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Edited Transcript of 8150.TW earnings conference call or presentation 10-May-18 12:00pm GMT

Q1 2018 ChipMOS Technologies Inc Earnings Call

Baoshan May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of ChipMOS Technologies Inc earnings conference call or presentation Thursday, May 10, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Pasquale

* Shih-Jye Cheng

ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President

* Silvia Su

ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt.

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Conference Call Participants

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* David Wayne Haberle

Susquehanna Financial Group, LLLP, Research Division - Associate

* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the ChipMOS First Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, and a replay can be accessed by dialing (412) 317-6671 and using ID #13679178.

I'll now turn the conference over to David Pasquale of Global IR Partners.

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David Pasquale, [2]

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Thank you, operator. Welcome everyone to ChipMOS' First Quarter 2018 Results Conference Call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; and Ms. Silvia Su, Senior Director of Finance and Accounting Management Center. S.J. will review business highlights and provide color on the operating environment. Silvia will then review the company's key financial results. We are also joined today on the call today by Mr. Lafair Cho, Senior Executive Vice President, COO and spokesperson.

All company executives will participate in the Q&A session after management's formal remarks. If you have not yet received a copy of today's results release, please email Global IR Partners at imos@globalirpartners.com, or you can get a copy of the release off of ChipMOS' website at www.chipmos.com.

As with prior quarters, we hosted a call in Mandarin after the close of the Taiwan Stock Market a few hours ago. This is part of the company's ongoing efforts to broaden investor and analyst following in the domestic Asia market, given the full Taiwan listing. The prepared comments that management will cover here are the same as those covered on the earlier call. The second call is intended to give the company's English-speaking investors the same opportunity to both hear directly from management and to ask questions pertaining to results and the operating environment.

With that said, we must also make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended; and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the company's most recent annual report on Form 20-F, which was filed with the U.S. Securities and Exchange Commission and in the company's other filings with the SEC.

At this time, I would like to now turn the call over to the company's Chairman and President, Mr. S.J. Cheng. Please go ahead, sir.

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [3]

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Yes. Thank you, David. Welcome everyone to our first quarter of 2018 conference call. Hopefully, you all had time to review our earnings release.

The key points for Q1 are, first, we see Q1 as normal seasonal low. That was again the case in 2018. Coming off the normal Q1 seasonal low, we expect quarter-over-quarter revenue growth in Q2, Q3 and Q4 2018. We are confident based on the demand level and market expectations. And thus we report a 20.9% increase in revenue for March 2018 compared to February 2018.

Second, gross margin was lower in Q1 on the lower revenue and lower utilization rate in Q1 2018. We expect gross margin will improve as we move through the years.

Third, net profit was lower in Q1 versus Q4, representing a similar low revenue and gross margin along with a higher foreign exchange loss at USD 4.3 million, that probably was lower compared to Q1 2017 because we recognized a USD 65.6 million benefit to the net profit last year from our equity interest transfer to Tsinghua Unigroup led strategic investor. This did not repeat in 2018.

Four, on the positive side, we started to increase price most probably in our COF and [COD] product and gold bumping in May. Much of the demand is coming from the move to full-screen smartphone model. This reflects our substantial market-leading leadership position and favorable business mix.

Five, also on the positive side, as you know, we are repurchasing some equipment from ChipMOS Shanghai. That [purchased] COF equipment is going to be online, giving us hedging capacity to meet strong customer demand.

Finally, we continue to execute on our [growth strength] and returned capital to shareholder. We announced a dividend distribution and capital reduction distribution totaling USD $1.24 per ADS. Both distribution are expected in the second half of 2018.

Overall, we feel confident about ChipMOS' business position, and we expect headwinds from 2017 will have less of the impact in 2018. Our business is strong so far in 2018 with healthy demand indicated. Importantly, our business is diversified. We are not relying upon one specific customer or one specific market for our success. For example, we are building up our revenue contribution in the industry and the automobile market. The revenue from automobile and industry market grossed in the higher single digit in Q1 and represented around 9% of our total first quarter revenue. And TDDI product also grew single-digit level in Q1 and represent more than 7% of our total first quarter revenue.

