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Edited Transcript of 2454.TW earnings conference call or presentation 7-Feb-20 8:00am GMT

Q4 2019 MediaTek Inc Earnings Call

Hsin-Chu City Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of MediaTek Inc earnings conference call or presentation Friday, February 7, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Ku

MediaTek Inc. - Corporate Executive VP, CFO & Spokesman

* Jessie Wang

MediaTek Inc. - Director of IR

* Lih Shyng L. Tsai

MediaTek Inc. - CEO & Director

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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

* Roland Shu

Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research

* Sebastian Hou

CLSA Limited, Research Division - Research Analyst

* William Lu

UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst

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Presentation

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Operator [1]

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Welcome, everyone, to the MediaTek's 2019 Fourth Quarter Investors Conference Call. Financial results and presentations for today's conference call are available on Investors section of the company's website at www.mediatek.com.

And now I would like to turn the call over to Ms. Jessie Wang, Deputy Director of Investor Relations. Ms. Wang, please go ahead.

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Jessie Wang, MediaTek Inc. - Director of IR [2]

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Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek's CEO; and Mr. David Ku, MediaTek's CFO. Mr. Ku will report fourth quarter results; and then Dr. Tsai will provide our prepared remarks. After that, we will open for Q&A.

As a reminder, today's presentation will provide forward-looking statements based on our current expectations. The statements are subject to various risks and factors, which may cause actual results materially different from the statements.

The presentation material supplement non-TIFRS financial measures. Earnings distribution will be made in accordance with financial statements based on TIFRS. For details, please refer to the safe harbor statement in our presentation slide.

In addition, all contents provided in this teleconference are for your information only, not intended for investment advice. Neither MediaTek nor any of the independent providers is responsible for any actions taken in reliance on content provided in today's call.

Now I would like to turn the call to CFO, Mr. David Ku, for the fourth quarter financial results.

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

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Thank you, Jessie. Good afternoon. Now I will start with a quick update for our 2019 fourth quarter financial results. All the currency followings will be representing in NT dollars.

Let's start on the revenue. Revenue for the quarter was TWD 64.7 billion, down 3.7% sequentially and up 6.3% year-over-year. For 2019, the annual revenue totaled around $246.2 billion, up 3.4% year-over-year.

For gross margin ratio, gross margin of the quarter was 42.5%, up 0.4 percentage points sequentially and up 3.6 percentage points year-over-year. Gross margin of the year was 41.9%, up 3.4 percentage points from the previous year.

For the operating expense, operating expense for the quarter was $21.3 billion compared with $21.3 billion in the previous quarter and $19.9 billion in the same period last year. Full year 2019 operating expense was $80.5 billion, increased 6.5% year-over-year.

For operating margin, operating income for the quarter was $6.2 billion, down 11.4% sequentially and up 61.7% year-over-year. Operating income for the year was $22.6 billion, up 39.5% year-over-year.

For operating margin ratio, the ratio for the quarter was 9.6% compared with 10.5% in the previous quarter and 6.3% in the same period last year. For the full year, operating margin of the year was 9.2%, up 2.4 percentage points from 2018.

For net income, net income of the quarter was $6.4 billion compared with $6.9 billion in the previous quarter and $4.1 billion in the same quarter last year. Net income for the full year was $23.2 billion, up 11.7% year-over-year.

For net income profit margin for the fourth quarter last year was 9.9% compared with 10.3% in the previous year -- previous quarter and 6.7% in the year's -- same quarter a year ago. Net profit margin of the year was 9.4%, up 0.7 percentage point year-over-year.

For earning per share of fourth quarter last year was TWD 4.03 compared with $4.38 in the previous quarter and $2.63 in the same quarter last year. The total earning per share for 2019 was $14.69 compared with $13.26 in 2018.

That conclude my comments. In addition to TIFRS financial report, we also provide non-TIFRS financial measure, which is excluding share-based compensation, amortization of acquisition-related asset and tax effects. Please refer to the earning press release and the presentation for details.

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Jessie Wang, MediaTek Inc. - Director of IR [4]

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Thank you, David. And now I would like to turn the call to CEO, Dr. Rick Tsai, for prepared remarks.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [5]

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Thank you. Good afternoon, everyone. In today's call, I will summarize MediaTek's 2019 performance and then we talk about 2020 outlook.

2019 was a solid year for MediaTek. We executed our business strategy very well to achieve a very balanced product portfolio and delivered much improved financial results. Gross margin improved 3.4 percentage points year-over-year, and operating profit dollars increased nearly 40% compared to 2018.

MediaTek's R&D investments to date have strengthened our competitive position in the global market. In 2019, we increased market share in smartphone, AIoT, ASIC and other consumer electronics. Our technology investment in AI, 5G, WiFi 6, enterprise ASIC and automotive also gained good traction. However, the recent coronavirus situation adds uncertainty to the global economy, with lower near-term visibility. We believe our achievements in 2019 are clear indicators of our overall competitiveness and will translate into mid- to long-term growth.

