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

Good afternoon from Taiwan. Welcome to WIN Semi Second Quarter 2024 Earnings Conference Call. I'm Alex Lee, your host for today. I'm also the CEO at QIC. Participating in today's call will be Mr. Steve Chen, WIN Semi, General Manager of Corporate Administration and Mr. Joe Tsen, Spokesman and Associate Vice President, Finance. Before we start, we would like to remind everyone that today's discussion will contain forward-looking statements that are subject to significant risks and uncertainties. Please refer to Safe Harbor notice that appears on the presentation. Additionally, the financial results for second quarter 2024 and the presentation have been posted on the company website and the MOPS for your reference. By the way, the format for today's earnings call will be as follow: First, Steve will provide a key message of WIN Semi's operations and the future outlook. Soon after that, Joe will go through WIN Semi's financial results for the second quarter and first half of 2024. Finally, in the Q&A session, Steve and Joe will jointly answer questions from investors. And now, I would love to turn the call over to Mr. Steve Chen for the key message of WIN Semi's operation and future outlook. Thank you. Steve?

Thank you, Alex, and welcome everyone. 2024, our consolidated revenue was TWD 4.96 billion, up 12% quarter-on-quarter and up 26% year-on-year, which was in line with our previous expectation. Our gross margin was affected by the decline in the share price of a listed Chinese customer held by our consolidated subsidiaries in the second quarter. However, as our capacity utilization rate increased from 55% in the previous quarter to 65%, and the product mix was better than expected, our gross margin increased from 22.4% in the previous quarter to 27.2%. And operating margin also increased from 4.1% in the previous quarter to 10.1%. Net profit attributable to the parent company for the second quarter was TWD 485 million with an EPS of TWD 1.14. Looking at the revenue change for each product in the second quarter, WiFi once again delivered the most significant quarter-on-quarter revenue growth. In addition to the increasing penetration of WiFi 6E/7, we have also seen order pull-in momentum of WiFi PA for new smartphone launch in the second half of the year. Infrastructure revenue in the second quarter exceeded our previous expectation, with a double-digit quarter-on-quarter growth. We will continue to monitor the end demand of 5G infrastructure and the changes of inventory levels in the second half of the year. For Cellular PA, while the demand from Android smartphone customers in the second quarter was slightly lower than the previous quarter, the inventory pull-ins of Cellular PA for new iOS devices launching in the second half of the year has started. As a result, cellular revenue in the second quarter experienced a mild quarter-on-quarter growth and a year-on-year growth exceeding 50%, which was the highest among all product categories. This indicates that the industry has passed its trough, and the inventory levels for smartphones are much healthier than last year. Lastly, optical was the only product with a quarter-on-quarter revenue decline in the second quarter, primarily due to the product transition for smartphones. As we focus on the massive data streams brought by AI, investing significant resources in optical sensing and datacenter data transmission, AI is also quietly impacting the future of smartphones. During our last earnings conference call, we emphasized the importance of high-end smartphones to WIN Semi and were pleased to see the return of momentum for high-end smartphones. Recently, multiple major smartphone brands expressed that smartphones equipped with AI features will be the mid- to long-term trend, and they look forward to the long-awaited replacement demand in coming years, with high-end smartphones being the first to benefit. This is consistent with our view. To meet the huge data transmission demands of the future, we have not only developed technologies for WiFi 6E and 7 and mass-produced relevant products, but also introduced the industry's most powerful 7th generation HBT technology. This PA process, designed for high-performance, high-end smartphones, has been under the qualification process by several customers. Although, the near-term end market demand remains uncertain considering geopolitical or China economic factors, we will continue to focus on our customer-first foundry business model with ongoing investments in R&D to maintain our long-term leadership. For the Chinese smartphone market, the inventory adjustment came to an end by the end of the second quarter of 2023, and customers resumed inventory pull-ins for 4 consecutive quarters since the second half of 2023. Entering the third quarter of 2024, we expect the demand from Chinese customers will temporarily slow down, while iOS smartphones will enter the stronger season for inventory preparation as scheduled. As a result, for the third quarter of 2024, we expect revenue to decline by high single digit quarter-on-quarter, with gross margin at around mid-20 levels. Overall, for the whole year of 2024, we still expected revenue to increase from last year. Thank you.

