Good afternoon, everyone. Welcome to Realtek 2021 Realtek spokesman Yee-Wei Huang third quarter earnings call. The presentation will be available today at the beginning on the company website before 6 A.M. Our spokesman will report our third quarter results and give management's 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. You can browse through the pages of the presentation. Note that portions of what is presented during the call you should note anytime. Statements made in this call contain forward-looking statements. Forward-looking statements involve risk and uncertainty. The actual results may differ materially from the results forecasted or implied. Investors should not place undue reliance on such statements and the agreements on such statements. To our spokesman, Yee-Wei Huang. Now, I'll pass this call Good afternoon, ladies and gentlemen. This is Yi Wei Huang of Realtek Semiconductor's Q3 2021 webcast. You are listening to this earnings release. First, let us go through the Q3 2021 operational results. TWD Q3 revenue was TWD 99 billion, a 12.1% quarter-over-quarter increase and a 29.2% increase compared to the same period in 2020. The three consecutive months flat shows the continuing demand shifting record highs in Q3 revenues and the product mix favoring high-end solutions. It should be noted that part of the September record high shipment meant to accommodate the National Day was benefited by the advanced shipments holidays in China first, then in Taiwan for roughly the first 10-11 days of October. PC-related businesses maintained their strength in the third quarter, resulting in the same 36-64 split of PC versus non-PC revenues in the second quarter. Q3 gross margin was 52.6% compared to 50.4% in 2Q 2021. The higher gross margin was due to the better product mix favoring products with better supply limits. Operating expenses were TWD 9.89 billion or 34.1% of revenue. It's mainly a result of two things. An increase in the OPEX ratios. First, continuing engineering and other investments to expand and secure supply for the future. Larger bonus accrual. Q3 operating profit was TWD 5.35 billion or 18.5% of revenue. Higher operating profit mainly a result of better gross margin. On non-op loss, Realtek recorded TWD 261 million loss. It's mainly due to asset. A sum of loss on valuation of financial Realtek investments experience market value loss in third quarter. This result in a TWD Q3 billion or 16.9% of revenue. TWD 4.89 billion. EPS for the third quarter as a result was TWD 9. This is better than 8.57. 0.43 in 4.91 in the previous quarter or in the same period last year. The inventory turnover days was. Regarding inventory, third quarter is 97 days compared to 82 days in Q2. Inventory increase is mainly caused by uneven availability of various materials in the supply. Being produced first may not be what we can, resulting in what we did immediately. As we strive for maximizing production output, we do not see the inventory increase. In produce will be shipped in the coming months from. Nevertheless, as we certain what statement for your approval. We also have balance sheet and cash flow for your convenience. This concludes Realtek's third quarter financial reports. The market generally still see overlooking into the fourth quarter is supply lagging. It remains necessary to pay close attention to the impact brought by the changing stream demand in each application in the upstream supply and downstream market. Now, let's run down the top product lines at Realtek. On Ethernet shifting generally from. The market growth driver is similar to commercial segments for both PC and non-PC applications. Product shipment growth. In 2.5 Gigabit Ethernet. A good example of product mix change. Gigabit Ethernet, nevertheless, favoring high-end solutions, remains the largest portion of Ethernet demand and shipment. Forward-looking, 2.5 Gigabit Ethernet will be a focus in PC-related products in 2022, with priority on home Wi-Fi 6 router applications subject to supply, other and even some 5G availability. Each business continues to be limited by supply. Regarding switches, while the demand remains robust for both unmanaged and managed switches, the goal is that of standard mix shift favoring high-end switch. Another example of product solutions. The penetration of 2.5 Gigabit Ethernet switch is limited due to the supply constraint at the present time. It represents a solid growth path for switches for 2022 and beyond, nevertheless. About Wi-Fi, demand strength and business focus were mainly on PCs and we start to observe some weak USB dongles in the third quarter. The market demand for Wi-Fi consumer applications at 6 stays strong despite supply shortage. By the end of 2021, the market is expected to have 20% of routers adopting Wi-Fi 6. Have about 30% of PCs at 6. The penetration may readily start adopting Wi-Fi 6E in 2022. Customer projects underway. The ramp up will be gradual in 2022. Next, PC codec is still, by the end of this year, 27%. May reach 38 million units for Wi-Fi growth. Most PC customers we know expect 2022 PCs