Realtek Semiconductor Corp. (2379) Earnings Call Transcript

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

Good afternoon, ladies and gentlemen on the line. We are currently participating in the second quarter 2026 webcast earnings release hosted by Realtek Semiconductor Corporation. Now let's go through the second quarter 2026 financial results. Second quarter revenue reached TWD 37.6 billion, up a modest 3.1% quarter-over-quarter and a strong 17.7% year-over-year. Realtek's business momentum remained solid in the second quarter, supported by stable end market demand and supply chain-driven price increases, particularly in DRAM. At the same time, certain supply remained tight amid exceptionally strong AI server demand. As a result, some customers maintained a solid order placement strategy reflecting concern over potential supply constraints and further ASP increases in the second half of the year. Q2 gross margin was 47.0% down 2.7 percentage points from the previous quarter and 3.2 percentage points year-over-year. The decline was mainly driven by higher ASP, reflecting OSAT capacity constraints from AI-related demand, higher DRAM memory prices as well as a higher mix of ICs with embedded memory. Q2 operating expenses amounted to TWD 13.9 billion or 37.1% of revenue. This represents a 0.7 percentage point decline in OpEx ratio from the previous quarter. Maintaining disciplined control over the OpEx ratio remains an important priority for Realtek's management, alongside product innovation and operational efficiency improvements. Q2 operating profit was TWD 3.73 billion or 9.9% of revenue, representing a 2.0 percentage point decline in operating margin from the previous quarter, mainly reflecting lower gross margin. Q2 nonoperating income was TWD 645 million, broadly in line with previous quarter, reflecting our continued disciplined approach to financial management. Q2 net profit was TWD 3.81 billion or 10.1% of revenue. Q2 EPS as a result was TWD 7.42 compared to TWD 8.44 in Q1 2026 and TWD 7.62 in Q2 2025. Moving on to inventory. Q2 inventory turnover days were 107 days compared to 105 days in the first quarter. We continue to view inventory turnover days of around 100 days as normal and healthy under the current operating environment. That said, a meaningful portion of our inventory remain in work in process, mainly due to the constraint in available OSAT capacity, as industry-wide capacity continues to be prioritized for AI server demand. This concludes Realtek's second quarter '26 financial results.

Thank you, Ivy. Now our spokesperson, Yee-Wei, will give a management remarks.

