Earnings Call Transcript - IMOS Q1 2020

Operator, Operator

Good day, everyone and welcome to the ChipMOS First Quarter 2020 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference to David Pasquale of Global IR Partners. Please go ahead, sir.

David Pasquale, Global IR Partners

Thank you, operator. Welcome everyone to ChipMOS’ first quarter 2020 results conference call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President and Ms. Silvia Su, Vice President of Finance and Accounting Management Center. S.J. will review business highlights and provide color on the operating environment. Silvia will then review the company’s key financial results. We are also joined on the call today by Mr. Jesse Huang, Spokesperson and Vice President of Strategy and Investor Relations. All company executives will participate in the Q&A session after management’s formal remarks. If you have not yet received a copy of today’s results release, please e-mail Global IR Partners or you can get a copy of the press release off of ChipMOS’ website. As in prior quarters, we hosted a call in Mandarin after the close of the Taiwan Stock Market a few hours ago. This is part of the company’s ongoing efforts to broaden investor and analyst following in the domestic Asia market given the full Taiwan listing. The prepared comments management will cover here are the same as those covered on the earlier call. The second call is intended to give the company’s English-speaking investors the same opportunity to both hear directly from management and to ask questions pertaining to results and the operating environment. With that said, we must make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements which involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the company’s most recent annual report that is filed with the U.S. Securities and Exchange Commission and in the company’s other filings with the SEC. At this time, I would like to now turn the call over to the company’s Chairman and President, Mr. S.J. Cheng. Please go ahead, sir.

