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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, and welcome to the Third Quarter 2020 Financial Results Conference Call of ASUSTeK. This conference call is divided into 2 parts. First, Mr. Nick Wu, our CFO, will brief you on the financial results, followed by remarks from our Co-CEOs, Mr. S.Y. Hsu and Mr. Samson Hu, on operations and outlook. The second part is the Q&A. [Operator Instructions] First, we'll hear from our CFO.
Hello. Thank you. Hi, everyone. Please turn to Slide 5 of the presentation. This is our brand P&L for the first 3 quarters of 2020. The net revenue was TWD 269 billion, up 10% year-over-year. Operating profit was TWD 17 billion, up 174% year-over-year. Net profit for the 3 quarters was TWD 16.7 billion, up 76% year-over-year. EPS for the 3 quarters was TWD 22.5. Page 6 is our brand P&L for the third quarter. Net revenue was TWD 119.6 billion, up 41% quarter-over-quarter, 35% Y-o-Y. Operating profit was TWD 9.4 billion, up 94% Q-o-Q and up 115% Y-o-Y. Net profit was TWD 10.5 billion, up 98% Q-o-Q and 87% Y-o-Y. EPS was TWD 14.1. Gross margin was 17.7%. Operating margin was 7.9%.
We can talk about Q3 operations from several aspects. In terms of the macro environment, we see as people work and study from home, demand remains quite healthy and strong. If we look at our own operations at ASUS, starting from this year, we've been implementing our 3-pillar brand strategy. We are also innovating on products. We are now more user-centric. Because of these factors, we continue to add more value to our users. And these strategies seem to be reaping fruit.
Lastly, we can talk about the supply chain management. Indeed, in terms of the strong demand, in terms of our enhanced operations, we see that we are receiving very healthy orders. However, the supply is quite tight. And that is why in the third quarter, we also saw that demand outstripped supply. However, with the hard work of our supply chain, ASUS actually delivered a growth that is -- that was much higher than that of the industry. Our revenue and profit growth also were greater than the industry. We actually delivered a record-high operating profit for the single quarter.
Now please turn to Slide 7. This is our pro forma P&L for our phone business. Looking at old models, net revenue was TWD 1 billion. And due to adjustments and reversals, operating profit was TWD 747 million for the third quarter. For new models, we continue to enhance our brand positioning. We also increased shipments of our gaming phones. Net revenue was TWD 2.9 billion, up about 40% year-over-year.
We have been investing heavily on new phone models. So we had an operating loss of about TWD 1.17 billion in the quarter, in line with our expectations.
Next slide is Slide 8, non-OP items. Major non-OP items included exchange gain of TWD 1.3 billion, and dividend income, TWD 2.8 billion. Total non-OP items, TWD 4.8 billion.
Now Slide 9 is our brand balance sheet. As mentioned earlier, in the third quarter, we delivered good revenue growth. We had strong operations, and that is why, in terms of accounts receivable, inventories and accounts payables, we saw these numbers expanded quite healthily, showing that we have very strong and solid balance sheet.
Now please turn to Slide 11 for our revenue breakdown. PC accounted for 70% of our revenue components and the open platform products accounted for about 30%.
Slide 12, revenue breakdown by region. In the third quarter, Europe accounted for 34%; Asia, 42%; Americas, 24%. Compared to the same period 2019, we saw nice growth from Europe and Americas. This reflected the demand from Western countries was relatively strong. This also reflected our gain in market share and shipment numbers in Western countries.
Slide 13. This is our business outlook for the fourth quarter. Again, there are several aspects to this. First, if we look at demand in the industry, we think we are going to see very strong demand for Q4. We now have the 3-pillar brand strategy. We also have very good new product cycles. They are all helping us maintain a very healthy brand awareness in the market.
Another aspect is the supply chain. Compared to Q3, we believe the supply in Q4 is going to be tighter. Due to this constraint from the supply chain, we expect PC and component products, in terms of revenue and shipment, will go down by 10% quarter-over-quarter. However, if you look at Y-o-Y numbers, PC and components will grow by 20% and 40%, respectively. Since in Q4, demand is outstripping supply. We believe some demand will be deferred to the next quarter.
