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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technologies 2023 Second 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 Technologies President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2023, 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. 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 the 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. 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.
Ladies and gentlemen, welcome to Nanya Technology Q2 Investor Conference. I'm Pei-Ing Lee. My report today will be our first Q2 revenue and result, then followed by CapEx and bit shipment, followed by market outlook and conclude with business review and outlook. For Q2 financial results summary, on Q2, we have net sales of TWD 7.027 billion versus Q1 TWD 6.425, an improvement of 9.4%. And gross profit minus TWD 788 million, okay, and minus 11.2%, which is slightly more than Q1 at minus TWD 554 million. For operating income, minus TWD 3.185 billion, a percentage of minus 45.3% versus Q1 at minus TWD 2.885 billion at almost also minus 45%. EBITDA at TWD 663 million and nonoperating income at TWD 1.264 billion and income tax benefit at TWD 1.15 billion and which comes to net income of minus TWD 771 million at a net margin of minus 11%. For earnings per share -- for earnings per share comes to minus $0.25 per share. Book value per share, $55.72 per share. For Q2, Q1 results comparison, net sale is improved by 9.4%. And the reason for that is that we have a bit shipment increase by mid-teens while ASP decreased by mid-single digits and exchange rate relatively flat. For gross profit, this is including the idle cost and inventory write-off, gross profit at minus TWD 788 million, and the gross loss is around -- increased by TWD 234 million due to ASP decrease. Operating expense, which is at TWD 2.396 billion, very similar to Q1 TWD 2.331 billion. And operating income, we have a net loss of minus TWD 3.185 billion versus last quarter's TWD 2.885 billion, both at a number of around 45% negative. And with operating loans increased by TWD 300 million, mostly due to ASP decrease by mid-single digit.
The net income comes to minus TWD 771 million versus last quarter is TWD 1.685 billion as a decrease of net loss by TWD 914 million and the reasoning behind it is that first, we have operating loss of increasing TWD 300 million and exchange rate is favorable by TWD 258 million with a big help from income tax payable of TWD 722 million. For the operating expense, SG&A expense comes to TWD 602 million, which is in the normal range. For R&D expense also comes to TWD 1.795 billion, which is in the lower range as well. For cash flow situation, beginning balance for Q2 is TWD 65 billion. At the end of the quarter, the balance is at TWD 59.651 billion. The reasoning for the drop in cash flow is change from operating activity is minus TWD 3.737 billion, mostly due to operating loss and capital expenditure at minus TWD 2.808 billion with other financial as plus TWD 1.194 billion, mostly due to exchange rate change on cash and cash equivalent. For first half of 2023, beginning balance at TWD 73.593 billion and the end of the first half, TWD 59.651 billion, with the cash from operating activity, minus TWD 5.946 billion and CapEx at minus TWD 8.625 billion with financial activity TWD 629 million plus. For CapEx and bit shipment on the left-hand side, the chart indicated we planned to spend TWD 15 billion for 2023. Up to now, for first half, we already spent TWD 8.6 billion. And for 2023 CapEx plan is around 20% lower than last year with some wafer equipment CapEx approximately 50% of what we plan to spend for a year. Of bit shipment, we are targeting bit shipment of down 10% by this year. However, we see in Q2 quarter-to-quarter increased by mid-teens in bit shipment, which is good news. And we also plan to have production output control remain dynamically reduced by up to 20%. For market outlook, we have seen DRAM market demand declined sequentially since Q2 last year. And we are seeing it's been bottoming up in second quarter this year. We are expecting marginal or moderate demand rebound in second half this year, which is going to be dependent on the recovery strength in China domestic market, and also U.S. enterprise cloud market and also global economic recovery. For the second point for the outlook, second quarter this year, we see signs of inventory reduction in some DRAM supplier, but now. All suppliers have adjusted capacity and CapEx and improvement on supply-demand balance is expected in fourth quarter this year, which is subject to the strength in DDR4 destocking and DDR5 transition as well as overall demand recovery.