Thank you, Steve. Over to you Joe.

Okay. It's our pleasure to present our financial results for the second quarter of 2024. We are starting from our presentation slide. Firstly, the second page, Safe Harbor notice, please read it over. And then we started from Page 4. Page 4 is talking about our revenue and the margin trend. The Q2 revenue was a TWD 4.96 billion and Q-o-Q was up 12% and Y-o-Y was also up 26%. And our Q2 gross margin due to the decline in the share price of listed Chinese customer held by our consolidated subsidiary, the impact for gross margin was negative 3.1 percentage point. However, driven by the higher utilization rate and also the better product mix compared to the last quarter, so therefore, the gross margin for Q2 become 27.2% and operating margin was 10.1%, which is an increase about 4.8 percentage point and 6 percentage point from the previous quarter. And you can find out that, if we exclude the impact from the Chinese customers' decline in the share price for Q2, you can find out, actually our gross margin for this quarter is already exceed 30% this kind of level. Okay. Then please flip to the page -- next page, Page 5, talk about earnings. In Q2 2024, our net profit attributable to the parent company was TWD 485 million compared to last quarter, last quarter was TWD 407 million. And the EPS for second quarter become TWD 1.14 and last quarter it was TWD 0.96, so accumulated, the first half EPS become TWD 2.1. Then now we discuss about our product mix in Page 6. When I mentioned that earlier, the Q2 gross margin impact by -- are driven by the higher utilization rate and also the better product mix. And we can show you in this page. If you are new to our earnings call, then firstly, I would like to give you some kind of background. Our gross margin -- we enjoy the best of our gross margin for infrastructure and the second one will be the optical, which is inside the optical, the others. And cellular and WiFi both are the smartphone related and high volume products, so maybe suffer lower margin. So in this quarter in 2024, as you can see that our Cellular PA in the range of between 40% and 45%. Although, compared to last quarter, last quarter was between 45% and 50%, which is lower than this quarter -- it's lower than last quarter. But because the whole quarter of Q2 revenue up 12%, so actually the Cellular PA for Q2 still have single digit growth. The most significant growth happened in the WiFi, which is more than 60% of the growth. That's because of the iOS customer for WiFi actually is already triggered the inventory pull in Q2. And I think the infra is a little bit surprised in Q2 because we do see a certain customer or industry has some kind of inventory pull and we're not supposed to see this kind of growth, but it actually grows more than 10% for infrastructure. And lastly, it's optical. Optical, it's about 12% of the total revenue, which is -- I think it's only the sector which is decline among the product mix. It's due to the end customer -- I mean, end product is in the -- during the product transition period. Okay, this is the product mix, and please flip to -- flip page to the Page 7, we talk about the guidance. And as you know that the whole Android, China Android market has been -- the restocking since the middle of 2023, the inventory restocking and after the fourth consecutive quarter and we do see that Chinese customer for Android camp has temporarily slowed down. And so we expect that the Q3 of '24 revenue to decline high single-digit Q-o-Q. And -- but we do -- also we do see that the utilization rate -- because of the revenue