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 Fourth Quarter of 2021. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi. Joining me today -- on today's call are our CEO, Kyle Chen; and our General Manager of Corporate Administration, Steve Chen. Today's call is organized into 3 sections. First of all, our CEO, Kyle, will comment on the company's result and provide brief guidance for the first quarter of 2022. And secondly, I will go through the financials in detail, and Kyle will 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.

Okay. Thank you, Joe, and welcome, everyone. In the fourth quarter of the 2021, customer demand continued to grow, reflecting a sustained momentum from the third quarter. Our revenue reached TWD 7.2 billion in the quarter. It's an increase of 7% Q-o-Q and 5% up year-over-year. This marked another record high for a single quarter during the past 2 years, surpassed the previous one set in the fourth quarter of 2019. Driven by full capacity and better product mix, our gross margin in this quarter was 40.5%, which was better than our previous expectation. And earnings per share was TWD 4.19. For the full year of 2021, our revenue set another historical record high to TWD 26.2 billion, with an annual growth rate of 2%. And earnings per share reached TWD 12.9. Looking at the growth in the fourth quarter, we saw strong demand for the smartphone PAs, which not only driven by the continuous momentum from the just nearly released U.S.-based smartphone in the third quarter but also the strong demand from China smartphone customers. In addition, our infrastructure revenue, which included 5G and low earth orbit, so-called LEO, has delivered growth for 2 consecutive quarters. This was another important key contributor to the revenue growth and a better product mix in the fourth quarter. For the full year of the 2021, we see the opportunity to be a key beneficiary amidst the reshuffling of the China smartphone market by leveraging our strength of the advanced technology, excellent product yield and industry-leading production capacity. This was our most outstanding growth driver. Last year, in addition, when the die size shrink of the new generation of 3D sensing chip for U.S.-based smartphone caused the market to be cautious about the overall shipments for wafers, our 3D sensing revenue actually increased year-on-year given the increased difficulty of the wafer production technology, making another key growth driver for us last year. This demonstrated that our strategy of the focusing on technology leadership and customer diversification has served us well, allowing WIN to continue to outperform despite the volatility and uncertainties in the market. Looking ahead to the upcoming new year, while the COVID-19 pandemic continues to impact the world, we believe the global 5G network infrastructure is still incomplete, and the penetration rate of the 5G smartphone is still lower than that of the 4G. However, the long-term development of the IoT, AI and the big data and the evolution from the AR and VR, even to XR and the recently very hot topic Metaverse all require the characteristic of the broadband, high-speed transmission and low latency for the 5G network. Thus we continue to be optimistic about the growth trend of the 5G in the next few years as well as the construction of the satellite communication infrastructure. In addition, our technologies in optical communication and optical sensing are becoming more mature as we continue to accumulate more experience, which also helps us to attract more potential customers. As a result, we continue to invest in R&D resources and cooperate with key customers closely, aiming to become a pioneer of the next new application. In terms of the capacity expansion, the clean room expansion of our Fab C, that's our third fab, will be completed in the first half of this year. And then we will install equipment immediately after that. The new capacity is expected to come online in the second half of the year to meet the demand for the strong seasons. For the new Luzhu fab in the Southern Taiwan Science Park in Kaohsiung, after its groundbreaking in the middle of the last year, the construction of the new fab is a key focus for this year, and the goal is to enter mass production before end of 2024. In addition to achieving operational excellency, we also prioritize corporate sustainability and corporate governance. For the 2021 Corporate Governance Evaluation Survey by TWSE, this is the Taiwan Stock Exchange, we not only have been ranked top 5% among the Taipei-listed company for several years but also ranked top 10% among all TWSE and Taipei Exchange-listed companies in the electronic industry with a market value of over TWD 10 billion. In addition, we also -- we were also the winner of the 14th TCSA Sustainability Report Platinum Award. Internationally, we have been selected to join the Dow Jones Stock Index (sic) [ Dow Jones Sustainability Index ] World Index for the second year since 2020. As ESG continues to grow the importance globally, it is encouraging for us to be included in the Dow Jones Stock Index (sic) [ Dow Jones Sustainability Index ] again, along with global leading semiconductor companies and gain recognition for our efforts in the corporate governance and sustainability. Looking ahead to the first quarter of the 2022 because and due to the annual maintenance of our 3 fabs and the traditional slower season, our revenue is expected to decline [ low ] 20s than the previous quarters. And the gross margin will be about mid-30s. I will turn back the call back to Joe.

