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 Results Webcast Conference for the Third Quarter of 2020. My name is Joe Tsen, Spokesman and Associate Vice President of Finance in WIN Semi. Joining me on today's call is Steve Chen, the General Manager of Corporate Administration of WIN Semi. Today's call is organized into 3 sections. First of all, our General Manager, Steve, will comment on the results for the third quarter and provide brief guidance for the fourth quarter. Secondly, I will go through the financials in detail. And after that, we will open to the floor for Q&A. [Operator Instructions] Before we begin, I would like to draw your attention to the safe harbor notice on Page 2 of the presentation slide. Please note that this presentation contains forward-looking statements. 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. Steve Chen, General Manager of WIN Semi.

Thank you, Joe, and welcome, everybody -- everyone. In the third quarter of 2020, while the market has been full of uncertainty from COVID-19 and U.S.-China trade tensions, we delivered a satisfactory performance in both revenue and profit. Our revenue for the third quarter of 2020 increased by 9% quarter-on-quarter, better than our previous expectation. Revenue for the first 3 quarters reached TWD 18.7 billion, increasing by 29% year-to-year. Although our capacity utilization rate declined as new capacity came online months by month. Third quarter gross margin was maintained at 43.4%, given better product mix, roughly in line with our previous expectation. Net profit and net margin for the third quarter were TWD 1.97 billion and 30%, respectively, both hitting a record high level. Our third quarter EPS reached an unprecedented level of TWD 4.68, and EPS for the first 3 quarters of 2020 was TWD 12.38, already exceeding our full year EPS of last year. We have always adhered to our long-term strategy of diversifying customers, maintaining R&D investment and continuous expanding capacity. This year's capacity expansion plan of adding 5,000 wafers per month was completed at the end of the third quarter. Our current monthly capacity has reached 41,000 wafers, which is the world largest production capacity in the gallium arsenide industry. We believe as 5G networks become more mature in the next few years, the increase in 5G smartphone penetration will further drive the demand for 5G PA. Meanwhile, as global leading smartphone players introduced 3D sensing technology for AR applications following the facial recognition application, it is expected to drive another wave of adoption. Thus, we remain optimistic about the further demand for the compound semiconductor wafer foundry. To fulfill the long-term demand for customers, we have just received approval from the Ministry of Science and Technology in mid-August and will soon enter the Southern Taiwan Science Park in Kaohsiung to establish an additional fab. It is expected to lay the foundation for the next 20 years of WIN Semi, having just reached a milestone of 20 years since WIN Semi was first established. Looking ahead for the fourth quarter, we expected revenue to grow by low single digits quarter-on-quarter. Due to the product mix change, gross margin will be around the level of high 30. I will turn the call back over to Joe. Thank you.

