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

Q3 2019 MediaTek Inc Earnings Call

Hsin-Chu City Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of MediaTek Inc earnings conference call or presentation Wednesday, October 30, 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

* Jessie Wang;Investor Relations

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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

* Sebastian Hou

CL Securities Taiwan Company Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the MediaTek 2019 Third Quarter Investor Conference Call. Your speakers today are MediaTek's Director of Investor Relations, Jessie Wang. Wang will report the third quarter results. And after that, we will open for Q&A.

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

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Jessie Wang;Investor Relations, [2]

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Good afternoon, everyone. Welcome to MediaTek's Third Quarter 2019 Conference Call. As a reminder, all content provided on this teleconference is for informational purposes only, not intended for investment advice. Neither the issuer nor any of independent 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 statements based on TIFRS.

Unauthorized recording or redistribution of the video, audio, text and the 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 third quarter financial results. The currency here is the NT dollar. Revenue for the quarter was $67.2 billion, up 9.2% sequentially and up 0.3% year-over-year. Gross margin of the quarter was 42.1%, up 0.2 percentage points sequentially and up 3.6 percentage points year-over-year. Operating expenses for the quarter was $21.3 billion compared with $19.6 billion in the previous quarter and $19.5 billion in the same period last year.

Operating income for the quarter was $7 billion, up 14.4% sequentially and up 11.4% year-over-year. Operating margin for the quarter was 10.5% compared with 10% in the previous quarter and 9.4% in the same period last year.

Net income for the quarter was $6.9 billion compared with $6.5 billion in the previous quarter and $6.7 billion in the year ago quarter. Net profit margin for the quarter was 10.3% compared with 10.6% in the previous quarter and 10% in the year ago quarter.

EPS for the quarter was $4.38 compared with $4.11 in the previous quarter and $4.30 in the same quarter last year. We also provide our TIFRS financial measures which exclude share-based compensation, amortization of acquisition-related assets and the tax effect. Please refer to earnings press release and the presentation for details.

For the fourth quarter of 2019, we expect revenues to be in the range of $51.8 billion to $67.2 billion, flat to down 8% sequentially, and a forecast exchange rate of TWD 30.6 to USD 1. We are forecasting the gross margin at 42% plus or minus 1.5 percentage points, and a quarterly operating expense ratio to be at 32.5%, plus or minus 2 percentage points.

With that, 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) The first to ask a question is Randy Abrams, Crédit 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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Okay. Yes. And good result and outlook, especially for next year. I'm curious on the fourth quarter sort of the guidance flat to down 8%. If you could go through the factors for -- it looks like a little bit above season or above some of the prior years. And maybe coming off of that, with first quarter, the start of the 5G ramp, if it's your expectation, we may continue this, at least based on an early look at some of the customer forecast out there.

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

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Randy, I think for the 5G again, like what we talked about during the Chinese call, overall, in the last quarters, we feel that market momentum is actually improving or getting better. I think that has been confirmed. But in terms of the detailed momentum into the volumes and as our customers design, and this and design win situation, we probably would not be able to disclose all those details right now. But probably, the best way to think about that actually is that we pretty much have a pretty solid design and design win in progress with all the key customers. And currently, we will not be able to disclose all detail. But once their product is actually in the market, I think everyone will know. I think instead of a -- before end of this year, people should know actually who our customers because we feel comfortable that some of the customer will have a product launch before end of this 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. And maybe to take a step back, sir, I was just more implying for the fourth quarter. If you could go through the factors, maybe your guidance for sales is down -- flat to down 8%, maybe what drove it a little bit better than some of the prior years? And then kind of the initial read, how that looks into first quarter?

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

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I think for the fourth quarter, specifically, in general, that's still in line with the past sort of the fourth quarter seasonality. And in terms of the magnitude, like you say, is actually slightly better, but mainly due to the smartphones revenue momentum in the fourth quarter. I mean in the fourth quarter, for the non-smartphone sector, is actually -- have a seasonal down, which is in line with the past seasonality.

On the other hand, I think our smartphone strategy for the 4G smartphone in the fourth quarter, I think in general, we've got a really very strong quarter. So I think that somehow offset the original or the embedded seasonality. So I think that's actually is when you combine both of that, that gives out aggressively stable and less volatile or less seasonal fourth quarter.

