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Edited Transcript of 3105.TWO earnings conference call or presentation 30-Jul-19 9:00am GMT

Q2 2019 WIN Semiconductors Corp Earnings Presentation

Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Tuesday, July 30, 2019 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

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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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The investor conference is about to begin. Good morning, and good evening, ladies and gentlemen. Welcome to WIN Semi's Results Webcast Conference for the second quarter of 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, Senior Vice President.

Today's call is organized into 3 sections. First of all, our Senior Vice President, Steve, will comment on the results for the second quarter and then provide brief guidance for the third quarter. Secondly, I will go through the financials in detail. And after that, we will open to the floor for Q&A. Please freely submit your question by clicking the 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 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. WIN Semi's revenue for the second quarter was TWD 4.5 billion, increasing by 23% quarter-on-quarter and decreasing by 3% year-on-year. Our better-than-expected second quarter sales growth was mainly due to Asia PA design houses increasing demand since the end of the first quarter, while this momentum continued to be strong during the second quarter. As new smartphones are being introduced into the market at third quarter, we have been also benefited from the client inventory build-up. Though our first half of 2019 sales were TWD 8.1 billion, decreasing around 10% year-on-year as a result of a low season lasting for the 3 consecutive quarters, our June sales growth turned positive year-on-year. To prepare for high season demand, our monthly wafer capacity has reached 36,000 by the end of second quarter. Our second quarter utilization rate increasing to 80% from 50% of the first quarter, and our second quarter gross margin was 34%, bottoming out from first quarter. Therefore, our operating margin was 20.6%, contributing our second quarter EPS, TWD 1.87.

Looking ahead to the second half of 2019, WIN Semi is continuing to benefit by our long-term strategy of collaborating with various clients. Though not much 5G smartphones have been launched year-to-date, we believe 5G demand is imminent as a result of international carriers launching their 5G service and more smartphone manufacturers are rolling out 5G models. WIN Semi developed 5G PA with multiple customers and shipped out small-volume during the first half of 2019. In the same period, we have seen 5G infrastructure demand becoming stronger, contributing not only our 5G infrastructure sales growth to reach more than 40% year-on-year but also to our confidence in 5G infrastructure demand during the second half of 2019.

Looking ahead to the third quarter of 2019, we expect revenue to increase around 30% quarter-on-quarter. We expect gross margin for the third quarter to be better than the level of second quarter.

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. Thank you. So it's my pleasure to present our financial results for the second quarter of 2019. Please refer to the page -- we're starting from the Page 4 in our presentation slide. In Page 4 presentation slide, we're starting from the revenue and the margin trend of the second quarter of 2019. The revenue was TWD 4,455 million (sic) [TWD 4,451 million]. It's -- the Q-o-Q is up 23%, but the Y-o-Y is down 3%. And if you still remember, back to 2018 from Q1 to Q4, and then the -- actually, Q2 of 2018 is the peak season of the revenue during the whole year. And actually, the first half 2018, first half is stronger than the second half. So we've been experiencing the sequential slow down for 3 quarters, picking up in Q2. Right now, we believe 2019, this year, we will come back to a normal seasonality, which is -- maybe we will see the second half will be stronger than the first half. It's totally opposite to '18.

And as to the gross margin, because of product mix, it is not impacting the gross margin that much in this quarter. So the higher utilization rate is driving the gross margin increase by 9 percentage points to around 34% and therefore, the operating margin increased by 12.3 percentage points to 20.6%. This is the revenue and the margin.

And please flip to the page 5. We talk about the earnings trend. The second quarter of 2019, the net income was TWD 774 million and Q-o-Q is up 413%, and Y-o-Y was down 15%. And in this quarter, EPS was TWD 1.87 and last quarter was TWD 0.41.

And now we can -- please flip to the next page, Page 6. We talk about free cash flow and the gearing trend. In this quarter 2019, Q2, we see that free cash flow was decreasing and -- compared to last quarter and that's because, in this quarter, we have higher -- the higher CapEx happened when compared to last quarter, including the Avago equipment moving, which is we agree each other to help customer. So that -- for that kind of activity was starting in the end of Q1, and the majority happened in Q2. As to the interest-bearing debt and the gearing ratio, it is still going lower -- going down and lower than the quarter about -- before. So the financial structure remains very healthy.

