Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2021-Q1

[Operator]

[Foreign Language] Welcome to Nanya Technology's First Quarter 2021 Earnings 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 conference will be approximately 60 minutes. Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the first quarter of 2021, followed by our guidance for the next quarter and key messages; and then Nanya Technology's Executive Vice President, Dr. Lin-Chin Su; and Vice President, Mr. Joseph Wu, will join us as we open our Q&A session.

Today's presentation materials are available for download at Nanya Technology's website at www.nanya.com.

And as usual, we would like to remind everyone that today's discussion 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. Now I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and the current quarter guidance. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Welcome to Nanya Technology Q1 Investor Conference. I'm Pei-Ing Lee. It's a list of my reporting item to you. I'll first start with Q1 revenue and results, followed by CapEx and bit shipment and then market outlook and then conclude with the business review and outlook. First of all, the financial results summary. For the Q1 '21, our net sales comes to TWD 17.731 billion versus last quarter, TWD 14.773 billion it's an improvement of 20%. Gross profit comes to TWD 5.162 billion at gross margin of 29.1% versus Q4 last year, TWD 3.251 billion at 22%. Operating income comes to TWD 3.027 billion at 17.1% versus last quarter of TWD 1.304 billion at 8.8%. EBITDA at TWD 6.769 billion at 38.2%, is also improved from Q4's TWD 4.937 billion. Nonoperating income TWD 307 million. Income tax expense at TWD 630 million. Net income comes to TWD 2.705 billion at net margin of 15.3%, which is the improvement from Q4 last year's TWD 924 million, which is at 6.3%. Earnings per share comes to TWD 0.88 per share versus Q4 last year's TWD 0.30 and book value per share, TWD 51 versus last quarter's TWD 50. Now comes to more detail. For the quarterly revenue results, Q-to-Q, revenue up by 20%, year-to-year revenue up by 23%. For Q-to-Q, the shipments increased by mid-single-digit, and ASP increased by mid-teens percentage. And exchange rate and favor by 1.5%. Our detailed comparison of financial results. Net sales TWD 17.731 billion versus TWD 14.773 billion in Q4 last year, up 20%, mostly due to few reasons. Bit shipment increased by mid-single digit, ASP increased by mid-teens and exchange rate negative impact 1.5%. Gross profit, TWD 5.162 billion at 29.1% versus 32 -- versus TWD 3.251 billion. This is an increase of TWD 1.911 billion, mainly due to ASP increase plus bit shipment mainly is ASP, especially ASP. Operating expense, TWD 2.135 billion versus TWD 1.948 billion with the increase in R&D expense by TWD 203 million. Operating income comes to TWD 3.027 billion and operating margin of 17.1% versus TWD 1.304 billion in last quarter, mostly due to OP income increase by TWD 1.723 billion as a result from ASP increase and bit shipment increase and mainly due to ASP increase. Net income TWD 2.705 billion and net margin of 15.3% versus TWD 924 million in last quarter. And net income increased by TWD 1.78 billion. Key reason is operating income increased by TWD 1.723 billion. Exchange rate, TWD 440 million favorable with Q1 as favorable by TWD 38 million, but Q4 last year is unfavorable of TWD 402 million. Income tax, TWD 417 million unfavorable for Q1. For quarterly financial highlights here. For the most recent quarter, the revenue comes to TWD 17.731 billion with gross margin 29.1% and operating margin 17.1% with net income of TWD 2.705 billion. As a comparison for the last 2 years, we've seen that the last 2 years, the operating -- mostly gross margin, operating income and net income coming down. This is mainly due to the market ASP decline with the exception of Q2 2019 -- I'm sorry, Q2 2020, okay? So this is a 2-year trend, mostly due to ASP decline. Even 2 years ahead of that, you are seeing 2 years, almost 2 years of ASP uptrend. This is mainly also due to ASP increase in those 2 years.

