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Edited Transcript of 3105.TWO earnings conference call or presentation 6-Feb-18 9:00am GMT

Q4 2017 WIN Semiconductors Corp Earnings Presentation

Oct 15, 2018 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Tuesday, February 6, 2018 at 9:00:00am 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. - Senior VP & Director

* Yu-Chi Wang

WIN Semiconductors Corp. - CEO & 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 result webcast conference for the fiscal year 2017. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi.

Today's call is organized into 3 sections. First of all, our CEO, Dr. Y.C. Wang, will comment on the company's results and then provide brief guidance for the first quarter of 2018. Secondly, I will go through the financials in detail, and Dr. Wang will have the industry outlook to share with you. After that, we will open to the floor for Q&A. Please freely submit your question in the input box on the webcast window throughout the company.

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, 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 Dr. Y.C. Wang, the CEO of WIN Semi.

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Yu-Chi Wang, WIN Semiconductors Corp. - CEO & Director [2]

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Thank you, Joe, and welcome, everyone.

For the fourth quarter of 2017, our revenue and EPS were TWD 5.58 billion and TWD 3.31, respectively, both reaching a record high for a single quarter. We are also delighted to see our 2017 full year revenue and net profit both hit a record high for another year, growing 25% and 20% year-on-year. We've seen all-time high EPS of TWD 9.34.

Overall, 2017 was a challenging but fruitful year for us with following achievements: First, in 2017, in addition to the strong growth for our existing RF business, the optical device for consumer products started shipping in the second half of 2017. This marked the year that our continued efforts in the development of compound semiconductor technologies have successfully expanded our technologies into other applications. Second, in 2017, our performance was recognized by MSCI, with WIN Semi being included in MSCI Global Standard Indexes for the first time. Third, since being established in 1999, we have been aiming for global IDM customers to increase dependence on our technologies and capacity and ultimately decide to outsource 100% foundry services to us. 2017 was the year that we achieved this goal in a strategic alliance through a private placement with an IDM customer. Fourth, in 2017, we were awarded top 5% of listed companies in the Taiwan corporate governance assessment for the third consecutive year.

Looking ahead, we continue to be optimistic toward the development of optical devices, especially with our leading position in 3D sensing applied on handhelds. For the next few years, with increasing penetration of 3D sensing into more handhelds and brands, future applications on AR or VR and the maturity of ADAS/LiDAR, we expect rapid growth for optical device applications.

In addition, we have high expectations on the forthcoming 5G communication applications. This was not only because the expansion to sub-6 gigahertz frequency band for handheld devices in the 5G era will be -- materially boost the demand for PA, but the demand for 5G infrastructure will grow at the same time.

Specifically, base stations will require our most specialized and unique high-frequency/high-power technologies, such as integrated millimeter-wave devices and gallium nitride technology. And this will materially widen the gap between WIN Semi and the competitors. As a result, we believe optical devices and 5G will be the 2 growth drivers for WIN Semi in the next few years.

Lastly, for the first quarter of 2018, we expect, in U.S. dollar term, revenue will decline by high teens quarter-on-quarter. If no reverse of Taiwan dollar appreciation trend, revenue will decline by low-20s quarter-on-quarter in Taiwan dollar term. Nevertheless, we still expect significant revenue growth compared to same quarter last year. We expect gross margin to be lower than the fourth quarter of 2017.

Now I'll turn the call back over to Joe. Joe?

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

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Okay. Thank you, Y.C. It's our pleasure to present the financial results for the fourth quarter of 2017. You also can refer to the presentation slides.

Let's start it from Page 3 and talk about revenue and margin. The Q4 2017 revenue increased about 27% Q-o-Q, comes to TWD 5.58 billion, and Y-o-Y, it's 70 -- even higher, it's 74%. And take a look, for the Q4, although the peak season of the traditional smartphone, it was -- it all happened in Q3, but still, the wireless communication business, still strong comparatively, the Y-o-Y basis. But the major -- another major driver, which is the optical devices applied on the consumer product, actually it has even strong demand in Q4 2017.

