Earnings Call Transcript
CHIPMOS TECHNOLOGIES INC (IMOS)
Earnings Call Transcript - IMOS Q2 2020
Operator, Operator
Greetings and welcome to the ChipMOS Technologies Inc. Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. David Pasquale with Global IR Partners. Please go ahead, sir.
David Pasquale, Host
Thank you, operator. Welcome everyone to ChipMOS' Second Quarter 2020 Results Conference Call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; 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 release off of ChipMOS' website. Before we begin the formal comments, we must make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 as amended and Section 21E of the U.S. Securities Exchange Act of 1934 as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including but not limited to the potential impact of COVID-19, 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 on Form 20-F, which was filed with the U.S. Securities and Exchange Commission and in the company's other filings with the SEC. At this time I'd 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. We are pleased with our results for the second quarter of 2020 and continued progress. I'm proud of our team for staying focused in serving our customers, during the uncertain coronavirus environment. Q2 revenue grew 10.7% compared to Q2 2019. This represents a six-year record high for Q2 revenue. For the first half of 2020, we grew revenue by 17.6% compared to the first half of 2019. We also kept gross margin above 20% in Q2, as we benefited from mix and utilization levels. If you look at a year-over-year basis, gross margin increased 360 basis points to 20.7% compared to Q2 2019. On the cost side, we continued to control our expenses as we worked to gain as much leverage as possible in growing earnings and our operating cash flows. Even with the added costs of higher factory environment safety and employee health related to coronavirus, we kept OpEx at 7.3% of the revenue. Let me give some color on the mix. Our Q2 testing utilization level significantly increased to 81%, as we benefited from higher TV SoC and memory testing demand. On the other side, our assembly utilization level declined to 76% from 81% due to the Chinese NAND wafer supply, which impacted our loading number. The Chinese NAND wafer supply was across the industry. Smartphone demand remains soft, which impacted our LCD and bumping utilization levels. However, this was more than offset by strong demand from increased work-from-home, which led to an increase in our 8-inch COF utilization for TV and IC panel, notebook, and tablet. Our overall utilization level was 76% in Q2 2020, up from 75% in a year ago Q2 2019 but slightly lower than 79% in Q1 2020. Regarding our manufacturing side, the assembly represented 27% of Q2 2020's revenue. Package testing and wafer sort represented 13.5% and 9.7% of the revenue respectively. Wafer bumping represented 19.1% of Q2 revenue. On a product segment basis, mixed signal segment revenue grew to around 11% of Q2 2020 revenue. While our COG, COF segment was 30.4% of revenue and gold bumping represented 16.4% of Q2 revenue. Revenue from DRAM and SRAM represented 22% of Q2 revenue and our flash segment represented 20.2% of Q2 revenue. In terms of adding color on Q2, our memory product revenue declined just under 3% and represented 42.2% of our total Q2 revenue. Our results benefited from stable commodity DRAM demand. Total DRAM revenue increased around 6% compared to 1Q 2020. Revenue from NOR flash and Mask ROM grew around 8% compared to 1Q 2020. NAND flash business represented about 34% of total Q2 flash revenue. Customers' memory loading volumes were lower due to the NAND flash wafer supply declines. As for the driver IC-related product, revenue declined around 4% compared to 1Q 2020 and represented around 46.8% of total Q2 revenue. The COF portion of our revenue grew 7.4% in Q2 compared to the Q1 2020 and represented 54% of DDIC revenue. The strong growth was led by higher demand for 8-inch COF for TV panels and stable IC panel demand. Revenue had been up strong, but was impacted by continued global weakness in smartphone demand. As a result, total DDIC revenue in Q2 declined 2.6% compared to 1Q 2020. Finally, TDDI and OLED driver business represented 24.6% and 6.5% of Q2 DDIC revenue respectively. Regarding our end market, revenue from smartphones declined to 34.5% of total Q2 revenue. Revenue from our TV category and computing grew to 20% and 13% respectively. Automobile and industry represented about 10.5% and the consumer category held flat at 22% of Q2 revenue. The weakness in auto, industry, and consumer is in line with the trend across the broader industry. As we look forward into the third quarter of 2020, we had a challenging