MediaTek Inc. (2454) Earnings Call Transcript

Welcome to the MediaTek 2026 Second Quarter Investors Conference Call. Financial results and presentations for today's call are available on the Investors section of the company 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.

Good afternoon, everyone. Joining us today are Dr. Rick Tsai, MediaTek's CEO; and Mr. David Ku, MediaTek's CFO. Mr. Ku will report our second 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 to differ materially from these statements. The presentation materials supplement non-TIFRS financial measures. Earnings distribution will be made in accordance with financial statements based on TIFRS. For details, please do refer to the safe harbor statement in our presentation slides. In addition, all contents provided in this teleconference are for your reference only, not intended for investment advice. Neither MediaTek nor any of the independent providers is responsible for your any actions taken in reliance on content provided in today's call. Now I would like to turn the call to our CFO, Mr. David Ku, for the second quarter financial results.

Okay. Thank you, Jessie. Good afternoon, everyone. Now let's start with the 2026 second quarter financial results. The currency used here is NT dollar and the average exchange rate for the second quarter was TWD 31.6 to USD 1. Revenue for the quarter was $152.2 billion, up 2% sequentially and up 1.2% year-over-year. Gross margin for the quarter was 46.2%, down 0.1 percentage point from the previous quarter and down 2.9 percentage points from the year ago quarter. The year-over-year decrease was mainly due to a one-time benefit in the year ago quarter. Operating expense for the quarter were $47.4 billion compared with $46.2 billion in the previous quarter and $44.5 billion in the year ago quarter. Operating income for the quarter was $22.9 billion, down 0.1% sequentially and down 22.2% year-over-year. Non-TIFRS operating income for the quarter was $23.7 billion. Operating margin for the quarter was 15%, down 0.3 percentage points in the previous quarter and down 4.5 percentage points year-over-year. Non-TIFRS operating margin for the quarter was 15.6%. Net income for the quarter was $24.6 billion, up 0.9% sequentially and down 12.3% year-over-year. Non-TIFRS net income for the quarter was $25.3 billion. Net profit margin for the quarter was 16.2%, down 0.1 percentage point from the previous quarter and down 2.5 percentage points year-over-year. Non-TIFRS net profit margin for the quarter was 16.6%. EPS for the quarter was $15.28, up from $15.17 in the previous quarter and down from $17.5 in the year ago quarter. Non-TIFRS EPS for the quarter was $15.71. A reconciliation table for our TIFRS and non-TIFRS financial measures is attached in our press release for your information. And that concludes my comments. Thank you.

