ChipMOS Technologies Inc (IMOS) 2018 Q4 法說會逐字稿

Greetings, welcome to ChipMOS TECHNOLOGIES Fourth Quarter and Full Year 2018 Results Conference Call.

(Operator Instructions) Please note, this conference is being recorded.

I'll now turn the conference over to David Pasquale.

Mr. Pasquale, you may now begin.

Thank you, operator.

Welcome, everyone to ChipMOS' Fourth Quarter and Full Year 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 and 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. Lafair Cho, Senior Executive VP and COO; and Mr. Jesse Huang, Spokesperson and VP of New Product Development Management Center and 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 using imos@globalirpartners.com or you can get a copy of the press release off of ChipMOS' website using 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 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 operation 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, which was 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 the company's Chairman and President, Mr. S.J. Cheng.

Please go ahead, sir.

Yes, thank you, David.

Welcome, everyone to our fourth quarter and full year 2018 conference call.

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

2018 was marked by significant accomplishment for ChipMOS.

Our accomplishment were around business operation, financial, corporate structure and strategy.

Taken together, our [efforts] have been meaningful and position us for success in 2019.

We are pleased that we achieved a higher gross margin at 22.8% in Q4, up from 19.5% in Q3.

We delivered this significant improvement of modest revenue growth.

This show that leveraging our business and benefit of higher pricing level, the favorable mix and ongoing operation efficiency improvement.

Our focus on profitability has helped us to move through up and down in the market.

Though there has been industry softness in Niche DRAM related to ongoing conservative behavior around the trade tensions, for ChipMOS, our end market, customer and geography diversify -- diversivity (sic) [diversity] put us on a growth path and help isolate our business.

We continue to have a high utilization rate and our balance sheet remaining strong.

We are able to invest in the area of our business that will drive our near- and long-term growth while keeping the financial health to operate in up and down markets.

Our results in 2018 benefit from the main growth in TDDI product.

This is a major driver for our business because TDDI allow customers to upgrade performance while reducing costs.

This is the perfect value offering, and we continue to see growth in narrow bezel panel requirement in the new smartphone, particularly the COF format.

In addition, the larger-size TV driver IC continue to increase due to the higher 4K TV penetration rate.

Overall revenue in 2018 grows about 3% compared to 2017 and gross profit margin also increased to 18.6%.

DDIC was a positive area for us.

Our DDIC business grows about 18.2% in 2018 compared to 2017 and this represented about 31.6% of our total 2018 annual revenue.

Demand continue to outpace capacity through 2018 and allow to (inaudible) increase pricing.

The other positive outcome was customer moved to set up the long-term capacity contract to secure the capacity.

This agreement help us to streamline our CapEx plan and help to reduce typically volatility.

For Q4, DDIC product represent about 34.2% of total revenue while gold bumping represent about 17.6%.

The COF format packaging grow and represent about 60% of the DDIC revenue in the fourth quarter.

At the same time, the TDDI product grows to 28.3% of DDIC revenue in Q4 from 22.8% of Q3.

And they are around 21% of TDDI product, our packaging in COF format in Q4 from around 13% of Q3.

The other area of our business was mixed compared to 2017.

Flash product benefit from higher automotive demand and other new application, such as smart speaker and gaming.

Flash revenue grows around [12%] in 2018 compared to 2017 and represent about 21.5% of 2018 revenue.

Memory product revenue, however, declined about 5% in Q4 compared to Q3 and represent around 38% of total Q4 revenue.

This is in line with the broader market trend widely reported.

As we look into first quarter of 2019, Q1 normally represent the lowest period for the year for the industry, followed by revenue growth in Q2, Q3 and Q4.

This is due to fewer working days around Chinese New Year holiday and typically semiconductor churn, inventory rebalancing.

ChipMOS is in strong position entering 2019, having fortified our balance sheet and secure long-term financial agreement on favorable terms from our banking partners.

We secure a new syndication credit line, TWD 12 billion with a 5 years term in May 2018.

This allows ChipMOS to refinance its existing banking debt on favorable financial terms, while maintaining financial flexibility to support company working capital for future growth and expansion.

It is also important to know that because we complete our 2018 capital reduction plan in Q4 2018, there was around about [15%] reduction of the number of common share in ADS.

This will result in higher return to the shareholder and allow us to award shareholder a distribution of TWD 1.5 per common share together with a cash dividend of TWD 0.3.

We are confident we will be able to outgrow as we benefit from strong demand in our DDIC business, particularly with COF.

We are also encouraged by our progress in cooperation project with customer on OLED panel driver IC and DDIC for automobile application.

Wherever you look, semiconductor content and device complexity is increasing.

For ChipMOS, we have to say in the past, the driver like TDDI require significantly higher testing time.

Also, more and more sales from auto shift to TDDI.

We benefit from the volume upside and potential revenue per device.

The same is true for automobile.

The semiconductor content in the motor today has never been higher.

It take incredible advanced system to make the entertainment and driver comfortable.

And this does not even get into what is required with the vehicle, connected to the cloud and self-driving auto.

The 5G buildout is expected to the main catalyst later in 2019 and in 2 years.

Interconnection is not possible without high reliability.

Only specific large OSAT company like ChipMOS gain profitability, making a critical ongoing R&D investment required to support the new technology requirement.

