AAC Technologies Holdings Inc
HKEX:2018
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AAC Technologies Holdings Inc
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[Operator Instructions] I would now like to hand the conference over to your host today. Please go ahead.
That's great. Good evening. Welcome to our 2018 first quarter conference call. I'm [ Eddy Gong ], Head of Investor Relations of AAC. And joining us today, we have our CEO, Mr. Benjamin Pan; and our Managing Director, Mr. Richard Mok.
Before we start, we would like to remind you some information you may hear during our discussion today may contain forward-looking statements. Actual results or trend could turn out differently.
I would now turn the call over to Richard for brief review of the results before opening up the call to questions. Richard?
Hi. Good evening. Thanks for joining us on the call today.
For the first quarter, although there was weak seasonality in smartphone supply chain, we reported strong year-on-year revenue and net profit growth, 10% and 6%, respectively, to CNY 4.6 billion and CNY 1.1 billion, respectively. Gross margin, although down 3.6 percentage points to 38%, and that is mainly due to a significant U.S. dollar depreciation against renminbi in the first quarter when we compare that in the same period of last year, given our currency mix of revenue.
Net profit margin is down less than 1 percentage point, 0.9 percentage point, to 24.3%. We have the benefit of mitigating that with fair value gain on our investments and favorable taxation achieved in the first quarter.
In this slide, the performance of different business segments are shown. And acoustic experienced strong growth of 27%, driven by acoustic specs upgrade cycle and, of course, our new SLS solution, which has already been adopted by a major flagship model launched during the first quarter. Although in the terminal haptics and radio frequency mechanical structures, sales had declined 11% due to some product mix factor. However, very good progress is going on in Android smartphones as they pursue advanced haptics for upgrading the tactile user experience. And we are also glad to report that high-end metallic frames and 3D copper glass solutions had already started shipping in the first quarter.
In optics, sales is on track to deliver the single digit of total revenue for this year. At the same time, there is increasing demand of the unique WLG hybrid lens solution. We will consider continue to expand production capacity for both the plastic lens and WLG.
Finally, for the MEMS microphone, in this quarter, sales was up 65%. Shipments growth, in line with our sales expectations.
The 27% increase in acoustic sales year-on-year was driven by both shipments and ASP growth of the speaker module. When speakers and receivers continue to operate a more complex design, which caused some migration from the standards of speaker module, and that's why, on a stand-alone basis, the speaker and receiver components shipment declined. Higher selling price of SLS platform, to some extent, explained ASP growth of the speaker module.
I would like to take the opportunity to reiterate 2 updates, recent updates that we posted and broadcasted last week. For the first time, Moody's has issued a Baa1 credit rating to the company, and the related outlook on the rating is stable, and we are very pleased with that. Also last week, we issued the sustainability report for the year 2017. We welcome feedbacks from investors and yourselves and other stakeholders. As usual, we are mindful of our commitment to further provide improvement and strong performance on initiatives we started on AAC overall manufacturing road map to become a responsible company. We welcome, and we will continue our efforts on that.
Now I think we are ready to open the floor for Q&A. Please raise your questions.
[Operator Instructions] Your first questions comes from the line of Cherry Ma from CLSA.
My first question is related to gross margin. Gross margin had not dipped below 40% since 2008. And external factors like currency is hard to manage, but product mix and product efficiency should be within the company's control. So I'm wondering which product or specific group of customers was the main contributor of this margin erosion besides FX. And FX aside, is this a structural change in profitability that we should expect in 2Q or rest of the year?
Cherry, this is Richard. Thank you for your question. We don't see any long-term structural changes to our cost structure as such. We believe our target and achievable gross margins on all our products platform, including the optics business. Again, we are aiming for them to deliver more -- up more than 40% gross margins. In the first quarter, on a year-to-year basis, renminbi has appreciated 7.5%. And that, on its own, has caused a 3.2% drop in gross margins. And -- but having said that, I think the second quarter, as of today, if we looked at how renminbi has performed since 1st of April to today, I think renminbi has remained quite strong. So to some extent, I think that there will still be a impact on the gross margins for second quarter. But nevertheless, the fundamental of our capability of delivering, achieving gross margins of about 40% in all -- in most of our business, we expect for the group, as a whole, definitely over 40%.
