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 Result Webcast Conference for the First Quarter of 2022. 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, the General Manager of Corporate Administration. 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 second quarter of 2022. Secondly, I will go through 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. These statements are based on our current expectations. Actual results may differ materially from our expectations and the company undertakes no obligation to update this 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. After record high revenue in the fourth quarter of last year, we experienced a traditional slow season and inventory adjustment in smartphone industry in the first quarter of 2022. Our revenue was TWD 5.6 billion in the quarter, a decline of 22% quarter-on-quarter and 7% year-on-year. Although the product mix did not change from the previous quarter, our gross margin and operating margin declined to 30.6% and 16.4% respectively, as our capacity utilization rate declined from 100% in the previous quarter to 70% this quarter. EPS for the first quarter was TWD 2.08. Looking at the product mix in the first quarter, for 3D sensing, after the peak season of the new product preparation in the third quarter and fourth quarter of last year, the demand for 3D sensing entered to a slower season as expected and this product segment had the highest quarter-on-quarter decline. Cellular PA, which had high exposure in China smartphone and Wi-Fi PA were both negatively impacted by high inventory level at the end of quarter, so the revenues declined from the previous high levels. Lastly, the higher margin infrastructure and the satellite related shipment did not decline as much as smartphone related applications. While the industry has recently faced some headwinds, which resulted in slow demand and visibility in the near-term, our view on the mid- to long-term growth momentum of the industry remain unchanged, especially, we expect the increasing potential of 5G in smartphone and the development of the 5G infrastructure including low-earth orbit satellites and evolution of the WiFi 6/6E to low Wi-Fi 7 and another increasing contribution for the optical devices and optical sensing business will continue to drive long-term demand. As a result, our plan for the new Luzhu fab in the South Taiwan Science Park in Kaohsiung to enter mass production in 2 to 3 years plan remain unchanged while the near-term capacity expansion through de-bottleneck will be dynamically adjusted to meet the industry change. Looking ahead to the second quarter of 2022, due to the continued inventory adjustments at China smartphones, our revenue is expected to decline high-single digit than the previous quarter, and the gross margin will be between the level of high-20s and low-30s. I will turn the call back over to Joe. Thank you.

Okay. It's my pleasure to present our financial results for the first quarter of 2022. Please refer the presentation slide starting from the Page 4. Before that, remember to read all that for the Page 2 of the safe harbor notice. In Page 4, I will talk about revenue and the margin of Q1 2022. After we have been through the Q4 record high revenue last year and the Q1, we are entering the traditional low season and also experiencing the smartphone market inventory correction. Therefore the Q1 revenue was become TWD 5.6 billion and Q-o-Q was down 22% and Y-o-Y down 7%. And the things that the product mix looks similar compared to last quarter, but the capacity utilization rate, the timing from 100% in last Q4 to the 70% in the Q1 2022. And so therefore the Q1's gross margin was declining by 9.9 percentage point and becomes the 30.6% of the gross margin and also the operating margin declined by 11.5 percentage point to 16.4%. And please flip the next page in Page 5, talk about earnings. The Q1 net profit was TWD 786 million, Q-o-Q down about 53% and Y-o-Y down about 28%. The EPS in this quarter coming at TWD 2.08 compared to TWD 4.19 in Q4 of 2021. And we talk about product mix in the Page 6. You probably found out the Q1's product mix looks very similar to the Q4 except others, which means the optical business. The optical business is dropping from 16% to 14% and as Steve mentioned it on his management comment that we've been through a new product launch period in last Q3 and Q4 and expected Q1 become the low season for this sector. And also as a management comment, we talk about the -- we've been experiencing smartphone market inventory correction, especially in China and that's why the cellular and also the WiFi business suffered. On the same time, the infrastructure also dropping, but still maintain about between 20% and 25% of range, which is -- it's better than our cellular business. And please flip to the next page. In Page 7, we talk about Q2's guidance. in Q2, due to the continued inventory adjustment at China smartphone market, so we expect that Q2, our revenue to decline high single-digit Q-o-Q and therefore we also expect that Q2's gross margin