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

[Foreign Language] Dear investors, analysts and media, good afternoon. Welcome to Novatek's 2021 Third Quarter Online Investor Conference. This is David Chen, Vice President and Company's Spokeperson. I'll be the host for today's conference. Hope everyone is doing well, outperforming the market and staying healthy. We are very happy and fortunate that Taiwan domestic pandemic cases has fallen to nearly 0, but we still have to take precautionary measures to ensure everyone's safety. Therefore, we have decided to maintain online. Please be reminded that all questions can be sent in by text during the conference. The agenda of today's event will be as follows: first, I'll be preparing the -- I'll be reporting Novatek's third quarter results in English. After that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q3 results and Q4 guidance. Following that will be our Q&A session. As mentioned earlier, if you have questions, you can send them to us by text. Our IR Director, 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; CFO, Mr. Sheng-Cheng Chou and myself will answer all the questions in Chinese and will be translated into English later. As usual, please take a look at our safe harbor notice. So let's start with our 2021 Q3 financial highlights. Our net sales in Q3 was $38.35 billion, up Q-o-Q 12.41% from $34.11 billion, Y-o-Y up 34.39% from $22 billion in Q3 2020. Net gross profit in Q3 was $19.92 billion, up 16.02% from last quarter, $17.17 billion, and up 152.76% from $7.58 billion in Q3 2020. Our gross margin in Q3 was 51.94%, up 1.61 percentage points Q-o-Q from 50.33%, Y-o-Y up 17.49 percentage points from 34.45%. Our operating expense in Q3 was $4.8 billion, down 7.32% Q-o-Q from $5.18 billion, Y-o-Y up 44.56% from $3.32 billion. Q3 operating income was $15.12 billion, up Q-o-Q 26.1% from $11.99 billion, Y-o-Y up 254.75% from $4.26 billion. Our operating margins in Q3 was 39.43%, up 4.27 percentage points Q-o-Q from 35.16%, Y-o-Y up 20.06 percentage points from 19.37%. Yes, our Q3 net income was $12.27 billion, up Q-o-Q 25.39% from $9.79 billion, Y-o-Y up 260.37% from $3.41 billion. Q3 EPS was $20.17 versus last quarter, $16.08, a Q2 increase of $4.09. And last year's Q3 EPS was $5.6, a Y-o-Y increase of $14.57. Next, let's take a look at our Q3 consolidated income statement. Next slide is our first 3 quarters consolidated income statement. Our sales in the first 3 quarters was $98.82 billion, Y-o-Y up 71.86% from $37.5 billion in first 3 quarters of 2020. Net gross profit in the first 3 quarters was $48.59 billion, up higher than 150.22% from last year's $19.42 billion. Our operating expense in the first 3 quarters was $14.27 billion, up 51.94% from $9.39 billion last year. 2021 first 3 quarters operating income was $34.32 billion, up Y-o-Y 243.24% from $10.03 billion in 2020. 2021 first 3 quarters net income was $27.93 billion, up Y-o-Y 241.76% from $8.17 billion last year. Overall, first 3 quarters EPS was $45.9 versus last year's $13.43, Y-o-Y increased by $33.47. Next is our Q3 sales breakdown by product line. SMDDIC, which is small and medium driver, that accounts for 38% of our total sales. SoC business up, which is all the non-DDIC, accounts for 33%. LDDIC, which is a large DDIC, accounts for 29%. We have just released our October sales, which is $12.59 billion, multiple down 2.63%, Y-o-Y up 66.38%. SoC accounts for 29% and DDIC accounts for 30% of the total revenue. 2021 accumulated revenue, January to October, is $111.41 billion, Y-o-Y up 71.22%. Comparing our 2021 and 2020 monthly sales, we are seeing significant Y-o-Y growth for the first 10 months of each month. Let's look at other key financial numbers. Our cash and cash equivalent in Q3 was $42.79 billion, increased Q-on-Q by 18.49% from $36.11 billion, Y-o-Y increased by 161.73% from $16.35 billion. Accounts receivable Q3 was $27.08 billion, increased Q-o-Q 26.56% from $21.4 billion and Y-o-Y up 76.5% from $15.35 billion. Inventory, Q3 was $12.28 billion, Q-o-Q up 13.47% from $10.82 billion, Y-o-Y up 59.98% from $7.67 billion. Short-term loans, Q3 was $5.63 billion, Q-o-Q decreased by 24.93% from $7.49 billion. The following slide is a recap of our recent major events. [indiscernible] has been selected as the [indiscernible] Taiwan HC 100 Index cap, Taiwan Employment Creation 99. [indiscernible] entered the top 10 of the [ Commonwell Systemat Sustainability Award ]. And also, the 2021 Taiwan Corporate Sustainability Report Award, we got a gold award for that. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us much more details on Q3 results and Q4 guidance. [Foreign Language]

