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 2023. My name is Joe Tsen, the Spokesman and the Associate Vice President of Finance in WIN Semi. Joining me today, on today's call is Steve Chen, General Manager of Corporate Administration. Today's call is organized into 3 sections. First of all, Steve will comment on the company's result and provide brief guidance for the second quarter of 2023. Secondly, I will go through the financials in detail. After that, we will open 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 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 first quarter of 2023, given the traditional off-season effect and continued inventory adjustment of the smartphone industry, WIN Semi's consolidated revenue was TWD 2.9 billion, down 19% quarter-on-quarter and down 49% year-on-year. Although the first quarter revenue was better than our previous expectation, our gross margin and operating margin declined to 11% and negative 21%, respectively. Our capacity utilization rate further declined to 20%. Net loss for the first quarter was TWD 479 million and EPS was negative TWD 0.95. Looking at the product mix in the first quarter, revenue for all product segments each declined by 20% to 30% quarter-on-quarter, mainly due to the off-season effect and the weak consumer demand. While the progress of the smartphone inventory destocking remains unclear, we have received rush orders from multiple Android customers since the end of last year. And we have also seen gradual order recovery from customers entering the second quarter. As a result, we believe that customers' inventories are moving towards a healthier level. Year-to-date, the war between Russia and Ukraine is still ongoing, and the pressure of the global recession is still impacting the world. Amid many near-term uncertainty, we maintain our strategy of cautiously expanding capacity but actively investing in R&D, as our view on the long-term growth momentum of the industry remains unchanged. Several international customers have not only adopted our latest generation HBT technology for 5G mobile communication, but also actively work with us on the qualification of the next-generation HBT process. Meanwhile, in order to meet customers' need of the integrated components, we provide filters for low, mid, and high frequency applications. And we have developed GaN-on-silicon carbide technology and GaAs nano-pHEMT processes to fulfill the demand of millimeter wave for 5G infrastructure. In addition, many customers are collaborating with us to develop an optical application related to short-wave infrared and the long-wave lasers. And those technologies could also be applied to the automotive LiDAR. These are our current R&D focuses. Looking ahead to the second quarter of 2033, our revenue is expected to grow by low 30s quarter-on-quarter, and the gross margin will be around the level of mid-teens. I will turn the call back to Joe. Thank you.