Now let me further elaborate on our 3 business groups. Mobile computing, which includes smartphone and tablets, accounted for 37% to 42% of revenue in the fourth quarter. We commenced small quantity 5G SoC shipments since December last year. We are expecting a gradual ramp throughout 2020.

In 2019, our highly competitive 4G smartphone lineup not only succeeded in growing market share but also in improving profitability. We believe 4G is a long-tail market where MediaTek maintains a strong position and continues to gain share. Our 4G footprint both in Mainland China and other regions has a strong foothold to build out in 2020.

Then for 2020, with 5G rollout around the world, we expect 170 million to 200 million unit 5G smartphones globally and 100 million to 120 million units in Mainland China. MediaTek has worked closely with major global operators for 5G in their operate -- operability testing and expect to enable 5G smartphones in Mainland China, South Korea, Europe and the U.S. in 2020.

On the product side, MediaTek has put forth competitive 5G single-chip solutions for all segments. Dimensity 1000 series for flagship models in the way, high-performance Arm A77 CPU and supports true carrier aggregation, delivering the world's fastest throughput with 4.7 gigabit per second downlink over sub-6 gigahertz network.

Dimensity 800 series targets the new premium segment, bringing premium AI and multimedia features to the mid-tier market. Dimensity 1000 and 800 series design in projects with multiple customers are tracking smoothly. Smartphones powered by these 2 series are expected to be available in the market in the first quarter and second quarter this year. In addition, we will extend our 5G SoC range to serve the higher-volume mass market starting from the third quarter of the year.

Furthermore, we created a SIM modem business line to address 5G business beyond smartphone. Our announced partnership with Intel to serve the 5G PC market marks our first steps in this direction. The goal is to increasingly expand our addressable market. In parallel with sub-6 gigahertz, MediaTek's millimeter wave solution will be ready this year for devices to be shipped in 2021.

Now on to the growth area, which principally consists of AIoT, PMIC and ASIC. In the fourth quarter, growth area accounted for 30% to 35% of revenue, accompanying healthy year-on-year growth across the board. Growth area has delivered double-digit growth rate for the past few years in a row. In 2019, we enabled numerous marketplace products globally and had a strong presence in WiFi as well as Bluetooth through wireless earbuds. PMIC mainly benefited from cross-platform adoption. And most importantly, we successfully made inroads in enterprise ASIC with our first [wire] networking solution commencing volume shipment and expect more to come in 2020.

Looking forward, we see several positive industry trends such as technology migration and diversity of connected devices. These trends enable MediaTek to further expand total addressable market in the global space and present tremendous multiyear growth opportunities for us. With a rich and strong IP portfolio, we are confident that we are in a good market position to continue to grow our AIoT, PMIC, ASIC and automotive business globally in the mid to long term.

Next, smartphone and others. Primarily TV and other traditional consumer electronics accounted for 26% to 31% of revenue in the fourth quarter. Products in this group are in relatively mature markets and declined seasonally in the fourth quarter. In digital TV, our comprehensive solutions support all price tiers in global market and enable features such as AI, audio control as well as wireless connectivity to make TVs a smart hub empowering AI smartphones. We started shipping our AI 8k flagship SoC S900 in late 2019 and expect our market-leading position to persist.

Before we discuss our first quarter guidance, let me share some thoughts for the year. Moving into 2020, despite near-term macro uncertainties, we still expect a solid revenue growth for the year, driven by the balanced business portfolio and revenues from new areas, including 5G, ASIC and auto. Specifically, revenues from the new areas in 2020 are expected to be over 15% of our total revenue, higher than the 10% we estimated a year ago.

Meanwhile, we continue to pursue profitable growth. We aim to improve both gross margin and profit margin as we expand our top line in the midterm. Our gross margin percentage in 2019 is clearly that 40% target and should remain stable at current levels in the near term given product mix dynamics. For operating expenses, we will invest prudently in new areas at a similar pace as last year. Through internal resource reallocation and disciplined investment, we expect to achieve healthy operating leverage.

For the first quarter of 2020, as the coronavirus situation continues to develop, estimates provided today are based on our best available knowledge at this stage. Despite near-term demand uncertainties, with our balanced and diversified business portfolio, we still see a solid year-over-year revenue and gross margin growth in the first quarter. Based on current effects, our view is that the potential business impact on a full year basis should be manageable.

We expect revenue to be in the range of TWD 55 billion to TWD 50.2 billion, down 7% to 15% sequentially and up 4% to 14% year-over-year at a forecasted exchange rate of TWD 30 to USD 1. We are forecasting gross margin at 42%, plus or minus 1.5 percentage points, and quarterly operating expense ratio to be at 34.5%, plus or minus 2 percentage points.