And to follow up to my first question, when we negotiate price with our customers, do we take this RMB strength into account when we negotiate a new pricing based on U.S. dollars?
To some extent, there are different kind of business arrangements when we look at the projects. So some customers, we would be discussing the business in renminbi and some customers in U.S. dollar. But nevertheless, I think the extent of appreciation or in the past, some depreciation of renminbi have been outside the kind of framework of the business arrangements. So it's a variable arrangement.
My second question is in optics. I would like to ask in terms of shipment volume of plastic lens. How was it in 1Q? And have we reached our 20 million monthly shipment target? When will we start mass production of hybrid lens? And what sort of specs would it be in our CapEx expansion plan for second half?
I think as we said and as we announced -- again, this is Richard. As we announced, and as we said in the past, we are progressing very well with the optic business in terms of both plastic lens and WLG hybrid lens solution. Our plan of preparing a capacity of 20 million pieces per month, I think we have reached that. And I think in the second quarter, we have strong confidence that, that capacity in the second quarter will turn into shipment. So that is very much on track. And the hybrid lens, I think as we spoke last time, I think in the third quarter, we will be shipping the hybrid lens solution, so that is not changed. And again, the company is confident that it will be start of a very important new capability, which the industry has been anticipating.
[Foreign Language]
Ben has added to give some numbers for the main shipment. I think for the month of May, we will likely to reach a range of 16 million to 17 million pieces in the month of May. And there's a very high probability that in the following month, in June, something close to 25 million may be the shipment that we are expecting. So the overall longer-term or medium trend for this year is that most likely, in spite by or in the third quarter, the capacity for plastic lens will be in the range of 25 million to 30 million. And whether in the fourth quarter we will consider further expansion along with our CapEx plan to increase capacity, say, to 50 million, that is something that we are ready to kind of pay attention. At the same time, in the next 2 months, we are seeing very strong, very steady progress in terms of building up the capacity and shipments. For WLG, the current reception, as expected, is very, very positive. The capacity each month reached 5 million. We are there. And possibly, I think, most likely by year-end, it will get to about 10 million per month. And in terms of project delivery shipments, mostly will take place in the third and fourth quarter. The important there is to build up our capability at this stage. But the long-term strategy, as we have said last time or many occasions, is that with the plastic lens, the focus definitely is for a 5P design. There will be small portions of 4P design. But the aim of plastic lens capability is really focusing on replacing the plastic lens solutions with WLG. Hence, whether we get to the 50 million capacity is really a kind of question of how much we could prove to the market that WLG is a long-term capability, and it's welcome by the market.
Next question comes from the line of Yunchen Tsai from Morgan Stanley.
[Foreign Language]
This is Richard again. Thank you for your question. I think what we like to say at the current stage is that the guidance for the 2018 sales most likely will be a double-digit growth on a year basis instead of quantifying, giving a number. But again, I think you're right in saying that because AAC business is not only concerned about the next 90-day cycle, we are in this for a long kind of building up our foundation for miniature technologies. Hence, it's more important for us to make sure the preparations and the business cycle are in sync, whereby AAC growth is on a sustainable, strong platform background. So on that, we like to say, obviously, this year, perhaps in some of the years before, a stronger second half would definitely be a -- would not be a unlikely -- I think would be likely pattern to see how our sales progress.
[Foreign Language]
Well, I think the -- as we said, the Android business in terms of the performance, not only in acoustic but in RF mechanical and haptics and, to some extent, we described a little bit about optics development for the Android models, I think those are very strong growth factor. So the percentage, I think, really, is a play out between how this progress in the second half of the year. But whether the split will be a very kind of market device, I doubt it. And maybe it's very kind of close device. But at this stage, I think it's too early to be certain to be able to give you a fixed kind of decision on what, which portion, but I think they will come very close to one another.
[Foreign Language]
Ben added that, clearly, with optics making a meaningful contributions to revenue this year and helped by extra 3D cover glass and haptics growth in Android business -- in Android's business segment, it's very likely that nonacoustic definitely would be a larger portion compared to acoustic, not only for this year but for future years trying to come on the developments of these 3 business segments. We expect nonacoustic to continue to be a larger portion.
