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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technology's 2022 First Quarter Earnings Conference Call. [Operator Instructions] The conference will be held only in English for investors around the world. 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 2022, followed by our guidance for the next quarter and key messages. And then Nanya Technology's Executive Vice President, Dr. Lin-Chin Su; Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao, 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 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.
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 begin.
Okay. Ladies and gentlemen, welcome to Nanya Technology Q1 2022 Investor Conference. I'm Pei-Ing Lee. My report to you will be, first, our Q1 revenue and result and CapEx ambition, then followed by market outlook and then conclude by business review and outlook.
First, for the revenue and results, and our Q1 net sale comes to TWD 19.946 billion versus Q4 last year, TWD 21.399 billion, down by 6.8%. Our gross profit comes to TWD 8.75 billion, down from Q4 TWD 10.56 billion. And the gross margin at 43.9% versus 49.6% (sic) [ 49.4% ] in Q4 last year. And our operating income, TWD 6.26 billion at 31.4% versus last year Q4 at TWD 8.0 billion at 37.5%.
And move to our net income comes to TWD 6.55 billion, 32.8% versus Q4 last year, TWD 6.452 billion at 30.2%. And our earning per share for Q1, TWD 2.11 per share versus TWD 2.08 per share Q4 last year. And the book value comes to TWD 58.45 per share.
Now it comes to our quarterly revenue comparison in a little bit more detail. Our revenue was down by point -- 6.8%, with the shipments down by around 1% and ASP decreased mid-single digit with exchange rate favoring 0.5%. So versus Q1 last year, our revenue up by 12.5% and shipment decreased by 20%, and the ASP increased in 40s with exchange rate minus 1.3%.
For the Q1 this year and Q4 last year's result comparison, for net sales, TWD 19.946 billion versus Q4 last year, TWD 21.399 billion, down 6.8%, mostly due to ASP decreased by mid-single digit with bit shipment also marginal decrease by 1%. Okay? And our gross profit, TWD 8.75 billion at 43.9% versus 10.563% -- TWD 10.563 billion at 49.4%. And this gross profit decreased mainly due to ASP decrease.
Our operating expense at TWD 2.488 billion, which is very similar to Q4 last year at TWD 2.54 billion. And for operating income, TWD 6.262 billion versus TWD 8.023 billion. Our operating income decreased by TWD 1.761 billion and mainly due to ASP decrease as well. Our net income comes to TWD 6.55 billion versus TWD 6.45 billion.
Net income increased by TWD 96 million, with the point one -- first point there, operating income unfavorable decrease by TWD 1.761 billion and followed by 3 favorable points, that is exchange rate favorable by TWD 1.09 billion and facility expense favorable by TWD 514 million and income tax also favorable by TWD 192 million.
For quarterly financial highlight, for Q1 this year, it's reported that our revenue comes to TWD 19.946 billion and gross margin at 43.9%; operating margin, 31.4%; and a net profit at TWD 6.55 billion, and it's marginally down from Q4 and Q3 last year.
For operating expense, on the left-hand side, you've seen the SG&A expense for Q1 this year at TWD 594 million. This is normal at around yearly average. On the right-hand side here, we see the R&D expense at TWD 1.895 billion. This is also normal at the yearly average compared to last year.
For the cash flow situation, Q1 this year, beginning balance at TWD 80.7 billion, with the cash from operating activity increased by TWD 11.19 billion and capital expenditure TWD 1.165 billion and with the financial activities, mainly due to exchange rate and cash equivalent, at TWD 1.68 billion. And end balance comes to TWD 92.409 billion. This is the historical new high for Nanya, okay?
And however, for this year's plan, we plan to have a dividend distribution of over TWD 10 billion, which will be explained later. And we also plan to have CapEx at around TWD 28 billion and which will also be explained later, okay? By the end of this year, the cash balance is likely to come back to around TWD 80 billion.
For CapEx and bit shipment. For the CapEx this year, planning is TWD 28.4 billion. And the -- so far, our spending is TWD 1.2 billion. And the purpose of this is to prepare 10-nanometer production, R&D and general CapEx reason. Bit shipment-wise, on the right-hand side, we expect this year our bit shipment will be relatively flat.
