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

Welcome, everyone, to E Ink's 2020 First 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.

Good day, everyone. My name is Lloyd Chen, the CFO of E Ink. First of all, I would like to talk about the financial in the first quarter. Next page. I think before we talk about the financial in the first quarter, let's spend a few seconds on the safe harbor statement. Okay. Next page. All right. For first quarter results, first thing first, for the sales revenue, it's around TWD 2.9 billion. But it's worthwhile to mention, even you can see from the presentation, in terms of the year-over-year comparison, the sales revenue was declined by 1%. However, if we translate it from the local Taiwan currency to the U.S. dollars, actually the sales revenue was increased by 1%. And that was caused by the relatively stronger U.S. dollar against NTD in first quarter 2019. And for the gross profit percentage, that was 46.2%, equivalent to TWD 1.3 billion. And for operating profit, that was TWD 68 million. And in terms of the nonoperating income, basically that was TWD 820 million. If we break it down, basically, 3 major components. One is royalty income, the other is realized and unrealized foreign exchange evaluation gain, and the last part was the financial income associated with the cash that we have on hand to be invested in those financial assets. And that led to the net income in first quarter was TWD 790 million and associated EPS was TWD 0.69. Okay. Next page. After the numbers, I would like to talk about the accomplishments that E Ink has done in the first quarter. I think, first of all, I would like to talk about a term that you may know, that much familiar with, E Ink Gallery. So basically, E Ink Gallery is the market name of the full-color ePaper display module product that is using ACeP technology. ACeP, basically, is short for Advanced Color ePaper technology. Basically, this ACeP is a high-quality, full-color reflective display. In the ACeP, the ink can produce full color at every pixel, achieving full color even without the use of color filter array. And you may see another term, it's called E Ink Gallery Palette. Basically, it's using the same ACeP material, but provides a limited set of colors. So with those new technology that we are working on, in first quarter, we shipped more than 1,000 samples to around 30 customers in terms of the E Ink Gallery Palette, especially on the 5.65-inch samples. And also, in the first quarter, we also teamed up with one of the leading TFT-LCD panel suppliers, Innolux. Basically, that collaboration that we worked with, basically on large-sized ACeP panels. Basically, Innolux is the first partner to work on the production and sales of large-sized ACeP. With this partnership, E Ink and Innolux will focus on expanding ePaper products in IoT and Smart City applications. As you can see on the presentation, the 28-inch of bar type signage basically will be mainly used for in-vehicle advertisement signage and retail signage, and also being used for the public transportation such as metro, high-speed railway, train and bus. And that's for the E Ink Gallery and Gallery Palette. And we also have some achievements in the TCON T1000. That's the E Ink in-house chip that we have explored. And in first quarter, we [ called ] one of our customers in China, iFLYTEK, basically, they work China Mobile and launched a new product on eNote 9.7 inch. And also in first quarter, basically upon the COVID-19 impact around mid-March, we suffered the capacity problem in our Yangzhou module site. However, at the beginning of April, the capacity was fully recovered. So those module capacity is ready to go for the growing demand. And also, I just mentioned, our operating profit in first quarter as well as the net income and associated EPS, basically, that was the best first quarter achievement in the past 9 years. And that's the accomplishments we have made in the first quarter. Next page. The next one is also, it's about our color technologies. And once again, I'll talk about the term that you may not be familiar with, which is the E Ink Kaleido. So once again, it's a marketing name for the color ePaper display module product but with the technology -- Print Color technology. Basically, it doesn't use the convention glass-based full color filter. Basically, it just direct print on our ePaper materials. So that make our product thinner, lighter and with higher contrast ratio and less parallax. And the most important one is that, that provides a lower-cost solution to the potential customers. And with these new technologies, some of our customers in China, such as iReader, BOOX, Hisense and iFLYTEK, they all utilize this E Ink Kaleido technologies. And also, one of our Europe customers PocketBook is also using these technologies. And so far, the market feedback we have collected, basically, it pretty much exceed the market expectations. So what we need to work on harder is on how to scale up our E Ink Kaleido capacity. That's something we need to enhance and work on harder from the first quarter. Next page. And this page is about our corporate recognition externally. So E Ink was -- has been the pioneer to utilize the renewable energy certificate. And basically, E Ink is the first company to purchase the renewable energy certificate in Taiwan. And for all the renewable energy certificate has been issued in Taiwan, E Ink has purchased more than 30% out of it. And E Ink -- and with another companies, such as TSMC, Foxlink have been the green energy purchase program's biggest participants. So that's for the green energy, renewable energy. And for the corporate governance evaluation, E Ink has been ranked under top 20 companies listed in TPEx, basically Taipei Exchange, both in 2018 and '19 in terms of the corporate governance evaluations. So that's on the corporate recognition that we achieved in the first quarter. Next page. And for the gross profit