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

Good afternoon, everyone. Thank you for joining Novatek 2023 Fourth Quarter Online Earnings Call. This is David Chen, Vice President and company's Spokes Person. I'll be the host of today's conference. Joining me on the call today are our Vice Chairman, Steve Wang; our CFO, Mr. S. S-C Chou and our IR Director, Tony and [ Ivan ]. The agenda for today's event will be as follows. First, our IR Director, Tony will 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 2024 Q1 guidance. Following that will be our Q&A session. We've already received some questions from our investors. And if you have any questions you would like to ask, please send them to us online. Our IR Director, Tony will process and read out the investors' questions one at a time, both in Chinese and English. And our Vice Chairman, Steve, our CFO, Mr. Chou and myself will answer all your questions in Chinese and will be translated into English later. Now I will hand over the time to Tony, our IR Director, to report our Q4 results.

Thank you, David. Good afternoon and good morning. This is Tony Tseng. So please take a look at the first page our safe harbor notice. Now we are going down to our financial results. The first slide is our revenue. Our quarter 4 revenue of TWD 27.15 billion exceeded our guidance of TWD 26.1 billion to TWD 27.1 billion, which is down slightly 6% quarter-over-quarter but still increased year-over-year by 21%. The next page. As for consolidated gross profit in quarter 4 reached TWD 11.26 billion, down about 8% sequentially but still increased about 24% year-over-year. Next page. Now moving to the next page about our gross margin. In quarter 4, our gross margin of 41.48%, again, exceeding our guidance of 38.5% to 40.5%. On a quarter-over-quarter comparison, this is slightly down from 42.25% in quarter 3, [ 2023 ], but still up year-over-year from 40.55% a year ago. Next page. Regardless our operating expense -- our operating expense of TWD 4.96 billion in quarter 4 was down slightly 2% quarter-over-quarter, but still increased 27.7% year-over-year. Next page. Then on the operating income in quarter 4, still reached TWD 6.3 billion, which is down 11.7% sequentially but still increased [ 21% ] year-over-year. Next page. Now let's look at our operating margin. Our operating margin of 23.22% in quarter 4, again, exceeded our guidance of 21% to 23%. On a sequential comparison it's down slightly from 24.69% in quarter 3 and also almost flattish year-over-year from 23.24% a year ago. Next page. Now let's take a look at our net income. In quarter 4, our net income reached TWD 5.33 billion, which is down 16% quarter-over-quarter but still rose 31.8% year-over-year. Next. Now let's look at our EPS for quarter 4. We reached EPS of TWD 8.76 in quarter 4, down from TWD 10.46 in quarter 3 last year, but still increased from TWD 6.64 a year ago. Now let's take a summary of our overall income statement for quarter 4 compared with quarter 3 last year as well as quarter 4 2022 as we already highlighted in the previous pages. Now look at our -- the full year income statement for 2023. For [ overall ] 2023, our revenue were almost flattish year-over-year and reached TWD 110 billion. Gross profit also reached TWD 46 billion, which is down 9% year-over-year. Operating expense of TWD 19.55 billion increased 7.35%, mainly due to the increase from the R&D expense. As for the net income TWD 23.3 billion, which is down 16.6%, also partially due to a little bit lower nonoperating income. The EPS of TWD 38.32, down from a year ago of TWD 45.96. Next page. This slide shows our revenue breakdown for 3 major business groups for quarter 4 last year. The small medium-size driver accounted for 37% revenue in quarter 4, down from 39% in quarter 3. The second largest business group, system-on-chip, SoC, accounted for 35% of quarter 4 revenue, also down from 38% in quarter 3. Lastly, regarding our large-sized drivers, which accounted for 26% of quarter 4 revenue, up from 23% in quarter 3. Next page. This page shows our monthly revenue for both 2022 and 2023. As you can see, we started to deliver year-over-year revenue growth from middle of last year. This page, we just reported our January revenue of TWD 8.6 billion, which is almost flattish month-on-month, [ but still posted ] 20.7% year-over-year growth. Regarding the breakdown, you can see with SoC and the drivers. On a relative basis, SoC [ coming to be ] more resilient and accounting for 38% of revenue in January. Next page. This is also, again, a monthly revenue to show the sequential trend over the past 1 year, and you can see a big year-over-year growth for January 2024. This page is key financial numbers for quarter 4 versus the previous quarter. The cash position increased again to TWD 54 billion level. It's up around 18% quarter-over-quarter and also around 10% year-over-year due to our lower account receivable as well as inventory dollars. Now I'll switch gear to look at accounts receivable and also the amount reduced by about 18% quarter-over-quarter to TWD 16.9 billion in quarter 4, but slightly increased 7% year-over-year. [indiscernible] inventory, our inventory dollar further slid to TWD 8.55 billion, about down 6% quarter-over-quarter and around 29% year-over-year. And this is also the lowest dollar level since the COVID period. Now let me pass the call back to David.