S.J. Cheng, Chairman and President

Yes. Thank you, David. We appreciate everyone joining our call today. This has been a challenging quarter for all of us as we manage in the coronavirus pandemic. As a result of our effort, we were able to restart our manufacturing facility in Asia after the Chinese New Year targeted closure with no additional delay or disruption. We have worked closely with our customer and supply chain allowing us to maintain full inventory level to ensure uninterrupted service to customers. We are taking the coronavirus pandemic seriously and we will continue to improve all safety measures. Let me now turn to our Q1 results, the big takeaway for Q1 is that Q1 was a great quarter for us with revenue up 25% over Q1 2019 and as of 5 years, the highest record level. We achieved this despite fewer working days due to the Chinese New Year’s closure and the coronavirus pandemic. Q1 revenue was up 0.3% over Q4 2019 while the impact has normally caused the seasonal decline. Second, gross profit increased 90% in Q1 2020 compared to Q1 2019 and up 0.3% compared to Q4 2019. We have been driven by the highest profit with a more favorable end-market mix and key product cost reduction. Third, net earnings increased 233% in Q1 2020 compared to Q1 2019 and was up 34% compared to Q4 2019. Finally, our overall utilization rate improved to 79% in Q1 2020 compared to 70% in Q1 2019 and 76% in Q4 2019. This is a significant improvement and is allowing us to drive improvement across our financial metrics. We feel confident about our capacity footprint moving into Q2 and we are taking a very conservative approach with our capital expenditures. We are lowering our capacity investments where possible as we focus on improvements through automation, while maintaining a strong balance sheet and liquidity in order to maintain our leading market position in this uncertain market. For the first quarter of 2020, we benefited from growth in our DRAM, NAND flash and AH COF business. Demand was driven by ongoing 5G growth. We also saw a strong uptick in Q1 in demand for working and schooling from home. This combined positive demand helped us offset the fewer working days in Q1. As I mentioned at the start of the call, our focus has been on employee health and delivery for our customers; we occupy a critical space in the supply chain for our customers. By providing service during the coronavirus pandemic, we have helped ensure inventory stability for our customers. This helped us increase our overall utilization level to 79% in Q1 2020 from 70% in Q1 2019 and 76% in Q4 2019. With major utilization aimed in both assembly and bumping production lines, we saw a pickup in demand from applications related to process, storage, set-top boxes and 5G base stations, demand for memory. Our utilization of assembly and testing fell at the same level as Q4. Utilization rates for LCD and bumping significantly improved, led by demand for COF tablets, laptops and notebooks for working and schooling from home. In terms of adding color on Q1, our product revenue represents between 10% to 11% of total Q1 revenue; assembly product lines represent around 26%; and package testing represent 9% and 13% respectively. Memory total revenue growth around 3% and represents 42.1% of total Q1 revenue, up from 39.2% of Q4 2019. Revenue from DRAM and end-to-end products represents about 30.1% of total Q1 revenue. Revenue from flash represented about 22% of total Q1 revenue; NAND flash business continued to grow and represent about 50% of Q1 gross revenue. As for driver IT-related products, revenue increased to 47.4% of total Q1 revenue, including gold bump and COG and COF. Demand growth from tablets, desktops, and notebooks for working and schooling from home offset seasonal lows from fewer working days in Q1. TDDI product revenue represents about 39% of Q1 DDIC revenue and was impacted by broader market softening in smartphones in Q1. We see benefits from appreciation in using OLED standards for full HD grade panels in smartphones. OLED driver product revenue increased significantly and represents more than 9% of Q1 DDIC compared to 7% of Q4. Our revenue in Q1 represented about 50% of DDIC revenue as the TDDI penetration rate continued to increase in HD grade panels, with average price for OLED panels emerging in full HD grade panels. Regarding the end market, revenue from smart mobile represents about 36% of total Q1 revenue. The TV category represents about 19% and the consumer category represents about 22%. Revenue from computing represented about 12% of total Q1 revenue. Automobile and industry contributed to an increase to 11% and will be a long-term growth area for us. As we look forward into the second quarter of 2020, I am very proud of the ChipMOS team for remaining focused during this challenging period. Areas in Asia are starting to see demand pickup with things returning to normal. Other parts of the world, including Europe and the U.S., continue to be impacted. We are managing our expenses and cash while maintaining a conservative approach to capital expenditures as we work through the coronavirus environment. Our long-term relationship with the banks recently provided us a credit line of around $80 million with good terms, including lower rates for accountability and the confidence in our balance sheet and operations. From a demand standpoint, we are positive about our market position. In general, we expect growth of memory products will be higher than DDIC products in 2019. We are encouraged by healthy demand from memory customers. We expect stability with steady demand for cloud storage and set-top boxes. We also expect NAND flash business will increase, driven by continued pricing in 5G networks worldwide and gaming demand. NAND flash should continue to grow as we move into Q2. In DDIC, flat panel demand for tablets and notebooks should remain stable. Large panel demand for TVs has been soft, but with everyone trying, that may change. Small flat panels have been negatively impacted by smartphone weakness recently. However, TDDI continues to grow with a higher penetration rate of HD grade panels and OLED in emerging full HD grade panels in 2020 despite ongoing pressure on other unit sales. Silicon flat panels are still increasing as more and more display panels are being utilized in cars. These present significant long-term opportunities for ChipMOS given our customer base. Finally, you may have already read the full resolution we filed with the SEC today. One resolution relates to the application for the retirement of Mr. Lafair Cho, Senior Executive Vice President and COO. I would like to thank Lafair for his tireless efforts to the company; on behalf of ChipMOS, I personally express my appreciation to him for assisting me over the years. Lafair will continue to contribute his expertise and experience, including his work with our Japan business and customer maintenance as a consultant to the company after his retirement effective July 1. He will be assisting the two newly appointed Executive Vice Presidents, Mr. D.Y. Tsai and Mr. Vincent Hsu, to smoothly take over all operational responsibilities during the transition period. Now, let me turn the call over to Ms. Silvia to review the first quarter 2020 financial results. Silvia, please go ahead.

