Nanya Technology Corp

TWSE:2408

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

[Foreign Language] Welcome to Nanya Technology for 2024 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 50 minutes. Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2024, followed by our guidance for the next quarter and key messages. And then Nanya Technology's 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.

[Pei-Ing Lee, executive]

Ladies and gentlemen, welcome to Nanya Technology Q2 2024 Investor Conference. I'm Pei-Ing Lee. Today, I would like to report to you our Q2 revenue and result and CapEx and bit shipment followed by market outlook and conclude by business review and outlook. First, our Q2 2024 financial results summary. Our net sales, TWD 9.921 billion, compared to Q1 this year is 4.4% improved. Gross profit, TWD 287 million, compared to last quarter gross loss is an improvement of 700 -- is an improvement of 5.8 percentage. Operating income loss of TWD 2.319 billion and EBITDA TWD 1.734 billion, with nonoperating income of TWD 1.047 billion, and that comes to net income of loss of TWD 813 million.

Please pay attention to the note underneath. The second remark underneath is that we have recognized TWD 657 million in earthquake-related loss, okay? Without the earthquake-related loss, our net income comes to loss of TWD 140 something -- TWD 150-some million, which is near breakeven point. And our earnings per share loss of TWD 0.26 per share, and book value comes to TWD 54.14 per share. With that, let's review the quarterly results comparison. For quarter-to-quarter, revenue-wise improved by 4.4%. And year-to-year, our revenue improved by 41.2%. And for shipment, Q-to-Q decreased by mid-single digit, and for year-to-year, improved by low 20s. For ASP, increased by low-teens versus year-to-year increased by low-teens as well. However, for last year, Q2, the ASP is on the way down. And it looks like this year, Q2, the ASP is on the way up, okay? Exchange rate increased low-single digit, and year-to-year increased by mid-single digit. For Q2 and Q1 comparison, result comparison in a little bit more detail. The net sale, TWD 9.921 billion, improvement are basically due to our ASP increase by low-teens and bit shipment decreased by mid-single digit and exchange rate favorable by low-single digit. Gross profit, TWD 287 million, finally getting into positive gross margin, 2.9% versus Q1 is negative 2.9%. And the gross profit increased by TWD 564 million, mainly due to ASP improvement. And also noted that we had took TWD 657 million of earthquake-related loss in Q2. For operating expense, TWD 2.6 billion, very similar to Q1. And operating income, minus TWD 2.319 billion versus minus TWD 2.918 billion, is an improvement of TWD 599 million. And net income comes to loss, TWD 813 million, okay? There is some improvement of TWD 395 million. And with the exchange rate gain, decreased by TWD 207 million and also include TWD 657 million of earthquake loss.

