WIN Semiconductors Corp. (3105) Earnings Call Transcript & Summary

Good morning and good evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's Result Webcast Conference for the Fourth Quarter of 2019. My name is Joe Tsen, Spokesman and Associate Vice President of Finance of WIN Semi. Joining me on today's call are Dr. YC Wang, our Chairman -- our Vice Chairman; and our CEO, Mr. Kyle Chen; and our General Manager of Corporate Administration, Mr. Steve Chen. Today's call is organized into 3 sections. First of all, our CEO, Kyle, will comment under the company's results and provide brief guidance for the first quarter of 2020. Secondly, I will go through the financials in detail, and CEO will have the industry outlook to share with you. After that, we will open to the floor for Q&A. Please freely submit your question in the input box on the webcast window throughout the conference. Before we begin, I would like to draw your attention to the safe harbor notice on Page 1 of the presentation slides. Please note that this presentation contains forward-looking statements, and these statements are based on our current expectations. Actual results may differ materially from our expectations, and the company undertakes no obligation to update these forward-looking statements going forward. Now let me hand over the call to Mr. Kyle Chen, CEO of WIN Semi.

Joe, thanks for opening, and welcome, everyone, and thanks for joining the conference today. 2019 was amazing and a fruitful years for WIN Semi. Although the industry remains sluggish at the beginning of this -- the year, with the change in the smartphone market and the strong customer demand, our revenue has shown quarterly growth throughout the year. Revenue for the fourth was TWD 6.9 billion, reaching another record high for a single quarter. As we were running the full capacity, our gross margin exceeded the previous quarter and has set a historical record of the 44.2%. Given that our operating margin and the net profit all reached a 3-year single quarter high, our EPS hit an unprecedented level of the TWD 4.40. The full year revenue in 2019 increased by 23% from the previous year to TWD 21.4 billion, and the EPS was TWD 10.59, both setting historical records. Entering 2020, government and the telecom operators in all country in the world are accelerating the release of the 5G spectrum and engage in 5G infrastructure construction. It is expected that the smartphone manufacturers will also launch multiple 5G models to meet end demand. According to the estimate from the various research institution, the global penetration rate of the 5G smartphones is predicted to increase from 1% in 2019 to about 15% to 20% in 2020. And moreover, there will be around 30% in 2021. So therefore, 5G is expected to be formally enter a growth stage from this year, we believe. As a global process technology global leaders in power amplifiers for wireless communication, WIN not only have offer 5G Cellular PA solution to customers as early as a few years ago, but we have also shipped in volume in the second half of 2019. In 2019, the 5G Cellular PA has contribute to over 10% of our overall Cellular PA revenue, and the base station-related infrastructure revenue has increased by more than 50% from the previous year. That means we increased 50% from 2018 to 2019. It's reaffirming and building our confidence in the growth of the 5G demand in the 2020. In addition, for optical devices, we continue to hold our market leadership position in 3D sensing in last year, and we will add more application and more customer engagement this year to create more contribution to our company. In response to customer demand, we are actively executing our capacity expansion plan as original. We will add about 5,000 wafer monthly capacity. We aiming to contribute this capacity for the second half, I believe, another peak season this year. So there's no change on our capacity expansion. And looking ahead to the first quarter of the 2020, because of the fewer working days and the impact of the traditional off-season effect, we expect revenue will decline low teens quarter-on-quarter. And the gross margin will keep around the level of the low 40s. Okay. Now, I turn the call back to the Joe.

