Nanya Technology Corporation (2408) Earnings Call Transcript & Summary

[Foreign Language] Welcome to Nanya Technology's 2024 Third Quarter Earnings Conference Call. [Operator Instructions] The conference will be held only in English for investors around the world. Today's conference will be approximately 60 minutes. Nanya Technology's President, Dr. Pei-Ing Lee will summarize our operations in the third quarter of 2024, followed by our guidance for the next quarter and key messages. And then Nanya Technology's Executive Vice President, Dr. Lin-Chin Su; Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao will join us as we open our Q&A session. Today's presentation materials are available for download at Nanya Technology's website at www.nanya.com. As usual, we would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause the actual results to differ materially from those contained in the forward-looking statements, and please refer to the safe harbor notice that appears in our presentation materials. Thank you. Now I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee for the summary of operations and current quarter guidance. Dr. Lee, please begin.

Ladies and gentlemen, welcome to Nanya Technology Investor Conference. I'm Pei-Ing Lee. My agenda for today is starting with Q3 revenue and result and then followed by CapEx and bit shipment, market outlook and conclude my business review and outlook. First, Q3 2024 revenue and results. Q3, our net sales comes to TWD 8.133 billion Q-to-Q, a reduction of 18%, and mostly due to our shipment decline, and our gross profit comes to TWD 264 million compared to Q2 of TWD 287 million is about similar. Operating income, minus TWD 2.505 billion versus Q2, minus TWD 2.319 billion and EBITDA of TWD 1.52 billion. Nonoperating income, TWD 677 million and income tax benefit TWD 341 million. Comes to net income of minus TWD 1.487 billion at a margin of minus 18.3%. Earnings per share come to minus $0.48 per share, with the book value comes to $53.17 per share. And this result is accounted with a recognition of TWD 475 million due to power outage in Q3. And in Q2, we have an earthquake impact also. So quarterly revenue comparison Q-to-Q. Q3 versus Q2, our revenue down by 18.0% and year-to-year of plus 5.1%. Shipments declined by low 20s. And ASP increased by mid-single digits. And the exchange rate are relatively flat. A little more detailed comparison. Our net sales in Q3 comes to TWD 8.133 billion versus Q2 of TWD 9.921 billion, is a decline of 18%. And out of that, ASP increased by mid-single digit, with the bit shipment declined by low 20s. And exchange rate relatively flat. And gross profit, TWD 264 million with margin of 3.2% versus Q2 of TWD 287 million, margin of 2.9%. And gross profit decreased by TWD 23 million. And this is including the power outage. This is due to the lightning strike Taipower supply system and the Taipower supply system went down, and as a result, our company power has a complete outage, okay? And that has a relative loss of TWD 475 million. Operating expense TWD 2.769 billion versus Q2 of TWD 2.606 billion. The operating expense increased slightly by TWD 163 million. And out of that, mostly come to R&D expense increased by TWD 140 million. Our operating income minus TWD 2.505 billion at minus 30.8% operating margin versus minus TWD 2.319 billion at minus 23.4% margin. And this is due to operating loss increased by TWD 186 million. Net income comes to minus TWD 1.487 billion at minus 18.3% versus Q2 of TWD 814 million at minus 8.2%. Although that the reason is that first of all, net loss increased by TWD 673 million, and a major reason for that is exchange rate impact, this Q-to-Q impact of TWD 324 million unfavorable. And that's because of Q2, we had exchange rate gain and versus Q3 exchange loss plus and minus the difference Q-to-Q is by TWD 324 million. And the second impact is the income tax unfavorable by TWD 118 million, okay? Accounted all this together, exchange rate, income tax and the marginal operating loss due to increase in R&D expense. Q-to-Q operation result is very similar. Our SG&A expense for Q3, TWD 631 million, slightly increased versus the -- on the right-hand side, R&D expense comes to TWD 2.138 billion for Q3, an increase of TWD 140 million. This is due to -- we tried to expertise our implementation of new technology and a new product in the production system. For cash flow, beginning of balance for Q3 is TWD 65.491 billion. And with the cash from operating activity, minus TWD 126 million and capital expenditure, minus TWD 7.333 billion and financial activity increase of TWD 3.035 billion. The end balance for cash is TWD 61.067 billion with free cash flow of minus RMB 7.459 billion. And if you look on the right-hand side of the chart, our beginning of balance for January this year is TWD 58.812 billion with cash from operating activity of increased TWD 2.083 billion and capital expenditure of TWD 2.771 billion and financial activity of increased TWD 12.943 billion. The end balance for September 30, end balance is TWD 61.067 billion. And our net cash and equivalent comes to TWD 38.2 billion at the bottom of this chart -- note, okay? Cash equivalent minus the short-term debt and the long-term debt, our net cash comes to TWD 38.2 billion. Our CapEx and bit shipment. For CapEx, Q3 CapEx was $7.3 billion. In total, Q1 to Q3, our CapEx was TWD 12.8 billion, and CapEx for this year, plan up to TWD 20 billion is just down from TWD 26 billion. This is due to equipment shipment and the payment term delay, okay? The total wafer equipment CapEx is accountable for around 50% of this CapEx. For bit shipment on the right-hand side, our Q3 bit shipment decreased by low 20s and bit shipment is expected for this year to increase by around 10% year-to-year, this is adjustment down from original forecast of 20%. For market outlook. We are seeing a demand for AI application, particularly in the cloud and HBM applications remain robust. However, demand other than AI in a general PC, in mobile and consumer products are slower than expectations. And we also see the regional economic downturn and comfort around the world, including Middle East and Europe, have impact on DRAM demand. And from the supply side, major suppliers have continued to allocate capacity for HBM and DDR5 and advanced nodes, an inventory level for standard DRAM product that's including DDR4, low-power DDR4, DDR3 lead time to reduce. For the demand side, AI server helps boost the demand for DDR5. This is the application that is remained robust. For the mobile side, sales for mid- and low-tier -- low-tier smartphones did not improve, okay? And high-end AI phone may increase DRAM content. For the PC side, AI PC is still in the initial stage of growth. Consumer side, the long-term -- short-term demand remain conservative and regional economic improvement is required to demand recovery. For Nanya business review and outlook, Nanya business, for Q3, we have a net loss of TWD 1.487 billion, that's including power outage loss of TWD 475 million. EPS is minus $0.48 per share. Our volume production for second-generation 10-nanometer class 8-gigabit DDR4 and 16-gigabit DDR5 is as scheduled. We are having targeting our wafer input exceeding 15% of total capacity by the end of this year. We plan to introduce our second generation of 10-nanometer class low-power DDR4 and low-power DDR5 in 2025. And our third-generation 10-nanometer class product development are on track. Thank you. That concludes my presentation. Now let's move to question and answer.

