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Edited Transcript of 2408.TW earnings conference call or presentation 8-Oct-19 7:00am GMT

Q3 2019 Nanya Technology Corp Earnings Call

Oct 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Nanya Technology Corp earnings conference call or presentation Tuesday, October 8, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pei-Ing Lee

Nanya Technology Corporation - President & Director

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Conference Call Participants

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* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* Dong-je Woo

BofA Merrill Lynch, Research Division - MD and Tech Analyst

* Haas Liu

Crédit Suisse AG, Research Division - Research Analyst

* Jeffrey Ohlweiler

Macquarie Research - Asia Technology Hardware Analyst

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Presentation

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Operator [1]

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(foreign language)

Welcome to Nanya Technology's Third Quarter 2019 Earnings Conference and Conference Call. (Operator Instructions). As this conference is being viewed by investors around the world, we will conduct this event in English only. The format of today's event will be as follows: First, Nanya Technology's President, Dr. Pei-Ing Lee will summarize our operations in the third quarter of 2019, followed by our guidance for the fourth quarter of 2019 and key messages. Afterwards, Nanya Technology's Executive Vice President, Dr. Lin-Chin Su; Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao will join us as we open our question-and-answer session, both online and on floor.

Today's conference will be approximately 60 minutes. Now for online positive participants, if you do not yet have a copy of today's earnings conference presentation materials, you may download them from Nanya Technology's website at www.nanya.com.

And as usual, we would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our presentation slide.

Now I would like to turn the podium over to Nanya Technology's President, Dr. Pei-Ing Lee for summary of operations and the current quarter guidance. Dr. Lee, please begin.

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [2]

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Welcome to Nanya Technology Q3 2019 Investor Conference. I'm Pei-Ing Lee. So this is quite normal. My agenda is Q3 '19 revenue and result and CapEx, big shipment, market outlook and business review and outlook.

Q3 revenue and result. Our Q3 net sale is TWD 14.799 billion compared to Q2 TWD 12.441 billion, up by 19%, and gross profit TWD 4.137 billion versus TWD 4.348 billion, down by 4.9%, operating income TWD 2.252 billion versus TWD 2.805 billion, down by 19.7% and EBITDA TWD 5.957 billion, and this is slightly lower than Q2.

Non-operating income, TWD 432 million, and income tax benefit is basically paying income tax of TWD 479 million. Our net income comes to TWD 2.205 billion at 14.9 percentage, okay? And this is down by almost 20%. Earning per share for the quarter at TWD 0.72 per share, and our book value, TWD 49.71 per share, and this is after subject the TWD 7.11 cash dividend, that was distributed in Q3.

Okay. So that pretty much summarizes our financial results for Q3. And for quarterly revenue comparison Q-to-Q, Q3 versus Q2 this year, revenue up by 19%. Shipment increased a lot more than our original expectation, okay? Our last report is up -- increased shipment from 15% to 25%. But at the end, we shipped a lot more than our expectation at mid-30% range, okay? ASP decreased by a low-teen percentage. This is also pretty good compared to the market, okay? And exchange rate also help on 0.3%. So overall speaking, although summary is the key point, this is up there.

And year-to-year wise, compared to last year, you can see that, particularly, the revenue down is by 39% and -- but shipment increased by 20%, year-to-year comparison. ASP has decreased by 50%, very high percentage decrease for the last year in ASP. And however, for Nanya, we still are in profitable range.

Okay. For a little bit more detailed comparison between Q2 and Q3. Net sale up by 19%, mostly due to the key reason just mentioned, which is the shipment increase by mid-30% and ASP decreased by a low 10%. Gross profit TWD 4.137 billion, 28%, okay? Down 6.9%. The gross profit decreased by TWD 211 million. This is mainly due to ASP drop and also compensated by the strong shipment, okay? Operating expense TWD 1.885 billion versus last quarter TWD 1.543 billion, and the increase is R&D expense increased by TWD 285 million, okay? But later on, I will explain to this, okay? Now this is actually the normal due to seasonal pickup on the expense.

Operating income TWD 2.252 billion versus last quarter TWD 2.805 billion, and this is mostly due to the change up from here, okay? Operating income decreased by TWD 553 million. Net income TWD 2.205 billion versus TWD 2.748 billion, down 7.2%. And the reason is again very similar due to the operating income decrease, the TWD 553 million, okay? The exchange rate and interest and income [tax] is pretty much compensate each other at TWD 160 million to TWD 170 million, okay?

