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Q3-2025 Earnings Call
AI Summary
Earnings Call on Nov 6, 2025
Revenue: Q3 revenue was TWD 24.57 billion, down 6% quarter-over-quarter and year-over-year, but at the high end of guidance.
Margins: Gross margin for Q3 was 36.29%, flat versus Q2 and at the high end of guidance, but down from last year.
Outlook: Q4 revenue is expected to decline to TWD 22–23 billion due to seasonality and fading policy effects; gross margin guided to 35–38%.
AI Progress: About 20% of SoC revenue now comes from products with integrated AI functions, expected to grow further.
Cost Pressures: FX stability expected in Q4, but rising gold and key material prices (like KGD) are weighing on margins.
Inventory: Inventory days rose slightly to 59, and levels are expected to stay flat into Q4.
ESG Recognition: Novatek's MSCI ESG rating was upgraded and it received multiple CSR awards.
Q3 revenue declined 6% sequentially and year-over-year, reaching the high end of company guidance. The company attributes this to NT dollar appreciation and the fading effect of China's subsidy and US tariff policies. Looking ahead, Q4 is expected to be a low season with revenue further declining, affected by typical seasonal trends and panel makers controlling production. Early purchases and shipments in H1 due to government actions disrupted normal seasonality, leading to weaker H2 performance.
Gross margin in Q3 was 36.29%, flat from Q2 but lower than a year ago, and within the guided range. FX appreciation reduced its negative impact during Q3, but higher gold prices and rising costs for key materials like KGD continue to pressure margins. Management expects Q4 gross margin in the 35–38% range, with stable FX but further cost pressures from gold and raw material shortages.
Management guided Q4 revenue to TWD 22–23 billion and gross margin to 35–38%. Operating margin is expected at 14.5–17.5%. For 2026, while macro and geopolitical uncertainties persist, management expects steady revenue growth, supported by new product launches and increasing demand for AI edge devices.
AI-enabled products now make up about 20% of SoC revenue, with future growth anticipated. Novatek is integrating AI accelerators like TPUs and NPUs into its SoCs, supporting applications in machine vision, smart home, and surveillance. The ASIC business, built on a partnership with Arm Neoverse, aims to complete a demo system by end-2025, with no revenue contribution expected this year but plans for future custom solutions.
Small and medium driver ICs remain the largest revenue group, supported by TDDI shipments for smartphones and growing tablet demand. Automotive revenue is flat, with increasing TDDI shipments. The SoC segment faces inventory adjustments in TV and monitor, though imaging-related SoC demand is rising. Large-sized driver ICs are declining the most due to lower demand post-subsidy and tariff changes.
Novatek is working to diversify its customer base and applications, with positive progress in Korea and among non-China handset OEMs. OLED TDDI shipments are on track to exceed 10 million in 2025, with new clients evaluating products. OLED adoption outside smartphones remains limited but is expected to pick up in TV, notebook, monitor, and automotive segments as mass production ramps up.
Operating expenses rose due to higher R&D spending in Q3, but are expected to remain similar year-over-year for 2025. Rising costs of memory and other key materials are being managed with a strategy to pass on costs to customers when possible. Inventory days increased slightly to 59, with levels expected to remain healthy into Q4.
Novatek received an MSCI ESG rating upgrade from BB to BBB, as well as several awards for corporate social responsibility and workplace environment, reflecting improved governance and sustainability practices.
[Interpreted] Good afternoon, everyone. I would like to extend a warm welcome to everyone for joining Novatek 2025 Third Quarter Online Earnings Call. This is David, Vice President and Company Spokesperson. I'll be the host for today's conference. Joining me on the call are Vice Chairman, Mr. Steve Wang; and our AVP, Mr. Chou; and IR Director, Tony and [ Ivan ].
The agenda for today's event is as follows: first, Tony will report on Novatek's third quarter results in English. Following that, our Vice Chairman, Steve will provide further details on our Q3 results and guidance for the fourth quarter of 2025. Next, we'll proceed with the Q&A session.