decline, the utilization rate may suffer a little bit. So we guided the gross margin to be around the level of mid-20s. Okay, then we can talk about our financial statement quickly in Page 9. Page 9 is our Q2 income statement and I still need -- I still want to remind everybody that all of the figure we mention that today is on is under the unaudited basis. The actual result is based on the CPA's reports. The Q2 '24 net revenue was TWD 4,961 million, Q-o-Q was up 12% and Y-o-Y up 26%. And the gross profit was TWD 1,352 million and Q-o-Q up 36% and Y-o-Y up 71%. And the gross margin for Q2 was 27.2% and compared to last quarter -- last quarter was 22.4%. And operating expense in this quarter was TWD 850 million, and so therefore the operating -- the OP ratio become 17%. The operating income become TWD 501 million, Q-o-Q was up 173%. So, therefore, the operating margin become 10.1%. Last quarter it was 4.1%. And then non-op item was TWD 46 million loss. The detail was in -- will be in Page 11. And income before income tax was TWD 455 million and the income tax expense was TWD 62 million, so therefore the net income was TWD 393 million. And this figure was -- Q-o-Q was up 47%. So, therefore, the net margin becomes 7.9%. And the profit attributable to the parent company was TWD 485 million and therefore the EPS becomes TWD 1.14. And the return on equity was 5% which is in line with last quarter. Now approximately utilization rate was become 65% compared from the 55% last quarter. That's also driving the gross margin up in this -- for this quarter. The depreciation expense is very close to last quarter, it's TWD 1,159 million and last quarter was TWD 1,170 million The CapEx for -- its TWD 343 million. It's about TWD 40 million more than last quarter. Okay, then now we can take a look for the first half. The first half net revenue was TWD 9,404 million and the Y-o-Y was up 38%. Gross profit was TWD 2,346 million and Y-o-Y was up 110%. So the accumulated, the first half gross margin was 24.9% and OP ratio become 18%. The operating income was TWD 685 million and therefore the operating margin becomes 7.3%. The non-op item for the first half -- accumulated first half was income of TWD 79 million. And the income before income tax was TWD 764 million and income tax expense was TWD 103 million and the net income was TWD 660, so the net margin becomes 7%. The net profit attributable to the parent company was TWD 892 million, so the EPS become TWD 2.1. And compared to last quarter -- I mean, the same period of last year was a loss -- last year was a loss, TWD 1.18. Okay, so therefore the first half return on equity was 5.1%. The approximately utilization rate for first half was 60%, depreciation expense was TWD 2,329 million. The CapEx was TWD 646 million. It's much slower than last year. Okay, then that's the first half income statement. In the Page 11, for Q2, I think, I only want to show you that the significant figure is the financial cost of TWD 203 million which is interest expense. The rest of it is still quite normal and for your own reference. And finally, the last page will be the balance sheet. As at the day of June 30, 2024, the cash on hand was TWD 5,296 million, and the total assets was TWD 65.14 billion. And the total liability, it's TWD 27.129 billion and it's about TWD 1 billion lower than last quarter. And the total equity was up TWD 1.3 billion, become TWD 37.884 billion. Therefore, the book value per share also up from TWD 83.28 to TWD 86.52 which is up TWD 3.24. Finally, the key indices. The current ratio is 110% and the debt ratio is 42%. Okay, this is all I have. Thank you.

