E Ink Holdings Inc. (8069) Earnings Call Transcript & Summary

Welcome, everyone, to E Ink's 2019 Fourth Quarter Earnings Conference Call. [Operator Instructions] For your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.eink.com under the Investor Relations section. And now I would like to introduce the Chairman, Mr. Johnson Lee; CFO, Mr. Lloyd Chen; and Financial Center Director, Mr. Patrick Chang. Now please begin.

Yes. Good day, everyone. My name is Lloyd. Welcome to our 2019 E Ink Fourth Quarter Investor Conference. So let's look at the safe harbor statement first. Okay, on next page. This page is about the 2019 fourth quarter results. I will not go through it one by one. Obviously, our fourth quarter for E Ink was not the best quarter. However, it had the highest gross profit margin ever basically was caused by more E Ink material sales as well as the operational efficiency improvement, and we will talk about later. And we're also going to give you a 2019 flashback in terms of accomplishment, recognition we had and then we will talk about the 2019, the whole year financials. Later, we will also talk about how we mitigate the COVID-19 impact. At the same time, that also creates the possible business opportunity for E Ink. We're going to talk about that later. Next page.

Hi, everybody. I'm Johnson. So let me give you a brief update about our 2019 accomplishment. So in 2019, we launched our Print Color. And this is a year where the Print Color is adopted, I mean, 2020. We recently have 2 customer announcements, one from iReader in China. It's one of the major online e-book player in China. And also iFlytek, which is very strong in the educational market in China. Both of them did the same-day announcement of the Print Color product. It was well received. It's been sold out. And people are excited about our Print Color. At the same time, last year, in 2019, we launched our ACeP, which is a colored E Ink display that -- the color is more vivid, it's more saturated than our Print Color. So Print Color was designed mainly for the Chinese educational market. It's been currently adopted as a comic-book leader in China, and it seems like it's well received at this moment. For ACeP, the target is more about signage, where you need more vivid colors in the retail space. And that is ongoing with our customer adaptation of the ACeP product. They're doing the designing at this moment. People are excited, at least our partner is very excited about the ACeP. They're looking to deploy these ACeP in the market soon. At the same time, we launched our JustWrite. So JustWrite is our E Ink material that you can write on. You can -- as you write -- it's just like a Boogie Board, as you've seen, in the market. So it doesn't require TFTs, it doesn't require electronics. It's -- you'll only need very basic electronic to power it on. So because of the flexibility nature of the E Ink material, you don't need any power to maintain the image, but you can write on it. When we developed this technology, the goal was to aim for the architectural market. So basically, try to adopt that into wallpaper inside a home or office where you can write on. But when we did this announcement of JustWrite, a lot of educational players are interested in this product for the blackboard market. So they want to use this to replace blackboard in schools because there's no chalk. It's more readable, and you can rewrite it. At the same time, we talk about E Ink is actually a material company. So we also develop our own protection sheet. The protection sheet is used in the module process where it's placed on top of the E Ink material, the E Ink film as a protection of it. We make our own protection sheet, and we launched it last year in 2019. At the same time, we started providing the protection sheet to our module partners as well, and we also use that internally as well, and which helps with our gross margin -- it helps with our cost structure within our own module. At the same time, we provide this protection sheet to our partners. And last year, we also won the wireless power e-paper display, meaning the display does not require any batteries. And the power and images is actually transferred wirelessly to the E Ink display, and we won an award for that. At the same time, we develop our own TCON, the T1000. So this T1000 helps E Ink enable other applications because to drive E Ink display is a lot different from driving a LCD display. The way you drive it is very different. And it took a long time for our partners and our customers to design an E Ink product. And with this T1000, ensuring the whole development cycle and developing the product, and we won an award for that. So it makes the integration of E Ink display on to an Android OS or Windows OS much easier. Even with these awards, E Ink is very serious about doing CSR and contribution back to the society. I think it's a very important aspect of our company. So in 2017, we actually won 2 awards for doing CSR in Taiwan, but we do CSR actually across the globe, but we were recognized for 2 awards in Taiwan in 2017. In 2018, we won 3 awards. In 2019, which was last year, we won 4 awards. So you can see we're actually putting more effort into how we can give back to the society. At the same time, in 2019, we actually won another award in Taiwan, which is 15 strongest midsized company in Taiwan, and we're part of that 15 company. The same -- the Taiwan government started to see the strength of E Ink and what we can do, and they gave us award as 1 of the top 15 companies in Taiwan that's a midsized company. Also, we're the largest purchase of renewable energy in Taiwan. E Ink is not the biggest company in Taiwan, but we actually buy 30% of all the Taiwan renewable energy because we believe that we need to keep our environment safe. Just like our product, we're replacing paper. We believe it's a renewable and clean energy. Lloyd?