Then we can turn to the next page in Page 7, we talk about our product mix. Okay. Compared to before, in Q2 2019, you probably notice that the cellular PA was going up significantly. It's about 40% to 45% in the product mix. And something you should pay attention is infrastructure still remains between 25% and 30%. It did not going down, which is diluted -- I mean the percentage did not diluted by the growth of the total revenue. It means the infrastructure business still remains strong. And the rest of it is like Wi-Fi is 15% to 20%. And others, including 3D sensing, is 10% in Q2. So this is product mix.

Please flip to the next page. On Page 8, it talks about the Q3 guidance, I think Steve has mentioned it in his management comment. So I'm going to repeat, just repeat again. We expect Q3 2019 revenue to increase around 30% Q-o-Q. And we also expect Q3 2019 gross margin to be better than the level of Q2.

Okay. And now we can quickly go through the financial report starting from Page 10. Before we go through every figure, I have to emphasize that all of the results are under unaudited basis. Okay. The net revenue for Q2 was TWD 4,455 million (sic) TWD 4,451 million . And the Q-o-Q up 23%, but Y-o-Y still down 3%. If you look on the left-hand side, the Q2 of 2018, TWD 4,567 million. That was the peak season in the whole of 2018. And the gross profit become TWD 1,513 million. And so the gross margin was 34% compared to a year ago it was 32.4%. And it's also better than a quarter ago.

Operating expense was TWD 595 million. And so the OpEx ratio becomes 13%. The operating income is TWD 918 million. So the Q-on-Q is 206% and Y-o-Y, it's a negative 3%. In non-Op item, it's positive TWD 82 million. So the income before income tax is TWD 999 million and income tax expense is TWD 226 million. So the tax ratio is about 22.6%.

The net income is TWD 774 million. So Q-o-Q it is a growth of 400, I'm sorry, 413% and Y-o-Y still down around 15%. So therefore, the EPS for this quarter is TWD 1.87. The return on equity is around 12% in this quarter. And utilization rate is up to 80% from Q1, 50%. And depreciation is 842% (sic) [TWD 842 million] -- it is pretty close to a quarter ago. And CapEx. CapEx has almost doubled to the last quarter, become TWD 1,665 million (sic) [TWD 1,669 million]. And as I mentioned earlier, most of Avago, which is our important customer, Avago [is] moving -- it's what's happened in this quarter.

And that's Q3's income statement -- Q2 -- I'm sorry, Q2's income statement and now to flip to the next page, which is Page 11. We can easily take a look for the first half income statement. The revenue -- total revenue accumulated Q1 and Q2 was TWD 8,070 million. Actually, Y-o-Y, it's down around 11%. The gross profit was TWD 2,416 -- sorry, TWD 2,416 million. And so the gross margin was 29.9% for the first half. And operating expense was TWD 1,198 million. So the operating expense ratio is 15%. By the way, R&D is almost 7% around the whole operating expense. And operating income became TWD 1,218 million and the operating margin was 15.1%. The non-Op item was TWD 26 million expense, which is a loss. And the income before income tax is TWD 1,192. And so the income tax expense equals to TWD 267 million. So the net income for the first half is TWD 924 million. And therefore, the net margin is 11.5%.

EPS accumulated first half is TWD 2.28. And so the equivalent ROE for the first half is around 7% and approximately utilization for the first half is only 65%. Depreciation in total is TWD 16,000 -- I'm sorry, TWD 1,668 million. And the CapEx is TWD 2,489. So this is the first half income statement.

And page 12 is the non-op items in detail for your own reference. Okay.

Then for the Page 13, we talk about the balance sheet. The balance sheet up to the -- June 30, 2019. I pick a couple of numbers to talk about it. Cash and the cash equivalents are TWD 4,206 million. I think -- okay, the inventory. Inventory is higher. It's around TWD 4,438 million. I think that is due [in try] there is a more [retail] for the next quarter. The total assets is TWD 37,434 million. And the current liability is also a lot higher than the quarter ago, become TWD 6,287 million. That's because of the dividend payable that's almost every Q2. You will see that the current liability is higher than other quarters, but most of the reason is because of that.

So the long-term borrowing TWD 4,780 million. It's lower than the last quarter. So the total liability -- the debt ratio is the total liability over the total assets, becomes 31%. So the common stock a little bit more -- it's TWD 4,241 million. And so the total equity became TWD 25,867 million. And the book value, which is the book value per share, becomes TWD 60.66. And finally, the last one, current ratio is 175%. So it's remained healthy.

So that is the financial report. Okay. And now we begin the Q&A. So please submit your questions by clicking the question button on the webcast window right now.