Great. Thank you, Joe. Let's move on to the Q&A. We've got a pretty busy kind of good quality question list today, both online and in the pack. For those questions prepared and requested by the investors before the call. Again, it's little reminder, if you have any question, please submit your question in the chat box the management will answer the question as soon as possible. Let me read couple of questions in the packet in first place. For the third quarter revenue, the guidance is down high-single digit Q-on-Q, though the whole year guidance remains unchanged. Can management provide more detail about the expectation for each product segment?

Okay, thanks Alex. I think for the third quarter, I think look like it's optical application is the only one who will have slightly increasing. And the other, no matter WiFi, cellular or infrastructure will have a slightly decline in this quarter. Yes. That's the reason why for the whole quarter we will guide this high-single revenue down and also little down about gross margin from 27% to mid-20s level is because of the product mix looks like it's a little not as good as Q2. Thank you.

Thank you, Steve. The second question in the pack is, in terms of smartphone segment, what are the order trends for U.S. and the Chinese customer in the second half of this year? And how will the launch of the AI smartphone impact customers' order trend?.

Yes. I think this -- actually you can say that's the first year after the COVID. So right now what we see from the U.S. customer or the Chinese customer is a little different in momentum after the COVID. Yes, because like we say, I think from that second half in 2023, the Chinese customer, they start to rebuild their inventory and recover the demand. And quarter-by-quarter the demand is increasing until Q1 and then Q2, we see that a little slowdown in Q3. Right now what we see is a little slow in Q2. But at the same time, the U.S. customers are still keeping the momentum, like the -- momentum traditional like before the COVID. Actually the peak season of the Cellular PA that will be located in Q2 and part of the Q3. And also at the same time optical sensing application peak season will be Q3. And so that's a little different with different geography. And also the other question is about AI function. I think for AI function it definitely will bring the new demand momentum for the smartphone, because especially there were for high end smartphone because they have a better spec which can provide a better AI experience, function for -- there. So for a point of WIN Semi view, we think the AI function smartphone, it definitely will bring a long term demand for the smartphone growth. Thank you.

Thank you, Joe. Another question of pack is about a WiFi 7. What is your expectation for penetration rate for the second half of the year and the next year? And how significant the content growth opportunity in PA usage with the upgrade to WiFi 7? Lastly, and with the WiFi upgrade trend, how many PAs were switched to GaAs based from silicon based?

Okay, thank you. For the WiFi 7, actually, we already seen start from this year a lot of high-end smartphone is already adopting the WiFi 7 in their smartphone flagship product. And we also see the new -- next coming high-end smartphone, most of them will have WiFi 7 in there. So we think the penetration rate will keep going up start from this year and even better in next year. And the WiFi 7 is really help for the -- our gallium arsenide content in the handheld devices. Because I think it's not only handheld devices, also routers, because from the WiFi 6 to WiFi 6E/7 actually they were increasing a new band in the applications which means they were using 3 bands instead of 2 band compared to traditional WiFi. And also this new band is -- the frequency is higher between 6 to 7 gigahertz, which we can see in most of the case gallium arsenide PA will provide a better performance than other materials. So, I think, as the WiFi 7 adopting rate keeping growing, I think the gallium arsenide demand for the WiFi PA that will increasing compared to the peer for the traditional WiFi. Yes. Thank you.

Thank you, Steve. Let's shift to those questions in the chat box. Thank you for all of the online this kind of patience. Well, I will read each question before management answer the question. The first question from investors online. Does the seasonality pattern change for WIN Semi i.e. on the revenue drop in the Q3?

Okay, like I just mentioned, I think after the COVID we see right now on the Chinese market momentum look like it's a little different with other geography. So I think that the reason why this year we see the seasonality is a little different with previous before. But I think that's maybe because that's the first year after the COVID in China. So like we just saying, they start to pull up the demand almost 1 year ago. So look like right now it's going a little slow down. It's still in a very common situation for us. But at the same time on the seasonality for our USA customers that still keeping the same pattern like before. So I suppose that's -- maybe that is only this year kind of special case not indicate the pattern will become changed in the future. Thank you.

Thank you, Steve. The second question, with respect to the market share change in the optical, what is the outlook for the market share in the remainder of 2024? Do you expect it to remain flat or continue to decline?

Okay, I think we all know that since 2023 actually the end customer, they bring a new player for the 3D sensing. But this year, I think, they don't bring -- the other new one. So I think in most of the case, the share should be much stable compared to last year. I think that's the reason why in this Q3, we see our optical revenue were better than Q2. Yes. So, I suppose those kind of share in 3D sensing, I think, it's much stable right now.

Okay. Steve, thank you. Will the management also comment on the potential inflection point of Android smartphone market?

Okay. I think for Android camp, I think the customer that I now, most of are Android camp customer for WIN Semi, I think that will come from China. So that's maybe the reason why we see our Android camp Cellular PA revenue is a little weaker in Q3 compared to Q2. But, because the visibility of the Cellular PA is only around like 4 weeks, so, I suppose right now it's not what we see for Q3. Yes. But Q4 keep the same kind of situation, it's still only time to watch. Thank you.

