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Edited Transcript of 3105.TWO earnings conference call or presentation 23-Oct-18 8:00am GMT

Q3 2018 WIN Semiconductors Corp Earnings Presentation

Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Tuesday, October 23, 2018 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Tsen

WIN Semiconductors Corp. - Spokesman and Associate VP of Finance

* Steve Chen

WIN Semiconductors Corp. - SVP

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Presentation

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Joe Tsen, WIN Semiconductors Corp. - Spokesman and Associate VP of Finance [1]

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The investor conference is about to begin. Good morning and good evening, ladies and gentlemen. Welcome to WIN Semi's result webcast conference for the third quarter of 2018. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi.

Today's call is organized into three sections. First of all, our Senior Vice President, Mr. Steve Chen, will comment on the results for the first quarter (sic - see press release, "third quarter") and provide brief guidance for the second quarter (sic - see press release, "fourth quarter"). Secondly, I will go through the financials in detail. And after that, we will open to the floor for Q&A. Please just 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 1 of the presentation slide. Please know that this presentation contains forward-looking statements. The statements are based on our current expectations. Actual results may differ materially from our expectations, and the Company undertakes no obligation to update this forward-looking statements, going forward.

Now let me hand over the call to Mr. Steve Chen, the Senior Vice President of WIN Semi.

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Steve Chen, WIN Semiconductors Corp. - SVP [2]

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Thank you, Joe, and welcome, everyone. For the third quarter of 2018, given that some customers have pulled in inventory still in the first half of the year, and some has faced product transition or soft demand, we experienced that customers in different application area faced inventory adjustment at the same time.

Our revenue for the third quarter declined 11% quarter-on-quarter and 8% year-on-year, but revenue for the first three quarters still delivered 14% annual growth. As capacity increased while shipment declined in the third quarter, our utilization rate decreased to 60% from 85% in the second quarter. This combined with increasing depreciation expenses and unfavorable product mix compared to last quarter, our gross margin was 25.6%, declined 6.8 percentage point sequentially. EPS for the third quarter and first three quarters of 2018 was TWD1.7 and TWD2.59 (sic - see press release, TWD5.59), respectively.

The second half of each year is traditionally the season for customer to actively prepare for the future market demand, and typically customers are at the product development stage for design-in of end product for next year. Without (technical difficulty) capacity support, our customer were not affect by the downturn in the third quarter, and we witnessed more R&D activity for both sub 6 gigahertz and VCSEL related applications in second half of 2018. This is evidenced by our third-quarter R&D expense, which reached this year's new high.

Looking ahead for the fourth quarter of 2018, VCSEL and infrastructure business are expected to recover from the bottom and be better than the third quarter, while cellular and Wi-Fi business would continue to face inventory adjustments. We expect the fourth-quarter revenue to grow mid-single digits, quarter on quarter, and for the gross margin to be around the same level as the third quarter.

I will turn the call back over to Joe.

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Joe Tsen, WIN Semiconductors Corp. - Spokesman and Associate VP of Finance [3]

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Okay. It's my pleasure to present our financial results for the third quarter of 2018. You also can refer the content of our presentation slides. Let's flip the page to page 4, talk about revenue and the margin. Our -- the Q3 2018's revenue is TWD4.066 billion. It's in line with our guidance before. Q-o-Q, it is down 11%; and Y-o-Y, down 8%. And the gross margin for this quarter was 25.6%, down about 6.8 percentage points sequentially.

That's mainly because of the following reasons. The major impact is utilization rate went down to 60% from 80% last quarter, and also the volume -- sales volume went down significantly. And also the product mix is not favorable to the gross margin in this quarter. You can see that actually the -- in Q3, VCSEL -- the volume VCSEL down the most, and cellular down the least, but VCSEL's ASP is better than cellular.

And the last one is the depreciation expense is still increasing, and so that's the reason why making more margin pressure on gross margin. And also because of that, operating margin was 10.6%, down about 10.1 percentage points sequentially. That's mainly because of the OP ratio is up to 15% from 12% last quarter. And the majority of the increase come from the R&D expense.

