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Nanya Technology Corp
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Welcome to Nanya Technology's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As this conference is being viewed by investors around the world, we now conduct this event in English only.
Today's conference will be approximately 60 minutes. And Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2020, followed by our guidance for the third quarter of 2020 and key messages. 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 question-and-answer session.
Today's presentation materials are available for download at Nanya Technologies website 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 materials.
And now I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and current quarter guidance. Dr. Lee, please proceed.
Okay. Thank you. Gentlemen, thank you for joining Nanya investor conference. I'm Pei-Ing Lee. My report to you today include Q2 revenue and results, CapEx and bit shipment, and our response to COVID-19, market outlook and business review.
First, our business results, our financial results summary. In Q2 2020, our net sale comes to TWD 16.489 billion which is 14.4% improvement over Q1 2020. And our gross profit, 5.042 billion, exceeding 30%, which is 6.8% improvement over Q1. And operating income TWD 3.229 billion is also nearly 6.9% improvement over Q1. And EBITDA at TWD 6.784 billion exceeding 41% for Q2.
For the nonoperating income and income tax, the nonoperating income pretty much compensated by income tax expense, okay, and Q2, the exchange rate has impacted negatively to our results. The net income comes to TWD 3.211 billion at 19.5%, which is 6.1 percentage point improvement over Q1. And our earnings per share at Q2 is TWD 1.05 per share, and book value TWD 49.62 per share, which is after deducting TWD 1.5 of cash dividend.
For the summary, quarterly revenue results. Q-to-Q revenue increased by 14.4%. And this is due to mainly shipment increase by mid- to high single digit and ASP pricing also increased by mid- to high single digits. Exchange rate impact negatively by 0.5% Q-to-Q. For year-to-year, revenue increased by 32.5%.
For result comparison, Q2 versus Q1 this year, our net sales increased by 14.4% and mainly due to the reason explained before, the bit shipment increased by mid- to high single digits and ASPs also increased by mid- to high single digits.
Okay. For the gross profit, TWD 5.042 billion and mainly also due to the same reason, ASP shipment increase and some cost improvement. On the operating expense, percentage-wise, it is pretty much even with Q1 as dollar number increased in the SG&A and R&D space will be spent in the next few -- 4 years. Operating income at 3.229 billion, 19.6%. And operating income increased by TWD 1.397 billion.
Our net income, TWD 3.211 billion, also improvement of TWD 1.283 billion and primarily due to operating income increase by TWD 1.397 billion. Exchange rate loss by TWD 280 million, as I explained to you, is unfavorable. Our Q2 has a negative of TWD 202 million negative due to strong NT dollars, and Q1 is favorable. Income tax is TWD 180 million favorable, okay, so these 2 pretty much offset each other.
For the financial highlight quarterly, for the last few years, Q2 2020 seeing some improvement over Q1. Our OP margin, which is the blue line, comes to 19.6%; and gross margin, which is a green line, comes to 30.6%; with net income TWD 3.221 billion as indicated.
On the operating expense, SG&A expense at Q2 is TWD 574 million, which is pretty much in the ballpark of our SG&A expense. For the R&D expense on the right-hand side, 1.29 -- TWD 1.239 billion, which is also in the range of our quarterly expense, and difference is mainly due to a charge in different quarters, okay? There's no -- everything is a normal range.
For cash flow situation, Q2 beginning balance is TWD 47.532 billion and end balance is TWD 50.971 billion, with a cash positive from operating activities TWD 4.706 billion and CapEx TWD 1.02 billion. And exchange rate offset and financing -- with financing change, okay? And this number is explained at the bottom low, TWD 513 million from exercising ESOP, employee exercising ESOP, and negative TWD 788 million from exchange rate difference of translational foreign exchange rate.
For the first half, cash flow, our beginning balance is TWD 44.149 billion, and the end balance at June 30 is TWD 50.971 billion. And over this time every year, cash flow from operating activity is TWD 8.786 billion positive, CapEx; 1.858 billion; and finance and effect on exchange rate is TWD 106 million.