Okay. Thank you, Johnson. I want to talk about the 2019 P&L. The first thing I want to talk about is even with the slight decrease in the sales revenue by 4%, that still leads to the highest gross profit margin ever in the -- I think in the past 10 years, and that was 44.4%. And the reason behind, basically, that was caused by the changes in the product portfolio. Basically, we sell more E Ink materials than E Ink modules. And also, through the cost reduction, operational efficiency improvement that lead the highest gross profit margin ever, as I just mentioned. For the OpEx, that was around TWD 5.5 billion for 2019, and that's pretty much on par with what it was in 2018. So basically, our OpEx was in control. However, even the year-over-year OpEx was very similar, but our research and development expenses were increasing. Basically, our OpEx was in control, but with increased continuing R&D investment. And for operating profit and that was around TWD 560 million, basically 23% improved than 2018. And in terms of the nonoperating income, that was 13% improved from TWD 3.2 billion to TWD 2.8 billion (sic) [ TWD 2.8 billion to TWD 3.2 billion ]. If I break down the nonoperating income, basically, our royalty income in 2019 was slightly decreased by 5%. However, we spend more efforts on the nonoperating financial investment. So that basically make up the shortfall from the royalty income. So that led to the net income in 2019 about TWD 3 billion, and EPS is TWD 2.72 '19. And that was our P&L for 2019. And next page.

So in terms of gross profit, as you can see from 2018, we increased from 38% to 48%, and that was mainly through the increase of material sales. And because when we sell materials -- when we sell more E Ink materials, it actually do hurt our module business because our customer has more choices to purchase the modules from. So that was part of our overall strategy to expand our module partners. We believe that it's important to expand our module -- we think it's important to expand our module partners because it helps enable more people into the E Ink ecosystem. And by doing so, then we can go after more customers to adopt E Ink as part of their product. So we think we're on the right track, and that was what we're expecting. But at the same time, it reflects back to our gross profit. At the same time, we also have continued to improve our supply chain efficiency. How do we reduce our cycle time in terms of producing our materials and our modules as well. And these improvements mostly through automation to help actually improve our cost structure at the same time and improve our quality level. So I think we're moving on the right trend on that front. As you can see from this chart, our operation profit margin, this is how it's been broken up. So our module sales has actually decreased compared to 2018 over 2019, that was offset with the increase of sales with our material business. So I think that's the right direction we're moving on. And also in 2018, we did win a [indiscernible] voting machine one-off deal. So basically, they're using E Ink display in their voting machine and that was implemented in [indiscernible]. It's also something that's very interesting for us because we're also beginning to see different system integrators are thinking about using E Ink into voting machines across the globe. So we'll see on that part. But that decrease, because we don't have that business in 2019, was offset with our improvement in our supply chain efficiency. So overall, we have a slight increase in our operation profit. And again, as Lloyd had mentioned, we continue to spend money into R&D because it's very important that E Ink continue to innovate. We don't think we have reached the full potential of where E Ink technology can go, and so we continue to invest into this R&D. So the R&D investment is actually broken up in 2 parts. One is to look into how do we improve our E Ink material? How do we improve our color saturation? How do we improve our speed, wider temperature range, so that we can enable more applications such as automotive or industrial use? There is a lot of requests from automotive and industrial situation to use E Ink because we're low power, we're always on, and they like our look and feel. So we need to continue to invest in that front to make sure that the market can expand even bigger than what we're targeting today. At the same time, on our module side, we want to lead our module partners in terms of what can be done with our E Ink technology from a module front. So we were investing a lot of money into flexible displays. Now we're moving that into foldable displays. And we're seeing an uptick from the Samsung Fold to the Motorola folding phones and Huawei folding phone, there is a demand on the consumer side or consumer electronics side to use a foldable display. And think -- we also think it's an interesting value proposition for eReaders as well that the eReader can fold it up like a book, and so you get the feeling of holding a book. And that's something that's quite interesting. So we'll also continue to invest in that front. So you can see our R&D expense has increased from 2015, TWD 1.7 billion to 2019, TWD 2.4 billion. We believe that in 2020, this number will still go up a bit, but we do control our overall operational expense. And we hope that we can get the savings from supply chain, operational efficiency so that we can invest more money back into the R&D.

