ChipMOS Technologies Inc (IMOS) 2020 Q3 法說會逐字稿

Greetings, and welcome to the ChipMOS Third Quarter 2020 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. David Pasquale with Global IR Partners. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to ChipMOS's Third Quarter 2020 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, Spokesperson and Vice President of Strategy and Investor Relations. All company executives will participate in the Q&A session after management's formal remarks.

If you've not 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. We have also posted a PowerPoint presentation on the IR site to accompany today's conference call.

Before we begin the formal comments, we must 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, including but not limited to the potential impact of COVID-19, 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 company's Chairman and President, Mr. S.J. Cheng. Please go ahead, sir.

Yes. Thank you, David. We appreciate everyone joining our call today. We are pleased with our results for the third quarter 2020 and continued progress. The quarter developed in line with our expectations. Demand in our end markets remaining strong with positive utilization labor. This was an important quarter for us as we drive Q3 revenue to the 6 years' record high.

Revenue was up 4.8% compared to Q2 and growth 5.3% compared to Q3 '19. Even more impressive is the 13% revenue growth we achieved for the first 9 months of 2020, with the gross margin up 290 basis points to 20.9%.

Let me give some color on mix. Our Q3 assembly utilization labor significantly increased to 80% as we benefit from demand in gaming, consumer electronic and a slightly rebound in auto and industry and led the tightened utilization of assembly wire bonder.

Our 8-inch COF utilization remains soft. This was more than offset by strong TDDI demand, which was -- drove utilization of our middle to high-end wafer testing platform higher to full utilization. We are also pleased to see DDIC utilization increase to 76% in Q3 after a decline in Q2.

We continue to benefit from higher bumping demand led by our 12-inch gold bumping and other non-driver business. Our overall utilization level was 79% in Q3, up from 74% in a year ago and higher than 76% in Q2.

Regarding our manufacturing site, assembly represent 25% of Q3 revenue; package testing and wafer sort represent around 22%; and wafer bumping represent around 23% of Q3 revenue, up from 19.1% in Q2.

On the product segment basis, our DDIC, including COG and COF, segment was around 30% of revenue and gold bumping increased significantly to represent around 19.5% revenue. Revenue from DRAM and SRAM represent 19.2%, and our flash segment grew significantly to represent 23% of Q3 revenue. Mixed signal segment revenue increased and represents around 8.5% of Q3 revenue.

In terms of adding colors, our memory product revenue grew more than 3% and represents around 42% of total Q3 revenue. DRAM revenue was up 15% year-over-year, but declined 10% compared to the Q2. This reflects broader inventory level adjustments in the channel.

Total flash revenue grew 18% compared with Q2. We benefited from significantly growth of NOR and Mask ROM, led by strong demand from gaming. Lastly, our NAND flash business continued to grow and represents about 29.5% of total Q3 flash revenue.

As for driver IC-related product, we continued to benefit from new 5G smartphone launch, particularly large HD-grade panel model. Driver IC-related product revenue increased around 10.7% compared to Q2 and represents around 49% of total Q3 revenue.

Gold bumping revenue grew significantly around 26% compared to the Q2.

8-inch COF for middle/large panel remained being soft due to the foundry level supply limitation. Overall, DDIC revenue grew in Q3 compared to Q2 as we benefited from strong demand for TDDI given the high penetration of HD-grade panel. As a result, TDDI business represents 34.3% of Q3 DDIC revenue with middle to high-end wafer testing platform fully utilization currently. When we look at our target end market, revenue increased in both smart mobile and consumer, while TV declined. And both computing and automobile and industry (inaudible) compared to Q2.

As we look forward into the fourth quarter of 2020, we are encouraged by end market and inventory trend in our target market. Long-term opportunity like ongoing 5G build-out are positive for the industry and ChipMOS. New smartphones are likely to drive higher volume demand, while the global work-from-home trend had led to an uptick in demand for consumer, electronic and gaming.