Now I would like to invite our co-CEOs to give us their remarks on strategy and outlook. Thank you.
Hello, dear investors, and members of the press. My name is S.Y. Hsu. I'm going to give you an update on our operations.
Let's go back to the key business objectives that we set at the beginning of the year. First one, managing market dynamics. Of course, this year, the biggest factor is COVID-19. In Q1, we experienced disrupted supply chain. In Q2 and Q3, we experienced parts shortage. We have encountered a lot of challenges. But here, I would like to thank all of our colleagues and suppliers. Thank you for your hard work. We delivered pretty good results in Q3, if not up to our own high bar.
As our CFO mentioned earlier, we expect the supply remains to be tight going forward. And we will continue to work with our suppliers to ensure a smooth production.
Second, expanding addressable markets. In the past, ASUS was very consumer product centric. We didn't put too much resources on commercial products. But this year, we established a BU overseeing commercial business. So we're devoting a lot of resources to this part.
Now due to the pandemic, we also saw significant growth in the education market, especially in the area of Chromebook. And this is also handled by our commercial BU. We have put a lot of resources in this area. We are working closely with our suppliers as well as Google.
In 2020 as well as 2021, we have a lot of Chromebook projects. Speaking of Chromebook, people would think this is a low-end product with low ASP. However, Google is adopting a new strategy. Google is trying to enhance the positioning of the Chromebook. They have put a lot of resources in this aspect. They are trying to introduce Chromebooks to enterprise users.
Now the biggest obstacle is, of course, software compatibility. Most enterprise users, they have Windows-based applications. So it's not easy for them to adopt Chromebook. Now Google has put resources in this area. They have opened up some VM. And under VM, enterprise users can install Windows operating system and then their own applications. Some U.S. clients are already adopting this. We believe this is an area of huge growth potential. We continue to work closely with Google.
In terms of Chromebook, we might be a late comer. However, we have a very comprehensive lineup, and we will continue to address the high-end market. We would like to tap into this segment. Another addressable market is AIoT. We're also establishing new business unit for AIoT. More on that later.
Thirdly, focusing on areas of growth. This year, one of the high-growth area is gaming. The other is -- another is education. Creator is also another area that we focus on. We have created a sub brand called ProArt. All creator-related products are under this sub brand. We are also going to devote a lot of resources in this area. Another area of growth is AI-related applications, that is handled by our AI OTBU.
This slide shows you our growth in revenue and units. In terms of revenue, open platform products grew 42% year-over-year, system products 36% year-over-year. In terms of units, MBs and graphics cards grew by 20%. PC grew by 50%. You might be wondering how come system products saw a 36% increase in revenue, while PC shipments grew by 50%? The biggest factor is Chromebook. Chromebook grew significantly this year. And Chromebook accounts for a majority of the shipments, but Chromebook has a lower ASP. That is why you see the revenue growth is slightly less than growth in shipments or units.
This goes back to our 3-pillared brand strategy that our CFO touched upon earlier. At ASUS, we focus very much on great products. That has been our forte. So one of the fundamentals is how to make great products. Very early on, we adopted design thinking. Through design thinking, we would like to identify pain points and offer great solutions for users, offering a great user experience. So design thinking is applied in the design stage.
Once our products are out there in the market, we, of course, want them to be well received by consumers. We want our brand to be well received by consumers as well. This can be done through CRM, Customer Relationship Management, and connected services. Of course, our strength lies with hardware. But now when we ship our hardware, we also bundle software and services, which can add value to our hardware products to offer greater experience to our consumers.
A few of these efforts, for example, the integration of software and hardware and connected services. We will want to offer great experience to users. And in turn, increase our brand positioning. Now after all these efforts, of course, we need to measure how exactly do customers see us.
Internally, we now use the benchmark of NPS, Net Promoter Score. When each BU gives us the business update, they have to report on their NPS. The idea of NPS is quite simple. We simply ask our users, would you recommend this product to your friends and family? The score can be from 1 to 10, only 9 and 10 are considered promoter. We've been using this benchmark for quite some time. We think this is a great parameter.
Earlier, I talked about NPS. We have compared ourselves with our competitors. After adopting the brand strategy, what is customers' feedback for us? So we look at data from PC Magazine in 2020. The magazine surveyed all PC brands. And this one is for all home laptops, so more consumer centric. And that is our forte.