to maintain and further build on the strength of what is achieved in 2021. Bluetooth NIC plays an important part in telco OTT projects to fill in for Wi-Fi during supply shortage. This is expected to continue in 2022. Wearables and remote controllers using BLE was strong in the third quarter, and the long-term demand is expected to grow. Shipment for TWS using BT SoC is stable or as expected. Realtek TV stays sluggish in 2021 over or 2022. We are working closely with team- Now, we are entering the Q&A session. Please type your questions in the box at the lower right corner on the screen. Thank you, Yiwei. We will reply accordingly. First question is from Randy, Credit Suisse. What is your second half outlook for growth margin? And will mid-term if 42%-44% is the level or now could be higher? As long as the semiconductor supply shortage continues, the marketplace is generally a seller's market, giving the seller an upper hand in product mix and pricing. To the best we can tell, the semiconductor supply is not likely to catch up with demand anytime soon. To this end, we expect to see the product mix in the semiconductor supply chain favoring products yielding better business performance, including growth margin. The growth margin pressure may start kicking in when supply and demand starts balancing out. Next in for Q1 2021 and the next question. Randy would like to ask, what is your target growth or target ratio should we use for OPEX to sales in 2022? We expect full-year revenue to slow down this year due to year-end business recalibration, engineering projects and expense planning. Meanwhile, their normal year-end rush payout. Therefore, for 2022, OPEX ratio lower than slightly increased this year. We try to keep in the 2021 level as some non-recurring engineering efforts to qualify new supply capacity are expected to bear fruit in 2022 and beyond. Thank you. Next question is from Daniel, Morgan Stanley. Regarding component shortage, what components or industry are still in shortage from your observation? The demand on the commercial application IOT Chromebook, in third quarter, patterns remain strong. Commercial PCs and networking applications, including telco tender projects, are good examples. Automotive industry. Provide some guidance on the foundry capacity. Also from Daniel. Could the company increase in 2022? Capacity increase in 2022 will be before the new capacity. The fastest one will barely come online in second half of 2022. Increment in 2022. In 2022, all foundry capacity, worldwide foundry capacity will be limited. Of course, for Realtek, to expand or explain, we are qualifying new foundries for supply base. That difference. Next question. 10 is not changing much, but Realtek will increase. Next question is from Bruce, Goldman Sachs. About the impact from wafer price hike, what's your customer's feedback so far? Which type of customers by different end demand find it more difficult or easier to accept the price hike? Most, if not all customers are reacting with increasing complaints and resistance to the continuing price hike. Nevertheless, the price will eventually be determined by the supply-demand mechanism. Next question is from Rick, Daiwa. His question is, in terms of an application, which areas has Realtek seen softer demand, and how it impacts Realtek? Applications appear to be slowing down. TV, Chromebook, TWS, for example, IP cam, IoT, et cetera. The impact to Realtek is rather manageable. It's quickly reassigned to other applications. The supply for these applications. Overall, the demand outstripping supply remains the same. Next question is from Jason, CLSA. What is the current inventory level of Realtek and downstream? The inventory tend to increase in third quarter. It's still mainly due to supply imbalance. What we produce first from time to time. Regardless of the time, it may not be what is needed immediately as we try to maximize product output. We are certain that the inventory level is still manageable in light of the demand trends. Next question is from William, JP Morgan. How does the company think about demand slowdown in China and its impact? Well, the impact particularly in China will be related to consumer-oriented applications in some region. The demand for other applications in China seem to remain strong. The impact to Realtek is manageable, as Realtek serves the global market and the supply capacity can be readily reallocated. Thank you. A follow-up question from Bruce, Goldman Sachs. Any view that you can share regarding recent China power cuts next year? Some companies in China seem to be under- -were to last longer till- Semiconductor-related, affected by the recent power outage. The long-term effect is unclear, although certain negative impacts to both demand and supply are within expectation. If the power shortage in China persists for an extended period. Next question is from Kevin, Mizuho. Could company comment on the first half of 2022 business outlook? Overall, the demand is strong in 2021. Do we have the confidence that the momentum will continue into the first half 2022? The