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

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Okay. And a quick follow-up on that question. Is that more an export 4G that you're seeing the staying power hold up and that's where the strength is, it's a fairly healthy export market?

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

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Well, I think export market is definitely one of the factors or one of the major factors, if you like. On top of that, I think the China 4G still have a relatively stable demand even for fourth quarter. It's actually both.

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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 then I wanted to ask on the margins. It sounds like more confidence on the accretive after seeing more market feedback. I'm curious if you could talk maybe the drivers on the confidence. Is it a different look on the competitive pricing discipline or landscape or something you're seeing on either the differentiation of your product or cost structure, how you're positioned?

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

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Well, like what we said during the Chinese call, I think it's nothing secretive, to be honest. In general, we are approaching some of the mass production time. I think we got better handle about the pricing, about the volume, about the timing, about the overall segmentation for (inaudible). I mean it's just a natural for the business, so we're much closer or near to the mass production. I think we got a better handle on the gross margin. I think this is why we kind of indicate we feel comfortable that the 5G should be accretive on the overall margin. But again, like what we explained, it doesn't imply we change our view. It's just -- in the last quarter, we don't think that's the right time to kind of disclose that because there's still some more uncertainty or some moving piece out there. But right now, actually, given the fact we're going to start shift 5G in the fourth quarter and also in first quarter as well, and so I guess we feel much more comfortable in terms of timing to discuss our view about the 5G gross margin 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. I guess what I'm looking at, because 4G, I guess when it came in, it got -- as we got closer, it got a lot -- it was very aggressive pricing to go after market share. Is it -- are you just as you get closer to seeing a better environment? Or it's just more from your -- how you feel like your products are positioned for differentiation or...

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

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I think overall pricing need to be competitive, and I think that's just natural for the business. So pricing always got to be competitive. But another key element, I think something will probably do but we think it arguably, about something we call starting for early this year. It's something we call the segmentation migration, okay? If you recall, early this year, we talked about how we start with P60, then we migrate to P90, then the G90. So the portfolio right now is actually much more balanced. And more importantly, we expand into the mid- to high end, and that helps on the margin as well on top of a competitive pricing.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [12]

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Okay. Great. And then last question I'll ask is just -- I think you started to talk about a third chip, like the sort of the first chip is high end and then mid-tier. So if you could expand that -- if you could elaborate a bit more how you will roll the product line further out and kind of timing and like if that's also going to come out kind of in the second half for that separate chip on 5G?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [13]

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We probably will not be able to disclose a lot of details for the third chip. And I think the general idea is to just trying to let the market know that, for the 5G product, again, that's not something new. We kind of explained to everyone that we actually have a pretty aggressive portfolio strategy, which means we want to make sure we cover all segments, not just a single segment or a few segments. The only difference this time around is actually because the 5G product is actually a new product cycle, normally, it was found in the high end. So that's why we just are in line with that portfolio. We have the high first start shipping fourth quarter, and mainstream started shipping in second quarter. And basically, the products in the following is basically second half next year. But in terms of detail, we probably need to withhold that until the product is actually formally launched second half next year.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [14]

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Yes. And for the price point, can your chips get -- or do you think we could see sub RMB 2,000 or that probably takes a bit longer for the overall build materials to get to that?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [15]

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Sub 2,000, I think it will take much longer. I think in general, at least for next year, probably we're not going to see the sub 2,000. Most likely, it's going to be 2,000 above. Yes.

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Operator [16]

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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 [17]

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So first of all, on gross margins, could you just talk a little bit -- I think Randy did ask about some of the gross margin details, but just wanted to understand that. What are you seeing from the customers and your competitors? I mean previously, the view was gross margin is probably going to be similar to 4G. What has changed? What gives you more confidence on the gross margin side? And is that something that you expect to happen to the 5G product cycle? Or is it primarily a function of the 5G products next year being more high end than the 4G product?

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

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Again, I think I've kind of explained about what's our view because it gives us more confidence. I think probably the better way is actually last quarter, we didn't really commenting about the gross margin because there are still some moving targets. Now because we are going to ship 5G in the fourth quarter and also in the following quarters, so I think a lot of a little bit less moving piece out there. I think that's reason #1, we will be trying to slow down. The reason #2 is actually is because, again, the third quarter and the fourth quarter are 2 very important quarters for us because we're trying to bring up, stabilize the system. And more importantly, now I think both on our side and our customer side can know what the overall performance for our 5G product. We're always talking about the gross margin versus ASP is all depending about what our product positioning. Now actually, our customer got much better understanding and handle of our performance and actually also related on the pricing and also on gross margin as well, if you will try to drill down.

