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 Results Webcast Conference for the first quarter of 2024. My name is Joe Tsen, Spokesman and Associate Vice President of Finance in WIN Semi. Joining me 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 for Q1 and provide a brief guidance for Q2. And secondly, I will go through the financials in detail. After that, we will open to the floor for Q&A. [Operator Instructions]. 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. The 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. In the first quarter of 2024, as expected, we entered the traditional season. First quarter consolidated revenue was TWD 4.4 billion, down 8.7% quarter-on-quarter, but up 55% year-on-year, slightly ahead of our previous expectation. Due to a decline in capacity utilization from 60% in the previous quarter to 55% and a less favorable product mix, coupled with the impact from the stock price volatility of a listed Chinese customer held by our consolidated subsidiary, our gross margin decreased from 29.4% in the previous quarter to 22.4%, and operating margin also decreased from 13.1% in the previous quarter to 4.1%. Net profit attributable to the parent company for the first quarter was TWD 407 million with an EPS of TWD 0.96. Looking at the revenue change for each product in the first quarter. WiFi delivered the highest growth after inventory has been depleted in the end market, making the first return to positive growth since the second quarter of last year. Cellular continued its momentum from the second half of last year. With revenue staying at the similar level to the previous quarter, both Wi-Fi and cellular achieved above-seasonality performance in the season. For Infrastructure, revenue has consistently been within a narrow range, but the revenue from the first quarter was slightly lower than the previous quarter. Lastly, optical experienced the most significant revenue decline in the quarter. This was mainly due to the peak season of the 3D sensing end product has passed together with the additional new supplier by the end customer this year. The smartphone market has been undergoing a period for the inventory adjustment for the past 1.5 years. Supply chain also faced a price competition. According to a recent forecast by the research firm Counterpoint Research, the global smartphone shipment growth for the full year of 2024 is expected to be 3% with an annual shipment returning to 1.2 billion units. The firm also believes that the segment with the highest growth rate will be the premium smartphone segment, with a projected annual growth rate of 17%. Premium smartphone has always emphasized innovation, quality and performance in contrast to the mid-end range and low-end smartphones that typically prioritize price at the expense of performance. WIN Semi has consistently held a high market share in the premium smartphone market. This is because of we invest heavily in R&D yearly and yearly to provide our customers with the most advanced and high-performance foundry technology and service, assisting them to enter the premium market. Our strategy and business model were focused on providing customers with higher value added and we are dedicated to seeing the return of this trend, which may benefit our further revenue and profit. Looking ahead to the second quarter of 2024, driven by the demand of smartphones and Wi-Fi, we expect revenue to grow by low teens quarter-on-quarter and a gross margin at around mid-20 levels. I will return the call back to Joe. Thank you.

