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Edited Transcript of 3105.TWO earnings conference call or presentation 29-Apr-20 8:00am GMT

Q1 2020 WIN Semiconductors Corp Earnings Presentation

Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Wednesday, April 29, 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

* Kyle Chen

WIN Semiconductors Corp. - CEO

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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 First Quarter of 2020. 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, the General Manager of Corporate Administration in WIN Semi.

Today's call is organized into 3 sections. First of all, our General Manager, Steve, will comment on the results for the third quarter and provide brief guidance for the fourth 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 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 obligation to update these forward-looking statements going forward.

Now let me hand over the call to Steve for management comments.

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Kyle Chen, WIN Semiconductors Corp. - CEO [2]

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Thank you, Joe, and welcome, everyone. For the fourth quarter of 2020, our revenue and profit both achieved better performance than the same period the previous year. Revenue from the first quarter reached TWD 6.1 billion, in line with our previous expectation of decline at 12%. Quarter-on-quarter and materially increasing by 68% year-on-year.

Our capacity utilization rate declined during the quarter, but we were still able to maintain at high levels.

Combined with the slightly change in the product mix, our gross margin only modestly declined to 43% compared to the previous quarter.

Our net profit and EPS for the first quarter reached TWD 1.6 billion and TWD 3.76 respectively.

Looking at the overall revenue for the first quarter. While all application in the product mix declined sequentially due to the seasonal factors our first quarter wafer shipment for the whole -- for those having higher relevance to the 5G, namely, cellular and infrastructure, performed relatively better and 5G stellar still account for more than 20% of the overall cellular revenue. We believe that this not only suggests that there is currently no change in the trend for global wireless communication to involve to 5G, but also indicates that we hold a leading position in technology and business development in 5G. Although COVID-19 continues to affect territories around the world, and it is difficult to estimate the impact of the economic and the supply chain, we will strengthen our effort in the prevention and supply chain management, ensure that our R&D progress and the capacity expansion plan will not be interrupted and to be better prepared for any risk and opportunity in the future.

Looking ahead to the second quarter of 2020, we expect revenue to decline low single digits quarter-on-quarter and gross margin to be around the level of low 40s.

I will turn the call back over to Joe.

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

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Okay. Okay. It's my pleasure to present our financial results for the first quarter of the year 2020. You can also refer the presentation slide, starting from Page 4. Remember to read over the safe harbor notice.

In Page 4, Q1 -- the Q1 year 2020, we just reached the record high in the last quarter, which is the Q4 2019, and then seasonally, the revenue going -- went down for 12% Q-o-Q become

TWD 6,071 million and the Y-o-Y was up 68%.

As the margin, the gross margin in Q1 2020 with the stable yield rate and only slight change in the product mix, which is we can see that. And the capacity utilization rate went down, but still at a relatively higher level, we still have the 90% of the utilization rate in Q1. Because of that, the gross margin decreased about 1.2 percentage points and -- sequentially to around 43%. And also impact the operating margin, decreased by 1.8 percentage points to become 31.9%. That was the revenue and the margin.

And then after the operating margin, then we talk about the earnings, net profit in Page 5. In Q1 year 2020, the net profit was TWD 1,575 million, Q-o-Q went down about 14% and Y-o-Y up 945%. So the EPS come in at TWD 3.76, and compared to the quarter before, Q4 2019 was TWD 4.4.

So after the earnings, now please flip to Page 6. Page 6, we talk about free cash flow and the gearing trend. Although the CapEx was lower than quarter before, but because of the lower operating profit, so free cash flow also declining. But the interest-bearing debt and the gearing ratio, both sequentially declined for 3 quarters. So the financial structure and the financial position still remain very healthy.

And now please flip to the Page 7. Page 7, we're going to talk about the product mix. The Q1 2020 product mix that is between 40% and 45%. Infrastructure, it's between 20% and 25%. WiFi is between 15% and 20%. And others, including the 3D sensing is 15%. So you probably already recognize that the range was pretty much the same as Q4 in 2019. Yes, that's why we say that the product mix is similar, similar to the last quarter.

I think including Steve's management comment and the previous slide, we already point out the conclusion -- a couple of conclusion. First of all, the product mix remained similar quarter-on-quarter. But the cellular and infrastructure, which is related to 5G, relatively have a better performance than others like WiFi and 3D sensing.

And then also, our 5G cellular still maintained above 20% of the total cellular business. So that means the 5G business is still very solid. And then also that's the reason why we also believe our technology, the development and also the business development is ahead of our competitors.

And now please flip to the Page 8. We talk about the guidance for Q2. I think Steve mentioned it, I'm going to repeat. We expect Q2 2020 revenue to decline low single digits Q-o-Q. We also expect Q2 2020, the gross margin, to be around the level of low 40s.