But overall, again, I'll just repeat myself several times. It's not a new information. It's just -- normally we don't disclose detailed gross margin. We're still too far down the road. But now actually given the fact that we ship 5G this quarter, I guess we think it's the right time to disclose that.

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

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Fair enough. Okay. Could you talk a little bit about how this ASP increase, higher 5G mix starts to translate down to your operating margins as well? Because it seems like that's where the bigger impact is likely next year. Could you talk a little bit about how we should expect operating margin improvement? And any thoughts on how much OpEx growth you would anticipate next year, given next year, I think is going to be the first year of meaningful revenue growth after a couple of years?

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

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I probably would not be able to provide a qualitative guidance on that one because, again, we still have a few months -- actually 1 quarter to go, and next year, there's still a lot of moving pieces out there. But just about -- if you look back on our trajectory, I think in the last 2 years, what we did as we were trying to maintain the revenue and also managed to grow the revenue a little bit, I would say very low single digit. But in the meantime, in the last 2 years, I think the key thing, the key initiative, what we did is, a, we try to improve the profitability. So that's why you see the gross margin being on the rise in the last 8 quarters. And b, I think more importantly, I guess probably the best way to increase operating leverage is really trying to increase the top line. In the meantime, at least maintain the gross margin, if not, further increase the gross margin. But in order to increase the top line or increase the gross margin, the new product portfolio, the completion -- the comprehensive product portfolio and also more importantly the timing of the product portfolio, when the products are ready, are 2 most important critical factors out here. So the last 2 years, we've been spending a lot of time and effort and also a lot of R&D efforts on that. And 5G is obviously along this direction. But I think earlier this year, we also talked about, in addition to 5G, the data switch, basically the enterprise business, the automotive business, are all in the same line. So again, it's got a long way to answer your question, I guess. For the next years, the overall game plan is a, we're definitely trying to increase the top line because that's the most effective and efficient way to increase operating leverage; and b, hopefully, through the different business mix, we can still continue at least maintain the gross margin, if not manage to grow the gross margin a little bit. And once we can achieve 1 or 2 of that, I think we should continue to see pretty good operating leverage out there. Again, operating leverage, what I mean by that is that, hopefully, we continue to see the operating margin ratio increase in the meantime, the absolute dollar increasing at a meaningful pace.

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

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Understood. Okay. Could you talk a little bit about your market share? I think you mentioned in the Chinese call that 5G market share should be at least similar to 4G or, if not, could be even higher. Could you talk about the degree of confidence, maybe first half next year? And second half, I think, obviously, the product is still coming out. So I just wanted to understand where is that confidence coming from. I guess first half is probably more in the back given you probably kind of [sample] and kind of secured some of the designs.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [22]

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Well, yes. Let me give you a detail about since you asked the question. Let me just say this, do a small clarification, especially during the Chinese call. I think during the Chinese call, one analyst about our view for the 5G market share, right? Our view is actually pretty straightforward. Our goal is actually, in the 5G product cycle, our overall market share should be at least the same, if not better than 4G. I think that's the big statement. But somehow, people bring that directly to our earlier guidance, talking about our view, say, for 2020, in China, we believe overall 5G should be around 100 million units. And people then talk about the market share is 40%, which implies our 5G shipment is to be 40 million. The short answer is no. Actually, the 100 million is not the addressable market. It is the total addressable market, not the service market, if there are some internal solution vendors out there. So again, when we're trying to calculate the shipment on the MediaTek side, there are 2 factors out there. A, I think market share-wise, we feel comfortable. We're looking for 4G, if not higher than 4G market share. That's our goal. And -- but just for the addressable market, people need to apply to your judgment on that. That's I think point number 1.