We are continuing to work on improving our capital efficiency. [At one stage], we are working to refinance existing [cumulative] loans at more favorable terms. This will potentially include secured 5 years' credit line for around USD 400 million for syndicated of several Taiwan Bank in middle of May. The new syndicated credit line will help as we plan our future expansion and capacity strategy to meet [industry strength] and customer demand in high growth market to maintain ChipMOS' leadership position.

Update of ChipMOS Shanghai. The second [measurement tranche] was complete in Q1 2018. As everyone on the call knows, we are not able to comment for Unigroup. We expect a continual ramp moving forward based on the current and projected demand labor with the focus on memory over the near term. As the test and the assembly provider for Unigroup, ChipMOS Shanghai tend to benefit with higher volume starting this year and had biggest competitive advantages in a major [head], starting serving the domestic China market. We expect this to be a catalyst for shareholder value growth in 2018 and beyond as the domestic China market continues to evolve and grow at a fast path.

As we look forward into second quarter of 2018, Q1 normally represents a seasonal low period for the year, following by the revenue growth in Q2, Q3 and Q4. As I noted earlier, we are already seeing positive signs, including March over February report revenue and led by strong demand from Niche DRAM and 12-inch gold bumping for TDDI product. We are encouraged by strong demand for our [low price] business. [Resulting our low price] testing capacity to be hopefully utilized. We expect to see the revenue growth quarter-over-quarter through the 2018 with improvement in the gross margin through the year. We expect the headwind seen in 2017 was solved in 2018, met by our customers' business and geography diversification enter into high-growth market.

According to the industry and customer feedback, we expect to benefit from strong demand of Niche DRAM and an increased revenue contribution from TDDI, OLED and 12-inch fine pitch COF for the new smartphone model featuring narrow bezel and full-screen panel.

Finally, we continue to work with our partner and then are now well positioned in the optical sensor-related market. This is a developing area and that we are moving forward conservatively. We are positive, however, because we already have some projects in production with the potential to capture broader market opportunity in the second half of 2018.

With that, I would like to turn the call over to Ms. Silvia Su, our Senior Director of Financial and Accounting, to review the first quarter of 2018 financial results. Silvia, please go ahead.

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Silvia Su, ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt. [4]

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Thank you, S.J. All dollar amounts cited in our presentation are in US dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rate of TWD 29.1 against USD 1 as of March 30, 2018. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards.

For the first quarter of 2018, total revenue was USD 137.8 million. Net earnings for the first quarter of 2018 were $0.02 per diluted ADS compared to $0.13 per diluted ADS for Q4 of 2017. This represents net profit of USD 0.8 million and $0.01 per basic and $0.01 per diluted common share compared to net profit of USD 5.6 million and $0.01 per basic and $0.01 per diluted common share in the fourth quarter of 2017. As S.J. mentioned, net profit was lower compared to Q4 because Q1 is the low period.

Net profit was lower compared to Q1 2017 because we recognized a USD 65.6 million benefit to net profit last year from equity interest transfer to Tsinghua Unigroup led strategic investors.

Gross margin was lower in Q1. This is due to the lower revenue and lower international rates in Q1 2018.

Our operating expenses in Q1 were USD 12.4 million or 9% of our Q1 revenue compared to USD 12.7 million or 8.4% of our revenue in Q4 of 2017.

Other operating income in Q1 was USD 1.1 million. Net operating expenses in Q1 were USD 7.1 million, including foreign exchange loss of approximately USD 4.3 million. Income tax expense for Q1 was $0.9 million.

On a segment basis, revenue breakdown of first quarter was 28.8% in testing, 26.5% in assembly, 27.1% in LCD driver business and 17.6% in bumping.

