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 third quarter of 2024. 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, our General Manager of Corporate Administration in WIN Semi. Today's call is organized into 3 sections. First of all, Steve will comment on company's result and provide brief guidance for the fourth quarter 2024. Secondly, I will go through the financials in detail. After that, we will open to the floor for Q&A. Please freely submit your question in the input box on the webcast window throughout the conference. Before we begin, I would like to draw your attention to the safe harbor notice on Page 1 of the presentation slide. Please note that this presentation contains forward-looking statements, and 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. Steve Chen, General Manager of WIN Semi.

Thank you, Joe, and welcome, everyone. In the third quarter of 2024, our consolidated revenue was TWD 4.3 billion, up 4% year-on-year and down 12% quarter-on-quarter, which was slightly softer than our previous expectations. As the capacity utilization rate declined from 65% in the previous quarter to 50% this quarter, our gross margin dropped from 27.2% in the previous quarter to 21.6%, and operating margin fell from 10.1% to 2.9%. Net profit attributable to the parent company for the third quarter was TWD 0.27 billion, which with an EPS of TWD 0.54. For the first three quarters of 2024, cumulative revenue increased by 25% year-on-year, with an EPS of TWD 2.64. While the third quarter is typically the traditional peak season for U.S.-based iOS smartphones, we had previously anticipated that due to the soft demand in Chinese Android smartphone market, the third quarter this year would be below-seasonality in the peak season. It's now appears that the decline in demand was greater than we previously expected, and thus cellular PA revenue had the most significant quarter-on-quarter decline in the third quarter. WiFi PA revenue also declined from the previous quarter, as the peak season of inventory preparation of the new models launched in the second half of this year had passed. However, driven by the introduction of WiFi 7, WiFi revenue in the third quarter and the first 3 quarters increased by 50% and 70% year-on-year, respectively. In addition, revenue of infrastructure was better than expected in the second quarter due to customer inventory restocking and the revenue in the third quarter was also better than expected even though it was slightly lower than the second quarter. Finally, Optical revenue [ entered ] the peak season as expected with the launch of new iOS models, making it the best-performing segment in the third quarter. The current inventory levels of smartphone customers are much healthier than the first half of last year, but the end market demand was fluctuated since the beginning of this year due to factors such as geopolitical tensions and the economic downturn in China. These fluctuations continue to test the adaptability of both upstream and downstream suppliers in the supply chain. In response to market changes, in addition to maintaining our existing business, we are investing heavily in R&D, focusing on the vast high value-added products' business opportunity in the coming years. Taking low Earth orbit satellites as an example, we not only continue to developing high-power semiconductor devices for signal transmission and reception between satellite, but also provide customers with data transmission solutions between satellites to gateways. Meanwhile, to meet the further demand for AI data center, we not only participate in industry alliances to deepen cooperation with upstream and downstream suppliers, but also collaborate with several customers to develop related optical data transmission, reception, and also modulation components, as well as optical driver ICs. We aim for these developments to become another mid to long-term growth driver on top of mobile wireless communication. Looking ahead to the fourth quarter of 2024, as the demand in China's smartphone market remain weak and the peak season of WiFi 7 PA inventory build for new model launched in the second half of this year has passed, we expect revenue to decline by mid-teens quarter-on-quarter, with gross margin at around high-teens levels. Overall, for the full year of 2024, we still expect revenue to increase from last year. Thank you. I will turn the call back to Joe.

