Lite-On Technology Corp

TWSE:2301

Earnings Call Transcript 2023-Q1

[Julia Wang, executive]

Dear investors and friends from the media. Welcome to LITEON Technology's 2023 Q1 physical and online earnings conference. In addition to explaining Q1's operating results, we also hope that everyone will better understand LITEON's growth strategy after completing many operational adjustments and transformations in recent years. Our meeting will begin when everyone is seated.

Today's agenda consists of 3 parts. I will first explain the results and financial performance of Q1. Next, President Anson will explain the company's operating outlook and growth strategy. The Q&A session is open for questions and further explanations.

For those who are here for the first time, this page provides you with an introduction to the 3 major business segments: Opto-electronics, semiconductors and auto electronics; Cloud & AIoT, including products used in data centers, servers, networking equipment, AI, IoT, et cetera; ITCE, including products used for notebooks, workstations, desktop computers, game consoles, et cetera.

LITEON Technology's net sales in Q1 was TWD 34.2 billion; gross profit, TWD 6.4 billion with a gross profit rate of 18.8%; operating expense, TWD 4.27 billion with a rate of 12.5%. The operating profit was TWD 2.15 billion with a rate of 6.3%. In Q1, there was the impact of structural adjustment of the consumer electronics industry.

Excluding the imagery BU already disposed of in Q4 of last year, the net sales decreased by 15% Q-o-Q and 12% Y-o-Y. However, our high-value, high-growth businesses such as cloud computing power supply, automotive electronics and 5G networking products saw their net sales continue to grow Y-o-Y.

Gross profit benefited from the improvement of product and customer mix as well as optimized operating efficiency. The gross profit rate increased by 1.7 percentage points Y-o-Y. Operating expense decreased by 16% Q-o-Q and increased by 4% Y-o-Y. The increase mainly comes from R&D investment. In Q1, R&D accounted for 5.5% of net sales, and the amount increased by nearly 20% Y-o-Y. Among the R&D, cloud power supply and automotive electronics accounted for a higher proportion.

Operating profit was affected by the decline in business scale with a decrease of 35% Q-o-Q and 28% Y-o-Y. Other income was TWD 820 million; profit before tax, TWD 2.98 billion; profit attributable to parent, TWD 2.35 billion; and EPS TWD 1.03 with an annual increase of 12%.

On the left, you can see that since Q1 2020, the net sales of the Cloud & AIoT and Opto-electronics segments have grown year by year. In Q1 2023, the combined net sales of them were nearly TWD 20 billion. Although slightly lower Y-o-Y, the CAGR in the past 4 years is nearly 12%. In the core applications of the Opto-electronics segment, such as photocouplers, net sales in Q1 fell by 7% Y-o-Y.

The net sales from the high-end photocouplers continued to increase Y-o-Y, but those of general purpose products were affected by a decline in industry demand. Auto electronics increased by 2% annually. The annual growth rate of AIoT and the Cloud & AIoT segment was 3%, mainly from 5G small base stations and networking products. Cloud computing power supply grew by 16% Y-o-Y, mainly from new generation system products, with the improvement of industrial specs. High-voltage, high-efficiency and high-density cloud-computing power supply continued to grow.

In Q1 2023, the 2 major segments of Opto-electronics, including auto electronics and Cloud & AIoT, accounted for 58% of total net sales, an increase from 52% Y-o-Y. LITEON's business model is actively transforming towards the goal of 4-3-3: 40% of sales from ITCE, 30% from Opto and auto electronics, and 30% from Cloud & AIoT.

The 3 major business segments were affected by the structural adjustment of the industry showing an annual decrease in net sales. Cloud & AIoT benefited from the increase in the proportion of integrated system products. The gross profit rate of high-end products exceeded 25%, and the operating profit was TWD 790 million, an increase of 14% compared with TWD 690 million Y-o-Y.

In the Opto-electronics segment, component and module products account for a high proportion, thus impacting more on net sales and profit due to weak demand from end customers. The gross profit rate of high-end products exceeded 30%, and the operating profit was TWD 480 million. ITCE is excluding the businesses disposed of.