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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. There is a question asking about the capacity. In the beginning of this year, we're starting from 32,000 wafer per month. And in the end of Q2, we went up to 36,000 for the preparation of the high season in Q3. And that's what we've done. And the second half, we're going -- we still have a little bit of the bottleneck, but not that much. And -- but still have to pay a lot of cap -- the deferred payment for the CapEx trend. So as to the next one, we'll have to wait until probably closer to the year-end to understand the demand in next year.

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

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Okay. The question want to know better about Q3 breakdown by segment, which was better or not.

I think as Joe just mentioned, actually, our infrastructure is keeping doing well. At the same time, I think, in Q3, [the major side] of the PA, Wi-Fi PA, even digital, is all doing well. So actually, we shared about the Q3. I think all the segments is doing well. That's why we have a very positive growth rate forecast.

I think there's several questions all asking us about end customer situation on a scenario, but I think as you know, we, as a foundry, we don't really have a direct relationship with handset makers, no major U.S. or even China or Korea. So sorry, I think it's hard for me to comment about the end handset maker situation. Sorry.

Okay. I think there is some question who wants to know about 5G stand-alone solution or the nonstand-alone solution -- difference to us.

But I think -- because right now WIN is in a very initial stage of 5G generation, so I think no matter stand-alone or nonstand-alone 5G, once they want to have support 5G in several things, then we all -- we will all benefit from both kinds of scenario because no matter stand-alone or nonstand-alone, it all means the more 5G base station was built, the more handset demand we can see.

Okay. I think there is a question wants to know more detail about the financial about the Q3 and also the ASP in Q3.

Okay. Yes. I think because of the growth momentum that we had foreseen, I suppose the utilization rate, that will be better than Q2. But ASP is a very complicated product mix because recently has not only have smartphone-related product but also have base station, radar and even a satellite. The margin and ASP was very big difference. So whether the ASP were better or not, we still need to wait until we have the final results.

And there is also the other question who wants to know about this millimeter-wave or the sub-6 gigahertz, which kind of PA we will benefit on the 5G smartphone?

Okay. I think first, I want to say that WIN Semi has all kind of technology support for [no matter] our customer wants the sub-6 gigahertz frequency technology support or a millimeter-wave technology support. So I think once the 5G smartphone was launched, WIN Semi definitely will have a better demand for that, but because we are not directly discussed at the back with handset makers, so it's hard for us to comment what kind of smartphone will do that.

Okay. There's a question about future capacity.

I think, as we -- I recall to you before, we -- right now, WIN Semi has 3 fabs. FAB A, FAB B, and FAB C. And FAB C right now is only using maybe around 50% to 60% of the building space. So we still have enough capacity, clean room capacity, for the future demand to be spent for the future 5G launch.

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

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Okay. There is a question asking about the data content increase between 4G and 5G mobile phone.

Actually, I should say that the answer will be all different every year, every single year. The reason why is because just take a look for the history of the past almost 10 years. LTE, it's not happened in 1 year or 2 years. And right now, probably only 2 or 3 countries have the 5G service, and not enough frequency band commercialized to support the 5G smartphone. And with more 5G service country-by-country for the next few years, the -- they will be creating more incentive to the smartphone maker to improve more frequency band, which is more 5G PA into a smartphone. So year-over-year, we will expect more 5G PA year-over-year from now on to the smartphone. So every year, the data answer will be -- the data value will be different. So up to where, nobody knows. 10 years from now, nobody knows what the 5G phone will look -- what it looks like.

And the customer -- another question asking the engagement of the question that the customer on the 5G.

I think we do have -- already have several customers develop 5G PA in our fab. And we also have a limited 5G PA shipment in the first half and especially the sub-6 gigahertz, we already have the solution to -- with the customers. So we believe with -- again, with more and more 5G phones in the market, there will be -- also have more 5G content or exposure in the smartphone and also in WIN Semi.

And the -- another question asking about mobile shipment for millimeter-wave phone.

I think because it is still early to say. The -- some -- I know there are some other investor would like to know do we have the millimeter-wave solution for smartphone. Actually, we do have it. And -- but for the market-wise, the -- I think sub-6 gigahertz is still more mature than the millimeter-wave. So there still have -- it's still early stage for millimeter-wave. And definitely, for WIN Semi, I think cadmium arsenide solutions still have the advantage. And also our -- it's our advantage. We -- but we don't really know which customer or what kind of -- they have -- different customer have a different kind of solution with WIN Semi. So it still is early to say. And just so let's see what happens. It's still, again, it's still early stage.

Okay. There are a couple of questions asking about the next few years' growth driver or growth momentum.