In summary, we believe MediaTek has the right set of technologies and platforms to fulfill the demand of our global customers, with focus on value creation and execution. Despite near-term macro uncertainties, we believe the multiyear opportunities across different sectors remain intact and will continue to drive long-term shareholder value.

That concludes my remarks. Thank you.

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Jessie Wang, MediaTek Inc. - Director of IR [6]

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Thank you, Rick. Operator, we are now ready for Q&A. Can we please have the first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Now the first to ask questions, 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 want to ask the first question, maybe just to follow up on the virus impact. And I'm curious of the outlook, 170 million to 200 million, if there is any adjustment, just reflecting some of what you're seeing with the virus. And from that side, I think 2 potentials, if you're seeing any change both from a network or device rollout schedule from one side; and then the second would be just whether it's potential demand or customer driving to launch it?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [3]

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Randy, if you look at our numbers, 170 million to 200 million total units globally, this, of course, is up from our forecast 2 quarters ago, which was 140 million. We believe this is a reasonably cautious estimate. We, of course, understand this virus potential impact on China's domestic demand. However, we've been working with our key customers even -- or I shouldn't say working, we've been communicating with our key customers over the past 2 weeks. Most of our -- which 5G product launches, as you know, will be launched in second half this year. And all those projects are basically moving forward.

There are certain, of course, potential disruptions from the working methodologies, but our people are working closely with customers to ensure there will be no major delay in the major projects long term. I feel reasonably confident that the -- for MediaTek, the 5G business will have -- well, will not have a major impact from the virus situation mainly because our major volume will start in the late second quarter, extending into the second half.

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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 if I could ask a follow-up just in terms of the road map. If you could talk maybe the timing when you think we get the first initial volume ramp or models with the 800 series, when that will reach the market, and then maybe the timing when some of the follow-on mass-market chips that would kind of ramp into devices into the market.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [5]

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Okay. The -- as you know, our flagship chip, Dimensity 1000, is being shipped already and also being -- is available in the market. Our 800 newest chips will be shipped in the second quarter. I would say roughly...

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [6]

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Mid to late second quarter.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [7]

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Yes. Mid to late second quarter, we'll have the production shipment. And for the mass-market SoC, we were shipping also in about mid to late third quarter.

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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. Great. And the other trends, you mentioned the new product, I think, originally was 10% or over, now it's 15%. Could you maybe talk to components, how much of that is -- versus when you made the forecast, like a change on the 5G view versus some of the other products like automotive and networking, like what changes you're seeing on that side?

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

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Randy, I think we upsized the revenue contribution for our new products mainly still because of 5G, which as well of course, both for auto and also for asset, we see a pretty healthy growth as well. But given the magnitude of our year, I think the big portion of the new digital revenue is actually mainly from 5G. Especially if, like the CEO said, given the overall product portfolio we have and also given the current design in our pipeline situation, we feel comfortable basically to see the new revenue contribution for this year will be over 15% relative to earlier comments, say, more than 10%.

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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. And the last question, I think it's a good sign, like the margin is holding stable at these higher levels, like around 42%. The 5G, though, I think originally you were saying would be accretive to margin. So with the -- I guess, one, if you still see accretive 5G margins. And then the second part, if you start getting more of the inflection with the mainstream in the second half, if maybe at that time, the margin could start to even move up a bit again.

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

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Well, I think for -- like the earlier guidance we provided, I think the 5G gross margins, I mean our goal should be accretive to the overall corporate margin. And also, we're kind of expecting the 5G gross margin should be slightly better than 4G gross margin. So overall, I guess I think it goes the same. But bear in mind, actually, on the blended basis, they're all 4G plus 5G overall gross margin because right now, especially for this year, most of the shipment is still going to be 4G. So the gross margin on the smartphone side, basically, which including 4G and 5G, which is a big portion of that beyond 4G, still slightly below our corporate average and given the fact the contribution -- overall revenue contribution will be higher.

So if you put everything together, that's why we say this year mostly likely will be the stabilized gross margin. I think the gross margins still have the opportunity to grow up a bit. But I think the key words will be stabilized gross margin. In the meantime, the key for this year is to actually grow the top line. In the meantime, we see a pretty healthy operating leverage, which mean operating margin dollars should be able to see another healthy year of growth this year.

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Operator [12]

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Next one to ask question is Bill Lu from UBS.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [13]

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On your Q1 guidance for revenues, down 7% to 15%, can you just talk about whether that's factoring in any impact from the coronavirus? And in the last 1 to 2 weeks, I'm just wondering what you're hearing from customers since you're really strong in China.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [14]

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Yes, Bill. As far as we can make out with our customers and suppliers, the current guidance does include our estimate of the virus impact.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [15]

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Is there any way you can quantify that? What would the guidance have been without the virus impact?