but very successful first half of 2020. As we continue to deliver strong results as we enter the second half, we remain focused on our growth segment and execution, but we do remain cautious given the uncertain coronavirus environment. We are encouraged by healthy demand from customers and end markets. From a demand standpoint, we are positive about our market position. Based on what we know today, we expect that revenue from two major product segments, Memory and DDIC-related, will continue to grow in Q3. In general, we expect the growth of DDIC-related products to be better than our Memory segment in Q3 2020. We also remain focused on improving margins further through higher revenue, favorable mix, and ongoing cost control. We expect the commodity DRAM to be stable with steady demand for cloud storage and PC. We expect our NOR flash business to increase, led by continuing 5G network build-out globally and an increase in gaming demand. Niche DRAM, on the other side, continues to be impacted by soft demand from the smartphone sector. NAND flash continues to be affected by the weakest demand for consumer-grade storage and the lowest NAND wafer volume. In DDIC, we expect demand from medium-size panels for tablet and notebook to remain stable. Large-size panels for TV are likely to maintain the momentum of Q2 2020. For small-size panels, demand will likely be impacted in Q3 by ongoing smartphone weakness. However, we expect TDDI growth to help offset this weakness. Our TDDI benefits from higher penetration of HD-grade panels in new bezel sparing smartphones. We are seeing wafer testing capacity gradually tighten signaling a higher-end platform in Q3. Overall, we expect the mix will help drive further improvement in utilization rate. Finally, our OLED driver shipments in the first half of 2020 were greater than the entire year of 2019. We expect to benefit from the continuous growth trend as we move into the second half of 2020. Now let me turn the call over to Ms. Silvia Su, to review the second quarter 2020 financial results. Silvia, please go ahead.
Silvia Su, Vice President of Finance and Accounting Management Center
Thank you S.J. All dollar amounts cited 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 the exchange rate of NT $29.44 against US$1 as of June 30, 2020. All the figures were prepared in accordance with Taiwan International Financial reporting Standards. To help make the presentation easier to follow, my comments will go along with the investor presentation on our Investor Relations website published today. Page 12, consolidated operating results summary. For the second quarter of 2020, total revenue was US$184.4 million. Net profit attributable to the company was US$18.5 million in Q2. Net earnings for the second quarter of 2020 were $0.025 per basic common share or $0.51 per basic ADS. Depreciation and amortization expenses were US$35.6 million. We invested US$27.6 million in CapEx in Q2, as we continued to conservatively add capacity in support of our customer demand levels. EBITDA for Q2 was US$52.4 million. EBITDA was calculated by adding depreciation and amortization together with operating profit. Return on equity of Q2 was 10.9%. Page 13, consolidated statement of comprehensive income. Compared to last quarter, total Q2 revenue was US$184.4 million, decreased 2.8% compared to Q1. Gross profit was US$38.2 million in Q2 with Q2 gross margin at 20.7%, decreased two percentage points compared to 22.7% in Q1. Our operating expenses in Q2 were US$13.5 million, or 7.3% of our Q2 revenue, which is about 0.6% higher than Q1. Operating profit for Q2 was US$26.8 million and operating profit margin for Q2 was 14.5%, decreased 1.6 percentage points compared to 16.1% in Q1. Net non-operating expenses in Q2 were US$4.5 million, compared to net non-operating expenses in Q1 of US$0.1 million. The difference between Q2 and Q1 is mainly due to the increase of net foreign exchange loss of US$5.7 million. This was partially offset by a US$1 million increase in the share of gain of associates accounted for using the equity method and an increase of US$0.5 million in the gain on valuation of financial assets at fair value through profit or loss. Net profit in Q2 was US$18.5 million, compared to US$24.2 million in Q1. The difference between Q2 and Q1 is mainly due to the decrease in operating profit of US$3.8 million. The increased net non-operating expense is US$4.4 million and partially offset by the decreased income tax expense of US$2.4 million. Net earnings for the second quarter of 2020 were $0.025 per basic common share compared to $0.033 per basic common share in Q1. Basic weighted average outstanding shares were 727.2 million shares. Compared to the same period of last year, total