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 result webcast conference for the third quarter of 2021. My name is Joe Tsen, the Spoken and Associate Vice President of Finance in Win Semi. Joining me on today's call is Steve Chen, General Manager of Corporate Administration of 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 fourth quarter 2021. And secondly, I will go through the financials in details. After that, we will open to the floor for Q&A. Please freely submit your questions 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. Steve Chen, General Manager of WIN Semi.

Thank you, Joe, and welcome, everyone. In the third quarter of 2021, driven by the robust customer demand, our consolidated revenue was TWD 6.76 billion, an increase of 9% quarter-on-quarter, which was roughly in line with our previous expectation. Given better product mix and higher capacity utilization rate, our gross margin was better than our previous expectation, with a sequential increase of 3.1% points to 38.8%, which was the highest level this year. Our operating margins also increased by 4.1 percentage points sequentially to the level of 26.8%. EPS in the third quarter was TWD 3.67. And EPS for the first 3 quarters of 2021 was TWD 8.71. Third quarter is the traditionally high season for the smartphone. Taking a close look at the individual performance of each product segment. Thanks to the review of the high-end smartphone, our optical revenue, which was the primary for 3D sensing, delivered the highest quarter-on-quarter growth. Although, the die size strength of the new generation 3D-sensing chip may affect the overall demand for the wafers, it will also increase the difficulty of the wafer production and entry barriers for the peers at the same time. This is evidenced by our customer demand for the optical wafer in the third quarter, which was as strong as the previous year and was not affected by small size -- small die size.. In addition, 5G cellular PA and infrastructure-related revenue both increased single digits quarter-on-quarter. Overall, the growth quarter from the cellular PA customer remains the most [ relevant ] product segment this year. Effectively, the contribution of the 5G PA revenue to the total sales cellular PA revenue maintained at over 20% in the third quarter, which was similar to the previous quarter. Please reaffirm that the momentum of the 5G smartphone has sustained. Although we will not add new production capacity this year, we have adopted a strategy of maximizing the existing production capacity through improving the efficiency to fulfill customer demand. While our integration rate in the third quarter has reached 95%, we continue to execute our scheduled capacity expansion plan. Preparing for the new capacity next year as well the new facility for long-term expansion. Looking ahead to the fourth quarter of 2021. We expect revenue to grow by mid-single digits quarter-on-quarter and growth margins to be around the level of high 30s. I will turn the call back to Joe. Thank you.