[Operator Instructions] The first one to ask question, Jeff Ohlweiler from Macquarie.

Dr. Lee. Two questions for me. Number one, how is inventory at Nanya Tech side? I guess 3 questions. Two is, as your utilization rates back to full. And 3 is, how much DDR5 shipments do you think you can get out in the fourth quarter?

Okay, Jeff. Our inventory level because of shipment in Q3 is down by 20%. So inventory level was not improved. However, because we are starting to move our production into our second generation of technology, that's including DDR5 and [ KGD-used ] DDR4. And that will help us improve our inventory as we speak, okay? And our production wise, because we are migrating the most of the production -- 15% of the production into DDR5, as a result that, we don't have any utilization reduction, we are in full production. And as of DDR5 contribution, we are expecting it's going to be gradually increasing month by month starting December and then gradually into Q1 next year.

Okay. Great. Maybe a couple of follow-ups quickly. One is what's the latest schedule for the Fab 3 ramp-up?

Fab 3, you're talking about current edition -- we have Fab 3 ramping up as we speak, we already started wafer input for the DDR5. .

Okay. And I guess last question then I'll get back in line is, can you talk more about -- it seems like your ASP was up for the quarter Q-o-Q, but it seems like a lot of the news flow has been Chinese competitors flooding the market with some DDR3, DDR4, low-power DDR4 and price is down, but at least you're seeing your ASP. Can you talk a little bit about pricing trends in the third quarter and also into fourth quarter?

Fourth quarter-wise, it looks like -- from a DDR5 point of view, still have a good chance of continue to make improvement. And for the rest of the product portfolio, including DDR4, low-power DDR4 and DDR3, will very much depends on a couple of topics. The first topic is the inventory digestion from the big 3 suppliers. As far as we understood that the big 3 inventory level in DDR4 and low-power DDR4 is still relatively high at the point and still digesting, okay? But as they migrate more of their capacity into HBM and DDR5, likely that will make improvement, too, okay? That's one topic, okay. And the second topic is the regional economic improvement. There are some stimulation policy being introduced recently. However, the result will still need to be observed for the next couple of months, see how it goes.

Next one to ask questions Simon Woo from Bank of America. .

Yes. Number one, you are feeling that the December quarter ASP for Nanya Tech still showing the quarter-on-quarter increasing trend?

