Japan Display Inc. (6740) Earnings Call Transcript & Summary

Hello, and welcome to JDI's earnings video conference for the first half of fiscal 2024. Today, we are joined by our CEO, Scott Callon; our CFO, Hiko Sakaguchi; and our Chief Technology Officer, Yoshiharu Nakajima. They will be sharing our latest financial results and business strategy update. You can find a copy of the presentation slides on our Investor Relations website. Just so you are aware, we recording today's conference for YouTube. You'll be able to watch it later on our official YouTube channel. Now let's move on and hear from Scott.

Hi, everybody. Thank you so much for joining. I'll start just briefly, I'll turn it over to Hiko Sakaguchi, who is the CFO, who will run through the numbers, and then I'll come back and talk about what we're doing on the strategy side. So to start with, an apology. We did a pretty significant earnings forecast downgrade for the second half. And that's a problem. And it is a fundamental failure on our part. And our shareholders and all of our stakeholders do have our apologies for this. It does call for kind of a fundamental rethink of what we're doing. We are a pure-play display company that has always been structurally very challenged. We expected to get to EBITDA profitability in the second half of this year. Okay, on that basis, you can manage to be profitable, and that's fine, with the path towards getting significantly higher profit going forward. But to the extent that we're going to miss this, it really does call upon us to clear the decks and do something radically different. So Hiko will talk about the numbers, but I'm going to spend a lot more time talking about what the forward vision looks like, because it's going to be very different. We call the strategy BEYOND DISPLAY. We're cutting away from being a pure-play display company, and there are a number of opportunities that are available that are going to create a lot more value for our shareholders, and that is beginning today. So let me turn it over to Hiko. But again, my apologies. This is an unacceptable outcome and we're going to fix it.

Hi, everyone. This is Hiko here. Thank you very much for taking time out of your busy day, your busy evening to join us on this call today. I'm going to talk about the first half results for the fiscal year ending March of 2025. So why don't we jump right over to Page 12, where we have some earnings numbers for you. So what you see in front of you are the results for the first half of the current fiscal year. Top line sales has come in at a little over JPY 103 billion, EBITDA is a JPY 13.4 billion loss, operating profit is a JPY 15.5 billion loss and net income of JPY 16.8 billion loss. As you see here, sales is down 14% versus the first half of the previous fiscal year. All of our profit lines are actually up year-on-year versus the prior year. I'll give you a little bit more detail later on in terms of what has contributed, both in terms of the sales decline as well as the sort of the improvement in the profit lines. I'm going to just focus right here on this slide on the net income line. As you see, the improvement in the net income line is a little bit more enhanced than what you see above for the operating profit line. Two basic reasons there. One is that last year's first half, we recorded a fairly large impairment loss in the order of magnitude of JPY 9.2 billion. That has effectively fallen off. So that's one big reason for the improvement there. And then the other thing is, as you know, earlier in the fiscal year, we sold our former Higashiura fab, which generated a JPY 1.8 billion extraordinary gain. So these are the 2 primary reasons for why the improvement in the net income line is actually a little bit more enhanced than those above. The next slide here shows the same results for the second quarter as a stand-alone quarter. I'm not going to talk too much about this slide or any other slide that really focuses on the stand-alone quarter, I want to really focus today's meeting from my part here on the results of the first 6 months of this year. So I'm going to skip this slide and move on to Slide 14. This slide here shows the improvement and change in -- I'm sorry, the change in top line sales versus the first half of last year. On the upper hand of the slide, you see our core businesses; in the lower hand, our noncore businesses. For our core businesses, automotive is actually up year-on-year. We had a little bit of a tailwind from the currency, but it wasn't just that. We actually saw strong sales for a series of new products that we launched this year. So automotive up year-on-year. On the other hand, the other part of our core business, smartwatch and VR. OLED smartwatches actually did okay. Sales were flat versus the previous year, the problem was really more VR. VR was down significantly versus the first half of last year, and that really contributed to the 24% decline, what you see on the screen, in terms of sales there. So overall, core businesses together, down 8%. And on the lower half of the screen, you see our noncore business is shrinking by 53%. That's as expected. As you know, we've been saying for a while now that we are