Good afternoon, everyone. Welcome to Realtek 2023 third quarter earnings call. This call is chaired by Realtek Spokesperson, Yee-Wei Huang. The presentation will be available on the company website before 6:00 P.M. today. At the beginning, our Spokesperson will report our third quarter results and give a 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 accordingly. During the call, you can browse through the pages of the presentation anytime. Note that portion of what 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 the results forecasted or implied in such statements. Investors should not place undue reliance on such statements. Now, I'll pass this call to our Spokesperson, Yee-Wei. Good afternoon, ladies and gentlemen, on the line. You are currently participating in the third quarter 2023 webcast earnings release, hosted by Realtek Semiconductor Corporation. Let us go through the third quarter 2023 operational results. Q3 revenue was TWD 26.68 billion, a 1.47% QoQ increase, but a 10.4% decline compared to the same period in 2022. If we take into account that part of the demands in the third quarter have been pulled into the second quarter, the market in the third quarter showed a steady growth after hitting the bottom in the first quarter. Q3 gross margin was at 42%, a 0.3 percentage point improvement compared to the previous quarter. The trend of gross profit decline for the past several quarters may be stabilizing. percentage point" - Correct. * *Wait, Rule 3:* "Comparative periods: hyphenate year-over-year, quarter-over-quarter, month-over-month." * "quarter-over-quarter" - Correct. * *Wait, Rule 5:* "Correct obvious spelling and capitalization errors, including financial acronyms (e.g., EBITDA, ROI, OpEx, CapEx)." * "OpEx" - Correct. * *Wait, Rule 1:* "Remove unnecessary starter conjunctions (And, But, So, Or, Then) from the beginning of sentences only if doing so does not alter or impact the meaning." * None. * *Wait, Rule 1:* "ONLY REMOVE distracting fillers and stutters: 'um,' 'uh,' and meaningless false starts that do not add meaning." * "thirty-four point three-- uh, thirty-four point six" -> Regarding inventory, Q3 inventory turnover days were at 111 days, another 22-day drop compared with the 133 days last quarter. In terms of dollar amount, Q3 inventory decreased by 20% compared to the last quarter. We expect inventory days to continue to fall in the fourth quarter. We also have third quarter balance sheet and cash flow statement for your reference at your convenience. Yeah, this concludes Q3 third quarter financial report. Despite steady operations in the third quarter, the end market demand visibility remains very limited due to uncertainty in macroeconomy and international state of affairs. Additionally, considering the seasonality of the semiconductor industry, we maintain a cautious and conservative view towards the first quarter operation. Next, let's review the top product lines at Realtek. Before that, we estimate the PC versus non-PC revenue to be approximately at 33%-67% in the third quarter. The ratio tilts towards the PC-related revenue, reveals the relatively steady demand in the PC segment in the third quarter compared to the second quarter. Now, on Ethernet, the market demand for multi-gig Ethernet solutions is clear. In spite of some third quarter orders pulled into the second quarter, the Ethernet orders held up generally well in the third quarter. Nevertheless, the demand visibility is very limited as we move into fourth quarter. In general, we expect a seasonal slowdown towards the end of the year, followed by a steady recovery in 2024. As various markets demand 2.5 Gbps and 5 Gbps Ethernet in PC and other LAN-based connectivity solutions to support the performance of 10G PON, Wi-Fi 7, and even 5G CPE, namely Customer Premises Equipment. Now, on switch, the global telco project kept delaying, although the market still believes some tender awards should be imminent, with the delivery to start in the first half of 2024. Stated differently, the switch market is almost certain to stay muted in the fourth quarter. Assuming the macroeconomy does not further deteriorate due to the global geopolitical affairs, we expect the telco projects should recover in 2024. This, plus the push for 10G PON and multi-gig switches in the market to match the growth in Wi-Fi 7, AI servers, and data centers. We hold a cautiously optimistic view of the switch market in 2024. Regarding Wi-Fi, it did generally well in the third quarter, with Wi-Fi 6 deployment continuing its strength in PC and routers. Consumer electronics using Realtek Wi-Fi-based IoT solutions also fare well in the market. Wi-Fi 6 penetration is all but certain to reach 70%+ for PCs, while 60%+ for routers by year end. Wi-Fi 7 prospects is expected to conclude in the first quarter 2024, with an official kickoff of the Wi-Fi 7 Logo Program in the second quarter of 2024. It would be considered a great success for Wi-Fi 7 to have a 5% market penetration in 2024. Realtek first Wi-Fi 7 will target high-end routers and PCs. On Audio Codec, the PC market in the third quarter experienced a 10% QoQ growth, according to IDC. It should