Okay. It's our pleasure to present our financial results for the fourth quarter of 2021. You also can refer our presentation slide. We're starting from Page 4. Before that -- before I start, please still have to read over for the safe harbor notice in Page 2. Okay. In Page 4, we talk about revenue and the margin. Q4, the year 2021, the revenue was TWD 7.2 billion Q-o-Q, was up 7% and, Y-o-Y, was up 5%. And Q2 (sic) [ Q4 ] 2021, the gross margin improved about 1.7 percentage points to about 40.5%. And that was driven by the full capacity in our fab and also the better product mix, which is -- we can discuss it later. The gross margin was better than our expectation earlier. And therefore, the operating margin improved about 1 percentage point to around 27.8%. The next page, in Page 5, it's talking about earnings. The Q4 2021, the net profit was TWD 1.7 billion. Q-o-Q was up 13% and Y-o-Y up around 32%. Therefore, the EPS come in at TWD 4.19 compared to TWD 3.67 in Q3. The whole year of 2021 EPS was TWD 12.09 -- TWD 12.9. And we talk about the product mix in Page 6. In Q4, the product mix, we can compare one by one. The cellular was between 50% and 55%, and the infrastructure was between 20% and 25%. And WiFi was between 5% and 10%, and others and including optical is around 16%. You can find out that the cellular was up one stage and the infrastructure also up around -- up one stage. And the cellular, the continued momentum was from the U.S. Tier 1 smartphone supply chain, which is the momentum still continue in Q4. Other than that, also the China market is still strong. And the infrastructure was another contributor for the revenue growth and also the margin growth due to the sequential growth in the infrastructure business from the pattern in Q2 last year and then the sequential growth in Q3 and Q4. I think our CEO, Kyle, has mentioned a lot about several factor in the infrastructure momentum. And then they can give us more color later in this presentation. And Q1 guidance in Page 7. I think Kyle already mentioned that, so I just would read it over again. Due to the annual maintenance of the fab and the traditional slower season, we expect the Q1 '22 revenue to decline low 20s Q-o-Q. And we also expect that Q1 2022, the gross margin to be around the level of mid-30s. Okay. Then we can quickly go through the income statement and the balance sheet, starting from Page 9. I have to remind everybody that all the figures are based on the unaudited basis. The actual result will -- based on the final CPA's auditing -- audited reports. The Q4 net revenue was TWD 7,217 million, and Q-o-Q was up 7%, Y-o-Y up 5%. The gross profit, around TWD 2,923 million and Q-o-Q up 11% and Y-o-Y up 22%. The gross margin are better than our expectations earlier. It was 40.1% (sic) [ 40.5% ], which has improved about 1.7 percentage points. The operating expense, about TWD 914 million, and OpEx ratio is around 13%. Therefore, the operating income was -- it's TWD 2.009 billion and which is -- Q-o-Q was up 11% and Y-o-Y up 21%. The operating margin become 27.8%, which has improved about 1 percentage point. The non-op item was a net income around TWD 41 million. The details will be in Page 11 for your reference. Income before income tax was TWD 2.049 billion, and the income tax expense was 600 -- I'm sorry, TWD 360 million. Therefore, the net income was TWD 1,690 million, which is -- the Q-o-Q was up 13% and Y-o-Y up 32%. And that the net margin was 30 -- 23.4%, which has improved about 1.3 percentage point. So therefore, the EPS for this quarter was $4.19 and which is the -- the last quarter, it was $3.67. The equivalent quarter ROE was 21%, and the approximate utilization in Q4 was fully loaded of 100%. So the depreciation expense for Q4 was TWD 1,018 million, and the CapEx for this quarter was TWD 2,256 million. Okay. That's Q4 for '21. And for the whole year 2021, the net revenue was TWD 26.182 billion. The Y-o-Y was up 2%. The growth profit was TWD 9,770 million, and the gross margin for the whole year was 37.3%. The operating expense was TWD 3,347 million, and the OpEx ratio is -- was 13%. The operating income becomes TWD 6,423 million, and the operating margin was 24.5%. The non-op item, the net expense was a negative TWD 23 million. Again, the detail was in Page 11 for your own reference. The income before income tax was TWD 6,400 million, and the income tax expense was TWD 1,189 million. Therefore, the net income was TWD 5,210 million. The net margin become 19.9% for the whole year. The EPS was $12.90 for the whole year. So the ROE for 2021 becomes 16%, and the whole year's utilization rate was 90%. And the depreciation expense becomes TWD 4,035 million. The whole year's CapEx for 2021 was TWD 8,081 million. So this is the whole year's income statement. And Page 11 is the non-op items for your own reference. And my last page will be the Page 12 for balance sheet. The -- dated 2021 December 31, the total assets was TWD 74.894 billion. The total liability TWD 37.772 billion. And the common stock remained the same as last quarter, TWD 4,240 million. So therefore, the total equity was at TWD 37.122 billion. The book value per share was improved from TWD 77.33 to TWD 82.41. The current ratio, the key index about current ratio, which is in terms of current asset or the current liability, was at 367%. The debt ratio, which is in terms of total liability over total assets, was 50%. Okay. This is a financial report and the -- that's my report. So yes, okay. Then I will turn the call back to our CEO, Kyle.