trend, as you can see from the presentation, the first quarter gross profit percentage was around 46%. It has been increased from around 30% in our first quarter 2016 and all the way up to 46%. And the reason behind was, basically, we have been selling more E Ink material than the module. So that creates a better gross profit margin to us. And on the other hand, we have been working very hard on the operation optimization and also improve the supply chain efficiency as well as the automation. So that leads a better gross profit margin in the first quarter. And gross profit margin remained high, basically, in the first quarter. Next page. And the next one is the operating profit part. And as I just mentioned earlier, first, this quarter was the best first quarter achievement in the past 9 years. Two reasons. Basically, in the first quarter, we have more material sales and basically offset the module sales decline. And once again, we spent more [ assets ] on automation and cost reduction on the supply chain efficiency and operating cost improvements. So basically, that leads to a better operating profit in first quarter this year. Next page. And the next one is on the balance sheet part. The first thing I want to talk about is the asset side. On the asset side, E Ink -- the cash and financial assets have been increasing. As you can see from the presentation, first quarter 2018, the total financial assets plus cash was around TWD 12 billion. And after 2 years, the cash and financial assets we have on hand was around TWD 15 billion. So basically, we utilized the cash we have on hand to invest more on financial assets. So that's for the asset side. And for the liability side, one thing to mention was, basically, from fourth quarter 2019 to first quarter of 2020, that ratio hasn't been -- it has been slightly increased. The bigger jump was from 2018 because the cash utilization strategy we have on hand is, just like what I just mentioned, we converted the cash on hand into financial assets to generate higher interest and investment income. On the other hand, we first utilized the bank loan at a lower interest cost to meet the operation cash needs. So that's the reason why our financial assets plus cash has been increasing. But on the other, our debt ratio also slightly been increased from fourth quarter last year to this year. Okay. Next page. For the cash flow movement, so once again a few major points. We converted the cash on hand for financial investment and operations. So as you can see from the bar on the presentation, we utilized the cash on hand from TWD 8 billion to around TWD 6 billion by the conversion from cash to time deposit and in the financial assets. And those cash generated from royalty and operation, basically, is used for the CapEx for expanding on E Ink Kaleido capacity and material capacity. Okay. Next page is about the global R&D footprint. So in the first quarter 2020, we have of 462 R&D employees globally. And the global R&D spending in the first quarter was around TWD 600 million. And in terms of the patents we have on hand -- I mean, first of all, we have more than 5,000 patents globally. And the way we build up our patents is from one layer to the other, just like we build the blocks. We started from the basic principle patents and go all the way from optical layer, imaging film and then to the electrical, for example, the -- something relevant to the TFT backplane. And then on the module, display module design and also driving the algorithm and waveform and all the way up to the device and applications. So just like we are building the blocks from one layer to the next. And geographically speaking, the way we place our R&D resources, basically, in the United States, from Fremont to Billerica, basically, 2 sites are specialized on the material, but also the advanced technologies. And in Asia, in China, Yangzhou basically specialized in the module. In Tokyo, Japan, this site that we spend most of our resources on the advanced technologies. And in Taiwan, Hsinchu and Linkou, 2 sites are specialized module, advanced tech on material and even systems. So that's how we build up our patents and spend our R&D resources. Next page. So the last page is about the business opportunity after the COVID-19 crisis. I believe that the COVID-19 impacts still are, especially in the States and also the Europe, but we do identify on 3 major business opportunities there. And the first one is eLearning. The second one is grocery retail. Third one is information board. For the eLearning basically, we still target the education market. The targeted market basically still on the distance education, home schooling and those test/homework being done on cloud. And with the product feature of our product, for example, easy on eyes, low-power consumption, creates a long-sustaining, basically, combine the function not only on reading but also on writing. So that gives us more opportunities in the eLearning business. So at the beginning of the COVID-19 breakout, we understand, in the long run, Europe and U.S.A. market would be more impacted. So we spend more time on build up a better ecosystem in China. So in the first quarter, for example, on the brand Haier and another brand, iFLYTEK, they all launched the new eLearning ePaper products in this field. For the grocery retail, because of the outbreak of the COVID-19, basically, that we believe that will speed up the installation after the epidemic. And same thing for the information board. During the COVID-19 epidemic, we believe a real-time update information board for the emerging trusted message will be very important, especially that the nature of our product tend to be easier to be installed. We believe we can take advantage on the COVID-19 crisis. So that's 3 potential business opportunity that we noticed in the first quarter. So that's about my presentation. If you have further questions, feel free to ask Johnson, myself and Patrick. We're happy to answer.

