Nanya Technology Corp
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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technology's First Quarter 2018 Earnings Conference Call. If you are joining us today via the conference call, your dialing lines are now on listen-only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format of today's event will be as follows. First, Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the first quarter of 2018, followed by our guidance for the second quarter of 2018 and key messages. Afterwards, we will open both on-call and on-floor question-and-answer sessions. And Nanya Technology's Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao, will join both Q&A sessions. Today's conference will be approximately 60 minutes. And for those participants on the call, if you do not yet have a copy of today's earnings conference presentation slides and press release, you may download them from Nanya Technology's website at www.nanya.com. And as usual, we would like to remind everybody that today's discussion may contain forward-looking statements that are subject to significant risk and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears in our presentation slides. And now I would like to turn the podium to Nanya Technology's President, Dr. Pei-Ing Lee, for a summary of our operations and current quarter guidance. Dr. Lee, please proceed.
Welcome to Nanya Technology's first quarter 2018 investor conference. I'm Pei-Ing Lee. Today's agenda. Okay, we have, first, key takeaway, revenue results, our CapEx and bit shipment, market outlook and business outlook. First of all, the key takeaway for the quarter. Q1 '18, our revenue comes to TWD 18,797 million, up by 12.1% Q-to-Q. ASP increased by 6.1%, and bit shipment increased by 8.4%; gross margin, 51.8%; and operating margin, 44.3%. The foreign exchange is not helping. We have a loss of TWD 1.178 billion; this is a result of the high level of U.S. dollar on hand. So we since have done some risk management that we shared with you before data. As of March 7, 2018, 100% of ECB were converted, and the Q1 net income comes to TWD 7.227 billion; net margin, 38.8% (sic) [ 38.4% ]; and EPS, TWD 2.39; book value per share, TWD 47.24. For our financial highlights, including the revenue; net income in blue; and gross margin in pink; and operating margin is red. Our gross margin, exceeding 50%, okay; and the OP margin exceeding 44%, which is slightly better compared to the last time, and there were almost 9 quarters of the price decline during this time frame, okay. And the revenue also continued to grow, okay, for the past quarter. And the net margin -- net profit comes to TWD 7.227 billion. This is the, purely, operating margin. And as of this [indiscernible] and some of this net profit mainly come from some of -- there are shares, some of them, Micron share disposal, okay. Here, it's purely operating income, and hopefully, this will get better in a future quarter. Okay. Q-to-Q, revenue-wise, up 12.1% versus last quarter and last year, pretty positive numbers; shipment, plus 8.4%, also a pretty good number versus last year; ASP, 6.1%.; and exchange rate, minus 2.6%, okay. For a more detailed financial summary, the net sales, TWD 18.797 billion versus TWD 16.769 billion, up by 12.1%; gross margin, TWD 9.74 billion versus TWD 8.3 billion, okay; operating income, TWD 8.3 billion versus TWD 6.5 billion, okay; and EBITDA also increased to TWD 11.2 billion, okay. And for the non-operating income, this quarter here, we had the exchange rate issue, as described just now. We'll get into more detail later. And last quarter, we had the disposal of Micron shares, so it was a big positive for last quarter, so this is the big difference. As a result, there's a difference coming mostly from this, okay. So earnings per share, TWD 2.39 per share book value. And the share outstanding comes to 3.6 -- 3.06 billion share, okay. This is a result of all the ECBs have been converted and is final, complete. We're going to have the last report. A little bit of comparison between Q1 '18 and Q4 '17. Net sales increased 12.1%, mostly it is coming from ASP increase by 6.1% and bit shipment by 8.4%. And gross margin increased by TWD 1.399 billion. It's mainly due to ASP and shipment increase and cost improvement, okay. This is all on positive trend. And net operating income, TWD 8.319 billion versus TWD 6.52 billion, increase of TWD 1.793 billion, and again, due to ASP and shipment and some of R&D spend decreased, okay. Net income, TWD 7.227 billion, mostly, as I described, due to recognizing Micron share disposal last quarter -- Q4 last year versus this quarter, only purely operating income. And the exchange rate, Q1 we took TWD 1.178 billion loss versus Q4, a TWD 396 million loss, okay. Interest income, already positive; as indicated, we have quite a bit of cash on hand. R&D expense-wise this quarter, TWD 876 million, okay. This is a little bit lower than Q4 last year due to some