Thank you. So as we look ahead to the third quarter, despite challenges such as certain supply-demand adjustments in the supply chain and rising component costs, Realtek remains a prudent yet stable outlook in its near-term operations and will continue to closely monitor external market developments and their potential impact. Now let's examine the key market segments Realtek serves. First, the PC market. According to IDC, the global PC market grew 3.1% year-over-year in the first quarter, followed by a 4.9% year-over-year decline in the second quarter. As a result, global PC shipments for the first half of the year were down approximately 1% compared with the same period last year. As we previously discussed, the first quarter growth was partly driven by channel inventory build ahead of anticipated price increases in the second quarter of 2026, reflecting rapidly rising DRAM and NAND flash component costs. Windows 10 end of product migration also contributed to some replacement demand. However, the same increase in memory costs subsequently weighed on PC demand and contributed to the second quarter contraction. Against this backdrop, our sales mix between PC and non-PC products was approximately 33% and 67%, respectively, in the second quarter compared with 36% and 64% in the fourth quarter. For the full year, the PC market is under price pressure and likely to decline in the second half compared to the first half. Nonetheless, Realtek has products that are in a good position to ride the wave of spec upgrade and/or to expand market share. Realtek's actual PC-related sales, including those for audio codec, amplifier, Ethernet controller, camera controllers, USB controllers, et cetera, will depend on several factors, including IC OSAT capacity availability, supply conditions for key PC components such as CPUs and memories, and brand customers strategy regarding potential order pull-in to manage supply chain uncertainty. Moving on to the consumer electronics market. Let's walk through the 3 consumer electronics segments where Realtek has the strongest exposure, TVs, home appliances and game consoles. Starting with TVs, demand picked up in the first quarter ahead of the 2026 FIFA World Cup, supported by some early customer orders amid rising memory cost prices. After the World Cup, global TV shipments began to soften and price increases in the second quarter added further pressure. Even so, Realtek SoC business grew above the corporate average in the first half, partly reflecting the higher memory costs, and we expect it to remain well positioned for the rest of the year. For home appliances, including washers, air conditioners, refrigerators and many more, demand continued to grow steadily, led by strong air conditioner shipments and replacement demand from climate-driven heat waves and stricter energy efficient standards. Realtek's IoT solutions remain highly competitive in this segment, and our deeper integration of AI is helping us outperform market growth. A July 2026 report by gamesindustry.biz estimates that the global game console shipments are expected to fall 19.5% this year. This decline attributable to higher console prices to address the ongoing RAM and storage crisis. While this may create some near-term softness, we are expected to outperform the market as we see more products adopted by key game consoles and their peripherals. The networking market experienced a memory cost wave in the second quarter and the first half of 2026. However, unlike the PC market, where much of the growth was driven by pre-price hike inventory build, networking demand remained fundamentally stable. For broadband access, mainstream 10G PON or XGX-PON deployments have now stabilized as the baseline standard. While G1 Tier 1 operators have begun structural testing of higher-speed 25G PON architecture to build future-proof subscriber networks. In enterprise networking, campus and branch Ethernet switches continue to benefit from a broad hardware refresh cycle as organizations upgrade aging infrastructure to support newer Wi-Fi standards, AI-enabled applications and modern digital workloads. In the consumer and SMB router markets, demand continued to shift away from entry-level products toward higher-value solutions, including mesh systems, tri-band configurations and Wi-Fi 7 upgrades. Overall, we believe the solid underlying demand for Realtek's networking solutions, especially as AI applications continue to expand across different end markets. We will continue business growth in the second half of 2026 and beyond. Now on automotive, the global automotive market was mixed in the first half of 2026. Overall sales remained resilient, but traditional internal combustion engine vehicles continue to contract, weighing our performance in major legacy markets. At the same time, electric vehicles remain the key growth drivers globally despite slower momentum in markets such as China and the U.S. due to regulatory and policy changes. Industry forecasts point to roughly 23 million EVs sold globally in 2026, representing about 27% to 28% of total vehicle sales, up from 25% in 2025, with Europe expected to be the main growth engine. The continued EV growth is supported by automotive Ethernet adoption, and we saw demand for Realtek automotive Ethernet solution in the first half, which we expect to continue into the second half. The main challenge remains on the supply side, given long qualification cycles required for new automotive suppliers. Looking ahead at the second half of '26, we expect a seasonally strong second half with EV growth continue to improve in the selected market, particularly Europe. Realtek's automotive Ethernet solutions continue to maintain market leadership as evidenced by the introduction of our award-winning integrated Ethernet switch, the industry's first and only of its kind to achieve ASIL D functional safety. In addition, our automotive-grade Wi-Fi, audio codec and other products are making steady progress in entering the market.

[Operator Instructions] The first question is from Kevin Wang, Mizuho, regarding demand outlook. What is demand outlook for third quarter 2026 by applications, including PC, networking, consumer and auto? Do you see demand risk for PC, networking and consumer in fourth quarter 2026, given demand pull in first half '26?

Okay. We'll have Ivy to help answer this one.

Sure. Let me briefly recap the key market segments Realtek serves. Overall, we expect third quarter demand to remain resilient, although visibility varies by segment, and we continue to manage shipments with discipline. In PC segment, demand is likely to remain under pressure as higher DRAM and NAND costs as well as high CPU supply weigh on end market demand, following early orders ahead of price increases. In the networking segment, the demand should remain fundamentally stable, supported by broadband upgrades, enterprise switches refresh cycles and the ongoing mix shift towards higher-value Wi-Fi 7 mesh and tri-band router solutions. In consumer electronics, the outlook is mixed. TV demand is softened after 2026 FIFA World Cup. Home appliances continue to show steady growth, supported by AI and energy efficiency replacement demand, while game consoles may face near-term weakness due to the higher hardware price and memory cost pressures. In automotive, demand should remain steady to stronger in the second half, supported by continued EV growth, particularly in Europe and the ongoing adoption of automotive Ethernet, although supply side qualification cycles remain a constraint. At Realtek, nevertheless, we expect to see year-over-year growth this year in every segment we serve.