Okay. Thanks, Joe. I will explain more about the market outlook this year and beyond, so please see my files. Okay. The first page -- second page is 2021 operation highlights. There are 4 highlights. First is annual revenue: we hit a new record high. For the application, we saw the -- we achieved more than 30% revenue growth on the cellular and the satellite and more than 10% revenue growth on optics. For production capacity expansion, Southern Taiwan Science Park, STSP, construction is on schedule. Clean room will be completed next year Q2 and hope we can launch the production, better qualification starting from the 2024. The other, you can see the -- we have a lot of cooperation with the key university at Taiwan. As you know, the talent people is a very important key successful factor of the semiconductor. So we have been nurturing compound semiconductor talent. We have a joint technology innovation center together with National Yang Ming Chiao Tung University. And also together with 15 companies, we established the Academy of the Innovative Semiconductor and Sustainable Manufacturing in the National Cheng Kung University at Tainan. This can support our future Southern Taiwan production site in South Taiwan. Okay, so next page. This page shows the revenue trend of the semiconductor. The upper is the growth rate. Worldwide semiconductor business focus is from the Strategic Analytics and Gartner. Last year, forecast is 25% growth. Gallium arsenide forecast is 5%, but WIN achieved 8% in terms of the U.S. dollar. So we achieved the -- from $845 million in 2020 to $913 million in 2021. It's an 8% growth in -- from U.S. dollars. So we saw the future. We are pretty optimistic for the future growth engine as below: first is 5G and WiFi; second, the satellite; the other is not for -- it's about optical application, could be sensing and data communication. So we see the 5G penetration rate is still lower than 4G, but we expect the 5G will become mainstream in the future for the next year. And we have a new technology to deliver more high-performance PA. The other is WiFi. WiFi, since last year, migrated from WiFi 5 to WiFi 6 and the future more high-frequency band increased to 6E. So the other, we also developing the WiFi 7. And the second is satellite. So the satellite will become more mature in the future. So the more and more company will launch more satellite in next year and the following. So we provide a state of technology for the receiving and transmission, so it could be the -- we have a certain market share. And also on the VCSEL, we are the key manufacturing in the world. So 3D sensing and proximity sensing are -- right now, more and more applications are expanding. So we -- actually, we already delivered the vehicular sensor in the automobiles successfully. Later I will explain more detail. The other is for another wavelength for the indium phosphide also have receiving and laser device. We expect the indium phosphide-sensing proximity sensor will contribute revenue this year. So first is communication, connectivity. This from the strategic analysis in Page 6, so we see the 5G compound annual growth rate is about 20%. The 4G will become lower and lower, so 5G phone will become over the 4G phones from this year. And the revenue, this grows, so we have no doubt about this smartphone PAs market. The next page, Page 7 (sic) [ Page 19 ], is WiFi 6 and WiFi 6E. So WiFi 6E covers a new frequency band from 6 to 7 giga. And the modulation will become more difficult. So the gallium arsenide, the substrate, will have an outstanding characteristic to fulfill this critical requirement. For the next page, we saw the WiFi 6 is a mainstream, and WiFi 6E will be launched maybe second half of this year, will occupy 20% of the market. By 2024, WiFi 6E will cover about 40%. So we can see this market is also growth. And WiFi 7, the same frequency of the WiFi 6E, but it's a more complex modulation on the wider bandwidth and high frequency. The QAM from starting from 1K to 4K. So the other is a good thing for the gallium arsenide MIMO from 8 by 8 to 16 by 16. So following the Broadcom MTK announced their SoC chip on WiFi 7, we are already developing the advanced HBT to meet the performance of the SoC. Okay. Next page is about satellite communication. As long as the satellite installed in the sky, so you can see that a lot of the -- in my chart, you can see the top line, the measure from the sky to the ground and is it either to the aircraft, the boat and the vehicle, even the cellular phone. So you can see the market and the markets have forecast the cellular communication have an annual growth rate about 20% from 2021 to 2026. And also the data rate, that means the data traffic is increasing 14x from 2020 to 2030. So this high data rate and the more satellite, we can expect this market is keep growing for the next few years. On Page 11 (sic) [ Page 23 ], this is what we got from the Taiwan IEK. They have surveyed these satellite, the launch plan. So I think the U.S.A. SpaceX Starlink you know very well. And U.K. have OneWeb. Also Amazon have Kuiper. It's about to start the plan. In Canada, the Telesat. So you can see the satellite number is huge. So not only the satellite can bring the business to win for the receiving and the transmission, but also, as I mentioned, the user terminal, the aircraft, the boat, the vehicle, the phone as well as the cost is beneficial to the customer. I believe the market will come in. So next page is optical devices. 