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

Q3 2019 WIN Semiconductors Corp Earnings Presentation

Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of WIN Semiconductors Corp earnings conference call or presentation Friday, October 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. - GM of Corporate Administration & 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 Results Webcast Conference for the Third Quarter 2019. My name is Joe Tsen, the spokesman and the Associate Vice President of Finance of WIN Semi. Joining me on today's call is Steve Chen, the General Manager of Corporate and Administration of WIN Semi.

Today's call is organized into 3 sections. First of all, Steve will comment on the results for the third quarter and provide brief guidance for the fourth quarter. Secondly, I will go through the financial details. 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 Mr. Steve Chen, the General Manager of Corporate Administration of WIN Semi.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [2]

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Thank you, Joe, and welcome, everyone. We are pleased to see that our financial results of the third quarter of 2019 have once again set several historical records. Revenue for the third quarter was

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[TWD 6.40 billion] increasing by 44% quarter-on-quarter and 58% year-on-year, respectively, reaching another record high after the fourth quarter of 2017. Revenue for the first 3 quarters was TWD 14.47 billion, increasing by 11% year-on-year.

Our new capacity, which became ready at the end of the second quarter, was able to fulfill the strong customer demand in the third quarter in a timely manner. Given an increasing capacity utilization rate, our gross margin increased to a record high level of 42.1%, and operating margin of 31.4% also reached the second highest level in our company's history. Our net profit and EPS reached an unprecedented level of TWD 1.64 billion and TWD 3.9, respectively.

Given the third quarter is the traditional strong season for the smartphones, our overall revenue has started to reflect the demand for the stronger season since July and reached a record high for a single month for the 3 consecutive months. Compared to previous quarters, the third quarter shipment for the cellular, WiFi and VCSEL, which applied to the smartphones, all delivered significant growth. In addition, even the demand for infrastructure, which typically has less clear seasonality, also showed continued growth momentum for the first half, leading to tight capacity again.

In response to the end of demand of 5G next year, we have recently announced that we will initiate a new round of capacity expansion, with monthly capacity to be expanded from currently 36,000 wafers to 41,000. New capacity is expected to come online in the second quarter of next year in order to prepare for the demand in the peak season.

2019 is the first year of 5G. Although the current 5G network is still not widely available, telecom operators and smartphone manufacturers in all countries are all geared up, expecting to take the lead. We are pleased that -- to see the 5G contribution, over 10% of our cellular PA revenue currently. And I firmly believe that with the prevalence of the 5G communication in the next years, 5G will become our mid-to-long term growth driver.

Looking ahead to the fourth quarter of 2019, given continued strong customer demand, we expect revenue to grow by mid-single digits quarter-on-quarter and for gross margin to be around the same level with third quarter of 2019. Meanwhile, we expect that revenue for the full year of 2019 to be increased by over 20% year-on-year, outperforming the expected growth 0.1% for the Taiwan semiconductor industry and the expected decline of 13.1% (sic) for the global semiconductor industry.

I will turn the call back over to Joe. Thanks.

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

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Okay. It's our pleasure to present our financial results for the third quarter of 2019. So I will start to take a look at our presentation slides. Please flip to page starting from Page 4.

On Page 4, we talk about revenue and margin trend. So everybody knows that the traditional -- Q3 is a traditional smartphone high season for our industry. We have -- we were experiencing a strong Q3 for 2019 this year. And the Q3 revenue is TWD 6.4 billion, reached a record high. The Q-o-Q is up 44%, and the Y-o-Y is up 58%. And some of you may hear what I mentioned before that for the 2019, we expect would be a traditional -- a tradition seasonality as we -- as our understanding and -- which is the second half would be stronger than the first half. It's totally opposite than last year.

And now as we can see that Q3 is strong. So because of the high utilization rate in Q3, which is 95% of utilization rate, our gross margin was -- it increased to 42.1%, which is increased by 8.1 percentage points Q-o-Q. And this gross margin is a record high for WIN Semi. And while the operating margin become 31.4%, which is another -- this is the second highest level for the -- for WIN Semi for single quarter, the margin increase -- grow -- the operating margin increased by 10.8 percentage points Q-o-Q. So this is revenue and the margin.