Thank you, Tony. The following slide is a recap of our recent ESG major events. Novatek has been selected to Business Weekly's Top 100 Enterprises in Carbon Competitiveness. And [indiscernible] nearly 1,000 listed companies, maintaining its position as one of the top 100 carbon competitive enterprises for 2 years in a row. And we've also been recognized with an excellent result grade in the Temperature Rising Index Pathways, which is called TRIPs. And we've been also recognized as one of the future investment initiative top 250 most sustainable emerging market companies based on the inclusive ESG score. And Novatek has also been honored with the Ministry of Education 2023 Taiwan iSports Certification, and this demonstrated Novatek commitment to caring for the physical and mental wellbeing of its employees and help to make work-life balance a reality. We also have been given the 2023 Education Business Volunteer Service Award by the Ministry of Education. And please also visit our website for more information on our ESG achievements and the links as below. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q3 -- Q4 results and Q1 guidance. [Foreign Language]

[Foreign Language]

[Interpreted] As Tony already reported our Q4 results, the revenue for the fourth quarter actually decreased by 6.1% Q-o-Q, but Y-o-Y up by 21.1%. This is mainly due to the weaker slower recovery of consumer electronics end market demand and year-end inventory adjustment. But overall revenue reached near the upper bar of our guidance, TWD 26.1 billion to TWD 27.1 billion. And as for the Q4 margins, our Q4 margin was 41.48%, Q-o-Q declined by 77 basis points, but better than our guidance, 28.5% to 40.5%. This is mainly due to a gain from recovery of [ entry ] and NRE.

[Foreign Language]

[Interpreted] As for our Q1 guidance, normally, Q1 usually is a low season for consumer electronics. Plus we have Lunar New Year, which has less number of working days. Therefore, Q1 revenue is expected to decline quarter-over-quarter. And due to the demand uncertainty in Q1, and most customers rely on our short and rush orders, based on the above, our 2024 Q1 guidance will be as follows. Revenue will be within TWD 24 billion to TWD 25 billion with an exchange rate of [ 31.2 ]. And the gross margin will be 38.5% to 40.5% range, and operating margins will be 19.5% to 21.5% range. Thank you, Steve, for the Q1 guidance. Next, we'll move on to Q&A session. Please be reminded to send in your questions if you have any questions that you would like to ask. So Tony, please we'll go first with some of the questions that we have already received.

[Interpreted] Could management share the view on the sequential trend across major applications for the overall demand into the first quarter?

[Interpreted] Well, the demand across applications such as TV, monitor, notebook, smartphone, we are -- even auto tends to be weak in Q1 due to low seasonality.

[Interpreted] Consequently, could you also provide some guidance on your quarterly revenue trend across your 3 big business groups?

[Interpreted] Well, the -- based on the 3 major business groups, the first one is the system on chip. We are expecting Q-o-Q will decline slightly. Basically, it's mainly because of the early correction in Q4. So in other words, a lower base in Q4. And as for the small, medium business group, Q-o-Q will also decline. And the smartphone inventory replenishment pretty much done. And [ a pointer ] that we need to keep watch for Chinese New Year sell-through. But we expect smartphone TDDI shipment to decline but OLED TDDI to be flat. As for the auto, the shipment will decline due to customer inventory adjustments. And the other business line -- business group is the large driver, which Q-o-Q will decline the most, and it is due to the soft demand across notebook monitor and TV and also the lower utilization rate at the panel customer side.

[Interpreted] What are major factors for the sequential decline of your small medium-size driver revenue in both quarter 4 last year as well as first quarter this year?

