Earnings Call Transcript - IMOS Q2 2022

Operator, Operator

Greetings, and welcome to the ChipMOS Second Quarter 2022 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. G.S. Chen, of ChipMOS Technologies' Strategy and Investor Relations team to introduce the management team of the company in the conference. Dr. Shen, you may begin.

G.S. Chen, Investor Relations

Thank you, operator. Welcome everyone to ChipMOS second quarter 2022 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. As 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 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 now 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, G.S. We appreciate everyone joining our call today. We continue to deliver revenue growth, profit expansion, and strong financial results. Our strong results highlight the effectiveness of our management of near-term supply chain issues, global inflation, and recent weaknesses in the macro environment. In the second quarter of 2022, despite facing challenges from geopolitics, inflation, and fluctuating demand, ChipMOS achieved a revenue increase of 1.9% from the first quarter of 2022, while experiencing a slight decline of 1.9% year-over-year. We are pleased to report that our gross margin improved by 40 basis points to 25.4% compared to the first quarter, which remains a key focus for us. We are also satisfied with how we managed operating expenses, which were 7.1% of revenue for the second quarter. We have cut costs through greater automation and initiatives implemented in our manufacturing facilities. Our long-term automation efforts have significantly contributed to our profitable growth. Additionally, net earnings for the second quarter amounted to NT$1.82, leading to a first-half EPS of NT$3.50, reflecting a 14% increase year-over-year. I am proud of the ChipMOS team for achieving higher profitability in such a challenging environment. To provide further details on our second quarter performance, assembly utilization remained at 69%, while testing increased to 75%. These utilization rates indicate industry-wide capacity adjustments as customers manage their inventory amid soft demand. Our high-end DDIC test capacity rose in the second quarter, although both DDIC and bumping utilization rates fell to 80% and 77%, respectively. Overall, our utilization rate decreased to 75%. In terms of our manufacturing segment, assembly contributed 28% of second quarter revenue, testing accounted for around 22%, and wafer bumping made up about 19%. For product contributions, our DDIC products represented approximately 32% of revenue, with gold bumping at about 17%. Revenue from DRAM and SRAM combined accounted for about 20% of total revenue. Flash and mixed-signal products made up roughly 20.5% and 10.7% of revenue, respectively. Mixed-signal revenue rose over 10% compared to the first quarter, benefiting from strong demand and inventory restocking in the automotive sector. Additionally, memory product revenue increased by about 1.5% from the first quarter, although it was down 7.7% year-over-year, representing around 40.5% of total revenue. DRAM revenue saw a 4.8% rise compared to the first quarter and a 10% increase year-over-year, contributing about 19.6% to total revenue, driven by rising demand for commodity DRAM. Total flash revenue represented approximately 20.5%, down slightly by 1% sequentially and about 19% year-over-year due to macro demand softness. NOR revenue grew around 3.3% from the first quarter, while NAND accounted for about 27% of total flash revenue. Moving on to driver IC-related product revenue, which includes gold bumping, we experienced benefits from a price increase in March and utilized additional high-end test capacity in the second quarter, helping to mitigate the impacts from declining demand in TV panels and smartphones. Revenue from driver IC-related products increased marginally from the first quarter and grew about 5.2% year-over-year, making up around 48.8% of total revenue. Thanks to short-term orders for COF, DDIC revenue grew by 1.3% from the first quarter and approximately 6% on a year-over-year basis. COF revenue surged 11% compared to the first quarter, constituting more than 40% of total DDIC revenue. TDDI revenue accounted for about 20% of DDIC revenue, and OLED sales also significantly increased over the first quarter, representing more than 5% of DDIC revenue. From an end-market perspective, revenue from the automotive and industrial sectors was about 19.7% of total revenue for the second quarter, increasing by over 20% from the first quarter due to strong demand for car display panels, greater sensor usage, and rising electronics content. Smartphones and TVs represented approximately 27.2% and 17.8% of revenue, respectively, while computing made up about 8.6% and consumer products accounted for 26.7%. Now, I will hand the call over to Ms. Silvia Su to review the financial results for the second quarter of 2022. Silvia, please proceed.