We expect revenue from 2 major product segments, memory and DDIC related, we'll continue to grow and growth of the DDIC-related product will be better than memory segment as we benefit from increased demand, capacity addition and higher testing price in Q4. In memory, we expect DRAM will remain the similar momentum from Q3, and our flash business, including NOR flash and NAND flash, will continue to grow by global work-from-home trend.

We are investing some wire bonder due to the tightened wire bonder capacity. We expect that assembly utilization could be maintained with healthy level because the new increased wire bonder are all booked by our customers.

In DDIC, we expect demand from middle, larger-size panels for TV will remain healthy in the 4 quarters. For the small-size panel, demand is being driven by increased demand for middle, low end new 5G smartphones and strong demand for TDDI from the higher penetration ratio of HD-grade panel.

As I mentioned, the wafer test platform are fully utilized. We expect to maintain this level into 2021 based on the customer forecast. We are carefully investing in the new high-end test platform capacity to meet strategic customers' request.

Finally, given the testing capacity utilization level, we raised related wafer testing price on October 1. This will benefit our DDIC revenue growth and profitability in the Q4 '20.

We are working with our customer and committed to providing the capacity they need, similar to the situation in second half 2018 and 2019. Our new testing capacity additionally are all secured by customer contract guarantee to reduce the investment risk.

Before I turn the call to Ms. Silvia Su, I would just like to highlight the comment we made in our Q3 result conference call notice last month. Starting in calendar year 2021, ChipMOS will be hosting only 1 call in Mandarin due to the timing and resource issues. To ensure transparency and to facilitate a better understanding of the financial results and operating environment of the company for English-speaking investors, we plan to provide English translation audio following the Mandarin call on its website.

Silvia, please go ahead.

Thank you, S.J. All dollar amounts cited in our presentation are in NT dollars. The following numbers are based on exchange rate of TWD 28.95 against USD 1 as of September 30, 2020. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards. We have provided a PowerPoint presentation on our Investor Relations website that will follow my comments on the call today.

Page 12. Consolidated operating results summary. For the third quarter of 2020, total revenue was USD 196.4 million. Net profit attributable to the company was USD 14.6 million in Q3. Net earnings for the third quarter of 2020 were $0.02 per basic common share or $0.40 per basic ADS.

EBITDA for Q3 was USD 61.5 million. EBITDA was calculated by adding depreciation and amortization together with operating profit. Return on equity of Q3 was 8.5%.

Page 13. Consolidated statement of comprehensive income. Compared to Q2, total revenue of Q3 increased 4.8%. Q3 gross profit was USD 37.8 million with gross margin at 19.3% compared to 20.7% in Q2.

Our operating expenses in Q3 were USD 13.6 million or 6.9% of total revenue, which is about 1% improvement compared to Q2. Operating profit for Q3 was USD 24.8 million with Q3 operating margin at 12.6% compared to 14.5% in Q2.

Net nonoperating expenses in Q3 were USD 6.2 million. The difference between Q3 and Q2 is mainly due to the increase of the share of loss of associates accounted for using equity method of USD 1.8 million, which was partially offset by a decrease of foreign exchange loss of USD 0.3 million. Basic weighted average outstanding shares were 727 million shares.

Compared to Q3 2019, total revenue for Q3 2020 was up 5.3%. Gross margin decreased 2.1 percent points compared to 21.4% in Q3 2019. Operating expenses were mostly flat compared to Q3 2019. Operating profit margin decreased 2 percent points compared to 14.6% in Q3 2019.

As I noted earlier, the difference of net nonoperating expenses compared to Q3 2019 is mainly due to the increase of the share of loss of associates accounted for using equity method and the increase of the net foreign exchange loss. This was partially offset by a slight increase in the gain on valuation of financial assets at fair value through profit or loss.