Okay. It's our pleasure to present our financial results for the first quarter of 2024. Please refer to our presentation slide. And remember to read over the first-half notice. We're starting from the revenue and the margin trend. Q1 '24, the revenue was TWD 4.4 billion. Q-o-Q was down 8.7%, but Y-o-Y was up 55%. And the Q1 gross margin was 22.4%, which is Q-o-Q down about 7 percentage points. And the reason due to a couple of factors. First of all, the utilization -- the capacity utilization was declined in Q1 compared to last quarter. And also, that less favorable product mix in Q1, also the impact from the stock price volatility of listed Chinese customers held by our consolidated subsidiary. For this item, there is an erosion for gross margin about 2.4 percentage points. And so therefore, the gross margin, if we exclude this item, then the gross margin should go up to 24.8%. Therefore, the operating margin became 4.1%, which is the Q-o-Q was also going down for 9 percentage points. Please flip to the next page for the earnings trend. And for our Q1 '24, driven by the non-op profit, which is recognized from the redemption of the remaining ECB. So the net profit attributable to the parent company was TWD 407 million when compared to TWD 385 million in the last quarter and EPS for Q1 become TWD 0.96 and compared to TWD 0.91 in Q4 of '23. And please flip to the next page. We can discuss about product mix. Well in the page earlier, we mentioned that in Q1, we have less favorable product mix. You can see that in our product mix for Q1. The cellular is about between 45% and 50% of the total revenue, and Wi-Fi is between 10% and 15%. And for the Q-o-Q basis, actually, the cellular revenue for Q1 is very close to last quarter and it's kind of flattish. But the Wi-Fi revenue increased about almost 20% compared to last Q4. And you can say that it's better than seasonality for cellular and Wi-Fi. And for the infrastructure, normally up and down within a small range, I mean, for revenue-wise. And for this quarter, also the same range between 20% and 25% for the total revenue. However, the optical business is significantly lower than last quarter, declined about more than 30% for revenue. Well, I think Steve mentioned that that's because the preseason for 3D sensing and product has passed and also the additional new supplier by the end customer for this year in this supply chain. So this is the change in the status for the product mix in Q1. And next page, we talk about the guidance for Q2. I think Steve has mentioned it, and I'm going to repeat it again. We expect Q2 '24 revenue to increase about low teens Q-o-Q and also expect Q2 '24, the gross margin to be around the level of the mid-20s. Then we can go through the financial statement quickly. First of all, the income statement for Q1 -- before I begin, I would like to remind everybody, this is an audited basis, and the actual result is based on the CPA's report. The Q1 net revenue was about TWD 442 million and Q-o-Q was down about 9%, but Y-o-Y was up 55%. The gross profit was TWD 995 million, and the gross margin for Q1 was 22.4%. The operating expense was TWD 811 million and the operating OP ratio was equivalent to 18%. The operating income was TWD 184 million. So the OP margin is about 4.1%. There is a non-Op income net about TWD 125 million. And also, therefore, the income before the income tax becomes 309 million. And because of the income tax expense was TWD 42 million. So therefore, the net income was TWD 267. The net margin was 6%. The net profit attributable to the parent company is TWD 407 million. So therefore, the EPS becomes TWD 0.96. Compared to the last quarter, last quarter was TWD 0.91 for EPS and compared to the same quarter a year ago, the same quarter a year ago, the EPS was a loss, TWD 0.95. The ROE return on equity for this quarter was 5%, is the same as last quarter. The approximate utilization rate is 55%, which is lower than last quarter, which is 60%. And the depreciation expense is a little bit lower than last quarter, become TWD 170 million. The CAGR for this quarter was TWD 303 million. So this is the income statement. And on next page, we can quickly take a look for the non-op item. It's majorly 2 items. One is the gain on financial liability at amortized cost, which is what we mentioned earlier that because of the retention of the remaining BCP then recognize the non-op profit. That's this one, TWD 254 million. And the financial cost is actually is interest expense. Okay. Then please flip to the next page, we discuss our balance sheet. Well, since we have mentioned that we already fully redeemed our ECB, the remaining ECB, so we're starting from there. Please take a look at the December 31, 2023, and the current portion of the bond payable still can see that there is a TWD 4.7 billion. That's exactly the ECB outstanding. But if you take a look on the right-hand side, the March 31 is gone, disappeared. And that's because this has been fully redeemed. And because of that, you can also find out that the cash on hand also declined from compared to last quarter, end of last quarter, become TWD 5.6 billion cash on him. But because of the -- we pay out the early payout the ECB outstanding, so the total liability also going down from TWD 33.8 billion to TWD 28.2 billion. And therefore, the debt ratio also going down from 49% to 43% at March 31. And so therefore, the total assets also become TWD 46.745 billion, but the net worth, which is the total equity, going up from TWD 35.3 billion, up to TWD 36.6 billion. And the book value per share or net worth per share also going up from TWD 80.09 to TWD 83.28. And the key impact, but with the debt ratio going down, the current ratio going up from 135% to 139%. The both ratio and the index going to the healthier label. So that's pretty much what I have. Okay. Then now we can begin the Q&A. Please submit your question in the input bars and the webcast window now. Thank you.