Okay. It's our pleasure to present our financial results for the third quarter of 2024, please refer the presentation slide. We starting from Page 2, please read all the safe harbor notice. And then starting from Page 4, we discuss about revenue and the margin. The Q3 '24 revenue was $4.35 billion and QoQ down 12% and the YoY was up 4%. As has been mentioned by Steve on his management comment for the Q3's revenue down the most of sector will be the cellular and WiFi, which is the high-volume business. And because of that, the high-volume business went down most, so the utilization rate also went down significantly to 50% from 65% last quarter. And then making the unit cost went up dramatically and then impact the gross margin. So therefore, the gross margin declined by 5.6 percentage points to become the 21.6%, and operating margin, therefore, also declined 7.2 percentage points to become 2.9%. And because of the cellular and WiFi -- the weaker of the cellular and WiFi demand in Q3 and given the slower inventory pull-in by customer and also decline the utilization rate, therefore, the earnings, please take a look on the Page 5. The net profit attributable to the parent company was TWD 228 million and therefore, the Q3's EPS was TWD 0.54. The accumulated Q1 to Q3, the EPS was $2.64. That's for the income statement from top-line to the bottom-line. And now please flip to the Page 6, we can discuss about the product mix in Q3. In Q3, as we mentioned, the major -- the slowdown mainly coming from cellular and WiFi. So you see that the cellular PA, the percentage was between 35% and 40%. It went down from 40% to 50% in last quarter. And the WiFi, it looks like remain on the same range between 15% and 20%. But actually, we still have the double-digit of slowdown. And the infrastructure, you see that infrastructure maintained about between 25% and 30%. And actually, the QoQ, it only went down about low single digit, which is better than our expectations in the very beginning. The overall, we see that infrastructure have a better performance this year from last year. And finally, the optical business, 16% of the total revenue. It's coming from 12% last quarter. In this quarter, optical is the only sector which on the growth of the business. That's all because of the second half new flagship model launched the new phone, new model on time and then exactly benefit our customer, which is 3D sensing. And so that's what happened. And next page, please flip to Page 7, talk about our guidance for Q4. I think on Steve management comment has already mentioned it, we expect Q4 revenue to decline about mid-teens QoQ. I think the reason and pretty much the same as Q3, which means we see that the China smartphone market still remain weak. And WiFi -- I think the WiFi, the inventory pull-in for the second half new model is almost over. And so the high season -- the peak season for the inventory pull for the second half new model for WiFi components -- I mean, the WiFi PA, the peak is already happened between Q2 and Q3 and Q4, we see that significantly going down. So this is the 2 major products will be weaker in Q4. And on the contrary, we see the rest of like infrastructure and optical business will be remain flattish in Q4, which is good. And then, however, because of revenue going down mid-teens, we expect the utilization also will impact it again. And then -- so the gross margin also impact the gross margin to be around the level of high-teens. That's our view for Q4. Okay. Then after the -- a couple of pages of summary, then we can quickly go through the financial result -- financial statement. First of all, the income statement for Q3. Before I begin, any number or figure I mentioned that will be on audited basis and the actual result should be based on the CPA's report later. The Q3 net revenue was TWD 4,348 million and QoQ was down 12% YoY was up 4%. And the gross profit was TWD 938 million and the gross margin become 21.6%. And under the 50% of the utilization rate, you see that the most similar utilization rate is a year ago, Q3 also 50% and the gross margin is pretty close to this quarter. And operating expense is TWD 813 million, although this figure is lower than last quarter but, however, because of Q3's top-line QoQ was down 12%, so the operating ratio was a little bit higher, become 19% and, therefore, the operating income was TWD 125 million so operating margin become 2.9%. And the non-operation income was TWD 121 million. And so the income before income tax was TWD 247 million and then the net income become TWD 210 million and the net margin was 4.8%. The net profit attributable to the parent company become TWD 228 million. So the EPS for this quarter was TWD 0.54. And the ROE for this quarter is 2% and depreciation expense TWD 1,133 million, it's little bit lower than lower quarter. But the CapEx is $424 million a little bit higher than last quarter. So that's Q3's number. And now we goes to the page 10 accumulated Q1 to Q3. The net revenue was TWD 13,754 million and the YoY was up 25%. The gross profit TWD 3,284 million and then therefore the gross margin for the Q1 to Q3 is 23.9%. The operating ratio for the 3 quarter total was 18% and operating income was TWD 810 million. And therefore, the operating margin become 5.9%. Net income before income tax was TWD 1,011 million. So the net income for the accumulated 3 quarter was TWD 870 million. The net profit attributable to the parent company become TWD 1,120 million. And therefore, the EPS for the first 3 quarter was $2.64. And the return on equity for the first 3 quarter was 4%. And the approximate utilization rate was 55% average, and depreciation expense was pretty close to the same [ turm ] last year was TWD 3,462 million. The CapEx is lower than our expectation is also lower than the same turn of last year. It becomes TWD 1,070 million. Okay, this is the income statement for the first 3 quarters. And next page, on page 11 it's a non-op item. I think we can leave it for your own reference. And the last page on my presentation slide would be the page chart, it's a balance sheet. At the September 30, 2024 the cash and the cash equivalent was TWD 5,673 million. The total assets was TWD 64,209 million and the total liability was TWD 26,009 million. And therefore, the debt ratio, it went down 1% to become 41%. The total equity went up to TWD 38,200 million and also the book value per share also went up to $87.29 from $86.52 last quarter. So finally, the debt ratio is 41% and the current ratio it went up from 110% to 141%. That's my part.

