Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2021-Q3

[Operator]

[Foreign Language] Welcome to Nanya Technology's 2021 Third Quarter Earnings Conference Call. [Operator Instructions] And this conference will be held only in English for investors around the world. Today's conference will be approximately 60 minutes. Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the third quarter of 2021, 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 actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our presentation materials. And now I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and current quarter guidance. Dr. Lee, please begin.

[Pei-Ing Lee, executive]

Ladies and gentlemen, welcome to Nanya Technology Q3 Investor Conference. I'm Pei-Ing Lee. I'd like to start by reporting to you the Q3 2021 revenue and results, followed by CapEx and bit shipment, market outlook and then conclude by business review and outlook. First of all, Q3 revenue and result. Our Q3 2021 revenue comes to TWD 23.837 billion versus last quarter TWD 22.637 billion. It's Q-to-Q up by 5.3%. Gross profit, TWD 11.735 billion versus last quarter TWD 9.583 billion, Q-to-Q up by 22.5%. Operating income, TWD 9.073 billion versus last quarter TWD 7.063 billion, Q-to-Q up by 28.5%. For EBITDA, TWD 12.966 billion versus last quarter TWD 10.896 billion, Q-to-Q up by 19%. With non-operating income, TWD 314 million, and income tax expense, TWD 1.862 billion, net income comes to TWD 7.526 billion versus last quarter TWD 6.163 billion, Q-to-Q up by 22.1%. And our earnings per share for the quarter, TWD 2.44 per share versus last quarter TWD 2 per share. Book value per share comes to TWD 53.87 per share. For quarterly revenue comparison or Q-to-Q and year-to-year, our revenue, up by 5.3% Q-to-Q and year-to-year up by 55.3% -- 55.6%. Shipment-wise, Q-to-Q decreased by low teens. This is mostly due to inventory depletion, and year-to-year decreased by single -- mid-single digit. For ASP, it increased by 20s for Q-to-Q and increased by 70s for year-to-year. And the exchange rate, unfavorable by 0.6% for the quarter. For Q-to-Q comparison, a little bit more detail and remarks, net sales, TWD 23.837 billion versus TWD 22.637 billion, increased by 5.3% due to bit shipment decreased by low teens and ASP increased by approximately 20s and with exchange rate impact 0.6%. For gross profit, TWD 11.735 billion comes to 49.2% gross margin versus TWD 9.583 billion at 42.3%. Q-to-Q percentage point, up by 6.9%. And this is mostly due to gross profit increase of TWD 2.152 billion, mainly due to ASP increase. Operating expense, TWD 2.662 billion versus TWD 2.52 billion is very close, with R&D expense increased slightly by TWD 138 million. Operating income, TWD 9.073 billion at 38% versus TWD 7.063 billion at 31.6% (sic) [ 31.2% ], Q-to-Q up by 6.9%. And net income, TWD 7.526 billion versus TWD 6.163 billion, and this is due to increased operating income of TWD 2.01 billion, with exchange rate impact TWD 472 million favorable and income tax TWD 1.105 billion unfavorable. For quarterly financial trends, for the last few years, you see that our revenue comes to TWD 23.837 billion, with gross margin comes to 49.2% and operating margin comes to 38.1%. And the net income, TWD 7.526 billion. Operating expense. For the quarter, SG&A, TWD 642 million. This is pretty normal. And R&D expense slightly increased for the purpose of 10-nanometer class technology and product development. This comes to TWD 2.02 billion. And for the future, we are expecting the R&D expense will be staying very close to TWD 1.9 billion to TWD 2 billion. For cash flow, our beginning balance for the quarter is TWD 67.738 billion. And end balance comes to TWD 71.355 billion, with free cash flow in TWD 7.037 billion. And cash from operating activity is normal at TWD 10.8 billion. Capital expenditure, which is mostly for equipment purchased, TWD 3.8 billion, prepare for 10-nanometer piloting. And financial activity, minus TWD 3.4 billion with an increase from last quarter, mostly due to TWD 4 billion of dividend payout to shareholders and with positive income of TWD 320 million proceed from employee treasury stock, employee recognized Nanya stock. On the right-hand side, first 3 quarter cash flow situation. Beginning of the year, TWD 51.726 billion. Cash position comes to third quarter at TWD 71.355 billion end balance, with the 3 impact, thus, cash from operating income is TWD 29.92 billion and capital expenditure of TWD 6.5 billion and financial activity, mostly dividend payout, at a negative of TWD 3.7 billion. For CapEx and bit shipment. Our Q3 CapEx at TWD 3.8 billion. With the whole year, we expect to spend about TWD 12 billion. And this is mostly preparing for 10-nanometer piloting equipment. And next year, we will likely to start preparing for mass production equipment. So next year's capital expenditure will be -- likely to be higher than this year. However, the number is not available as of now. We will report to you in the next quarter -- next quarter's investor conference. For bit shipment, our Q3 bit shipment decreased by low teens, as reported just now. For the Q4, we are estimated to be relatively flat. And this decrease in bit shipment, mostly due to inventory depletion, as I reported just now. For 2021, our yearly bit shipment is expected to be relatively flat compared to 2020. For market outlook. Overall speaking, in Q4, we're seeing consumer electronics, server market and smartphone sectors remain solid, with Chromebook and spot market declining. And supply chain unbalanced and components shortage have impacted many market sectors. And for the COVID-19, we've seen it interrupting Southeast Asia electronic assembly factories. And we're also seeing that high inflation across the globe and geopolitical tensions have slowed down global economic recovery. So we are expecting DRAM market enter short-term minor correction in Q4 2021. For supply side, we see more supply and CapEx have been introduced due to supplier had expect global economic recovery. And we also see that market confidence declined due to low-quality product shipment to spot market in Q3. From the demand side, for mobile market, 5G new model launch for Q4 hot season, and we see mobile market resume marginal growth in 2021 versus 2020. For server market, we still see a strong server market demand for new platform with higher DRAM content. For PC market, we are expecting enterprise PC demand continue to be stable with Chromebook slowdown, and components shortage issue has not been resolved yet, especially for small IC like PMIC, audio IC, et cetera. Consumer market, we've seen positive outlook for networking, for wearables, smart speaker, SSD, et cetera; while we're seeing DTV, digital TV and automotive demand may be slowed down by component shortage. For Nanya business review and outlook, as a summary, in Q3, our result has been improved from Q2, with gross margin comes to 49% and operating margin comes to 38%. In Q4, we are expecting the market is entering a short-term correction. Our first 10-nanometer class 8-gigabit DDR4 and 8-gigabit DDR5 piloting is on schedule. Our second-generation 10-nanometer class product development is also on schedule. Our new fab planning for groundbreaking will be postponed to first quarter next year due to longer approval process. This is mostly due to COVID-19 interest to [ locally ] and document preparation issue. With that, I conclude my presentation to you. Thank you.