Page 14. consolidated statement of financial position and key indices. Total assets at the end of Q3 2020 were USD 8.8 -- USD 1.18 billion. Total liabilities at the end of Q3 2020 were USD 486.2 million. Total equity at the end of Q3 2020 was USD 693 million. Accounts receivable turnover days in Q3 2020 were 74 days compared to 78 days in Q2. Inventory turnover days was 44 days in Q3 compared to 50 days in Q2.

Page 15. Consolidated statements of cash flows. As of the September 30, 2020, our balance of cash and cash equivalents was USD 165.4 million, increased USD 2.9 million at the beginning of 2020.

Free cash flow for the first 3 quarters was USD 45.9 million compared to negative USD 4 million for the same period of 2019. The difference is mainly due to a USD 29.4 million increase of the operating profit, a USD 28.3 million decrease of CapEx and partially offset by a USD 15.1 million increase of cash dividend paid. 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.

Page 16. Capital expenditures and depreciation. We invested USD 14.6 million in CapEx in Q3. The breakdown of CapEx was 10.6% for bumping, 43.4% for LCD driver, 30% for assembly and 16% for testing. Depreciation expenses were USD 36.7 million in Q3. As of October 31, 2020, the company's outstanding ADS number was approximately 5 million units, which represents around 12.5% of 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 Scott Bishins with Caffeine Holdings.

It looks like a big quarter. It looks like a lot of things have been accomplished this year. Just a couple of things I want to go over. I saw the October revenues this month. And there are TWD 72 million approximately brand-new high, up about 9% year-over-year, also up about 9% quarter-over-quarter. Do you see that sustainable going through the rest of the quarter?

Scott, this is S.J. To answer your question, in the May 3 conference call, I was asked the -- we answered the same question. At this time, I will ask Silvia to answer. How come our gross margin will reduce 1.4% compared to Q2, okay? And...

That was my next question, so you will answer that too. Okay.

Yes. I'll answer you later.

Yes, I'll let that lady to answer your question, okay? I will just give you the October -- October -- starting from October revenue, which we already announced today, which was -- revenue was -- grew almost 9% compared to 2019. And November and December is to maintain the strong momentum similar like October.

And starting from October 1, we increased the pricing for DDIC due to the fully utilization rate. And so both revenue and gross margin will be better than Q3. In the whole year's, in beginning of this year, we give the forecast for whole year's growth -- revenue growth compared with last year, was high single digit. But based on the October results and first 9 months results and existing strong demand from customer side, our revenue growth for the whole year is higher than 10%, and whole gross margin will be higher than 20%. And the earnings will be better than last year.

So our cash dividends for next year will be better than this year because we are too much better than last year. So it means our shareholders can enjoy the higher cash dividend compared to the last year.

That's incredible news.

Yes. But I will ask Silvia to answer your question.

Yes. Regarding the gross margin, the Q3 gross margin is around 19.3% and it decreased around 1.4 percent points as compared to Q2. And there are 3 major factors. The first one is, for Q3 there was a higher electricity rate for summer season, and the impact will be around 0.9 to 1 percent points. That's the first one. And then the second one is U.S. dollar depreciation, and that impact around 0.5 to 0.7 percent points. And the last one is higher gold price, and that impacts around 0.1 to 0.2 percent points. That's the major 3 factors for the...

What was the first one again? I missed the 1%, the first one.

Yes. The first one is higher electricity rate for summer season.

Okay. So in other words, you would have come in assuming that there would have been normal charges, you would have come in with a higher gross margin than the second quarter?

The answer is yes.

Yes, you can say that. Yes.

If you go to the Q4, it's going to the wintertime. So not this factor and gold price are already higher and usage there is also higher. So these 3 negative factors can be eliminated. And we also -- revenue will continue to grow in Q4. We also increased the pricing. So you can forecast year 2020 will be a good year for the company. And November and December was also stronger, yes.

Okay. Don't put up the heat too high. We don't want to spend a lot of money on heat in the fourth quarter, try to keep it down.

But all the wafer just [pile-on] in front of my office.

