Q3 2023 Parade Technologies Ltd Earnings Call

Participants

Ji Zhao; Co-Founder, Chairman & CEO; Parade Technologies, Ltd.

Yo-Ming Chang; IR Officer; Parade Technologies, Ltd.

Bruno Cheng; Former Analyst; Nomura Securities Co. Ltd., Research Division

Eric Chen; Associate Analyst; UBS Investment Bank, Research Division

Jacky Chen; Associate; HSBC, Research Division

Julie Tsai

Richard Chen

Sejong Chu

Stephanie Yang

Vivian Yang

Presentation

Operator

Welcome, everyone, to Parade Technologies 2023 Q3 Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang, will present 2023 Q3 financial results first. And during the presentation, all lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session in English by CEO, Dr. Jack Zhao; and VP of Finance, Mr. Kuowei Wu, and we will also reserve the last 15 minutes for the attendees who would like to ask questions in Chinese. Please follow the instructions given at that time if you would like to ask questions. (foreign language). Now, I would like to introduce Mr. Yo-Ming Chang, Investor Relations of Parade Technologies. Mr. Chang, please begin. (foreign language)

Yo-Ming Chang

Welcome, everyone, to Parade Technologies 2023 Q3 Webcast Investor Conference. Parade Technologies third quarter 2023 consolidated revenue was USD 115.96 million, and the net income was USD 19.32 million. It's both best and fully diluted after-tax earnings per share were USD 0.24 and then USD 0.24, respectively. These results compared to consolidated revenue USD 151.04 million and a net income of USD 32.64 million or USD 0.41, and then USD 0.40 per basic and fully dated share in the year ago quarter. In U.S. dollars, the third quarter revenue increased 12.7% sequentially and it was down 22.7% year-over-year.

The gross profit in the third quarter of 2023 was USD 51.17 million, an increase of 11.74% from the previous quarter and a decrease of 25.15% compared to the same quarter of last year. And over 30, 2023, Parade announced the availability of the PS8580, PS8580V, and the PS8581 PCI532 gigabits per second linear driver to buy to cross switch family. PS8580 and the PS8580V integrate acquired channel unidirectional linearly driver with 2 by 2 core switch, while PS8581 figures a linearly driver only. PS8580, PS8581 are designed for notebook PG-server data center, and the industrial applications while PS8580V supports automotive AEC-Q100 Grade 2 requirements. Multiple PS8580 devices support by 4 by 8 or by 16 by the rational link. PS8587 is comprised with PCI5 specification.

On October 18, 2023, Parade announced the availability of its new high resolution automotive-grade PS8627V disputable to LVDS protocol converter. The PS8627V is used to convert a display core or embedded display for video transporting to the LVDS interface used by automotive grade display panels or display assemblies. The PS8627V enables ultra-wide display up to AK1K60 width, 30 bps per pixel covered. The PS8627V features EDP input of up to 4 lens, and the LVDS output of up to 6 ports, enabling a negative DP eDP connection between automotive video control units and the display example can simplify system design and then lower implementation costs by eliminating the need for a service for the audio video transport channel. Based on the current business outlook, Parade is providing the following guidance for the fourth quarter of 2023. Revenue is between USD 110 million to USD 122 million. Gross margin is between 43% to 47%. Operating expense is between USD 30 million to USD 33 million. (foreign language). This is my presentation for the 2023 Q3 financial results. Now I transfer to CEO, Dr. Ji Zhao, to answer your questions. (inaudible) you may begin.

Question and Answer Session

Operator

Yes. Thank you, Yo-Ming. Ladies and gentlemen, we will begin our English Q&A session. (Operator Instructions). The first one to ask questions is Eric Chen from UBS.

Eric Chen

So my first question is on your near-term outlook. Your near-term outlook looks to be soft. Could you talk about your observation about your lose customers into like near quarters? And also what's your observation about your general Notebook customers? And if possible, what's your initial view into the first quarter next year?