strategically exiting our unprofitable LCD smartphone business, and this trend will continue. Again, I'm going to skip this slide, which speaks to the same breakdown of sales for the stand-alone quarter of second quarter. We're going to move on to Slide 16 here. This shows our usual waterfall chart showing how the operating profit line has changed from the first half of last year to the first half of the current year. Now as you see, operating losses first half last year were JPY 21.4 billion. This year, as I mentioned earlier, we're reporting operating loss of JPY 15.5 billion. So you see the breakdown of how that change happened. Volume was a negative factor. That's -- what I've been explaining, it's the decline in sales of our LCD smartphone business. It's the fall in our VR business. The mix improvement is really a manifestation of profitability. Here, you're seeing the benefits of us exiting the LCD smartphone business, which was relatively unprofitable for us. It also manifests from the higher contribution of the OLED smartwatch business, which is -- has relatively higher profitability for us. And also, as we've been explaining over the last year or so, we've been strategically either downsizing or exiting specific product lines that had lower margins within our automotive business. So all of this together contributed to better profitability. So that's what you see in that mix line right there. Otherwise, we continue to chip away at costs. We're always looking at ways to cut costs, to optimize. And then the last line you see there, Other is primarily inventory valuation losses. This is really just trying to drive stronger and tighter management of our inventory, trying to get -- reduce that balance there. And what you see there as a positive impact versus operating loss is that we've actually made headway in terms of how we've managed our inventory over the last year. Same thing here. Slide 17 and Slide 18 simply show -- express the same waterfall change on a stand-alone quarter basis for Q2. So I'm going to skip Slide 17 and Slide 18, and we're going to jump into the last section of my part, which is where we talk about the full year forecast for the current fiscal year. As Scott mentioned earlier, we are revising down our full year forecast. The primary reasons are, first of all, some of our end user markets are seeing weakened demand, especially in smartwatches and the automotive sector. So the customers of our customers are exhibiting sort of weaker demand and weaker consumption trends. That's manifesting in our numbers there. And also, we were expecting earlier in the year, in our original forecast for the year, to report some relatively high-margin eLEAP and/or HMO related licensing revenue. Unfortunately, it looks like that will be either delayed or smaller in size than we had originally expected. And because of these 2 primary factors, we decided to revise down our full year forecast. The actual magnitude of the downward revision is what you see on the screen. We were originally forecasting at the beginning of the year, JPY 221.8 billion of revenue, that now is -- we're forecasting JPY 180 billion. So it's a very significant drop there. I'm not going to go through each of the profit lines, just let's look at the operating profit line together. Originally, in the beginning of the year, we were forecasting an JPY 18.2 billion loss, which now we're looking to be reporting a JPY 31.7 billion loss. So a significant sort of deterioration there in our forecast. All of these numbers, except for the sales line, are still above what we actually achieved last year in fiscal year ending March '24, March 2024. But nonetheless, it doesn't excuse us. These new forecasts are significantly lower than what we had set out to achieve in the beginning of the year. There's no excuse, as Scott mentioned. We were hoping to achieve EBITDA profitability in the second half of this year, that is going to be delayed. And we understand the disappointment in these numbers, and all of us at JDI are apologetic for this downward revision. The last slide I'm going to speak to here is the waterfall breakdown of our previous forecast versus our new forecast. On the left-hand side, I'm not going to talk to it, it shows for our first half results actually compare to what we set out to achieve in the first half, which as I mentioned, were pretty much in line for the first half. It's really the problem is what you see on the right-hand side, which is our second half forecast. We originally set out in the beginning of the year to deliver a small JPY 2.9 billion loss in the second half of the year. That has now expanded to JPY 16.2 billion loss. And as you see, the biggest 2 factors there or what I've explained in the previous slide, it's that the volume represents the fact that our -- the weakened demand in our end customer markets, and the mix decline is what I explained earlier about the fact that what we had expected in terms of our eLEAP and HMO licensing fees, have either shrunk or are being delayed until -- into the next year. So that's all I have in terms of the numbers. I'm going to hand the podium back to Scott to speak about our new strategy now. Thank you very much.

