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 fourth quarter of 2022. My name is Joe Tsen, 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 sessions. First of all, our CEO, Kyle will comment on the company's result for fourth quarter of 2022 and provide a brief guidance for the first quarter of 2023. Secondly, I will go through the financials in details, and Kyle will have the industry outlook to share with you. 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 result 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, our CEO in WIN Semi.

Joe, thank you. And welcome everyone joining the WIN investor call today. In the fourth quarter of the 2022, given the continued inventory adjustment in the global entry smartphone market, WIN Semi's consolidated revenue was TWD 3.53 billion, which was down 10% quarter-on-quarter and 51% year-on-year as previously expected. Due to the decline in demand, our capacity utilization rate further declined to 30%. However as our product mix improved slightly from the previous quarter and expenses were under well control, our gross margin was 22.1% and operating margin was 0.5%. On the other hand, our net profit was impacted by the non-operating losses including the foreign exchange and the disposal of plant by our subsidiary to adjust its operating scale. And therefore the EPS for the fourth quarter was minus TWD 0.22. For full year of the 2022 our revenue was TWD 18.33 billion, which was 30% down year-on-year, and EPS the whole year was TWD 4.21. Looking at the product mix in the fourth quarter, which we did receive a few large orders from the Cellular PA, also and the Wi-Fi PA as well at the end of the 2022, but volume is not continued. And we also see that the Cellular PA revenue still have largest sequential decline among all product category. 3D sensing revenue also declined from the previous half season quarter, which was a traditionally stronger season with new product launch. Although the infrastructure revenue was also slightly below the previous quarter, we have surpassed Cellular PA and become the largest revenue contributor in the quarter. Wi-Fi revenue also increased slightly, but not too big, driven by some customer's inventory restocking. In respect, the year 2022 the war between Russia and the Ukraine was still ongoing. China experienced a surge in COVID infections across the country after strict epidemic control was lifted, and the trade tension between the US and China was intensified. These have disrupted global supply chain. And meanwhile, inflation also impact the end customer demand. Comparing with 2022 to previous year 2021, in terms of product mix change, consumable related application including the Cellular PA, Wi-Fi PA and 3D sensing, all experienced varying degrees of decline given softer macro environment. And compared to the non-consumer applications, related infrastructure segment increased slightly from the previous year. And here, I would like to say, some good news is, gallium nitride, our product -- sorry, the foundry service revenue, which was highly related to the 5G infrastructure has performed particularly well. So looking ahead to the new year, which were still facing the pressure of the economic weakness and the inventory adjustment in the short-term, the supply and the demand are expected to gradually return to normal as the global pandemic was released. COVID restrictions are lifted and the global economy reopens and the inflation gradually get under control. So in the coming years, we are still very optimistic about the long-term development of the compound semiconductors. 5G smartphone penetration is expected to further increase and drive the demand for 5G infrastructure. Wi-Fi spec upgrade will be gradually adopted by the routers and the smartphones. Wi-Fi 6E is expected to become popular and the developing of the Wi-Fi 7 is expected to officially started. Leveraging all our experience on the 3D sensing in the past few years, we have actually worked with the client on automotive application, including both in-vehicle sensing and out-of-vehicle ADAS system as well as the V2X and OTA, which use our existing wireless communication technology. All of these related application no matter in conventional vehicles or electrical vehicles are getting closer and closer to us. In order to meet these trends, we have been actively working on the development of the related new technology, including the filters. Here I would like to emphasize the filter -- this filters help our PA customers to strengthen their product competitiveness, which we've already started providing customers filter foundry service together with our existing products, that's PA to further increase customers' stickiness. So amid of the headwind last year and also the first half, we have never relaxed the commitment to ESG. In 2022 we were ranked in the top 5 among the Taipei Exchange based companies in the Corporate Governance Evaluation Survey by the TWSE for the 8th consecutive year. And we were selected to join the Dow Jones SI World Index for the third year. It is encouraging for us to be included in this index again along with our global leading companies and is also helped to driving force for us to keep improving. Looking ahead for the first quarter of the 2023, due to the continuous soft demand and the impact of the traditional off-season and of the smartphone, our revenue -- this quarter revenue is expected to decline to around the high 20s quarter-on-quarter, and gross margin will be about low-teens level. So right now I turn the call back to Joe.