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Let me repeat -- translate the -- what Steve just mentioned in English. The Q3 revenue increased by 12.41%. The sequential rise in the group was attributed to a combination of continued momentum from IT-related products, the seasonal pickup of SoC product and increase of smartphone and automotive DDIC that contribute to the growth. Our Q3 margin was 51.94%, up 1.61 percentage points Q-o-Q. This was supported by the better product mix and price rise for part of products on the back of higher costs. As we enter Q4 [ null ] season, consider demand starts to slow down, but we do have expectation on the coming Double 11, Black Friday, Christmas sales promotion. As COVID restriction being lifted, people are returning to office for work. This will drive commercial local monitor, automotive, industrial demand. Most of the new smartphones are also adopting OLED display, and we're expecting the OLED demand to pick up momentum. So based on what I just mentioned, our guidance for Q4 is external. Revenue will be $36 billion to $37 billion with an exchange rate of 1:28. Gross margins will be 48% to 51% range. Operating margins will be 34% to 37% range, 34% to 37% range. That is it for the Q4 guidance. Next, we'll move on to Q&A session. Please be reminded to send in your questions. We'll start with the questions on hand.

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The NRE for Q3 was $81 million, and Q4 will be roughly around $90 million.

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Well, that's mainly due to the decline in R&D-related expense.

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The third quarter revenue, the small-medium driver IC ind, the large driver IC, the main reasons is that the -- our smart OLED actually had a record rise in Q3, and our automotive sale also went up in Q3.

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Inventory days increased -- absolute dollar increased roughly in line with the revenue growth. Could you provide all cover and also by which product?

While the inventory increase are mainly due to the increase in revenue and [indiscernible]. Well, the SoC recon is relatively longer, especially some of the [indiscernible] raw materials. So -- but overall, the inventory level in Q3 is pretty healthy.

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Okay. One again, a little more color on your [indiscernible] for quarter 3 and also the year-over-year growth for the first 3 quarters for this product or even overall for this year or even next.

Well, the overall KDDI, we are expecting -- or we've seen a Q-o-Q relatively flat as we move forward to Q4. And overall, in Q3, as we mentioned earlier, we have a record high. We're expecting in 2021, TDDI will be slightly up. And then overall, even though it's a record high for this year, we still have some constraints in the capacity. But as we move forward to 2021, we are expecting to increase more capacity for OLED. So we are expecting that next year, our OLED will be better than 2021 as we increase more capacity.

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Just wonder, help me how to reduce the impact on [indiscernible].

Well, on the consumer side, the demand has slowed down a bit. What we are experiencing the overall capacity, what you're seeing now is still relatively tight. So if you've adjusted our product mix, you'll be able to see that the panel maker side, as we mentioned, the TV and the consumer product has slowed down a bit. So the panel mix are also adjusted the production line allocation to more on the IT side.

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Also, wonder did you expect [indiscernible] year-over-year?

