Nanya Technology Corp
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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technology's Second Quarter 2018 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. The format for today's event will be as follows. First, Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2018, followed by our guidance for the third 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. 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 now download them from 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. And now I would like to turn the podium over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and current quarter guidance. Dr. Lee, please begin.
I'm Pei-Ing Lee. Okay. We come to the agenda for today's conference. First, start with, as usual, key takeaway. Then the Q2 revenue result, CapEx figures, market outlook and business outlook. Q2 has been a pretty good quarter for Nanya Technology. Our revenue comes to 24.52 -- TWD 24.592 billion, Q-to-Q up by 30.8%. ASP increased by mid-single percent, and bit shipment increased by low 20%. Gross margin at 55% and operating margin at 46.8%, and foreign exchange gaining on the revenue for TWD 1.768 billion. And we recognized TWD 2.526 billion of income earning tax expense due to undistributed income from last year. Okay? So at the end, the final net income comes to TWD 11.304 billion, with net margin at 46%. EPS for Q2 TWD 3.68. And book value, this is after deducted cash dividend of $3.5 per share, comes to $47.36 per share. Okay? For first half, revenue comes to TWD 43.39 billion, which is 74.6% versus last year first half. Net income TWD 18.531 billion, and accumulated EPS of TWD 6.07. The quarterly financial highlight for the revenue in deep blue and net income in light blue versus the gross margin in the upper line here and the operating margin in the lower line here. For the Q2, the gross margin comes to 55% versus around 51.4% last quarter, and whereas the operating margin 46.8%. Okay? And the -- what I'd like to point out further is that for the previous 5 quarters in 2017 and Q4 '16, our net income here are partially contributed by major nonoperating income, that's including selling of Inotera share, selling of some of the Micron share here. Okay? So even though we have the operating income in every quarter, these portions are partially contributed by major nonoperating income. However, for the last 2 quarters, there is no major operating income for these 2 quarters. And our performance in terms of the revenue continued to increase as well as the net margin continued to improve, also the gross margin as well as the operating margin. So for the quarterly revenue result, Q-to-Q comparison, Q2 versus Q1, revenue up 30.8%. Shipment low 20%. ASP increased by mid-single digit. Exchange rate also helped. Versus last year, it's increased by pretty big number. So this is pretty much comparative quarterly result between 2 quarters. For the financial summary, as described, net sales increased by 30.8%. Gross profit TWD 13.537 billion, also increased by around 39%. Operating income TWD 11.51 billion. Also there's nonoperating income here, TWD 1.984 billion and income tax minus TWD 2.19 billion, with the net income comes to TWD 11.3 billion, which is about 56% improvement over the Q1. Okay? Earnings per share TWD 3.68, also improvement from the first quarter. Book value is [indiscernible] already subtract $3.5 of dividend payable. Okay? A little bit more detailed comparison between Q2 and Q1. Net sales increased mostly contributed by ASP increase in mid-single digit, and also bit shipment increased low 20 percentage, and with exchange rate help a little bit. And gross profit improved to 55%, and also this is mainly due to ASP and shipment increase and some cost improvement. Okay? For operating income, this is pretty much very similar to the OP margin, helped by the increase in ASP and shipment increase. Okay? Expense wise, we had R&D expense increased by TWD 482 million and SG&A increased by TWD 123 million. Net income, TWD 11.3 billion, whereas the exchange rate positive compared to last quarter. Exchange rate Q2 is positive TWD 1.768 billion versus Q1 is minus TWD 1.178 billion. So this back and forth is already TWD 2.946 billion positive. However, we have to recognize tax expense of TWD 2.526 billion for the undistributed earning. However, overall speaking, Q2 has been a pretty positive quarter for Nanya Technology. For SG&A expense comes to TWD 669 million, and increases -- the reason for slight increase is for employee compensation and variable selling expense during this quarter. R&D comes to around TWD 1.358 billion. And this is -- this increase is due to, we are putting quite a bit of effort in the 20-nanometer product development as well as the 10-nanometer class technology development plus some employee compensation for R&D employee. Okay? For the future, the outlook for SG&A expense, we are expecting in order of about TWD 550 million to TWD 650 million per quarter. And for R&D, we're also expecting around 12 -- TWD 1.2 billion to TWD 1.3 billion per quarter in the future quarter. Cash flow. Beginning balance for Q2 is TWD 50.197 billion with the cash operating activity contributing, capital expense and investment from the others. All this comes to end balance at TWD 61.456 billion, with free cash flow coming in for Q2 at TWD 8.9 billion, which is pretty positive. And if we summarize from Q1 -- beginning of Q1 balance at TWD 33.76 billion to the end of Q2 at June 30, basically we had a cash up from operating income TWD 19.635 billion and capital expenditure of TWD 4.7 billion and with investments and other coming in at TWD 12.772 billion. And this's cash coming in as mostly due to the Micron share disposal. Okay? So in summary, total in first half free cash flow came in at TWD 14.915 billion. To summarize the first half financial result, total sales TWD 43.39 billion, up by 74%. And the gross margin, TWD 23.278 billion, up by 122%. Operating income, TWD 19.829 billion, up by 147.3%. Then we have the income before tax also up by 83.6%. The net income for the first half this year TWD 18.531 billion versus last year TWD 9.765 billion. EPS TWD 6.07 versus TWD 3.55.