The lingering impact by geopolitical conflicts, including European war, including trade restrictions between U.S. and China may continue. From the supply side, the DRAM supplier continue to adjust capacity and product mix, overall supply decrease yearly is expected in 2023. For DRAM CapEx cut, we are expecting significantly in 2023, which may extend into 2024. From a demand point of view, for server market, AI-related servers is favorable for demand. However, enterprise IT spending remain conservative. So U.S. enterprise cloud center is key to thorough market recovery. For mobile market, new smartphone in second half introduced higher DRAM content, which is good news. However, sales momentum of China's smartphone would be the key factor for recovery. PC market, inventory gradually returned to normal label and second half shipment is expected to be better than first half this year. For consumer market, demand for TV, IP camera, networking, industrial and automotive applications are all relatively healthy and resulting in potential recovery for perspective -- respective consumer devices. Business review and outlook for finance point of view, Q2, we experienced net loss of TWD 771 million with EPS of minus TWD 0.25 per share. From operating side, our second-generation 10-nanometer-class lead product and third generation 10-nanometer-class test product is piloting on schedule. Our production is dynamically reduced by up to 20%. And Nanya has received top 5% ranking in corporate governance evaluation among TWSE-listed companies. For market outlook, DRAM supply-demand balance is expected to improve in fourth quarter 2023 along with inventory normalization and demand recovery. That's my report for you. And now we'll open up for question and answer.
Yes. Thank you, Dr. Lee. [Operator Instructions] The first one to ask question, J.J. Park.
I have this question. The first one is regarding the market outlook. Just looking at your market outlook back in April when you report the result, we expect the [indiscernible] market recover in the second half, but now you're looking at the Q4 recovery. So is there any major change in terms of the supply-demand dynamic or inventory destocking cycle compared to the Q1 this year and then -- as of now? And the second question is the -- can you elaborate your inventory situation? And why do you believe the industry developing in the second quarter?
Is your question about market recovery? I think in general, market is bottoming up in the second quarter, okay, this year already, okay. You've seen that we are improving marginally in our shipment, okay? And likely this may be seen in the industry throughout, okay? However, the decline since Q2 last year is substantial, okay, for the full quarter, continued decline is substantial. So the recovery in Q2 is very helpful, but we still need to see the momentum of recovery more for the industry, okay? And in terms of the pricing momentum, there are some product portfolio seeing pricing bottoming up or even recovery slightly. And there are some product portfolio still slightly declined. So in Q3, likely it's a mixed situation, okay? And hopefully, in Q4, the situation will be more upturn in compared to Q3. But the reason that I indicated maybe Q4 is more of the balance situation, more balanced than Q3. But it's a good indicator that we're already seeing marginally shipment improvement. In terms of your question about inventory issue, each company has different inventory situation. And you may already see that some companies already reported their quarterly financial results. And there are maybe some good news on the marginal improvement, inventory situation. But inventory could also be related to different product portfolio, okay? Look closely to what product inventory may be doing slightly better and the other product may be doing slightly worse. And from year point of view, our inventory is well distributed into maybe more than 30 products or so. So -- and there are some areas, some healthy improvements, some areas there inventory is still an issue, okay? So it's a mixed situation for us as well.
[Operator Instructions] Next one to ask questions, Haas Liu from Credit Suisse.
Okay. This is Haas Liu from Credit Suisse. My first question is regarding the CapEx cut. Could you comment on what are the areas you are cutting for the CapEx this year? Is it related to the technology migration or the new [indiscernible] construction plan in 2025? And I have a follow-up. Thank you.
Liu, the CapEx reduction mostly on the wafer equipment point of view. We don't intentionally delay any construction activity, okay? And CapEx-wise is basically delaying some of the equipment that we plan to introduce, the new generation of the technology. Since the market already oversupplied. So it looks like there's still no immediate need for us to introduce more capacity into new generation of the technology.
Okay. A follow-up to CapEx cut will be your opportunity in China to fill the gap with micron nonrecurring license to do business in China? And I will have questions on inventory.
You're talking about building effect in China, your question?
I mean your opportunity in China to fill the demand gap...
Fill the demand gap. Okay. I think specifically, Nanya Technology do not target it for certain competitors' business specifically, okay? In generally speaking, we basically serve our customer as what customers need, okay? So we don't specifically know that what our customers in terms of the their procurement policy, one supplier versus the other, okay? In terms of filling the gap, I think that probably, in general, it will be true for all suppliers in China. And then your follow-up question is?
Okay. Before going back to CapEx, I think my second question would be just about the inventory write-off. How much inventory write-off did you recognize during the quarter? And when do you expect the reversal could happen?
Nanya Technology inventory value is still higher than our inventory cost, okay? So we don't have to take inventory valuation loss at this point yet, okay? However, for some certain slow-moving inventory, we may want to write off for certain specific products or specific reason. So that is already included in our cost as well as some of the equipment have been idle due to production cuts. So that cost is included in our cost as well, okay? So that's -- the magnitude of inventory write-offs depends on what do we need in terms of inventory situation. It's not in big quality, okay, here and there. Okay.