So this is pretty much summarize our comparison between quarter-to-quarter. For the change on our quarterly financial highlights. The upper line is our gross margin, lower red line is our OP margin, okay? And the thick blue is our revenue, and the light blue is our net income, as you can see that we have reached very low level compared to the last dip in season, okay? So operating income 28% with the OP margin, 15%, okay? However, our profitability maintained at around TWD 2.2 billion, is largely due to continued cost down, okay? And company structure improvement, okay? Versus last downturn.

Okay. Continue to report detail on our operating expense, okay? Our SG&A in Q3 TWD 540 million increase from Q2. This is mainly due to sale revenue increase in terms of share in the SG&A expense, okay? So this is quite normal. And R&D expense, I just indicated there some increase from Q2, TWD 1.059 billion to TWD 1.345 billion. This increase mostly due to increase in R&D development charge at this quarter, okay?

If you look back to last year 2018, in a large part, our R&D expense is about TWD 1.3 billion range of the R&D expense. The R&D expense that I indicated here already include all our process development for 10-nanometer nodes, okay? Our activity for process development and product development has continued for more than 2 years already, okay, which means that for the future, okay, our R&D expense will likely maintain around this value in the ballpark, okay? The change will not be in a very significant way.

The potential future major increase in R&D expense likely to be involving in EUV development, okay? However, at this stage, we don't see that EUV development is urgently necessary for us, okay?

Our cash flow situation, okay, beginning of our balance is TWD 60.861 billion for this quarter, okay? Cash from the operating activity TWD 4.93 billion mostly from the profit, okay? And the depreciation. CapEx, TWD 1.1 billion, this is also normal.

In Q3, though, we had distributed cash dividend payout at TWD 21.7 billion. So this is a large cash out item. As a result, our imbalance comes to TWD 43 billion. So this -- main reason of cash come down is due to cash dividend payout in Q3, okay? And free cash flow for this quarter is TWD 3.824 billion.

If we compare to the cash situation from beginning of the year up to now, up to September 30, you find that our beginning balance is TWD 57.384 billion. Cash from operating activity is TWD 12.437 billion minus the CapEx, TWD 4.656 billion, and mostly, it's dividend distribution, which accounted for majority of this amount here and comes to TWD 43.011 billion at September 30.

Our CapEx and the bit shipment situation. CapEx will remain very similar to what we report to you last time. For this year, we expect to have about TWD 7 billion CapEx, which is much lower compared to previous year for 2019. And so far, what we spent is TWD 4.7 billion, okay? For bit shipment wise, as I reported you for the last few [full year] that bit shipment, Q3, increased mid-30s, Q4 bit shipment, we expect it to be around flat or low single-digit decline, okay? Because Q3 is such a hot season, such a high season for the year, Q4 maybe not as hot as Q3. However, that's still yet to be find out, okay?

Also 2019 year-to-year bit shipment growth expect to be low teens. Remember back -- a few quarters back, we expect this is to be flat. And then we expect to be low single-digit. But now it looks like, we will be shipping around low teens, which is very close to market demand increasing, okay, for this year, okay? And we'll continue to allocate 5% to 10% of capacity to technology and product development, and the cost for this is already taken into account in our R&D expense and all kind of expense I described to you previously.

Okay. Now market outlook. Fully macro-economic uncertainty expect to be continue, okay? This is probably not only impacting DRAM industry, but also globally to all the economic sectors, okay? Our Q3 seasonal effect resulted in shipment increase and inventory reduction. This is across the board for the DRAM industry, okay? Q4 DRAM supply-demand expect to be stable and pricing pressure decrease and the pricing pressure largely due to the inventory issue that maintain on the supplier side, as we have indicated to you in the last quarter report and the quarter before, okay?

Sector outlook. Server demand improve gradually. Smartphone content per box increase, and second half bit shipment is better than first half. And the consumer demand remained quite stable, okay? Inventory adjustment has continued from the supply side, and CapEx also conservative from the supply side. Demand from mobile market, we're seeing that new smartphone upgrade with the AI, multi-camera, stimulated DRAM content growth. Also introducing 5G phones equipped with 8 gigabyte DRAM and the forecast substantial shipment growth in coming years.