Our CapEx and bit shipment situation on the left-hand side of the chart, CapEx, we are targeting TWD 15.76 billion for this year. This is the full approval of CapEx -- upper limit for CapEx expense, okay? The main purpose for this is for 10-nanometer class piloting line establishment.
On the right-hand side, we have bit shipment of approximately 20 percentage for this year, year-to-year. And this plan, in Q2, we had shipment increase of mid- to high single digits, okay? And Q3, we're expecting bit shipments to be relatively flat versus Q2.
Our response to COVID-19. In Taiwan, the COVID-19 pandemic situation has calmed down significantly, and the restraint is gradually unlocked. However, internationally, COVID-19 outbreak is still severe in United States, Brazil, India and other countries. So we have to pay close attention to international impact on the business.
On our supply chain management, our production line and subcontractors are all located in Taiwan. We are not affected by COVID-19. And we had take action on raw material. So they are currently not affected. Shipment and transport of our supply chain are normal, and we have increased the material and chemicals inventory. And we have some minor equipment delivery delay. However, there's no impact on overall operations.
On the customer support side, we have been paying great attention to assist our customers for stable production. And currently, we have to still closely monitor future development of COVID-19 impact and take appropriate measure to ensure that overall normal operation.
For the market, we see short-term [ solid ] demand from remote working, online learning, e-commerce demand and we see healthy enterprise data center outlook. PC, SSDs, networking momentum, we're seeing it potentially can continue into Q3. Smartphone and some consumer electronics, we have seen it recover better in Q3 for harder season. However, COVID-19, macroeconomic and trade dispute may potentially slow down short-term demand growth. So we have to pay close attention to monitor the dynamic change.
In long term, healthy demand trends from AI, 5G communication, cloud and edge computation, and autonomous car and IoT are expected to help year-end demand.
On the supply side, conservative CapEx in first half of 2020 result in limited bit growth supply in second half 2020. For 2021, bit supply growth still depends on DRAM suppliers CapEx plan on second half this year.
For market demand in the mobile market, COVID-19, the entity list ban from U.S. Commerce Department negatively impact smartphone shipment in first half 2020. Demand likely to improve in second half as major smartphone supplier launch their new models, a harder season for smartphone.
Server market, first half demand is strong due to remote working, online learning and e-commerce. In second half, we continue to see enterprise-type data center remains solid. Yet, we have to be paying close attention to advertisement-oriented data center is expected to be soft. PC market. Notebook shipment is flat year-over-year, as shipment in Q3 is similar level to Q3 '19. We see Chromebook demand increase in Q3 2020. In the consumer market, networking, SSD continue to Q3 demand, and or we're seeing TV set-top box expect to be improved in Q3 versus first half year. However, COVID-19 and global economic uncertainty may continue to impact automotive demand.
Our business review and outlook. For Q2 2020, our performance and supply chain were not impacted by COVID-19 pandemic. And for the second half this year, we see mixed market outlook, as I described to you in the last 4 years.
Cash dividends of TWD 4.6 billion, approximately TWD 1.5 per common share, is scheduled to be distributed on July 24. Our first generation 10-nanometer node is on track to pilot second half this year, and second generation 10-nanometer class node development is also on schedule.
So that conclude my report to you. The floor is yours.
[Operator Instructions] The first question is Randy Abrams, Credit Suisse.
Okay. I have 2 questions. The first one, I wanted to talk on the higher shipments versus your original, I think expecting not much bit growth. Could you discuss what drove it and where it now leaves your inventory balance? And into the second half where you're guiding flat shipments, could you discuss if there are certain markets that are really dragging your outlook to be more -- not see further growth, totally guide it flat? Or are you keeping conservative as you did a few months back due to COVID-19?
First half, the shipment is -- there are some improvement, okay, mid- to high single digit, due to server market, as we explained to you just now, the working at home, online study and also networking, okay? That, as a result, in the PC market, in the networking market, SSD market, also some [ Chrome ] market are pretty strong, okay, so that shipment has improved.
