ChipMOS Technologies Inc (IMOS) 2018 Q2 法說會逐字稿

Greetings, and welcome to the ChipMOS Technology Second Quarter 2018 Earnings Conference Call.

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

It is now my pleasure to introduce your host David Pasquale.

Please go ahead.

Thank you, operator.

Welcome everyone to ChipMOS' Second Quarter 2018 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.

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, Vice President of New Product Development Management Center; and Dr. G. S. Shen, Deputy Director 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 at imos@globalirpartners.com, or you can get a copy of the release off of ChipMOS's website at www.chipmos.com.

As with prior quarters, we 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 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 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, 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'd like to now turn the call over to company's Chairman and President, Mr. S.J. Cheng.

Please go ahead, sir.

Yes.

Thank you, David.

Welcome everyone to our second quarter of 2018 conference call.

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

Q2 was a strong quarter for us with delivery on both financial targets and effort to increase shareholder value.

Highlights from this quarter, including first, we achieved a revenue growth of 12% in Q2 compared to Q1.

We improved gross margin to 16.4%, from 14.6% in Q1.

Our DDIC price increase in May is well received.

And then we continue to benefit from growth in our DDIC and gold bumping product revenue and margin.

We continued to delivery on our goal of increased shareholder value and maximizing the company capital structure.

The latest decision was approval of our 2018 Capital Reduction Plan and separate dividends.

Lastly, we are optimistic for the second half of 2018, based on improved visibility from ramping customer program, including TDDI.

In terms of Q2 revenue, the 12% growth versus Q1 was led by strong demand really to new smartphone model and our DDIC price increase in May.

We are pleased to see growth across multiple segments, including DDIC, gold bumping and mixed signal.

The growth is driving the rebump in gross margin, which we expect will further improve as we move through 2018.

Additional color on revenue, gold bumping growth around 10% compared to Q1.

DDIC revenue growth about 19% over Q1 and mixed signal per the revenue growth, more than 22% over Q1.

The gold bumping and DDIC revenue contribution of Q2 represents 46.8% of our Q2 total revenue compared to about 45.5% of total Q1 revenue.

Q2 TDDI revenue growth in double-digits compared to Q1 and represented in higher single digits of our total Q2 revenue.

Demand is coming in support of new smartphone model.

It's important to point out that testing time for TDDI product is almost 3x of the channel DDIC testing time.

This helps drive a higher margin but also means we are too conservative adding capacity to meet the higher demand.

TDDI demand has increased since the start of 2018, and expect it to continue through the second half of 2018.

We are also pleased with the growth in our Chip On Film demand, which had a 12% increase in Q2 revenue compared to Q1 and represents around 50% of all DDIC revenue.

Demand was stable from 4K TV and COF transition of the full-screen model of new smartphone, particularly, 12-inch fine pitch COF requirements from full-screen model of the new smartphone.

As a result, COF capacity is expected to remain tight through the second half of 2018.

On the memory side, I'll transfer the benefit from diverse demand driver related to IoT growth, including smart speaker and growth related to gaming products.

As a result, flash revenue growth more than 15% in Q2 compared to Q1 and represents nearly 23% of total Q2 revenues, slightly offsetting the growth of decline in Q2 DRAM revenue of about 1.7% compared to Q1.

Another example of our success is growth in automobile and industry business, which increased to 11% of revenue in Q2 from 9% of revenue in Q1.

Although, we are confident about our business position and look for the second half of 2018 based on our business and customer diversification.

As we look forward into the third quarter of 2018, we are in good position to achieve both revenue growth and improve profitability.

We see the rest of the year can be quite positive, as we benefit from our growth strategy and seeing the benefit of our improvement in capital structure and higher earnings per share.

We are encouraged by strong customer demand in our TDDI and COF business.

We expect -- we will continue to benefit from demand for TDDI and 12-inch fine pitch COF led by new smartphone model featuring narrow bezel and full-screen panel.

In addition to the revenue and margin benefit, another benefit of our strong TDDI demand environment is that DDIC customers are thinking long-term agreement to secure the needed capacity, support for their expected growth.

This will add further visibility and stability to our business.

We are also encouraged by the optical sensor opportunity.

We continue to grow with our partner, and are well positioned in this development segment.

We are moving forward conservatively, but look for the optical sensor related revenue to grow in the second half of 2018, as new smartphone model into production.

Before I turn the call over to Ms. Silvia Su, I would like to give an update on the cash dividends and 2018 Capital Reduction Plan.

Shareholder has now approved the cash dividend of NT$0.30 per common shares in the Capital Reduction Plan, which call for the distribution of NT$1.50 per common share with the 15% reduction of number of common share in ADS.

Taiwan Competent Authority has now approved the Capital Reduction Plan.

In today's board meeting, there will be likely to recommend payment days, was set for the common shares with the Form 6-K filed.

It is expected that distribution will occur in the fourth quarter.

Now let me turn the call over to Ms. Silvia Su to review the second quarter of 2018 financial results.

Silvia, please go ahead.

Thank you, S.J. All dollar amounts cited in our presentation are in U.S. 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$ 30.43 against USD 1 as of June 29, 2018.

All the figures were prepared in accordance with Taiwan International Financial Reporting Standards.

For the second quarter of 2018, total revenue was USD 147.6 million.

Net earnings for the second quarter of 2018 were $0.10 per diluted ADS compared to $0.02 per diluted ADS for Q1 of 2018.

This represents net profit of USD 4.1 million and $0.005 per basic and $0.005 per diluted common share compared to the net profit of USD 0.7 million and $0.001 per basic and $0.001 per diluted common share in the first quarter of 2018.