For Server Market, demand increased gradually. And we're seeing enterprise cloud service, AI, networking and streaming services continue to drive server long-term growth. And this may continue for the future year as well.

PC market. PC shipment, second half better than first half.

Consumer market. DRAM demand in the consumer sector, including many different application area, also including TV, set-top box, smart speaker, SSD, gaming, smart watch, et cetera. They are growing stably, okay?

For Nanya business review and outlook. Nanya named Dow Jones Sustainability Index on Emerging Market, okay, for the second straight year, okay? This is quite encouraging that -- for Nanya Technology. Our effort and corporate social responsibility has been recognized. Our strong Q3 bit shipment growth in the consumer and commodity segment. And Q4 DRAM market expect to stay stable. For 2019, bit shipment increased to mid-teen in line with market demand growth. And our 20-nanometer low-power DDR4/4x and low-power DDR3 product has come to the volume shipment. And 10-nanometer class technology demand is on track, and this has been continued for more than 2 years, okay? And all CapEx requirement and all R&D expense already been -- already are being taken into account in our each quarter's financial result, okay?

Okay. That pretty much conclude my report to you. Thank you, and let's open for questions.

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Questions and Answers

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Operator [1]

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Thank you, Dr. Lee. (Operator Instructions) The first to ask questions, Haas Liu from Crédit Suisse.

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Haas Liu, Crédit Suisse AG, Research Division - Research Analyst [2]

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Hi management, this is Haas from Crédit Suisse. And congratulations on the good results. So my first question is on your profitability. You reported gross margins at 28% in 3Q, down 7% quarter-on-quarter. While pricing down low teens, quarter-on-quarter. Could you provide more detail on what [effects] the margin's performance in 3Q?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [3]

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Thank you for your compliment. Let me make sure that I understand your question. Your question is, our shipment increased by mid-30% and the price down by low teen, and you want to know a little bit more explanation on that?

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Haas Liu, Crédit Suisse AG, Research Division - Research Analyst [4]

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Yes. So...

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [5]

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Okay.

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Haas Liu, Crédit Suisse AG, Research Division - Research Analyst [6]

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If you could break it down by how much is impacted by the underutilization? And how much is affected by the -- selling older products?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [7]

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Okay. In general speaking, the market is divided by different sectors. However, they are inference between sector-to-sector. For example, Server, mobile, PC, consumer, the overall market situation and individual demand and supply balance. Overall speaking, over the last quarter, the commodity Server pricing declined maybe more than the consumer sector, okay? Shipment wise, we're seeing that older sector have been positive, okay? Older sector have been improving in the demand, including Server, mobile and consumer and PC as well, yes.

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Haas Liu, Crédit Suisse AG, Research Division - Research Analyst [8]

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So my second question is, could you give an update on your own technology versus Micron 1X and 1Y? And when will you make a decision on ramping up the new node? And how will the new node affect your gross margins and also your R&D spending going forward?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [9]

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Your question is regarding to the next technology, no, yes. Our agreement with our partner is that we do have the option -- right to license future technology, okay? We haven't yet to make our final decision, okay? And we will -- hopefully, we can report to you in our next quarterly investor conference, okay? But today, we still haven't made any decision. But we do have option of going with our own technology, okay? Process technology. And our development activity is on track.

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Haas Liu, Crédit Suisse AG, Research Division - Research Analyst [10]

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Okay. And just want to circle back to the margins. So do you think that your cost reduction or any benefits from selling your inventory in the coming quarters that can lift your margins? Because you reported that gross margins are [decreasing in 3Q]. I was wondering, if you could give more color on that?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [11]

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Okay, I think in the last few quarters, I have response to a similar question a few times, okay? For the process technology, no, although you're seeing some improvement in cost reduction, some, okay? But nowadays the improvement amount is not very big, okay? Not as big as many years ago, okay? So process technology migration is important, but it's not that urgency for Nanya Technology. Particularly, Nanya Technology is more focused on our market sector, which is a little bit different from the major supplier -- the big supplier, okay? You can look from our gross margin and the -- also, OP margin. Compare DRAM to DRAM business-wise, we are really not too far away from our gross margin and OP margin, okay? And of course, the OP margin and gross margin has 2 important factors in there, that is -- first one is the pricing and the second one is the cost, right? So with the end result very similar, which means that our -- both our pricing and cost is very similar to the major supplier, okay? But that doesn't mean that we should be slowing down in our process technology. The process technology's still quite important for future product portfolio, okay, that will enhance our ability to get into more product portfolio in -- let's say, DDR5, low-power DDR5, all those are new product portfolio, okay? And that will be our interest as well, okay? So we'll continue to migrate our process technology, okay? So we do have a choice to move along with our own process development work or license from Micron.