be noted, nevertheless, some of the PC shipment with using semiconductor components were pulled in delivery in the second quarter. Per IDC, the PC market up to the end of the third quarter is down about 17% YoY. Most of the PC makers are expecting a seasonal slump in the fourth quarter, thereby leading to a full year of PC decline of about 15%, the same as what we forecast in the second quarter earnings call. For CE codec, we stay focused on gaming and high-end mobile phone markets, which are also having a seasonal slump in the fourth quarter. Last but not the least, TV market reached its peak this year in late Q2, early Q3. The weakness in the price of panels and DRAM further dampen the TV production in the near term. Overall, the PC shipment in 2023 is expected to reach about 200 million units, a slight YoY increase. Realtek TV is expected to outperform the market. It is expected that 2024 Olympic Games might stimulate some demand for the TV market. Thank you, Yee-Wei. Now 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. Could you provide more color on fourth quarter outlook? Also, is there any preliminary outlook for 2024 that you could share? Well, despite steady operations in the third quarter, the end market demand visibility remains very limited due to uncertainties in macro and international state of affairs. Further, given the seasonality of the semiconductor industry, we maintain a cautious and conservative view towards the fourth quarter operation. Said differently, we expect the market may hold back some in the fourth quarter, but prepare for a recovery in 2024, barring any uncontrollable surprises. Generally, the market is ripe to spend, to expand applications, exploiting AI and big data with intelligent audio and video man-machine interfaces, running on state-of-the-art managed switches, PON, Wi-Fi, Bluetooth, USB, et cetera. The opportunities for Realtek are many. The second question is from Bruce, Goldman Sachs. How should we think of our long-term gross margin when everything return to normal? We know that all the specs, technology migration, product mix improvement might help, but is there any way we can provide a more quantitative target, for example, comparing to historical high? How are we going to achieve the target, if any? Well, we are cautiously optimistic about Realtek long-term gross margin, with an initial goal to approach the high end of our historic gross margin range. The optimism comes from our incessant efforts to improve our product mix towards mid- and high-end applications, while maintaining our focus on cost-down to mass-enable the AI deployment. Thank you, Yee-Wei. Next question is from Sunny, UBS. How is the inventory level at Realtek and at channel? What's your latest inventory management strategy? When will your own inventory get back to normal level? Well, currently, the inventory outside of Realtek, that is, with Realtek distributors and customers, is healthy to the best of our knowledge, especially in PC and consumer segments. For networking segment, it is also moving in the right direction. Inside Realtek, the short-term inventory target is less than 100 days to cope with the low order visibility and high market uncertainty. We will adjust our inventory targets dynamically, depending on the market situation. Thank you, Yee-Wei. Next question is from Jason, CLSA. How should we expect the OpEx in the fourth quarter 2023 and 2024? The OpEx ratio normally peaks in the fourth quarter based on our experience. For 2024, we expect the OpEx ratio to be roughly the same as that in 2023, as we expect a steady recovery in both market demand and our own performance. Next question is still from Jason, CLSA. Regarding the competition, how is market competition in Wi-Fi, networking, and PC markets? Can we get market share from other players? If can, how to take more market share? What's important to know is that Realtek embraces various international standards in our solutions. While international standards enable mass deployment of ubiquitous connectivity, they most certainly, at the same time, guarantee the entry of competitions. For Wi-Fi controllers, for example, following IEEE 802.11 standards, we serve the global markets along with the global marques, such as Intel, Qualcomm, and MediaTek. For Wi-Fi found in routers, PC, and consumer products, there are also indigenous Chinese companies entering Wi-Fi, mainly in the Wi-Fi-based IoT market today. Realtek is consistently among the top solution suppliers in every field we play. Our market share in every field grows slowly but surely in time. We won by solid interoperability, best cost performance, and perhaps most importantly, second-to-none customer support. Thank you, Yee-Wei. Next question is from Randy, UBS. How is the supplier pricing looking going to 2024? Is it still firm or getting more favorable? Also, how is the competitor pricing versus normal? The pricing pressure from the customers in the market today is very high. A supplier cannot ignore the requests from his or her customers. We are currently in discussions with suppliers regarding production plans and prices for 2024, aiming to achieve a mutually satisfactory