And next page, we talk about the earnings trend. Please flip to Page 5. And because of the performance of the gross margin, the record high gross margin and the second highest of the operating margin, so the net profit in Q3, it's also reached a record high. Net profit become TWD 1.637 million. And the Q-o-Q is up 112%, and the Y-o-Y is also up 135%. And EPS comes to TWD 3.9, and yes, it's also a record high for a single quarter.

Okay. Now we can flip to the Page 6. Page 6 talk about the free cash flow and gearing trend. And this as you can see that the slide, the free cash flow, it's -- was increasing because of the higher net profit. And the interest-bearing debt and gearing ratio is also going up a little bit compared to last quarter. As you can see that normally the gearing and interest bearing debt were going up in Q3 in the past several years, if you can -- but the -- still -- the financial structure still remained healthy.

Okay. The -- now we can -- next, we're going to talk about the product mix. Please flip to the Page 7. Okay. The Page 7, the product mix -- okay, in Q3, our product mix, so you can see that. The cellular is between 35% and 40%. The -- it's going down from 40% to 45% last quarter. And the WiFi, it went up to 20% -- between 20% and 25%, and from the Q2 of between 15% and 20%. And infrastructure is 20 -- between 20% and 25%. And others, including the VCSEL, the majority is the VCSEL. It becomes 16%, up from 10% last quarter. So from this product mix, we can conclude that the total revenue is up 44% Q-on-Q. And -- but the [rating] of each sector the strongest momentum -- I mean, the strongest growth rate, the first is coming from VCSEL, and the second one is WiFi, and then cellular, and then infra. So this is our product mix, what it looks like in Q3.

Okay. And now, we can flip to the Page 8. Page 8 talk about the Q4 guidance. Actually, Steve already mentioned it, and I'm going to repeat again. We expect Q4 2019 revenue to grow by mid-single digits quarter-on-quarter. And we expect Q4 2019 gross margin to be around the same level as Q3 2019.

Okay. So then we can quickly go through the financials in detail, a couple report including income statement and balance sheet. Please flip to the Page 10. I will talk about our Q3 income statement. I have to remind you that the figures we present is under the unaudited basis. The final result has to be based on the CPA's report.

Okay. The revenue in Q3 2019 is TWD 6.404 million. It's -- Q-o-Q is up 44% and Y-o-Y up 58%, and this is a record high.

And gross profit's TWD 2.693 million. And gross margin become 42.1%, this is also a record high. The gross margin Q-o-Q is up 8.1 percentage points, and Y-o-Y is up 15.5 percentage points.

The operating expenses is TWD 681 million. So the operating ratio -- operating expense ratio become equivalent to 11%.

Operating income comes to TWD 2.012 million. The Q-o-Q is up 119%, and Y-o-Y is up -- also up 30 -- 369%. The operating margin becomes 31.4%. This is the second highest of the record. The Q-o-Q is up 10.8 percentage points, and Y-o-Y is up 20.8 percentage points.

The nonop item is negative. It's a loss of TWD 29 million. The detail is in Page 12. I will explain a little bit about this.

The income before income tax is $1.983 million. And the income tax expense is $346 million. So net income become TWD 1.637 million, which is also a record high. The Q-o-Q is up 112%, and Y-o-Y is up 135%.

Net margin become 25.6%, and EPS become 3.9 -- TWD 3.90. The -- this is also a record high. The -- compared to a year -- last quarter is $1.87, and then a year ago is $1.70.

The equivalent ROE is 24%. And the approximately utilization rate is 95%. Actually, we are facing a very high utilization rate right now.

Depreciation expenses are TWD 809 million. And the CapEx become TWD 1.116 million. Okay. This is Q3.

And the accumulated Q1 to Q3 in Page 11, the net -- the revenue become TWD 14.474 billion. Y-o-Y is up 11%.

And the gross profit become TWD 5.109 million. And the gross margin for the first 3 quarters is 35.3%, and compared to the same period last year is up 4.4 percentage points.

And operating expense become TWD 1.879 million and operating expense ratio is 13%. And there -- R&D is around 6% in total.