[Operator]

[Operator Instructions] The first one to ask questions, Haas Liu from Crédit Suisse.

[Haas Liu, analyst]

Dr. Lee, congratulations on the good results. And my first question is regarding the DRAM pricing outlook. Your DRAM pricing was up by 20% quarter-on-quarter in 3Q, but we also see sales -- September sales down 6% month-on-month. Does that mean that DRAM price start to adjust in late 3Q? And if that is the case, could you also discuss your expectation for the price outlook for 4Q and also 2022?

[Pei-Ing Lee, executive]

We are expecting marginal adjustment correction for Q2 pricing. As of the percentage-wise will be different from sector to sector and also different from product to product, including DDR3 versus DDR4. Also from a density point of view, all density will be different from high density. So there will be mix of different price trends for each of the sector and each of the product.

[Haas Liu, analyst]

Okay. Could you please discuss a little bit more detail about the...

[Operator]

This is the operator, I'm sorry to interrupt. Mr. Liu, I'm afraid that we can barely hear you. Do you think you can speak up, please?

[Haas Liu, analyst]

Okay. Can you hear me better now?

[Pei-Ing Lee, executive]

I can hear you, yes.

[Haas Liu, analyst]

Okay. Could you discuss more in detail about the price adjustment by different applications, as you just mentioned? Probably more detail on DDR3, DDR4 and also by different end applications.

[Pei-Ing Lee, executive]

The expectation is that price correction likely to be more in the PC and spot market and maybe less in the server market, consumer market and mobile market. And likely, the low-density adjustment will be less -- maybe have a good chance of staying flat, okay, slow adjustment, with high density maybe slightly more.

[Haas Liu, analyst]

Okay. That's very helpful. And my second question is about the bit shipment. Could you let us know why your bit shipment in 3Q was below your original guidance for down single digits quarter-on-quarter? And also for full year, I think you also revised down your bit shipment guidance from marginally growth to flat year-on-year. Is it because you are building year-end inventory levels and wait for the shipment when the price returns to a better level next year?

