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

[Foreign Language] Good afternoon, everyone. I would like to extend a warm welcome to everyone for joining Novatek 2025 First Quarter Online Earnings Call. This is David Chen, Vice President and Company Spokesperson. I'll be the host for today's conference. Joining me on the call are our Vice Chairman, Steve Wang; our CFO, Mr. S.C. Chou; and our IR Director, Tony Tseng and [ Ivan ]. The agenda for today's event is as follows: First, our Investor Relations Director, Tony, will report on Novatek's first quarter results in English. Following that, our Vice Chairman will provide further details on our Q1 results and guidance for the second quarter of 2025. Next, we will have a Q&A session. We have already received some questions from our investors. And if you have any further questions you would like to ask, please send them to us. Our IR Director, Tony, will review and read out the questions one by one in both Chinese and English. Steve and Mr. Chou and myself will try our best to answer all your questions and will be translated into English later on. Now I'll hand over the time to Tony to report our Q1 results.

[Foreign Language] Now let's move into our first quarter results. The first line is our revenue. Our first quarter revenue of TWD 27.1 billion increased both year-over-year and quarter-over-quarter from TWD 25.3 billion in quarter 4 last year and TWD 24.4 billion a year ago. This result also reached the high end of our guidance of TWD 26 billion to TWD 27.2 billion. Now let's look at our next line, the gross profit. Given our stable gross margins, our first quarter of gross profit reached TWD 10.78 billion, also managed to grow both quarter-over-quarter and year-over-year from TWD 10 billion in quarter 4 last year as well as TWD 10 billion a year ago. The next page shows the gross margin trend for first quarter 2025 compared with quarter 4 last year as well as a year ago. Gross margin of 39.76% increased 25 basis points quarter-over-quarter and also reached the high end of our guidance of 37% to 40%. Now let's take a look at our operating expense. First quarter of operating expense of TWD 5.09 billion were flattish quarter-over-quarter from quarter 4 last year and slightly increased 4% year-over-year from TWD 4.89 billion a year ago. That's due to our good cost control. Now let's look at the operating income in the first quarter. Operating income of TWD 5.7 billion in the first quarter increased 16% quarter-over-quarter from TWD 4.92 billion and 10.7% year-over-year from TWD 5.14 billion a year ago. Now let's take a look at our operating margin for quarter 4 as well as last quarter -- quarter 4 last year as well as first quarter 2024. Operating margin of 21% increased 154 basis points quarter-over-quarter and again reached the high end of our guidance of 18.5% to 21.5%. Now let's move down to see our net income in the first quarter. Our net income in first quarter reached TWD 5.26 billion, which is up 9.6% from quarter 4 last year and 7.6% from a year ago. Lastly, let's look at the EPS line. Our first quarter EPS reached TWD 8.65 per share, which is up TWD 0.76 from quarter 4 last year and TWD 0.61 a year ago. Now please take a look at our overall income statement for the first quarter compared with our quarter 4 last year and the first quarter 2024. And you do see the positive growth across different lines for both quarter-over-quarter and year-over-year. Now the next -- this page shows our revenue breakdown for three business groups. For this quarter, the small, medium-size driver remains the largest and accounting for 40% of first quarter revenue, the percentage slightly down from 41% in quarter 4. The second largest group was SoC in first quarter with 37% revenue in first quarter, and the percentage was flattish quarter-over-quarter. Lastly, for large-sized driver ICs, which accounted for 23% of first quarter revenues, up from 22% in quarter 4 last year. We also just released our April revenues. Our April revenue of TWD 9.12 billion continued to post positive year-over-year growth at 9.5%, but slightly down from the March level by around 3%. So the first 4 months revenue reached TWD 36.2 billion and still up 30.6% (sic) [ 10.6% ] year-over-year for the first 4 months. Also there's a table here to show the revenue breakdown for SoC and the drivers for our April revenues here. The next page shows our monthly revenue trend since the beginning of 2024 until April this year. You can see the overall trend has been stable and see the upward trend with year-over-year growth since February this year. This page shows some brief key financial figures in our balance sheet. For first quarter, our cash reached TWD 53.2 billion. It's up 9% quarter-over-quarter but down 7% year-over-year. That's due to the cash distribution in the second half last year. Account receivable in the first quarter was pretty stable quarter-over-quarter at TWD 20.4 billion. As for inventory, the first quarter inventory increased 10.3% and 5.4% quarter-over-quarter and year-over-year to TWD 9.6 billion mainly due to the increased sales. This page shows our dividend payout history as well as the payout ratio. For 2024 earnings, we proposed to pay out TWD 28 per share, which is equal to 83.76% payout ratio. And this ratio has been stable and slightly on an upward trend over the past few years. Now let me pass the call back to David. Thank you.