Okay. Thank you for our CEO's management comment. It's my pleasure to present our financial result for the fourth quarter of 2022. And you also can refer our presentation slide. And please read over for the Safe harbor notice in Page 2. And now we are started to talk about revenue and the margin trend, starting from Page 4. Q4 '22's revenue was TWD 3.5 billion, Q-o-Q was down 10% and Y-o-Y down around 51%. And due to 3Q's one up factor no longer exist and also in Q4 we have a better product mix and also expense well controlled, so our gross margin increased by around 6.1 percentage point, become 22.1%. And operating margin also increased by 5.6 percentage points to 0.5%. And now please flip to the next page, Page 5, we talk about earnings. Our Q4 '22 was a net loss of TWD 177 million, Q-o-Q was down 172% and Y-o-Y was down 110%. And so, therefore the EPS came in at negative TWD 0.22. And it was impacted by the non-operating loss, the majorly was foreign exchange loss. And secondly the disposal of a plant and a property by our subsidiary to adjust its operating scale. And please flip to the next page, in Page 6, we discuss about what has changed in our product mix in the Q4. In the Q4 because experiencing the continued inventory adjustment in the Android smartphone market, so Cellular PA still weak, and the percentage went down to between 25% and 30% from 30% to 35% last quarter. On the contrary, although the infrastructure also decreased about single-digit, but the percentage went up to between 35% and 40% from 30% to 35% in Q3. And as our CEO mentioned that some of the Wi-Fi customer restocking in Q4, so although the Wi-Fi has a single-digit growth, but still within the same range here, the percentage which is between 5% and 10%. In the optical and including 3D sensing and others, it decreased a similar level of the total revenue remained the same percentage of around 26% in Q4. And so please flip to the next page, in Page 7. Page 7 talk about Q1 '23 guidance. I think our CEO already mentioned that, and so I'm going to repeat again. We expect Q1 '23, the revenue to decline around high 20s Q-o-Q. We also expect the Q1 '23 gross margin to be around the level of low teens. Okay, then we can quickly go over the financial statement, starting from income statement in Page 9. For Q4, the income statement, before we begin, I still want to remind everybody, this is under the unaudited basis. The actual results should base on the CPA's report. Q4 '22 the net revenue was TWD 3,527 million, Q-o-Q down around 10% and Y-o-Y down around 51%. And gross profit TWD 781 million, Q-o-Q was up 25%, Y-o-Y down 73%. Gross margin was 22.1%, which has improved about 6.1 percentage point from last quarter. Operating expense was TWD 762 million. The operating expense ratio was similar level around 22%. Operating income was TWD 19 million, Q-o-Q was up 109% and Y-o-Y down around 99%. So therefore the operating margin becomes 0.5%, and the Q-o-Q was improving around 5.6 percentage points. And the non-op item was a loss around TWD 168 million, the detail will be in Page 11. And net income before income tax was a negative TWD 145 million. And income tax expense was TWD 28 million. Therefore the net loss was TWD 177 million. So the net margin become negative 5.0%. And the EPS for the Q4 was negative TWD 0.22. Therefore the ROE, which is return on equity was negative 1%. The Q4 net approximate utilization rate was at 30%, which went down from 40% last quarter. The depreciation expense a little bit less than last quarter, which is TWD 1,017 million and the CapEx for Q4 was TWD 916 million. Those are the Q4's financial income statement. And please flip to the next page in Page 10. The cumulated whole year 2022, the net revenue was TWD 18,330 million, Y-o-Y was down around 30%. The gross profit was TWD 4,720 million, and the gross margin was 25.8%. And the operating expense was TWD 3,238 million. So the operating expense ratio for the whole year has become 18%. Operating income was TWD 1,482 million, and operating margin become 8.1 percentage point. The non-op item was a gain on TWD 327 million. The income before income tax was at TWD 1,809 million. So the income tax expense for the 2022 whole year was TWD 411 million. So therefore the net income for the whole year was TWD 1,398 million. The net margin becomes 7.6%. So therefore the EPS for the 2022 whole year was TWD 4.21. So therefore the ROE, which is return on equity for the whole year was 5%. And -- the utilization rate accumulated whole year 2022 was 50%, which is going down from 90% of 2021. The depreciation expense is TWD 4,164 million, which is a single-digit increase from last year. And the CapEx for the whole year was lower than our original expectations, which is TWD 7,124 million. And since it's already 2023, we'd like to share with the investor that for the 2023, depreciation expense and the CapEx expectations. For depreciation expense for the whole year 2023 we expect to be increase about single digit, which is less than 10%. And the CapEx for the 2023 whole year should be around TWD 4 billion plus and minus, which is mainly the existing fab equipment and machine and the equipment maintenance and the replacement. And then secondly, we'll be continuing to complete the first building for our new fab construction in the Southern Taiwan, Kaohsiung -- Science Park in Kaohsiung. And this is for the whole year 2022 income statement. The non-op item in Page 11 and the major item other than we already mentioned that earlier, foreign exchange loss and the loss on disposal of property and plant. Another one will be the gain on our ECB buyback in Q4. Okay, that's the non-op items. And finally the balance sheet in Page 12. Up to 2022 December 31st, I just pick up couple of major item, cash and cash equivalent was TWD 10,380 million. So the total assets was TWD 68,982 million. And the total liability was TWD 33,936 million. And the common stock remain the same as last quarter. So the total equity become TWD 35,047 million. So therefore the book value per share was TWD 78.28. The major impacts like current ratio was 276%. And the debt ratio versus total liability over total assets was 49%, pretty close to last quarter. Okay, this is my report. Thank you. So I going to turn the call back to -- over to our CEO for industry outlook. I think that's the most important portion of this quarter's earnings call in the conference. Okay, thank you.

