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Edited Transcript of 3105.TWO earnings conference call or presentation 25-Apr-19 8:30am GMT

Q1 2019 WIN Semiconductors Corp Earnings Presentation

May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Thursday, April 25, 2019 at 8:30:00am 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. - Senior VP & 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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Investor conference is about to begin. Good morning, good afternoon, good evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's Result Webcast Conference for the First Quarter 2019. My name is Joe Tsen, the spokesman and Associate Vice President of Finance in WIN Semi. Joining me on today's call is Steve Chen, our Senior Vice President.

Today's call is organized into three sections. First of all, our Senior VP, Steve, will comment on the results for the first quarter and provide brief guidance for the second quarter. Finally, 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 1 of the presentation slides. Please note that this presentation contains forward-looking statements. These statements are based on our current expectations. Actual results may differ materially from our expectations, and the company undertakes no obligations to update these forward-looking statements going forward.

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

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Shun-Ping Chen, WIN Semiconductors Corp. - Senior VP & Director [2]

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Thank you, Joe, and welcome, everyone. In the first quarter of 2019, due to industry low season and weaker end demand, our revenue for the first quarter was TWD 3.6 billion, decreasing by 14% quarter-on-quarter and decreasing by 19% year-on-year respectively. During the same period, our capacity utilization rate was approximately 50%. Since there was no significant improvement in the product mix, our gross margin was around [25%] as we stated.

Operating expense increased by 3% quarter-on-quarter due to slightly increased R&D and sales expense, resulting in lower first quarter operating margin of 8.3%. However, we believe declined revenue during off season causing higher operating expense rates should be temporary.

Reviewing last quarterly conference, we were confident about 5G and 3D printing application to be our future growth drivers. But we also faced short-term challenges during 2019.

Though we mentioned market considered 5G developments, it's still at early phase this year. We do observe that [infrastructure related companies] are actively developing 5G products and (inaudible) order. Therefore this infrastructure product segment was able to maintain quarter-on-quarter and year-on-year sales growth during industry low season.

In addition, we have seen Asian smartphone PA design house [kinds] increased their wafer input one after another, post Chinese New Year. (inaudible) significant March sales growth in making first quarter revenue better than our expectation. We believe first quarter is the burden of our operation this year and we have covenants in our 2019 full year outlook.

Looking ahead to the second quarter of 2019, we expect to increase by mid teens quarter-on-quarter. We also expect gross margin for the second quarter to be around the level of low 30s.

Now I will turn the call back over 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, Steve. It's my pleasure to present our financial result for the first quarter of 2019. Please refer to our Presentation Slide starting from Page 4. Page 4 will talk about the revenue trend and the margin trend. On 2019, Q1 because of traditional losses and the weaker end demand, so the revenue finished at TWD 3,619 million. Q-o-Q is down 14% and Y-o-Y is down 19%. And due to the lower utilization and the product mix, the gross margin down to 25%. The gross margin declined about 7.6 percentage points quarter-on-quarter, and the operating margin declined by 10.4 percentage points to 8.3%.

The utilization rate went down from 55% in the Q4 to 50% in the Q1, 2019. And also unfavorable product mix also made a lot of pressure on the gross margin. We will talk about the product mix more in the Page 7. And now we -- please flip to the Page 5, talk about earnings. Q1 net income was TWD 151 million. Q-o-Q and Y-o-Y basis is both down 79%, the EPS become TWD 0.41.

And now please flip to the next page, Page 6. Page 6 is talking about free cash flow and gearing and in terms of the financial position and the balance sheet. And in 2019, Q1 depreciation expense and the CapEx, it's almost at the similar level of the previous quarter.

The major decrease from top line to the operating profit that caused the free cash flow was decreased sequentially. But the Q1 is still generally the positive free cash flow. The interest-bearing debt and the gearing ratio was lower than those of the previous two quarters.

WIN Semi dynamics are adjusting the financial leverage position to maintain the sufficient cash on hand, so we can maintain a very healthy financial structure in even the traditional low season.

And now please flip to the next page, Page 7. Page 7, it's the product mix in Q1. From the pie chart you can recognize that the percentage of cellular up sequentially and also the infrastructure. Although, you see that the ranges look similar, but actually the value of infrastructure still growing from last Q4 to this Q1.

And infrastructure is the only one -- the only one segment maintained the Q-o-Q and Y-o-Y growth in all of the segments in product mix. The rest of it, like, a Wi-Fi, that's going down in Q1. And then also the others, including, the majority is the 3D sensing business, it's also decreasing from 25% to 17%. So because of that -- that's why we say that the product mix is not favorable to the margin.

Okay, and please further flip to the Page 8. Page 8 is the Q2's guidance. I think we have mentioned it in our management comments, I'm just going to repeat again. We expect the Q2 revenue to increase by mid-teens Q-o-Q. We also expect 2019, Q2 gross margin to be around the level of low 30s.

Now we can quickly talk about the income statement and the balance sheet. Please flip to the Page 10. In Page 10, first of all, I have to emphasize that all of the numbers and the figures is based on -- it's on unaudited basis. The final results should be based on the CPA's report.