[Interpreted] Well, the small and medium driver revenue in Q4 was largely dragged by weak VR and auto, while the shipment of OLED and TDDI actually increased quarter-on-quarter. And -- however, the revenue in Q1 will decrease Q-o-Q, but this will be mainly due to the soft smartphone demand. So it's a little bit different in Q4 and Q1.

[Interpreted] Could you share your view on the top revenue growth drivers into 2024?

[Interpreted] Well, the growth for 2024, first of all, is the OLED TDDI, we are anticipating decent growth for smartphone OLED TDDI IC in 2024. And as for TV SoC, we will also benefit from new customers and from new product launch which should be a growth opportunity for Novatek. And last but not the least, the PC and notebook. And we also expect the replacement demand and also some of the high-end products like the AI, which should provide more room for our growth opportunity. But the OLED -- but the overall TDDI in 2024 will not grow.

[Interpreted] Wonder if you could provide percentage of revenue from AI-related products in 2023. How will AI-related product will drive your growth in the future? Could you also share your view on the interface IC, which seems to benefit from these AI trends? As mentioned earlier, the AI PC or AI notebook or even AI smartphone, some of these new functions and features will trigger the replacement demand and especially some of the display upgrades in terms of specification. And on the other hand, the adoption of AI in some of the applications like surveillance, TV, gaming monitor will also be positive for our growth. And as mentioned about the transmission interface, and this has always been one of our core technologies. So our product development has already moved towards higher transmission speed. And we'll definitely have our presence in that area. What percentage of revenue in 2023 came from ASIC product and also for which product lines? Could you also provide if you have any growth or revenue target for your ASIC business? The overall ASIC business is mainly driven by some of our customers' needs for product differentiation. And currently, Novatek has ASIC business for both driver and SoC product line. And yes, we do expect our ASIC business to grow year-over-year in 2024. What percentage of your revenue in 2023 came from 6-nanometer product, for which product lines? Could you also provide some color on how this advanced process node will help your business in the future?

[Interpreted] Well, currently the 6-nanometer product contribution is still low. And the advanced node is mainly adopted for products related to smart imaging and also picture quality. And for Novatek, the early engagement or implementation of these advanced nodes is accretive and beneficial to our long-term product and also the ASIC business development.

[Interpreted] Earlier, you mentioned about the OLED DDIC will be one of your key growth drivers in the future. Could you give more color on a few topics such as your foundry capacity plan, your differentiated product lines, the node project and also a potential competitive cost structure.

[Interpreted] Well, for Novatek, we are well prepared for the future capacity need, given the long-term rising adoption of OLED products across applications and -- although they will continue to develop our full series of differentiated product portfolio to meet our customer needs. For example, like [indiscernible] or OLED TDDI. And for us, the evaluation of process nodes of foundry partners are basically based on prior performances and is usually done at an early stage during the product design stage.

[Interpreted] A follow-up question on OLED. Could you also give some color on other OLED related products?

[Interpreted] Besides a smartphone application that we've been talking about, and Novatek has also developed and launched OLED products for various applications, including TV, IT, auto and even T-con related.

[Interpreted] What percentage of your revenue in 2003 came from auto-related products? Could you also share with us about your growth driver auto related product in the future? And also any comment [indiscernible] recent vertical acquisition into the supply chain in Europe?

[Interpreted] Well, according to Omdia, Novatek currently rank top 2 in the auto DDIC market in terms of revenue. And from what we see is that in the future, the adoption of higher dollar content products such as LCD TDDI, [ LTDDI ], OLED and the automotive display will increase, and this will provide a growth opportunity for us.

[Interpreted] Given USC's announced partnership with Intel and the 12-nanometer product starting from 2027 [ in the state ], will Novatek utilize this capacity?

[Interpreted] Well, the adoption of any new process nodes or foundry partners will all depend on its competitiveness and also the needs of our customers.

[Interpreted] Previously you mentioned you have worked mostly with new customers. I wonder if you will potentially expand the offerings.

[Interpreted] Well, expanding customer base or adding new customer or new application, this has always been our major goals, and we'll continue to work closely with our customers to develop the new products to meet their needs.

[Interpreted] Previously you mentioned inventory level in the supply chain across products are returning into the normal level. Could you still hold this view at this moment for your business through 2024?