We've already received some of the questions from our investors. If you have any further questions, please feel free to submit them online. Tony will review and read them one by one in both Chinese and English. And afterwards, we'll try our best to answer all your questions in Chinese and later on translate it into English. We encourage your active participation and look forward to addressing your concerns.
Now I'll hand over the time to Tony to report our Q3 results.
Thank you, David. Good afternoon. This is Tony. First, please take a look at our safe harbor notice. Now this page shows our consolidated sales for quarter 3. Our quarter 3 revenue of TWD 24.57 billion, down slightly quarter-over-quarter and also year-over-year, but in the high end of our guidance of TWD 23.7 billion to TWD 24.7 billion. Next.
In terms of gross profit, our gross profit of TWD 8.9 billion in quarter 3 is also down quarter-over-quarter 6% and 19% year-over-year.
Now moving to our gross margin trend. For quarter 3, our gross margin of 39.29% was flattish compared with 33.3% in the second quarter, but down from 39.74% a year ago. Sorry, flattish compared with 36.3% in the second quarter, but down from 39.74% a year ago. But again, that's actually in line with our guidance of 34% to 37%. Next.
Now moving to our operating expense. Operating expense of TWD 5.06 billion both increased quarter-over-quarter and year-over-year by 8% and around 5% year-over-year. Next.
Now moving to the operating income. For quarter 3 operating income of TWD 3.86 billion decreased 20% quarter-over-quarter and 38% year-over-year.
Now let's take a look at our operating margin. For quarter 3, our operating margin of 15.7%, down from 18.44% in second quarter and 22.4% a year ago, but still in line with our guidance of 15% to 18%.
Now let's take a look at our net income. For net income of TWD 3.66 billion in quarter 3, is down 2% quarter-over-quarter and also down from TWD 5.26 billion a year ago.
Now let's take a look at our EPS. For quarter 3, our EPS of TWD 6.01 is down from TWD 6.14 in quarter 2 and also down from TWD 8.64 a year ago.
On this page shows our income statement for quarter 3 compared with the figures in the second quarter as well as a year ago. As we highlighted earlier, you can see the revenue, gross profit, operating expense, operating income as well as net income and EPS at this page.
This page shows our income statement for the first 3 quarters compared with the same period a year ago. Overall speaking, the revenue is flattish year-over-year. Gross profit is down slightly year-over-year and operating expense is roughly flattish, but operating income and the net income down slightly over 10% year-over-year and with TWD 20.8 EPS for the first 3 quarters.
Now this page shows our revenue breakdown for our 3 key business group. For the quarter 3 the small medium-sized driver remain our largest group with 41% of revenue, slightly up from 40% in the second quarter. SoC business still accounting for 37% of quarter 3 flattish compared with second quarter in terms of percentage. Lastly, in terms of the large-sized driver, the percentage came down to 22% in quarter 3 from 23% in second quarter.
We are also reporting our October revenue. October revenue of TWD 7.88 billion is down both year-over-year and month-on-month in single digits. For the first 10 months, the cumulative revenue of TWD 85.7 billion is roughly flattish compared with the same period a year ago. And also the table also shows the revenue breakdown for October for both SoC and the driver IC.
The next page shows the monthly revenue trend for 2024 and the first 10 months of 2025.
This page shows some key figures for our balance sheet. The cash and the cash equivalent of TWD 39.6 billion is down both quarter-over-quarter and year-over-year. The sequential decline mainly caused by the distribution of cash dividend. Account receivable and inventory is roughly flattish both quarter-over-quarter and year-over-year at a healthy level.
Now let me pass the call back to David.
