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 2023. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi. Joining me today on today's call are Dr. YC Wang, the Vice Chairman and the Vice President of WIN Semi; and also our CEO, Kyle Chen; the General Manager of Corporate Administration, Steve Chen. Today's call is organized into 3 sections. First of all, our CEO, Kyle, will comment on the company's results for the fourth quarter of '23 and provide brief guidance for the first quarter of '24. Secondly, I will go through the financials in detail. And then Dr. Wang 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 slide. Please note that this presentation contains forward-looking statements. These statements are based on our current expectations. The 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.

Okay. Thank you, Joe. And good morning and evening, everyone. Let me give you a quick summary of our fourth quarter of last year and a projection of the Q1 this year. Okay. For the fourth quarter of the 2023, driven by inventory restocking in Android smartphones and sustained demand in -- demand following the launch of the new flagship smartphone in global market, our consolidated revenue slightly exceeded our previous expectation and reached TWD 4.9 billion with a Q-o-Q growth of 17% and Y-o-Y growth of 38%. Looking at the product mix in the fourth quarter, as anticipated previously, except the Wi-Fi PA peak season of inventory preparation for customers has passed. Other product segments are all delivering [ double-digit ] Q-o-Q growth. And moreover, as our capacity utilization rate increased to 60% from 50% in the previous quarter. Our gross margin improved to 29.4% from 21% -- 22.1% in the previous quarter. Operating margin also recovered to 13.1% from 1.7% in the previous quarter, with EPS at TWD 0.91. For the full year of 2023, our consolidated revenue was TWD 15.8 billion, down is Y-o-Y 14%, with total EPS at negative TWD 0.19. Okay. So let me give you a summary of the 2023. The year of the 2023 has ended in the amid of global economic downturn and geopolitical risk. During the year, while the pandemic eased and the global economic remained overshadowed by inflation, this, combined with the ongoing regional conflict, including the unresolved Russia-Ukraine war, the Israel-Palestine conflict, and escalating trade tensions between the United States and China, made 2023 a challenging year. But fortunately, the smartphone market one year and a half long inventory adjustment period has come to the end at the first half of 2023. Inventory level for the Android smartphone gradually returned to healthy levels, and related customers resumed their order pull-in momentum in the second half of the year. Meanwhile, the launch of the new flagship smartphones, Cellular and 3D sensing customer demand was picked up. The [ resurgency ] -- the recovery in the demand propelled revenue growth in the second half of the year, both Q-o-Q and Y-o-Y, marking the return on the profitability for our company. As we enter the new year, this year 2024, although the macro environment remains uncertain, we firmly believe that the industry's trough is now behind us. We have long been committed to invest in compound semiconductor manufacturing process and material, providing wireless communication, optical communication, and optical sensing solutions. We expect that the increasing demand for the high-speed data transmission in the future, the AIoT trend will drive our mid- to long-term growth momentum. Firstly, Cellular and Infrastructure applications will benefit from the higher 5-generation smartphone penetration rate, and handheld devices and short term infrastructure, including IoT will benefit from the evolution of Wi-Fi 6E and Wi-Fi 7, driving more demands, more PAs. And [ secondary ], optical transceiver components, including the VCSEL, will benefit from the migration from the copper to optical fiber for data transmission in the AI data centers. And the long, short-distance LiDAR will proliferate, will be increased as automotive ADAS become the mainstream. And final -- lastly, the rise of the low earth orbit satellite communication technology will seamlessly integrate numerous AI and big data applications, achieving the ubiquitous connectivity. In all these aspects, we collaborate closely with our customers, walking hand in hand toward mutual success. As we enter the traditional slower season, this season, looking ahead to the first quarter of the 2024, we expect revenue will decline low-teens Q-o-Q with gross margin maintained at around the mid-20s level. This is how we foresee the Q1. Okay. Now I turn back the call back to Joe.

