Nanya Technology Corp
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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technology's Third Quarter 2018 Earnings Conference and Conference Call. [Operator Instructions] As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows. First, Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the third quarter of 2018, followed by our guidance for the fourth quarter of 2018 and key messages. Afterwards, we would both open online and on-floor Q&A session. Nanya Technology's Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao, will join both Q&A sessions. Today's conference will be approximately 60 minutes. And for those participants online, if you do not yet have a copy of today's earnings conference presentation slides and press release, you may download them from Nanya Technology's website at www.nanya.com. And as usual, we would like to remind everybody that today's discussion may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears in our presentation slides. And now I would like to turn the podium over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and the current quarter guidance. Dr. Lee, please begin.
Okay. Welcome, and thank you for attending Nanya Technology Q3 investor report.
In today's, my agenda is as usual. Key takeaway, then Q3 revenue and results, CapEx and bit shipment, market outlook and business highlight.
Our Q3 results revenue TWD 24.375 billion, down by 0.9% Q-to-Q, and bit shipment decreased by low single digit. ASP remained relatively flat. Gross margin 58.9%, operating margin 51% and Q3 net income comes to TWD 12.872 billion, net margin at 52.8%.
EPS for Q3, TWD 4.15, book value per share TWD 51.52 for Q3.
In summary, for accumulated results Q1 to Q3, our revenue is at TWD 67.764 billion, up by 77.6% versus same period last year. And Q1 to Q3, net income TWD 31.409 billion, EPS at TWD 10.23 per share.
This chart shows our quarterly financial highlights, that's including the top line indicating our gross margin and a red line indicating our OP margin, and with the blue bar -- the blue bar is our revenue and the light blue bar is our net income. For Q3 last quarter, as indicated, our gross margin, OP margin all achieving pretty high-level and whereas the net margin at TWD 12.872 billion.
We'll have taken a little bit of consideration of net income without considering Inotera and Micron share disposal and ECB result. The target line shown there indicate basically our core business, indicating our core business income has continued to improve.
Our quarterly revenue, Q-to-Q, our revenue down by 0.9%, shipment decreased by low single-digit and ASP relatively flat. Exchange rate helped by 3.2%, Q-to-Q. Year-to-year revenue is up by 83.4%, bit shipment low 50% increase and our ASP increased high teen percent range.
Operation results summary for Q3. On the left, you see the revenue, TWD 24.375 billion, it's slightly down by 0.9%. Gross profit TWD 14.366 billion, is up from the TWD 13.537 billion.
OP, operating income, TWD 12.434 billion at 51% versus 46.8% last quarter. EBITDA TWD 15.487 billion, 63.5% versus 58.9%. And non-operating income, here mostly from the interest income and other income, TWD 438 million versus last quarter, we had a tax expense, okay. So the net income TWD 12.872 billion is at 52.8% with earnings per share TWD 4.15 and book value TWD 51.52 per share.
For a little more detailed comparison, revenue wise, this is already explained that bit shipment and ASP and foreign exchange rate difference is pretty much evened out to nearly 1% down.
Gross profit increased by TWD 829 million, mainly due to foreign exchange and the cost down improvement -- cost improvement. And operating income of TWD 12.434 billion, increased by TWD 924 million and this is mostly contributed by gross profit increase from here. And the net income of TWD 12.872 billion and with increase mostly coming from the OP, operating income, of TWD 924 million and with a tax expense decrease and exchange rate favoring for Q3 versus Q2, and with interest income increased by TWD 47 million.
Operating expense, SG&A in Q3 is slightly down by TWD 73 million due to lower operating expense. R&D expense is pretty much similar to Q2 at TWD 1.336 billion.
Our cash flow situation, beginning of the quarter, our cash TWD 61.537 billion and the end balance is TWD 56.362 billion, but the cash from operating activity is pretty normal at TWD 12.2 billion and capital expenditure also as expected at TWD 2.96 billion. This number is slightly unusual for Q3. We have an investment and other expense, the TWD 14.414 billion. This is due to a [ remark next year ], mainly due to, we pay off the cash dividend of TWD 10.88 billion and also acquired FATC, Formosa Advanced Technology share for TWD 3.05 billion. So this is a little bit unusual high number for investment. So for the year, three-quarter accumulated cash flow beginning TWD 33.769 billion, beginning balance. And end balance at Q3 TWD 56.362 billion, this number here. We have cash from operating activity of TWD 31.9 billion and capital expenditure of TWD 7.6 billion and investment and others down by TWD 1.647 billion and the free cash flow is at TWD 24.24 billion.