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

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Bill, unfortunately, I think the -- because the whole situation is still developing, so it's truly hard for us to give out quantitative guidance. But overall, I think that's what -- best we can do was the Q1 guidance issue, which is where we consider everything.

One more thing I'm trying to add on is strategy because right now, again, I think one of the key idea we're trying to propose here is really that our overall business portfolio, these [time around], especially for the first quarter, probably China is, from a relative scale, probably is actually the area with the most hit in terms of end-market demand. But because overall, we still have other region of the business as a demand. Even when we zoom into the smartphone business, we have a sizable revenue, I think, in exporting to China.

So the end demand is actually not in China even on the -- especially China, but actually exporting in China. I think for that one, especially, I think the impact due to the virus impact is actually somewhat mitigant a bit. So overall, I think for the Q1, we do factor in with a reasonable input, actually, based on the best knowledge we have on the coronavirus impact, but we see a pretty still solid year-over-year growth in Q1 guidance.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [17]

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Great. My second question is on 5G, and you talked about global market being 170 million to 200 million. What do you -- what's your target for market share?

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

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He was asking what's our target market share for global.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [19]

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Well, we -- I think over the lifetime of the 5G, we expect to do about as well as the 4G, about 40% of the SAM, 40% of the SAM.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [20]

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Yes. For the life cycle, that's what we've said in the first quarter or first year.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [21]

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Sorry, I couldn't quite hear that. 40% of what?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [22]

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Oh, the serviceable addressable market.

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

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SAM.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [24]

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Okay. So I guess you would be calling that as the total market ex a couple of the customers that you don't serve currently?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [25]

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Correct. The -- like the Apple or Huawei with their own captive chips with their...

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [26]

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Bill, just one thing I'm trying to highlight actually is I think what CEO is talking about is really just for the 5G lifetime, so it doesn't really represent the first quarter or first year market share.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [27]

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Yes. Understood. Okay. My other question is on the ASICs business. It looks like that's growing quite nicely. Can you talk a little bit about, first of all, if you can quantify the growth for us for this year? And then secondly, if you look at the various segments that you serve, i.e., networking, gaming, maybe AI, what are the key drivers for this year?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [28]

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High single digit, double digit.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [29]

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On the growth, it's about high single digit to double digit -- low teens. The key growth drivers, I think, for this year will be in the network and some of the data center applications. For the game, the game ASIC probably will have a good second half performance because of the change of the major game consoles for the key customers.

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Operator [30]

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Now 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 [31]

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First of all, could you talk a little bit about the kind of ASP step-up that you're seeing in 5G? And what do you expect the margin profile in 5G to be when it comes to operating margin? Your bigger competitor talks about 50% increase in dollar content in 5G compared to 4G and is targeting around 500 to 700 basis points increase in operating margins as well.

Now that we have achieved most of the targets that we laid out on corporate level, gross margin more than 40%, close to double-digit operating margins as well. Could we also talk a little bit about, as 5G propagates into the portfolio over the next few years, what does that do from an ASP perspective? What does that do from a margin perspective for MediaTek?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [32]

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Sorry. I [the line was breaking up] so let me check your question. So first question will be for the ASP profile for 4G versus 5G. What's your second question? Can you repeat again?

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [33]

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Yes. The second question is, as 5G becomes a bigger portion of revenues, what does that mean from overall operating margin perspective? I think just to give some reference points, I think MediaTek was making 20% operating margins back in 3D. Obviously, 4G, we had a meaningful margin compression. Your competitor is talking about going back to 20% operating margins in chipset business in the next few years with 5G. So how does MediaTek think about operating margins in the next couple of years now that we have reached 10% operating margin in the last year or so?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [34]

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Okay. For the ASP, I think the ASP, as we explained, the ASP for 5G versus 4G should be multiple times higher. But unfortunately, we can't really provide a detailed guidance. But overall, it is a pretty nice accretive in terms of 4G versus 5G -- 5G versus 4G ASP. I think that's the first question.

The second question is about the OP and operating margin target, if I take that. I think for this year, if you look at 2019 and 2018, in the last 2 years, we've both been growing both from the ratio perspective and also from a dollar perspective very nicely, I think, especially for the last year. I think for this year, as you know, we're aiming for the same thing. We should be able to continue to grow both from the ratio and from the dollar. I think, more importantly, from the dollar. Ratio-wise, like we explained earlier, this year is more like a transition year even though the gross margin -- this year is the key to reach the top line growth. Gross margin is stabilized. In the meantime, actually, we controlled operating expense, so we will see the operating leverage. So we should be able to see both the operating margin dollars and also ratio grow.