It's our pleasure to present our financial results for the first quarter of 2023. Please refer the presentation slide. Remember to take a look for the Page 2, the Safe harbor notice. And then we're starting from Page 4, the revenue and margin trends. Our Q1 '23 revenue was TWD 2.9 billion, Q-o-Q was down 19% and Y-o-Y was down 49%. The gross margin for Q1 was become 11.4%, which has declined by 10.8 percentage point. And operating margin has become negative 20.8%, which has declined about 21.4 percentage point. The decline was mainly caused by a decline in the capacity utilization rate. And in this quarter, it's further down to -- in Q1, it's down to 20% of the utilization rate from 30% of last quarter. The earnings, please flip to the Page 5. The Q1 '23 net loss was TWD 479 million, which is the loss was increased about 198% Q-o-Q. And the EPS become negative TWD 0.95 compared to last quarter, I mean, Q4 of '22 was negative TWD 0.18. And please flip to the next page in Page 6. Page 6, we take a look for the product mix. In this quarter, Q1 of 2023, most of the product in product mix has a different level of slowdown. And for example, like infrastructure, due to the macro economy and making the -- weaker end demand, so the infrastructure, what's going also going down, it used to be more stable. The rest of the product in the product mix, most of them related to the smartphone market, which is suffering by the traditional low season in Q1. And next page will be -- in Page 7, we're going to talk about the Q2 guidance. I think Steve had mentioned that and I'm going to repeat again. With expect Q2 of '23, the revenue to increase about low-30s Q-o-Q. And we also expect Q2 of the 2023, the gross margin will be around the level of mid-teens. And now, we can quickly talk about income statement for the comprehensive income statement for this quarter Q1 of '23. Before we begin, I still have to remind everybody this is under the unaudited basis and then the actual results are based on the CPAs report. In Q1 '23, the net revenue was TWD 2,860 million, the Q-o-Q was down 19% and the Y-o-Y was down 49%. The gross profit was TWD 326 million, therefore the gross margin was 11.4%. And the operating expense was TWD 921 million. In Q2, we have more capacity and more resources to support the R&D activity and then -- so a lot of customer use it and also internally have more projects on the R&D activity. So operating expense, [indiscernible] go up to TWD 921 million. The operating expense ratio becomes 32%. And because utilization rate is going down since last year quarter-by-quarter and we used to be -- provide the OP ratio guidance about maybe 13% to 15%, that kind of level, if the utilization rate is over like 60% or 70%, but is no longer applicable because of this kind of low utilization rate. So we expect that based on the past experience, of course, the operating expense is going up with the company scale and the size. And so, the operating expense is pretty much in the range between TWD 8 billion and TWD 9 billion, in this kind of range should be reasonable. The operating loss was TWD 595 million. The operating margin was negative 20.8%. And there is a non-op item, like gain on -- TWD 39 million, the detail in Page 10 for your own reference. The income or loss before the income tax was a loss of around TWD 556 million. And there's an income tax benefit for TWD 77 million. Therefore, the net loss become TWD 479 million. And the net margin become negative, 16.7%. The EPS in this quarter was negative TWD 0.95. And the return on equity in Q1 was negative 5% due to the [ net loss ]. The approximate utilization rate in this quarter was 20%, which is down from 30% of last quarter. Depreciation expense in this quarter was TWD 1,077 million. The CapEx in Q1 was TWD 536 million, that's for Q1 income statement. And the Page 10, the non-op item, I leave it for your own reference. And the Page 11, consolidated balance sheet. I'm going to highlight a couple of major items. First of all, the total asset was TWD 69,115 million and the total liability was TWD 35,026 million, and the total equity was TWD 34,089 million. And in between compared to last quarter, I mean, compared, say at December 31 and March 31, there's something like the bond payable, which is our ECB, which is -- the outstanding ECB because the ECB investor in Q1 of 2024, they have a put option. So in Q1 of '23, our CPA has reclassified this item into the current liability to reflect the put option for the investor in the Q1 of '24. Therefore, the current ratio significantly go down to 96%. That's what happened. And then the debt ratio remained around 50% up and down, which is in Q1, it's around 51%. And last quarter, it was 49%. It's pretty much close. And then finally, the common stock remained the same, TWD 4,239 million and the book value per share was TWD 76.16. Okay. That's pretty much what I have for financials in Q1. And now we can begin the Q&A section, please submit your question in the input box on the webcast window now.

Well, there is a question, which is in our Mandarin Section, has several investors asking, and we have explained about the revenue contribution there is a 7% coming from our 100% owned investment, which is holding the offshore listed company and due to the evaluation gain. So it contribute the revenue around 7%. That's why the Q-o-Q went down to 19%. But originally, when we announced a monthly revenue, it went down around 25% -- 24%, something like that, or 25%, something like that. And there is a difference around 7%. Remember, the investment company holding the majority was the share of one of our China customer here, which is IPO last year. And so the company -- the evaluation gain will become the investment company's revenue. That's the reason why. And because of that, the gross margin, if we exclude this kind of item, the gross margin will become 5% from the existing 11.4%. That's something in last section of -- Mandarin section of earnings call, several investor has asking, that I would like to highlight it in the very beginning.

Okay. The answer and question about the ASP difference between this quarter and 1 year ago, has a very big difference there. I think if maybe we can see our presentation for the product mix, we can see compared this quarter and a year ago, actually the cellular PA portion has dropped from 50% to 55%, dropped to 25% to 30%. It's almost dropped 50%. And at the same time, the infrastructure percentage is increasing 10%. I think that's the reason why if you compare ASP between 2 quarters, just very simply divided by our utilization rate and our capacity, you've got a very higher ASP compared to quarter. Yes. I think -- so we can say basically the increase of all the ASPs because of the product mix. Thank you.

There is an investor question asking about the increase in operating expense. I think in Q1, the operating expense, no matter the promotion, no matter the administration or R&D, they're all increased in Q1 compared to last quarter. And -- but we see that the majority coming from R&D and the R&D expenses, it's more than 50% of the total operating expense. And we also see more activity in R&D in the recent quarter due to the lower utilization in our fab and we can provide more resources to the customer and also the R&D business units. So yes, there is -- this is what happened. Thank you.

