ChipMOS Technologies Inc (IMOS) 2016 Q4 法說會逐字稿

Greetings and welcome to ChipMOS Technologies' fourth quarter and full year 2016 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) I'd now like to turn the conference over to your host, David Pasquale. Please go ahead, sir.

Thank you, operator. Welcome everyone to ChipMOS's fourth quarter and full year 2016 results conference call. Joining us today from the Company are Mr. S.J. Cheng, Chairman and President and Mr. S.K. Chen, Vice President. S.J. will review highlights from 2016 and then provide ChipMOS's first quarter 2017 business outlook.

S.K. will then review the Company's key financial results. We will then have time for your questions. If you have not yet received a copy of today's results' release, please email Global IR Partners at imos@globalirpartners.com, or you can get a copy of the release off ChipMOS's website at www.chipmos.com.

Please not we're launching a new format for the quarterly calls this quarter. We have already 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 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 the results and the Company's outlook.

With that said, we must also make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the US Securities Act 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended. Such forward-looking statements 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 registration statement on Form F-4 that the Company filed with the US Securities & 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.

Yes, thank you, David. Welcome, everyone, to our fourth quarter full year 2016 conference call. Hopefully, you all had time to review our earnings release. 2016 was an important period in the history of our Company. [We are] (inaudible) to continue execution of our business. We achieved great progress on the strategic areas that will drive our long term strategic growth and enhance future value for shareholders.

This is including exiting 2016 with our long-awaited streamlined corporate structure in place, having finalized and merged our ChipMOS Taiwan and Bermuda. This [Company's] efficiency and financial benefit drive this important effort.

We also advanced in finalizing our major JV in the domestic China market with the strategic investment led by Tsinghua Unigroup. China has an [equal] investment program [underway] -- if you are domestic semiconductor supply chain. Being in China with a strong JV partner will give us a powerful strategic advantage and goes far beyond the investment itself.

Separately, we distributed $101.7 million to shareholder as cash consideration for the merger of ChipMOS Taiwan and ChipMOS Bermuda. We also distributed a cash dividend of $55.3 million to shareholders in 2016. And then we repurchased $31.1 million in shares during 2016.

We are pleased with our achievement -- further strengthened competitive position and (inaudible) our business for 2017. Our focus remains on achieving our financial growth, delivering value for our shareholders and execution of our long-term objectives.

For the fourth quarter of 2016, revenue was in line with our guidance and gross margin came in above the high-end of guidance. Our memory business remained relatively stable due to the inventory [favourable] and more balanced supply and demand position.

We expect to benefit from growth in the DRAM and NAND flash markets after the traditional Q1 seasonal trough and fewer working days in the quarter during the Chinese New Year's closure. Demand is coming from diverse applications including handsets and computing. This market has tended to not focus on computing. That may start to change if the volume picks up as some have predicted.

Of note, SoftBank's founder, Chairman and CEO predict recently that in 2018 computer will have more brain cells as measured by transistors in computers than the human brain. And that will have an IQ of 10,000 in 30 years. This will likely drive more demand for our service.

Revenue from our LCD driver business declined compared to the prior quarter and year-ago period, reflecting the industry-wide headwinds due to the channel inventory adjustments and capacity shift from other applications, like smartphones to OLED solution. We expect to see demand improve as we move past the first quarter, led by further penetration of the 4K2K opportunity, demand from the smartphone market and expected growth out of China.

And ChipMOS is well positioned to ramp up support solution like OLED -- seeing increased volume. We already start to support our customers with growing OLED business. We are able to use existing equipment, which makes this less-capital intensive than other growth areas. We like this because it allows us to be conservative in our build out and eliminate the risk that in the event customer volume forecasts are too aggressive.

Another bright spot for us was gross margin, which came in at 19.8%. We are pleased to come in above the high-end guidance. And we did so on a lower revenue base, as we're moving around equipment for building our Shanghai LCD driver and bumping operation.

Our leadership in LCD driver continues to give us a competitive advantage and provide stability as we continue to capture LCD driver assembly and testing volume in the global large panel market.

In terms of color of performance by product segment in Q4 2016, (inaudible) our flash business including Mask ROM increased 14.4%, representing 18% of our Q4 revenue. Mixed signal product increased 9.1% compared to Q3 2016, contributing 10.1% revenue in Q4 2016.

Our DRAM business increased 9.4% in Q4 2016 compared to Q3 2016. This represents about 29.3% of our Q4 revenue.

Revenue from our assembly and testing service for LCD driver decreased 5.8% in Q4 compared to Q3 2016, representing 24.6% of our Q4 sales. (Inaudible) remained fair. Revenue from driver for large panel decreased 9.1%, while the revenue from small panel driver decreased 2.2% compared to Q3.