Our operating expenses in Q2 were USD 12.7 million or 8.6% of our Q2 revenue compared to USD 11.8 million or 9% of our revenue in Q1 of 2018.

Other operating income in Q2 was USD 2.1 million.

Net nonoperating income in Q2 was USD 2.1 million, including foreign exchange gain for Q2 approximately USD 6.3 million.

Income tax expense for Q2 was USD 11.6 million, including unappropriated earnings tax of around USD 8.2 million.

On a segment basis, revenue breakdown of second quarter was 27.6% in testing; 26.2% in assembly; 28.9% in LCD driver business; and 17.3% in bumping.

We spent USD 32.1 million on CapEx in Q2 compared to USD 41.5 million for our first quarter 2018.

The breakdown of CapEx for second quarter was 38.3% for testing; 6% for assembly; 46.7% for LCD driver; and 9% for bumping capacity.

As you can see, the majority of our CapEx was invested in expanding our LCD driver capacity, which is mainly for DDIC tests and 12-inch fine pitch COF capacity and to meet current and expected customer demand levels.

As S.J. noted, this capacity is tight and expected to remain constrained through the second half of 2018.

Depreciation and amortization expenses were USD 27.7 million or approximately 18.8% of revenue in the second quarter.

EBITDA for Q2 was USD 41.3 million or 28% of revenue.

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

As of June 30, 2018, our balance of cash and cash equivalents was USD 134.2 million.

Overall, free cash flow in Q2 was negative $3.2 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.

As of June 30, 2018, our net debt balance was USD 141.4 million, which resulted in a net debt to equity ratio of 23.3%.

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

Accounts receivable turnover days in Q2 were 82 days compared to 88 days in Q1 of 2018.

Inventory turnover days were 44 days in Q2 compared to 50 days in Q1 of 2018.

As of July 31, 2018, the company's outstanding ADS number was approximately 6.6 million units, which represents around 15% of the company's outstanding common shares.

Operator that concludes our formal remarks.

We can now take questions.

(Operator Instructions) Our first question today is coming from Richard Shannon from Craig-Hallum.

I guess t0 the first one I'll ask is on gross margins.

Although, I know that currency has been a headwind in some of the past several quarters with price increases and some increased demand.

I'd love to get your sense S.J., of where we see gross margins go not only into third quarter, but maybe if you want to get your crystal ball and look into next year?

Can we get to that 20% level?

Yes, actually it's -- as you know we will not provide...

Guidance.

Guidance.

But we can give you the -- our internal targets.

Actually company set an internal target, for the revenue growth is 5% organic growth per year.

And CapEx investment is 15% to 20% of total annual revenue.

But this year, we will increase the CapEx investment to around 20% to 25% because of the strong demand from customers for LCD driver which -- including TDDI and 12-inch COF.

And we said our gross margin is 15% to 20% and for the second half of this year, I think, based on our current business requirements and customer forecast, it's better than the first half.

The management team had a comment were stable for the second half and the beginning of the first half of next year, is pretty positive for us.

Okay, that answers that question and probably 2 or 3 I had, thank you for that S.J. Maybe I'll step over to parts of your business here.

One it's -- that's a little hard to track is in your DRAM business.

I know you've got some commodity and some niche business.

I'm wondering if you can give us a sense on both sides?

How are your allocations with your primary commodity DRAM customer?

And then do you continue to see favorable trends with your niche business as well?

Yes.

Actually, previously I had mentioned Q2 coverage to Q1, our DRAM business declined around 1.7%.

Actually, both niche DRAM area.

I think, right now our customers are doing the inventory adjustments and especially for the tax confrontation between China and U.S., but right now lot of problem in China, pretty prolonged hold.

So this is the uncertainty for us.

And regarding the commodity DRAM areas, our U.S. customer, they might change their business strategy and give more allocation to us, this is a good sign for us, and which is expected to happen beginning of Q4 this year.

Okay, great.

Last question for me.

I'll jump out of the line, regarding TDDI.

Sounds like both from a high-level environment it looks pretty favorable and sounds like you're competing pretty effectively there.

Maybe if you can talk a little bit about any breadth of design wins that you have and what kind of percentage of your business could this be over, say, the next 3 to 4 quarters?

Yes, regarding the design wins, we gave separately a couple of slides.

For TDDI area, right now, since the testing time is almost 3x longer than the traditional test variety, because they put the driver and test sensor together.

So -- and starting from Q2 -- beginning of Q2 this year, this TDDI are going into mass production, due to the smartphone -- every smartphone will promote their most advanced feature phone.

So those need a lot of testing time and also need a 12-inch -- 5-inch COF packaging assembly, so it led to help us to increase our utilization rate and so that's the reason we can increase the pricing in May time frame that's in TDDI.

And since right now the testing equipment delivery schedule is much longer than before, so I think we just -- in the second half equivalent increase not too much.

So we're looking -- we're working with our customers.

They almost send the engineering and they stay in our production line in order to squeeze more output, which helps us to increase our output and also efficiency.

So that's a -- we've confident flavor of our output and margin further improved.

And regarding to the OLED, your question maybe the OLED.

We also had a good progress in Korea, 2 major customers.

We are also past the qualification, and are going to start mass production right now, in the second half -- Q4, it will be much greater.

And the other design house, they also participate for OLED market share.

We're held in during the production line.

I hope maybe I answered your question.

(Operator Instructions) If there are no further questions at this time, I'll turn the floor back over to management for any further or closing comments.

Yes.

Thank you, everyone for joining our Q2 conference.

Thank you very much.

If anything we will do our best to improve the business and visibility.

Thank you, again.

Bye-bye.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time and have a wonderful day.

We thank you for your participation today.