So now we can simply flip to Page 10 for the financial statement starting from income statement. Before I begin, I have to remind everybody, this is unaudited basis. The final results still have to base on the Board approval and the CPA's report.

The net result -- net revenue -- the net revenue year -- Q1 of year 2020 was TWD 6,071 million, Q-o-Q down 12% but Y-o-Y up 68%. The gross profit was TWD 2,611 million, Q-o-Q down 14% and Y-o-Y up 189%. And gross margin becomes 43%, which is down 1.2 percentage points from last quarter. The last quarter was 44.2%.

Operating expense become TWD 673 million, and the OP ratio is about 11%. So the operating income was TWD 1,936 million (sic) [TWD 1,938 million], which is Q-o-Q down 17% and Y-o-Y is up 546%. So the OP margin was 31.9% Q-o-Q, down 1.8 percentage points.

The nonoperating income was TWD 2,600 -- I'm sorry, TWD 26 million. The detail will be in Page 11 for your own reference.

Income before income tax was TWD 1,965 million, and income tax expense is TWD 389 million. But the net income become TWD 1,575 million and Q-o-Q is down 14% and Y-o-Y up 945%. So the net margin becomes almost 26% which is 50 -- 25.9%.

And so this -- in this quarter, EPS become TWD 3.76. Last quarter was TWD 4.4.

The ROE -- equivalent ROE in this quarter is 22%. And approximately utilization rate 90% from -- went down from 100% last quarter.

The depreciation was TWD 841 million, and then the CapEx in this quarter is TWD 1,322 million. So this is the income statement for Q1.

Page 11 will be the nonop item detail for your own reference.

And so please flip to the Page 12 for balance sheet. The balance sheet dated March 31, year 2020. Cash and cash equivalent was TWD 4,812 million. The total assets is TWD 42.996 billion.

And you may recognize that the significant difference for liability and equity.

Aside -- as we mentioned it, the interest-bearing debt was going down. So the long-term borrowing is TWD 4,833 million. But the current liability going up to TWD 9,178 million, which is because, in Q3, Board meeting-approved dividend for last year is TWD 7 per share cash dividend. So there was a dividend payable in current liability. So the total liability going up. And also the dividend payable was deducted from retained earnings, so the total equity going down. The total equity become TWD 28.463 billion.

So the book value also going down to TWD 66.73. And because of that, the current ratio also went down to 142% from 228%. The debt ratio, which is comparing the total liability to the total assets becomes 34% also because of dividend payable.

Okay. This is the financial statement. Now we can begin the Q&A. Just -- please just submit your question in the input box on the webcast window now.

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Questions and Answers

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Kyle Chen, WIN Semiconductors Corp. - CEO [1]

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Okay. I think, yes, the first question I will answer is the inventory-related question. Yes, I think from Q4 last year to our Q1, our inventory increasing almost around like a little more than 10%. I think it's mainly due to -- because of the COVID-19 impact. You can check on a global logistics and some of the countries have some operation crisis. So at this moment, we decided to rising up our safety inventory level. So that's the main reason why you can see the inventory is bigger than Q4, yes. And before the COVID-19 is really the contained, I think we will keeping as a high safety inventory level during this period. But -- and once the COVID-19 has become slower, then I think we will domestically decrease the safety inventory level at that time.

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

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Okay. There is a question asking about the CapEx plan and also how to manage the COVID-19 -- the potential COVID-19 impact of the demand for the second half.

Okay. First of all, our CapEx plan remain no change -- remain the same, which is we believe that the whole year's CapEx probably is still about TWD 6 billion, plus and minus. And we -- as everybody knows that we start to expand additional 5,000 starting from end of last year. And then it's -- actually, this 5,000 is coming for mass production starting from this quarter. So for us, it's only a little bit more than 10% of our capacity expansion. So -- and traditionally, the second half is the high season. And so far, yes, there is a lot of uncertainty as for the second half because of COVID-19, but actually still no visibility. And we -- there is -- you cannot -- nobody -- no one can say that the high season definitely is not coming and how long is it going to suffer for 1 quarter, 2 quarters? Nobody knows. And since it's only less -- it's only 10% of the expansion and also the new capacity is coming underway, so we believe we can manage the capacity and the utilization for the next couple of months and a couple of quarters.

And then by the way, if intentionally slow it down or stop the expansion, then sometimes it's going to take even longer time to recover. And then -- so it's more -- it's going to create more uncertainty and risk in the future. And so yes, we -- that's why we believe that with the momentum of the 5G, no matter sub-6 gigahertz and the infrastructure, when you think we're going to remain the same of the CapEx plan as we planned it. Thank you.

Okay. There is another question asking about the satellite business, which is -- we have the ground level of the satellite also has the Internet in the sky, which is LEO and MEO business. I think the question should be asking about LEO and MEO all this business. It's about low single digits for our total revenue. I'm talking about the total revenue.