I think the investor want -- we see some questions about how each application situation in Q2. I think as I just mentioned earlier, the total revenue from Q2 were increasing more than 30% in this quarter. I think it's mainly coming from the cellular and WiFi. Yes, because like we say, we already see some demand come back from the smartphone-related product. Yes. So for the second quarter, I think cellular PA and WiFi PA will have better performance than others. And optical and infrastructure may be a little weaker in these 2 segments. Thank you. I think there's a question investor wants to know a little bit of picture about the second half year. But I think, yes, although we see some recovery from the second quarter right now. But as we always mentioned, actually, the lead time for our product in most of the case is only around like 4 to 6 weeks. So it's really hard to say how the second half situation right now because most of the situation, our customers just based on the lead time to place the orders. So I think at this moment, it's really hard for us to gather enough [ exciting ] order from the customer for second half year. So I think for the second half year, usually we will quarter-by-quarter to report to all the investments and the conference call. Thank you. There's a question, it's asking about how the difference between our guidance for Q1 and the real margin is close of our investment adjustment. I think -- yes, I think basically, first, I think the product mix is a little different quarter-by-quarter. In Q1, actually, the infrastructure percentages dropped around like 5%. It definitely will impact our margin a lot because as everybody knows, I think infrastructure is the highest margin of our product. And also at the same time, because a very low utilization, 20%, actually every difference in high-margin business will enlarge the impact of the margin. There is a question, some question about how WIN Semi will control cost at this low utilization rate period? Because I think from OpEx point of view, maybe it's not that easy to explain that because as a foundry, a lot of our cost is coming from the fab operation, not for OpEx. Most of all -- and that's mainly if we can control better our manufacturing cost, I think that will have a better benefit with our margin in a very big factor. So I think definitely, we were more focusing on how to control our manufacturing costs and this low utilization period. And also, at the same time, definitely, we also have tried to control our OpEx. But as you know, in OpEx, maybe 50% or more than that is coming from R&D. And as we just have made a comment in previous time that we don't want to lower down our R&D activity, even though in this low demand period because of -- for the future demand growth, if we don't invest in the R&D right now, we definitely will lose the opportunity in the future Yes. But besides R&D, momentarily our sales expense, our other administrative expense, I think we will put our eye on that and make and control that.

There's a question asking about, do we -- any update for our CapEx this year? And I think in last earnings call, we have released the CapEx guidance for the whole year 2023, which is, we expect that the CapEx will be around TWD 4 billion plus and minus for the whole year, which has significantly went down from the past 2, 3 years. And I think the major task will be the -- our existing fab, no matter the machine and equipment maintenance and also the facilities maintenance. And the second one will be our new fab in Southern Taiwan Science Park in Kaohsiung Luzhu area because we're still working on the first main building construction, and we need to finish the construction for the main building, first main building. Otherwise, you're going to -- well, if we stop the construction at this moment, then when there's any kind of recovery, the restarted construction will be not easy and wasting a lot of resources and money. So we would like to finish the main buildings construction first and then stop there, and then wait and see until the recovery of the business. That's about the CapEx. On the same time, our depreciation expense for the whole year of 2023 also remained the same. Our view will be less than 10% of increase. Most of that is coming from the new equipment installed in the past 1 year. So it will be single-digit increase for this year of the depreciation expense. That's the CapEx and the depreciation.

Some investor want to discuss about the competition, especially from China. Yes, I think right now, because of the trade war, definitely, China government right now is trying to build their own semiconductor supply chain domestically. So I think definitely, our compound semiconductor also will have some impact about that in the future, yes. But as we discussed with other investors in before, how WIN Semi is also more focusing on the advanced technology with future to our customers. So I think most of our revenue and our profit is coming from our advanced technology in that our legacy technology to our process. So yes, I think in the future, our China foundry maker, they definitely will have some product in the market. And -- but as we just mentioned in the major comments, the 5G spec, communication space also upgraded year-by-year. So recently, we're more focusing on collaboration with all the Tier 1 customers to making the new advanced PA launch in the future to gain a better profit in there because for the PA market, I think most of the profit of profitable portion is coming from the higher frequency and high-end PA. Yes. So for the low-end and low-end PA, and even some mid-end PA, definitely I think in the future, that will face a lot of competition in China. But fortunately, I think WIN Semi has well diversified our PA market. And I think the share of the high-end PA, WIN Semi is still keeping a very good shares in there. Thank you.

There are no more new question and we're going to wait for 1 minute, then close the -- finish the call. Thank you. So there are no further questions, then thank you very much for your participation in WIN Semi's conference. There will be a webcast replay within hours. Please visit www.winfoundry.com under the Investor Relations section. You may now disconnect. Goodbye.