Silvia Su, Vice President of Finance and Accounting

Thank you, A.J. All dollar amounts stated in our presentation are in NT dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on exchange rates of NT$30.25 against $1 as of March 31, 2020. All figures were prepared in accordance with Taiwan International Financial Reporting Standards. To help make the presentation easier to follow, my comments will correspond with the investor presentation on our Investor Relations website published today. Page 12, consolidated operating results summary. For the first quarter of 2020, total revenue was $184.7 million. Net profit attributable to the company was $23.6 million in Q1. Net earnings for the first quarter of 2020 were $0.03 per basic common share or $0.65 per basic ADS. Depreciation and operating expenses were $33.2 million. We invested $37.6 million in capital expenditures in Q1. EBITDA for Q1 was $52.9 million. EBITDA was calculated by adding depreciation and amortization together with operating profit. Return on equity for Q1 was 14.3%. Page 13, consolidated statements of comprehensive income. Compared to the previous quarter, total Q1 revenue was $184.7 million, up 0.3% compared to Q4 2019. Gross profit was $42 million in Q1, with Q1 gross margin at 22.7%, which was the same as Q4 2019. Our operating expenses in Q1 were $13.1 million or 7.1% of our Q1 revenue, which is about 1% higher than Q4 2019. Operating profit for Q1 was $29.7 million and operating profit margin for Q1 was 16.1%, a decrease of 0.1 percentage points compared to 16.2% in Q4 2019. Net non-operating expenses in Q1 were $0.1 million compared to net non-operating expenses in Q4 2019 of $7.4 million. The difference between Q1 and Q4 2019 is mainly due to the increase of net foreign exchange gains of $6.7 million and the decrease in the share of losses of associates accounted for using equity methods, with a decrease of $0.9 million. Net profit in Q1 was $23.6 million compared to $17.9 million in Q4 2019. The difference between Q1 and Q4 2019 is mainly due to an increase of net foreign exchange gains of $6.7 million. Net earnings for the first quarter of 2019 were $0.03 per basic common share compared to $0.02 per basic common share for Q4 of 2019. Basic weighted average outstanding shares were 727.2 million shares. Compared to the same period last year, total revenue for Q1 was $184.7 million, which was up 25.2% compared to the same period of 2019. Gross margin was 22.7%, up 7.7 percentage points compared to 15% in Q1 2019. Operating expenses in Q1 were $13.1 million, an increase of 9.8% compared to Q1 2019 in support of our higher revenue level. Operating profit margin in Q1 was 16.1%, an improvement of 9 percentage points compared to 7.1% in Q1 2019. Net non-operating expenses in Q1 were $0.5 million compared to $2.1 million in Q1 2019. The difference is mainly due to an increase of net foreign exchange gains of $1.1 million and the decrease in the share of losses of associated accounting for using the equity method of $1 million. Net profit in Q1 was $23.6 million compared to $6.4 million in Q1 2019. The difference is mainly due to the increase of gross profit of $19.9 million, net foreign exchange gain of $1.1 million and partially offset by an increase of income tax expense of $4 million. Net earnings for the first quarter of 2020 were $0.03 per basic common share compared to $0.01 per basic common share for Q1 of 2019. Page 14, consolidated statement of financial position and key indices. Total assets at the end of Q1 were $1.3 billion, including current assets of $513.8 million. Total liabilities at the end of Q1 were $592.5 million, including current liabilities of $149.1 million. Total equity at the end of Q1 was $671.4 million. Accounts receivable turnover days in Q1 were 75 days compared to 80 days in Q4 2019. Inventory turnover days were 44 days in Q1 compared to 38 days in Q4 2019. Page 15 consolidated statement of cash flow. Cash and cash equivalents at the beginning of Q1 were $155.5 million. Net cash generated from operating activities was $24.2 million. Net cash used in investing activities was $47.4 million. Net cash generated from financing activity was $415.9 million. We took the opportunity in the first quarter to add to our cash balance through local bank loans at favorable low rates. This allowed us to add an additional $115.3 million to our financial position. As of March 31, 2020, our balance of cash and cash equivalents was $248.3 million. Free cash flow in the first quarter was $18.3 million. Free cash flow was calculated by adding depreciation and financial interest income together with operating profit and then subtracting capital expenditures, interest expense, income tax expense and dividends. Page 16 capital expenditure and depreciation. We invested $37.6 million in capital expenditures in Q1, down from $56.3 million in Q4. The breakdown of capital expenditures was 10.1% for bumping, 46.2% for the LCD driver, 5% for assembly, and 34.7% for testing. Depreciation expenses were $33.2 million in Q1. As of April 30, 2020, the company’s outstanding ADS number was approximately 5 million units, which represent around 12.8% of the company’s outstanding common shares. Operator, that concludes our formal remarks, we can now take questions.

