Good afternoon, everyone. Welcome to Realtek's 2021 second quarter earnings call. This call will be chaired by Realtek's spokesman, Yee-Wei Huang. The presentation will be available on the company website before 6:00 P.M. today. At the beginning, our spokesman will report our second quarter results and give a management remark. After that, we will have a Q&A session. You are welcome to type your questions in the box at the lower right corner on the screen. We will answer the questions accordingly. During the call, you can browse through the pages of the presentation anytime. Now, I'll pass the call to our Spokesman, Yee-Wei. Thank you. Good afternoon, ladies and gentlemen on the line. You are listening to the second quarter of 2021 webcast earnings release by Realtek Semiconductor. First, let's go through second quarter 2021 operational results. On Q2 revenue, it was TWD 25.8 billion, a 10.7% QoQ increase and a 49% increase compared to the same period in 2020. The QoQ and YoY increases reflect both the continuing demand strength and the increase in product ASP. PC-related businesses performed strongly in the second quarter, resulting in a 36/64 split of PC versus non-PC revenues. On gross margin, second quarter gross margin was 50.4% compared to 44.8% in first quarter 2021. The higher than normal gross margin is mainly a result of better product mix, favoring products with better profitability given a supply limit. Q2 operating expense was TWD 8.72 billion or 33.8% of revenue. An increase in the OpEx ratio is a reflection of continuing engineering and other investments to expand and secure supply for the future. Our current operational priority is to meet our customers' expectations in supply the best we can while maintaining competitiveness in cost performance. The operating profit of the second quarter was TWD 4.3 billion or 15.6% of revenue. Higher operating margin is mainly a result of better gross margin. Q2 non-OP income was TWD 184 million, remaining stable compared to the first quarter, with TWD 27 million foreign exchange gain from successful hedging in this quarter. Q2 profit was TWD 4.31 billion or 16.7% of revenue, a 3.6 percentage point increase QoQ. As a result, Q2 EPS was TWD 8.43, better than the TWD 5.98 in the first quarter this year or the TWD 3.97 in the second quarter last year. Regarding inventory, Q2 inventory turn order days were at 82 days compared to 66 days in Q1, with work in progress constitutes the major portion of the inventory as a result of uneven availability of various materials in the supply chain, which remains a real challenge. We also have balance sheet and cash flow statement for your perusal at your convenience. This concludes Realtek's 2Q 2021 financial report. Peeking into the third quarter, the current market for Realtek products still face supply shortage. We need to pay close attention to changes in the upstream supply, as well as end market demands. We are cautiously optimistic about the operations in the third quarter. Let's run down the top product lines at Realtek. On Ethernet, market demand for 2.5 Gb Ethernet, Gigabit Ethernet, and Fast Ethernet, all outpaced supply significantly in the second quarter, which is expected to be the same in the third quarter. Main applications include PC notebook, IP cam, surveillance cameras, broadband CPEs, et cetera. In spite of supply constraints, the adoption of 2.5 Gb Ethernet in the high-end segment of selective applications such as gaming and motherboard, kicked off successfully in the first half this year. The continuing constraint is now hampering the growth of the new spec for mainstream applications. As a result, the penetration of 2.5 Gb Ethernet may be limited in 2021. For example, less than 10% in PC. Still lots of headroom for growth. Switches business is limited by supply, although there's no shortage of demand for both dumb switch and managed switches. We believe the demand strength will sustain post-pandemic. For dumb switches, the expanded install base due to work from home and remote learning, is expected to enter into a regular refresh and technology upgrade cycle. For managed switch, Realtek continue to expand customer base and win new projects. Wi-Fi. Applications performed the best in the second quarter were consumer electronics and IoT. Both demands remains strong across the board, including PC routers, broadband. Sales is still led by 11AC and 11N for Realtek. The growth for Wi-Fi 6 has been suppressed by supply shortage, although its growth is inevitable. 30% penetration of Wi-Fi 6 for PC and routers may still be achievable this year, while the broadband and other applications may be forced to slow down their Wi-Fi 6 adoption. Wi-Fi 6E MP shipment is expected in 2022. Bluetooth. In this segment, we choose to allocate supply fairly across BT NIC, BT SoC, and BLE SoC. The demand outstrips supply for all three segments. Main applications include broadband boxes and PC dongles for BT NIC, wearables and remote controllers for BLE SoC, and TWS for BT SoC. Due to supply limits, Realtek focuses on performance and brand customers for TWS. On the TV, the price and supply of LCD panels and DRAM continue to impact TV growth negatively. We expect TV worldwide TAM to drop a little YoY this year, although 4K TV sales regain momentum. Realtek TV shipment in 2021 is expected to maintain at about the same level as last year. Thank you. Thank you, Yee-Wei. We are entering the Q&A session. Please type your questions in the box at the lower right corner on the screen. We will reply accordingly. The first question is from Daniel, Morgan Stanley. The company