will be between the level of high-20s and the low-30s. That's Q2's guidance. And so we can quickly go through the financial statements starting from income statement in Page 9. The Q1 2022, the net revenue was TWD 5,597 million and QoQ down was 22% and YoY down 7%. And the gross profit was TWD 1714 million and the QoQ was down 41% and YoY was down 15% and the gross margin become 30.6% and the circumstances of the utilization rate around 70% in this quarter and compared to last quarter, last quarter was 40.5% and the utilization was 100% and compared to a quarter ago -- I'm sorry, a year ago, in Q1 '21, the gross margin was 33.5% and under the utilization rate of 80%. Then the operating expense becomes TWD 798 million and operating -- OpEx ratio a 14% which is in line with a year ago. Operating income was TWD 916 and QoQ was down 54% and YoY was down 23%. And the operating margin was 16.4% and then the non-op item was a positive -- it's a positive TWD 75 million and then we can discuss it later in Page 10. And the income before income tax was TWD 991 million and income tax expense was TWD 205 million. Therefore, the net income become TWD 786 million and the QoQ was down 53% and YoY was down at 28%. And so, the net margin become 14% and the EPS was TWD 2.08. So the return on the earnings, the ROE become 10% in this quarter and depreciation expense is about TWD 1,058 million and CapEx in this quarter was TWD 1,320 million. So this is Q1. In next page and in Page 10, the non-op items, the total was, it's again, 700 -- I'm sorry, TWD 75 million. There are 2 items are probably highlighted and then discuss it. The first one is we have a foreign exchange gain for TWD 339 million and another one was a loss, the item was gain on financial assets, liability, our fair value through profit or loss. That was a loss at TWD 279 million. In this item, the major one was the ECB evaluation loss for TWD 346 million. That's because the convertible bond. It's evaluated based on WIN Semi's stock price for the end of Q1 compared to end of Q4 last year and that's the -- now based on the accounting principle, there is an evaluation loss about TWD 346 million and that's the other items for this one. Okay. Then we can talk about the balance sheet in Page 11. The total assets was TWD 74,073 million and the current liability was TWD 11,036 million, that's the current liability. And so the total liability was TWD 39,177 million. The reason why I mentioned that the current liability that because on March, Board meeting has approved the dividend payout of TWD 8 per share and therefore the none of the dividend payable. It's happened in the curve, it's incurred in the current liability which is removed from the total equity. So then total equity become TWD 34,896 million and approved value per share also going down to TWD 77.22 from TWD 82.41 last quarter and also because of that the current ratio going down to 210% from last quarter, up 367%. And also on the same time that that ratio going up 3%, become 53%. Okay. That's our balance sheet for Q1. Okay, that's my report. Thank you. And I will turn the call back to our CEO, and now we can begin the Q&A and please submit your question in the input box on the webcast window. Thank you.

Okay. I think first, I will answer the questions to experience some picture about Q2 applications status. As you know, we guide Q2 will decline high single digits in revenue and I think it's mainly because of the cellular PA. Yes. Because besides the cellular PA, what we see right now is such more stable demand, maintain infrastructure, optical or WiFi. Yes. So most of the decline or revenue decline for Q2 I think is because of the cellular PA. Yes. And the other question is regarding right now China smartphone inventory is still high. So that at any our cellular PA, which have around 30% to 40%, was coming from China, is that customer contribution face a very big inventory issue right now. Yes. So we see that will be easing in Q3 or not. I think right now is still clear rollout because recently China face the other new COVID situation and some of the big city was Brazil for more than several weeks. So it definitely will impact the demand in the future. So I think right now we are very cautious to watch no demand situation and inventory situation. But I think we will update the status to all the investors quarter by quarter. But until right now, we don't see the situation is already eased or has settled down yet. Thank you. Okay. The other new question. Want to know about that we have pricing pressure no matter in our supply chain of on the customer. Okay. Yes, I think there any right now because of the COVID, because of the war, because of the logistic issue, I think right now a lot of material facing a very big change, no matter the production or the shipment. So yes, right now a lot of material we think have pricing pressure right now. Yes. And that really now rising of some material cost. Yes. But because of the economic scale of WIN Semi, until right now, I think we still can deal that and minimize the impact of