Nanya Technology Corporation (2408) Earnings Call Transcript & Summary

Welcome to Nanya Technology's 2024 Fourth 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 fourth 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 we open our Q&A session. Today's presentation materials are available for download at Nanya Technology's website at www.nanya.com. And 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. Please refer to the safe harbor notice that appears in our presentation material. Thank you. And now I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of corporation and current quarter guidance. Dr. Lee, please begin.

Ladies and gentlemen, I'm Pei-Ing Lee. Welcome to Nanya Technology Q4 2024 investor conference. My presentation to you will start with our Q4 revenue and results, followed by 2024, the whole year revenue and result. And then CapEx and bit shipment then followed by market outlook. Finally conclude by business review and outlook. For Q4, revenue and result. Our Q4 2024, net sales comes to TWD 6.575 billion compared to TWD 8.133 billion in Q3 is down by 19.2%. And the gross profit is negative TWD 695 million compared to TWD 264 million positive Q3 is a negative of minus TWD 1.188 billion. Within this, the idle cost accountable for TWD 639 million has been included in Q4. This is due to power outage and some production reduction. And operating income comes to minus TWD 2.812 billion versus Q3 minus TWD 2.503 billion is marginal more loss of TWD 0.3 billion; EBITDA at TWD 1.185 billion and nonoperating income TWD 900 million and income tax benefit, TWD 339 million. The net income comes to minus TWD 1.574 billion is a marginal worse than Q3. And our earnings per share comes to minus TWD 0.51 per share versus minus TWD 0.48 per share in Q3. And that comes to our next page. Our Q-to-Q comparison, revenue down by minus 19.2%, and this is due to bit shipment of decreased high single-digit and ASP decreased low teen percentage and exchange rate around freight. Compared to last year, revenue down by -- year-to-year down by -- Q-to-Q year-to-year, down by 24.5% and shipment decreased by low 30% and ASP increased by a low teen and exchange rate increased low single digit. For a more detailed comparison Q-to-Q, our net sales as reported that was down Q-to-Q by 19.2%. And this is due to mostly 2 important factors. One is that ASP decreased by low teens and bit shipment decreased by high single digits. From a market point of view, other than AI and HBM being very promising the rates of the market has been weak demand for the Q4. And gross profit minus TWD 695. And as I explained just now that also within that, they are around TWD 600 -- more than TWD 600 million is coming from idle costs. And gross profit decreased by TWD 959 million, mainly due to ASP decrease. Operating expense TWD 2.118 billion versus Q3 TWD 2.769 billion and this is mostly due to operating expense decreased by TWD 650 million, mainly due to R&D spend decrease. And operating income minus TWD 2.812 billion and operating notes increased by TWD 307 million. Net income of minus TWD 1.574 billion, and the net loss increased by TWD 87 million and mainly due to ASP and bit shipment decrease. For operating expenses, our SG&A expenses at Q4 last year is TWD 628 million is in average of the quarterly expense. R&D expense comes to TWD 1.489 billion is lower in Q4 compared to previous quarter, this is due to the charge into separate quarter and Q4 happen to be less charged on R&D expense. And this R&D expense will come to normal at about TWD 1.9 billion quarter in the future. For cash flow situation, beginning of the balance. Q4, at the beginning, is TWD 61.157 billion and end balance at TWD 61.86 billion dollars. And cash from operating activity is minus TWD 258 million, and CapEx is TWD 3.37 billion, with financial activity positive of TWD 4.33 billion. Free cash flow is the cash flow situation of TWD 3.63 billion. And our net cash, which means that on our cash equivalents minus our short-term debt and the long-term debt, the small notes at the bottom shows that we still have net cash of TWD 36.6 billion. Even though our net cash is still positive financially, the company still relatively okay. However, we are in a cash low situation, we have to further make improvement on our operations as well as CapEx expenditure, it will be more sensible. And for 2024 on the right-hand chart, beginning of the cash in Q1 last year is TWD 58.812 billion. At the end of the year, it's TWD 61.86 billion. And the change within the year, cash from operating activity is positive TWD 1.909 billion and CapEx as reported is TWD 16.1 billion. This is -- almost 50% is for construction purpose, and 50% is for our technology migration purpose. And financial activity, positive TWD 17.282 billion, mostly this is the debt increase. For 2024 revenue and result. 