Ji Zhao

Yes. I think as we had said in the last conference call, we see the PC market is on the L-shape recovery, and we continue to see those kinds of trends and to extend to the Q3 and Q4 and continue will be to the 2024, and we think the 2024 public recover will be better than the 2023, hopefully, and in coupling for the newer device introduction, newer system introduction. So that's pretty much the current view we have. And of course, when you come to the 2024, you will have a better comparison with 2023, since we had a pretty bad downturn in the 2023. So the 2024 definitely looks much better than the 2023 in terms of comparison.

Eric Chen

Yes. Maybe a quick follow-up with that. I'm just curious about what's your observation about your senior notebook customers and also your general notebook customers. I mean, are there outlooks fairing similarly?

Ji Zhao

General notebook customer has been recovered for at least two quarters. And we saw general notebook market get a quite good strength in the Q3 and also reasonable in the Q4 actually is getting pretty promising, I would say, in the Q4. Our standard plus customer, they were a little bit late in terms of recovery. However, hopefully, we see some trend in the Q4 or continue to next year, they will recover better, especially they had announced a new product just recently and also reduced the price for the existing notebook. And we really hope they can recover. And even though that was a little bit delayed versus others. And yes, we will keep pretty positive. We think they are very strong. Their product is top the line, they should be able to catch up and meet the rest for the market.

Eric Chen

Maybe my last question I have is on the competitive landscape. So could you talk about your status in USB for retimers and also PCIe retimers? I think there are other Taiwan-based tell design house, introducing their own solution to tablets markets. So what's your edge in this market, respectively.

Ji Zhao

Okay. On the PCI Gen 3 or Gen 5, there are two types of distinguished difference the product. One we call the retimer, which we will address more in terms of a data center, in terms of the more advanced system and that there is a redriver which you could do a short distance, however, with a lower power. So with our new product introduction, we are have the path on both segments. And we continue to see those mission-critical service system or AI systems will prefer using with timer and those are a lot more expensive and a lot more rigid in terms of design as we currently engage with the OEM customers. And there are another segment which is PCI 105, the driver and the typical can address the needs for shorter distance, but it's pretty reasonable good. And at the same time, the power is lower. So it will tend to be addressed like a cable, those kind of things related. So we are playing on both sides. And we think we cover the needs for the different markets on the different devices.

Eric Chen

So any color you could share about the retimer competitive landscape? And also, I'm particularly curious about your USB for opportunity in Intel based notebook. I think last quarter, Intel introduced from the PCI5. And is it possible for Parade to finally have an opportunity to enter into the segment?

Ji Zhao

Okay. the PCI5 and we are working with the end customer and hopefully by Q1, sometimes we have some shipment as we communicate with the market in the last conference call, which seems our solution is pretty promising as well. And in terms of U.S. before, we had dominated on the non-intel platform, whether AMD or Coca or others. But Intel is a bundle sale with their own solutions. So it's been really bit slow. They own their CPU. They own their own retimers. It's very hard to break it. Even though we did communicate with OEM customers and OEM customers really support us to do that, but I think it will take time to break into.

In terms of what do you say, the tone 5 or the 80 gig or 120-gig for solutions. In fact, we already have the test chip already tapered out and on the November time frame, we should have the test chip with us. And so we will play with that market for sure. And yes, we will follow up very closely on those segments. And we believe we will be the leader in this segment and hopefully, intel will allow us to play on the intel platform as well. But for sure, we already lined up with non-intel platform. And yes, that's what we can report.

Operator

Next one to ask questions, Sejong Chu, Taiwan.

Julie Tsai

For the first question, I have to ask, according to the fourth quarter guidance you mentioned, you see the revenue at midpoint as more flattish on quarter-over-quarter basis? And does that mean that our strong system of revenue will not be able to sustain until the fourth quarter? And is it because of the slower recovery of our standard plan customer? Or is there any other reason behind it?

Ji Zhao

Well I think the PC segment historically, traditionally, tend to be Q3 is a stronger quarter and because of holiday related. And the Q4 depends upon, a lot of time could be flat, could be a little bit lower or it could be a little bit higher. And we guided the range, but we work very hard. Let's see what the end result would be. And as much as I can say, into the Q4, the momentum of a business is still existing. However, the customer there are pure order is tend to be short and they tend to be the polling type of thing. So which means the end customer is not as stronger as what we would like to. So typically, they are just pulling the POs and place very short-term POs. So that's what we experienced. But compared with the other area, I see promising, we think the PC in the Q4, we are kind of certified what the momentum we see at this moment.