And so, now please flip to the next page, just page 5; talk about the earnings. And in Q3, because of the decline of -- in gross margin and operating margin in Q3 -- so the net income declined about 23% Q-o-Q and 40% Y-o-Y, and become the TWD698 million for the net income in Q3. And the EPS is equal to TWD1.7.

Okay, then the next page, in page 6 we talk about the free cash flow and the gearing, financial position. In Q3, we're experiencing the continual -- the higher CapEx. And that also [matching] the free cash flow become the net outflow, and it's continued the three quarter of this year.

And as you can recognize that Q3 is the traditional high season of cash spending. For example, we have a dividend payout happen in this quarter. It's almost TWD3 billion, and the CapEx is almost TWD1.5 billion. And so, that's the reason why we thought we modestly increase the financial leverage, and making the interest-bearing debt become higher than the first quarter and the second quarter. But the gearing ratio still lower than the same period of last year, which is the Q3 in 2017. That -- making our financial structure remain healthy.

Okay, then. Let's flip to the next page, page 7, talk about product mix. The product mix in Q3, you probably see that most of the product was within the same range of last quarter, but remember the whole revenue Q-o-Q actually down 11%. And cellular went down the least, but the percentage is still within the 30 -- between 35% and 40%. And Wi-Fi also -- Wi-Fi actually, it's in the range of 20 -- between 25% and 30%.

And infrastructure is in the range of between 15% and 20%. And others, 13%, which is the -- the others also include the 3-D sensing, which is VCSEL revenue; it's down the most of the whole -- all of the -- among all of the product become the 13% from 16% last quarter.

Okay, then. Now we can go -- flip to the page 8 and talk about Q4's guidance. Actually, I think Steve already mentioned it. I'm going to repeat again. We expect 4Q 2018's revenue to grow mid-single-digit Q-o-Q. We also expect 4Q 2018's gross margin to be around the same level as Q3 2018.

Okay. Then we can -- now we can easily go through the financial statement, starting from the page 10. Page 10 talk about the income statement for the Q3. Q3 net -- revenue is TWD4.066 billion Q-o-Q. It's down 11%; Y-o-Y, down 8%. And the gross profit become -- it's TWD1.041 billion and the gross margin is 25.6%.

The operating expense become the TWD611 million; and the OP ratio, it's 15%. It's higher than last quarter. Operating income is TWD429 million, and operating margin is down to 10.6%. The non-op items is TWD379 million, and the detail in this -- which is in the page 12 for your own reference.

The income before income tax is TWD808 million. And income tax expenses -- it's lower this quarter, which is TWD110 million. So the net income becomes TWD698 million, which is 23% down Q-O-Q, and 40% down Y-o-Y. Net margin becomes 17.2%.

So the EPS for this quarter is TWD1.7. And the annualized ROE is 11% for this quarter, and approximately utilization rate for Q3, down to 60%. That's a major -- because of we raised up the capacity up to the 32% from 29 -- I'm sorry, 32,000 from the 29,000 in this quarter.

When in the beginning of Q3, we recognized that the demand is weaker than we expected, which we intentionally trying to touch the brake and make -- slow it down for the CapEx; but some of the equipment actually is on the way, so we tried to slow it down. It probably will. You will see that significantly in Q4.

But in Q3 we actually still be -- CapEx still increase up to the TWD1.540 billion is higher than the Q2. And so making the utilization rate go even lower, which is from 85% to 60%, and also making a lot of pressure on the gross margin. And the depreciation go up about 24% Y-o-Y to TWD805 million. And yes, the CapEx, I already mentioned it; in this quarter, still increasing. It's TWD1.540 billion.

So just talk about accumulated Q1 to Q3, please flip to the page 11. The page 11, the net income accumulated Q1 to Q3 is TWD13.097 billion, which is increased 14% y-o-y. And the gross profit is TWD4.041 billion, and the gross margin becomes 30.9%. And operating expense is TWD1.625 billion. So the OpEx ratio, it's 12% for the first three quarters.