But when you're talking about like 20% or 25%, unfortunately, I think this is not what the industry looks right now, especially when you look at like our competitor, our peer companies. I think even for the leader right now in the smartphone space right now, they don't -- we have 20% gross margin, especially if you're judging from the GAAP perspective. Even with the non-GAAP perspective, I think it's below 20%. So I think for the near term, we're really just trying to focus on increase the operating margin dollar. Last year is nice, about more than 30%, 40%. This year, hopefully, will be a nice double-digit as well.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [35]

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Okay. So David, do you have any guidance on OpEx growth this year? What kind of OpEx growth should we expect for 2020? Last couple of years, I think OpEx has been under a reasonable level of control.

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

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I think for last year, the total OpEx increased around 6.5%. This year, I would say, it will be the similar pace, if not slightly lower. I think that's our goal.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [37]

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Okay. And my second question, could you give a little bit more breakdown by the different segments for Q1? I think midpoint, you are looking at about 10% to 11% revenue decline in Q1. How does that shape up for smartphone versus those segments versus the major segments?

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

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We probably can provide some directional guidance, but not the detailed quantitative guidance. I think for Q1, we see, both from the mobile sector and also from the growth sector, we all see a pretty healthy growth. For the smartphone sector, I think for Q1, it's actually a seasonal decline.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [39]

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Okay. So the other 2 are growing on a sequential basis?

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

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Yes, but main issue is the smartphone. I think in terms of magnitude, I think smartphone is still the one with the strongest growth, quarter-over-quarter growth.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [41]

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Sorry, this is for Q1 or for Q4?

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

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For Q1. That's for Q1.

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Operator [43]

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Next to ask questions, Charlie Chan, Morgan Stanley.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [44]

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So my first question is really my question last quarter about your brand image for the 5G SoC. So after your key customer did a product launch, in fact, if you do a like-to-like comparison, the end -- the pricing for the end product is a 7 -- it's around a RMB 600 difference, whereas your chip's performance is similar to Qualcomm 2. So how are we going to reverse that brand image discount? And longer term, do you see any difference of a MediaTek product strategy versus Qualcomm in the 5G?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [45]

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Well, our key customer, if you watch their launching event, they also announced they will use our flagship chip for their higher-end products. I think that should be launched in...

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

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In the first quarter.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [47]

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The first quarter, late first quarter. So as you know, our customers obviously understand and recognize the value of our chips and the -- well, we do have different grade with our -- within our chip series. So there you can -- a different grade of the chips for different grade of their products, which is usually quite normal for most of the customers.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [48]

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Okay. So does that mean you don't see any so-called price discount due to the brand image?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [49]

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I think, well, the price, I wouldn't use price discount. I mean price is always feared in this part of the business. The important thing is, as you will see also, some other customers will come up with their product using our Dimensity 1000 chips for a higher level tier of their products. So we are quite comfortable with that.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [50]

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Okay. Yes. And so -- but what matters is really for the long term, right? So do you see any kind of differentiation of your product versus -- I guess, now it's the only one competitor, right, Qualcomm, in your product road map or your chipset strategy. For example, I think Qualcomm, the reason why they can really increase their 5G content is because they also bundle sale with the RF module, right? So just want to get some thoughts from you about this technology -- sorry, strategy differentiation.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [51]

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We continue to focus on the SoC shared solutions. We work closely with partners in RF programs such as Skyworks, [Bogo], [Muraka] to provide our customers the solutions that they feel comfortable with. We -- if you look at our market position, I think it's just the right thing to do. Our competency resides in our SoC and modem capability. We want to provide the best tiers, best road map for our customers. If you compare our chips portfolio in 5G against our competitors, you'll find that we are really very competitive in the -- really very competitive portfolio. So we are quite comfortable with what we're doing.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [52]

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Okay. And my next question is about your 5G gross margin. So this is kind of a key investor consent that given some delay due to the coronavirus issue and your -- you would enjoy fewer premium for your new 5G SoC products, and maybe it gives your competitors some time to catch up and to do some price competition. Do you think that is the case?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [53]

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Not really. As you know, competitors also have their chips out. We are already -- I think we -- they have their SKUs. We have our buckets. I really feel comfortable that we're working with our customers with the pipeline of the product to come out in the first quarter and second quarter. And then in second quarter, there will be really also mid-tier products out using our 800 SIM with the chips, which I think that this is right at the very beginning of the 5G generation. Again, as I said, I really feel comfortable with our road map in the year. And this road map, plus, of course, what are in the pipeline for next year, will provide MediaTek a strong positioning in the 5G generation right at the beginning of this era.