Point number 2, let me answer your earlier question saying what's the confidence level, why we're so confident on that. And again, it's all about the product portfolio, that comprehensive product portfolio and more importantly the timing of the product portfolio. When you think about market shares, especially for 4G market shares, one thing you need to realize, actually in the past, our market share on the high end is near to nothing. It's like 0%. So this time around for 5G, if we can get something, okay, on the high-end side, assuming you're on the entry level and managing side, we can maintain the market share, if you do the math, which means our market share should be higher in 5G product cycle versus 4G. I think that's a simple assumption. Because in the 4G side, I don't have the high end. On the 5G side, I start with the high end right off based on designing and design win situation. It's actually much better than 0%. I got 0% of high end. So assuming in entry level, I only get the same 4G market share, overall, if we do the math together, the market share should be higher, okay? But when you take into consideration about the timing this time around about when I have the comprehensive 5G product portfolio ready, it's actually much faster than earlier compared to my 4G market share. And so in general, from an industry perspective, when a player has that comprehensive product portfolio ready at day 1, they actually got a better chance providing the product portfolio and also product performance is actually very competitive. In general, they got the chance to get a better market share. And I think that's basically the assumptions.

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

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Understood. Okay. Could you also talk a little bit about -- I think on the competition side, it looks like #1, #2 merchant players seems to be very disciplined on pricing, and pricing is going up. Do you see any -- how much is the risk is the #3 player, like Samsung coming in and disrupting the pricing dynamics in 5G? And how do you think about the price premium for 5G versus 4G? Is it just that 5G die size, foundry node, all those kinds of things are more expensive? And the price premium that we're seeing, 5G versus 4G, is going to stay similar in pretty much every segment on a like-for-like basis?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [24]

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I think actually -- I don't have the answer, to be honest, okay? But I think overall and maybe I'll come back to the baseline is, our merchants have a comprehensive product portfolio starting at day 1. I think they will change a lot of dynamic, both from a customer perspective and also the competitive landscape. That's point number one.

Point number 2, I think, again, during the Chinese call, some people talked about our high end maybe is getting to our competitors kind of serious. But in reality, I guess, we feel very comfortable in our high end product on the 5G side. It's actually very competitive, even compete with our peer companies. There's such a product would be and kind of serious. I think that actually changed the loss of the competitive dynamics out there.

On the Chinese call, we're kind of talking about we are probably the first one and only one right now for the new radio care relegation. So the download speed will be up to 4.7 gigahertz. And our view is actually we are probably the leaders in the high SoC with the fastest speed of the download speed. That's just one example, right?

Another example is if you think about, from a CPU perspective, we are the only one using the latest A77 CPU architectures. That actually will translate into pretty good application process and performance. And I think we're going to have a lot more details to talk about by end of this year, so I think we will have a 5G product launch event. But in general, I guess we feel -- this time around, we feel fairly comfortable, from a product performance, not just on the timing and the comprehensive product portfolio, more importantly, the product performance itself is what actually gives us confidence.

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [25]

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Understood, understood. Just my last question, shifting gears a little bit to ASIC. How do you -- can you give us an early read on how you think about ASIC growth next year? I think we are expecting some of the networking ASIC to start ramping up I think in Q3 or Q4. And also I think consumer ASIC probably is a good cycle. So if we -- I think 5G, obviously, is the spotlight, but if you step aside into the growth businesses, could we say ASIC is probably going to be the fastest-growing segment within the growth segment next year?

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

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When you talk about ASIC, I'm assuming you are more focusing on the enterprise sector rather than the consumer product, right?

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Gokul Hariharan, JP Morgan Chase & Co, Research Division - Head of Taiwan Equity Research and Senior Tech Analyst [27]

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Right.

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

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Okay. I think for the enterprise sector, I think starting from Q3, this is the first time we start to ramp our -- actually we start to ship our enterprise solution. I think overall both from a performance perspective and also on a deliverable perspective, the customers are all very pleased about our performance. In the return, I think starting from this year, we have more -- a few more design ins and design wins. Given the fact for the enterprise assets, the revenue base is very low this year. I think from a revenue growth momentum perspective or growth rate perspective, to be precise, next year will be pretty strong or could be strong. But on the absolute scale -- I mean the revenue -- absolute revenue scale, I think no matter this year or next year, is going to be still relatively small because of the enterprise solution I think ramping up time, actually taking much longer compared to the consumer product. But overall, if we're judging from the addressable market perspective, and more importantly, based on the current design and design win, the momentum perspective, we'll feel fairly comfortable that will become another gross pillar in 2 to 3 years' time.

