Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2019-Q1

[Operator]

[Foreign Language] Welcome to Nanya Technology's First Quarter 2019 Earnings Conference and Conference Call. [Operator Instructions] As this conference is being viewed by investors around the world, we will conduct this event in English only. Today's format will be as follows: First, Nanya Technology's President, Dr. Pei-Ing Li, will summarize our operations in the first quarter of 2019, followed by our guidance for the first quarter of 2019 and key messages. Afterwards, Nanya Technology's Vice President, Mr. Joseph Wu and Financial Executive, Mr. Philip Jao, will joining us as we open Q&A sessions, both online and on floor. Today's conference will be approximately 60 minutes. For those participants online, 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. As usual, we would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks 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 over to Nanya Technology's President, Dr. Pei-Ing Li, for the summary of operations and current quarter guidance. Dr. Lee, please begin.

[Pei-Ing Lee, executive]

Thank you. Welcome to Nanya Technology. I am Pei-Ing Lee. Let me start with today's investor conference. My agenda is Q1 revenue and result, CapEx and bit shipment, market outlook and business review. The first for you here shows our financial results summary. The net sales is TWD 11.372 billion compared to Q4, TWD 16.958 billion, down by 32.9%. Gross profit, TWD 4.633 billion, also down by 48.4%. Operating income, TWD 3.02 billion versus TWD 7.09 billion in Q4 last year, down by 57.4%. EBITDA at TWD 6.38 billion, also down by 37.5%. Nonoperating income, TWD 567 million with the net income comes to TWD 3.586 billion at 31.5% and compared to Q4 last year -- Q4 last year is down by 54.9%. And earnings per share TWD 1.18 per share with book value of TWD 55.26 per share. Let me give you a little bit Q-to-Q comparison, quarterly revenue result. The revenue as described just now, Q-to-Q, is down by 32.9%. And year-to-year, down by 39.5%. This down is largely due to shipment down and ASPs down. Shipment was down by low teens and ASP decreased by low 20. This is pretty much in the industrial ballpark, industrial average. And compared to last year, you also saw a decrease. Exchange rate, minus 1%. As I described to you that this number pretty much explain the reason of down 32.9%. A little bit more result comparison with the remark explanation. Sale, TWD 11.37 billion, down from TWD 16.9 billion. And as described, ASP down by low 20s and bit shipment down by low teens. These 2, in combination, explain almost all these reasons why revenue come down. Gross profit, TWD 4.63 billion from TWD 8.972 billion. And the gross profit decrease also pretty much explained by the sale decrease decline in the pricing and the shipment. Operating income of TWD 3.02 billion and TWD 7.09 billion. And for the same reason, op income decreased by TWD 4.07 billion, pretty much explained by gross margin decrease. This is a major reason, gross profit decrease with some minor decrease in the expense and cost. For the net income, TWD 3.586 billion versus last quarter's TWD 7.953 billion. Again, for the same reason, the net income decrease is due to op margin, gross margin and as a result from the ASP down and the shipment down. Again, this is a major reason for the net income down, whereas some minor improvement in gain, and income from interest income and the exchange rate gain. For the quarterly financial highlight over past few years, this is the very steep decline for the past 2 quarters as indicated by this chart. I just reported to you that Q1 '19, revenue come down to TWD 11.37 billion and the net profit come down to TWD 3.586 billion, whereas the gross margin come down to 40.7% and op margin come down to 26.6%. And this is a very sharp decline and how we explain what we see in the market in the data portfolios.

