Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2022-Q2

[Operator]

[Foreign Language] Welcome to Nanya Technology's 2022 Second Quarter Earnings Conference Call. [Operator Instructions] The conference will be held only in English for investors around the world. And today's conference will be approximately 60 minutes.

Nanya Technology's President, Dr. Pei-Ing Lee will summarize our operations in the second quarter of 2022, followed by our guidance for the next quarter and key messages. And then Nanya Technology's Executive Vice President, Mr. 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. And please refer to the safe harbor notice that appears in our presentation materials.

And for 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 begin.

[Pei-Ing Lee, executive]

Okay. Welcome to Nanya Technology Q2 investor conference. I'm Pei-Ing Lee. As usual, my presentation will include Q2 revenue and results, CapEx and bit shipment, market outlook and business review and outlook.

For the revenue and results, our Q2 financial summary as follows: net sales at TWD 18.031 billion versus Q1 at TWD 19.946 billion, down 9.6% Q-to-Q. Gross profit TWD 7.958 billion at 44.1% margin versus TWD 8.75 billion at Q1 at 43.9 percentage margin.

For operating income, TWD 5.364 billion at 29.8 percentage margin versus Q1 TWD 6.262 billion at 31.4 percentage margin. For EBITDA, TWD 9.21 billion versus TWD 10.1 billion in Q1. Nonoperating income at Q2, TWD 1.74 billion versus Q1, TWD 1.766 billion. Income tax benefit, minus TWD 530 million versus minus TWD 1.478 billion. For the net income, TWD 6.574 billion at 36.5 percentage margin versus Q1 TWD 6.55 billion at 32.8 percentage margin.

For earnings per share, TWD 2.12 per share versus Q1 TWD 2.11 per share. Book value, TWD 57.4 per share, already deduct TWD 3.7 per share dividend payout versus Q1 TWD 58.45 billion -- TWD 58.45 per share.

For quarterly revenue result Q-to-Q, Q2 revenue versus Q1 down by 9.6%. For year-to-year, down by 20.4%.

For shipment, Q2 versus Q1 decreased by high single digit. For ASP, decrease by mid-single digit. And exchange rate favor by mid-single digit.

For Q1 and Q2 result comparison in a little bit more detail, first of all, net sales, TWD 18.031 billion versus TWD 19.946 billion, down by 9.6%. The reason is why bit shipment decreased by high single digit and ASP decreased by mid-single digit, with exchange rate favor by mid-single digit.

For gross profit, TWD 7.958 billion and margin of 44.1% versus Q1 TWD 8.75 billion and margin of 43.9 billion -- 43.9%. The Q-to-Q is 0.2 percentage up.

Operating expense, TWD 2.594 billion versus Q1 TWD 2.488 billion. And operating income TWD 5.364 billion at 29.8% margin versus Q1 at TWD 6.262 billion at 31.4 percentage margin.

For net income, TWD 6.574 billion at 36.5% versus TWD 6.55 billion at 32.8%. The net income increased by TWD 24 million mainly due to operating income decreased TWD 898 million and income tax decreased TWD 948 million.

For the trend chart for quarterly financial highlights. At Q2 this year, as you can see, that revenue, TWD 18.031 billion, is the blue bar. And the net income, TWD 6.574 billion, the green bar. And a gross margin, 44.1%. And operating margin, 29.8%. With the market downturn outlook, it's unlikely that Q3 will maintain at this high level.

For operating expense, SG&A expense for Q2, TWD 663 million. This is at normal range. R&D expense, TWD 1.931 billion, also normal.

For cash flow, beginning balance at TWD 92.537 billion and end balance for Q2 at TWD 94.776 billion. For cash from operating activity, TWD 6.128 billion, versus Q2 (sic) [ Q1 ], is a little low, which is due to income tax payment of TWD 3.5 billion. And CapEx, TWD 5.379 billion. And the financial activity, TWD 1.489 billion.

From the right hand of the chart, you see that beginning balance for beginning of this year, TWD 80.7 billion, with the cash from operating activity up by TWD 17.446 billion and CapEx minus TWD 6.544 billion and financial activity plus TWD 3.173 billion, comes to the end balance at TWD 94.776 billion at the end of Q2.

For CapEx and bit shipment. For this year, the original plan for the CapEx is TWD 28.4 billion. And we estimate this year's spending may be TWD 25 billion.