Silvia Su, Vice President of Finance

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$29.74 against one US dollar as of June 30, 2022. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards, referencing Presentation Page 12, Consolidated Operating Results Summary. For the second quarter of 2022, total revenue was NT$6,852 million. Net profit attributable to the company was NT$1,321 million in Q2. Net earnings for the second quarter of 2022 were NT$1.82 per basic common share or $1.22 per basic ADS. EBITDA for Q2 was NT$2,474 million. EBITDA was calculated by adding depreciation and amortization together with operating profit. Return on equity of Q2 was 21.3%. Referencing Presentation Page 13, Consolidated Statements of Comprehensive Income. Compared to Q1 2022, total Q2 2022 revenue increased 1.9%. 2Q 2022 Gross profit was NT$1,742 million, with gross margin at 25.4% compared to 25% in 2Q 2021. This represents an increase of 0.4 percentage points. Our operating expenses in 2Q 2022 were NT$485 million or 7.1% of total revenue, which is about a 3.9% improvement compared to Q1 2022. Operating profit for 2Q 2022 was NT$1,277 million with operating profit margin at 18.6%, which is about a 0.3 percentage points increase compared to Q1 2022. Net non-operating income in 2Q 2022 was NT$309 million, compared to NT$229 million in Q1 2022. The difference is mainly due to an increase of foreign exchange gains of NT$82 million, share of profit of associates accounted for using equity method of NT$41 million and the decrease of finance expense of NT$10 million, partially offset by the increase of loss on valuation of financial assets at fair value through profit or loss of NT$54 million. Profit attributable to the company in 2Q 2022 increased 7.8% compared to 1Q 2022. Basic weighted average outstanding shares were 727 million shares. Compared to 2Q 2021, total revenue for 2Q 2022 decreased 1.9%. Gross margin at 25.4% decreased 2.8 percentage points compared to 2Q 2021. Operating expenses increased 4.8% compared to 2Q 2021. Operating profit margin at 18.6% decreased 3.5 percentage points compared to 2Q 2021. Net non-operating income of NT$309 million in 2Q 2022 compared to net non-operating expenses of NT$19 million in 2Q 2021, which increased by NT$328 million. The difference is mainly due to an increase of foreign exchange gains of NT$289 million and share of profit of associates accounted for using equity method of NT$76 million, partially offset by the increase of loss on valuation of financial assets at fair value through profit or loss of NT$48 million. Profit was up 2.9% compared to 2Q 2021. Referencing Presentation Page 14, Consolidated Statements of Financial Position & Key Indices. Total assets at the end of 2Q 2022 were NT$43,037 million. Total liabilities at the end of 2Q 2022 were NT$19,262 million. Total equity at the end of 2Q 2022 was NT$23,775 million. Accounts receivable turnover days in 2Q 2022 were 77 days. Inventory turnover days were 56 days in 2Q 2022. Referencing Presentation Page 15, Consolidated Statements of Cash Flows. As of June 30, 2022, our balance of cash and cash equivalents was NT$7,270 million, which increased NT$1,363 million compared to the beginning of the year. Free cash flow for the first half of 2022 was NT$2,321 million, compared to NT$1,768 million for the same period in 2021. The difference is mainly due to a decrease of CapEx of NT$671 million and an increase of depreciation expenses of NT$102 million, partially offset by a decrease in operating profit of NT$190 million and an increase in income tax expense of NT$39 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 dividend from the sum. Referencing Presentation Page 16, Capital Expenditures and Depreciation. We invested NT$1,401 million in capex in Q2. The breakdown of CapEx in Q2 was 3.8% for bumping, 59.6% for LCD driver, 18.9% for assembly, and 17.7% for testing. Depreciation expenses were NT$1,197 million in Q2. As of July 31, 2022, the company's outstanding ADS number was approximately 4.5 million units, which represents around 12.3% 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. We are well-positioned in the right markets for long-term growth. The first half of 2022 started strong, and we are actively collaborating with our customers to address demand. Like many others, we are facing short-term challenges due to wider market issues such as the semiconductor supply chain and COVID-19 lockdowns in China. The increase in inventory is a reflection of global inflation and a slowdown in consumer electronics. Given this context, we are taking a cautious approach to our business and are being conservative with our capital expenditures to alleviate depreciation pressure and maintain our utilization levels. In our memory product segment, we anticipate that the business momentum will remain consistent from Q2 to Q3, primarily driven by DRAM from new offerings and niche DDR3. We also expect a gradual increase in production and positive demand for flash products as we enter the normal seasonal demand period. In the DDIC segment, customers have adjusted their near-term demand downward due to high inventory levels of TV panels and weak smartphone sales. We are not insulated from these macro challenges, and the DDIC business is experiencing a clear correction in the near term. Nevertheless, demand for OLED and automotive panels remains steady, albeit slightly weaker compared to other DDIC products. Some of the pressures are being alleviated by customers optimizing their product mix and our use of take or pay contracts. In light of the current market conditions and considering our long-term partnerships with customers, we have decided to shift our high-end test capacity planned for the second half of the year to 2023. We have communicated this decision to our customers, and we believe it will help reduce depreciation and maintain our utilization levels for both ChipMOS and our customers. Lastly, to highlight the positive long-term outlook for customer demand, ChipMOS is participating in a government incentive program through the Invest Taiwan initiative from the Ministry of Economic Affairs. I am pleased to share that we received approval for a three-year investment project in July, which includes expanding manufacturing facilities, enhancing capacity, investing in AI and automation, and focusing on green energy for future operations. Meanwhile, ChipMOS continues to optimize manufacturing processes and implement automation to sustain our competitive edge. Our ongoing efforts are aimed at improving product quality, increasing efficiency, and reducing costs. That concludes our formal remarks. We are now open to questions.