Operating expense, major expense, operating expense on SG&A and R&D expense. This is TWD 465 million. It's pretty much in the ballpark, not major change, with some minor decrease due to variable cost decrease. R&D expense, TWD 1.148 billion for the quarter. Again, this is pretty much in average ballpark, similar to the average number. No major surprise. For cash flow point of view. Beginning balance is at TWD 57.384 billion and the end balance for the quarter is TWD 60.172 billion. So cash still have a free flow, come in of the TWD 3.99 billion, with the cash from operating activities, TWD 5.714 billion and CapEx of TWD 1.7 billion. And also, we had spend money for share buybacks. These 2 numbers, TWD 2.55 billion from last quarter and TWD 1.2 billion from this quarter is mainly for the share buyback. So overall speaking, the cash position for the company is still healthy. CapEx and bit shipment. The CapEx for Q1, TWD 1.7 billion and we spent for the whole year, 2019, will come down from TWD 10.6 billion original plan to approximately TWD 7 billion. We further reduced our CapEx for the year. And bit shipment-wise, Q1 bit shipment decreased by low teens, as reported just now. And Q2 bit shipment growth, we are expected to be flat or up single digit. We're seeing that Q2 has some chance for better than Q1. We're working on it. 2019 bid shipment growth originally was 15%. We like to reduce it down to low single-digit. And we also allocated 5% to 10% more capacity for technology and product development. And I had reported this plan almost 2 quarters ahead, 2 quarter back that I already mentioned that we will be using some more capacity for our technology development and product development. And this is what we have been doing for a while now. For the market, I'd like to comment as follows. For the overall outlook, the macroeconomic uncertainty, also inventory adjustment, CPU shortage and also particularly the trade conflict issue that, as a result, manufacturing [ for a city ] relocation issue, the supply chain relocation issue has impact on DRAM demand in Q1, which result in price decline worse than expectation. We expect Q2 inventory will gradually digested and price decline will be narrowing. The price decline in the first quarter is quite big. And we expect the price decline in Q2 will be narrowing. We are optimistic on Q3 market stabilization with seasonal peak in consumer application. We've seen that consumers -- the customer expectation are reasonably good. Mobile demand increase coupled with PC and server recovery in Q3. So far, we're expecting that Q2 will be better than Q1 and Q3 has a good chance of better than Q2.

Supply side, major suppliers has reduced capital expenditure and adjust inventory. On demand point of view, the mobile, the unit shipment, may decrease in 2019. However, we still expect that the content per unit will continue to grow. And this already been -- has been seen on the flagship model being announced by each of the small smartphone makers. For server market, Q1 and also Q4 last year basically doing inventory adjustment. And we expect that demand will resume gradually. The server market, overall speaking, due to the accountability AI and all the AI center requirement, so the market still will content -- will sustain the DRAM long-term growth. For the PC, PC shipment is affected by -- was affected by CPU shortage. And hopefully, this would be eased by Q3. Consumer market, U.S. and China trade conflict continue to interfere with consumer market in short term. However, we're seeing that many of the consumer markets, including set-top box, smart speakers, SSD, IP cam will continue to grow DRAM demand. And as we see that consumer market is getting more and more stable as we speak. Business review and outlook. Nanya has received National Industry Innovation Award from MOEA of Taiwan government. Our Board has decided to have cash dividend of TWD 21.7 billion distribution, which is around TWD 7.09 to TWD 7.15 per common share. And this proposal from the Board will be proposed to AGM on May 30 for final approval by AGM. 2019, our CapEx further trim down to about TWD 7 billion. And we have allocated 5% to 10% more capacity to technology and product development. And we will further diversify our product portfolio to minimize downside risk. And we expect DRAM demand growth will be further stabilized and getting better for second half '19. Okay. That pretty much concludes my presentation. Now ready for questions.

[Operator]

[Operator Instructions] The first to ask question is Charlie Chan, Morgan Stanley.

[Charlie Chan, analyst]

But my first question is about your first quarter gross margin. Because the result is that the ASP declined more than 20%, but EBITDA margin only behind 4 percentage points, right? So I'm wondering what makes first quarter gross margin keep such a high level. This is first question.

[Pei-Ing Lee, executive]

Charlie, thanks for your question. First quarter gross margin came down from 52.9% down to 40.7%. Percentage-wise, it's down by 12.2 percentage points. However, if you look at the value of the numbers, it has come down from TWD 8.972 billion down to TWD 4.633 billion, already down by 48.7%. Basically, your question is that the denominator actually is bigger, okay? So that's why the percentage point is 12.2%. That's quite normal.

[Charlie Chan, analyst]

So I guess if you look at your presentation, Page 5, you disclosed the -- yes. You disclosed the EBITDA margin, right? So first quarter EBITDA margin was 60.2%, right? So assume the variable cost is stable, right, with 20% blended ASP decline. Supposedly, first quarter EBITDA margin should be around that 40% level. I guess that's my key points, because EBITDA margin already excludes the kind of those depreciation impacts.

[Pei-Ing Lee, executive]

Other one, this, with my EBITDA increased numbers are. [Foreign Language] Hello, Charlie? Our core structure has a large percentage is on depreciation with an increment. And the depreciation of our core structure has come back down in EBITDA.

[Charlie Chan, analyst]

Okay, okay. That's fine. I think I can try to ask maybe after the call.

[Pei-Ing Lee, executive]

Yes, you can. You're welcome to discuss with Sandra or Joseph on these numbers. This is pretty much the semiconductor cost structure. It's quite different from the others.

[Charlie Chan, analyst]

Okay. And second question is regarding your DRAM inventory level. I think some of your peers like Micron disclosed it's almost 150 days. So exiting 1Q, what is your inventory days and what do you think the inventory days will be in 2Q? And is there any plan you want to cut off production?