So we're going to make a big change. I'm American, you can probably tell from my accent, you can hopefully tell from my accent. But I have spent most of my life in Japan. So I'm an immigrant to Japan, and I'm deeply loyal to this wonderful country and the wonderful people here. And I still admire this incredible tenacity and commitment of the Japanese people and what we've done at JDI. We are a display company with roots in Sony and Toshiba and Hitachi, the extraordinary commitment and they never give up, and the courage and the tenacity, the discipline it takes to just grind forward despite all adverse conditions, is something that I think we should all admire. And yet sometimes, you need to switch from the courage to battle forward against all odds to the courage to make a big change. And that's where we have ended up as a Board and as a management team and as a company, we need a big change. The global display industry, it is structurally unprofitable. We had a path to profitability that we thought we had, high probability attached to it. We were wrong, and we're not delivering on it. Okay, it's time to do something radically different. And so we are. And so the strategy is called BEYOND DISPLAY, because what you're hearing today is that we're making a substantial commitment of our resources away from displays into some new areas. And let me go into those details. And on that basis, I think things are going to be really exciting. This is just a really, really tough business, the display business. We have core capabilities that are meaningful. We have world-class technology. We have robust IP. We have deep customer trust. We have a very strong geopolitical position as a Japanese company. And we don't make money as a pure-play display company despite all the strengths. So at this time, we made the decision to make a big shift and move on. We will still do displays, and I'll talk about how we're going to do that. But we're adding sensors, AI data centers, advanced semiconductor packaging. All 3 are areas where -- they not only have high growth, they have higher structural profitability and we have key capabilities that are meaningful to those. And we'll see where we go. I mean the firm could end up being a pure-play sensor company. And if that ends as being profitable, we had no problem with pure-plays, we can break ourselves into parts. But we're going to do something radically different that is transformational for our shareholders, our customers, our suppliers and our employees. So look, displays have an advantage of being really important tech, meaningful to the lives of billions of people all over the world. And it is structurally overcapacity because of strategic interest to build out capacity, particularly in China, which is taken a view that this is a very strategic technology, and they're right, but it has meant that the industry is playing with overcapacity and poor profitability. It isn't -- and so we need to do something different, and we will. And the key is to deliver on the 4 elements that are on the bottom of the page, which are all linked to -- you want a technology leadership in order to drive higher margins, you want alliance partnerships in order to deliver higher revenues, you want an asset-light business model and to have higher capital efficiency, you want to further cut costs in order to drive higher margins and also lower breakeven point. All of those are fundamental, and we think they're possible. And to be clear, today's announcement -- at the end of this presentation, Slide 61 -- I won't go all the way there and bring us all back here, we point out that we expect to do further disclosures. Which is to say, all 4 of these elements we've been working on and we think will take us to profitability. And if we if we don't -- can't get to profitability, we will exit. We do think it'll take us to profitability. We've been working on for years. And we're about to begin to have some announcements, we're -- okay, we're doing this, we're doing this and that. And so the reason why today is kind of a strategy explanation as opposed to showing what the KPIs look like is we expect to make some announcements over the next couple of months that will be deeply relevant to the firm and will be positive, and how the firm runs forward. On that basis, at our Q3 announcement in February, we're going to say, okay, this is what we've announced, this is what we're doing. We will be on display, and these are the kind of the things we brought to fruition and here's what we're going to be as a firm going forward, and here's what the KPIs and the numbers would look like, and we attest to it. So a bunch of stuff has happened is happening, and we expect to make some announcements in their future. eLEAP is phenomenal, and that's kind of a key element of it. We are going into mass production next month. This has been a brutal bone-crunching process to deliver the first maskless OLED technology in history. This is really, really hard, and it's fantastic. And so at this point, we're in mass production next month, so we know kind of how we are, we are creating the world's best OLED. Extraordinary brightness, extraordinary lifetime, lower cost, it is really great tech. And that's an example of the first element on the slide of delivering higher margins with technology, doing things that are really, really hard. We love and admire TSMC. They are only people in the world who know what they do. Besides being a capital-intensive hardware business, they're doing something that's truly unique and, therefore, incredible valuable. We prefer to have a substantially lighter business model in terms of assets, and we're going to deliver on that. But do things that are real hard and no one else can do, you get paid because you deserve it, you get paid because you're creating significant customer and social value. So we will run forward in this place. And