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

Good morning and good evening, ladies and gentlemen, no matter where you are. Welcome to WIN Semi's result webcast conference for the fourth quarter of 2024. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi. Joining me on today's call are Dr. YC Wang, Vice Chairman; and Kyle Chen, our CEO; and Steve Chen, our General Manager of Corporate Administration. Today's call is organized into three sections. First of all, our CEO, Kyle, will comment on the company's results for Q4 '24 and provide brief guidance for the first quarter 2025. Secondly, I will go through the financials in detail. And Dr. YC Wang will have the industry outlook to share with you. 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. Kyle Chen, the CEO of WIN Semi.

Okay. Thank you, Joe, and welcome, everyone. So I'll give you our fourth quarter performance and the guidance of the Q1 2025. Okay. In the fourth quarter of the last year 2024, WIN Semi's consolidated revenue was TWD 3.706 billion, which is down 50% quarter-on-quarter and down 24% year-on-year. The performance is in line with our previous expectation. But analyzing this quarter-on-quarter revenue decline, I think the main reason, the primary factor was Wi-Fi PA segment, which experienced a notable decline as the peak season of the inventory preparation for the new model has passed. The second factor was Cellular PA segment, which was mainly due to the weak demand in the China market. On the other hand, both Infrastructure and Optics segment outperformed expectations, achieved a double-digit quarter-on-quarter growth. So although our capacity utilization declined from the 50% in the third quarter and down to the 35% in the last quarter, the fourth quarter of 2024. So also, the share price fluctuation of the listed Chinese customer held by our consolidated subsidiary negatively affected gross margin by minus 1%. This impact was partially offset by a very -- by a favorable product mix, as I mentioned, the Infrastructure and the Optics segment outperformed. So as a result, our gross margin for the fourth quarter was 20.4%, decreasing by only 1.2% versus the utilization, down 15% on the quarter. Operation margin declined from 2.9% in the previous quarter to minus 1.3%. The net loss attributable to the parent company for the fourth quarter was TWD 350 million with an EPS of minus TWD 0.83. But for the full year of the 2024, WIN Semi officially moved past the downturn experienced in 2023 with a consolidated revenue reached TWD 17.455 billion, marking a 10% year-on-year growth. The full year EPS was TWD 1.81. A look back in the 2024, the China smartphone market has finally moved past prolonged inventory adjustment. However, the market is not as we expected due to the weak consumable spending in the Android smartphone market, which was affected by the China's economic slowdown and the trade barrier between China and the U.S. So overall end demand did not rebound as strongly as the market initially expected. But fortunately, in the iOS smartphone supply chain, both cellular phone PA -- Cellular PA and the Wi-Fi PA have benefited from the strict quality and the performance requirement set by end customer, which allows WIN Semi customers to keep very -- to remain the key customer with a very significant market share. As a result, they have maintained a stable growth in the last year 2024, supporting WIN's Cellular and Wi-Fi business to outperform the previous year. On the other hand, for the optical business, which is also primarily tied to the iOS supply chain, at the end, customers continue to diversify its supplier. The business faced a continuous decline in the smartphone 3D sensing contributions in 2024. As expected, however, the infrastructure business rebounded from the previous year downturn, achieving a double-digit year-on-year growth driven by strong demand for infrastructure and satellite communications. In particular, the gallium nitride revenue, we delivered a very outperformed annual growth rate over 30%. And looking ahead this year, I think everybody is talking about the AI. The AI application in optical communication and data center are emerging as a key focal point in industrial growth with companies across the supply chain actively positioning themselves to seize the new business opportunity, and WIN is no exception, whether in traditional optical transceivers or silicon photonics technology, optical communication transmission rely on compound semiconductor as the core material for both photodiode and laser light sources. At the same time, time-of-flight laser technology is expanding beyond smartphones and automatic guided vehicles to humanoid robots and the automotive collision avoidance LiDAR. Compound semiconductors offer wavelength solutions ranging from short to long to accommodate various distant sensing requirements. As a member of the Taiwan Silicon Photonics Industry Alliance, WIN Semi is one of the few companies globally with mass production technology and experience in both optical communications and optical sensing wafer foundry service. We are seeing a strong demand from the optical customer to outsource manufacturing. And we are now currently -- we work closely with multiple clients to address this need. Additionally, WIN Semi is optimistic about our technology development, the Wi-Fi 7, in particular with U.S.