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

Good afternoon, and welcome to the E Ink First Quarter 2024 Earnings Call. [Operator Instructions] Today's conference is being recorded. And the Webex replay will be available on E Ink's website after today's conference. Joining me today are CFO, Lloyd Chen; and Finance Center Senior Director, Patrick Chang. Now I would like to turn the call to Lloyd.

Good day, everyone. My name is Lloyd. Before we proceed, as you can see from the screen, the new cover page, I would like to share some information behind. Basically, for the display, you can see from the screen, that's our 88-inch large-scale color e-paper display being showcased in Touch Taiwan just happened last month. Basically, it's [indiscernible] display 88-inch, this display consists of on 6 31.5-inch narrow bezel on the E Ink Spectra 6 modules. This large size captivates audiences with visual on comparable to high definition on [indiscernible] and featuring saturated color effects that rival the visual impact of on-paper printing. This display demonstrates the environmental benefits of I'm using e-paper for large digital advertising sites, not only I'm saving energy but also increasing the utilization of the same advertising space. We're going to talk about more later on in my presentation, right? Next page. Let's take a few seconds on the safe harbor statement. Next page. Yes. For the Q1 on results, revenue was about TWD 5.6 billion, and nonoperating income was around TWD 0.88 billion. Net income was TWD 1.3 billion, basically on business headwinds due to the color technology transition and inventory correction, especially on the ESL material sales impact. Next page. So once again, for the operating profit, as I mentioned earlier, that was on TWD [ 0.88 ] billion, basically, the Y-o-Y decline was mainly due to, as I mentioned earlier, business headwind was associated with the color technology transition and inventory digestions. And even some business hiccup, what's happened on the first quarter. However, the revenue and net income still on the third highest in the past of 13 years. Next page. On the balance sheet side, the total assets was around TWD 80.9 billion first quarter this year and versus TWD [ 68.4 ] billion, first quarter last year, year-over-year increase TWD 12.5 billion increase. Total assets increased from basically operating and financial investments basically continued profitability has led to an inflow of cash from operations, resulting in increase on cash reserve, financial investments and net asset value per share. All right. Next page. On the cash flow, first quarter on both cash and financial assets increased totally around TWD 54.1 billion, a year-over-year increase was around TWD 5.2 billion. The slight increase in terms of the cash inflow in debt was mainly due to the preparation for CapEx expenditure on the e-paper production line, basically, I mean to support our future operational growth. Right. Next page. So next, normally, we talked about on the recent recognition received outside organizations. So we collaborate with Kaohsiung museum on the first quarter to integrate on e-paper signage beyond cultural sponsorship, we endeavor to launch diverse, sustainable and innovative activities, basically combining technology and art to achieve win-win cooperation. We also always value on talent, cultivation and development. So we continue to participate in the 2024 talent in Taiwan. Also, as you can see, we are the early adopter for TNFD. We always care about the natural environmental impact and on biodiversity on conservation. So as I mentioned just now, we are an early adopter on for TNFD initiatives. And for those achievements in CDP. As you can see from the screen, for the CDP Supplier Engagement Rating. We have achieved the highest rating of A supply chain collaboration on leaders. And also in terms of the climate change and water security management, we also achieved the good result. Of course, there's a room for improvement. So we will continue to improve on this [indiscernible]. Next page. Further on recognitions, the 20 on Taiwan Golden Root Award organized by the TICA, Taiwan Industrial Technology Association, basically they've honored us with the special contribution award. We also have constantly ranked in the top 5% of enterprises in the S&P Global Corporate Sustainability Assessment, CSA, affirming our sustained efforts in the ESG performance. Also same thing, we were being awarded in MSCI, as you can see, there is recognition, rating, indexes, I think for the detail, you can see from the screen, also for EcoVadis, as you can see, we were Silver and being back on the top 5 -- top 15% in terms of the sustainability rating. Next page. April this year, last month, we received the sixth Presidential Innovation Award, basically this award on recognized E Ink efforts in technology innovation. We have remained dedicated to ongoing technology development with our green products. We will keep it up. Next page. Basically more recognitions on display. Our low flash, faster refresh rate Spectra 6 plus, as I mentioned earlier, its color on e-paper technology is long on the Excellence Products, Gold Panel Awards on 2024 in the panel module product category. And also, additionally, our eNote medical care has also worth TDUA Smart Medical Smart Display Application Awards in 2024. Next page. So once again, we showcased our latest and greatest technology at Touch Taiwan, this year, we collaborated with 62 partners upstream downstreams in our ecosystem with the focus of accelerating technology advancements and expanding green product applications. We have developed a comprehensive business strategy for on the e-paper on ecosystem. Next page. Last but not least, for the second consecutive year on one of the leading magazine in Taiwan Global Views, we have been honored with the Global Views on ESG on corporate sustainability awards under the category of electronics technology, and among 162 companies. And also one of the leading corporate governance evaluation organized on either Taiwan Stock Exchange, we remain top 5% ranking among 754 listed companies. Okay. So that's about my first quarter presentation. So let's move to the Q&A session. Thank you.