Thank you, Tony. The following slide is a recap of our recent major events. Novatek's Board of Directors has approved the date for our 2025 AGM, which will be held on Wednesday, May 28, 2025. And as mentioned earlier, the Board of Directors proposed a cash dividend of TWD 28 per common share, with a total amount to TWD 17 billion, which resulted in a payout ratio of 83.76%. And we're happy to announce that it is our third consecutive year to be ranked in the top 5% of companies in 2024 corporate governance evaluation. And the 2024 CDP scores have been announced. And our climate change score has improved from B- to B, and the water security score has improved from C to B. And of course, we have our ESG report. If you want to read them, you can download from the following link. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q1 results and Q2 guidance. [Foreign Language]

[Foreign Language]

Okay. Thank you, Steve. Steve just mentioned that the revenue in Q1 increased by 7.35% compared to Q4, and this is mainly due to the introduction of the old-for-new subsidy policy in various provinces in Mainland China. And this led to an advance in shipments and an increase in demand for consumer electronics products, reaching the upper end of our guidance and performing better than traditional seasonal trends. And as for our Q1 margins, the Q1 gross margin was 39.76%, Q-o-Q up by 0.25 percentage point, also reaching the upper end of our guidance. And this is mainly contributed to cost reduction. And for our second quarter outlook, the advance pull in of shipments in Q2, driven by China subsidy policies and reciprocal tariffs, is now starting to show signs of slowing down. The most important focus now is to closely monitor the developments in tariff policies and their impact on the global economy and the end market consumer demand. And based on the current customers' demand, our Q2 guidance will be as follows: Revenue in terms of NT dollars will be TWD 26.5 billion to TWD 27.7 billion and at an exchange rate of USD 1 to TWD 32. And due to the recent ForEx fluctuation, we also provided our revenue guidance in U.S. dollar for your reference. And in terms of U.S. dollar, our guidance for Q2 will be USD 828 million to USD 866 million compared to our Q1 results, which was around USD 830 million. And this is for your reference. And as for our gross margins, they will be around 37% to 40% range, and our operating margins will be 18.5% to 21.5% range. And next, we'll move on to Q&A section. [Operator Instructions] And as I mentioned earlier, we already have some questions on hand. And I'll ask Tony to ask one by one some of the questions that we already have on hand. Tony, please?

[Interpreted] Could management share the view on the sequential trend across major applications in terms of the demand into second quarter?

[Foreign Language]

[Interpreted] Well, in terms of the second quarter demand by product-wise, the demand in TV will increase quarter-over-quarter; as for notebook, which will be flat to down; while tablet and monitor are up Q-o-Q; and as for mobile phones, we are expected to be flat to up; while automotive will maintain flat.

[Interpreted] Given the huge volatility of FX rates recently, could also comment on impact of FX to your overall operations?

[Foreign Language]

[Interpreted] As for the revenue impact, the appreciation of the new Taiwanese dollar, NT dollar, it will directly affect revenue because as the products are all quoted in U.S. dollar and the production costs are primarily in U.S. dollar. So short-term exchange rate differences may raise inventory costs affecting gross profit margins. But medium to long term, there won't be much impact.

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

[Foreign Language]

[Interpreted] If you look at the three main product business groups, the small, medium driver IC revenue in Q2 will be better than the previous quarter, primarily due to the increased shipments of mobile OLED and tablet TDDI, while the automotive shipments will remain stable. And as for revenue for SoC product line, we expect it to continue to grow, basically driven by gaming monitor and smart imaging recognition products. And the large driver IC, basically we're expecting to decrease sequentially.