CapEx wise, for Q3, we spend TWD 2.96 billion as indicated on last chart. And we have trimmed down 2018 CapEx, the overall CapEx, by 12% to TWD 21 billion. If you recall last quarter, we reported nearly TWD 24 billion. This will be trimmed down to -- by 12%. And the Q4 bit shipment, we expect it to be relatively flat versus Q3 and targeted for the whole year, 48% bit shipment. And in 2019, we still target for mid-single -- mid-teen percentage increase in bits.
Market -- for the market, Q4 '18, the DRAM demand growth is now relatively conservative versus first half of this year. This is pretty much affected by the trade conflict, the trade war and a CPU shortage. The scale and the duration of this trade conflict is not yet finalized, as you know. So long term wise, the impact to DRAM market still need to be closely watched.
Supply-side, we see in Q3, suppliers increasing wafer capacity. However, as a result of the conservativeness, the Q4 capacity expansion is known to be slowed down and also reduction of CapEx postpone are expected.
From a demand point of view, mobile market, we're seeing that dual-lens becoming mainstream, multi-lens may come next and the highly intelligent flagship mobile phone require high DRAM content. And we've seen the Android flagship is running at around 6 gigabyte to 8 gigabyte and Apple new model is at 4 gigabyte versus previous at 3 gigabyte.
Server market, cloud service and various industries continue to increase the server demand. And China server demand expected to grow 23% this year, and North American ODM direct supplier server unit continue to grow also.
Worldwide server unit shipment is expected to grow by 11% this year and average DRAM content also increased. So total server demand increased by more than 30% as expected. This is here the growing momentum -- the largest growing momentum sector of market. Consumer market pretty much is more of the application. We've seen the TV set-top box, smart speaker, SSD are major driver and next-generation smartwatch that provide ECG function also expected to stimulate growth in wearable device.
PC market is a little bit pessimistic. This is -- short-term demand is impacted by CPU shortage and also spot market affected by downgrade product and pricing pressure are expected in Q4.
So overall speaking, we're seeing that mobile market in terms of long-term and short-term, we've seen that unit shipment is not increasing; however, the content still continue to grow. Server market is growing both in shipment unit as well as the content. Consumer market is growing in application as this -- the whole world becoming smarter. PC market is only market that's probably a little bit more of the fluctuating, more volatile.
For Nanya Technology business highlights, we have a couple of good news. First, Nanya Technology was named 2018 Dow Jones Sustainability Emerging Market Index, DJSI. Dow Jones, DJSI, they monitor over 3,500 worldwide top market cap companies, although that 3,500 company, there were 78 semiconductor-related companies, and Nanya is 1 of the 3 company that were selected out of that 78 companies. And we also qualified for DRAM server in the Tier 1 data center customer. Most of this are pretty good news for Nanya, although there is a lot more room for us to make improvement both in CSR, corporate sustainability, responsibility and as well as the server market, but this represented pretty good news.
We have been missing from the server market for the last almost 6 years. Now we are on the verge of beginning to getting back to this -- the fast-growing market sector. And also, we are first time invited to DJSI selection and we are -- we make the index for the first time. It was representing that we had a pretty good team effort and our team accomplishment is pretty promising.
Nanya Technology also acquired 84,000 shares of FATC shares, approximately 19% of FATC issued shares. Regarding to the trade conflict, the tariff war, we had taken action of trim down CapEx by 12% in 2018, and we also will be diversifying our product portfolio and applications, that's including, we will be shifting more into server market as well as we will be launching 8 gigabit low power DDR4 -- low power DDR4X as well as 4 gigabit, et cetera. And also, our 10-nanometer class technology development is in pretty good progress.
With that, I pretty much conclude my presentation to you. So let's follow-up by questions and answers.
[Operator Instructions] First, we're having J.J. Park from JP Morgan.
You cut the 2018 CapEx number by 12%, but bit shipment guidance for the both 2018 and 2019 remain unchanged. What's the reason behind? Is it mainly due to the improvement in the product mix? Or any change in the tech migration? And I have a second question later on.
Your question is regarding to CapEx trim down by 12%?
Yes, yes, and the implication to the bit shipment growth in 2018 and 2019?