Operator, Operator

Thank you. We will go first to Scott Bishins with Caffeine Holdings LLC.

Scott Bishins, Analyst

Yes, hi, Silvia, hi, S.J. How are you? I just want to say a great quarter all around, probably the best I have seen at least 10 years if not longer. Couple of questions I have. Maybe I will just go through these. It looks like your revenue is stronger than the overall industry; can you keep up that high level through the rest of 2020?

S.J. Cheng, Chairman and President

Scott, to answer your question, I think for the first half, it will be pretty good, because we also published the April revenue we interfaced, and for May and June, it will be slightly down. For the second half, only speaking, right now, memory is more stable than the LCD driver, because our memory customers are more stable and also give us a commitment for the second half. Regarding the driver, only speaking, the pictures here are also of uncertainty, but we will carefully walk step-by-step. For the second half, we are conservative with our capital expenditures investment in order to maintain more cash in this uncertain environment. So I hope this can answer your question.

Scott Bishins, Analyst

Okay. Where do you think the capital expenditures would be for the second half? Exactly how much do you spend?

S.J. Cheng, Chairman and President

Previously, for the past 2 years, our capital expenditure investments have been around 25% of total revenue. I think this year, the management team set a target that will be less than 20% of our this year’s revenue.

Scott Bishins, Analyst

Okay. That’s great. How much of the revenue growth is coming from higher ASPs or from more unit growth?

S.J. Cheng, Chairman and President

From both, because of the product mix. For LCD driver, as an example, the OLED and TDDI, their penetration rate is getting higher and higher. That is a favorable product mix for us; that being the LCD driver area, there being longer testing time and also more bumping service. And then for memory wise, more and more customers are getting involved in the automobile and industry, that need a higher quality and also a more stable forecast for the long term. So for quality, we have also increased a lot because we invest a lot of resources into the separate processing and also automation in online, as well as AI in online. Like in 2019, our revenue increased around 10%, while our total headcount was reduced around 10%. In this case, our gross margin has also maintained the variable income that continues to increase, and this year will be the same. We will try to maintain the same headcount and continue to increase our revenue in order to further contribute benefits to the company and also share benefits with the shareholders.

Scott Bishins, Analyst

That sounds great. That’s very encouraging. Seeing that there’s tight utilization, are there opportunities for increasing prices also?

S.J. Cheng, Chairman and President

Actually, under the current environment, for memory wise, yes, we see that a little bit. But regarding the LCD driver, I don’t think that is a good timing.

Scott Bishins, Analyst

Okay. Do you need a good recovery in the LCD driver between the smartphone and television demand to continue on a double-digit growth path?

S.J. Cheng, Chairman and President

Only speaking for this year, I think the second half of the LCD driver pace of the current demand will be a little bit weak compared with the first half due to weak smartphone demand.

Scott Bishins, Analyst

Right. I mean so far this year, you’ve been on a very strong path; the first quarter looks like April was a very good month too, actually the best, I guess, in the history of ChipMOS. Do you feel that if we stay on the same product mix that we have today, will that allow us, for the full year, to still achieve double-digit growth?