Right. Let me see, just a couple of other questions. Any news on the negotiations for the China factory?

We are in good progress. But once everything is clear, then we will let everybody know.

Okay. Do you think there is any chance we might know that before the end of the year? Is that a possibility?

I think coming Q1 maybe more safe, yes.

Okay. Just a couple of other things here. Now that you're going to be not doing the New York time conference call going forward, will there be any times during the year that maybe you could do an update for the IMOS investors through a little question and answer, maybe not a full conference call but something we'll -- maybe we could just dial in, anybody that's interested?

I will let our IR Head and Spokeswoman, Jesse Huang, to answer your question, yes.

Okay. We really have the needs for our investors in the USA. I think we can go through David Pasquale, our IR representative in the USA to arrange that one for such kind of informal conference call. However, right after, as S.J. just mentioned, right after our formal Mandarin conference call, we will make sure that all that information will be provided, make sure our USA investor can get an equal base information during the Mandarin conference call.

Is there any chance if we have some questions prior to the -- your first call in Taiwan that we could e-mail them in to David or directly to Taiwan that possibly could be asked by somebody during the conference call?

Okay. We'll take your request into consideration and work with David to see how we can work it off.

Okay. I'm sure between myself and David and a couple other investors, we could come up with some questions, maybe just even after we read the report -- the quarterly report and maybe just a couple of questions that could be asked on that call. At least this way, when you translate it into English, we'll be able to see our question and what the answer was. So that would be very helpful, I believe.

Let me just see, anything else. How do you see the Taiwan dollar strength, and it's been coming down dramatically over the last 4 quarters. I guess which also has been incurring a foreign exchange loss. It's been pretty substantial throughout the year. How do you see that going forward? Do you feel now maybe with the U.S. -- with the change in government in the U.S., do you think that there'll be a change in maybe how the Taiwan dollar acts?

Actually, Scott, to answer your questions, we use a very conservative foreign exchange based on the Central Bank announcement for our next year's budgeting. So as far as our understanding right now, the gold price is more than TWD 1,950 per ounce us and foreign exchange is 28-point something. So I think that will be there in high tides. So we use this one to -- as an assumption for our budgeting. So I don't think -- that will be pretty conservative.

Okay. Let's see, just 1 more question. The -- I guess the change in the value of the facility, I imagine the charge for lowering the value of the equity loss. Was that attributed to the China factory or was that attributed to something else?

Yes. That's related to the China factory.

Okay. Is that also -- was that affected also by JMC, the last 10 million shares we have, I'm not sure how...

As for JMC, it's gain for JMC investment.

JMC was a gain?

Yes.

Okay. Let's see. Do you have any plans on -- I guess at this point, you've already renegotiated all your loans with longer term payouts. Do you see that, that's going to be enough at this point that you don't need to do anything else on the financial side as far as any kind of raise of capital or anything else that might be needed? Or do you feel that we have enough cash and we're able to pay down the debt that won't cause us any shortage of cash? And what the CapEx might be going forward for next year?

Okay. Regarding the -- actually, I think we have sufficient cash position. And actually, we also have sufficient short-term loan and long-term loan, especially in syndicated loan credit line. Yes. So I think for the future investment, there should be no problem for the company. And regarding the CapEx for 2020, actually, we try to control it under 20% of our total revenue of 2020. And that's the best thing...

That's the plan for 2021 also?

For 2021, our target -- I think that the target given by the Board is 20% to 25%, but we will try to keep it lower. Yes. Trying to under -- like this year to under 20%, but it's still hard to say, it depends on the business, yes.

Scott, let me give you a bit more color. I think, Silvia, has just answered your question, the big difference is if business is too good, then we need to build a new building or buy a new building in order to expand our capacity. But if you have enough space, there's no need for the facility increase. Just by the [CapEx increment] only that can maintain around 17% to 18% of total revenue for next year.

Okay. Well, that sounds great. Do you have a building in mind right now that you're negotiating on?