We look at the top 5 PC brands and calculated their average NPS. The average for the top 5 brands is 70 -- 47.8, whereas our NPS is 52. So our NPS is much higher than the average of the top 5 brands. This means that our consumers really recognize the quality of our products.
To offer great products, you have to do many things right. Your products have to have great performance, great quality, great design, and offer great user experience. Of course, we are not simply bragging on our own. We have data to back us up. We have been recognized by Best Laptop. Later on, Samson will give you more information on that.
A few words about AIoT. We believe this is going to be a growth area, where we need to invest heavily. Now I would like to give you an update on some of the achievements in the area of AIoT. First, smart manufacturing. We have, in AICS, EHS management system. By using sensors, cameras and algorithm, the system can quickly survey and identify possible hazards in a manufacturing facility. In turn, this can make sure factories are safer.
We've been working with our client and they've been giving us pretty good feedback on this system. Microsoft also recognized the quality of the system. They think this is a great application. So they worked with us and made a promo video on this system. So if you're interested, please approach our CFO for a link for more information.
Next, intelligent cloud. This year, we participated in Taiwania 2. We are going to participate in Phase II and Phase III of the project. Smart medical, a lot of achievements in this area. I'm just going to mention 3. First, we have an ICD-10 coding system. This is a smart coding system. This has been adopted by 5 hospitals, with more than 700 active users. We've got great user feedback on this system. Second example, EMR search, Electronic Medical Record search. This has been adopted by 3 hospitals.
By August, more than 100,000 searches were conducted. That was the number in August. Now it's November, I believe the number of searches is now over 200,000 or 300,000.
Another system, CDSS. This has been adopted by 3 hospitals. This is about unplanned rehospitalization of patients. This can help hospital administrators significantly.
Another example is our VivoWatch. We've been working with some hospitals. Using this wearable device, they can identify the locations of their patients. They can also assist their health care professionals. So these are some of the examples.
I will now turn it over to Samson.
My name is Samson Hu. I'm Co-CEO of ASUS. Dear investors and journalists, good afternoon. I'm going to give you an update on our product strategy and operational results.
As S.Y. mentioned earlier, we have the 3-pillared brand strategy. This is a very important thinking as we design our products. Different users have different scenarios, which can be very varied and sophisticated. Our product strategy is user-centric. We put users into different segments. We offer different designs and innovative products to serve different segments. This kind of product strategy as well as our brand strategy are already bearing fruits.
First, this is the survey result of Laptop Magazine, in September 2020. Each year, this magazine surveys top 10 PC brands. And we have been recognized as #1 PC brand. We got the highest marks in innovation, in design, in product reviews, and in value.
We even got full marks for innovation and design, and we are the only brand to have this outstanding performance. This means that we do have strength in innovation and product development. This also shows that our brand strategy and customer segmentation strategy are on the right track.
Another achievement is that in the third quarter of this year, compared to the same period last year, as you can see from the slide, all PC segments grew by leaps and bound. Regular PC, at the bottom, grew by 25% year-over-year. Commercial and education PC grew by more than 100% at 123%. Gaming PC grew by 85%.
Next slide. Last year, we already enjoyed a significant base for our gaming business, our ROG business. But we, again, delivered significant growth. Of course, we enjoyed the tailwinds brought by COVID-19 as more people play from home.
However, the fundamental reasons that we're doing so well are several fold. First, we've been working in this segment for multiple years. We have very good products. We are very competitive. We also have done a great job managing the community so we have established a comprehensive ecosystem. I think these are the major reasons behind our stellar performance.
Next slide. A few words. Let me give you some numbers. At our last earnings call, we talked about how we have a very comprehensive offering for gaming, including graphic cards, motherboards, systems and peripherals. The gaming business now has a higher and higher in-house share in our revenue.
In the first half of 2020, at last earnings call, the contribution was about 30%, almost 1/3. The latest Q3 number was 40%. This shows that gaming is very important for ASUS. We will continue to enhance our product competitiveness in this area. We will also continue to manage the gaming community.
