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Edited Transcript of 3105.TWO earnings conference call or presentation 28-Jul-20 8:00am GMT

Q2 2020 WIN Semiconductors Corp Earnings Presentation

Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Tuesday, July 28, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Tsen

WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division

* Shun-Ping Chen

WIN Semiconductors Corp. - GM of Corporate Administration & Director

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Presentation

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [1]

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Good morning and good evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's Results Webcast Conference for the Second Quarter of Year 2020. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance of WIN Semi.

Joining me today on the call is Steve Chen, the General Manager of Corporate Administration. And today's call will be organized into 3 sections. First of all, Steve will comment on the results for the second quarter and provide brief guidance for the third quarter. Secondly, I will go through the financials in detail. And after that, we will open to the floor for Q&A. Please freely submit your question by clicking the question button on the webcast window throughout the conference.

Before we begin, I would like to draw your attention to the safe harbor notice on Page 2 of the presentation slides. Please note that this presentation contains forward-looking statements, and these statements are based on our current expectations. And actual results may differ materially from our expectations, and the company undertakes no obligation to update these forward-looking statements going forward.

Now let me hand over the call to Mr. Steve Chen, General Manager of WIN Semi.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [2]

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Thank you, Joe, and welcome, everyone.

While the overall demand in the first half of 2020 has faced many uncertainty arising from the COVID-19 pandemic and the U.S.-China trade tensions, we have delivered satisfactory financial results over this period.

For the second quarter, our revenue marginally declined by 0.4% quarter-on-quarter, but increased by 36% Y-o-Y, roughly in line with our previous expectation. Revenue for the first half of this year increased by 50% over the same period last year.

Gross margin for the second quarter marked a record high level at 44.8%, driven by better product mix and capacity utilization maintaining at a high level of 90%. As a result, net profit for the second quarter increased by 5% quarter-on-quarter and 113% year-on-year.

Earnings per share for the second quarter and the first half reached TWD 3.94 and TWD 7.7, respectively, hitting the new highest for the same period in the company's history.

In the second quarter, cellular PA delivered the highest growth among all product segments, especially the percentage of 5G cellular revenue contribution to our total cellular revenue has risen to over 25%. In addition, the first half revenue of GaN on silicon carbide wafers, which are mainly being utilized for the 5G, has been close to the full year revenue of last year. We confirm that the demand for 5G continues to be strong, and the trend of 5G remain unchanged.

As the COVID-19 pandemic remains severe globally and U.S.-China trade tensions are still ongoing, we expect short-term impact of our Finnish business may be inevitable, and the peak and the off-season will be less obvious and more difficult to predict this year.

However, we will continue to execute our long-term strategy of diversifying customers, expanding production capacity and maintaining R&D investments while preparing for the potential risk of the continued emergence of the black swan event in the global market.

Looking ahead to the third quarter of 2020, we expect revenue to grow by mid-single digit quarter-on-quarter and gross margin to be around the level of low 40s.

I will turn the call back to Joe. Thank you.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [3]

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Okay. Thank you. It's our pleasure to present the financial results for the second quarter of the year 2020, and you can also refer our presentation slides.

Okay. Remember to refer the safe harbor notice in Page 2, and then I'm going to start from the Page 4, talk about the revenue and the margin trend.

The second quarter of 2020 revenue was TWD 6,048 million. Q-o-Q is down about 0.4%, but -- and Y-o-Y is up 36%. And as a whole, the year 2020, because of COVID-19 pandemic and the U.S.-China trade tension, so the seasonality is not so significant as usual because the seasonal up and down is not that obvious. And then -- so the quarter-over-quarter, it's become more and more difficult to predict. But I think we have better performance in the first half for -- from the top line to the bottom line.

The second quarter 2020, because of the utilization rate, maintaining the higher level and also the better product mix, so our gross margin reaching a record high increase by 1.8 percentage point become 44.8%, and operating margin also up 1.7 percentage point to reach 33.6%.

