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

Good afternoon, and Happy New Year to everyone. Thank you for joining Novatek 2024 Fourth Quarter Online Earnings Call. This is David, Vice President and Company Spokesperson. I'll be the host for today's conference. Joining me on the call is Novatek's Vice Chairman, Mr. Steve Wang; our CFO, Mr. S.C. Chou; and our IR Director, Tony Tseng. The agenda for today's event is as follows: First, Tony will report on Novatek's fourth quarter results in English. Following that, our Vice Chairman will provide further details on our Q4 results and the guidance for the first quarter of 2025. Next, we'll have a Q&A session. We have already received some questions from our investors. And if you have any further questions, would like to ask, please send them to us online. And Tony will review and read out the questions one by one in both Chinese and English. And our Vice Chairman, Steve and Mr. Chou and myself will answer all the questions in Chinese first, and later on, translated into English. Now I'll hand over the time to Tony, our IR Director, to report our Q4 results.

Thank you, David. This is Tony, the IR Director. Let's first take a look at our safe harbor notice. We already reported our first (sic) [ fourth ] quarter revenue. First (sic) [ fourth ] quarter revenue of TWD 25.3 billion exceeded our guidance of TWD 24 billion to TWD 25 billion, but sequential decline by 9% from TWD 27.9 billion and also down around 7% year-over-year from TWD 27.2 billion a year ago, okay? Now let's look at our gross margin results. Our gross profit of TWD 10 billion in quarter 4, also down around 10% quarter-over-quarter from TWD 11.07 billion in quarter 3 and down 11% year-over-year from TWD 11.3 billion a year ago. Now this is our gross margin trend. Our quarter 4 gross margin of 39.51% also met the high end of our guided range of 37% to 40%, but this is slightly down 33 basis points from quarter 3 and also down almost 200 basis points year-over-year from a year ago. Now let's look at our operating expense. Our quarter 4 operating expense of TWD 5.06 billion, slightly increased around 5% from quarter 3 and also slightly up 2% from a year ago. As for our operating income of TWD 4.9 billion decreased around 21% quarter-over-quarter and 22% year-over-year, I think, due to a sales decline and also a little bit lower margin. As for operating profit margin, our quarter 4 operating margin of 19.46% also met our guidance of 7.5% to 30.5% but down from 32.4% in quarter 3 and also down from 32% a year ago. Now let's look at our net income. Our quarter 4 net income of TWD 4.8 billion was down around 9% quarter-over-quarter and also 10% year-over-year. The latest one is our EPS, our quarter 4 EPS of TWD 7.89 was down TWD 0.75 quarter-over-quarter and also down TWD 0.87 year-over-year. Now this is the overall summary of our quarterly income statement for quarter 4 and also compared with quarter 3 as well as a year ago for fourth quarter of 2023. This page also shows our full year result for 2024 compared with 2023. For 2024, our revenue of TWD 102.8 billion was down 7% year-over-year. Gross profit of TWD 41.5 billion, also down about 10% year-over-year. Operating expense of TWD 19.7 billion was almost flattish year-over-year and now look at the net income of TWD 20.3 billion is down around 13% year-over-year. EPS of TWD 33.43, down TWD 4.89 from 2023. This page also shows our revenue breakdown by 3 product growth for quarter 4. The largest group remains small medium driver, which accounting for 41% in quarter 4, slightly down from 42% in quarter 3. Second largest segment, SoC system on chip representing 37% of our quarter 4 revenue, the weighting was unchanged compared with quarter 3. Lastly, for large-size drivers, sales weighting in quarter 4 was 22%, up from 21% in quarter 3. We already released our January revenue last month, our January revenue of TWD 8.48 billion was down 3% year-over-year and almost flattish month-over-month. Also, there is a revenue breakdown for our January revenue. One thing I would like to highlight here is SoC of TWD 3.38 billion already accounting for almost 40% of our monthly revenue in January. This page shows the monthly trend for 2024 compared with 2023. As you can see, pretty much is year-over-year decline, but we already see this trend and gradually narrowed total December last year. The next page also have the January revenue compared with 2024, also show the similar trend year-over-year decline and then to only below 3% in January. The last page shows our key financial figures for quarter 4 also compared with quarter 3 and a year ago. We continue to have a very strong cash position at TWD 48.8 billion in quarter 4, which is up 16% quarter-over-quarter, but down around 10% year-over-year is mainly due to the dividend distribution during 2024. Account receivable remains stable, so it's flattish, roughly flattish quarter-over-quarter, but increased around 20% year-over-year. And in terms of inventory of TWD 8.7 billion is down 7% quarter-over-quarter and up slightly year-over-year. So let me pass the call back to David to also highlight some of events.