[Pei-Ing Lee, executive]

No, we hadn't seen intentional buildup of inventory, okay? It is -- we have a normal production volume. And this year, in the beginning of the year that we are selling not only the normal production volume, in addition, we are selling inventory, okay, at the beginning of the year. And in the beginning, because of the market recovery, so the depletion of inventory is faster, means that we are selling more than the end of the year in terms of inventory. And the change mostly due to the amount of inventory being sold. For the production, it's a normal situation, staying pretty flat for the whole year.

[Haas Liu, analyst]

Okay. A quick follow-up to my second question would be about the inventory levels. Could you discuss your own and also the channel inventory levels? Do you think the current price correction will only be a few quarters, with DRAM inventory levels low across the board?

[Pei-Ing Lee, executive]

So far that we've seen, our own inventory level has been very -- as I say, it really is very low, okay? And until Q2, I'm seeing all the supplier inventory also been very low, according to their financial report. But their Q3 financial report, yet to be delivered yet. So that's -- we need to wait probably a month or so to understand their current inventory situation. But my expectation is that likely their inventory level will be still healthy from the supplier side. From the channel side, we are seeing the channel inventory is relatively stable, getting stable now.

[Haas Liu, analyst]

Okay. Stable at a higher level or stable at a...

[Pei-Ing Lee, executive]

I would say stable at a normal level.

[Operator]

Next, the line is open to Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

Yes. Dr. Lee, when you mentioned DRAM market entering the short-term correction, are you just talking about pricing? Because you are guiding for a flat Q-on-Q shipments.

[Pei-Ing Lee, executive]

Jeff, we lost you. Your question didn't complete.

[Jeffrey Ohlweiler, analyst]

Okay. Sorry. You mentioned you're entering a short-term DRAM correction. However, you're guiding for flat Q-on-Q bit shipments. Does that mean when you talk about correction, you're talking about just pricing correction, not necessarily demand correction?

[Pei-Ing Lee, executive]

Not necessarily demand correction, mostly due to -- we don't have inventory. We don't have additional volume to sell, okay?

[Jeffrey Ohlweiler, analyst]

So if that's true, why do you lower prices in the fourth quarter if you're still seeing flat shipments and stable demand?

[Pei-Ing Lee, executive]

Market has price up and down always. The customer side will also negotiate for the market fair price. It's not just that the one side will determine or based on, of course, the -- there's going to be some bargaining, but generally, it will be a fair market price.

[Operator]

[Operator Instructions] And next one to ask question is J.J. Park from JPMorgan.

[J.J. Park, analyst]

Okay. Dr. Lee, can you maybe elaborate? You said short-term correction from the Q4. So do you expect the correction for one quarter? Or do you expect the correction will last until some point in the next year? And then I have a clarification.

[Pei-Ing Lee, executive]

This is a very important question, but I don't think I have a long-term forecast for you for the reason that this time, that short-term correction is a result of several reasons. First big reason is the component shortage has interrupted many of the supply chain, okay? That becoming -- impacting sectors, even with the server area also being impacted. So on top of that, we had this Southeast Asia assembly factory, the shutdown issue. And also that globally, there are some also conservativeness on the recovery speed, okay? And all this issue may change -- may dynamically change. And the component shortage issue being resolved, okay, and the market confidence began due to global economic recovery. This will be ongoing change probably through the next 2 quarters as well, okay? So in short term, I mean, maybe this quarter or even Q1 that may be some correction. But it's not a major -- very slight correction. I would expect it to be some reasonable, marginal correction instead of what some analysts may have reported that will be going back to 2017 or '18 correction, which I don't agree, okay? I think this time, it's more likely to be marginal correction for a quarter or 2. And beyond that, we have to look into those issue that's causing this correction being resolved or not.

[J.J. Park, analyst]

Okay. It's very clear. My second question is that if you look at the bit shipment growth, this year, you're likely end with flat. I think you see growth throughout in the last couple of years. So what about the next year bit shipment growth? Do you think you can drive the softened bit shipment growth along with the tech migration? Or you do expect the kind of flattish bit shipment growth next year?

[Pei-Ing Lee, executive]

J.J., you asked also another good question, okay? You're talking about for Nanya specific, okay?

[J.J. Park, analyst]

That's correct.