Actually, right now, it's not a good timing since the building and land prices continue to increase.

Okay. And just the last question, just to verify what I think this is. The GAAP earnings came at $0.58 for 8150, correct?

You mean the share price?

No, the GAAP earnings, the earnings per share?

The earnings?

Earnings per share on a GAAP basis was $0.58.

Non-GAAP? Sorry, can you say again?

You mean starting from first 9 months?

No, no. For the quarter, I saw that the earnings per share was $0.58. Is that correct?

Yes.

Yes.

Okay. And then also, if I -- just a little non-GAAP number, just so that we could see what it looks like with maybe some onetime non-expenses -- nonoperating expenses. It looks like the $6.2 million would reference to another $0.24 in earnings, which would have brought us on a non-GAAP basis to $0.82. Does that sound correct?

You mean non-GAAP -- what do you mean non-GAAP? Can you explain?

Well, you said there were about $6.2 million in charges that were associated with the third quarter. Part of it was the write-down in the equity value and also some foreign exchange losses. So -- which I think you mentioned was -- was $6.2 million. So if you add the $6.2 million back into Taiwan dollars. And then per share, it would be about $0.24, which would have brought earnings up to $0.82.

(foreign language)

Do you mind that you just give me your calculation and then I double check that for you?

Okay. The earnings that you posted that I saw on MOPS was $0.58 per share for 8150, correct? For the third quarter?

Yes.

Yes?

Yes.

Okay. And then you also mentioned that there was a USD 6.2 million loss on -- foreign exchange loss and also the value of the equity -- using the equity method of the assets that we hold that are nonoperating that totaled $6.2 million.

Yes.

So if you take the $6.2 million, convert it back into Taiwan dollars and then divide it by the amount of shares outstanding, I see it should be about another $0.24?

Yes. Yes.

That would bring us -- that would have brought us up basically on a non-GAAP basis of $0.82?

Yes. Yes.

Okay. I just want to confirm that. The only reason why I'm saying that is because I just looked at in some of the, I guess, reports that just came out, and it's saying that I most missed on the price per share, the earnings per share. But if you factor in the $6.2 million which was taken -- which was deducted from the GAAP earnings, actually, you would have had a gain. I think The Street was looking for $0.71. So now coming to $0.82, actually, you did better, even with a lower third quarter gross margin percentage, which means that if -- without some of those onetime charges in the third quarter, assuming that we had another 1% or 2% in gross margin percentage, we really could have even done much better.

Yes, you just want to exclude the, you can say, onetime expenses like foreign exchange loss or the investment loss, right, trying to calculate.

Yes, yes.

Okay.

That's probably something that's good to do also just to reference it, so people understand when they take a look and they see headlines. Sometimes it's misleading when it says you missed for the quarter, when actually most companies -- most technology companies always give GAAP and non-GAAP earnings. They -- usually on the non-GAAP, they take out the onetime charges and they add it back to the GAAP earnings.

All right. Understood.

Yes. Thank you for your questions. You have the capability, yes.

It's not too hard, if you need help just let me know. But again, thank you very much. And look it's been great the last 15 years for me anyhow, I've been an investor since 2004. So for me, it's been a great ride. I'm very happy to see how things are going. I love waking up and seeing all brand-new highs on revenues and gross margins and profitability and also raising of dividends.

So keep up the great work. And yes, again, I would love to be able to, if possible, sometimes send some questions into David and maybe some other investors that, maybe, could be asked on that on the Mandarin call, and then we'd be able to actually see the translation the same day and have our questions answered.

Got it.

Okay.

Okay. We will take your messages.

(Operator Instructions) Our next question comes from the line of Vipul Sagar with Blash Capital.

The first question I have is about free cash flow. It seems like you had a negative free cash flow in Q3. Is that right?

Yes. Because of -- we pay our dividend in Q3.

Perfect. And then Q4 -- go ahead. About $5 million?

I mean the dividend payout for Q3 is around USD 45 million. That's the reason why we have negative free cash flow in Q3.