For operating expense, our SG&A expense at Q1 TWD 492 million, which is in the normal range and we're expecting for the rest of the year it will be very similar at TWD 500 plus/minus million. For R&D expense, at Q1 comes to TWD 1.643 billion, and this is also in the normal range. We are expecting for the rest of the year, each quarter will be around also TWD 1.6 billion plus/minus. For cash flows, beginning of the balance for the quarter at TWD 51.726 billion, and for the ending balance comes to TWD 59.08 billion with improvement of free cash flow of TWD 6.867 billion. The detail of the cash flow is cash from operating activity come in at TWD 8.352 billion, mainly from profit. And capital expenditure, TWD 1.485 billion with financial activity and others TWD 488 million, minimally from treasury stock sold to employee. In comparison to Q4 last year, it's an improvement of TWD 6.862 billion free cash flow in compared to Q1 of last year, it's the improvement of TWD 11.5 billion. And the company has no interest-bearing debt at the moment.

So for the CapEx and bit shipment. For Q1 CapEx is around TWD 1.5 billion, and we are expecting this year, the CapEx planning is up to TWD 15.6 billion. For bit shipment, our Q1 bit shipment increased by mid-single digit, and we're expecting Q2 as relatively flat for bit shipment. And for the year, we're expecting relatively flat to marginal increase in bit shipment. Finally, for the market outlook, global economic recovery has been forecasted, which favoring DRAM demand growth. And for Q2 this year, we're seeing robust consumer electronics demand. We're also seeing that loan book remains strong, and we're seeing server market is gaining recovery. In addition to that, smartphone demand has been improved. What we need to watch closely is COVID-19 pandemic control and vaccination around the world and also need to watch closely on U.S. and China trade tension as well as supply chain balance issue, including shortage of key components in service -- in some sectors, which may impact long-term market outlook. For the supply side, DRAM supplier inventory level has been low and first half this year, industrial bit supply growth is limited. Suppliers' capacity deployment, capacity planning in the second half this year will determine next year's market balance.

From a demand point of view, for the mobile market, smartphone shipment resumed growth in 2021 versus last year the shrinkage market. So low power DRAM demand will be improving year-to-year. Server market, Stay-at-Home economic and new server platform launch will drive up data center CapEx, and DRAM content per system also continue to grow. For the PC market, e-learnings and new platform launch has stimulated notebook, Chromebook, SSD, HDD and video conference module demand throughout the year. For consumer market, we're seeing promising outlook for digital TV, set-top box, 5G networking, new generation of new game console, wearable device and automotive, electronics, et cetera. A summary of Nanya's business review and outlook. First of all, we have seen improved Q1 results, driven by strong demand from various applications. And for Q2 DRAM market outlook, optimistic with strong demand. So the cash dividends is planned TWD 4 billion, approximately TWD 1.3 per share will be proposed to AGM on May 27 this year. For the product status, our DDR4 32Mbps and low-power 4X 4267Mbps has been validated by major chipset vendors. We plan to start sampling first generation of 10-nanometer class 8 gigabit DDR4 in second half this year, and our DDR5 development is ongoing. And we plan the pilot second-generation 10-nanometer class product in Q3 this year. Also from a CSR point of view, we have received Green Factory Label certificate by M.O.E.A, the Ministry of Economic Affairs. This concludes my report to you. Thank you, and back to you, Mr. Wang.

[Operator]

[Operator Instructions] The first one to ask questions, Haas Liu from Crédit Suisse.

[Haas Liu, analyst]

Congratulations on the good results. So my first question is regarding your bit shipment guidance for full year 2021. You are guiding flat-to-mild year-on-year growth for this year. And factoring mid-single digits quarter-on-quarter bit shipment growth in the first quarter and also flat quarter-on-quarter guidance for second quarter, you imply the bit output would decline quarter-on-quarter through second half. Could you give us more detail why the shipment will decline? And if your guidance reflect the inventory or just purely the bit outputs from the production? And if possible, could you also let us know your inventory level exiting 1Q, as you still have around 111 inventory days in 4Q with 60 days of the finished goods of inventory?

[Pei-Ing Lee, executive]

The question is on big shipment. We are expecting this year the bit shipment will be relatively flat to marginal increase. This is mostly due to our production size is currently at it's -- already at its maximum, okay? So we were not expecting to have bit shipment increase until when we have implement our first-generation and second-generation 10-nanometer class product and technology and which would likely to be happen -- happening starting the end of this year to next year. And your second question is regarding to the inventory. Our inventory level has been low, quite healthy, okay, and as a result, that our bit shipment will be mostly flat.