Okay. And I think you mentioned you are selling new technology migration. Could you update your target production ramp of 10-nanometer class memory? And would this slow your bit cost reduction in the future?
A very good point is that our first generation of 10-nanometer generation is ready. However, it's no hurry for us to input more capacity into 10-nanometer due to the market already quite a bit of oversupplied as everybody knows, okay? So basically, we try to slow down that activity in the first-generation introduction, okay? However, we are preparing our second-generation and third-generation and putting in more R&D activity in second-generation and third-generation.
Okay. Thank you so much. I will be taking the queue.
[Operator Instructions] Next one to ask question is Simon Woo from Bank of America.
Number one question is, could you provide some details for the September quarter in price -- you found it further downside is for the Q3 right?
I think for September quarter, likely will be some product portfolio, have opportunity of price up and some product portfolio may continue to have small number marginal price decline, okay? And that's -- so in the Q3 September quarter likely would be a mixed situation for different product portfolio. So it depends on each suppliers, their strategy and how they -- how they emphasize their market sector may be different from a company to the other company. But overall speaking, Q3 likely will be an improvement to Q2.
You mean the improvement of the blended ASP...
Likely ASP point of view, yes.
Yes. So [indiscernible] you think maybe some price upside or we can say more consumer-related or PC commodity area?
Mostly some consumers, portion of consumer market and maybe, for instance, good opportunity for HBM, for example, to have a price rebound earlier, maybe even some of DDR5 market has a good chance of earlier rebound than the others.
Sorry, how about the PC area -- I mean the DDR4...
PC area likely month by month wise. DDR5 likely to rebound earlier than DDR4.
So still DDR4 level pressuring the downside of this sort of sales price.
Yes. This all depends on also inventory quantity in the big suppliers, okay.
So overall, the most important application for Nanya Tech is a consumer electronic, consumer-related low-density commodity DRAM. So net-net, you think kind of a stable pricing momentum for these levels low-density DRAM for consumer applications or you too see sum upside?
The consumer potentially will be more stable than in general DDR4.
Yes. okay. Okay. And then the -- how about your utilization ratio because the [ big 3 DRAM-3 ] makers were already alluded, mentioned maybe 25% or 30% lower wafer input versus the full capacity. So any rough idea [indiscernible]
Nanya market size is relatively small. So the capacity reduction-wise, our impact to the market is also relatively small. However, we are doing up to 20% of production cut, mostly to manage our inventory situation and also mostly to meet our customer demand [indiscernible].
So 20% cost since then and then roughly by how many quarters, for example, from Q1 this year? Or when did you start the production cost and how long...
Yes, we've been starting that on Q1. And as I said, we're doing it dynamically up to 20%.
You since said Q1, you mean the...
Since Q1, yes.
Since Q1, 20-odd% and then currently also around the 20% lower.
Up to 20% dynamically. So sometime maybe 10%, sometimes may be 20%.
I see. So in the range of maybe 10% to 20%?
And by time may be different.
I see. Okay. Maybe I'll get back to you if I have questions.
[Operator Instructions] Next on the line is open to J.J. Park from JPMorgan.
Okay. Thanks for giving another opportunity to ask a question. So I know the Nanya Tech is not participating in the HBM space and is different, so excited to do the HB opportunity. Given your loan cadence in the DRAM market, do you think that this could be the structural trend and then the game changer for the DRAM market. Will does remain as each product and the benefit -- the selected players in the market?
J.J., I didn't quite understand your question. Your question is regarding to ChipPac of USA? Or what -- which one you are asking about?
There is a high bandwidth memory, HBM.
HBM, I see. Okay, okay, okay. That's an interesting question -- is that HBM actually is a very good product and is a bright spot for AI-related server business, okay? Cloud computation, specifically also, okay. However, the -- when we talk about HBM application and AI-related server business, mostly related to NPU related calculation, okay. However, the server market, including both CPU-related and NPU-related server market. At this point, CPU-related server market is still far our number of NPU-related server business in the cloud computation. And good thing is that we've seen HBM and NPU related business is helping out in terms of DRAM consumption, okay? It's a good news, okay? However, percentage-wise is still small, okay? And with all big 3 suppliers are very focused on this area, likely, it's not going to be a sweet spot for Nanya. Nanya is only a small percentage of market share, okay? However, for the long term, are we going to totally miss the market if the HBM becomes more and more in terms of market share, okay? And well, that's some activity that Nanya probably have to evaluate for long term -- for long-term reason, okay? But for now, that's still really a small market and with all 3 big suppliers are very focused on.