Okay. Now it's our pleasure to present our financial results for the third quarter of 2021. Please refer to the presentation slides, starting from the Page 4. But before that, please read over for our safe harbor notice first. Starting from Page 4, I'll talk about our revenue and the margin. Our Q3 revenue for this year was TWD 6.76 billion. Q-o-Q was up 9%, and Y-o-Y was up 3%. And because of the better product mix and the higher utilization rate, so the gross margin increased by 3.1 percentage points to the 38.8%, which is the higher level -- the highest level in this year. And the capacity, the higher utilization rate as high as 95% this quarter, it's one of the reasons and almost most of the reason. Other than that, the better product mix, we can discuss it later in Page 7. And also another one of the reasons it probably is a depreciation expense not as high as we expected in the very beginning. And operating margin, therefore, also increased about 4.1 percentage points to 26.8%. That's OP margin. And the net profit for next page, Page 5. And the Q3 net profit was TWD 1.5 billion. Q-o-Q was up 61%. And Y-o-Y, down 24%. And the EPS, therefore become TWD 3.67. And compared to last quarter, last quarter was TWD 2.32. Accumulated Q1 to Q3 become TWD 8.71. And next page, Page 6, we can discuss about free cash flow and the gearing. The CapEx in Q3 was a little bit lower than last quarter. So we have a net inflow for free cash flow. And also because the Q3 is the season for dividend payout, so the interest-bearing debt and the gearing ratio was higher than last quarter. Okay. Then we can discuss the product mix now for Page 7. The Q3, the product, our cellular business was between 45% to 50% and infrastructure was between 15% and 20%. And WiFi is between 10% and 15%. And the others, majority was 3D sensing and optical products of 19%. And compared to the last quarter and before, you can see that the -- remember the total revenue for this quarter was up for 9%. So the cellular, although the cellular percentage was down about 5 percentage points, but the dollar value probably still a little bit higher, still growth for single digits. And -- but the 5G revenue was over 20% of total cellular, which is in line with the Q2's level. And the infrastructure, also the percentage was in line with last quarter but still have the single digit of growth, which is the -- this is the most reach for the gross margin sector. And the WiFi business, actually, the -- is not -- is still in the same range of last quarter. The WiFi business is kind of -- I think it's the weakest business for the -- in the product mix for overall this year. Most of the reasons still -- I think the content -- no, there is a -- for WiFi 6, majority without the content increase per box. And then recently, the market talk about WiFi SoC shortage impact some of their customer demand. And finally, the 3D sensing business, I think, is the most significant growth quarter-on-quarter from 14% to 19% this quarter. And you can see that it's even sustained or even a little bit higher than a year ago. You can see that although there is some design change for die shrink in this generation, but the -- we -- our -- it didn't really impact our business for this year. Okay. The next page, Page 8, is -- talks about 4Q guidance. I think Steve have talked about that. I'm going to repeat again. We expect Q4 '21 revenue to grow by mid-single-digit Q-o-Q. And we also expect the gross margin to be around the level of high 30s. Okay. Then -- okay, I can -- we can quickly go through the income statement and the balance sheet. Okay. Before I begin, I have to remind everybody, this is unaudited basis. The final results have to -- based on the CPA's report. For the Q3 2021 net revenue was TWD 6,761 million Q-o-Q, up 9%. Y-o-Y, up 3%. And gross profit was TWD 2,623 million, and Q-o-Q was up 19%. And the gross margin becomes 38.8%. And the -- it's improving 3.1 percentage points compared to last quarter. And operating expense, TWD 814 million. And operating ration -- operating expense ratio was 12%. So therefore, the operating income was TWD 1,810 million. And Q-o-Q was up 28%. And OP margin improved 4.1 percentage points to 26.8% in this quarter. And so the non-op item was positive TWD 28 million, and the detail is in Page 12 for your own reference. And the income before income tax expense was TWD 1,838 million. And income tax expense was TWD 342 million, equivalent to the tax rate about 18.6%. And the income tax expense -- I'm sorry, so therefore, the net income was TWD 1,496 million. The Q-o-Q was up 61%. And so therefore, the net margin become 21.1%, improving 7.1 percentage points compared to the last quarter. And EPS for this quarter, TWD 3.67 is -- Q-o-Q is up 58%. And the ROE for this quarter, equivalent to 19%, improved from 12% last quarter. And approximately utilization rate 95% is up from 90% last quarter. Depreciation expense was TWD 990 million, and the CapEx for this quarter was TWD 1,289 million. And this is the Q3 and the next page, in Page 11, we can talk about the cumulated Q1 to Q3 income statement. And the total revenue accumulated Q1 to Q3 was TWD 18,965 million. And Y-o-Y is up 1%. And gross profit was TWD 6,847 million. So the gross margin accumulate that the first 3 quarters was 36.1% and our operating expense ratio was 13%. And operating income become TWD 4,414 million. And operating margin becomes 23.3% in this quarter -- I'm sorry, in the first 3 quarters. The non-op item for the first 3 quarters was a negative TWD 64 million. The detail, again, in Page 12 for your own reference. And income before income tax was TWD 4,351 million. And the net income becomes TWD 3,521 million. So the net margin becomes 18.6%. And therefor, the EPS for the first 3 quarters was TWD 8.71. So the ROE equivalent to 15% for the first 3 quarter and approximately accumulated utilization rate was 90% for the first 3 quarters. Depreciation expense accumulated become TWD 3,017 million. And the CapEx was TWD 5,825 million. So I can -- we conclude that the total 2021, the depreciation expense approximately compared to last year probably increased about between 10% and 20%. And the CapEx for the whole year probably will be around TWD 8 billion plus or minus. Okay. Then the Page 12 is the non-op item, it's here for your own reference. And finally, the Page 13 is the balance sheet up to the dated September 30, 2021. The couple of major ones: cash and cash equivalent was TWD 16,482 million. And the total assets was almost TWD 72 million, almost. And the total liability was TWD 3,721 million. And the common stock remained the same, TWD 4,240 million. And so the total equity become TWD 34,978 million. So the equity per share, which is a per value per share was TWD 77.33. And some key index like current ratio was 21 -- I'm sorry, 218%. And the debt ratio was 51% for -- dated September 30. Okay. This is the financial results for the Q3 and up to the September 30. And now we can begin the Q&A. [Operator Instructions]