We spent USD 43.4 million on CapEx in Q1 compared to USD 36.2 million for our fourth quarter 2017. The breakdown of CapEx for the first quarter was 29.3% for testing, 8.1% for assembly, 55% for LCD driver and 7.6% for bumping capacity. As you can see, the majority of our CapEx was invested in expanding our LCD driver capacity, which is mainly for DDIC tests and 12-inch COF capacity and to meet current and expected customer demand levels.

Depreciation and amortization expenses were USD 27.9 million or approximately 20.2% of revenue in the first quarter.

EBITDA for Q1 was USD 36.7 million or 26.6% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit.

As of March 31, 2018, our balance of cash and cash equivalents was USD 229.8 million. The decrease from Q4 primarily reflect our second and final investments into ChipMOS Shanghai.

Overall, free cash flow in Q1 was negative USD 8.7 million, which was calculated by adding depreciation, amortization, interest income together with operating profit and then subtracting CapEx, interest expense, income tax expense and dividends from the sum.

As of March 31, 2018, our net debt balance was USD 138.6 million, which resulted in a net debt to equity ratio of 21.7%. While EBITDA, free cash flow and net debt to equity ratio are not defined by Generally Accepted Accounting Principles, we believe those are helpful indicators to measure our financial strength.

Accounts receivable turnover days in Q1 were 88 days compared to 84 days in Q4 of 2017. Inventory turnover days were 50 days in Q1 compared to 48 days in Q4 of 2017. As of April 30, 2018, the company's outstanding ADS number was approximately 8 million units, which represents around 18.72% of the company's outstanding common shares.

Operator, that concludes our formal remarks. We can now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Richard Shannon with Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I see a lot of interesting things going on and to ask about here. I guess, my first question is, I think, if I recall correctly, this is the first time you've called out your industrial and automotive exposure, which I think you quantified as something like 7% or 9% of sales in the first quarter. Two questions on that. Wondering what the products are that you're exposed there? I would assume it's mostly a Niche DRAM or NOR flash, but just want to get a confirmation there. And what do see as the growth dynamics of that business going over the next year or even longer?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [3]

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Yes. This is S.J., Richard, let me answer your question like this way. Things right now, we have [good position] in the Niche DRAM and also had a very solid product for NOR flash. And also had a 2D NAND flash. Those customers in order to get into the better profit, so they are pretty aggressive to increase the market penetration into the automobile. In the meanwhile, the automobile market also needs high-quality service and the environment and also engineering capability, which is our expertise in assembly and testing area. And [as announced], it represents around total of 9% of our revenue. I think we -- our target is going to continue to increase this percentage quarter-over-quarter. We hope end of this year, we can increase to around 15% to 20% of our total revenue.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Okay. Excellent. A follow-up on the comments posted on your prepared remarks as well as the press release regarding price increases for a few different products as you get into the second half of the year. Wondering if you can describe the level of increases and how should we think about your gross margins as we exit the year? Obviously, we're interested as much just -- not on just on the price increase, but also any thoughts on the foreign exchange changes that might be affected as well over that time period?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [5]

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Yes. Regarding the foreign exchange impact and the benefit, maybe Silvia, you can answer for it. Regarding the price increase, I guess, let me explain to you. Since I want the product -- LCD [product growth in] TDDI, since the function is getting completed and so may need a longer testing time compared with the standard LCD driver, so they do need a longer testing time. So it also help us to increase the capacity. And since right now, capacity is very tightened and so we negotiate with the customer to increase the pricing for this one, this first. The second is, as you know, right now more and more smartphone, high-end smartphone, especially for full-screen smartphone, the LCD drivers go to [broad COD] into COF because of the bezel in the edge. So there's your main user COF. They also need a longer testing time and fine pitch COF capacity, and this is pretty tightened. And also output is -- needed more accuracy, so there in fact [efficiency]. So after the negotiation with our customer, so we start to increase the price for the fine pitch COF and also normal COF. And this will execute starting from beginning of the May, so which will be [continuing] the result for the second quarter and also second half of this year.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. S.J., any way that you can help us think about where this can help your gross margins go by the end of the year?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [7]

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Exactly.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Is there any way you can quantify what that might be or give us a range or anything like that?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [9]

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I think for the Q2, we already see a very good recovery of our gross margins with...