The original bit growth target is mid-teens in 2019. And likely, our trimmed down 12% will be affecting bit growth by a couple of percentage. We'll probably still be mid-teens, okay. Regarding to the product mix, CapEx has very little impact to product mix except some of the back-end testing equipment, but that's probably not going to impact in a major way.
So Dr. Lee, is it safe to assume that 2019 bit growth target of the mid-teens percent and massive investment growth, given the CapEx cost?
Can you please repeat your question, again?
So your previous guidance for the 2019 bit shipment growth contributed mid-teens percent?
Yes.
And even after 12% CapEx cost, you maintained mid-teens percent bit shipment growth in the 2019?
Yes, as I said, maybe a couple of percentage lower.
Okay. So there could be downside risk to the...
Let's say, maybe from say 16% down to 14%-or-so, something like that.
Okay. Got it. And then second question is payout ratio. Do you still maintain the 50% in your payout ratio for the both 2018 and 2019?
Yes, yes. Our target, yes.
Next we're having Stefan Chang, Maybank.
Dr. Lee, this is Stefan from Maybank. First of all -- hereby, I have 2 questions. The first is about the guidance and the good results. For Q3, bit growth actually declined sequentially, but based on the Q4 chart, you still guided the full year to be 48%. But mathematically, that seems doesn't match for the quarterly and annually guidance. Can you explain what is the difference in between -- what is the reason behind the difference? And if it is inventory, can you advise what is the inventory level right now?
The -- your question is that we still guidance for 48% bit growth, right? And...
Yes.
Yes. Our Q4 may be relatively similar to Q3, but doesn't prevent it from to be a couple of percent different. This month is still the first month of Q3. So we still don't want to change our guidance for the whole year. And your second question is regarding to inventory level. We expected the inventory levels will remain pretty good, pretty healthy even with the Q4 -- by the end of Q4.
Okay. Actually, the inventory level was part of the question because I wonder if that is the reason what drives the quarterly guidance and annually guidance as such. Here, it's actually -- my second question is, in the presentation, you mentioned about you got qualified for the server of DRAM. Can you please elaborate a little bit more about what is the progress now? Are you shipping already? And if you can, what is the mix, I mean, for server as of a whole? Or if anymore specific number you can indicate regarding server?
As I described to you that we missed -- we had missed the server business for more than 5 years now. And by this time, we are very happy that we will be gradually returning to server market. And server market demand very high quality, very consistency supply. So we will be taking this in a very cautious way. However, we also like to be aggressive to ship as much as we can. So the shipment will start in Q4 this year. And as we speak, we already prepared to have a small volume shipment and shipment would likely to gradually increase quarterly -- quarter-by-quarter. And we don't expect that this quarter would be in big number. But, hopefully, it will improve in next quarter and the quarter to come beyond. And in addition to server is that we will also start to ship low power product, also likely in Q1 and Q2 for next year. And this is the 20-nanometer low power DDR4 product I just described.
[Operator Instructions] . Next, we're having Mark Newman from Bernstein.
Can you update us please on the technology migration plan, can you update us on 20 nanometers, what portion of the mix today? And what is the plan for 1X? And how is that impacted by the decrease in CapEx? Is there any change to the 1X nanometer plan from that?
Okay, Mark. We are currently at 20 nanometer and we plan to have the 10-nanometer generation early shipment likely in 2020. And the 10-nanometer generation will take some time for us to develop. And also we don't intend to be doing this side-by-side very closely with the major supplier. We will intend to engage this generation of product in more of the consumer market, in a market that's suitable for us. So 2020 is the target time that we will be start to having some volume shipment.
And we can assume that the 1x nanometer then is not impacted by the CapEx change?
10 nanometer will not be impacted by the CapEx change. And the next year -- for the next year, mostly, we will be doing product portfolio diversification, as I just described. That's including server market, including low power DDR3, low power DDR4, those market sector as well as more of the consumer market will be developed into say, more application. We have pretty good engagement in smart devices like speakerphone, smart speakerphone, SSD, smart wearable devices across the board.
If I can ask my second question, it's a follow on to one of the earlier questions on the bit growth for the quarter. Just trying to understand why bit growth is negative this quarter and implication is fairly flat again, maybe even down slightly in Q4. Is that -- trying to figure out if you are building inventory? I understand that the inventory was already very low level, but is the inventory coming up a little bit for Nanya? And are you seeing significant inventory from customers at this point?