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

Good afternoon, everyone. Thank you for joining us today. MediaTek's second quarter revenue achieved TWD 152 billion, exceeding the high end of our guidance range, primarily driven by solid business momentum across Smart Edge platform products. Second quarter gross margin was around the midpoint of our guidance range, in line with our expectations. Recently, the release of increasingly capable frontier AI models, together with the rapid transition towards agentic AI has become a key driver of compute demand across both cloud and edge AI. Agentic AI, which executes a series of actions, including planning, reasoning, execution, and self-correction further increases workloads. This represents a compelling growth opportunity for MediaTek as we are well positioned to support both the scaling of AI data centers and the proliferation of agentic AI experiences across a broad range of edge devices. In data center, demand for customized solutions to pursue optimized performance per TCO and performance per watt at scale remains strong. Through close partnership with major U.S. CSP customers, we have successfully built our first AI accelerator ASIC with leading performance. Production of this product is scheduled to begin in the fourth quarter of this year. We expect our data center revenue to exceed $2 billion in 2026 and will continue to scale substantially in 2027, primarily driven by increasing customer demand for our solution with superior TCO. With that, we now believe the 2027 TAM to be USD 80 billion, and we are raising our share target to 15% to 20% from 10% to 15% that we guided last quarter. Meanwhile, our second AI accelerator ASIC is progressing well with a meaningful upgrade in compute performance, which further optimized TCO. Additionally, with close collaboration with our advanced packaging partner, the yield and reliability of the second ASIC are on track for high-volume production in 2028. And we are confident in capturing additional market share when this ASIC ramps up. Furthermore, we continue to deepen our engagement with several customers for data center ASIC opportunities, backed by our industry-leading IP, deep ecosystem partnerships and proven execution capabilities, we believe we can secure more design wins in the data center market. Building on our industry-leading IP portfolio, we offer best-in-class pre-validated subsystem solutions for memory, I/O and connectivity. This largely reduces design complexity and shortens time to market for our data center customers to scale from AI ASIC chips to full-scale system and platform deployments. In addition, our development of 448G SerDes is progressing well, delivering best-in-class performance and powered with our co-packaged copper system solution. Looking beyond 448G, we continue to develop CPO system solutions on TSMC COUPE platform to enable next-generation system connectivity. In addition, we offer end-to-end 3.5D platform with best-in-class 3.5D IP, packaging and design flows for large data center design on 3.5D. Furthermore, we serve as a major enabler for data center customers in this increasingly complex global supply chain environment. Through deep design technology co-optimization, DTCO with TSMC and close collaboration with key advanced packaging partners, we leverage our experience in advanced node design such as 2-nanometer and strong engineering and architecture capabilities to develop high-performance ASICs across a broad range of very large chip sizes using CoWoS and EMIB-T technologies. We also create significant value beyond semiconductor by orchestrating other key components throughout the supply chain such as memory and substrate to drive successful execution. Looking ahead, as data center architectures and broader semiconductor ecosystem continue to evolve rapidly, we are confident in our ability to support our data center customers' innovative road map as their trusted long-term partner. With that, I will now talk about the recent business performance for our 3 revenue groups. In the second quarter, mobile phone declined 14% quarter-over-quarter and 20% year-over-year, primarily due to weak demand as a result of increasing smartphone POM costs. Mobile phone accounted for 41% of total revenue in the second quarter. Our view for global smartphone shipment remains unchanged, and we continue to expect the market to decline by about 15% in units this year. Specifically, we have observed that customers are prioritizing both flagship products with differentiated user experiences and entry-level products for price-conscious demand. For the flagship segment, we will launch our 2-nanometer SoC in the third quarter to power customers' next-generation agentic AI models. SoC delivers strong agentic AI computation with a step-up in user experience at a more efficient cost structure. Together with ongoing engagements with global players, we will increase our presence continuously in the flagship smartphone market in 2027. For the entry segment, we continue to support customers with our leading SoC portfolio and the memory utilization technologies to optimize their cost structures. As rising costs across the supply chain have become an industry-wide reality, we are taking pricing actions to ensure these increases are appropriately reflected in our product pricing. For the third quarter, we expect mobile phone revenue to be flat to decline mid-single-digit percentages sequentially as the ramp of our flagship SoC is expected to largely offset weakness in other segments. Moving on to Smart Edge platforms. In the second quarter, this group grew 19% quarter-over-quarter and grew 26% year-over-year, accounting for 53% of total revenue. The sequential growth was primarily driven by our continued market share gains across connectivity, computing and automotive products as well as contribution from DRAM content in TV SoC. Our strength in advanced computing and connectivity continue to help us gain shares in multiple areas. During Computex this year, we announced our collaboration with NVIDIA on RTX Spark, a new class of Windows PCs built for agentic AI applications and best-in-class graphics capabilities. The products will be on shelf for the holiday season this year. This represents a meaningful step in broadening our computing businesses and a strong validation of our capabilities in the high-performance CPU system integration. For the third quarter, as several new connectivity and automotive projects are scheduled to enter mass production, we expect Smart Edge platforms revenue to grow mid- to high single-digit percentages sequentially. Moving on to Power IC. This group accounted for 6% of total revenue in the second quarter and grew 11% quarter-over-quarter and 6% year-over-year. The revenue strength in the second quarter was mainly from share gains in computing and data center businesses. For the third quarter, we expect Power IC revenue to be flattish sequentially. Moving to the guidance. In the third quarter of 2026, we expect the revenue growth from Smart Edge platforms to offset the weakness in mobile phone and gross margin to be within the current range. We expect our third quarter revenue to be in the range of TWD 152.2 billion to TWD 159.8 billion, flat to up 5% sequentially and up 7% to 12% year-over-year at a forecasted exchange rate of TWD 32 to USD 1. Gross margin is forecasted at 46% plus or minus 1.5 percentage points and operating expense ratio is forecasted at 31%, plus or minus 2 percentage points. With that, we now aim to achieve the high end of our full year revenue target range, which is high single-digit percentage growth in U.S. dollars. For gross margin, through our disciplined pricing strategy that reflects the rising costs throughout the supply chain, we aim to deliver our full year gross margin within the current quarter guidance range. To secure supply chain capacity and fuel our strategic expansion from AI ASIC chips to full-scale systems and platforms, the Board has approved a discretionary USD 5 billion financing budget today. This flexible framework provides us with optionality when needed to agilely support our long-term growth and capitalize on massive data center opportunities. In summary, we will continue to focus on executing our growth strategy across both edge and cloud AI. Supported by our technology leadership, broad portfolio and strong ecosystem partnerships, we believe we are well positioned to deliver sustainable long-term value for our shareholders. This concludes my prepared remarks. Thank you.