Operating income become TWD2.416 billion, so the operating margin become 18.5%. The non-op item is accumulated first three quarter is TWD458 million. And then again, you can refer to -- by your own in the next page.

And the income before income tax is TWD2.864 billion (sic - see slide 11, "TWD2.874 billion"), and the -- for the first three quarters, income tax expense is TWD541 million. And so the net income becomes TWD2.333 billion, which is down 2% y-o-y. And net margin becomes 17.8%. So the accumulated EPS for the first three quarters becomes TWD5.59.

So, therefore, the ROE is accumulated; it's 12%. And the utilization rate accumulated is 75% compared to 90% last year. Depreciation expense, the first three quarter accumulated becomes TWD2.319 billion, which is 20% -- 29%, sorry -- 29% higher than last year.

CapEx. It's the -- up to the first three quarters, it's TWD4.953 billion (sic - see slide 11, "TWD4.753 billion"). And we expect that the whole year -- this year, 2018 -- the whole year's CapEx will fall into a range of between TWD5 billion and TWD6 billion. That's what we expect. It's actually decreased from our previous CapEx guidance.

Okay. Then we just flip to the last page, page 13, the balance sheet. The balance sheet -- the total assets become TWD35.248 billion, and that's up to the September 30, 2018. And the total liabilities becomes now TWD10.087 billion, and you can see that long-term borrowing is increasing to TWD6.467 billion. That's to pay the dividend in Q3; also pay the higher CapEx.

And on the contrary, the current liability went down to TWD3.398 billion, which is the dividend payable in June 30 actually is already paid out in the September 30. The common stock is TWD4.238 billion, and the total equity become now TWD25.161 billion. And the book value per share become TWD59.37.

Okay. The sum of key index, the current ratio actually is become better, which is 323%. And debt ratio, which is total liability over the total assets, becomes 29%, which is all healthier than before. So this is our balance sheet and financial position.

Okay, then this is my part. Okay. We now begin the Q&A, so please submit your questions by clicking the question button on the webcast window now.

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Questions and Answers

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Joe Tsen, WIN Semiconductors Corp. - Spokesman and Associate VP of Finance [1]

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Okay. There's a question concerned about the gross margin, and would like to know what kind of situation can expect gross margin back to above 30%. I think lets everybody know that WIN Semi's gross margin was impact by utilization -- and utilization and the product mix. And then also when we implement the CapEx, also the depreciation expense.

As a whole, if we -- as we estimated, this year actually 3-D sensing actually -- the revenue should increase the most. And then second one will be infrastructure. And unfortunately, cellular and Wi-Fi probably will decrease compared to last year. And for this kind of product mix, actually you can see that it's better than before.

But unfortunately, we are experiencing the lower utilization, also more than -- lower than before. But it's been a while; we haven't -- we never see that 60% of utilization in a while. And I think, of course, if the utilization can go (technical difficulty) back to the normal, which is like -- the years that -- I mean, like 80%, 85%, and maintain still the similar product mix, then the -- our margin definitely can be better. And then last reason why: in Q4, actually we provide the guidance, the gross margin's still in conservative, which is in line with the Q3.

Maybe most of you think of the product mix; actually it's better in Q4. But because we are not -- we're still not sure the volume will be higher than Q3. Actually maybe still lower because of cellular and Wi-Fi still correcting for the inventory right now. And so that won't -- the utilization probably we still won't see a lot of improvement yet. So we rather making the estimation conservatively. That's the major explanation for this question about gross margin. Thank you.

Okay. There's a question asking about Q4, maybe the CapEx, depreciation, OpEx. Those are a couple question. And talk about the CapEx. Okay, I will answer this together. First of all, when we enter into Q3, we recognize that the demand in Q3, actually it's weaker than we expected. And so we start to slow it down intentionally for the CapEx. Actually everybody know that our CapEx this year is higher than the years before. And so we tried to slow it down.

But the problem is some of the equipment actually is on the way. So we -- it will arrive to our fab, one by one. So we -- that's the reason why the CapEx still going up significantly in Q3. And this which is -- I think TWD1.5 million in this quarter. And we expect, Q4, the CapEx will going down significantly, and that's the CapEx.