Thank you, Tony. The following slide is a recap of our recent major events. Novatek MSCI ESG rating has been upgraded from BB to BBB mainly because of the recognition of our efforts in corporate governance and particularly Board practices. And Novatek has also been awarded the excellence in Corporate Social Responsibility Award, advancing from last year's 18th position to #9 this year. And we have also received the following awards from Commonwealth Magazine like the Talent Sustainability Award, Family-Friendly Workplace Award and there's various other awards. Please visit our website for more information on our ESG achievement. .
And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on our Q3 results and Q4 guidance. Please, Steve.
[Foreign Language]
The Q3 revenues reached TWD 24.57 billion, quarter-on-quarter declined by 6%. And the decrease by 6% basically still reached the upper end of our guidance, and this is mainly due to the appreciation of NT dollars and as well as the fading effect of China's subsidy policy and U.S. tariff. And the Q3 gross margin was 36.29% quarter-on-quarter kind of flat. Q4 is a low season for consumer product and IT industry. Therefore, we expect our Q4 revenue to decline. Basically, we are also seeing the panel makers, they are controlling the production.
In the first half, the consumer electronics market benefited from early purchase driven by Chinese government subsidies and advanced shipments in response to U.S. tariff policy. And this has basically changed the normal seasonality, resulting in the second half weaker than the first half. And based on the above, our 2025 Q4 guidance will be as follows: revenue will be from the range of TWD 22 billion to TWD 23 billion with the exchange rate of $1 to TWD 30.5 and gross margin will be between 35% to 38% range, and operating margins will be around 14.5% to 17.5% range.
Thank you, Steve. Now we'll move on to Q&A session. Please be reminded if you have any questions that you would like to ask, you can send them online. And we'll proceed with some of the questions we already received. Tony, please go ahead with some of the questions that we already have.
[Interpreted] Could management share the view on the sequential trend across major applications in terms of order flow into quarter 4 this year?
[Foreign Language]
[Interpreted] The following is the major applications demand in Q4 based on the panel production. What we are seeing is that TV is slightly down and monitored due to the low season will also be down quarter-on-quarter. Demand on notebook is down a little bit more after the inventory buildup in third quarter, but with the limited replacement. But we are seeing the tablets Q-o-Q are up. As for the demand for mobile phones in China is basically flattish as the -- we are also seeing the sequential increase of TDDI, but it's offset by the downtrend of the OLED orders. And as for the automotive, we're seeing it kind of flattish Q-o-Q.
[Interpreted] Consequently, could you also provide your quarterly revenue trend across 3 business groups?
[Foreign Language]
[Interpreted] The small and medium driver IC in Q4 will decrease at a milder rate basically supported by smartphone TDDI. And also we've seen the tablets also, as mentioned earlier, it's expecting to grow Q-on-Q. While OLED smartphone, we expect to decrease quarter-on-quarter. Revenue from automotive will be flat, but we are seeing the automotive TDDI shipment will increase quarter-on-quarter. And following the small medium driver IC will be the SoC. Basically, it is affected by inventory adjustment of TV SoC and also the gaming monitors. But we are expecting imaging-related SoC to increase quarter-on-quarter, basically because of the multiple applications demand that we are seeing at this moment. And as for the large driver IC, this product line will decrease the most. And this is basically due to the boost from subsidies and tariffs has tapered off and has led to lower demand for large-sized panels.
[Interpreted] Could you also provide the preliminary outlook for first quarter of 2026 in terms of the revenue or your major products?
[Foreign Language]
[Interpreted] Given the multiple challenges from geopolitics and tariffs, demand on consumer electronics remains uncertain and needs to be monitored carefully. But Novatek will be launching numerous new products next year. And hence, we believe our revenue will grow steadily in 2026. And furthermore, demand for edge devices with AI capability is beginning to emerge and replacement demand is projected to occur in 2026 with the integration of touch functions and various other functions.
[Interpreted] Given your licensing agreement with Arm last year, could you also share with us our ASIC progress in terms of direction of node process applications and the customers?
