Nanya Technology Corp

TWSE:2408

Earnings Call Analysis

Nanya Technology's Q3 Challenges but Hopeful Future

Nanya Technology's Q3 earnings reveal a mix of challenges and opportunities. Revenue increased by 10% to TWD 7.736 billion, but net loss widened to TWD 2.505 billion, with an EPS loss of TWD 0.81, affected by idle costs and reduced average selling prices (ASPs). ASPs, however, are expected to rise, although lagging behind competitors in DDR5 adoption, impacting profitability. The company plans DDR5 shipments in the second half of next year, aiming to catch up with market demand. Capacity utilization hovered around 80% in Q4, with management staying hopeful for recovery. Critical factors influencing future performance include DDR5 conversion, market recovery, and geopolitical uncertainties.

Navigating Rough Seas with an Eye Towards Calmer Waters

The third quarter of 2023 has been a challenging one for Nanya Technology, as evidenced by a net loss of TWD 2.505 billion and a drop in gross profit to a loss of TWD 1.953 billion, mainly due to idle costs and reductions in average selling price (ASP). Despite these troubling figures, the company's revenue saw a 10% increase from the previous quarter, and bit shipments increased significantly, offering a glimmer of hope for the future.

The Battle Against Declining Prices and Increasing Costs

The company's sequential net sales improved by 10%, yet gross profit slid downward as costs outpaced revenues, with a notable increase in gross loss of TWD 1.165 billion. Additionally, EBITDA went negative at TWD 475 million. However, Nanya managed to keep its operating expenses consistent with the previous quarter while facing a financial landscape where earnings per share suffered a more pronounced loss than before, moving from TWD 0.25 to TWD 0.81 per share loss.

Liquidity in Flux Amid Strengthening and Sustaining Efforts

Nanya Technology reported a decrease in free cash flow and an end-quarter balance of TWD 60.468 billion due to negative cash flow from operating activities and capital expenditures. The year-to-date cash flow reflected a significant spend on capital expenses, and while managing finances with caution, the company is geared up to focus 50% of its estimated yearly CapEx of TWD 15 billion on wafer equipment. This strategy is part of Nanya's initiative to dynamically adjust production with ongoing market evaluations.

Optimistic Outlook Amid a Shifting DRAM Landscape

Nanya anticipates some recovery in Q4 demand alongside the market's gradual destocking and suppliers' capacity adjustments. Furthermore, DDR5 emerges as a pivotal player in reigniting market demand and easing DDR4 inventory levels. The company expects improving demand across various sectors like AI computing in cloud centers, the smartphone market, and PC upgrades to DDR5 technology, thus painting a cautiously optimistic view of the future.

Nanya's Focus on Innovation and Market Adaptation

Despite the net loss incurred in Q3, Nanya plans to pivot by introducing its second-generation 10-nanometer class 16-gigabit DDR5 products, which it expects to qualify by mid-next year. With hopes to initiate shipments by the second half of the year, Nanya is aligning its production outputs with strategic reductions of up to 20% and adjusting to market demand and inventory levels to nurture gradual demand improvement.

Keeping an Eye on External Factors and Idle Cost Management

As the market faces uncertainties like geopolitical tensions and DDR5 conversion, Nanya is bracing for these macroeconomic factors by remaining vigilant and considering the possibility of continued underutilization of capacity and idle costs. The company is proactively managing its production cuts and preparing for gradual capacity resumption as the overall industry situation improves.