Okay. Thank you, Johnson. So let's look at the balance sheet side. Basically, let's look at the asset side first. As you can see from the chart, our total assets was increased from TWD 37 billion to TWD 41 billion in 2019. And especially in our cash and financial assets, that was increased from TWD 13 billion to TWD 15 billion. And for the liability side, the debt ratio was increased. But you may be curious why it was increased since we still have a lot of cash on hand. The increased debt ratio basically doesn't mean that E Ink cash is typically -- it means E Ink cash is higher -- doesn't mean -- sorry, it doesn't mean E Ink debt is higher than our cash. It represents basically we optimized our funding planning with the best net interest allocation effectively in order to meet our operating cash needs and increase other investment income, as I just pointed out in the P&L. Basically, in 2019, the other investment income was increased than 2018 to make up the shortfall from the royalty income. So that's one of the efforts we have done through the funding planning arrangement. And in terms of the book value per share, that was TWD 24.8 in 2018, and then increased to TWD 25.8 in 2019. So that's for the balance sheet side.

So just more to add. Lloyd has mentioned about our balance sheet. We do understand that eventually, FFS, our licensing dollar, will fall and as the AMOLED will start replacing the LCD business, the licensee of FFS will be paying us less royalty. So what we do is that we actually invest into our E Ink ecosystem, our partners, who we think have the best opportunity to grow in the ones that looks very promising. So far, it has worked out for us. It has given us a good dividend because the investment we made has paid off. That's something we do look at. From a company perspective, in case one day when the FFS start falling more dramatically as AMOLED encroaches on the LCD. But we hope that we're investing into the E Ink ecosystem that we can offset the loss of FFS licensing from investment returns on that front. And that's mostly through our upstream or downstream partners or our partners that we work with together to grow this market. Okay. In terms -- I guess, everybody wonders what -- how we look at the COVID-19 situation. We -- our factory in China, we started in February 10. So you can probably see from our P&L that we have published that February wasn't a good month. We were hit by a shortage of supplies, mainly touch panel because I guess, touch panel is a very labor-intensive business, at least touch panel model is a labor-intensive business. And also labor shortages. But as we look at it today, we're probably around 70% to 80% -- we're closer to 80%, 80-ish, central 80-ish receiver of our capacity. So we believe by end of this month, which is only a few days off, we should hit around 80% to 90% in terms of recovery. We're still very careful about this because it's very important to look at the demand side. In our Q1 and Q2, we do see an uptick in terms of demand for E Ink product. And the China experience is actually a good indicator because China was the first country that was hit with the COVID-19. In January and February, we do see a slight decline in demand for eReaders in China. But in March or January and February there was a short -- sorry, there was a -- in January and February, there was a decline in demand for eReaders. But in March, it pick up -- it really picked up, that has offset the loss of demand in January and February. So that's the situation in China. But when we look at U.S. and Europe, it could be a good indicator, but we don't know. We don't know where the bottom is where this COVID-19 impacted the economy. But we still think it's something that's very interesting, mainly because people are forced to stay in home and the need of alternative entertainment besides playing games, reading may be part of that entertainment. So we're seeing that kind of uptick in China. But will that reflect back to the U.S. and European economy? We really have to wait and see. But so far in Q1 and Q2, we think it's relatively safe. At the same time, we also see a strong demand in terms of ESL being adopted in the retail space. Grocery stores is the least impact by the COVID-19. People are rushing out to buy food and stocking up on toilet papers. And a lot of retailers are coming to us and our partners saying they do need ESL, but they don't have the time to do installation today. And because of this COVID-19, there's not even enough workers to go and install in these retail stores. And I don't believe these retailers will want these installers in their store when the -- when there is a strong demand of their products. So -- but the good news is that there is more people asking about ESL to be adopted in the retail space. And we think that because of COVID-19 will help the ESL to grow even further down the road. We might see a short hiccup along the way because there's not enough people to install it. But overall, ESL should be very strong. In terms of risk mitigation, the first thing for E Ink is across the globe, from Taiwan to China to U.S. to Japan and Korea, is that we need to keep our people safe. So we did install a lot of measures within E Ink. It's actually a lot tougher than the regulation in Taiwan or China or U.S. in terms of how do we keep people safe, and I think that's the first most important thing that we need to make sure. The second thing is how do we meet the demand for the market side? On the materials side, how do we further improve our efficiency to mitigate the risk of labor, which we think automation on our module side is very important. So we'll continue to invest in