In Q1 2019, net revenue was TWD 3,619 million, Q-o-Q down 14% and Y-o-Y down 19%. And gross profit is TWD 903 million, the Q-o-Q is down 34%. The gross margin become 25% as we expected earlier. And because of more R&D activity and also more sales and marketing activity, the R&D and the operating expense up around 3%, and it's become TWD 603 million.

And because of that in the low season, the operating expense ratio going up to 17%, which is higher than before. So we believe that it should be a temporary situation. And when the high season or when the utilization getting better, the operating expense ratio should come back to the normal. Operating income become TWD 300 million, and operating margin is 8.3% and non-operating items in Q1, it's a loss of TWD 108 million. The detail, please refer to Page 11 by yourself.

The income before income tax is TWD 192 million, and the income tax expense is TWD 42 million. The tax rate, it's about 22%. Net income become TWD 151 million, as we mentioned that Q-o-Q and Y-o-Y both down around 79%. The net margin is 4.2% and EPS become TWD 0.41.

The ROE equivalent -- ROE in Q1, it's become 2%. Approximately, utilization is 50% from 55% last quarter. The depreciation went down a little bit to TWD 827 million, that's because part of equipment depreciation is due and slightly went down. And CapEx also down a little bit from TWD 838 million to TWD 820 million.

That's our income statement for the Q1. So we can now skip Page 11 and please flip to Page 12, and a part of balance sheet. The balance sheet, cash and cash equivalents is TWD 4,765 million. The total assets is TWD 36,137 million. And as you can see that the long-term borrowings, which is interest-bearing debt, went down to almost TWD 5,100 million. And so the total liability become TWD 9,362 million.

The common stock remained the same, TWD 4,238 million. So the total equity become TWD 26,775 million. The book value per share increased to TWD 62.8. Lastly, the current ratio is 273%, slightly went down from last quarter, but still very healthy. And so therefore the debt ratio, which is total liability over the total assets, went down to 26% from 28%, is even healthier.

Okay, that's my report. So now we can begin the Q&A. And please submit your question by clicking the Question button on the webcast window now.

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Questions and Answers

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Shun-Ping Chen, WIN Semiconductors Corp. - Senior VP & Director [1]

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Okay, I think first I would like to discuss the capacity for this year, okay? And make it more clearly. I think everybody knows, at the end of last year, we have around 32K monthly 6" wafer output capacity, and originally the CapEx trend for 2018 is up to 36K to 37K, and we postponed part of that to this year. So that means at the end of Q2, our capacity will rise up to 36K to 37K per month.

And the reason we will do that, first, is definitely that some of the postponed equipment (inaudible) 0:20:24 in the first, second – the first half of the year. And the second, [if you look back], we already see, like, Joe and I just mentioned at the conference that we see the demand for the smartphone PA is ramping up quarter-by-quarter.

So even though we will [increase] some capacity in Q2, but because of the Q2 and Q3 season, we think our integration rate still [can go back] to the healthy level.

Okay, I think that the question is, wants to know about the full year outlook. I think everybody know, we -- the visibility just (inaudible) 0:21:58 so usually we can have a better clear picture just about one quarter, okay. But so I'll try my best to give you some picture about the whole year.

I think for the whole year, definitely, infrastructure we still feel very confident about the growth. Because for the past few years, WIN Semi is already become -- taking a lot of share for infrastructure foundry service, so this year still keep the same. I think because of the LTE and even some pre-5G preparation, I think our infrastructure still can keep a very positive growth momentum in there.

And also, like, I just mentioned at the beginning that we already see our Asia design house customers, they all have better outlook, I think the Chinese New Year. And looks like that will continue to Q2 and even into Q3. So I suppose the cellular PA still can have a good momentum in this year also.

And for the other two, I think that maybe more related to some Q3 new model. So right now, I'm sorry, I don't have so much visibility. But we suppose, for example like Wi-Fi, I think that what situation is last year Q3 situation. So we still think that has some positive share [come back] in this year to help their growth.

But, I need to say again, but before the new model launch, I think right now it's still too early to make sure about that. But we still keep positive to see that.

Okay. I think [another questioner] wants to know about, discussion about our pHEMT technology and gallium nitride technology using in infrastructure application.

Okay, I think that we shared our view to our investment at the last conference, that we definitely think 5G will bring a very good momentum to WIN Semi, no matter infrastructure or handset smartphone. And for infrastructure segment, that is because WIN Semi's pHEMT technology and gallium nitride technology has a better, superior performance than (inaudible) 0:25:50 solution.

So we shared that view to all of you that we think going to 5G definitely our pHEMT and gallium nitride can gain more share in infrastructure, PA application, and they have share right now in LTE. And definitely I think until right now, pHEMT technology is still is our main technology that's using the infrastructure.

Although, gallium nitride, they are making very good progress year-by-year, but because that's a new technology and in a very low base, so even though they have a very good growth by year, but I think right now they only have very low single-digits contribution. But I think as time goes by, that contribution will be going up year-by-year.