Our bumping business decreased 4.8% in Q4 2015 compared to the previous quarter, representing 16.9% of Q4 revenue.

Let me now turn to our business outlook. Q1 is always a seasonal slow period with fewer working days in the quarter due to the Chinese New Year closure and the general seasonal weakness. We are more than halfway through Q1 and I'm optimistic about rest of 2017. We expect to see the improvement in the LCD driver market, led by the maturation of 4K2K and AMOLED opportunities, along with the improvement in macro conditions.

Our open major [bet] is that 4K2K TV require at least over two times as many LCD drivers at a typical HDTV. In addition to the design-in volume increase, there is an ongoing production and demand shift to the domestic China market.

The number of large investment funds, capacity [adds] and expected market share gains are [staggering]. We have covered this on prior calls. The volume pick up underscores why having a direct role involving China market is so important. China has quickly become one of the world's largest panel production centers. This is in line with the China insourcing trend. And the main [thing] to build out is domestic semiconductor supply chain. Over the long term, we expect to benefit from expanding our operations there along with our partner Tsinghua Unigroup.

From a timing standpoint, we expect to have a steady growth before end of the Q1 2017 and initial (inaudible) increase in Q2 2017. There have been many moving parts to create a strategic JV of this kind with the funding source, partners and multiple countries involved. Having to work through more than one set of regulatory requirements has been highly time consuming and complicated. We continue to push close, over the finish line.

But I also fully understand that it is better to take the extra time required to reach the closure, rather than rush ahead and risk the closure given the complexity of the process. So the key point here is that we are confident in the JV closure before end of the Q1 2017 and [bumping] on the [savings] in Q2 2017, which is slightly delay our original target for the founding conditions for the reason just noted.

We are excited and predict the joint venture will serve as the cornerstone of our long-term growth by allowing us to [escalate] the planned expansion of ChipMOS Shanghai, while adding a new line to serve the higher demand we are seeing for our LCD driver ICs, touch driver, AMOLED and memory back-end service.

Importantly Tsinghua Unigroup have committed to actively supporting the joint venture across the comprehensive semiconductor supply chain investment portfolio. And we are looking to working with maturing the growth to substantial revenue and profit of ChipMOS Shanghai, while promoting the interests of all shareholders and employees.

Finally, with regard to the JV, as we had now previous -- under accounting rules, ChipMOS Shanghai will not consolidated on an ongoing basis. The Company will however continue to recognize 45.02% of net income generated from ChipMOS Shanghai.

With regard to the broader business we are seeing positive signs. We have a healthy channel inventory of the memory market major area. We are also seeing some potential for improvement in other areas including the smartphone market. All this will help a recovery in 2017.

So overall, our core business fundamentals remain strong with leadership position and a growing market trend. In terms of Q1, based on the current outlook, which takes into account Chinese New Year, we expect revenue for the seasonal slow first quarter of 2017 to be about 4% to 8% lower as compared to the fourth quarter of 2016.

To give you an added perspective, the other major LCD (inaudible) guide for Q1 revenues to fall 10% to 13%. Further, we expect gross margin on a consolidated basis to be in line in a range of about 16% to 20% for the first quarter of 2017.

Let me now turn the call over to S.K. to review the fourth quarter financial results. S.K., go ahead.

Thank you, S.J. All the amounts in our presentation are in US dollars. We have provided both US dollars and TWD in our press release. The following numbers are based on the exchange rate of TWD32.4 against $1 as of December 30, 2016 -- 2015. As S.J. reviewed our revenue and margin, I will provide details on the rest of our fourth quarter 2016 results.

Net income for the fourth quarter of 2016 was $18.9 million and $0.02 per basic and $0.02 per diluted common shares, compared to the net income of $7.9 million and $0.01 per basic and $0.01 per diluted common shares in the third quarter of 2016.

Net earnings for common shares for fourth quarter of 2016 benefited from net foreign exchange gain of $6.2 million, the reversals of accrued income tax for $6.4 million related to the merger of ChipMOS Bermuda and ChipMOS Taiwan and a change in the company's depreciation schedules of the production equipment to 8 years from 6 years.

Our [operating expense] in Q4 was $14 million or 9.7% of our Q4 revenue compared to $13.1 million or 8.9% of our revenue in Q3 2015. The increase of Q4 2016 operating expenses was mainly the accrual of professional service fees related to the close of mergers with ChipMOS Bermuda. Other operating incomes in Q4 was $0.1 million and non operating income in Q4 was $5.5 million. Foreign exchange registered a gain of $6.2 million in Q4 compared to a loss of $6.9 million in Q3 16.