When we look at further detail from that for first half Q -- first half last year, we have nonoperating income contribute nearly 1/3 of the net income. For this year, very little major nonoperating income. We are achieving a lot better than last year. So if we minus this nonoperating income, actually the improvement is more than 2.5x. So for the CapEx and bit shipment situation, the CapEx for this year will be increasing -- will be increased to TWD 23.9 billion, and this is Q1 and Q2 already expensed. Okay? And what is going to be increasing here is due to new CapEx expended for this year, TWD 15.94 billion, this is out of the total of TWD 19.71 billion total package to achieve 15% bit growth for 2019. Okay? 15% bit growth for 2019. So we have some remaining payment needed for 2018. Basically this is the 20-nanometer equipment deferred and 10 -- the final payment basically and the 10-nanometer class technology development. These 2 totally around TWD 8 billion. Okay? So for the bit shipment, we are expecting mid-single digit increasing beyond Q2. Okay? Q2 we had low 20% bit shipment increasing. Q3, we are expecting mid-single digit increasing. So we target for the 2018 overall reach 48% of bit shipment versus 2017. And we are expecting 2019 bit growth will be 15%-ish up more than 2018. For market outlook, we are expecting moderate supply growth for Q3, and the second half demand in each segment remains pretty favorable. And for the mobile market, the new flagship smartphone with emerging application, including high resolution, including 3D sensing, artificial intelligence, and augmented reality, all these new application continues to stimulate the mobile RAM demand for the mobile business. High-end gaming phone starting to ship at around 8-gigabyte mobile RAM. Server market continued to be world-based market, okay? Continued to outgrow the market average demand. Hyper-scale data center also continued to be very strong. Telecom operators prepare for 5G service and estimated 258-gigabyte DRAM as the average content for server unit. Okay? Consumer market. Major drivers for consumer application continued to be TV, set-top box, IP -- SSD, networking and smart speaker. The IPTV 4K penetration now exceeding 50%. And SSD built-in DRAM in [ iSSD ] continued to grow. And communication DRAM content forecasts to grow by 40% year-to-year. What need to be watched globally, we need to continue to pay strong attention to tariffs war, IP infringement and Antitrust accusation, et cetera. However, all this matter has not been impacting memory business in the near term. We don't see any business impact yet. However, caution need to be -- is needed for potential out-of-control situation. This basically impacting the global economic is probably more concerned than anything else. Business outlook. For second half, DRAM demand-supply, I'll expect to remain reasonably stable. Cash dividend of TWD 10.88 billion, $3.5 per share. Payment day is on July 20, is coming up in a couple of days. CapEx budgeted for '19, new CapEx, TWD 19.71 billion, mainly for mid-teen bit shipment in 2019. And as I described, some of this, about TWD 15 billion-or-so, will be spent towards the end of this year in preparation for next year's 15% bit growth. Our Nanya Technology operation focus. We plan to deliver low-power DDR4 and low-power DDR4X product in Q4 '18. And as a result of this planning, we expected our monthly output to increase to 73,000 wafer start per month -- output of wafer per month in 2019 versus current 65,000. And this -- within this 73,000 wafer per month will be 47,000 in 20-nanometer. And the current 20-nanometer is only 35,000. Our 10-nanometer class technology development is underway, is in pretty good progress. With that, I'll conclude my presentation to you, and I like to welcome your question.