[Foreign Language]
[Interpreted] Well, as mentioned previously, the cooperation with Arm at Neoverse platform, it's the extension of Novatek's ASIC business in preparation for customers' future needs. And Novatek to complete the [ full ] nano HPC POC demo system by the end of 2025. But we do not expect any revenue contribution this year. The -- what we are aiming at is to leverage the Arm CSS ecosystem and TSMC's advanced process and packaging support to offer flexible ASIC design services basically customized for various applications and fulfilling customers' diverse the requirements.
[Foreign Language] What percentage of SoC revenue do AI-enabled product account for at this moment? Could you also provide some color on how they can differentiate your product or enhance the competitiveness?
[Foreign Language]
Well, what Steve just mentioned is that by integrating our proprietary high performance, low-power AI accelerator like the TPU and NPU and also the tool change into our various SoCs, we provide customers with improved audiovisual experience and user engagement while enabling edge AI applications, including machine vision, smart home and surveillance back ends. And these are some of the AI-related functions that we have designed into our SoC product. And product with integrated AI functions at this moment, roughly accounts for 20% of our SoC revenue, and we are anticipating the future revenue to continue to grow related to the AI product.
[Interpreted] Given the popularity of the social media, along with various new form factors of cameras, will this make contributions to your image SoC business?
[Foreign Language]
[Interpreted] Driven by the surge in the social media usage, demand for vlog AI camera basically has increased. And our imaging division has been working very closely with numerous brand partners and unit shipments are gaining momentum at this moment. And we expect related product revenue to grow in 2026.
[Interpreted] For smartphone OLED TDDI, first question, do you still maintain a shipment target of over 10 million units for 2025? Two, could you also update the progress at the customers' expansion? And three, will this be positive to your market share among handset OEMs in China?
[Foreign Language]
[Interpreted] Well, our customers have started the OLED TDDI mass production as scheduled, and we mentioned earlier, it's pretty much on track. And we expect this year's shipment to exceed 10 million, and there shouldn't be any problem. We're also expecting new clients to commence evaluation and deployment next year. And we also anticipate that the OLED TDDI adoption will have a favorable impact on Novatek's market share within the China smartphone segment, and this should be a very positive trend for Novatek.
[Interpreted] As for your effort in customer diversification, could you also provide updates on your customer in the state in terms of smartphone OLED driver IC shipments or revenue contribution?
[Foreign Language]
[Interpreted] It is our goal to continue to diversify customer base and applications. And the mobile OLED TDDI shipment and new project development are very much on track. And basically, it's a long-term strategic partnership.
[Interpreted] Additionally, could you also provide updates on your customers on panels in Korea or handset OEMs outside of China?
[Foreign Language]
[Interpreted] As mentioned earlier, for us, we'll continue to expand our customer base and applications. And as for the progress with the panel customer in Korea and the non-China handset OEM, at this moment, it is proceeding smoothly and positively. And as a result, our shipments are expected to begin in early 2026.
[Interpreted] Could you provide updates on the deployment of shares and OLED product outside of smartphones? And any thoughts on the adoption of OLED panels next year after the mass production of new 8.5 generation OLED panel line?
[Foreign Language]
[Interpreted] Smartphones remains as the primary OLED applications and the penetration into other areas such as TV, notebook, gaming monitor, automotive is still low and concentrated at the high-end products. However, Novatek has developed related products, and some of them are already in mass production and expect the shipment to increase next year. And then we have some new products that's still under development.
[Interpreted] Third quarter gross margin was at the high end of the guidance and flattish quarter-over-quarter by how much has FX affected your gross margin and any other factors?
[Foreign Language]
[Interpreted] The ForEx continued to appreciate in third quarter versus second quarter and then stabilize later on. And it's reducing its effect on gross margin for the quarter. The other factors that impacted our margins were the increase in gold price.
[Interpreted] According to the gross margin guidance for quarter 4, how much is affected by FX and any other factors?