-based flagship smartphones fully upgrade the phone to Wi-Fi 7 in the second half of the 2024. This is expected to drive the broader adoption among Android devices or even upgrade the Wi-Fi routers, presenting a promising outlook for the Wi-Fi PA demand. Lastly, I think the infrastructure business, as I said, we moved down from the past downturn in previous year and delivered a very outstanding, satisfactory growth in 2024. We believe the optical electronic component for data center, satellite communications and military and commercial radar application will serve as primary growth driver for WIN Semi infrastructure business in the post-5G era. Entering the traditional low season, the Q1, also, we have less working day and the [ endeavor ] is do the annual maintenance, we expect the revenue of the first quarter of 2025 will be declined mid-single digit quarter-on-quarter with gross margin around high teens level. So that's my report. Okay. So I will turn the call back to -- over to Joe.

Okay. Thank you, Kyle. It's our pleasure to present our financial results for the fourth quarter of 2024. So we're starting from the Page 1 of the presentation slide. Remember, read over the safe harbor notice. And then next page, just for your reference, which is our ESG achievements. And next page, we're starting from the revenue and the margin. The Q4 '24 revenue was TWD 3.71 billion and Q-o-Q was down 15% and Y-o-Y also down 24%. And the Q4 '24, the capacity utilization declined to 35% from 50%. At the same time, we also suffered the share price decline of a listed Chinese customer held by our consolidated subsidiary, negatively affected the gross margin by negative 1 percentage point. Although we have such a negative impact, but it's partially offset by the better product mix. So therefore, the gross margin become 20.4%, which is decreasing about 1.2 percentage points, which is better than our earlier expectations. And operating margin become negative 1.3%, which has declined about 4.2 percentage points if we compare to the previous quarter. In addition to that, the -- if we take the loss on non-op items into consideration, in the Q4 '24, the net loss attributable to the parent company was TWD 352 million, and with the EPS for Q4 was negative TWD 0.83. And the EPS for the full year of 2024 was TWD 1.81. This is for earnings. And please flip to the next page, talk about product mix. Okay. Since we -- I have mentioned that the better product mix have partially offset the negative impact on gross margin, means we have Q4 product mix which is favorable to the gross margin. If we take a look at the major four items. First of all, in Q4, Q-o-Q basis for Cellular PA, the percentage was from 35% to 40% last quarter to 20 -- 25% to 30% this quarter Q4, and which is, it went down. And then Wi-Fi also, from 15% to 20% last quarter to 10% to 15% this quarter. Also, it went down. But the infrastructure is going up from 25% to 30% of range to become 35% to 40% of range, which is going up. And the majority is optical business, the others become 21%, which is also going up from 16% last quarter. And at the same time, I would like to give you more color about the -- inside the optical business, we also have -- majority is 3D sensing business and then partially non-3D sensing business. In the past, most of the time, the percentage comparing 3D sensing to non-3D sensing is about 80 to 20. And then for Q4 and the whole year of '24, the 3D sensing went down to around -- went down to 70 and then non-3D sensing going up to become 30, which is 70 -- compared 70 to 30. That's the product mix for the Q4 '24. And please flip to the next page. It's the guidance for Q1 '25. First of all, I would like to repeat again what our CEO already mentioned. We expect Q1 '25 revenue to decline mid-single digit Q-o-Q, and because -- that's because of Q1, that's a traditional low season with less working days. And at the same time, I also would like to share with you more color about Q1's different products, the trends. We believe that in Q1 '25, our Cellular business and Wi-Fi business will be slightly going up for -- compared to the previous quarter. And the infrastructure business will be flattish compared to last quarter. And finally, the optical business, because of all of the inventory pool for any kind of new product, including the spring model of the flagship smartphone is all over, so