of the R&D expense is deferred to later quarters, okay. And the SG&A expense is pretty normal. Our typical R&D expense may come to between these 2 numbers, okay, normally, in a future quarter. For ECB, we had the ECB issuance of USD 500 million at January 24, '17. And accumulated valuation loss, TWD 7.739 billion until the end of March, okay. So until the end of last year, it was TWD 7.599 billion, and Q1 had additional TWD 140 million loss. Luckily, this is all converted, okay. But this is as a result of our share price increasing substantially and some of the exchange rate factor as well. Mostly due to the share price increasing, okay. So this is all converted, and outstanding share now comes to 3.06 billion with a dilution effect of 10.17%. Our cash situation, beginning of balance in Q1, TWD 33.769 billion, and the end balance about TWD 50.04 billion, with cash from operating activity, TWD 7.8 billion; and capital expenditure, TWD 1.9 billion. And loan-wise, we since have paid off onerous bank loans, okay. And also, all the parent company loan has been cleaned, okay. So loan-wise, we are very, very minimum with remaining account payable very [ routine ] kind of debt, okay. In investment and others, this is coming mostly from the Micron share disposal that happened on Q4 and the money came in, in Q1, okay. And end balance of TWD 50.04 billion; free cash flow of TWD 5.87 billion for the quarter. Next is our CapEx and bit shipment. For the CapEx, we remain reporting the same number. For the next quarter this year, we're expecting CapEx of TWD 11.5 billion, okay, with the first quarter already bit up TWD 1.94 billion. This is a small, small growth prior year, okay. All this CapEx, TWD 11.5 billion, is currently for 20-nanometer equipment payment deferred and the 10-nanometer class technology development, okay. However, if we consider 2019 bit growth requirement, we may need to increase the CapEx beyond TWD 11.5 billion, which we will update to you in the next quarter investor conference, okay. Likely, we'd like to maintain around mid-teens bit growth for the next year, okay, which means that this number will increase, which will be reported next quarter.
And for the bit shipment-wise, we expect in Q2, this quarter, our bit shipment will increase by high teens, likely to be beyond 15% for Q2, okay, for bit shipment, okay. And for the whole year, we're expecting reaching 48% bit shipment growth versus previously 45%; we're seeing some positive sign of more output. For the market outlook. So supply side, remain tight for the first quarter '18, okay. And there may be some wafer starts second half of '18 by the key supplier, the main supplier from [ Korean ], okay. And we expect DRAM demand growth stable in Q2 and Q3; demand growth for the whole year, 21% to 23%, which is pretty positive, okay. And for market sector-wise, mobile market seems to -- there is an effect of MWC of the new phones, particularly the flagship new phones being introduced. And then there's preparation for shipment as a result of requirement of DRAM shipment is a positive sign, good sign. Mobile market is more related to MWC announcement now -- nowadays, okay. And mobile side enjoy for equipped with higher content [ for box ] continue to drive mobile DRAM demand, okay. The server market is still very strong, okay, and it's the strongest market sector, okay. And including the hyperscale data center, the Intel Purley, okay, platform trigger potential replacement at higher performance DRAM, higher content. And also, big data and edge computing also require additional DRAM application. On the PC market, we've seen solid gaming, gaming PC demand, and it looks like even a consumer recovery in North America, okay. And the decline in the commodity DRAM consumption, it looks like it's slowing down, okay. Consumer market remained pretty healthy. We've seen that the set-top box increasing the content. IPTV, the penetration rate, 4K IPTV penetration rate is pretty promising. The high-end smart speaker, okay, as well as the game console, equipped with pretty high content per box, are selling pretty good. All this increasing consumer DRAM consumption. Business outlook. For Q2, our demand and supply remain stable, okay. Cash dividend of TWD 10.88 billion -- TWD 10.879 billion. Estimated around TWD 3.5 to TWD 3.6 per common share will be proposed to Annual Shareholder Meeting on May 24, okay. For our operating focus, expected 48% bit output increasing in 2018. And second quarter, we expect high-teen percentage. And our 20-nanometer product shipment already exceed 60% of our total revenue, okay. And volume shipment of 8 Gb DDR4 happened -- already happened in Q1 '18. And we are expanding 20-nanometer product lineup to diversified applications, including DDR3, DDR4 and coming out with low-power DDR4, low-power DDR3. And we are on track to develop 10-nanometer cloud technology now. Okay, that pretty much concludes my presentation. Now we open up for question-and-answer session.