On the right-hand side of the chart, bit shipment. For Q2, bit shipment decreased by high single digit. And for the year, we are expecting the bit shipment will be between flat to down marginally.

We have announced a new fab plan. And the fab groundbreaking ceremony has been carried out. We are targeted to build a 12-inch DRAM fab, including R&D center and water resource recycling center. And total investment will be approximately TWD 300 billion. And investment plan will take 3 phases and up to 7 to -- approximate years.

10 class -- 10-nanometer class process will be implemented in this new fab that including the next 4 generation 10-nanometer class and will also include a separate EUV building. Approximately 45,000 wafer per month after 3 phases will be targeted. The phase -- first phase production is scheduled to be started on 2025.

For the market outlook, we've seen weaker demand and DRAM market outlook. Excuse me. We are seeing weaker DRAM market outlook due to high inflation, Europe conflict between Russia and Ukraine and also China control matter -- COVID-19 control matter and supply chain disruption and consumer spending weakness. In short term, we see market correction. However, long-term DRAM demand remain positive outlook on 5G, AI, cloud computing and networking applications.

For supply, DRAM demand softening trigger major DRAM suppliers 2023 investment adjustment. And equipment shipment delay may impact supplier capacity improvement plan.

From demand point of view. Server market, data center is still leading demand growth. However, adverse effect of inflation likely to impact server market as well in second half 2022. New CPU and DDR5 introduction will be likely delayed.

Market -- for mobile market, average DRAM content has been increasing. However, smartphone shipment trim down due to macro-related downside, particularly consumer confidence.

PC market, enterprise demand remains solid. However, consumer demand softening. And we've seen notebook shipment declining.

Consumer market, WiFi 6/6E stimulates networking demand. Automotive demand also resumes growth while component shortage alleviated. However, control measures have severely reduced local demand in China in first half 2022, and second half 2022 remains unclear.

For business review and outlook. For finance, cash dividend of TWD 3.7 per share will be distributed on July 26, 2022. Our Q2 EPS at TWD 2.12 per share and first half EPS total up to TWD 4.24 per share.

For operation, our new fab groundbreaking was carried out on June 23. Our first-generation 10-nanometer class product has started sampling, and second-generation is piloting, and our third generation development is on track.

For market outlook, we see short-term market correction. However, long term still remain positive on cloud computation, on 5G, AI and networking applications.

With that conclude my presentation to you. Thank you.

[Operator]

[Operator Instructions] The first one to ask questions is J.J. Park from JPMorgan.

[J.J. Park, analyst]

The first question is about the second half bit shipment growth outlook. Given that the second quarter, the bit shipment was just down by high single-digit percent, is it safe to assume that the third and the fourth quarter bit shipment growth will be double-digit percent to get to the full year bit shipment either flat or marginally decline?

[Pei-Ing Lee, executive]

Conventionally, Q3 is the hot season for the year. However, there are some potential concern in the market, as I described just now. The inflation issue, the regional political conflict issue and the control measures in China issue, all becoming a potential concern for the market demand.

So with the positive side of the hotter season and the downside of the negative effect, potentially also there are effects of the economic stimulation factors, may be carried out by different countries, all these factors, there are many uncertainty, okay?

So therefore, our target is still to resume some shipment gains for third quarter. However, we will be looking out closely for the overall demand situation and make adjustments accordingly.

[J.J. Park, analyst]

Okay. My second question is also related to the ASP outlook. If I talk to the mainstream DRAM maker, they're willing to carry for the inventory into the 2023 to protect the DRAM price decline to some extent. So are you willing to carry forward the inventory into next year if demand turned out to be much weaker than your expectations where you want to manage your inventory, selling some extra inventory into the market at the lower price?

[Pei-Ing Lee, executive]

The question is the market situation and the inventory carry, okay? And this is -- all depends on each of the company policy. And also, each of the product may have different inventory situation. For instance, you may have different inventory situation for DDR4 [ or part DDR4 ], DDR5 or DDR3 also at different density as well. So the inventory carry has been becoming probably the policy of each of the company, cannot be, in general speaking, in one way, okay?

From Nanya point of view, to some extent, we can carry some inventory, to some extent. But we have potentially more flexibility in terms of our product portfolio and our customer base. We now have more than 30 product portfolio and more than 800 customers that we can flexibly adjust the customer demand accordingly.