Okay. Okay. So our pleasure to present our financial results for the fourth quarter of 2019. So please refer the transition slide, starting from Page 4. In Page 4, we discuss about the revenue and the margin. Our 2019 Q4's revenue reached TWD 6,904 million. It's another record high of cost for quarterly basis, and Q-o-Q is up 8%, and Y-o-Y is up 64%. And the gross margin increased 2.1 percentage points to become of 44.2% and operating margin increased by 2.3 percentage points, become 33.7%. And the both figure, it's all historical records both for a single quarter basis. So you can -- as a whole, that you see, you can see that from the chart, in 2018, the first half is higher than the second half. And in '20 -- in 2019, it's totally opposite. The second half is stronger than the first half. And so because of -- that's driving -- driven by the higher utilization rate and that's also the major reason, also driving the record high of gross margin and operating margin. And now please refer to Page 5, talk about the earnings and EPS. In Q4 2019, the net profit was TWD 1,840 million and up -- Q-o-Q up 12%, and Y-o-Y is up 151%, and EPS became TWD 4.40. And the net profit and the EPS is both also the record high. The Q4 EPS, TWD 4.40, and compared to Q3, Q3 was TWD 3.90. Okay. And now we talk about free cash flow and gearing in Page 6. Page 6, although in Q4 2019, our CapEx is higher but with the -- also, the higher profit. So we still have a sufficient free cash flow in Q4, and the interest-bearing debt and gearing ratio this quarter both declined and means -- indicate that we remain a very healthy financial structure. And now please flip to the Page 7, talk about the product mix. Cellular becomes between 40% and 45%, and infrastructure remained 20 -- between 20% and 25%; Wi-Fi is between 15% and 20%; and Others, including the optical and the 3D sensing, down a little bit to 15%. And to -- for more understanding the -- in this single quarter, cellular is -- and the infrastructure is stronger than the rest of it in the product mix. And like -- for example, like the cellular, I think Kyle had mentioned that the whole year 2019, we reached -- the 5G Cellular PA reached 10% of the total cellular PA. And for the single quarter in Q4, actually it's already reached the 20%. So yes, we can say that the product mix also have the better impact to our margin. Okay. And the next page, talk about Q1 guidance. So I think Kyle already mentioned this, so I just repeat again. We expect Q1 2020 revenue to decline low teens Q-o-Q. We also expect the 2020 Q1 gross margin to be around the level of low-40s. Okay. Now we can simply go through the financial statement starting from income statement of the Q4 in Page 10. Before we begin, I have to emphasize again, this is -- if this is under the unaudited basis, the final result should base on the CPA's report. Q4 2019 revenue came to TWD 6,904 million, Q-o-Q up 8%, Y-o-Y up 64%, and gross profit become TWD 3,052 million, up 13% Q-o-Q and 122% Y-o-Y. And because of the utilization and the product mix, the gross margin become record high, which is 44.2% compared to last quarter, last quarter it's 42.1%, and a year ago, it's 32.6%. The operating expenses came to TWD 723 million. So the OP ratio become 10% roughly. And operating income become TWD 2,329 million, up 16% Q-o-Q and 195% Y-o-Y, which is also a record high. Operating margin, also record high, which is 33.7% in this quarter, in Q4. The last -- last quarter was 31.4% and 18.7% a year ago. The non-op item was loss, about TWD 110 million. I will discuss a little bit in Page 12 later. And income before income tax was TWD 2,219 million, and the income tax expense TWD 379 million, and so therefore, the net income comes to TWD 1,840 million, Q-o-Q up 12% and Y-o-Y up 151%, and this also a record high. So the net margin become 26.6% in Q4, and Q3 was 25.6% and 17.4% a year ago. EPS become TWD 4.40, and it's better than last quarter, which is, what, TWD 3.90. A year ago, same period, it's TWD 1.80. So therefore, the equivalent annualized ROE becomes 25% in this quarter, and approximately utilization rate is full, which is 100%, compared to last quarter, it's 95%. A year ago, same period, was 55% only. So depreciation expense increased to TWD 871 million and CapEx for this quarter is at TWD 1,701 million, just both increase Q-o-Q. Okay. Then we discuss about the whole year 2019. In the Page 11, the total revenue for the whole year is 25.370 billion -- TWD 21.378 billion. Year-on-year, it grows 23%. And gross profit became TWD 8,161 million. It's