3D sensing application at WIN is a major driving force for the revenue growth. So the Structure-Light since U.S.-based smartphone adopt this 3D sensing, so since 2017 or 2018, WIN still is the key supplier for this application. And also for the -- since iPhone 12, we see the LiDAR was adopted on the rear side of the smartphone. And more and more application on the AR, VR, Metaverse. And we believe another many projects ongoing, no matter what kinds of phones, the proximity sensor, so can install on the camera to help the focus. So this new, say, the -- or notebook already might start to use the 3D sensing. That's another growth momentum for the 3D sensing business. So next page, 14 (sic) [ 26 ], you see the -- you have the forecast, the growth rate, about 13.6% from the 2021 to 2026. You see the majority is correspond the mobile, consumable and telecom infrastructure. So this market is growing. And LiDAR, okay, so we also have -- actually, we already delivered our wafer chips to automotive application. This in-vehicle sensing device, so-called DMS, driver monitoring system, and OMS, occupant monitoring system. So this is inside the car. For outside of the car, we also cooperate with customer. It's about 150- and a 200-meter long-range LiDAR for the -- from robotaxi and the passenger car is ongoing. Right now, it's under the pilot stage. The other application is for the AGV. As you know, the factory will reduce the manpower. AGV is the key. So this is also another application together with customer in the pilot stage. So we believe the LiDAR, no matter in vehicle or outside the vehicle and other applications, we believe that this growth will come in. So this is the market about the LiDAR. The upper chart shows the -- right now, the majority in vehicle is by the infrared LED. But the VCSEL has a more good capability and performance. So by year 2025, I think this VCSEL, the in vehicle will take over the majority of the application. So the lower chart shows the market, LiDAR market, no matter the -- for the autonomous vehicle, industrial and the delivery or even smart city, this market is growing. So to achieve the -- no matter for the eyes and also the optical, so we have provided the best technology developed for the future market. So in Page 18 (sic) [ Page 30 ], this is a little bit complicated. I have shown you the periodic table in the upper-right side. So we focus on the gallium arsenide, as you know very well. And also the other is for gallium nitride and also the indium phosphide. So in the left side chart, you see there's the frequencies versus power. The gallium arsenide have a superior characteristic performance better than the silicon. Its frequency is over maybe 5 gigahertz, and the power is over like 100 watts. Gallium arsenide definitely will be the major technology to fit this application. And as well as the frequency increase, we also have an indium phosphide HEMT, HBT is ongoing for developing. And the frequency, up to 1 kilohertz, so you can see the LiDAR, short wavelength infrared and the datacom application, these are using gallium arsenide and the indium phosphide. And WIN have developed all these technology ready for this market. The other technology is GaN. WIN's GaN is for RF mainly, not for the power device. So we have more than 20 years experience and the skill and the technology on the gallium arsenide. Then we can leverage this kind of the experience to help with the gallium nitride for RF. We have 0.15, 0.25, 0.35, 0.45 technology. This can be covered the gallium nitride major solution under the DC-40 gigahertz. So we believe this gallium nitride market, WIN -- we can gain some share for this under 40 gigahertz. Okay. So the other is another technology, indium phosphide for optics. As I mentioned, the sensing and the data communication will become more and more application in the world. Like proximity sensor, short wavelength infrared and the LiDAR, no matter on the sensing of the communication. So WIN are ready to enter this market and become the pioneer production site for this application. So that's more in detail to you, okay? Now I turn back to the next topic. Okay.