[Haas Liu, analyst]

Okay. Just a quick follow-up. Does your bit shipment guidance only reflect your production outputs or it also includes the inventory depletion?

[Pei-Ing Lee, executive]

As I say, our inventory level has been reaching very low level as well, so pretty much representing our production output.

[Haas Liu, analyst]

Okay. And my second question...

[Pei-Ing Lee, executive]

And the number you mentioned about inventory level, it's a little bit off from what our number, okay? Basically, our inventory level has been low already.

[Haas Liu, analyst]

Okay. And my second question would be on your pricing. Your pricing was pretty strong, up mid-teens quarter-on-quarter in the first quarter. Could you let us know your mix between the contract and spot price at this stage? And also, what is your view for the pricing outlook in the second quarter of this year?

[Pei-Ing Lee, executive]

Our pricing has been different from sector to sector. So for DRAM that has server sector, as you know, you have the server, the cloud computation sector, you also have notebook, commodity sector, you have the low power, the mobile phone and other like a Chromebook or mobile device, okay, sector as well as the consumer sector, okay. And product-wise it's quite a big range as well. It comes from DDR4 at various density, low power DDR4 at various density, low power DDR3 as well, okay? And on top of that, you still have DDR3, okay? For -- so each of the sector has different degree of the price movement, depends on its own demand and supply.

[Haas Liu, analyst]

Okay. Just a quick follow-up. Could you also give us some detail about your shipment mix between spot versus contract?

[Pei-Ing Lee, executive]

Yes. As I indicated before, we don't really had directly shipped to spot market. We don't do that. We -- our shipment consists of quarterly contract, monthly contract and some long-term contract, okay? Long-term contract is like EUV contract, some of those is like industrial or automotive as a yearly contract. But most of the shipment is based on the quarterly contract and monthly contract, okay? So I don't know how the comment about the spot, okay? I indicated a while ago, in the last couple of meetings that starting to -- starting Q4 last year, Q4 last year, the quarterly price is lower than Q3 last year, but monthly price is already showing some improvement starting October to November to December. As a whole result, the Q4 last year because of quarterly price still going down, but monthly price going up, so Q4 last year is sort of buttoning up, okay? In Q1 this year, though, both quarterly price as well as monthly price has been -- went up, okay? So you're seeing significant improvement in the pricing point of view.

[Haas Liu, analyst]

That's very clear. And just a quick follow-up. I think on the mix, could you also give us detail about your mix by percentage?

[Pei-Ing Lee, executive]

Yes. I'd like to report to you that our consumer is between, say, 60%, 65%, okay? Our mobile, which means low power, is around 15%, 10% to 15%, month-by-month differently, okay? And our server, the cloud computation is less than 10%. And the rest of is balanced by say commodity and notebook, Chromebook, desktop those area.

[Haas Liu, analyst]

Okay. So you're expecting for a pretty healthy price increase for the same quarter balancing of these kind of application mix-wise?

[Pei-Ing Lee, executive]

Application mix-wise, I am expecting further improvement from Q1.

[Operator]

[Operator Instructions] Next one we're having Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

Can you talk about maybe with the mid-teen ASP upside in the first quarter, where do you see the biggest strength?

[Pei-Ing Lee, executive]

Yes. As I indicated to you that we had 60% to 65% in consumer. Within consumer, there are 2 major products. One is DDR3, the other one is DDR4 and the mix of this, okay? And also each of the product, DDR3 and DDR4 as a mix of the density. Say, DDR4, we have 8 gigabit, 4 gigabit. And DDR3, we have more, okay? We have 4 gigabit, 2 gigabit, 1 gigabit, even down to 512, okay? So this each of the product has its own supply/demand in consumer. And we're seeing that for Q1, DDR3 is taking a lead in price improvement, okay? Also, we're seeing some improvement in DDR4, but DDR3 have contributed to more significant in the price improvement, okay? And the same improvement also in -- happened in low-power DDR4 and server area, but the the margin increase, maybe DDR3 is the #1, okay, and the rates are even, okay?