As mentioned earlier, the panel makers are reducing the utilization rate or product mix. So basically, based on what's going on, we do expect most probably the -- in Q1, the ASP will stabilize.

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You mentioned briefly about the Q4 powered by application. Could you give more color by product or by end market as well as [ some inning ] on the first quarter demand.

Well, what we see in Q4 is that the -- we're expecting Q4, the consumer to be kind of slow down a bit. But on the commercial side, we still see a strong demand on the commercial side. So as we move forward to Q1, we do expect the demand will be sustainable moving forward to Q1. So we hope we are seeing that Q1, it will be relatively stable.

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You mentioned about quarter 4 guidance. We just wonder if you could give more color about the quarter-over-quarter growth by your 3 major business schools.

Well, the -- we're expecting this small size -- small, medium-sized business to go up sequentially in Q4. And for the large DDIC, we're expecting it to be -- to slow down, decline a bit in Q4.

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Regarding your panel business, so we just also wonder if you can share some view of the panel industry in terms of the outward reduction as well as the utilization rate is falling.

Well, as mentioned earlier, the panel maker, actually, they're adjusting the utilization rate and also adjusting their location to -- I mean, adjusting the product mix. So I think the situation will continue from Q4 to Q1.

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[indiscernible] our panel market [indiscernible] to stabilize or even improve.

Well, of course, this question will be best to ask the panel maker. But of course, it basically depends on supply and demand. But as you know, as Steve mentioned, the -- currently, globally, there are only 2 places really have the panel industry like in China and Taiwan. So I do believe the situation will be more stable.

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You touch about for OLED, especially for 2022, you go for an overall picture for your more targeted growth product for next year and also maybe anything related to the recent -- [indiscernible] first.

Well, as we mentioned earlier, we will be increasing -- we expected to increase our foundry supply next year for the OLED. So definitely, the OLED will experience growth next year. And then, of course, upon that, we have automotive, which also expect to grow. And then we have LED backlight and then we have also surveillance. And then, of course, you mentioned about the metal works. We do have projects, we are working on these projects. So we will give more details as we move forward.

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Which product cost has been pushed up in quarter 4? And also, which product have you raised the price to reflect the higher cost in quarter 4?

Well, in Q4, partially, some of the costs have gone up. So we are discussing with our customers to reflect the cost of [indiscernible].

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There are a lot of questions about gross margin trend and your guidance for quarter 4 or 3 months for quarter 3, the results are much stronger. I just wonder if you can maintain your gross margin in quarter 4 or you will [indiscernible] slow down in the trend.

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Yes. We just gave a guidance for gross margin of -- around 48% to 51%. But virtually, we don't expect too much fluctuation on the margin. It should be relatively stable.

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You mentioned about how you provided the quarter 4 guidance, but you also mentioned about margin was pretty stable, relatively stable for quarter 3. Could you also provide some early view for your first quarter [indiscernible] trend?

Well, Steve just mentioned that there are some areas that the costs have gone up and reflected the cost to our customers. And firstly, looking at Q1, I think the situation is manageable. So as mentioned earlier also, the ASP basically depends on supply and demand. So we are keeping a close watch on the supply and demand situation, also updating those situation for our customers and then to make sure that reflecting the cost to enable them to get the capacity to work.

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Earlier, we discussed about demand-supply situation for the TVs or even the panels for early next year. Just wonder if those [indiscernible] starts of [indiscernible] or it might improve. Would you have [ worked ] like better to reflect your DDIC cost?

Well, again, it's a matter of supply and demand. And currently, the foundry capacity is still very tight. So we'll work very closely with our customers.

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[indiscernible] management take any action or measures to maintain the LP and the qualities and also reduce the potential impact from the margin pressure given on the back of higher component costs.

Well, as a fabless IC design house, our core value is to create value for our customers. Of course, this includes new technologies and new competitive product for customers, new solutions. And also, we are also strengthening our partnership with our suppliers.

