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 Second Quarter of 2022. My name is Joe Tsen, the spokesman and Associate Vice President of Finance in WIN Semi. Joining me today on today's call is Steve Chen, our 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 third quarter 2022. 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. 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, the General Manager of WIN Semi.

Thank you, Joe, and welcome, everyone. For the second quarter of 2022, WIN Semi's revenue was TWD 5.3 billion, a decline of 5% quarter-on-quarter and 14% year-on-year. As our capacity utilization rate further declined to 60% in this quarter, our gross margin was 30.2% and operating margin was 14.1%, with EPS TWD 1.52. Looking at the product mix in the second quarter, Wi-Fi PA, Infrastructure, and 3D sensing-related optical business all had different levels of growth compared to the previous quarter among which 3D sensing had the highest quarter-on-quarter growth, driven by the seasonal effect as the first quarter was a traditionally slow season. Infrastructure and Wi-Fi PA both delivered quarter-on-quarter growth. However, Cellular PA revenue declined significantly as expected due to the ongoing inventory adjustment in China's smartphone market. While China's smartphone market has been undergoing inventory adjustment since the first quarter, the ongoing war between Russia and Ukraine beginning in the first quarter, together with the fact that China enforced strict COVID control in the second quarter, both not only affect local consumer demand in China, but also led to shortage of raw materials and disruptions of the global supply chain. These have pushed up the already high inflation and further affected the end of demand. As a result, the inventory digestion in the smartphone market has been slow. Currently, the overall demand visibility for smartphone remains at a low level while the U.S. high-end smartphone customer is still placing orders at the same pace as in the past. The high inventory of Android smartphones leads to uncertainties in demand in the second half of this year. In this challenging macroeconomic environment, WIN Semi continues to invest in R&D capability to develop new applications for customers and the required technologies, because we believe that volatility in macro this year could be short-term, and the long-term growth trend for 5G remains unchanged. As deployment of the related infrastructure and low-orbit satellite is still incomplete, the technology migration to Wi-Fi 6/6E and 7 is ongoing. The optical communication and optical sensing related applications are still at an early stage. We continue to optimistic about the long-term growth trend of the industry. Looking ahead to the third quarter of 2022, due to continued inventory adjustments at the Android smartphone and the uncertainty of the macro environment, our revenue is expected to decline mid-20 than the previous quarter, and the gross margin will be around the level of low 20%s. I will turn the call back to Joe.