that front to make sure that we can use less labor to produce our ePaper module, at the same time, improve our quality and cost structure because of automation. Again because of automation, we do see a lot of improvement that can happen on the operational side. So that's the part we also look at and also how do you dual source. The good thing or maybe bad thing is that because now we have more partners doing E Ink modules, so our system customers, our brand customers may buy from us, E Ink directly or they can buy from our partner. So in case that E Ink has a shortage on the module side, our partner can buy it from our partner. It can be a good thing. It can be bad. The good thing is that we sell more E Ink materials so have better profit margin, but the downside is that you get less sales revenue, okay? But I think the most important thing is to grow the E Ink ecosystem and to get more players adopt E Ink and to grow the overall E Ink usage in different applications. I think that's the most important thing for E Ink. Okay. Next page. And because of the COVID-19, we know that there is going to -- it is going to impact the business in the short term. But at the same time, it is -- there is also -- present itself with business opportunities that E Ink should really look after or try to target. And it may shift the way how people -- either how they work or how they go -- how they learn. And online learning hasn't taken off for the past 10 years. And because of this COVID-19, it seems like the online learning is really taking off and teleconferencing is also picking up. But how does E Ink be part of that? That's something we're really exploring. I think there is a couple of good things about E Ink that can make this a very interesting market for us to really look at. One is that E Ink is very easy on the eye. So we don't emit backlight. There's no blue light hazard. It's great for anybody that's reading for a long time, doing their homework, like our eNote product that you can really work on. At the same time, it's low power. And also, you can't play games on E Ink-based products so far. I mean none of them has really opened up to allow game apps to be installed on E Ink products. So that might be a good sell for E Ink, like E Ink-based product into the online business or online education, online learning. So that's a market that we're looking at. At the same time, information board, the ability to update real time trusted information by trusted agencies. So -- and because E Ink is -- it's easy to install, you don't need to pull wires, it's quick to install, and we're seeing an uptick in that front as well. More people are requesting to use E Ink information signs. Even in offices or hospitals that they don't have to continue changing paper of the latest policy that may come through. And E Ink itself, us as a company, when we start applying all these different policy, we also realize there's a need for an E ink information sign to update the latest policy that we want to implement, either when you get into the office or in the bathroom or different places in the company or even in the cafeteria. So it's a good opportunity for us to really promote in that front from hospital to public places to transportation. And we talked about the grocery retail, we do see a strong request from retailers. We really think about -- more retailers are thinking about adopting E Ink ESL products to help improve their efficiency, to make sure there is no shortage of product, best way to do online delivery. So it's very promising, and it's also a good time for us to promote our E Ink advertised and signed into retail space. So we think that because of COVID-19, there's these 3 opportunities that E Ink should really target moving forward.

Thank you, Johnson. So basically, we finish on the presentation for our fourth quarter investors conference. So through our explanation, basically, you know what happened for E Ink in 2019, and also you can understand better how we mitigate the COVID-19 impact and also sort of turn the COVID-19 crisis into opportunities. So let's move to the next session, Q&A session.

[Operator Instructions]

We saw a question from [ Michael Lee ]. [ Michael's ] question is about I think the gross margin trend of the 2000 -- he doesn't indicate this, is it for 2019 or 2020, but I can answer that. And the second question was about the royalty income and how much it was in 2019. I can answer that and the trend of the royalty income. So basically, for the gross profit margin, [ Michael ], as you can see, the historical percentage that was about 44-point something percent. So if you want to build up the model, that percentage minus/plus should be the number you can stick with. However, as Johnson explained, the more E Ink material we will sell, the better gross profit margin we will have. So also, we are working very hard on the operational efficiency improvement. So through those actions and through the changes of the product portfolio, that does help our gross profit margin. So that's how I can answer your question. And also for the royalty income, that was around TWD 2.2 billion in 2019. I think that's a public information, so I don't mind, I mean, giving you those information. And the year-over-year comparison for royalty income was 5% decrease, and that was in line with what we talked about before, single digit decline. And for the trend of the royalty income, we believe that the financial for those TFT LCD maker and together with the threats against FFS technology from AMOLED, we believe the trend will be still decreasing, and that will be jumping from single digit to low double digit. So that's how I can answer you.

