ChipMOS Technologies Inc (IMOS) 2017 Q2 法說會逐字稿

Greetings, and welcome to the ChipMOS Second Quarter 2017 Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, David Pasquale, with Global IR Partners.

You may begin.

Thank you, operator.

Welcome, everyone, to ChipMOS' Second Quarter 2017 Results Conference Call.

Joining us today from the company are: Mr. S.J. Cheng, Chairman and President; and Mr. S.K. Chen, Chief Financial Officer.

S.J. will review business highlights from Q2 2017 and then provide color on the operating environment.

S.K. will then review the company's key financial results.

We are also pleased to be joined on the call today by Vice President, Mr. David Wang; Deputy Director, [Mr.

G.F. Chen]; Director, Ms. Silvia Su; and Mr. Lafair Cho, Senior Executive Vice President and COO.

All of the company's executives will participate in Q&A after the prepared comments.

If you have not yet received a copy of today's financial results release, please e-mail Global IR Partners at imos@globalirpartners.com or you can get a copy of the release off of ChipMOS' website at www.chipmos.com.

As with prior quarters, management has 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 Taiwanese 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 also make a disclaimer regarding forward-looking statements.

During today's 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, 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 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.

Yes, thank you, David.

Welcome, everyone, to our second quarter of 2017 conference call.

Hopefully, you all had time to review our earnings release.

We are recently on the road in July and met with many investors.

We appreciate everyone taking the time during their summer to host us.

The meetings were very positive and give us the chance to talk about the future of ChipMOS and why we are positioned for continued success.

Our efforts over the [passing -- - last three years] have put us in a strong competitive position.

We had several catalysts for revenue and profit growth, and we are [expected] to outgrow the progress in the industry as the [other] industry had done in the past.

The key things for ChipMOS over the near term are: First, our Q2 revenue was impacted by a lower allocation for one of our largest DRAM customer.

We do commodity DRAM assembly for this customer.

Our commodity DRAM revenue has decreased due to the lower allocation trend and other market reasons from about 18% of our revenue in 2014 to about 14% in 2016.

We expect this challenge will continue in the second half of 2017.

Of note, this was a strategic decision for us.

We could have made a major investment in capacity with the shared facility with the customer.

However, assembly-only operations will not accommodate our other need to build our DDIC capacity on site, which requires a safety environmental evaluation work for the compounding line.

This did not make sense to us, given the lower-margin revenue and the fact it would limit us from investing in the growth areas.

On the positive side, we had a [good position interest] with our partner.

We expect this will allow us to maintain the relationship in the higher single-digit percentage of the revenue level.

Second, we are excited about several new programs that we are ramping.

These are key to our customer and revenue diversification, and this will help us to more than offset the decreased allocation from our DRAM customers over the long term.

In the near term, it will take time to ramp the program, and there are several factors that are impacting timing.

One is the continued softness in the China handset market due to the heavy [free flow] impact of one of our largest Korean customers that sells the China market with his own handset and sells to another handset company that sells into the China market.

This is additional pressure on our foundry business over the near term.

Based on the market effect, we believe the China inventory situation will become healthy in the second half of 2017.

The bigger picture will be the [introductory] schedule for the highly anticipated handset model by the North American consumer electronic company.

It looks like other company are waiting to see what is the final future [spec up], and which feature consumers are most interested in.

Other handset companies will likely to copy the most promising feature and roll out their own new model.

This will, in turn, drive higher [copying] demand.

Finally, the best thing for ChipMOS will be our China JV.

We are very pleased to report that our Shanghai joint venture is now complete, ramping production and qualified additional customer program.

I will give you some additional color on this near-term and the long-term growth (inaudible) in a minute.

In terms of second quarter's results, the quarter's developments are expected.

We were able to focus on the higher-margin business on working and work to offset the pressure from the lower allocation from our DRAM customer.

As a result, we are able to expand our gross margin to 20.1% in Q2 '17 from 17.9% in Q1 '17, a relatively great revenue.

This underscores the leverage in our business model as we further improve our overall utilization level to 77%, led by strength in our higher-margin testing business.

The 77% [branded] utilization level is important for us.

We have 87% utilization in our LCD driver segment and 82% in testing.