As I described to you now we don't see the market as pessimistic, say in mobile business, in server business, in consumer business. And the only market that is probably a little bit conservative is the commodity PC market. And yes, in the beginning of shipping our DDR4, mostly our shipment is in a commodity market for Q3. As a result, our bit shipment was not increased in Q3 by small percentage. Originally, we may expect to increase the bit shipment by low single-digit, now we're down by low single-digit. So that is pretty much influenced by the PC commodity. And as we move into the future, when we develop more server business as well as more low power business, we expect to be seeing that the pressure from the commodity will be alleviated very quickly.
Right now we're having Simon Woo, Bank of America Merrill Lynch.
Number one, let me double check that the overall Q3 lower bit growth rate is mostly because of the PC business, mostly?
Yes, the CPU -- shortage of CPU does impact on PC commodity, but also, on the other hand, the international trade conflict also influenced commodity portion psychologically. On top of that, the downgrade product, mostly also in commodity. All these factors making the commodity sector a bit more conservative than expectation.
Yes, however, the Nanya [ sequentially], almost 70% of your revenue is based on the consumer DRAM, you have a very low exposure to the PC, although it's not from the [ area ], so could you recap maybe Q3 revenue mix for consumer business versus PC, Mobile and wholesale shipment, but I'm sure that most of your revenue generation is based on the consumer DRAM, I guess?
Yes, you are right. However, the consumer market is still not ready for DDR4. Most of the majority of consumer market customer, they're still using DDR3 as a majority. So when we're having our DDR4 shipment, we started first in the commodity sector. And as I say, we will be gradually moving our DDR4 into server market as well as consumer market, as our consumer market customer become more ready to this product. So temporarily, we are affected by the commodity market sector.
And very quickly, maybe lastly, any chance to hear the share buyback program because the share price dropped over the last -- meanwhile, your quarterly number is still pretty good. So any color on the share buyback program?
I'm sorry, I couldn't quite understand your question. Could you repeat that?
My question is share buyback, share repurchase program. You said, our cash dividend at end of year maybe because the share price dropped a lot year-to-date. Meanwhile, your overall fundamental's still good. Fundamentals maybe for the current share price are very low versus your own book value. So any projection? Any guidance regarding the share buyback program?
Well, that's something that -- a good situation. You're talking about -- your question is about share buyback?
Yes.
Yes, so that may be a very good situation, okay. Something that need to be evaluated. Yes. However, at this time, we still don't have a legitimate plan yet.
But the share buyback program requires just the Board member approval only, right? You don't have to host or do any special shareholder meetings, right? So just the Board members, even the decision should be...
Oh yes, that has to be going through only very legitimate, the Board approval. As far as the government approval, everything come with it.
Well, thank you for all your questions. Now we are moving onto on-call Q&A session. Dr. Lee, please go ahead.
Okay. Now we are open for questions. Please.
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[Foreign Language] so the shipment is down by [Foreign Language]
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Yes. Okay. One more question from our call-in.
We got one more question from online participant. It is Stefan Chang, Maybank.
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[Foreign Language] guidance, yes.
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[Foreign Language] mid-single digit, plus/minus [Foreign Language] mid-single-digit. [Foreign Language] low power market [Foreign Language]. Server market, current PC market [Foreign Language] DDR4. The consumer market [Foreign Language] Server market and PC market. [Foreign Language] PC market.
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[Foreign Language] cost reduction per site [Foreign Language] product mix [Foreign Language] the cost reduction [Foreign Language] cost reduction or is it quarterly? Or is it annually? [Foreign Language]
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Okay. So cost reduction [Foreign Language] initially the case. And I think, initially, the case and the cost reduction [Foreign Language] cost reduction [Foreign Language] reduction [Foreign Language] cost reduction. [Foreign Language] cost reduction [Foreign Language] cost reduction [Foreign Language] accumulate [Foreign Language] may initially have cost reduction [Foreign Language] operating cost [Foreign Language] now initially the case and [Foreign Language]
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I'm sorry. Sorry for cutting you, but Mr. Chang, we are actually running short of time. So we are going to put you back on the queue and I will hand it over to Sandra Liu for closing comments. Sandra, please go ahead.
Thank you. That concludes our today's conference and conference call. Please be advised that a replay of this conference will be accessible through our website within 3 hours from now. Thank you for joining us today. Thank you. Have a good day.