Thank you, Tony. The following slide is a recap of our recent major events, and we're happy to share with you that Novatek has received the 2024 Carbon Competitiveness Top 100 award for straight 3 consecutive years. And then we also obtained the ISO-14067 product carbon footprint verification for our driver product line. We also received the 2024 Youth Volunteer Outstanding Unit Award. For the past 15 years, Novatek Education Foundation Volunteers team through collaboration and empowerment have continuously supported visually impaired students youth in residential institutions and disadvantaged children in their learning and growth journey to practical actions. We are also honored with the 2024 Sports Promoter Long-Term Sponsorship Award. Novatek's long-term sponsorship has helped the local Fuli archery team members, secure sports as national representative for the 2025 World University Games and also the 2026 Asian Games training team. Novatek has been also awarded the TCSA Taiwan Corporate Sustainability Award for the eighth time, securing first platinum award and sustainability reporting. And regarding the RBA VAP recognitions, we've received the RBA VAP recognition with a high score of 193.8 out of 200. Last of all, please also visit our website for more information on our ESG achievement. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on our Q4 results and Q1 guidance.

[Foreign Language]

[Interpreted] The revenue for the fourth quarter decreased by 9.34% Q-o-Q and Y-o-Y were down by 6.97%, but exceeded our top line guidance of TWD 24 billion to TWD 25 billion. This decline in revenue is mainly due to consumer electronics low season and the year-end inventory adjustment. And as for the Q4 margin, the Q4 gross margin was 39.51% Q-o-Q down by 0.23 percentage points, but at the upper end of our guidance.

[Foreign Language]

[Interpreted] As for 2025 Q1 outlook, the subsidy programs for the swap all for new initiatives throughout China, along with the pulling due to anticipation of higher tariffs imposed by the United States have stimulated increased demand for consumer electronics. So we expect Novatek first quarter revenue to be higher than last quarter and better than normal seasonality. Based on the above our 2025 Q1 guidance will be as follow. Revenue will be TWD 26 billion to TWD 27.2 billion, and an exchange rate of $1 to TWD 32.5. Gross margins will be 37% to 40%. The operating margins will be 18.5% to 21.5% range. Thank you, Steve, for the Q1 guidance.

Next, we'll move on to Q&A session. [Operator Instructions] So I'll hand over the time to Tony to ask some of the questions that investors already handed to us.

[Interpreted] Could management share the view on the sequential trend across major allocations into first quarter 2025.

[Foreign Language]

[Interpreted] As mentioned earlier, the China subsidy programs and also the anticipated higher tariffs actually has stimulated increased demand for consumer electronics. So by product category, the demand for TV is expected to increase quarter-over-quarter, particularly for large-size model. And we also see that the TV panel price is also on the rise. And as for notebook, tablet and monitor, all of them are also experiencing growth, while the demand for smartphone is increasing, basically driven by the swap over new program and especially in the mid- to high-end segments. But in contrast, the demand for automobile is relatively soft.

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

[Foreign Language]

[Interpreted] Basically, all 3 product lines are projected to experience quarter-over-quarter growth in the first quarter. Among the large driver IC segment is anticipated to exhibit the most significant growth and then followed by the SoC segment. And as for the small, medium driver IC segment, it is also expected to grow quarter-on-quarter, but at a lower rate because out of the small and medium-size segment, the automotive product line basically will decline quarter-on-quarter. But for the smartphone, especially for the OLED, DDIC and the tablet TDDI, those will exhibit growth quarter-on-quarter.

[Interpreted] Could you also provide the growth opportunity for your Android smart OLED driver IC in 2025 and also provide some comments on potential impact of OLED TDDI to your ASP and the GP margin.

[Foreign Language]

[Interpreted] As mentioned earlier, the China subsidy policy have increased consumer willingness to purchase mid- to high-end smartphones, leading to a higher adoption rate of OLED DDIC. And the other question that asked about the OLED TDDI, the ASP and gross margin for OLED TDDI basically will be better than that of the OLED DDIC. And upon that, I would like to also mention that the customer mass production schedule for the OLED TDDI in Q2 remains unchanged.