[Pei-Ing Lee, executive]

Our plan for production and CapEx are already described in the presentation. Our CapEx has come down, by 34%. And we have allocated 5% to 10% of our capacity to R&D. That's already described. Naturally, that would reduce our output. So that pretty much is what's going to be our production plan. So inventory, because our overall market share is relatively small in the whole industry. So our inventory level basically impact on the industry is relatively minor compared to the major supplier. And yes, due to the market situation change, our inventory does go up. And this is quite natural for all the supplier. But as I said, the inventories is not impacting the whole industry in a significant way.

[Charlie Chan, analyst]

Okay. So exceeding 4Q, remember it was 6 weeks, right? So what was the inventory level exiting 1Q?

[Pei-Ing Lee, executive]

Inventory level has went up a little bit, okay? I would say probably 3 weeks, increasing by 3 weeks or so, yes.

[Charlie Chan, analyst]

Okay. That makes sense.

[Operator]

Next one, we're having J.J. Park, JPMorgan.

[J.J. Park, analyst]

Just based on your guidance for the second quarter, [ the reported ] growth of the single-digit percent. At the same time, you're guiding full year of the low single-digit percent. If I just do the simple calculation, then you should grow by around the [ 7% throughout the third ] quarter, another 30% in the Q4 to meet the full year that this mother guidance of the low single-digit percent. So where are we seeing this kind of meaningful growth in the second half of the year?

[Pei-Ing Lee, executive]

You have... [Audio Gap]

We are working on it, trying to improve our sales quarter-by-quarter as we speak. The whole year, we are expecting low single-digit growth. And that could be achieved by the second half improvement in the market as well as our delivery of new product portfolio into the market. That's including our server business and our product portfolio in low-power DDR4, low-power DDR3.

[J.J. Park, analyst]

So is it safe to assume that you're looking at the overall 30% QoQ growth in third quarter and another 30% [ on top ] of growth in the Q4, right?

[Pei-Ing Lee, executive]

We expected that we may have some better result in second half, yes.

[J.J. Park, analyst]

Okay. And my second question is that your bit shipment guidance is a low single-digit percent for 2019. Is it safe to assume that your production growth will be less than bit shipment growth or it's going to be in line with bit shipment growth. The reason I'm asking is you're clearly [ catching up ] inventory starting from the Q4 last year and then throughout the first half of this year. So I just wanted to know the [ context ] your bit shipment guidance versus production growth.

[Pei-Ing Lee, executive]

Okay. Your question is -- I'm sorry, I don't quite get your question in -- if I may repeat your question. Correct me if I'm wrong. Your question is on our production versus our sales. Is that your question?

[J.J. Park, analyst]

Yes. For the 2019. Yes.

[Pei-Ing Lee, executive]

Yes. There would be some discrepancy between production and sales. And this is including the typical cycle time delay for that. And also there are some market customer readiness qualification delay also.

[J.J. Park, analyst]

So 2019 -- which is higher between the production growth versus bit shipment growth or the sales growth?

[Pei-Ing Lee, executive]

I don't have the exact number for that. We like to be able to increase our sales by second half, so that likely both of those numbers can be very similar.

[Operator]

Now the line is open to Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

Dr. Lee, my first question, can you give us an approximate first quarter sales breakdown by type whether consumer, commodity, server, et cetera?

[Pei-Ing Lee, executive]

Our consumer maintained around 65% of the market. And with low-power, around 15%. And the rest is [ the market. ]

[Jeffrey Ohlweiler, analyst]

Have you started shipping server in any kind of meaningful quantity yet?

[Pei-Ing Lee, executive]

Yes. We shipped a small quantity into the server market.

[Jeffrey Ohlweiler, analyst]

Okay. And then my second question, you have a good drop in OpEx in first quarter. Will that go up again with shipments up in second quarter and the second half or can you keep that down at the lower level like you did in first quarter?

[Pei-Ing Lee, executive]

Sorry. Can you repeat that again?

[Jeffrey Ohlweiler, analyst]

Your OpEx came down in the first quarter, both SG&A and also R&D. Do you expect that to -- to see that back up again later in the year? Or is that going to try to maintain at lower level like first quarter?

[Pei-Ing Lee, executive]

You mean the SG&A and R&D cost? Likely to maintain similar number. With R&D cost, maybe marginally increased, okay? Actually, we have shipped some of the capacity into R&D. But as I said, we started our project more than 2 quarters ago.

[Operator]

Next, we're having Simon Woo, BFA Merrill Lynch for questions.