Thank you. Could you help me understand why is our Q3 revenue guidance weaker than the typical seasonality? Is it just because of a China slowdown or iOS smartphone also weaker than season. Also, second quarter gross margin was very strong. Subsidiary, the share price related loss implied margin 30% plus gross margin. So why is the Q3 gross margin down so much to the mid-20%.

Okay. Thank you. Yes, I think like I just mentioned, I think for this year, the Q3, what we see for cellular is only China related market was slow down, but our iOS smartphone camp is still slow and they are also still building the inventory for new product launch in Q3. So I don't think that the whole cellular market or the smartphone market become weaker. It's only a special situation in China for Q3. So I think the total smartphone market doesn't mean that will become -- going to weaker seasonality for Q3 and Q4. Yes. And, yes, I think for our Q2 gross margin exclude subsidiary share price evaluation rules that were more than 30%. Yes. But as I mentioned in the management comment, yes, it's not only contributed by the utilization rate increasing around 10%, but also we have a better product mix than are expected in Q2 such as the infrastructure which is our highest margin application. They performed very well in Q2. But in Q3, we also -- we still see it's a slightly decline there also, yes. Because for Q3, right now, we only see optical will have positive growth and all the other applications maybe feel slow down, decline there. So that's the reason why we will guide the Q3 gross margin back to around the mid-20%, because the highest application infrastructure related product is also down in Q3. So that's the reason we don't think it's that easy to maintain the margin better than 30%. Thank you.

Thank you, Steve. The next question. Could you please help us with the breakdown of your handset exposure roughly by Chinese versus non-Chinese customers?

Okay. I think maybe it's more reasonable to describe the iOS versus the Android will be easier, because the -- for Chinese, sometimes it's kind of mix customer also on the different market. So we can say that like, for example, the iOS approximately around between 20% and 30% in of our total Cellular PA, which means the rest of the 70% to 80% is Android camp. Of course, Android camp, including the Chinese smartphone -- China smartphone, Korean smartphone and any other non-iOS. So yes -- and for this kind of breakdown is also pretty match the whole smartphone market breakdown from end smartphone -- I think the breakdown is pretty in line with the end smartphone breakdown, 20% to 30% of iOS, 70% to 80% of Android. Thank you.

Thank you, Joe. Next question, is there any chance that we may get foundry outsourcing orders from other U.S. RFID end players in the coming year or 2.

Okay. Yes. I think, since WIN Semi start, we always think the IDM company is our future customer. And also, we have that kind of policy since we field WIN Semi. And actually, most -- actually I think all the U.S. IDM company, actually they are WIN Semi's customer. I think it's all more than 10 years ago. Yes. So I think in most of the case they will process their major product in their own fab, but all for the other non the major RF related application, they always will collaborate with WIN Semi to use WIN Semi technology to produce the wafer for them. Yes, so it's definitely as the future demand going up, I think it's certainly we think that's a very good situation for WIN Semi to have a better product that are also seen from those IDM companies.

Thank you. Thank you, Steve. Next question. What is your expectation on infrastructure related products, sequential sales growth in Q3.

Okay. Like we just mentioned, our infrastructure application, they performed very well in Q2 and even better than our expectations. So I think going to Q3, what we see is a little back to the normal demand level. So compared to Q2, we think infrastructure will little decline in Q3. Thank you.

Thank you, Steve. Next question. Given industrial condition has improved, when will management plan 2024 and 2025 CapEx in a Kaohsiung factory longer term?

Okay. Like we mentioned in the previous conference call, we will finish the share of the Kaohsiung factory at the end of Q2 or Q3. And then we will waiting for the cleanroom and equipment prepare since we see our deterioration rate coming back to around 80%. Yes. Because I think in most of our case our lead-time for a new fab is around 1 year to 1.5 years. So for the utilization rate range right now, it's only around like 60% up and down. I think we still have plenty of time to watch the market and to see what kind of equipment mix is we needed in the future for Kaohsiung. Thank you.

Thank you, Steve. The next question. Could you please guide us how many percentage of your revenue related to datacenter? Would you put in infra and opticals? And could you please also highlight how the cloud trend benefit WIN Semi now and in the future?