[Operator Instructions] The first question is coming from Simon Woo, BoA (sic) [ BofA ] Merrill Lynch.
Two questions. Number one, yes, the $3.50 per share dividend based on the last year's results. But any new update or new guidance regarding the dividend payment based on the 2018 results? So you're saying about 50% or more than 50% of OP can be useful for the shareholder returns? And then I'll ask the second question regarding the 10-node technology.
Thank you for your comment, okay. For the $3.5 for this year and 2018, as I described to you all before, that we are looking for more than 50% of the income will be distributed. However, all those numbers still need to be approved by our shareholder, by our board. So that's our general guidance, that still remain the same.
And second question is regarding your 10-node technology. So this is all based on the Micron support and also the -- after the 30 node and then 20 node, what's your progress for the 1x node. Is it fair to say 1x node [indiscernible] will be available late this year? Or still we have to wait until the first half next year?
The 10-nanometer generation technology development is a 3-year project for Nanya Technology. And I'll tell you, it's substantially different from the existing 20-nanometer technology. In order to prepare for future technology growth platform, Nanya had come up with a very -- pretty substantiated technology innovation that will be implemented in our 10-nanometer generation. And we will then use this first 10-nanometer generation technology for the future platform, which means that in order to -- for the server generation of the technology migration, we have to look far ahead in terms of the key ingredient in the technology and implementing those future -- basically future technology ingredient in front in the 10-nanometer first generation first. So the future outcome for the technology growth will be a little bit smoother for us in the future year.
[Operator Instructions] Next one we are having [ Melrose Chiu ] from [indiscernible].
I have one question regarding the ASP. For Nanya, your growth -- the ASP growth mid-single digit quarter-on-quarter in the second quarter. [Technical Difficulty]
It's hard to hear you.
[Technical Difficulty]
Can you speak out a little more?
Yes, sure. I have questions about the ASP for second quarter. So the ASP growth, mid-single digit -- is it okay? Hello?
I will try to understand. Okay. Please continue.
Yes, sorry. For ASP, the second quarter growth, mid-single digit quarter-on-quarter. And how much was it from the price increase and also how much was from product mix improvements? And can you also share with us about the pricing trend in the third quarter and fourth quarter and also the breakdown from the market price and also the product mix?
Your question is regarding the improvement in the margin, how much contribution, right?
The ASP.
ASP.
The ASP.
ASP, how much is contributing from the product mix and how much contributing from the pricing? Yes, okay.
Yes. Also the [indiscernible] third quarter and fourth quarter.
Third quarter and fourth quarter. Okay. For the upcoming quarter, our product mix is pretty much in place already at the end of the Q2. So the product mix contribution to ASP likely will be remaining very similar. And the ASP wise for Q3 and Q4 for Nanya Technology likely will be remaining very similar to Q2, maybe with slightly better contribution if we get into more into the server business toward the end of Q4. Okay?
Next, we are having J.J. Park from JPMorgan.
I have 2 questions. There is some concern about the -- some inventory at the channel and the major maker. Did you hear anything about the inventory level at the channel? And what's your inventory level by the end of June for the [indiscernible] and I will ask the second question.
Okay. Your understanding is your -- about the inventory in the channel, right?
Yes, that's correct.
Okay. This is mostly related to the DDR4, okay? And DDR4 is shipped to basically 2 major markets. One is the server market, okay, which contributed to probably worldwide demand about 25%. And the other is shipping to the commodity for the PC and notebook. This is -- or contribute to our worldwide demand about 15%, okay? For the server market, actually, it's pretty -- the demand is quite low. Inventory level is very low, okay? And for the PC market, it's possible that the -- this is a seasonal low time for the PC market, okay, although the PC market has continued to hear some encouraging news that the enterprise use PC and notebook continue to be pretty promising, okay? So yes, there are maybe some commodity DDR4 inventory in the channel. But as far as we know that inventory issue is not severe, it's actually a short-term situation for them. And as we also know that Q3 usually, typically, is harder season, not only in the consumer market but also in the PC market as well.