we're cutting over significant resources to other areas, because we should. I mean we had a plan, to reiterate the point, of getting the profitability in displays. It's not happened. Time to make a big move. And there are another area -- there's significant areas. We think these 3 are the most viable for us to deliver a significant different source of profitability. Sensors, I should point out, we have done sensors just before. So the question is, well, wait a minute, what are you doing different here? And the issue is always been that we are a display company with our core business. We do a little bit around the edges in sensors, for example, we have. And yet, kind of because our core business is displays and unprofitable displays, there's been a decision, and I've been involved in the decision, so I own this, of, okay, we need to get done what we need to get done in displays. And so it has always taken the strongest, most capable resources of the firm and the highest priority. And so despite us having significant capabilities in displays, it was always like the second -- it was like the stepchild who wasn't treated well, and stepchildren should be treated well. So we are now elevating sensors. We're going to put more resources to it. And the key element -- I mean, it's a massive market. It's actually bigger than the display market. And one of the key elements that underpin structural profitability in displays is that displays are, in a sense, sold by the yard. I mean if you take your mother glass, everybody always wants a bigger display, so you have to have increasingly larger mother glasses with all this CapEx requirements on it. Or you're loading fewer items that you're selling, like a larger and larger display under the mother glass, and so profitability is really under pressure. And the great thing about sensors is they can be very small. They like semiconductors. So you just have extraordinarily higher levels of profitability available to you to succeed in sensors as opposed to what you see in displays. We've got a bunch of technology available in this area, which we'll begin rolling out far more aggressively and putting more resources into this. One of the things that we're doing, as an example, which is one of our most recent entry, which is called ZINNSIA, which is a high-precision sensor interface, and this is my favorite description of ZINNSIA. Literally, it makes everything into a switch. We have the ability to turn any surface into a touch interface. It's just super great. We have never experienced this kind of demand for the product. We have customers already in hand. We have -- we really need to resource up this area. And this is in part the background for making a hard cut over to put more resources in to things like ZINNSIA, which we think will drive substantial higher profitability for us going forward. And so this is a long presentation, we try to give you more information rather than less, but I'm not going to go through every slide. But we've got a serious set of capabilities in sensors and we're about to deploy them in a big way, different from what we've done before. The day of JDI being, and for all intents and purposes, a display pure-play company is over. We're cutting over. So sensors is one area. AI data centers is another. And it's probably worth understanding why this makes sense for us, and it kind of reflects Japan's kind of unique situation relative to -- well, it's centered on Japan being a small island country that is super sophisticated, with massive growth in data processing activity. So Japanese compute demand, per the Mitsubishi Research Institute, is literally going to increase 100,000x between 2020 and 2040. We need massive more compute here. And it's a small island country. And so it's not as if you can say, well, we'll just kind of open up this or that in much larger countries. And it's not just about the land from or data centers, it's like 3/4 of the country is mountainous, you can't put things there. There's tsunami risk. We're an island country. Good locations because land is so scarce and so unavailable, Japan is already built out. I mean it's a huge problem to get locations for data centers. Two, we have a deep shortage of grid capacity. It is a fundamental problem within Japan's economic infrastructure, that's understood and it's going to take decades to resolve. So it is like, okay, you can't get the land to put up a data center; two, you can't get power to your data center. And as we all know, data centers require huge amounts of power. And the third issue is there's a massive shortage of construction labor linked to both the aging out of Japan's construction workforce and all these rules to protect workers from over time, which make it impossible for you to work long hours. And so we have this double punch that is taking down the ability of Japan to build things with any degree of speed. So what it means is 100,000x in compute demand and a total unavailability of the data centers to accommodate this. And we're JDI, we now have some technical capabilities that are relevant to the space, but we have what you need for data centers. We literally have kind of unused fabs that are available that we will deploy against this opportunity. We will deploy. And deploying, kind of is 2 versions. The more obvious one, and we will do this, is to sell what we have at extraordinary returns for JDI shareholders and get the money back. I mean, that's great. We are in the business of rewarding our shareholders and growing value for our shareholders. There's another element. And particularly, we have -- because there's global interest in Japanese -- Japan is deeply integrated into a global economic system. There's global interest in Japanese data centers. So we also have foreign data center enterprise investors coming up and say, we want some of your engineering capability involved. And so we