Okay. Thank you. Just I'll first start to present our financial results for the second quarter of 2022. You can also refer the material for our presentation line. We're starting from Page 4, but do remember to read over the safe harbor notice in Page 2. The Page 4, we talk about revenue and the margin trend. The second quarter's revenue was TWD 5.3 billion and Q-o-Q was down around 5% and Y-o-Y down around 14%. And due to the decline in capacity utilization rate and of course, combined some change in the product mix. So therefore, the Q2's gross margin was declined by 0.4 percentage points to around 30.2%. And the operating margin declined by 2.3 percentage points to around 14.1%. And please flip to the next page in Page 5, and we discuss about the earnings. The Q2 net profit was TWD 544 million, which is a Q-o-Q down around 31% and Y-o-Y was down around 41%. The EPS came in at TWD 1.52 and compared to last quarter was TWD 2.08. And please turn to the next page. We discussed about product mix in Page 6. The page -- the product mix, Page 6, you can see that in Q2, the product mix, the cellular business, Cellular PA, the percentage significant went down to 40% -- between 40% and 45% from 50% -- between 50% and 55% in last quarter. And in Q2, our Cellular PA was the only product went down, I mean decline. And other than that, no matter 3D sensing, Wi-Fi or infrastructure have a different level of the group. Of course, first of all, the significant growth in 3D sensing, which is the others going up from 14% last quarter to 20% this quarter. And there is a possibility the customer may prove in the earlier of the demand are from the new product ramp up in Q3, and it's possibly there is a proving earlier. And another one will be the infrastructure. You can see that our infrastructure revenue went up to between 25% and 30% from between 20% and 25% in last quarter. Normally, infrastructure revenue is not a month-over-month or quarter-over-quarter, it's not a regular demand, which is unlike the cellular or Wi-Fi. And sometimes it depends on the project phase from a different customer, which is related linked to the telecom communication companies, projects or any infrastructures or satellite launch, they all have different schedule. So it's not a regular business month-over-month, or quarter-over-quarter. And obviously, in Q2, with the -- it's the demand is better than Q1. In the Wi-Fi business, since early of this year, our Wi-Fi business, it's kind of weaker among most of the product mix. And in this quarter, we have a slightly growth in Q2. Okay. Then the next page, please click to Page 7. We talked about Q3 guidance. I think Steve has mentioned that in his management comment that just I just still have read it -- repeat again. We expect Q3 '22 revenue to decline mid-20s Q-o-Q. We also expect that Q3's gross margin will be around the level of low 20%s. Therefore, now we can quickly go through the financial statement starting from Page 9. This is a consolidated statement for income statement for Q2. Before I begin, I still have to remind everybody, this is an audited basis from the company. And the final result should be based on the auditing report from the CPA and approved by the Board meeting. The Q2's net revenue at TWD 5,297 million Q-o-Q, was down around 5% and Y-o-Y down 14%. And the gross profit is TWD 1,601 million, and gross margin becomes 30.2% compared to 30.6% last quarter, the Q-o-Q was down about 0.4 percentage points. The operating expense in Q2 was TWD 853 million. And so the OpEx ratio equivalent to 16%, compared to last quarter, it's a little bit higher. The -- if -- well, if we retake a look for the -- the -- compare the R&D expenses compared to the total revenue, it's a little bit around -- between 1 and 2 percentage points higher than before. That's because during the utilization going down, our fabs have more resources to allocate it to the R&D activity, no matter the internal new technology projects or external, the customer engineering demand. And therefore, we can see that in the past 1 or 2 months, we see the new tip out is in a higher level from the customers. In the operating income, it's around TWD 747 million. Q-o-Q was down around 18%, and Y-o-Y was down around 47%. And operating margin, it's become 14.1%. And the non-op item, the -- was a negative TWD 79 million. The details in Page 11, we will discuss it a little bit later. The income before income tax was TWD 669 million and income tax expense was TWD 125 million. Therefore, the net income becomes TWD 544 million. And the Q-o-Q was down around 31% and Y-o-Y was down around 41%. And finally, the next margin was 10.3%. And the EPS for this quarter was TWD 1.52. And the ROE -- return on ROE for this quarter is around 8% and approximately utilization rate in Q2 is 60%. It's going down from 70% last quarter. And the depreciation expense in this quarter is TWD 1,051 million. It's pretty close to last quarter's number. And the CapEx, it's TWD 3,136 million, it's much higher than last quarter. And now we can shift to the next page, talk about the first half of 2022, the income statement in Page 10. The first half of total revenue is TWD 10.894 billion, Y-o-Y was down around 11%. And the growth profit is around TWD 3,315 million and the gross margin is around 30.4%. So operating expense around TWD 1,651 million, and the OpEx ratio equivalent to 15%. And the operating income is on TWD 1,663 million and the Y-o-Y was down around 36% and operating margins equivalent to 15.3%. The non-op item for the first half is negative TWD 4 million and again, the detail is in Page 11. The income before income tax of around TWD 1,659 million and income tax expense equal to TWD 329 million. And the net margin -- I'm sorry, net income was TWD 1,330 million and the Y-o-Y down around 34%. So the net margin becomes 12.2%. And the EPS for the first half was TWD 3.60. And the accumulated ROE for the first half 2022 was 9% and approximately utilization rate accumulated first half was 65%. And the depreciation expense for the first half in total was TWD 2,109 million, and the CapEx was TWD 4,456 million. And in -- at this moment, we just finished the physical of the cycle of the first half. And I would like to share with you around the -- our view for the 2022, the total depreciation expense and CapEx for the whole year. First of all, the CapEx, the -- originally, we -- in the earlier of this year, we mentioned that we expect that the whole year's CapEx around TWD 12 billion plus and minus. And now our view is around TWD 8 billion plus and minus, which means around 1/3 of the original CapEx would be postponed. And the around -- and around the depreciation expense for the whole year, our view will -- the revised -- the also revised. And originally, we expect the depreciation expense will increase about around between 10% and 20%. And now we expect it should be fall into the lower level in this range. Okay. Then that's next page, we're going to discuss about non-op items in Page 11. I think the major one I would like to highlight that to the investor is the item of gain on financial assets or liability at sale value through the profit or loss. In the Q2 for this item, it's negative TWD 300 million. And actually, the major in this one is coming from evaluation loss on the ECB, which is -- we issued early of last year. The number was TWD 367 million loss. There's an evaluation loss of TWD 367 million evaluation loss on ECB. Those are the non-cash flow items, so there's no impact for cash flow. This is a non-op item. I would like to highlight it only. And finally, we're going to discuss our balance sheet in Page 12. The -- dated on the June 30, 2022, I -- the major item of the balance sheet, like cash and the cash equivalents, we still have TWD 12.960 billion. And the total assets around TWD 72.767 billion. And the total liability was around TWD 37.796 billion. And the common stock remain the same as before, which is around TWD 4,240 million. So the total equity is of TWD 34.971 billion, and the book value per share was increased to TWD 77.67 from TWD 77.22 last quarter. And finally, the key index for the current ratio was 210% December last quarter, quarter end. And the debt ratio is a little -- 1% lower, becomes 52% from 53% last quarter at quarter end. Okay. Okay, that's my report for financials. Now we can -- we're going to begin the Q&A, and please submit your question in the input box on the webcast window now. Thank you.