revenue for Q2 was US$184.4 million, which was up 10.7% compared to the same period of 2019. Gross margin was 20.7%, up 3.6 percentage points compared to 17.1% in Q2 2019. Operating expenses in Q2 were US$13.5 million, which decreased 4.4% compared to Q2 2019. Operating profit margin in Q2 was 14.5%, an improvement of 5.3 percentage points compared to 9.2% in Q2 2019. Net non-operating expenses in Q2 were US$4.5 million, compared to net non-operating income in Q2 2019 of US$31.1 million. The difference is mainly due to the decrease in the gain on disposal of investments accounted for using the equity method of US$33.4 million and a US$4.9 million increase in net foreign exchange loss. This was partially offset by a US$2.5 million increase in the share of gain of associates accounted for using the equity method. Net profit in Q2 was US$18.5 million, compared to US$43.3 million in Q2 2019. The difference is mainly due to the decrease of gain on disposal of investments under the equity method of US$33.4 million, which was partially offset by the increase in gross profit of US$9.7 million. Net earnings for the second quarter of 2020 were $0.025 per basic common share compared to $0.06 per basic common share for Q2 of 2019. Page 14. Consolidated statements of financial position in key indices. Total assets at the end of Q2 were US$1.2 billion including current assets of US$447.1 million. Total liabilities at the end of Q2 were US$546.3 million including current liability of US$205.1 million. Total equity at the end of Q2 was US$664.5 million. Accounts receivable turnover days in Q2 were 78 days compared to 75 days in Q1. Inventory turnover days were 50 days in Q2, compared to 44 days in Q1. Page 15. Consolidated statements of cash flows. Cash and cash equivalents at the beginning of Q2 were US$159.8 million. Net cash generated from operating activities was US$94.4 million. Net cash used in investing activities was US$69.2 million. Net cash generated from financing activities was US$4.4 million. As of June 30, 2020, our balance of cash and cash equivalents was US$189.3 million. Free cash flow in the second quarter was US$48.6 million. Free cash flow was calculated by adding depreciation, amortization, interest income together with operating profit and then subtracting CapEx, interest expense, income tax expense and dividends from the sum. Page 16. Capital expenditure and depreciation. We invested US$27.5 million in CapEx in Q2. This is down from US$38.7 million in Q1. The breakdown of CapEx was 8.7% for bumping, 45.8% for LCD driver, 15% for assembly and 30.5% for testing. As always, we are working to keep a proper balance in supporting our customers with the necessary capacity they need for their programs. Depreciation expenses were US$35.6 million in Q2. As of July 31, 2020, the company's outstanding ADS number was approximately 5 million units, which represents around 12.6% of the company's outstanding common shares. Operator, that concludes our formal remarks, we can now take questions.
Operator, Operator
Thank you. Your first question comes from Scott Bishins with Caffeine Holdings LLC. Please go ahead with your question.
Scott Bishins, Analyst
Yeah. Hi, SJ and Silvia. It looks like you had a very good quarter. I have a couple of questions I'd like to ask. First of all, I see that this is sort of like a new format for the release for the earnings, pretty much using a presentation instead of writing it down and also putting it into the press release. Are you going to continue to do it like this, or you're going to go back to the other way?
Silvia Su, Vice President of Finance and Accounting Management Center
Yes, we will continue to use this format.
Scott Bishins, Analyst
Okay. After looking at it for a while, it seems quite good to see it this way; it's easy to follow along while you speak and observe what's happening. I like that. Let me ask you a question. I know gold has increased significantly in the last three months and probably for the entire year. Has the rising cost of gold impacted our gross margin?
S.J. Cheng, Chairman and President
Scott, this is S.J. To answer your question, we had a gold formula with our customer in LCD driver areas. This means we use the past three months average gold price to charge for this month. But for assembly-wise, we don't have this formula. So we need to observe the costs with our sales or renegotiate the material cost with our customers. So gold price increase is a pretty high pressure for us to maintain the margin.
Scott Bishins, Analyst
Would you have any idea what the cost is as far as a gross margin percentage in the second quarter on the assembly side?
Silvia Su, Vice President of Finance and Accounting Management Center
You mean the increase of gold price?