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Operator [12]

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Next one, we are having Jeff Ohlweiler, Macquarie.

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Jeffrey Ohlweiler, Macquarie Research - Asia Technology Hardware Analyst [13]

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First one, can you talk more about the product mix for the third quarter, in terms of consumer specialty, breakdown and others?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [14]

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Okay. Our consumer is in the range of around 65% to 70% range, okay? And the mobile is between 10%-ish, okay? And the rest is say our commodity and Server business, okay? In general speaking, this is a small change only compared to what we had reported to you in the previous quarters.

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Jeffrey Ohlweiler, Macquarie Research - Asia Technology Hardware Analyst [15]

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Okay, great. And my second question, can you talk about the movement in ASPs on a monthly basis, maybe through third quarter and maybe, outlook for at least through October this quarter?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [16]

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The previous quarter, as I described to you that our ASP came down at low teens, okay? And the ASP came down in all the sectors, okay? However, as I described to you on the last question that the Server market and commodity market may be coming down more than consumer market, okay? And for upcoming quarter, this will very much depends on the inventory level from the bit supplier. From what we understand that the inventory level has been coming down substantially also from the bit supplier for the last 2 quarters, okay, Q2 and Q3, okay? Likely, if we watch closely on their inventory consumption, that will determine how the market goes in the quarter, upcoming quarter or even Q1 next year, okay? And some of those information you may be able to follow it more than I do, okay? You maybe have more information than I do. Basically, from our side, looking at the customer response, the market is getting a -- much better than the Q2 situation or Q3. And likely, Q4 will be -- remain stable, as I described to you in my report. Yes.

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Operator [17]

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(Operator Instructions) Now we are taking questions from Simon Woo, BofA Merrill Lynch.

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Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [18]

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Okay, Can you hear me well?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [19]

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Good afternoon.

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Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [20]

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Oh, yes. Great. Very simply, one quick question is that OP margin trend seems to be lower than the market expectations. Yes, you mentioned that the low teen maybe has to decline and the maybe, limited cost reductions or debt means quarter-on-quarter margin decline, but is there any chance to further, further the margins [decrease] for the December quarter, if the more overall material price remains stable, which means maybe further single-digit ASP decline, which means further margins [increase] for Nanya for December quarter?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [21]

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I think, I somehow answered that question in the last response to the last question. The upcoming quarter, are -- very much will be -- depends on the inventory reduction in the major supplier, okay? From what we understand from the customer side, that the demand is probably not an issue, okay? And the customer side has also more enthusiastic in taking their order, okay? So based on that collectively information, we're seeing that majority of the bit supplier, the inventory level has come to much more healthier situation, majority, okay? And that situation likely to get even further improve as we speak, okay, month-by-month, okay? Month-by-month. So it's very likely that within the next few months, the market situation will get further improved, okay?

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Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [22]

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Yes. How about the cost of [trying this strategy] that may be my second question? Do you expect any meaningful cost reduction for December quarter, say, more than 5% cost reduction possibly? And how about the overall 2019 and the 2020 outlook, sir?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [23]

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I'm sorry, do you mean quarter reduction, OP margin reduction?

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Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [24]

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No, no, no. Cost. The (inaudible) basis. Usually, the Micron, for example, they guided around high single-digit or 10% cost reduction per year per bit, for the DRAM. While quarter-on-quarter, cost reduction would meet 2% or 3%. That's a, kind of, the Micron campus view for the profit basis cost to trend. How about the Nanya Technology, sir?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [25]

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I guess, I'm not supposed to comment other company's' cost situation -- cost structure, okay? For Nanya, we have continued to see our costs are being improved for the last few quarters, and we continue to expect the next quarter, we will have some marginal cost improvement as well. That's due to our operation efficiency, okay? And also the shipment improvement over the past few quarters have helped, okay?

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Operator [26]

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Next one to ask questions, [Oshi Hudi] from Moody's.