2024, our net sale is TWD 34.132 billion versus 2023, TWD 29.892 billion is an improvement year-to-year above 14.2%. With the gross profit in 2024, minus TWD 421 million versus 2023 of minus TWD 4.483 billion is some improvement for 2024. Operating income, minus TWD 10.555 billion versus minus TWD 14.46 billion in 2023. Nonoperating income, TWD 3.998 billion is about same similar to 2023 and tax -- income tax benefit a lot less than 2023, okay. And net income comes to minus TWD 5.0 billion versus 2023, minus TWD 7.44 billion. Although the net income is slightly improved. However, the company is still losing money at earnings per share of minus TWD 1.6 versus 2023 of minus TWD 2.4, and the book value stay about same at TWD 53. The comparison of year-to-year result compared to 2024 versus 2023. The net summary is from last chart, as shown here, and the main reason for net sales improvement is ASP increased by low teens and bit shipment is about frac. And gross profit improvement of about TWD 4 billion is mainly due to ASP increase and lower idle costs in 2024 versus 2023. And operating expense remained similar at around TWD 10 billion, and operating income minus TWD 10.555 billion versus minus TWD 14.46 billion, and operating loss decreased by near TWD 4 billion and the reasoning as explained in the gross profit. And the net income comes to minus TWD 5 billion versus minus TWD 7.44 billion, and the net loss decreased mainly due to the ASP increase year-to-year and also due to unfavorable income tax impact. For CapEx and bit shipment, in 2024, our Q4 CapEx comes to TWD 3.4 billion and the whole year 2024 was TWD 16.1 billion. In 2024, we expect the CapEx to TWD 20 billion, this is still subject to Board of Directors approval. And our bit shipment in 2024 is unchanged year-over-year. This is due to the second half of the year, the market for -- other market other than AI has been weak, okay? And 2025 bit shipment plan increased by more than 20% year-to-year. On market outlook, we've seen that AI continue to drive DRAM demand in the cloud data center and edge computing. Edge application spending from server to PC to smartphone, robotic and other smart devices. This is the positive side. Demand for the general PC, mobile and consumer products remain weak for now. We're seeing that market may be bottomed up in first half 2025, with the potential recovery beginning in second half 2025. This is a market other than AI. AI has been continued to be good without an issue, is that the market other than AI, we are expecting to be improving in second half this year. And this is due to regional economic improvement by stimulation policy and also by inventory improvement over time. From the supply side, DRAM supply is expected to grow in 2025 with most of the expanded capacity mainly for HBM and DDR5 and ongoing reduction of inventory in standard DRAM products such as DDR4, low-power DDR4 and DDR3. In the server market, market for both AI focused and general server has been some positive growth likely throughout 2025. And inventory level are normalizing in mobile market and resulting in a better supply/demand balance in first half 2025. PC, we are expecting to enterprise device will upgrade in PC growth. And for the future, we are expecting AI PC will contribute to higher DRAM content. And for consumer, potential recovery from weak demand may be starting from Q2 2025 by regional economic improvement due to stimulation policy, but also due to inventory improvement. For business review and outlook. For Q4 2024, Nanya experienced net loss of TWD 1.574 billion, EPS of minus TWD 0.58. And for the whole year, we have net loss of TWD 5.083 billion EPS of minus TWD 1.64. Our second-generation 10-nanometer class are ramping up as we speak and we are expecting bit exceeding 30% of total output by 2025. And our 16-gigabit DDR5, stack at 5,600 has been delivered to market in Q4 2024. It's more volume, and the volume is expected to be improving quarter-to-quarter and our 16-gigabit DDR5, stack 6,400 target to release in the first half 2025. And we are developing strategic partnership to explore market opportunity driven by growth of demand in edge computing, AI edge computing and planning to release product by the end of 2026. And we're also receiving a number of ESG recognitions, that's including DJSI World Index for the fourth consecutive year and MCSI ESG rating upgraded to AA and also for ISS ESG Rating for the fifth consecutive year. And also from Taiwan corporate sustainability award for the eighth consecutive years, okay. That concludes my presentation to you. Now we may move to question and answer.

[Operator Instructions] The first one to ask question is Simon Woo from Bank of America.

Number 1 question is could you remind us your -- the DDR5 production volume progress as of January is very meaningful. I mean, more than 10% of the total and then the -- how to achieve, let's say, 30% of the total output. So what do you mean the -- 30% of the output, it is in terms of the total bit for the entire year 2025. And then I will raise the second question.