the -- we expect that Q1, the optical business will be going down. That's some color about Q1 each product. And then therefore, we expect Q1 gross margin will be around the level of high teens. Okay. This is our financials and the business. And then I'm going to give you -- we're going to take a quick look about the financial statements, first of all, the income statement for Q4 in Page 10. The -- before I begin, I still have to emphasize that all of the figures is non-audited basis. The actual results should base on the CPA's report. For Q4 '24, the net revenue was TWD 3.706 billion and Q-o-Q was down 15% and Y-o-Y was down 24%. And the gross profit was TWD 758 million and the gross margin become 20.4%. In operating expense, TWD 806 million is -- although it's less than last quarter, but because the net revenue Q-o-Q declined, so our OP ratio went up to 22% from 19% last quarter. Therefore, the operating income -- the operating loss becomes TWD 48 million. So the operating margin was negative 1.3%. The non-op item was loss, about TWD 630 million. We're going to have some explanations in Page 12. The income -- the loss before income tax was TWD 678 million, and the income tax benefit, it's TWD 148 million. So therefore, the net loss becomes TWD 530 million and net margin is negative 14.3%. So the net loss attributable to the parent company was TWD 352 million. So the EPS was negative TWD 0.83. The return on equity was negative 4% and the approximately utilization rate went down to 35% from 50% last quarter. The depreciation expense for Q4 '24 is pretty close to the last quarter. And the CapEx, it's much less than last quarter, TWD 152 million. So this is the Q4 income statement. And please flip to next page. The -- I will show you the whole year of '24 income statement. The net revenue was TWD 17.458 billion and Y-o-Y it's up 10%. And gross margin for the whole year was 23.2%. It's higher 1.2 -- 1.3 percentage points higher than '23. And the OP ratio is 19%, which is 3 percentage points better than last year. And operating income was TWD 762 million and operating margin become 4.4%. And the non-op item was loss, TWD 429 million. And the net income was TWD 340 million. The net margin become 1.9%. And the net profit attributable to the parent company was TWD 768 million, and therefore, the whole year of '24 EPS become TWD 1.81. The return on equity for the whole year of '24 become 2.1% and accumulated utilization for the whole year '24 become 50%. The depreciation expense, it's TWD 4,595 million, slightly less than the last year 2023. And this is the first time it trend down on the depreciation expense. And on the same time, we would like to share with you that the guidance for depreciation expense for 2025, we believe, will be 10% less than '24 but it's month-over-month gradually going down. And the CapEx for the 2024 whole year is TWD 1,222 million. And then we also expect the whole year of '25, we expect the CapEx will be between TWD 1 billion and TWD 2 billion. Okay. This is 2024 whole year's income statement. And then please flip to the next page. We can discuss about non-op item. I probably will pick around three items, the major three items for some explanations. First of all, the foreign exchange loss. That's the foreign currency debt on hand because suffer from the foreign currency up and down and then suffer the foreign currency loss. And the impairment loss is -- it's a CPA-based on our IFRS -- based on IFRS to recognize impairment and loss on the goodwill for the investment on our subsidiary in the past. And then finally, the financial cost is exactly the interest expense for our debt with the bank. That's the non-op item for this page. And then please flip to next page. It's the balance sheet. Okay, on the -- first of all, the total assets is pretty similar to -- for the December 30, it's very close to the September 30, which is TWD 64.259 billion. On the other hand, under the total liability, which is TWD 25.121 billion, the liability is going down significantly because the debt is also going down. And common stock remain the same, then -- so the total equity actually is going up, become TWD 39.138 billion. It's also significantly going up. So therefore, the book value per share becomes TWD 89.91. It went up from TWD 87.29, although the Q4 it suffered a lot. That's because we have financial assets evaluation gain on the OCI, which is other comprehensive income. And then compared to the end of '23, it's even higher. The '23 -- December 30, '23, the book value per share was TWD 80.09. Okay. Finally, the financial index. Our current -- nominally the current ratio, which is 164%, our debt ratio which is 39%, it's all going to the healthier direction compared to last quarter or even a year ago. Okay. That's pretty much what I have. And then -- okay. Thank you. I will hand over the call to Dr. YC Wang, our Vice Chairman.