[Pei-Ing Lee, executive]

Yes, yes. For this year, as I reported to you that we have no more production volume. But for this year, in the beginning of the year until Q3, we had been selling normal production volume plus inventory, okay, plus inventory. So we had additional volume sale by inventory, okay? And that inventory has been depleted. Next year, we are expecting that we will have some output from our next-generation technology, namely the first generation 10-nanometer, okay? And that will come gradually, probably a small amount in the first half and a little more in the second half. And that likely will make up the inventory. Now we're talking about we sell this year. So as a result, year-by-year, likely that next year, we will not have more shipments. Do you understand what I'm talking about?

[J.J. Park, analyst]

Yes. So I'd like to clarify. So you do expect the softened bit shipment growth next year, even though you enter next year with no inventory on hand?

[Pei-Ing Lee, executive]

I don't expect next year Nanya shipments will be increased, like will be relatively flat versus this year. Because next year's additional output from 10-nanometer in volume is likely to be very similar to this year's additional inventory that we saw.

[Operator]

Next one to ask questions, CW Chung from Nomura.

[Changwon Chung, analyst]

Okay. My name is CW Chung at Nomura. Recently, we saw a letter from Micron's CEO to customers. I feel it's very reasonable and also brave letter. He mentioned that DRAM industry need more lead time for customers and also need to reflect some cost increase from many materials during the pandemic situation. So do you think that we can -- DRAM industry suppliers can change this kind of environment more favorable for DRAM companies going forward?

[Pei-Ing Lee, executive]

I don't know if I can comment on this issue versus what Sanjay has commented on, okay? I would say, for DRAM market, we are mostly [ full ] market value. I mean, in this pandemic, demand and supply balance point of view determine the market price trend instead of any artificial way of making adjustment, okay? I personally believe that will be mostly demand and supply determining the market price.

[Changwon Chung, analyst]

Okay. My then second question is, given rising CapEx intensity, do you think you need a higher OP margin profitability going forward? And how you can [ utilize ] it going forward?

[Pei-Ing Lee, executive]

Oh, if that's the case, that's -- again, that's come back to demand and supply balance, okay? As a result of the higher CapEx, higher costs in the manufacturing, then in terms of making adjustment to the market balance.

[Changwon Chung, analyst]

So I'm asking this question because different from other industry, as our CapEx intensity is increasing, unless we start to invest more CapEx after the even higher OP margin. Otherwise, our free cash flow will be much smaller than before. So I just wonder whether you have such kind of a concept internally when you make a CapEx decision.

[Pei-Ing Lee, executive]

Well, in general speaking, now we invest based on market demand and customer requirement, okay, customer demand, okay? When there's demand and also a reasonable value means that whatever we invest, we have reasonable return, then it will make sense for us to do more CapEx. And also, more CapEx result in more competitiveness or less competitiveness is we also have to consider. We overbuilt the market, and in terms of keeping the market balanced and becoming irrational, and that's also that the other supplier has been -- has to be very carefully evaluate future plan.

[Changwon Chung, analyst]

Okay. Last question is regarding your 10-nano class product development. It's kind of Nanya-owned, developed, I understand. So do you feel you are fully prepared for that? How do you think about it?

[Pei-Ing Lee, executive]

Yes. We are -- the 10-nanometer generation technology will completely order the structure as well the process flow recipe, everything and also background, including the tool, everything, but we try to renovate everything, okay? And with structure that we built, we believe that we can take it for few, several generation without major change in the future, okay? So with that, it took us a bit of time. I think by now, it's for more than 3 years, the time that we have spent. And of course, the investment and the engineering team, et cetera, all put in there for more than 3 years, okay, probably near 4 years by now. And we are in a stage of preparing for initial mass production, okay? And then hopefully, that will be happening some time first half next year.

[Operator]

Now the line is open to Simon Woo from BofA.

[Simon Woo, analyst]

Okay. Congrats, Dr. Lee. Great results. But the immediate question should be, how long your great momentum will be sustainable? You mentioned there's a little bit correction period for Q4 or maybe early next year. But we are feeling that Nanya Tech's blended ASP has been rising very strongly versus the industry trend, relatively higher, higher price. Every quarter, we can [indiscernible] quite significant ASP drop. That's when we think about investor concern.

So let's [indiscernible]. So Q3 ASP of 20%, right? And then the second quarter of 30% and early this year, Q1 of 15% quarter-on-quarter. So overall, your ASP almost doubled versus 3 or 4 quarters ago. But that really means maybe kind of the double-digit ASP decline possible, maybe December quarter, even you said minor correction for the short term. But how are you going to explain very strong ASP increase year-to-date and then the quite significant ASP drop possible going forward [indiscernible]?