So I think we have to look at this in this perspective. The virus will have its impact, but this will be gone, I think, after a relatively short period of time. The important thing is that we have the right technology and right products.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [54]

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Yes. So just out of curiosity, right, so your comment, you said the 5G SoC margin is higher than 4G. Do you think there's something structural? I mean I think maybe 6 or 7 years ago, your 4G margin is actually lower than mature product like 3G in the future phone. So what makes the difference this time that 5G margin could be structurally higher than 4G? And how sustainable you think that's going to be after 5G becomes a mass market?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [55]

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Well, I'm going to answer your question in the -- well, I'm not going to give you the numbers, but the -- again, just as I said earlier, I think the key for us with MediaTek for the 5G product is we have the right product with advanced and really competitive technology building right at the beginning of the 5G generation. And this -- we're at the first wave of the business. And for 4G, I think we -- okay, we were kind of a follower and we were playing catch-up for quite some time, and that obviously was not ideal for the gross margin.

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

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Before I pick the queue next question, I will just clear up -- make a quick correction. I think for the previous question asked by JPMorgan, talking about the smartphone seasonality, I think we say it's really Q4, not Q1. It's '19 Q4 last year. I think for the mobile phone, we see quarterly upturns, not Q1. Okay, just a quick correction.

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Operator [57]

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Next one to ask question, Sebastian Hou, CLSA.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [58]

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My first question is on the -- so the CEO mentioned the business growth account for 15% of the revenue in 2020. And how about the other existing business, the other business that are not categorized as new business? Do you expect it to be stable or grow or decline?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [59]

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Well, as we said in our opening remarks, number one, 2020, we will see a solid growth in our revenue overall. Of course, with 5G and some of the ASIC, auto, we will have a good growth. We continue to have our growth sectors like AIoT, PMIC, auto to continue growing. For the smartphone business, I think we will see -- we'll have a more mature -- it's a more mature market, plus some of the quite old product, we probably will not see much growth over there.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [60]

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Okay. All right. On gross margin -- okay, this is my second question. On gross margin, I think the CFO mentioned that this year, the goal is to stabilize the gross margin. But if your new business like auto, AI, 5G will account for 15% of revenue this year versus, I assume, it's low single-digit last year. And assuming these new business carry higher margin presumably, then why -- what's the reason behind the stable margin? Is it because the rest of the 85% of revenue, the margin is declining?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [61]

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No, I don't think this is how we should interpret it. The thing about our business segment is the mobile growth into those models. Obviously, these years, we're going to see a strong growth on the mobile side. Mobile by itself, I think the gross margin will improve due to the 5G rollout. But overall, I think even on the blended side, mobile this year, most of the gross margin contribution is still going to be on the 4G side, so which means the mobile sector, the gross margin still is slightly lower than the corporate average and to know precisely the value of home and some of the other smart home sector.

So for this year, we're going to see some revenue mix shift, which mean higher mobile, lower smartphone. And on a blended basis, basically, we will see a stabilized gross margin. Okay, so it doesn't mean that gross margin on other sectors is declining. It will be just the fleet -- this is the mix that's different this year.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [62]

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Okay. The -- sorry, okay. So when we compare the first half and second half, it looks like the Dimensity 800 will ramp in either late second quarter, assuming more in the second half, and your third SoC will ramp in second half, so which means the 5G as a total smartphone -- total revenue will be higher in second half versus first half. So that should supposedly should be a tailwind to margins. So can we assume that the second half gross margin will be higher than first half?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [63]

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Currently, we didn't really comment about the second half gross margin. We only provide the first quarter and also the full year, but basically, a heads-up.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [64]

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All right. Third question is on your 5G products. On the -- if you -- assuming -- if you assume the -- I would say the initial point of when you launch the product, without any price erosion happening yet on the first Dimensity 1000, 800 and your third generation second half this year, how do you compare the margin? Would it be similar across all 3 different tiers of those products?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [65]

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We don't really provide Dimensity 1000 specific gross margin.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [66]

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No, I know. I'm not asking about the gross margin numbers. I'm asking about, like if you compare it, would it be similar across within the 5G different product lines? I think that's what I'm trying to understand.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [67]

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Can you just repeat your question again? We didn't hear your question.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [68]

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Yes. Okay. So MediaTek will have 3 5G products this year, right? And -- so 5G SoC, and I know you target different tiers of the phone. But looking -- but I think the lower tiers of the phone, certainly the cost is lower. I was just wondering what's the -- would the different tiers of the 5G SoC will carry similar gross margins, assuming no prior erosion?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [69]

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Yes. Again, we don't really provide a [how many] series and other series that has serious growth margin. We only provide the overall 5G planning gross margin.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [70]

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Okay. Okay. But that still means that the overall -- based on the product mix you -- the shift in the mix you see for this year, overall, 5G will still be accretive or higher than 4G?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [71]

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Yes.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [72]

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Okay. Got it. Can you -- and my fourth question is that, can you -- and you mentioned about the millimeter wave products will be ready this year or following chip shipment next year. Would it be -- do you already have the customer traction where you see the customers, they're, "oh, we're going to adopt this next year?"