Okay. It's very clear. But [indiscernible], you basically guided with mid-teens percent [indiscernible] growth in 2019. And then I think the overall depreciation is perhaps likely increased into 2019. So what kind of a [indiscernible] do you expect in the 2019 compared to the 2018 fiscal year?
Depreciation, yes, it was a new equipment initiative likely to come to around USD 30 billion -- USD 30 million per month, okay? And the -- cost down wise, we are expecting within single digit of cost down for next year, okay? And this will not come by within 1 quarter, will come maybe quarter-by-quarter. Okay.
So let me clarify, so you expect the middle digit -- middle single-digit percent year-on-year cost reduction in the 2019.
I am saying that I expect it probably within 10%.
Okay. [indiscernible] 2018 cost reduction for the [indiscernible]?
I'm sorry, can you repeat that?
Yes. You're looking at within 10% cost reduction in 2019. What about the 2018 cost reduction target?
2018 is very similar to 2019, within 10%.
[Operator Instructions] Next, we are having [ Eddie ] from [indiscernible].
I was just wondering, can you share with us your assumption of smartphone growth into the second half of this year, given that you expect roughly stable pricing in the fourth quarter for DRAM, 4Q?
So I cannot hear you. Can you repeat the question?
Yes, yes. So based on the pricing outlook that you gave, Dr. Lee, what are you assuming in terms of smartphone unit growth in the second half of this year? You are guiding for more or less flattish or slightly up ASP for DRAM into the quarter?
Guidance for ASP?
Yes, yes, ASP. So I was wondering, what are you...
ASP?
Yes, in terms of...
So your question is regarding to guidance of ASP?
No. My question is, based on your guidance of ASP for the second half of the year, what are you assuming for smartphone's unit growth for the second half of this year?
ASP [indiscernible].
[Technical Difficulty]
Okay, [ Mr. Eddie ], thank you for your question. Because your line is kind of disturbed and we cannot hear you correctly, so I'm going to release you. Okay, the next one we are having is Simon Woo from Bank of America Merrill Lynch.
So just one quick question regarding the -- your 1x node [indiscernible]. Sorry, I don't understand well your guidance [indiscernible]. Mainly [indiscernible], right?
[indiscernible]
[Technical Difficulty]
Mr. Woo, your line has also been disturbed. So can you hear us?
Yes, I can hear you well, but I think that some noise is coming from your side.
Okay. And also, really sorry because we're running out of time for online Q&A session. So we are going to move on to the Q&A on the floor. Okay. And you will -- going to be -- ask the last question. So go ahead, please.
Okay. My question is, what's the -- maybe second half, your production node mix for 20 node versus the 30 node? And then for 2019, which quarter will be the first time we can see 1x node production then?
Yes. The question is that the 10-nanometer generation, when is it going to be ready for production. We are targeting for 2020 production for 10-nanometer generation, okay? And...
1x node?
Most of the 2019, we -- our production would stay at 20-nanometer.
Oh, I see. So mainly 20 node. So not yet 1x node because Micron actually already started 1x node and then your competitor is even working on the 1y node. So the question is, are you sure you will continuously use the -- only the 20 node even for -- through the year 2019?
Yes. That's our plan. And since our business model is a little bit different from the major supplier, okay, and as I described to you, Simon, that our technology implementation can be slightly behind major supplier and we can still maintain our competitiveness in the market sectors that we are interested in.
Yes. Lastly, how about the mix with for DDR4 versus the DDR3?
I'm sorry?
Question is the DDR4 versus the DDR3 or below, what's the mix ratio for maybe second half this year?
Ratio of DDR4 versus DDR3. Our DDR4 is running around 30 percentage versus DDR3 70 percentage. And this could be the -- vary slightly quarter-to-quarter.
[Operator Instructions] Now we move on to on-floor Q&A session. Dr. Lee, please go ahead.
Okay, now we open up for question on-site here. Okay, please make your comment and question. Charlie?
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Thank you. That concludes our conference and conference call today. Please be advised that the video replay of the conference will be accessible within 3 hours in Nanya -- from now at Nanya's website. We hope you will join us again next quarter and coming quarters. Goodbye, and have a good day. Thank you.