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

[Operator Instructions] First one to ask question, Gokul Hariharan from JPMorgan.

First of all, I think, Rick, you mentioned your second-generation ASIC is on progress for mass production in 2028. Could you talk a little bit about how does it influence your TAM estimate? I think you've already updated your TAM to $80 billion in 2027. But as this project starts to ramp up, how does the TAM start to look like? Definitely it feels like the compute component within that chip is much bigger than the first generation that you're going to ramp in the next quarter? And could you also talk a little bit about how much market share can you take within this family of projects? Given that you seem to have some confidence that the market share will continue to expand. Can you potentially be the majority source within this larger customer when it comes to 2028, 2029 kind of time frame? That's my first question.

Gokul, I understand your question. I think first, I want to point out that the second ASIC certainly is much more powerful chip from both performance per TCO and performance per watt point of view. So while we are not ready today to guide the 2028 revenue range through the TAM yet, but we are certainly confident our 2028 TAM will be quite a bit higher than 2027. And our share because of also the strong capability demonstrated by our first ASIC in 2028, we are looking forward to both the first ASIC and the second ASIC to be in production in the same year. And that we believe certainly will enhance our market share, well, I would say, in a very significant manner.

Do you see any line of sight into you becoming a majority source for your customer? Or you still think that you will be the smaller vendor when we think about the next couple of generations?

Well, Gokul, we are not going into this because we know there are a lot of, shall we say, reports in the market. What we are doing basically, as we have always been doing is to stay on the ground to solidly execute what we have committed to our customers as we have and build -- continuous building a very strong trust between us and the customer. And as such, we believe we will get our hopefully, better than fair share of the market share. So that's really what we are doing, and we will continue to execute that way. Thank you.

Got it. So second question is on your 448-gig 2-nanometer-based SerDes. Could you give us a little bit more color on where we are in that process? Like when do we have the IP ready to kind of talk to your customers, given I think the third generation of this family of ASICs is kind of right now seems to be in RFQ stage. And any other IP that you are kind of putting forth to the customer in addition to the strong supply chain support that you have when it comes to the key enablers for the next project, which is in discussion?

Well, 400G or 448G SerDes IP is really going well. We certainly expect that to be ready sometime in the next year, maybe second half of next year. We were having kind of a middle of the road SerDes now already well proven. I can say that. We have certainly very, I would say, really at least equivalent industry-leading D2D IPs in terms of performance and power consumption. But however, that's some IPs we are also providing leading-edge packaging technology capability for very large chip size applications. In addition, our team, I think, is working with some other key partners to put all those IPs together, as I mentioned in my text, a subsystem with which our maybe some different data center customers can use to -- because those chips are all very complex, and people want to go to the system level as soon as they can, but we can provide the time to market needs to the customers, some different customers. So I think we are moving into -- compared to, say, a year ago or not to mention 2 years ago, the company is moving to not only provide very competitive IPs, but also integration of those IPs into a chassis format. So the customers or various customers can utilize for fast time to market and to achieve their complex design.

Next, I have a question, Sunny Lin from UBS.

Congrats on the very steady progress, especially for the cloud ASIC side. So my first question is I want to follow up for the second cloud ASIC project. And so one is in terms of timeline for mass production, should we be looking at early 2028? And also, how should we think about the execution? You mentioned pretty steady progress. But I guess the market has some questions around like tape-out schedule, whether it's on track for Q4 this year? And also, how should we think about Intel EMIB-T?