[Pei-Ing Lee, executive]

Simon, that's a very good question. Thank you for asking, okay? Nanya Technology, today, we are running many different products, okay? All products that's currently being shipped is more than 30 different products and shipped to more than 300 customers for various applications, okay? And ASP increase is as a result of -- due to mostly -- the higher percentage due to mostly low density. Let me give you an example. Low density, for example, for 1 gigabit use, the percentage of price increase when you normalize through in general 4 gigabit is much higher, okay? For instance, if you take in 1 gigabit, selling in $0.10 and the price has increased by $0.02, 4 gigabit equivalent, it's increased quite a bit, okay? So therefore, you're seeing product portfolio-wise it's favorable in the price increase. On top of that is that the DDR3 and DDR4 has different price momentum for the past few quarters, with DDR3 being more -- the price increase is higher than DDR4. And this is mostly, again, due to each of the sector demand and supply balance as a result, okay? Today, it's not only a major one big demand and supply, but it's also individual products, individual sector supply and demand. That's why you're seeing that maybe the mobile pricing trend is a little different from server pricing trend, okay? And server pricing trend is different from consumer. And even with the consumer that you are using 1 gigabit more compared to using 4 gigabit, or you're using DDR3 versus you're using DDR4, the pricing impact will be different. And for the upcoming quarters that you -- question that you asked, we're seeing that our price stability are maybe becoming more similar between DDR3 and DDR4. However, we're still seeing that low density being more stable than high density. And we're also seeing that maybe a server product may be more stable than PC product, so even they are both DDR4, okay? So that, again, is a market demand and supply in each of the sector by itself, with all the supply, including all the suppliers and all the different type of products, 8 gigabyte, 16 gigabyte, 32 gigabyte and 64 gigabyte, each one of them will have different trends as well.

[Simon Woo, analyst]

Yes. Yes, very clear, sir. So then hopefully, we can be -- kind of the softer landing rather than any drastic [indiscernible] landing.

[Pei-Ing Lee, executive]

I hope so, too. I hope so, too. But I'm confident so far by -- for fourth quarter, I'm seeing it, it's not going to be a major landslide kind of a situation. I'm pretty confident on that.

[Simon Woo, analyst]

Yes, yes, yes. Actually, the follow-up question should be the China, people talking about market risk, financial issues, maybe purchasing power among the consumers getting weaker in China. But do you feel any kind of a weaker order? I'm not talking about price. I'm talking about maybe the amount of the provision on your customers, if you meet your low-density DRAM chips and maybe high density. But how do you assess over the China chip demand that we face and then their inventory level among the phone makers and the PC OEMs, sir? Any near-term risk or order cancellation or weaker demand from China do you think?

[Pei-Ing Lee, executive]

So far, from the consumer market, we still don't see any major impact yet from the power shortage issue, okay? So your question about, overall speaking, is there going to be some change in China market, which I personally think that we should continue to be watching very carefully about the upcoming couple of quarters, not only the power shutdown issue, but also maybe the real estate industry, the impact by FINRA fee, et cetera. Also, in general speaking, global inflation is also something to be careful. And that's also may include in China as well. All this topic has to be carefully paying attention to, okay? And I indicated geopolitical issue and the global inflation issue and COVID impact issue all have to be carefully evaluated, on top of that component shortage and unbalanced. All those factors had to be watched very closely in order to determine what's going to be in 2 quarters beyond.

[Simon Woo, analyst]

Yes. Yes, very clear, sir. By the way, sir, did you say you don't have any issue for your packing and testing for the -- your DRAM? That is different versus Micron's -- some [ packaging ] disruption. Your DRAM packaging, testing mostly done in Taiwan via your affiliate company and also the outsourced company, but you don't get any immediate disruption then for your packaging and testing?

[Pei-Ing Lee, executive]

Look, we don't have any impact so far. Everything is normal for us.

[Operator]

[Operator Instructions] Thank you, ladies and gentlemen. There seems to be no further questions at this point, neither there are questions from webcast. So I'm going to hand it over to Dr. Lee for closing comments. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Thank you for joining us for Q3 investor -- I'm looking forward to seeing you for the next quarter investor conference. Thank you.

[Operator]

Yes. Thank you, Dr. Lee. And 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. Thank you for your participation, and have a wonderful day. You may disconnect your line now. Thank you, and goodbye.