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 Third Quarter of 2023. My name is Joe Tsen, Spokesman and Associate Vice President of Finance in WIN Semi. Joining me today 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 fourth quarter of 2023. Secondly, I will go through the financials in details. 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 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, the General Manager of WIN Semi.

Thank you, Joe, and welcome, everyone. For the third quarter of 2023, our consolidated revenue reached TWD 4.2 billion, an increase of 6% quarter-on-quarter and an increase of 7% year-on-year, slightly exceeding our previous expectation. Driven by the increasing capacity utilization to 50% from 40% in the previous quarter, coupled with a slightly better-than-expected product mix, our gross margin increased to 22.1% from 20.1% in the second quarter, and operating margin also recovered to 1.7% from negative 4.3% in the second quarter. The net profit attributable to the parent company was TWD 34 million, turning from a loss to a profit with an EPS of TWD 0.08. Looking at the revenue change of each product segment in the third quarter, optical performed better than expected, while the rest segments were generally in line with expectation. The third quarter is typically the season of the launch of high-end smartphones. For Wi-Fi PA, as preparation of inventories has peaked in the second quarter, Wi-Fi PA revenue declined quarter-on-quarter in the third quarter. However, for Cellular PA, the pull-in from customers has kicked off as expected. Meanwhile, as the inventories of Chinese smartphones has gradually returned to healthy levels and the launches of the multiple new smartphones in the second half of the year has driven the demand, we have witnessed increasing momentum from Chinese customer compared to the second quarter. As a result, our Cellular PA revenue delivered significantly growth compared to the previous quarter. According to the forecast by the market research firm IDC, it expects global smartphone shipments in 2023 will decline by 4.7% year-on-year, following a 11% decline in 2022. However, it projects a growth of 4.5% in 2024. This forecast seems to be consistent with the recovery that we have seen in our Cellular PA in second half of this year. While we are still some distance away from the previous peak in quarterly revenue, we can already feel the gradual recovery in customer demand. We did face intensified competition from peers amid the weak demand in the past. However, as we remain committed to offering customers the best technology and the resources of R&D and production capacity, customers are choosing to stay with us as the storm clears. Additionally, leveraging our accumulated R&D and volume production capabilities in 3D sensing over the past years, our optical communication technology has deepened its reach into a more diverse range of applications. This including addressing the demand from datacenters driven by the AI high-speed computing and the automotive LiDAR market, ensuring that we are well-prepared for the sustainable long-term growth in the future. Looking ahead to the fourth quarter of 2023, our revenue is expected to grow by low-teens than the previous quarter, and gross margin will be around the level of mid-20s. I will turn the call back to Joe. Thank you.

Okay. It's our pleasure to present our financial result for the third quarter of 2023. And you can refer the presentation slides we're starting from Page 4. Before that, please remember to read over the safe harbor notice in Page 2. In Page 4, we're going to discuss about the revenue and margin. The Q3 revenue was TWD 4.2 billion. Q-on-Q was up 6% and Y-o-Y also up 7%. Q3 driven by the increase of the capacity utilization to the 50% in Q2 from the 40% Q3 -- Q2, coupled with a slightly better-than-expected product mix. We can discuss the product mix later in Page 6. So therefore, the gross margin increased about 2 percentage point Q-o-Q become 22.1%, and operating margin also increased by 6 percentage point becoming 1.7% Q-o-Q. We understand that most of the investors would like to know what kind of impact to our gross margin from our China customers' share price volatility? Well, I think the background is our 100% owned subsidiary holding our China customers' share, which is we acquired when the IPO in the middle of 2022. And so due to -- in Q3, customers listed share price volatility. So, there is 2.7 percentage point gross margin erosion in Q3. Therefore, they consolidated into our financial statement, so our consolidated gross margin becomes 22.1%. Of course, if we exclude that, then we'll go up to 24.8%. Please flip to the next page, which is Page 5. We discuss about earnings. In Q3, due to the order and the demand recovery from the customer and also the better utilization, our net profit attributable to the parent company was TWD 34 million. So therefore, the EPS was TWD 0.08. Compared to last quarter Q2, the EPS was negative TWD 0.23. In next page, we're going to discuss about product mix. Please flip to Page 6. As you can see that in Q3, the Cellular PA, the percentage going up from 30% to 35% to 45% to 50%, which is around over 30% of a growth. And the others majorities are optical application, remained 18%. That's pretty much the same number. But actually due to the revenue growth, it's better than our earlier expectations. And the rest of it like Wi-Fi and infrastructure, it's still weaker than Q2. Wi-Fi, because of the ramp up -- the peak for ramping up for high-end smartphone, this generation has already happened in Q2 and so Q3 is gradually going down. So, therefore, the percentage going down to 10% to 15% from 15% to 20% last quarter. And infrastructure also weaker than last quarter, between 20% and 25% from 25% to 30% last quarter, so pretty much exact. I think the only exception is optical business, otherwise a pretty -- it's