Okay. This is Steve. I think, first, I think I will provide some better picture about the Q2 guidance. I think as I just mentioned, I think for Q2, right now, we see most of the growth momentum that were coming from cellular and Wi-Fi. Both these 2 applications due to the smartphone demand, I think what we see is these 2 applications will have a strong growth in Q2. But at the same time, we see infrastructure may be slightly decreased. And also optical may be facing a bigger decline compared to Q1 because of the traditional low season of the 3D sensing yes. So that's the reason why even we think Q1 from Q1 to Q2, the utilization rate should be going up because of the revenue growth. But at the same time, what we see is the product is maybe a little worse than Q1. So that's the reason why we gave the guidance about mid-20 range of the gross margin Yes. Thank you. Okay. There's a question about the 3D sensing. As you know, we allocate our 3D sensing revenue in our other RS, and also, I think the whole -- our optical revenue that will categorize in one segment. So maybe it's not easy to separate the 3D sensing because as you know, that's almost a single end customer Yes. And until right now, I don't think we can go very clear shifting from them for the second half of the year Yes. So basically, what we see from recent 2 years, the end customer is adding up one supplier for the 3D sensing. So it looked like the total 3D sensing supply right now, the share was more equal compared to 3 to 5 years ago. So I think if we just check with our 3D sensing revenue, maybe we'll go down a little compared to last year. But as we mentioned in the previous meeting. Actually, from last year, actually, we have more diversified our revenues of our optical devices. Right now, the non-3D sensing revenue is more than double digits in 2023. And this year, maybe have the chance to reach almost like 20%. So I think for the whole year, optical device revenue, maybe right now, we don't get a very clear picture, but what we have more confidence is our non-3D sensing revenue will be growing year-on-year. Thank you. Okay. It's a question about the Wi-Fi. Like I mentioned, but I think for WIN Semi, the portion about the 6D and 7, I think maybe it's a little different with the industry. As we mentioned, as I just mentioned in the comments, WIN Semi always provide the most advanced technology for all applications. So starting last year, we already provide a lot of 6D modules to our big customer and also got a very good result in smartphones. And this year, we also see not only the cellular, but also our rounder Wi-Fi router customer. They also rising up about 6D and 7 portions in the orders. What we see is for our Tier 1 Wi-Fi customer no major central or router. Actually, right now, they are all very big portion is for Wi-Fi 6G and 7. I think right now for LAN Wi-Fi 5 or Wi-Fi 6 maybe has less portion in the portfolio in WIN Semi.

Okay. While we are still waiting for more questions coming, maybe we shared our view with everybody question, which is from the investor 1 hour ago. There is one question asking about LIDAR because it sounds like China has their own LIDAR product. And the investor would like to know where the LIDAR product comes from and is there any opportunity for WIN Semi. Well, I think WIN Semi engage several LIDAR products and the technology with a different customer for a period of time. And I think not only for the long-distance LIDAR and also the short distance LIDAR is all in our portfolio with our existing customers. And we probably cannot really tell where our foundry product goes to. But according to the communication with the customer, it looks like we have the customer in China's automotive LIDAR supply chain. We also have other customers also in the U.S. or the Europe market supply chain. So we believe no matter which one is ramping up, we both have the opportunity for the LIDAR market.

Okay. It's a question about the picture about 2024. What the driver for 2024 for growth. We just mentioned previously, the second half year last year or this year, the first half, what we see is secondary because of the smartphone demand was turning back from negative to positive growth, especially what we see is a stronger demand for the high-end smartphones. So it's definitely driven WIN Semi revenue has a better result than last year, especially in cellular PA, Wi-Fi PA. Yes. I think that may be 2 major volume drivers for WIN Semi in this year. Thank you.

Well, I think, again, while we are waiting for more questions coming we'd like to share with you about some questions in the last section like there is one of the question asking about is there any update for CapEx and the depreciation expense for the year 2024. I think I would like to say that in the last earnings call, before the Chinese New Year, we provided the whole year's depreciation expense year-on-year will be about almost flattish. That's our view. And for Q1, actually, the depreciation expense is a little bit lower than the Q4. So I think from this point of view, depreciation expense, we still keep the same view. And for the CapEx, also in the last earnings call, we also mentioned that the whole year CapEx will be pretty similar to the year of '23, which is TWD 3 billion plus and minus. So far, I think we still keep pretty the same, maybe between TWD 2 billion and TWD 4 billion, mainly for the fab and the equipment maintenance. There will be no new capacity will be added into our fab for this year '24. Yes, thank you.

Okay. I think we're still waiting for further questions. Yes. But I think we wait another a few minutes. If we don't have got us further questions, I think we will end up today's meeting. And before that, I think I will update our new fab, which located in Kaohsiung and that we start to build the construction around 3 years ago. Because a lot of investors still want to know the further information about this project. I think for this project right now, we will finish the shell maybe end of first half this year. And then after that, we will hold the [indiscernible] buildup and also the equipment acquirement because right now, our utilization rate is just around 60% up and down. Compared to what we have right now, I think we still have plenty of capacity to support the demand this year. So I think before we reach the utilization rate of about 80%, we will wait for the demand going run up back and also check with the technology or application change year-on-year because that's also related to our equipment in the future. So I think at the end of this year, we will only finish the --- share in this year and start and plan about the clean room and equipment acquired. That's about the Luzhu Science Park project right now status.

Okay. Now the time is for 4:15 p.m. and there are no further questions on the pipeline. So thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. And please visit www.winfoundry.com under the Investor Relations section. Thank you very much, and you may now disconnect. Goodbye.