[Operator Instructions]

Michael, we noticed -- I think we do have a big problem to ask questions. So feel free to ask a question online. We are happy to answer.

Yes. So I think I saw one of the comment is, color EPD cannibalizing the black and white eReader. Could you give me more explanation on this? So basically, yes, I do believe that, once there's color, people will choose color over black and white. As long as the black and white, on the color, is just as good as the current black and white. I think people today are still buying eReaders because the black and white experience with an E Ink display is quite good. But once we can achieve, just as with black and white and with the additional color, it will definitely cannibalize the black and white business. But we do believe that the market TAM will be bigger than what it is today. And that's our goal. Our goal is really to expand the market TAM for the eReaders and really move the E Ink technology, not just for eReaders but for other applications. Because once we get color, there's more applications we can go after. Okay?

Okay. Also from the question online, a few questions about the outlook in the second half. Yes. Johnson, would like to...

Okay. Yes. So basically, Q2 looks okay. We're still very -- we're still bullish, looks better than last year. But looking for the second half of this year, I mean, there's a lot of uncertainty because of COVID-19 and also because we're kind of -- our color eReader has -- the demand is quite strong, but we really don't have that enough capacity to fulfill that. And it's really impacting the black and white business. So we do expect some turbulence moving into Q3 and possible Q4. But we'll see. I mean, it's how quickly we can build up the color capacity to meet that. And it's really when we can pool in the equipment and start doing manufacturing. So that's roughly the situation for us. I mean, yes. So overall, we do expect it to grow compared to last year. We're not allowed to give you the exact numbers, but if you were to look at our partner that's downstream, most of our partners have issued positive growth rate for the ESL market. And so we think -- yes. I think [ Harvey ] is asking another question. It is, how does ACeP, which is our market name is called E Ink Gallery and Kaleido, which is our Print Color. But Kaleido is our marketing name. I guess [ Harvey ] has been following us for a while, so he knows our technical name for Gallery is ACeP. Yes. So ACeP, the color saturation is well liked. It's good. And -- but that does have one big issue, it's the speed of the update and that flashiness. So the current market that's good enough for that is mostly signage and price tags and different paper replacement that wanted to have good color performance, doesn't care too much about update, but it does require it to update that it can replace paper. So we do think there's a big enough market just in that field, replacing the paper that's out there, the posters, the paper tags, the price tags and signage and these kind of applications. But for eReaders, speed is very important. The black and white experience is very important. So with the Kaleido, we think it can serve that market. And also, with color, although it is not as good as -- sorry, the Kaleido color is not as good as our Galaxy -- Gallery, sorry, our Gallery product, I'm also getting used to the name, our Gallery products, it's still good enough for educational market. Especially in China, we compare the color saturation of our Kaleido and we think that it may be good enough to serve that market. That itself is a big market. As you can see from our slide that Lloyd was presenting, our R&D expense has actually gone up. We're still able to squeeze some profit out of it, but our R&D expense went up. And that's mostly because we want to continue to reinvest into our technology. We think that we can do a better Kaleido product moving forward. We also believe we can do a better Gallery product. So we're still investing to these 2 technologies. But at the end of the day, they might compete. Because once Gallery speed is fast, it can potentially replace the Kaleido product. And Kaleido, as the color saturation improves, it can potentially replace Gallery. But