Okay. Thank you, Kyle. Now it's my pleasure to present our financial result for the fourth quarter of '23. Please refer the presentation slide. Remember to read over for the safe harbor notice in Page 2. And then we start from Page 4, talk about revenue and margin trend. The Q4 '23, the revenue was TWD 4.9 billion, the Q-o-Q was up 17% and Y-o-Y up 38%. And then in Q4, driven by the increase in capacity utilization rate, our gross margin was increased by 7.3 percentage point to become 29.4%. And as every investor care about our subsidiary holding, our major Chinese customers' share, the -- for this fourth quarter, it contributed the gross margin about 1.15%. And so, therefore, the operating margin also increased by 11.4 percentage points and become 13.1%. And please flip to the next page in Page 5, talk about earnings. In Q4, again, due to the better utilization rate, our net profit attributable to the parent company was about TWD 385 million compared to last quarter was TWD 34 million. Therefore, the EPS for Q4 become TWD 0.91, and compared to Q3, Q3 was TWD 0.08 for EPS. Now please flip the page to Page 6, we talk about product mix. Let me refresh the memory, the total Q4 revenue Q-o-Q was up 17%. So therefore, for Q4, product mix compared to Q3, you probably will recognize that the Cellular was in line with last quarter between 45% and 50%. And Infra also the same as last quarter between 20% and 25%. The major difference by Wi-Fi. Wi-Fi, the percentage was down to -- between 5% and 10% compared to Q3, Q3 was between 10% and 15%. That's -- the major reason was like our CEO Kyle have mentioned it, our major Wi-Fi customer had the product flowing earlier of the year of '23. So the Q4, the Wi-Fi, it's the only sector went down. And the others, including the optical, was 22%. So therefore, we can say that the -- except Wi-Fi, the rest of the product, we have more -- we have double-digit growth in Q4 Y-o-Y -- Q-o-Q basis. And the Page 7, it's about our Q4 guidance. I'm going to repeat again. As Kyle already mentioned it in his management comment, we expect Q1 '24 revenue to decline about low-teens Q-o-Q. We also expect Q1 '24, the gross margin to be around the level of mid-20s. And now we can go -- quickly go through the -- our income statement and the balance sheet. Starting from Page 9, we talk about Q4 income statement. Q4 net revenue was TWD 4,868 million, Q-o-Q up 17% and Y-o-Y up 38%. And the gross profit was TWD 1,433 million. And so the gross margin was 29.4%. Q-o-Q was up 7.3 percentage points. And operating expense was TWD 794 million, and the op ratio becomes 16%. And operating income was TWD 639 million. And due to the lower base in last quarter and the quarter a year ago, so the growth rate was very significant. But the operating margin also increased about 11.4 percentage points, becomes 13.1%. The non-op item was the expense about TWD 357 million. The detail will be in Page 11. The income before income tax was TWD 282 million, and the income tax expense for Q4 was TWD 5 million. So therefore, the net income was TWD 278 million. And the profit attributable to the owners of parent is TWD 385 million. So therefore, the EPS is TWD 0.91 compared to last quarter, Q3 was TWD 0.08. The Q4 return on equity was 5%, and approximately, utilization rate up -- is going up to 60% from 50% last quarter. The depreciation expense is -- it's quite similar to Q3. It's only up a little bit, which is TWD 1,190 million. In the CapEx, you can see that the -- it significantly went down to TWD 252 million compared to almost TWD 1.9 billion last quarter. Okay. Then please flip to the next page, in Page 10. Page 10 talk about the whole year of '23 income statement. The 2023, the whole year's net revenue was TWD 15.836 billion. The Y-o-Y was -- it went down about 14%. And the gross profit is TWD 3,469 million and accumulated whole year's gross margin was 21.9%. And due to it, the operating expense was TWD 3,525 million. The OpEx ratio become 22%. So the operating -- operating loss was TWD 56 million. The operating margin was negative 0.4%. The whole year's non-op item is a loss of about TWD 623 million. And income -- the income -- the income cost, there is an income tax benefit for TWD 121 million. So therefore, the net loss for '23 was TWD 558 million. And because of a profit, the loss -- I'm sorry, loss attributable to the owners of parent was TWD 80 million. So therefore, the EPS was negative TWD 0.19. For the whole year, our return on equity was negative 0.2%. The whole year of utilization rate accumulated become 45%. It actually 5% below a year before, which is '22 -- year '22, it's 50% and '23, it's 45%. And the depreciation expense whole year was TWD 60 million -- I'm sorry, TWD 4,621 million. It's pretty close to the guidance