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

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There are several questions asking about utilization, the further utilization, CapEx, and also the depreciation; maybe I can put it all together to answer at one time. First of all, we expect the CapEx this year, 2019, should be around -- between TWD 6 billion and TWD 7 billion. [That includes] the CapEx, which is the payment last year 2018, the payment we deferred, also the equipment order we delayed, we're going to realize that in this year.

And also the agreement between Avago, one of the major customer; Avago, and WIN Semi, we agreed to acquire their equipment from their fab and then -- actually it's moving to our fab one-by-one from Q1 to Q2, and then put it all together we will spend that kind of money and then also increase the capacity from currently 32K to 36K or 37K in the second half. Which is, this number -- those numbers are originally supposed to complete last year, but we suspended.

And we expect the whole year depreciation expense will increase about roughly 15% of the depreciation expense. Of course, in the middle we may have some -- the old depreciation expense due, but also adding more -- some of the new depreciation expense, so put it all together; and CapEx depreciation, yes, that's all about it.

Okay, there is a question from one of the investors, asking about OpEx, which is -- it looks like increased a lot year-on-year in this quarter. And as we talked about earlier, in Q1 we see more R&D activity happening. And as you know that we treat the 5G and the 3D sensing as our major growth driver in the next couple years, including this year. And we do have a – [aside that], we also mentioned that we already see some significant project, 5G project, and also advanced mass production order is coming to WIN Semi.

Other than that, we also have several projects with smartphone PA company working on the sub-6 gigahertz [PA's]. Part of the major customer, actually we are already -- we are ready for the qualification for sub-6 gigahertz. But we still have a lot of other 5G PA [approximate] actually still working on it.

So we still have several R&D projects on hand, not only that, also 3D sensing. We have other than smartphone related, also have a couple commercial and, like, automotive VCSEL project on hand. So when the utilization is lower, means you have more capacity to satisfy those R&D or engineering demand to our customers, so that's the reason why.

And then not only that, I have to say that they also have more sales activity or marketing activity in the beginning of the year. As you probably understand that there [are several shows worldwide, and our sales team] actively participate those promotion events. So that's the reason why they pushed the operating expense higher than before.

Of course, the R&D activity, it's up and down some time. It's not necessarily related to the top line. But because of the top line, in Q1 it's lower. So push the operating expense ratio getting higher, and we don't think that's a normal situation. So we expect it [should be] going down with the topline growing and the utilization going up. It should have a better ratio in the -- even the next couple quarters of this year.

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Shun-Ping Chen, WIN Semiconductors Corp. - Senior VP & Director [3]

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Okay, I think that several questions wanted to discuss about the capacity we will have this year. I think I already said at the beginning, I think it's -- the capacity we're increasing, that's some of the partial capacity that we should install last year, but because of the demand (inaudible) the second half is little weaker.

So we postponed partial of the equipment installation until this quarter. That's because -- the question is why we still need that? I think, first, actually it's a continuous order, you cannot just take it off. And second is, actually going through this year [where Q2 and Q3 hot] season, I think actually we can -- we definitely need that kind, this extra capacity to fulfill our customer demand for that.

Okay, next question is related to the VCSEL and 3D sensing. I think compared to this year and last year, I think -- we think the VCSEL has a better opportunity in this year. The reason is because, I think, if you check with most of the Android's modelled in this year, I think they're 13 percentage with VCSEL compared to last year. It's increasing.

Yes, so that means our customer, they will have better customer base than last year. So I think for the whole year, although the major VCSEL (inaudible) most coming from the second half of the year. But I think because the customer base is increasing, I suppose we can have better chance for our customers for the VCSEL application.

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

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There is a question asking about the impact from the Qualcomm and Apple's lawsuit settlement. "What does that mean to WIN Semi?" Well, we probably -- it's very difficult to quantify that. Well, we should say that that definitely should be a good news for the 5G industry supply chain; because that means the 5G smartphone will come in on time, and the 5G smartphone market will remain healthy. That's our view.

(technical difficulty)

Okay, there is one question asking about our margin guidance for Q2 and question about the utilization. "What kind of utilization can make it happen to our low 30s gross margin guidance?" Well I know that some -- part of the investors question that if our revenue guidance only up mid-teens then how come we can reach the margin to the low 30s level?

Actually, based on our experience and record, when most of the time when our utilization can reach almost 80% or even 70% something, most of the time you will see more than 30% of the gross margin happen. And we believe with the -- that wafer input ramping up month-over-month from Q2 to Q3, we should be able to see the low 30s gross margin in Q2.

And especially, we obviously suffer the lower margin in Q1 because of the lower wafer input; which is, each wafer will suffer the higher fixed costs, including the depreciation expense, when more wafer input means the total fixed cost have more wafer to share that. Definitely, you can expect that better margins should happen in the following few months. So, yes, we are confident with that.

Yes, I think -- so we see no more question input in here. So, yes, I think that's it for today's meeting. Thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. So please just visit www.winfoundry.com under the Investor Relations section.

Thank you everybody, and you may now disconnect. Buh-bye.