Nanya Technology Corporation (2408) Earnings Call Transcript & Summary

[Interpreted] Welcome to Nanya Technologies 2026 Third Quarter Earnings Conference Call. [Operator Instructions] The conference will be held in English for investors around the world. Today's conference will be approximately 60 minutes. Nanya Technologies President, Dr. Pei-Ing Lee, will summarize our operations in the third quarter of 2026, followed by [indiscernible] guidance for next quarter and key messages. Then Nanya Technologies, Executive President, Dr. Lin-Chin Su, Senior Vice President, Mr. Joseph Wu; and Financial Executive, Philip Jao will join us as we open our question-and-answer sessions. Today's press release material is now available to download and Nanya Technology's website at www.nanya.com. As you [indiscernible], we would like to remind everyone that today's discussions may contain forward-looking statements and are subject to significant risks and uncertainties, which could cause 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 slides. I will now turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee for the summary of operations and the current quarter guidance. Dr. Lee, please begin.

Ladies and gentlemen, welcome to Nanya Technology Q3 2026 Investor office. Today, I'd like to present to you our Q3 revenue and result and followed by CapEx and shipment than market outlook and then conclude by business review and outlook. First of all, our Q3 revenue and result. Our Q3 net sale comes to TWD 113.6 billion versus Q2 TWD 82.5 billion is our Q-to-Q increase of 61.9% and gross profit, TWD 114.4 billion versus TWD 65.6 billion, an improvement of 74.5%. Operating income, TWD 106.8 billion, at 80% versus Q2 [ TWD 60.8 million ] improvement of 75.7% and EBITDA of TWD 110 billion nonoperating income at TWD 2.4 billion, and we paid income tax of around TWD 21.7 billion. This comes to net income for Q3 TWD 87.6 billion and net income, net margin rate of 65.6% versus Q2 is an improvement of 74.6%. Earnings per share for Q3 come to $25.4 per share, compared to Q2 at $14.66 per share. Our book value at Q3 is $118.99 per share. versus Q2, $93.45 per share. For comparison, our Q-to-Q comparison revenue Q-to-Q up by 61.9% and year-to-year, up by 611.7%. ASP increased by greater than 60% Q-to-Q and year-to-year greater than 500%. Our shipment decreased by mid-single-digit due to [ depletion ] in inventory and the exchange rate favorable by low single digits. A little bit more detailed explanation for Q2 and Q3 result comparison. The net income, TWD 133.6 billion versus TWD 82.5 billion increased by 61.9%, mostly due to ASP increase by more than 60%. If you look down to the bottom in the notes, you'll find out the ASP increase is primarily reflect renew long-term agreement. And [indiscernible] shipment decreased by single digit as its brand as depleted inventory and exchange rate favorable low single digit. Our gross profit TWD 114.4 billion at gross margin of 85.7% compared to Q2 is an improvement of TWD 48.9 billion due to higher ASP. For operating expense, [ $7.588 billion ] versus Q2 [ TWD 4.753 billion ]. This R&D expense increased by $1.9 billion and SG&A expense increased by $0.9 billion. And for the note, most of this increase is mainly due to concurrent and future employee compensation. For operating income, TWD 106.8 billion versus Q2 TWD 60.8 billion. Margin-wise, increased by 6.3% and operating income increased by TWD 46.1 billion. Net income, TWD 87.6 billion versus Q2 of TWD 50.1 billion. The net income increased by TWD 37.4 billion, and the income tax also increased by TWD 9.6 billion. For operating expense, on the left-hand side of this chart, the SG&A expense for Q3, it comes to TWD 2.443 billion versus Q2 [ 1.5 and Q1 1.09 ], a substantial increase mainly due to concurrent and future employee compensation. And on the right-hand side, on the space also increased from beginning of the year, $2.1 billion to Q2 $3.2 billion and to Q3 at TWD 5.145 billion. This is again increase, mainly due to concurrent and future employee compensation. For cash flow situation, our Q3 beginning balance at TWD 217.6 billion and the [indiscernible] at TWD 288.5 billion, with free cash flow of TWD 75.2 billion. And during this quarter, the cash from operating activity, TWD 96 billion and capital expenditure, TWD 20.7 billion as financial activity of TWD 4.3 billion. And cash in Q3, the cash activity minus TWD 4.3 billion, mainly due to dividend payout at $4.6 billion. And we have dividend income also due to [indiscernible]. And if you look at the right-hand side, we are beginning balance of the TWD 217 billion and balance TWD 288 million. This is including all the