Novatek Microelectronics Corp. (3034) Earnings Call Transcript & Summary

[Foreign Language] Dear investors, analysts and media. Good afternoon. Welcome to Novatek 2020 Fourth Quarter Online Investor Conference. This is David Chen, Vice President and Company Spokesperson. I will be the host for today's conference. Hope everyone is doing well and remaining healthy despite the challenging pandemic outbreak. Let's pray that the pandemic will be contained soon. But before that, we'll have to continue to use live audio webcast. Please be reminded that you can still send your question to us by text. The agenda for today's event will be as following: first, I'll be reporting Novatek's fourth quarter results in English. After that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q4 results and Q1 guidance. Following that will be our Q&A session. As mentioned earlier, if you have questions, you can send to us by text. Our IR director, Mr. Tony Tseng, will be processing and reading out the investor questions one at a time, both in Chinese and English; and our Vice Chairman, Steve Wang; our CFO, Mr. Chou, and I will answer all your questions in Chinese and we'll be translated into English. As usual, please take a look at our safe harbor notice. So let's start with our 2020 Q4 financial highlights. Our net sales in Q4 was $22.45 billion, up Q-o-Q 2.05% from $22 billion, Y-o-Y up 35.87% from $16.53 billion in Q4 2019. Net gross profit in Q4 was $8.54 billion, up 12.65% from last quarter's $7.58 billion and up 60.23% from $5.33 billion in Q4 2019. Our gross margin in Q4 was 38.03%, up 3.58 percentage points Q-o-Q from 34.45%, and Y-o-Y up 5.78 percentage points from 32.25%. Operating income was $4.75 billion, up Q-o-Q 11.4% from $4.26 billion, Y-o-Y up 94.42% from $2.44 billion. Q4 net income was $3.64 billion up Q-o-Q 7.02% from $3.4 billion, Y-o-Y up 102% from $1.8 billion. Overall Q4 EPS was $5.99 versus last quarter $5.60. And last year, in 2019, it was $2.96. Our cash and cash equivalents in Q4 was $22.88 billion increased Q-o-Q by 39.92% from $16.35 billion. Y-o-Y increased by 27.69% from $17.9 billion. Account receivable. Q4 was $13.37 billion, decreased Q-o-Q by 12.85%, from $15.35 billion and Y-o-Y up 2.4% from $13.34 billion. Inventory. Q4 was $8.16 billion, Q-o-Q up 6.28% from $7.67 billion, Y-o-Y up 30.23% from $6.23 billion. Short-term loans. Q4 was 0. The overall Q4 384 equivalent large panel unit -- driver unit shipment was $884 million, up Q-on-Q 3.88% from $851 million and Y-o-Y up 20.27% from $735 million. Next, let's look at our 2 major product line sales breakdown. SOC in Q4 was $7.05 billion, down Q-o-Q 9% from $7.75 billion, and up 45.81% from $4.84 billion in 2019. Display driver in Q4 was $15.3 billion, up Q-o-Q 7.3% from $14.26 billion, and up 32.51% from $11.55 billion. Next, let's look at our 2020 monthly sales. Our monthly sales in 2020 has all outperformed debt of 219 -- 2019. 2020 net sales were $79.96 billion, Y-o-Y up 24% from $64.37 billion in 2019. Next is our January sales number. Our January net sales was $8.12 billion, month-on-month up 11.17% and Y-o-Y up 40%. This is another record high for Novatek. SOC net sales were $2.62 billion, month-on-month up 9.5%, Y-o-Y up 59.79%. Driver IC was $5.42 billion, month-on-month up 10.34%, Y-o-Y up 36.05%. Next, let's look at our year 2020 Y-o-Y income statement. Our net sales in 2020 was $79.96 billion, up Y-o-Y 24% from $64.37 billion. Gross profit in 2020 was $27.96 billion, Y-o-Y up 35.62% from $20.6 billion. Operating expense in 2020 was $13.18 billion, Y-o-Y up 22.53% from $10.76 billion. Operating income was $14.78 billion, Y-o-Y up 50% from $9.86 billion. Net nonoperating loss was $229 million, Y-o-Y up 440% from $42 million. Net income in 2020 was $11.82 billion, Y-o-Y up 49% from $7.93 billion. Overall 2020 EPS was $19.42 versus 2019, it was $13.03. Next let's look at our fourth quarter Y-o-Y income statement. As mentioned earlier, the top line Y-o-Y growth by 35.87%. The gross profit were up by 60.23%. Looking at the operating expense, Q4, it was $3.79 billion, up 31.31% from $2.89 billion. Operating income Q4 were $4.75 billion, up 94.42% from $2.44 billion. The net nonoperating loss Q4 was $199 million, down 5.51% from $210 million. The net income Q4 were $3.64 billion, up 102% from $1.8 billion. The EPS for Q4, $5.99, versus last year Q4 $2.96. Let's look at the income statement for Q4, Q-on-Q. The top line mentioned earlier, there's a growth of 2.05%. The gross profit were up by 12.65%. The operating expense Q4 at $3.79 billion, up 14.26% from $3.32 billion. The operating income for Q4 was $4.75 billion, up 11.4% from $4.26 billion. The net non-operating Q4 was $198.7 million, up 70.41% from $116 million. The net income Q4 $3.64 billion, up 7.02% from $3.4 billion. The overall EPS for Q4 was 5.99% versus last quarter, $5.60. Let's look at the sales breakdown by product. As you can see that SOC accounts for 31% of our total sales, and the driver accounts for 68%. And you can see for the last 4 quarters, we've been experiencing growth every quarter. Finally, let's look at some of the financial numbers. As you can see that since we have no short-term loans, our net cash position end of last year is $22.88 billion, increase of $6.5 billion. Accounts receivable, $13.37 billion. It's down by $1.97 billion. Inventory, $8.16 billion, increase of $482 million. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q4 results and Q1 guidance.