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [73]

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We're having a discussion with actually multiple customers as to the timing of their requirements and what segments they like to have. So in addition, the millimeter wave technology can also, of course, be used for the SIM modem type of a business application. So we have -- we're in discussion with multiple customers. But as I said, the chips will be available sometime in next year.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [74]

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Okay. Got it. The last one, I mean is in terms of your mass-market SoC to be ready third quarter this year, I know MediaTek has been very confident in your first and second generation of the 5G SoC. It's very competitive. But how -- what's your current assessment on this mass-market SoC when you -- if you compare to itself and also compare to your competitor's offering?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [75]

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Well, as far as our discussion with our major customers is concerned, we believe we have a very competitive mass-market SoC. Since this is already January -- I'm sorry, February, for a third quarter long -- or I should say, production shipment in third quarter based on the several projects already in the line. So we, again, we feel comfortable with our competitiveness in our SoC.

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Operator [76]

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The next to ask a question, Roland Shu, Citigroup.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [77]

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First question, if I look at your 5G global shipment number, 175 million to 200 million. This actually, compared to competitor or compared to the number in industry, I think it looks a little bit low, probably it's at the low side. Yes, so any reason I will add -- is this because that you are particularly conservative on the number? Or is that you factor in the impact for the virus issue?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [78]

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We do include the -- well, we believe the impact of the virus situation. And Roland, if you, again, if you follow our last 2 conference calls, we have been -- we said 140 million 6 months ago. And we said last time, higher number than 140 million.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [79]

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Yes, I know. But this 140 million is that it seems low, yes?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [80]

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We're increasing our estimate. We are not overly aggressive, I guess.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [81]

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Okay. But let's say, compared to the market number, I think your competitor are looking for 175 million to 225 million. TSMC is looking for making somewhere around 210 million to 225 million, and some expects even more. So your number actually is definitely in the lowest in the market. So going forward, do you -- it's better more upside or more downside for your numbers?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [82]

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We're giving you guys a good number as we believe, really. Look, 5G is really in its first year. I guess we are taking a bit more cautious stance on the number.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [83]

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(inaudible)

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [84]

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Yes. And we're comfortable with that.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [85]

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Okay. And so for your targeting 5G market share, you said you are trying to achieve a 40% SAM across the whole 5G lifetime -- life cycle. Yes, so question is then your -- are going to start this 5G market share with the high market share or starting from low and gradually above 40% and then average for the whole life cycle is 40%?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [86]

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I think most likely, Roland, it should be gradually going up because I think that's, basically, that's normally how a new product coming out, how it work out, especially design realm, we're starting from the hiring segment. In the past, we actually don't have any market share. So you can't really much expect. This is the first time getting the high-end, the flagship product. And all of sudden, we just get this to a high market share. I think that's in our original plan, but we do are trying to get in and expand into different segmentation, in the meantime, increase our market share gradually.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [87]

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Yes. Do you have any view for what level of the market share we are going to start with, 10%, 20%? Or...

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [88]

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We -- I think there will be -- first of all, we don't provide that guidance. You will have to be advised to make a judgment. Yes.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [89]

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Okay. My following question is on your -- how about the overall 4G market in first quarter and the 2020 outlook?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [90]

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It looks actually good. We have a strong demand with our 4G chips. And the -- as David kind of mentioned earlier, a lot of those chips are going into the phones, which are being sold outside of China, from Chinese customers and also from non-Chinese customers. So again, we feel good about the 4G market demand.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [91]

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So in terms of the total SoC shipment to 4G this year compared to 2019, is the total shipment for 4G going to increase this year?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [92]

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I think we're talking is our shipment should increase.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [93]

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You said that at least your export market is increased, right?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [94]

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The total shipment, which including mainly on the export market because in China, a slight proportion will be played by 4G -- 5G. So the big portion will be 4G, but we're not talking about the increasing shipment, I'm talking about total shipment.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [95]

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Total shipment, all right. And your 3G, 4G and the 5G will be increased?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [96]

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I'm talking about the 4G shipment from MediaTek.

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Roland Shu, Citigroup Inc, Research Division - Director and Head of Regional Semiconductor Research [97]

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Okay. Yes, true. 4G shipment for MediaTek will be increased?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [98]

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Right.