Scott Bishins, Analyst
Yes. Well, how much did that affect the gross margin in assembly in the second quarter?
Silvia Su, Vice President of Finance and Accounting Management Center
Okay. Maybe let me put it in this way. If the gold price increased around 10%, then I think it will impact our gross margin for the total company by around 0.8% to 1% of gross margin.
Scott Bishins, Analyst
Okay. So about 1% based on the current price of gold that you're saying?
Silvia Su, Vice President of Finance and Accounting Management Center
Yes.
Scott Bishins, Analyst
But you're saying also though in the bumping that you're able to get reimbursed for the difference in the price of gold?
S.J. Cheng, Chairman and President
The answer is yes, but the gold price increased a lot. So we use Q2 average still cannot catch up with the gold price increase. So it still offsets some margin for us. But once the gold price drops, we will return it back.
Scott Bishins, Analyst
Okay. Do you believe in the third quarter that we'll be able to increase gross margins and revenue?
S.J. Cheng, Chairman and President
For revenue-wise actually we already announced our July revenue. Our July revenue compared with June is a 5.7% increase. So in August we also see a good sign. Since right now the LCD driver TDDI is fully occupied in the testing area. So revenue-wise for Q3, we are very optimistic it will be better than Q2. But Q3 margin will be dependent on key factors like gold price, foreign exchange, and summertime electric costs, which will increase.
Scott Bishins, Analyst
The foreign exchange at the end of June is pretty much the same today as it was then. It may be slightly down or a little stronger, but not much on the NT dollar. So hopefully, if we stay around this price, we probably shouldn't expect much of an FX impact. Would you agree with that?
S.J. Cheng, Chairman and President
Yes, we hope so. So our revenue will grow, and the margin will be dependent on these three key factors.
Scott Bishins, Analyst
Okay. Let's see. Any impact at all on revenue from the COVID virus?
S.J. Cheng, Chairman and President
Up to now, it seems like we get some benefit from that, yes. Because our product segment commodity DRAM continues to be stable and strong due to working from home. And PC and the notebook medium-size increase. So driver-wise also increased.
Scott Bishins, Analyst
So you see that going on for the rest of the second half of the year possibly?
S.J. Cheng, Chairman and President
Actually, yes.
Scott Bishins, Analyst
Is China fully operational again, or are companies still seeking to move materials out of China and are looking for other locations like Taiwan or other countries to fill the gap left by China?
S.J. Cheng, Chairman and President
Yes. I think the China situation is more complicated compared with Taiwan. The relationship between China and the U.S. is getting much worse. There are a lot of issues; it's not just a business issue, it's a political issue. Secondly, the coronavirus is not yet stable, and there are heavy rains in Taiwan. So far at least we are lucky our Shanghai operation finally got profitable for the first half.
Scott Bishins, Analyst
I have a suggestion regarding the presentation. Last year in the second quarter, there was a significant capital gain from the sale of shares, specifically from JMC. It would be helpful to include footnotes about these one-time large gains. If someone looks at this year's presentation and doesn't remember last year's gains, they might mistakenly think profitability has significantly decreased, when in reality it only reflects that one-time capital gain. Additionally, considering the fluctuations between the NT dollar and the U.S. dollar, it would be beneficial to add footnotes about non-operating expenses, gains, or losses, and specify the foreign exchange impact for each quarter. This would help provide context on why overall profitability might have shifted. For example, if there had been no foreign exchange changes, our earnings in ADRs could have increased by about $0.11, and potentially another NT$0.15 for common shares. Without this information, the report may not clearly convey the necessary context for those who are not familiar with prior periods. I recommend that whenever there are large capital gains or losses, including foreign exchange impacts, footnotes be added and carried over into comparisons from quarter to quarter or year to year. That's just my suggestion.
S.J. Cheng, Chairman and President
Yes. Thank you for your suggestions, Scott. I think we will enhance this footnote statement, and then people will have an apple-to-apple comparison.
Scott Bishins, Analyst
Yes, I would appreciate that. I think that would help a lot of investors understand what's going on during the quarter. So it also shows the potential of what this quarter could have been; where it could have been $0.90 common, basically, if we would have had a flat FX. So it just makes it a little easier to understand and just shows the steadiness of the earnings versus being lumpy as far as the earnings because of the one-time charges.