Income tax benefits for Q4 was $3.7 million, which was benefited by a reversal of $6.4 million related to merger of ChipMOS Bermuda and ChipMOS Taiwan, compared to income tax provisions of $2.4 million in Q3 2016. There were no non-controlling interests for the first quarter of 2016 -- pursuant to regulations of T-IFRS, ChipMOS Shanghai has been classified as the discontinued operations of the company, due to the ongoing sales of 54.98% equity interest of ChipMOS Shanghai. The loss from discontinued operations was $0.6 million in Q4 2016.

On a segment basis, Q4's revenue breakdown was 27% in testing, 32% in assembly, 24% in LCD drive IC business and 17% in bumping. Total capacity utilization was 74% for the first quarter of 2016, compared to 74% for the third quarter of 2016. Our Q4 testing capacity utilization was 81%, as compared to 70% of Q3. Assembly capacity utilization was running at 67% in Q4, as compared to 69% in Q3 2016.

LCD driver IC capacity was running at 79% utilization in Q4, as compared to 82% in Q3 2016. Bumping utilization was 68% in Q4 compared to 78% in Q3 2016.

We spent $29.8 million on CapEx in Q4 compared to $30.2 million for our third quarter 2016. The (inaudible) for CapEx for the fourth quarter was 21% for testing, 24% for assembly, 13% for LCD driver IC and 42% for bumping capacity.

Depreciation and amortization expenses were $21.6 million or approximately 15% of revenue in the fourth quarter. This was lower compared to the third quarter 2016, owing to the change of depreciation schedule of our production equipment from 6 years to 8 years.

EBITDA for Q4 was $37.3 million or 25.9% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. The free cash [outflows] in Q4 was $US50.4 million which were calculated by adding depreciation, amortizations, interest and income together with operating profit and subtracting CapEx, (inaudible), interest, interest expenses, income, tax expenses and dividends from the (inaudible). We ended Q4 with a strong balance of cash and cash equivalents of $232.7 million (sic - see press release, "$233.7 million"), compared to $375.1 million at the end of Q3 2015.

As of December 31 2016 we maintained our net debt at $99.3 million, which is resulted in the net debt to equity ratio of 19.8%. This is after we increased our debt by $37.1 million in Q4 after distributing $101.7 million to shareholders as cash considerations for the merger of ChipMOS Taiwan and ChipMOS Bermuda in October, after we distributed a cash dividend of $55.3 million, after CapEx of $96.4 million and after we repurchased shares of $31.1 million.

Our EBITDA, free cash flow and net debt to equity ratios are not defined by generally accepted accounting principles. We believe those are helpful indicators to measure our financial strength.

Our total [short-term] debt including the (inaudible) was $33.1 million at the end of fourth quarter 2016 compared to $40.6 million at the end of the third quarter 2016. [Long-term] debt was $299.9 million at the end of the fourth quarter compared to $255.3 million at the end of the third quarter 2016.

Our accounting receivable days of sales outstanding in Q4 was 81 days compared to 72 days in Q3. (Inaudible) returns were 50 days in Q4 compared to 49 days in Q3 2016. Our net interest expense was $0.9 million in the fourth quarter which was slightly lower compared to $1 million for the third quarter 2016.

The total number of company outstanding common shares at the end of the first quarter for 2017 is expected to be approximately 856 million, whereas the total outstanding ADS number was 21.2 million units which is about 49.6% of the outstanding common shares, as of February 28 2017.

Operator, that concludes our formal remarks. We can now take questions.

(Operator instructions) Our first question comes from the line of Timothy Arcuri with Cowen, please go ahead with your question. Our first question comes from the line of Timothy Arcuri.

Hi, good morning, this is [Phoebe Onjar] on behalf of Timothy Arcuri. My first question is -- was there a reason for the delay of closing off Shanghai JV? I thought initially you expected to close by the end of 2016?

Yes. Thank you very much for your questions, this is SK. I think this is the first time for ChipMOS to execute this joint venture with a Chinese company, and actually we experience many (inaudible) unexpected procedure.

So it takes us additional time to close these joint ventures, and we expect that we can have this in place before end of Q1 this year. I think this -- yes, I would say yes, it is correct in terms of three more months than we excepted. So I think that's the -- that's what we experience right now and we have confidence that we can have it done in this quarter.

Okay, great. And then second question is, what is your expectation for ChipMOS Shanghai in terms of revenue and net income contribution in 2017 and 2018? Thanks.

We have classified Shanghai as a discontinued operation, so in our expectations we didn't -- we will not consolidate Shanghai's revenue into our revenues starting from 2017. And I would say that in our estimation that Shanghai revenues in 2016 will have pretty significant growth based on our -- our estimations because of we -- just because we do have many production lines and capacity opening there and it will be starting to contribute some revenues from Q2 and this revenue will come in from Q2 and in the second half of the year.