Julie Tsai

So another question from me is on the foundry side. Fewer peers enjoying better cost structure with their wafer price reduction from their suppliers? And are we seeing like any price cut for our supplier? And if not, what's our strategy on managing our cost and also the selling price to our customers?

Ji Zhao

The foundry side, in terms of cost is already subject to which notes, which foundries and so on and so forth. And we tend to be old notes or traditional established notes. And foundry inside of China, more willing to reduce the price. And the foundry in the Taiwan is, or in the advanced note, is difficult to negotiate the price. However, the more into the traded late of 2023 or into the 2024, semiconductor demand continued softening. Foundry is more willing to negotiate on the price. So that's a good side of it. We continue to push the foundry to reduce cost to help us support our customers as well as the gross margin, maintain our gross margin, but that's a dynamic change as the trend, the older notes of wafer, you will be able to negotiate price. The foundry in the China side is a lot more easier. And in the tower side, it's a lot more difficult and where it is in the advanced note.

Operator

Next one, we have Vivian Yang from Nomura.

Vivian Yang

So I've got two questions. So first, I would like to ask about next year PC market. We know that some people are hoping a lot of recovery for PC due to some reasons, for example, the replacement cycle after COVID, AI PC or a Windows refresh. So could you provide us with your thoughts about maybe which would be the biggest driver for next year's PC market?

Ji Zhao

Okay, thank you. And I think what you had said -- and as might well happen. And what do we read as many reports we could. And we think the 2024, the PC unit growth were around 5% to 10% or high single digits. Having said that, we see the driving force. One is because the early time purchased in the pandemic stuff pandemic on 2020. Now the PC, the edge is between three or four years. So it's time to replace. And more important, exciting one is related to the Microsoft just announced the Windows 11 and announced with core pilot AR function. And those are the new features and very exciting for the 2024. I would think 2024 will be the first year, the PC or notebook where equipped the edge AR functionality.

We are working with the leading notebook vendor to enable those features and design with the CPU has such as AR, the accelerated features for newer notebook. And we truly hope those AR equipped mobile PCs may take another new wave for the replacement. And that's the exciting thing, and we hope we'll see, and we were told how many CES shows in the Las Vegas and last like two months or early next year. Two months or three months away and you will see a lot of the notebook or newer notebook related to this area and to display or exhibit over there. And we certainly hope that will become a new way to move the replacement cycle earlier. And another good thing is those are the acceleration feature do demand a high bandwidth and whether PCI Gen 4, Gen 5 and those sort of things benefited to us as we are the high-speed provider.

Vivian Yang

And my next question is regarding your long-term opportunity. We know that you have a lot of long-term growth drivers such as auto projects, PCI opportunities in servers and maybe USB4. So I just want to ask if you have a ranking like which projects would be food quickly or have more meaningful contribution in the next maybe three years?

Ji Zhao

Okay. So, it's very real for the USB4 or Gen level 5 retimer, or in future for the driver to continue strength our high-speed the success, right? And those are the large volume that we commit a quite large volume or large market share there. So for sure, that's the first project and a full first school segment. And in addition, our traditional HDMI, the HDMI retimer, HDMI, the dispute time retimer, and those high-speed related will contribute to our revenue strength. And we're talking about HDMI 2.1. We are talking about the Sprint 2.1. And the new standard proposed HDMI 3.0. And also in the coming years will become the opportunity to close on both the market share and the ASP price.


And the second area we are exciting is where we inquire new design on the high-speed side for automotive applications. Those are the new to us. And we do have some success, design high-speed parts into automotive. And I think those are the new contribution to us for revenue purpose. And however, the automotive, the volume cannot be not as high as the PCs, but it does help us to grow and help us to understate automotive, the area. And that's public second. And in the automotive, we'll also address the space side. And then the public will say, the PCIe Gen 4, Gen 5 and those will start to become a contribution to our revenue.