[Foreign Language]
[Foreign Language]
Ben confirmed that he believes, from the numbers forecast, the shipment for this year should remain quite positive.
Next questions comes from the line of Narci Chang from JPMorgan.
[Foreign Language]
In the first quarter, we believe both the volume and ASP contributes to the growth. I think the volume growth is higher in terms of the speaker, especially what we call the speaker module. Definitely, it's a strong double-digit growth. In terms of ASP, I think it's a meaningful, okay, close, I would say, a lower double-digit growth in ASP. So each contributes differently, but both are very healthy, very positive trend.
[Foreign Language]
[Foreign Language]
Ben added that the WLG hybrid lens solutions that we are focusing for delivery in the third quarter, the first project is related to sensing, and after that, followed by various project related to imaging. And the imaging design mostly is what we call a hybrid lens 6P structure, whereby it's not a 6P, this is really what we call 1 graph 5P design. And we are on track to deliver.
Next questions comes from the line of Wei Chen from Goldman Sachs.
Yes, I have a question on gross margin. So you mentioned about 3.2% is due to currency, but can you kind of talk about how are the gross margin for each segment in the first quarter, and how do you see that moving forward?
Thank you for your question. Overall, I think in the -- we don't split up -- first of all, we don't split the detailed segments within the nonacoustic. But we are very glad to report that on a -- even on a quarter-on-quarter basis, the margins are very positive [ we made ]. There is no big changes to the margins in most of the segments we talked about. So really, the major cause for the overall gross margin drop is not due to one individual product line, it's more really just because of the currency mix and the appreciation of renminbi. And as we expand our capacity in optics, as we said before, the economies of scale, and we are on very steep learning curve. We are improving on the margins. Again, the different projects we are -- will have different kind of performances. But overall, we are definitely approaching our target to continue to improve the gross margins and focusing on the related, what we call, production yield, et cetera. And in the third quarter, those are very, very healthy. There is no adverse kind of problem we see in any one of the product lines.
Okay. And [ from what ] specifically -- can you talk about the pricing dynamics for -- from -- for acoustic from competition perspective? Because there's a lot of rumors on your new entrants really offering very low pricing. Also, with the higher mix of that sales structure, how does that kind of impact our acoustic gross margin?
We have already reached a very high automation kind of process for the new platform, SLS. And again, we are quite happy. We are quite pleased that our production teams, people are delivering very, very good results in terms of yields, in terms of gross margins for the SLS platform. So we have high hopes to see that would actually make a strong positive contribution to the overall gross margins of dynamic components as such. Especially in quarters to come, we are going to continue to penetrate the other first-tier Android models as well. But at the same time, I think it's also fair to say we are also ready for stronger penetration in the mid-segment design phones, whereby there is again no reason that AAC should see any erosion in the gross margins of stand-alone speaker or receiver. And in terms of price kind of pressure or coming down, I think AAC is very, very accustomed to price down pressure. But continuously, our automation, our already invested automation lines should be able to help us to achieve the margins we are seeking. And hence, right in the beginning of this call, both myself and Ben has reiterated the gross margins of not only AAC as a whole but also our acoustic business segment. We should not -- we do not see any strong reason for why we would not be able to deliver a 40% plus gross margin.
Got it. So one last question. Just to clarify, when you -- on the previous question on the full year year-on-year growth, the previous guidance was at 25%, and so what's the latest outlook? And what really drove the more cautious tone versus beginning of the year?
I said for 2018, we are forecasting a double-digit top line growth year-on-year basis. I think we have reported a 10% top line growth in the first quarter. We continue to work on improving kind of the penetration of SLS platforms, improving the optics contribution, et cetera. But I think, overall, there have been some kind of adjustments to the projects, adjustments to the forecast by our customers. I think, as a good practice, we should be updating the latest business environment and the situation. Hence, we are still very confident that this year is a growth year, whereby our gross margins should remain. Again, new segments of optics should be going on as planned. The further improvement in the mechanical business with the shipment of 3D cover glass should all help us to be able, realistically, to deliver a double-digit top line growth. So that is for sure.