[Foreign Language]
[Interpreted] We expect Q4 gross margin to be between 35% to 38%. And given the recent stable exchange rate, we do not anticipate any material impact from the foreign exchange movements. The further rise of gold price and the KGD which is called the known good die will be negative to gross margin.
[Interpreted] Should you expect the gross margin to improve in 2026? And what are the major swing factors for your gross margin? Could you also provide trends for foundry and packaging costs into 2026?
[Foreign Language]
[Interpreted] The revenue growth and gross profit margins basically are the 2 key index for Novatek's management that we really focus on. And factors influencing -- impacting our gross margins are basically the currency appreciation, if there is any, and the gold price trend and the shortage of certain raw materials like the known good die or the substrate. And at this moment, we are working closely with our suppliers to jointly manage the rising wafer and packaging and testing costs. And at the same time, we also seek our customers' understanding and to pass on the increasing cost of raw materials to our customers at the right timing.
[Interpreted] What are major items for the nonoperating income of TWD 518 million in quarter 3 compared with loss of TWD 221 million in the second quarter?
[Foreign Language]
[Interpreted] The non-op income of TWD 518 million in third quarter actually came from a ForEx gain of TWD 249 million and interest income of TWD 222 million.
[Interpreted] Inventory dollar of TWD 9.2 billion in quarter 3 increased slightly from the level of second quarter. While your inventory days in quarter 3, could you also provide some comments into the quarter 4?
[Foreign Language]
[Interpreted] Inventory days for third quarter were 59 days, up by 1 day from 58 in the second quarter. And we're expecting inventory dollar at the end of fourth quarter to be at the same level as third quarter and should be still at the healthy level.
[Interpreted] What are the major factors for operating dollar up by 8% quarter-over-quarter in quarter 3? Also given the 1% year-over-year increase for operating dollar for the first 3 quarters, where operating expense in 2025 increased year-over-year?
[Foreign Language]
[Interpreted] The operating expense dollar in the third quarter increased sequentially by TWD 391 million from second quarter. And basically, it is due to higher R&D spending. And based on the fourth quarter revenue guidance, our operating expense dollar in 2025 should be similar to those in 2024.
[Interpreted] What are the major factors for higher tax rate of 16.5% in quarter 3, slightly up from 16.2% in the first half. Did you maintain the tax rate guidance of 16% to 17% for the full year of 2025?
[Foreign Language]
[Interpreted] The tax rate of 16.46% in third quarter was marginally higher than 16.2% in the first half. And the tax rate guidance for 2025 is unchanged and should be around 16% to 17% range.
Tony, is there any further questions? We have covered most of them and see if there's any other questions that we haven't yet covered.
[Interpreted] There is some follow-up question about the progress of Novatek AI-related ASIC. Could management provide more color on this business?
[Foreign Language]
[Interpreted] Basically, as you know, the AI-related ASIC is pretty much very broad application. There's a lot of applications, and we're working very closely with our customers. And we are targeting various applications, not just the server side. So currently, we're working with various customers to explore various opportunities.
[Interpreted] So there's some follow-up about the cost structure, particularly for the key materials such as memory. Could management also tell us how you react to the recent surge on the memory price and other related key components?
[Foreign Language]
[Interpreted] As you know, the KGD pricing going up and basically is a result of supply and demand issues. And for us, we'll work closely with our customers and to manage the cost together and at appropriate time, we'll pass on the cost.
[Interpreted] The next question is about the smartphone OLED driver. Could you also give more color in terms of the ASP trend and the competition?
[Foreign Language]
[Interpreted] Well, for the OLED driver for the low-end product line, we do see some pricing pressure in that area. But for Novatek, what we are doing is we are trying to add value to our product. For example, TDDI -- OLED TDDI and also adding some extra functions to our driver to add value to our customers. And also, for example, the foldable OLED phone.
Okay. It seems that there aren't that many other questions that we didn't cover. So we'll end our investor conference. At this point, thank you so much for joining in. See you next quarter.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]