In Q1, net sales decreased by 18% Y-o-Y, thanks to the increase in the proportion of high-end products and optimized operating efficiency. Among them, the gross profit rate of high-end products was over 80%, and the operating profit was TWD 1.89 billion, and the operating profit rate increased by 3.5 percentage points Y-o-Y.

On our balance sheet, among our current assets in Q1, accounts receivable decreased by TWD 7.7 billion Q-o-Q, inventories down by TWD 2.4 billion Q-o-Q. In current liabilities, bank loans down by TWD 11.8 billion Q-o-Q and accounts payable down by TWD 7.1 billion Q-o-Q. For working capital management, including accounts receivable, accounts payable and inventory levels, the number of days of inventories decreased by 3 days Q-o-Q, and the cash cycle improved by 5 days, reflecting the improvement of working capital management.

Through active working capital management and free cash inflows from operating activities, the net cash position was TWD 56.8 billion, which is helpful for the future improvement of operating performance and investment and growth of core businesses. Shareholders' equity decreased by TWD 4.6 billion Q-o-Q due to the dividend payable of about TWD 7 billion declared in Q1, which is the main reason. The BVPS increase from TWD 31 to TWD 33 Y-o-Y, indicating that the intrinsic value continue to increase.

In recent years, LITEON has continued to implement the transformation and growth strategy. From the perspectives of product mix, operating model and profit structure, we are already a completely different company. On the other hand, we increased the output value and profit ratio of high-growth high-value businesses with active working capital management and optimized invested capital and operating efficiency.

ROIC increased from 15% in 2018 to 28% in 2020, and further increased to 43% in 2022. It also reflects that the profits and returns generated from core businesses have created the resources we need to continue to develop new businesses.

Finally, a quick operational overview for Q1 2023. The net sales in Q1 were TWD 34.2 billion mainly from cloud computing power supply, automotive, electrics and 5G networking products businesses. Gross profit rate increased by 1.7 percentage points Y-o-Y to 18.8%, benefiting from the improvement of product and customer mix as well as optimized operating efficiency.

In Q1's operating expense, R&D investment accounted for 5.5% of the net sales with an annual growth of nearly 20%, focusing on investment in cloud, auto electronics, 5G and new businesses. The net profit after tax was TWD 2.35 billion, and the EPS was TWD 1.03, an increase of 12% Y-o-Y.

The Q4 2022 ex dividend was on March 16, and the dividend was paid on April 21. Last year, the cash dividend per share reached TWD 4.5 with a dividend payout ratio of 73%. The annual shareholders meeting is expected to be held on May 17, 2023.

This concludes the key financial report for Q1. I'm now handing over to President Anson, who will explain the company's operating outlook and long-term growth strategy. Thank you.

[Anson Chiu, executive]

Thank you, Julia. Good afternoon. Thank you for being here today, everyone. I think there are some key messages that I would like to share with you in today's earnings conference. First of all, I believe that from the beginning of this year, everyone was already concerned about this year's economic situation.

After 1 quarter, I believe that everyone has seen that some industries are indeed in a headwind situation, which has affected some of our company's operating tracks. However, although our net sales are under some short-term pressure, just as what Julia told you, the gross profit rate continues to grow Y-o-Y.

This means that our operation has also been continuously improved over the past few years, which also allows us to still have sufficient capabilities to cope with the drastic changes in the external environment. At the same time, it also accelerates our development on the new tracks of development.

Over the past period, I have often been asked by friends about the future development of generative AI and what opportunities our company has in the future with this trend. I especially asked our colleagues to sort out our views for your reference, but I have to emphasize that these are our own views and opinions. For your reference, you can see them on this slide.

There are 2 key messages that I would like to deliver to you. First of all, with the increase of cloud computing power, the requirements for the power and density of future power supply will be higher and higher, so the difficulty of product design will be relatively higher in the future.

Second, because of the increase in power, heat will naturally increase and the heat dissipation solution of power supply also becomes an important issue to tackle. But even though it is an issue, we also see future potential business opportunities.

In Q1, we clearly felt that the demand of clients in this area was gradually heading up. This is something for your reference, in terms of generative AI, the situation that we see and our views and opinions. In addition to the cloud computing market where we still maintain growth, the networking products market also performed well in Q1 for us, especially in the 5G small base station market.