Next questions comes from the line of Kyna Wong from Crédit Suisse.
I have a follow-up question on the hybrid lens. May I ask, actually, if Richard -- or could you like quantify like how many projects that will adopt hybrid lens or there's some potential to adopt? And what's the -- when the progress versus the plastic lens business? I mean, in the plastic lens, we see the [indiscernible] progress is quite smooth, and the pickup is very strong since last year. And what should we expect for the hybrid lens this year and next year in terms of the run of patent? That will be the first questions. And the second question is about the haptics solution. What's the future development in terms of haptics solution in smartphone or in other new business [ that we see ] -- I mean, we should say there's no ceiling for the haptic at this moment, or you can see more innovative design that will come in because haptic is one of the very strong and leading products for AAC.
Thank you for your question. It's Richard. On -- in terms of the numbers of projects of hybrid lens that we are targeting, we believe around 5 to 6 possibly in Q3 and Q4. But definitely, as we have said, the capacity we have built, we should not be committed to deliver shipment or shipment deliver number, whereby our capacity could not meet customers' requirement. So in a way, definitely, we also discuss about increasing the capacity to 10 million pieces per month by the end of the year. So that very much give us the additional flexibility to catch on new projects if there are customers kind of follow up on good reception, which we do expect very good reception on the hybrid lens capability. As Ben has pointed out, we already have 3D sensing project and also imaging project. I think the very kind of interesting optical performance of hybrid lens with WLG is very well -- not only kind of reviewed but actually tested. And it's in a very kind of solid road maps of user experience and design in new models to come, not only for this year but models to come, and hence, the exciting user experience that WLG can bring about. I think, similar kind of characteristics for haptics, for Android as well. Recently, I think that the industry has received strong, enthusiastic kind of reception when smartphones are turning into specialist smartphones for game players, whereby haptics user experience plays a very interesting, innovative, a must-have feature for these game design smartphones. And the -- and through that, we believe the user experience, whereby the advanced haptics solutions that AAC is so strong held in IP and also in our manufacturing, we could quickly accelerate the adoption of those design in the Android phones. So we talked about a target of 30 million to 50 million shipments for Android phones this year. We remain confident of delivering that. And again, I think you can see the range, there's a flexibility, and -- but definitely, from the current dialogues and interaction from the customers, we are confident that the haptics kind of adoption of the advanced user experience again is only a first phase in the Android segment.
[Operator Instructions] Next questions comes from the line of Alice Chen from UBS.
[Foreign Language]
In fact, the performance in acoustic gross margins, what we call dynamic components, there is -- really, just in terms of -- if we look by line-by-line basis carefully, our speaker module has performed very well due to the contribution of the new platform and the existing kind of efficiency on a design that we are very familiar with. I think there may be a slight kind of impact from receiver, but there is a very small impact on margin. And the major really impact is on the renminbi appreciation.
Okay, got it. And my second question is about acoustic growth. Just want to clarify that. Benjamin just mentioned, for acoustic, growth may be lower than the non-acoustic part. But I remember last time, we still expecting the acoustic growth could be still driven by these advanced design. So just want to make sure if the story of these upgraded site for acoustics deal intact in the next maybe 1 to 2 years.
Yes, I think what Ben was transmitting is not the growth as such. I think both Ben and myself are very confident that not only SLS, but our acoustic kind of upgrade cycle is very strong. We are in the beginning stage of a acoustic upgrade cycle, and the growth is very, very interesting. I think when we discuss about the portion of the business, nonacoustic and compare that to acoustic, we believe that optics and RF Mechanical and haptics have got very strong business foundation. And because those 3 add together is most likely -- they're not only for this year but for years to come, will be a bigger portion than acoustic. But in terms of growth, we have meant to say strong growth in acoustic and very, very exciting growth in the new optics business contributing to the growth of nonacoustic as well. We didn't mean to say acoustic has slowed down at all. I apologize for confusion. But no, acoustic, very strong growth, operating cycle. SLS will contribute. We are preparing for the second generation of SLS. We are also targeting -- we have solutions for improving penetration in the mid-segment as well as, to some extent, the lower-end segment of smartphones with AAC acoustic solutions.