may do some partnerships also in this area, where we're kind of involved as an operator in the data center space. But as an example, we have an unused fab right near Tokyo, away from the ocean, so that we don't have to work at tsunami risk, 44 megawatts available, a power hookup immediately, a built-out floor area and cleanroom area. Data centers need relatively robust construction. We have super heavy equipment. So we have absolute world-class construction. Our -- we've done the work on this, our fabs and our buildings can be deployed immediately for data centers. This shows a little bit of a map. It says JDI Mobara right there, with the blue dot in Japanese, it says that we've got a factory there and we have an electrical hookup going in right in the factory. So this is a super prime location readily available to become an AI data center. And we have another fab, this was in Tottori. So it's in Southern Japan, doesn't have the prime location of Tokyo, which has all this kind of network traffic. But again, there's also things that you're doing with data centers, and you can do LLM modeling and that's kind of more compute-intensive rather than bandwidth intensive. There is an opportunity to deploy this. It's reasonably close to Osaka and Hiroshima, but it's available. And again, bunch to land, power right available, we've got the buildings, the cleanrooms to become data centers effectively also immediately. So Tottori is an opportunity in the data center space, and we think we'll get this done. And there it is. And again, the yellow line are the trunk lines that are running, and we got one going right into our fab in Tottori. This one is a little bit more work. In fact, a lot more work, but pointing it out as an opportunity because it has more work because undeveloped. So this will be a multiyear process to get this thing online. But it's worth pointing out that we do have the land, and it's sitting right next to a massive 275 kV trunk line right there. And so Tokyo area, lands available. The trunk line is literally right there. This is very low cost and a lot easier in terms of the new construction to bring this up, so it will be faster rather than slower. But this is -- again, an order of magnitude, more difficult. But it's the first 2 opportunities which are immediately like we can solve for the Japanese AI data center problem now that are really interesting. So we're going to do AI data centers as primarily -- we think it's a sales opportunity and a monetization of shareholder value, but also there will be an ongoing, we think, presence there in some way or form. It's a huge growth market, and we can become more involved space in ways that we're pretty sure we can add value. Final area is advanced semiconductor packaging. Another very big market. Substantially better economics. I mean pretty much everything has better economics than the display industry, the -- than what we're achieving today. And it's worth pointing out that there is a significant technology shift that's going on right now. AI semiconductors or leading a semiconductors that are super, super hot. And because they're so hot, thermal requirements have become so much higher that organic substrates people have been using no longer work. They just don't deal with -- they don't have thermal characteristics that are necessary. The increasing use of chiplets, so they're putting multiple chips on a single substrate is kind of calling for larger substrates than silicon is very well positioned to do. And so there is a huge need to move to glass. The industry has recognized this. The semiconductor industry has recognized this. And we are seeing high-end semiconductor manufacturers buying display fabs for the glass processing capabilities. So TSMC bought and is buying a second fab from Innolux. Micron has bought multiple fabs from AUO. And the key is to be able to do super-high resolution kind of line etching to connect these various chips on the substrate, and JDI is the best in the world at high resolution -- ultra-high resolution processing of glass substrates. So our ASP, which in this case we mean advanced semiconductor packaging, we have the technology and set of capabilities that are deeply relevant to the space. So I should have pointed out earlier, we've got ongoing activity in sensors that we're going to make bigger. We have ongoing discussions that we think are going to come to fruition sooner rather than later in the data center space. We've got ongoing activity in the semiconductor space. Because it's what I said earlier, I mean, this is a technology transition that is enormously important. I'm going to show these slides rather than speak to them. I just want to make sure you know we actually have some material describes what we're doing and why it's appropriate to the space. But we're deeply relevant to this, and you should expect to be involved. So thank you for your patient listening and I look forward to serving you in a far more powerful way with this new business model. We do think we will get to profitability in displays, but it's going to be a radical shift to the company to move resources away from it. And if we don't get there, again the profitability in displays, then that makes it pretty straightforward. We know we were going to focus our resources in high profitability areas, but we believe this is a powerful way to run forward for you. Again, I apologize for this. What we expect to see this year is a miss in terms of our earnings. It's unacceptable. We're going to get this right and we're going to fix it for you. Thank you very much. Happy to take any and all questions.

[Operator Instructions] Since there are no questions, so we'll be wrapping up today's briefing. We deeply appreciate your participation and would like to express our sincere gratitude. Thank you very much for joining us today.

Thank you very much, everybody. We'll run forward.