Okay. Well, I think we have investors curious about what mix -- what's happening for the China smartphones inventory, such high level and then what happened -- maybe they curious about what happened for the future. But anyway, I will -- I can share with you that as everybody knows that since the year 2020 in of the 2020 Huawei band, we no longer can shift any wafer to Huawei in China and then starting from 2021, the other premiums smartphone, almost everyone, you name it, they all set up a very aggressive target or try to gain share from existing the share in Huawei. And then on the same time, our China PA design house customer ran up. And I can say that localization are happening. And we have several China customers, I mean, a PA maker design house, they also gaining share and work together with the branding smartphone maker in the -- to cooperate with this kind of aggressive target and keep accumulated the PA starting from beginning of last year. And then you can see when the Q4, the year 2021, when our WIN Semi's revenue reached record high in Q4, actually those PA design house still trades a lot of order to us and still accumulate a lot of PA on hand. Unfortunately, in the end of the last year, the -- those smartphone maker, no matter, Oppo, Vivo, Xiaomi or even Honor, they started to revise down their forecast and then they talking about their inventory is getting higher and higher. Unfortunately, the -- our customers who are at that time, they actually still in a very high level in the -- they're still pressing orders to us at that time. And even in this Q1, they recognize that the -- they're cutting order, but it's still the orders still there. And so I think we analyze it and read a lot of different news and analyst reports and find out that I think not only they are a smartphone maker may have a lot of inventory on hand and maybe part of it in the channel. And also our customers also have a lot of PA inventory on their side. So it looks like the inventory adjustment period a little bit longer than everybody expect or even longer than the core chip maker like NPK or [ Qualcomm ], that's the reason why. And I think the true is not only the China smartphone, but also the whole android phone, I think the layer on the one-off, the Tier 1 android phone maker also mentioned that they're going to start collecting the components. So yes, I think the whole thing is just like that. And yes, we -- the -- that's why the inventory adjustment is keep happening. And so far, unfortunately, the macro environment also changing very fast, and it's kind of making the demand even weaker. So yes, I think part of -- some of the investor wondering and how about the U.S. Q1 smartphone supply chain Q3, I can say that the schedules on chart, everything on chart, but the trend of going down from android actually is still very strong. So that's why we guide the Q3, the revenue, it's kind of weaker like that. And yes, that's exactly what happened.

Okay. Let's take the other question. Want to know better detail about the Q3 application situation. As I just mentioned early -- for Q3, the revenue were going down around more than 20%. And it's mainly due to the smartphone market. So I think right now what we see, the sales here will decline, the highest percentage is for the sale of PA. And sale -- and at the same time, Wi-Fi and infrastructure still facing some slightly decline in third quarter, but at the same time, I think optical because of the seasonality is the shipping peak season. So compared from Q2, I think optical will have a positive growth in Q3. Yes. That's the short different application situation in Q4. Thank you.

Q3.

Sorry, in Q3. Okay. Let's take the other question. Want to know how -- what's the biggest factor about the margin decline from Q2 to Q3? I think it's mainly because of the inheritance rate decline because the revenue will decline more than 20%. So at the same time I think the revenue [ utilization ] will decline double-digits in here. So as a symmetry because once the utilization rate though then 50%, I think in [indiscernible] will impact margin a lot because you don't have enough economic scale to cover order depreciation in fiscal in there. Yes. Thank you. Okay. [indiscernible] -- actually, our CapEx that will have some postpone or delay shift to next year. So this year, CapEx will be only around TWD 8 billion plus and minus compared to original CapEx TWD 12 billion at the beginning of the year, this year, we forecast, yes. So a lot of investors want to know how is our capacity trend right now. Yes. So right now we -- our capacity is 41,000 wafer per month in 6-inch right now. And at the end of this year, I think we will actually bring up around 2,000 wafers per month in here. So at the end of this year, we will have around 43,000 wafers in 6-inch wafers per month. That's right now the new capacity plan right now. Thank you.