30% of the output is including all of our second-generation node of process technology, that will include and include our DDR4 as well as low-power DDR4 and low powered DDR5, for instance.

Yes. But if you have 30% out of the total annual production, presumably the second half, the penetration ratio must be easily 50% or higher, right?

Likely to be above 30%, yes. Currently, we already are converting around more than 20% as we speak, today, as of today.

20% means what? It's capacity or production volume for now?

Production volumes for now, yes.

So 20% of the total production measured in terms of the bit already DDR5 for now?

Yes, already 1B technology and mostly DDR5, yes.

Yes. And then the -- sorry, 30% mean entire year 2025?

Yes, that's our target.

Yes. That means, again, more than maybe 50% for second half 2025, second half only.

As I said, as of today, in January, already 20%. So there's a good chance that we are exceeding 30% for the whole year.

Yes. So in that case, automatically, your DDR5, ASP 30% or 40% higher than DDR4 per bit price premium, we can say or?

That would depend on the market price trend, okay? I cannot give you an exact number for now. But yes, there are some price premium for DDR5.

Okay, very clear, sir. And then to make the OP margin, Q4 minus 43%, so any rough idea when the OP margin can be 0% or better than breakeven or what kind of the assumption needed ASP increase or more cost reduction needed?

Yes. That's a very good question is that, so far, Nanya's business is on non-AI business, okay? Everything other than AI is Nanya business is mostly concentrated on that so far, okay. Therefore, our margin has been weak, okay? And as we introduce more 1B technology and DDR5. And also, we are expecting that the general DRAM that is non-AI DRAM also expecting to some improvement likely on second half this year, okay? And on top of that is our cost going to see some reduction in Q4 this year.

Sorry, you mean the cost reduction will be meaningful in Q4 or?

Q4, mostly our depreciation cost will be substantially improved.

You mean this year, December quarter?

This year. December quarter, yes. We have some significant improvement on depreciation.

Yes. So for the short term in late December quarter, the pricing momentum look good, right? Because you already reported more than 10% ASP decline for December quarter, so March quarter ASP cut should be somewhat similar to the December quarter then or?

March quarter may still need to digest some of the industrial inventory, so we are expecting likely to be second quarter, we are seeing some recoveries start to happen. And this is due to, say, regional economy has some stimulation package offer and also due to inventory level adjustment likely to be much better in Q2 versus Q1.

Next one to ask question, Jay Kwon, JPMorgan.

I also have 2 questions. Number one, what are your upside and downside factors for 2025 bit growth plan given 2024, a year ago, you also -- the firm also anticipated a 20% bit growth, but it turned out to be flat. So I'd like to ask your assumption. And also you mentioned about the inventory still the clearance and the digestion, does it mean in the short term in Q1 bit shipment may not actually grow? That's my first question. Then I have one more question.

Okay. Your question about bit growth, originally, we expect in 2024 to be improved. Yes, that's a target that we did not achieve and this is due to, as I explained just now that in the second half of this year that the only market other than AI has been quite weak, okay? And that's -- as a result, we did not have any bit growth in 2024. But 2025, we are looking for bit growth, okay? And we are conservative in saying that greater than 20%, okay? And this is due to that we're starting to convert our DDR3, DDR4 capacity into DDR5 and 1B technology, okay, and we will improve our DDR5. And DDR5 is a market really at this point, probably the on -- one of the only market that is demand is still relatively okay compared to DDR4 and DDR3, okay? And on top of that, we also expect DDR3 and DDR4 to be improving starting second quarter due to regional economic improvement and overall inventory adjustment. That's the reason why bit growth situation changing from 2024 to 2025. I hope that answers your question. Regarding to inventory issue is that ASP current situation for the bit 3, they still have -- at the end of last year, they still have a bit of DDR4, low-power DDR4. They even try to -- or final sale on their DDR3. And those actions has already occurred, okay? And on top of that, they are migrating their capacity focus more on DDR5 as well as HPM. So we're looking for that their input and output on the general market, particularly DDR4 and low-power DDR4 will be regulated down. So as a result, that may help on the inventory situation in non-AI market.

Understood. Then, is it fair to assume that Q1 also considering the Chinese New Year season that the bit shipment to be somewhat not far different from that and your improvement would happen sequentially and much more back half loaded into the second half?

That's fair to say that, but we are still not giving up hope on Q1 yet. There are some signs that Q1 may see some marginal improvement versus -- from a shipment point of view compared to Q4 last year.