If you take a look for this slide -- the chart, our traditional seasonality, as we recognize, Q2, Q3 is always the high season. But 2017 is quite different. That's because the new application, which is the optical devices, the first half in 2017 actually, we still enjoy the Y-o-Y growth, but the second half is even stronger. That's all because of the new application.

And talk about the gross margin and operating margin in Q4 2017. The gross margin was 38.3%, and operating margin is 28.9%. The gross margin increased about 0.5 percentage point, and operating margin grows about 1 percentage point Q-o-Q basis. That was mainly driven by the increase in capacity utilization and better product mix.

And now talk about earnings, please flip to the Page 4. Since we have a strong revenue in Q4, so -- and also the group performance in gross margin and operating margin, and the revenue increased about 14% Q-o-Q and 141% Y-o-Y, reached to -- the net profit reached to -- reached TWD 1,327 million, which is also another record high again for WIN Semi. And the Q4 EPS come in at TWD 3.31, and compared to Q3, Q3 is TWD 2.93.

And next page, please flip to Page 5. Talk about free cash flow and gearing trend, which is also our financial position. As you will see the number in the next several page, you will see that in Q4, actually our CapEx has a significant increase in Q4. Although despite of that kind of increase, our free cash flow still remain sufficient and strong. And interest-bearing debt, it's -- although the interest-bearing debt increased a little bit in Q4, but the gearing ratio actually is going down because of we complete a private placement with a strategic customer in the last December. And so that we -- that's making even better financial structure and even healthier of the financial position. So you can see that the gearing ratio is going down Q-o-Q, even a better position.

And product mix, please flip to the Page 6. As you recognize in Q4 2017, you can see that other than the RF business, traditional WiFi, cellular and infrastructure, now we have another strong pie chart sector in others. And you can say that WIN Semi is no longer a pure RF company now. We actually -- as our CEO, Dr. Y.C. Wang, mentioned it, the -- that strong growth driver in the next few years, actually except 5G, another one is the optical devices. And yes, we do have a strong momentum in last Q4 and make the product mix even healthier. And that's the Q4, the product mix looks like. Although the -- that also pushed -- dilute the WiFi and cellular percentage and infrastructure percentage, which has -- makes the whole pie chart even healthier.

And talk about the guidance of the Q1 2018, please flip to the Page 7. I think Dr. Wang has already mentioned it in their -- in his management comment. I just repeat it again. We expect, in USD terms, Q1 2018 revenue to decline by high teens Q-o-Q. If no reverse of TWD appreciation trend, then the Q1 2018 revenue will decline by low 20s Q-o-Q in new Taiwan dollar terms. And we expect the gross margin to be lower than the Q4 2017. That's the Q1 2018 guidance.

So after that, I can go faster for the whole financial result by the income statement and balance sheet. Please flip to the Page 9. Page 9 is talking about income statement for the Q4. The net revenue -- first of all, I still have to remind everybody, this is on a non-audited basis, all of the figures. The net revenue of the Q4 2017 is TWD 5,581 million, Q-o-Q up 27%, Y-o-Y up 74%. Gross profit comes to TWD 2,137 million, and Q-o-Q is 28% -- up 28%, and Y-o-Y up even higher, 118%.

And gross margin comes to -- for the Q4 comes to 38.3%, Q-o-Q increased about 0.5 percentage point. And remember, a quarter ago when we provided the guidance of the Q4 gross margin, we guided flat, which is it's a similar level of -- for the Q3 and Q4 of gross margin. At that time, there -- I've been questioned by some analysts and investors and see it's too conservative. But actually, in consideration of the foreign exchange from the end September to the end December, actually, the NT dollar appreciate about 1.6%. And on the other hand, depreciation expense increased from TWD 650 million in Q3 to TWD 714 million, and total increase about TWD 64 million. That also impacted gross margin about 1.15%. So all -- I should say that all of the factor have been consideration -- taken into consideration. So now the 38.3%, a little bit better than our original guidance, and Q-o-Q, it's positive, it's up 4.5 percentage point. It's pretty close to our guidance.