Okay. Well, there is a question asking about several different perspectives. Well, of course, we cover around our maybe U.S. Tier 1 smartphone supply chain and also would like to know that what's the difference between this year and the 2018 cycle. First of all, as I did mentioned it earlier, I think the U.S. Tier 1 smartphone supply chain is the most -- it's -- I can say that relatively stable than the android. And the schedule is pretty on track. And of course -- but I think that maybe there's some difference from several years ago -- several years ago, in U.S. Tier 1 smartphone, we have cellular PA, we have 3D sensing, we have Wi-Fi business. So have a very good customer in the supply chain. And starting from last year, I think we -- actually, we mentioned it in earlier before Wi-Fi customers kind of losing share. But in this year, I think for the cellular, for the 3D sensing, they're all on track. So the -- and this schedule is still pretty on time. And the -- okay, for the 2018 compared this year in the 2018 cycle, it looks pretty similar the trend, which is the -- from the quarter-by-quarter actually, the first half looks still -- maybe still okay, although it's already weaker than a year before, but the second half is even weaker. It looks like now Q3 -- looks like pretty in line with last year, 2018. But it looks -- I think the reason is quite different because if you recall that for 2018, we -- 2018 is after the peak season of the 3D sensing of 2017, which is -- we just have remember the first 3D sensing phone went up in the Q4 2017. And at that time, every -- I think in the supply chain, the yield rate is not that good and -- but gradually, quarter-over-quarter, year-over-year, and the yield is kind of improved. And so it's -- the demand, I mean, the WIN Semi, we don't -- in the beginning, we already have a very good deal. But in the supply chain, actually still have some problems. So when everybody improve -- the yield improved, the wafer consumption becomes not that strong later on. And also in the second half, there is a -- I think we have said we have -- in 2018, we have the cellular and the Wi-Fi customer also lose part of this year in that -- on that year. But for this year, 2020, I think it's all because of the macro environment and also the market inventory. I mean, the PA inventory or the android inventory, it was too high and kind of impacted demand for this Q3. For -- it's an environment -- I mean, it's a macro environment issue rather than the single customer's issue. So yes, it's pretty much data. Thank you.

Okay. Now to some investment. I want to -- want us to update on our LiDAR business. Okay. I think as we discussed before, actually, LiDAR I think is more related to the autopilot level, which that will adapt in the market. So [indiscernible] from level 2 to level 4, level 5, that will increase tremendous LiDAR remaining at that time. But I think until right now what we see in most of the car in the market right now is all just apply the level of pilot devices, which means the demand for LiDAR at this moment is still quite small. So I think we still have a very good confidence about a LiDAR contribution in the future once the market adapts autopilot level from level 2 right now to level 3 or level 4. Yes. So -- but I think, again, right now we still are booking this technology and keeping a lot of our Taiwan project with different customers to next year, we can provide most of the [ vent ] technologies here, but the revenue contribution still need to wait a few years. Thank you. Okay. I think still a lot of investors was very concerning how the corrections will be at the end. But I think until right now that we just saying that the visibility is pretty low. Right now we only can say that the Q3 remains very weak. And for the Q4, because of every year, most of the smartphones will launch their premium model, flagship model in Q3 or early of the Q4. So I think the demand for the Q4 or the inventory transaction will last to Q4 or even longer. I think we need to wait to see how those new flagship products launch, the market relation, yes. Because I think for the market right now it's quite slow, but we need to watch is, well, those new section model launched at the end of Q4 -- sorry, at the end of Q3 or around like in September or October, can they bring the new demand in the market. Otherwise, if they can bring the demand for the market maybe the correction can be shorter, but if the demand is still flat at that time, then this correction may be last longer. Thank you.

Looks like there is no further questions. We're going to wait another 1 minute. And otherwise, we will end the meeting. Thank you.

Okay. I think there's a new question. Want to know about the foundry competition status for getting us right now. Yes, I think for the past few years, I think most of the new competitor was coming from China. Yes, everybody knows about that. But compared to WIN Semi technology and those China competitors can provide, I think it still has a lot of gap in there, especially for the 5G PA, I think it needs a very new advanced technology from WIN Semi in there. So I think for WIN Semi point of view, it's always a competition in the market, but WIN Semi spend a lot of time to developing the new advanced technology. So definitely, we are more targeting for the customer and demand for those new advanced technology such as the 5G or even the new Wi-Fi 6, those high-frequency and high-performance PA because for those kinds of application and technology, WIN Semi still has a very good advantage compared to those other competitors because of the own -- the unique technology that WIN Semi provide to the customer. Thank you.

Okay. There are no further questions. And we want to thank you for your participation in WIN Semi conference today. And there will be a webcast replay within hours. And so please, this is www.winfoundry.com under the Investor Relations section. Thank you very much again, and you may now disconnect. Thank you, and goodbye.