[Operator]

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

[Simon Woo, analyst]

Dr. Lee, while it seems to be a little bit tough these days, but any rough idea which application was better than expected or worse than expected regarding your second quarter results? It's probably a matter of the consumer electronics area, China issue. Or what's the key -- key factors for the price cost or negative bit growth for second quarter results?

[Pei-Ing Lee, executive]

Your question is particularly for Q2?

[Simon Woo, analyst]

Yes, I want to review which, maybe PC or smartphone, consumer electronics or applications collectively lowered bit growth or ASP cost or any particular applications are showing the negative bit growth quarter-on-quarter or ASP cost quarter-on-quarter?

[Pei-Ing Lee, executive]

In general speaking, as I discussed, let me start with the cloud computation. The market, as of today, cloud computation is still a leading sector for the demand point of view. However, as I described it, with the worldwide inflation, all kind of consumer confidence declining, all of the cost addition, et cetera, okay? So all these factors plus the regional part conflict is not been alleviated. And if the control measure in China is not alleviated either, the situation could become very mixed for Q3.

I will come back to Q2. We're seeing, as I said, cloud computation still most healthy. And notebook, we're seeing that there are some downside in the notebook area, as I reported. And also, they are particularly impacted by the supply chain, particularly on the control measure in China as well, okay?

And for the low power, the mobile phone has not been going too well for Q2, okay? And for consumer, beginning of the quarter in Q2 was okay until the heavy control measure happened in China. As a result, has significantly reduced the consumer confidence. So the local demand in China has been severely influenced by control measure as well.

[Simon Woo, analyst]

Yes. Yes. Very clear. And then I know some investors checking the quarterly cycle versus 2019 downturn. Sorry for asking this, but how do you assess the maybe second half for headwinds versus the first half 2019 where the chip makers really suffered, right, already in 2019 or second quarter of 2019? Do you expect any similar pattern, cyclical trend for second half this year versus 2019? Or still you think memory cycle will be very resilient, still better than the previous downturn case this time?

[Pei-Ing Lee, executive]

Simon, it's quite complicated to -- it's quite difficult to answer your question because there are so many uncertain factor, basically uncontrollable factor out there. That's including the worldwide inflation, the petroleum, gas, foods, all kinds of goods, the pricing going up, okay, including the regional conflict, it's not been resolved. Including the control measure in China is also -- I don't know how it's going to become better, okay? All these uncertain factors. And then plus the Q3 potentially is supposed to be hot season. Supposedly, some stimulation policy may be happening in certain countries, okay?

And also, including from the supplier side, the inventory level has been discussed, okay? CapEx planning has been discussed, okay? All those factor is going to be quite dynamic happening in the next few months, okay?

So it's quite difficult to anticipate the cycle. Is it going to be exactly the same as 2019 or not? My recommendation is continue to pay close attention to those factors I just described. And then maybe from there, we will be able to tell how is the market trend will go to?

[Simon Woo, analyst]

Yes. Yes. Very clear. Sorry, one quick question maybe from some investors. Which product showing the relatively better -- the growth momentum, I mean, the pricing momentum for, I mean, DDR3 better than DDR4? Or are vice versa [indiscernible] these days? Which products showing the worse or better momentum, I mean, between the DDR3 and DDR4?

[Pei-Ing Lee, executive]

At this moment, probably all the product portfolio is in decline mode, okay? They're all in downturn, okay? It's just a matter of -- one is probably more severe than the other, okay?

As I described, it cannot be generalized, say, DDR3 or DDR4 because each of the products may have different density as well, okay? And so I would say in the future, will continue to be the situation by so, will be each of the product, including the different density, may have different demand and supply in smaller sector. And by itself, then we'll have different price trends, okay? But overall speaking, I would say likely with the product diversification, likely the consumer may have more stable situation compared to, say, a particular commodity.

[Operator]

[Operator Instructions] Next one to ask questions, J.J. Park from JPMorgan.

[J.J. Park, analyst]

Yes. I have just 2 follow-up questions. I think actually, you're saying is that the lack of the visibility for the demand side, and then it is well known that all the consumer electronic product across the smartphone, PC, TV, set-top box has been weak. So are you seeing the order cut from your customer in the recent months? Or you just see the lack of the visibility but you don't really see any order adjustment from the -- your customer?

[Pei-Ing Lee, executive]

Consumer side, as you can see that TV market has not been going well. And you mentioned that TV set-top box may not be so good. However, networking has been stable. And for the automotive, which long has been suffering from the component shortage, now is actually getting better, okay? So there are up market in some regions, maybe smaller region. And there are also down market in some different products.