Next one to ask question is Haas Liu from Credit Suisse.
You mentioned you will keep 20% output cut. Could you comment on your expectations for bit shipment outlook in 3Q and full year guidance?
On Q3, we remain at same policy of up to 20% dynamic cut.
Okay. I mean your bit shipment outlook for 3Q and also full year.
Additional -- bit shipment outlook up -- bit shipment's outlook for Q3, likely at this point, we're expecting some improvement over Q2.
And we expect that the magnitude of the improvement would be similar to 2Q or will it be better or be worse?
Likely, it will be better, okay, in terms of percent-wise, at this point, we're still working very hard for it. Of course, it's going to be a key -- it's going to a key focus item for Nanya, okay? But I still don't have a specific number for you due to that the -- as I say, that there are several factors out there, we still don't know how well it's going to be. The factor is that is it going to be significant improvement in China domestic market, is it going to be a significant improvement in cloud IT expense, okay, and a global economic recovery. All those factors. And also another factor is also inventory digestion, okay. Particularly DDR4 inventory digestion is one of the key observation and DDR5 transition is another key observation. All those factors combined will determine how much momentum of this bit shipment improvement. Therefore, I don't have very specific numbers for you. Still the market is quite dynamic. And not to mention that lingering impact may continue by the geopolitical issues around the world.
Next one, ask questions is Simon Woo from Bank of America.
Absolutely very quickly in your second quarter total shipment. What was the DDR5 percentage out of the total volume in second quarter?
So far, DDR5 is very minimal.
So any target by the end of this year?
One of the issues is that our first DDR5 product is in a gigabit DDR5 which -- the market demand is not very good, okay, of course. So we are working on 16 gigabit DDR5 and which is currently is on schedule. And we targeted by mid-next year, we will have some product to the market.
So this is for PC, right?
This could be for PC, it could be for -- also for server, okay? And we also are working on low-power DDR and which will be for mobile and automotive as well. And that will come slightly later than that.
Yes. Then your DDR5 for PC, server and then mobile will be available meaningfully from the mid next year.
Yes. Yes.
Okay. Very clear, sir. And then lastly, the -- would update over the channel inventory situation. Some people saying already normalized led by China OEMs. Some people saying China OEMs are purchasing more and more memory chips from maybe [indiscernible] innately because the micron disruption. So any view on the -- maybe PC server, mobile, [indiscernible] chip inventories held by OEMs and also some impact over the China government's restriction on the micron.
I think the issue is actually related to all other suppliers other than the micron, okay? And Nanya is more concentrated on consumer market. Yes, we've seen some here and there, okay, some changes, okay? But we serve our customers, as I say, not specifically to replace certain suppliers, but instead, we serve the customer based on customer demand for us to help them in terms of their production needs.
Okay. Sure, sir. So how about the overall channel inventories? Do you feel this is almost at normal level or at the 1 or 2 months higher than normal level PCs and mobile server OEM customers market?
I think PC side, as I indicated, that worldwide PC is, inventory level is low and likely from now I'm hoping improvement, okay, worldwide. In terms of the mobile, yes, Chinese domestic demand as well as Chinese phone-maker business is very key to the recovery of mobile business, okay? And that we think is bottoming up, is now at a very low point. Likely could -- cannot be worse than today, likely, okay? From now on, it could be some improvement, okay? That's we hope, okay? And in terms of server business wise, okay, there are some indicators that the server market in China is stabilizing.
Yes, yes. So you are saying PC earlier, inventory valued low, that means PC product or PC DRAM chip instead?
I mean PC product, okay. PC DRAM -- PC DRAM-wise, you've got DDR4 and DDR5, okay? And that's basically the issue is in the supplier side, not in the market side. Market inventory is okay. The supplier side is what needs to be taken care of.
That's very clear. So net-net, we can say OEMs in China or ex China, they're holding [indiscernible] inventory not so high, PC, mobile, even the server third earlier you think.
From what we see, the customer side, inventory is not a big issue, okay? What needs to be careful is on the supplier side inventory?
Yes, yes. Okay. All clear. So yes, maybe please correct me if my understanding is wrong. So basically, the memory is held by PC OEM at regional level. No need to worry too much. And that you think one of the similar situations among the mobile OEMs, right, even in the smartphone area?