For the market outlook, we're continuously seeing strong cloud demand in Q2 -- for the Q2 this year. And the consumer market remains healthy as we're seeing smartphone and PC softening due to seasonality and also due to global uncertainty. And for the component shortage, we are expecting alleviation coming up at second half this year, and we also expect DDR5 supply increasing in second half this year. Also, in the second half this year, Russia and Ukraine conflict and high inflation rate and China lockdowns may impact overall demand.
From the suppliers' side, we're seeing supplier inventory remain low, healthy, and supplier CapEx dynamic adjustment may affect supply growth. From a demand point of view, our server market, data center leading the demand growth. And we are expecting DDR5 shipments starting second half this year.
For mobile market, our 5G model penetration continue to grow and average DRAM content increasing, however, shipment for mobile phone momentum is tapering. PC market for enterprise and gaming demand remain solid, while consumer model demand are softening as a result of global inflation and also seasonality issue. Consumer market, we see a positive outlook for networking, wearable and smart home device. We're still seeing automotive sector still dragged by supply chain issue.
Finally, for Nanya business review and outlook. For finance point, we will plan to distribute cash dividend of [ TWD 9.4 ] per share approximately. This will be proposed to Annual Shareholder Meeting at May 26, 2022. For Q1, our EPS, TWD 2.11 per share.
From operation side, our first- and second-generation 10-nanometer-class product development is on schedule. And our CapEx plan for this year is up to TWD 28.4 billion. And we also have signed a 250 million kilowatt hour renewable energy purchase agreement, which will give us about 10-year delivery of green energy. And we have maintained appropriate inventory of laser gas mixture.
And for the market outlook, Russia and Ukraine conflict and high inflation and China lockdown due to COVID may impact overall demand in the short term.
With that, I conclude my report to you. Thank you.
[Operator Instructions] The first one to ask questions, Haas Liu from Credit Suisse.
Dr. Lee and Joseph, congratulations on the good results. So my first question would be regarding on the pricing trend. And based on your comments, it seems that demand is still pretty healthy for customer applications, while supply for specialty DRAM continues to decline as Tier 1 DRAM makers are shifting to other focus. Could you discuss about the competitive landscape for specialty DRAM and your expectation for pricing in 2Q for specialty DRAM and other mainstream DRAM?
Pricing trend for Q2 is your question. And currently, we're seeing pricing trend will be either flat or marginally decrease. And the reason for that is that still maintained global uncertainty, that's including the original material instability, global inflation and component shortage still in place and also COVID lockdown. And overall speaking, we're seeing the supplier inventory being healthy. Okay?
And the demand side, there are some healthy side and some tapering side, okay? Overall speaking, this market is relatively balanced and healthy with the uncertainty still ahead of us. So pricing trends, in the short term, we're seeing the -- could be relatively flat or marginally down. And for specialty DRAM-wise, it will be similar to what I just described to you.
Okay, very, very helpful. And could you also discuss your progress on 10-nanometer technology and the technology road map and also production timing for the new fab?
Okay. 10-nanometer technology, as I reported, that our first-generation and then second-generation 10-nanometer product development and process development is on schedule. And actually, it's quite promising, and we are expecting that for second half this year. We may have some engineering sample available from first-generation 10-nanometer technology, and that's including both DDR4 and DDR5 product, okay?
And for new fab, our new fab are still not yet under construction. We are still waiting for getting the license approval from government. Okay? And likely, our new fab will be ready by 2025, okay? And because of all this delay due to licensing approval, plus, recently, there are shortage in terms of labors and materials, in construction materials, so we are expecting the new fab will not be ready until 2025.
Before that, though, we still have a small space in our current fab. And plus that, we plan to convert our 30-nanometer process technology into 10-nanometer. And also, possibly, some of our 20-nanometer production will be also converted to 10-nanometer generation production. So with that, before 2025, we will have marginal, not very much of a big growth. But we're still going to have a marginal big growth between now and 2025.
Okay. I think just a quick follow-up on pricing. Do you think specialty DRAM pricing trend will be more favorable compared with mainstream DRAM in the near term given your comments?