So in general speaking, I would say this very much depends on the future, those big topics that I just mentioned, a few of them, and also including the stimulation policy may be carried out in certain regions, certain countries, that may help regional economics.

I don't know if I answered your question specifically. If I don't, please ask again so I can understand better.

[J.J. Park, analyst]

Yes. So my question was that -- I mean are you seeing there any order cut from the major customer? That's why you guide a lack of the visibility for the second half or even in terms of your bit shipment growth? Or you just don't know how the demand will shape up in the second half?

[Pei-Ing Lee, executive]

This will depend on what I just say. I mean, in Q2, particularly May and June, many consumer sector has been -- the customer has reduced their ordering and -- but also commodity, particularly PC side, okay? And you also see that mobile home -- mobile phone also severely impacted worldwide, okay? And all this area has caused reducing in demand.

And so the recovery, on the other hand, will depend on all these regions, if the consumer confidence regain due to easing inflation or due to stimulation package or due to easing control measures, et cetera.

[J.J. Park, analyst]

Okay. My second question, I mean, look at your bit shipment growth last year. Last year, it was flat. And this year, [ they're flat ], probably down year-on-year. So what about the next year? Are you -- do you expect the next year production growth to be -- to increase given 1A nano, the ramp-up?

[Pei-Ing Lee, executive]

Yes, the bit shipment is due to, first of all, market situation, as we discussed, okay, but also due to our production limitation, okay? Our manufacturing capacity can also be built to a certain range, okay? And our next growth potential is our 10-nanometer self-developed process and product generation being introduced, okay? And we are expecting that to gradually happen in some time next year or 2023, okay? And I have reported that we can start sampling our first-generation. And our second-generation is now in piloting. And our third-generation development is on schedule. And those will be -- yes, those will be our next growth potential, okay?

And you're right, we haven't been growing last year and this year. And even though with the market -- slightly market downturn, we may be even shipping less than last year, okay, although there's 2 major factors. One is our capacity restriction limitation currently and then the -- it's a market situation time to time difference.

[Operator]

Next one to ask questions, CW Chung, Nomura.

[Changwon Chung, analyst]

From 2023 to 2025, what's your technology road map? And how much bit per wafer growth per each technology is likely to be the case?

And second question is I feel that your next fab construction to -- first phase production takes more than 2.5 years. I just wonder why it takes so long time. Yes, that's it.

[Pei-Ing Lee, executive]

Yes. Fab construction takes some time, okay? And particularly with the shortage in many factors, in labors, in materials and also construction contract, et cetera, okay? In general speaking, our fab construction will take probably 1.5 to 2 years. And it would take a little bit more for us. One of the reasons also, we are building a 2-deck cleanroom fab, okay, instead of a single deck. So it takes a little bit more construction time.

[Changwon Chung, analyst]

Understood.

[Pei-Ing Lee, executive]

Okay. And your question -- another question is about between 2023 to 2025, where is our bit growth will be coming from, okay? I guess that's your question.

Yes. As I mentioned that we are currently separating our 1A generation and 1B generation. Our second generation is currently on the piloting. Between now and 2025, we will have marginally -- only marginal capacity increase because our current fab, the floor space is almost occupied, with only -- with small areas still available. We will use those areas and with some of the conversion from current generation to future generation to achieve marginal bit growth for the next couple of years.

[Changwon Chung, analyst]

Okay. So can you please tell me what the bit or wafer growth or tech migration between current 1A and 1B?

[Pei-Ing Lee, executive]

Hello? There is some noise. Can you hear me?

[Changwon Chung, analyst]

Yes, yes, I can hear you. Yes. So I just wondered what the bit growth for wafer from the migration from 1A to 1B kind of. Yes.

[Pei-Ing Lee, executive]

Yes. We are targeting 30% [ CPW ] growth for each generation. Namely, our first-generation 10-nanometer will be 30% more than current generation. Now we are in manufacturing. And then the second-generation will be another 30% more beyond the first-generation and et cetera. That's our current target.

Likely, we'll be very close to that number, may not be exact. But we'll be very close to that number I just described to you.

[Operator]

[Operator Instructions] There seems to be no further questions at this point. We thank you for all your questions. Now we'll move on to the webcast Q&A session. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Okay. I got a question from web from Pro Capital, Vincent. Your first question is that bit shipment guidance for Q3 '22 is plus 0% to 5%, Q4 0% to minus 5%.