And please flip to the Page 5 to talk about earnings. In the second quarter 2020, our net profit was TWD 1,651 million, and Q-o-Q is up 5% and Y-o-Y also up 113%. Then the EPS coming at TWD 3.94 compared to -- last quarter, it was 3.76% (sic) [TWD 3.76]. So accumulated, the first half become TWD 7.7.

And so please flip to the next page, Page 6. I'll talk about the free cash flow and our financial position. The Q2 -- because of higher capacity expansion, so we generated net outflow of free cash flow in this quarter, and also because of that interest-bearing debt and the gearing ratio also going up. But our financial structure still remain very, very healthy.

And next page, we're going to talk about the product mix in Page 7. In Q2, the product mix -- obviously, if you compare to last quarter, the major difference would be cellular. You see that cellular become between 45% and 50%. And also something exciting is the 5G cellular become higher than 25% in -- among the overall cellular business. And also, as Steve had mentioned it, inside the infrastructure, GaN on silicon carbide accumulated in the first half is almost reaching the whole year's revenue level. So that's why we so called -- the product mix is better.

And next page -- please flip to Page 8. The Q3 guidance. I think Steve has already mentioned it, I'm going to read it over again. We expect Q3 year 2020 revenue to grow by mid-single-digit Q-on-Q, and we expect Q3 year 2020 gross margin to be around the level of low 40s.

So now we can quickly flip over to the financial statement, starting from the income statement in Page 10. The Page 10 talk about Q2 income statement. Before I start it, I have to remind everybody, this is under the unaudited basis. The final result have to base on the CPA's report.

The net revenue for Q2 was TWD 6,048 million. Compared to -- last quarter was TWD 6,071 million. Actually, it's down around 0.4% Q-o-Q. And -- but it's up -- Y-o-Y, it's up 36%. Gross profit becomes TWD 2,707 million. Gross profit Q-o-Q is up 4% and Y-o-Y also up 79%.

And because, as we mentioned it, the better product mix, the gross margin reaching the record high of 44.8%. And compared to 43% last quarter, it's improved about 1.8 percentage points.

As to -- operating expense become TWD 674 million. And so the operating expense ratio was 11%, which is in line with last quarter. Operating income become TWD 2,033 million. The Q-o-Q is up 5%, and Y-o-Y is up 122%.

And operating margin become 36.6% (sic) [33.6%]. Compared to 31.9% last quarter, it was improved 1.7 percentage point. And the non-op item, the -- it's -- I'm going to leave you guys to read it by yourself in Page 12. And you can refer the Page 12. And the major item will be foreign exchange. The -- but net-net, the non-op item was negative. It's negative TWD 3 million.

And income before income tax was TWD 2,030 million, and income tax expense become TWD 380 million. So therefore, net income becomes TWD 1,651 million. So Q-o-Q is up 5%, and Y-o-Y is also up 113%. So therefore, net margin become 27.3%. Q-o-Q is improving about 1.4 percentage points.

And finally, the EPS was TWD 3.94. And last quarter, it was TWD 3.76. And so the ROE -- equivalent ROE for the Q2 was 22%, in line with last quarter. And also -- something also in line with last quarter is utilization rate 90%. And depreciation TWD 868 million and CapEx TWD 1,938 million is all increasing compared to last quarter.

Okay. And then we can flip to next page in Page 11. Page 11 talk about the income statement or the period of the first half accumulated Q1 and Q2. The net revenue was TWD 12.119 billion, and the Y-o-Y is up 50%. Gross profit of TWD 5,318 million, the Y-o-Y is up 120%. And the gross margin -- I'm sorry. The gross margin is 43.9%. The Y-o-Y is also improving 14 percentage point.

Operating expense become TWD 1,347 million and operating expense ratio is 11%, also improving. And operating income become TWD 3,971 million, and Y-o-Y is up 226%. And operating margin become 32.8%. Y-o-Y, improving 17.7 percentage point.

The non-op item is positive. It's a gain for TWD 23 million. And the details, you can refer to Page 12 by yourself.

Income before income tax was TWD 3,995 million, and the income tax expense is TWD 769 million. So therefore, the net income becomes TWD 3,226 million, and Y-o-Y is up almost 250%.