[Operator Instructions]

So while we try to get some online questions. I would like to share what we just talked about in previous earnings conference at the Mandarin one. So basically, the guidance we gave to you guys was in terms of the sales revenue, our sales revenue, basically will be better on 1 quarter after the other. That said, basically second quarter will be better than first quarter, third quarter will be better than second quarter. Fourth quarter will be better than third quarter. And for the inventory correction. Basically, we believe it will be ended by second quarter and that's specifically for the basic inventory. So we believe in terms of the whole year, the sales revenue, basically, year-over-year, we still believe a positive growth in terms of the year-over-year on sales revenue. So basically, that's the general guidance we gave from our Mandarin earnings conference. And we do see some online questions. One is relevant to the second quarter sales revenue, the question basically, is second quarter sales will be better than first quarter? Yes, as I just mentioned earlier, yes. And for the margin looks low. Yes. Basically, that's caused by the product mix because for the CE business including eReader and eNote. The business model, we are running the module modest business model. So -- and basically, it's a material sales related business. So yes, so material sales, basically that the margin, normally is higher than the CE. So in the first quarter, the product mix sees higher than IoT. So that caused a relatively lower margin in the first quarter. All right. And I would like to take the question from Kenny, Nomura.

I still have two questions. So the first one is regarding the CE. I'm wondering if you could provide the color eReaders and eNotes penetration rate in 2023? And do you have any thoughts on how the penetration rate will go in 2024?

Right. So a short answer is definitely the penetration in 2024 will be higher than 2023. And but to what extent it remains to be seen because Kobo launched their new color reader and the market feedback basically is excellent. So we do see on the upside in terms of the demand going forward. And for the rest of the player in this industry, and we expect there will be also the new products being launched. So but they haven't really launched the new product. So we don't really know how well that the market feedback going to be. So we still need a lot to observe what will be happening in terms of the market feedback. So coming back to your questions, in terms of the penetration rate for the color product. Hard to say at this moment, but we believe that there will be definitely a growth year-over-year. So allow us to comment on it in the next quarter.

I see. Thank you. And regarding the retail, yes. Yes, I know you have demonstrated the quarter-on-quarter sales movement. But I'm wondering how can we see the magnitude of half-on-half improvement during 2024. Should that be -- should your growth be in line with your major SI clients or any other way to think about that?

