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 Results Webcast Conference for the first quarter of the year 2021. My name is finance Joe Tsen, the spokesman and Associate Vice President of Finance in WIN Semi. Joining me on today's call is Steve Chen, General Manager of Corporate Administration. Today's call is organized into 3 sections. First of all, Steve will comment on company's results and provide brief guidance for the second quarter 2021. Secondly, I will go through the financials in detail. 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. 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, everyone. Given the first quarter is a traditionally low season, our revenue for all products segment in the first quarter of 2021 decreased sequentially compared with the previous quarter. 5G PA shipment accounted for slightly less than 20% of the overall cellular revenue in the quarter. Revenue of TWD 9 billion decreased 12% quarter-on-quarter, in line with our expectation. This translates into a mild decline of 1% Y-o-Y. Due to the impact of the product mix and the capacity utilization, gross margin declined sequentially to 33.5% with a decline in revenue and an increase in operating expense. The operating margin in the first quarter was 19.9%, declining by 4.4% sequentially. EPS was TWD 2.72. Looking at the product mix in the first quarter, the magnitude of the sequential decline in cellular and WiFi revenue was relatively mild. We attribute this mainly to the fact that working from home and learning from home has become the new normal since the outbreak of the COVID-19 pandemic, driven by the demand for long time intervals and the large amount of audio and video data transmission from wireless connected devices. Devices, including handheld WiFi-based stations and IoT applications, all required better and more stable connection quality. We have provided high-quality and high-performance power amplifiers for a long period of time. And our product has become the first choice for the market. In addition, since last year, despite rapidly change in the market share of the smartphone brand and tension of the cheaper global coverage, many of our Asia-based customers has actually benefited from this trend with a continuous increase in demand. Given our diversified customer base and competitive advantage in technology and capacity, we have always played an important role in the market. We are actively trending the development of our new fab in Southern Taiwan Science Park in Kaohsiung this year, and it is expected to officially start construction in the middle of this year. This is the easiest to serve customers' long-term demand for production capacity and to lay the main foundation of our continuous growth in the future. Looking ahead to the second quarter of 2021, we expect revenue to grow low single digits quarter-on-quarter and gross margin to be around the level of low 30s. I will turn the call back to Joe.

Okay. Thank you, Steve. This is our pleasure to present our financial results for the first quarter of the 2021. Please [Audio Gap] the page in your presentation slide in page -- starting from Page 4. Page 4, we talk -- we discuss about the revenue and the margin. Q1 2021 revenue was TWD 6,009 million, Q-o-Q was down 12% and Y-o-Y down 1%. And because of the product mix and the capacity utilization, our Q1 gross margin declined by 1.5 percentage points to 35.5%, and the operating margin was down 4.4 percentage points Q-on-Q to 19.9%. And talk about the product mix, because as Steve mentioned on his management comments, like the 5G PA actually below 20% of the overall cellular business. And at the same time, our cellular and WiFi looks better than infra in the optical, but it's -- in this kind of mix, it's unfavorable to our gross margin. And another one that the operation expense also higher in Q1 compared to last quarter. That's because the -- our bottom line and EPS in the full year 2020 is better than expected. So the company decided to adding -- add more employee bonus for normally in the Chinese New Year. And it's making the Q1 all tax ratio are higher than before. And the next page, we talk about earnings. In Page 5. In Q1 year 2021, the net profit was TWD 1,095 million, and Q-o-Q was down 14% and Y-o-Y down 30%. So therefore, EPS was TWD 2.72 compared to TWD 3.07 last quarter. And please turn to the next page, Page 6, talk about free cash flow and gearing, which is the balance sheet figure. In Q1, because the CapEx was lower than last quarter, so we have an increase in net free cash flow inflow. And you probably see the interest-bearing debt and the gearing ratio both increased significantly. That's because we successfully issued an ECB, which is a euro convertible bond, for USD 500 million in Q1. So the -- both the interest-bearing debt and the gearing ratio went up significantly. And next page, we talk about the product mix in Page 7. In Page 7, compared Q1 to Q4 last year, you probably already noticed that the cellular -- the percentage of the cellular was between 45% and 50%, which is higher than last quarter. And another one will be the optical, including 3D sensing in others, it went down from 22% to 19%. And with the revenue -- total revenue went down 12% Q-o-Q, the WiFi and infra public remain in the same level. So because of the cellular and 3D sensing percentage change, so which is unfavorable, so this type of product is unfavorable to our gross margin. Okay. Then next page, we'll talk about Q2 guidance. As Steve mentioned it in his management comment, so I just repeat again. We expect Q2 2021 revenue to grow by low single-digit Q-o-Q. And we also expect Q2 2021 gross margin to be around the level of low 30s. Okay. Then we can quickly go through our financial statements, including income statement and balance sheet. Before I begin, I still -- I always want to remind everybody, all the figures here is based -- it's unaudited basis. The net revenue for the Q1 2021 was TWD 6,009 million, Q-on-Q down 12%, Y-o-Y up 1%. The gross profit was TWD 2,012 million and gross margin become 33.5%, which is down 1.5 percentage points. And operating expense was TWD 816 million. And so therefore, the operating expense ratio was 14%, which is 3 percentage points higher. Operating income become TWD 1,196 million and so the operating margin was 19.9%. Compared to last quarter, it's 4.4 percentage lower. The non-op item for this quarter is positive TWD 191 million, the detail will be in Page 11. The income before income tax was TWD 1,386 million, so the net -- the income tax expense was TWD 291 million, the equivalent -- the tax rate equivalent to 21%. The net income becomes TWD 1,095 million. So the net margin was 18.2%, which is 0.4 percentage points lower than last quarter. The EPS was TWD 2.72 in this quarter. And the ROE become 14%, which is a 2 percentage lower compared to last quarter. The approximately utilization rate was 80% in this quarter, which went down from 85% from last quarter and compared to the same quarter last year, last year was 90%. The depreciation expense was TWD 1 billion in this quarter and the CapEx is TWD 1,834 million. That's the income statement for Q1. The next page will be the non-op item in Page 11, that mainly come from the foreign exchange gain. Then we can talk about balance sheet in Page 12. Okay. In the dated March 31, 2021, the major items difference will be the cash and the cash equivalent, it's a TWD 22.334 billion. And first of all, because we successfully issued an ECB in this quarter by USD 500 million ECB, so making a couple items different, for example, like cash and cash equivalent. And another one would be the total assets went up to TWD 70.149 billion. And for the liability, you can see that there is a bond -- a convertible bonds payable, which is exactly coming from the ECB issuance. And another one, the current liability also went up significant. That's because the Board approved a dividend payout on March 18 for payout TWD 10 per share for -- it's about dividend payable about TWD 4.2 billion. So the total liability becomes TWD 36.919 billion. And the common stock was pretty much the same as before. So the total equity was TWD 33.230 billion. The book value per share becomes TWD 74.62. And the key index, including current ratio was almost 280%, and the debt ratio went up to 53% because of the issuance of ECB. Okay. This is all I have. So now we can -- we can begin the Q&A. Please submit your question in the input box on the webcast window now.

