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

[Interpreted] Good afternoon, everyone. I would extend a warm welcome to everyone for joining Novatek's 2026 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 Vice Chairman, Steve Wang; and our CFO, Jane; and our IR Director, Tony Tseng and Yvonne. Thank you so much for joining in, and good to see you all online. The agenda for today's event is as follows: First, Tony will report on Novatek's first quarter results in English. Following that, our Vice Chairman, Steve, will provide further details on our Q1 results and guidance for the second quarter of 2026. Next, we'll proceed with the question-and-answer session. We've already received some questions from our investors. And if you have any additional questions, please feel free to submit them online. Tony will help to bring up the questions in both Chinese and English. Afterwards, our Vice Chairman, Steve and Jane and myself will try to answer all your questions in Chinese, and I'll later translate them into English. We do encourage your active participation and look forward to addressing your concerns. And now I'll hand over the time to Tony to report our Q1 results. Yes, Tony, please.

Thank you, David. Good afternoon. This is Tony. Let me report our first quarter results in more detail. The first page, please take a look at our safe harbor notice. As for consolidated sales, first quarter at TWD 23.15 billion increased 1.4% quarter-over-quarter from TWD 22.82 billion, but decreased 14.7% year-over-year from TWD 27.12 billion in first quarter 2005. Now moving to the gross profit. First quarter of TWD 9.04 billion increased 3.8% quarter-over-quarter from first quarter but decreased 16.2% year-over-year from TWD 10.78 billion in first quarter 2005. Now moving to the gross margin. First quarter gross margin of 39.06% increased 87 basis points from 38.19% in first quarter, but decreased 70 basis points from 39.76% a year ago. This is exceeding our guidance of 36% to 39%. Now moving to the operating expense. First quarter of TWD 5.01 billion increased 3.3% quarter-over-quarter from TWD 4.85 billion, but decreased 1.5% year-over-year from TWD 5.09 billion. As for operating income, first quarter of TWD 4.03 billion increased 4.3% quarter-over-quarter, but decreased 29.3% from TWD 5.7 billion a year ago. Let's take a look at our operating margin. Our first quarter operating margin of 17.4% increased 48 basis points quarter-over-quarter from TWD 16.92 billion 6.92% in quarter 4 last year, but decreased 360 basis points from 21% a year ago, and this is meeting our guidance of 15% to 18%. Next, as for net income, first quarter of TWD 3.77 billion increased 2.1% quarter-over-quarter from TWD 3.69 billion in quarter 4, but decreased 28.4% year-over-year from TWD 5.26 billion a year ago. Next, as for EPS, first quarter of TWD 6.19 increased TWD 0.12 quarter-over-quarter from TWD 6.07 but decreased TWD 2.46 from TWD 8.65 a year ago. Next, this is our income statement summary for first quarter compared with quarter 4 last year and also first quarter 2025. This page shows our revenue breakdown for our 3 business groups. For first quarter, SoC business accounted for 44% of overall revenue, which is one of the highest level in our history and up from 35% in quarter 4 last year. As for small medium-sized drivers, this business accounted for 33% of revenue in first quarter, down from 43% in quarter 4 last year. Lastly, as for large-size driver, this business accounted for 23% of revenue in first quarter compared with 22% in quarter 4. We are also reporting our April revenue. April revenue of TWD 9.23 billion increased 1.16% from TWD 9.12 billion and also increased 8.93% month-over-month. For the first 4 months, the combined revenue of TWD 32.37 billion decreased 10.68% from TWD 36.24 billion a year ago. As for the revenue breakdown for the April, we'd like to highlight our SoC business hit a record level in terms of percentage of revenue, reaching 53.7% in April revenue. This page shows our monthly revenue from January 2025 until April '26. As you can see from here, we are telling year-over-year growth from April this year. This page shows some key summary for our financials and the balance sheet. For cash in first quarter reached TWD 48.92 billion, increased 15.32% quarter-over-quarter from TWD 42.42 billion, but decreased 8.1% year-over-year from TWD 53.23 billion. Accounts receivable first quarter of TWD 17.92 billion decreased 15.05% quarter-over-quarter from TWD 21.10 billion and also decreased 12.03% year-over-year from TWD 20.38 billion. Inventory first quarter of TWD 10.85 billion increased 25.58% quarter-over-quarter from TWD 8.64 billion and also increased 13.05% year-over-year from TWD 9.60 billion. Now I'm handing back the call to David.

Thank you, Tony, for the report on our Q1 results. And here, we have some recent major events. We would like to share with you our latest achievement on corporate governance. Novatek has once again been ranked among the top 5% in corporate governance for the fourth consecutive year. And our Board of Directors also proposed a cash dividend of TWD 23 per common share with a total amount of TWD 13.995 billion, which resulted in a payout ratio of 85.61%. We would also like to give you a heads-up. Novatek Board of Directors also approved the date of our AGM, which will be held on May 29, Friday, 2026. And we are also pleased to share an update on the status of our Novatek 2025 ESG report. Throughout 2025, Novatek has made significant progress across multiple ESG areas, and we are on track to publish our report in June, and we warmly invite you to download or review the report upon release and welcome your valuable feedback. And now I'll turn over the call to our Vice Chairman, Steve, to provide us more details on Q1 results and Q2 guidance.