reported second quarter revenue to be up to 11% quarter-over-quarter. Could you provide a split of the 11% quarter-over-quarter growth? For example, how much from shipment and how much from ASP hike? Also, what's the reason behind better than expected gross margin? Are we still maintaining 42%-44% guidance into second half this year? Okay. Both quantity shipped and ASP increased QoQ. ASP was the primary contributor to the higher revenue and QoQ growth in the second quarter. Note that there are two factors giving rise to higher ASP. One, product mix, and two, price increase. Regarding gross margins, there are also two contributing factors. One, ASP, two, ASC. For example, wafer costs impact on sales costs. It should also be noted that some of the cost to secure supply may not be included in the cost of goods sold and impact gross margin directly. For example, engineering investments to qualify additional production lines or vendors, or investment on long-term partnerships. Changes in ASP and ASC are both very dynamic, and they do not align with each other. As to the factors impacting gross margin, ASP and ASC are expected to change continuously but independently, to a large extent in the second half. We cannot predict where growth margin may land quarter by quarter. Nonetheless, the supply shortage does impact product mix to tilt towards what favors higher ASP and profitability. Thank you. The next question is from Goldman Sachs, [audio distortion]. Will Realtek's ASP and gross margin decline back to previous level when wafer supply is no longer an issue? Okay. At least not anytime soon. I think the key word here is when supply is no longer an issue. When that happens, the only factor to determine ASP will be market competition. We will see how the market dynamics drive this competitive landscape. That will be the determining factor. For the supply to go away and not an issue, that doesn't seem to be possible in the foreseeable future. Thank you. The next question is from Kevin Wang, Mizuho. Is it possible to see even higher gross margin in second quarter this year? You mean second half? Second half, yes. Okay. As we said, we cannot predict where gross margin may land quarter by quarter, so higher, lower, both are possible. Thank you. Okay. The next question is from Randy, Credit Suisse. This question is related to OpEx. What is Realtek's target to grow OpEx, and what target ratio should we use for OpEx ratio in the second half? Okay. Compared to normal times, OpEx in this and coming quarters will include engineering investments to qualify additional vendors, and also investment on long-term partnerships. Such additional engineering investment is necessary, although its benefits may not be visible this year. OpEx ratio always dominated by R&D expense. This year is likely to be higher than that of 2020. Thank you. The next question is from Aaron Lamuna. Realtek will respond to the rising wafer cost into second half this year and 2022. Will Realtek be able to pass on rising costs continuously? Would Realtek need to bear the cost with gross profit margin hit into 2022? Although wafer price increases in second half 2021 and even 2022 are within expectation if demand continues to outgrow supply. As we reminded everyone in the past, Realtek does not pass on price increase in the supply chain in a straightforward manner. We will review the necessity of price increase on our part regularly. Both profitability and market acceptance competitiveness are important factors in our decision. The next question is from Morgan Stanley, Daniel. Could you provide a rough revenue split of first half versus second half this year? All we can say is the second half is very likely to be higher than the first half. That will be as much as we can comment. Thank you. Followed by the question, supply situation for the second half in 2022 and inventory level. How is Realtek's own inventory versus the target level? How do you see your foundry supply growing for the second half this year? Do you have comfortable capacity availability in 2022? The supply remains tight and very challenging in the second half. Most, if not throughout 2022, from what we can tell at this time. No new capacity is expected from foundry and OSATs in the second half this year and most parts of 2022. Spot opportunities for free wafers may come and go. Realtek tries our best to capture some. Inventory of finished goods remains low in Realtek, with nonetheless increase due to unevenness in supply chain process. We do not see Realtek finished goods inventory returning to normal in the near future. Thank you. Next question is from Martina, Fubon. Do you see other components shortage impact in the second half of this year? We see supply chain shortage occurs in many places in addition to wafer. For example, OSATs, PCBs, substrates, memories. They are all good examples. The next question is from Brian, CLSA. Could you elaborate the growth magnitude by product line? Realtek has been relatively conservative to the TV SoC growth this year due to higher panel and DRAM price. These prices are even higher in the second quarter and third quarter in 2021. Do you see the same impact with the PC as well? What's the difference between now and the three months ago? Panel and DRAM prices now are higher than those three months ago. Panel price is still high at the present time, although the momentum for further price hike seems to be tapering. There are even rumors that the panel price may drop in the near future, although we have not seen it. DRAM price is also at a high point at the present time. The price impact mentioned