Operator

Next one, we have Richard Chen from AIA.

Richard Chen

My first question is regarding the foundry node that we use. Could you share any of your product line or location, which need to migrate into 16 or 40-nanometer or more advanced given the increase of the speed from the customer? This is my first question.

Ji Zhao

Well, you see product broad the semiconductor nodes, and depending on the product distributed from the Huawei all the way to the FinFet 12-nanometer technology node. And certainly, a lot of wire use is a 40-nanometer, 28-nanometer and 55-nanometer. So those are the -- all the way on the bottom side has the old 100-nanometer thing. On the high speed, we tend to use the more advanced nodes because of the speed of requirement. And in addition, we also use silicon germanium by CMOS. Okay, many people just not very familiar with Silicon germanium by CMOS. Those are used in the U.S. on the global foundry, the original, the IBM set. So we are pretty proud and usage for the quite widely distributed foundries.

Richard Chen

My another question is that you're talking about the AI PC opportunity. Could you share roughly how you see the AI PC shipment for the next several years? And for Parade yourself, how do you see the AI PC could drive the current increase operate?

Ji Zhao

I think the people have been in terms of hardware side, software per system. Microsoft, the heavy lifting already doing quite a lot, right, window level or pilot and you will see more. But a week ago, I think Poco also introduced those -- what is the kind of a net driving act. The AI PC process, which has AR exit there, right? So we are working with the team there to designing our high-speed parts and hopefully, soon we'll be on the market. On the other side, we see the opportunity customer or notebook customer using so-called Acculink interface to connect our PCIe Gen 4, Gen 5 signal to connect to the extreme graphics car. It's not for purpose of play game, but the purpose or accelerate the AI functionality. And we are on those systems with our PCIe Gen 5, retimer, the driver along with it. And hopefully, those systems will become more popular. And then we will have more business associated with it.

Richard Chen

My last question is also regarding the notebook. Thanks for that you've shared initial thoughts that notebook shipment will be up around maybe 5% to 10% or high single digit next year. But I'm wondering it could create IT shipment could actually outpace the overall notebook shipment. And also how do you see the inventory level at your customer side heading into 2024?

Ji Zhao

Yes, I already said that we are actually really based on the research report and the people indicated, and we talk to our end customer and seems our end customer also sort of validate what the risk processes. And hopefully, the momentum can be stronger. And in general, I would think the PC OEM is kind of quite positive for 2024, very different from the early time of 2023. It's a lot more. I think it's positive and look at the longer term, what are the future will be and what are the new technologies will be. And so I would think in the state, in this moment, as we talk to OEM and the OEM are more positive to the 2024.

Operator

Now, the line is open to Stephanie Yang from Morgan Stanley.

Stephanie Yang

So my first question is what is the revenue breakdown by product in third quarter?

Ji Zhao

Okay. For our discrete product, it was lower than 40%. Our high-speed product per product is slightly lower than 45%. Our TC product is slightly above 15%. Our Q touch product is lower than 5%.

Stephanie Yang

So my second question is that I would like to follow up on the PCIe Gen5 retimer side. So we are seeing several peers entering into the PCIe Gen 5 retimer market. Could you share with us our advantages over the peers? And do we have a revenue contribution target for our PCIe Gen 5 retimer in the near term?

Ji Zhao

I don't know what is our competitor. Clearly, where they are, our customer products and our PCIe Gen 5 retimer power is lower and more stable. Seems they are putting to the system with AI in Canada, and each chip is almost 10 watts, so that any power contribution is significant. In terms of our target, and we are in the very advanced stage of customer validation and hopefully, customers where we finished the qualification, everything by end of this year. And hopefully, next year we will have the product shipments with it. And those are the leading customers. And so far, the steel we work with are pretty promising I would say.

Stephanie Yang

My third question is that as we are now in the fourth quarter of this year, can you share the current USB4 penetration rate with us? And also in the last earnings call, you shared that the USD penetration rate in 2024 will be double from this year? And are we seeing any changes in this number?