[Foreign Language]

[Interpreted] Our Q1 revenue reached TWD 23.15 billion, increased by 1.44% quarter-on-quarter. And the revenue increased reaching the upper end of our guidance, and this is mainly due to growth in the SoC and large display driver IC business despite the negative impact of the weak smartphone demand. And as for the Q1 margins, our Q1 gross margin reached 39.06%, quarter-on-quarter increased by 0.87 percentage points, and this has also exceeded our guidance, and this is mainly due to favorable product mix. Regarding our second quarter outlook, in the second quarter, memory supply remains tight and price continues to rise. As a result, price of some end products, for example, smartphones, PC and notebooks have been -- the price has been adjusted upward and consumer demand trends in the second half of the year will need close monitoring and a bit expectations of price increase, system customers pulled in orders, resulting in a stronger demand in Q2. Accordingly, Novatek Q2 operating guidance is projected as follows: Revenue will be between TWD 27.5 billion to TWD 28.5 billion at an exchange rate of TWD 1 to TWD 31.3 and gross margin will be between 38% to 38% to 41% range. And operating margin is expected to be around 16% to 19% range, which will be around -- the top line will be around quarter-on-quarter growth by 19% to 23%.

Next, we will move on to Q&A session. Please be reminded if you have any questions that you would ask please send it online. Now I'll hand over the time to Tony, and Tony will try to read out some of the questions that we already have on hand, and we'll answer them one by one.

[Foreign Language]

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

According to the panel production across a major application into second quarter, TVs are expected to be slightly up quarter-on-quarter. Monitor production to be flattish and as for notebook demand, we are expecting it to improve quarter-on-quarter, mainly driven by early order pull-ins from brand OEMs in anticipation of rising memory price. And tablet demand is largely unchanged and mobile phones are flattish, but demand for LCD TDDI is increasing quarter-on-quarter. And as for automotive, demand in the China market, we are seeing a slight increase, while other regions remain flat.

[Foreign Language]

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

Based on the earlier guidance that we gave you, all the 3 of Novatek's major product lines are expected to deliver meaningfully quarterly growth in Q2. And as for our SoC we are seeing the revenue is projected to grow the most, driven primarily by rising demand for machine vision edge-related AI chips, along with selective ASP adjustment for certain products because of the memory price. And as for the large panel driver and small medium-sized driver, we are expected to have a similar quarter-on-quarter growth rate. And as for the large driver IC, growth will be mainly supported by early pull-ins of notebook and on the panel orders. And the small, medium-sized growth will be driven by increased shipment of LCD TDDI for tablets, flattish demand for OLED smartphones and a slight increase in automotive applications.

[Foreign Language]

[Interpreted] Could management also share the view on the second half across major applications? And also, could you also highlight your major product launch in the second half?

Well amid the expectations of price increase, consumer electronics demand has seen order pull in and coupled with geopolitical factors, including tensions in the Middle East and uncertainties in the second half of the year have increased. And accordingly, Novatek will closely monitor the consumer end market demand trend. And in the second half, we do plan to launch a number of new products, particularly in high-end applications such as machine vision, edge AI solutions and OLED TDDI for foldable smartphones. OLED for notebook and also gaming monitor products. And as a result, we expect full year revenue to grow year-over-year.

[Foreign Language]

[Interpreted] Could management also update the progress on advanced ASIC project over the past 3 months?

Regarding our 4-nanometer HPC POC demo system, it is still under development, and we don't expect any revenue contribution from this advanced ASIC in the near term. But we'll be more focusing on the edge AI, which we think should have more contribution in the short-term.

[Foreign Language]

[Interpreted] As management mentioned the positive outlook on your image SoC for 2026, could you also provide the year-over-year or quarter-over-quarter revenue growth on this product line in first quarter? And also, could you also elaborate the major growth driver for this business?

Well, as the industry enters into the era of AI agents, edge device with embedded AI capabilities are expected to become a key structural growth trend. And the demand for Novatek's Edge AI image or vision solutions has remained pretty strong, and particularly in market outside China because of the geopolitical reasons and supported by expanding adoption across a broad range of emerging applications. So we remain confident in the long-term growth potential of this business.

[Interpreted] Has penetrated into the Tier 1 customers, particularly on the smartphones over the past 2 years. What are major factors behind this breakthrough? Will Novatek continue to grow revenue from this customer year-over-year in year 2026 and even next year?

Well, the Novatek's new product development programs and projects and also shipments with the international Tier 1 customers basically are progressing pretty smoothly. And as a result, meaningful revenue contribution from these initiatives to the driver IC product line are expected for the next 1 to 2 years. And this progress reflects our customers' strong recognition of Novatek's technological capabilities, and this includes design expertise, advanced process nodes along with our product quality and services. And currently, Novatek is highly regarded by our customers as a trusted long-term strategic partner. And continued expansion of the customer base and application portfolio remains a core long-term strategic focus for the company.