[Jeffrey Ohlweiler, analyst]

Okay. Great. Is it possible -- are you doing much change in terms of product mix for second, third quarter based on where prices are going right now?

[Pei-Ing Lee, executive]

It would be -- will be a small change, but not going to be very significant, okay? For the second quarter, the demand from each of the application has been reasonably strong, okay? There isn't any weak sector been seen. So we will continue to support consumer sector and also the low-power sector, we'd like to have more business. And the server sector is the area that we'd like to develop more business opportunity, okay? But at this time, server may be not -- the margin is not as good, okay? But it's still important to develop business opportunity.

[Jeffrey Ohlweiler, analyst]

Okay. I guess, with monthly and quarterly ASPs going up, I imagine the momentum should give a nice healthy ASP hike as well in the second quarter?

[Pei-Ing Lee, executive]

We're expecting second quarter, the ASP will be -- has a good opportunity to be improved, okay? At this moment, it's pretty confident that there's a good opportunity that further improvement will happen.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And just last question. As you, at some point later in the year, shift some production to 10-nanometer, do you expect significant capacity reduction for quarter 2 as you might raise that production? Or you should be pretty smooth in terms of maintaining close to 70,000?

[Pei-Ing Lee, executive]

It would not be -- we will not be doing 10-nanometer as an expense of the current production, okay? All the 10-nanometer from the production equipment utilization point of view it will be quite different, okay, because of new technology and process is quite different. So equipment is also will be different. So we would not be expecting production impact, basically, the manufacturing go down and as a result of the technology migration.

[Operator]

[Operator Instructions] Next one to ask questions, Simon Woo from Bank of America.

[Simon Woo, analyst]

Okay. Congratulations for the great result. First, the question is regarding your strategies for the auto memory chip, auto DRAM. So do you see there any order cancellation among the auto OEMs given the fact auto OEM customers should reduce their production. So do you see any impact on your auto DRAM business?

[Pei-Ing Lee, executive]

Okay. Simon, thank you. And our result has been improved. It's not great yet, but I think it has been -- Q1 result is a pretty good improvement. From the auto market point of view, we don't see cancellation happening. Even though you may be hearing the report that auto production is constrained due to other component limitation, okay? But overall speaking, automotive sector usage of memory devices, percentage-wise, is not very big, okay? You may say it's -- from a DRAM output point of view, it's probably, overall speaking, it's low single digits, okay? So overall speaking, that low single-digit is a sector that's not going to have significant impact to overall market balance, okay? And as I also report to you that we'll be mostly doing the long term, okay, for the auto sector. Some of them are doing it in yearly contract, some of them doing quarterly contracts. And with the adjustment of their production output in Q2, the other components shortage, we have not been seeing a major adjustment from our side.

[Simon Woo, analyst]

Okay. Very clear. The final question is, could you recap the maybe Nanya Tech's mainstream DRAM density spec for the auto versus industry average? Because you mentioned that the consumer DRAM chip of Nanya based on the both, right, DDR3 and DDR4, but how are the auto DRAM? The mainstream still DDR3, maybe 1 gigabit, 2 gigabit or DDR4 already, sir, for the Nanya Tech?

[Pei-Ing Lee, executive]

For Nanya Tech, we now have quite a bit of product portfolio supplied to our customer simultaneously, okay? Compared to maybe 8, 10 years ago, we may have only 1 or 2 products at the same time to the market. Now we have near 30 products that we are shipping to the market. And so from a product point of view that we have raised product from DDR3, DDR4, even DDR2, now still shipping at different density. And also from a low-power point of view, we have Low Power D4, Low Power D2, Low Power D3, also at various density, okay? So all those product portfolio has given us the flexibility to react to market demand, customer demand. So we haven't been seeing major issue from a demand point of view, okay? And your question is about our mainstream product, as I described to you that we are shipping all these products at the same time. And in terms of total volume-wise, probably, I would say, DDR3 is probably still consists of -- DDR3 and DDR2 still consists of probably 30% of our output with strong demand from the consumer side, probably 30% or more. And the rates will be balanced by DDR4 and Low Power product.