For operating expense, for SG&A expense is $608 million in the normal range and R&D TWD 1.998 billion, also in the normal range for the quarter. This number is unaudited, will be fairly adjusted after audit. For cash flow, beginning balance, TWD 62.356 billion and end balance is TWD 65.329 billion. The cash from operating activity is minus TWD 354 million. This is due to account receivable and inventory. And capital expenditure is TWD 2.587 billion with financial activity and others positive TWD 5.913 billion. If we look on the right-hand chart, we see that our beginning balance for beginning of this year is TWD 58.812 billion and now, at the end of Q2, June 30, the cash flow comes to TWD 65.329 billion. And with the positive cash from operating activity of TWD 2.047 billion and capital expenditure of TWD 5.438 billion and also financial activity is basically mostly taking some long-term and short-term loan, TWD 9.908 billion. So if we can pay a little attention to the remark at the bottom, our net cash comes to TWD 46.9 billion. This is the cash on hand minus the short-term debt and long-term debt, okay? When it comes to next topic, CapEx and bit shipment, on the right hand -- on the left-hand side, our CapEx plan for this year is TWD 26 billion. And out of that, it will be 50% for equipment and another 50% for construction and others, okay? And the -- up to now, our CapEx was TWD 1.4 billion. And towards the second half of this year, CapEx will be increased a little more, okay? For bit shipment, our Q2 bit shipment decreased by mid-single digit. For the year-to-year, this year, we still expect to increase by more than 20% year-to-year. Comes to market outlook, overall speaking, the outlook is that HBM and DDR5 momentum is expected to assist a market recovery in second half 2024. And also with the introduction of AI, okay, including into server business, AI/PC, AI/phone may drive new DRAM demand. For the negative side, unfavorable geopolitical issue and regional economic issue continue to influence non-HBM DRAM demand. From supply side, major supplier has focus on HBM capacity expansion, which helped DRAM inventory adjustment. Also, major suppliers resumed full production, which may lead to supply increase in 2025. From the demand side, in the cloud business, server side, increased CapEx from cloud provider and AI infrastructure and continue to drive demand for AI and high-end server. For mobile, we're seeing some smartphone sales improving in China. This is good news. And in the future, AI smartphone may stimulate the demand for replacement. For PC side, the demand for traditional PCs remained flat. In the future, we expect that AI/PC may increase demand for edge computing and DRAM content. On the consumer side, in Q2, we see a slower regional economic recovery and seasonality. So the sale is flat. In Q3, we expect some improvement for harvest season. Comes to business review and outlook for Nanya. Nanya Q2 2024, we have net loss of TWD 813 million, which include earthquake loss of TWD 657 million. And EPS comes to minus TWD 0.26. And we target to ship second-generation 10-nanometer class 8 gigabyte DDR4 and 16 gigabyte DDR5 in second half this year as scheduled. And we have received platinum certification from Alliance for Water Stewardship, AWS. We ranked top 5% in corporate governance by Taiwan Stock Exchange. And we also released first TNFD and TCFD, which is Taskforce on Natural and Climate-related Financial Disclosures. With that, thank you. And now we may come to question-and-answer session.

[Operator]

[Operator Instructions] First one to ask question, Haas Liu from UBS.

[Haas Liu, analyst]

This is Haas Liu from UBS. My first question would be regarding your margin improvement on quotation. Do you expect to return to profitable from the operating margin levels in 3Q? And what is your expectation for the price improvement through the second half of this year? Because when I tried to calculate how much of the earthquake-related loss recognition impacted your business, it would be around 60% of the sales impact. So basically, if your operating margin is excluding that part of the loss recognition, it should have been improved to close to mid-teens or high-teens loss from the operating margins level. So just to take it for second half of this year, do you think you can make your profit -- your profitability on the operating margin level back to comfortable increase in 3Q?

[Pei-Ing Lee, executive]

Okay. Mr. Haas, for operating margin back to positive in Q3 is very challenging. However, there may be a chance to have a net margin back to positive. And even that, we still require a lot of effort from our team. Okay. Do I answer your question?

[Haas Liu, analyst]

Yes. That's very clear. Yes. So I also see we reported your ASP up in quarter-on-quarter in 2Q. Could you share your expectation for second half, including 3Q...

[Pei-Ing Lee, executive]

ASP-wise, maybe different market and different product portfolio make different, likely that from the HBM and DDR5 point of view, ASP may improve more than the others, okay? And DDR4 wise, we still have some positive news with the capacity focus being shift to DDR5 and HBM. As a result, the inventory adjustment may be helpful, okay, DDR4, okay? So that also may have some improvement in the second half, okay? With DDR3, it also need to be watched out, the inference of geopolitical effect and the regional economic as well as the competition for the legacy competitor, okay? So overall speaking, we are expecting the market is moving up trend, but the competition is still there. We need to work very diligently to moving to positive net margin.

[Haas Liu, analyst]

Okay. Yes, that is very helpful. And my second question will be on the operational trend. Could you let us know the operational trend in 2Q if we exclude the earthquake impact? And also for full year, I think you also guided on shipments to be on growth above 20% year-on-year, sometimes poor. So could you share with us your view on the seasonality in the second half? And what applications will be driving the shipment growth in the second half of this year?