[Interpreted] In terms of end product, what percentage of revenue does your company generate from the U.S. in your estimation? And which product lines have the higher exposure to the U.S. market? And also could you provide some comment on the impact of higher tariffs, particularly for either shipments or pricing?

[Foreign Language]

[Interpreted] Novatek has basically no direct shipments to the U.S. But the revenue exposure to the U.S. basically is indirect shipments account. That's about 17% of our total revenue. And among these, the notebook, automotive, TV-related products account for the higher percentage. And currently, shipments are normal as customers have not made any major changes.

[Interpreted] As for smartphone OLED TDDI, could you provide some updates, including the timetable for the mass production, the benefit of product for your customers, the technical barrier, lead time over the peers and any shipment target for 2025?

[Foreign Language]

[Interpreted] Regarding our OLED TDDI, our customers have already introduced the new models in April as scheduled, and the mass production has already kicked off in this quarter. And the OLED TDDI basically has architectural advantages, which results in the reduction of the thickness or the increase in battery space. And in addition, the power consumption for the touch has also been reduced, more efficient -- power-efficient. And along with that, we are also seeing some component reduction, which can eventually lower the material cost. And this, especially if applied to foldable phones, we can see the advantages -- more advantages in that area. And the technical barrier particularly lies in the touch-related experience, which is very important. And the products are currently under production, as mentioned earlier. And we are expecting the number of adopted models to increase as we move forward.

[Interpreted] Management mentioned about your efforts at diversifying your clientele, particularly for smartphones. Could you comment on the progress at the panel customers in South Korea and also for OEMs out of China?

[Foreign Language]

[Interpreted] I mean that's a good question as Novatek's strategy basically focus on diversifying our customer base and also applications. And currently, the overall progress is smooth and also positive.

[Interpreted] As for the overall OLED product in 2025, do you have other growth drivers in addition to the smartphone driver ID you just mentioned?

[Foreign Language]

[Interpreted] The primary applications for OLED display is smartphones, which we have concentrated on for a number of years. And regarding other applications such as TVs, notebook, gaming monitors or automobile, and Novatek does offer related products that are either in mass production or under development. However, these markets are still in their early stages, so with relatively small shipment volumes at this moment.

[Interpreted] According to the third-party research, Novatek has expanded share at tablet DDIC over the past 2 years. What are major factors? Also wonder if you can share with us about the gross margin for tablet DDIC versus your smartphone.

[Foreign Language]

[Interpreted] Well, our performance on the tablet DDIC, this is attributed to strong customer recognition of our technological advancements and product designs, especially in relation to the experience offered by our EASYPEN and also the touch technologies. And our market share in the tablet driver IC has continuously increased over the past 2 years.

[Interpreted] Also according to the third-party research, we also noticed Novatek has maintained the top 2 position for automotive drivers. Could you also share with us about your deployment for 2025, particularly about the panels and OEMs in China? Do products at automotive driver IC enjoy better margins versus other products?

[Foreign Language]

[Interpreted] Novatek is currently focusing on the new model design-in of the automotive brands. In addition to European and American car manufacturers, the expansion in the Chinese market is also progressing very smoothly with shipment expected to increase year-by-year in the future.

[Interpreted] Management previously mentioned about AI-enabled products as a [indiscernible] in SoC. Could you provide some update on your expansions about clientele and the margins and also major factors behind these programs?

[Foreign Language]

[Interpreted] Incorporating the AI elements into our image recognition product is the direction for Novatek's product development. And at the same time, we are also moving towards smart home and also computer vision applications and also improving our product computing power to meet those requirements. And aside from the Chinese market, the expansion among the international brand customers is also receiving very positive feedback, making future development very promising.

[Interpreted] Now we have a few questions about the margins. The first one is, your gross margin in first quarter was at the upper end of your guidance. What are the major factors?

[Foreign Language]

[Interpreted] The price reduction across products in first quarter from annual negotiations were basically offset by the cost reductions, which helped our gross margin increase by 25 basis points from the last quarter in Q4.