So the net margin of 26.6% is improving. Y-o-Y is improving 15.1 percentage point. So accumulated EPS for the first half becomes TWD 7.70. And so the ROE -- equivalent ROE for the first half was 21%. And then, again, the utilization for the first half is again 90%. And the -- you can see the depreciation is also higher than the year before. And CapEx is also significant, increasing to TWD 3,260 million.

Okay. And we finish this page, and then we're going to skip the Page 12 for your own reference. And please flip to the Page 13 for our balance sheet.

As to the year 2020, June 30, the total assets was TWD 47.169 billion, and total liability is TWD 15.629 billion. So the common stock remain the same. And the equity -- the total equity become TWD 31.540 billion. So the book value per share becomes TWD 72.15.

So the current ratio is improving to 172%, and debt ratio similar level at around 33%. And for you guys' information, on June 22, we distribute the dividend payout on June 22. And so that will make the current liability -- I mean, the dividend payable and also the cash on hand will be both reducing, reflecting in the July's balance sheet.

So yes, pretty much that. And that's my presentation. And now we can go to the Q&A. Now please submit your question in the input box on the webcast window now.

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Questions and Answers

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [1]

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Okay. Everyone, I'll answer the question about 3Q-related demand, especially for the smartphone order. I think this year is more special because until right now, what we see is that seasonality is not so up and down. For example, I think, from Q1, Q2 and even to Q4, you can see our guidance is always up and down in a very narrow range. So it's really hard to say which season is the strongest for this year. But do we see the new model demand for Q3? Yes, definitely. I think for Q3, we still see new model demand in this quarter. Yes.

Okay. Let's see the other question. They want to us to explain more about the product mix for the Q2. Yes, definitely, for Q2, I think revenues later declined by a very -- point percent. But we have a better profit margin. Yes, it's better mainly due to the better product mix, especially like we say that the 5G cellular PA taking the revenue of the whole cellular PA more than 25%, this is -- it definitely will contribute to better margin because we -- for most of the 5G PA, they will use our most advanced wafer project technology compared to the 4G cellular PA, yes. So that's why for this quarter, even though the product mix doesn't -- if you check with the application percentage, maybe a very bigger difference for the infrastructure, but we have better 5G portion in the cellular portion that also help us for our gross margin.

Okay. It's a question, want to know the product mix and why it help up the margin. And how about Q3, yes, because it looks like compared to Q3, in Q2, we guide just low 40s for Q3, and we have 44% in Q2.

Yes. I think when -- in Joe's introduction, you maybe already know that we add 5K capacity this year, and most of this 5K capacity will ramp up stuff from the end of Q2, and that will be finished at the end of Q3. So that means we don't increase much depreciation expense in Q2. But for Q3, I suppose the depreciation expense were rising up because of this new capacity. So that's why even though we have low -- sorry, mid-single-digit revenue growth guidance, but we have a little down about our gross margin. I think it's mainly because we think the depreciation will be higher than Q2, and that definitely will impact the margins.

And the new -- the other question, want to know that the new capacity will impact our future margin.

I think if you check with WIN Semi's historical margin trend, I think the new capacity only will impact the margin, we can -- if we cannot use it. So if we can keep the utilization rate above 80% and even higher, I think the new capacity should not be a problem for our gross margin.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [2]

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Okay. There are several -- I should say, many questions about -- asking about Huawei and HiSilicon, those questions and how it's going to impact WIN Semi.

First of all, well, I have to say that WIN Semi is the largest foundry -- gallium arsenide foundry company in the world. And we fully utilize -- fully diversified our customer base. And so for the longer term, we're not so worried about the U.S.-China trade tension because we have a diversified customer base and no matter what -- how it's changed in the end market, the market will -- the demand will rebalance again. And the -- once the smartphone and RF demand still -- and 5G, the trend is still maintaining strong. And for longer term, we -- there is nothing to worry about that, and we can rebalance -- the market will rebalance. The market share will also rebalance again. And we're still the market leader in the gallium arsenide foundry market in the world.