From an ASP point of view, our DDR5 contribution percentage for Q4 still not sufficient, okay? We're looking for Q1 next year for a more significant contribution for DDR5, okay? And with the DDR5 price advantage versus DDR4 and low-power DDR4 likely the major contribution may gradually started to happen in Q1 next year instead of Q4 this year. So DDR4, so Q4 this year's December quarter is still challenging from an ASP point of view.

How about DDR3, sir?

DDR3 remains the same. It's similar to DDR4 and low-power DDR4.

So you mean the DDR4, low-power DDR4 and then DDR3, they are showing similar pricing trend?

Pricing trend, yes. Yes.

Yes. But you think not easy to see the price upside further for December quarter for the...

I think it's challenging, but this is going to be month by month, we have to see how the inventory digestion from the major supplier and how the economic situation then improve from regional economic situation countries.

However, once the Nanya Tech, say a more expensive DDR5 versus DDR4, the blended ASP upside we can talk, mix improvement ASP upside. .

We expect that to happen on Q1 instead of Q4 this year. Yes. .

Yes, yes. And then eventually, the legacy DRAM, DDR3, DDR4 will be more balanced once the big 3 DRAM makers reduce their production volume or inventory of this legacy product?

Yes. That's what we expect to be happening in the next few quarters.

Next few quarters and not immediately for now, right?

Probably not going to be in Q4 this year because look at the current market situation, regional economic situation and the inventory level overall in the market, likely this may not be happening instantly in Q4, especially in beginning of Q4.

Yes. And then the question is CXMT or Chinese DRAM maker, not several investors asking the impact of the China local DRAM production volume increase, but what's your views, sir? I think the -- I don't see the DDR5 product from the China local DRAM maker. But yes, I do see DDR4, but -- not sure whether their volume is really big to threat Nanya Tech because Nanya Tech still says at least 20% of our DRAM revenue is for the China local smartphone or PC consumer makers, right? So the investors question these days, China local memory makers, DDR4 production volume growing, capacity gain bigger that may affect Nanya Tech, maybe Q4 and then 2025 will recover. These are the key questions. What's your view on this, sir?

CXMT, shouldn't be mentioned so much on the company. But the maker in China, they do make some impact because of the huge capacity they have -- they had achieved, okay? But the major impact so far are still in the mobile phone. And as you know that the mobile phone maker and the consumption of mobile phone DRAM in -- by all these Chinese mobile phone makers contributed to almost 50% or even more in overall DRAM consumption, okay, in the mobile sector, okay? And so therefore, because Nanya is not a major player in that area. So the impact to Nanya in that area actually is relatively smaller than the impact to the big 3 suppliers. However, the other sector of consumer DRAM, Nanya is one of the major player in the consumer DRAM. This is also impact in China in a regional economic situation. However, this is the economic impact instead of competition from the other supplier. So overall speaking, the Chinese maker in DRAM do impact on the market -- impact on every supplier, okay? As a matter of fact, it impact all suppliers, okay, and maybe even more to the big supplier than to the smaller supplier.

But do you think their quality is good enough. I think the DDR4 is okay, but they never proved DDR5, LP DDR5 for the mobile phone. So do you think their quality is good enough...

I shouldn't be commenting on the other company's quality. Instead, I would say they have some domestic supply and demand policy as the government policy. So they will take care of that throughout all those policies.

Yes, yes. So overall, no impact on Nanya because you focuses on the consumer demand...

It does impact Nanya on the consumer because our regional economy is now very promising in that region. As a result, it's actually impact on consumer side as well, okay? That's including communication, including TV, general consumer products, and those will be -- is impacted in the region as well.

Because of the demand...

Yes, because of overall demand reduction.

[Operator Instructions] The line is open now to Jay Hyun from JPMorgan.

I have 2 questions. First, allow me to ask more details about your third quarter bit shipment. How much of the third quarter shipment that 20% decline was impacted by the one-off factors versus organic demand decline from customers? And you also mentioned 15% of your wafers are now being migrated. Is it the major reasons? Could you just help us a little bit more detail to understand the 20% bit decline as it sounds quite high. And just extension to this, were there any wafer scrappage in the third quarter? And then I have one more follow-up.

Okay. Bit shipment impact on Nanya, 20% down, mostly due to regional economic downturn and demand issue, okay? And if I may, regional-wise do a general -- put a general comment on that is that we are seeing like in U.S.A. and Japan, the market is not great, but the market is reasonably okay, USA and Japan, okay? However, say, in China, in Europe, the market is pretty bad, pretty low, okay? Demand is pretty low, okay? And for Taiwan, is mostly influenced by China demand as well, okay? So I would say the impact wise, more significant is the situation like that, okay? So we are seeing, in general speaking, is the economic downturn impact and the demand downturn impact, that 20% decline coming from.

