Parade Technologies, Ltd. (4966) Earnings Call Transcript

Welcome, everyone to Parade Technologies Limited 2022 Fourth Quarter Webcast Investor Conference. Investor Relations of Parade Technologies, Mr. Yo-Ming Chang will present 2022 fourth quarter and fiscal-year 2022 financial results first. [Operator Instructions] After the presentation, there will be a question-and-answer session in English by CEO, Dr. Jack Zhao; and CFO, Ms. Judy Wang. And we also will remain last 15 minutes for the attendees who like to ask questions in Chinese. [Operator Instructions] [Foreign Language] And now, I would like to introduce Mr. Yo-Ming Chang, Investor Relations of Parade Technologies. Mr. Chang, please begin. [Foreign Language]

Thanks, Jason. Welcome, everyone, to Parade Technologies 2022 Q4 webcast investor conference. Parade Technologies fourth quarter 2022 consolidated revenue was USD 101.45 million and the net income was USD 14.48 million. Both basic and fully diluted after-tax earnings per share were USD 0.18 and USD 0.18, respectively. These results compared to consolidated revenue USD 194.26 million and a net income of USD 52.6 million or USD 0.66 and USD 0.65 per basic and fully diluted share in the year ago quarter. In U.S. dollars, the fourth quarter revenue decreased 32.83% sequentially and was down 47.77% year-over-year. The gross profit in the fourth quarter of 2022 was USD 44.68 million, a decrease of 34.66% from the previous quarter and a decrease of 52.46% compared to the same quarter of last year. For the fiscal-year 2022, the consolidated revenue was USD 679.92 million, representing a decrease of 4.82% from USD 714.33 million in the prior year. Gross profit was USD 316.18 million and the operating income was USD 180 million. Net income was USD 167.25 million or USD 2.09 per basic share and USD 2.06 per fully diluted share. These results compared with net income of USD 187.44 million or USD 2.37 per basic share and USD 2.32 per fully diluted share in the prior year. Based on the current business outlook, Parade is providing the following guidance for the first quarter of 2023. Revenue is between USD 90 million to USD 105 million. Gross margin is between 43% to 47%. Operating expense is between USD 29 million to USD 32 million. On January 18, 2023, Parade introduced the new PS8936 retimer chip developed for PCIE 5.0 and CXL, supporting 16 bidirectional lanes. In addition to supporting the 32 gigabit per second data rate offered by the PCIE 5.0 specification, it also supports 2.5, 5, 8 and 16 gigabit per second for backward compatibility with earlier PCIE revisions. The PS8936 is the PCIE 5.0 retimer addition to Parade's PS8926 and PS8925 PCIE 4.0 16-lane and 4-lane retimer family currently in production and PS8570 PCIE 4.0 4-channel linear redriver in sampling stage. The PS8936 is in full compliance with the PCIE 5.0 specification and has been successfully tested in multiple OEM systems and PCIE 5.0 CPU platforms. It is designed for use in enterprise systems including servers and data storage and in high-performance workstations. On January 25, 2023, Parade announced a new offering in its eDP TCON with embedded driver product category. TC3222 provides a single-chip display driver solution as an alternative to the traditional multichip solutions, eDP TCON plus source drivers. The TC3222 provides a lower cost alternative to the TC3210 by eliminating the frame buffer required to support Panel Self Refresh. Both versions feature narrow COG package dimensions to support new generations of sleek LCD panel assemblies. TC3222 is compliant with the eDP 1.4b standard and supports MSO, Dynamic Refresh Rates and more. The TC3222 is designed for Flip Chip on Glass application on both Amorphous and Oxide type TFT panels. It requires no external crystal or timing reference, includes a programmable gamma buffer, as well as Parade's exclusive Smart-Backlight feature for additional color and power optimization. The fully programmable row and column driver timing enables the TC3222 to serve a broad range of panel types and it provides synchronization signals that support a wide range of touch controllers. [Foreign Language] It is my presentation for the 2022 Q4 and the year 2022 financial results. Now, I transfer to CEO, Dr. Jack Zhao, to answer your questions. Jason, you may begin.

Ladies and gentlemen, we will now begin our English question-and-answer session. [Operator Instructions] And our first question is coming from Carol Juan of HSBC.

And my first question is some quick questions on the results. Just wondering what is your product mix in the last quarter. And also curious about the gross margin has declined Q-o-Q in last quarter, and the inventory has increased a bit. So, just could you provide more details on the margins? And any product lines seeing more inventory pressure in the last quarter? Yes, that would be my first question.