[Simon Woo, analyst]

Sorry, you mean the DDR2 and DDR3 can be more than 50% of the total your...

[Pei-Ing Lee, executive]

30%.

[Simon Woo, analyst]

More than 30%.

[Pei-Ing Lee, executive]

Yes, more than 30%.

[Simon Woo, analyst]

That means the mainstream auto DRAM is DDR4 now?

[Pei-Ing Lee, executive]

Mainstream automotive, as I said, they contribute to not very significant number, okay? And there are 2 major applications there. One is DDR3. Some use DDR4, but not very much. There are some starting to use Low Power DDR4.

[Simon Woo, analyst]

Yes, yes. I see. Lastly, sir, sorry a little bit maybe unpleasant question. The DRAM ASP increase the mid-teens, but your OP margin improvement is kind of the less than 10%, which implies maybe cost increase quarter-on-quarter. So any reason why your cost to structure -- yes, FX income only 1.5%. So any reason why your cost increased quarter-on-quarter even with a 5% bit shipment growth, sir?

[Pei-Ing Lee, executive]

Our costs have been pretty much flat to maybe very small 1 percentage or so difference, okay, Q-to-Q, okay, cost-wise, okay? It's not major. Exchange rate also impact or maybe a couple of percent, okay? But the ASP increase at very -- ASP is calculated by, say, normalized to 1 density, okay? And as I described to you that we do have several different density, several different products. For instance, 1 gigabit, if you take the ASP compare to 4 gigabit, you do multiply by 4. So the actual profit, it's not a ratio the same thing, same way, because you still have overhead of packaging, testing, everything, okay? So for the ratio-wise, cannot take directly the ASP ratio to profit ratio, okay? It's not cost increase, but it's the product portfolio change mostly? I hope I explained okay to you?

[Simon Woo, analyst]

Yes, yes, yes. Maybe lastly, in the memory industry cyclical and then we -- yes, Nanya's quarterly results show you very good quick recovery, so how do you feel, sir, for maybe second half of this year or even next year to you? Do you think maybe this cycle will be different with continuously the trend? What's your view, sir?

[Pei-Ing Lee, executive]

I think DRAM is a very dynamic market, as you know, you have seen in this business for quite a few years, okay? At this time, I can say that the overall-wise, okay, the supplier side, the inventory level has been quite low, okay? And also from the worldwide economic point of view, seem positive, okay? Because last year, the COVID had only issue -- impact. Last year, the economic growth has not been great, okay? And this year, all the country has predicted good GPD (sic) [ GDP ] growth, okay, which will be helping the DRAM market recovery, okay? And we do see that the application application has been positively increasing in demand, okay?

So as I described to you also in my report to you in the financial highlight, okay, I've shown you that this quarter's result and I'm also showing you the last cycle of ASP decline, which is about 8 quarters to 9 quarters, okay? And I also showed you the last ASP increase, which is also 8 quarter, 9 quarter. As a result, because of what I just described to you on economic -- on the inventory level, okay? And all the factors that we have seen, the market demand, okay, I'm seeing that this will be an uptrend, okay, beginning of the uptrend, okay? However, this is not a guarantee, okay?

We still have to watch very closely on the potential negative impact, as I indicated, potentially COVID-19 recovery, okay? The impact to the worldwide demand, the trade conflict, is that going to be some negative impact also? Or the supply chain, okay, is there any overbooking or any shortage in certain key components that impacted, you indicated automotive area, okay? Is that going to be becoming a major impact to the market balance? And I just replied to you that the automotive by itself in terms of DRAM is a very small sector, okay? And a small adjustment on the small sector is not going to be a major impact to the industry.

[Operator]

[Operator Instructions] Next one, we have as Haas Liu from Crédit Suisse.

[Haas Liu, analyst]

I have 2 follow-up questions on the cost structure. So the first one is on the R&D. You mentioned the R&D expense will be staying at TWD 1.6 billion quarterly run rate through 2021, which is up by 20% year-on-year from TWD 1.3 billion last year. So maybe you could give us some more detail and color on the increase in R&D expense?