Ji Zhao

I think I can only talk about non-Intel platform, right? So yes, we are shipping. Yes, some million parts this year. And with multiple OEMs, and the primary with AMD systems. And the next year, the 2024, we will have more OEM using our systems and we will expand to other platform other than the AMD. And we still stand by what we had cleared by 2024, we should see at least doubled the unit shipment compared with 2023.

Operator

Next one to ask questions is Jacky Chen from HSBC.

Jacky Chen

I want to ask about the third quarter gross margin, which went down a bit. Is there any ongoing inventory digestion? And when do you expect to see healthier inventory levels for your display ICs?

Ji Zhao

Well, it is true that a lot of IC vendors in ring to the downturn as we are. And so the competition on the market is getting high, especially if there are multiple vendors there. So it is kind of true that where you have a lower price, you can sell more, especially in the panel area. And so those are the common parts, common platform and however, on the high-speed side, our peers parts and has less that kind of situation. So we have a little bit dip on the gross margin. I don't think that's really just because of the product mix there. And hopefully, we can keep those as we guide our gross margin there, and we can continue to have a pretty healthy gross margin. Now it's a pretty dynamic is one side. You get a pressure from your customer on other side, you push your supply, your foundry, your back end as well, try to balance out that. And in addition, you have a new product tend to be higher with the gross margin there. So you have to mix things together to meet our gross margin goal.

Jacky Chen

My second question is regarding the OLED Tcon. And when do you expect to see further rising adoption rate in notebook or any other application like tablets?

Ji Zhao

Well, we have developed the MOLED already. And we think our customer were introduced to the market sometime soon. And we hope that will help us to increase the revenue and so on and so forth. And yes, MOLED is getting more traction in the mobile space. And however, because it's still expensive on the tenor self. So the adoption rate were subject to the price of channel and so on and so forth, right? So we think in the short term or in a couple of years, the MOLED still will be on the niche market purposing maybe the leading client customer will use it. But we will work very closely with the customer to develop the ASIC-based on MOLED solutions and for their high-end applications. I hope I answered your question, but that's the current situation. And yes, depending on who the customers like and the price point, what you would like to. MOLED solution is expensive.

Jacky Chen

One final question. Can you share the -- sorry, what's the gross margin trend do you expect for 2024?

Ji Zhao

Gross margin on 2024 will remain similar to the 2023, we hope as the new advanced product coming and might help us to improve, but we have to wait and see, and it very much is competition on the foundry side and your competition in the customer side. And so it's pretty dynamic, I would think. And a lot of not only depend on our device, our advice would be also your supply. How much you're willing to reduce the price, right? So it's pretty dynamic, I would think.

Operator

Ladies and gentlemen, we are still in English Q&A session. (Operator Instructions). Next one, we have Bruno Cheng from Alliant.

Bruno Cheng

My first question is regarding the pricing environment. I'm just wondering, is it fair to say that the overall pricing environment for our products are kind of stable for now? Or are you still seeing some kind of timing treasure is ongoing?

Ji Zhao

I would think the largely price environment is stable. In some pockets, especially on the panel side, you may see more price pressure on the soft driver in those areas. But in the high-speed side or general other side, I think we will consider it as stable. And we always, as our business, we will see the price pressure from our customer, and it's subject to negotiation and taping. But in general, I would think it's stable.

Bruno Cheng

Understood. And in terms of fourth quarter, do you expect to see any changing in product mix or is it quite similar to the third quarter?

Ji Zhao

Well, certainly, I cannot say the Q4 exactly, that's where we're within our gross margin range but not. I only can say it's business as usual. It's very subject to the product mix.

Bruno Cheng

And my last question is regarding the Tcon market. I'm curious about it. It's more like a long-term outlook for the Tcon market. As you can see, the penetration of mini and macro Tcon could be limited to some kind of client segment. So I'm just curious, when you look at Tcon market, the long-term market growth, is it driven by the upgrade panel? Or it's more or less in the high integration, for example, you integrate driver and touch into Tcon? That's my last question.

