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

Good morning, good evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's Results Webcast Conference for the Fourth Quarter of 2020. My name is Joe Tsen, Spokesman and Associate Vice President of Finance in WIN Semi. Joining me today -- on today's call are Kyle Chen, the CEO; and Steve Chen, the General Manager of Corporate Administration. Today's call is organized into 3 sections. First of all, our CEO, Kyle, will comment on today's results and provide brief guidance for the first quarter of the year 2021. Secondly, I will go through the financials in detail and then Kyle will also have the industry outlook to share with you. 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 1 of the presentation slides. 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. Kyle Chen, the CEO of WIN Semi.

Thank you, Joe, and welcome, everyone. Year 2020 has shown to the end and amid of the escalating of COVID-19 pandemic and the rising U.S.-China trade tensions. I think you all -- everybody know that in the early of the 2020, the demand visibility remained at a low level, and the industry generally expected global smartphone shipments to be declined over 10% due to the COVID-19 pandemic. However, given the growing customer demand, coupled with the proper allocation of the WIN's production capacity and also leading technology as well, we have consistently maintained quarterly revenue fluctuations within 10% through all the years. Our revenue in the fourth quarter of the 2020 reached to TWD 2.86 (sic) [ 6.86 ] billion, increasing by 4% quarter-on-quarter. But nevertheless, due to the change in the product mix and the impact of the NTD appreciation, that's the exchange rate, the appreciation over U.S. dollars, our gross margin declined to 35%, as we previously expected. The Q4 EPS, we -- our achievement is TWD 3.7 (sic) [ TWD 3.07 ]. For the whole year of the 2020, our annual revenue increased 19% to TWD 25.55 billion. It was a record high. Gross margin, we achieved the 41.4%. And the whole year EPS, we achieved TWD 15.45. So both gross margin and the EPS of last year reached the highest level in our company history. Okay. Let me talk about the expectation for this year. With the adventure (sic) [ advent ] of the 5G area, we have been ahead of the peer in developing 5G smartphone Sub-6 giga power amplify, related to the manufacturing process many years ago. The 5G cellular phone contribute 10% last year of our overall cellular phone PA revenue. And this year, the contribution was further increased to over 20%. Let me remind you, it's under the impact of the COVID-19 and the trade war tension between U.S. and China. So in terms of the 5G base station and satellite applications, we began to developing the GaN-on-silicon carbide process since 10 years ago. And our revenue in this field has increased by more than 50% for 2 consecutive years. Besides, the application of the 3D sensing to the flagship smartphone has officially entered now the fourth year since 2017. Our revenue in 3D sensing has delivered a solid growth in 2020, especially on the new end market application that people call ToF or either the LiDAR. This year, 2021, with the increasing of the 5G smartphone penetration and coverage of 5G infrastructure, we expect -- one of the characteristics of the 5G is the massive MIMO. So we expect IoT -- sorry, massive IoT, so the IoT, we expect application will become more and more popular, that certainly brings the wafer demand that definitely we'll use in the gallium arsenide. Later, I will explain more detail in the market analysis. Okay. So think about the -- this is the current business we have, but think about the future. We also -- some of the new technology material is under developing (sic) [ development ]. So we continue to invest future materials such as the gallium nitride and the indium phosphide as well. In addition to microwave communication, we developed a product for optical communication and optical sensing. So more and more applications under the Sub-6 giga and the millimeter wave smartphone, also the optical data center and also -- as well as the LiDAR application in advanced -- for the driver assistance system. So for this gallium nitride and the indium phosphide, overall, the -- are developing for these advanced technology to ensure WIN's position when those applications become mature. This has been always WIN's key success factor to maintain the leadership in this industrial. So this is the our 2020 performance and also the future technology developing. So besides these 2 items, in terms of the corporate sustainability, WIN have a very fruitful year in 2020. In the first half of the last year, we have been ranking top 5 among the Taipei Exchange-listed company in 2020 Corporate Governance Evaluation. And this is the consecutive sixth year, we incur this top 5 award. In the fourth quarter of last year, we also was selected to join the Dow Jones Sustainability Index -- World Index for the first time. So this is together with other famous semiconductor leaders such as TSMC, UMC and ASE. Meanwhile, we are also the winner of the Taiwan Corporate Sustainability Award and 2020 SGS CSR Award. So these awards encourage WIN to gain the recognition in the market because everybody recognize WIN's effort, not only the revenue contribution, EPS, but also in the corporate governance. So this recognition will bring WIN to another level. So back to the first quarter of this year. The first quarter of this year, we have a 3 fab continued individual for the annual maintenance. Because of this annual maintenance and this unfavorable exchange rate of the Taiwan versus U.S. -- TWD versus U.S. dollar, so we expect Q1 revenue will decline low teens Q-o-Q, and gross margin will maintain the level of the mid-30s. This is our Q1 guidance. So right now, I turn the call back to Joe.