Operator, Operator

Thank you. Our first question comes from Jerry Su from Credit Suisse. You may begin.

Jerry Su, Analyst

You just mentioned that DDIC business is in a more obvious correction over the near term, would you give us more color about this statement? Under the condition, how long do you think the correction will take for the DDIC segment and also potential pressure on DDIC and memory?

S.J. Cheng, Chairman and President

As you know, the near term semiconductor supply chain inventory increase reflects global inflation and consumer electronics macro softness. Ongoing China COVID-19 shutdowns may also further impact inventory levels. Our DDIC and mixed-signal products are not immune to the macro weakness of panels and consumer electronics along with the broader market and obviously corrected. However, memory products could maintain similar momentum in the second half. So, as we have done in the past, we are taking a conservative view. We currently expect third quarter revenue to be lower than the second quarter, with a decline for 2022. Regarding our longer-term outlook, we will continue to update you on our quarterly calls as is our normal process. We serve a diverse base of customers. There are always pockets of the market that are stronger than others. Our customers reflect this based on their business and customer profile, and each individual customer's situation is such different. So, it is hard to make a broader call on inventory for the end of the year. We are still okay with the price pressure from memory products and DDIC high-end platform contract customers. For non-contract customers, we could waive some prices for specific products in order to gain volume and maintain the utilization level.

Jerry Su, Analyst

Would you give us more color about your mentioned DRAM new product and DDR3 higher volume? How about the 2022 CapEx and depreciation?

S.J. Cheng, Chairman and President

A couple of customers show better DDR3 visibility. Regarding the new DRAM product, it referred to mass production for customers using advanced DRAM technology.

Silvia Su, Vice President of Finance

Regarding 2022 CapEx, it will be near 20% of annual revenue. Q2 depreciation is around 1,197 million NTD, and depreciation of Q3 and Q4 would be expected around 1.2 billion NTD.

Operator, Operator

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

G.S. Chen, 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.