I will put it all together, and I think we keep emphasizing that for WIN Semi growth driver from the near-term to the long term will be -- first one is 5G; next one will be 3D sensing, which is the optical business. We do believe that because 2019 with 5G just the beginning, and there is still -- have a long way to go and still -- as I mentioned that still only have -- only few or probably 2 countries commercialized the 5G service in limited area. So with more and more countries or telecom to implement the 5G Service, will driving the -- will be driving -- also driving the smartphone or any kind of handheld devices to provide their solution. And also the 5G, the 5G PA, drive the 5G PA demand -- before that infrastructure, that's definitely -- have to -- the momentum also will be happening.

Actually, we already see that the infra -- 5G infrastructure has been stronger for the past few quarters. And we believe that it's related to the 5G service. And for infrastructure -- for the 3D sensing, we also believe that with -- right now, the major momentum or demand still coming from one single brand name, smartphone. And for -- there will be more and more application and more and more smartphone makers will adopt this kind of -- this kind of function into their smartphone, no matter the front side or the back side. And not only to improve the camera, but also any kind of future application like AR/VR. So that's a major momentum. Something also related to 5G is like -- the final target for the 5G Service actually not only supported -- supporting to the -- your handheld devices, which is smartphones, but also IoT, also autonomous car, a lot of massive connectivity, lower latency. So the -- like we -- we actually have the business newly come from aerospace, which is a low orbit or middle earth orbit from the sky, which is provide Internet service, the -- so that kind of service -- that kind of business is just the beginning. And yes, this is -- a lot of growth momentum ahead.

Okay. There is a question asking about our share in the 3D sensing area.

And actually, we are a foundry company. And we're supporting every single customer. The -- I think, right now, most of the case, we are 100%, especially the major customer in 3D sensing, we are 100% sure. As to our customers, then that will be depending on their business. So -- but for us, I think, as to the major smartphone application, we -- our customer still having the major share and we still enjoy the better business. This is the third generation or the third year, and I think the high season for 3D sensing is coming in Q3. So that will be better than the first half, Q1 and Q2, anyway.

Okay. The -- there is some question about the capacity next year. And also the CapEx for the second half. First of all, the next year's CapEx hasn't been decided yet. If the utilization is getting very tight and getting very busy, then most likely, yes, there will be another CapEx expansion trend for next year. But the size hasn't been decided yet, have to wait until almost the end of this year. And as to the CapEx for the second year, although we have been reached 36,000 right now, but most of the -- still have a lot of payment hasn't been paid yet. And then also last year we deferred -- we delayed the paying of the -- [the process] paying and also deferred a lot of payment, which has been paid in the first half. And then the major CapEx for the second half is still coming from the existing 36,000. So that is what happened.

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Shun-Ping Chen, WIN Semiconductors Corp. - Senior VP & Director [4]

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Okay. I think there is some question, there is some concern about do we have some demands because of the overbuilt capacity from some certain regions or some certain handset maker.

I think, first, we need to say is we don't directly discuss demand with our end customers. All wafer was ordered by the -- most of it is by the design house. So I think in Asia, since Q1 to Q2 and Q3, I think the demand is still keeping very strong, no matter which country in Asia. I think most of the design house in Asia give WIN Semi -- the demand is better and better quarter-by-quarter. Even going to Q3, we don't see any kind of big difference with that. So first, we -- it's hard for WIN Semi to break down or to know all the wafer we ship out is for the inventory overview or for a current demand, but because PA is a very tailor-made product, every handset model and every handset maker has a different kind of demand and spec. So usually, it's hard to see customer has a very big inventory for the smartphone PA. Because last year you prepare for this year, maybe cannot use in second year, new generation models. So it's a very high-risk to build too much inventory for that.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [5]

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Now I am going to answer the last 1 question. There is one investor wondering -- the smartphone -- worry about the smartphone shipment outlook. It's kind of weak this year. And I mean the whole market, I assume. And then wondering why we guide a strong Q3.

I think you guys probably know that we are in the supply chain of the U.S. major smartphone makers supply chain and the -- almost the end of the Q2 most of the related customers, it's already triggered their inventory pool. And the major wafer shipments are going to happen in Q3. And then also the momentum coming from the Asia fabless company -- fabless PA design house, which is bringing us good business growth in the first half, still continues in the Q3. So that's the reason why I think WIN Semi have several -- we have a diversified customer base and also have several momentum with us.

So okay, this is the last question I have. So if there are no -- it's time now. 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.