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

Sure. I can still help on this one.

Okay. Realtek remains clear visibility to IC inventory levels at distributors and direct customers, typically module makers or system ODMs served by those distributors. Based on this understanding, Realtek's IC inventory remains healthy across the value chain.

The next question is from Nicholas Lai, Citi, on our strategy in response to supply constraint. What components are you seeing increasing shortage? And what is your inventory procurement strategy in view of the rising cost? Are you also seeing inventory write-off pressure? How should we quantify the impact?

Okay, sure. The semiconductor value chain is experiencing a major structural supply shift driven primarily by the AI data center boom. This has created critical shortages in advanced packaging, specialized materials and memory allocation. Realtek is addressing these shortages on 2 fronts. From a procurement perspective, we have qualified multiple vendors to diversify our supply base. From an engineering perspective, we are applying "design for availability principles" to reduce exposure to constrained materials wherever feasible. As for inventory write-offs, we do not view them as a risk or source of pressure as long as we are confident that aged inventory is held by choice. Although it has aged and have been written off from the books, it can still be sold and converted into revenue over time. At Realtek, we are confident that the current supply-demand imbalance remains checked and manageable.

Next question is from [ Astoria, CLST ] on broader cost hike impact. Given the further cost increases from both mature node foundry wafers and memory prices in second half, can you pass through this cost by raising prices to customers? If so, which product lines are affected? And what is the rough magnitude of the increase?

Sure. Well, actually, as a matter of principle, Realtek emphasized that we do not simply shift or pass cost increases on to customers. We have started working closely and constructively with our customers in early June. New prices where applicable, are taking effect in the third quarter to manage broad and challenging cost environment plagued by rising memory prices, OSAT constraints and related cost increases, and the potential for further mature node foundry wafer price increase in the second half of this year. Given the scale and the breadth of these pressures, very few, if any, products are likely to remain unaffected. As noted earlier, we cannot disclose the specific product lines affected or the magnitude of any potential price adjustments. Pricing and business terms with customers remain confidential. Our priority is to work cooperatively with customers to address these challenges while minimizing disruption to their business and ours.

The next question is from [ Haas Liu ], Bank of America, regarding memory price hike impact. Would you be able to quantify the impact to your revenue this year from the memory cost inflation? Any example you could provide for your PC peripheral networking and automotive business, the chipset pricing to reflect the memory cost hike?

The memory price increase, which began to accelerate in mid-2025 and became more pronounced in early 2026 had limited impact on Realtek's overall revenue. Throughout this period, Realtek worked to optimize its product cost structure and absorb part of the unexpected cost pressures. At this point, however, the memory price cut, together with OSAT supply constraints and related price increases has reached a level that Realtek can no longer fully absorb on its own. We are working closely with customers on a case-by-case basis, taking into account product categories, supply conditions and long-term business relationship. Beyond this, we cannot provide further details as pricing and related business terms are confidential.

Thank you, Yee-Wei. Next question is from Bank of America, [ Haas ] about the gross margin outlook. With more pressure from your manufacturing and component supply chain on raising costs, would you be able to share your view on the margin profile into second half 2026? What is your countermeasure in the cost inflation environment? Could you also provide an update on your long-term structural margin profile expectations?

Yes, we'll have Ivy pick up this.