[Pei-Ing Lee, executive]

In Q2, and I described that Q2 maybe other than DDR5 and HBM, has a pretty strong momentum. All the other market is relatively flat or low season, okay? That's including mobile phone, including PC market, also including consumer market. And hopefully, in Q3, seasonality will help in this area.

[Haas Liu, analyst]

Okay. So for the shipment down quarter in 2Q, does that have any impact -- does that have any impact from the earthquake?

[Pei-Ing Lee, executive]

Some, but not major impact, okay? Most of the impact still coming from the market situation.

[Operator]

[Operator Instructions] Next one to ask question, [indiscernible] from Morgan Stanley.

[Unknown Analyst]

Can you please share about what's your view for the third quarter pricing trend and also on the shipment trend?

[Pei-Ing Lee, executive]

Very similar comment to the last question is that for the third quarter, we expect in -- by product portfolio difference, we're expecting -- overall speaking, the pricing still up trend, okay? Shipment could also see uptrend due to seasonality, okay? So as of which sector may be stronger in DDR5, and then, in DDR4 and then DDR3?

[Unknown Analyst]

And I think that although we are trying very hard to like increase the pricing to turn our profitability better, but it seems like that in the market there are still ample of inventories out there, especially for DDR3 and 4. So how will you view about the market conditions on the inventory level? And when do you think it -- maybe in which month do you think the overall inventory level should be healthier?

[Pei-Ing Lee, executive]

Overall speaking, inventory level in major supplier is a concern, okay? For smaller supplier inventory, because our market share is very small, everything, it's more so that accountability for small supplier inventory issue for the whole market is not as significant, okay? However, for DDR4, we have seen major supply inventory is improving. That's coming from not only by digesting on DDR4, but also because of the HBM whole focus. A lot of capacity production will be focused more on HBM and also DDR5. As a result, the production output for DDR4 will be less. That will help adjust the DDR4 inventory as well. And I think as the time goes on in the second half, that will become more obvious quarter-to-quarter.

[Unknown Analyst]

Got it. And maybe my last question is on the China competition because we learned from the equipment players that actually like the DRAM project in China, they're still going to be very aggressive, expanding capacities, like -- since like next year, the CapEx will be like 40% higher than this year. So what do you view about, like, the potential position on the lower supply issue? And how can we calculate position in this kind of situation?

[Pei-Ing Lee, executive]

First of all, the Chinese supplier has aggressively increased our production capacity, that's well known, okay? And the second is the impact. The impact of that capacity is overall speaking to heavy supplier, as a matter of fact, probably to major supplier more than to smaller supplier. For the reason that big capacity is too big or the legacy market is good for the mobile market, okay? And also, the mobile phone market in China is also a major portion of the worldwide mobile market, okay? We're talking about maybe #1 supplier and #2 supplier, [indiscernible], probably only equivalent or even smaller than all China mobile phone-maker combined, okay? So China mobile maker consumed a lot of mobile phone -- mobile DRAM, okay? So their focus at this point, mostly on supplying those mobile side, okay? And therefore, their impact to the market is to everyone, to major supplier and to a smaller supplier. At this point, it's still more to the major supplier because mobile phone market available in China. And as I say that the consumer market is a little bit legacy and it's a smaller market and not growing very fast, so that's -- they are not totally paying attention to this area, but later the contribution to this area still small.

[Operator]

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

[Simon Woo, analyst]

Would you recap why the second quarter sales volume was so weak, it was in line or below your expectations? Or if it was a simply matter of earthquake impact?

[Pei-Ing Lee, executive]

Our shipment -- Simon, your question is on shipment, right?

[Simon Woo, analyst]

Yes. Big growth, yes. Much weaker than, I think, the market expected.