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Operator [29]

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Right now. We're having Brett Simpson, Arete Research.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [30]

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Yes. David, can I ask about the segment breakdown in Q3? Just to go through the 2 divisions and where exactly sales splits between those? And also, just on Q4, do you expect to report positive year-on-year sales growth in the mobile business?

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

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Brett, sorry, your first question was talking about the revenue breakdown among different business lines?

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [32]

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Yes.

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

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Okay. I think for the smartphone or the mobile computing, to be precise, we can -- including smartphone and tablet, in the third quarter, which account roughly 32% to 37%. For the growth factors, which including IoT; PMIC, power management IC; ASIC, which is consumer ASIC and also the enterprise, all together, I think that accounts for 32% to 37% as well, so pretty much the same size of the mobile computing. The rest goes to the smart home and other, which including TV and others, which account for roughly 28% to 33%. I think that's the revenue breakdown among our 3 business sectors.

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Brett William Simpson, Arete Research Services LLP - Senior Analyst [34]

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Okay. Great. And then just on mobile computing specifically, does that suggest -- I mean, just given the guide for Q4, it sounds like it won't be declining -- maybe it's relatively flat for you guys. Does that mean we go back to positive year-on-year growth in mobile computing?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [35]

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For Q4 precisely, Q4 year-over-year growth, I think, it's positive, so…

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Unidentified Company Representative, [36]

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[I said yes].

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

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Okay. And in terms of unit numbers, because I know you sometimes talk about how many shipments in mobile computing. Are we around about a 100 million-a-quarter level? Can you give us some insights there?

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

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No. I think I can't provide the details to you right now, unfortunately.

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

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Okay. And then, I guess, in Q4, you have a couple of things happening that's a little unusual in consumer tech. You have Chinese New Year coming a little earlier in January versus February. And also, you have, in the U.S., you have tariffs being introduced -- potentially being introduced in mid-December. Are you seeing any pull-ins because of both these issues? And can you talk about what impact this might have? I mean are you concerned at all about finished goods inventory heading into year-end this year?

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

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Different business unit probably have different implications. If I may, let me just go through one by one. I think for the growth sector and also for the smartphone and others, by and largely, mainly consumer product-related, we all see a seasonal downturn in the fourth quarter, which, from our perspective, is pretty much in line with the past seasonality. To be precise, actually, it's -- are you kind of talking about several macroeconomic factors out there? We didn't really see those macroeconomic factors somehow come in and cause severe seasonality. When I say severe, I mean compared to the normal seasonality. I would say it actually is normal seasonality compared to last few years. So I think that's on the nonmobile computing sectors.

On the mobile computing sector, on the other hand, I guess, it's truly somehow -- we show in this year is actually a different seasonality pattern. Actually it's a much better seasonality. And I think the rationale, reason behind that, I think, a, all this actually would probably still manage to gain some market shares in mobile computing. That's reason #1. Reason #2 is kind of like you say; this year is actually where we have earlier Chinese New Year, so some of the companies start reviewing their inventory in fourth quarters. And #3 is actually, in the fourth quarter, we see the exported market which is the outside China, they are all pretty healthy and stable as well. I think that's a combination of all 3 factors out there.

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

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Okay. Great. And David, just on 5G, can you give us an update around how you're thinking about the market size in 2020? Maybe split between domestic and exports. And what market share do you think is achievable for MediaTek in 2020 for 5G?

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

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We actually don't have new guidance or new views about the 5G. Let me just repeat what we talked about last quarters. Our view is actually, for next year, globally 5G, maybe around 140 million and with a big portion coming off on China. I think for mainland China our view will be like 100 million, rather than the 140 million. By the way, that was our view for last quarter. I think this quarter is -- overall, our view becomes even more positive about the potential size. But in terms of the actual view, we probably likely withhold that for one more quarter because, again, there are several factors blending in. I mean we do see stronger demands out there, both from the customer side and also from -- especially from the operator perspective. But on the other hand, we also kind of worry about the global macroeconomic situation. Brett, if you follow the recent -- several big companies out there, they got somehow mixed view about the global economic situation, not just talking about the China/U. S. trade issue, but also in general -- across sector and across geographies. So that's something we still need to monitor and follow closely. But overall, I guess, our view still feel positive for 5G demand. And the baseline, China 100 million, global 140 million, has not changed yet, but most likely for next quarter, we're going to upsize that. But in terms of magnitude, bear with us. We've got better view for you maybe next quarter.