cash from operating cash from operating activity, capital expenditure and financial activity, et cetera. For net cash situation, Q3, our net cash which at the bottom notes, comes to TWD 270 billion. This is the cash minus debt, okay, cash of TWD 288 [indiscernible] debt of [indiscernible]. At least compared to Q2, our net cash is TWD 199.2 billion is an improvement of around TWD 70 billion in net cash. Our CapEx and bit shipment report here on the left-hand side. Our CapEx for this year is targeted for TWD 69.7 billion. So far, Q1 to Q3 CapEx was $27.6 billion and this is the time frame of starting to move in equipment or new fab. So this year is planned for TWD 69.7 billion with wafer CapEx accountable for around 50% of this month. And our new fab CapEx will be TWD 346 billion for [indiscernible] we will start per month. And currently, our inventory level is low. So [indiscernible] are likely to stay flat from now on for a few quarters. And for 2026, the shipment, year-to-year comparison is about up by [indiscernible]. The overall market, the AI computation that's including GPU, GPU, CPU, ASIC dominate the DRAM demand growth and memory supply to smartphone, PC and general consumer were suppressed and suppliers' long-term capacity plan based on LTA commitments. On the supply side, the new fab construction, equipment delivery and process node introduction all require longer lead time. LTA enable efficient product and capacity planning, supporting future market stability. And currently, we're seeing lean supply side inventory. From a demand point of view, AI-driven, expanding AI applications are driving the memory demand for higher content, for higher bandwidth and customer [indiscernible] architectures. AI drives [indiscernible] demand beyond HPM and low-power DDR5 across networking, storage and system management. For general application, the supply shortage and higher ASP has resulted in down specification and extended life cycles. Also recycled DRAM partially support low end market. For business review and outlook. For Nanya, our Q3 net profit, TWD 87.6 billion at EPS of $25.40 per share. And our gross margin at 85.7%, and net margin at 65.6%. And our Q1 to Q3 net profit comes to TWD 163.9 billion, with EPS accumulated to $49.28 per share for 9 months. And our shipment may stay flat until a new fab with output, second half of '27. And our operational results likely to be sustainable by favorable ASP may continue. For operational update and outlook, AI infrastructure and server contribute to Nanya's more than 20% of our revenue. And fresh shipment at a new fab wafer output in second half 2027. Our new fab equipment is scheduled for move in Q1 '27. We plan to rent up to 30,000 by the end of 2028 and target up to [ 50,000 ] by the end of 2030. And generally, the new fab brand and [indiscernible] equipment is aligned with future AI projects under LTA. 3D wafer packaging and test [indiscernible] is branded for [indiscernible] Science Park. And our 1C customer sampling is targeted for Q1 next year. Our 1D fourth generation and 1D Fifth generation set develop process technology and EUV development are on track. We continue to provide a broad product portfolio, including DDR5, low-power DDR5, DDR4, low power DDR4 and DDR3, low power DDR3 and also, we will support customerized AI, wafer-to-wafer bonding product for AI infrastructure solutions. That conclude my report to you. Now we may move to question and answer. Thank you.

[Operator Instructions] Now please question will be coming from Charlie Chan, Morgan Stanley.

So I do think that has two questions. First question is a very, very strong EDR for [indiscernible], right? So I'm wondering if customer, [indiscernible] or does reach out for more supply security. And also, I think it was a new report, right? Talking about Apple may also [indiscernible] use company the low-power DDR products. [indiscernible] to get a sense of the kind of high-profile customers engage with [indiscernible] -- that is my first question.

And at this point, the DDR4 demand is still quite strong. If you could take more than 10% of the overall market demand -- and in comparison, Nanya overall market size is in low single digit, okay? So DDR4 demand is quite strong. However, Nanya is [indiscernible] on adjusting our DDR4 low-product DDR4 with DDR5 and other products we have, okay? That's including our AI [indiscernible]. And your comment about Apple potentially using competitors' DRAM. For ARPU, we don't supply the major DRAM, okay? However, we may have supply there -- they are more than DRAM, okay? And those is a specialty DRAM that we don't think that there are other suppliers are providing those supplies to Apple, okay?