Okay. Thank you. It's our pleasure to present our financial results for the third quarter of 2020. You also can refer to our presentation slide. I still want to emphasize -- to encourage you to read it over for the safe harbor notice in Page 2. And we're starting the presentation from Page 4. Page 4 talk about revenue and the margin trend. The Q3 revenue was TWD 6,566 million, q-o-Q was up 9% and Y-o-Y up -- also up 3%. And because the CapEx coming online month-over-month in Q3, the utilization rate also declining because of that but with the better product mix. So the Q3's gross margin was able to maintain at 43.4%, down about 1.4 percentage points. And the operating margin was 32.7%, it's down -- Q-o-Q, it's down 0.9 percentage points. And talk about the earnings trend in Page 5. You can see that the net profit become TWD 1,967 million. And that was the record high for single quarter. And not only for the net margin, also the record high, which is 30%. And the net profit in Q3, Q-o-Q was up 19% and Y-o-Y, up 20%. Another record high is EPS. EPS came at TWD 4.68 and compared to TWD 3.94 in Q2. Okay. Then let us discuss about the free cash flow, the gearing trend and the financial position. As the continued increase in CapEx, so in Q3, we generated a net outflow of free cash flow. And besides the CapEx, also Q3, also the traditional dividend payment -- dividend payout season, so making the interest-bearing debt and the gearing ratio also increased, but the financial structure has remained healthy. And next page, in Page 7, let's talk about the product mix. In Q3 of year 2020, the Q3 supposedly is traditional smartphone high season, but you can see the difference from the product mix. The cellular is between 30% and 35% and infra is between 25% and 30%, and WiFi is between 20% and 25%. And the others, including 3D sensing optical electronics and other -- in others, this total consolidated 18%. So you may already recognize that the -- percentage of cellular went down. And the rest of it is going -- it went up. And the major reason is, first of all, because of a U.S. trade restriction and also in Q3, high -- the high-end smartphone launch delays and because of the strong in other segments, which is infra, WiFi and 3D sensing. So also squeeze the percentage of the cellular went down. The total 5G cellular, among the total cellular for this quarter is roughly around 20%. So this is the product mix. And next page is Q4 guidance. I think Steve has mentioned it in his management comment. So I'm going to repeat again. We expect Q4 2020 revenue to grow by low single-digit Q-o-Q. And due to the product mix change, Q4 -- 2020 Q4 gross margin will be around the level of high 30. Okay. Then we can quickly go through the financial statement, starting from income statement in Q3. That's in Page 10. I have to remind you, first, the -- all of the figures in this presentation slide is under the unaudited basis. The final result will be based on -- will be based on the CPA's report. The net revenue for Q3 was TWD 6,566 million, Q-o-Q, up 9%; Y-o-Y, up 3%. Gross profit become TWD 2,851 million. And the Q-o-Q it's up 5%, and Y-o-Y it's also up 6%. The gross margin was 43.4% in Q3. The Q-on-Q compared to last quarter was down 1.4 percentage points but Y-o-Y is up 1.3 percentage points. The operating expense was TWD 705 million and the all parts ratio becomes 11%, which is in line with the quarter before. Operating income become TWD 2,146 million and Q-o-Q it's up 6%, Y-o-Y it's also up 7%. So the operating margin was 32.7%. And compare the quarter before, it went down 0.9 percentage point. But it went up -- Y-o-Y, it went up 1.3 percentage points. The non-op item was again TWD 244 million. The details, you can refer to Page 12, as usual. The income before income tax was TWD 2,391 million and income tax expense is TWD 423 million. So the income tax expense over the income before income tax become the tax rate about 7-- 17.7%. And the net income become TWD 1,967 million. So the Q-o-Q was up 19% and Y-o-Y also up 20%. So the net margin becomes 30%. And the net -- the -- compared to last quarter improved 2.7 percentage points and compared to a year ago, also improved 4.4 percentage points. So finally, the EPS become TWD 4.68. So from the net income and net margin and the EPS, it's all a quarterly record high for WIN Semi's history. The equivalent ROE for Q3, it's about 24% and approximately utilization rate becomes 75% to the ramping up of the capacity month-over-month in Q3. And last quarter was 90%. And depreciation become TWD 935 million, was higher than Q2. And CapEx also higher than Q2, become TWD 2,291 million. So this is the Q3 income statement. And next page, Page 11, we can take a look for the accumulated Q1 to Q3 income statement. The net revenue becomes TWD 18.685 billion. And then Y-o-Y, it's up 29%. The gross profit was TWD 8,169 million, was -- Y-o-Y was growth, 60%. And gross margin in the first 3 quarters was 30 -- 43.7% compared to the same period last year, improved 8.4 percentage points. The operating expense was TWD 2,052 million. So the OpEx ratio for the first 3 quarters was 11%, in line with the Q3. And operating income was TWD 6,118 million and this number grows -- Y-o-Y growth about 89%. So operating margin was 32.7% compared to the same period of the year 2019, was improving about 10.4 percentage points. So the non-op item was a gain about TWD 268 million and the income before income tax was TWD 6,385 million. And so income tax expense was TWD 1,192 million. So this number over the income before income tax become -- the tax rate was roughly about 18.7%. So the net income -- finally, the net income was TWD 5,193 million, and Y-o-Y was growing about 103% and the net margin becomes 27.8%, which is improving about 10.1 percentage points compared to the same period last year. And the EPS, finally, for the accumulated Q1 to Q3 become TWD 12.38, which is already exceeds the total EPS of the year 2019 and also roughly double of the same period with -- of the year 2019. The ROE for Q1 to Q3 become 22%. And approximately, the utilization rate from Q1 to Q -- the first 3 quarters was 85%. So the depreciation for the first 3 quarters was TWD 2,645 million, the CapEx was TWD 5,551 million. So okay, this is the first 3 quarters income statement. The Page 12 is non-op item. I'm going to leave yourself for your own reference. And the Page 13, the last page I have for the consolidated balance sheet. I only highlighted the major item, which is like the total assets is TWD 49.701 billion. And total liability TWD 16.763 billion. And so therefore, the debt ratio, which is total liability over total assets become 34% which has increased a little. The common stock remained the same, just TWD 4,241 million. So the total equity becomes TWD 32.938 billion. And the book value per share was TWD 75.46. Finally, the current ratio has the good performance, which is 279%. That's all I have. So now we complete the Q&A. [Operator Instructions]

Okay. There is a question from the investor, asking about the depreciation for the whole year of the year 2020 and then also the guidance for the year 2021. First of all, I may have to say sorry about any guidance for the year 2021. It's still too early and immature at this moment. And then our team is still working on the forecast and the budget for the next year and may -- we will release this kind of information for the next investor conference. As to the depreciation for the whole year of year 2020, according to the number we have, right now, we maintain our view earlier, which is Y-o-Y basis probably, the depreciation expense will increase about 10% roughly for yearly basis.