[Interpreted] Your gross margin guidance for second quarter is similar to what you provided in first quarter. Does that suggest your gross margin in second quarter is again similar to first quarter?

[Foreign Language]

[Interpreted] Given the recent volatility of ForEx and also the gold price, it is indeed very difficult to predict. But Novatek still expect our gross margin in the second quarter to be at the range of 37% to 40%.

[Interpreted] Given the potential increase of tariff to the U.S. market, have you discussed with your customers about the cost sharing? If yes, in the future, how will Novatek cope with that?

[Foreign Language]

[Interpreted] Basically, the importers are responsible for the tariffs. And currently, Novatek has not yet discussed with customers on this matter.

[Interpreted] Could you provide your gross margin ranking for your three major product groups?

[Foreign Language]

[Interpreted] The gross margin for the SoC is relatively higher than the driver product line.

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

[Foreign Language]

[Interpreted] Well, as we mentioned a few times that the revenue growth and the gross margins are the two major KPIs for Novatek management. And gross margin of 40% is our near-term target, while for us, we do expect to improve in the long term.

[Interpreted] We have some questions more about some details on the financials. So the first one is what are the major items for the nonoperating income in the first quarter as it came down to TWD 445 million in the first quarter compared with TWD 746 million in quarter 4 last year?

[Foreign Language]

[Interpreted] The nonoperating income of TWD 445 million in first quarter came from interest income of TWD 275 million and ForEx gain of TWD 162 million.

[Interpreted] The inventory dollar of TWD 9.6 billion at the end of first quarter increased by TWD 0.9 billion from quarter 4 last year. So what are the inventory days as of first quarter? Could you also provide some comments for this into the end of second quarter?

[Foreign Language]

[Interpreted] The inventory days for first quarter were 60 days, down by 1 day from 61 in Q4. And we are expecting inventory dollars to increase quarter-on-quarter at second quarter but still should be at a healthy level.

[Interpreted] We noticed your operating expense dollar increase by 4% year-over-year from a year ago. Last time, you also mentioned about your operating expense dollar in 2005 will increase year-over-year from 2024. I wonder if you can provide the magnitude of the growth rate for your OpEx in 2025, and also the OpEx dollar in the second quarter will increase compared with first quarter 2025.

[Foreign Language]

[Interpreted] The OpEx dollars in 2025 will increase yearly from 2024 and the growth rate will be subjected to the revenue momentum but likely to be at a single digit. And the OpEx dollar in second quarter will increase sequentially from the level in the first quarter.

[Interpreted] The tax rate of 14.3% in first quarter, which is lower than the guidance of 16% for 2025, what are the major reasons? And could you provide your tax rate guidance for second quarter this year?

[Foreign Language]

[Interpreted] The tax rate of 14.3% in the first quarter this year mainly benefited from higher tax credits. And the tax rate guidance for 2025 remains around 16%. Tony, see if there's any more questions that we haven't answered.

[Interpreted] I'm sorry. The first question is, you mentioned about a lot of uncertainties from the macroeconomics right now. Just wonder if you can provide very preliminary outlook for quarter 3 or even second half of this year.

[Foreign Language]

[Interpreted] As mentioned earlier, due to the ForEx volatility and also the tariff uncertainty, it is difficult to predict because of the low visibility. So we have to wait and see how the tariffs are settled.

[Interpreted] There are some follow-up questions about the impact of FX rates, particularly for the revenue and also the cost line. So could you provide a little bit more color for these two lines?

[Foreign Language]

[Interpreted] Basically, all our revenues are based on U.S. dollar and all our costs also are nearly 100% U.S. dollar.

[Interpreted] Also, in addition to impact to the revenue and the cost, could you also comment on your sensitivity for the FX rate?

[Foreign Language]

[Interpreted] Basically, if the NT dollar appreciate by 1%, that will have a 0.2% impact on our net income. I think we mostly covered all the questions. So thank you so much, all of you, for joining in, and hope to see you again next quarter.

See you. Bye-bye.

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