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Morningstar | MediaTek’s 2Q Results Were Slightly Ahead of Expectations; Our TWD 290 FVE Is Intact

No-moat MediaTek’s second-quarter results were slightly ahead of the company’s and our expectations, with revenue and operating profit increasing 4.1% and 73.5% year on year, respectively. The outperformance was mainly driven by strong volume growth of its new Helio series system-on-chip products, or SoCs. On the profitability front, gross margin and operating margin increased 3.2 and 2.7 percentage points, respectively, to 38.2% and 6.8%, thanks to the rollouts of new mobile SoC products and the company’s efforts for diversification, as it has been enhancing its nonmobile chip segments to include solutions for Internet of Things, power management integrated circuits, application-specific integrated circuits, and automotive electronics applications.

The management guided for a less optimistic sales outlook for the third quarter and expects revenue to grow 3%-11% sequentially (the equivalent of between negative 2% and 5% year on year), given that smartphone shipments are likely to be flattish. Gross margin is expected to be between 36.7% and 39.7%. This guidance was in line with our forecast, as we believe the nonmobile business will pick up in the second half. We are maintaining our TWD 290 fair value estimate for MediaTek and view shares as fairly valued, trading at 29 times 2018 earnings and 15 times enterprise value/EBITDA.

MediaTek’s second-quarter revenue rose 4.1% year on year or 21.8% sequentially to TWD 60.5 billion. Combined shipments of its smartphone- and tablet-use SoCs was 100 million-110 million units. Thanks to ramp-ups of new smartphone SoCs to Chinese smartphone vendors Oppo, Vivo, and Xiaomi, MediaTek’s mobile computing division grew faster than its major competitor Qualcomm, which posted a 1% sales increase for its chip business, QCT.

Gross margin improved 3.2 percentage points to 38.2% from the year-ago quarter, but declined 20 basis points from last quarter, owing to product mix changes. On top of the gross margin expansion, the operating expense ratio decreased by 50 basis points year on year. As a result, operating profit surged 73.5% year on year, or 112% sequentially, to TWD 4.1 billion, with operating margin increasing 2.7 percentage points year on year to 6.8%. Net income grew 239% year on year to TWD 7.5 billion, helped by investment disposal gains, with earnings per share of TWD 4.75.