[Operator Instructions] First question is coming from Mark Newman, Bernstein.
Could you confirm on the -- what you said on the bit growth for 2019? You said that you expect minimum of mid-teens is what you want to achieve. But in order to get that, you expect you'll have to bump up CapEx. So just -- but then, I just wanted to clarify because the actual slide itself looks like you're guiding for mid-teens in 2019. So is it right then that we expect the CapEx to be up a bit next year? And will you expect to be growing around mid-teens 2019? I just want to clarify that, first of all.
Mark, question is regarding to bit growth for 2019. Currently, as I described, we plan to maintain the shipment growth rate versus the market demand growth rate, okay, approximately, say, mid-teens for us, okay. And next year, the market growth may be 20%, may be 21%, okay. But we just say that we at least would like to achieve about mid-teens percentage, okay.
And so the second question, really, if you could talk a little bit more about 10-nanometer, if there's any change on the plans there and when the decision will be made on 10-nanometer.
There's no change in 10-nanometer generation, okay. Basically, for 10-nanometer generation, we have 2 choice. One choice, that we have license right from -- licensed from Micron, as described to you for many quarters before, okay. And meanwhile, we are doing our own development in 10-nanometer. And we would look at the future status and the result of what we can achieve, okay. And we will make a decision from there, okay. So there's no change, okay?
Great. If I -- if it's possible, I'll have just one more question. Looking forward to 2019 then, because it's very clear that your bit growth and cost decline is quite good for 2018 because of 20-nanometer. Looking forward to 2019, what could we expect for bit growth and cost decline if we assume CapEx is roughly flat?
2019 in the short term may require additional small number of wafer new capacity, okay. And we've yet to come up with the number of wafer, okay, precisely. So we will update you in the next quarter.
[Operator Instructions] We are now having [ Gunu Na Wan ] from Morgan Stanley.
Just one question on your dividend policy. Is there any room to move out the payout ratio?
The question is dividend policy, okay. This year, we are distributing probably TWD 10.8 billion, okay, which is around TWD 3.5 to TWD 3.62 per share. This is based mostly on the -- our operating income, which means that the nonoperating income was not considered in this case. If we do it only on operating income, the ratio of distribution coming to -- on high 60s, okay. And so this is indicating that likely for 2018 result, we may have much more significant improvement based on a similar policy, say, around 50% or higher, okay. And generally speaking, that likely would be what the company would recommend to the board as well as to the shareholder meeting to approve, okay. And generally speaking, it's still subject to the board approval, but we would like to say and make this a general concept around 50% or higher.
Okay. I have a follow-up regarding your relationship with Micron in terms of technology transfer. Could you give us an update on what is the status right now? And the production...
Sorry, I'm sort of missing your question. Could you repeat, sorry?
Okay. Could you just give an update on the partnership with Micron in terms of the technology transfer, where are we now, and what can we expect in the next 1 to 2 years?
We don't have any change. Our partnership with Micron, our relationship with Micron has remained very nice, very good, okay. And so we had a pretty good cooperation before. We had a joint development venture and also have license activity. And in the future, we'll continue to consider this in an open-mind way, okay. Depends on the company what's our needs, okay, and what is the business situation that would make the right choice for the company, okay. We will continue to maintain very good relationship with Micron.
Is that in your forecast for your CapEx already with the kind of ongoing relationship?
Could you say that again?
Is that factored in into your expenses and your CapEx, together with the joint development and own development?
The CapEx is mostly for the -- our bit shipment consideration or R&D consideration, okay. So that's mostly not necessarily related to our partnership, okay.
[Operator Instructions] We are now having Mark Newman from Bernstein for questions.
I thought I'd just ask one more question. Can you talk about your opinion -- we've often talked about this before, but maybe share your latest opinion on the threat from China in DRAM? When do you think China will start to have some impact in the market? And what, if any, is the impact on Nanya? Any kind of comments around that would be helpful.
Okay, Mark. Basically, my comment on that subject, it remain the same, okay. There would be very minimal impact within the next 3, maybe even 5 years, okay, to remeasure sector of the market, okay. There may be some legacy kind of impact. But those market is pretty in the narrow market sector, okay, so we don't expect that to have a significant effect on the market trend, okay.