[Pei-Ing Lee, executive]

Yes. We had marginally increased our R&D expense, mostly to further, okay, accelerate our implementation of next-generation 10-nanometer technology and product and that's our goal to do that. And the increase, I'm not -- probably not -- yes, it's about 20 percentage or so. And this number is likely to be mostly the same way throughout the year.

[Haas Liu, analyst]

Okay. And my second question would be on your 1A and 1B. So would you expect the cost structure to be better or worse when you start ramping on 1A and 1B, as it is the first advanced technology you are developing on your own instead of licensing from micron? And maybe you could also provide some color on the depreciating your run rate based on your slightly increase in CapEx guidance?

[Pei-Ing Lee, executive]

Cost-wise, cost improvement wise, as I indicated several times before that throughout the industry, for all the company, all the suppliers, the further technology migration is not improving on the cost in the big number like many years ago, okay? There will be some improvement per generation, okay? But the percentage of improvement on cost will not be as significant as many years ago, okay? So we do see that we will have further cost improvement but that's not the main goal of further technology migration, okay? Of course, we're looking for some percentage of cost improvement. But majority driving force for furlough technology improvement is in the technology that enables us to introduce further products okay, that's including higher density, including lower power, even more lower power, okay, including the like DDR4 migration to DDR5 and in the future to DDR6. The capability to do the further product migration to step with the market demand, the mainstream demand.

[Haas Liu, analyst]

Okay. So my last follow-up would be on your 1A technology ramp. Could you provide more detail on how fast you expect to ramp 1A in 2022 and also 1B? And will you consider to expand the wafer capacity next year? Because, I mean, you want to disrupt your current, I mean, production based on your comments just now?

[Pei-Ing Lee, executive]

Our current fab, okay, we still have some space, small, but we still have some space, space available for small quantity home migration, 1A and 1B, small quantity, okay? And that's sufficient for us to have this technology and product introduction, okay, as I indicated. For longer term, we're looking for future growth beyond we still don't have a very clear report to you yet. But as soon as we had clear definition of that, we will report to you. Please stay tuned, okay?

[Haas Liu, analyst]

Okay. So it doesn't seem that you're going to expand wafer capacity very aggressively at least in 2022, while the contribution from 1A and 1B will be pretty limited. So that would imply very limited bit output growth next year as well?

[Pei-Ing Lee, executive]

We will not be doing very aggressive bit growth, yes, for next year.

[Operator]

[Operator Instructions] Now we are going to move on to webcast the Q&A session. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Okay. I have 2 questions from J.J. Park from JPMorgan. And first question is, can you provide how much 10-nanometer class product will account for total bit shipment in 2022?

Sorry, I still don't have that number. Probably this will be marginal, I would say, probably within 10%, okay, for next year, 10% plus/minus, okay, for next year.

And second question is, given supply tightness across key components, there is concern about inflated order, basically double booking for DRAM, for CE OEM, including smartphone maker, do you see slowing order from CE customer?

Okay. Overall speaking, I indicated our product portfolio, okay, shipment market, okay? We don't see major double booking, okay, from our side, okay? And the -- that's particularly in the consumer side, we don't see double booking. And for us, we also have to be at closely how we supply it to customer. We will be watch closely how many parts, how many volume they ordered from us the last few quarters. And how many they order this quarter, okay? And if there's something unusual, we will be taking control carefully for that, okay? So from our side, we haven't been seeing inflated orders double booking concern so far, okay? And do I see the double booking on CE OEM, including smartphone maker? There are some market talk, okay? Some market talk about maybe there are some CE OEM smartphone maker maybe buying more now in preparation for the upcoming smartphone hot season, which is typically in Q3 and Q4 instead of Q1 and Q2, but there are some market talk happening. But if I look at the overall supply and demand situation, the suppliers' inventory level, okay, and overall demand level, I have not seen this as a major concern yet for this year.

So we have the next question coming from [ Brian ], [ Yuanta Funds ] okay? The question is, do we expect the wafer cost stay relatively stable throughout 2021? Or we would expect some degree of rising, okay?

