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

Good afternoon, and welcome to E Ink's Third Quarter 2023 Earnings Call. [Operator Instructions] Today's conference is being recorded. The webcast will be available on each website after today's conference. Joining me today are CFO, Lloyd Chen; and Financial Center Senior Director, Patrick Chang. Now let me turn over to Lloyd.

Thank you, Elly. Good day, everyone. Before we officially start, I would like to share a bit story behind our cover page. I believe on the extensive screen time has caused concern of health problems and distraction for children and adults alike. So we've recently sponsored a website, healthiestgreentime.com. One can find some information of research papers, on news, white papers and e-paper device cards. It's all about helping people preserve their eye health for themselves and their loved ones. So please check out on the website, healthierscreentime.com. I assume you can also see right in the middle, down below www.healthierscreentime.com, all right? So let's look to our investor conference today. Before we start as usual, let's take a quick look at the safe harbor statement. All right, next page, all right. Let's look at the Q1 to Q3 results for the sales revenue was around NTD 21.3 billion and non-operating income was around NTD 2.4 billion and EPS was NTD 5.76. Overall, the Y-o-Y decline was mainly due to the color technology transition. And we also spend more investment on R&D and key talent as well as a decrease in royalty income. However, the net income was still historically second best. All right, next page. So for operating profit relatively lower Y-o-Y operating profit but still historically second best. So once again, the Y-o-Y decline was mainly due to the -- as I mentioned earlier, color technology transition and more investment on R&D and our key talents, so even the operating profit was relatively lower, but still 27.1% against October sales [ revenue ]. All right, next page. For the Telco assets; that was around NTD 72.4 billion versus NTD 64 billion by third quarter last year. The Y-o-Y increase is around NTD 8.4 billion. And basically, total assets increased from upgrading and financial investment, so for the net asset value per share also growing. It shows a positive trend upfront this group. Next page. For cash, the cash position was around NTD 10.9 billion at third quarter. Basically, we utilized the cash inflow from operation and investment to further financial investments to CapEx on the paper production line. The total financial assets plus cash was increased to around NTD 46.1 billion by third quarter. Next page, all right. Recently lots of inquiry about our growth momentum. So we would like to explain through this page, driven by COVID-19 economic impact and global ESG initiative. The demand of e-paper has experienced rapid growth since 2020. And due to e-paper capacity shortage and uncertainties in the supply chain during the pandemic, our customers proactively stock up, leading to our sales revenue, exceeding expectation in 2022. However, this year, the color technology transition has extended the transition period, so causing a bit slowdown in business growth. But if we look back over the past 4 years, from a sales revenue perspective, it increased modestly from NTD 13.6 billion in 2019 and then to NTD 15.4 billion in '20 and then jumped to NTD 20 billion in 2021 and further exceeding expectation, reaching around NTD 30 billion in 2022. And also for operating profit, starting at NTD 600 million in 2019, grew to NTD 1.8 billion in 2020 and then jumped to NTD 3 billion in 2021 and eventually exceeded expectation, again, reaching NTD 9.2 billion in 2022. As you can see from the trend chart, we already established a track record. So comparing this year to previous one, there's a big deceleration in business growth. But we still anticipate a continued growth driven by new retail solution from ESL and teleconsumer products under our e-reader e-notes segments and also large-sized color signage, both in indoor and outdoor. All right, next page. I would like to talk a bit about the reason recognition that we received. As you can see from the screen, this year, one of the leading magazines is called Commonwealth Magazine. They have annual award it's called Excellence in Corporate Social Responsibility. We were listed in #18 this year, and we were #49 rank last year. So that was quite a big jump. And also it's the third consecutive year in a row we won Best Company to Work for in Asia by Asia magazines. And we will also be honored by TSAA, Taiwan Sustainability Action Awards and also Asia-Pacific Sustainability Action Awards, we won both silver and bronze. Last but not least, by CRIF, China Credit Information Service Company ranked us the top #9 company with outstanding operation performance in top 10 from a general rating out of Taiwan's top 500 technology companies. So that's the recent recognition in terms of the sustainability. Next page. We also received the recognition in our new technology organization is called SDIA Smart Display in Industrial Alliance annually basically they honored the company with forward-looking display. So our 2 color technologies, the E Ink Spectra 6, color e-paper technology and another one, Kaleido 3, color printing e-paper technology, both won gold awards from SDIA. And next one, I would like to share our efforts on environmental impacts. We were awarded the Best Newcomer in 2023, RE100 Leadership Awards. And we also received awards during the Climate Week in New York City. The next one, I think in the previous quarter, we talked about we joined SBTI, Science Based Target Initiative, a leading international authority on climate change. And after the lengthy process, basically, we get their approval. So our Scope 1 and Scope 2 on carbon emission reduction target we set basically in line with SBTI's 1.5 degree Celsius trajectory. So as you can see from the screen, it shows this information I just shared. And on SBTI's website, they also mentioned E Ink with our highly ambitious net zero target, which is currently the most ambitious designation attainable through the SBTI process. And the next one, we'd like to share one of our annual important social engagement events E Ink for the Future. Basically, this event has been launched since 2017. This year, we are pleased to have invited more ecosystem partners. In October, us together with 22 ecosystem partners, we conducted this event for 39 primary school and 10 public schools in Keelung City at the northern part of Taiwan, a total of 1,075 color e-meter were donated and each device loaded with 102 e-books for school students. So the total donation value around NTD 30 million benefiting over 15,000 students in Keelung City. All right, next page. So talking about moving towards net zero, one of very important events from the Taiwan government. Basically, we've been honored recognized outstanding entity. I mean there is an annual event. It's called National Sustainable Development Awards, and we will be awarded in this category. And also another very important event just being happened early this morning, the 6th Taiwan Corporate Sustainability Award, TCSA, basically this year, attracted 526 participants. We won 7 awards this year, including the most important one is called most prestigious sustainability top 10 corporate and also a platinum award for corporate sustainability report, climate leadership, sustainable supply chain, social engagement and the price will beat and growth through innovation leadership awards. All right. Last but not least, I think one of the leading sustainability rating organization called S&P Global basically announced that we have achieved the highest score of 89 points under the ITC electronic equipment, instrument, components industry this category and year-over-year, 12 points improvement. We are quite excited about this outstanding performance. All right. So that is my presentation for this quarter, and let's move to the Q&A session.