Okay. There's a question asking about the gross margin, operating margin, those kind of questions. And -- okay. And -- okay, first of all, as I mentioned, the gross margin is the -- major reason for gross margin this time is because of the change in product mix and also the decline in capacity utilization rate. And so the -- of course, it depends on -- in the future, it depends on both utilization and the product mix is both favorable to the mix and utilization rate can be better than it will be favorable to our gross margin. The operating -- as to the operating margin side, as we explained it, there's additional employee bonus for Chinese New Year this year this time because of the bottom line EPS was outperformed in last year. So it's a one-off reason and one-off item for Q1. And normally, our operating ratio, most of the time below 12%. So what we believe that after this Q1 then it should be back to normal for the operating ratio. Thank you. Okay. Looks like not many question on the list and then we will give you more color about what we have in the -- in this quarter and the next quarter. As you can see that in the Q1, our customer in cellular looks like a little bit stronger. And looking forward, we may see a little bit -- for the Q2 we also still seen that the cellular customer looks -- has a stronger demand. And on the same time, the 3D sensing -- normally, the high season for 3D sensing will be in Q3. And this time, in Q2, probably the 3D sensing business will be under some kind of product transition period. So this -- the 3D sensing business may be weaker in Q2, but the cellular business looks even stronger. Since the rest of the other business pretty much in line with Q1. So that's why the -- although the revenue will look a little bit growing in Q2, but margin may be still not favorable from the product mix perspective. So yes, that's what we see that -- here. And also, I would like to talk about the -- some -- a lot of investor interesting about the demand from IDM customer. As you know, you guys know that right now, the compound semiconductor, the limited IDM for us, it's only few. In most of the business, WIN Semi have -- with those IDM customer in -- it was in the WiFi product, especially WiFi router, IoT gateway, which is like WiFi base station, those kind of business. In the past, over 1 year, because of COVID-19 pandemic, work from home, learn from home, making the WiFi base station, the demand stronger. And so the WiFi 6 -- normally, the WiFi router, WiFi base station will need a better performance, higher volume, the -- in the -- compared to smartphone, I mean, the mid-end and low-end smartphones. So WiFi 6, we do see WiFi 6 migration happening more and more. And we have very good relationship and business with those IDM on this kind of business. So the -- in the WiFi business, and I think -- I know there is a lot of investors also interesting about WiFi 6E. I have to say, yes, we did see WiFi 6E is coming and we have -- already have a project with an important customer, including those IDM customer. And well, I believe that WiFi 6E should be contribute our revenue further in the near future. Yes, that's about the product mix in the IDM customer and WiFi. Thank you.

