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

The investor conference is about to begin. Good morning, and good evening, ladies and gentlemen. No matter where you are, welcome to WIN Semi's Results Webcast Conference for the Second Quarter of the Year 2021. My name is 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 in WIN Semi. Today's call is organized into 3 sections. First of all, Steve will comment on the company's results and provide brief guidance for the third quarter for 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, the General Manager of WIN Semi.

Thank you, Joe, and welcome, everyone. After a traditionally dull season in the first quarter, we have seen a gradually pickup of customer demand, and our revenue in the second quarter reached TWD 6.2 billion, an increase of 3% quarter-on-quarter and 2% year-on-year. This was roughly in line with our previous expectation. Driven by changes in the product mix, our gross margin in the second quarter increased by 2.2 percentage point from the previous quarter, recovering to 35.7%. This also did a sequential increase of our operating margin by 2.8 percentage point, returning to the level of 22.7%. EPS in the second quarter was TWD 2.32, and EPS for the first half of 2021 was TWD 5.04. Looking at the product mix in the second quarter, apart from infrastructure revenue being maintained at the level of the first quarter, the double-digit sequential growth in cellular PA revenue was the most pronounced. Especially, the contribution of 5G PA revenue to total cellular PA revenue recovered to over 20% again, and the significant increase in the momentum of Chinese fabless customers was also one of the drivers. After the third quarter of 2020, we could no longer supply to our largest Chinese customer at that time due to the U.S.-China trade conflict. However, as we had previously stated, after the reshuffle of the smartphone end market, our strategy of diversifying customers has served us well again. Many Chinese customers who have been worked with us for many years seized this opportunity to gain market share. They chose to work closely with us given our strong support in R&D and production capacity. This was a win-win for our customers and us, strengthening our confidence in delivering continued revenue growth in 2021. In response to our customers' future growth and the long term demand for production capacity, we will adhere to our strategy of investing R&D resources to participate in the next generation product developments of our customers and expanding production capacity. We believe our customers' market share gains will further reinforce our leading position in the compound semiconductor foundry industry. Looking ahead to the third quarter of 2021, we expect revenue to grow by high-single digit quarter-on-quarter and gross margin to be around the level of mid-30s. I will turn the call back to Joe. Thank you.