In terms of market share, again, that's the same targeted view. I think our 5G market share, especially if we don't have focus around Q1 or Q2, or not even for 2020, I need to be clear on that. Our view is actually for the whole product life cycle for 5G, our market share should be better than 4G, okay? It doesn't mean in Q1 it's -- my 5G market share will be better than 4G, I think that's not what we're referring to. And why we feel comfortable for the 5G market share versus 4G? For 2 simple reasons. First of all, for 4G our market share at the high end is like 0%, very low, okay? But for 5G, in general, we should have some market share from the high end. So assuming we share the same market share for mainstream or even for the entry level, as long as we can get some of the market share on the high end, on the branding basis, our market share for 5G should be better than 4G. I think that's reason #1 or assumption #1. Assumption #2 is, actually, if we look at the 4G product cycle, when do we have a comprehensive 4G product cycle ready versus when we should have a 5 -- comprehensive 5G product ready. I mean that readiness actually is much different. This time around, we're talking about -- we have at least 3 products across all different sectors that are 5G-ready pretty much right now versus 4G. It will probably take us 2 to 3 years. So I think our positioning, more importantly, when we talking to our customer about their product planning, I think the overall positioning is actually very different. They actually give us even more confidence about the market share as well.

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

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And maybe just on understanding the number of design wins you have or anything you can help us, just in terms of the engagements you're getting, do you have multiple customers for your first chip, your high-end chip? Or do we really have to wait for that second generation or second chip before we see the customer count really start to grow?

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

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I think, for the first product, which is the high-end product, I think we have multiple customers. We don't need to wait for the second generation product. Multiple, yes.

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

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Okay. That's helpful. And then maybe just finally on smartphones and 5G. How should we think about ASPs? Because as you say, this is a new segment for MediaTek. We haven't seen you in the sort of premium segments in 4G. So how should we think about ASPs? And I guess, if we look at 4G today, you're maybe under $10 or so, around about $10 ASP. In the early ramp in 2020 for 5G, should we be assuming roundabout the sort of [$30 to $40] level, if it's competitive with, say, Snapdragon 800 or Snapdragon 700, that would suggest ASPs well ahead of what you're producing today in 4G. So just want to get your sense as to how we should be modeling that.

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

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Well, first things first. I probably would not be able to comment on the absolute number, right, unfortunately. But let me try to answer your question from a slightly different perspective. Well, first of all, I guess, because we feel comfortable and confident about our overall product portfolio, more importantly, about our product performance, so we're definitely trying to make sure we capture the value we create, which will factor in ASP, and also on the gross margin as well. I think that's how we're pricing -- how we come to our pricing strategies for our new product. So we will not go lowball on ASP because this time around, I guess, our product portfolio and also product performance is actually very good. It's actually very good. So we will matching -- but in the meantime, we will be competitive as well, okay? So I guess we just need to find a delicate balance about competitiveness versus capture values about our product portfolio.

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

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And maybe just lastly, David, on foundry availability. You're going into 7-nanometer and potentially 6-nanometer next year. And I guess when you look at the ramp-ups that TSMC is committing to with other guys in this same node, whether it's iPhone 5G, Huawei is obviously a major customer, AMD is ramping hard. Are you happy with the availability of wafers to deliver potential upside scenarios for 2020, particularly in the second half of the year when seasonally the leading edge is pretty tight for capacity?

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

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Brett, I think it's tough question. Probably, the best way to answer that is actually, so far we work very closely with our foundry partner. So [we have loans in] partner -- to our foundry partner. And they understand we have a pretty comprehensive and competitive product portfolio. And we -- so far, we got -- I think we got enough support.

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Operator [49]

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And next we're having Charlie Chan, Morgan Stanley.

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

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David, I'm sorry that I went with my own math based on your comments. So thanks for your clarification on those 5G market share and those comments. So first of all, if I may, get more color. What is your 4G market share in China or globally? Is it based on your company's own data?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [51]

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Charlie, can you repeat your question again? I didn't really -- the 4G market share?

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

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Yes. So I just want to get your own kind of assumption for your 4G market share.

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [53]

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Our 4G market share -- again, we are charging from the addressable market perspective, not the total market perspective, roughly is around 40%.