Right. I think in terms of the change, definitely, our growth was consistent with the SI growth, no doubt of that from the trend perspective. However, we are suffering from the inventory correction to end of second quarter. So the growing momentum will be picking up gradually from third quarter. So we still need to observe how fast they can pick up. So it's kind of hard to comment in terms of the year-over-year growth for a year so. But we believe our third quarter, the growing momentum will be back to the normal manner, that's for sure. But how soon it can pick up. We still remain to be seen, allow us to observe for a while. So I think that's my comment. There's online question about the long-term margin outlook. And I think the question is also relevant to the pricing strategy. For example, more aggressive pricing to help the ESL penetration affect our margin performance or not. Basically, this question is raised by Alex Steve. So long-term margin outlook, basically, I would say, it is determined on our product mix. So we basically aiming for the gross profit dollar growth, not really aiming for the short term on gross profit margin growth. In other words, we really want to open up the market -- the e-paper market share in order to make more gross profit dollar. So we want to use color technology to trigger the start growth, not only on CE but also on ESL, maybe up even in the long run, outdoors line which -- so how well they will grow in order to affect the product mix? It's hard to say at this moment. But maintaining 50%, I think, we don't have a concern from that perspective. So I think that's how I see it for -- in terms of the long-term margin outlook. More aggressive pricing to help on ESL penetration. We believe so because once again, we really want to open up the market share not only on ESL, but also on CE and outdoor signage. So I believe aggressive pricing, mainly that would affect our short-term margin a bit, however, as well as it hit the economies of scale, we're going to be getting more gross profit dollars in a way. So given the fact that the demand for CE, ESL, even outdoor signage definitely still intact in the long run. So we definitely will consider on the aggressive pricing. But we don't think it will affect our gross profit margin in the long run since we are dominant in this industry. Basically, we are the price maker. It so depends on how our strategy is. So as long as we are the price maker, we should have the room to decide our margin in the long run. But once again, we really want to open up our e-paper market share in order to make more and more gross profit dollar in the long run, okay? So -- and, okay. There's a question from...

We see a question from Jennifer from JPMorgan.

Can you hear me?

Yes, very well.

I have a few follow-up questions. So first of all, can you share like the breakdown in the first quarter and how much of our ESL is from white colored and how much is it from three-colored? And can you share your view on how the penetration of full color will be by year-end this year?

Yes. The -- what's the second question come again? Sorry.

So what the penetration of four colored ESL, are we expect full color ESL by year-end?

All right. Okay. For the first quarter, the I think -- sorry, for the first quarter, four colors still basically at the majority, but we also try to get rid of the leftover three color inventory. So I mean, we don't really disclose in detail for between four color and three color in the first quarter. But I think going forward, four color definitely will be the main street. So majority, on 80%, even higher 90% will be on four color.

And another follow-up regarding the outdoor signage. I think we're ramping up H5 by year-end this year and H6 next year? Can you maybe give us some update on how the size it is for H5 and H6 compared to our existing lines?

You mean capacity differs?

Yes. I think we have previously mentioned that H5 will be, say, 50% larger compared to the existing lines? Is that still the case? And what's our plan for H6?

Yes. So H5, basically will be moving by end of this year. So normally, we need a quarter or 2 to get everything ready, it picks up the issues and ramping up, so that is a status quo. And same thing for H6. So basically, H6 probably become -- H6 basically in preparation mode. So H6 basically could be ready by end of next year. And once again, we probably need a quarter or 2 to get everything fixed and get it ready. And in terms of the capacity, yes, on H5, as we mentioned earlier in the previous earnings conference, the capacity will be 1.5x than those capacity from the four lines that we have done. Yes.

Understood. And so do we have like further plans for H6 now? Or is it still under discussion?

Come again, Jennifer?

For H6, is it also 1.5x the current capacity? Or are we going to make it even larger compared to H5?

The idea is 1.5x or higher, yes. Bigger. I mean, yes.

Understood. So my last question is that I think in the Mandarin call, we mentioned that we have pull in onto ramp-up schedule be and H5 is coming year-end this year. So can you share a bit more color on our expectation on the large outdoor signage contribution to our revenue and [ 1.5 ], do we see like confirm the demand or order in the pipeline. So as far as the capacity is roughly [indiscernible] we can say, transferred to revenue rapidly, and maybe some color on the outdoor signage?

