Earnings Call Transcript - IMOS Q4 2021

Operator, Operator

Greetings, and welcome to the ChipMOS Fourth Quarter and Full Year 2021 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I would now like to turn the conference over to Dr. GS Shen of ChipMOS Technologies Strategy and Investor Relations team to introduce the management team of the Company in Conference. Dr. Shen, you may begin.

G.S. Shen, Strategy and Investor Relations

Thank you, operator. Welcome everyone to ChipMOS' fourth quarter and full year 2021 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. We are also joined on the call today by Mr. Jesse Huang, Spokesperson and Senior Vice President of Strategy and Investor Relations. S.J. will chair the meeting and review business highlights and provide color on the operating environment. After Silvia’s review of the Company's key financial results, S.J. will provide our current business outlook. All Company executives will then participate in an open Q&A session. Please note, we have posted a presentation on the MOPS and also on the ChipMOS' website to accompany today’s conference call. Before we begin the prepared comments, we advise you to review our forward-looking statements disclaimer, which is noted as the 'Safe Harbor Notice' on the second page of today’s presentation. As a reminder, today’s conference call is being recorded and a replay will be made available later today on the Company’s website. At this time, I'd like to turn the call over to our company's Chairman and President, Mr. S.J. Cheng. Please go ahead, sir.