[Foreign Language] Good afternoon, everybody. [Foreign Language]

[Foreign Language] Our first quarter revenue -- our fourth quarter revenue came up to $20.45 billion, and the margin went up to 38%. One of these were record highs for NovaTek. The moderate growth in Q4 was mainly driven by the following reasons. The IT-related applications like notebook, tablet, gaming, these demands driven by the COVID-19 actually continued to be strong in Q1 and Q4. And Q4, as everybody knows, is the high seasons for smartphones. So due to the above 2 reasons, our revenue reached the higher end of our Q4 guidance. And as to Q4 margins, our margin was 38%, up from -- up 3.58 percentage point Q-o-Q. And this is mainly due to the -- first of all, we adjusted our ASP to reflect our rising costs. And secondly, due to the tight supply, we have adjusted our production to more favorable and better product mix. And looking at the outlook for Q1, even though the various countries have started to provide vaccinations, but the global pandemic is still far from over and still spreading in various countries. So working from home, learning from home or web meeting will become a norm. Thus, we see the demand for notebook, tablet, gaming monitor, and it's maintaining its strength in Q1. And we're expecting it to maintain its momentum until Q2. Normally, everybody knows that Q1 is usually a low season. But this year, we are seeing strong demand in Q1. All our product lines are expecting to grow both the SOC and the driver IC line. So based on the above scenario, our guidance for Q1 is as follows: revenue will be within the range of $25.2 billion to $26 billion, and this is based on an exchange rate of USD 1 to TWD 28, $25.2 billion to $26 billion. And our gross margin will be 38% to 41% range, 38% to 41% range. Operating margins will be from 22% to 25% range. Well, due to the tightness in the supply chain for SOC for both foundry and the back end, the lead time has been extended, therefore, our SOC product delivery has been postponed to Q1. So based on this, we are expecting our SOC line to grow stronger growth than rest of the other line. So SOC has been the strongest. Second will be the large panel driver and then the small sized -- small and medium-sized driver. Okay. That's the review on the Q4 and the first quarter guidance. I will now move on to the Q&A session. Please be reminded to send us your questions, and Tony will process and then read them out one by one. And before the questions coming in, I think we already have some questions. So I'll ask Tony to read them out. [Foreign Language]

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Okay. Based on our recognition of all the key sectors for the record high gross margin quarter 4 and exceeding the guidance, can you also provide more detail about the NRE amount in quarter 4 versus the first 3 quarters of the whole year?