Right. Correct. So let me give you more color on the Yangzhou expansion. So strategically we will not expect the module capacity for the small to meet sized display. We only do the large size. So that's the first thing I would like to clarify. And second of all, for Yangzhou, apart from those on large-sized module production line. We also do the printing machine line expansion in Yangzhou. So that's what we are doing at this moment. And for 2025 since first half, we still need some time. Even the equipment moving by end of this year, we still need a quarter or 2 to get things ready. So it's really from the second half of this year to generate the sales revenue for large size outdoor signage. So I don't think that's going to create a meaningful sales revenue. So if you are talking about the meaningful sales revenue contribution, I believe, 2026 will be the year to consider more realistically. We still see online question, [indiscernible], I saw your question. I think your question is more like how can we hit the year-over-year sales revenue of growth in a way seems ESL, we need from the first half to -- for the inventory digestion, and for CE still was still relatively lower. So what I can tell you is for CE basically, after the Kobo launch on their color products, we do see a very strong growing momentum. So we see the upside on demand. But how well it's going to be. And the rest of the player when they are launched on their products, hopefully this year and how well is going to grow. It's hard to say at this moment. But in general, we believe they're definitely going -- we definitely expect a year-over-year growth, CE growth in a way. So from that perspective, the contribution from the CE business can be expected. And also for ESL, as I mentioned earlier, from third quarter after the inventory correction, we believe the ESL growth will be back to the normal manner. So add up those to positive parameters, we believe that year-over-year sales revenue can be expected. . And there is a question about the [indiscernible] on LCD and the question is about that technology, that product can be a possible rate against our e-paper technology in the foreseeable future. It's a good technology basically. We definitely believe in that. But so the nature of their technology, as far as we understand they are using the multiple glass layer. So more glass, more glasses that is used the more [indiscernible] is going to be so from an ESG perspective, possibly, it could be a challenge for the customer and also multiple on glasses player, the thickness of the device could be an issue from a customer perspective. So also, I mean, on top of that, sees is still LCD-based technology products. So we believe our technology is still more how efficient than that technology. So I would put a question mark about the effect you just mentioned. So that's how we see it. But anyway, it's a good technology. It's good technology. There's a question about the yield of the full color ESL. So, yes, we started on the mass production for full color ESL. So inevitably lower yields can be expected, but I have a good faith on our operations folks, as long as the volume goes up, we have a more volume to work on that your issue. We believe we -- the yield can go back to the mature level in a way, very, very soon. So we -- I don't think that the yield should be a concern in the long run.

We also see questions from [indiscernible] from HSBC.

My first question is still regarding the product mix impact to gross profit margin this year. I remember during third quarter's earnings conference last year, management team mentioned GPM has the chance to remain flat Y-o-Y. So as we are seeing stronger CE revenue this year, and we missed some of the ESL revenue in the first half. Should we expect a lower GPM margin in 2024? That is my first question.

Okay. As I said, as I mentioned earlier, CE is growing. So it's a module business. So basically from a product mix perspective, it would affect our gross profit margin in a way. However, the ESL inventory issue will be ended by second quarter and the shipment -- ESL shipment start picking up from third quarter. So how well it's going to be, how certainly it going to be, it still remains to be seen. So it's kind of hard to comment the blended gross profit margin for the whole year would be higher or lower than last year. I mean we still need some time to understand better. But once again, as I mentioned earlier, short term, gross profit margin is not what we are aiming for. We really want to open up the e-paper market share. So as long as the color can trigger the further growth of the e-paper products we will work harder to make it happen. And on top of that, we are in a dominant position in this industry. Basically, we are the price maker. So we will carefully and strategically take advantage of that, our role in order to best maximize our gross profit dollar.

Yes. Very clear. So I have a follow-up for this because you also mentioned, I think the key multiple points is how fast we can [ rent ] in terms of the ESL production in second half this year. So a quick follow-up is are we still expecting full-year ESL can grow year-over-year? I think that is the question I wanted to ask.

That is -- let me confirm. Your question is, can we expect ESL year-over-year growth whole year, right?

Yes. Because we know CE will definitely grow this year. So my question will be, are we still expecting full-year ESL sales to grow Y-o-Y this year?