Second half, we are expecting to be flat versus -- this third quarter, we are expecting flat as Q2 due to -- we're seeing some the data center in the enterprise may continue to be stable versus advertisement-oriented data center may be softer. And PC stronger in Chromebook, okay? But the other may be flat, okay? On the TV side, we're seeing stronger. Okay. mobile phone, we're seeing it stronger. However, the automotive area, we're seeing potential to be weaker. Okay. So that, overall speaking, we expect in second half to be flat versus Q2.
Okay. And there's one piece on the first and then I'll ask a second is if you could give kind of ending inventory days or dollars. And then the second question I wanted to ask is on the big increase for 2020 CapEx to 15.8 billion. Could you mention the factors in that? Was there an acceleration or pull-in from next year on 1x? Or is there a factor that's a bit more expensive on the development? And I guess the 2 follow-ons to that is implications for how depreciation will trend. And then if there's an initial view into 2021 then, if some of this was a pull-in CapEx. would it imply for '21 that you're ramping up 1x next year.
Well, it's not a pull-in CapEx, instead it's our original plan to pilot our first 10-nanometer generation product, okay? And we had that approved on the first half this year. That's why we made an announcement after our Board approval. And one other question is, I'm sorry?
Yes. So I guess based on that approval then, if you can give an update, the 2 parts are depreciation with that implication. Then for the 1x, if there's any more color as you start to ramp the node, directionally how CapEx may trend into 2021.
Well, our depreciation is pretty stable. With this CapEx, we are seeing marginally changed, not a very significant change.
Okay. And then the CapEx view as you ramp the node, what's your initial expectation?
Our 2021 CapEx expectation, is that your question?
Yes, if you can provide any details or what…
So we don't have any detail for 2021 yet, but we will say that the, likely, CapEx would be towards the end of next year for the preparation of 10-nanometer first-generation ramp-up and second-generation piloting.
Okay. So next year not much growth, we should expect. It will be more for the following year.
That's correct.
Next question is from J.J. Park, JPMorgan.
Number one question is that how is the ASP outlook for the third quarter. The reason I'm asking is that, now that you get the high exposure to the consumer DRAM application and you mentioned that the consumer electronic demand is in recovering into the second half of the year, so you may see that better is the outlook compared to the industry trend. I have the follow-up question after this.
For the third quarter, in general speaking, is a harder season for consumer, okay? However, our consumer has a mix of many different areas that including, say, TV set-top box, networking, IP camera, SSD, were [ in line ] with the consumer, including industrial grade, automotive grade, okay? In this area, we've seen that, likely, it will remain stable versus previous harder season, okay?
Okay. So if -- do you expect the ASP could decline in third quarter on QoQ basis? Or likely remain flat or…
ASP is likely still under negotiation now because, of course, the customer always want lower ASP. And from supplier side, it's still bargaining for most cases, okay, for the ASP situation. So I cannot tell you a very definite number, okay? However, my expectation will be -- there might be some change, but any change will be of a small change instead of major change.
Okay. Got it. My second question is actually one of the most difficult questions from the Investor Day. There's an increasing gap between the spot and then contract price until June. Contract price [ computable ] both for the commodity ramp, but spot price had a decline since the April time frame. So why there's a meaningful gap between the contract price at this moment? So this implies further price pressure to the contract price in the second half.
Yes, the spot and contract have some gap, okay? The spot price mostly influenced by low-quality parts from suppliers, okay, and major supplier to provide some low-quality parts to the spot market. And in turn, the spot market becoming weak, okay? And in some way, you also inference back to country market negotiation, and that's what's happening today.
[Operator Instructions] And now next, we're having Charlie Chan, Morgan Stanley.
I have some question regarding your CapEx upward revision. Because I thought that your 10-nanometer class is already planned. So why you're revising up the CapEx now? Is that because you need more equipment to enable the 10-nanometer pilot run? Or you already have some idea for the future capacity for the 10-nanometer production?
Yes. It's a plan for 10-nanometer, primarily as we reported to you, okay? And the equipment, it's pretty expensive, okay? And also process is pretty -- it's much older. So in the process of doing this job, we are arranging some of the existing equipment we have while buying some new equipment in. So we have mix of new and old equipment to build out our pilot line. And that's the amount of expense we will be doing for this year.