This slide is looking at growth by region. If we look at the third quarter 2020 year-over-year growth, in Europe, the figure was 104%; North America, 100%; Southeast Asia, 67%; China, 72%. Overall, we delivered 85% growth year-over-year worldwide. That's my brief update on product strategy and operational results. Thank you.
[Operator Instructions] First question, from JPMorgan.
What is the current inventory level in the channels after the strong PC demand and shipments in the second and third quarters 2020? Other brands and ODMs, in addition to ASUS, have all indicated Q-o-Q -- quarter-over-quarter decline in the fourth quarter. Should we consider this as an initial sign of decline in demand?
I'll take this one. If you look at the normal shipment cycle throughout the year, for a PC company, Q3 normally is the peak season for shipment. So it's normal to see a slight decline in Q4. But this year, of course, is quite different. In the first half of the year, in Q1, specifically, the supply chain was disrupted. At a time, Western countries did not experience severe pandemic. So shipments were quite good to Western countries.
Based on information from Microsoft, if we compare shipment and activation numbers, actually activation number is higher than shipment number. In other words, inventory in our channels is getting lower.
Now recently, we've heard about the possible availability of a successful vaccine, and people might wonder, the PC demand might go down as the pandemic goes away. Here's our current thinking on this. Let's put the availability of vaccine aside. Before Q2, next year, we believe demand will remain strong. There are several reasons behind that. First, channels need to replenish their inventory. In the first half of the year, inventory was down significantly, and Q3 and Q4 were not -- are not going to be able to replenish the inventory at different channels. In other words, we've been shipping a lot of products out there, but consumer demand is still stronger. Even if demand goes down next year, replenishing inventory alone is going to be a significant boost.
Second reason. Even if the pandemic goes away, I think people are going to work differently. You may have read media reports about how corporations now are adopting a new policy. Working from home will be part of the norm. As long as employees want to work from home, they can continue to do so. Working from home may become the new normal after the pandemic is behind us.
What remains to be seen is what this new normal will bring to the PC industry. Will the uplift in demand as significant as we experienced this year? Even if the uplift is slower than this year, we believe the PC industry will not go back to the situation prior to 2019, where the PC market overall was in decline. So we're quite confident in demand growth, at least for the first half of 2021.
Next question also comes from JPMorgan.
Which components are currently in shortage? Previously, the management mentioned that IC manufactured in 8-inch wafer fabs were in shortage. If we assume 8-inch fab capacity remains the same, will such a shortage become the norm? How will ASUS address this issue?
Let me take a stab at this. I remember, during our last earnings call, we talked about this strong demand brought by the pandemic. It's a nice problem to have, what I call a happy problem, because the supply chain could not keep up with the strong demand. And the situation remains the same. Right now, we see shortage in several components.
First, GPU. GPU is still in short supply. Second, as I mentioned last time, IC produced in 8-inch foundry. The shortage in this area is now more severe. These ICs include a variety of products. There has been a lot of industry discussions over this. They include power management IC, or power IC for short, because power management ICs can be used in a lot of different applications: PC, mobile phones, automotive, et cetera. These applications all need power management ICs.
We are also seeing shortage in driver ICs for display channels -- rather panels. So this is a challenge faced by the entire PC industry. Now how do we address this? We have been leveraging our own strengths at ASUS. We have very strong in-house R&D.
When we experienced shortage in different ICs, we have been able to introduce the second source or even the third source to have multiple suppliers for different ICs. Because we have very strong R&D capabilities, that has allowed us to be flexible and agile. We are able to verify the products of different vendors. As long as their products are up to the specs, we can incorporate them in our designs.
Using this strategy, we have been able to meet Q3 demand. In Q4, we are also using the same strategy. However, for Q4 or Q1 2021, we think the shortage is going to be more severe. For example, several brands have launched a new smartphone product. And these companies have been very aggressive in terms of securing components.
Also, we see auto players trying to secure parts as well. So we are really competing against other industries for the limited resource. And this is a challenge for the entire PC industry, not just to ASUS. But as I mentioned earlier, at ASUS, we can leverage our strong R&D resource to introduce a second or even a third source. Thank you.
next question.