Sure. Regarding gross margin, our second quarter performance was lower, primarily due to the product mix and the rapid rise in memory prices, which creates pressure on our cost structure. Looking ahead to the second half and the foreseeable future, we are taking several steps to mitigate cost inflation, including optimizing our supply side arrangements, improving product design and cost structure and reflecting cost increases where appropriate. We are certain these actions will support a gradual recovery in gross margin. Longer term, we continue to see room for further gross margin improvement, driven by ongoing product mix optimization, a higher contribution from value-added products and technology upgrades across our product portfolio.

Thank you, Ivy. Next question is from Sunny Lin, UBS, about OpEx trend. How would your OpEx and OpEx ratio trend in third quarter and 2026? Will OpEx amount remain elevated with more advanced node designs in 2026 and beyond?

Yes. Ivy, you can take this, too.

Yes. We appreciate your continued attention to Realtek's OpEx trend. Our OpEx ratio over the past 4 quarters were 39.1% in third quarter '25, 39.2% in fourth quarter '25, 37.8% in first quarter '26 and 37.1% in second quarter '26. These results reflect our disciplined control on operating expenses, while we continue to make strategic investments in product innovation, including the use of advanced process nodes to deliver higher performance with lower power consumption. In the short term, we expect the OpEx ratio to remain stable at current levels. In the long term, we are committed to lowering the OpEx ratio through productivity enhancement. Advanced node designs generally require higher R&D investments, including spending on design tools, IPs, tape-outs and verification. As we continue developing more value-added solutions, absolute OpEx amount may therefore remain relatively elevated. That said, we will continue to manage expenses prudently and direct resource towards areas with clear long-term growth potential.

Thanks, Ivy. Next is a question from Sunny, UBS, related to product spec upgrade trend. For the broader product segment, what is the current spec upgrade traction that we can anticipate for AI PC, Wi-Fi 7, multi-gig Ethernet and so on?

AI PCs, Wi-Fi 7 and multi-gigabit Ethernet are all entering a rapid upgrade cycle, driven by stronger demand for high-performance local processing and ultrafast connectivity that can support Realtek's business growth. All AI PC requires not only higher performance local computing capability, but also better connectivity and richer peripheral functions. This includes higher speed wireless and wired connectivity solutions, better audio and webcams with embedded MPUs and more intelligent man machine interface features. Wi-Fi 7 complements its shift by offering fiber-like wireless speeds and sub-1 millisecond latency. We expect its adoption to continue expanding across PC routers and broadband devices. To prevent bottlenecks, wired connectivity is also moving to multi-gigabit Ethernet with 2.5 gigabit Ethernet, 10 gigabit Ethernet ports quickly becoming standard on premium routers, motherboards, NAS, and workstation-related applications to support the growing data demand of AI-powered workloads. Taken together, these trends are favorable for Realtek because they increase the value and importance of connectivity IC across multiple product categories.

Thanks, Yee-Wei. The next question is from Nicholas Lai, Citi on Agentic AI demand impact on networking and PC. What is your view on networking and PC application outlook in view of the emerge of Agentic AI demand? Are you seeing accelerated deployment or shift toward higher specification to support AI-driven workloads?

Okay. Now Agentic AI is shifting the AI landscape from basic conversational chatbots to autonomous multistep workflows. These workflows may involve local inferencing, memory retrieval, tool execution, application interaction and cloud edge coordination. As a result, the system requirement for PCs and edge devices are gradually increasing. For PC applications, we believe generative AI will support continued shift toward higher specifications, including stronger local compute capability, large memory configuration, better power efficiency and richer AI-enabled peripherals such as camera, audio and connectivity. From a networking perspective, Agentic workloads are fundamentally different from traditional generative AI. A single task can trigger a sequence of actions such as memory retrieval, database query and tool execution requiring networks to deliver sub-millisecond communication and consistent latency. We, therefore, expect noticeable upgrade for Realtek solutions. That said, we would categorize the demand impact as steady upgrade cycle rather than a sudden step change across all end markets. Adoption will vary by application, customer and platform, but the long-term direction is clear. AI workloads are pushing devices and networks to a higher performance, faster connectivity and more edge capabilities.