Okay. Okay, it's my turn. It's our pleasure to present our financial results for the second quarter of year 2021. We can also refer our presentation slides, starting from Page 4. Page 4 talks about revenue and the margin. With the continued gaining share on China smartphone market through China fabless customer, and our Q2 -- our Q2 revenue was of TWD 6.2 billion Q-o-Q was up 3% and Y-o-Y up 2%. And with the utilization -- 90% of utilization rate, as we expected in Q2 driven by some changes in product mix, our gross margin improved by 2.2 percentage points to 35.7%, which is better than our original low 30s expectations. And therefore, the operating margin improved about 22 point -- improved about 2.8 percentage points to 22.7%. We will discuss about product mix changes in Page 7 later. And next page, please flip to the Page 5. I'll talk about earnings. The second quarter net profit was TWD 930 million, Q-o-Q was down 15%. That's mainly because of the impact from one-off foreign exchange loss due to the appreciation of new Taiwan dollar against U.S. dollar in Q2. So, therefore, the EPS coming at TWD 2.32 and compared to Q1 -- Q1 was TWD 2.72. And please flip to the next page, in Page 6. Page 6 talk about free cash flow and gearing. Q2 had a net outflow for our free cash flow, that's because we continue increasing in CapEx. And the Q2 interest-bearing debt and the gearing ratio maintained at a similar level of the last quarter. So please flip to the Page 7, we may discuss more about our product mix. In Q2, the product mix of cellular was between the 50% and 55%, which is higher from 45% to 50% last quarter. And the cellular revenue for Q2 -- actually Q-o-Q was double-digit up. And especially, 5G -- for 5G cellar was higher than 20% of the total cellular PA. And another one is infrastructure. Infrastructure -- actually, infrastructure remained in the same range between 15% and 20%, which is the similar level as Q1, but it's better than our expectations. And the 3D sensing in this quarter down to 14% from 19% last quarter and -- which is as we expected, when last earnings call we did mention that the 3D sensing business will be experiencing a product transition period. And WiFi business also went down a little bit, become -- between 10% and 15% for the total revenue. That's the product mix in this page. And in the next page, I'm going to talk about the Q3's guidance. I think Steve have mentioned that on his management comment. So I'll just repeat again. We expect Q3 '21 revenue to grow by high-single digit Q-o-Q, and we expect Q3 gross margin to be around the level of mid-30s. Okay. Then we can quickly go through the financial statements. We're starting from income statement for Q2 in Page 10. I have to remind you guys, all of the figures below -- it's all on audit -- based on audited basis. The actual result should await until the -- our CPA's report. The Q2 net revenue was TWD 6,195 million Q-o-Q, up 3% and Y-o-Y up 2%. The gross profit was TWD 2,212 million, which is up about 10% Q-o-Q. The gross margin become 35.7%, which has improved about 2.2 percentage points. The operating expense become TWD 803 million, and the OpEx ratio was 13%. The operating income was TWD 1,409 million, which is up 18% Q-o-Q. The operating margin become 22.7%, which has improved about 2.8 percentage points. The non-operating income and expense was TWD 283 million loss, which is the detail in Page 12, and the main -- the majority was the foreign exchange loss. The income before income tax was TWD 1,126 million. And the net -- the income tax expense was TWD 197 million, so the tax rate equivalent to 17.5%. The net income was TWD 930 million, so the net margin becomes 15%, so EPS come out at TWD 2.32. And the ROE for Q2 was 12%. And the utilization rate, as I mentioned earlier, in this quarter was 90%, which has increased from 80% last quarter. The depreciation expense was TWD 1,028 million. It's a little bit higher than last quarter. The CapEx become TWD 2,702 million, which is higher than last quarter. Okay. Then please flip to the Page 11 for the income statement for the first half in 2021. The net revenue was TWD 12.204 billion, Y-o-Y was up 1%. The gross profit was TWD 4,224 million, the gross margin becomes 34.6%. And the operating expense become TWD 1,619 million, so the operating -- the OpEx ratio becomes 13% for the first half. The operating income was TWD 2,605 million. The operating margin become 21.3%. The non-op item was TWD 92 million loss. So the income before income tax was TWD 2,513 million and the income tax expense is about TWD 488 million. The net income become TWD 2,025 million. So therefore, the net margin becomes 16.6%. So the EPS for the accumulated first half become $5.04. The ROE for the first half accumulated becomes 13% and approximately utilization rate was 85%. The depreciation for the first half was TWD 2,027 million. The CapEx for the first half was TWD 4,536 million. Okay. That's the first half income statement. The next page will be non-op items. For your own reference, I just let you know that the major item is the foreign exchange loss. And the Page 13, is the balance sheet. The -- okay, stated at the June 30, 2021, the cash and cash equivalent was TWD 19.899 billion. The total assets was TWD 32.576 billion. And the total liability was TWD 37.634 billion, so the debt ratio equivalent to 52%. And the total equity was almost TWD 35 billion and the book value per share is about TWD 77.18. And finally, the current ratio was 266% for the first half. Okay. So this is -- this is my presentation. Thank you. Now, we now begin the Q&A, and please submit your question in the input box on the webcast window now. Thank you.

Okay. I think, first, I will answer some questions around the Q3 quarter trends. Because Q3 is the traditional peak season for the smartphones, so technically most of the smartphone related products would be stronger in Q2 in this quarter, such as PA, even WiFi and optical. Yes. And infrastructure should be keep the same level of Q2? Yes, I think that will be the most likely trend for Q3 product. Okay. There's some question was -- I want to know how is the margin? Because I think we still -- guidance, the margin will be around mid-30s level. Yes. But yes, definitely -- I think, yes, it's -- although, it's in the same kind of margin level compared to Q2, but because of the revenue growth and better [ UT ]. So yes, definitely, even in the same kind of mid-30 level, but compared to Q3 to Q4, the margin still be increased. For the Q2 and Q3, Q3 margin that will be still a little better than Q2. And next question is about the capacity plan. I think we have discussed that in previous conference. Also that for 2021, our capacity will maintain at 41,000 per month in this year. And at the same time, right now we are expanding our Taoyuan space in FAB C. So we will have some new capacity joined to the production in next year. Okay. There's a question, I want to know how is the status right now after we lose a very big customer in China since last year, September due to the trade war conflict. Yes. I think it's already almost one year that event. But you can see, actually, our revenue is still keeping a very stable situation. And at the same time, most of our Chinese customer, actually they gain share from this situation. So I think right now, no matter which new smartphone maker model -- actually, right now, our Chinese customer, actually, they all gain the shares in there. Okay. Here some questioner want to know how about some news in the market saying that the 3D sensing receiver chip size will become smaller and has the impact upon WIN Semi. I think WIN Semi is developing the 3D sensing technology since day one, that product launched to the market. So every year we're making the progress and the generation change of our technology process. So, definitely, at the same time we will bring a better performance and also the smaller size of the chip every year. Yes. So the size shrink, definitely that will happen along with the technology roadmap keep change. So -- but at the same time, for the size -- even the die size is keeping smaller. But at the same time that will bring the -- technology barrier becomes higher, because if you want to size down a chip, definitely you need to -- based on the previous technology and making some new progress of that. Yes. So -- and at the same time, because of the technology process was become better and become a new generation, actually, we can leverage those technology capability to diversify our optical business, not only the 3D sensing, but other related sensing or optical data in there. So I think for a single product, yes, the size shrink maybe will bring -- the revenue become a little lower. But compared to the technology progress, actually, we can gain more business from other optical projects. So I think for whole year to see, I don't think the optical revenue will be going down year-by-year because of the size shrink. Thank you.