[Pei-Ing Lee, executive]

As I described just now, that on Q2, other than the HBM and DDR5, all the other markets are actually pretty flat, okay? And as a matter of fact, consumer is in low season, okay? And if we may divide the market into server, which means the cloud computation, everything, that area was improving on Q2, okay? That accounted for more than 30% of the market, okay? The other market in mobile, it's actually not so good, okay? That's also accountable near 30% of the market. That's not so good, okay? Even we've seen some improvement may be happening in China, okay? And then on PC, that's a little bit more than 10%. That is not so good. On the consumer, the rates are balanced, near 20%. That's also in low season. So in general, the demand for Q2 is not so good other than HBM and DDR5.

[Simon Woo, analyst]

Yes. Very clear. The second quarter, your revenue mix, DDR3 versus DDR4, maybe what, 40% to 60% or what was the mix ratio?

[Pei-Ing Lee, executive]

Mix ratio for us now is around -- mobile is around a little bit more than 15% mobile, low power. And then the risk is about even, probably 30-some percent is in DDR3, near 40% is in DDR4.

[Simon Woo, analyst]

Okay. Yes, very clear. So you mentioned that the AI, it will be important even for the non-server area consumer electronics. So do you see any meaningful content increase for the consumer electronics and auto because of AI these days to second half for next year?

[Pei-Ing Lee, executive]

That may happen gradually, but will not come suddenly for AI/PC and AI/mobile.

[Simon Woo, analyst]

So to achieve maybe a 20% bit growth -- more than 20% bit growth this year, what could be the capital for just seasonal recovery in the second half? Or what could be the key underlying assumption to achieve more than 20% volume growth if...

[Pei-Ing Lee, executive]

I think most positive theory in the server side where AI and high-end server and general server probably still had the highest momentum for bit growth. And compared to that market, the PC may be a slight improvement due to content growth, okay, a mobile phone, still very much depends on performance out of the China mobile maker and the regional economics, okay? And consumer likely will be slightly better Q3 versus Q2.

[Simon Woo, analyst]

Yes. So your business is pretty much consumer-centric DRAM sales, so how to achieve 20% bit growth, I mean, the Nanya Tech...

[Pei-Ing Lee, executive]

20% year-to-year bit growth is mostly because last year it is too bad. It's a very low value, okay. So that's not very something -- some number to be very proud of.

[Simon Woo, analyst]

So what would be the normal production volume growth, Nanya Tech? Let's forget the inventory sales, what's the normal level Nanya Tech production volume growth? And then what could be the normal trend for the newer cost reduction? For example, your production volume rose maybe 5% or 10% or 10% higher and the cost reduction, maybe 5%, 10%, what could be the -- overall the trend of it maybe this year, next year?

[Pei-Ing Lee, executive]

Overall speaking, big growth-wise, Nanya has been relying on our operation efficiency to improve big growth for the last few years, okay? And that's very, very small, very minor bit growth for Nanya in production point of view because we did not have new technology introduction. We do not have new fab for the last so many years, okay. As a result, our big growths may come from our new technology generation, as I indicated just now, our second generation of 8 gigabyte DDR4 and 16 gigabyte DDR5 and more products to come in the future. And that growth in the big growth will be also in general gentle, okay? Because we are doing those because only on existing fab, okay? And our new fab won't be ready until 2026 or even 2027, ready for production, okay? So in generally speaking, we relied on operation improvement and some technology conversion coming up okay? So the big growth may be slightly more than previous year, okay, only slightly, almost up to 10% for next couple of years to come.

[Simon Woo, analyst]

Sorry, sir, the third quarter, do you expect another more than 10% ASP increase, right, for Q3?