Okay. Thanks, Joe. This is YC. I'm pleased to share our latest market outlook with you. So please flip to Page #14. This page shows the global data traffic continues to grow at a compound annual growth rate of 18%. All the three segments, consumer fixed networks, consumer mobile network, enterprise and the industry networks, are growing strongly. I think this is fundamental factors driving the computation demand to grow, okay. The last -- I think in this -- in the next few slides, we will first explore the key markets that drive our base business revenue, and then we will examine the critical role that III-V compound semiconductors and WIN can play in the AI era. So let's start from smartphone power amplifiers, on next page, which is Page 15. I think this page shows the 5G smartphone adoption continues to grow. From last year 2024, 63% penetration, will increase to close to 69% in 2025. This indicates the more -- because of one 5G smartphone content, so more gallium nitride content performed, so that indicates the power amplifier market we expect to continue to grow. And due to WIN's advanced HBT technology leadership position that we see we continue gain market share in the premium and the flagship smartphone models. Okay. So let's move on to the Wi-Fi page, which is Page 16. Wi-Fi 7 enhanced data transmission through the spectrum expansion and advanced modulation and wider channel bandwidth. The Wi-Fi 7 market will continue to grow in the following years for both cellular and router segments. Okay. And as you can see from the TSR's market report, the total Wi-Fi shipment units will have a strong growth in the following years. Again, it's mainly driven by the Wi-Fi 7. And also you can see Wi-Fi 6 adoption continue -- also continue to expand, gradually replacing Wi-Fi 5. Okay. Let's move on to next page, WIN's technologies for cellular power amplifier and Wi-Fi. In this slide, it shows the WIN's cutting-edge seventh generation technology, which has been widely adopted in the 5G smartphone and Wi-Fi 7 markets by multiple customers. This technology offers superior power gain, power efficiency, excellent linearity and robustness under very stringent environment conditions. Okay. And then let's move on to the satellite slide in the next page. Satellite communications is another market expanding very fast. The higher frequency band, which is E-band and V-band, are being adopted to expand capacity. We expect more LEO satellites going to plan for launch in 2025, this year. And WIN, we provide industry-leading gallium arsenide pHEMT and gallium nitride HEMT technologies to support satellite to ground communication needs. And it's also very interesting, we observed there's emerging opportunities for satellite. Direct to smartphone service is coming up. This might increase our opportunity in the near future. Okay. And the following slide shows the WIN's advanced technologies for satellite communications. Our advanced pHEMT and gallium nitride technologies are widely adopted in satellite communications, delivering high power, high-bandwidth RF solutions to meet the demands of emerging frequency applications. So we -- let's look at the -- from the left to right. Already in production, which we have 0.12 -- 120-nanometer gallium nitride pHEMT, can be operated at 28 volts, which is very good for Ka-band power amplifiers with good power ruggedness. And we also have a 0.1 micron gallium arsenide pHEMT which can be operated at 4 volt used in E-band and the W-band. Those two technology have already been in production, qualified by multiple customers. And this year, we expect to launch a new technology on 0.12 micron gallium nitride to improve largely in the linearity to be more suitable for the satellite communication power amplifiers. And in parallel, we are actively developing 0.1 micron gallium nitride, which will be used in E-band power amplifiers. And I want to mention that all the gallium nitride technology are compatible to both QFN and their flip-chip packaging. Okay. Then let's move on to next page and see how -- what is the role that III-V semiconductors and WIN as III-V foundry we can play in AI age. I think AI is driving growth across multiple industries, including data centers, robotics, AI glasses and autonomous vehicles. These four markets represent the most promising opportunities for the widespread adoption of III-V compound semiconductors. Today, the demand for III-V laser sources and the photo detectors in AI data centers is already exceptionally high. And meanwhile, as AI technology continues to rapidly mature, 3D sensing lasers for robotics, AI glasses and the autonomous vehicles are poised to -- for explosive growth in the coming years. I think WIN's III-V semiconductor technology plays a pivotal role in enabling high-performance AI applications and