demand strength for first half 2022 appears to be about the same as that in the second half of this year. We see the overall strength in demand for Realtek products is more than sufficient to make up some demand weakness seen in selected segments. It's from Martin Wong, Fubon. Next question, where are some of the biggest opportunities like Wi-Fi 6, 2.5 Gigabit Ethernet, 10G-PON, managed switch, mesh router? Are any of these lower due to lack of supply? Supply shortage does slow down spec upgrades to say Wi-Fi 6, 2.5 Gigabit Ethernet, 10G-PON, for example. However, the need for each spec and technology of it. We expect the migration to new tech in 2022. Spec and technology will pick up even when supply remains tight. Thank you. Next question is from Terrence, KGI. How about peers SoC lead time? Update for our recent Wi-Fi 6 status. Do we lift up 2022 Wi-Fi 6E penetration rate forecast? While the market acceptance and demand for Wi-Fi 6 remains strong, Wi-Fi 6 penetration for PCs and routers in 2022 from about 20% may reach 50%-60% in 20%-30% this year. The competitors involve the familiar names of Qualcomm, MediaTek in the mid and high end, and of Wi-Fi 6E from Chinese indigenous players in the low-end segments. The adoption is expected to start from notebook PC, AP router, and broadband PON applications. The adoption rate may be gradual as the supply is still tight. Still questions on Wi-Fi 6. Bruce from Goldman Sachs would like to check on peers, including MediaTek, how the offering, segment focus, pricing strategy. How is the momentum so far and pricing premium over Wi-Fi 5? 11n, 11ac and Wi-Fi 6, they co-exist in the market. The price ratio 5. The ASP roughly 1 to 3 to 4 point. For Wi-Fi 6E may add another 20%-30% premium over that of Wi-Fi 6. All specs may co-exist at the expense of in time. Nevertheless, Wi-Fi 6, 6E may replace Wi-Fi 5 first. Also in time, Wi-Fi 6, Wi-Fi 5 may replace some 11n. With a comprehensive product portfolio, where Realtek arguably is the only Wi-Fi solution providers covering all specs for various networking, consumer. Realtek continues to focus on PC and IoT market by providing Wi-Fi solutions, meeting Wi-Fi Alliance logo programs with high level of integration and low power consumption. Realtek Wi-Fi 6 is as good as any top-tier solutions available in the market. In addition, Wi-Fi 6 delivers more values in terms of longer range, lower RFOM and portfolio completeness. Consumer customers are attracted to Realtek Wi-Fi 6 roadmaps covering, for example, different antenna and- I would like to ask about the demand for such as switches, routers, gateways, enterprise networking products, etc. Will the networking demand still be impacted by component shortage in first half 2022? Along with everything else, networking products such as switch, router, and gateway have been impacted by supply shortage since late 2020. The demand remains strong as these products are fundamental to deliver ubiquitous connectivity. As far as we can tell, the demand still outstrips supply in the first half of 2022. Next question. Daniel from Morgan Stanley would like to ask: Do you see TV demand contraction in the near term? What's your view on TV demand in 2022? TV market started to slow down in the third quarter. A number of factors may contribute to the slowdown, deteriorating panel price, overall demand in the past 1.5 years, rapid congested sea and land transportation, softening consumer segment, et cetera. Overall, 2021 TV panel is expected to drop about 5%, and 2022 TV panel may stay flat. Both drivers by product in 2022. Next question is from Randy, Credit Suisse. Any products underperforming or slowing now because of the end of the stay-at-home demand? The growth drivers for 2022 may come from Wi-Fi 6 or the Multi-Gig Ethernet, Bluetooth, PON, set-top box, PC and PC related. These connectivity solutions provided by Realtek are working steady from home or by the market with or without pandemics and regardless of people who otherwise. Thank you. Next question is from Kevin, Mizuho. How is the demand momentum for China Telco bidding in 4Q 2021? Have we seen different seasonality this year? The telco tender market in China remains robust, which accounts for about 50% of worldwide tender market. Delivery for projects awarded in second quarter, verdict in the fourth quarter. Additional projects are expected to be award. There does not appear to be changes for all three types of tender project demands. PON is still annual demand 70-80 million, 30-40 million per year, 60-70 million per year, and router. Next question is from Terrence, KGI. TWS now is still in relatively weak demand. Do we expect TWS shipment in 2022 still weak among muted smartphone shipment growth? And how is current ANC penetration rate and its outlook in 2022? In addition to slow mobile phone sales, the TWS market has been affected by Amazon shutting down thousands of Chinese sellers paying for fake reviews. Realtek has been focusing only on brands and high-end TWS. The ANC penetration remains limited as the technology barrier, therefore low product yields, has