And so I think there are several companies, including like SpaceX, Boeing, OneWeb, Amazon and several different companies, they have highlighted the future Internet in the sky landscape and defined the second stage of the 5G or even 6G. But no matter what, I think WIN Semi has not only the business, but also we have involved with this kind of project because we have the certification of the aerospace. So I think this is a very good business for high margin, and we continue to be optimistic about the future of the aerospace business.

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Kyle Chen, WIN Semiconductors Corp. - CEO [3]

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Okay. I think I will answer the other question relates to the inventory because some of investor was concerned where we have some mark-to-market price value rose in the future because of the high inventory level. I should say it's -- for most of our materials, the price is very stable for the whole year, yes. So besides, I think the only one will have a mark-to-market value is the gold. But I think gold -- for the gold inventory level actually compared to the past few quarters, I think it's almost the same so it will not have the extra evaluation risk for these prices may hold. And for other nanometer IP or other chemical or other raw material, I think it's a stable price for WIN Semi. So I don't think for -- in rise up the inventory level will bring some risk of the market value growth. Thank you.

Okay. There is a question, want to know about how many 5G smartphone unit?

It's relative to our 5G PA shipment. I think it's very difficult for WIN Semi to really convert our 5G PA shipment to the 5G smartphone unit because right now it has around like 3 to 4 frequency is installed in the smartphone for the 5G. But different model has different kind of 5G content. So it's not a very easy formula to really convert to the shipment to the unit.

But we can see from our 5G percentage of the PA is keep very -- is still above 20% of that. So in -- what we see the 5G smartphone demand should not have very big difference even in this COVID-19 impact at this moment. Thank you.

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

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Okay. There is a question from an investor and asking about -- I think probably confused of our 5G sub-6 gigahertz and millimeter wave and thought there is another CMOS replacement happened again. I think that it didn't happen before. We don't see that also that will happen again. And actually, the 5G frequency, I think the mainstream is still sub-6 gigahertz. And so far, the countrywide is majorly sub-6 gigahertz is the major frequency to be used.

And millimeter wave, of course, there is a couple also have some millimeter wave frequency, but still minor.

And so yes, in the 5G phone, probably in the future, you're going to see the 4G PA, 5G sub-6 gigahertz PA and millimeter wave PA, but it doesn't mean the millimeter wave is going to replace sub-6 gigahertz. Physically, it didn't replace before. It's not going to replace in the future as we understand. So that must be a misunderstanding. Thank you.

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Kyle Chen, WIN Semiconductors Corp. - CEO [5]

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Okay, I will answer the question about the ASP will be different for mid-end or low-end smartphone for the 5G. Okay. I think, first, WIN Semi is a foundry. So our wafer price is according to the technology and customer's wafer layout design. The most -- the higher the frequency, the complicate -- the more complicated about the layout, that will all become charged more for the wafer price. So no matter it's a high-end smartphone, it's a smartphone -- or high -- or a low-end smartphone, I think it's not really directly related to our wafer price. So it's not a correlation between the high-end smartphone or low-end smartphone to the wafer price.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [6]

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There is a question asking about the acceleration of the 5G infrastructure spending by China, if that's going to benefit to WIN Semi's infrastructure business or revenue?

Yes, I think we're doing global 5G infrastructure business, our customer cover worldwide. So any region for spending more in 5G infrastructure definitely will benefit WIN Semi infrastructure business because our customer no matter where they are, U.S., Asia, China or Japan, or European customers, they're also doing business worldwide. So yes, the answer is yes. Thank you.

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Kyle Chen, WIN Semiconductors Corp. - CEO [7]

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Okay. I think a lot of investment was really interesting about -- we have the outlook for the second half. I think at this moment, it's really -- have no visibility because of the COVID-19. So until right now, I think the second half for us, we just prepare all the operation site, things we can do and watch that very carefully to see how it will go.

And for the second quarter, I think for those 3 segments, I think cellular and infrastructure as compared to the other application segment, I think these 2 segments is proposed better than others. Thank you.

Okay. There's a question, want to know about the infrastructure, especially the base station PA content in this segment. I'm sorry, it's hard to really have a simple answer like the PA content in smartphone because there's a different kind of model and different kind of size of the base station in every country. It's not a standard equipment or the standard model to apply it all over the world. So every different country, they will have a different kind of size or model of the base station equipment and that will all bring a different number of the PA content in there. So it's really hard to apply to our wafer shipment to the PA content in the base station by unit or different kind of model. But I think if we check our past 3 years, we can see the base station is keeping increasing because of the 4G and even 5G installment equipment. So I think for the next few years, we're still seeing the infrastructure-related PA will have a good momentum in there. Thank you.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [8]

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Okay. It's almost 5:00. There are no further question on the table. So yes, 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.