consensus. We do not comment on pricing strategy of competitors. However, in times of relatively sluggish market condition, price sensitivity is indeed higher, and the pressure from customers and peers on pricing is also greater than usual. Realtek responds to various price challenges by launching products that are most suitable for different markets and implement flexible pricing strategy. The next question is from Lucas, KGI. What initial insight does the company possess about global PC shipment for 2024? What are the primary catalysts for the growth in shipment? Most of the customers we talk to are expecting the PC market to return to growth in 2024, after a very challenging 2023. The growth drivers often cited are, one, strong fundamentals of the PC usage. Two, refresh cycle for PC notebook bought during the pandemic. Three, discontinuation of Windows 10. Four, the emergence of AI PCs. Thank you, Yee-Wei. The next question is from Rick, Daiwa. Do you think Microsoft Win 12 accelerating replacement cycle? Well, we know what Microsoft seemed to follow a three-year cadence in Windows major releases until Win 10. Win 10 was released in July 2015. That's three years after Win 8. There's no Win 9. Win 11, Windows 11 was released in October last year. No, October 2021. That's six years after Windows 10. This, and whatever other reasons, make Windows 10 the most installed Windows in Windows history, accounting for 70%+ share of all Windows. Now, it is set to reach end of support in October 2025, announced by Microsoft. Some are assumed back to the three-year cadence. Win 12 is rumored for release in 2024. Nonetheless, it may be worth noting that there's no confirmed date for Win 12 release. As far as we're concerned, the catalyst to accelerate PC refresh may be more from the corporate PC upgrade due to the end of support of most installed Win 10 and the emerging refresh cycle for PC notebook bought during the pandemic. Thank you, Yee-Wei. Next question is from Kevin, Mizuho. He would like to know what is the current outlook for the telco project in the fourth quarter 2023 and first quarter 2024. Should we expect strong growth for the telecom project in 2024? As mentioned earlier, telco tender projects have been continuously delayed worldwide. Although the market still believes that some projects are imminent and will start delivering in the first half of 2024, overall, this market has been sluggish for a year. With a low base in 2023, we expect to a gradual recovery in infrastructure deployment in 2024. After all, the development of artificial intelligence, 5G, autonomous electric vehicles, and other areas require expanded network infrastructure and specification upgrades. Thank you, Yee-Wei. Next question is from Sunny, UBS. She would like to know, when will you expect to see more meaningful and product ramp-up for the Wi-Fi 7? What's Realtek's latest product planning? * Wait, "logo program". * Is it "Logo Program"? * I'll use "logo program". * Wait, "second quarter 2024". * "in second quarter 2024". * Wait, "fourth quarter next year". * "until the fourth quarter next year". * Wait, "5%". * "a 5% market penetration". * Wait, "Realtek Wi-Fi 7". * "Realtek Wi-Fi 7 will target..." * Wait, "high Next question is from Rick Stewart. Please comment the automotive revenue contribution, and when to expect significant automotive revenue to ramp. Realtek continues to see automotive an important and necessary long-term investment. Our first wave of investment on automotive Ethernet and switch has performed exceeding our expectation. Its growth rate has been outperforming corporate average by a large margin since its first year of production, nearly five years ago. While Realtek Automotive Ethernet team will continue to focus on in-vehicle network connectivity, its success has attracted automotive OEMs and Tier 1s to other Realtek solutions. In the next two to five years, we are expecting additional Realtek solutions, such as Wi-Fi and audio DSP, to spur a second wave of expansion of automotive-related revenue contribution. Thank you, Yee-Wei. Next question is from Bruce, Goldman Sachs. Please give us some color about Realtek PC content value. For example, for one notebook, what's the same that Realtek can reach? As more and more people talking about AI in PC, are we expecting better business opportunity or incremental change to Realtek? Sure. Now, around the PC notebook and the peripherals today, we can count Audio Codec, card reader, camera controller, SSD controller, USB hub controller, Ethernet controller, Wi-Fi, Bluetooth controller, monitor display controllers, video hub controllers, and so on and so on. That is, we can count 10 or more Realtek products today. The list and the value are expected to grow further in time, reflecting both spec upgrades and expanded PC applications, including AI. Thank you, Yee-Wei. Next question is about Wi-Fi 6 penetration. What's your latest estimate about Wi-Fi 6 penetration in 2023? Are customers accelerating the Wi-Fi spec upgrade into 2024, given the normalizing inventories? * "readily" -> "steadily". * These are corrections of misheard words. * "Correct obvious spelling and