kind of in line with our view we provided in last time. And please flip to Page 7. It's the Q4 guidance. I think Steve has mentioned it earlier. So, I'm going to repeat again. We expect for Q4 2023 revenue to increase about low-teens Q-o-Q and we also expect Q4 2023, the gross margin will be around the level of mid-20s. Okay. Then we can quickly go through the financial report -- financial statement starting from income statement from Page 9. And before I begin, I still want to remind everybody that all of the figures are based on unaudited basis by the company. So the actual results are based on the financial report, which is audited by the CPA. The Q3 -- the revenue was TWD 4,165 million, and Q-o-Q was up 6% and Y-o-Y is up 7%. And the gross profit was TWD 919 million, and gross margin become 22.1% compared to last quarter. Last quarter was 20.1%. And operating expense better than last quarter. It's becoming TWD 849 million. And therefore, the operating -- the operating expense ratio was equivalent to 20%. And operating income was TWD 70 million and op margin -- the operating margin was 1.7%. The non-op item was a loss of about TWD 114 million. We can discuss it later in Page 11. And the loss before the income tax was TWD 44 million, and the income tax expense was TWD 37 million. Therefore, the net loss was TWD 81 million. The net margin becomes negative 1.9%. However, the net profit attributable to the parent company was at TWD 34 million. Therefore, the EPS become TWD 0.08, become profitable. The ROE, the return on equity was 0.4%. And the utilization rate for Q3 was 50%, which is up from 40% last quarter. The depreciation expense was TWD 1,182 million. It's slightly higher than last quarter. The CapEx for Q3 was TWD 1,880 million. So, this is Q3's income statement. In the next page, we talk about accumulated Q1 to Q3 income statement. Please flip to Page 10. The Page 10 -- 2023, the first three quarter revenue was TWD 10,968 million, and the Y-o-Y was down around 26%. Gross profit was TWD 2,036 million and the gross margin become 18.6%. Operating expense was TWD 2,731 million and OpEx ratio for the accumulated three quarters was 25%. And operating income was TWD 695 million, and the operating margin become negative 6.3%. The non-op item was a loss of about TWD 267 million. Again the details in Page 11. And the loss before the income tax was TWD 961 million, and there was an income tax benefit of TWD 126 million. So therefore, the net loss accumulated Q1 to Q3 was TWD 836 million. And the net loss attributable to the parent company was at TWD 465 million. So, therefore, the EPS become negative TWD 1.1. So the total -- the accumulated 3 quarters, the ROE -- return on equity was negative 2%. And accumulated utilization for the first 3 quarters was 40%. And depreciation expense of the first 3 quarters was TWD 3,431 million. And the CapEx was totaled around TWD 2,957 million. And remember, we have provided some kind of guidance for depreciation and CapEx for 2023 in very early of this year. And looks like the depreciation expense, right now the first 3 quarters, the Y-o-Y was up around 9%, which is kind of in line with what we provide around 10% for the whole year. And the CapEx, we also provide the guidance of -- the whole year of around TWD 4 billion plus or minus. And right now, the first 3 quarters is already very close to TWD 3 billion. So, we believe that it's also not too far away from the guidance we provide. Okay. Then the non-op items. In Page 11, -- okay. First of all, for Q3's non-op items, I'm going to discuss and highlight the 3 items, which is most significant. The first of all, we take a look on the gain on repurchase of bonds payable, which is the ECB buyback we did on Q3, which is making again around TWD 157 million. But remember, the ECB we have is NT dollar linked convertible bound. And so it's a fixed dollar NT -- it's a fixed falling FX at that time. So every time when we -- at this -- under this -- the current foreign exchange dollar NT, then -- when we implemented the ECB buyback, we have created some kind of a foreign exchange loss. But, however, net-net, are still profitable. So, you see that the foreign exchange loss around TWD 121 million actually very close to TWD 100 million was because of an ECB buyback. And another item is gains on financial assets or liabilities at a fair value through the profit and loss. It's also majorly due to the ECB -- outstanding ECB evaluation as everybody knows that ECB contains the bond and also the stock option. And due to the -- during the Q3, stock price has volatility. So, there is an evaluation loss on the stock option. So therefore, TWD 122 million of loss and the evaluation loss is around 50% due to the ECB evaluation. Okay. That's pretty much for non-op items. Okay. Then please flip to the Page 12. The final page, we discuss about the balance sheet. As to the September 30, our cash and the cash equivalents around TWD 6,352 million, and the total assets becomes TWD 66,081 million. And I think except the accounts receivable, it's going up a little bit due to the -- growing for the revenue and the order. And the total liability becomes TWD 31,224 million. And you can see that the current liabilities going down from around 1 -- almost TWD 1 billion, and pretty much the same size reduced on our ECB holding going down from TWD 6.2 billion -- from TWD 6.2 billion to TWD 5.2 billion. That's because of the ECB buyback. Okay. The common stock remained the same, and total equity was TWD 34,857 million. So therefore, the book value per share going up from TWD 76.6 last quarter to TWD 78.6 this quarter. And the major financial index, for example, like current ratio has improved to 97% from 92%. And the debt ratio is going down around 1% to 47% in this quarter. Okay. That's my portion. Okay. Thank you. Then now we can begin the Q&A. Please submit your question in the input box on the webcast window and now. Thank you.