S.J. Cheng, Chairman and President

Only speaking, you can – Scott, let me put this in context for the first half. For Q1 compared with that period of last year, we increased revenue around 25%. For Q2, I think there’s still around a 30% discounted rate. So for the first half, our revenue increase compared with the same period last year will be more than 20%. Even we take a very conservative forecast for the second half, we expect it to be the same as last year. So we may still see a high single-digit revenue growth compared with last year. So we have strong confidence we can deliver good results to the market and also maintain the high cash dividend policy to the shareholders.

Scott Bishins, Analyst

That’s great. Considering all the adversity that’s going on now with the virus and the unknowns for us to have a growth trajectory like that for year 2020 is amazing. It just shows you how well the company is doing and how well you guys are running the whole operation. It’s really great. I have just a couple more questions. I think I saw somewhere in your remarks that there was a lot of demand coming from computing from people that are working at home and schooling also being thwarted at home. Do you see that continuing into the second half also?

S.J. Cheng, Chairman and President

Yes. The answer is yes. Not only for working from home, but also very importantly, gaming requirements.

Scott Bishins, Analyst

Okay. Yes, that’s where it seems to be. I’ve seen other reports from other companies talking about how they’ve suffered in retail stores, but they’re picking up a lot of sales from buying computers and other devices to use at home. So that seems like it could be a trend for a while. Is there any more opportunity, you believe? I know the gross margins were great at 22.7%. Do you see any chance that, in the short term, that might improve also?

S.J. Cheng, Chairman and President

Through automation and UPS improvement without a new capital expenditures investment, we try our best to do so.

Scott Bishins, Analyst

Okay. I didn’t – I haven’t seen the depreciation numbers. Do they still stay on an upward trend or do they start to decline coming into the second half of the year?

Silvia Su, Vice President of Finance and Accounting

Yes. For the depreciation, as you know, we could invest in capital expenditures, so the depreciation for quarter-over-quarter will increase, I think, 3% to 4% quarter-by-quarter for the depreciation.

Scott Bishins, Analyst

Okay, when does it start to go down? Any time this year or not until next year as your capital expenditures?

Silvia Su, Vice President of Finance and Accounting

Yes, maybe in the fourth quarter or the first quarter of 2021.

Scott Bishins, Analyst

Okay. Yes, I just want to model that into my financials. Let me just see – a couple more questions. Is more capacity still moving out of China into Taiwan based on what’s going on with the U.S. tariffs?

S.J. Cheng, Chairman and President

The answer is yes. We take a lot of advantages, especially for the U.S., Europe, and Japan, as a lot of other competitors, which is great and sure. And for automotive, they also would like to ask for capacity from us. Therefore, outside China, companies benefit. Inside China, we are also gaining a lot because of the coronavirus issue, where the local logistic system is impacted due to the coronavirus. Previously, China was pretty aggressive in their infrastructure building; they wanted to keep the majority share of the supply chain in China. But right now, due to the coronavirus issue, it has moved to a 50:50 balance between China and outside. So we gain a benefit.

Scott Bishins, Analyst

Okay. Actually, two more questions. Are you maintaining the normal level of inventory during this pandemic or do you need to stock up because of shortages in components needed to do final assembly?

S.J. Cheng, Chairman and President

Yes. Actually, we increased around two weeks to one month of material inventory in order to support the customer, because during this critical period, transportation and logistics are significant issues. That’s the first point. The second point is that we see that IC requirements are pretty strong, so material supply lead times are getting longer. Therefore, we negotiate with customers with guarantees. We expect an increase in our material inventory to present enough capacity and materials to support our customers.

Scott Bishins, Analyst

Okay. Yes, that sounds good. That seems like it’s the prudent thing to do. One last question, I have been reading a lot of articles about our partner in China, the memory – I believe it’s Tsinghua Memory.

