On the evening of March 27, Goertek released its 2023 annual report. Under the background of the overall pressure on the consumer electronics industry, the company will achieve revenue of 98.57 billion yuan in 2023, and the revenue scale will basically remain stable; the company's annual profit will decline, in line with market expectations, but the gross profit margin will improve significantly in the second half of the year, and the net profit in the fourth quarter will be 196 million yuan, which will turn from a year-on-year decline to an increase in a single quarter.
After the release of the earnings report, there were various voices in the market.
Some investors continue to be pessimistic, and some believe that the bearish is good, but the market divergence is not as serious as imagined. On the first trading day after the results, Goertek's share price remained basically stable. The market seems to have voted on Goertek with its feet.
Goertek's annual report is relatively detailed. Therefore, we can go back to the earnings report itself and look for clues that can support investment decisions.
What kind of "boots" did they land?
Goertek's black swan event occurred at the end of 2022, which had a great impact on the year-on-year growth rate of the data throughout 2023. Therefore, some people believe that the impact of the black swan event has been fully felt, and this financial report is like "boots on the ground".
Before discussing what exactly is a "boot", let's review the development of the consumer electronics industry:
1. The consumer electronics industry chain (whether it is the Apple chain or the Android chain) is the one who gets the explosive products. Once the company seizes the opportunity to explode, it usually achieves several times growth in performance within 1-2 years, and at the same time brings the "Davis double-click" effect.
2. The consumer electronics industry chain is a super cyclical stock. Consumer electronics follow a life cycle curve, and growth has its ceiling. Products usually start in the budding stage and go through periods of growth, maturity and decline. (as shown in the figure below)
Therefore, whether the company can continue to grow depends on whether the company can take advantage of various opportunities in the horizontal and vertical industry chain, seize the opportunity of explosive products many times, and realize the iteration of the growth curve. If successful, the company's growth curve will look like this:
Each growth curve eventually becomes smoothed out and gradually becomes a stable basic business, while the new growth curve is responsible for providing growth and new room for growth. Goertek, Lixun Precision and other leading companies have developed in this way. Taking Goertek as an example, it started from a start-up company in the field of acoustics, successively seized the traditional acoustic wave, and then turned to the smart acoustic opportunities led by smartphones, followed by TWS market opportunities, as well as VR/AR, smart watches golden development period, and towards the direction of automotive electronics.
In 2021, the smart hardware business represented by VR/AR and smart wearables has accounted for 40% of Goertek's overall revenue, and the growth driver and business focus have switched to the smart hardware business. Therefore, in 2022, Goertek is at a critical moment when the two curves of TWS and VR are excessive. The growth rate of the TWS curve has gradually slowed down, but the new VR curve has risen to provide the company with a growth momentum. As the climax of the TWS market has passed, the focus of market valuation has also changed, switching to VR. Based on the company's previous experience, this growth shift should have been smooth (as shown in the chart below).
However, it is regrettable that the black swan event has shaken the TWS growth curve, and the new VR curve has not yet fully risen, and Goertek has fallen into a temporary "cut-off". Moreover, the rise of new products is not a linear growth, but a spiral. For example, in 2023, the old products of Goertek's major VR customers have entered the last year of their life cycle, so the growth has slowed down. The commonality of Apple Chain and Android Chain companies is that the fixed costs are high, which may bring the worst utilization rate in history, which will affect the gross profit margin. This should be what the market calls "boots".
At the moment, the boots have hit the ground. But as shown in the figure above, the influence of the "boots" is equivalent to a small arrow on the TWS curve. It only affects a certain product in the TWS business - judging from the announcement and industry chain research, it does not affect other TWS products, nor does it affect other orders from Apple, let alone orders from other customers.
Looking at the long-term dimension, the impact of this episode may not be so great. Over the past 20 years, the company has successfully seized many golden opportunities in science and technology, and has achieved success repeatedly. At present, the company is still following its own trajectory as it has done in previous stages, driving the rise of the new VR growth curve (which is the part of the market that originally gave high valuations), as well as bringing the TWS business back to normal and accumulating momentum for the next updated curve.
The boots have actually landed in the first half of the year, and the inflection point in the second half of the year has been established
Looking back on 2023, Goertek will gradually return everything to its proper trajectory by adjusting its business strategy.
There are two steps:
(1) Promote the normalization of TWS orders, so that the intelligent acoustic business curve returns to normal. In 2023, the revenue of intelligent acoustic machines will be 24.19 billion yuan, a year-on-year decrease of 6.6%, compared with the revenue of 9.3 billion yuan in the first half of 2023, a year-on-year decrease of 25%, a very obvious recovery.
(2) Continue to push the XR growth curve forward. In 2023, the revenue of smart hardware will be 58.709 billion yuan, accounting for 60%.
In the past year, in terms of XR business, Goertek and Qualcomm jointly launched the lightweight AR smart glasses reference design of the first-generation Snapdragon ®AR2 platform, as well as the next-generation mixed reality (MR) reference design based on the Snapdragon XR2Gen2 platform and the Snapdragon XR2+Gen2 platform;
The company continues to make breakthroughs in the field of VR optics, and has launched VR Pancake modules with high display performance using curved lamination technology, flat film technology and in-mold injection molding technology based on COC materials to meet the different product needs of users. In terms of AR optics, Goertek has launched a number of newly upgraded full-color diffractive optical waveguide display modules, focusing on small size, ultra-brightness, full-color display and other characteristics, as well as the industry's smallest optical machine (volume compressed to about 1cc) that can adapt to large FOV optical waveguides.
Just as there are two sides to the story, if the upward momentum comes mainly from the new growth curve ((2)) under the normal switching path, then in this case, the upward momentum will come from the superposition of (1) and (2).