Okay. There's a question, I think, is related to the better gross margin than our credits. I think it's mainly coming from the 2 factors. One is the product mix. We can see this quarter, I think the optical device is still growing. And at the same time -- although the infrastructure has slightly declined and also Wi-Fi has declined, but at the same time, we have a very strong demand for the Cellular PA. So the utilization rate is increasing around 10%. It definitely will bring a better cost of the material because of the better utilization rate. So, I think compared with the better product mix, with the better optical demand and also the better utilization rate, the gross margin is better than our expected in Q3. Thank you. Okay. The next question is about the outlook of the 2024. But honestly speaking, I think until right now, the visibility is still around 4 weeks to 6 weeks. So, I think we will keep our print. That is we will give the guidance about the next quarters, quarter-by-quarter, yes. Because, as you know, as a foundry -- and we almost have 80% of the revenue is related to the smartphone as such. And smartphone is such a very big volatility industry. And there's so many models and brand companies in there. And so every year, it's hard to say how the share of a customer will take in every smartphone segment and in every smartphone makers portion. So in order to make a greater accurate guidance, I think we will provide the outlook quarter-by-quarter. Okay. I think the other question is about the competition. Yes, definitely, I think for the Cellular PA, which takes more than 50% of our revenue, this application definitely is a very competitive market, no matter in China or even in other areas. And every year, the smartphone maker, they will have a new spec. And every IDM company or a design house need to design a new PA module to compete with a new spec year-by-year. So it definitely is a very competitive market, and we have very severe competition in here. But I think until right now, WIN Semi still can provide a better technology and better capacity support to all our customers, especially for the Tier-1 customer. We want to win Tier-1 handset makers orders. So even with those very competitive competition, but I think we still keep our position in there. Thank you.

Okay. There is a question asking about Q3 utilization. We have a better utilization rate in Q3. Was that due to rush orders? If you recognize that this time, no matter verbally talking or our comment by written, we haven't said anything about rush order. That means we treat the recent demand is more healthier than before, and also our customers kind of are coming back gradually. I mean, remember, we have also mentioned that -- from our management comment, we mentioned that we still have some distance away from the previous peak quarterly. But at least we see that with the end smartphone new model has been published recently. I mean the second half, no matter in China, in US, I think the demand, it looks like everything on schedule, on time. And the customer has provided a more positive view and also starting to discuss the future demand with us, which is also -- give us more confidence. The demand -- normally, the PA demand or smartphone demand is more healthier than before. So, that's the reason why we haven't mentioned anything this kind of demand order by the rush order this kind of turn. So, yes, I think, especially we see the sequential growth from Q3 to Q4. And that make us more comfortable now and the future. Thank you. [Technical Difficulty] We had disconnection due to the technical issue. It now should be back to normal. Thank you. Sorry about that. [Technical Difficulty] Okay. There is a question asking about our technology and business, anything to do with the AI or the data center? I think the answer is yes. And I think due to the AI, the high-speed computing, that creates a very high volume and high speed of data transmission because we're working on the data center business, which is nothing to do with server, of course. But it's for data transmission, no matter the laser dial for the detector, those kind of components. We have developed a lot of this kind of technology for many years. And so now we are booking with several different customers. They are also focusing on no matter like between server to server rack to rack, cluster to cluster for those different kind of transmission because of -- due to the AI demand. And we also see this kind of the -- the technology engagement has significant -- more significant than before. So of course, currently, not too much about that. But the big data is the future trend. We can predict that it will be a very important momentum for the future. Thank you. Okay. There is another question asking about our ECB, which is convertible bonds on hand right now. Things making the financial index or the liability level is a little bit higher. And what do we see our ECB for the future? I think as you probably -- if you noticed that since the Q4 of last year and every single quarter, we have implemented the ECB buyback, no matter Q1, Q2, Q3 this year and then continued. We also did a little bit in Q4 for ECB buyback. The reason why we try to decrease the ECB, which is the debt on hand. And so I think the -- from now on, I think we still were working on that if the ECB buyback doesn't create any kind of loss on financials. And if we can have a -- maintain a better financial status, then we will continue to do that using our cash position. And I think in the past, maybe 1 year due to the ECB on hand, we have a higher -- we have a higher -- we have the higher debt ratio. And now it's going to the healthier level. Okay. Thank you. There are no further questions on the line. So 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 it. Thank you, and goodbye.