And then one other further question, if I may. On Slide 17, you talked about the -- some of the demand dynamics, mobile being particularly strong for the high-end flagships. And server is one, I think, is quite strong. For those markets, though, does Nanya have any -- or do you expect any presence in the high-end mobile and server markets? Just because I think my expectation is you're more on the consumer and a little bit PC, but maybe you can talk about how that may change. Is that -- could we expect Nanya might have some opportunity in those markets?
What I showed in this -- for you here is the worldwide market situation, okay; that's including mobile, server, major market, PC market, consumer market, okay. As of today, we are in all the markets, except server market, we're still engaging, okay, we're still qualifying, okay. And hopefully, that will have some volume shipment second half of the year, okay, and that's here our current target. Other than that, we're already in mobile, we're already in PC, consumer, okay.
So that was volume for the second half of this year in what again?
Could you repeat that again?
I just wanted to confirm, you said volume second half of this year for what was that, that you will reach volume in the second half?
In terms of which market?
Oh, it's okay. I heard you say you're going to beat volume second half of this year in something, but I didn't hear what it was that you would beat volume in the second half of this year.
Okay. We expect, okay, we are planning to target that we can reengage into several markets in second half, okay?
Okay. Okay, that's fine.
At this moment, we don't have a clear number to tell you what the percentage we will be in, okay.
Ladies and gentlemen, we are still going to have some time for the question-and-answer session for on-site participants. So I'm going to take the last question from on-call. The last one will be [ Gunu Na Wan] from Morgan Stanley. [Operator Instructions]
On the pricing environment, could you give us some guidance and color looking to second quarter and probably second half of the year, is it possible?
I'm sorry, [ Mr. Wan ], we sort of lost you for the first part. So would you mind repeat your question one more time, please?
Okay, I apologize for that. Could you just give us like color and guidance in terms of the second quarter pricing environment? And if possible, for the second half, what are we expecting for the pricing environment?
Changes in that market environment for second quarter and second half, am I right?
More the pricing -- yes, the pricing environment.
Yes. Second quarter, the market situation remains -- demand, basically in shortage supply, okay? The third quarter typically is the half season for the year. So for second quarter and third quarter, it looks like it's going to be pretty stable situation for the market pricing, okay. For the fourth quarter, as I say, we have to still waiting for what the extent of the big supplier, their new capacity increase, okay. Overall speaking, this year is a very good market environment for the supplier, okay. For Nanya Technology point of view, I described to you that we're going to continue the growth in the next quarter or 2, next few quarters, okay. On top of that, since we are delivering DDR4 and with additional margin provided by DDR4, likely we had -- we're going to have to be favorable pricing ASP going forward, okay. So that's the current outlook for Nanya Technology and for the market situation.
Ladies and gentlemen, we are still going to take another one from on-call participants. The next question is coming from Simon Woo from Merrill Lynch. Simon, you're on the line now. Simon, if you can hear us, you're on the line now for questions.
[Technical Difficulty]
Okay, we thank you for all your questions for online participants. Now let's move on to Q&A session on floor. Dr. Lee, please go ahead.
Okay, thank you. Okay, yes?
So could I clarify [ Gunu Wan's ] question on ASPs? So it sounded like you said second quarter DRAM ASPs overall market is roughly flattish, but because of your product mix, even Nanya Tech ASP should go up in second quarter, is that correct?
Yes, that's -- it's the ratio, the portion of DDR4 is increasing for Nanya, and DDR4 versus DDR3 is that higher pricing, okay. And also on top of that, since there's a gap between DDR3 and DDR4, DDR3 pricing also going to be making up this gap as well. So for those factors, likely we will have a favorable situation for ASP, yes.
Do you give out a DDR4 percent of your output? I know you started shipping December last year. Roughly...
DDR4, actually, we start shipping first quarter this year, okay, first quarter this year. And we like to -- probably by the end of this year, we like to ship, in terms of volume-wise, 30 -- more than 30% of DDR4, yes.
Just one last question from me. You talked about capacity expansion next year. Can you tell us -- I know you have like roughly half of a wafer fab available. Roughly, how many wafers capacity can you add assuming, a, all 20-nanometer; or b, 10-nanometer?