Okay, yes. So yes, I'm just not sure how to read this CapEx upward revision. Again, I thought that 3 months ago, you should be having very good idea about this. So why is there this sudden CapEx hike, yes?
That mostly is the board approval. We don't make formal announcement to public after -- until we get full approval on the numbers. And yes, there's some internal planning and arrangement, we do that's part of our formula and internal study, okay? But we make an announcement only after we get approval.
Okay, so it seems like a small number, right, the TWD 15 billion? So any kind of guidance on the capacity for 10-nanometer in the coming year?
We don't expect major change for the coming year, okay? If there's any change, maybe toward second half of next year.
Okay, okay, got it. Sorry, I have to touch base on this China competition still. Because recently, there were several module makers like Kingston, Huawei, ADATA, they've announced to you a source from the CXMT, that DRAM.
Again, do you see that as a kind of competition to you in the China markets? And do you have any idea about those modules performance and the pricing versus your different products?
You're talking about CXMT, right?
Yes. Yes. The -- it's interesting. You have those DRAM chips from some module makers and we can see that in some website. For example, Huawei or ADATA. And currently, we haven't seen any real products yet, but it seems liken Kingston also trying to source some CXMT DRAM products in second half.
Yes. So far, we haven't seen impact to our business. And if there's any impact at all, we are expecting that it will impact all supplier, not just Nanya alone, okay? And as we just discussed, spot market is impacting on country market, okay? And the spot market by itself is because of low-quality product from major suppliers. So they are pretty much close related.
And the potential difference in CXMT is that they could -- mostly limited into China market, okay? Because they may still have to face certain trade secret or IP issue in the long run. And also potentially, major -- the quality issue just indicate -- the performance issue just indicated could be potential slow down their impact as well, okay? So overall speaking, we don't see the impact happening yet. But I'd say if there's any impact, we're expecting that they will impact all suppliers.
And in China market, our direct shipment to China market is around 20% to 25%, on and off, to China customers. And many of those customers are major company, international company. They are -- their products are shipping internationally, okay? So likely that they have to use high-quality and legal products, okay?
In addition to that, other major suppliers shipping ratio to China is approximately similar to Nanya, okay? So maybe we're facing similar story that we're talking about.
Okay. Sorry, may I clarify this a little bit? You said that you have 20% to 25% shipment to China, but those kind of end markets, part of these are overseas. Is that what you just said?
Look, I said many of those customers are international company and their product are shipping around the world, okay? So they are likely sensitive to the quality and the IP right issue.
Okay. So what about other 70% or 75% of shipment destinations? Is that also to China?
No. So that's international customer. Some of them may have been manufacturing in China, and they may ship themselves for [ traffic ] or drop ship to China factory. But most of those are international companies.
Oh, I see. Okay, okay. That's very clear.
That's an important understanding that I have to remind you, Charlie, that our exposure to China has very similar percentage as the major suppliers. And the IP as well as the quality sensitivity, also very similar to the major supplier.
Now we're moving on to Simon Woo, Bank of America.
Okay. Great. Congrats, actually, on another great second quarter results in very tough business environment. And a very quick questions here, what's the rationale or background to stay higher bit growth for 2020 at maybe over 20% versus your previous guidance. So guidance revision is based on the higher utilizing ratio or kind of the inventory sales. So could you explain how you can achieve higher bit growth rate?
Because your CapEx increase is mainly for the next year for 10-nanometer class rather than this year production. And then the follow-on question, sir.
Simon, as you probably recall, that last year, market situation is going down, down quarter-by-quarter, heavily, particularly down to fourth quarter. And that, as a result, the shipment for last year, okay, has been reduced due to unfavorable market. And because last year, it's not too good, so we see it likely to be better. That's the natural reason, okay?
And demand-wise, we've seen some demand increase in Q1 this year versus Q4 last year, technically. And Q2 versus Q1, as I report to you, mid- to high single-digit improvement in demand from our market, okay?