we provided earlier, which has increased about 11%. And the CapEx for the whole year was TWD 3.2 billion, almost TWD 3.2 billion, is significant smaller than a year ago. And normally, in this earnings call, we will provide the depreciation expense and the CapEx guidance for '24. We believe that the depreciation expense roughly for '24 will be flattish to '23. And also, the CapEx for 2024 is about TWD 3 billion plus and minus. Okay. Then this is whole year of '23. And the non-op item for Page 11, I'm going to leave it for your own reference. And please to the Page 12. Page 12 talk about the balance sheet. The stated December the 31st 2023, the total assets was TWD 69.168 billion. And the total liability was TWD 33.819 billion. The common stock remained the same, and the total equity become TWD 35.349 billion. And the book value per share was TWD 80.09. Therefore, the key financial index, the current ratio back to above 100% become 135% compared to last quarter at 97%. And the debt ratio is at 49%, a little bit higher than last quarter due to -- we have more the long -- the debt facility from the financial institution to prepare to pay the redemption for our ECB, actually, it's already happened in January 12. Okay. Now this is my part. And thank you. I'll -- now I'm going to hand over the call to Dr. YC Wang, and for our Vice President -- our Vice President and Vice Chairman, he's going to share the market outlook with you. Thank you.

Okay. Thank you, Joe. Now, good afternoon, everybody. So now I would provide you WIN's perspective on the markets that we are in. So please flip over to Page #14. I think everybody will agree with me that the global technology megatrend is toward ubiquitous AI access. The AI access -- the AI will enable a lot of exciting new use cases in the futures. However, the -- these new use cases will require not only the mass data computing, but also needs very fast data transmission. Let's flip over to Page #15. So this page shows the Nokia's estimate on the global data transmission capacity. They -- it estimates that the global data transmission will increase at a rate of 22% compound annual growth rate from 2022 to 2028. In order to enable the higher data transmission capacity, there are 2 things that's going to happen. One is to increase the number of devices, which we as a compound semiconductor foundry going to be a benefit. The second, it will improve the performance of devices, which, for example, the fixed bandwidth going to transmit more data rates. So we have to continue to improve our device technologies to meet this increasingly stringent requirement, okay? Let's flip to next page. So there are 3 critical elements toward ubiquitous AI access. The first one is we need ultra high-speed data transmission. And the second one is we need a smart sensing device. And the third, we need mass data computation and storage. So WIN Semiconductors as the world's leading III-V compound semiconductor foundry supplier is going to provide our customers this critical process to help our customers to be successful in the market toward the IoT megatrend. So in the following few slides, I'm going to present to you our WIN's technologies that we developed along with our customers toward this megatrend. So now let's flip to Page #18. Let's go through one by one starting from the ultra-high-speed data transmission. First, let's look at HBT. Last year, in 2023, we officially released WIN's seventh generation HBT technologies, which our customers has now designed -- using this technology to design in the high-end 5G smartphone, and also our customers have successfully developed their product in the coming Wi-Fi 7 routers as well as smartphone, okay? We're going to see the Wi-Fi 7 has more exposure toward the second half of this year. And we also have customers that use this HBT 7 to develop beyond 5G power amplifiers for next-generation smartphone, which means in the FR3 at the frequency from 7 gigahertz to over 10 gigahertz. The next one is our pHEMT technology, which we have a world-leading technology position. We have a very comprehensive technology portfolio on pHEMT ranging from 0.5 micron to 0.25 micron, 0.15 micron and it's down to 0.1 micron pHEMT, which can support the millimeter wave ICs up to 100 gigahertz. With -- those technologies have been in mass production, supporting a very wide range of millimeter wave and the microwave markets. And at the same time, we have developed the [ 70-nanometer ] pHEMT, which can support up to a D-band frequency, which is around 140 gigahertz to 150 gigahertz circuits, which we are going to release shortly. Now move on to gallium nitride HEMT, which we have spent over 10 years on the technology development, focusing on the RF applications. Now we're confident that our