[Simon Woo, analyst]

So first question is what was the rough idea or cost of reduction quarter-on-quarter in terms of bit basis? My simple calculation indicates 1 or 2% quarter-on-quarter total reduction even with -- net of your bit growth since they're quite good and also the -- [ your view ] second quarter or for 2019, do you still believe that you have listed low to mid-single-digit year-on-year cost of reduction of bit. Question overall is that your view on the cost trend.

[Pei-Ing Lee, executive]

Cost reduction nowadays for the even supplier is reducing as you know for all the supplier. We don't expect significant cost reduction also for 2019. Hopefully, we can maintain the whole year in around 10% or high single-digit.

[Simon Woo, analyst]

Year-on-year basis, right, [ probably? ]

[Pei-Ing Lee, executive]

Yes, yes. It's going to be challenging. It's going to be challenging. But we are working on it in all kinds of different efforts, including all of the manufacturing costs, including improve our manufacturing efficiency, including year upward, et cetera, try to optimize our performance, okay?

[Simon Woo, analyst]

Yes. And then last question is would you recap the Q1 results based on total running wafer capacity? Has it already reached the 70,000 wafers per month? Or not or less? And then the rough idea for the node mix, 20 node version versus 30 node and when eventually the 1x node will come, say, mid 2020 or earlier? So overall, the wafer capacity and the node mix trend, sir.

[Pei-Ing Lee, executive]

I think, Simon, I only get 1 question out of your question. Your question about 20-nm percentage, I can tell you is over 70%. And what is the other question that you have?

[Simon Woo, analyst]

The wafer, wafer capacity, 70,000 wafers per month...

[Pei-Ing Lee, executive]

Yes. That's pretty much similar except we have allocated some capacity into R&D.

[Simon Woo, analyst]

For the first time, [ 5.2% ] capacity reallocated for the R&D [ what you said, ] what's the previous...

[Pei-Ing Lee, executive]

Within the same total capacity, we allocated portion into R&D. We do our R&D in the same facility. R&D and manufacturing in the same facility. Nanya is a very small company. We don't have a dedicated R&D line. Everything was done together in the manufacturing facility.

[Simon Woo, analyst]

All of 70,000?

[Pei-Ing Lee, executive]

Okay.

[Operator]

[Operator Instructions] Right now, we're having Mark Newman, Bernstein.

[Mark Newman, analyst]

So the demand seems to be pretty weak across the board, sounds like. Is there any signs that your sales team is picking up for any slight improvement in demand yet for Q2? I know you talked about you hope to increase shipments in Q2. But I'm just asking if there's any specific signs of demand starting to improve from a very, very low base in Q1. And if you look at the different segments, is there any -- I mean, I think what I have learned is pretty much everything is within the moment. But is there anything that is, from Nanya's perspective, because your mix is slightly different, anything that is worse or slightly better in the market in Q1 or something that might start to recover or you're seeing recovering slightly earlier perhaps in Q2 rather than Q3, Q4 this year?

[Pei-Ing Lee, executive]

Okay. Mark, I think, your question regarding to market situation, I think to address the market situation topic, I would like say to address this issue, we have to look in each of the market sector point of view, okay? Starting from the server market, the crowd server market. In the first half of 2018, Q1 and Q2 2018, that was a time of very, very good server market demand. Now a lot of demand coming from server market. That situation come to almost a complete halt in mid-Q3 last year. And until Q4 is also very, very low activity in server market. And Q1, again, extremely low activity for server market. That's a server market, which accounted for around 25% of the market demand. That indicated that sector is facing inventory adjustment over more than 2 quarters already. On top of that, that market tend to have some trade conflict-related issue. Relocation of manufacturing facility issue. Basically, supply chain disruption issue. And that situation, we have seen that some potential overlap as we see in for the Q2 already. Basically, there's nearly no activity and Q2 could be worse, okay? And good thing is, we've seen some encouragements, some more enthusiastic in this market. From a PC side, PC is very much related to CPU supply, okay? And again, that has been shortage for Q4, Q1. And likely that will continue for a few months. But we are hopeful that we've got share, but we're hopeful that this will get better also because the shortage is getting too long. On the consumer side, actually, our customer base so far has been good. It's getting more enthusiastic now. And we're expecting that Q3 likely will be even better than Q2. We're already seeing Q2 better than Q1. Another peak sector is the mobile market. And mobile market, likely Q3 is an indicator of the hottest season for the year. And mobile sector, that also may have some early encouragement from 5G and from all the infrastructure or the station, the base station. All this preparation activity is already ongoing from our customers' side. So we do see some encouraging signs in the market. Although we still have to watch out carefully about the major suppliers, inventory label, et cetera. However, from a demand point of view, it's certainly seen that Q2 will be better than Q1 and Q3 will be better than Q2.