Okay. Thank you, Kyle, and we now begin the Q&A. [Operator Instructions]

Okay. I think there's a question, want to know about our gallium nitride and indium phosphide tech and the future plans. I think, first, as you know, WIN Semi right now for -- its purpose, we're still more focusing our resources to GaN and silicon carbide. And the investor, I think right now, want to know that we have some study on GaN and silicon for eyes purpose. Yes, I think definitely, as we mentioned before, WIN Semi is a foundry so -- and they're focusing on the -- a high purpose. So all the material if that can have the technology used for the eyes application, I think we'll put some resources for that. So -- but I think, as I mentioned before, I think GaN and silicon carbide is still the mainstream, so we're again on silicon for eyes purpose. Yes, we have put some resources, but I think it's just in the R&D stage. And for the indium phosphide, I think right now, most of our indium phosphide capacity, that's for the optical devices, which is the laser-related technology. For the indium phosphide eyes purpose, I think it's a little like the GaN and silicon. We just put some resources for R&D purpose. Yes. Thank you.

Okay. There are several questions asking about this year, the year 2022 capacity expansion, depreciation, such questions. We plan to expand the capacity in around 3,000 to 5,000 increase for this year. And the total CapEx will be around TWD 12 billion plus and minus. I think the maturity and the major focus will be for the Southern Taiwan Science Park, the Kaohsiung Luzhu fab. And it's still on construction for the first building of the fab. And this is -- this will be the forecast for this year. And the depreciation spend, because of that, the depreciation, I think the new fab in Kaohsiung is still on construction. And also, that the building, I think the last amortization for the depreciation, but we still -- we are open up the new capacity in our Fab C, which is in Guishan, for the 3,000 to 5,000 this year. And they also have the equipment procurement, which is coming later after year. And so they still have the depreciation. That the expense will we expect around -- will be -- compared to last year will be around 10% to 20% more in this kind of range. That's for the CapEx. Thank you.