So that's mostly market-driven situation for year-to-year difference in the demand.
Yes. But the question is, you -- did you increase your production -- I mean, the utilization ratio? What did you -- or did you just [ produce ] more?
No. No, we don't. As I explained to you, the production-wise, maybe only marginally improvement because of production efficiency. We don't increase our capacity, but maybe some product mix, 30-nanometer, 20-nanometer mix difference and production efficiency improvement like [ I/O ] like arrangements, cycle time improvement, okay? Some of those minor improvements, but we don't increase our capacity, okay?
And on top of that is, as I say, a major factor is last year is quarter-by-quarter getting worse. So as a result, that inventory is getting higher last year but getting much healthier this year.
Yes. Yes, sure. That's good. That's why you are saying even the DRAM spot market price recently declined a lot. For example, it was around mid-30s -- mid $3.50 around April. But now it's around $2.70. So almost 25% decline we can see, but your point is you are still negotiating with your OEM customers, sort of maybe to get a better contract price, but you are dealing with just a small revision rather than numbers in the spot market price there?
Maybe secular market will be different from the other. In general speaking, say for PC market and some consumer market, which is 60% of our shipments. My expectation is that the change would be a small number.
Yes. Yes, very good. And then lastly, could you recap the second quarter revenue mix [ numbers ] roughly? Because the consumers still maybe 60%, 70% and then [indiscernible] through the majority? Could you recap the second quarter, your revenue mix by application, and the node mix.
We expect that consumer remain very similar at a 60%, 65%, okay. And we are expecting -- we are targeting that we will improve our server market shipment, okay? Even though the price is still unknown, it could be tough, okay? And we will be improving our shipment into low-power market as well. And overall speaking, that will be in balance for the PC and other commodity.
Okay. Node mix, sir?
I'm sorry?
How about the [ 20-nanometer ] node mix? [ The one that connects to the server ].
[ The node media? ]
[indiscernible] [ node mix ].
Oh, you mean the next-generation node?
Yes, I mean, the -- let's say, second quarter production, the -- what's the percentage of the 1X node versus [indiscernible]?
Oh, okay. I'm sorry to disappoint you, Simon. I mean the -- we are doing piloting for second half. Likely, we'll not be impact or improve our shipment to 1X due to 10-nanometer generation.
Yes. So your 10 node class includes 1X node. That's why almost announced for the 1X node for that kind of production?
If there's any, it will be mostly sampling. There's a small quantity.
Okay. So we can say 20 node is the main thing. 20 node is…
[indiscernible] Yes.
Next in line, we are having Mark Newman from Bernstein.
So I just wanted to clarify the revenue details on the 10-nanometer development you've been talking about. I understand about the filing plans. But to the status of the actual development itself. Any commentary you can give around that and potential planning for the actual mass production. And related to that, the -- what would be -- do you expect the total CapEx required for that 10-nanometer transition? I'd expect it to be more than the recent run rate of CapEx. Just wondered if you could just comment on that briefly.
10-nanometer production likely will be in 2021 and 2022 beyond what we have more percentage of 10-nanometer generation production, but will not impact on this years or even the first half of next year production outlook. CapEx-wise, we'll be more likely second half next year, we'll have more CapEx for this reason. The production preparation for 10-nanometer generation as I described. Yes?
Should we expect the CapEx to go up quite a lot next year as you ramp the 10-nanometer?
Maybe the next year, second half will be some increase, but I don't see it to be major increase for next year. Maybe 2022 will be -- will be more requirement for buying equipment.
What is -- can you talk about the gigabyte-per-wafer benefit you get from the 10-nanometer node versus 20-nanometer?
I'm sorry, can you repeat that?
Do you have -- can you share the gigabyte-per-wafer growth that you get going from 20-nanometer to 10-nanometer node?
Oh, you mean the big growth?
Yes, gigabyte-to-wafer growth.
Okay. I would say we are targeting 30% more die, okay? Our chip efficiency has a 30% area efficiency or per generation, okay? And that's -- currently, our road map is on schedule on that.