[Operator Instructions]

There, we received a few questions online. I think one question about, share a bit more detail on how we are investing on the cash, for example, from stocks, for money market, et cetera. Basically, our investment portfolio consists of several categories. But most of the investments are relatively stable. So we select more stable stocks in the stock market and we also purchased some bonds. And also, we invested some good company in our ecosystem. So that's how we utilize the cash basically. We have the quite stable investment income being reflected in our P&L. And there's also a question asked, the outlook sales revenue have outlook and also the 2024 outlook. So basically, our fourth quarter still 2 months to go. As I mentioned earlier, we are facing a bit headwind at this moment. The business pickup basically is associated with the 2 things. And the first one is the destocking issue, but it has been smoothing out gradually. And the other one is the 3 color for color transition. And we believe it will take a while to smooth things down. But we believe all the business hiccup should be able to be normalized by first quarter of next year. So that's how we look at sort of like the headwind we are facing at this moment. And for 2024 outlook, we believe we will be expecting a Y-o-Y growth. The first quarter, still, as I mentioned earlier, on 3 color for color technology transition, so first quarter next year would be relatively lower, but we believe we will be better each quarter. In other words, it will be better from 1 quarter after the other. So that's how we see the 2024 outlook.

We have a question from [indiscernible].

Congratulations on the recent results. What I would like to better understand is can you share a bit more detail on the impact of the new color display. So 2024, we can expect a higher share of those being, what's the impact on the margin overall and the cost structure. Can you give us some details there?

Sure, absolutely. Let me explain like this. So for the color technology, we have 3 major color technology. For the E series, basically being used in the ESL market, so as I mentioned earlier, we are in the transition between 3 color to 4 color. So 3 color internally we call it e3, 4 color what we call the e5. So we believe we still need a quarter to get through this transition. But we are also moving forward to e6, but the market then is close to about Spectra 6. So Spectra 6 is also quite suitable for the retail signage. And we believe Spectra 6 can be launch in the market first half next year. So we will wait and see how the market response has. So that's for the E series for the ESL market. And for CE, consumer electronics, or e-note, they are 2 major color technologies, one is called Kaleido. The latest and greatest is Kaleido 3. So it's been launched and some second-tier customers they already adopted. The feedback we collected from them is the climate product really helps them to grow the market to maybe 22% to 30% on the color CE product. So that is the situation. And for another color technology, we call it Gallery 3, that's the latest and greatest. And it's more suitable for the signage application. So basically, we have been shipping samples to our customers. So we are -- we believe it's potential. And there's a possibility like even Kaleido is a printing color technology. But it can sort of like play video. So according to some of our customers, they are thinking to extend their CE device to the tablet-like device. So we do see the potential from that perspective. But it's just at the early stage of this market. So we still need a big time for that. So yes, so that's the status-quo for our color technology.