Next questions comes from the line of David Dai from Bernstein.
[Foreign Language] I have 2 questions here. The first question is regarding the metal casing 3D glass -- cover glass. Could you give outlook about the -- in terms of the unit shipment and ASP? How does it look as compared to last year?
This is Richard. We believe, first of all, as we have said, our CapEx in this RF Mechanical structure for this year, 2018, is very minimal as we believe our capacity planning or the related CapEx machinery we have already invested in the last 2, 3 previous years already. So with that in mind, we believe what we are talking about is a higher utilization of our CNC and related production capacity to be more efficient in terms of shipments, whereby we are still expecting to deliver something like around 4 million pieces per month in terms of what we call mechanic frames or cases at capacity, fully utilizing or improving the utilizing of our 7,000-plus CNC machines. And we are on target to, again, fully expanding our 3D cover glass capacity step-by-step, gradual because the trend of more 3D cover glass design is very strong. Last year, we reached 3D cover glass 1 million per month capacity. I think most likely, during this year, we should be aiming to double that kind of capacity. So with that in mind, the overall segment for RF Mechanical structure, definitely with the incremental contribution by 3D cover glass, it's in a strong growth. And in addition, we expect our gross margins performance to further improve in this segment because of the fact that we have already kind of worked with most of the Android phones last year already. We fully understand our customer. Our customers understand how quickly, how responsive AAC is. We further improve on the management process, focusing on news, looking, focusing on potential kind of steps in automation between processes. There is no reason again that we should not be able to deliver the improvement on gross margin of the mechanical structure business.
The second question I have is, from the presentation, you mentioned that you're exploring new opportunities in smart vehicle, AR/VR, IoT and robotics. Could you give some examples of what kind of opportunities are there? And also, are these opportunities that we can potentially see the results in the next -- in the near term, say, like 1 to 2 years? Or is it more for long term, 3 years or 5 years?
Yes. Thank you for helping us to talk a little bit more about this kind of initiative. Breaking into a new industry definitely takes time for new customers or projects to realize how important the miniaturizations of hardware in order to integrate with new products, not only in the household smart speaker, VR/AR but also more importantly, to some extent, smart automobiles, as the industry is developing very, very fast. I would say, the cycle of developing smart automobiles have to be quicker than the cycle in the traditional automobile. And hence, with that kind of environment, the miniaturization capability, for example, we talked about SLS platform, we talked about designs that AAC already are thinking how we should make use of what we call the form factor, but bear in mind, the performance required by these clever designers in the smart vehicles, how they should kind of think of AAC capability in turning out customized solution. Although I must stress, these are early stages. It's very, very important that AAC understands, at the same time, for customers, potential customers in this new industry appreciates our R&D but also our manufacturing capability for kind of responsive in terms not only in the performance of each segment but in terms of the different kind of variations and the potential changes, et cetera, AAC should be ready. And at this time, when we mentioned this, we are in the preparation stage. By no means we are seeing -- we are ready to see a big contribution in our revenue. But most importantly, I think this is something that we started. And so far, active interactions with new potential kind of market players have been very positive, have been healthy. And we will continue to report and talk about this. And I think at the end of the day, I think differentiation of what capability that AAC could bring to miniaturization in acoustics, in the optical sensor, in the haptics design, which gives the user experience required in this new segment, is something that AAC understands very, very well. And I think both Ben and myself and our sales/marketing team are working very hard on this to make sure this potential is captured at a early stage.
Next questions comes from the line of Kylie Huang from Daiwa Capital Markets.
This is Kylie from Daiwa. I have 2 questions here. The first question, I just want to clarify, Benjamin mentioned actually the business contribution from the nonacoustic will be still higher than acoustic this year. And given, it seems acoustic actual growth still very strong. So I want to clarify, in terms of nonacoustic between different segment like haptics, RF Mechanical and optic, each business will still have a growth this year? Or some business actually will be more flattish to offset the other segment growth?