Earnings Call Transcript 2023-Q3

[Operator]

[Interpreted] Welcome to Nanya Technology's 2023 Third 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 Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the third quarter of 2023, followed by our guidance for the next quarter and key messages. 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.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 2023 Investor Conference. I am Pei-Ing Lee.Generally speaking, Q3 '23 still a tough quarter for Nanya. However, we are seeing signs and opportunity for future improvement in the market. I will begin with presenting Q3 revenue and results, followed by CapEx and bit shipment and discuss market outlook, then conclude by Nanya business review and outlook.First, our Q3 financial results summary. Our net sales comes to TWD 7.736 billion compared to Q2 of TWD 7.027 billion, it's an improvement of about 10%. However, the gross profit come down to a loss of TWD 1.953 billion compared to Q2 of TWD 788 million. This is largely due to idle costs and some ASP reduction. And operating costs, minus TWD 4.34 billion versus minus INR 3.185 billion in Q2 and with the same reason. EBITDA at minus TWD 475 million. Non-operating income is TWD 1.198 billion, very similar to Q2. And the income tax benefit, TWD 638 million compared to Q2 TWD 1.15 billion is less about TWD 5 billion -- TWD 500 million. And the net loss comes to TWD 2.505 billion versus Q2 of TWD 771 million. Earnings per share is a loss of TWD 0.81 per share compared to Q2 of loss of TWD 0.25. Book value per share, TWD 55.52 per share.For quarterly revenue comparison and year-to-year revenue comparison, the revenue for the quarter is about 10% better than Q2. The shipment increased by high-teens, which is some good sign. ASP decreased by high single-digit and exchange rate increased by high single-digit. For year-to-year, revenue still down by 29.8% and the shipment has increased by low-20s.Now, it comes to a little bit of more detailed comparison quarter-to-quarter. For net sales, there's an improvement of 10%, largely due to bit shipment increased by high-teens and ASP decreased by high single-digit with exchange rate favorable low single-digit. And gross profit minus TWD 1.953 billion versus minus TWD 788 million. The gross loss increased by TWD 1.165 billion, mainly due to higher idle costs and ASP decrease. The operating expense are TWD 2.387 billion, which is very much similar to Q2. And operating income minus TWD 4.34 billion versus Q2 TWD 3.185 billion, it's due to operating loss increased by TWD 1.155 billion for the same reason in the gross profit. Net income minus TWD 2.505 billion versus minus TWD 771 million, and the net loss increased by TWD 1.734 billion with the reason operating loss increased by TWD 1.155 billion and income tax unfavorable at TWD 512 million.And for operating expenses, our SG&A expenses TWD 600 million, which is in the normal range. And the R&D expense is at around TWD 1.787 billion, also at normal range. I noticed that this is unaudited result.For cash flow, beginning balance for Q3 is at TWD 59.665 billion, with the cash from operating activity at minus TWD 891 million and capital expenditure at minus TWD 2.431 billion. Financial activity, which is positive TWD 4.125 billion. If you're looking at the note underneath, you see that we have included a short-term debt of -- short-term loan of TWD 8.5 billion (sic) [ TWD 8.3 billion ] in Q3 plus the net dividend payout at TWD 6.1 billion with exchange rate gain about TWD 1.9 billion, okay? Then the end balance for Q3 comes to TWD 60.468 billion and free cash flow minus TWD 3.322 billion. And if you look at the bottom note, you see that our net cash, which is the cash minus debt, comes to TWD 52.2 billion.Looking at the right-hand side, this summarize our Q1 to Q3 cash flow situation. Beginning of this year, cash situation is TWD 73.593 billion, with the cash from operating activity, minus TWD 6.677 billion, and capital expenditure, minus TWD 11.055 billion, with the financial activity plus TWD 4.607 and the end balance comes to TWD 60.468 billion as is branded on the left-hand table.For CapEx and bit shipment, Nanya's capital expenditure in Q3 is around TWD 2.4 billion and accumulated Q1 to Q3 at TWD 11.1 billion. And we planned for the whole year to spend estimated around TWD 15 billion, within those 50% wafer equipment related, okay? And for the bit shipment, our Q3 bit shipment increased by high-teens. And for Q4, we will continue to plan for production output dynamically reduced by up to 20%, very similar to Q3. And this will be looking into our product portfolio situation and market demand situation doing dynamic adjustments. For annual bit shipments, we are expecting to be down by mid-single-digit for the year.Now, comes to market outlook. Overall speaking, we are expecting some improvement in Q4 demand. And we are seeing suppliers gradually destock as a result of production cuts and given suppliers continue to adjust capacity and focus on next-generation high-end products. We are seeing that geopolitical issues, including Russian-Ukraine war, U.S.-China trade conflict and most recent Mid East conflict remain key to recovery of global economics.From the supply side, DDR5 and HBM are instrumental in improving market demand and alleviating DDR4 inventory. For the CapEx and capacity, are expected to remain conservative in 2024, which may help restore market balance.From each sector demand point of view, for server market, we're seeing growing demand for DDR5 driven by AI computing in enterprise cloud centers and the server market would show quarterly improvement from Q4 and beyond. Mobile market, the smartphone market in China is expected to rebound in Q4. And globally, AI smartphone may trigger future demand. For PC market, new product launch will drive the demand for DDR5 and low-power DDR5, which will gradually replace DDR4 and low-power DDR4 as the mainstream products. For consumer market, demand growth for TV, IP camera, networking, industrial and automotive application remains stable.For business review and outlook for Nanya, Q3, we had a net loss of TWD 2.505 billion, EPS at minus TWD 0.81 per share. And we are doing second-generation 10-nanometer class generation 16-gigabit DDR5 product piloting. And Q4 production output will be dynamically reduced by up to 20%. And inventory has started to decrease and overall demand is improving gradually.With that, I conclude my report to you. Thank you for your attention.