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

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Roughly 40%?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [55]

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40%, right.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [56]

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It's global or China?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [57]

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That actually is -- addressable market is mainly in China. I should say China and emerging market.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [58]

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Okay. And then, I think the big part of the 5G (inaudible) probably comes from another player, Huawei, right? So can you comment your possibility to get a Huawei 5G smartphone order? I remember last week -- sorry, last quarter, you did try to answer this question. I remember the answer. You said you wasn't sure. But how about the possibility now for a Huawei 5G?

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

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Sorry, I probably would not be able to comment on this question.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [60]

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Okay. And then, yes, in terms of time frame, how long do you think you can bring your 5G market share to your 4G market share?

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

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I think this year we've managed to increase the market share a bit. I mean next year is, like what the CEO talked about during the Chinese call, we still have a pretty solid 4G business product portfolio for the next few years. We do believe for the emerging market, I think, 4G will be a long-tail business and will be [relevant] actually, for many more years. So I think based on our product portfolio, and more importantly, based on our current market shares, our view is actually we can at least maintain, if not maybe increase a bit our market share on 4G.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [62]

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Okay. And then I guess on your millimeter wave products. I remember last time you mentioned, it could be out around next year-end. And do you think this one will target even higher-end markets or the same segment as the MT6885?

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

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I think for the millimeter wave, I think it's merely for the non-smartphone product. Definitely, I think for the super high-end smartphone, there might be a few sectors will require those millimeter wave and also a sub-6 gigahertz product. But at least right now, especially if you based on from China's demand perspective, I think sub-6 is actually -- it is probably the best solution on the high end because people probably want more multimedia function, AI function, (inaudible) function (inaudible) in the millimeter wave function. But by saying that, we're still going to have a millimeter wave solution, but know in the beginning of the millimeter wave solution, we'll be targeting on the non-smartphone sectors, basically non-smartphone (inaudible) migrate that into smartphone solutions.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [64]

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Okay. Yes, actually, between Chinese call and the English call, we start to get some investors feedback, right? So somehow investors are a little bit concerned about the OpEx trend. I'm not sure why after your explanations, investors are still concerned about third quarter OpEx. So if you can give us just kind of a more kind of comment about the future years OpEx (inaudible) recall is the top line. What kind of OpEx in terms of growth rate are you expecting for the OpEx?

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

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Charlie, I probably don't have the number on top of my head with me right now, especially not the OpEx. Just right now, to be honest, we're still going through those we call the annual planning right now. In general, we will have a better understanding and better view of the OpEx next year, probably in late November since this is our planning sessions. But if I may, why don't I just commenting about this year at least. I think we did here -- if you recall earlier this year, we kind of gave the guidance -- the OpEx on absolute dollars. Therefore, we're looking to manage that to low single-digit to mid-single-digit. I think for the full year, if you take our midpoint of our guidance for the 4 quarters, I think, overall, we are pretty much in the mid-single-digit year-over-year growth on absolute dollar terms. And I think for this year and last year, if people only focuses on OpEx as a ratio, somehow we are handicapped because from the top line in last year, this year, we didn't really see a strong top line growth. This year we probably see low single-digit top line growth in the -- based on how we do say in the fourth quarter. So how we manage our OpEx this year and last year as well, as we're referring to the shareholder, is actually -- in potential investor, is actually on the absolute dollar terms. I think for next year, again, I don't have a detailed disclosure yet. I think we'll have a better view maybe later this year. Following that, I think how we manage our P&L, so operating leverage, (inaudible) leverage, is we will be trying to increase the operating margin dollars at a very healthy pace. Like last year, operating margin dollar rose more than 60%. This year, again, if you take the midpoint of the guidance, I think overall, we're looking for very strong double-digit growth on operating margin dollars this year as well. And on top of that, you also see the operating margin ratio expand, continuing nicely in the last 2 quarters.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [66]

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And lastly, can I switch gear to your kind of the new growth drivers? So besides the new working ASIC, can you comment about your progress in those AI or kind of data center server type of ASIC? And when do you think that is going to contribute to your revenue?