[Interpreted] As for your new customer and smartphone, could you grow the revenue year-over-year in 2025? If the customer adopts the more advanced node process, will that change the landscape and the supply chain?

[Foreign Language]

[Interpreted] Well, as mentioned during our last investor conference, our strategy has always been focusing on expanding our customer base and applications. And this is basically our KPI. We continue to enhance our R&D capability. For example, advanced node, as you just mentioned, and also the product quality and the mass production capacity to build or to earn our customers' trust. So therefore, our goal is to increase our revenue in 2025. And with the Novatek extensive mass production experience in the advanced node, we do believe we can migrate products successfully upon customers' request. So this shouldn't be an issue.

[Interpreted] Could you also comment on the growth opportunity for your TV monitor controller in 2025? And also, how about your opportunity at your smartphone and ASIC?

[Foreign Language]

[Interpreted] Again, the China -- the subsidy policy as mentioned earlier, has increased the willingness to purchase large-size TV and also the high-end monitor. So this will really bring growth opportunity for Novatek in 2025. And the revenue from smartphone MMC ASIC, the ASIC chip you just mentioned, is anticipated to grow Y-o-Y in 2025. And this is mainly because of new customers and new models because, as you know, the MMC ASIC chip basically can enhance the picture quality, particularly at the high-end gaming models.

[Interpreted] ASIC also another major product line, your SoC, could you also comment on the growth opportunity in 2025, particularly at the premium notebook PC and auto segment?

[Foreign Language]

[Interpreted] As you all know, Novatek, we are in the leading position in the high-end notebook. And with the introduction of AI features, this will basically increase the demand for the premium models, which result in unit growth opportunity for Novatek. And as for the Novatek auto timing controller, we are glad to announce that it's already entering into mass production. And Novatek will benefit from the growth of the high-end models in the future. And as I mentioned several times that Novatek has a long and strong position in [ TCOM ] with leading technology and market share, and we'll continue to leverage our position to provide total solution and also differentiation to support our customer needs.

[Interpreted] As for AI product, could you also provide your deployment and opportunities for AI-related products and also opportunities from the introduction of DeepSeek.

[Foreign Language]

[Interpreted] Well, the answer is yes, it will give us more opportunity. And for Novatek, we focus on edge AI device. And the introduction of AI features in smartphones, notebook, PC, all of these will stimulate replacement demand. And as for TV, gaming, surveillance systems, all of these are all incorporating AI elements into the designs. We have also designed in some of these AI features. And as you know, this also -- the trend is also moving towards computer vision and smart home. So this development is expected to increase the further demand for all these products. And as for the Edge AI, basically will drive the higher display specification, especially in the gaming side, which will really help the gamer to have a better experience. And with the DeepSeek I think the AI model will become more efficient, and this will accelerate the widespread adoption of edge AI applications. So as a whole, I think the development in the AI segment will definitely benefit Novatek.

[Interpreted] Could you please update your progress on numerous platforms and 4 and 5 advanced node process and also your mid- to long-term outlook for your ASIC-related business.

[Foreign Language]

[Interpreted] Basically the extension of Novatek's ASIC business. So we are preparing in advance for our future customers' requirements. And also, we've mentioned many times, the ASIC business, both in driver and in SoC product lines, we have ASIC for many, many years. And the outlook for this business is so far looks positive.

[Interpreted] The exchange rate of a high level of 44 NT dollar versus Korean won, do you see any impact to the pricing and your competitiveness?

[Foreign Language]

[Interpreted] As the transactions are all U.S. dollar-based, so there are no impact at this moment.

[Interpreted] Quarter 4 gross margin was at the upper end of the guidance. What are the major factors? And also how about the gross margin trend across 3 business groups in terms of quarter-over-quarter trend?

[Foreign Language]

[Interpreted] The sequential decline of gross margin in Q4 by 23 basis points actually came from -- number one, the product mix, given we have a lower SoC weighting. And the second is because of the increase in gold price.

[Interpreted] Why is your first quarter gross margin midpoint guidance is lower than result in quarter 4 last year? And also how about gross margin trend across this group in terms of quarter-over-quarter comparison?

[Foreign Language]

[Interpreted] We expect the gross margin in first quarter to be at the similar level to Q4 last year.

[Interpreted] As for pricing, which products are facing more pricing competition into first quarter 2025?