gallium nitride HEMT technologies have now been on par with the [ other -- was the ] leader in these technologies. We have been in production for multiple years on various markets, such as infrastructures and satellite communications, et cetera. Also move on to the filters. Last year, we have commenced a small scale volume productions on SAW filters with a few customers. And we are -- as to BAW filter, we continue the technology development. We have a very good progress. They are all on track. And we also -- on indium phosphide HBT, which we have developed over 5 years. And the last year, we have some breakthrough on the technology development. We have got cut-off frequency well above 300 gigahertz. And more importantly, they passed our reliability qualification, which is the most challenging part. And on the optical devices last year, we have developed photonic integrated circuits, which started small volume productions in the second half of last year for several top tier customers in this field. And we also released the indium phosphide-based edge-emitting lasers, no matter -- on both [ fabric pro ] as well as the DFB laser diodes, which will be used in telecommunications as well as data telecommunications in the near future. Okay. Let's go to Page 19. On the smart sensing, as you know, WIN Semiconductors, we have the world's leading VCSEL technologies for the 3D sensing consumer products on smartphones. We probably have the world's largest -- we have produced the world's largest volume VCSEL, and we continue to advance our VCSEL technologies. For example, we have developed the flip-ship capability on VCSEL devices, and we also develop the grating process on the VCSEL to provide a polarized light, which will be widely used in AR, VR, XR in the future and also will be used in 3D sensing for mobile devices as well as biosensors, and definitely will be used in automotive LiDAR in the future to provide a better signal to noise ratio. And we also successfully develop a back-emitting VCSEL with integrated optics -- optical lens at the backside of the wafer. And we -- on VCSEL, we also develop along with our customers for higher output power. This is for a long-range automotive LiDAR and also for industrial heating applications. And we developed addressable VCSEL array, which can individually control each VCSEL emitters, which will be used in the next-generation pure solid-state automotive LiDAR. And also on the indium phosphide device side, we have, again, edge-emitting lasers, which can be used in the 3D sensing devices and also automotive LiDAR. And on the -- we also developed the indium phosphide-based photodiode, both APD and PIN diode, okay? Next page. On the mass data computation and storage part that we have VCSELs that's not only been used in 3D sensing, we also developed a VCSEL for high-speed data transmission purpose. For example, we closely work with our customers on the 100 gigabit per second per lane VCSEL technologies on 6-inch gallium arsenide wafers. And we are going to address this part in greater detail later. We also developed indium phosphide-based DFB laser diode and also high-speed photodetectors. As we mentioned earlier, this is for -- this can be used in both communication and the 3D sensing device. We -- for data center -- AI data center applications, we also see customers are using our pHEMT technologies for laser diode and the modulator driver IC. This is going to go for volume production in 12 months to 18 months from now, okay? So the last 3 pages, I'll just give you an overview on the overall technologies toward this AI megatrend. The following few pages, I'm going to give you the near-term markets that we see with clarity that is -- that definitely is happening or is going to happen in the near future. So now we are on Page 21, starting from the smartphone -- PA in the smartphone. So as you can see, the 5G smartphone continue to penetrate. Last year in 2023, the 5G smartphone is past the 50% mark and the penetration rate will certainly continue. Although the market report says the global smartphone in terms of the shipment would not -- it's either single-digit growth or not growing. But however, we want to emphasize that although the smartphone shipment is not growing, but the -- each 5G smartphone has more PA content than 4G. For example, as shown in the left table, the 4G smartphone contains typically 4 power amplifiers, where 5G smartphone depending on its phone or high-end 5G phone, it will contain from 6 to 8 power amplifiers, which means it's a 50% to 100% large higher PA content than traditional 4G smartphone. So for sure, we are confident the smartphone power amplifier will continue to grow. Okay, next page, Page 22, we come to Wi-Fi 7. This is another content increase game we were