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

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We probably would not be able to break down such details at this presentation, but in general, for ASIC, we'll break it down to consumer product. Right now, it actually is majority of our revenue coming up on consumer product, mainly from the game console, both for -- especially 2 big platforms, the Xbox and the PlayStations. Then for (inaudible) what are the new initiatives, mainly some people talk about on enterprise sectors, which including data switching and also the [older] AI and other stuff you talked about, but we only don't do further breakdown, level 2 breakdown. We only just categorize it as enterprise solutions. And this year, the revenue is still very tiny, very small. Last year, we see very strong growth rate but because the base is still very low, even with a very strong growth rate, I think, on the absolute dollar revenue perspective, it is still pretty small.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [68]

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Okay. And then on TWS, what's MediaTek's view about the market size and the pricing trend? Do you think it already reached a point that the chip for TWS is [commoditizing]? And what was kind of MediaTek's overall target to grow this kind of overall IoT business in next year?

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

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Well, I think for TWS, our view is actually, currently, if your judging it from the market share perspective, well I think we are still leader in this space. [And those 3 things, obviously is being commoditizing] because we can see a lot of new application coming in and still a lot of new technology we could put in into the TWS solution. And I think, overall, we have several new products coming out in TWS and we do believe, largely in the fourth quarter and then the first quarter next year, we should be able to get more market share on the TWS as well.

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Operator [70]

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The next one to ask a question from CLSA, Sebastian Hou.

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Sebastian Hou, CL Securities Taiwan Company Limited, Research Division - Research Analyst [71]

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So my first question is on the -- I think the combination of second-generation 5G SoC [will target phone] selling price at RMB 2,500. So what about the third and fourth following (inaudible)? Will you target the price at a lower one, lower tier phone?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [72]

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Sebastian, sorry. Your voice is kind of breaking out. Can you just repeat the question again? I can't really hear you properly.

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Sebastian Hou, CL Securities Taiwan Company Limited, Research Division - Research Analyst [73]

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Okay. I will repeat. So the second-generation 5G SoC [may not yet had] targeting the selling price – the phone selling price at RMB 2,500. And how about your third and fourth following (inaudible). Would it be targeting even lower tier or pricing of the phone? And what will that be? What kind of the price range?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [74]

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First of all, I guess, again, is that we kind of clarified that during the Chinese call. And I'm trying to clarify it again. I think the precise way to describe that is actually RMB 2,500 in the first. And most likely for the next year, beginning, we're starting from RMB 3,000. Really [RMB 2,500], I think, that actually somehow caused a lot of miscommunication during the Chinese call. So I will just be clear that we're talking about RMB 2,500 to RMB 3,000 and most likely beginning of the product cycle, we'll be gearing towards RMB 3,000, [really inside that value]. And that's my clarification. But to answer your question, I guess, for third-generation product, the answer is yes. We're trying to cover all segments. So the third product most likely will be [carrying] from RMB 2,500 and below.

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Sebastian Hou, CL Securities Taiwan Company Limited, Research Division - Research Analyst [75]

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Okay. Do you have a timeline for the third one, the product?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [76]

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We do actually, but we probably would need -- like to withhold that until the right timing to disclose that.

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Sebastian Hou, CL Securities Taiwan Company Limited, Research Division - Research Analyst [77]

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And in terms of the foundry technology node of your 5G SoC product, so for the next year -- I'm sorry, what was your plan on the 5-nanometer? When will you move to 5-nanometers?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [78]

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I think for 5G solution, next year we will be all on 7. We do have still projects coming out from both 6 and 5, but again, we will disclose that when the time is right. But we do have projects on both 6 and 5.

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Sebastian Hou, CL Securities Taiwan Company Limited, Research Division - Research Analyst [79]

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Okay. So when you talk about all on 7 for next year, this doesn't include 6, 5. It's actually the [same thing] we have 7?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [80]

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For all 5G product, commercially launched products 5G next year 2020, will all be 7.

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Sebastian Hou, CL Securities Taiwan Company Limited, Research Division - Research Analyst [81]

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Okay. Got it. Just last, double-check. So the smartphone business in fourth quarter is going to be up both Q-on-Q and year-on-year, right?

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David Ku, MediaTek Inc. - Corporate Executive VP, CFO & Spokesman [82]

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Correct.

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Operator [83]

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

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Jessie Wang;Investor Relations, [84]

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Ladies and gentlemen, this concludes the MediaTek 2019 Third Quarter Conference Call. We would like to thank you for your participation and thank you. Now you may disconnect.

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Operator [85]

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