WIN Semiconductors Corp. (3105) Earnings Call Transcript & Summary

This investor conference is about to begin. Good morning and good evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's results webcast conference for the first -- the second quarter of 2023. 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 reorganized into 3 sections. First of all, Steve will comment on the company's results and provide brief guidance for the third quarter 2023. Secondly, I will go through the financials in detail. 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, and 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. After a traditional off-season in the first quarter 2023, our revenue for the second quarter reached TWD 3.9 billion, an increase of 38% quarter-on-quarter and a decrease of 26% year-on-year. Benefiting from the recovery in capacity utilization, our gross margin increased to 20.1% from 11.4% in the first quarter, and operating margin also significantly improved to negative 4.3% from negative 20.8% in the first quarter. Net loss was TWD 276 million, and EPS was negative TWD 0.27 (sic) [ 0.23 ] for the second quarter, indicating the low risk -- the losses has narrowed sharply compared to the previous quarter. While the global smartphone shipments in the first half of the year is estimated to decline year-on-year, we observe that our revenue has resumed growth momentum in the second quarter, with an increasing number of rush orders from Chinese smartphone PA customers. In addition, in response to the demand for new high-end smartphone in the second half of the year, related customers have started preparing for inventories, driving material sequential growth in both Cellular and Wi-Fi PA in the second quarter. This has been a key factor in raising the capacity utilization rate of our fabs back to 40%. Furthermore, Infrastructure revenue also delivered double-digit sequential growth, while Optical was the only segment that declined quarter-on-quarter. As of today, the wars and the trade tensions arising from geopolitical conflicts continue impacting us, and economic downturn caused by inflation has weakened the customer purchasing power. The hardest-hit industry has been the rapidly evolving smartphone market, and this has also affected the progress of related infrastructure development. Until recently, we have finally seen some signal of recovery in the smartphone market. However, it's still too early to conclude that the inventory adjustments at the end-user level, which has been ongoing for over a year and was nearing completion. WIN Semi has always been the best foundry partner to our customers. Despite the challenging economic condition and the sluggish demand, our strategy during this period has been consistent. We continue to invest in research and development, work very closely with our customers and understand their need to enhance their competition (sic) [ competitiveness ]. Our goal is to assist our customer in seizing opportunities upon demand recovery, maintain their and our market positions, and survive and thrive during this challenging time together. Looking ahead to the third quarter of 2023, our revenue is expected to grow by low single digits than the previous quarter, and the gross margin will be around the level of mid-teens. I will turn the call back to Joe. Thank you.