S.J. Cheng, Chairman and President

Yes, thank you, GS. We appreciate everyone joining our call today. I am very pleased with our Team’s work in 2021. It was a challenging year for everyone in the industry with COVID-19 and supply constraints. We were in a position to capture higher volumes of the higher margin segments we have been expanding. Finally, while Q4 was slightly lower than Q3, this reflects normal seasonal patterns. Our business and underlying demand trends remain strong entering 2022, and we are very positive about our business. Revenue and profit of 2021 were both the new record highs of ChipMOS. Let me give you some highlights. First, we achieved a new full year revenue of NT$ 27.4 billion with a 19.1% increase in 2021 revenue. Gross Margin increased by 460 basis points for 2021 to 26.5% compared to 2020. We achieved a new net earnings record of NT$ 6.96 in 2021 with a 113.5% increase compared to 2020, which was NT$ 3.26, and NT$ 1.95 in Q4 EPS. We continue to stress operating efficiency targets and utilization improvement and maintain a healthy level of operating expenses, which was at 6.9% of Q4 revenue. The overall utilization was 76% in Q4. It decreased compared to Q3 due to the capacity we have been adding and some wafer tightness, which slowed loading rates. We observed a decrease in assembly utilization to 67% in Q4 2021, while testing held at 80%. Driven by strong demand from OLED DDIC and Automotive applications, our high-end DDIC test platform remained fully utilized in Q4. DDIC and Bumping utilization levels remained at around 78% and 83% respectively, despite the non-linear wafer supply issues. Regarding our manufacturing business, assembly represented 27% of Q4 revenue. Testing represented just over 21%, and wafer bumping represented about 20% of Q4 revenue. On a product segment basis, our DDIC, including COG and COF, was about 31.6% of Q4 revenue, while gold bumping represented about 18% of Q4 revenue. Revenue from DRAM and SRAM represented about 16.8% of Q4 revenue. Our Flash segment and the Mixed-signal segment represented about 23% and 10.5% of Q4 revenue, respectively. In terms of adding context to our business, our memory product revenue was up about 2% on a year-over-year basis but down 12.7% compared to Q3 2021 due to seasonally adjusted year-end inventory. Memory products represented about 40% of total Q4 revenue. Full year 2021 memory revenue was up 19.8%, driven by demand growth in IoT and Consumer electronics, including gaming and increased assembly prices. DRAM revenue represented about 16% of total Q4 revenue, down about 14.3% compared to Q3 2021 but up about 2% year-over-year. DRAM also increased about 4% for the full year 2021. Total Flash revenue grew about 5% year-over-year but declined about 11.5% compared to Q3 2021. Flash revenue represented about 23% of Q4 revenue, as we benefitted from further diversification in the applications we serve, combined with customers’ continued re-stocking. Full year 2021 Flash revenue grew significantly and was up 33.6%. NOR increased by more than 45% and NAND increased about 12%. This represented about 30% of total Flash revenue in 2021. Moving onto Driver IC-related product revenue, including gold bumping, our test ASP increased due to customers optimizing their product mix while benefitting from higher OLED and Auto demand. These figures would have been even higher, but we continue to work through ongoing industry-wide wafer supply bottlenecks from foundry capacity constraints. Despite the supply constraints, our Driver IC-related product revenue increased about 6.6% compared to Q4 2020 and was up about 3.3% compared to Q3 2021. Driver IC-related revenue was about 49.5% of total Q4 revenue and was up about 15% in 2021, driven by price increases and our high-end test platform being fully utilized. Total DDIC revenue, including COG and COF, was up just over 13% year-over-year and increased slightly over Q3 2021, and up more than 18% for the full year 2021, with COF revenue representing about 44% of total DDIC revenue for the full year 2021. TDDI revenue increased more than 11% compared to Q3 2021 and represented 27% of Q4 DDIC revenue. OLED grew significantly by more than 15% compared to Q3 2021 and represented more than 5% of Q4 DDIC revenue. On an end-market basis, we benefitted from strong demand from automotive electronics applications. Revenue from Automotive and Industrial increased to 17.5% of Q4 revenue and grew around 80% in 2021 compared to 2020. Meanwhile, driven by strong demand for car display panels, the DDIC portion of Auto grew to more than one-third. Smartphones and TV, as an end market, accounted for about 33.5% and about 17% of Q4 2021 revenue, respectively. Computing represented about 6% and consumer represented 26% of Q4 revenue. Now let me turn the call to Ms. Silvia Su, to review the fourth quarter and full year 2021 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. The following numbers are based on the exchange rates of NT$ 27.74 against US$1 as of December 30, 2021. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards. Referring to presentation Page 12, Consolidated Operating Results Summary, for the fourth quarter of 2021, total revenue was NT$ 6,791 million. Net profit attributable to the company was NT$ 1,418 million in Q4. Net earnings for the fourth quarter of 2021 were NT$ 1.95 per basic common share or US$ 1.41 per basic ADS. EBITDA for Q4 was NT$ 2,490 million. EBITDA was calculated by adding depreciation and amortization together with operating profit. Return on equity for Q4 was 24.0%. Referring to presentation Page 13, Consolidated Statements of Comprehensive Income, compared to Q3 2021, total revenue for Q4 2021 decreased 5.2%. Q4 2021 Gross profit was NT$ 1,769 million, with gross margin at 26.0%, compared to 27.3% in Q3. This represents a decrease of 1.3 percentage points. Our operating expenses in Q4 were NT$ 467 million, or 6.9% of total revenue, which is about a 0.8% improvement compared to Q3. Operating profit for Q4 was NT$ 1,336 million, with operating profit margin at 19.7%, which is about a 1.6 percentage points decrease compared to Q3. Net non-operating income in Q4 was NT$ 319 million compared to NT$ 148 million in Q3 2021. The difference is mainly due to an increase in the share of gain from associates accounted for using the equity method of NT$ 190 million, partially offset by an increase in loss on valuation of financial assets at fair value through profit or loss of NT$ 12 million and foreign exchange losses of NT$ 8 million. Profit attributable to the company in Q4 expanded 1.3% compared to Q3. Basic weighted average outstanding shares were 727 million shares. Compared to Q4 2020, total revenue for Q4 2021 was up 7.6%. Gross margin at 26.0% increased 1.6 percentage points compared to Q4 2020. Operating expenses increased 13.1% compared to Q4 2020. Operating profit margin at 19.7% increased 1.3 percentage points compared to Q4 2020. Net non-operating income of NT$ 319 million in Q4 2021 compared to net non-operating expenses of NT$ 278 million in Q4 2020, representing an increase of NT$ 597 million. The difference is mainly due to an increase in the share of gain of associates accounted for using the equity method of NT$ 439 million, lower foreign exchange losses of NT$ 150 million, and interest expense of NT$ 5 million. Profits were up 106.5% compared to Q4 2020. The difference between Q4 2021 and Q4 2020 is mainly due to an increase in operating profit of NT$ 176 million and net non-operating income of NT$ 597 million, partially offset by an increase in income tax expense of NT$ 42 million. Referring to presentation Page 14, Consolidated Statements of Comprehensive Income compared to last year, total revenue for 2021 was NT$ 27,400 million, which is up 19.1% compared to 2020. As S.J. mentioned, this was a record level for the company. Gross margin increased to 26.5%, up 4.6 percentage points compared to 2020. Our operating expenses in 2021 were NT$ 1,817 million, which was up 13.5% compared to 2020. Operating profit margin in 2021 was 20.3%, an improvement of 4.8 percentage points compared to 2020. Net non-operating income in 2021 was NT$ 473 million. The difference is mainly due to an increase in the share of gain of associates accounted for using the equity method of NT$ 773 million, lower foreign exchange losses of NT$ 266 million, and interest expense of NT$ 41 million. Net profit in 2021 was NT$ 5,059 million, which was up 113.7% compared to 2020. The difference is due to an increase in operating profit of NT$ 1,996 million and net non-operating income of NT$ 1,066 million, partially offset by an increase in income tax expense of NT$ 371 million. Net earnings for the year of 2021 were NT$ 6.96 per basic common share compared to NT$ 3.26 per basic common share for 2020. Referring to presentation Page 15, consolidated Statements of Financial Position & Key Indices, total assets at the end of Q4 2021 were NT$ 42,523 million. Total liabilities at the end of Q4 2021 were NT$ 18,137 million. Total equity at the end of Q4 2021 was NT$ 24,386 million. Accounts receivable turnover days in Q4 2021 were 84 days. Inventory turnover days was 53 days in Q4 2021. Referring to presentation Page 16, Consolidated Statements of Cash Flows, as of December 31, 2021, our balance of cash and cash equivalents was NT$ 5,906 million, increased NT$ 1,793 million compared to the beginning of the year. Free cash flow for the year was NT$ 956 million compared to NT$ 1,559 million in 2020. The difference is mainly due to an increase in operating profit of NT$ 1,996 million and depreciation expenses of NT$ 459 million, partially offset by the increase in CapEx of NT$ 2,419 million, income tax expense of NT$ 371 million, and cash dividend paid of NT$ 291 million. Free cash flow was calculated by adding depreciation, amortization, and interest income together with operating profit and then subtracting CapEx, interest expense, income tax expense, and dividends from the sum. Referring to presentation Page 17, Capital Expenditures and Depreciation, we invested NT$ 2,685 million in CapEx in Q4 and NT$ 6,553 million in CapEx in 2021. The breakdown of CapEx in Q4 was 4.6% for bumping, 34.8% for LCD Driver, 25.1% for assembly, and 35.5% for testing. Depreciation expenses were NT$ 1,155 million in Q4. Depreciation expenses were NT$ 4,634 million in 2021. As of January 31, 2022, the Company’s outstanding ADS number was approximately 4.5 million units, which represents around 12.4% of the Company’s outstanding common shares. That concludes the financial review. I will now turn the call back to our Chairman Mr. S.J. Cheng for our outlook. Please go ahead, sir.