Okay. There's a question asking about 3D sensing, especially POF, the trend and the future, et cetera.

I think WIN Semi participates into the supply chain -- 3D sensing on smartphone since 2017 and its sequential 3 years, and then this will be the fourth generation. I think we're supporting our customer and end customer, and our direct customer is still the major -- having the major market share. And so because of -- based on the experience for the past 3, 4 years, we also accumulated a lot of experience and also attracting many customers -- potential customers to have many projects with us. And just like more than 10 years ago when -- even longer, I mean, when we first stepped into 3G market and -- with major customers and later on also stepped into the U.S. Tier 1 smartphone's supply chain and having a track record for many years. And also -- on the same time, also attracting many, many of RF design house or IDM to work with WIN Semi. So we become this kind of market position as a leader right now.

And so I should say that for 3D sensing or optical, it's just exactly like more than 10 years ago. The stage is just like that because of the success for 3, 4 years ago. And the -- having the track record, we have many projects, many potential customers right now. So we're expecting 3D sensing and -- should be the next growth momentum for WIN Semi. And no matter on the front side or the back side, which is like POF, especially this year we believe that U.S. POF smartphone adopting on the back side POF is bringing everybody the new user experience that will be followed by -- than android can also. And so WIN Semi has the capacity, has the technology and also has the customer base. We believe that's another growth momentum for WIN Semi.

And as to the path for this year, we do -- I think we work with our customer for more than 1 year and have been qualified more than 1 year ago. And we don't see any significant obstacle for -- technology-wise. And so -- but it's not that easy for -- technically, it's not easy, but I think we have a mature technology. So we -- I think that that's going to bring better business from now or even in the future. Yes. That's my comment.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [3]

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I think there's a lot of question, really interesting about our China smartphone situation, especially our design house customers, such as HiSilicon and other design house. How's everyone's situation? And how's the demand from everyone? Or how's the adoption from Huawei?

I think, first of all, WIN Semi is a foundry. We don't really direct supply to Huawei, yes. And our direct customer is HiSilicon. So it's really hard for us, and we don't have the position to making any comment about after the Huawei ban, how the Huawei PA player will be. I think it's only Huawei know. So I have no comment about that, yes. And -- but as Joe has just explained to you that we cover almost all the PA design house in Asia, not only in China. So if the smartphone demand in China keep the same and -- no matter who got the market share, I think because we are well diversified to all the PA design house, I think we still can get an order from them. So that's why we say the single customer up and down -- because of our well diversified and our global market share, we don't think we'll be having a big -- very big impact because just one customer up and down. Thank you.

Okay. There's a new question, want to know do we have some opportunity to get more outsourcing order from U.S. customer or other company.

I think, yes, we definitely have that kind of opportunity because, like we just say, right now, WIN Semi is the biggest foundry -- gallium arsenide foundry in the world and adding up on the Ultra 5K of this year, we already have 41,000 monthly 6-inch wafer capacity in the world. I think we typically can provide more capacity through various IDM company once there's any kind of issue like you say in the question. If they really need a demand, yes, definitely, WIN Semi is their first choice. And I think we have that kind of capability to fulfill their sudden demand in the future. Thank you.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [4]

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Okay. I think there are some investor concern. I mean they're asking about Q3, the different segment, how does this look like. Because, for us, the Q3 forecast is just based on estimation. And of course, we have some visibility, but not 100%. So we -- actually, we do not see any different or any segment significant stronger than the other.

And so the -- we probably have to give us more -- some time and we can finalize it. But so far, we do not see any significant up and down in different segment or anyone -- any segment is significantly stronger than the other. So yes, pretty much the momentum is quite -- still quite even for most of them. Yes. Okay.

We do not see any more question on the question window box. So yes, probably we're going to finish the conference -- today's conference right now. So yes, thank you for your participation in WIN Semi's conference. And there will be a webcast replay within hours. Please visit www.winfoundry.com under the Investor Relations section. And thank you so much, everyone. And you may now disconnect, and goodbye.