With the pandemic gradually subsiding, some progress has been made in the European and Japanese markets. Although it seems that some ICT and consumer electronics industries are still at the bottom, we are optimistic that this year will show a trend of quarterly growth.

Julia also just told you about the growth of our ROIC since 2018. We see that in 2018, our ROIC was 15%, and in 2020, it became 43%. The profits and returns from our core businesses have steadily created the resources needed to develop new businesses. When we look forward, we expect to start more strategic investments in new businesses and continue to improve their operating efficiency so that long-term ROIC can achieve both stable growth and sustainability.

Finally, what I want to share with you is the company's long-term growth strategy. In terms of the proportions of existing businesses, we will continue to move towards the direction of 4-3-3. I'm sure that you are already familiar with this.

In other words, our opto auto electronics, 5G, AIoT and cloud computing are still the main accesses of short-term growth of our company, but in the future, we will focus on the development of ESG and on IoE, Internet of Energy, in the management of new energy, including energy storage, energy transfer, energy control and energy saving.

We will make long-term development goals in the 3 major areas of green data center, clean mobility and effective infrastructure. We look forward to fulfilling our corporate responsibilities to society and environmental protection while developing new businesses so that the future world will be a better place because of our efforts.

These are the messages that I would like to take this opportunity to briefly share with you. Thank you so much.

[Julia Wang, executive]

Thank you, Anson. Now we move on to the Q&A session. We will provide further explanations.

[Cheng-Tai Lee, analyst]

Management team, I'm Tai Lee from KGI. I want to ask you, you mentioned this year's outlook gradually going up. And I want to know, well, it was mainly IT that dragged things down in Q1. So what is the recovery like in Q2? And what is your current visibility?

[Anson Chiu, executive]

Okay. In Q1, there are 2 factors: first of all, the Lunar New Year and the fact that the number of working days in February is lower. So traditionally, Q1 is our low season, especially in terms of consumer ITCE products. This is the trend -- this has been the trend for many years. So the performance in Q1 was weaker.

But what's also special about Q1 is that we found that when the market inventories were being adjusted, we only started to react strongly in Q1 because -- well, the reason is simple. The Lunar New Year takes place in January and in February, and last year, there was a serious shortage of materials.

So from the perspective of clients, they were worried that if they adjust inventories too early, then it would impact the supply chain too much. So we feel that it wasn't until after the Lunar New Year that they started to adjust inventories. In terms of consumer ITCE products, we think that in Q1 and Q2, things are more conservative.

As for the other sectors such as servers and cloud computing, if you look at Q1, the performance was not good, but it wasn't bad. It was normal. And from our perspective, in Y-o-Y terms, there was still a double-digit growth. Of course, you may expect to see a higher growth than -- our numbers are not particularly high in this regard. Basically, it follows the market trend.

As for Q2, as the number of working days increases and as servers and auto electronics recover, we are quite optimistic about our performance in Q2, which may probably surpass that of Q1. This is quite certain. But of course, in terms of ITCE, in Q2, things are still quite at the bottom. This is how I would like to respond to your questions.

[Cheng-Tai Lee, analyst]

Could you be specific about when LITEON competes with competitors, what are the advantages of such products? And for this year and next year's growth momentum in LITEON from AI, what is your take on this?

[Anson Chiu, executive]

I think we mentioned a while ago that in terms of AI power supply and in terms of our product design advantages, if we look at mid-high power or above 3,000 watts, then we don't really have that many competitors. In Taiwan, there is only one. I'm sure that you are clear about this. And in worldwide terms, you may also know that we are the second largest in terms of power supply.

Our advantage comes from our 40 years involvement this sector, which there are 2 things that make us superior than our competitors in the sector: first of all, power density, because as you know, as power increases, more space is needed, but our clients don't give us more space, so we have to figure out a way to make things smaller.

Power per cubic inch, therefore, becomes a very important index. As voltage goes up, the demand for density also increases. Second, power supply efficiency or conversion efficiency. If you look at market specs, the demand is getting higher. We have to achieve 97% of conversion efficiency, and we will soon be able to achieve 97.5%, actually. So these are 2 major advantages that we enjoy in this sector.