driving innovations in these emerging markets. So let's start from the laser sources for AI data center use. Let's flip to Page #22. On this page, according to YOLE's market report, the optical transceiver market is projected to grow at a compound annual growth rate of 11% from 2023 to 2029 with datacom expanding at a faster rate of 14% compared to telecom's 8%. Okay. So obviously, datacom is growing at a faster rate than telecom. So here, we're going to focus on the data center segment. And in last Page 23, this slide illustrates the laser technologies used in AI data centers across different network layers. Every server to server layer, which has the shortest communication distance, VCSEL will be preferred technology. And meanwhile, the leaf to server network layer and spine to leaf network layers, indium phosphide-based DFB laser and EML lasers are the dominant choices. Okay. And let's further flip to next page. If we further look inside the optical transceivers. You can see where is WIN's III-V technology being utilized within optical transceivers inside data centers. So this is a typical optical transceiver architecture. If you -- the upper side is transmitters path and the lower side is receiving path. Let's look at the transmitting path first. So on the transmitting path, it basically transform electrical signal data to optical data. So it needs a driver IC, very fast driver IC to drive either the laser diode itself or the modulator. So we have multiple customers using our 0.1 micron pHEMT successfully to get into the 100 gigabit per second market already in the second half of last year. And I would believe this year, the volume is going to continue to grow. And at the same time, we are actively developing 70-nanometer pHEMT with our customers for 200G, and we're also developing indium phosphide DHBT for 400G in the future with multiple customers. So let's look at the transmitting side, the light source at the transmitting side. There's two types. One is, we call it a directly modulated laser, DML. Usually, the VCSEL is the technology of choice. At this part, we have our 50G VCSEL has been in production last year, and the 100G is close to be qualified by several customers, and 200G plan is certainly the future in our technology road map. And the other type of laser which needs modulator, and there are two types of modulator: it's a called EAM and MZM, Mach-Zehnder modulators. Each type of modulator has its own merits. Okay. Let's -- on both EML and the CW-DFB lasers, we have several customers which -- who are the leaders in the market. We have projects working with them. So we believe in the coming 1 year to 18 months, we're able to get into this market. And also here, I would like to mention that WIN has a strong advantage in getting into this suite -- into the optical device market because we are known to have a strong III-V process technology. And at the same time, we have a potential growth capability, very strong potential growth capability. We have an internal -- we use external MOCVD and we also have internal MOCVD capability that helps a lot in getting into the optical laser business. Okay. And at the lower side, in the receiving side, we are -- it's an optical PIN diode detector, photo detectors, which transform the optical signal into the electrical signal. We have also -- we also have multiple projects with our partner customers on the 100G and 200G photodiode, which we believe likely to get into the -- get the qualification in the next few quarters. Okay. Let's move on to the next page on the trends in the laser technology for datacom. This page presents our perspective on the evolving trends of integrating laser sources into high-speed switches, CPU and GPU through the CPO and the silicon photonics. CPO with continuous wave CW external laser source remain the dominant technology today to support higher transmission speed while reducing power consumption per beat. Higher power CW lasers are required. So we are -- on our road map, we are working closely with our partnership customers on CW laser with different voltage from 70 milliwatt or 100-milliwatt to 200-milliwatt in the future and even higher. Okay. And at the same time, significant efforts are being made to directly integrate III-V laser sources with silicon photonics. However, several challenges still need to be addressed, including live coupling efficiency and precise alignment of the light source and waveguide to minimize the signal loss. At WIN, we are actively collaborating with multiple customers to address and advance this emerging technology trend. So let's move on to next page, on the robots. So AI-powered robots are driving the widespread adoption of 3D sensing technologies, including LiDAR and the time-of-flight sensors. WIN's advanced VCSEL array chips enable precise