Okay. I think there is some question want to know about the picture about the Q4 applications and also the reason about the product mix change, making the margin may be a little decline compared to Q3. Yes. As we -- as Joe just mentioned in the presentation, yes, looks like this year, the high-end smartphone launch schedule is -- most of them was shifted maybe 2 to 3 weeks. Yes. So it also makes the demand shift for our wafers. So it looks like our cellular PA related application demand was stronger in Q4 rather than in Q3. Yes. And at the same time, the Q4 infrastructure percentage were going down a little. And also, I think our 3D sensing was going up also because it's also the same application that we'll install in the smartphone. And WiFi, because it's combined handheld WiFi module and also the routers application. So look like compared Q4 and Q3, maybe will be flat. So the whole picture about Q4 look like will be cellular PA percentage were going up. Infrastructure will be going down a little and also 3D sensing is going up. So compared to Q3 and Q4, the product mix were a little worse than Q4 because -- I mean Q3, sorry, because infrastructure will be going down a little. So I think that's the main reason why we guide the margin for Q4 will be down to the high 30 level.

Okay. There are several investors care about the 3D sensing outlook for Q4 and for the future. And as we understand, the 3D sensing in the Q3 is already stronger and Q4 probably remain strong. And for the next couple of quarters or even next year, the -- it's out of our visibility. Normally, our visibility is below 1 quarter. So -- but for the longer term, we see a positive for the 3D sensing or even 5G's growth and especially -- we are in the high-end smartphone supply chain and especially this year, we also have a new function, new adoption. And we're expecting this kind of new function will be expanding to the other smartphones, which is Android. So yes, it's -- the user experience is popular. So -- yes, but we see a positive for the 3D sensing's future.

Okay. I think because there is not so many questions. So I think I will update some centers about our new approval for the Southern Taiwan Science Park in Kaohsiung plant, because I think in recent months in Taiwan, maybe -- some of you maybe already see there's some news released by the government or by the Kaohsiung city government or even the Ministry of the Science and Technology in Taiwan. So I think we're making an update. Yes, we've got approval in mid of August. And that's -- the total space -- I mean, the land, we've got approval. That should be 3x bigger than our FAB C, currently what we use. So that's a very big land and the total capacity, I think, for that area can provide to us definitely, that were bigger than the total capacity what we have right now, yes. But -- because right now, we still have 1 floor space in FAB C, yes. So for next year and the next 1 or 2 years demand, I think we will use the FAB C to making the expansion first. Yes. So the new FAB in Kaohsiung, I think, that's more like 5 to 10 years long-term plan for us to prepare a new fab for the -- further next 10 years demand for that. And some people ask me about how they were making some contribution to WIN Semi. Because we just got approval and still have a process, we need to complete before we start construction. So it maybe take 2 to 3 years for us to complete the construction and then move the equipment and qualified by customers. So it should be -- have some contribution around like 3 to 4 years later if we count from now on. Yes. Thank you. Okay. The other question is -- has some question about, after September 5 -- 15, we can -- we start to ship out the wafer to Huawei. So how about we still can have the growth in, Q4 especially for the cellular application? Like we said in our presentation that in Q4, looked like the cellular PA application will better than Q3. Yes. But taking out one of the very big customer, how can we still making the growth? Yes. I think we already discussed with a lot of investment -- investors in these 3 months, yes. Because WIN Semi is taking more than 70% of the foundry market share in gallium arsenide, yes. No major USA or Asia, Japan, Korea, even China, I think we cover maybe most of -- maybe we can say of most -- we can say, all of the design houses or the IDN companies in the world. Yes, especially in Asia, I think we are not only cover most -- maybe all the design house. And also, I think in most of the design house, especially for the cellular PA, I think we should be the major source or even a single source. Yes. So actually, if you go to check to the final smartphone market, I think maybe you can see WIN Semi's chip or we can say, PA in every branded smartphone. So unless the Q4 smartphone demand is going down, otherwise, even we can -- we don't ship the wafer to 1 customer. But actually, the market will restructure, and it will bring the demand to our other customers. So that's why in Q4, we see most of our customer demand is going up, even though we don't -- we use 1 customer shipment. But I think the other smartphone cellular PA-related customers, they can offset that kind of change.

Okay. There's a question asking about the new fab for the Southern Taiwan Science Park in Kaohsiung, is that going to contribute a lot of car parks budget for next year? According to what Steve said, the -- this -- next year is still the early stage for the new fab in Kaohsiung. So most of spending are still focusing on the training, the construction and nothing to do with the equipment and the machine. So compared to our annual capacity expansion, that relatively will be smaller than that. Yes. So -- but the total size are still not fixed yet. So maybe have to -- we're still working on that. So yes, it's not a major one for next year. Okay. There is a question coming from an investor asking about do we see more Apple customers or other smartphone makers adopting 3D sensing design next year? And -- well, actually, we do have several 3D sensing direct customer and we have several projects with different customers right now. But most of the time -- I mean that was working for a few years already. And -- but most of the time, the contribution -- I mean, so far, the contribution for 3D sensing still coming from U.S. Tier 1 smartphone majority. So yes, I mean -- so it's a -- it's still early stage, but we see positive for 3D sensing's application and adoption in the future. Then -- but we do have several projects. Let's see what happens. Thank you. Okay. So there's no further questions -- the -- on the system. So yes, well then we're going to thank you for your participation in WIN Semi's conference. And there will be a webcast replay within hours. And so please visit www.winfoundry.com under the Investor Relations section. So you may now -- disconnect now. Thank you, and goodbye.