These are essentially full utilized labor, even though we invest 51% of CapEx dollars into LCD driver capacity in the quarter.

Demand in the segment will continue to grow as the 4K2K TV and our 2nd array is ramping up and driver requirement increasing.

We do not expect this trend to slow.

For example, many new smartphone models are expected to have an 18x9 screen with the nano phaser.

This model will use a more advanced TV solution driver with the COF packaging [with] conventional [COG phone hardware].

As additional color on Q2, there was a mixed performance in our business -- in our memory business, with DRAM down about 4.6% in Q2 '17 compared to Q1.

This is due to the allocation I mentioned earlier.

For us, revenue, including Mask ROM grew 9.6% compared to the previous first quarter, represented 18.4% of our Q2 revenue.

Revenue in our mixed-signal business grew 11.1% compared to Q1 '17, contribute 11.2% of revenue in Q2 '17.

Revenue for our assembly and testing services of LCD drivers in Q2 was flat compared to Q1, represent 25.7% of our Q2 sales, representing macro demand trends revenue from the driver for large panel increased 6.1%, while the revenue from our small panel drivers decreased 7% compared to Q1.

Our bumping business decreased 9.6% in Q2 '17 compared to the previous quarter, representing 14.7% of our Q2 revenue.

[Pretty strong].

Total revenue, that's not including revenue from Tsinghua Shanghai.

For the purpose of the backlog, revenue from Tsinghua Shanghai was about $9 million in Q2 2017, which is up from about $7.5 million in Q1 '17 and up from about $7.3 million in Q2 2015.

Overall, we made a strong financial position.

We are investing in the area that will drive our revenue and profit growth over the near and long term.

This, including capacity in both Taiwan and China, our focus remains on the business execution in order to deliver the high return to our shareholders.

In line with our effort, we are able to distribute another cash dividend of [TWD 1] per common share on July 12, 2017 and USD 0.655 per [APS] on July 19, 2017.

We will continue to evaluate the best possible way to reward the shareholders based on the company's success.

As we look forward into the Q3 '17, we are expecting further softness in our commodity DRAM business as low allocation create a headwind.

This will likely stabilize in the second half, making it a near-term issue and one we are already addressing.

Meanwhile, we continue to see material uptick of demand on HD RAM and [low price].

Based on our customer and market effect, demand for low price and HD RAM product remains healthy and is expected to last for a couple of quarters, led by product upgrades and the new aggregation of the mobile device.

For new sensor product releasing to production, growth should also continue to our mixing of business in Q3.

We also expect DDIC demand will continue to improve as we benefit from the ongoing 4K2K UHD TV market development, combining with the new model feature introduction and the requirement across smartphones, including OLED, TDDI, nano phaser and larger screens.

In addition to increased driver volumes, these trend means longer testing times and require larger testing capacity from us.

With respect to the China market, as noted earlier, we are pleased to report that our China JV is now funded, ramping production and qualifying a variety of the new customer programs.

Our strategic partner's buildout of their semiconductor ecosystem is now expected to be even more aggressive and on larger scale than originally contemplated.

The [ensures] ChipMOS is positioned as the OSAT services company within the Unigroup ecosystem give us excellent growth prospects as DDIC ramps in the near term, followed by the growth in domestic China memory production over the long term.

Finally, you likely saw the [full] Resolution 6K we filed with the SEC today.

One of the resolution related to the application for retirement of Dr. S.K. Chen at the end of the third quarter.

I would like to personally thank S.K. for his tireless effort on behalf of ChipMOS.

He has delivered in our various strategic efforts beyond his role in heading our financial department.

We will miss him on our team but wish S.K. and his family the best.

S.K. will remain as a consultant after his retirement to ensure a smooth transition through end of this year.

We greatly appreciate his willingness to stay with us to ensure an orderly transition.

S.K. has transitioned is role to another financial executive at ChipMOS, Director Ms. Silvia Su.

Miss Su has been with us since year 2000 and was also directly involved in our management strategic effort related to consolidation of subsidiary merger of ChipMOS Taiwan and Bermuda and our China JV.

She has benefited from S.K.'s professional leadership and financial leadership and will ensure that ChipMOS remains in good hand moving forward.