Okay. Thank you, Joe. Next I will present and share how we see this market trend status. I will divide into several category, smartphone, infrastructure, VCSEL, Wi-Fi and et cetera. And also introduce our new technology to all. So please go to the Page 14. So this page shows -- of course is [indiscernible] smartphone related PA. So based on the chart, you see the Morgan Stanley forecast, also we observe as well the 5G penetration rate will surpass the 4G in this year 2023. That's good sign for the semiconductor -- for compound semiconductor because the 5G, the PA content were definitely more than the traditional 4G smartphones. Especially the 5G, there is a new frequency band we called ultra high band from the 3 maybe around 3 gigahertz to 5 gigahertz. And these bands also need MIMO, we call multi input, multi output, that means the PA comps will be increased. So we foresee these smartphone 5G smartphone will surpass 4G and the content of the 5G smartphone will much more than the traditional 4G phone. Okay go to the next page, Page 15. Also is about the infrastructure about 5G. So we have a very good technology on gallium nitride which we are continuing for few years and the traditional gallium arsenide technology keep improving for the performance. So among the base station of the typical 5G, I mentioned MIMO base station, lot of the technology using WIN's foundry service, for example, gallium nitride as a PA, PA as a [indiscernible] and HBT is typical for the driver IC and integrate passive device. These 4 component is key element for the base station. Then we can provide total solution for 5G infrastructure operators. Go to the next page, is Page 16, is Wi-Fi. Wi-Fi last year already many router and smartphone adopt the Wi-Fi 6, but we feel that dual band only, but this year we foresee this more and more router, we migrate from -- to 6E from 6. And smartphone also will adopt 6E, we believe, in this year. So based on the wireless connectivity market [ amenities ] in this chart, you can see the WiFi 6E will start and the volume will increase as well, okay? Let's go to the next page, Page 17. So WiFi 6E is a triple band. It's 2, 5 and 6 giga. So based on the modulation improvement, so [ WiFi G ], we're going to have 3.6 data rate faster than the WiFi 6. So under this road map, we have a cohort with our IBM and PA design house to have WiFi 7 design right now is ongoing and the progress is good. So to take over these WiFi 6E, WiFi 7, we believe for next few years will be the mainstream because it covers a more wider band and high data rate to have all the IoT, the change to reality. Okay. Next page is about the sky, the satellite. So you can see starting already launched more than 3,000 satellite LEO in the sky. And more and more application is launched. So they already start to give the sky service. So in addition to the starting for the LEO and the Gen2 systems already approved by the FCC, December last year. So these Gen2, which we know is about more than 20,000 or even 30,000 satellite will be launched. Also another system -- other systems like OneWeb, Kuiper and Telesat and others which are not on the list also had at least a few hundred to several thousands. So we believe this satellite will be very, very hot topic and need more gallium arsenide solution for the next few years. Go to the next page. It's about application for the automotive. So since 2017, Win's VCSEL and 3D sensing and smartphone, we are taking leadership in this industry. We have a very good VCSEL technology. So based on these, more applications opened. So we see the VCSEL will start to adopt in vehicle such as DMS, Driver Monitoring System and Occupant Monitoring System we call OMS, and out of the car, you can see different color by different distant range, will also adopt the VCSEL-related technology for the ADAS. In addition, the sensing in vehicle and other vehicle also the wireless connectivity for the automotive, so the [ eyes ] will be installed in every car for the auto drive and next mount on the top of the car which can connect together with cellular. This is drive the -- all the connectivity worldwide, including the user terminal on the road, like vehicle and in the sea like boat or in the sky like airplane. Okay. So this is where we see the different category for the future. For this year, it will be gradually opened. Next is about new technology. Please go to the Page 21. Based on the VCSEL which will be applied -- adopted for the different kind of application, so more the applications such as VR, Virtual Reality, Augmented Reality, AR and more sensing on the handheld system like on the different frequency band, SWIR and also have some [ touchability ] sensor on the biometrics on either the watch or the clothing, so we can foresee this VCSEL market will keep growing. The other is about optical, but on the data communication. So different color shows these -- the green color -- sorry, the orange color shows the emission side, DFB. And the blue collar is for the receiving. We have a good technology on the -- no matter on the emission side and the detection side. Also, we have a capability to provide these photonic -- we call PIC, integrate all the device in one chip. This will help these data centers to have a quick data rate to support these very -- tons of the data rate requirement gradually. So this is a VCSEL market, as I mentioned in previous 2 pages. So you see the red circle one is about mobile, we call it like handheld system, consumable mobile phone or the iPad and the notebook. So still from 2022 to 2027, still have about like a compound annual growth rate of about 16%. The other new application we expect is telecom and infrastructure from the -- this is the blue one from [ $782 ] million grows to [ $2.1 ] billion. The compound annual growth rate about 22%. This is the 2 major markets which we expect from the VCSEL technology. Okay. Last page is to show we are very excited to introduce the Win provide a filter service, foundry service. We provide -- we're cooking this technology for a few years. Now some of our customers already adopt our filter into their new PA module, which can provide better performance, better footprint and the size to compete with the worldwide IT company. So the filter not only contribute revenue, but also provide these strengtheners to cohort with our customers to increase their performance on the smartphone. So -- and the technology we deliver covers [ SO and BO ]. Okay. I hope that this will be a [ bundle ] our customer for the best technology. Okay. That's all my view and sharing towards about business outlook. Now I'll turn the call back to Joe.