S.J. Cheng, Chairman and President
Yes. I appreciate your suggestions. Thank you. We will take a note of it.
Scott Bishins, Analyst
Okay. Otherwise, a great quarter. Really looking forward to the second half. It seems, seeing some of your notes, you feel we might get a little bit of a rebound in the smartphone especially in the TDDI?
S.J. Cheng, Chairman and President
Yes.
Scott Bishins, Analyst
Hopefully, that will also help improve the margins. If I'm correct, we receive a higher margin on the LCD compared to memory.
Silvia Su, Vice President of Finance and Accounting Management Center
Yes.
S.J. Cheng, Chairman and President
Actually, the answer is yes. But memory-wise, testing also has a very high margin but assembly-wise it's very limited. But LCD driver, yes, it's higher margin in there.
Scott Bishins, Analyst
Okay. Well, like I said, congratulations and looking forward to the second half of the year. Thank you very much.
S.J. Cheng, Chairman and President
Okay. Thank you.
Silvia Su, Vice President of Finance and Accounting Management Center
Thank you. Thanks.
Operator, Operator
Your next question comes from Vipul Sagar with Blash Capital LLC. Please proceed with your question.
Vipul Sagar, Analyst
Good morning or good evening, S.J. and Silvia. I have two questions. The first one is about free cash flow. I noticed your cash flow increased in the second quarter compared to the first quarter. It was $18 million in the first quarter and $30 million in the second quarter. Can you share if we can expect positive free cash flow for the second half of the year?
Silvia Su, Vice President of Finance and Accounting Management Center
Yes. For the second half, I think the free cash flow will be positive.
Vipul Sagar, Analyst
Okay. Thank you.
Silvia Su, Vice President of Finance and Accounting Management Center
Yes, for the second half.
Vipul Sagar, Analyst
Thank you. The next question I have is more about the China business. The Unimos business, if you have any update for the first half, how they're doing, or any revenue number or are they breakeven here or profitability?
S.J. Cheng, Chairman and President
To answer your question for the first half, they've reached the breakeven point with a very limited profit.
Vipul Sagar, Analyst
Okay. In the past, you mentioned that the Unimos business in China was expected to grow and contribute to ChipMOS' business in the future. However, since the company decided to sell the majority interest, we now hold a minority stake of around 45%.
S.J. Cheng, Chairman and President
Yes.
Vipul Sagar, Analyst
Is there a plan to eventually take this public? I understand it's not solely up to management here, but that's a decision they will make. Shareholders of ChipMOS have two options to benefit: either the business significantly improves or it goes public, which would allow us to capitalize on it. The alternative would be to sell the remaining stake since it hasn't added value for some time. What are your thoughts on how to monetize this for ChipMOS shareholders? I see you've reduced your stake in JMC from nearly 20% to 10% and shifted from a majority to a minority holder in Unimos. If going public in China isn't on the table, have you considered selling the remaining stake?
S.J. Cheng, Chairman and President
Yes. To answer your question since right now China-wise, they are going to build their infrastructure by their sales. So from a long-term viewpoint, we will find the best benefit for the company and shareholders. And like JMC, we are on the negotiation prospects to try to dispose of the rest of the shares to them.
Vipul Sagar, Analyst
Okay. Fantastic. That's good news. Okay. I mean, is there like a timeline by year-end or within a year?
S.J. Cheng, Chairman and President
Actually negotiate with China people. If you rush, you cannot get a good price, right?
Vipul Sagar, Analyst
I understand. Okay. Thank you so much for the update.
S.J. Cheng, Chairman and President
Yes. Yes.
Vipul Sagar, Analyst
Okay. Thank you so much. That's all the questions.
S.J. Cheng, Chairman and President
Thank you.
Silvia Su, Vice President of Finance and Accounting Management Center
Thank you.
Operator, Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Chairman and President Mr. S.J. Cheng for closing remarks.
S.J. Cheng, Chairman and President
Yes. Thank you everybody for joining our Q2 conference call. If you have any questions, please contact us through e-mail through our website. Thank you very much. Bye-bye.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.