[Foreign Language]

[Interpreted] First quarter gross margin exceeded the guidance of 36% to 39% range and also increased by 87 basis points quarter-over-quarter. What are those positive factors?

Basically, there are 2 reasons for the improvement in our margin. Number one is a favorable product mix that really helps us better margin. And the second one is because the KGD price hike, some of our selective product ASP has been adjusted accordingly.

[Foreign Language]

[Interpreted] Given the gross margin guidance for the second quarter, major factors to compare with the result in first quarter. Could you also provide a comment on cost increase and the selling price adjustment?

Well, there are 2 key factors that are driving the impact on our margins. Number one, the rising costs across certain materials and OTAT services including KGD, the nongood die, gold, wafers, substrate. And these all prompting Novatek to continue discussions with our customers to reflect these cost increases. And secondly, as I mentioned earlier, the favorable product mix supported by higher contribution from our SoC product shipments that really helps to improve our margin in the second quarter.

[Foreign Language]

[Interpreted] Given ASP adjustment for your SoC product post surging memory cost, how will your gross margin for SoC change?

Well, certain SoC products has KGD in it, but not all of them, but a certain portion do have KGD in it. And given the tight supply and rising price of memory, we are making every effort to meet the customer demand while also engaging with our customer on pricing adjustment. However, such price adjustments are not expected to fully offset the impact on our product gross margins.

[Foreign Language]

[Interpreted] Raw material will continue to rise price in the second half. Could you also comment on the magnitude potentially in the second half compared with those in the first half?

Looking at the second half, driven by the strong AI-related demand, which resulting in capacity allocation effect, cost for certain materials, packaging testing service, as mentioned earlier, are expected to remain elevated in the second half of the year. And given the continued uncertainty surrounding consumer electronics demand in the second half, we are maintaining ongoing discussions and negotiations with our suppliers.

[Foreign Language]

[Interpreted] Among your 3 product lines, could you provide the status on selling price adjustment -- could you also roughly maintain your gross margin into the second half?

Considering the rising cost and the tight material supply, Novatek will prioritize supply stability and make every effort to ensure reliable product deliveries. And as for pricing adjustments, where applicable, will be made in a timely and appropriate manner, and it will be based on market demand through close communication with customers and suppliers with the aim in mind of navigating the challenges together.

[Foreign Language]

Major items for your nonoperating income of TWD 362 million in the first quarter compared with TWD 554 million in quarter 4 last year. The non-op income of TWD 362 million in the first quarter mainly came from interest income of TWD 228 million and ForEx gain of TWD 84 million.

[Foreign Language]

[Interpreted] Your inventory days as of first quarter 2026 compared with those in quarter 4 last year. Could you also provide the comments into second quarter this year?

The inventory days for first quarter were 74 days, up from 59 days in the first quarter, increased by 15 days. This is mainly due to the rising raw material costs, but it is still at a healthy level. And do you expect the inventory days at the end of second quarter to increase slightly from first quarter due to further rising raw material costs.

[Foreign Language]

[Interpreted] Operating expense of TWD 5.01 billion in first quarter was similar to the amount in both quarter 4 last year and also first quarter last year, while operating expense in 2026 still increased year-over-year from 2025.

We expect our operating expense to increase modestly in 2026, primarily driven by higher R&D investments, particularly in the advanced process technologies and also the recruitment of key talent.

[Foreign Language]

[Interpreted] Why is the tax rate of 14.2% in first quarter lower than the guidance? Could you also provide the guidance for the second quarter? And also, will you maintain the full year guidance of 16% to 17% of tax rate for 2026?

The tax rate of 14.2% in the first quarter was lower than guidance, mainly due to higher tax credits from Industrial Innovation Act implemented in 2024. And the tax rate guidance for 2026 is unchanged at the range of 16% to 17%, which is similar to 2025. I think we have covered most of the questions that we collected and that we've seen. So give us a few more minutes to review some of the other questions online.

[Foreign Language]

[Interpreted] Could management also provide your strategy and product development for your upcoming AI chips?

Well, the application for edge AI is pretty broad. Besides what we already know about surveillance, we also have other application for drones for robotics and also the Vblock camera and it is. And then -- so we are exploring all these areas. And especially all these applications are related to machine vision and also related to the...

[Foreign Language]

[Interpreted] We noticed you recently announced CapEx investment plan for your data center. Could you also provide more color in terms of the purpose and also your expected return on this investment?

In order to support our revenue growth we need more advanced nodes. And using all this advanced nodes, we definitely need more computing power and storage. And therefore, we need to build our own data center to support all these needs.

[Foreign Language]

[Interpreted] We noticed that even the legacy wafer capacity, foundry capacity and the packaging capacity has been pushed or getting more tied from the strong demand on AI and the memory. Could you also provide the recent capacity status? And could you also secure your enough capacity in the second half of this year?

Yes, you're right. I mean the strong AI-related demand did result in the capacity allocation effect. And we are currently working very closely with our suppliers to secure our capacity. Our main purpose is to make sure that we have a stable supply and make the deliveries to our customers. Okay. Thank you so much. We have covered nearly all the questions that we have on hand. And thank you once again for joining in and wish you all the best. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]