Okay. It's our pleasure to present our financial results for the second quarter of 2023. Please refer our presentation slide, which, remember, [ narrated ] over the Page 2 of the safe harbor notice. And now we start from the Page 4. Page 4, I can talk about the revenue and the margins. The second quarter of '23 revenue was TWD 3.9 billion, and the Q-o-Q was up 38% and the Y-o-Y was down 26%. And in Q2, benefit from the capacity utilization recovery -- recover back to 40% and also a little bit help from the product mix. Therefore, the gross margin increased to 20.1% from 11.4% last quarter. And the operating margin was significantly increased to negative 4.3% from negative 20.8% last quarter. And please flip to the Page 5. We're talking about the earnings. And with the order recovery from our customer, and therefore, the losses have been narrowed down in Q2. And the net loss was, in Q2, at TWD 276 million, and Q-o-Q improved about 42%. And the EPS in Q2 was negative TWD 0.23, and compared to Q1 is nearly almost a negative TWD 1. And now we take a look from the product mix in Page 6. Steve has mentioned on his comments, remember, Q2, our Q-o-Q revenue was up around 38%. And the major momentum, firstly, is for Wi-Fi business. The product mix in Wi-Fi in Q2 was between 15% and 20%. And then compared to last quarter, it's only 5% to 10%, but mainly due to the U.S. premium phone launching the new generation of the smartphone in the second half and some related customers already went up the demand. At the same time, the second major momentum coming from Cellular PA. And the major momentum is from China. It's -- we can see that the China market has been downturn for a long time over a year. And we do see some rush order from China customer, and the momentum is still coming and even stronger. And the -- another momentum also for Cellular is also related to U.S. premium phones' second-half new model. Of course, this different customer for the U.S. premium phone, maybe they started ramp-up under different timing. And then -- but it looks like the Wi-Fi customer already ramped up earlier. And then so the peak maybe is closing. And -- but the Cellular customer is still continuing. And the third one, for the Q2, it's an Infrastructure customer. Infrastructure in Q2 was between 25% and 30%. And then -- although the percentage is lower than Q1, but it's already better than our expectation. And Q-on-Q for Infrastructure also increased by double digits. The only -- so the only segment in our product mix decreased is the Optical business. In Q2 Optical business, roughly around 18%. Okay. That's for product mix. And now please flip to the Page 7, talk about Q3 guidance. As I mentioned it, some of -- for the third quarter, supposedly is U.S. Tier 1 smartphone high season. And actually, it's Q2, from Q2 to Q3. And -- but we see that like, for example, like Wi-Fi is already ran up in Q2. And probably, sometime in Q3, it will be -- reach the peak. But the Cellular business for U.S. Tier 1 smartphone, the customer is ramping up a little bit later and then will continue in Q3. And so also the China cellular customer, the rush orders of -- their momentum is still strong. So Q3, see that the Cellular PA will be the stronger factor for product mix. Unfortunately, the -- probably with the Wi-Fi, Infrastructure and the Optical maybe is not as strong as at Q2. So therefore, the Q3 guidance, the revenue is going to increase about low single digit Q-on-Q. And then the gross margin, because of what I mentioned as the Cellular PA, it's a major growth factor. So because of the product mix, the gross margin will be around the level of the mid-teens. That's the Q3 guidance. And now we can quickly take a look for the financials. First of all, please flip to the Page 9, talk about the income statement for Q2. The consolidated income statement for Q2, first of all, I will still want to remind everybody that the figures, everything I'm going to say will be based on the unaudited basis. The actual results should be based on the CPA's report later. For Q2, net revenue was TWD 3,944 million, Q-o-Q was up 38% and Y-o-Y was down 26%. The gross profit was TWD 791 million and gross margin for Q2 at 20.1% increased from 11.4% last quarter. And then in last hour's earnings call in Chinese already have investors asking about the -- our subsidiary may impact some of the gross margin. While I would like to share with you that our subsidiaries, the holding -- the investment company holding the listed company, like Vanchip, this kind of listed company, their market price volatility impact the gross margin. I mean its 1.4 percentage points means it contributes a 1.4 percentage point. So it means that the Q2 gross margin are supposed to be high teens if we exclude the Vanchip contribution. And the operating expense is TWD 961 million, and operating expense ratio was of 24%. And the -- actually, the R&D is already 13% compared to the revenue. The operating loss was TWD 170 million. And therefore, the operating margin was negative 4.3%, and it improved from negative 20.8% last quarter. The non-op items was a loss at TWD 191 million. I will explain that later in Page 11. The loss before tax was negative TWD 362 million. And there is a tax benefit around TWD 86 million, therefore, the net loss was TWD 276. And the net loss was improved about 42% compared to net loss of about TWD 479 million in Q1. The net margin was negative 7%, and the -- compared to last quarter was a negative 16.7%. The EPS for Q2 was negative TWD 0.23, last quarter was negative TWD 0.95. So the return on equity for Q2 was negative 1%, last quarter was negative 5%. And approximately, utilization rate for Q2 was 40%, which is an increase from 20% last quarter. The depreciation expense of TWD 1,172 million, and the CapEx was TWD 540 million. It's not so different from last quarter. And accumulated first half income statement, please turn to Page 10. The first half 2023, the net revenue was TWD 6,803 million. The Y-o-Y was down around 38%. And the gross profit was TWD 1,117 million, and the gross margin was 16.4%. The operating expense was TWD 1,882 million. Therefore, the operating ratio first half was negative 28%. And the operating loss for the first half was TWD 765 million and the operating margin was negative 11.2%. The non-op items accumulated, the Q1 and Q2, was TWD 152 million. And then the same, we will discover later in Page 11. The loss before the before tax was TWD 917 million. And there was a tax benefit of TWD 163 million. So therefore, the net loss for the first half was TWD 755 million, so the net margin was negative 11.1%. And the EPS for the first half was TWD 1.18. And then the first half return on equity was negative 3%, and approximately accumulated utilization rate was 30%. The depreciation expense for the first half was TWD 2,249 million. And CapEx for the first half of TWD 1,076 million. And if we review -- well, the depreciation spend and the CapEx guidance we provided in the early of this year, I think we're still in line with the guidance. And about the depreciation expense were not -- will increase not higher than 10% Y-o-Y. That's still in line, our view. And the CapEx for the whole year of 2023, it will be TWD 4 billion plus and minus TWD 1 billion, that's also in line. It will also still remain the same view. That's the income -- consolidated income statement for the first half. Now we flip to Page 11, the Page 11 non-op items. I think the major 2 item is the foreign exchange loss, about TWD 650 million, and the gain on ECB buyback for -- the gain of TWD 540 million. I think we should put it together to discuss. First of all, we implemented the ECB buyback in Q2, and we have a gain because of the bond -- repurchased the bond and the gain for the TWD 540 million. But on the same time, because we buy back a fixed -- this is a NT-dollar linked ECB, which means the foreign exchange about dollar-NT is fixed. So therefore, when we're doing the ECB buyback, that will create some kind of foreign exchange loss. So TWD 650 million loss, they are 50% coming from ECB buyback. Another 50% is due to U.S. dollar appreciation in Q2 and the evaluation. We have the foreign currency debt outstanding and the evaluation loss. Put it all together, so it's TWD 650 million foreign exchange loss. But if we consider the ECB buyback began and the foreign exchange loss coming from the ECB buyback altogether actually still gain more than TWD 100. So it should be, again, on the offset opportunity, still gain between TWD 100 million and TWD 200 million. So yes, that's non-items. And finally, the last one will be on the balance sheet. The balance sheet on Page 12. Well, see that, again, because of the ECB buyback, so our cash and the cash equivalent is reducing from last quarter. As to June 30, we still have a cash around TWD 7.054 billion. And the total assets -- what's TWD 65 million something. And the -- as you see that the outstanding ECB in Q3 -- or I'm sorry, Q2 was around TWD 4 billion reduced from the last -- in March 30, the ECB outstanding is around TWD 10.5 billion. And as of June 30, it's at TWD 6.2 billion, that's reducing the bond payable around TWD 4 billion -- more than TWD 4 billion. Therefore, see that the liability also reducing about TWD 4 billion. And as to the common stock has remained the same. The total equity, TWD 34.064 billion. And so therefore, the book value per share becomes TWD 76.61. And so as to -- we significantly reduced our debt. So the debt ratio becomes 48%, reduced from 51% last quarter. And the last one would be our current ratio is 92%. Okay. This is the balance sheet. So okay. Now we thank you very much, and now we can begin the Q&A. And please submit your questions in the info box on the webcast window. Now thank you.