For the specialty DRAM, that's including both DDR3 and DDR4, okay, of course, DDR4 also being used now in server, also in PC as well. And for the low power, it's using in mobile, low power DDR4 primarily, okay? So the application-wise, DDR3 is mostly in specialty. But also in the consumer side, it's also DDR4 as well. Okay?
And if you're looking into just DDR3 versus DDR4, though, DDR3 has different density mostly from 4 gigabit, down to 2 gigabit, down to 1 gigabit and then even lower. Okay? On the other hand, for DDR4, though, it has 4 gigabit and up to 8 gigabit and 16 gigabit up the other side, okay, with a common at the 4 gigabit, okay? So 4 gigabit is both DDR3 and DDR4, okay, and both being used in consumer side and speciality side, okay?
At this time that the pricing for DDR3 and DDR4 is coming to narrow down the gap. The different -- price difference is coming closer. Okay? And however, different density has its own different price trend. For the future price trend on specialty, I would say DDR3 likely to be -- continue to be stable. Although DDR3 has been price increasing since Q1 last year until Q3 last year, then gradually are coming down, okay, now coming down to about a similar price like DDR4. Okay?
So from now on, my -- I'm expecting the pricing will be more stable in the DDR3, okay? At least from the quarterly price point of view, we already see that for second quarter. Okay? And however, monthly, we still have to watch closely on this global uncertainty we're just talking about. Is it going to be becoming more stable or not, okay? And with all this in mind, we expect, overall speaking, Q2, the price trend is still going to be relatively flat or marginally down.
Next one to ask questions, Jeff Ohlweiler from Macquarie.
First one, can you talk about when you expect the material production of 10-nanometer in terms of actual real shipments?
As I reported that we will begin some engineering samples second half this year, and possibly, a very small volume, a small production volume by the end of this year, very end of this year. And the contribution likely will happen on next year, beginning next year, first half, and then gradually increasing to second half also.
Okay. And do you expect pretty flattish bit growth throughout each quarter this year?
Pretty flattish until the end of this year as the opportunity of some contribution from 10-nanometer class.
Okay. And then also, you mentioned facility expense reduction of TWD 514 million this quarter. Can you explain that a little bit more, please?
So you're talking about the facility cost reduction?
Yes, yes.
Oh, okay. Okay. That's because of we had some facility cost planned long time ago, okay? We had took some of the costs, okay? And after all the conclusion that we don't have to spend so much in facility costs, so basically, that's a reduction in the cost of TWD 514 million.
Okay. And then lastly, can you talk a little bit about the tax rate that you expect going forward?
Tax rate?
Yes, yes.
Okay. Tax rate, generally speaking, is 20% in Taiwan.
Okay. And will you get any benefit of your R&D expense with the 10-nanometer ramp-up, with the CapEx? Or how will that work?
The CapEx planned for this year is TWD 28.4 billion, up to TWD 28.4 billion. Mostly, it will be used for the 10-nanometer equipment preparation, as I just described to you. Some of them will be used for R&D, okay, and general use.
[Operator Instructions] Next one, we have Simon Woo from Bank of America.
First question is your China sales exposure in -- according to the Q1 results. I remember you said previously, 20% range, but your annual report is still showing about 40%. But could you recap your [ weather ] unit, I mean the sales exposure for China according to Q1 result versus the last year annual result?
Okay. China exposure, generally speaking, is 20%. It's slightly lower than 20%. That's our direct customer. However, many of our customer, like U.S.A. or European customer, Japan customer, they buy from us, but they ship to China for their own production. So you may be seeing some ship to difference such what you see the difference, 20% versus 40%. Okay? So our direct customer is relatively around 20%.
Yes. Yes, great. So not much has changed from mix [ range ]?
Yes, yes. And that -- you're talking about exposure, so far, we're seeing that the COVID lockdown may be causing some of the imbalance in terms of supply chain. Okay? We have some customer who was not able to receive the shipping. Okay? Some customer had difficulty shipping out and some customer had difficulty in shipping in. Okay? That issue has been also dynamically changing from South China to Shanghai and inner China, et cetera.