proven to be difficult to overcome. LE Audio may provide the next growth opportunity for TWS. Realtek has led the market to introduce LE Audio solution. Thank you. Next question is relating major players in this segment. Could you give us some colors on it? How do we compete with them? Well, for the auto industry, worldwide car sales may drop by 10 million units due to semiconductor supply shortage in 2021. The main shortage appears to be in MCUs and Power ICs. Foundries account for a minor portion of the global automotive chip production. BMW Group, Geely Auto, Stellantis, Volkswagen Group are reporting strong first half sales and profits despite the supply shortage. For the auto industry, it is still bullish. Also, Ethernet is growing stronger than expectation. This segment welcomes supply relief resulting from the softening of non-automotive applications. And now to the IT industry. The concept of software-hardware platform which is taking root in the auto and other IT technologies. This will help deployment of Automotive Ethernet in the auto industry. But in the Automotive Ethernet market, there are only a small number of competitors. With over 30 years of experience with an extremely solid technology foundation, Realtek enters the Automotive Ethernet space. Realtek's strength in high-level integration, therefore low BOM and small footprint. Low power design gives our Automotive Ethernet products a competitive edge. Last, in customer support. Realtek Automotive Ethernet team is second to none, building customer intimacy. We listen to customers carefully, and at times propose solutions even before they see the needs. Last, in high port count. Case in point, in 2021, Realtek automotive switches supporting 5 Gigabit focused switches to pass many grades. The innovative design enables Realtek automobile OEM stringent EMC tests, and to be designed into a wide range of car models. Maintain a 0 defect rate of mass production. Realtek automotive products winning confidence from customers all over the world. Next question is from Warren Chu, Fubon. Can you talk about do you think about the growth rate in 2020 IP set-top box market and IP cam market? How about 2022? Okay. We do not comment on market share, but we can share our observation. Both IP set-top box and IP cam market, they both remain strong, and we believe we have a good position in both markets. Second question. Will you design in Wi-Fi and Bluetooth solution to be the card? Also not a straightforward answer to you. Companies, they actually are very interested in Realtek Wi-Fi and other solutions. We will work with our customers, and they are certainly welcome to use our solution where applicable. We want to emphasize is that the only product in Realtek that has passed through automotive-grade products, today, they are not yet so-called automotive grade. The third question is, do you have PCIe Gen 4 or 5 products and the mass production schedule? They are work in progress, and we will share the progress in due time. What product will be impacted? Do we have any plan for further price hike next year? When? It really depends on our supplier. As we share, we have feedback from our customers, mainly complaints and resistance. On our own initiative, we never raise the price. As we explained, the price eventually will be governed by suppliers. Our upstream supplier will see in many ways up to what happen next year. Okay. Next question is from Claire Yu, investor. What's the die size difference among Wi-Fi 5 and 6 and 6E? Does Realtek have enough foundry supply to support migration from 5 to 6 and 6E? We have shared with you the ASP ratio of Wi-Fi 5, Wi-Fi 6 capacity. We don't have enough foundry capacity to meet all Wi-Fi demand, but we are managing through it. That's what we can share at this point. Thank you. The second question is, we understand the industry is in shortage compared to third quarter. Do we see the gap narrowing? How about next year? The gap is large enough. Comment about gap narrowing or not is not too meaningful, especially if you drill down to different applications, as we mentioned. Some segments, some applications are slowing down, others are growing, remain at a high level overall. The gap at this point is still significant enough that makes whether a comment about whether gap is narrowing meaningless. For the next year, at least at this point, from what we can see, it's about the same. Thank you. Next question is from Bevan Gwyn about fourth quarter from Prudential. When could we expect the OpEx ratio to decrease? How about- Expense ratio fourth quarter. Like, as we explained, likely, the revenue may slow a little, while some expenses tend to rush in before the end of the year. The ratio, the OpEx ratio for 4Q may increase. We target and we expect in 2022, well, we believe there's definitely room to reduce the OpEx ratio as some of the recurring, non-recurring engineering costs will start bearing fruit. Thank you, Yee-Wei. Due to time constraints, we will conclude the meeting now. Thanks 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 afternoon.