S.J. Cheng, Chairman and President

Thank you, Silvia. While we are pleased with our progress and record results in 2021, we think there is still more room for improvement. Despite Q1 typically being impacted by seasonally shortened workday schedules, we are cautiously optimistic for Q1 given the current healthy customer demand and supply chain situation. In our memory product segment, momentum is improving, and we will work to offset seasonality in Q1 with flat to slightly up segment revenue. We expect growth in DRAM against the trend, with near-term upside coming from rush orders. We anticipate healthy demand momentum in NAND as we benefit from customers restocking inventory. In DDIC, customer momentum is also healthy, with our high-end test platform fully utilized, driven by strong demand from OLED and automotive applications. We strategically extended new DDIC high-end test capacity to meet this strong demand and have secured 'take or pay' contracts with customers for the new test platform, which will help ensure utilization levels in the next three years. However, we do expect DDIC revenue to decrease slightly in Q1 due to the longer lead time of our test platform and shortened workday schedules. On the positive side, we expect to increase our test pricing over the near term based on tight demand for high-end test capacity and the healthy industry situation. Finally, reflecting our business strength, positive outlook, and focus on building shareholder value, our Board approved another dividend. Pending shareholder approval at our May Annual General Meeting, we will distribute NT$ 4.3 per common share. Operator, that concludes our formal remarks, and we can now take questions.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Jerry Su from Credit Suisse. You may begin.

Jerry Su, Analyst

Please give us more color about your statement regarding better memory visibility of DRAM and Flash in Q1 2022. Why is this segment not impacted by seasonal adjustment as per the regular pattern? Besides, could you further quantify the DDIC outlook in Q1 2022 caused by fewer working days as mentioned?

S.J. Cheng, Chairman and President

As you know, there was a COVID-19 pandemic event in Xian recently. We benefited by receiving some rush orders from customers for commodity DRAM. For DDIC, our high-end test platform remains tight and fully utilized due to strong demand from OLED and automotive applications. We strategically extended new DDIC high-end tester capacity to meet such strong demand and have added three-year 'take or pay' contracts with customers for the new test platform to help ensure our utilization levels in the future. There should be around a 4% capacity increase in Q1 2022 and a total of 16% to 17% in 2022. In the meantime, the package format is switching to COF from COG for automotive application due to reliability and quality requirements for large and curved displays. We expect to benefit from all of these factors to drive approximately high single-digit year-over-year revenue growth company-wide in 2022.

Jerry Su, Analyst

Please give us more color for niche DRAM in 2022?

S.J. Cheng, Chairman and President

Our niche DRAM customers have reserved capacity from specific wafer foundries. Depending on market demand, they will release the wafers for assembly and testing at our site. Besides, Korean DRAM players are stepping out of the DDR3 & DDR4 market, which is also beneficial for the supply chain in Taiwan.

Jerry Su, Analyst

Finally, I would like to ask about your CapEx and depreciation in 2022.

S.J. Cheng, Chairman and President

For 2021, our CapEx was about NT$ 6.5 billion, around 25% of annual revenue. For 2022, our CapEx will be about 20% of annual revenue. However, this does not include some planned extra expenses in green energy, stable power supply, and searching for new factory land for future shop-floor expansion in northern Taiwan.

Silvia Su, Vice President of Finance and Accounting Management Center

As for depreciation, Q4 2021 was about NT$ 1.1 billion, and it should increase about 3% to 4% quarterly.

Jerry Su, Analyst

Could you share which business segment will be expanded in northern Taiwan as you mentioned?

S.J. Cheng, Chairman and President

There are two portions: one for Bumping, and the other for mixed-signal and wafer testing.

Operator, Operator

Thank you. I am not showing any further questions in the queue. I would like to turn the call back over to GS.

G.S. Shen, Strategy and Investor Relations

Thank you. I will orally read some questions from foreign institutional investors. The question is asking about automotive and Industrial applications, which increased significantly in Q4. Is this from share gains or a demand increase? Will it continue to grow in 2022?

Jesse Huang, Spokesperson and Senior Vice President of Strategy and Investor Relations

We are really pleased with our continued growth in Auto and Industrial. We view this as a multi-year growth driver for the company and are well positioned. We expect that ratio will continue to increase, led by various product segment customers, including Memory, DDIC, and Mixed-signal, as everyone focuses their products on serving automotive applications.

G.S. Shen, Strategy and Investor Relations

That concludes our question-and-answer session. Thank you for participating. I’ll turn the floor back to Mr. S.J. Cheng for any closing comments.

S.J. Cheng, Chairman and President

Thank you everyone for joining our conference call. Please email our IR Team if you have any more questions. We appreciate your support. Goodbye.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.