Okay. I think there's a question, want to know will the millimeter wave 5G SoC impact the 5G PA? I think first, we should say that until right now, what we call 5G PA we provided is all gallium arsenide-based PA. And the last one relate to the sub-6 gigahertz PA. Until right now, I think all the millimeter wave 5G PA installed in the handheld devices, I think it's not made by gallium arsenide So I think it's not such an impact that the SoC for the millimeter wave PA will impact the -- getting our site or not. Because I think until right now, you can see all the sub-6 gigahertz PA that was made by gallium arsenide 4G PA, yes. And so I think until right now, we don't see some kind of replacement for sub-6 gigahertz PA to become used SoC. Okay. I think it's a very complicated question. Want to know about first, the competition; second is how's the opportunity for WIN Semi in infrastructure and even for LiDAR? I think that maybe can all consolidate to WIN Semi, how is the strategy about WIN Semi about technology. I think as you know that in -- since WIN Semi established, I think we are more focusing to become a technology-leading foundry in the world. So we developed all those technology by ourselves and provide all the total solution to the customer from hundred of gigahertz to hundreds of megahertz. So any customer no matter he want to design any kind of partition from the cellular PA to satellite PA, he can find total solution technology to them in WIN Semi. But for other competitors, I don't think they can do that because they may be more focusing on some special technology, not a very fully coverage about the frequency and applications. So I think there's a big difference from WIN Semi and other competitors. So -- and especially because of the technology. So definitely, WIN Semi has -- there's an opportunity in the infrastructure and even in LiDAR because we -- I think right now, WIN Semi should is only pure-play foundry who can provide the fully infrastructure base station related or even satellite kind of PA technology in a world. It's other -- no other competitor can provide with that. And at the same time, for the LiDAR, I think because WIN Semi is so successful in the 3D sensing. So definitely, we already have a very good experience to mass production, those kind of very complicated and powerful devices than traditional optical company. So I think the technology-leading strategy still will provide WIN Semi in a very good position in those new -- coming new applications. Thank you.

Okay. There's I think several investors concern about the Tier 1 smartphone, maybe there is a 3D sensing design change may impact our business or anything -- any kind of question like that. Okay. First of all, we -- I have to say sorry that anything related to U.S. Tier 1 smartphone or our customer, it's a source to them, a major source there may be sensitive. It's not -- as a supplier to -- in the supply chain, we may not describe too much about that . But something I assure is our customer still the major shareholder, I mean, the major -- having the major share in this supply chain and in this product. And even if -- is there any change of the design that only will making the entry barrier higher, which is to make sure our customer still have the major share. And so for us, we are the only source. We are the only foundry partner to our customers, so there is nothing to worry about that, about 3D sensing this year. Thank you.

Okay. I think that's a continuous question about millimeter wave 5G PA. I think we maybe should say it more clearly is that the millimeter wave PA -- 5G PA that's using gallium arsenide, mainly right now is using for the small cell or winter cell, those kinds of infrastructure-related devices, yes. But for the silicon-based SoC, I think right now, it's more using in smartphone devices. Okay. I think because of there's still some investment, want to know about our new capacity expansion no matter in FAB C or the new fab that will built in south of China -- south of Taiwan in Kaohsiung in the future. I think first, I think in this year, we may not have any new capacity that will added to us. Yes, because right now, we just start to build our FAB C first floor cleaning in this year, and that should be maybe well completed and move into equipment in next year Q1 and Q2. So for this year, I don't think we will add the capacity, yes. And for the new fab in Kaohsiung, I think we will start to the construction like I said before, the middle of this year, and then maybe it will take 2 to 3 years to fully complete the construction. And then move the equipment into it. So maybe around it's 3 -- around like 3 years to prepare for the new fab in Kaohsiung before we got the capacity added for that. So that's why -- although we still have plenty space to expand in FAB C, but we need to start the Kaohsiung site right now. Otherwise, we will have a very long-term demand and supply gap in the future. Thank you. Okay. There's still some questions related to the LiDAR business. Yes, I think we mentioned before, yes, because like I say, we certainly were successful in 3D sensing. So definitely, we have a lot of the project. And the customer come to WIN Semi and try to codeveloping LiDAR application with us. But because until right now, LiDAR is not a standard equipment for the car. So in most of the case, right now, we see those LiDAR developing projects still in the project base and also in a very initial stage. So yes, definitely, we will have some revenue from those projects. But I think compared to our total revenue, it will still be pretty small. So I think for this year, it's still should be in that kind of project-based revenue and taking a very few contribution to us. Thank you.

Okay. There are no further questions. Thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. Please visit www.winfoundry.com under the Investor Relations section. You may now disconnect, and goodbye.