that. And talking about the ASP pressure because that you know we really I think any negotiated price with our customer quarter by quarter, so in most of case, that's annual base pricing negotiation. So we don't really apply pressure just because of this demand situation. Yes. But year-on-year, definitely we will pay based on the demand and customer allocation situation to discuss the broader price. Thank you. Okay. There is investor concern about the low visibility on the demand in the near term and how about the capacity is pension, do we going to change any kind of adjustment. Well, I think, first of all, our view for the mid-term to long-term growth momentum of the industry will remain unchanged. So the major long-term expansion in the Southern Taiwan Science Park in Kaohsiung, the new Luzhu fab, we are [indiscernible] things in middle of last year and still under construction right now. This is for the long-term demand. So the mass production schedule in the next 2, maybe 2 to 3 years will remain unchanged, because that's for the long-term demand. As you guys know, we are running out of space for our Kaohsiung fab. On the other hand for the near term, the capacity expansion to de-bottlenecking, we were doing some kind of adjust dynamical to meet the industry change, which means, the original plan to open up additional 10% of the capacity, we will make some adjustment based on what happened for the second half and the adjustment will be dynamic based on the industry change. So original CapEx we provide in last time was the CapEx around -- it is TWD 12 billion for the whole year, because we haven't made any kind of adjustment for this figure. So because we are still watching how the industry happening, so maybe we will. So far, this number still remained unchanged because the majority is still for the long term Kaohsiung Taiwan Science Park construction. So any kind of change for this project, we will update it in the following our next couple of quarters earnings call. The depreciation expense probably remain on the range of between 10% to 20% additional to last year's depreciation expense. That's for the CapEx plan. Thank you. Okay. That is a question, I would like to discuss about the deterioration rate. Yes, I think we just according to our cadence that Q2, the revenue could decline a single digit, so that imply that utilization rate compared to Q1 is opposed to also will be declined. Yes. But they are very equal to the percentage of the revenue decline or will be, I think a bigger than that. I think right now is still need to wait for more data because I think the utilization rate not only the revenue sector, but also labor input. Yes. For some next quarters demand. So I think right now, we don't have very clear visibility about our UT numbers, but the trend is clear. There will be some decline compared to Q1. Yes. And for the long term, because of asking that we have maybe around like more than 2 quarter, our utilization rate is higher than 90%, even 100%. So it's not very healthy situation for us yet. So that's the reason why we apprehend in last year to increasing around like 2000 WIN Semi capacity in our [indiscernible] is the utilization rate situation. Yes. And because this is only a very small capacity increasing. So compared to the total capacity, I think it's lower than just a few single digits increase. So I don't think that would be a big factor to effect, impact the depreciation experience because every year, we still have some old equipment end of the depreciation. So at the end of this year, also we were increasing around 2000 capacity, but I don't think that depreciation will because of this 2000, the depreciation cost will be much different. Thank you. Okay. The other question, I want to know about the CapEx this year. I think this year CapEx because of our new go-to-fact is our new -- is under construction. So I think this year, the most of the CapEx is because of luck. And as you know in most of the question, our case the payment was not one deal transaction, it's actually paid -- we paid to the vendor just according to cater. So I think those [indiscernible] concession and the CapEx, we don't need to have any new funding trend. We can just leverage our existing cash position and our existing bank agreement to deal with that. Thank you. Okay. It's a new question. It is related to the 5G base station demand. And yes, as we just mentioned no matter Q1 and Q2, actually our infrastructure is fair performance better than other application. Yes. So what do we see the demand for infrastructure is still much more sustainable compared to other application. Thank you.

Well, I think there's no further question. We will wait another 2 minutes, if there is no other question, then we're going to finish the call. Thank you. Okay. Now the time is 4:15 and still no further questions. And then thank you for your participation in WIN Semi's conference and there will be a webcast replay within hours. Please visit winfoundry.com under the Investor Relations section. You may now disconnect the call. Thanks and good-bye.