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Given your very strong performance this year, I just wonder if you can maintain your cash payout ratio at around 80% for 2021?

Well, as you know, the overall payout ratio is decided by the Board. At this moment, I don't have a number. So wait for the Board to make the final decision.

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Wonder if you have any solve to increase the investors' return such as [ treasury ], share of asset or special dividend?

No plans yet.

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Also given the dramatic change at your own tax ratio in quarter 3, just wonder if you can provide some guidance for the OpEx ratio for 2022?

Our 2020 OpEx of -- [indiscernible] from Q1 to Q3 is 14.5%. So the increase of revenue at the momentum, but I think it will be maintaining around 14% to 15%.

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You mentioned about cost out, particularly some small, medium-sized drivers. Just on the safe side, can you also provide us update on your foundry supply growth for these segments?

Well, the overall foundry capacity is still tight. So -- but we do expect to increase our supply for OLED. So the OLED business are expecting to grow next year. And as again, the automotive is -- the business is also very good. Demand is strong. So we also will increase more supply to the auto also.

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Just wondering if you can give more color about your TDDI shipment as well as the market estimate for next year.

Well, the TDDI penetration rate is already pretty high. So we are not expecting a very high growth, but a slight growth for next year. And as for OLED, we are expecting a much higher growth rate.

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Just wonder if you can share some early view in terms of the margin trend for the OLED product next year.

Well, we mentioned earlier, the OLED capacity is very tough. So the -- it's still under supply. So what we expect is the gross margin should be relatively stable, and we also will try to increase more capacity to support the market demand.

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[indiscernible] OLED guide to provide [indiscernible] for your OLED driver business?

Well, as all of you know, that our OLED technology is -- we are leading in the industry. And recently, we also have already provided our OLED TDDI to our customer. And so I think we are still leading in that area.

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Just I wonder if any -- given the right transaction for OLED side, just wonder if any outsourcing of [indiscernible] to Taiwan from airport and so can you comment on that?

Well, we have no comment for specific customers. But the opportunity is there and it's -- that's our goal, to penetrate all the major brands. That's our goal.

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We switched the gear to the TDDI gross margin trend. Just wonder if you can provide some early thought for the margin trend?

Well, I think the Q1 margin should be relevant -- Q-o-Q relatively stable.

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Also wonder, given the small negative product and also given the recent [indiscernible] acquisition of [indiscernible], just wonder if you can also provide some comment on the competitive landscape.

Well, certainly, what we see is that we're still not able to meet the needs of our customers. So it's still under supply, so yes.

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You already mentioned about your target at your [ auto business ] next year. I just wonder if you can give more color on this topic.

Well, we are expecting our auto business in 2022 to outgrow 2021. And currently, we've been providing the TDDI solution to various customers, especially for the CIE display. So we do expect the CIE for the EV penetration rate to go up.

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Also wonder if you can share your thoughts about the [ budding ] trend for automotive [ driver ] business.

Well, I think we can maintain the automotive margins. Should not be a problem.

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If you just look, we already covered the major product for your small, medium-sized drivers. Could you also provide an update for your relative new products such as the [indiscernible], the wearable or even FTDDI?

Well, our FoD product is going to get into mass production in Q4. And our variable device such as the smartwatch is also getting to mass production in Q4.

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[indiscernible] supply for 2022?

Well, we still see that the foundry for the large-sized driver is also tight. And then, of course, the large kind of drivers, Steve just mentioned also on the demand side, we're seeing that the application is also moving towards higher resolution. For example, notebook, the full HD will increase the penetration rate as we move forward to next year.

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Just wonder if you can provide [indiscernible] in 2022 in terms of shipment or even the [indiscernible]?

Yes. As we mentioned earlier, if the [indiscernible] migration continues to next year, we do expect the Y-o-Y growth for the large panel driver.

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Also, Mr. Walker [indiscernible] DDIC provider for our [indiscernible] directly or indirectly.