And I have to maybe make a comment on this is that we don't expect it to be a major cost down per generation, will be some cost down per generation, but not major, which is very similar to the other major suppliers, okay? As you know that we're running more the 20-nanometer today, and the major supplier, probably 1 or even 2 generation ahead of us, okay? And our overall cost structure and OP margin is different by say, within single-digit to 10, 10 to 20 percentage, only they send 20 percentage okay?
So they're indicating that the cost down improvement and -- is small. On top of that is our major supplier has much bigger capacity, okay? They're much bigger market share. That will also reduce their per-bit cost structure. Even with that being considered, we are within a reasonable range from a cost structure point of view, even with 20-nanometer.
Got it. Okay. That's helpful. And then on the demand side, you commented about -- your comment is clearly, I'd say, reasonably optimistic about demand. You're saying that the only weaker it sounds like you're seeing is advertising or into data centers.
I just want to check if there's any other weakness you're hearing about, because I think in general, there's a feeling, as you can see from a lot of the share prices from memory companies. There's a bit of a fear that there's going to be a weakening in demand in the second half. And just maybe if you could comment on that? Are you seeing overall margin weakness in the second half?
Your question is regarding to data center. Our observations, okay, information show us that in the data center, there's 2 areas. One area is that when the data center has more business related to enterprise. Those data centers seems to be reasonably good, okay? And remains strong, okay? And they are data center more related to advertisement, okay? And they may be slowing down by COVID-19 impact as well.
I see. My question was actually overall as well, about the demand in the second half, just overall, the level of demand locally at your -in our experience in the second half.
Overall speaking -- yes, overall speaking in data center side, we're actually observing that enterprise data center actually has a bigger share on overall data center.
And the traditional enterprise?
Yes, yes, yes. Overall speaking there, I mean if you can divide the data center into 2 sections, one is the enterprise, the other one is advertisement-oriented, if we can do that, the enterprise side is a bigger share, bigger pie.
Oh, I see. And then you think that's the segment remains strong in the second half?
Reasonably healthy, okay? And of course, there are some purchasing behavior also, okay? Purchasing behavior means that arrangement of their purchasing requirement, quarter-by-quarter difference, and their strategy or inventory management or their -- or whatever strategy they may have also included and noticed in these demand pictures.
[Operator Instructions] And now we're having Jeff Ohlweiler from Macquarie.
First easy question. What was the reason for the tax -- or I guess, the positive tax in the second quarter?
No. Look, tax -- actually, we're paying tax, okay? What I'm saying is that in Q2, we had a nonoperating income and all the nonoperating income is pretty much used to pay for tax, pretty much offset by the tax expense.
Okay. Understood. And just last question. It seems like DRAM demand has been a little bit more resilient than original expectations. So therefore, you have bit shipment growth increase per year, per your forecast. So I guess now are you surprised by how resilient demand has been and actually looks at least in the next few months?
Am I surprised to the resilience? We are expecting -- when COVID-19 and the -- comes, we are expecting that some market will be better, some market will be worse. And we just didn't know how much better it may be, okay? It turns out that in first half, what is better pretty much offset what is worse. For instance, in the first half, mobile phone was very bad, automotive was very bad, okay? And area like TV sector was bad, okay? But at least in the second half, likely, our mobile phone will be better, TV will be better. However, you still have this automotive still not so good, okay?
And data center, first half. Most enterprises are good and advertisement are good. But second half, some area starting to slow down. But please keep in mind that COVID-19 still may continue to impact, particularly impact on U.S. territory, and well, for U.S. as a major economic region. So we have to continue to keep watching on the development.
On top of that, the trade conflict between U.S. and China, how they are going to be changing over time still also need to be closely monitored.
[Operator Instructions] There are currently no questions at this time. We thank you, and that concludes our conference call today.
Please be advised that today's conference call replay of the conference will be accessible within 3 hours from now, which will be available through Nanya Technologies' website at www.nanya.com.
We hope you will join us again next quarter, and thank you for your participation. Have a wonderful day. You may now disconnect. Thank you, and goodbye.
Thank you.