Okay. Okay. Thank you to our CEO's comment, and now I will begin the Q&A session. [Operator Instructions]

Okay. There's a question, wants to know about utilization rate for 2022 fourth quarter and outlook for Q1 in 2023. As we mentioned at the beginning, the Q4 utilization rate is around 30%. And because of the revenue or the decline high-20% in Q1, sequentially, I think the utilization rate will be going down again. But because how the product mix is still not so fixed right now, so I think, right now, we only can say the trend will be going down, but it still cannot have an exact number of the rate about Q1 yet. Thank you.

Okay. There is a question from the investor asking about the progress and the schedule or any plan for our new fab in Southern Taiwan. I think I have mentioned a little bit earlier when I was talking about our CapEx guidance for 2023. I think we will -- we still will continue to complete the construction for the first building for our new fab in Kaohsiung. And after that, we probably will stop there and then waiting for any signal of the demand. And we're not -- before that, we are not going to do any further on the cleanroom construction or even the equipment volume. That's exactly what we will do for the CapEx in our new fab in Southern Taiwan plant's part. And maybe I'd repeat again another part and also the major part of the CapEx in '23 will be mainly the existing fab's equipment maintenance and replacement, that's a major 2 portion for this year's CapEx. The total amount roughly around TWD 4 billion plus and minus. Okay. Thank you.

Okay. There's a question that want to discuss about the [ product line ] status of Q1. Right now, what we foresee, I think all the product line will decline in Q1. I think the main reason is I think Q1 usually is our traditional low season, yes. So what we see right now is that our product line will decline fairly equal, yes. So that means the sales percentage may be not change, but all the product will decline like high-20% in this kind of range. Yes. Thank you.