increased about 51%, and the total -- the whole year's gross margin comes to 38.2% compared to 2018, was 31.3%. So the operating expense is TWD 2,602 million, and OP ratio equivalent to 12%, and operating income is TWD 5,559 million. It's up 73% Y-o-Y. So the operating margin become 26% compared to 2018, was 18.5%. So the non-op items for the whole year, you can refer the Page 12 by yourself. And income before income tax comes to TWD 5,393 million and income tax expense is TWD 993 million. So the net income comes to TWD 4,401 million, which is growth about 44% year-on-year, and net margin finished at 20.6% net margin, and compared to a year, year 2018, was 17.7%. So EPS comes to TWD 10.59 and EPS in 2018 was TWD 7.39. This is -- for EPS in 2019, TWD 10.59 was a record high. The return on equity, it was 16% for the whole year 2019. Approximately, utilization rate was 80% compared to 2018 was 70%. So depreciation expense, about TWD 3,348 million, which is a 6% increase year-on-year. The CapEx was TWD 5,306 million, a little bit lower than a year ago. Okay. Then please flip to next page, which is Page 12. Okay. The -- I'm going to do some explanation on the Q4 non-op items. The Q4 non-op items was loss, TWD 110 million. Majority was a foreign exchange loss of TWD 138 million. And also, the loss on the disposal of the property, plant and equipment, which is -- we have mentioned it about a quarter ago -- on the conference, we have mentioned it, when we acquired the equipment from our customer, Avago's HBT production line, and then we disposed some of the unserviceable machine. So there was a loss in Q3. And then we also predict it probably will continue loss in the Q4 of about maybe less than TWD 100 million, and it comes to TWD 87 million. And the -- that's the 2 major item. Okay. Now we can talk about the balance sheet, which is my last page, in Page 13. The balance sheet item, December 31, 2019, the total assets is TWD 42.126 billion, which is about TWD 2 billion more Q-o-Q. TWD 1 billion -- you can find out TWD 1 billion comes from the cash and the cash equivalent, another TWD 1 billion increase from the fixed assets, which is property, plant, equipment, et cetera. The total liability is TWD 12. 287 billion, and the long-term borrowing, it went down. And common stock remain the same, and the total equity was increased to TWD 29. 840 billion, which is an increase, TWD 1,283 million. And the book value per share increased from TWD 67.04 to TWD 69.94. So the major financial ratio, the current ratio was 20 -- 228% and debt ratio was 29%, which is -- remain healthy. So yes, that's my presentation, so thank you. And I will turn the call back to our CEO, Kyle.

Thank you, Joe. Thank you for the detailed explanation of the earnings of the Q4 and all the balance sheet of the total 2019. So let's add -- for now I will give you some details in market outlook from WIN Semi point of view. Please go to the Slide 15. The Slide 15. Before I go to the market, then we'll give you quick summary of the 2019. So I have a full headline to explain what we achieved. The left side, you can see the 20 years logo. We found this in 1999, and we celebrated 20 years anniversary. And indeed, 2019 is really a outstanding year performance for WIN Semi. Okay. So first headline is revenue growth. We are over 20% and this hit record high again. So no matter in the cellular infrastructures, these are the major growth reason. And the second, non-handset, what we call infrastructure, this growth rate is also amazing, about more than 50%. There are a lot of the application in the non-handset like base station, point-to-point, security, aerospace, cellular, blah, blah. So these helped WIN Semi a lot. And the third one, because we put more resources on the technology developing, so you can see the end result, we earned a lot of share for the 5G and also the 3D sensing since last year. In the 3D sensing, also keep very strong leadership in the market. So number four is nothing about the revenue and earning. I'd like to share with you this: We are honored to be selected as Industry Mover of The Sustainability Yearbook of 2020. So you can see these among all the company worldwide, including the, like I said, the manufacturing company and the equipment company, we are in top 10 ranking. It's really an honor and we are very proud of, because the evaluation is divided by 3 dimension. One is the economic, of course, the company revenue growth; and the second, environment; and the third one is the corporate society responsibility. That's the responsibility; WIN