But the depreciation, we're still not sure yet. Because when the equipment arrive our fab, one by one, since the first half and then still happening in Q3. And it's -- when it become a mass production, we have to put the depreciation into the book, which is the depreciation expense will happen. So we will try to slow it down, as well, but we're still not sure. That's the CapEx and depreciation.

And OpEx, okay. OpEx ratio actually in Q3 is higher, 15% for the -- 15% from 12% before. And then actually maturity has increased after increase, come from our R&D expense. And then the second one would be the marketing expense.

And the -- as you know, that normally this kind of second half, it's the season customer will do a lot of R&D activity for the design-in into the next generation's end product for next year. And so they were asking more resources for R&D activity. And then, in the past, because of also -- second half also the high season, so we probably cannot provide a lot of capacity. But this year, yes, we do. So that's also the reason why R&D become higher.

And I think except that, we will -- if the utilization also going up, and probably the OpEx ratio should be come back to normal, which is between 11% and probably 12% or 13%, this kind of range, should be the way. Okay, thank you.

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Steve Chen, WIN Semiconductors Corp. - SVP [2]

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Okay. Let's -- there is some question related to the competition in the future of VCSEL or the 5G materials, which I think is recently discussing in the market. I think first, for the VCSEL, I think we have a lot of project with a lot of different customer in different kinds of VCSEL applications.

So I think until right now, WIN Semi and our customer is still the major source about the handheld devices using VCSEL. And that already leading other competitors more than one year. Because, as we know, this year is the second model of --. So, in the future I think we still feel confidence with the future project which we are collaborating with our customer right now.

And talking about the 5G materials, first I think for the handset, that's definitely the biggest [balance] for all of the 5G applications. And in this field, I think definitely sub 6 gigahertz is still the mainstream for the further few years. So I think there's no doubt to concern about WIN Semi scaling up demand for the 5G, because most of the devices' PA is still needed for getting us in sub 6 gigahertz.

And some people maybe have some concern about our infrastructure PA will be replaced by, like, CMOS or [second germanium]. As I know right now, the 5G infrastructure, that will be a very complicated 3-D metrics communication structure. So that means it's not only one kind of state or only one kind of PA were needed in there.

So from a very low track satellite to fiber-to-home, related millimeterwave small cell, that maybe have a lot of different kinds of [circumstance] for application. So that means -- I think that will be a different kind of material will be used for the 5G environment. But compared to the 4G, I think gallium arsenide and gallium nitride, which WIN Semi will support in the future, that we'll have more share in 5G compared to the 4G.

Okay, there's a question about our guidance from 2Q to 3Q, and how's decline for [RF]. I think in the second quarter's conference, we already told everybody that we will decline around 10% for revenue, and older application should be dropped. It's just the percentage may be different.

And for 3Q, I think for right now we see the result [evidently] is really pretty much -- is what we expected, which means right now look like the RF is -- the satellites in the declined percentage is quite (inaudible). I think the biggest application that the car come from 2Q to 3Q that will be VCSEL, yes. And secondly, there will be Wi-Fi. Cellular infrastructure, I think, is all just decline very, very few single digit.

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Joe Tsen, WIN Semiconductors Corp. - Spokesman and Associate VP of Finance [3]

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Okay. On the -- there is a question asking about the cost structure impact regarding the Q3's lower [loading] -- what the impact it is. First of all, because of the utilization rates, it's lower than before; and means every single wafer have to support -- I mean, have to carry more higher cost, unit cost, than before.

And not only the higher depreciation -- I mean the fixed cost, including the overhead and the depreciation expense -- and also because of the idle capacity that will charge the idle capacity expense. So that's making the unit cost for each single wafer, the unit costs become higher. That's the major problem. And I think with the -- if the utilization can come back higher, then definitely the margin will become better.