Okay. It's my pleasure to give you the financial results for the fourth quarter of year 2020. You can also refer our presentation slides. Before we begin, I still want -- hope you can -- remind you that read over the safe harbor notice in Page 2, and then we start it from Page 4, talk about revenue and the margin. The Q4 year 2020 revenue was TWD 6,861 million and up 4% Q-o-Q and down 1% Y-o-Y. Also in this quarter, due to the change in product mix and the impact of TWD appreciation over U.S. dollar, so the gross margin and operating margin both declined 8.4% sequentially to 35% and 24.3%. And in Q4 year 2020, you can see that the revenue are going up, the wafer shipment is also going up, the utilization going up, but the product mix is unfavorable, which is -- which means that the lower-margin product, which is like cellular significantly going increase and the high-margin product such as the infrastructure is significantly going down. So the -- making the product mix unfavorable to our gross margin. Now please flip to the Page 5, talk about earnings. Q4 2020 net profit was TWD 1.276 billion. The Q-o-Q is down 32% and Y-o-Y is down 27%. So the EPS becomes TWD 3.07 compared to TWD 4.68 in Q3. So next page, in Page 6, we talk about free cash flow and gearing. So as you can see that the CapEx is higher in Q4 compared to before, and we generate the positive cash -- free cash flow in Q4. Although the interest-bearing debt is increasing, but the gearing ratio this quarter is similar to last quarter. So the financial structure remains solid and healthy. And now we can talk about the product mix in Page 7. As I mentioned that the product mix impact the gross margin. So you can see that in Q4, cellular is between 40% and 45% of our total revenue from the -- last quarter, it's in the 30 -- between 30% and 35% level. And on the other hand, the infrastructure down to 15% to 20% from last quarter's 25% to 30% level. So that -- and having the cellular up and the infrastructure down, which impact the margin the most. And the rest of the product mix like WiFi and others also have some kind of volatility, but it's more minor. And WiFi it's, in Q4, it's between 15% and 20%. And the others, including the optical 3D sensing and other subsidiary income, it's total about 22%. Okay. The next page, talk about guidance. I think our CEO, Kyle, has already mentioned it in his management comments, so I'll just repeat again. We expect Q1 2021 revenue to decline about low teens Q-o-Q. And we also expect Q1 2021, the gross margin be around the level of mid-30s. Okay. Now we can quickly go through the financial statement, starting from income statement in Page 10. Before I begin, I still want to remind everybody all of the figure is under the unaudited basis. The actual result have to based on the accountants' audited report. In Q4 2020, the revenue was TWD 6,861 million. Q-o-Q is up 4%, Y-o-Y down 1%. The gross profit TWD 2,399 million, and gross margin become 35%, compared to last quarter was down 8.4 percentage points. The operating expense is about TWD 735 million, and operating -- OpEx ratio, it's 11%, similar level as last quarter. So the operating income is TWD 1,664 million. And so all parts, our operating margin becomes 24.3%. Compared to last quarter, it's also down about 8.4 percentage points. The nonop item was negative TWD 48 million. The detail will be in Page 12. The income before income tax was TWD 1,617 million, and income tax