As for AI's impact on our future growth, I'm sure that it will be beneficial. First of all, as power increases and voltage increases, the ASP will also go up. This is the first phase. Second, the market is still booming. So in terms of future impact, no one can be 100% sure. But if we look at clients' forecast this year, we will have the opportunity to increase the demand by more than 50%.

This is the current situation. And as for next year, then we will have to wait until the situation is clearer before we can give you more concrete answers.

[Unknown Analyst]

I want to ask you. The OP margin of Opto-electronics dropped so much. Why?

[Anson Chiu, executive]

Well, there are 2 major parts in this segment: Opto-electronics semiconductors and auto electronics. In Q1, we see that Opto-electronics semiconductors were quite at the bottom. And as for auto electronics, the demand was weaker in Q1. There were also some revisions in EVs. And in Julia's data a while ago, we saw that the proportion remained the same. It didn't go down, but it didn't go up either.

[Unknown Analyst]

I want to add to that question. He asked about the OP of Opto-electronics. I want to ask about the OP margin of cloud because over the past few quarters, it's still at a lower level. And after all, this is a sector for long-term development, which requires a larger scale of net sales. So when do you think will it be able to achieve the corporate average of OP margin?

[Julia Wang, executive]

Well, I think in Cloud & AIoT, we can clearly see that if we look at the product mix in this segment, the profit and growth mainly come from cloud computing power supply. And in Q1, power supply's net sales grew by 16%, which surpasses the entire AIoT. So that's the locomotive of net sales growth. Second, as we explained, high-end products' gross profit rate surpasses 25%.

So the net sales and profit are relatively higher from this segment. Even though in Q1, there were some seasonal factors, things were lower, but compared to the same period last year, the operating profit grew still by 14%. So in Q1, despite the structural adjustments in the industry, the operating profit still managed to go up.

And as Anson mentioned, that we estimate that in the second half of this year, as high-voltage new platform system products are launched, our ASP and margin will continue to go up. So this year, in the Cloud & AIoT segment, our estimation is that the second half of this year will be better than the first half.

[Unknown Analyst]

Mr. President, I want to ask you about EV charger products because during the last earnings conference, you said there would soon be new products launched. So what's the current situation? And what is the future road map? Second, in terms of EV chargers, what is LITEON's market strategy? And how do you compete with Taiwanese and international peers?

[Anson Chiu, executive]

Okay. Well, previously, we explained to you that in the past, we focused on Level 2 or wall-mounted AC chargers. And in this market, in North America, we have a market share of more than 20% already. And this year, we will officially launch the first-generation 30-kilowatt DC charger.

And we don't just have 30 kilowatt. It's more like a module. If today, we can do 30 kilowatt, then in series, we can achieve 60 or even 180 kilowatts. So these, depending on clients' needs, will gradually be launched. We believe that on the market, the mainstream right now is under 180. So for the short run, our focus will be this range, under 180.

For above 180, that will be our next step, depending on the market needs. As for our EV charger strategy, well, I think car manufacturers or local EV service providers or other operators or utilities companies, all of these are our potential clients. We don't specifically discriminate against any one of them, but right now our main focus is on EV service providers and also car OEM brands.

These are our main focus right now. And we focus on the North American market right now. And this year, our AC and DC solutions may be expanded to Europe this year. So in terms of DC and AC charger business, the market size will expand. So the CAGR will be quite high over the next 2 years. If we can seize this opportunity in the next 2 years, then this business will enjoy very positive performance.

[Unknown Analyst]

I'm Daniel from Citi. Over the last few years, we've seen that the gross profit rate has been going up thanks to product optimization. So I want to ask you about the proportions of the 3 segments. You've been saying that the ultimate goal will be 4-3-3. So I'm curious about does it mean 40% for ITCE and 30% for Opto-electronics and Cloud?

If that's the case, right now, cloud is already beyond 30%. It's 36% already, and Opto-electronics, right now is 22%. It will go towards 30% in the future. So when they go beyond 30%, do you strategically lower them? Or you grow net sales to move towards 4-3-3 in the end?

[Anson Chiu, executive]

Well, your understanding about 4-3-3 is correct. For ITCE, we hope that in terms of our net sales, it shouldn't be too high. Because in Julia's report, we see that its GP compared to the other 2 segments is lower. But at the same time, it's a good business. It's not a bad business. We hope that in the future, the 2 segments of Cloud and Opto-electronics can achieve 60% combined.