Okay, now we can begin the Q&A. Please submit your question in the input box on the webcast window now. Thank you. [Audio Gap]

Okay, first I think I will update some more picture about Q4 guidance, about the [ prioritization ] segments. For Q4 right now what we see the optical and infrastructure should be flattish. And due to the smartphone is weaker in Q3, so we see no matter cellular PA and WiFi PA and that will be also decline in Q4. Yes. So for the 4 segment look like optical and infrastructure will maintain in flat, but cellular PA and WiFi PA will be decline in Q4.

There's a question asking about related to WiFi. The question is the -- when all of the new model of the U.S. Tier 1 smartphone launch this year adopting WiFi 7, do we see this kind of adoption, were also happening in the Android market, and something like that. And then some other also, I will talk about some other view about Wi Fi. First of all, yes, thanks to the WiFi 7 this year and actually, we already have a customer stepping to the Tier 1 smartphone market last year, which is still WiFi 6E, but this year, their share remains strong. And also, in the -- when the all of the new model this year, Tier 1 smartphone adopting WiFi 7 and then bring the significant growth for the business. And then we also see a part of the WiFi router customer also adopting WiFi 7. On the same time, they still ship -- we're still shipping the WiFi 5 and WiFi 6, but already see the adoption happen in the WiFi router for WiFi 7, and that's a good thing. And then regarding the Android market, actually, WiFi 7, the first adoption should be in Samsung flagship model, which is earlier, very early of this year. And maybe we're expecting this kind of adoption from the Tier 1 smartphone market, including Samsung, including iOS, the more adoption for WiFi 7 is supposed to have more adoption happen in the rest of the Android market. And then year-over-year, from the high end to the mid end, from mid end to the low end, that's based on the experience in the past. And because of that, I'll also update some of the number for our WiFi business growth in WIN Semi. For example, like our -- actually, in Steve management comment have mentioned it, the -- our Q3 WiFi business, YoY has growth about 50% and accumulated Q1 to Q3 the WiFi business grows more than 70%, which is making the WiFi business the strongest product in WIN Semi for the year of 2024. Although, we're expecting for QoQ basis, WiFi business were going down because of the peak season has been ended. But the WiFi business and WiFi product, it should be the strongest product for the whole year of 2024 in WIN Semi, no doubt. [Audio Gap]

Okay. There's a lot of question was related to this Samsung increase the new vendor list for some China supplier will benefit about from wind. Actually, I think yes, I think both of the new vendor and the vendor is I think they are all same as customer, especially in those China design house. And definitely that wind and it certainly will benefit for those of new opportunity in Samsung with our customer in the future. Yes, but because of as everybody know, WIN Semi is always taking the technology leading position in the foundry market. And we always will provide most advanced technology to our customer to design a better value-added product to compete in the market. So it's really again showing that WIN Semi technology can provide our customer very value-added profit to making their product become more high performance to join the Tier 1 Samsung vendor list. Yes. So I think maybe that will not really directly give us some rush order in the very short-term. But I think for long-term, it definitely will increasing WIN Semi's coverage for all those Tier 1 high end smartphone customers vendor list. [Audio Gap]