And our OP, operating expense, TWD 523 million. So equivalent to OP ratio about 9%, a little bit improved. And operating income comes to TWD 1,615 million, which is up 31% Q-o-Q and up 176% Y-o-Y. So the operating margin comes to 28.9%, which is 1 percentage point improved Q-o-Q basis.

The non-OP item is a loss, about TWD 38 million. The detail is listed in the Page 11 for your own reference. So the income before income tax is TWD 1,577 million, and tax -- income tax expense is TWD 249 million. So net income comes to TWD 1,327 million, which is increase of about 14% Q-o-Q and 141% Y-o-Y. So net margin comes to 23.8%, and EPS for the single month of Q4 is TWD 3.31. Compared to Q3, Q3 is TWD 2.93, and a year ago, Q4 of 2016 is 1.38% -- TWD 1.38.

So we already talked about the depreciation and CapEx. We have increased a lot of -- about TWD 700 million increase of the CapEx in Q4. The total Q4 CapEx is TWD 1,470 million. And the utilization is 100%, it's all full. And the ROE becomes 23% for the single quarter of Q4.

So now we take a look for the whole year of 2017. The revenue, the total revenue of 2017 is TWD 17,086,000,000. Actually, it's a record high and the sequential 3 years growth -- double-digit growth. The growth rate is 25%. Actually, if in U.S. dollar basis, then that should be -- the growth should be more than 30%.

The gross profit is TWD 6,328 million, Y-o-Y growth about 26%. The gross margin for the whole year is 37%, and compared to a year -- 2016, it improved about 0.3 percentage point.

Operating expense comes to TWD 1,759 million, and OP ratio for the whole year is about 10%. Operating income is TWD 4,569 million, which has increased about 31% Y-o-Y. Operating margin comes to 26.7%. It's 1 percentage point improved.

So again, the non-op item total at TWD 41 million loss. And actually, if you take a look at the detail, the foreign exchange loss is about TWD 174 million. Again, the detail is in Page 11 for your own reference.

Now for the income before the income tax, it's TWD 4,529 million, and the income tax expense is TWD 813 million. So the net income for the whole year 2017 becomes TWD 3,715 million, which is increase about 20%, and net margin comes to 21.7%.

And the EPS for the whole year is TWD 9.34. It's -- compared to 2016, whole year 2016 is TWD 6.04. So improved about 55%.

Okay, the ROE for the whole year is 17%, and approximately, utilization rate, it's going up to 95%. Depreciation expense comes to TWD 2,515 million. Year-on-year, it grows about 7.6%. Remember, about a year ago, when I was asked what depreciation expense will increase for the whole year 2017, my answer is below 10%. This is kind of in line with my opinion.

The CapEx, again, the -- for the past 1 year is -- the investor is curious about the whole year of 2017's CapEx, what is the range of the CapEx. What we provided, about between TWD 3 billion and TWD 4 billion, actually comes out to almost TWD 4 billion. It's in the upper limit of our guidance.

So now we're going to skip the Page 11 and then goes to the Page 12. Okay, the Page 12 talks about the financial position from the balance sheet. As you can see that, again, as I mentioned it, we -- in the end of last year, we complete a private placement with IDM customer. So that's the reason why we have that -- we have sufficient cash and cash equivalent. Of course, would be very helpful to our CapEx for the whole year of this year.

The cash and cash equivalent is TWD 7,849 million, and the current financial asset at a fair value through the profit or loss is about TWD 1,301 million. And another significant increased item is the fixed asset, which is the property, plant and equipment. It's about TWD 1 billion increase. That's because we -- a TWD 1 billion increase Q-o-Q, that's because we understand there is a heavy CapEx in 2018, but beforehand, we need to complete the clean room and facility construction first. And so we already started to do that.

And the total assets comes to TWD 37,027,000,000. The total liability is TWD 11,233,000,000 (sic) [TWD 11,223,000,000. And common stock Q-o-Q increased about 20 million share, which is, from TWD 4,027,000,000, increased from -- to TWD 4,227 million. So the total equity is about TWD 25,805,000,000. So the book value per share increased from TWD 48.4 to TWD 61.05.