expense was TWD 341 million. That's equivalent to the tax rate 21% the tax rate. The net income becomes TWD 1,276 million. So the net income Q-o-Q is down 35%, Y-o-Y is down 31%. So the net margin become 18.6%. And the EPS for Q4 was TWD 3.07 and the ROE, return on equity, in Q4 equivalent to 15%. And approximately, the utilization rate was 85%. It's going up from 75% last quarter. The depreciation is up a little bit to TWD 983 million and CapEx become TWD 2,958 million, and -- this is Q4. And next quarter, Page 11, talk about the whole year of the income statement in 2020. The net revenue the whole year was TWD 25.546 billion. Y-o-Y is up 19%. And gross profit is TWD 10.569 billion. It's up 30% Y-o-Y. And the gross margin for whole year was 41.4%. Compared to last year, it was 3.2 percentage points up. The operating expense was TWD 2,786 million. And OpEx ratio equivalent to 11% in whole year. So operating income was TWD 7,782 million. So the operating margin becomes 30.5 percentage points -- I'm sorry, 30.5%, which is Y-o-Y it's up 4.5 percentage points. The nonop item for whole year is positive TWD 220 million, the detail in Page 12. And the income before income tax was TWD 8,002 million, and the income tax expense was TWD 1,534 million, the tax rate equivalent to 19%. So the net income was TWD 6,469 million, and the Y-o-Y is up 47%. So the net margin become 25.3%. And finally, the EPS for the whole year is TWD 15.45. And the whole year of year 2020, the ROE was 20% and the utilization was 85%. And the whole year's depreciation expense total is 50 -- I'm sorry, TWD 3,628 million, and this figure is lower than our expectations in the very beginning. That's because our 5K expansion for year 2020 was complete for the machine installation at the end of Q3. And -- but the acceptance for the new machine was partially down in Q4. The rest of it will continue in the 20 -- the year 2021, so the depreciation were kind of delayed to reflect in the financial statement. And okay, next page, talk about the nonop items in Page 12. The net total for the nonop item was negative TWD 48 million about the impairment loss on our financial assets was TWD 139 million. That's coming from one of our investing company, Phalanx Biotech Group, and that's because the investment benefit hasn't been effective as expectations. So the accountants request to recognize the impairment loss of intangible assets based on the IFRS. Okay. Now finally, we can go through the balance sheet up to the day of December 31, 2020. The total assets was TWD 54,702 million. The total liability was TWD 18,972 million. And the total equity was at TWD 35,730 million and the common stock remained the same as last quarter. So because of the total equity grows from TWD 32,938 million, so the book value per share increased from TWD 75.46 to TWD 80.36 on December 31. And finally, the current ratio and the debt ratio is at similar level last quarter, it's 261%, and debt ratio was 35%. That's our financial report for Q4. And I would like to -- okay, before we go to the next section, I would like to add something about -- we just announced our January consolidated revenue for -- and the revenue was 20 -- was, I'm sorry, TWD 2,105 million and Y-o-Y is up 4.37% and the month-over-month was down 8.64%. That -- we just announced this afternoon, maybe about 2 -- 1 hour ago. So okay, now we can have our CEO -- okay, now we turn the call back over to our CEO, Kyle, for industry outlook.

