quarters, it will always stay the trend, especially on a quarter-over-quarter basis. But if we focus on year-over-year perspective, you just lift an observation window, I guess, we'll still feel comfortable to see some growth year-over-year. That's on the gross margin side.

But move down to the operating margin side. I guess what we really trying to push in the last 2 years, and also the next few years, is really the operating margin improvement. Like what we explained earlier, for last year, the operating margin -- especially operating margin dollar grow I think more than 6%. This year, we expect just overall, we're looking for 20%, 30% operating margin dollar improvement. Next year, we don't have the view yet, but I guess hopefully will be the similar fashion.

Because if you do the math, as long as we can somehow grow the revenue, the top line, even at a mild 3% to 5%, bear in mind actually in the last 2 years, our top line pretty much remained the same, right? But if we can somehow grow even for a low single-digit growth of revenue next year, due to the new product portfolio, which including but not limited to 5G, I guess the translations or trickle down to operating margin should be still quite sizable. So this is how we're trying to drive our overall business for the last 2 years, and also likewise, for the next 2 year as well.

Unfortunately, I probably wouldn't be able to give out sort of guidance or view or target or thing like that. Are the same people kind of like explaining their numbers. So I guess that's something we probably will not be able to provide right now.

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Operator [60]

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Right now, we're having Randy Abrams with Credit Suisse.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [61]

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Okay. David, I just had 2 follow-up questions. One on the consumer ASIC, just following up on Brett's comment or question. For the new upcoming gaming cycle, I just want to see if you can comment if you expect to maintain the existing 2 platforms. And at this stage, if you view it as stable content or could be start really to see some increase in that business?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [62]

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Randy, what do you mean, steady 2 platforms?

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [63]

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Yes, just for that consumer ASIC, if you expect -- because you've had those platform wins, if you expect to maintain with the upcoming game console refresh, your market share. And from a value you provide, if there's room to increase the value or content you provided to those game consoles.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [64]

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I see. I think for the consumer products or game console, I think overall, we probably need to wait for the sort of new product coming in, I should say, the customer new product cycle. Because normally, when the new products start coming in, we actually have the opportunity to win more sockets.

For the current product, I guess, this is what it is, it's probably relatively stable. But in term of the increase to market shares, normally, we have the chance to win or lose to the highest bids when there's a new product coming out, a new product cycle on the customer side. But overall, based on the current design win situation, we feel comfortable we should be able to still continue to grow the consumer side of the ASIC business.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [65]

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Okay. And the last one, I just wanted to ask on this G90, as the new product you launched, if you've seen anything on sizing or the customer interest, what type of category will remain niche and very low volume? Or do you have any expectations for this new category were accretive if it's higher ASP?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [66]

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Well first of all, actually, it's -- G90 is a gaming -- I won't say gaming platform. It's actually about one of our platform especially tuned their performance for game-related performance. And -- but bear in mind actually, is that one of the key features or applications, if you like, for the smartphone is usually gaming for China. Some people play the high-end games, some people play the social game. By game is actually one of the main, most frequently used and very popular applications out there.

So I believe it's actually -- G90s is good for high-end gaming phone as well as for others, sort of the general phone, even when you play the games occasionally. And so that's why we say the G90 is not designed as a niche product. It's really a product with niche features, if you like, a niche performance, but it's actually designed for game -- high-end game phone, plus the general products work.

So with that, I think the overall, we do believe actually G90 is, and also P90s as well, is actually really 2 of our 4G major product. The appeal of the products should be able to sort of provide reasonable returns for us.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [67]

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Okay. And do you have any feel on traction or design win momentum at this time? Like, so it just launched, but how it's getting adopted across your customer base?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [68]

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I think adoption started pretty well. I think right now, it's actually -- so today is the end of July, right? I think -- soon, within a month, you should be able to see some of our customers announcing their products, the go-to-market play. So it's actually it's design-in and design wins actually were pretty good.

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Operator [69]

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Ladies and gentlemen, we thank you for your questions. Now I'll hand it over to Mr. Tseng for closing comment. Please proceed.

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Tienyu Tseng, MediaTek Inc. - Senior Manager of Finance Division [70]

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Ladies and gentlemen, this conclude MediaTek's 2019 Second Quarter Conference Call. We'd like to thank you for your participation, and you may now disconnect.

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Operator [71]

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Thank you for your participation in today's conference. You may now disconnect. Thank you, and goodbye.