Okay. So my next question is for Q4. You go back positive free cash flow?

It depends on the CapEx, but I think, yes, that maybe around -- yes, I think there is a chance, but it still depends on the CapEx, how much the CapEx we spent in Q4.

Okay. Okay. But right now, The Q3 was down because of dividend and then Q4 is going to be based on how much you spend on CapEx in Q4, correct?

Yes, yes.

Okay. You said your Q4 revenue is going to be sequentially higher than Q3. What about Q1 2021? Do you see above seasonal -- better than seasonality on Q1 2021?

To answer your question, since everybody asked how come our Q3 gross margin is not as good as Q2. So I think Scott's question already, (inaudible) in a clear picture, okay. And Q4 is pretty strong. We also increased the unit price. And all the negative onetime event was disappeared. So revenue will be higher and market will be significantly improved, not only for price increase, but also negative onetime event will disappear.

And for the first half of next year, based on the current order, we're still very optimistic. But only speaking for the second half, still a lot of uncertainty. But all our investors for the new CapEx was secured by 2 years contract, which can significantly reduce our investment risk and also guarantee our revenue growth. Does that answer your question?

Yes. Yes, it does. It does. Yes, you did say why the gross margin was down. You explained that very well. You did say the guidance for revenue, EPS, gross margin and even cash dividend for next year is going to be better than 2020, I appreciate that. And then I had a question about the price hike that you started in October. Was that like a 5%, 10% or somewhere around there or even more? What was the price hike you started?

For the testing, wafer testing for driver is around 5% to 10%. For assembly wise, it means we are going to refrain the gold price increase to the customer side, that will be around like 1% to 3%.

Okay. There was a fire at AKM recently?

Yes.

And does that help ChipMOS bringing more business?

Yes. Actually, we try our best to help them to pass this critical time period. And we will do our best to support the extra capacity they need. We don't make any comment for the single customer, until AKM makes a statement.

Okay. Now here's the thing that your revenue is growing, your free cash flow will be better than the previous year. And I know you're going to pay a little better dividend than in 2021. Here's my question about the value of your company. It's close to book and it's barely about 1x revenue. And I see Chipbond has about a 1.4 book. It's trading about at least almost 2x its revenue. What is management going to do about something like, let's say, share buyback? Because if your growth is coming and the stock is near the lows, what -- I mean 8150 has been listed in Taiwan for 7 years, and it's pretty much where it was. So my question is, any thought about buyback? And especially once you settle the sale of Unimos in China and you bring back cash, what is management thinking about that cash that comes down the road? What is management thinking about buyback?

Well, actually, we don't do any profitability in amount of both. We are also talking about this kind of subject. How can we reprice our fair market value and our share price. And first one is I think we will continue to deliver our performance. And there's stable cash dividends and then the shareholders can enjoy the higher premiums. I think that once we are going to be recognized, our share price will be increased. And you must -- that we don't do any possibility to increase in order to protect the best benefit for the shareholder.

What do you mean by repricing? I didn't understand that?

Means if we are going to continue to deliver a good result by quarterly basis and stable cash dividend policy, which is year-over-year is higher, 6% to 7% per year, I think that will be recognized by shareholder, and stock price should be improved. If they are not improved, then we have enough cash. We don't do any possibility to do something else.

Okay. Okay. You answered all my questions. Let me see if I have any more questions saved up. Let me see. Okay. So seasonality, Q4 and Q1 2021 is going to be better. There's a possibility of a higher dividend next year. Q4, everything is going to be up from revenue to margin, to free cash flow. Yes, that answers all my questions. Thank you so much.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. At this time, I'll turn the floor back to Mr. S.J. Cheng, the company's Chairman and President, for any final comments.

Yes. Thank you, everyone, for joining our Q3 conference call. If you have any questions, you can directly contact with our IR channel. Thank you very much. Bye-bye.

Thank you. Bye-bye.

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