that's okay. I mean, we're competing with ourselves. So that's good. I mean, we have this notion that we need to be -- we need to -- we shouldn't be complacent. We should continue to innovate. And sometimes, because our competition -- there's not much competition in the field of ePaper, so we really need to compete with ourselves to really move forward. And that's one of our main goal, is really to how we can speed up our R&D development and launch new products, one after another. And then once we can start doing that, I think E Ink will be in a much better shape than where we are at today. And we're still in that stage of trying to build our pieces together and building this ecosystem to create a third category for display. I mean, there's an LCD mature industry that's out there already. There's the OLED that's up and coming and trying to compete with LCD. But we're really trying to create that third leg. I mean, the third industry that's really replacing the paper that's out there, that's easy on the eyes and that will replace textbooks or used in the educational field and really to offer a better eReader experience that's out there. And also, just the paper itself we're trying to replace, that's billions of dollars of market. We're building this ecosystem where we're trying to deal with our partners to grow it. So that's why when you look at our financial statement, we actually break it down in terms of modules and material sales. And one of the highlights that Lloyd was talking about was we partnered with Innolux to go after the large-sized ePaper modules, where E Ink provides the E Ink materials to Innolux and Innolux acts as a module partner that sells to the customers. And it's -- I think it's super important to build that ecosystem of partnerships to really grow this market. We're in the process of doing it. You can tell from our financial statement or income statement that our material sales is growing. Sometimes it actually competes with our module. Our partners' module compete with our own module, which is fine. It's part of the game. It's part of building that ecosystem and growing it.

[Operator Instructions]

So Jerry is asking our gross margin for color versus black and white. I think E Ink is really running at a pretty high gross margin already. And it's actually getting higher because we're doing more material sales. But I think the key for us is really to grow the ePaper industry or ecosystem and to have more applications that's going to adopt ePaper. It's great that we have a gross margin that's quite healthy, but the goal is really to get E Ink everywhere. So we're still in that phase of trying to get there. Yes, so... Yes, for color, I mean, it doesn't matter if it's Kaleido or Gallery. It's -- for Kaleido, which is printing ink on top of our materials, so that -- the cost added is quite minimum, and that's not a big issue for us. For our Gallery products, we've demonstrated how we can have good margins on it by selling materials. So, yes. So gross margin is hard to predict because 1 day we might start really dropping the price -- or it really goes down, doesn't go up. But somehow, our margins have been improving because our efficiency and everything else is really improving. So also launching new products also helps with the margins.

Next, we have [ Michael Lee ] of [ Antivity Partners ] for questions.

Thanks for first quarter results, looks really good. Yes, I'm -- it seemed the share price reacted the way it has, I think you guys are probably pleased with yourselves. Just a few quick questions from me, if that's okay. I sent them online, but I'll just say -- I'll just touch on a few of them, if that's okay. One of the ones I want to ask about is I understand electronic shelf labels is still very strong and my understanding of it is the gross margins on that is around 55% to 60%. I'm wondering if you guys can confirm that. And then second is, from my understanding, speaking to suppliers like Pricer, they tell me that the average selling price of one of your labels is around $1 on a 3- to 4-inch shelf label, which could cost you $5. But that looks to me, sounds like you get 20% of the sale. So I'm just wondering, are those numbers roughly correct? Or could you correct me if I'm wrong?