Okay. There is a question asking about Q4 visibility and also I would like to know the progress on GaN on silicon carbide. First of all, I think our visibility is still not reaching the Q4 yet. I mean, we still qualify for the watching the backlog and also customers' order. And so far, we're still not even reaching the full Q3. But I think we already can roughly provide the Q3 guidance, but not Q4 yet. The -- about -- as to the gallium nitride on silicon carbide, actually, for this technology, it's already become our major technology for our Infrastructure business. There are many customer developed or even already mass production with us. And then we also provide different kind of the technology on GaN on silicon carbide. GaN on silicon carbide had -- including like 0.45, 0.25 and 0.15 micron of GaN, and the -- I think the customer feedback is very, very well. Of course, our infrastructure -- it's one of the important technology in our infrastructure portfolio, but it's not the only one. Of course, we still have a lot of product and order from customers for the GaAS, gallium arsenide, like pHEMT technology for LNA. For example, we have -- we're doing even better. So therefore, the -- as to this year, I think the whole infrastructure, it looks a little bit slowed down due to the macro environment and economic issues. So -- but we still are confident on the GaN on silicon carbide because for longer-term customer -- the infrastructure customer, they like this technology. And with the 5G ongoing the -- it's replacing the LDMOS technology. It's very significant. So we still look forward to it. Thank you. Okay. Another question asking about -- it looks like we built our Q2 guidance for Q2, asking why. Well, as we did explain that the -- our Q2 margin -- our gross margin was 20.1%. But if it's true, the subsidiaries' contribution, which means like ventures holdings, about 1.4 percentage point, then it's true that we will be high end, then still better. It looks like still better than our original guidance mid-teens. I think it should be due to the product mix. You see that the utilization going up to 40%, that's the plus. And then at the same time, the infrastructure business in Q2 was better than our expectations. So I think the major reason is the product mix better than our expectations. And the Q2 -- Q3 guidance, again, we guided mid-teen again. I think the major reason still the [ autonomy ] because in Q3, I think the major growth is going to happen in Cellular PA [ no meter ], U.S. premium phone no meter, the China smartphone, that's -- those are the major goals in Q3. There is the item in product mix like Wi-Fi probably not continue to grow from Q2 due to the inventory pool are probably reaching the peak. And also Infrastructure and Optical business, we don't see any significant growth in Q3. So due to the product mix, the low-margin business for Cellular PA, it's only sector will be continuing the growth. So we have to provide the gross margin, like the mid-teens will be safer. Thank you.

Okay. It's a question -- is about the ASP trend. I think in most of the case, our ASP was related to the product mix, yes. For example, as everybody knows, I think lowest ASP for WIN Semi is Cellular PA. So once the Cellular PA portion is higher, usually, ASP will be lower. So for example, like what Joe was just saying, we guide for the third quarter of this year is the margin is meeting, I think mainly because of the product mix. Because of in Q3, we suppose the most of the gross momentum is coming from Cellular PA. And because of the ASP and margin definitely is the lowest one of our older product mix application. So that's the main -- that's also indicating, I think the Q3 ASP will become lower than Q2. Thank you.

Okay. There is an investor asking about the plan for holding in the venture stock. I think as you guys know that Vanchip stock listed in China market around the middle of 2022. And as you guys probably know that we acquired order from MTK and become -- and we become the strategic shareholder and also the major supplier. That's the relationship. And so while I think it's still in -- there is a lock-in period for their IPO. And so I think that we -- after the lock-in period, we will consider and we will base -- internally, we will base on our evaluation to -- for next action. So that's our consideration. Thank you.