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Operator [99]

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Ladies and gentlemen, we thank you for all your questions. Due to running shortage of time, we are going to take the last one to ask question. And the last one is Brett Simpson from Arete Research.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [100]

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I just had a question on the automotive business. I mean, obviously, this is a business with long product cycles. But can you talk about your design win progress you're making? I don't know if you can share with us what sort of backlog or order book you've got sort of stretching out into the years ahead. But -- or what portion of RFQ you're winning. But maybe where specifically do you see the most opportunities in autos? We see a lot -- we hear a lot about Android auto in the dashboard. Obviously, 5G, your repositions. Maybe you can just sort of frame how you think about autos for MediaTek? And which OEMs are you really targeting? Which regions? Just to get a sense for how you're going to build up this business over the next 2 or 3 years.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [101]

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Okay. You're right, automotive is the, I guess, how should I say it, a very long-term business to build. We are focused on products that we believe we have a strong competency, such as IBI products, telematics products. We have now -- I don't remember the details, but we do have now production shipment to one of the large Tier 1 customers for our IBI chip. We're also making, I would say, pretty good inroads in the Chinese market, Chinese domestic car manufacturers. And this is the long road for this business. But as far as I can see, the 2 products I just mentioned have the right technology content and also a good, really, access now to the major either Tier 1 manufacturers or sometimes the OEM customers. So we -- again, we are seeing strong growth. But bear in mind, it's the start from a very, of course, low base.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [102]

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Yes. And maybe just on that point, Rick. I mean you mentioned a lot of these areas are coming off a low base. They're in investment mode today. You obviously have relatively high OpEx to sales compared to the industry average. But you also have a great balance sheet. You have a lot of cash, and you haven't done M&A for a while. MediaTek hasn't done deals for a while. So I'm just trying to understand like how you think about M&A playing a role to help you supplement the strategies around some of these new areas in ASICs or autos, et cetera? If you can maybe just help us understand how you're thinking about M&A for MediaTek.

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [103]

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Good question. We -- actually, we really continuously look at potential opportunity from an inorganic growth point of view. I cannot, of course, give you any details, but the -- what I can say is that if there is a good opportunity which has a synergy with our market position, our technologies and also a fairly reasonable valuation, we will certainly pursue it vigorously. So we are working on this constantly.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [104]

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Okay. That's helpful. And maybe just on 4G, I think there was a question earlier. But when we see these transitions from old generation to new generation, it's often the old generation that surprises us in a negative way. And I'm trying to understand how you see 4G playing out for MediaTek in 2020. Do you think it's a revenue -- a flat revenue year for you guys? Do you think it's going to inevitably start to decline, say, in the second half of the year? And how about that gross margin? As you go into the sunsetting of 4G over the next couple of years, would you expect returns in 4G to actually start to rise?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [105]

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As we said earlier, we believe, actually, 4G is a long-term market. It's not -- we are, if you use "sunset,” it's going to be a pretty slow sunset. The -- if you look at the 5G certainly is coming up. The majority of the volume will start in China, I think, and then, of course, in the U.S. and the other geographies. But there are many, many, many people, the current users who will need 4G phones this year and next year in different, again, different part of the world. And our customers are really providing those services to those people. We -- I think David said earlier, our 4G shipment this year will go up compared to last year. I guess that demonstrates our belief in the 4G market.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [106]

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Great. And maybe just finally, WiFi 6, I think this is a big transition for MediaTek. You've obviously got a large WiFi business today. Can you talk maybe more broadly about what WiFi 6 looks like for this year for MediaTek? I assume it's going to be largely smartphone driven. Or do we start to see WiFi 6 in televisions? Do we see WiFi 6 going into home gateways? Maybe just help us understand how you think about that, and also, what the ASP step-up is. Some of your competitors are talking about a 50% increase in ASP. Is that a right ballpark to think about for WiFi 6 relative to current generation 802.11n or ax or whatever it is?

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Lih Shyng L. Tsai, MediaTek Inc. - CEO & Director [107]

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Okay. WiFi 6, of course, is again kind of a new generation for the WiFi, and we have the -- have our first products in the router late last year already. We have, of course, we have our wireless building in our 5G SoC chips. But I'm talking about the WiFi 6 products that we can sell independently. We also have design in the high-end HKTVs for our WiFi 6 chips. We are quite happy with our technology and our, again, our product capability. I think our customers are also happy with our offering. And so it will take some time, of course, to get up the scale for any of the new generation. But we're pretty -- what we're seeing is the acceptance attitude from our customers have, shall we say, accelerated over the past several months. So we have also a road map, a portfolio for WiFi 6 chips for different applications, routers for the consumer, for consumer electronics and also for the high-end applications. So we feel good.

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Operator [108]

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Ladies and gentlemen, that concludes our Q&A session. Now I would like to hand it over to Ms. Jessie Wang for closing comments. Ms. Wang, please go ahead.

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Jessie Wang, MediaTek Inc. - Director of IR [109]

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Thank you, ladies and gentlemen. This concludes MediaTek's 2019 Fourth Quarter Conference Call. I would like to thank you for your participation, and you may now disconnect. Thank you.

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Operator [110]

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