Perfect. Just a quick follow-up. So what I would be very interested in is the numbers on that. So how much of your revenues are by now coming from the color technology? And what's the impact on the gross margin of this technology?

Max, if -- like basically, ESL sales revenue, they are all color. But I believe you are more referring to the CE, right? So if you are talking about the color products for CE, that's still relatively lower still single-digit yes, still single digit. So we are -- we believe its potential here for the color technology in CE products.

Okay. And ESL was nearly nothing, right? That's all black and white predominantly.

Yes. So ESL basically, I can say 100%, they are kind of a limited color, 3-color, 4-color. And we are moving to 5-color. But through the 5-color, through the filing, you can demonstrate more than 5-color.

So it's not only black and white, anymore?

Yes. I mean, ESL. Yes, E-tech is no longer black and white. We already -- I mean most of the retailer and SI they are already using the color impact already. But we are adding more color into the e-tech.

So what we -- so we just can say that for ESL, then, apparently, the gross margin stays the same no matter if we are like moving from black and white to color and what about CE then? Can we expect margin uplift for that segment?

Max, the ESL, basically, we are supplying e-paper, only. We don't -- in general, we don't supply the e-paper module. So ESL business, it comes with a higher gross profit margin. But for CE, we supply the e-paper module. So the gross profit margin is relatively lower, so the more ESL, we sell the higher gross margin it can be, yes.

Next question is from Jerry Tsai from JPMorgan.

Yes. First of all, can you any update on your capacity expansion. I think there's like a H5 and H6 coming in the next few years. Do you have more like precise schedule on this?

For the capacity expansion for H5, yes, it should be ready second half next year, I think in Mandarin earnings conference one hour ago. Johnson also mentioned that both for H5 should be ready by second half next year. And for H6, we reserve the space in our new build. But we are preparing for the right timing for that. But basically, it will not be happening next year, but it should come after next year. So that is sort of the time line for these 2 production lines. H5 definitely will be ready by second half next year. But for H6, we are still preparing to decide the best time.

And so as H5S, do you expect that it will be like 1.5x the current existing lines. Is that correct?

Yes, yes. Compared to those 4 production line we did before 1.5x, yes.

And maybe another follow-up on the consumer electronics side. I think the consumer electronics side in year-to-date holding better than expected, even stable to slight growth in the 9 months' time. I'm just wondering is it like volume-wise holding better than expected or is it because more like color reader is notes coming online. So the ASP-wise is better than expected. Can you maybe give us some color on that?

I think the upside, you just mentioned comes from 2 areas. The first one, when we are talking about the CE actually it comes from e-reader and e-Note. We do see a bigger potential from e-notes, because recently in China market, they use our e-notes for the current school. Just like those additional courses provided by those private after-school institutions. So they use our e-notes to replace the conventional paper textbook. So that's one of the upside and the other is coming from color.

I think you have mentioned there is a bit push out on the e-color in the second half until 2024. I'm wondering like the printer capacity constraint that we mentioned in the previous quarter earnings call, or and can you have some update on how the printer capacity preparation is now?

For the printing machine, it should be ready yes, it should be ready soon, but not now. So that's why we still have some obstacles in providing some Kaleido products. But that should be ready by, I believe, first half next year.

So maybe my last question will be on OpEx. So I think in the Chinese Mandarin call, we have mentioned R&D expense will see still year-on-year growth to keep the talent in the company. I'm just wondering, can we expect the ratio to see some meaningful decline if we have a higher revenue base after the inventory correction comes to an end?

I mean if the percentage you are referring is the total R&D spending against the sales revenue, yes. I agree with your statement as low as our sales revenue growth, the percentage definitely will go relatively lower because from R&D on dollar value perspective, we are expecting the growth. But the Y-o-Y should be still single-digit growth; so lower dollar sales revenue grows, the percentage should go relatively, yes.