We stay positive, but we don't know at this moment. As I mentioned earlier, inventory correction for the first half, and we start pick it -- picking it up from third quarter. So how well and how soon it's going to be, we still need a while to observe. If it goes very well, we definitely will be expecting year-over-year growth if it's slower than we expect it's hard to say.

We see Kenny from Nomura have further questions.

Sorry, excuse me, if I may have squeeze one. Yes, sorry. Just yes, still regarding the CE apparently, we're seeing very good growth progress right now. But I'm wondering if you currently -- given the order visibility, do you have enough the output capacity to support further growing demand. For example, your outlook for fourth quarter revenue was [ $4 billion ]. I'm wondering the mix, how much you can output in the rest of the quarter in 2024?

So Kenny, the capacity expansion we have done in the past 2 years for those lines, we believe we build enough capacity for both CE and ESL products. I think in the past, I mean past 1 year or 2 years, we never explained those full production lines. CE and ESL product can be switched around, no problem at all. So I mean, from a capacity perspective, there's no concern, there's no issue for that. And of course, in our Mandarin session, we ever talked about the ink, the ink for [indiscernible] Gallery and full color seems they are relatively newer products. But once again, I have faith in our operation folks a slow as the volume goes up, we should have enough volume to work on the yield issues. So from an output perspective, associated with yield or a capacity perspective, we should be good to go in the long run, yes.

Okay. And yes, so for [indiscernible] CE for CE, can you comment on the CE gross margin trend and will be determined by mainly on sales scale or product mix. For example, if you're a color e-Reader penetration really striking, should that be a positive catalyst for your CE gross margin?

Right. So economies of scale is definitely will be helpful in terms of the gross profit margin. So as the volume goes up, we definitely can enjoy from the operational efficiency. So yes, the operational efficiency includes the volume discount from our suppliers and the yield improvement something like that. So there is a question about the steps we are taking to address the problem both four color ESL, I'll call it the gradation especially for the yellow color. So basically, I don't exactly know what you are referring to about the yellow color. But let me put in this way, if our yellow color still an issue, I don't think our customer would take the product, even consider the technology four color technology. So not to worry too much about the color degradation, especially on the yellow color. And there's a question about higher OpEx in the first quarter. It was [indiscernible] by [indiscernible]. [indiscernible] let me put it this way. I believe our OpEx basically is in control. So are you talking about the OpEx percentage against the sales revenue, of course, because our sales revenue in first quarter was relatively higher or lower. However, if you are talking about OpEx dollar value was relatively higher. I think going forward, we -- our investment to our talents and also R&D is too many focuses. So if you do notice there's an increase in OpEx, basically they should be relevant to the employee costs and the R&D rather unrelated investment because we do believe the talent, the good employee, talented employee should be the key to help us to grow further. So how to provide a more competitive to our talent to help us to grow. That's extremely important. So that one can be understood well. And also R&D expenses because E Ink is a technology company, our, 50% of our R&D is relevant to the existing products and another 50% is relevant to our future products. So in order to generate more and more sales revenue we need on the future technology to help the growth. So coming back to your question, we control the OpEx very carefully. I believe it's in control. But for those two categories, employee costs, especially on the talent and also R&D, basically, that's something we will still invest. And basically, that's the main driver to help us to grow further.

At this moment, we did not see any further questions on the line. So let me turn the meeting to Lloyd for closing remarks.

All right. Thank you very much for all the questions. And, yes, I think I answered pretty much all of your question, and I believe, once again, let me just repeat the guidance we gave in the Mandarin session and also from what I just mentioned. So in terms of the sales revenue, basically the whole year 2024, we believe it will be better than 2023. And quarterly sales revenue, basically, we believe that would be better 1 quarter than the other. And ESL business, the inventory correction, we believe [indiscernible] ended by first half of this year, and the growing momentum will be back to the normal manner from third quarter this year. And to what extent ESL growth for the whole year, we still need a while to observe, and we still stay positive of -- with that. Okay. So thank you very much. Let's talk in the next quarter. Thank you.

Thank you for your time and see you next quarter.

Thank you.