We will expect our specific Nanya wafer staying relatively stable. They will be marginally up or down quarter-by-quarter, but it will not be a significant change, okay? We are increasing our R&D expense. But that's within very small percentage of our total cost structure, okay? As you see that we have been doing R&D spending quite a bit R&D effort for the last 4 years, it's always been included in our cost structure, and we do not expect that current increase in R&D marginally will change our cost structure either. Okay. Let me come to the next question by [ Shaun Alexander from Parrot Research ]. [ Shaun's ] question is any potential impact on production from wafer shortage -- or water shortage, I'm sorry, yes, water shortage.

At this point, for Nanya Technology, we are pretty -- 2 major factors that we don't have water shortage issue. First factor is that we are on northern part of Taiwan, which in this area, the water shortage issue is much lower. And the second point is that Nanya Technology, we have been planning for water supply long-term, okay. We have been -- had a long-term -- for many years now, more than 20 years now, maybe 20 years or so, we had already had quite a bit of arrangement for our water supply, that including from the regular supply as well as from our well, okay, or our different kind of source of water. We don't have the issue on water shortage at this point, okay? And if the situation gets worse, of course, we will be response much better than on those factories that is located in south part of Taiwan.

Let me get to the next question is from Stanley Wang from SinoPac and the question -- the first question from Stanley is that 2021 depreciation guidance and pattern over the following quarters, okay?

And the depreciation guidance is about TWD 1.2 billion per month, okay? And this number may marginally increase, okay, only throughout the year, okay?

Update with the new DRAM process. And for this part, I had also reported that we are doing first-generation product piloting as we speak, and we are expecting to do sampling by the end of this year and hopefully the contribution will happen for next year on the output, okay? We also are preparing DDR5. And for the second generation, we are piloting the product in Q3 this year, okay? So that's my report to you just now. I was -- I guess, repeating that.

The third question is that monthly revenue is back to year 2017, are we more positive on pricing situation compared to 3 months' stage? Oh, pricing, 3 months ago, okay, the pricing point of view, are we more positive? 3 months ago, my report to you is that we are seeing quarterly price in Q4 still going down, but monthly price is going up. And today, we are seeing quarterly price is going up and monthly price also going up. So yes, compared to 3 months of Pogo, we are more confident, okay? But 1 trillion, as reported 3 months ago, is about the same and the margin or price increase in years is better than expectation, okay?

The #4 question is, how do we face the overbooking?

And as I also report to you that we are seeing limited overbooking and we will closely monitor the customer booking situation, okay? We closely monitor how many volume, how much -- how many has in order for the previous few quarters, okay, to few years, okay? And we also closely monitor their production situation, okay? And also their current purchasing order, and we will watch very closely each of the customer situation. So making sure that we minimize the overbooking from our side. And this question is PC notebook, TV set-up box are demand, the visibility for the future, can they be continued to the end of this year?

My report to you is that PC and notebook we're seeing visibility until the end of this year. At this point, TV also had pretty good visibility. From a set-top box and a router point of view, the communication also visibility is quite well.

The #6 question is, could you talk about why your variable cost increased about 5% to 6% Q-to-Q in the first quarter? Variable costs.

I don't think that we make a report that, and I don't think that we had a variable cost increase. Our overall cost is only marginal change by within 1 percentage or so only, okay? So of course, in general speaking, it is about the same. And if you come to this conclusion based on our price increase by mid-teens, but the margin increase only by, say, 8 percentage or so, and I explained that to you a while ago when Simon asked this question. Basically, the pricing was calculated, it's overall pricing from various products and various density and pricing increased contribution from low-density is very significant because you've taken 1 gigabit price increase and multiply by 4, okay, to calculate equivalent to 4 gigabit pricing, okay? So we cannot take the price directory ratio to profit, okay? There are overall overhead issue, including packaging, 1 gigabit takes 4 assembly for testing, okay? 4 gigabit, only 1 assembly, 1 testing, okay? And this question has been asked by Simon, and I repeated my answer again.

Okay. So that pretty much concludes today's question online. Thank you for joining us.

[Operator]

And that concludes our conference call today. And 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. We hope you will join us again next quarter. Thank you for your participation, and have a wonderful day. You may now disconnect. Thank you, and goodbye.

[Pei-Ing Lee, executive]

Thank you.