Okay. I think right now, data center related revenue it's a mix with different application of technology WIN Semi. For example, we have the directly laser source revenue and also we have a lot of infrastructure related technology that also is related to the datacenter for the latest optical communication. So I think we should say the percentage for our whole -- the total revenue is still in a very low percentage, but year-on-year they are keeping growth. And the cloud trend is -- definitely will benefit for WIN Semi because of the cloud trend that means you -- everyone needs more wireless communication than before. Yes. So more of the cloud trend that definitely will bring up WIN Semi's wireless communication demand in the future. Thank you.

Thank you, Steve. In term of infra sales, could you please break down it by application like for telco, datacenter and defense et cetera?

Okay, thank you. I think right now most of our infrastructure revenue that were coming from base station still is major application. And the second one maybe that will be satellite, yes. Because of we all know for a recent past few years, the LEO satellite become launch and become more popular year-on-year. And also in this year, we already see the end customer, they start generation 2 LEO plan launch again. So, I think that's the other reason why we have seen our Q2 infrastructure revenue is better than our expectation. Thank you.

Thank you, Steve. The market has been talking about WIN Semi maybe the key beneficiary to the recent supply chain shift by the Korean smartphone brand. What is your view about this?

Okay. Thank you. Yes, I think that also we have heard and also got a feedback from our customer. Look like the Korean end customer, they are increasing their supply chain list and also invited more design house to join their suppliers. Yes. So I think in the future, definitely that will help WIN Semi more our end customer diversification. And also I think that will bring our design house customer have better customer diversification also. Thank you.

Great. Before I read my last question in the packet, let me remind you if you have any question, please submit it at the chat box. My next question. We know that WIN Semi has a leadership in advanced process of compound semiconductors. What kind of industrial development will accelerate the adoption of advanced process of a compound semiconductor and thus further enlarge WIN Semi's competitiveness.

Okay. Yes, I think WIN Semi was a pure foundry for the compound semiconductor and we all know compound semiconductor was -- have a better performance, especially for the wireless communication and also the optical communication. So I think in the future because of the AI become more booming in the future and demand of that kind of data communication will also upgrade their speed and performance because of the cloud or the AI applications. So, I think WIN Semi will still more focusing on our technology to developing related to the high-end wireless communication such as more advanced HBT for Cellular PA and also more advanced PA technology for infrastructure no matter for the base station or for the satellite. And also at the same time, I think we also locate more resources to the optical device such as [ IDN ] WiFi or the photodiodes that kind of data communication and also the VCSEL optical communication also. So, I think, in general, because of the AI trend or the datacenter trend, I think the future demand for the compound semiconductor demand will keep growing in the future. Thank you.

Well, the next question. In terms of automotive demand, what is WIN Semi's order visibility? Should it outperform auto market?

Okay. I think that's maybe the question related to the LiDAR application for the optical device. I think right now, most of our LiDAR project is still in the project base. And definitely in some of them is already maybe going through the mass production. But I think most of the reason for LiDAR is not become -- going to a very big contribution to our revenue is because of the government regulation for the autopilot, especially upgrade to Level 3 or even higher than that. Because upgrade to Level 3, that means the carmaker, they need to take some responsibility about access. So it looks like I think the LiDAR technology is ready and also the autopilot technology is ready. But right now its adoption waiting for the carmaker and be very quick upgrade to Level 3 or they want to maintain in Level 2 or Level 2 Plus for several. Yes. Thank you.

Well, due to the time constraint, this is possibly the best place we can conclude the meeting today. Well, thank you for all of your quick question from investors online and the question before the call. Again, thank you for the management, very transparent communication as before. Please feel also advised that a replay of the call will be accessible within few hours from now through WIN Semi's website. If you have any further questions, please also feel free to contact WIN Semi Semiconductor investor relationships. This will conclude today's call and have a nice day.

Okay, thank you.

Thank you.

Bye, bye.