Okay. There's a couple of questions asking about the infrastructure business. It's about asking about the infrastructure for this year and then for the future and also the growth driver, something like that, I put it all together. And first of all, I have to -- we have to admit that infrastructure demand has been weaker for a while since the '23 the beginning of '24. And starting from Q2 this year, we see some kind of inventory replenishment happened in Q2. And in the very beginning, we don't expect Q3 will happen the same, but the Q3 actually come out only down about low single digit, which is better than our expectation. So that -- making the Q2, Q3 all become YoY growth and then the Q -- the accumulated Q1 to Q3, we see infrastructure growth -- will be growth -- is growing about double digit. And I think the most difference between this year and the last year were coming from some momentum from satellite industry and satellite business. Of course, low Earth orbit is the major one and then except that we also see some other than LEO and GEO and MEO customer also have a very good growth in this year. Now making the -- our view, in the very beginning, we still -- in the very beginning, we expect the whole year of the infrastructure may not be grows or even only flattish, but now it looks like infrastructure become better. As I mentioned that for YoY basis, the first 3 quarter infrastructure have double digit growth. And the Q4, it's -- the guidance for infrastructure is flattish, that's also good. So I think the -- taking the satellite business as an example, we already in the supply chain of low Earth orbit industry, and then we're providing the components for the high power semiconductor devices to -- for the signal transmission between satellite. And also, we do have customer also working on the data transmission between satellite and the gateway. So even more, this kind of table is coming, so I think making -- [ not ] making, the infrastructure become a better performance in this year. So yes, this is about infrastructure question. [Audio Gap] Okay. There's a couple of questions asking about the AI application WIN Semi involved, and also the supply chain regarding the silicon photonics, something like that, and which is touch up our optical business. Okay. In general, because of AI, the AI megatrend, the huge data rate, it's going up. And so start pushing the part of our optical customer doing more aggressive involved with WIN Semi, the developing the technology between not only the server to server, server to leaf, leaf to spine and also, the data center interconnect, those kind of application. And because the inside the optical transceiver no matter the data transmission, the laser dial or photo detector, module laser, module laser driver, optical driver, those kind of components, the compound semiconductor is the major application. And also, in the silicon photonic you have to -- the light source have to leverage the compound semi, especially III-V compound semiconductor. So give us some opportunity, the -- some a couple of customers have some technology development with WIN Semi. Again, the components involving like a laser, laser dial, photo detector and the modulator and the modulator driver, those kind of application. So that's from now on, we put a -- we already input a lot of resources, and we will continue to input a lot of especially R&D with our customer. That's regarding the AI and AI data center and the silicon photonic. [Audio Gap]

Okay. I think there's some question about the utilization rate and I think for Q4 definitely because of revenues going down, so I think right now what we suppose, the utilization rate may be still going down with revenue especially, we just mentioned most of the decline for Q4 will come from cellular and WiFi low segment, and so the impact of the bottom maybe will certain revenue, so I think we suppose the utilization rate will going down in Q4. And on the other question that is about our new Kaohsiung Fab I think we already have mentioned that before that right now, we just finished the shell that means the building themselves, but for [ Indiscernible ] [0:45:15] an equipment I think it will pending until we see a much bigger improvement from the utilization rate. Okay. I think there is a point on last, our Mandarin section has investor the caution about the -- in the past couple of quarter, we have explained some impact from our subsidiary holding some our China customers listed share and because of their stock price volatility impact, the gross margin in the past few quarters and then how come this quarter we never -- we haven't mentioned anything about that. I think I would like to add up about this question in this hour. That's because normally that will be based on their closing stock price quarter-by-quarter to reevaluate any kind of impact and for the end of Q2, almost very close to end of Q3, their stock price. So that's why the impact is very, very limited, very, very minor. So we can skip that from the impact of any gross margin or the revenue for the Q3, that's the reason why. [Audio Gap] Okay. There are no further questions on the question box. So thank you for your participation in WIN Semi's conference. There will be a webcast replay within hours. And so please visit www.winfoundry.com under the Investor Relations section. Thank you very much, and you may now disconnect. Thank you, and goodbye.