We have a critical place in the supply chain, and we are relied upon by customers worldwide.

To support the expected growth, we will continue to carefully invest in our DDIC testing and 12-inch COF assembly capacity to meet the strong TDDI demand environment.

As I mentioned earlier, we have been able to eliminate market risk around adding capacity because DDIC customers are seeking long-term agreement to secure the needed capacity support for their expected growth.

This add further visibility and stability to our business and derisk our investment.

Overall, we are focused on achieve profitable annual revenue growth in 2019.

Finally, before I turn the call to Silvia, I'm pleased to report that our Board of Directors have approved a cash dividend distribution to shareholder of around TWD 1.2 per common share or around USD 0.78 per ADS.

Shareholder will be able to approve at our AGM in June 2019.

This is the message that (inaudible) by ChipMOS over the passing 3 years to reward shareholders and to build great value for shareholder.

We appreciate your support as we continue to execute our business strategy.

Now let me turn the call over to Ms. Silvia Su to review the fourth quarter and full year 2018 financial results.

Silvia, 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 TWD 30.61 against USD 1 as of December 31, 2018.

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

For the fourth quarter of 2018, total revenue was USD 162.4 million.

Net earnings for the fourth quarter of 2018 was $0.46 per basic ADS compared to $0.37 per basic ADS for Q3 of 2018.

This represents net profit of USD 16.9 million and $0.02 per basic common share compared to net profit of USD 14.4 million and $0.02 per basic common share in the third quarter of 2018.

For 2018, total revenue was USD 603.8 million.

Net earnings for 2018 were $0.90 per basic ADS with $2.34 per basic ADS in 2017.

All operating expenses in Q4 were USD 12.1 million or 7.4% of our Q4 revenue compared to USD 12 million or 7.3% of our revenue in Q3.

We continue to carefully manage our operating expenses as we work to drive improved profitability.

Net nonoperating expenses in Q4 were USD 3.3 million.

Income tax expenses for Q4 was USD 5.7 million compared to USD 4.1 million in Q3.

On a segment basis, revenue breakdown of fourth quarter was 23.5% in testing, 24.6% in assembly, 33.7% in LCD driver business and 18.2% in Bumping.

We invested USD 55.7 million on CapEx in Q4 compared to USD 32.6 million for our third quarter 2018.

The breakdown of CapEx for the fourth quarter was: 21% for testing, 5.6% for assembly, 69.5% for LCD driver and 3.9% for Bumping capacities.

Depreciation and optimization expenses were USD 28.1 million or approximately 7 -- 17.3% of revenue in the fourth quarter.

EBITDA for Q4 was USD 54 million or 33.3% of revenue.

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

As of December 31, 2018, our balance of cash and cash equivalent was USD 151.7 million after distributing cash dividend of USD 8.4 million and capital reduction of USD 42 million to shareholders in Q4.

As of December 31, 2018, our net debt balance was USD 168.7 million which result in a net debt-to-equity ratio of 28.6%.

While EBITDA and net debt-to-equity ratio are not defined by generally accepted accounting principles, we believe these are helpful indicators to measure our financial strengths.

Accounts receivable turnover days in Q4 were 87 days compared to 83 days in Q3.

Inventory turnover days were 43 days in Q4 compared to 41 days in Q3.

As of February 28, 2019, the company's outstanding ADS number was approximately 5 million units, which represent around 13.7% of the company's outstanding common shares.

Operator, that concludes our formal remarks.

We can now take questions.

(Operator Instructions) The first question is from the line of David Haberle with Susquehanna.

You mentioned in your press release that you're focused on achieving annual growth in 2019 which could be a bit difficult, given the start of the year for handsets here.

But can you talk about your 2 or 3 biggest growth drivers for 2019?

This is S.J. Let me answer your question.

For 2019, we set an internal goal for the organic growth is high single digits.

And we see the gross margin very conservative because there is the uncertainty in memory.

We say the target is 15% to 30%.

And the key driver for the 2019 was LCD driver, especially for TDDI and fine pitch, our COF smartphone model.

And then I can give you there some actual results.

January, our revenue increased around 15.93% compared with same period of last year.

In February, our revenue increased around 9.75% compared with the same period of last year.

So it means our Q1 is stronger than last year, that we had a confidence level by the new capacity install for LCD driver, and we already had a long-term contract with our customer.

So utilization rate is guaranteed.

So that's the confidence level, we are going to increase quarter-by-quarter.

But regarding the memory, still a big uncertain for us.

Got it.

That's great color on January and February and good results there.

In terms of memory, I guess what are your expectations on when pricing might stabilize?

Actually, you can see for the Q1, that's from the market report, I think first time I see is the -- for DRAM pricing around 20% drop then the 1 month data was 25% drop.

Then recently, they report actually the 30%.

So this will be the biggest pricing drop per quarter since 2011.

So under this kind of situation, we still doesn't see any good sign yet for the recovery.

So the -- our customer just feedback to us that once the inventory was clean, they might have a good sign in the second half of the memory.

So our assumption for the 2019 was based on these scenarios.

(Operator Instructions) Thank you.

At this time, I'll turn the floor back to management for closing remarks.

Yes, thank you, everybody, for joining our Q4 2018 and whole year conference call.

Thank you very much.

Please direct contact with company channel if you have any further questions.

Thank you very much.

Bye-bye.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.