Okay. Good afternoon for many people who are in Asia. So, the first question, what is the mix of our product line. The DisplayPort or DP line is above 40%. PS and our high-speed product line include the Fresco Logic part is above 30%. And our source driver or TC product line is above 20%. And TT, that's our touch product line is lower than 5%. The second question, I believe, is why would the gross margin a little bit slow, a bit lower. Yes. And I think that our gross margin is well within our guidance. And the large -- the gross margin mainly is due to our mix of our product sales in the previous quarter. And as we are going through the inventory correction and we took a little bit of conservative approach to roll down a portion of our parts to which are the kind of aging, and we have a rule there to mechanically to load up a small portion of our aging the path. So, that's another contribution for the slight lower of our gross margin. And I think the third question related with the inventory and the tough Q4 was a very difficult quarter for many of us, especially we had operation office in China and have started with -- if we recall with zero COVID policy there. And our office and people who are in the Shanghai office really closed the office for a couple of weeks and followed by the [indiscernible] open up and many of our employees have got infected. And so that within a quarter, probably you had 1 month of time, we are really dealing with those kind of issues. And as far as our manufacturing customer surrounding the Shanghai area and the people -- the factory were not open or only partially open and so they are fully took our parts than what we had anticipated. However, as we -- the China going through those COVID event and they got to recover and the manufacturing and our office both are totally open, and we see the acceleration and the manufacturing side or distributing side take our parts to the factory. So, I guess that's what I explanation why we saw the inventory kind of increase as the not as we had thought at the beginning of the Q4 quarter.

So, do you think that the inventory will continue to decline in the first quarter? And when do you think that the inventory level will back to the normal situation in this year? And any opportunities to see some of the high-speed interface products, you have a better -- faster suggestions compared with the other display-related product lines?

Okay, just to continue ahead, into the January, we saw or we experienced a lot of the rush order and [indiscernible] so that our distributing channel, which our [indiscernible] now shipping a lot more parts to go out of the shipping. So, we saw the consumption of our parts from the distributing channel accelerate. And as far as our own inventory in the January will continue consume very quickly. So as we modeled, we think by the end of Q1, the distributed channel inventory is no longer an issue, will become normalized. And for our own inventory, we also think by end of Q1, will reduce quite a bit and by end of Q2 or within the Q2, we think the inventory issue should be behind us.

And my last question would be the -- regarding to the full year outlook, have you been seeing any better momentum for any product lines or any visibility for -- to each product lines in [indiscernible]?

I think the larger we lead and follow the research report from many organizations and people modeled the 2023 PC special notebook will have about a 10% reduction from the 2022. That's a large picture and we model our business. However, within that the contest and we see the significant growth for our own newer device, especially USB4 retimer and we've been adopted in the 2 very significant platform and with multiple customers and we had the shipment going to mass production in the last year Q4 now is accelerated shipment for USB4 retimer. And we hope there will be a growth momentum for our high-speed device. And we also would like to see our TED device with our new announcement -- new announced new device and we continue to have several of our TED device. We are leading the market to have a better market share for the total solution to support the panel industry, which will provide much [ knowledge reserve ] and a complete solution for the IC panels and our customer -- our panel customers are excited. And in fact, TC3222 already into the mass production with end customer there. So, that to get kind of catalyst that we think will propel our business in the 2023 and within the people thinking the notebook shipment unit shipment were kind of 10% drop.

Next question, [indiscernible].

I've got a follow-up on inventory first. By end of 2Q, your inventory will be back to normal or within 2Q per what you just said? And I wonder what's your so-called normal level inventory in next cycle?

Yes, yes, yes. But we are -- our own inventory before the pandemic, [indiscernible] we typical lay in the range of 65, 60 days type of range. That's where we consider as a healthy inventory level and that's where we would like to target.

Sorry, I didn't hear clearly. It was the range what 65 to which -- how many days?

60 to 65 days.

I see. So, which means by end of 2Q, you project your DOI to come back to this level?

Yes. Probably by the end of Q2 time frame that will be those kind of level. Of course, this was essentially the key thing through the inventory level. The second one is the business picked up and the normally also they play a significant role there?

Follow-up to this. So, I would presume that you are seeing 2Q revenue to pick up. And I don't know how on a scale. But from this number, it looks like it's going to be a meaningful or double-digit revenue increase in 2Q from 1Q. Is that the right speculation?

I don't want to project the second quarter, but we do see the positive momentum in the current quarter with the rush order and the employing. And we do see our distribution channel ship out to the customer a lot more than we ship to our distribution, our...

But when you say you...

Yes, basically, your calculation the difference. You kind of see what is the intrinsic revenue to your end customer, right?

Yes, correct. Yes. And a follow-up to this one. So, when you say you rush order and employing, are you referring to both driver IC, driver business and also high-speed business?

I think the [indiscernible] is the high-speed device. And now we see the [ scanner ] industry also aggressive deploying.

Over the last, say, maybe 2 months' time, we -- and I think it's also being reported that your [indiscernible] customer reported quite low revenue shipments for your [indiscernible] product lines. Okay. And how is that already in your model projections into Q1? How does that impact your Q1 or Q2? Can we assume that the slowdown is already will be captured by your pre-market projection?

No, our [indiscernible] customer working with us very diligently. And we keep getting the -- on a weekly-by-weekly the forecast. And yes, whatever you had said the forecast or guidance is already projecting the customer forecast.