Okay. Thanks, Joe. So to follow, I will give you some slides to explain the market outlook. Let's go to the Page 15. So before the outlook, I would like to share with you the WIN's major achievement and milestone for 2020. Okay. First, to emphasize again, our revenue hit a record high once again, growth of 19% by TWD. Second, for majority of our application product keep growing more than 20%. That was cellular phone PA, optics and the infrastructure. One is WiFi is less than 20%, but still growth. So you can see our -- all the major application category with growth healthy. Third one is -- we joined the semiconductor industrial cluster of the South Taiwan Science Park. It will be another production base for WIN in the future. The land size we have is about like 100,000 square meter. The land size can offer about 80,000 to 100,000 wafer per month if the production sites have a full scale in the future. So we are looking good for the future on the compound semiconductor. So last one is we got many awards. So we are a newcomer of the Dow Jones SI World Index. Also, we are the winner of the Taiwan Corporate Sustainability Award in 2020. Also, we got the SGS CSR award. Okay. Go to the next page, Page 16. Okay. This slide shows the growth comparing with some analysis report. So you can see the WIN's in the red color, our growth rate 2020 versus 2019, by counting the U.S. dollar is 25%. So you can see we suffered a lot from the exchange rate. So you can see the yellow color and the blue color, but gallium arsenide device in the beginning of the last year, the forecast only overall growth 2.2% forecast. But worldwide semiconductor, this is actual number growth, 7.3%. So no matter on the overall worldwide semiconductor or only the compound gas device market, so our growth is much higher than the actual 7.3% or the forecast of gallium arsenide 2.2%. So 2019, our achievement is USD 676 million and growth 25% to USD 845 million in 2020. Let's go to next page, 17. So again, we're still very confident on the business growth driver. These are the 3 categories I point out. First is 5G, no matter the infrastructure and the smartphone, more and more chip for the compound is needed. The other is WiFi, WiFi from 11ac to 11ax, the so-called WiFi 5 change to WiFi 6. And the other is IoT is one of the characteristic of the 5G. That's massive MIMO. Second is infrastructure. That's the one specialist of the WIN's technology on the high-frequency, high-power, [ no matter ] on point-to-point and satellite, et cetera. Third one, optical device. Even though the optical device revenue share is less than 20% of the WIN total, but we believe this will be another growth engine. Okay, go to the next page. First, I would like to use this chart to share with you why we say the 5G is grows. So in the 2019, 2020, so the 5G deployment all over the world. And 5G phone was a massive launch last year. No matter, the iPhone, Samsung, China's main brands. So original only the 5G band, only on the ultra-high band all share the high band of the LTE, that's so-called N77, N79 and N41. And this year, there is a dual connectivity will be launched. That means original band of the LTE, we started to have a 5G spend as well. So there's still connectivity. Because the high data highway is one of the key characteristics of the 5G. So that means in the phone, in a smartphone or in handheld, such as iPad or others, more and more compound device will be needed. So the other is WiFi 6. Of course, the penetration rate is keep growing. But the other is WiFi 6, will have a new frequency band, 6 to 7 giga. I think this is 3GPP they have announced. This is 3 band for the WiFi. So there is some question that what's the difference between 6 and the 6E. So because you need to cover the more wideband frequency, it depends on what technology you adopt. It use still one chip but the chip size should be increased. But it depends on the design, maybe 2 chip needed. That means that for WiFi 6E, more compound chip will be needed. So that's to drive these wafer demand for the 5G and WiFi. Let's go to the Page 19. This is one thing I'd like to share with you is the massive IoT, because the 5G high data rate and the connectivity becomes more and more popular. Before when it was 4G is a silicon base for the narrowband IoT. It's a very low level. They don't need to transmit very more high data, and they're using the 2G, 3G's infrastructure. But right now, the [ consumable ] and the solution, they can use the LTE's infrastructure, they call the Cat 1. So definitely this high data rate compared with narrowband IoT, [ they can now ] have the advantages to -- on this market. In the future, will maybe go to the Cat-4, 6 or even use 5G's infrastructure. So for this IoT, for the IoT, massive IoT business is booming. I think the Cat is the major player of these applications. Okay. Go to the next page. We are talking about the 5G phone, WiFi IoT, one thing is the basic, infrastructure. So infrastructure is that's so-called base station, have the macro cell, small cell. So both the -- they need a PA, private PA, no noise amplify. WIN have all these metrics of the technology to support the macro cell and the small cell. This contains gallium nitride, gallium arsenide, especially for the HBPT, and we all have this kind of technology. So that's why our infrastructure is continue growing, no matter on gallium nitride and gallium arsenide. The other is more advanced, is satellite communication. I believe you noticed [Technical Difficulty ] [ SpaceX ] have provided a business model to support the -- both Canada and England from the countryside. They don't have enough infrastructure by the cable, by the base station, but they