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Silvia Su, ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt. [10]

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I think our gross margin in the second half, we can go back to the Q4 2017 level.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Okay. That is helpful. Maybe one last question for me and I'll jump out of line. S.J., I think in your prepared remarks, you talked about Unigroup's expansion into the NAND market and your expectation of working with them. Wondering if you can give us a sense of the scale of that potential business in 2019? I know it's looking a little bit far out, but given the scale of what those guys may be doing, it seems like any notable allocations you could get a fairly material size of business from them. So wondering if you can characterize how big that can be?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [12]

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Richard, let me answer your question by this way. I think since right now the relationship between Taiwan and China is pretty sensitive and [also due to these] issues. So actually, we cannot comment too much for Unigroup. I said roughly that you know that we have enough financial proceeds for the future expansion. And we spent and invest in special forecast and which is pretty firm because all our orders are coming from Unigroup.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Okay. I guess, certainly understandable.

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [14]

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Yes. And I think that starting from this year, especially for second half, we can report encouraging revenue growth in this area. And next year, I think that once the new wave are coming out, it will significantly improve and also help to increase the capacity and the revenue growth in 2019.

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Operator [15]

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(Operator Instructions) The next question is from the line of David Haberle with Susquehanna.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [16]

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As we enter into kind of 2Q '18 here, maybe you could provide us with an update of where you're at with your largest DRAM customer? Are all of those revenue headwinds behind us at this point? And is that customer kind of a mid- to high single digit customer for you in 1Q '18?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [17]

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Yes. Just let me explain to you. Since right now as discussed, they will occupy around 7% to 8% of our total revenue and are pretty stable right now, because most of them are automobile and are industry aggregating customers. So they are pretty stable. In the meanwhile, recently we also can maintain this level and maybe we can increase a little bit.

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [18]

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Great to hear that headwind is behind you here. My second question would be, I guess, in the press release, you guys had mentioned like the first quarter of 2018 had benefited from demand growth in cryptocurrency applications. Maybe you can just give us some color on what you're doing in cryptocurrency as it's related to NOR flash? And then was that growth quarter-over-quarter that you referenced in 1Q '18, was that quarter-over-quarter from 4Q '17?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [19]

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Can you repeat your question again, David?

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [20]

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Yes. It's related to cryptocurrencies. You highlighted it in the press release and you said that there was growth in the first quarter of 2018. Could you add some color around what you're providing for cryptocurrency applications? Is this a NOR flash product?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [21]

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Actually, this -- you mean, while revenue going to grow quarter-over-quarter, what is the major contribution from this growth? Am I correct?

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David Wayne Haberle, Susquehanna Financial Group, LLLP, Research Division - Associate [22]

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Yes.

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [23]

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Okay. First one is LCD driver was a more, bigger driving force for us. That's based on the fine pitch COF. The application is for full-screen smartphone and also the fine pitch COF for high-performance TV and then also TDDI product, that being LCD driver side. On the other hand, Niche DRAM is pretty stable. We also increased some testing capacities for that. And in the meanwhile, they also can absorb some idle capacity, which left from our previously biggest DRAM customer. And [so one] is NOR flash and then 2D NAND flash is still pretty strong. Our existing capacity already is fully utilized for more than one year. And so we are going to invest on more capacity for that. That will be the key driving force for the whole year for 2018.

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Operator [24]

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(Operator Instructions) Our next question is from the line of [Vipul Sarkar] with [Flash Capital].

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Unidentified Analyst, [25]

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S.J., I had a question about your comment about revenue growth from second, third and fourth quarter. What kind of revenue growth are you looking at?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [26]

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Actually, I think for the second quarter, we see the higher single digit and very confident, 10%, I just had kind of a range. And the third quarter, maintain the same path. And the fourth quarter, maybe middle single digit, something like that. That's based on the current focus from our customers and capacity we prepare for it.