Probably, it would be like around 10k or less additional 20-nanometer, yes. The space, you're talking about a space opening there?
Yes.
Yes, around 10k.
So if you migrated to 1x, that would mean maybe no wafer capacity addition, but you have more [indiscernible].
It's only small area. You have to manage to figure out how to do that, yes.
[Foreign Language] lower-power DDR4 [Foreign Language] DDR4, the DDR standard, your ASP's at the premium? [Foreign Language]
[Foreign Language] DDR4, okay [Foreign Language] DDR with our [Foreign Language] margin eventually, conservative margin [Foreign Language] So the migration maybe a consumer [Foreign Language] consumer that is a customer [Foreign Language] migrate our DDR4 [Foreign Language] flagship model [Foreign Language] the flagship model [Foreign Language] consumer market. Actually, so low power [Foreign Language] low-power DDR4 [Foreign Language] also low-power DDR standard [Foreign Language] low-power DDR standard, this is a -- it's a mid-end smartphone can [Foreign Language] smartphone [Foreign Language] may be a market sector [Foreign Language]
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[Foreign Language] margin [Foreign Language] margin [Foreign Language] total DDR4, DDR standard [Foreign Language] DDR standard [Foreign Language] DDR standard [Foreign Language] encourage [Foreign Language] DDR4 [Foreign Language]
[Foreign Language] supply constraint [Foreign Language]
[Foreign Language] market sector [Foreign Language] market sector [Foreign Language]
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[Foreign Language] DDR4, DDR3, DDR2 [Foreign Language] low-power DDR3, DDR2 [Foreign Language] low-power DDR1.
[Foreign Language] big growth guidance [Foreign Language]
[Foreign Language] second half [Foreign Language] [ 10% ] [Foreign Language]
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[Foreign Language] year-over-year [Foreign Language] guidance [Foreign Language]
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[Foreign Language] SG&A [Foreign Language] R&D [Foreign Language] circa [ 30, 3-0 ], yes.
[Foreign Language] Merrill Lynch [Foreign Language]
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[Foreign Language] consumer market [Foreign Language]
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[Foreign Language] but in consumer [Foreign Language] the consumer [Foreign Language]
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So in terms of the cash, I mean, obviously, you have a very good cash balance now. The outlook this year is very positive. I know your dividend -- cash payout for dividend should go up in the future, at least the next year or so. Besides increasing cash dividend and maybe a little bit of CapEx next year, any other usage for cash that you see?
Yes, we -- cash-wise, most importantly is that trend -- of course, first, we have to have the distribution coming up second half of the year. And then we have additional CapEx I described. And for next year, as I described, we maintain the mid-teens, be close, just CapEx likely to increase, okay, so that's for the cash usage most reason. But the more important, maybe more critical part there maybe, what is the exchange rate going to be during a similar situation for us? We don't want to see it, exchange rate at all, okay. So we're going to have to manage the risk management on that. So we already start doing that risk management, okay. As a matter of fact, we already adjust our U.S. dollars and Chinese dollars and Taiwanese dollars ratio, instead of 100% in U.S. dollar because most of our income is U.S. dollar, but disposal of Micron share, U.S. dollars, so we are shipping some of the U.S. dollar label to Taiwanese dollars and try to make it more even weight for the future. Likely, that will reduce our risk in terms of exchange rate one way or another. We're balanced by the label in both areas, okay. There still will continue to be some exchange rate up or down reasons, but the extent of loss, again, will be much lower. And for the exchange rate, it's very difficult to predict which way it's going up or down related to interest rate of all different countries, also related to who is saying what President Trump, [ San Juan ] or whoever and what, okay, is related to all the trade relationship, okay. So it's a very complicated situation, internationally, locally, et cetera, okay. So the best method for us is try to maintain similar label U.S. dollar versus NT dollars. At least that's what we -- and we're already pretty much achieving that as we speak, yes.
Okay. I'd like to thank you again for coming to interest and comments on Nanya Technology. Thank you. Have a good day.
That concludes our conference and conference call today. Please be advised that the replay of the conference will be accessible within 3 hours from now, which will be available through Nanya Technology's website at www.nanya.com. Thank you for joining us today. We hope you will join us again next quarter. Goodbye, and good day. Thank you.