But the percentages are just conceptual. These 2 segments have a higher GP compared to ITCE, so we want to invest more in them so that they can grow faster so that our overall gross profit can remain at a relatively higher level. This is our original intention. We don't lower them deliberately. If they can achieve 70% or even 80%, that will be even better.

[Unknown Analyst]

I want to ask about the 30 kilowatt DC charges. When -- in which quarter will they start to contribute more? And what is the shipment growth target this year?

[Anson Chiu, executive]

I think in Q4, we will have a chance to see some net sales coming from that. Any other questions?

[Unknown Analyst]

Sorry, just a follow-up. In Q1, the expense rate was slightly higher. So for the next few quarters, what are your thoughts on the expense?

[Anson Chiu, executive]

In Q1, just as Julia said, in Q1 compared to last year, the expense was higher mainly because of the increase in R&D. I also explained to you a while ago that we are going towards 4-3-3. So for cloud, Opto-electronics, 5G, AIoT and auto electronics, we continue to invest in them. But right now, the net sales have gone down a little bit.

So -- but in order to effectively manage the capital and resources invested over the next 2 to 3 quarters, we will something like an investment counsel mechanisms. For these new tracks and resources and investments, we will have more stringent review.

And when there is more headwind in the environment, we can make the best use of such resources so that they can lead to better results rather than investment only for investment's own sake and keeping maximizing investment as a result.

In terms of percentage, as we said, ideally, our R&D should achieve 5%, and in Q1, we already had 5.5% because the net sales were down. Ultimately, we want to move into this direction of 5% for R&D, and this should be our management target for the rest of this year.

[Unknown Analyst]

Mr. President, you mentioned that the operation performance is going up and Q1 was at the bottom and Q2 will be better than Q1. So I want to know much will be the growth? Because last year, the net sales baseline in Q2 was higher. If we look at H1 this year and last year, could you give us some guidance?

My second question is you said that for new businesses, there would be more strategic investments. So what are the focused applications? And in previous years, the CapEx was between TWD 5 billion and TWD 6 billion, such as last year, but now with the headwind, is there any CapEx pending?

[Anson Chiu, executive]

Well, in terms of the situations in Q2 as opposed to Q1, I cannot give you concrete numbers about that. This is something that we cannot be certain about. But as I said a while ago, Q1 was worse due to 2 reasons: first of all, economically, it was in a throw period, and there were fewer working days. But these factors don't quite exist in Q2, so this is a positive sign.

In addition, in Q2, cloud performs pretty well. It's been heating up gradually quarter-by-quarter. And networking products in Q2 has quite high demand. And in Q1, auto electronics was not good, but right now, the demand is coming back as well. With these 3 factors combined, we believe that Q2 will be better than Q1. These are the main reasons.

And you mentioned H1 versus H2. Well, in the past, in our industry, normally, the ratio was 45 to 55 H1 to H2, but the pandemic disrupted this normal tempo. Last year, H1 turned out to be better than H2, but I personally think that when the pandemic is subsiding gradually, all this consumption behavior will return to normal. I think this should be the case.

But internally of course, if the economic situation is worse this year, then we will have a worst-case scenario of 50 versus 50. This is the worst case scenario, and we will adjust and adapt accordingly. We take that into consideration. If we want to use 50-50 as our guidance, then some CapEx may be pending in order to reduce our expense, so this will be our necessary management measure. This is my answer.

[Unknown Analyst]

[indiscernible] from Merrill Lynch. I have one question for you. I looked at last earnings conference, and at the time, you said that there will be Y-o-Y growth for this year. But right now, Q1 turned out to be worse than expected. And in terms of ITCE, the demand recovery has been postponed, so I don't know if you still believe that this year there will be Y-o-Y growth or there is some offsetting?

[Anson Chiu, executive]

Well, regardless of the other factors, I think for this year, because of the situation we saw in Q1, we made some revisions. We think that this year, we will probably remain at the same level as last year. And if that is the case, then last year, about TWD 10 billion net sales came from [ RMC ]. So this year, if we remain at the same level, it means that there is still growth of TWD 10 billion in terms of net sales. So this can be used as a reference.