So finally, the current ratio is still very, very healthy. It's 331%. Debt ratio is only 30%.

So that's my presentation.

And now I will turn the call back to Dr. Y.C. Wang, our CEO.

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Yu-Chi Wang, WIN Semiconductors Corp. - CEO & Director [4]

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Thank you, Joe. So please flip over to Page 14. Last year was a very exciting year for our company. We achieved many things.

First, as we mentioned earlier, last year, we achieved record revenue and profitability. That's the consecutive -- second consecutive year we achieved record.

Second, we are very happy we were recognized by MSCI and was included in MSCI Global Standard Indexes.

The third, we -- last year, we introduced strategic investors. This is very important that we further strengthen our partnerships with our customers. No matter -- we're happy there was a strategic customer participate our private placement, but there are many other strategic customers who did not participate the private placement. However, we have also engaged in some very important future product and technology development with each other. It's not limited to one customer only.

Last one, although -- I mean, the -- for the whole year, our company's revenue grew significantly. However, in the both major business units, we -- each of them grow very significantly, I would like to emphasize. MMIC, which is our base business, continue to grow, no matter in cellular market or non-handset market. MMIC business, we grew over 10%, so double-digit growth. I would say it's in the mid-teen growth rate. And for optical devices, last year, revenue has reached greater than 10% of our whole company's revenue.

Now please flip over to Page 15. This page shows 2017 WIN Semiconductors revenue growth rate. For comparison -- fair comparison purpose, we use U.S. dollars to compare. WIN Semiconductors, we grew -- the revenue grew 34% and compared to the gallium arsenide device market, which -- the total gallium arsenide device market grew around 10%, according to Strategy Analytics report. And the worldwide semiconductor last year grew 22%, according to Gartner's report. WIN Semi's revenue growth rate is significantly higher than both gallium arsenide market and worldwide semiconductor market. This means we are not only in a very exciting, growing market, we are also actually taking share in this growing market.

Now let's flip to Page 16. As usual, we provide the outlook where we have seen, at this point of time, the company's -- what is the -- what are the drivers for our company's growth. Now we can see very clearly, the following coming years, our company will grow in 2 items. The first one is the demand is going to be driven by 5G wireless. The second one is optical devices. And for 5G wireless, there are 2 phases. The sub-6 gigahertz, which is a lower-frequency part for 5G wireless, will come first as the Phase 1. And the millimeter wave, which is at much higher frequency, will come as the Phase 2. I'm going to give more color in the following 2 slides. And for optical devices, we have 2 categories. One is 3D sensing, the other one is optical communications.

So now let's go to Page 17. So for 5G wireless, we believe in the 5G era, the RF contents will largely increase on both sub-6 gigahertz and millimeter wave. Specifically, for sub-6 gigahertz, we've seen more frequency bands at higher frequencies will be adopted, which means more -- that the more frequency bands means more power amplifiers will be required for handsets, and higher frequency means that gallium arsenide will have advantages over silicon devices because of the superior performance, particularly the power efficiency and the linearities. Also, we believe very likely multi-input, multi-output, similar as WiFi has adopted, will be adopted by 5G as well to enhance data transmission rate, which means more power amplifier for RF devices will be adopted in each handset.

As to millimeter wave, which usually means greater than 28 gigahertz, beamforming is approach being -- will be adopted, which use phased array antenna. As the photograph show at the right-hand side, there's an array of antenna. There is a power amplifier, the transmitter and the low-noise amplifier or -- that the receiving path will associate with each antenna. So this means a lot of RF devices will be included in one unit because of array of an antenna is required, which, again, means a lot of millimeter-wave devices will be needed.

And also, small cell base stations will be the infrastructure for millimeter wave. Small cell base station means it's very densely populated in an area, which means a lot of base stations, of course, means the greater demand for the compound semiconductor devices. And we believe our company's technology portfolios provide high-performance integrated solutions across all 5G frequency bands. For example, for sub-6 gigahertz, we have been -- we have spent years to develop very advanced gallium arsenide HBT and BiHEMT technologies for these applications. And for millimeter wave, we have developed integrated gallium arsenide pHEMT technologies, which can integrate power amplifier, low-noise amplifier and the switch functions into one chip. This is -- has been WIN's very advanced technology that will further differentiate ourselves with our competitors.