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Okay. Steve just mentioned that we have some product already in mass production, but there are always good opportunity out there, and that's our goal.

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[indiscernible] ordering position [indiscernible] margin trend into the near future.

Based on what we see at this moment, I think the Q1 margins, I don't think there will be a big fluctuation for Q1 margin. But of course, again, all these, it depends on supply and demand. But so far, what we see is based on visibility that we have, I think the fluctuation will be very small.

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Also, given the rising competition from China and always more capacity there, just what you can provide our competitiveness in this very digitalized market?

Well, currently, the overall foundry capacity is still tight globally, and we are still working on expanding our new capacity to get more and more supply. So basically, it's still tight globally.

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We recently heard [indiscernible] supply, rate supply through the -- for the fall. Just what's the impact to your SoC product?

Well, we keep our customers updated on the supply situation and help them understand the need to raise the [ SP ] to order to secure capacity. So we are working very closely with our customers.

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Could you provide overall more detail on your SoC product for 2022?

Well, generally speaking, our SoC revenue for next year should continue to grow. And looking at the unit wise, as for example, for TV SoC, we do expect unit shipments to grow next year. And then our automotive surveillance, also expect to grow the whole of next year. And then, for example, the timing controller, we are expecting the value to go out like, for notebook, both full penetration rate will go up. And then on the TP side, we're expecting the 120 hertz, our penetration also will go up. So all these value up will help our business next year.

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Yes, that's pretty much.

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Also on the OpEx side and also the recent news on the structure, salary rate, just wonder any -- can you give more information to the tenant recruiting as well, OpEx?

Well, everybody knows that for IC design house, the core value is technology and the right product, competitive products. And all these indeed good talent to develop those products and technology. So as you know, the current environment, it's getting more and more difficult to recruit. So we need to provide competitive package to recruit more talent. So we are making such a structural change to attract more talent.

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Regarding the OpEx side, the -- our CFO just mentioned that it will be relatively stable.

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Management mentioned about the business across some major lines, such auto, OLED, the [indiscernible] life science driver even is healthy. Just wondered if you can provide an outlook for your business for 2022 in terms of revenue or gross margin trend.

What we just mentioned earlier regarding some of the product line, those are based on what we see at this moment. And of course, for margins or for performance, it's all related to value what kind of value we can bring to our customers. And basically, in terms of technology or quality or supply capability, I think Novatek is able to bring those kind of value to our customers. Of course, at the end, it all depends on supply and demand. But besides that, I think the most important thing is the value, what we can bring to the customer. I think so far, we are doing a good job in that area.

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Yes, after this, the past 2 years, our customers, their confidence in Novatek has increased and the supply capability, the technology, I think that's a good feedback from our customers.

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Earlier, you mentioned about [indiscernible] product. I just wondered if the foundry cost will continue to increase year-on-year in 2022. Also, I just wonder if there is any way that you can reduce some of your component cost.

Well, the -- overall, the wafer side is still tight. So we're not seeing any sign of easing at this moment. And then the raw materials -- as for the raw materials, we are seeing the overall material still relatively okay, but there's still -- we have to see next year how things turn out. But currently, in general, everything is still kind of tough.

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Also, I wonder -- interested about one of your new product, FTDDI. Could you provide the update on this product?

Yes, our FTDDI solution has been delivered to our customers, and they're in the process of tuning the product. And so far at this moment, we don't have an NPE schedule yet, but it is in the process, designing in process.

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Could you provide more color on your exposure on the [indiscernible]?

Well, some of the products or projects that we're working on will be more display related. As you know, for example, this year kind of VR tech or stuff. And this panel display will be like for small area with higher resolution and then very demanding on the power consumption side. Yes, any more questions?

The allotted time is about 20 past 4. So if there's any one more question, then we'll end the conference call.

Okay. If there's no more questions, then thank you so much for joining in, and I hope all of you have a good weekend.

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Okay. Thank you all. See you next time.