The NRE for Q4 is around $119 million and the overall 2020 NRE roughly around $600 million.

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Yes. We noticed the operating expense in quarter 4 increased from 15.1%, quarter 3 to 16.9%, in quarter 4. In terms of the amount, the expense also increased over $400 million quarter-over-quarter, which will provide some key factors about this job.

The increase in the operating expense is mainly due to the R&D expense. And among the R&D, you have the mask and all. So basically, the increase in R&D is specially for the future product, and this is to improve -- to increase our competitiveness, we have to invest more into the R&D.

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[Foreign Language] Market gain -- market share gain. [Foreign Language]

We noticed in quarter 4, SOC revenue declined slip by 9% quarter-over-quarter. Could you give some highlights about the key products, the quarter-over-quarter trend? Also, could you provide some key highlights for your SOC product for 2020?

The reason for the decrease in the SOC revenue by 9% quarter-over-quarter, this is mainly due to the TV SOC line. As I mentioned earlier, because of the tightness in the foundry and back end, so the overall cycle time actually has been extended. So due to this, a lot of the delivery has been delayed to Q1. So this is the reason for the decrease in Q4. And talking about the SOC product line, among the SOC product line, the -- there are few of them. One of them is the TV controller and then the gaming monitor scaler. And these areas, we actually had a market share gain. And the next one is the timing controller, which we also did pretty well. And of course, the other one is the power-related -- display power-related line, which also did well.

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Now we switch the gears to the driver business. Could you provide some details or trends about the quarter-over-quarter trend for your large panel driver versus small, medium-sized driver and also some comments in terms of the shipment, the large panel driver as well as the OLED and the TDDI for your smartphone?

Well, as mentioned earlier, the Q4 SOC side, even though it was down Q-on-Q in Q4. But our driver line actually went up in Q4. And among the driver line, we have the large panel and small, medium-sized panel. And we are seeing -- we saw our large panel driver actually experienced a higher growth than the small and medium-sized driver. And among the small and medium-sized driver, we have OLED and TDDI product line. And the TDDI product line is kind of flat. The OLED driver was down slightly. So that's basically the 2 main product lines.

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Could you also provide some overall review on your driver business, such as the large panel driver versus small medium-sized driver and also a little bit more color on the OLED and the TDDI for example for overall 2020?

In 2020, the overall large panel driver and the small, medium-sized driver, they account roughly 50%, 50% of the driver line revenue, okay? And looking at the large panel driver, what you're seeing that is that the overall unit shipment, it's kind of flat. And mainly, it is due to the large panel driver, the trend towards the gate on the rate, which doesn't need a gate driver. So basically, the gate driver unit shipment has come down a lot. But the OLED class driver has increased quite a bit. So that was the situation in 2020, among the large panel driver.

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Then the large panel and small and medium-sized panel revenue is pretty much 50-50. But if for the overall 2020, the small, medium-sized revenue will be a little bit higher than that of the large panel driver.

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We noticed the inventory at the end of quarter 4 increased 6% quarter-over-quarter. You also mentioned earlier, partially came from the local lead time due to the tight contract on the pledging side for SOC. Are there more than -- are there reasons for that this inventory increase?

It's pretty due to the SOC line. Cycle time has been extended, and this has -- especially at the back-end packaging side. The capacity is pretty much very tight, and so the cycle time has been longer than normal. So these has been delayed. And this caused the inventory level to go up.

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We noticed your operating cost expanded to almost $200 million in quarter 4, up from about $100 million in Q3. What other major reason behind the quarter-over-quarter increase?

Basically this is mainly due to the continued NT dollar appreciation in Q4 versus Q3. Yes. So Tony, see if there's any more question on the Q4 numbers review.

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Okay. Let's move on to the outlook, okay?

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Before we go for the outlook, a lot of question is more centered on the supply side. And particularly given that we see a lot of news on the expanding tightening on the bank of big recovery on automotive semiconductor demand. Could you provide some comment on your supply side situation?