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Unidentified Analyst, [27]

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Okay. And then Silvia said that the margin will improve back to the Q4 2017 level, which was about 18%, which was about 18% in...

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Silvia Su, ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt. [28]

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Q4 is around 17%.

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Unidentified Analyst, [29]

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Okay. So are you saying that for the whole year, you're going to get back to 17%? Or second, third and fourth, you're seeing closer to 17%, 18%?

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Silvia Su, ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt. [30]

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I think the second half.

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Unidentified Analyst, [31]

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Second half, you're going back 17%?

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Silvia Su, ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt. [32]

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Yes.

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [33]

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Yes. If the foreign exchange rate is favorable to us, that was the ratio we [made here].

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Unidentified Analyst, [34]

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Okay. But you are going through a little price hike in some of your services, TDDI and COF, you said you're going to start implementing a price hike. What kind of price hike is it? Is it 5%, 10%, 20%? What kind of price hike is it?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [35]

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First number you mentioned, yes.

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Unidentified Analyst, [36]

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So about 5%?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [37]

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Yes, around this kind of range, yes. If the situation is getting good as we expected, we might do the second half.

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Unidentified Analyst, [38]

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Okay. Just the big picture I have. I'm looking at your revenue in 2007, it was $727 million; 2014, $695 million; 2017, $605 million. Your revenue is ticking down. Okay. Your gross margins are ticking down. I look at your competition. Chipbond just posted 21% in the first quarter. Powertech has 25%, 26% revenue growth. When can we see some kind of growth in revenue like more than 10%? I mean, what are you doing to -- the OSAT industry is over $30 billion. You are a 2% player in that business. In 10 years, you haven't grown your revenue. What I'm asking is, when is S.J. going to say, I'm going to capture even 2.5% of the market or 3% of the market? When will that revenue grow? Because without revenue growth, nothing good happens in the commodity business. What is the plan for revenue growth?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [39]

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Yes. You can see that for the past years, we had -- first one, we had some headwinds, which are referring to the [covenants]. So we need time to just diversify and find a new product, new customer to procure the capacity. And we also tried to increase our financial restructuring. So we've got a new 5-year syndication loan the middle of May, which give us sufficient financial capacity. So we (inaudible) possibility to growing more aggressive in capacity increasing or through merger or acquisitions.

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Unidentified Analyst, [40]

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[As per my counting] that, that was a strategic decision couple of years ago, I understand that. But if you look at 7 years or 10 years, you haven't captured. You haven't even gone to $750 million in revenue. I mean your competition, other people are growing their revenue. They are growing 5%, 10%, 20%. So it's just not Micron going out, it's a low-margin business, I understand. You made a decision. But my point is, what about other pieces, that Micron is not the only business. You do more than that. You have more -- you have NOVATECH, you have so many other customers. I mean, why aren't you getting a bigger allocation?

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [41]

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So you can see right now that we are continuing to increase our revenue in the industry in the automobile side. That is a good progress for us. And you can see starting from this year, our revenue has [given growth] quarter-over-quarter, and [growth] volume we can improve. And once our foundation is [laid here], then we will go into more aggressive to increase our capacity through organic growth or find new partner to participate to get in there.

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Silvia Su, ChipMOS TECHNOLOGIES INC. - Financial Officer, Accounting Officer and Senior Director of Finance & Accounting Mgmt. [42]

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And in the past 2 to 3 years, we spent some financial resources on the company restructure like merging (inaudible). Also the joint venture, Unigroup. So and also -- we are operating [also intact] by our major [union company]. So I think as S.J. mentioned that we just got -- we are going to gather a syndicated loan, so I think we are ready to grow in the near future, yes.

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Operator [43]

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Thank you. At this time, I will turn the floor back to management for closing comments.

Thank you. At this time, I will turn the floor back to management for closing remarks.

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Shih-Jye Cheng, ChipMOS TECHNOLOGIES INC. - Chairman, CEO & President [44]

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Yes. Thank you, everybody who join our first quarter conference call. Thank you very much. Bye-bye.

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Operator [45]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.