Michael, we can't always give you the guidance on the exact number. It's illegal if want to do that. But -- yes, so I mean, we look -- I mean, for shelf -- I mean...

[ Equal probably. ] Yes, sorry. Equal [indiscernible] okay.

I really can't give you the numbers for that. And I don't think it's right either. It's illegal in Taiwan to -- the Taiwan stock market to give those kind of guidance. But I do -- I can share with you something, though. Well, I mean, for ESL modules, I mean, assuming the market TAM is TWD 150 million. I mean, we probably do less than 5% with our module. And most of those we sell are mostly materials, materials to our partners and they sell that as a display module to the system integrators, like SES or you mentioned Pricer. Yes. And looking at -- I was noticing your comment. Yes, I mean -- so we shifted our marketing efforts online because of COVID-19. So we're doing a lot of more online marketing to promote our technology, to promote to different industries that we want to go after. So yes, because we're -- we've got to repivot to the situation. There's less trade shows you can go to. You just got to do everything online now. And yes, so that's how -- I mean, you've got to deal with the situation.

Say something and -- can I also ask about the kind of the marketing feedback. I mean when you're using things like LinkedIn, as I noticed, or Facebook, do you pay any marketing cost for that? Or is that only just free?

No. Honestly, I mean, the stuff I post is, no, I don't have to pay personally. I mean, you don't have to pay. But I mean -- I think corporate-wise, if you do advertising on Facebook or LinkedIn, you do have to pay, though. I mean, we do have paid corporate-based stuff, yes. I mean...

Can you give any thought about organic kind of -- I was just thinking, is there any -- can you give any sense of like the organic customers coming in from like Facebook or LinkedIn? Are there any that are -- are there any customers actually being attracted from those channels? That's just kind of -- I'm just trying to think about is that [indiscernible] for you guys?

Yes. So we do see an uptick in terms of people buying our development kit from our website. So there's more people buying our development kit. Maybe because we're launching a lot of new technology, so people are buying more kits from us, trying to understand how our display can fit into their business plans and/or their product plan, whether they make sense or not. So -- which is great. I mean, we -- I think it's more efficient that way. I mean -- so we're actually beefing up a lot of the effort that's online, either our website or our online shopping for our case. So we're working on that part to service our potential customer, the new customers, people thinking about using E Ink. Yes, so that's -- I think that's super important for new applications. I think you mentioned about bargaining -- yes, go ahead.

So I was just going to ask a quick question on that, was, is there a big marketing team behind that? Like what -- can you quantify like how many number of people is in that marketing team? Or has it increased or decreased? Can you give any sense about that?

Yes. So our marketing budget actually went down because we're going to less trade shows. Yes, it went down. I think the effect is actually better than when we were doing them off-line. We have roughly -- I mean, in U.S. team, we have 4 people doing it. In Taiwan, we have 4 to 5 people doing it. So less than 10 people added. So not a lot of people in that team. But we're also learning how to do more online marketing in China as well because we think that our color ePaper with the Kaleido product, it's actually quite good for the education market in China. So we're actually learning to do more online marketing in China in that space as well. So, yes. And you mentioned about bargaining power, more favorable bargaining power. So we think less about bargaining power. I mean we think about how do we help our customers grow. I mean, for us, another main topic here today for us is how do we make it easier to grow? I mean, our ESL has been growing. Its organic growth every year is growing. The TAM is getting bigger and bigger. But how do we get that eReaders to start growing again? And we really believe that our color will be a good catalyst to get this to grow. But in the short term, that does impact our black and white business because we don't have enough capacity right now to service the type of demand we're seeing today for the color ePaper, the Kaleido product line. So we're building up that printing capacity in our module site, as Lloyd has mentioned. And -- but we do believe the TAM will expand. And we hope to get us into the educational space and really grow the eReader e-mail market product line and to grow from there. So I do believe once we can get that momentum going on in the eReader and e-mail part, I think E Ink will be in a very good shape.