Understood. If I have 1 more question. In your later part of the slide, you mentioned about the AI edge computing product plan. Could you elaborate some details? Does it mean Nanya Tech has a plan to develop HPM or is it referring to like LP DDR6? I just want to get some clarity here.

Okay. This is a good question. That so far, currently, AI is mostly focused on cloud computing center with the AI computer using a lot of HBM, okay? And the AI application likely to continue to expand into each application. That's including AI PC, that's including AI mobile phone, also including AI robotic as well as many other AI electronics, could also -- it's one -- more or less of AI function in there. With that would require some AI chips, okay? That's including the AI function on the logic side as well as memory function on the high bandwidth side, okay, and the bandwidth could be different from one to the others, okay? So that's what Nanya customers are interested in looking into. And we are working very closely with our customer. And hopefully, we can come up with some product by the end of 2026.

Then this product features is more focused on the speed rather than the low power because it requires higher bandwidth memory.

They will require on both, low power and high bandwidth. And of course, there's going to be some balance between, okay? You have to work on certain application and what customers are required, what customers more sensitive to power or more sensitive to speed or more sensitive to cost, okay? All these factors has to be or taken to measure for each of different applications.

[Operator Instructions]

If I may, before next question, just follow up a little more on this edge AI application and what Nanya play a role in this area, okay? And as you know, that the HBM is mostly focused by bit 3 supplier. And the AI edge application likely to be mostly customer design kind of business model, okay? And for Nanya, we are able to offer our newly developed process technology and product technology to integrate with customer requests on this customer design AI application. And in compared to more legacy company, they still don't have high-density, the DRAM chip, okay, for this application. So Nanya do have a slight favor compared to more legacy company and Nanya also company can service and can do customization for the customer. So that's -- Nanya will try to develop a differentiation from the market.

Thank you, Dr. Lee.

Please continue to ask question.

Thank you for all your questions. We will move on to the webcast questions. Dr. Lee, please begin.

The first question comes from Michael, Yuanta Securities. He has 3 questions. The first question, is there any clue or evidence like longer order visibility, the larger amount of order supporting outlook that seeing recovery of consumer demand in second half '25? And we're seeing some signs of encouragement of the consumer market happening, okay? And we're seeing some -- we see some stimulation packages also being introduced by reaching our economics. And we are looking forward to see that inventory in this non-AI market been improved. So there's a good opportunity that the second quarter this year has a good chance that the non-AI market will be -- start to see some improvement. The second question is, will the company consider using treasury stock in 2025. And at this moment, we don't have plan yet, but our finance manager may be able to comment more later, okay? At this point, we don't have any plan yet. And your third question is what is scheduled for 1B node to make low-power DDR5 and 1C mass reduction. Our 1B is already started to deliver 16-gigabit DDR5 at a speed of 5,600 now. And we are qualifying 6,400 as we speak. We are expecting to start to deliver second quarter on that DDR5 16-gigabit, which is pretty much in par with the market demand for now. And for low-power DDR5, we will be start working on -- we'll start to do some test run, okay, in the second quarter -- end of second quarter this year. And 1C mass production likely we are expecting that the end of 2026, and we're looking for our 1B will come around hopefully in -- by end of 2027. We try to speed up our technology development. Stanley from SinoPac Securities. In your presentation, Page 18, it develops strategic partnership to explore market opportunity in edge AI computing, plan to release by the end of 2026. Could you elaborate more what kind of product is this? Okay, this is -- the product specific is our customers' confidential information. So I have to -- pardon me, pardon you, pardon myself, for not being able to release too much detail, okay? And we would have a few customer interested and discuss with -- and working with us in this area. And what type of edge application targeted. And this is -- the application there is really quite broad. As I described to you just now, AI PC, AI mobile, AI robotic and general AI electronics and could also applied to in cloud computation as well if it's successful in the long run. And your question is, is our company only supply DRAM die? In general speaking, we focus our business in DRAM, yes, for now. And the next question is from Richard from Fubon Securities. And Richard has 1 question. As DDR3, DDR4 production was reduced by peers, does NTC reduced more order, particularly from industrial customers? Yes, this is -- we expecting this to gradually improve by Q2 this year. Okay. That's the end of the question. Thank you so much for today. Bye-bye now.

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. Thank you for your participation and have a wonderful day. You may disconnect your line now. Thank you, and goodbye.

Bye-bye. Thank you for your support.