And also, some of the customer has been trying to flexibly adjusting their receiving point, okay, including the -- beginning, they may be shipping -- they may be receiving from Shenzhen and they switch it to Shanghai. And then Shanghai becoming lockdown, then they ship it to other places. Okay? Some even the -- changing their manufacturing location to like Thailand, okay? Things like that continue to be happening.
Yes. Very quickly, for the revenue mix by application, so consumer, still [ 60% ] range versus the other 10% range. Will you recap your revenue mix for the Q1 result?
They're very similar to previous quarter where, in general, has a 65% [ price mix ] on consumer, okay, and around 10% or so in the -- a little bit more than 10% in the low power. And then balance is the server as well as the commodity.
Yes, yes. Again, your consumer, 65% includes the automotive and industrial, right?
Yes, yes.
Okay. And then lastly, sir, sorry, you're saying your new fab construction has not yet started?
Yes. Yes, our groundbreaking for the new fab is not yet started due to we're still waiting for license approval from government. Yes.
Yes. However, you are saying shares that -- I mean the fab operation will start in 2025.
Yes.
Okay, okay. Okay. And then, sorry, lastly, media is saying equipment from U.S. and Europe, those deliveries actually had been delayed. And also, U.S. chemical company, which operate their facilities in Europe -- you know which material, right? We are not talking about laser, of course, that's for other materials. It tends to be some in the situation of the very tight time in the hedging process. So could you share your view on the equipment delivery delay and also some hedging, I mean the current raw material shortage?
Equipment delay is in general. I mean this is not just in DRAM, but also in the logic semiconductor manufacturing in general. Okay? And that continue to be the case. Some of the equipment suppliers still in shortage for their component, okay? But that situation recently has been gradually alleviated in the equipment side. Okay? And coming up is what you just described, the laser gas concern, okay? I'd like to add a comment that Nanya has prepared appropriate inventory for laser gas, okay? So we don't have, so far, we don't have any operational abnormal situation due to the case.
Yes, yes. Yes, all clear here, sir. So maybe today, to conclude then, your operation, okay; long-term plans to add new capacity, also okay. And then the lastly, the ASP down low single -- sorry, mid-single digits in Q1, but second quarter, maybe flat or fairly marginal decline. Then second half, maybe we can say some upside there, right? The industries [indiscernible].
I think currently, the market situation from the demand side is, without the uncertainty we just discussed, is actually quite okay. Okay? We have to look back a couple of years, like beginning of 2020, we had this COVID influence, the global economic influence, and then gradually coming to shipment issue, coming to supply chain imbalance issue, component shortage issue. Okay?
And then we're gradually seeing that improving, okay? And unfortunately, we now have a new issue, okay, Ukraine and Russian conflict, okay? And that's causing, even though the regional consumption is not very large percentage worldwide, however, still causing a worldwide concern on global inflation and also discontinuity of certain supply chain. Okay? So this -- all this uncertainty is still there, still exists. And it could be prolonged, okay, unfortunately.
So we still have to watch those development very closely, okay? Even though, so far, maybe still okay. Okay? We know that Q2 -- at least from April, I confidently say that April will be okay. But May and June, we have to see how bad it is. All those uncertainty continue to prolong, first of all, the regional [ militarial ] COVID issue, also the lockdown issue, COVID lockdown issue. All those cause quite a bit of manufacturing disruption. Okay? And if that continue, certainly, it will become in a [ cancer ]. Okay? So at this point, I have to be very cautious on those uncertainty. They change so rapidly.
[Operator Instructions] Next one, we have Simon Woo from Bank of America.
This other guy is not asking a question. So maybe 2 things. Number one, your payout ratio of 50% will continue, sir?
In mainly dividend distribution?
Yes...
Yes, our dividend distribution policy will be between, say, 45% to 55% of our yearly earnings. And this year, we plan to distribute TWD 3.7 per share based on last year's [ TWD 7.4 ] earning per share. Okay? And like this number will remain the same now.