ASUS' new phone business had a single-digit gross margin in third quarter 2020. Was there any onetime factor leading to this unfavorable result? Do you have a gross margin target for new phone models? When do you expect the adjustment of old phone inventories to be finished?
I'll take this one. There are several reasons behind this. First one, the prices of key parts. You can check Qualcomm information, look at their latest generations of products. The official prices have been going higher and higher. With their latest generation, I think the official price is about $150. The previous generation sells for $130 and earlier generation sales for around $100.
Now with the latest generation, since it's 5G, so in addition to the official price, you also have to buy other discrete chips. So your cost has to be higher. In other words, the prices of key parts have been going higher and higher. While our phones, our models, our high-end models, they are gaming phones. But consumers, they remain quite sensitive to pricing. They compared our prices with those of other high-end phones. And one benchmark is iPhone.
With the introduction of iPhone 12, iPhone prices have actually inched lower. Because of this comparison, we are constrained when we set the pricing of our own models. We may not be able to fully reflect the rising cost of key parts. So that's first negative factor.
Second negative factor. With gaming phones, in particular, our main market is China. Now the gaming phones segment is now more widely recognized by companies, more brands are making a foray into the segment. With more competition, our pricing power is also limited. And again, we are not able to fully reflect the rising cost of key parts. These factors all contributed to a lower margin.
But in other segments, this kind of pressure is less. With our phone BU, we've been trying to come up with new ways to drive up our margins. We are also exploring or identifying segments with unmet need, segments where there's less competition. We are also considering whether we can launch more than 2 models per year, like we used to. We usually have 2 models per year, 1 for gaming, 1 for power users. Perhaps we will have 1 more model per year to meet the demand of another segment. This will further drive up our revenue. With scale, we can enjoy economies of scale, and we can lower cost. So these are some of the efforts that we are making.
Regarding old models, in most countries, the adjustment of inventory will be completed by the end of this year, and only in a handful of countries that will continue until the first half of 2021.
Next question comes from KGI.
How much does Chromebook contribute to the company's overall laptop shipment and revenue? Since your strategy is to expand the Chromebook business, what is the growth target for 2021?
I'll take this one. Looking at 2020. By the end of this year, we expect Chromebook will contribute to 10% to 15% of our total PC business. This is in terms of shipment.
We started managing Chromebook since 2019. We've been aggressive with Chromebook. Going forward, as S.Y. mentioned earlier, we will tap into the education market. Since there's new demand as people study from home, in Western and Asian countries, multiple governments have set aside budgets for educational laptops, covering K-12, even teachers and faculty. So the market for Chromebook is quite promising. And right now, we are quite optimistic and confident in our performance in this segment.
In addition to the education segment, there's another segment, that is Chromebook for enterprises. Google is now overcoming some technical challenges. Enterprise users now are more accepting or -- of Chromebook because the security concern is no longer there. So this is also quite promising. Against this backdrop, next year for Chromebook, we are setting a very aggressive goal. At the base of 2021, we would like to see a Y-o-Y growth of 100%.
Next question from CLSA.
In terms of developing AIoT systems and solutions, what advantages does ASUS enjoy against EMS or ODM companies?
I can answer this question in 2 aspects. First of all, we have very strong R&D capabilities, covering both hardware and software. During my presentation, I talked about our AICS services. They have come up with a lot of AI-enabled services or systems. And I think this is our strength. We are very good at integrating hardware and software. This is how we serve our customers. So that's the first point.
Second, we have our own brand. Since this question is comparing us against EMS and ODM companies, EMS and ODM companies they work for their clients. They do not have their own brand. But at ASUS, we have our own brand. We can serve our clients and customers under our own brand. Whatever their requirements, we can use our R&D capabilities to meet their demand.
For example, I talked about how many healthcare facilities use our software systems. Take an ICD-10 system, for example. ICD-10, the coding is actually required by the National Health Insurance Administration. However, to adopt that coding system in different hospitals, you have to tweak the system slightly for each and every hospital. And that is our forte because we have our own hardware and software teams. I think we can do a very good job of servicing our customers.
Next question was asked by several investors, including JPMorgan and other institutional investors. The question is, what is the dividend policy for next year as profit is projected to reach a new high in 2020?