So [ Michael ], further to add to Lloyd's response. So yes, we do -- I mean we're expecting FFS to fall. So that's why we're looking heavily into investing into the ecosystem, our upstream, downstream partnership with E Ink, and we try to identify good partners. And so far, the investment has really paid off. And so our other income was actually increased from the financial dividend of our partnerships. From the business side, yes, the -- no, we do expect similar growth rates about from the ESL this year from relatively to last year. So far, it's been strong. It's been very strong actually. And we're actually expanding our capacity of our E Ink materials not just from our Linkou facilities, but also, we're looking into expanding that into our Hsinchu facility. At the same time, we're already doing the expansion in the U.S. sites, convert that to produce the ePaper from microcapsule to Microcups. That's mostly for the color. So we do see strong demand from our partners to pull in our material. And of course, the recent launch of color eReader has made the market very excited. Our partners has been selling really well. They've been out of stock. When they did the presell, it was sold out in 5 minutes. So it seems that in China, there is a well like of color eReaders, but how it translates to future sales, we really have to wait and see, hit the market, seeing -- does it continue to grow. But relatively, we're still fairly bullish about our situation so far. I think Q1 and Q2 should be okay. We should grow our business. And a lot of signs -- using E Ink signs, not just for ESLs, not just for price tags, but for other signs in the office, in the meeting or even into logistic signs, a lot of different application is happening or even hospitals to adopt E Ink. What we're doing -- seeing a lot of these potential applications being -- starting to grow, even bus stop signs, we're seeing that growth as well. But they're still fairly small in our overall revenue portfolio, but we do see positive signs on that trend, and we're happy to see that.

[Operator Instructions]

So [ Michael ], yes, I guess we're using chat. Yes. So how do we expect to execute this? So our strategy is really to enable more partners, so more module partners, more system integrator partners and let them do their selling. E Ink is more of a material provider that provides the E Ink material, like our protection sheet that we have developed last year, not just E Ink films, E Ink protection sheet to our module partners and let them do a lot of selling. Of course, our team will go out and try to do sales as well. I think it's more important to enable more partners into the E Ink ecosystem. So the overall usage of E Ink will continue to grow.

[Operator Instructions]

[ Michael ], I saw your question about the increase of debt ratio. Because in Taiwan, there is a policy or incentive policy that if you invest in Taiwan, you get really low interest rate and a lot of government incentives. And we figure that instead of using cash, we even invest our cash into our partners, our return is a lot higher than the -- getting a loan because these interest rates are quite low. So we're thinking about doing -- so we actually do have a need to expand our capacity in the E Ink materials side. We're doing that in our Linkou facility and also in our -- or our U.S. manufacturing facility at the same time. But we can -- I mean we can foresee that we will have -- we may run out of capacity. So we're also looking into expanding our E Ink material site into our Hsinchu factory. The Hsinchu factory used to be a generation 2.5 TFT fab. It has been -- we've recently shut it down for a couple of years, and we're carrying that cost as a company. So if we can reuse those -- that empty facility, it will help us to become even more competitive. But of course, the demand needs to be there. It's very important to watch carefully, especially with the COVID-19. I think we're okay for the first half of the year. But second half, whether that's going to be the bottom in Q3 or even in Q4, it's hard to say. So we've been -- we're watching this situation very carefully to see how it turns out.

Okay. So I -- we believe we answer all of the questions online. So thank you very much for your participation today, thank you.

Thank you and have a good day.

Thank you. And ladies and gentlemen, we thank you for your participation in E Ink's 2019 Fourth Quarter Earnings Conference Call. There will be a webcast replay within an hour. Please visit www.eink.com under the Investor Relations section. You may now disconnect. Goodbye.