[Pei-Ing Lee, executive]

I think this will have to -- need to be very careful, okay? Of course, we will target to improve our ASP, okay? Because of the market looks like DDR4, all the supplier is improving on DDR4 pricing, okay? And DDR3 pricing still a lot of challenge, okay? So we still need to be very careful in improving our pricing. Thank you, Simon, for your kind comment. Yet we're still not making positive yet, okay? So we are working -- we will be working hard for that, okay, make improvement.

[Operator]

Next one to ask question, Jay Kwon from JPMorgan.

[H. Kwon, analyst]

I have 2. First is, I remember from your last call mentioning you still target double-digit percent of your total wafer shipment based on DDR5 during some point of a fourth quarter, so we took it as probably in certain months. Are you still keeping this plan as your base case when you gave us a more than 20% bit shipment plans for the year? Then I'll have one more question.

[Pei-Ing Lee, executive]

Yes. Yes. As I explained to Simon just now, for this year, to have 20% more shipment is quite possible, okay? Because last year, the shipment is very low, okay, and low baseline; therefore, this year to have year-to-year 20% more shipment is likely to happen, okay? As of DDR5 contribution for the whole year will be small, but toward the end of the year, we hope that we can somehow ship more DDR5. Maybe even at the end of the month -- end of the year, if we can do it up to 10%, will be a great achievement, okay? But one month, 10% is divided by 12 months, is only very minimum for the year.

[H. Kwon, analyst]

Yes, that's right. And presumably, this 16 gigabyte DDR5 is after the PC customers. When you speak to your major customers, are you sensing incrementally a stronger demand or new material changes lately just heading into the -- that later part of this year? And I would say, if you could -- I know it's a bit far away, but if you could extend into early '25, say, Q1 '26, are you still seeing more demand improvement on the wafer taping for your 16 gigabyte DDR5? Or how are you seeing the demand changes slightly during the second quarter?

[Pei-Ing Lee, executive]

I see -- seeing positive trends for DDR5, okay, will be continued, okay? As of the market customer response to DDR5 and we do have quite a bit of customer asking for our DDR5 supply, okay? We are working hard to meet their demand, okay? And hopefully, we would have started to do some shipment on second half this year. And actually, I should say that we are quite confident that will happen, okay, towards second half of this year to have DDR5 shipment. And that trend for DDR5 likely to continue towards 2025, replacing DDR4 in the cloud computation as well as the PC side. And in the long term, it's also going to get involved into consumer side on the DDR5 business as well.

[Operator]

[Operator Instructions] There are currently no questions from the -- no further questions from dial-in, so we're going to move on to the webcast Q&A session. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Okay. We have the first question coming up from Richard of Fubon. The question is, Nanya capacity for 30-nanometer and 20-nanometer and 1B by the end of 2025, this is next -- the end of next year, okay? Yes, we're planning that the 1B capacity will come to more than 20,000 per month. And the 20-nanometer will come down from 50,000 down to around 36,000 per month. And the second question from Richard is that DDR3, 4 and 5 output proportion for 2024 and 2025, okay? And as I said that DDR5 contribution to 2024 will be pretty small. And hopefully, next year, DDR5, we will target for 10% or more to start with for 2025. And then we have another portion for low power. We're looking for around 20% of our -- at least 20% of our shipment will be low power. So if minus DDR5 and DDR -- and low power and the mobile, although risk, we may be doing half and half of DDR4 and DDR3. It depends on the market situation, okay? And the DDR3 market in general speaking is getting smaller and smaller, so it's DDR4, but the DDR3 is more shrinking than DDR4.