Yes. As everybody knows, the 8-inch and 12-inch, both this foundry site is pretty tight. And of course, this has impacted the auto product line, the supply. And as you know, the automotive, the qualification approval, it takes a longer period of time. So currently, the supply side is very -- pretty much very tight. And the situation will remain like that for a while. It cannot be resolved in a very short period of time.

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Yes. Let's actually talk about the product outlook for first quarter or even for the 2021. Could you provide more color for your individual -- your major product line within your SOC business?

Around the SOC side, the -- as mentioned earlier, TV is a big part of our SOC side. TV, we are expecting it to grow this year. And then besides TV, we also have the power related, which we are also pretty positive. And of course, this year, we'll have another product line that we'll be expecting significant growth, and that will be the surveillance.

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As for TV SOC, last year, we knew that a lot of growth came from your customers in Korea. How about this year's growth opportunity in Korea, South Korea as well as other countries?

Well, the Korean market, we do expect it continue to grow, and it should be positive. But besides Korean market, I mean, we are also making good progress outside the Korean market, for example, in China and the other areas.

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I think the main -- the focus that we want to -- is how to resolve the supply issue on the foundry side and on the back-end packaging and testing side. That will be our main focus. Basically, the demand is very healthy and strong. And the only issue will be the supply side right there.

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Now in addition to the TV SoC, [ Range Rover ] also mentioned about the growth in the SoC coming from power. Investors are less familiar with your power business. Could you also provide more color on your power business outlook?

Well, the -- our power line was mainly focused on the large panel display-related, but now we are also moving to the mobile smartphone display related to power. So we are making a progress in the various areas.

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Now switch gear to your surveillance SoC. You mentioned about the growth opportunity will be pretty impressive into 2021. Could you provide also more color on this business?

As you know, we've been working on the surveillance solution for quite a while. And currently, we are making a lot of progress no matter whether it is on the before market or aftermarket, okay? So the -- so we are expecting this area to grow and besides that, we also have -- used to have a lot of the dash camera for automotive, and it will continue to grow.

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As for SoC product, in addition to the 3 business lines with strong momentum in 2021, do you have other products to highlight or share with investors for the growth opportunity?

As everybody knows, at Novatek, we've been focusing on 2 major areas. That would be the smart display and smart image processing of video. And also, of course, these are all for different various display technology, okay? So we'll continue to focus in this area to provide a lot of good solutions and high performance, especially on the picture quality. So we'll continue to focus on this area. I mean there's a lot of things to be done in those areas and new technologies coming up, covering all the different applications and different display technologies.

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A follow-up question about the supply chain constraints. Could you also give more color on your supply chain side?

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Regarding the supply -- the tightness -- the question on the supply tightness. And what Steve just said is that on the foundry side, no matter if it is 8-inch or 12-inch, across the board, all the different nodes, all of them are tight. There's no area where it is not tight, okay? And on the back-end side, what we are seeing is that especially on the packaging side, the BGA and a lot of those packaging that related to wire bounding, and those are very tight, and the cycle time has been extended.

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Now we switch to the driver side. Let's start with the large-size driver. Could you provide some color on your large-size driver for first quarter or for the full year 2021 in terms of growth opportunity and also breaking down by quantity and versus ASP?

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The current situation what we are seeing is that because of the pandemic, as mentioned earlier, work from home, learn from home or gaming monitor, and these are actually driving the growth for the large-size panel. And we are expecting the large-size panel, because of this COVID, it will continue to grow. And because of this, the demand for driver is also very strong. But the thing is that the -- currently, the supply on the foundry side is also very tight. So we need to work hard to try to secure more capacity to fulfill our customer needs. And of course, because of this, we need to work very closely with our customer. And if there's a need to increase the ASP or to increase our competitiveness in securing the capacity, we'll try our best to work closely with our customer. So in that case, there is a possibility that the ASP will change accordingly, depends on the supply side.

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So because of the tightness, Steve just mentioned that we anticipate that the ASP might go up further because of the tightness in the supply side.

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