[Foreign Language]

[Interpreted] Well, as you know, we have annual pricing negotiations in the first quarter. So based on that, we see the driver [Audio Gap]

[Interpreted] As for conservative related questions, could you comment on the cost trend on 8-inch and 12-inch foundry in 2025 compared with 2024 and also these cost reductions are more gradual or more concentrated within certain quarters. And also any changes in terms of pricing discount between Taiwan and China foundry suppliers?

[Foreign Language]

[Interpreted] Well, as you all know, the trends in costs are highly correlated with the supply and demand balance. And for Novatek, we have already negotiated with our -- all our suppliers. So we are expecting the material cost in 2025 will be relatively lower than 2024.

[Interpreted] With new product introduction and the cost reductions, will your quarterly gross margin stabilize or even improve sequentially during 2025?

[Foreign Language]

[Interpreted] Yes, again, maintaining and improving gross margin is always our -- one of our top goals. And for 2025, we'll continue to introduce new products and also improve the product portfolio as we've been doing that for a while and particularly at the high-end segment and also we'll control the cost to continue to improve the gross profit margins.

[Interpreted] As your gross margin has maintained at about 40% level over the past 2 years, will this 40% be the reference point for your gross margin trend in the near future?

[Foreign Language]

[Interpreted] Revenue growth and gross profit margins are 2 main KPIs for Novatek's management. And gross margin of 40% for Novatek is a near-term goal. And as for mid- to long term, we'll continue to work on it.

[Interpreted] Now let's switch the gear and we have some questions about the financial figures. The first one is what are major items for your nonoperating income in quarter 4?

[Foreign Language]

[Interpreted] Nonoperating income of TWD 775 million for Q4 came from interest income of TWD 297 million and ForEx gain of TWD 355 million.

[Interpreted] Your inventory days at the end of quarter 4 given TWD 8.7 billion. And could you also provide some comments for your inventory dollar or days into end of first quarter?

[Foreign Language]

[Interpreted] The DOI for fourth quarter were 61 days, down by 2 days from 63 in the third quarter. We expect the inventory dollars to increase Q-o-Q in the first quarter, but it still should be at a healthy level.

[Interpreted] Why did your operating expense dollar in quarter 4 increase compared with the amount during first 3 quarters? Could you provide your preliminary thoughts on your OpEx dollar into 2025 compared with 2024?

[Foreign Language]

[Interpreted] In the fourth quarter, operating expense increased compared to each of the previous 3 quarters, preliminarily due to an increase in R&D expense. And due to the increase of R&D engineers and investment of advanced process nodes, the OpEx amount will increase year-over-year in 2025.

[Interpreted] If you benefit from the new tax rate as the tax rate came down to 15.7% in 2024, down from 17.4% in 2023. Will your tax rate in 2025 maintain at a similar level as 2024?

[Foreign Language]

[Interpreted] Yes. Due to the benefits of the amended tax act, the tax rate decreased to 15.7% in 2024, down from 17.4% in 2023. And we also expect the tax rate in 2025 will be around 16%.

[Interpreted] Well, Novatek maintains the cash payout ratio at 80% or plus. Have you considered to increase the frequency of cash dividend frequency?

[Foreign Language]

[Interpreted] The payout ratio in the past was around 80%, and it is not expected to change significantly in the future. However, the actual payout ratio is still subjected to the Board meeting. And as for the increase in the frequency of cash dividend payout, currently, we don't have any plan to change that. We have covered most of the questions. Tony, see if there's any other questions that we have not covered. [Audio Gap]

[Interpreted] The question is about given your kind of above seasonality trend in first quarter revenue, could you also give us some preliminary thoughts for the second quarter outlook?

[Foreign Language]

[Interpreted] As mentioned earlier, the subsidy -- Chinese -- China subsidy initiatives and the tariff uncertainty has stimulated some of the demand in Q1. And as for Q2, I think we still need time to keep watch how things change. It's hard to tell at this moment.

[Interpreted] Could you also provide your initial thoughts for your revenue outlook for 2025? And what are the major growth drivers for 2025 in terms of business line?

[Foreign Language]

[Interpreted] As for the revenue growth for 2025, we are cautiously optimistic. I think it will be more related to the consumer product line. Do you have any more questions, Tony? I think we have covered most of the questions. So I think we have covered most of the questions. Okay. Thank you all for your time, and see you next quarter.

[Foreign Language] [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]