Now let's move to Page 18 on optical devices. We believe 3D sensing market is going to explode. Last year was the -- only the first year, the initial -- in a very initial stage. We believe there are more and more applications will adopt 3D sensing devices. The more and more optical device we produce will be applied in the face and gesture recognition, AR/VR and even LiDAR in the coming years. According to Yole's market report, 3D sensing is going to have in average 37% compound annual growth rate, which is pretty high. And we are very excited we are in this market.

And as to optical communications, there are 3 applications that will demand more optical devices in the coming years. The first one is fiber to the home, second is data center, and then followed by 5G mobile, both front-haul and back-haul access.

Okay, thank you. So now Joe?

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Questions and Answers

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

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Okay. Now we begin the Q&A. So please remember to submit your question in the input box on the webcast window, and we'll begin to answer your question.

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

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This is Steve. I think, first, I will answer the question about CapEx. For 2018, I think the CapEx will increase a lot, going to be maybe around TWD 7 billion, plus/minus, for this year. And that means we will have the capacity, around 36k to 37k per month a year at the end of this year. And please note that the CapEx and the capacity will gradually increase maybe by several stage from Q1, Q2 to Q4.

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Yu-Chi Wang, WIN Semiconductors Corp. - CEO & Director [3]

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Okay, there is a question asking the -- each business growth rate in -- last year in 2017. So obviously, optical device revenue, that grow the highest because the base -- the revenue base in 2016 was much lower compared to the other business. And as I mentioned earlier, optical revenue last year has exceed 10% of our company's total revenue. And I think the cellular and non-handset part roughly shared the same growth rate in the middle between 10% to 20%. So that's -- if we look into 2018, we believe optical device will still have the highest growth rate and followed by non-handset, and then handset-related business will be the third. But we believe all the 3 sectors will maintain growth -- in growth mode.

Okay, there is a question asking about the depreciation expense for the whole year 2018, what's going to increase compared to last year. We roughly calculate it with this kind of capacity increase, about 7k to 8k capacity increase, it will probably -- well, the depreciation expense Y-o-Y will probably increase about -- around 30%. That's our view right now. Of course, it's a dynamic based on the equipment shipment and the accounting schedule.

Okay, there's a question asking about utilization rate for the Q4 2017, and then what do we see about Q1 2018? Actually, the Q4 2017 is fully loaded, it's full, so it's 100% of utilization. And Q1 2018, based on what -- our observation and our judgment, the -- of course, the -- but utilization is going down, but if the U.S. dollar basis guidance only is down about high teens, I think the utilization rate for Q1 should be in a -- still a reasonable level.

There was a question asking, what is your opinion of Apple's joint venture with [Fonisa]?

First, I would like to -- I believe Fonisa has clarified by -- I mean, some time ago that there was -- it was not a joint venture. It's sort of like a prepay type of engagement. And -- however, I mean, we -- what we see is -- we have no comment on their engagement. But we are pretty -- we have a very strong confidence on our technologies, especially the 6-inch gallium arsenide we sold, which is -- has a pretty high technology barrier, that we are pretty confident we are very good at this. We have been working on 6-inch gallium arsenide devices, so from, I think, the beginning of our company, we are very confident.

There was a question asking about our preparation on indium phosphide optical business. Yes, we have been developed indium phosphide-based optical devices, such as the PIN diode, avalanche photodiode and DFB laser, Fabry-Perot lasers for a couple of years. We have -- multiple customers have been engaged with us right now. We're shipping samples. In terms of revenue, still not very significant compared to our whole company's revenue. But it's certainly going to grow very fast.

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

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Okay, it's about time. There -- we almost answered most of the questions. So now thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. Please just visit www.winfoundry.com under the Investor Relations section. So thank you so much for everybody's participation. You now -- you may now disconnect it. Thank you. Bye-bye.