[Interpreted] Yes. The overall inventory level in the supply chain has returned to a relatively healthy level after more than a year of adjustment. And -- but we still need to keep close watch on the end demand, which is subjected to overall macroeconomics and geopolitics, and we need to keep a very close watch on the changes.

[Interpreted] What are your inventory days at the end of quarter 4 compared with quarter 3 last year? Could you also provide some comment on inventory dollar or days into the first quarter 2024?

[Interpreted] The average days of inventory in 2023 came down to 72 days down from Q4, which was -- Q3, which was 74 days. Inventory dollar at the end of Q1 2024 is projected to be close to 2023 Q4 level, which is a rather healthy level.

[Interpreted] Your quarter 4 gross margin exceeded the upper end of your guidance. How did NRE and inventory reversal gain [ helped the peak ]? Could you also provide the trend for your NRE into 2024?

[Interpreted] The Q4 NRE and the reversal gain from inventory write-down actually contributed roughly around 160 basis points to our gross margin. And as for 2024, we expect the NRE income to increase year-over-year.

[Interpreted] Why is your first quarter gross margin guidance is lower than your reported quarter 4 results?

[Interpreted] Well, the Q1 guidance lower than Q4, mainly due to 3 reasons. First of all, in Q1, the product mix is different and also there's some ASP erosion for some products. And also in Q1, there's lack of reversal gain.

[Interpreted] In first quarter, which products are facing more pricing competition?

[Interpreted] Well, given the weak seasonality in Q1, the large DDIC and smartphone DDIC are facing more pricing competition. However, we do expect pricing to become more stabilized moving forward.

[Interpreted] Could you share with us about your capacity timetable for other foundry suppliers at the 28-nanometer high voltage? Where will you start producing a product at 22-nanometer? And also which node process will you use for your OLED DDI? And also any timetable for more advanced node [ HID ] product?

[Interpreted] For Novatek we'll definitely evaluate and adopt any fact as long as it is competitive enough. And for us, we'll continue to adopt new process nodes according to our customer needs and also try to develop competitive cost performance products. And 22-nano is just one of them, okay? And besides process, I think the other key factor is the design capability, which we need to enhance as we move forward.

[Interpreted] Could you also provide some comments on potential impact from competitors in China, particularly for OLED DDIC?

[Interpreted] Yes, we are seeing some competition at the entry-level segment. But at the same time, we are also seeing the demand for the higher specification for OLED solution, which leads to also the upgrade in the IC specification. And for Novatek, our strategy is continuing to deliver a competitive solution to our customers by continuously enhancing our design capability and try to develop value-added and differentiated product portfolio. And this is our most fundamental competitive on the core technology that we need to enhance and provide our customers.

[Interpreted] Will management provide some guidance for your operating expense or operating expense ratio for [ 2023 ] compared with '23? Also, how about the tax rate for 2024, as we noticed your tax rate in quarter 4 of last year was a bit lower than the first 3 quarters given the new CHIPS Act?

[Interpreted] The operating expense ratio in 2023 is 17.71%. And looking into 2024, OpEx amount will be similar to those in 2023 while the operating expense ratio is basically subjected to the revenue size. So the income tax, on the other hand, the income tax rate is -- in 2023 is at 17.4%, lower than the previous estimate of 18%. And this is mainly due to the adoption of higher tax credits, which has gone up from 15% to 25% under the new tax act. And thus, the tax rate in 2024 will be at the similar level.

[Interpreted] What are major items for your nonoperating income in quarter 4 last year.

[Interpreted] The nonoperating income in Q4 mainly came from interest income of TWD 346 million and a dividend of TWD 98 million, despite the ForEx loss of TWD 449 million.

[Interpreted] Will you maintain your cash payout ratio at 80% for 2024? Also will you increase the payout frequency?

[Interpreted] Regarding the payout ratio, we expect it to -- likely to stay at the high level of 80%, but the actual ratio will be decided by the Board meeting. And as for the increase of payout frequency, at this moment there is no plan. Tony, I think we have gone through most of the questions. So -- yes, if there's any other -- if no, then I would like to hand back the time to our Vice Chairman, Steve Wang.

[Foreign Language]

[Interpreted] And as Lunar New Year is approaching, I would like to take this opportunity to wish you all a happy new year and the best of health. Thank you so much for joining in. Thank you once again. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]