can use these low-orbit satellite to share this connectivity. So this was announced. I believe [ SpaceX ] already have 1,000 low-orbit satellites in the sky. Let's go to the next page, 21. So again, optical device is one of our strengths in the market. Since 2017, the first 3D sensing phone launch. So right now, it's the fourth year. WIN still enjoy the major share of -- in this market. So in the future, more application will be adopt the 3D facial recognition, such as door lock and the other is -- right now -- last year, we also have a new application we used in the so-called ToF or in the LiDAR in the market. It's equipment on the phone on the [ wide ] camera, so it can be quick focusing and in the future maybe adopt in the augmented reality and virtual reality. So I believe this will be for a long-range LiDAR that -- for the auto drive. And in the car, in the cabin, the spatial recognition also needs kind of technology. So more and more application we're starting from the car. Okay. The other is more high-population areas such as airport or metro transportation, all for security for the bank payment, can use this kind of technology in the future. Okay. Let's go to the next, 22. So we enjoy and share the market growth information. This is the existing one. But also, we are looking for the future. There are 2 major technology material we are focused on, so let's go to the Page 23. The indium phosphide is one of the future growth material in the compound field. So indium phosphide, WIN also have developing the field technology on the laser diode for the transmitter and a photo diode for the receiver. Also, for the modulator, MAch-Zehnder modulator, this is for data communication. And third one, I think the auto-drive, LiDAR for the more high power that need more high-frequency lens, about 1,500 [Technical Difficulty] nanometers. And in the [ particle of that ] indium phosphide also can be used for the [ eye ] -- more in the millimeter wave. So these 4 major application, indium phosphide, we have to work with our customer closely. When the market comes, then WIN will own the position to have this market. Last one is the gallium nitride. We have focused on gallium nitride for the high-voltage, high [ wi fin cade ] for many years. So this application is, I think base station is the major. The other in the future, satellite and V band, point-to-point and in the future of the millimeter wave solution. So both the indium phosphide, gallium nitride, we have engaged with our key customers. And in the future, this will be our -- another growth -- business growth with attendant momentum in the future. Okay. Thank you. This is my presentation.

Okay. So now we begin the Q&A. Please submit your question in the input box on the webcast window now. Thank you.

One question is about, do we worry about the competitor in this market? I think that we cannot stop any competition in the market. But you can see, take the silicon as the example that the IDM will gradually stop the expansion or they did not have too much the resources on the developing. So you can see the compound semiconductor is -- follow the silicon fab. We don't see too much capacity expansion, already limited capacity expansion in IDM. But -- so that means Foundry technology is almost equivalent or even superior than IDM technology. That means that we can provide more cheap or more high-performance to this IDM company. So this is what we have observed in the IDM. The other is more and more player, such as in China, one of the most famous is [ Sangan ] I believe that in overall the technology, which I emphasized previously, is the gallium arsenide, that cover the frequency range from the smartphone to the high-frequency to the V band 100 gigahertz. And also the same thing and the technology developing on the gallium nitride and indium phosphide [Technical Difficulty] [ is cooking ] now. So we have a very diversified technology that is -- no one can take the position to compete with WIN. So this is our focus, and I believe we will take lead in this market.

Okay. I will answer some question about the 2021 CapEx plan and budget and also the depreciation guidance. The whole year 2021, we expect the CapEx will be around TWD 9 billion, plus or minus. And the majority, as everybody know that we're going to start to develop for the -- start the construction for our Southern Taiwan Science Park, Kaohsiung Science Park for that project. And that's going to begin maybe in the middle of this year. And on the same time, we continue to expand our Guisahn Taoyuan in Fab C. We have -- now we are re-lay our office space, and we're going to expand the whole floor of the space become the cleanroom. So all the construction, no matter the office and cleanroom, we'll also include in this year. And after the cleanroom construction complete, then we'll begin to move in the machine. Maybe in the second half or even later of this year. So the -- any kind of capacity to contribute our -- to contribute our mass production probably will start in -- from the early of the year 2022. But all of the infrastructure construction we'll spend in this year. That -- very focused on that. So the depreciation expense, we expect that because -- we expect we're going to increase about -- between 20% and 30% compared to last year. And I have mentioned that and explained that in the income statement, when we talked -- talking about -- there is a kind of last year's expansion, the depreciation starting to impact the financial statement starting from Q4 and -- but only partially impact. So the rest of the depreciation will carry forward to the year 2021. And so that the depreciation expense guidance and the CapEx plan. Thank you.