Yes, yes. And then secondly, you mentioned that the DDR5 will be available, maybe small volume late this year, more meaningful next year. But you are using the new equipment, and then the cost must be higher than maybe DDR4. So is it fair to say your overall second half cost structure may be a little bit unfavorable -- I mean sequentially up in the second half versus the first half? And then even next year, your costs should be up year-on-year because of the new equipment, a depreciation of cost?
Simon, regarding the DDR5, Nanya is a latecomer. Okay? We are -- we will be doing engineering sample this year. So we don't expect our DDR5 will be in volume this year or even most of the next year. Okay? So DDR5 affecting our overall cost or value will not be very significant for Nanya, okay, this year and next year. Okay? And the DDR5 likely will not be introduced in the consumer market yet, okay? Likely, it will start in the server market first, okay, and then the PC market. And however, both of server market and PC market will remain largely DDR4 even for next year. Okay?
So DDR5, generally speaking, we are preparing, okay? But we are not -- we will not be very aggressive in getting to DDR5 market. However, we need to prepare DDR5 as it's growing in server market, PC market. And also, it may gradually introduce into consumer market as well. Okay? So that's the reason why Nanya prepared DDR5. Okay.
Yes, all clear, sir. Maybe lastly, DDR4 portion is now bigger than, therefore, DDR3 for your consumer and the compute mobile area overall? Or was the DDR3 volume [ equipment ] larger than, therefore, DDR4?
Overall speaking, for Nanya, okay, we still have DDR3 more than DDR4. Okay? And the DDR3 contribute to still most of the consumer market today, specialty market today, with DDR4 gradually replacing DDR3, particularly in 4-gigabit density. However, in 2-gigabit, 1-gigabit or smaller density, still maintaining DDR3, okay? And some of the customer also like to maintain DDR3 even at 4 gigabit. For Nanya point of view, we make it available for both DDR3 and DDR4, even at 4 gigabit, okay, such that when a customer would like to move from the DDR3 to DDR4, they can also buy from us in the consumer and specialty market. Yes, I don't know if I give you the answer you expected.
Yes. Yes, we hear your point, DDR3 is still larger volume versus DDR4 in terms of the bit shipment. But it will be great if you can share when the crossover, when the DDR4 shipment volume can be [ available ] than DDR3 or that would not happen maybe even end of this year? Yes.
That very much depends on customers' demand, okay? At this point, as I described to you, customers in the special design consumer side still in higher percentage in DDR3. But some customer may be shifting from 4-gigabit DDR3 to 4-gigabit DDR4 in certain product, but not overall product. Okay? And also some customer may be using low-power DDR4 instead of DDR3 as well. And Nanya has been making both DDR3, DDR4 as well as low-power DDR4 and low-power DDR4X available for our customers, especially in the specialty market.
Yes. Yes, got it. Clear, sir. Sorry, sir, one of the investors asked, your new equipment was the $28 billion CapEx spend. You are putting the new equipment for [ $10-million-plus ] upgrade. This new equipment is for -- in the [ CVD ] machines. Depreciation period, it could have been longer than the previous? Or was saying -- I mean the depreciation period for the new equipment is still, what, 7 years, 8 years or...
Yes, it will be similar to previous. Yes. So we [ prelim ] for probably 8 years, yes.
Yes, I see. I see, no changes.
Yes, no change.
[Operator Instructions] Ladies and gentlemen, there seems to be no further questions from dial-ins at this moment. So we will continue our Q&A session from webcast. And Dr. Lee, please begin.
Okay. I'm seeing the first question from SinoPac Securities, Stanley Wang. Your question is, since you are transferring process into 1A and 1B nanometer, what should we think about your depreciation number this year? Okay?
Our depreciation number will be only marginally increasing this year and next year as well because we had the new equipment, but meanwhile, we also had the order equipment is gradually depreciating. Okay? So the depreciation will be about TWD 1.3 billion per month, okay? And the number is likely to be not too much change. Okay?
Okay, thank you, Dr. Lee. And thank you for all your questions. We will close the conference call now. And ladies and gentlemen, we thank you for your participation, and that concludes our 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. We hope you will join us again next quarter. We thank you for your participation today, and have a wonderful day. You may disconnect your lines at this moment. Thank you, and goodbye.
Thank you. Bye-bye.