[Unknown Analyst]

Sorry, Mr. President, I asked about new businesses and strategic investment. What are the focus areas?

[Anson Chiu, executive]

Sorry, I forgot to answer this question of yours. In the messages that I gave you at the beginning, I said that in the short run, 4-3-3 would be the strategy to pursue. So in the short run, in terms of cloud computing and auto electronics, these are the areas where we invest a lot. By short term, we mean 1 to 2 years. But in the long run, there is some other investment.

But if we look at H2, we are moving towards IoE and energy management efficiency for our investment. And under IoE, there are different areas. We mentioned, first of all, green data center; and second, clean mobility. Mobility means automobile. So they are data center and automobile. And thirdly, infrastructure which is what I talked about as micro grid. So both hardware and software are included, and these are where we are investing heavily.

[Unknown Analyst]

Mr. President, I want to ask you, over the past few years, the gross profit rate has been going up annually thanks to strategic transformation. And this year, are you confident that this goal can still be achieved?

[Anson Chiu, executive]

Well, I can use a metaphor to answer this question. When we improve our body quality, the quality remains there. So in the past, we were trying to improve our operational quality, and now the quality has been established. Our goal is not to achieve 20%, 25% and then 30% of GP. That's not what we want.

We hope that once we achieve a GP of 20%, we want to stay there and move towards 23% gradually. But when we increase our GP, the goal is not to make more money via OP, but rather when we increase our GP to 23%, we can have a few percentage points to be used for OpEx investment, because any new business requires large amounts of R&D investments.

So the money we make can be transferred to OpEx. So OpEx will also increase as a result, but our company's goal remains the same. Our GP increases, and we want to also increase OpEx investment and the GP. We want to keep it at around 10%, at least. This is the goal that we will try to pursue in the future.

[Unknown Analyst]

[indiscernible] from [indiscernible]. I want to ask you about the progress of the plant in the United States.

[Anson Chiu, executive]

Okay. I think previously, I told you that the location is in Dallas, Texas. The plant is ready. Last time, I explained to you that there are 2 production lines over there. The first is automobile EV chargers, including DC chargers in the future, perhaps; and second, we have been emphasizing that there is something very important for cloud in the future, which is BBU plus PCU.

This will also be produced there because of that battery. This plant is ready, and some electromechanical work is going on. And the biggest bottleneck right now is to increase capacity. Otherwise, there would be a shortage of power in the future. In Q3, the work will be completed, and in Q4, we will have some trial operation. This is the current progress.

[Unknown Analyst]

You talked about AI power supply. So I want to ask you, AI power supply accounts for how much of the net sales in the cloud segment? And I also want to ask you another question. You mentioned the road map or the generations of wattage, which have almost -- which has almost doubled. So how can we understand the relationship between voltage and ASP for power supply?

[Anson Chiu, executive]

Okay. AI is just starting. So the percentage is still at the single-digit level. But in the future, the percentage of AI will have the chance to account for about 20% of the net sales in the cloud sector. This is our initial estimation. About 20% of the net sales will come from AI in the future.

Another question is about voltage from 3 to 5.5 and maybe in the future to 8 kilowatt. Right now, it is still difficult to estimate the extent of ASP growth, because there are 2 factors that I just mentioned. The difficulty is about how we can comply with the specs while keeping maintaining power density.

And at the moment, the only solution is to use GaN nitride design. As you all know, GaN nitride is multiple times as costly as power MOSFET. We haven't used the GaN nitride solution, so our cost control is still quite good. We can provide clients with more competitive ASP.

But if we really need to achieve that density, then GaN nitride will have to be a solution. And by then, the cost may increase drastically, and we will have to reflect cost to our clients. And by then, the extent of ASP growth will be larger than for 3 kilowatt and 5 kilowatt.

So it's not that the lower the voltage, the lower the price, but rather quite by the opposite. The higher the voltage, the higher the price in the future. But for now, it is difficult to estimate and extend because it is determined by the quotation of many materials.

[Julia Wang, executive]

If there are no further questions, this concludes our earnings conference. All the material will be uploaded onto our official website. After the conference, you are invited to visit our LITEON exhibition. Our staff will guide you feel the brand-new experience and atmosphere.

[Anson Chiu, executive]

Thank you so much for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]