In addition, Ms. Su was appointed as a Supervisor of ChipMOS Shanghai.

I'm also pleased to note that Mr. Lafair Cho, Senior Executive Vice President and COO, was appointed as a spokesperson for the company from October 1, 2017 and onwards.

Finally, one more manager, [Dr.

G.F. Chen], who was supervising our company's IR activity, has now been working with the existing IR team.

With that, let me now turn the call over to S.K. to review second quarter financial results.

S.K., go ahead.

Thank you, S.J., and thank you for your kind words.

This was a difficult decision for me to make, okay, but the right one for my family.

There is never a good time for these things but now makes sense, given my age and the great position I'm leaving ChipMOS in.

We have been working around-the-clock the past few years as we compress our ownership structure and consolidated [many] subsidiaries.

The successful merger of Tsinghua Taiwan and Bermuda was another major effort and the start of a promising new chapter for the company.

The last steps was securing the company's future growth path in China.

With the growth and funding of our China JV, we have successfully completed the efforts as well.

I take great personal satisfaction in all we have accomplished.

And I'm confident that after a very long and successful career at ChipMOS, I will be leaving the company in a strong position and in good hands with the very capable financial teams to now be led by Ms. Silvia Su.

Let me now move to the second quarter results.

Total amount cited in our presentation are in U.S. dollars.

We have provided both U.S. dollars and NT dollars in our press release.

The foreign numbers are based on the exchange rate of TWD 30.38 against USD 1 as of June 30, 2017.

Net earnings for the second quarter of 2017 was $0.25 per diluted ADS compared to $1.82 per diluted ADS in Q1.

This represents net income of $10.6 million and $0.01 per basic and $0.01 per diluted common share compared to the net income of $78.3 million and $0.09 per basic and $0.09 per diluted common shares in first quarter of 2017.

Please note, net income for the first quarter of 2017 included the positive benefits of $62.8 million related to the completions of Tsinghua Shanghai equity interest transferred to Tsinghua Unigroup-led investors.

The benefit did not repeat in Q2 2017.

We recognized a net foreign exchange gain of $1.8 million in 2Q '17 compared to a net loss of $12.8 million in 1Q '17.

Our operating expense in Q2 was $16.2 million or 10.8% of our Q2 revenue compared to $14.6 million or 9.7% of our revenue in Q1 '17.

Other operating income in Q2 was $1 million.

Income tax expense for Q2 was $2.3 million compared to $4 million in Q1 '17.

On a segment basis, Q2 revenue breakdown was 28% in testings, 32% in assembly, 25% in DDIC business and 15% in bumping.

Total capacity utilization was 77% for the second quarter of 2017 compared to 76% for the first quarter of 2017.

Our Q2 testing capacity utilization was 82% as compared to 81% of Q1.

Assembly capacity utilization was running at 73% in Q2 as compared to 68% in Q1 '17.

DDIC capacity was running at 87% utilization in Q2 as compared to 85% in Q1 '17.

And bumping utilization was 63% in Q2 compared to 70% in Q1 '17.

We spent $45.9 million on CapEx in Q2 compared to $37.3 million for our first quarter 2017.

The breakdown of CapEx for the second quarter was 19% for testing, 13% for assembly, 51% for DDIC and 17% for bumping capacities.

Depreciation and amortization expenses were $23.3 million or approximately 15.6% of revenue in the second quarter.

EBITDA for Q2 was $38.1 million or 25.5% of revenue.

EBITDA was calculated by adding depreciation and amortization together with operating profit.

The free cash flow in Q2 was negative $11.5 million, which 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.

We ended Q2 with a strong balance of cash and cash equivalents of $364.7 million compared to $384.9 million at the end of Q1 '17.

As of June 30, 2017, our net debt balance was $48.8 million, which resulted in the net debt-to-equity ratio of 8.3%.

Our EBITDA free cash flow and net debt-to-equity ratio are [now] defined by generally accepted accounting principles.

We believe those are helpful indicators to measure our financial strength.

Our total short-term debt, including the current portions of long-term debt, was $130.6 million at the end of the second quarter as compared to $70.1 million at the end of the first quarter 2017.