above is expected to suppress the TV market this year. For Realtek, we still expect a flattish year for TV. The price trend for panel and DRAM for PC is no different from that for TV. Thank you. Next question is raised by William, JP Morgan. What was the product mix of the second quarter 2021, and how would it change in the second half year? The second quarter revenue growth was led by PC related, including Ethernet, audio codec, Wi-Fi. Moving forward, we still expect favorite product yielding better business results, while fulfilling customers' demands the best we can. The next question is from Morgan Stanley, Daniel. What's the Wi-Fi 6 in the first half and the second half of this year? Are we seeing slowing down of Wi-Fi 6 penetration versus our earnings call three months ago? What's our progress for the Wi-Fi 6E, and also when Wi-Fi 7 will come? Wi-Fi 6 demands are strong, constrained by supply. PCs and routers are expected to achieve 30% Wi-Fi 6 penetration, broadband-related market may delay Wi-Fi 6 adoption this year. Realtek restarted Wi-Fi 6 MP shipment at the end of 2020, last year. We expect to ship more Wi-Fi 6 in the second half compared to the first. For Wi-Fi 6E, the MP is expected in 2022, next year. High-end PCs are likely the first adopters. For Wi-Fi 7, it is under development. Product Product availability may be at least two to three years out. Thank you. Followed by the previous question, Ryan from the CLSA would like to ask our initial expectation of the Wi-Fi 6 penetration in 2022. Well, suffice to say, we expect Wi-Fi 6 penetration in 2022 will be stronger than that this year. Okay. Still a question on Wi-Fi 6. William from JP Morgan would like to ask whether the company has the confidence to replicate Wi-Fi 4 and 5 success in the Wi-Fi 6 cycle. Realtek, certainly, we are confident to be a leader in Wi-Fi 6. As we always do, Realtek Wi-Fi 6 solutions will enable mainstream adoption of the technology. Our strength includes, one, completeness of product portfolio. two, small form factor through integration. Three, low power design. Four, and probably most important, our customer support. The next question is from Kevin, Mizuho. What is the current PC demand outlook from customers for the second half this year? We can take a look for some market reports. Now, overall, PC demand outlook remains strong in the second half. According to data provided by IDC, the PC market may grow 10% up in the second half versus the first half, yielding a total of 368 million units of worldwide PC shipments this year. This represents an 18.3% year-over-year growth. We believe such data provides a reasonable reference. Thank you. The next question is from Goldman Sachs Group. He wants to know what your PC shipment product breakdown by enterprise and consumer. Do you expect the recovery in enterprise market to offset the demand concerns from the consumer next year? It appears that people stopped tracking PC commercial consumer split for a while. Still, it is generally believed that consumer purchase may dominate during the pandemic, when people work from home and study from home. Nonetheless, a large portion of PC Chromebook for educational use is through tender projects managed by school systems, which are considered commercial projects. If and when pandemic subsides, consumer purchases may shift to products and services other than PC notebook. However, corporate PC notebook refresh cycle may resume. Further, the new norm post-pandemic may involve a mix of work from home and back to office. Overall, the new norm may bring PC notebook annual TAM to a level higher than pre-COVID-19, as far as we can see. Thank you. The next question is from Rick, Daiwa. In the TWS market, the growth is probably capped a bit due to the capacity constraints. What's your expectation for the TWS market growth in 2021 to 2022? Also, do you see any meaningful change to competition landscapes? TWS year-over-year TAM appears to be flattish this year, as far as we can see. The TAM may go back to the growth mode in the future with the next growth opportunity in LE Audio. Realtek has decided to focus only on high performance segments and focus on brand customers for TWS. On ANC, it still constitutes only a small percentage of the TWS market due to the engineering challenges. We want to emphasize Realtek's robust product line, maintain a healthy growth as we see strong demand in BT/NIC, BT/BLE SoC, and BT SoC. Thank you. The next question is from Andy, Credit Suisse. How is the project momentum for the second half this year within China and overseas? For the tender projects, we see OCGPON demand in China remain strong, both in overseas, strong for PON and DSL. We see the fulfillment rate to be less than 50%, nonetheless. Just very recently, we see new tender projects open in China. In terms of the market potential, we see the OCG spec changes from Wi-Fi, Bluetooth combo to BT only due to supply constraints. Realtek fares well in this change. For upstream routers, we still see market potential of around TWD 45 million per year. The market size for PON worldwide and is about more than TWD 190 million. China alone, that's about over TWD 100 million. Realtek PON is expected to grow in this segment. Thank you. The next question is about China competition. Espressif recently also mentioned they have the Wi-Fi 6 product. What's your observation, and how about any other vendors in China? Competition from China always exists. Espressif has been a competitor in IoT for a few years. Wi-Fi 6, we should say, there are 3 key improvements over the previous generations of Wi-Fi. One, high