seeing, because of Wi-Fi 7 will be -- compared to Wi-Fi 6 has one additional frequency band at 6 gigahertz to 7 gigahertz, also needs higher bandwidth at 320 megahertz compared to 80 megahertz or 160 megahertz for Wi-Fi 6 and Wi-Fi 6E. And also Wi-Fi 7 adopted the more complicated signal modulation at the 4K QAM compared to 1K QAM for 6 -- Wi-Fi 6 and Wi-Fi 6E. So this leads to a more challenging power amplifier design for Wi-Fi 7. So from what we have discussed with our customers, we are pretty confident that the Wi-Fi 7 will have a higher gallium arsenide adoption rate, no matter in smartphone or the router. Okay. Let's move on to next page on 23. Now we come to satellite communications. I think satellite communication -- satellite network is complementary to cellular networks. There's still now like 2 billion people in the world do not have daily access on cellular network. And there's 90% of the earth's surface is not covered by cellular networks. So satellite networks is perfect to complement to the smart -- to the cellular networks to provide a seamless global network. At WIN, we have developed very complete technology portfolio to support all the satellite links, including satellite to satellite, which is operated at the E-band frequency, which is a very high frequency at around 70 gigahertz to 90 gigahertz. We use -- customers are using WIN's 0.1 micron pHEMT technology, which has been in production at this point of time. And also we support -- we have a successful project with our customers on satellite to gateway, satellite to user terminal, and also satellite to cellular phone. They are all going on track using WIN's pHEMT and gallium nitride technologies. Okay. By the way, we have multiple customers, end customers, we are engaging. It's not limited to LEO, but also on MEO and GEO as well. Okay. Now move on to Page #24. This is about our AI data center. As you can see at the right-hand side of the -- it shows the typical architectures for AI data centers. It's spine, leaf, servers architectures. Because of the AI, which needs a huge amount of data traffic, so this largely increased the demand, no matter, in spine level, leaf level, also in the servers levels. The most interesting part is at the server level, which has high data rate transmission at short distance, which we are seeing a trend that rapidly replacing -- using optical fiber to replace the copper wire. So this drives demand for the 100 gigabit per second VCSEL, which we are developing with our customers right now. We see -- we will see this going to happen toward mass production within this year. Okay. Let's move to next page on Page 25. Now we come to the automotive applications used for LiDAR and in-cabin applications. The market reports estimate there's a strong compound annual growth rate of 62% for automotive LiDAR applications. Although now at this point, it's still very early stage for LiDAR, but definitely, this LiDAR will be adopted by more and more vehicles in the near future. At this point, WIN, we -- our VCSEL has been adopted in the LiDAR by multiple car models and in -- actually in production. Although it's not extremely high volume, but it's a milestone to demonstrate that WIN's technology is capable of being used in automotive. And also not only on VCSEL, we also have long wavelengths indium phosphide-based laser has been qualified by our customers, used in the car. Now it's been moved forward to a system qualification. We expect in the -- roughly in the next 12 months, we should be able to see our device being used in top tier cars in the near future. Okay. So now let's move on to next page. So WIN's strategy is very simple. We serve the market-leading customers with our most comprehensive, world-leading and proven III-V manufacturing technologies in the fast-growing markets along the AI megatrend. Okay. So let's go to the last page, the key takeaways is, WIN as a global leading III-V foundry company, we provide critical process technology to meet the AIoT megatrend. At WIN, we possess the broadest technology portfolio to serve the major markets, as we pointed out today, in wireless communication, AI data center, automotive LiDAR, and broad range of 3D sensing emerging applications. Although some applications are still in the early stage, it's for long-term development, but we also show in the near term what is already happening. There's a few areas that's already happening. So while 5G content increase is one and Wi-Fi 7 adoption definitely will be -- is starting to happen. You're going to see more and more Wi-Fi 7 router -- in router and also smartphone happen in the second half of this year. And satellite communications is another one, data center O/E interface and automotive LiDAR, et cetera. So that's my presentation. Thank you.