play a very important role in this market. And one thing to emphasize again, WIN Semi is only one company in the semiconductor in this top 10 list. Okay. Please go to next page, Page 16. So before I explain the outlook, some data I had to share with you. So you can see last year for semiconductor is really not a good year. The worldwide market declined about -- nearly about 12%. If you take only the compound GaAs device market, also declined 1.3%. But WIN played a very outstanding performance this last year. You can see, we have a growth rate, about 20%. So maybe you're curious, the number difference, [ 23 -- 20 ]. This is the -- we take it by NT dollars or U.S. dollars, okay. So you can see the lower chart here, lower bar chart, with growth on the 6 -- TWD 563 million to TWD 676 million, about 20% growth. Okay. So please go to the Page 17. Here is what we look this year and the future and then beyond. So we see 3 category to drive to increase. One is 5G and the so-called Wi-Fi 6. So as I explained, many analysis institutes have researched the penetration of the 5G smartphone. Last year it's only single digit of about 1%. This year, the prediction is around 15% to 20%. And moreover, 2021 will be like 30%. So you can see the 5G is coming, and we're booming soon. The other is Wi-Fi from 11ac to 11ax, people call Wi-Fi 6. This is the first driver we see this year. And the second, we are very proud of that, last year, we have increased 50%, but we also see many infrastructure needed to build up the 5G base station and other cellular point-to-point radio. This is the second driver we're going to see. And the third one is also WIN's competence; it's optical devices. This including 2 parts: One is 3D sensing; second is optical communication. So later, I will explain each driver in detail. Okay. Please go to Page 18. Again, why we see the market so optimistic? So you can see, I use a simple chart to make this phone 3G, 4G and 5G migration. So you can see the data rate for smartphone from 2 megabits per second increased to 10 gigabits per second, and the Wi-Fi also increased to 10 giga per second. So you can see that the high data rate is required for the wireless communication, so like the nature advantage of the compound semiconductor. So right now, we migrate to the 5G. The 5G, the ultra-high speed, is high data rate, is one of the advantage of the 5G. So you can see the compound has a very good advantage for the 5G era. So I think you also remember that in the 4G period, maybe 2007, '13, '14, people say that the CMOS cannot [indiscernible] the compound semiconductor. But as the year goes by, you can see now the noise is gone. So CMOS cannot have this kind of advantage to compete with the compound conductor. Okay. Please go to the next page, Page 19. Okay. So what is -- are the opportunity for the compound semiconductor? First, of course, is 5G. Last year is many countries and many operation company, they are deploying the 5G infrastructure. So for now, that growth rate will keep growing. So 5G [ deployment ] have divided into 2 parts: One is sub-6 giga. The other is millimeter wave. I will spend more detail on the sub-6 giga. For mobile device, it's GaAS HBT. Like I -- we had a summary that, that year, our cellular PA [ base then ] is 5G PA. So easily we already have a market share already. And the infrastructure and the CPE, so you can see from 4G to 5G, the infrastructure, people called base station, likely the gallium nitride and the gallium arsenide. So this -- that's also the main increase for the last year. But for the millimeter wave, I think the market is still not clear yet, but we still have a -- our [ evolving ] has never stopped. We have engaged with some key customer for joint developing and co-work. So right now is under the [ hiring ] and the check for performance stage. Until the millimeter wave is marking more clear, WIN definitely will be part of the supplier. Okay. Please go to the next page, Page 20. Okay. Previous page explained the 5G focus. So 5G smartphone, you see this arrow to show the frequency. So you can see the deep color, sorry, the red color marked n41 and n77, n78, n79. n41 is existing 4G band, and n77 to 79, that's the new band for the 5G. So you can see a 5G smartphone will have more PA than the 4G smartphone, at least, like n41, n77, n78, depends on the country and the frequency spectrum of the smartphone. So you can see the 5G sub-6 giga will need more PA. So I have approved the 3 headline of this increase. First, like I explained, the new frequency band for the 5G