S.J. Cheng, Chairman and President

Yes.

Scott Bishins, Analyst

I see there are many reports out that they’re starting to ramp up their 128 NAND flash component chips. And it looks like they say they’re going to be going into full production sometime around the end of the year. Is that going to bode well for our China factory as they are now under the same umbrella?

S.J. Cheng, Chairman and President

To answer your question, as you can see, the Q1 result is better than Q4. One of the key reasons is that the Shanghai operation performance has improved a lot due to the YMTC support and COF capacity for that – and that was, I think, for the last quarter. Right now, the major shareholders include YMTC and the new Chairman is also the CEO of the YMTC. So they have full obligation and prioritize the Shanghai operations.

Scott Bishins, Analyst

How do we stand as far as – are we close to breakeven?

S.J. Cheng, Chairman and President

I think what we previously laid out has given this very data. After the virus, each of these will be overcome. I think that we will breakeven pretty soon.

Scott Bishins, Analyst

Pretty soon. Okay. Well, again thank you very much. Like I said before, this is the best report I’ve seen in many, many years. It certainly seems like there’s a lot of growth ahead for us. Just continue doing the great job and we’re here. We’re very excited about what the future looks like. So thank you very much, to both of you.

S.J. Cheng, Chairman and President

Just go ahead and buy more stock and you will benefit from it.

Scott Bishins, Analyst

I will, for sure.

S.J. Cheng, Chairman and President

Thank you.

Silvia Su, Vice President of Finance and Accounting

Thank you.

Operator, Operator

We’ll go next to Vipul Sagar with Blash Capital. Please go ahead.

Vipul Sagar, Analyst

Good evening S.J. Good evening Silvia. I just want to say a really impressive April revenue number, really impressive gross margin number. And I was really happy about the free cash flow so I just want to ask a question about the rest of the year. Last quarter, you told us that you expect positive free cash flow for the whole year. Is that still the case?

Silvia Su, Vice President of Finance and Accounting

Yes. Yes, for 2020, we expect that we can have positive free cash flow.

Vipul Sagar, Analyst

Okay. And Scott already asked the question about Shanghai, and that is really impressive that they had a good improvement in Q1. Down the road, how do we get more information on how it’s contributing to ChipMOS Taiwan? I mean, do you plan to include some updates in your press release about the happenings in ChipMOS Shanghai with YMTC being the major shareholder now? Or do you just keep that separate?

S.J. Cheng, Chairman and President

Actually, I think according to regulations, we don’t make updates regarding shareholder changes. Because they transferred from Unigroup to YMTC, that’s a major shareholder succession. Right now, the one who occupies more than 50% of the shares for Shanghai; the company name has already changed from ChipMOS Shanghai to Unimos Shanghai. The YMTC CEO also took the Chairman position of Unimos Shanghai. The government and Shanghai have upped their program, this is China government and also Shanghai, giving out the R&D project fee and also for the tax incentive. Therefore, under this kind of situation, the situation will improve better and better. YMTC can also benefit from this investor. This will be a win-win situation.

Vipul Sagar, Analyst

Okay. Thank you so much. I just want to say once again, a really impressive quarter. And obviously, Taiwan is doing so much better with the coronavirus. I mean, that government has done an amazing job in keeping its population safe. So thank you, again, and talk to you next quarter.

S.J. Cheng, Chairman and President

Thank you.

Silvia Su, Vice President of Finance and Accounting

Thank you.

Operator, Operator

It appears we have no questions at this time. I’d like to turn it back to management for closing remarks.

S.J. Cheng, Chairman and President

Yes. Thank you everyone who joined our Q1 conference call. Thank you very much. And please get in touch if you have any further questions. Thank you. Bye-bye.

Silvia Su, Vice President of Finance and Accounting

Bye-bye.

Operator, Operator

And that does conclude today’s conference. Thank you all for your participation. You may now disconnect.