Okay. There's a question asking about -- well, WIN Semi considered to raising the product price. Okay, we know the price hike was the popular turn for this year. I mean most of the semiconductor industry was having a price hike and including our competitor and in Taiwan, also raising the price for their product. And I think, first of all, I have to say that the -- for the compound semiconductor, I think silicon semi has some kind of shortage in demand. And of course, there is a lot of demand coming from PC, tablets and even the automotive. And that's -- there is a reason to do the price hike. But for compound semi, actually, I think we have a sufficient capacity and -- to supply the customer. Without a proper reason and without any warning, I mean that will ruin the trust between WIN Semi and our customer. We don't think there is really a shortage for PA. I think, yes, we run in the very high utilization and so as our competitor. But to -- it's not the easy thing just go ahead to raise the price and then forget about any -- the [ console ] franchise. I mean we have to -- we want to keep the relationship between -- the trust and the relationship between us and our customer. We do have a very good relationship and long-term agreement with the customers. So we have no plan for -- to do -- to raise the price, at least in the time frame for the contract and the agreement with the customer. Thank you. Okay. Some -- I guess, there's some investors concerned about the infrastructure business. I think this year, I think in the supply chain, there are -- it's a -- there is an inventory issue for infrastructure industry. I think no matter the upstream AP house or the downstream IDM company all mentioned that in their earnings call before. And I think for WIN Semi, most of the -- of course, most of the reason, as everybody knows, that we have a big customer -- China customer last year. I mean even in the past 2 years, and as everybody knows that since that the September 15, nobody can do business with them and the business stop at that time. And before that, the infrastructure, you can see that our infrastructure business was going very well and a very -- percentage also reach a record high. And we conclude -- this year, we conclude that this customer probably is accumulating a lot of inventory on hand in the past 1 year. And therefore, starting from this year, everybody, you can see that the infrastructure business go back to the percentage before, which is like between 15% and 20%, this kind of percentage. And the whole industry also suffering the inventory correction, not only WIN Semi. So yes, we -- I know that there is some noises for this year, not only the infrastructure but also some 5G smartphone. So for us, the smartphone business or even the 5G smartphone business is still doing okay. And then even the cellular business is doing well. Infrastructure, I think we're still waiting for some signal for recovery. And actually, for the recent quarter like Q3 is ramping up better than Q2. And maybe if the product mix remain similar for Q4 and probably also a little bit better. So we believe that the 5G generation is just the early stage. And think about it, the 4G go for 10 years and the 5G is only for 3 years now. It's still the early stage. It's no reason the momentum is just -- it's finished. No, I don't think so. So the -- it's just temporarily the inventory issue and need to take time to digest it. Thank you. Okay. It looks like there's no further questions. We were -- we spent -- we're going to spend some time to explain our current progress in the recent plan for the capacity expansion. And as everybody knows that we don't have new capacity coming up for this year. And what we're doing this year is we spend a lot of resources to expand the clean space, the final cleaning space in our Fab C. And without the clean space, it's -- we cannot have a new capacity. And so the new clean is going to be -- is going to finish about the first half next year. And therefore, the equipment moving, and we can -- we have the new capacity come out in the second half for the year 2022. And so far, the early trend, probably it's about 3,000 to 5,000 wafer per month for this kind of price. Normally, we -- for every year, we expand for about 10%. Still early to make the final decision, but roughly, it's about this kind of range. And the -- this is the recent CapEx for our Fab C and new capacity. And if still no question, then maybe we can have Steve to talk about our Southern Taiwan plant power expansion.

Okay. Thanks, Joe. I think right now, I will update some status of our new site in [ Gangshan ]. Right now, it's already under construction, and we will spend around 2 years to finish all the shell and then start to move in the equipment and making the qualification schedule. So until right now, according to the schedule, I think the new Gangshan site maybe will have the mass production contribution at maybe around the end of 2024 to 2025, around this period. And because right now, it's still in a very initial stage about the construction. So right now, it's not so much a status update, and we will update this status in the next conference call. Thank you.

Hi, everyone. We apologize that we're kind of experiencing a technical difficulty in the past about 5 minutes. And if you're still there, then we're going to continue our conference.

Okay. There's a question I wanted to discuss about the optical products process, possible improvement in the future. Yes, I think, right now, the optical product, I think for the VCSEL for 3D sensing, we already use 6-inch to produce the wafer. But for the other traditional optical wafers, some of that, we're still using 4-inch to produce. So yes, in the future, yes, you still have the chance to make an improvement of our design process to move all the applications to the [ chain ] in the future, yes. I think that, yes, that's the possible direction of the optical, yes. Thank you.

Okay, the -- some -- there is investor concerned about the China -- Chinese customer this year. And to discuss that, I have to say sorry about -- probably we cannot describe any details of individual customer one by one. But overall, I think the status is the thing -- the largest China customer last year, we cannot do business with them. And -- but the market share is kind of rearranged in the China market for smartphone. Our Chinese customer sees many, many PA design house in the market, gaining share one by one. And from the -- I think from the brand name smartphone -- China brand name smartphone, they're gaining share benefit our customer. And I think almost all of the design house have business with them with us. And of course, one of -- the major one also in our top 5 customer list is [ Vanchip ], which is familiar to the investor. But other than them, we see the significant growth to some other -- this kind of customer. They're also doing well and it's continuing growth in this market this year. So we expect -- so that's why what we expect -- that we have mentioned it for cellular PA customer is most strong product growth for this year. I think we see the very strong growth in this region. And not only the Q3, I think even continue in the Q4. So yes, I think WIN Semi is a diversified strategy, it works to support all of the customers no matter the market up and down. And we don't bet on one single customer. And -- but of course, we won't miss any opportunity to gain the market share. I think this year, we do gaining share on China PA smartphone market. Thank you. Okay. So if there are no further questions, we're going to finish this -- the conference call. Thank you for your participation and WIN Semi's reference. And we apologize for the interruption for the tampered line and the technical difficulty happened for a couple of minutes. We apologize for that again. So there if there are no further questions, then there will be a webcast replay within hours. And please visit www.winfoundry.com under the Investor Relationship section. And thank you very much, and goodbye. You can disconnect now. Thank you. Bye-bye.

Thank you. Bye-bye.