capitalization errors... Use contextual clues and phonetic matching to identify terms correctly." * "all a certain" is not a term, but "also certain" is the correct phrase. * "readily" is a word, but "steadily" is the correct word in context. * Let's look at the "word-for-word" rule again. * "Preserve every word in its exact order, with no rephrasing or verb-tense changes." * "NEVER remove or alter words unless they fall under the specific exceptions". Thank you, Yee-Wei. Next question is from Yi-Ho Liu, Capital Investment. Please disclose the price ratio among Wi-Fi generations, from Wi-Fi 4, 5, Wi-Fi 6, and Wi-Fi 6E, also Wi-Fi 7. Assuming Wi-Fi 4 to be 1, Wi-Fi 5 and Wi-Fi 6 will be about 2.4-2.5 and 4.2. As for Wi-Fi 7, since it's not in mass production yet, but roughly from what we can see, it could double the price of Wi-Fi 6 today. Thank you, Yee-Wei. Next question is about the competition in automotive industry. What's current market share of your Auto Ethernet products, and what's your view on the competition? Do you see it's rising from China? Also, please comment on the trend of the technology development on the Auto Ethernet. Realtek does not comment quantitatively on product market share. Suffice it to say, nonetheless, Realtek is oftentimes among the top contenders in the fields we play. Regarding Automotive Ethernet competition, we do observe potential new entrants from China. In the fifth years of mass deployment, Automotive Ethernet may be set to move from a novelty to standard solution in a car. As the technology matures in cars, best performance become as important as, if not more important than, the pursuit of higher specification. A trend that plays into the hands of Realtek. Make no mistake, however, this does not mean Automotive Ethernet has no further technology advancement. Higher spec, namely higher speed, lower power, as well as heightened safety and security, will continue to drive the Automotive Ethernet roadmap. Thank you, Yee-Wei. Next question is from Sunny, UBS. He would like to know: How would AI drive the networking upgrade? Would Realtek be a beneficiary? Any opportunities to work with the hyperscalers? Simply put, there's no AI without connectivity. A complete AI ecosystem consists of cloud servers or data centers, connectivity, and edge devices. As AI upgrades or scales, each within the ecosystem must upgrade or scale in tandem. Realtek oftentimes benefits as a solution provider for connectivity and edge devices. To this end, there are certainly opportunities to work with hyperscalers such as Google, Microsoft, and Alibaba. Next question is from Daniel, Morgan Stanley. How do we see the Edge AI development to contribute to Realtek? If it could, when do you think it could make a progress? * "camera chips" (2 words) * Wait, "PD application". * "P.D. application". * Wait, "AP router". * "A.P. router". * Wait, "IC". * Glossary: "IC". * Wait, "AI". * Glossary: "AI". * Wait, "2023". Thank you, Yee-Wei. Next question is from Sunny, UBS. What's the split of your product that's made by eight-inch foundries versus 12 in? How would this change in next two to three years? Would the process migration drive any cost benefits, or is it more driven by supply-sufficient point of view? * *Wait, one last check on "wafer" vs "wafers".* * Transcript: "twelve-inch wafer". * I'll keep "wafer". * *Wait, one last check on "low-power requirement".* * "low-power requirement" (adjective-noun). * *Wait, one last check on "high-power, high-voltage".* * "high-power, high-voltage" (adjectives) Next question is from Brad, BofA. Does Realtek see any de-spec trend for Wi-Fi, switch, Ethernet, home product amid macro weakness? Indeed, the market tends to favor products with basic configuration when the economy is slow. The adoption for the new specs are often likely to be suppressed, if not seeing de-spec. Thank you, Yee-Wei. Next question is from Daniel, Morgan Stanley. How is your initial view on Realtek's TV share and content growth as you bid for the project for 2024? Suffice it to say that Realtek TV SoC continues to gain market share slowly but surely, although facing challenges during the shortage. We expect to continue the momentum in 2024. In terms of silicon content in the TV, Realtek focuses on opportunities in Wi-Fi, Bluetooth, and camera at the present time. Thank you, Yee-Wei. Next question from Rick, Daiwa. Can you talk about the company progress and roadmap in the USB4, also the PCIe 5.0? Presumably, your focus is on the host end. Realtek multi-port USB4 hub controller has been with customers for product development since the third quarter. It is a full feature, the only full feature USB4 solution in the market, other than by Intel. Full feature, meaning it can be used on the host end or the device end. Realtek PCIe 5.0 will be ready by the end of the year. Okay, thank you, Yee-Wei. Next question. The investor would like to know about the corporate tax. Our corporate effective tax rate is roughly around 4% and probably will stay at this level. Thank you, Yee-Wei. We have no further questions, and 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. today. Thank you, and have a good afternoon.