Long-term debt was $282.9 million at the end of the second quarter as compared to $318.4 million at the end of the first quarter 2017.

Our accounts receivable days sales outstanding in Q2 was 71 days compared to 76 days in Q1 '17.

Inventory turns were 48 days in Q2 compared to 46 days in 1Q '17.

Our net interest expense was $1.4 million in the second quarter, which was slightly higher as compared to $1.2 million for the first quarter 2017.

As of July 30 -- 31, 2017, the company's outstanding ADS number was approximately 1 point -- 14.5 million units, which represented around 33.8% of the company's outstanding common shares.

Operator, that concludes our formal remarks.

We can now take questions.

(Operator Instructions) Our first question comes from the line of Chris Rolland with Susquehanna Financial Group.

This is David Haberle on behalf of Chris Rolland.

First, wanted to start off with the gross margins.

I think you guys typically give them by segment.

Could you provide those if you have them?

Gross margin.

Okay.

This is S.K. Thank you very much, David.

Okay, in general, the margin for our testings operations is, in general, higher than 30%, including product testing and wafer testings.

And in the assembly operations the margin is around 11%.

And the margin for LCD driver IC is about 24%.

And the margin for the bumping operations is negative, as -- which is since the lower utilizations of the capacity.

So the margin is slightly below 0 and -- as of today.

Right.

And then to get to the 20% gross margin in the second quarter, can you talk about some of the moving parts there?

I realize that the bumping revenue is lower, but can you just give us some color on how you got to the 20% this quarter?

All right, David, this is S.J. To answer your question, starting end of July, we see the strong recovery in both DDIC, so which contribute significantly in our bumping utilization.

So that's how the management is very optimistic from the second half for DDIC and bumping business will continue to be strong for -- to contribute to the revenue growth in the second half.

Great.

And then to shift gears a little bit, you talked a lot about your largest DRAM customer in your prepared remarks.

I believe that you mentioned lower allocation through 2017, but should we expect that revenue headwind to be cleared up as we enter 2018?

Actually, it's -- since we're working with this large customer for more than 15 years and -- we will try to maintain the minimum business relationship with them.

But since this is a strategic decision, which we made 4 years ago, we [have now joined] the (inaudible) program.

So once [this year] was established, we already know this issue and this is a potential challenge for us.

So I think we will try our very best to maintain other (inaudible) I mentioned, a higher single-digit percentage with this customer and also provide other turnkey positions to serve the new product portfolios with this customer.

(Operator Instructions) Our next question comes from the line of David Steinberg, Private Investor.

S.K., I wish you all the best, and it's been -- you've done an absolutely spectacular job.

Good luck to you and your family.

And I'm just disappointed that we're not going to be having you around.

The question is your revenues look flat, but they're not really because of what's going on in China.

Could you repeat what the quarterly increase was in revenue?

I know you can't put it in print or you don't want to or the Taiwan regulators from quarter 1 to quarter 2, from first quarter when we had the company come together to now.

So I'd like to know what that number is.

And that number because that's a big part of where all your money is going and it's tough dealing with Taiwanese regulators.

In fact, I'd suggest that you try to get a waiver or [a cessation] have your lawyers talk to the Taiwanese regulators because it's such a big part of the growth.

So anyway, the question is, what is that number [gross] in the second quarter from Shanghai in sales?

I already report it in the script.

The revenue from China -- from Tsinghua Shanghai was USD 9 million in the second quarter and -- which revenue grew roughly 19% -- 19.8% compared to Q1, there was USD 7.5 million.

And we're expecting that this revenue will ramp [in price] significantly in the second half of the year.

Okay, I couldn't hear that number.

I'm sorry, I didn't quite catch it.

Then the next question is, because -- is Shanghai going to cannibalize some of the sales from Taiwan over time?

And what might that look...

Not really.

No?

I'm sorry, I would say they would not really cannibalize.

That since China was focused on the local markets, and on the other hand that Unigroup use too much Shanghai capacity and part of the business will go back to Taiwan.

So I think that we -- both company will benefit from this trend and arrangement.

The Shanghai joint venture has not really taken the business from us in Taiwan.

Okay.