This part of the upward momentum has been partially reflected in the financial data for the second half of the year:
1. The rebound of profitability. As mentioned earlier, when fixed costs are relatively high, the elasticity of earnings will far exceed the elasticity of revenue. We can see that the gross profit margin has halved in Q4 '22, and in the second half of 2023, the gross profit has rebounded sharply. Among them, the annual gross profit margin of intelligent acoustic machines was 6.7%, significantly exceeding the gross profit margin of 4.1% in the first half of 2023, and the annual gross profit margin of intelligent hardware business was 7.3%, higher than the gross profit margin of 5.9% in the first half of the year.
It can be speculated that this may be due to the increase in the utilization rate brought about by the increase in orders, which has accelerated the recovery of gross profit margin.
2. Positive operating indicators and capital structure: the company's expenses during 2023 will be about 7.8 billion yuan, a year-on-year decrease of 5.11%, and the expense ratio will be controlled at 7.9% during the period, the net cash flow from operating activities will be 8.152 billion yuan, the inventory turnover rate will remain at a stable level, and the asset-liability ratio will decrease by 3.59% year-on-year;
3. In 2023, Goertek will maintain a high level of R&D investment. During the reporting period, the company's R&D investment amounted to 4.573 billion yuan, accounting for 4.64% of revenue, and in the past five years, the company's R&D investment was nearly 20 billion yuan.
Judging from the financial report, in the second half of the year, Goertek ushered in a performance inflection point, and gradually returned to the due trajectory - if you do not split the data of the first half of the year, only to look at the performance of the whole year, it is easy for us to ignore the marginal changes.
Goertek in the fourth quarter of 2022 and the first half of 2023 should be the most difficult moment encountered in the transition stage between the old and new curves. It is not so much that the "boots" have just landed, but it is precisely because of the comparison of the data in the second half of the year that everyone thinks that the worst time has passed, and they begin to believe that the boots have landed, and the future situation has become clear.
Good news is pouring in
At present, Goertek is the absolute leader in the field of VR/AR and MR.
Goertek has become the main foundry partner of top manufacturers such as Meta (formerly Facebook), Sony, and ByteDance's Pico. In addition, the name of Goertek is also included in the supply chain list of Apple's first MR headset, the Apple Vision Pro.
Soochow Securities Research Institute pointed out that in the short term, the iterative upgrading of new products and the development of the market of major customers of VR glasses this year are expected to drive significant growth in shipments; in the long term, in the era of spatial computing, based on the expansion of application scenarios, the improvement of software and hardware ecology and the entry of more technology giants and other factors, VR/AR/MR hardware shipments are expected to open the growth ceiling in the next few years, and Goertek is also expected to continue to lead the development of the industry with its status as a global core supplier.
According to market sources, Meta has reached a preliminary agreement with Tencent to start selling new, lower-priced VR headsets in China in 2024. Huatai Securities Research Institute released a research report after Goertek's performance, saying that it saw that AI large models are expected to improve AR interaction capabilities at exhibitions such as Semicon, and the subsequent launch of low-cost products similar to Apple's MR may boost overall VR sales. It further predicted that in 2024, driven by brands such as Meta and Huawei, Goertek's VR/MR business shipments are expected to usher in growth.
In addition, Goertek, which has been deeply involved in the industry for more than 20 years, does not have more than two growth curves. The company adheres to the "4+4+N" strategy, and lays out four types of components (acoustic, electrical, optical, and precision structural parts) and four intelligent machine fields (TWS earphones, VR/AR, wearable devices, and smart home), and is not only TWS and VR/AR two growth engines.
Soochow Securities Research Institute believes that Goertek's TWS earphone design and core acoustic components occupy a leading position in the market, and the orders and share of major customers are expected to rebound steadily, while the iteration of products is also expected to help the revenue and profit margin of the intelligent acoustic machine to rise steadily.
Ming-Chi Kuo of Tianfeng International, known as the "most accurate Apple analyst", said in an article that AAC Technologies and Goertek have been identified as microphone suppliers for iPhone16, and the shipment distribution is comparable. Benefiting from the specification upgrade, the unit price of each microphone on the iPhone 16 will be at least about 100–150% higher than that of the iPhone 15. Huawei P70 is also about to be released, as the main supplier of Huawei high-end smartphone acoustic components, Goertek is expected to continue to benefit.
In addition, Goertek's new growth curve is gradually taking shape. Relying on the rich experience and technology accumulated in acoustics, wireless, software, optics, system integration and other fields, the company continues to make efforts in automotive electronics and launches a wide range of technical solutions. In terms of cockpit optics, Goertek has successively released the PGU module PGU4620 and PGU4620 Gen2 of the on-board AR-HUD, with a brightness of 200lm, which can achieve a high refresh rate of 120Hz, a high contrast ratio of 1800:1, and a high color gamut.
In terms of automotive cockpit active noise reduction, innovative RNC (Road Noise Active Control Technology) and ENC (High Performance Engine/Range Extender Active Noise Reduction Technology) and other automotive intelligent acoustic technology solutions and "soft" and "hard" fusion solutions have been launched, which can significantly improve the comfort of vehicle driving and riding, and at the same time reduce the cost and time investment of traditional passive noise reduction. At present, the technology and solutions have been recognized by many customers.
Of course, if we put aside the fundamentals, we can see more efforts of Goertek - it insists on continuous dividends and actively carries out equity incentives, and we can also see that investment institutions have given buy ratings.
At the moment when the "boots" have landed, when the company is gradually returning to normal, more favorable news is emerging. What kind of changes will this bring to Goertek? We can wait and see.