And operating income becomes $3.230 million. Its -- Y-o-Y it's up 34%. OP margin become 22.3%. Y-o-Y is up 3.8 percentage points.

The nonop item, nonop, it's a loss of TWD 55 million. And income before income tax is $3.175 million, and income tax expense is $613 million.

So the net income after tax is TWD 2.561 million, and the Y-o-Y, it grows by 10%. Net margin is 17.7%. So therefore, the EPS for the Q1 -- accumulated Q1 to Q3 is TWD 6.18.

So this -- and the ROE for the first 3 quarters, its ROE is 13%. And utilization rate accumulated the first 3 quarters is 75%, pretty much the same as last year.

And the depreciation expense become $2.477 million and -- for the first 3 quarters. And we expect the whole year of 2019's depreciation expense Y-o-Y will increase by less than 10%.

And the CapEx is TWD 3.605 million for accumulated 3 quarters. And we also expect the whole year of 2019 will be around the same level of 2018. Okay. This is the income statement for accumulated 3 quarters.

Okay. The nonop item in Page 12, okay normally I will leave this page for your own reference. But this time, I would -- I'm going to explain one of the item, which is again a loss. It's a loss on disposal of property, plant and the equipment. In this quarter, it's a loss of about TWD 288 million. That's because we acquired all the manufacturing equipment from our large customer, which is Avago's all HBT production line in the first half of this year. And into the installation and the mass production for the past several months, there are some unserviceable machines, which is disposed. And then so the loss was mainly due to the disposal of some unserviceable machines in the Q3 of 2019. And we also -- we still -- we also expect that Q4 may still have such a loss, slightly over -- a little over TWD 100 million because of that. Okay. So yes, this is Page 12.

So my last page will be the Page 13, the balance sheet. Okay. I'm going to highlight a couple major item. The total asset is about TWD 40.580 billion. And the cash and the cash equivalent is around -- is almost $5 billion. And the total liability is about TWD 12.024 billion. So the current ratio is about -- I'm sorry, the debt ratio is about 30%, which is pretty much very close to the past several quarters.

And the -- okay, the common stock remained the same, it's TWD 4.241 billion. And the total equity become $28.557 billion. And the equity per share, which is the book value per share, it's TWD 67.04. It's up from $60.66.

And so the rest of it -- our current ratio is a lot better from the last quarter, become 253%.

Okay. This is my presentation. And so okay, now we -- well, we begin the Q&A. So please submit your question by clicking the question button on the webcast window. And then -- yes, we're going to start it 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's a question asking about, "I want to make sure the 5G PA contribution in -- about our total cellular PAs."

I think we have mentioned it on the management comment that we estimate that currently with our 5G PA it's about 10% of our cellular PA. So yes, we -- that's the -- we see that our second half become stronger than the first half. Obviously, the (sic) more 5G mobile phone than the first half, and also we see -- should be a stronger demand in the future. So yes, that's a very good news.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [2]

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Okay. There's a question, "I want to know about the VCSEL high growth in this quarter."

I think the reason is you -- typically, our Q3 is peak season of the smartphone. So technically VCSEL is one of our applications which will enter in the smartphone. So I think this comes with the same kind of momentum with the smartphone.

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

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [4]

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Okay. This is a question about the Q1 seasonality.

Frankly speaking, as you know that our visibility is just around one month. So for the Q1 next year, I think it's still hard to tell right now for all the details. Yes. So I think we still need to have some weeks, even around like 2 months for us to collect more information about that. Yes.

Okay. The question, "I want to know about more detail about the aerospace application."

Okay. I think yes [similarly] we have both [sides huge economic] solution. Not -- I think the [Quang] receiver on the satellites, we [now] have technology that can support with that kind of application. It just depends on the customer design or customer focusing target.

Okay. It's a question want to discuss about 5G profit impact of WIN Semi.

I think it will come from both applications. No matter infrastructure application or standard PA application. I think going forward to next year, definitely that will become more important to us, no matter cellular PA or infrastructure.

Okay. It's a question, "I want to know our new 5k capacity was locate to which kind of technology?"