Just 2 more questions.

One question is, how many quarters do you think it's going to take you to reach capacity utilization that's good in Shanghai?

Is this 1, 2, 3, 4 quarters?

What is this?

Do you have an estimate without holding you to the fire?

David, this is S.J. In the Q4 this year, we can see the high valuation there in Shanghai.

The reason -- the key reason of delay is that because the funding delays for final time frame.

And basically, we will take a very conservative by nature approach.

We don't [invest it] for the CapEx before we [got the proceeds].

So finally, the -- in June 29, we already completed the funding.

But right now, we have enough financial resource to do the investment.

And perhaps some qualification, so I think we can see the good result, [two positive years].

Okay.

So S.J., 12 months, 1 year from now, maybe we'll see more, like, full capacity utilization?

18 months?

Actually, since we already are funded, so we will base on the market valuation and adding the capacity in China, use the funding which we got from the JV.

Okay.

And then the last issue was, obviously, your investors are very interested in what is going on in China.

Has your legal counsel gone to the Taiwan regulators and asked them for a waiver so you can be more -- provide more disclosure at all?

I mean, have you asked or petitioned for that at all?

David, this is S.K. I think that we have been trying many times.

I am afraid that we couldn't get this lift, this recession lift.

And -- but on the other hand, we will release -- I think that we will disclose some of the financial information to the investors by, I think, by different way.

I think that's what we can do as of today.

(Operator Instructions) Our next question comes from the line of Charles Loving-DeCoster with Craig-Hallum.

So I'm in for Richard Shannon, who normally calls in on these, but he had a separate engagement.

My first question has to do with the Chinese joint venture.

You already explained quite a bit in your answer to a previous question.

But can I ask, what do you feel the sales growth will be going forward after the next couple of quarters?

You mean for Tsinghua Shanghai, right, the China joint venture?

Yes.

We have seen the revenue growth close to 20% in Q2 compared to Q1 and we're expecting that this trend will go up and expecting that we may see Shanghai breaking even by the end of Q4 or early next year.

I think, right now -- yes, right now, the -- we -- I'm afraid that I couldn't share with you the revenue information for consumer Shanghai.

Okay.

That is helpful.

Next question regarding the joint venture in Shanghai.

What are the gross margins for that and what do you expect those to be going forward also?

This is S.J. To answer your question, I think that once we've reached the [high rates in labor], the gross margin between Taiwan and China will be almost in the same rates.

Not until we reach the economies of scale, yes.

Okay.

And your second quarter gross margins were up materially in a multi-quarter high.

So do you expect those to remain?

And do you expect them to do so due to lower DRAM allocations?

I think the biggest answer is that they will be the [tiered] allocation.

But just as a headwind we are going to face, and which we already know, of course, and we're already be addressing for this issue.

On the other hand I mentioned that we see an uptick for both HD RAM and [low price].

That will offset the allocation impact for us.

The other one is, as I just mentioned, that we see a strong recovery in DDIC and bumping area, which will help us for display, both volume and utilization rate.

We hope that we can offset this allocation impact from our major commodity [DRAM] customer.

And we're also trying to provide other product portfolio with this customer since we have a long-term relationship with them.

So we -- that is the challenges we are going to face.

This also is a strategic decision which we made a couple of years ago and we are already prepared for that.

Okay.

That's helpful.

And my last question is regarding your CapEx outlook.

So you did $46 million this quarter versus $37 million last quarter.

What is your outlook going forward with that?

The CapEx for the 2017 full year will be around $150 million.

And we're expecting that we will spend approximately $50 million in Q3 and around $20 million in Q4.

(Operator Instructions) Gentlemen, it seems there are no further questions at this time.

I'll turn the floor back to management for any final remarks.

Yes, thank you, everyone, who joined our Q2 conference call.

Thank you, and I would like to take this time to appreciate S.K.'s effort to help company almost 20 years.

And also would like to -- staying with us after his retirement until the end of this year as a consultant in order to ensure the smooth transition and also to give the new successor some help.

Thank you, again, S.K. And also thank you, everybody, for joining us.

Thank you.

Bye-bye.

Thank you.

Bye-bye.

Have a nice day.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.