Okay. There are a couple of questions regarding the depreciation expense for this year. And I would like to know that we will -- will we remain the same view as the depreciation expense guidance. And yes, actually, we did provide that -- in early this year, we mentioned that this year, we roughly would -- probably our depreciation expense probably will increase about between 20% and 30% in this kind of range. And actually, from the result, we see that the first half Y-o-Y basis was increased very close to the lower level in this range. So we believe that even the -- including the second half, probably won't be over this range. So the whole year the depreciation expense guidance we probably will keep the same as before. Thank you. There is another question asking about our Q2 OpEx ratio, which is 13%, OpEx ratio actually was lower than Q1, but still a little bit higher than the normal OpEx ratio. But we check into the detail, the administration and the sales expense are pretty in line with before. But in Q2, the R&D expense looks higher than normal. We gauged that the -- it should be the second quarter we do more R&D activity with the customers, no matter the new tape-out or the development project for the second half or even the next year's project, it's happened on the same time. So making the R&D expense a little bit higher is normal. But normally, the -- for second quarters, the experiencing a higher R&D expense, it's not abnormal. It's partially the -- if we still have the capacity to support the R&D project, then we definitely will do that. And I think Q2 with -- although higher utilization, but we're still not 100% yet. So I believe that, that was the reason. Thank you.

Okay. There is a question on -- if you talk about ASP. I want to know will WIN Semi investing in our ASP at this moment or in the future. But I think, first, WIN Semi has a very long relationship with our customers -- for most of the customers. So in most of the case, we discussed the ASP year by year. Yes. So before the agreement duration is coming, actually, an agreement period, actually, we will not write-up the ASP without reason, yes. So -- and also for the ASP, I think for WIN Semi compared to other competitors, is more complicated situation for WIN Semi, because we are not only providing technology for single product or single PA. And actually, in WIN Semi, we produce all the tailormade PA by different customers with different end handset makers. So actually, the ASP was totally different customer-by-customer and also product-by-product. But if you check, WIN Semi's average ASP for the past few years, actually, I think, is -- keep in very good healthy level. And even we -- because of the -- every time when we have the new technology launch, actually, the ASP were going up. Yes. So for WIN Semi, the ASP is not just compared to the same technology, because WIN Semi technology keeping -- developing the new generation year-by-year. So the ASP for WIN Semi, yes, definitely, the new technology ASP is better than the older one, yes.