throughput. Two, mass connectivity, and three, power management through Target Wake Time. Two and three are both very important to the ubiquitous adoption of IoT solution. Wi-Fi 6 is expected to become an important choice for IoT in time. Same as other segments, Realtek wins on the solid field-proven technology, completeness of product portfolio, level of integration, low power, and customer services. We should also note that Wi-Fi 6 for IoT seems to be best to support, among other things, voice control. Realtek IoT solutions integrate voice codec, among other IPs. Realtek IoT will focus on global appliance brands and also solution providers. Thank you. The next question is spec migration. How much is supply constraint changing the pace of spec migration, and in which areas of the business? Okay. Supply shortage appears to slow down the development of new generations of spec, as engineering resources may be diverted to port existing products to expand supply base. For products that are already in MP stage, spec migration proceeds. The deployment of the new spec oftentimes, nonetheless, slows down due to supply shortage. Thank you. Next question is related to the auto Ethernet. Could you give us some colors on it? Sure. Auto Ethernet is growing at a healthy rate that beats expectation and significantly above corporate average for the past three and a half years. We are currently busy working on new design wins. The next wave of RFQ for year 2025, 2026 car models are not expected to arrive until the end of this year. Supply shortage does impact auto Ethernet business, but the situation is manageable due to the relatively small scale of the business. Realtek automotive Ethernet business covers customers in all major global car makers in EU, U.S., Korea, China, and Japan. We want to share that Realtek automotive switches lead in high port count supporting Gigabit PHY and PCIe interface. The innovative design enables Realtek automotive switches to pass many global OEM stringent EMC tests and to be designed into a wide range of car models. Realtek is keeping up with the automotive Ethernet trend to emphasize in safety and security. Ethernet PHY and switches may account for $15 upward to over $50 in 1 car in the coming years. Thank you. The next following question is from Zhong Xin Tai. Could you share the current auto-related revenue contribution of the company, the revenue contribution in the three to five years? Well, we will say, as we say, the relative scale is still small. We don't particularly comment on the single particular product line, ratio of that to the company. Suffice to say, currently, it's still overall low, compared to the corporate scale, but it has been growing very impressively in the past two and a half years, and we expect it, in the next two, three years, continue to grow at a very significant rate. Thank you. The next question is from Kevin Wang, Mizuho. Do we still expect the company to grow at least 10% year-over-year in 2022? What are the major growth drivers? We don't really give growth guidance there. Although we share in the past, every product line leader will set a target for themselves to maintain the growth momentum that we have achieved before. The major growth driver in the coming years, or maybe I say next year, because to comment too far out would be a pure guess. In the coming year, we still say for the top product lines, Ethernet, Wi-Fi, Bluetooth, switches, et cetera, will still continue to contribute significantly. For smaller product lines, we still expect product lines, automotive Ethernet, PON, still will lead the growth in the smaller product line. Thank you. The next question is from James Chi. What are the major challenges the company face in the second half this year? The biggest challenge, of course, continue to be the supply. It's very hard to expect new additional supply, meaning that the shortage we have borne on the first half of the year likely is going to continue, and that's the biggest challenge. Thank you. The next question is from Kevin Yang, UG Fund. We heard that the foundries are encouraging their customer to migrate more products to 28 nm. Could you disclose the 28 nm waiting this year and expectation of the 2022? We actually are not aware of a foundry encourage customer to go any particular direction. Overall, foundry tightness, to our understanding, very much is across the board. Arguably, maybe the most advanced node, but Realtek, we are not there. Today, Realtek, we use the most advanced node up to is the 12 nm. What we can say is from 12 nm down, all the mature node, including 28 nm, the supplies, they are all very tight. Having said that, overall, continuing technology migration appears to be a trend. We do expect in time, there may be more products moving to the 28 nm in terms of the mature node. Thank you. The last question is from DBS, Evelyn Chu. Why did the salary expense increase significant in 2020 compared to 2019? Well, salary expense usually also reflects the result of company operations. As Realtek performed well, a certain percentage of the profit will be allocated for salary. I assume salary here actually means salary plus bonus, overall compensation. Usually, as we say, well, in our business results, the compensation amount will increase. Thank you. Thank you, Yee-Wei. Due to the time constraint, we will conclude the meeting right now. Thank you for your participation today. Please feel free to contact our IR team if you have further questions after the meeting. The replay will be available on the IR page of the company website before 6:00 P.M. Thank you, and have a good day.