Allow me to have my probably another one set of questions, which is on gross margin front. Because in Q4, you are reporting gross margin of 44%, which is in the low-end of your guidance. And in Q1, you projected -- you guided gross margin is another 0.5% lower than the range of 4Q, right? But on the one hand, you were saying that inventory will be going down in Q1. So, okay. My question is that how much of 1Q say in terms of gross margin impact for Q1, how much is affected by the or call the inventory write-off, which is accounting -- which is accounting related? And how much is contributed by real price adjustment?

I think the right arm portion is quite small. You might want to talk with the you and me off the line, and we have a certain [Technical Difficulty] I actually just quantify, we think probably some aging device we should do the write-off to be conservative. And as we are moving to the very totally different environment and the competition and pickup as well, but that really not much significant impact on our gross margin either, but it does in some way if you want to push out the more your inventory, you have to get some incentive to your customer, particularly your part. And I don't think the -- the price move that much is really that you provide some incentive to the customer to move your parts.

This happens more in display side or high-speed side? I mean giving advantage to customer.

More on the display side than the high-speed side.

Next question, Harvie Chou of Credit Suisse.

Just a quick follow-up on inventory and gross margin. In the previous remark, you highlighted that during this market downturn, there are some incentives you give to customers in order to facilitate better deploying. But could you also comment a little bit on your -- maybe on your wafer cost. Are you seeing the overall cost to increase in the near term? What's the resulting impact to your gross margin guidance? You already provided the first quarter gross margin to be down but I think the guidance sequentially declined by 0.5 percentage points quarter-on-quarter. But what's the overall impact from the maybe the wafer cost to this gross margin assumption?

Moving to 2023, on the wafer side, frankly speaking, we really did not materially see the wafer price increase. Okay. And we do see some of the foundry, the cost of the slow demand to cover the wafer price to again, to increase the demand. So, this will dynamically change in a different continent given the category, people are provided different incentive to encourage to use their capacity. I think that's pretty normal as the entire semiconductor had a downturn now as to the foundry side. So however, it's really depending on which foundry, some of them the -- yes, still have to reduce the price or have to increase price, others remain price no change. However, some of the significant reduced price to weigh the business. So, this is pretty dynamic. Having said that, a lot of costs if we consume inventory, the new manufactured parts with some reduction, the benefit will have -- you won't come to the accounting until I think a Q2 time frame because Q1, you got a wafer supply, then you will move to the Q2 on the low selling the part. So, that's like half year delay there.

So instead of potential negative impact from the wafer cost, you're actually seeing maybe potentially incremental support due to the likely decrease in wafer cost to your gross margin.

Depending on your mix. As I said, some of foundry includes price, some of foundry -- keep the foundry plus not change it, but others actually significantly reduce the price.

And my second question is with regard to your -- the comment on incentive. You highlighted that in the past quarter, you provided more incentives. Probably a bit more incentive in order to drive your display in the sales. And I was just wondering because you also commented that toward the -- maybe first half of this year, you are expecting that the overall inventory level for the company as well as in the channel to see a duration of depletion. So, I'm just wondering, should we also expect some kind of like incentives going on in the first quarter or into second quarter? Or will this all be out of equation starting from the beginning of this year?

We make a decision depending on the situation and the data. And we certainly would like to get our inventory levels to normalized. And however, as we said, we always said we watch our gross margin carefully. We don't in the past cycle our gross margin has some change up and down, but we are not, we think that the certain there now go widely like others. And so we remain that kind of the attitude of management to try to stabilize our gross margin and which we feel is very important to the investor.

And a quick follow-up on your comments with regard to the near-term outlook. You highlight -- I think that previously, like investor also asked about your view on the second quarter expectation. I'm just wondering, could you just maybe provide some more detail, maybe just in terms of the second quarter momentum, do you expect the overall momentum to see a sequential rebound potential sequential rebound into second quarter, given the larger top line correction since the second half of the last year? And lastly, what's your expectation maybe for the first half versus second half momentum for the year?

Okay. So I had one more thing on the gross margin. And gross margin also very subject to your product mix. And if we introduce more high-value products which in the large volume sales, your gross margin may also increase, right? And in terms of the potential business on Q2, Q1 is PC, the low season and the typical lower season. And in particular, this Q, and we had a consumption of our -- the distribution inventory and that's larger every day in the Q1. And so which means -- and once the distributed channel getting normalized or lower than what we would like to, then the strategic channel work by a lot more devices than we are and that they are much healthier. So that's the -- one of the factors we think about moving forward, it will be more positive. And typically, the PC business mobile business second half will be better than the first half. And we also clearly see the behavior of large OEMs. They are more willing to take the system, take the inventory and we think those are the targeted trend and the precise the -- you have -- China has reopened and start to be normal to consume those consumer device. And hopefully, the same work a lot more normalized by the second half and versus the last year second half, that was pretty much horrible and with a sort of policy and people don't move that much and you don't have a momentum to buy both the PCR notebook.