So then may I just reconfirm that there was no wafer scrap finish at all in the third quarter?

Wafer scrap. We have power outage, okay, happened due to Taipower company, the supply system to our company, they get a lightening strike and the complete power outage. As a result, there are some wafer scrap, due to that reason because of equipment completely losing power for a period of time, as a result that some wafer being scrapped.

So it had a profit impact as you explained during the early beginning of the presentation, but the impact to the wafer production was minimal?

There are some impact to wafer production due to the incident, okay? In addition to the wafer scrap because the equipment was down heavily, we -- it took some time for us to restart the equipment, requalify everything, making sure that the quality, meeting our quality standard before we resume the complete -fully production. So there were a few days of production loss due to that.

Understood. My next question is related to DDR5. When you negotiate with your key customers, how much price premium is Nanya Tech team generally expecting to command over DDR4 such as for the PC applications? There are market price code that we can also refer to such as like 30%, 40% premium some people talk about. But do you think this is roughly the reasonable range that we could use to assume when you actually roll out more DDR5 bit shipments starting Q1 next year? Or do you think the range could be higher? If you could give us any reasonable range or thoughts, that would be really helpful.

That's about the percentage that we are expecting to have. Okay. Our overseas market is also dynamically changing and could be even more or even less, depends on the dynamic change in market situation. But in general speaking, DDR5 has that kind of margin over DDR4. The margin percentage-wise, very similar to what you just described.

Next one to ask questions, Charles Shum from Bloomberg Intelligence.

I just have 2 questions. I just want to follow up on the sales mix of the DDR5 because previously, you mentioned that looking at the 10% sales contribution by the end of this year. So is there any update on that front? And also, what is your expectation for the sales mix for the next year? So you are saying that you're actually putting 15% of your capacity in DDR5 now. So is that the percentage we should expect in the first quarter in terms of the sales mix? And second question on -- yes, please go ahead.

Okay. yes, we are starting to do wafer import as we speak. As a matter of fact, we already started wafer input since September, and it requires some time to ramp up, okay? And small volume has been inputted in September, and that volume will be increased month by month. And as I described just now, we are expecting to -- by the year end, December this year, we can have 15% of wafer input moving to our second-generation process technology includes mostly DDR5 5, okay? One additional comment on top of that -- I'm sorry for interrupting. One additional comment on top of that is that because of the process technology for our second generation has a more bit output, say, for wafer wise, it could have 70% to 85% of the bit -- more bit output because of technology migration, okay? So therefore, 15% of the input capacity is equivalent to bit wise is around 25% of the contribution. Likely, as we input say up to 30% of our input capacity, the contribution is almost near 50% of the bit output, okay? So that they -- also a technology improvement on that in terms of the product margin improvement.

So is there any target for your company on the sales contribution on the DDR5 in the first quarter next year?

Yes. We are expecting 15% input capacity and that input capacity likely will gradually contribute in Q1 -- in Q1 situation. And then as we may increase the input capacity month by month, okay? So that contribution will be gradually improving month-by-month, okay? But we are expecting that going to also -- that going to make contribution significantly starting Q1 next year. In Q4, this year because of cycle time, likely the contribution will be minor.

Okay. Got it. My second question actually is related to the power. You mentioned it seems that the power outage has a big impact on your operations. We also noticed that actually Taiwan -- Taipower is going to raise the power tariff again in -- later this month. So what's your estimation on that -- about 40% power tariff increase for your company?

Yes. That's becoming a very significant impact to our operation, okay? First, the power outage, this is due to lightning strike, but it's also indicating the lighting protection for Taipower facility and their power supply system is not sufficient, okay? Therefore, we have made a very strong request to Taipower. And we also make request to their managing organization, which is MOEA. We also directly talk to MOEA to request they make some improvement. So they too are starting to make improvement on that across major facilities, including our facility as well as the Science Park, okay? They already kicked off that project. So that's power stability issue. And the second issue is pricing. Yes, the price has been increased substantially, okay? Since they have made a price increase April last year and -- for the first time. And then this time, it's actually the third time they increased the price, okay? So overall speaking, the power, the cost for the power increased by near 50%, 5-0, 50% -- that's actually becoming a major concern to us. On top of that, recently because of green energy, they're going to be a green energy tax as well, okay? And that's also another impact to the cost in the power area in Taiwan in general. But that's the impact to every company, okay? Nanya is not alone, okay? And we're going to have to making sure that we can be competitive in our business, okay? And also in the future, how to reduce our power consumption as well.