navigation, object recognition and the real-time interaction, making them a key component in AI-driven robotics. Recent reports indicate that humanoid robots could require up to 40 3D sensing chips to support AI defined functions. Meanwhile, addressable VCSEL array has already been adopted in robots for sweepers, deliveries, drones and lawn mowers with initial production now underway. Move on to next page. I think AI-powered glasses and headsets have recently got significant attention. At this year's CES, AI is -- has shown AR and VR by enhancing gaming, health care, education and training experiences to entirely new levels. According to IDC's market report, the global AR/VR headset market is projected to grow at a compound annual growth rate of 36%. WIN's VCSEL technology enables precise 3D sensing for eye tracking and gesture recognition, driving AI-powered XR innovations. Okay. Let's move on to the next page, on the automotive -- autonomous vehicle market. So as AI technology rapidly mature, the adoption of LiDAR technology for autonomous vehicle safety is expected to escalate. According to YOLE's market report, global LiDAR shipments are growing at an impressive compound annual growth rate of nearly 60%. Both VCSEL and edge-emitting laser technologies are being used, and each one has their own merits. I would like to mention that at WIN, since the last years, we already have a VCSEL array being used -- started production, being used in the EV car already. So this is the last page of my presentation. So in conclusion, I think global data traffic continues to grow, driving the expansion of our key market segments, including 5G smartphone power amplifiers, Wi-Fi 7 and satellite communications. Meanwhile, as the AI technology matures, the demand for laser sources in optical communications is increasing significantly. Additionally, AI advancements are expected to drive innovative applications such as robots, AI glasses and autonomous vehicles, leading to a promising future for 3D sensing chips. In the WIN Semiconductors, we will continue to strengthen our market leadership through the technological innovation. I think that's what we have been doing consistently. Thank you. That's my presentation.

Okay. Now we have -- still have a couple of minutes. Let's begin the Q&A. [Operator Instructions] Thank you.

Okay. I think the first question is about 2025 CapEx and the depreciation outlook. I think this year, the CapEx could be very similar like last year. Mainly the CapEx will coming from our facility maintenance. So that means I think this year's CapEx should be still around like TWD 1 billion plus and minus kind of range. And due to most of our depreciation, peak is already done. So you can see actually starting from last year, we have slightly decreased from 2024. And I think we will keep that trend in 2025. And the next question is about the China foundry peers competition. I think we have discussed that with investors for a long time. Yes, I think definitely, there is some competition in there. So like YC just said, WIN Semi is more focusing on our high-end technology and high-performance technology, trying to making the gap technology with low China appear. And also that means we are more focusing on the high-end market. So I think definitely for the low-end smartphone, they are already taking some share since several years ago, yes. So I think for WIN Semi, our target is very clear. We are more focusing on high-end and high-end smartphone to secure our market and technology gap.

Okay. There's a question asking the driver IC. WIN's driver IC, to our knowledge, because it's our customers' product, their design. So based on our knowledge, it's used to drive the modulator. So I believe it's used for either EML or CW lasers modulator. Okay. And also, those has been actually, as I mentioned in the presentation, they are already in production, and we believe this year, in 2025, will continue to grow.

Okay. I think the last question we see is, I want to know about capacity. Because like we mentioned on the slide, we -- for the future, we have more demand we think that will come from the data center or the 3D sensing, yes. But I think, as we say -- as we show right now, our utilization rate are only about 30% to 40%. And so in most of cases, those kind of capacity, we can leverage our original gallium arsenide 6-inch process capacity. So I don't think we need to discuss about the expansion for those kind of new demand for next 2, 3 years. Thank you.

Okay, it's about time. And also, there are no further questions. So thank you very much for your participation in WIN Semi's conference. There will be a webcast replay within hours. Please visit www.winfoundry.com under the Investor Relations section. You may now disconnect. Goodbye. Thank you very much. Bye-bye.