Last question, we will have Kenny Chen from Nomura.

I just asked questions in the Mandarin session, but I still have 2 follow-ups, if I may. I'm wondering -- the first one is on the growth outlook. How should we expect your ESL which is IoT sales growth rate versus the system integration, client growth rate in 2024? I mean if we -- if clients are growing like 25% to 30% in next year, how can we assume E Ink's IoT growth rate?

Yes. Good question. I think it's still a bit early to comment on your question. But I can give you a flavor. I think in the Mandarin session, Johnson talked about, we may still need one quarter to resolve the destocking and current technology transition issue. So as well as it is resolved, the growth from our system integrator should be able to match with our growing momentum. So that's how I see it. And it's very hard to say how the system integrator will grow in 2024, because that I heard a different version. But I think most of their forecast or outlook; they will be growing likely now 20% or 30%. But it's hard for us to judge at this moment. But however, as low as those destocking issue, color technology transition issue, as long as they have been resolved. We believe that the growth of months, the key stakeholders' system integrator, smaller sample and us should be consistent, yes. That's how I see it.

Thanks a lot for the color. And on the CE, how should we expect the growth entering 2024? I know it's a low base this year. And you have major clients ready for the color e-Reader in 2024 to be launched. So I don't know -- how should we assume its growth rate internally faster or slower than the IoT into 2024?

I mean, growth rates, I can't really comment on the specific number. But we are still running 2024 budget cycle. We do see the growth there in fee, but hard to say how much it's going to be because, fee still highly relevant to the macro situation. So I don't think next year that the macro is going to be good. So we still stay a bit conservative in that area. However, from the upside I just mentioned in the fourth quarter, that mile -- should be able to bring up the growing momentum on CE. So hard to say how much it will grow, but we believe it will be growing, in terms of the year-on-year. We noticed one question from Jesper. It's about the color transition issues. Let me just read out the question. That's the issue with color transition persists for longer than initially expected. As I recall, you previously expected of the issue to be resolved by end of Q4. But it sounds like there will still be issues into Q1 next year. Yes, it last a bit longer than we expected. But let me elaborate for this kind of transition, that's mainly associated with the ESL business. And for ESL, we only supply the e-paper to our customers. So our customers procure TFT and driver IC by themselves. And we have around 15 different sizes for ESL products and they basically have the multiple sourcing strategy. So in general, they have 3 to 4 different vendors for both driver IC and TFT-LCD makers. So that complicates the whole qualification process, so that's why it takes a bit longer then withdraw.

Now we will have [ Julie ] from CLSA.

I have a question regarding the productive expansion will during the earlier session, the Mandarin session. I think it seems like we are now expecting commercial expansion to be first to be finalized by the end of first quarter 2025. But last quarter, during the earnings call, it seems like you should have -- we should have the newly launched production line in the second half of 2024. So I would like to convey what is our permitted schedule for now?

So you are talking about the H5 -- sorry, you. I didn't hear you very well. Yes, I think it should be able to be ready by end of next year. But after it's ready, we need to move in and we need a big time to ramp up, so that should go to 2025.

So how about H6, we are still sticking to second half 2025?

Yes. H6, it's always on our preparation list, and we already reserved the space for H6. And I would say that the planning we probably will make it happen in 2025. But we haven't decided the firm date, but H5 basically is in process. That's a timeline I can provide.

Understood. A final -- may I have another follow-up question. Is it fair to say that those commercial expansion, especially H5 is largely designed for the outdoor advertising signage products?

Yes, so no. Of course, we see the potential from outdoor signage. We need bigger size of equipment to meet that demand. However, if that doesn't come that early as we expect, we definitely can utilize that H5 for ESL business, because bigger size of the equipment, theoretically, just like on the bigger size of the fab, TFT fab. So the cost can be even more competitive. So for H5, it doesn't really just serve the single purpose for large size outdoor signage. Basically, it served on multiple purposes. Okay. There's a question and there's a lot of question about is there any inventory issue for CE business. And how is outlook in terms of Black & White and color for 2024? I believe we don't think there's inventory issue in CE. And for the black and white and color product mix, hard to give you a specific number. But we are pretty sure that the color will be increasing in 2024, yes, but hard to comment on the specific percentage.

So there are no other questions on the line. And we would like to thank you for following us and we will see you next quarter.

Thank you. Thank you, everyone. See you soon next quarter. Bye-bye.