We will recognize the profit -- it's roughly 45% of the net income as an investment, the profit again from the long-term investments on our book. So that -- and I think we will not discuss the Shanghai's revenues as of today.

Okay, thanks. The last question is, can you break out gross margin by segment for the fourth quarter of 2016?

The gross margins from -- okay, gross margins from testing, final testing is about -- it's about [30%] both for testing and wafer sort. And the assembly is around 8% just because that utilization rate, as in the capacity utilizations of the assembly capacity is lower.

The LCD driver IC revenue -- that gross margin also about 30% in Q4. The bumping capacity is below, as it's negative, that's because that the capacity is under-utilized in Q4.

Okay. Thanks guys.

Thank you. (Operator Instructions) The next question is from the line of Jorge Rivas with Craig-Hallum. Please ask your questions.

Hello SK, hello SJ. Thanks for taking my questions. So first more to the big picture question on your LCD business. So it's been two years of negative growth, you declining 5% in 2015 and declining almost 10% this year, and your serving markets -- you serve a smartphone market that's growing in low single digits.

And then on large panel driver I see with the 4K penetration -- I guess we would expect that specific segment to fare better and probably provide some type of growth, but I wonder if there is any other issues, whether it is [ASP] compression or maybe share losses in that part of your business? So I would appreciate your thoughts on that.

Jorge, this is SJ. Let me answer your question. I think for the LCD driver, the Q1 is a seasonal (inaudible), which I just mentioned, they had (inaudible) even with the adjustment. That's the first one.

For a long-term viewpoint, you can see more and more 2K, 4K penetration rate are going to be seen. And those are LCD driver, quality-wise it was a radical increase compared with the [HD TV]. But on the other hand, (inaudible) the large panel of the TV will consume the [service] of the panel output.

For me, if you use a larger panel, the quality of the TV will be reduced. So that's (inaudible). And for testing time, high resolution TV, even longer testing time. So in general speaking, the testing portion will increase larger than the quantity of the LCD driver. I hope this can answer your question.

That helps. I was just wondering more backward-looking as to what's happened, the trends that you've seen in the last couple of years. But that actually is a good segue to my next question on -- I know you or -- you have exposure to OLED and AMOLED and that's supposed to provide a tailwind to [ASPs]. Any of the revenue contribution from OLED/AMOLED for 2017? And whether or not it's (inaudible) revenues in December?

Yes, actually, right now we already provide some key customers for OLED capacity and service. (Inaudible) I would like to emphasize here is for our LCD driver and OLED we can use the same equipment, just with different supporting [tools]. So that will -- for ChipMOS-wise, we can use the same equipment to serve the two applications, LCD driver and OLED. So that (inaudible) question. And so that can reduce our investment risk.

And for OLED-wise, they need a longer testing time than LCD driver, so that's where we did invest in more testing equipment to fulfill that total requirement. And currently a lot of new panel is built in both China, the majority will be OLED, so we can see this will be improving very quickly in the future.

Okay. And then, in these new areas of growth, and I include OLED, AMOLED, fingerprint sensors and touch, driver IC. What -- for 2017 and possibly 2018, how much of a percentage of revenues can that be?

Currently we don't provide a whole year for it because right now it is beginning of the quarter, beginning of the year. And this year is a lot of uncertainty, but in general speaking we are pretty optimistic for LCD driver.

Okay, all right. Then my next question, so can you provide an update on the share buybacks? I believe that you were legally restricted on the last call until the end of November. We didn't get an update as to what the determination has been by the Board as to share buybacks. Can you update us on that front, please?

Jorge, can you repeat your question again?

Yes, just an update on share buybacks. What has the Board decided as far as buying back shares versus the previous quarter?

This is SK. All right, we -- I think last year we spent $33 million to buy back shares from Taiwan market, and right before we merged the Company. And as you know that in last quarter we spent probably $200 million, more than $200 million to close the mergers and to distribute cash dividends. And right now we have joint venture projects pending, pending for close.

So the Company, I would agree that to buy back shares is always a good -- I think is a good action to take for the Company, given that such low stock price, that our stock is trading at such a low price in the marketplace. But we will wait until we close the joint ventures with Tsinghua Unigroup then we will consider how to arrange the cash and go for this buyback from the markets. I think this is -- I think that's the position and attitude we are taking right now.

Okay. Thanks for taking my questions and look forward to the next call. Thanks, guys.

Thank you.

Thank you.

(Operator Instructions) Thank you. There are no additional questions at this time. I will turn the floor back to management for closing remarks.

Yes. Thank you everyone who joined our call today, our full year conference call. Thank you very much. Bye-bye.

Yes. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.