[Operator Instructions] Next one to ask questions, [ Michael Shi ] from [indiscernible].

And I want to know about how the company's visibility around the 1Q -- sorry, in next quarter end of 2025? Do we have any colors on -- whether there is pricing or our gross margin or even operating profit?

If the market point of view, likely the trend going to be continue for DDR5 and AI demand, okay, likely going to be continuing to 2025, okay, that's encouraging. However, the other market, okay, other than the AI and cloud computation, the market still need to be -- really depends on regional economics. That's yet to be observed is there any improvement due to stimulation or regional conflict being improved, okay? So that's a general market point of view. From Nanya point of view, we need to move ahead with our new generation of technology, which will have more bit output, as I described, 70% to 80% more output from per wafer point of view and also moving to more of the DDR5 and our KGD business, okay? And that likely will start the contribution in Q1 next year. and only marginal contribution in Q4 this year.

Okay. And I want to -- I have a follow-up question about -- so maybe you will imply our ASP in Q1. You may have a slight growth or flat or it could improve versus the first quarter of this year?

As I just comment just now, Q4 this year, ASP is very challenging without DDR5 major contribution, okay? And likely Q1 next year will be improvement compared to Q4 this year.

Okay. That's is very helpful. And sorry -- and my follow-up is about your utilization rates. How is our viewpoint on -- of orders utilization, which include and maybe we will transfer some current capacity into DDR5?

Yes. As we move more capacity into DDR5, we need the capacity for the new generation of the product and process technology. So our utilization rate remained near 100%.

[Operator Instructions] No further questions at this moment. So we are going to move on to the webcast questions. Dr. Lee, please begin.

Okay. Our first question is from Richard [indiscernible], okay? The question is 1B and 20-nanometer capacity ratio by the end of 2025, okay? Input capacity-wise, 1B may contribute to near 30% and output in bit-wise likely to be near 50% as I just described, okay? And then the next question is, will Nanya cut production in the next 3 months, how to improve high inventory? As I just commented, as we migrate some capacity into DDR5 and new generation of process technology. we don't have too much output on our current product portfolio, that's DDR4, low-power DDR4 and DDR3, that capacity already automatically reduced due to migration, okay? So we don't have plan to cut production for now. Based on the current spot price, where Nanya recognized inventory write-down in the near term. So far, as I explained just now, we are making the adjustment on the production portfolio into more DDR5. And based on the inventory, may starting to make improvement month by month. We don't expect inventory write down, okay, in the near term, okay? Progress of DDR5, output ratio in 2025, ratio of Nanya's D5 application on PC and server, okay? In the beginning, more of DDR5 move into PC and then gradually move into server and consumer as well. In terms of ratio-wise, I still don't have the specific number to supply it to you. And this will depend on our qualification process that is upcoming as we speak. Expect R&D spend in 4Q 2024 every quarter in 2025. Our R&D expense likely remain in a very similar number, okay, as we reported, maybe plus/minus a couple of hundreds of millions TWD, but it will not be per quarter. That will not be a major change from the current around TWD 2 billion or so per quarter. And the next question is from Stanley, SinoPac. Question is, how much revenue percentage comes from China in first half 2024 and Q3 2024? The revenue from China region has been coming down since Q1 this year to Q3 this year, okay? And It came down from 20-some percentage down to now probably a little bit more than 10%. The next question is IBF Securities, [indiscernible] question. The question is monthly capacity in Q3 this year versus Q4 this year. As I reported that our total input capacity will remain very similar month to month, okay? And with the DDR5 migration, maybe marginally increasing. The next question is from [indiscernible], [ Yuanta ] Securities. The question is, were expansion of DDR5 capacity generate depreciation-related expense? The answer is no. Our depreciation is now -- is around the highest point that we expected for the current fab, okay? And are we expecting our depreciation will start to gradually reduce. And by the end of 2025, based on current capacity point of view, we are expecting the depreciation month by month may be decreasing by near 30% by the end of the year. Again, that linear, that's almost starting to reduce starting Q3 and Q4 next year. Okay. That's all the questions for today. Thank you.

Yes. Thank you, Dr. Lee. And ladies and gentlemen, that concludes our conference call today. Please be advised that the replay of the conference will be accessible within 3 hours from now, which will be available through Nanya Technology's website at www.nanya.com. We hope you will join us again next quarter, and thank you for your participation, and have a wonderful day. You may disconnect your line now. Thank you, and goodbye.

Thank you.