Okay. There is another question still. Investors still want to know about the 5G PA in WIN Semi and the percentage of revenue, the ASP compared to the 5G to 4G such question. Okay. I think we started shipping the 5G PA since the second half of 2019 and start -- starting from about 10% and gradually up and the highest level in the year 2020, I think maybe Q1 or Q3, I can't remember. And the highest level was about 25%, and average is about between 20% and 25%, this kind of level for the whole year 2020. And the recent Q1 below the 20% and come back to above 20% -- 20-something in the Q2. So you see that WIN Semi, we developed a 5G PA many years ago and start mass production for our important customer since 2 years ago. And even long before our competitors not -- even not -- not even have the 5G PA recently. And so, of course, the wafer pricing -- the price for 5G should be better than 4G, especially 4G, it's a kind of -- 4G PA, is kind of the legacy product and experiencing kind of price erosion year-over-year. And there was almost no new band, or almost no new design. But the 5G is -- it's still early stage for 5G PA. So theoretically, the new product, new application, it's all -- the pricing is better than the old one and the -- so that's why the 5G generation is very important for a PA maker and we -- I think -- and especially 5G, the frequency band, so far is still limited to sub-6 gigahertz like 41, 77, 79, and we expect there will be more frequency band coming out the -- that maybe even coming from 4G band refunding to 5G for those, it's all new to the 5G PA in the future. So we're working on several important customers globally. And of course, different customers have different pricing and -- which is -- I probably cannot discuss it. But definitely, we enjoy the better pricing and better margin from 5G PA over 4G PA. Yes, exactly. Thank you. It looks like there is no further question, but we will still keep online for few minutes, and if still the same, then we're going to finish the conference. So if you have any question, please do it as soon as possible. Okay. There is one question come out asking about -- want us to do some kind of comparison between WIN Semi and our competitor. And this is -- really it's difficult for us to do such comment, because our major competitor is also in Taiwan, they're also listed in Taiwan. They are a listed company in Taiwan. If something will impact their stock price, which is -- we know it's -- well, we are not willing to see that. And -- but from -- of course, I can comment on something about ourselves, including that the technology. I think, we -- first of all, when I mentioned our technology means maybe they are different, but you have to find out how different it is. And we've developed our own technology since day one, and we don't do technology upholding from our customer. And we keep migrating from 2G, 3G, 4G and 5G now. The customer -- our customers keep using our technology to penetrate into their markets they want and also expanding their market share, and -- which is quite different from our competitor. And also, the timing, as I mentioned that we're developing 5G PA technology several years ago and mass production since 2 years ago. And I think we exceed our competitor for long time for this kind of upgrades. And also, because we input a lot of resources in R&D and the capacity. So the -- our customer attract a lot of Tier 1 customer or player to work with WIN Semi. We create a lot of #1 in the wafer, including the 3D sensing. And also when the most important moment happen, then we always the first choice to our customer. So that's why making us the -- no matter the capacity as several times compared to our competitor, our revenue also several times higher than our competitor. And our customer size is also several times compared to our customer (sic) [ competitor ]. That's exactly what I can say right now. So I think even the market share, based on strategy analytics, we have already have approaching 80%, 70 something of market share. So compared to our competitors, they still -- probably still very low anyway. So you guys can check that. So that's pretty much I can describe about what -- how different between WIN Semi and our competitor. Thank you. Okay. I looks like today's investor here is very shy, and I'm going to answer one last question and then close the meeting. And the last question was asking about the relationship between WIN Semi and our U.S. customer for 3D sensing anyway. Okay, I think, as I keep talking about WIN Semi input a lot of resources for R&D and the capacity, I think that's a proof since -- in 2017, when U.S. Tier 1 smartphone would like to have the first 3D sensing phone. And what the -- our U.S. customer choose outsourcing instead of in-house to produce that VCSEL chip leverage our 6-inch gallium arsenide in the compound semiconductor production experience and we're successfully helping our customer become the important supplier to the U.S. Tier 1 smartphone maker, and we continually work together for the sequential few years. Although in between, the -- every year has a little bit change on design, in the process. And -- well, WIN Semi always support them and to do our best to -- in the no matter the process or the capacity support. And even last year, in year 2020, other than the structured light and the front side, the best side POF is the first time launched in the last year's model, and we also successfully suppose our customer become probably the only supplier to that model. And even this year, there is a design change. We're still working and support our customer and keeping the major source, major market share to -- and for this year's 3D sensing -- for the front side face ID. So keeping we're the -- keeping the resources to -- all together with our customer -- U.S. customer, we're working very close. And I think what we -- just like our customer also mentioned that on their earnings call, they like to make their customer to remember that when -- even the next-generation or even the next -- and the next generation, when they need them, make sure they're still there. And then we keep the same thought. We also work together with every single customer and make sure that we were there then when customer need us. So we become the best partner to all of our foundry customers, no matter 3D sensing or the RF or anything else is. So okay, this is my -- our last question to answer. So still have no -- since I have no further questions. And thank you for your participation in WIN Semi's conference today, and there will be a webcast replay within hours. Please visit www.winfoundry.com under the Investor Relations section. Thank you very much, and you may now disconnect, and goodbye.