Yes, this is Richard. I think when we talk about the growth kind of trend from each of these segments, clearly, in the first quarter, acoustic has done very well. But we are very confident, we are pleased that the SLS platform will continue to contribute to a very good growth in this year. But nevertheless, I think in -- for example, in optics, we are starting from a very low base compared to last year. And we are expecting optics to deliver a single-digit contribution to our revenue. And again, we have some numbers that we talked about for the haptics shipments for Android phones. I think they will -- it will play a very important part in contributing to the growth of haptics for Android phone, not only in second half but in the second quarter and thereafter. So we are expecting the non-acoustic segment kind of business to have a more kind of, what we call -- [ given new ] growth achieved throughout this year. Whereby at the background of that, acoustic growth can be kind of more project, customer-related. But overall, we are seeing double-digit growth of the whole company should be contributed in that kind of proportion. Whereby at the end, by the end of this year, we should see the combination of 3 business segments kind of add together awaiting the acoustic.
Okay. My second question is about pricing environment for the optics. Could you give us an update about the plastic right now, planned date pricing? And also, for the hybrid lens, given it's likely we will start to have shipment in second quarter or third quarter, could you also give us an update most likely pricing ahead?
We already -- as we have said, we already started hybrid lens shipment last year. In this first quarter, we continue to be improved and recorded more businesses. So far, we have not seen -- I think it will be confirmed by analysts and yourself, there have been no kind of significant price drop or price changes to plastic lens solution. And we don't expect to change in the short term, whereby I think the plastic lens is still very much in demand. It's all about supply coming up with good quality, good yield, et cetera. And AAC is very well positioned to deliver that. I think, for hybrid lens solution, before, we have kind of quoted something around a USD 2 range for hybrid lens solution. We are sticking to that kind of price level.
Last questions comes from the line of Laura Chen from BNP. Your last questions comes from the line of [ Brian Li ] from BMV Capital.
Just want to have something to follow up. Just want to clarify that -- so the slower growth is actually coming from haptics volume or ASP? Can you give us some color on -- in terms of the volume or ASP change? And in terms of the Android haptics, does that also contribute towards the margin decrease on the haptics sector? And lastly, the final questions come -- is there any decision from the management thinking of applying hedges on the FX to smooth out this FX difficulty that we're experiencing this sector, this quarter?
This is Richard. Thank you for your question. But at the moment, we have not split out the markets by haptics or by RF Mechanical because I think we are not at the stage to be able to do that yet. Nevertheless, as we said, in the Androids, in the haptics solution for Android, it's becoming more sophisticated. As the performance becomes more kind of specific, the ASP for the Android haptics solution has been on an increasing trend. And we expect that continue because from the previous design to a, what we call, fixed axis, there's no reason for ASP to drop. And correspondingly, we have shared before in many manufacturing process and in the design, the haptics component is very much a electromagnetic kind of design component, whereby AAC is very strong in terms of design and also in the automation process. Again, we do not expect any variation to our good, high gross margins that we can achieve for this haptics, especially in the new Android business and this [ advanced solution ]. But you asked about potential hedges to renminbi appreciation. I think, at the moment, there is not much a kind of perfect solution for that. As -- I think as we have maybe have -- and not to repeat, previously, when [ we have seek ] kind of what we call borrowing facility, when we faced with a floating interest rate situation, we have used what we call fixed-rate swap to kind of tie down the cost of borrowing. Whether we would continue to do that, I think that depends on whether there will be new kind of facility that the company enters into. But I think it's a situation that myself, as in charge for the financial aspects of the group, will seek internal review and also professional advice on this matter. Again, as you understand, hedges only work in one way, and it's still a kind of risky kind of instrument. As we have said in the past, we are not very comfortable. And in the past, we have not [ abstain to ] any speculative kind of financial instruments. That's all. But when we have a very clear picture of how exchange rates evolve, to some extent, it will be my job to consider that.
Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to the host today for closing comments.
We are focused on the development of the different business segments, and we [ are devote to ] depreciation and increase the return of shares [ there] and focusing on our [ development ] growth. Thank you all for joining us today. We will speak with you again at [ 22nd ] of August for our second quarter results of 2018. Thank you. Good day.
Thank you for your participation, and this concludes today's conference. You may go ahead and disconnect.