Ji Zhao

Yes, I think that's a good question. I would think the high-end ticket market for gaming or MOLED. And those are the things continue will grow, and we will continue to play aggressively in those markets and the gaming and MOLED. In the more general market integration is a way to distinguish others and whether our TED device with our PT device, with our TSD integrated touch together. And those integrated device really make us stand out to provide innovative solutions and are customer like. In fact, the customers start to realize those integrated solutions provide a lower cost, provide lower power and you get advantage on the ESG because ESG now counting number of chips.

So we start to see the benefit of our early bird push in that area. And hopefully, those trend continue into the 2024 and beyond. And yes, the general market, you clearly see the trend. The massive market are moved to the TED, PTD and those areas has started. And we're glad in the Q1 next year, we have multiple products and with those kind of integration, we'll go to the mass production. And that actually is good because it's less competition, and we increased our content of panel side because touch now is additional in our offering there as an integrated solution.

Operator

Next one to ask questions is Chu from Daiwa.

Sejong Chu

My next question is on initial view on the display market condition right now and also the competition landscape. Are we seeing like more severe competition relating to your alliance? And also for longer term and can you share with us the growth outlook?

Ji Zhao

Spread market on the lower segment, you see the more competition. And what we play is go with integrated solution, but even recently, you on the core book, the panel we consider as a low-end market because we provide PTD solution with Tcon soft driver touch integrated together. OEM likes a lot because provide lower cost and simplify the whole structure. So those low end and while you compete, you have to find an innovative solution to go along with it. A positive for the display, the segment because on the high end, you would have the MOLED, you would have the LED type of display as well as micro-LED display. We recently worked with a customer and to start to develop the panel customers who started and develop early time of protocol for micro-LED type of solutions. The display market is an expansion and that mainly very obvious into the automotive special EV automotive, those are the expansion, they demand more panels. So we also push very hard to play those market as well. So overall, we are pretty positive for that. Of course, you have a competition there that always you will have a competition and to win the competition, you have to be innovative. You have to be putting your R&D dollar to go along with and be patient to win the customers.

Sejong Chu

All right. So my next question is our oil risk affecting our customer business right now? And/or even if not right now, we're seeing in our future business.

Ji Zhao

Yes, it's a little bit broken. Could you repeat your question one more time? I'm sorry for that.

Sejong Chu

Talking about the geopolitic coverage that's affecting our customers business right now or even not right now. And are you seeing like any potential rate to our future business?

Ji Zhao

I still missed your question. Maybe the operator, could can you hear clearly what she said? I'm sorry, we would like you to repeat your question one more time, sorry because from my end, your signal is kind of breaking up a little. Just a little.

Sejong Chu

Okay. What I'm asking about is the geopolitical risks, is that a factor?

Ji Zhao

Okay. Yes, geopolitical risk. Okay, that's a good question. Yes, in the same time, geopolitical become our pretty high priority to address. We have the most sensitive automotive customer and they push us very hard to move the assembly to move the foundry to outside China and in some extreme case outside Taiwan. We also see the PC customers want us to relocate the foundry to other place. And yes, we are working with them to provide a realistic trend. And the good thing for the PC customer, most of our chip during the pandemic, we achieved the multi-foundry supplier, so we can move around relatively easily. But for the automotive, it is a challenge. And we'll address it, and we'll work with customers to address it. But the geopolitical, as the current, what do we see is it's become a challenge to the provider, but we have to address it. We have to face it. That's what we are doing. And we'll work with our foundry. We'll work with the back-end painting house, try to address our customer concern.

Sejong Chu

Next from me is, could you please provide the outlook of totalling to fourth quarter like given a directional age for the line.

Ji Zhao

Yes, I did not hear very well. So sorry for that.

Sejong Chu

So my next question is that could you please provide the outlook or the direction of each product line to the fourth quarter?

Ji Zhao

Okay. It's a similar trend that our high-speed product line is a continued charge up in the Q4. And we continue to see the request of employing our high-speed product. Display product gets better, I would think, especially for the high-end product. And yes, we see our high-end customer start to more willing to take part. I think that's the main trend we observed.

Operator

Yes. Thank you, ladies and gentlemen. That concludes our English Q&A session. We will move on to the Chinese Q&A session now.