So the next question also from Richard. Expecting packaging for DDR5 portion of free chip and stacking for DDR5. Yes, we -- I cannot tell you the portion, okay? But in general, DDR5 for the single die will come with a free chip or [indiscernible]. And a second with a TSV, that would depend on the high-end market that we develop for the next year, potentially 2025. So the next question comes from Yuanta Securities Investment from Michael. Michael's question is NTC's shipment multiplied by ASP in Q2 should lead to a revenue increase of 8% to 10% including favorable exchange rate, but actual number is 4.4%. So this cannot be directly multiplied because there are quite a bit of product portfolio, okay? Product portfolio, including you had from, say, 1 gigabyte, 2 gigabyte, 4 gigabyte, 8 gigabyte, 16 gigabyte, even up to 32 multiple-die shipment, so it's not direct multiply, okay? So that's a little bit different. Some small percentage different than you may see. And the next question also from Michael. Geopolitical issue might cause order reduction, what that impact NTC on second half '24 and 2025 revenue? I think the geopolitical issue also has to consider together with the regional economic impact. For instance, in Europe, the demand is quite low. That's because of the -- you can see that geopolitical issue and also the regional economic issue come together, okay? What is the impact to NTC? That is something we have to assess time to time, okay? We don't -- we're still not quite sure how geopolitical issue and regional economic will improve to what extent, okay? So please let us give us some time. And then as we know more, we will report to you.

And the next question also coming from Michael. DDR3, DDR4 shortage might appear in fourth quarter 2024. I would say DDR4 may have an opportunity, may have a chance. DDR3, because the market is shrinking, is more challenging, okay? The DDR4 may have a chance. And that's my personal assessment, okay? It may depend on who you talk to. So now let me go to the next question coming from SinoPac Securities by Stanley. Stanley's question is DDR5 16 gigabyte target to ship second half of 2024 means entering mass production or ship for qualification. Basically, qualification is already ongoing. That means that we ship for production.

Our CapEx in first half is TWD 5.4 billion, whole year is TWD 26 billion, means CapEx growth pretty much in second half. How will investment be used? As I reported in my report, the CapEx, TWD 26 billion, approximately 50% will be wafer equipment. The other 50% is more in construction and others.

What's the impact on the depreciation for the whole year? The depreciation for Nanya now -- from now on is -- will continue to improve, reduce, okay? We are now at pretty much the highest point of depreciation for the current fab. Even if we added more CapEx, TWD 26 billion or upcoming next year CapEx may be needed, our depreciation will continue to improve year by year from this year on, okay? As a matter of fact, next year, by the end of next year, we'll be seeing some significant -- very significant depreciation decrease because some portion of our equipment already fully depreciated. And that situation will continue to improve for 2026 and 2027. On the next question coming from [indiscernible] question is Q3 2024 ASP increase will be higher than Q2 2024 or not. And that question is that -- as I say, this is -- I cannot tell you exactly. This is going to have to be day by day and month by month, also all the market demand situation and every PO negotiation, also mark -- also product portfolio adjustment, everything will come together. So please bear with me, I cannot tell you the exact number. But I hope the ASP will continue to increase in Q3. And there's a good chance it will be continuing to increase. And once we progress, future plan for EUV, we are making some progress on 1C development. We have some early yielding from our test product, and we also have some EUV development activity happening. So that is still going on well, okay? And that will be prepared for our future fab, okay? And that's going on well, okay? And the next question is from [indiscernible] Investment by [ Mr. Guo ]. Mr. Guo's Question is probe card company, FormFactor and MJC, will start to make IBM probe card and [ UTI ] -- HBM probe card, I'm sorry, and utilize almost full lead time for probe card if extended to 20 weeks and longer. Would that impact future shipment for DDR3 and DDR4? For DDR3 and DDR4, the impact for Nanya requirement in that area is already there, okay? We should not expect major impact to us, okay? Maybe on the low-power side, we are continuing to develop new products. However, with this, we will have a -- we'll plan on that. And does NTC have other probe card partner doing qualification? Yes, we do have a couple more probe card providers doing qualification. So that's the end of the question for today, and thank you all for your attention, and thank you for joining us.

[Operator]

Yes. Thank you, Dr. Lee. And 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 again next quarter. We thank you for your participation and have a wonderful day. You may disconnect now. Thank you, and goodbye.

[Pei-Ing Lee, executive]

Thank you.