Yes, that likely is bottoming up and it's recovering likely, okay? About -- what needs to be paid more attention again is supplier side inventory situation.
Same thing for the third world [indiscernible] I think.
[Operator Instructions]
So we have [ Vincent Mall ] from [ Pro Capital ], who had asked about yearly depreciation, okay? Our monthly depreciation is around TWD 40 million (sic) [ USD 40 million ], and that number is throughout this year. And that number likely gradually improve to around TWD 30 million (sic) [ USD 30 million ] by the end 2025, okay, the end of 2025 and then continue to improve beyond that. So that our monthly depreciation currently is around -- still around TWD 40 million -- sorry, USD 40 million. Sorry, USD 40 million. Okay. We now have a second question from [ Richard Shaw ] from [ Fubon Securities ]. And his question is, how is the progress of Nanya's DDR5 development? And what type of packaging are included? Okay. All first development, as I indicated is the 8-gigabit,DDR5, okay? And we are working on 16-gigabit DDR5 as we speak and we targeted to have 16-gigabit DDR5 to the market by middle of next year, okay? And packaging wise, this will be the -- mostly -- the standard [indiscernible] chip type of package, okay? Now we have the third question from Stanley from SinoPac Securities. And the question is, will the plan for 5A slowdown due to lower demand. And it's the initial capacity plan is to be 15,000 wafer per month? How large is the scale needed to break even? The [ 5A ] construction has not been slowed down, okay? Right now, there may be some very marginal delay due to construction issue, labor, the material and the only construction-related issue, marginal delay, but we don't intentionally slowed down 5A construction, okay? Initial capacity plans still up to discuss, okay? Depends on market situation, okay? And as a result, the scale need to be break even, is that -- it will depend on are we introducing more of the second-generation or third-generation okay? And that breakeven point will be slightly different, okay? And our second-generation and third-generation right now is on schedule, okay? And second-generation is almost near production-ready and third-generation test product is under pilot. And the fourth question also from [ Stanley ], SinoPac Securities. And the question is, as 1 nanometer is on small-scale production, how is the progress of 1B? And I think I answered that, okay, on 1B. 1A is low-scale production. We don't try to introduce more scale due to the market is in oversupply situation. There's no need for more capacity upward, okay? And on the progress, is doing as we planned it. It is doing well. For initial stage, what products may will be applied to? This is specifically to -- for current fab, we will apply 1B for sure and 1C maybe some -- also some mix. And for 5A, likely also started with these 2 and then gradually migrate it to 1D or even 1E in the future. How is the verification progressed? As I indicated that 1B is doing good. It's almost ready for production. And the 1C is now in test product, piloted. Number 5 question also from Stanley, SinoPac Securities. The question is to share about schedule 1C development. I just commented on that, Stanley, okay? The test product is on piloting. And Stanley has some question on #6. Okay. How much would the second quarter idle costs and inventory write-off be? And this number is, I would say, if we don't take the idle cost or inventory write-off, our gross margin likely will be very small, okay, negative, not as big as minus 11%, will be much smaller than minus 11%. Stanley, you have #7 question, okay? Would you advise the outlook for Q3 shipment? I think I commented on that in the J.J. Park and the Simon's question. We are expecting Q3 shipment to be improved from Q2, okay, improve. However, to what extent of the improvement? I did not specifically mention in that because there are still quite a bit of market uncertainty out there we have to continue to observe, okay? That's including inventory digestion, including DDR5 transition and also include global economic recovery and also include the negative impact by geopolitical issues, are they going to be lingering? And how much worse is it lingering? Or is it getting better or not, okay? Daniel, [indiscernible] investment, our outlook on inventory pricing trend? The inventory likely will be improved quarter-by-quarter, okay? Q3 likely will be better than Q2 and Q4 likely better than Q3. And price trend, we expect to be bottoming up, okay, in Q2 and Q3 range, and likely will be some price recovery in Q4, okay, overall speaking and inventory as well improvement quarter-by-quarter. And by saying that, it's because we're seeing demand is marginally improved. But also, we're seeing the supplier has taken action of production and CapEx, okay? And it will depend on the degree on those actions as well as the strength of recovery -- market recovery to determine how -- what the size of recovery and momentum of recovery, okay? Okay. This is the #8 question already answered, right? Okay.
Yes. So 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 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 in next quarter. We thank you for your participation, and have a wonderful day. You may disconnect now. Thank you.
Thank you for joining, and goodbye.