Let me briefly address this. We are committed to our dividend policy, which contains 2 aspects. First, over the next 3 years, each year, we are going to give out cash dividend of over TWD 10. Secondly, we will reference our industry peers in terms of their cash dividend and their dividend yield.
For our shareholders and investors, we are going to give payout ratio and dividend higher than those of our industry peers. So very likely, the payout ratio will be over 60% or over 70%. That's the starting point in terms of our dividend.
Also, we see a lot of questions regarding parts shortage. However, I believe we have addressed this question quite comprehensively.
Now we would like to ask if you have questions other than about parts shortage, feel free to raise them online.
Next question comes from JPMorgan.
We known that your shipment growth target for Chromebook in 2021 is 100%. Do you set similar targets for gaming, commercial and regular laptops?
I will take a stab at this. As I mentioned earlier, we have a 3-pillared brand strategy, which is user-centric. We have a segmentation strategy. So the segments include consumers, enterprise users and gamers.
In addition to Chromebook, for all the segments that I mentioned earlier, consumer, enterprise, gaming, regular, we are going to set very aggressive growth goals. We want to leverage on our design and innovation capabilities.
Regarding specific targets. Over the past few years, our targets have been to grow faster than the industry average. Take gaming, for example. We believe this year the industry will grow by 40%. In the third quarter, we already grew by over 80%. This year, we already have a large base. So again, take gaming laptop, for example, our goal is to grow another 20% to 30% year-over-year. That's my answer to this question.
Next question comes from Business Weekly.
What is the management's view on the development and outlook of ARM-based laptops?
I'll take this one. I guess, this question has to do with the latest product announced by Apple. Apple Silicon is a great product, offering great performance.
Regarding Windows-based products. Many years ago, Microsoft launched windows on Snapdragon products. And we, at ASUS, we were among the first to support Microsoft and Qualcomm to launch Windows on Snapdragon products. However, the problem was with software compatibility.
While WOS products offered great performance in terms of the applications that it could run, it also offered great battery life. However, software compatibility was a major issue several years ago. Over the years, Microsoft spent a lot of effort addressing this issue. These days, Microsoft would like all users to download applications from its own application store. For an ARM-based machine, when you access the store, it actually takes you to a different store than the x86-based machine. So whatever application you see in the application store on an ARM-based machine, all the applications can run on your ARM-based machine. In other words, they have improved significantly in terms of software compatibility.
Next step is how to change user habits. ARM-based products offer great battery life compared to x86-based products. I'm sure Intel is feeling the breath on its neck. So Intel is working very hard to improve the battery life of their products as well. So it depends on who eventually wins out as they vie for user attention. Most PC users are not so interested in ARM-based PC. As of today, I think this will take time.
Another factor might be 5G. Qualcomm is very strong in terms of 5G modem. If you can combine Qualcomm ARM-based CPU and their forte, modem, then the product can be outstanding.
But currently, not a lot PC products come with built-in modems. Those products still account for a very small percentage of ARM-based machines. So again, it will take some time before consumers will embrace ARM-based products. And it all depends on which company or which camp eventually wins out. As I said earlier, Intel is aggressively defending its territory as well.
Thank you. In the interest of time, we will conclude the earnings call pretty soon. We just took a last look at all the questions, and we believe we have all addressed them. If there are outstanding questions, feel free to contact our IR staff directly.
Now I would like to invite our Co-CEOs to give us the concluding remarks.
2020 has been very challenging for all sectors. We've seen significant change. Demand has been surprising.
Here, I would like to take this opportunity to recognize the hard work of all of our colleagues and our suppliers. Thank you for your support. Because of your support, we've been able to deliver great results. We would also like to thank all our investors for your support.
COVID-19 has posed a happy problem to the PC industry. We want to capitalize on the growth opportunities. We also tried to leverage our operational and R&D strengths.
I know you are all very interested in how we manage the supply chain. I can tell you, I've been in close contact, very close contact, with our suppliers. We understand how to manage the supply chain, we also understand how to leverage our R&D strength. We collaborate with our suppliers; we create synergy. We know how to work with one another. I'm sure at ASUS, we are able to address the supply chain issue.
Again, I would like to thank all of our suppliers and partners. And I would also like to thank you, members of the press and investors, thank you for your support. Thank you.