Right. And just maybe just following on the color eReaders that you mentioned. You don't have to give me numbers or anything, but can you give me any sense of what the premium is or the high price point you can charge on color versus black and white? Can you give any sense of that or...

Our plan -- I mean, our plan is not to charge more for color. Our plan is to enable this market. And it seems like, so far, a lot of our customers are very excited. I think in last call, on the conference, we mentioned that we're expecting 2 customers to launch our Kaleido product. But ended up being 4 or 5 that have already announced that's going to launch the product, and they're doing really well. I mean they're doing a lot better than they expected, a lot better than we expected. So we're really trying to build up our capacity. But we're not thinking about charging more. We have very healthy gross margins that we're working with. So trying to get that even higher may hinder the market to grow. So that's not our goal. Our goal is to grow that market. But in the short term, it does impact black and white. Because I think, our Kaleido product line, we can start up the same black and white color -- black and white experience, like what we did with black and white eReaders, but with addition of color. The color is not as saturated, but there's some color to it. And so having that little color, I think, makes a big difference in terms of the visibility in the user scenario. And also, we've really improved on our speed, so that responsiveness of using E Ink technology in the consumer space. I mean we used to be very slow. So every time you turn a page, you see that big flicker, and you have to wait almost a second. Now we kind of really fixed that. And so we believe our speed is good enough to even play video rate. We're doing 20 frames per second today, and we believe we can bring that even higher. So once we get over that bar of 9 frames, you can do the animation on 9 frames. But getting over that speed limit, I think, will -- yes, we're excited. And we're hopeful, and we're waiting for the market feedback. Our customer is excited. But at the end of the day, it's how the consumer responds to this. And that's the main thing.

Understood. Maybe just one last question, if I may, for you guys. It's just -- I mean, I recall, like in the past, you guys had a few competitors and that's kind of gone away. I'm just wondering, do you see any competitive threats to your business at the moment? Like are there any other, like, Chinese players that I should be watching catching up to you guys or could you give me any sense about the competitors?

I think we're always worried everyone will beat us out and then take us out the market. I mean, there's a lot of improvement in LCDs, in OLED, microLEDs, but we're really targeting a different category. I think our biggest competitor is ourselves, if we can innovate fast enough, launching our new generation of products quicker. Unless we're -- I mean, I'm not really looking at competition, I'm really looking at how fast we can come up with the latest technology and really capture the market. So you're seeing a lot of change in E Ink, at least that's what our customers are telling us. It's like, oh, now you can launch new technology platform a lot quicker than before. Because we've spent a lot of time looking internally, how do we fix this issue, how do we launch quicker -- the latest platform much quicker. And I think it's exciting. It's exciting. So yes, I don't think the competitive focus makes sense. There's some products that want to do reflective displays, that we want to do color, video. But it's really us. I mean, our -- can we beat them to the punch, right, and target an even bigger market. So I think it's up to us. And especially with the amount of dollars we're spending on R&D, I better hope that we can take our technology to something that everybody wants.

[Operator Instructions]

Jerry, I saw your question about the projected OpEx. So basically, with those supply chain efficiency and better control on the SG&A, we believe we -- those reduction can better offset the increase in R&D expenses. So yes, I kind of agree with you, the 2020 OpEx would stay flattish, yes. Basically, I would say, OpEx is in control.

There are currently no questions. We thank you for all your questions, and I'll pass the call back to the management team. Please proceed.

Thank you for your participation today. A lot of challenges ahead, but we will work harder. And talk to you soon, next quarter. Thank you.

Thank you. Thank you, guys. Thank you for joining our investor conference.

Thank you. And ladies and gentlemen, we thank you for your participation in E Ink's 2020 First 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.