like n77, 78, 79. And two, the MIMO. Because the high data rate, some flagship smartphone probably will use MIMO for the new frequency spectrum. So the number seven -- number three is the addition of 5G PA. Whilst the frequencies -- spectrum is not enough, so people are thinking to refarming existing 4G frequency band. So you can see the -- there's 3 item that will increase the PA volume in the single 5G smartphone, but depends on the -- people will ask how much PA will be increased. I can give you some estimation. I think 2 PA, maybe to 5 or maybe more in the future if the existing 4G frequency spend are refarming. So this is the driver of the -- key driver of the demand. So let's go to the next page, 21. So Wi-Fi right now is migrate to 11ac to 11ax, people call Wi-Fi 6. There are some of the advantage of the Wi-Fi 6. There's faster throughput and high network efficiency and better in the dense environment. So we also have some analysis. We first said that this kind of the migration, 11ac to ax, will starting from the flagship to the mid-range phone. That means mid, low-end phone. So we are expect this to happen. And the second is Wi-Fi 7, people call 11be. This is also have 2 advantage: It's extremely high throughput and the frequency can be into up to 6 giga. People say it's around like 6 to 7 giga. So this Wi-Fi could drive another demand not only in the smartphone, but also the portable device or router. Okay. Go to the next page, Page 22. So the other is second one driver; we call it the infrastructure. The infrastructure contains a lot of the applications. I'll take two as an example. First is the RF device for the macro and small cell sector. This, you can call, is like the base station. So the gallium nitride for PA or driver for the GaAs PA and LNA, pHEMT, this has shown very high performance than before. So that drives this wafer demand, when the 5G base station deepen in the work. This -- also, institutes say that the more than 100 million transceivers [ in margin ] will be needed this year. That calls another wafer demand for the GaAS and the gallium nitride. So for gallium nitride, we also have doubled our capacity, and I expect this capacity will be started in the upward end of this year. Second one is, people say it's 6G or 5G extension, a satellite communication. More than maybe 6,500 small satellites or even 10,000 satellites will be launched by end of the 2027. So we can also see this demand no matter on the satellite or on the ground, the base station. Okay. That's the second part of the driver. The last one is optical. First one is for 3D sensing. The structure light right now is still the main stream of the facial recognition. So that's why WIN keep a very -- a leadership in this market. And we are glad to tell you that the second half of the last year 2019, we have a success developing the ToF, Time of Flight, successfully to provide the customer for the 3D sensing, not only for the front but also for the world-facing application. So right now, more and more customer are engaging with the technology on the ToF. So besides this structural light, ToF, also some sensing about gesture recognition is also ongoing. In the future, we also see the autonomous application soon. Okay. Please go to the 24th page. The other optical is about communication. This is focused on the -- we focus on the data center interconnect and the metro/long-haul coherent transmission for synergy light sensor. Right now, we have -- more customer have engaged, and we believe soon -- we will enter the production stage soon. So that's the business outlook I have for these 3 key driver for this year and the future. Okay. So thank you.

Okay. Now we begin the Q&A. Please just submit your question in the input box on the webcast window now.

Okay. First of all, it's about the gallium nitride question. We are very glad to tell you that 2019, our revenue at the gallium nitride is almost far more of the 2018, and we have engaged very key customer for the base station player, which is a very famous player. I cannot tell you who. But -- and also, we see the demand [ transform. ] Like I say in the presentation that we have doubled the CapEx of the gallium nitride, and equipment is -- probably the second quarter end or Q3 beginning, we expect the capacity will double by end of this year or beginning of the next year. So that's about our gallium nitride. Okay. It's a question; want to know about our utilization rate in Q4. I think for that, he already mentioned. He already mentioned about that. Our Q4 utilization rate is 100%, yes.