Okay. Thank you, YC. And now we begin the Q&A. So please submit your questions in the input box on the webcast window. We're going to start now. Okay. There are more than one investor asking about the -- it looks like the Q4 operating expense, it's less than last quarter. And then ask for the reason and also want to know how do we look for the near future, how -- what is the operating expense look like? And then first of all, yes, we do -- WIN Semi implemented -- the efficient control for the operating expense actually is a continual task for us. And we have reviewed a lot of items of our expense and periodically. So we see a better quarter in Q4. And yes, it's a -- there is some kind of improvement for the operating control for this quarter. Yes. And for the short term, we treat this quarter, this level of the operating expense and the operating ratio as our target for the short period of time. Of course, hopefully, in the long-term future, we hope to see the lower operating ratio just like maybe more than 1 year or 2 years ago. But for the short term, I think we expect this kind of operating expense level and the ratio, it's our near term target. Thank you.

Okay. There's a few questions. It's all related to our utilization rate in Q4 and also the competition in Asia, mostly it's in China and Taiwan. So let's have the conclusion about that. First, I think the utilization for Q4 is around 60% of that. And I think for this year, basically, I think, what we see right now may be still in this kind of level of plus and minus. Yes. And then talking about the competition, I think as YC and Kyle just mentioned, I think for this year, because of WIN Semi's new technology such as like HBT 7 and those of Wi-Fi 7 applied technology, I think as you know, WIN Semi is always more focusing on the advanced technology to compete with [ IBM ] company and also provide those advanced technology to the design house. So I think when we're looking with right now some localization in China, I think the HBT technology is still a [ few ] generation away from WIN Semi. So definitely, with some legacy technology, I think we will face those kind of competition. But for those new advanced technology, I think we still have some room for them to compete with that. Thank you. And the other question is about the filter. I think as we mentioned before, actually, we provide a filter technology to service our customer, with our cellular PA customer, which want to integrate those filters into their PA module. So right now, we have several customers cooperate with us. And -- but I think the ASP is -- because it's a total package with our cellular PAs, so we don't disclose independently about the price. Thank you. Okay. The other question is about the -- some IBM company was fade out with Asia 4G market. I think it definitely will benefit with -- from WIN Semi side because I think that means that will become more favorable to the design house in Asia. And as you know, in most of the Tier 1 design house, I think they are all WIN Semi's customer and majority produce wafer in WIN Semi. So definitely that will be favorable to WIN Semi in the future. Thank you. Okay. And there's a question, want to know about the picture about Q1 application. I think what we see right now, although the total revenue maybe will decline a little, but I think for the Cellular PA and Wi-Fi PA, I think still we are doing well. Yes. And as you know, because traditionally, the Q1 and Q2, that will be the low season for optical. Yes. So that would be down a little. And also Infrastructure, because that's the whole year project-based business. So I think in Q1 is still lower than Q4 what we see right now. Thank you.

This is Kyle. There's a question about the outlook revenue of Infrastructure in this year, 2024. Just like Steve mentioned, Q1 right now, the Infrastructure, a little lower than our expectation, but overall, the year, we see the infrastructure is -- should be -- have room for increasing. We are pretty optimistic on the revenue of the Infrastructure in this year.

Okay. I see there are a few questions asking about the AR headset. We -- I think we cannot comment on the specific end customer's product. But however, we -- as a general comment, we think we definitely going to benefit from the launch of AR headset in general, because the AR headset is going to adopt the LiDAR, and on the headset as well as the eye-tracking capability, and so some kind of 3D sensing application as well. So that's all I can comment. But it takes time for AR headset to get to a significant multi-million, that kind of scale. That's what we see today.

Okay. It's -- right now, the time is 5:34. It's about time. 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. Thank you again. You may now disconnect it. Bye-bye.