Vincent, I don't recall it that we do a bit shipment guidance for Q3 and Q4 like that. But we, in general, predicted that the whole year will be marginally down year-to-year, okay?

And Vincent, your second question is, may I know company's second half 2022 depreciation and OpEx, SG&A and R&D? In general speaking, our SG&A and R&D, it will be very close to what I reported just now for Q2. In general, we expect them to be in a normal range. And our depreciation also in a normal range, okay? Very similar to first half, okay?

Okay. Now I have a lot of question from SinoPac, Stanley. Your question is, what is the main driver for nonoperating profit 2Q 2022?

Okay. There are 2 main drivers. One is the exchange rate favoring, and the other one is cost down from our nonoperating -- or mainly is the exchange rate favoring. Okay.

Q2 -- question 2 from Stanley. Since we adjust our CapEx guidance in 2022, what should we expect the full year depreciation level at this time?

Okay. The adjustment, actually, we are targeted for about similar number, okay. Instead of TWD 28 billion, likely to be around TWD 25 billion, only marginal decrease due to maybe equipment shipment or delayed payment, et cetera, okay? So the depreciation for the year level will not be changed in -- significantly. Will be only very minor difference, okay?

Question 3 is that since 1A nanometer DRAM product has been sampling, should we expect this meaningful increase for R&D expense in second half 2022?

R&D expense will not be increased, okay, in second half 2022 for the reason we have been doing R&D for many years, okay? And you can see the R&D expense for each quarter for the last few years has been reasonably stable. And we don't expect that one day we'll change the R&D expense in a big way. If there is any, it will be a minor situation. And instead, we will gradually shifting some of the 1A R&D spend into 1C instead. 1A by itself will gradually go down in R&D spend, okay?

So is there a next question? Okay, that's all your questions, Stanley.

[Operator]

Yes, Dr. Lee. And it seems that we still -- we have a late entry for Q&A from dial-ins. And this one will be Simon Woo from Bank of America.

[Simon Woo, analyst]

Very quick questions, sir. I remember your cost guidance previously saying very minimal, right, flattish year-on-year. However, when we look at the second quarter results, your OP margin, pretty good, high 20%. It was a matter of just the FX impact, right? 5% NT dollar depreciation versus U.S. dollar that really helped your margins in the -- versus the price cost, high to -- mid- to high single digit, right?

[Pei-Ing Lee, executive]

Yes. The price went down. However, exchange rate favoring. And also, we had a marginal decrease in our cost, okay? That's all factor into what you just described.

[Simon Woo, analyst]

Yes. So to double check this, sir, again, the ASP cost mid-single digit in second quarter, that's the U.S. dollar basis rather than NT dollar conversion base?

[Pei-Ing Lee, executive]

That's in U.S. dollar base.

[Simon Woo, analyst]

I see. And then the -- in terms of your -- maybe not necessarily guidance, but over the next maybe 2 or 3 quarters, your cost reduction will be very minimal, right, because you tend to know the class not really meaningful for your chip production. So is it fair to say, cost reduction, very minimal? Or your cost will be up quarter-on-quarter because of the R&D or new investment for the new technologies?

[Pei-Ing Lee, executive]

The cost will not be increased by R&D and also new equipment [ construction ] and depreciation. Those increase will be very small, okay? However, the cost may increase due to all the material increase, equipment cost increasing. And also, there are some -- as you recognize that recently, the electricity has been -- the cost has been increased, okay? Worldwide inflation may be impacting some of the costs, okay? And we will continue to have some operation cost reduction such -- there are all kind of different things that you can do to reduce the cost, including yield enhancement, including cutting costs in certain areas, okay? So all those factor in, we still don't expect major cost reduction in the upcoming quarter.

[Operator]

Ladies and gentlemen, we thank you for all your questions. And Dr. Lee, may we close the conference call now?

[Pei-Ing Lee, executive]

Yes. Thank you so much for joining us.

[Operator]

Yes. Thank you, Dr. Lee, and thank you, ladies and gentlemen. That concludes our conference call today.

Please be advised that the replay of the conference call 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, and thank you for your participation and have a wonderful day. You may disconnect your line now. Thank you, and goodbye.

[Pei-Ing Lee, executive]

Thank you, and bye-bye.