Okay. I think -- this is Steve. I think there's just some questions, want to know about some picture about the Q1 segment data. I think for -- as Joe just mentioned before, I think, Q1, our guidance is -- the revenue was down low 20s. And for those 4 segments, I think our device revenue that's the -- is the most -- is the segment that the drop percentage is biggest. I think it's mainly because for our optical segment, actually, it's mainly focusing on the 3D sensing. And as we know, that device is only for one [indiscernible] patient devices. So the seasonality is very clearly. Most of the demand will more concentrate on the second half. And the first half, there will be the low season as usual. So that's the reason why they drop the most percentage in Q1 compared to the 4 segments. And the best segment at performance in Q1, that will be the infrastructure. Although it still declined, but I think the percentage for our infrastructure segment is [ still high ]. Compared to the other 3 segments, the decline percentage is pretty lower than compared to the others. And the other 2, cellular and WiFi, which [ check ] maybe most of the revenue of the WIN Semi, their decline percentage is very close to our guidance, yes. So that's the -- is the situation and status picture about our -- the 4 segments in Q1. Thank you.

Okay. And I think it's that the other information right now we want to share with you is, as you know before, we will mention the 5G cellular PA percentage in our conference. But I think right now, we already see most of the cellular unit is more -- the 5G smartphone's become the mainstream. So -- and also, at the same time, the band of the 5G is increasing more. It's not only 77, 79. And also a lot of new 5G band was installed in smartphone, and those frequencies is also the same as the 4G. So actually, for our customer design, it's hard for us to really tell it's for the 4G or 5G. And so at the same time, so it's hard for us to really give the investors a very clear information how the percentage will be. So I think start from this quarter, we will start to calculate and figure out those percentages because right now it's become a little hard for us to do. And so in afraid to misleading the percentage to the investors, so I think we will no longer provide a 5G peer percentage about our -- in our revenue. Thank you.

We're still waiting for more question coming, but so far, we were waiting for 2 more minutes. Thank you.

Okay. I think there's one question right now. Just want to know about our future capacity expansion, I think. I think as Joe just mentioned, this year, we still have one for clean room expanded. So for this year, in our Fab C, we were increasing around like 3,000 to 5,000 capacity at the end of this year, yes. And -- so that's the plan right now. And about the Luzhu new fab, I think it's not so quick. The quick -- the said -- here, they can have some contribution. I think maybe still wait until 2024. Yes, I think that's about our future expansion plan for WIN Semi. Yes. Thank you.

Thank you. There are 2 questions about the indium phosphide sensor. One question is, will indium phosphide replace the VCSEL? It's definitely not. It's a different application. Indium phosphide have different wavelengths, so they have a different application.

Okay. We're going to answer the final question asking about the OpEx and the depreciation. The OpEx, most of the time, our OpEx ratio is surrounding around 12% up and down. But for the year 2022 -- 2021 was up to 13%, so probably will be in the range of between 11% and 13%. That will depend on the different situation, including the high season, low season, any kind of scenario. And about the depreciation, it's still hard to predict the schedule but because this year, we have -- as I mentioned that our major focus is on the construction for our new fab, and it's step by step. And on the same time, our old fabs -- Fab C still also the clean room, construction is still ongoing. And then later on, the equipment will be installed. So yes, probably, the later, the higher of the depreciation expense, that maybe happen. But let's see what happen quarter-on-quarter later. Okay. Thank you. Okay. Now -- right now, it's exactly the time, 4:30. So the -- thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. So please visit www.winfoundry.com under the Investor Relations section. You may now disconnect. Thank you, and goodbye.