I think I need to let you know that in most of the case, our wafer process equipment can flexible use for all -- most of the technology of our wireless communications. No matter it's infrastructure, cellular or even WiFi, I think in the wafer process, most of the equipment is the same result. So it's -- the total 5k capacity equipment, it's not special for one application or that. It's for the total demand for all our applications.

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

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Okay. I'm not very sure. The question, it -- there is a question asking about the main driver behind optical.

I think the -- I think these questions should be related to -- because we have in Q3's product mix, we have the strongest VCSEL growth. So probably the question is asking about that.

Well, the major reason is for Q-o-Q basis, you can look back in the Q2, actually, the base is lower, which is the VCSEL business is weaker in Q2. So the Q3 is a traditional smartphone high season, especially at the high-end smartphone. So the momentum, everything related to Tier 1 high-end smartphone, it's all -- are growing. And the -- it's -- the growth rate come from the lower base in the quarter, one quarter before. Yes, that's the major reason.

Okay. There is a question asking about why the Q3, the VCSEL grow so much on Y-o-Y basis.

That's because again the -- if you take a look on the 2018 seasonality, you will find out the first half is stronger, and the second half is weaker. And this year, 2019 come back to normal seasonality, which is the second half is stronger, the first half is weaker. So the -- again the -- and Q3 2018 have a lower base and -- but there is a strong rebound quarter-on-quarter from 2019's Q2 to Q3. So of course, the growth rate for Y-o-Y basis, it's the growth -- growth rate -- growth is strong. That's the reason why.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [6]

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Okay. I think it's a question, "I want to know about what's the difference with 5G smartphone and the 4G smartphone, especially for the PA."

I think the biggest difference for 5G PA, they need to add it more stand-alone 5G PA instead of the original 4G PA, yes. And the number of the PA they will install in 5G PA I think now will depend on how many countries they want to use for that model. So it could be 1, 2 or even more, that depends.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [7]

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Okay. There is a question asked about the -- 4Q's margin guidance.

I -- well, I think we have mentioned that in our presentation and management comment. I'm going to repeat again. The margin, the margin for our Q4 will be at the same level of the Q3 2019. Yes, that's our guidance. Thank you.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [8]

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Okay. There's a question, "I want to know why we have a very strong growth momentum in this in Q3 for the PA -- cellular PA."

Okay. I think first definitely for this whole year, our Asia customer is all doing very well. And especially this year, I think traditionally is the new -- a lot of new model launch in this quarter. So definitely it will bring more growth momentum for all our customers. So it's not -- so this strong growth momentum is not coming from any single one customer. I think all our cellular PA customer is -- have a very strong performance in this quarter.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [9]

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Okay. There is an investor asking about the margin among the different segment and our product mix.

I think our infrastructure always enjoys the best margin. And the second one will be the VCSEL. And WiFi, and then WiFi is still a little bit better than s cellular PA because cellular PA consume the -- a lot of volume, I mean, wafer. So yes, the -- it's the -- we can say that the best one is the infrastructure, the lowest one will be the cellular. Thank you.

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Shun-Ping Chen, WIN Semiconductors Corp. - GM of Corporate Administration & Director [10]

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Okay. There is a question, "I want to know which segment has the biggest gross margin improvement?"

Okay. I think for this quarter because of the evaluation rate is very, very high, so definitely that will improving our gross margin a lot. And because as I say, actually all wafer process equipment is shared for all segment process. So its -- at least iteration rate improvement will help all segments, not any single one. So you can say all the segment margin in this quarter was improved.

Okay. I think it's several question. "I want to know about some information of our single customer."

I'm sorry, it's due to the confidential duration, I think I cannot make any comment with single customer's demand or status. Thanks.

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Joe Tsen, WIN Semiconductors Corp. - Head of Finance & Associate VP - Finance Division [11]

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Okay. There are no further questions right now. So yes, thank you. Thank you for your participation in WIN Semi's conference. And there will be a webcast replay within hours. Please visit www.winfoundry.com under the Investor Relationship section. You may now disconnect the line and goodbye. Thank you so much. Bye-bye.