I mean I think that we were very, very clear answers. And my second question is as about you're going to wafer and wafer kind of technology because when I see [indiscernible], right? They kind of recently promoted for the bandwidth compute, right? And I think there's one way to be bandwidth issue or HPN supply issue for AI accelerators. So I'm not sure that is a kind of potential repeating partnership [indiscernible], right, but any kind of progress the kind of work around [indiscernible] for the AI applications.

Charlie, I cannot comment on a specific customer solution, okay? This is like mostly -- this is the customers' confidential and market trade secret, okay? We have more than one customer working with us, okay, on the AI-related wafer-to-wafer bonding, the EIC projects, okay? And the application will likely to be spend from, say, cloud computation for AI as well as all the way to age computation, okay, and physical AI and so on.

Okay. Okay. So far, I think in...

So far, it's still good. We already have some revenue, okay, and not big. And -- but the is an important business for Nanya to work on, are currently, even though the contribution is not big, we'll continue to engage with customers and support customers.

Got you. And do you foresee the end of the DDR4 price up cycle? Or is there any kind of [indiscernible] comparison order to gauge when and how this DDR4 price hike will end?

DDR4 is say the demand is still still quite strong, okay? So everything will depend on the market ecosystem. They are areas that high end, they will continue with higher ASP, okay? And there are area also they have to balance in between down specification, extension life cycle as well as some area even using recycled parts, et cetera, okay? But overall speaking, DDR4 is still -- market is still reasonably healthy. And again, DDR4 is not Nanya's only supply. We are flexible to adjust in DDR4 to DDR5 and our product as well.

Next one, H. Kwon, JPMorgan.

Congratulations on greater results. My first question is, within your 60% or above ASP increase in the last quarter, can you quantify how much of the impact was from the renewed long-term agreements? Is this mainly biannual repricing mechanism that you started reflecting? Or did it include also annual or other quarterly contracts? Just trying to see if we can also expect a another round of these type of a renewed long-term agreement related pricing hike in due the next quarter in Q4.

That's the mix of all those you mentioned, including renewal of one year or 6 months [indiscernible], that was mostly negotiated in either first quarter or second quarter last year or third quarter last year, okay? And during those time frames, the ASP was relatively low, and Nanya has made our commitment to deliver. So we have fulfilled our obligation on all the delivery at the price we have agreed upon last year, okay? So that's the situation for Q3, where most of these this LTA, long-term LTA has expired. And on top of that, there are Q2 and Q3 quarterly update as well. But I would say, contribution is mostly due to those long-term agreement, almost 60%.

Just a small follow-up here. You said large amount is from [indiscernible] renewed the pricing contract, can we say that's only like more [indiscernible], maybe even 1/3 or maybe 70% of...

I cannot quantify precisely, okay? I can quantify I would say more than half, yes. Yes.

Okay. And just one second question is about your summary. You have mentioned AI infrastructure and servers now over 20% of the revenue, so does it include mainly DDR5, DDR4 for server customers and also for ESSE solution, does it have any low-power DRAM solution that you're selling for to server as well?

It's a mix of everything, including DDR4, DDR5 and [indiscernible] as well, yes. So that's including chip to use for communication, for storage and for management -- the system management as well as enterprise SSD and also our team as well.

Understood. And one small follow-up here is because these customers are very longer-term order duration customer in our understanding. So if you have any expectation about how big this segment could grow from currently over 20% -- could even grow to like 25% or 30% or even higher number within next 12 months? If you could give us your high-level thoughts about the mix direction, that would be really great.

We plan to increase that percentage 2027, '28 and '29, okay? For our goal, our target is by '29 or 2030, we can grow to 40% to 50%.

40% to 50%?

By '29 or 2030. Yes, for all the...

Can I interpret sorry to interrupt. Can I interpret your message as your -- the firm's strong commitment to allocate increase in capacity, 30,000 by end of '28 and also 50,000 by end of 2030, like majority will be used for the survey of [indiscernible].

AI infrastructure. Included, okay? That's including all kinds of different AI application that just described to you.

Next one, Simon Woo, Bank of America.