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Unidentified Analyst, [27]

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So what I wanted to understand is current inventory levels at Nanya? And how do you see the bit growth for 2020?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [28]

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The question is for, how do I see on 2020, okay? And I'm seeing the 2020 very likely to be a better year compared to the end of 2019, okay? I'm pretty confident on that. However, that -- how much is the improvement going to be will depends on few factors. First important factor is the macroeconomic situation, okay? The worldwide, the trade issue and all the business outlook from all sectors, okay? That's the first uncertainties that we have to watch closely that will pretty much determine some degree of demand improvement, okay? And the second topic, we need to be -- watch closely is the -- as I described to you just now, how is the inventory level being digested from the bit supplier. And looks like by now, that's already making some improvement, okay? And the third factor is the CapEx from the major supplier, okay? And so far, the CapEx [equates] from the major supplier has been quite reasonable, okay? So so far, that is in the way that is positive, okay? So with that all being considered, and I'm seeing the next year will be a better year compared to now, okay? However, how good it is? How steep is the slope going to be, okay? Is it going to be gently recovering? Or is it going to be a steep climb, okay? Will depends on those factors I described to you just now.

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Unidentified Analyst, [29]

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And also, if you can tell us the inventory levels, currently?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [30]

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I'm sorry, I missed...

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Unidentified Analyst, [31]

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Inventory level?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [32]

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Inventory level, okay. As I described to you that majority of the supplier including Nanya has come to healthy inventory level already, okay? And maybe, only lab is, maybe, a small number of the supplier, still have some inventory issue.

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Unidentified Analyst, [33]

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Last question from my end. How do you see the Chinese players in the DRAM market competition for Nanya, especially in the specialty sector?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [34]

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I don't see they will be in making significant impact in the next couple of years, at least, okay? Be a little bit more optimistic, maybe, the next 3 years, they will not be making major impact, okay?

For the reason that they will be facing some of the trade secret issue, IP issue, for the upcoming, okay? For as long as that is happening, they will not be able to sell in a large -- in a very significant way, okay? Particularly, for the international customer will be a concern. Also for those customers in China who has the international business, they will also be concerned, okay? Even so I think that as China developing into more of the legalization system, okay, they respect more of a legal system in China business then they will also come into that situation also, okay? For that -- as long as that has happen, not only after the resolve the trade secret issue and IP issue, I don't see them to make any significant impact.

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Unidentified Analyst, [35]

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And how much time does it take to qualify for a new customer?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [36]

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How much time? Your question is how much time it takes to qualify customer? That's a very good question. Actually, today, to qualify a customer depends on what sector of the market, okay? If you're talking about commodity market, PC or server market, it takes long time, okay, and it requires a lot of tedious work, okay? Say, including you need to verify with a major CPU maker, a few of them before you can even ship, okay? On top of that, you have to meet certain quality standard before you can ship, okay? So those criteria is quite tough, okay? And also for the mobile is probably also quite [hard] on that area in terms of their performance being able to meet the market demand, okay, particularly for those customers who has substantial shipment in a mobile phone, they will require even higher quality [table] compared to the small mobile phone customer, okay? So in general speaking, it takes years, okay, years in order to make a significant impact in building volume shipment.

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Unidentified Analyst, [37]

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So can we say like 2 years -- 2 to 3 years, it will take for any significant impact?

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [38]

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It depends on how you -- which point you started to count, okay? It depends on really -- if your products are very mature and you are very in an industry for such a long time and you know how to do that, it may take you 6 months to 1 year to do that. But if your product is not mature, you don't even know how to meet certain criteria, it would take you long time to make adjustment on the product before you can ship in a quantity.

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Operator [39]

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Ladies and gentlemen, those are the questions from online. Now let's move on to on-site Q&A session. (Operator Instructions) Dr. Lee, please begin.

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [40]

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Okay, let's start question here. Yes, Char -- Charlie.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [41]

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [42]

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Pei-Ing Lee, Nanya Technology Corporation - President & Director [84]

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Okay.

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Unidentified Company Representative, [85]

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Thank you. That concludes our conference and conference call today. Please be advised that the replay of the conference will be accessible within 3 hours from now, which will be available through Nanya's website, www.nanya.com. We hope you will join us in coming quarters. Thank you for your participation and have a wonderful day. You may disconnect your line at this moment. Thank you.