Okay, there's a question asking about -- besides VCSEL, can we do the edge-emitting laser. I think, first of all, the -- I think most of you probably know that we input a lot of resources, two, three years ago, to work on the laser diode, photodiode, those kind of application. And actually for the laser diode, in the data communication area and actually for that kind of technology, it's edge-emitting laser.

So no matter what kind of the end application, actually we have several projects, R&D projects, inside our fab. And definitely, yes, we can do that. We can do an edge-emitting laser. But for the contribution, or when does that going to contribute or the (technical difficulty) schedule, that will have to depend on the end application, and also customers, their progress. And then we are not sure when is that time going to happen.

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Steve Chen, WIN Semiconductors Corp. - SVP [4]

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Okay, I think that several questions all relate to what's WIN Semi's plan in 2019. Frankly speaking, it's -- our visibility is actually just around one quarter or even shorter than that. So for next year CapEx or next year customer demand, I think we still need time to collect the data, especially in most of the case right now, there's no any handset maker will settle down their spec for next year's model. So before that it's really hard to evaluate what kind of revenue trend or even application trend in 2019. Okay.

But I think for CapEx, maybe we can give a bit -- a very simple direction. Because of the low utilization right now, so I suppose next year the CapEx will be a lot smaller than this year, and we'll get back to the normal situation, TWD3 billion to TWD4 billion. Could be; but we still need time to have more accurate [characterizations]. Yes, but definitely we are lower than this year.

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Joe Tsen, WIN Semiconductors Corp. - Spokesman and Associate VP of Finance [5]

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Okay. Going to answer two questions from investors. First one is asking about sub 6 gigahertz in 5G. Even ask us to quantify that; but, unfortunately, there is a lot of variation. For example, do you know how many country will release how many frequency band in this year or next year? If you cannot answer this question, I also cannot answer this question. Then we don't have -- we cannot quantify that, the demand for the 5G or for 6 gigahertz for the coming years.

But fortunately, as we keep confidence on the 5G, it's the next momentum for the RF in the future. Because no matter the sub -- the -- in the handheld devices, the 5G actually is -- have to be standalone, which is separate from 4G. So even the -- in the overlap frequency with the LTE, you still need to separate the 5G PA. And then don't mention it sub 6 gigahertz, which is -- it's in addition.

So, yes, we do see a lot of R&D activity or engineering from several cellular PA customer. They were all working on the sub 6 gigahertz. Like, for example, like a band 77 or band 79, which is -- it's a 3.3 gigahertz to 4.2 gigahertz; for that kind of frequency, we have several customers. It's on the engineering stage. So we keep confidence on that the 5G should be coming.

But next year, nobody knows, because I think next year probably several different countries will release the frequency band. Some countries go faster, some countries not. So the -- we do believe that Korean smartphone will have their -- the first 5G smartphone next year. Maybe Chinese smartphone, maybe also. But the volume -- it's still too early to predict that.

Another question about VCSEL, because the 3-D sensing is another momentum we expect for the future. The many different question asking about competitor, and expect WIN Semi will facing a lot of competition in the future.

I think we work together with our customer. We are in the first round, first generation. And also in the second generation, we -- I think we are in the first whole generation of two years. If a competitor penetrate into this supply chain next year, they're probably still in a very early stage. We already matching the -- not only the technology in proven and also the mass production very smooth.

And so any competitor -- the new competitor into this supply chain -- they still have to solve a lot of problems: not only the yield rate, not only the technology problem; also the mass production running the 6 inch fab, how to make it smooth.

I think don't jump to the conclusion too fast, and then say WIN Semi will lose a lot of market share. We do believe no one single supply chain -- it's only one supplier. Eventually there were a multiple supplier in the supply chain, definitely. But you have to maintain your advantage in technology, and then also in the procurement.

And then you can -- in the leading position most of the time. That's what we're doing right now, so we don't worry about a competition. And then not only the competitor may improving; definitely, WIN Semi will improve even more. So we don't worry about that.

Okay. I think that's the last question, so now the time is 5:03 right now. So yes, we don't see any further question, so thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. Please visit www.winfoundry.com, under the Investor Relations section. You may now disconnect. Goodbye.