Yes, you can assume early 2028 for early production for second chip. And the progress both in design, tape-out date, and are on track. We are working really closely with our customers, especially with the experiences we both have learned during the first chip, we really know even more how to leverage each other's capability. in getting the design out on time. So I'm quite comfortable with that. The back-end technology, the packaging technology, of course, is another key component of the whole complex ASIC chip. We work really, again, also well probably more than closely with our supplier in -- mainly in ensuring the yields from the substrate vendors continue to improve very well. The supply of the capacity, the cycle time from the -- by our supplier, but we're working on all those down to the operation details. So while those technologies are very challenging, we all understand that. And that's also -- those challenging technologies are also the ones that will enable the performance, the great performance per watt and per TCO for that chip. And we are, I think, on the way to make that happen. Thank you.

So sorry, maybe just to follow up on a bit more color regarding EMIB-T. So would it be fair to say I definitely feel that today, you are sounding a bit more constructive even more than like a quarter ago. And recently, like earlier this week, Unimicron in Taiwan, the substrate makers, they are also sounding more committed regarding EMIB-T. So can we conclude that overall EMIB-T technology is making good progress in terms of the yield rate improvement and also the technology maturity for mass production for 2028?

Yes, in short, yes, you can. Sunny, I think you're saying that probably better than I am. Thank you.

No problem. And my second question will be to follow up on your announcement regarding this USD 5 billion for financing budget regarding the supply chain. And so would you be able to provide a bit more color on what you are going to do? Are you going to support some of the expansions from your key suppliers and some of the key areas that you're looking to put into the investment? How should we think about that support that you just came out?

Okay. Sunny, it's David here. I think, first of all, I need to start with, we have a very strong balance sheet. I mean, currently, we actually have ample cash, $7 billion plus on our balance sheet. As you guys can see right now, the industry is moving very fast, especially for 2 elements. One is the whole supply chain situation and also the possibility for different AI ASIC business model. So what we get from our Board today is really just optionality, a flexing plan, a financing budget plan when we need it. So we can actually just power it up when we need it on top of our strong balance sheet. I think that's the general idea.

So should we take that as a flexibility that you can further strengthen relationship with key suppliers by maybe supporting their expansion?

Yes, yes.

Next, we have Haas Liu from Bank of America.

Congrats on the very great results. So first question is just on ASIC. You updated your expectation for data center sales contribution to be more than USD 2 billion this year and raised the related TAM to USD 80 billion in 2027. Would you be able to share more detail if it is mainly driven by single project or includes the other parts of the NRE contribution from other projects? And if you are going to see further upside on this market expansion, if you can secure more capacity support from your supply chain partners?

I think that's our first project. And currently, based on the supply chain situation, we feel comfortable to provide that capacity for the whole supply chain, which including the foundry, the substrate and also our customer side, the memory. I think supply chain for the revenue target both for this year and also for next year, I think we feel very comfortable.

Okay. Yes. And I think just a quick follow-up to this one is that if you can define the boundary of the TAM, is it just customer AI accelerator only? Or does it include other content like CPU or network switch?

Right now, it's accelerator only for now. Yes, our TAM estimate.

Okay. So $80 billion only includes AI accelerator?

And no HBM.

Okay. Got it. And second question is just regarding your first -- on your ASIC pipeline. You just mentioned in your prepared remarks that you are engaged with several customers. I think this is probably the first time you mentioned that you are engaged with several customers. Would you be able to share more detail on this, whether this just is more focused on Tier-1 hyperscalers or you are diversifying into Tier-2 hyperscalers and also enterprises as well? And when can we expect more design or manufacturing contribution from the other parts of the project?

There are several initiatives and projects going on, but unfortunately, we won't be able to provide detail right now. I think we will provide detail when it becomes -- when we're allowed to talk about that.

And now the line is open to Laura Chen from Citi.

So I'm just wondering that for these new high technologies, including like the process memory or CPO, et cetera, that's going to be the second project of your ASIC or other potential, like engagement with other customers? That's my first question.