[Mark Newman, analyst]

Great. That's helpful. And then on the supply -- if I could just clarify again on the supply. You mentioned that you're essentially reducing the capacity 5% to 10% or allocating that 5% capacity to tech and product development. Is the starting point 68,000? I just want to clarify that.

[Pei-Ing Lee, executive]

This is, as I described just now, that our total capacity is the same. We just allocated part of our capacity for R&D. We are doing our R&D together in the manufacturing line, okay?

[Mark Newman, analyst]

And when is that -- is that starting -- did that start in Q1 or is that starting now in Q2?

[Pei-Ing Lee, executive]

That's, as I recalled it more than 2 quarters ago, I already described that in the conference -- in this conference. We have started some smaller activity gradually already, okay? And that is likely in Q1 -- Q2 that we'll reach our requirement for R&D capacity allocation.

[Mark Newman, analyst]

It's been starting since late last year and it's more increasing the capacity.

[Pei-Ing Lee, executive]

Yes. Gradually increasing. Yes.

[Mark Newman, analyst]

I see. And is there any -- with the current CapEx -- and I noticed you cut a -- bringing pretty significantly CapEx down. Is there any change in capacity, the total capacity plan for end of this year or is it staying flat at around 68,000 also?

[Pei-Ing Lee, executive]

The total capacity, as I described, will not be changed. With partial capacity allocated to R&D, with the CapEx, mostly those CapEx is the final payment for those equipment that we purchased since last year. Most of those CapEx that we're talking about, we described this for this year. And that information already provided to you a couple of quarters ago also.

[Operator]

The next to ask question is Charlie Chan, Morgan Stanley.

[Charlie Chan, analyst]

So very quick follow-up. Dr. Lee, so [ would you code ] that more allocation for R&D activity as the production cuts, would you describe it that way?

[Pei-Ing Lee, executive]

No. R&D is required, R&D capacity for product and technology environment is important for our future competitiveness. Both on increased product portfolio and further technology -- process technology improvement.

[Charlie Chan, analyst]

Okay. So would that affect your coming quarters, the cost of those OpEx?

[Pei-Ing Lee, executive]

It will not increase significantly. Yes, it will increase marginally. And that, again, is probably distributed through few quarters. Yes.

[Charlie Chan, analyst]

Okay. And lastly, I think one of the previous presenters also asked about your technology developments. So can you give us more color? I mean, when will we see the production of those 1x node technology? And -- or you said any possibility that you will give other own even technology development and decide to license from Micron, will you still keep this option open?

[Pei-Ing Lee, executive]

Yes. We still have option of license from Micron. And meanwhile, we are developing our own 10-nm generation process technology and product technology. And activity is still in progress and is meeting our milestone. It's on our target.

[Charlie Chan, analyst]

Okay. And lastly, some smaller question. So first of all, do you think the bit shipments guidance probably is more directed to your slow inventory digestion or is it directly related to your CapEx cost?

[Pei-Ing Lee, executive]

No. Although speaking as we did it to everything, okay. It's including the market situation, including overall market inventory digestion, including product portfolio in each of the product sector. Including everything.

[Charlie Chan, analyst]

Okay. So do you feel like your customers, in particular, consumer customers, their inventory is still high? [ How can... ]

[Pei-Ing Lee, executive]

Consumer side is reasonably okay, okay? We don't see that to be high. And we believe that server market likely already inventory decline. And the PC and mobile is actually not normal. So we expect that from a customer side is okay. Now the key issue is from the supplier side, which we don't have the right information.

[Charlie Chan, analyst]

Okay. And last one is a financial number. Can you update the 1Q depreciation expense so that we can calculate your variable costs?

[Pei-Ing Lee, executive]

I don't have a number with me. Can we follow up via a phone call later, okay?

[Charlie Chan, analyst]

Okay. Or Mr. Wu can just provide this number verbally.

[Pei-Ing Lee, executive]

Roughly speaking, okay. We cannot give you a precise number.

[Operator]

We thank you for questions online. Now we move on to on-floor Q&A session. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Okay. Thank you. [Foreign Language]

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Just single digit.

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[Unknown Executive]

Thank you. That concludes our conference and conference call today. Please be advised that a replay of the conference will be accessible within 3 hours from now, which will be available through our website, www.nanya.com. Thank you for joining us today. We hope you will join us in the coming quarters. Have a great day.