[Operator]

[Operator Instructions] The first one to ask questions is Jeff Ohlweiler from [Technical Difficulty].

[Jeffrey Ohlweiler, analyst]

Lee, two questions for me. The first one is, any inventory write-downs, number one? And number two, can you talk a little bit about any kind of ASP momentum into fourth quarter?

[Pei-Ing Lee, executive]

We had both the idle cost, as well as some inventory write-down, yes. And for the ASP for fourth quarter, we are expecting the market gradually improvement in ASP. First of all, particularly in DDR5, likely the ASP will be improved substantially. And DDR4, there will be some improvement, as well as the DDR3, we're already seeing some signs of improvement.

[Operator]

[Operator Instructions] Now please welcome Simon Woo from Bank of America.

[Simon Woo, analyst]

Just a quick follow-up question. You mentioned that the -- it seems to be the -- for the first time that Nanya Tech recognized inventory write-down. But would you provide more details because why this time you recorded inventory valuation loss? And then we can also discuss the definition of the idle cost, still I didn't get your point for idle cost but let's kick off with the inventory valuation write-down details.

[Pei-Ing Lee, executive]

Okay. Generally speaking, our inventory still largely -- the value for inventory is still higher than the cost, okay? So in general, we don't have to do inventory write-down except certain small amount of the inventory, which had basically the time limit that we put in to write it down, and we do some degree of write-down for the long duration part, okay?Even the idle cost question is that, we do have the production reduction, and we had to take the idle cost for those equipment that is not fully utilized. And that's actually accountable for majority of the difference between Q3 and Q2, okay? My majority for the -- from a gross profit point of view, there are 2 major reasons. One is the idle equipment cost. The other one is ASP down. And with idle equipment cost, it actually contribute to majority of those difference between Q-to-Q.

[Simon Woo, analyst]

Okay. So Dr. Lee, you are saying inventory write-downs, the amount cannot be significant. Right?

[Pei-Ing Lee, executive]

Right. It's not significant. It's only a certain small quality of product that we need to write it down for the reason not because of the general problem that we have the inventory value lower than the value we can sell. Okay?

[Simon Woo, analyst]

So this one is mainly for the [ low-end ] legacy DRAM or you've some newly started high-end DDR4 or some samples DDR5? Would you share some details, which product?

[Pei-Ing Lee, executive]

Mostly DDR4.

[Simon Woo, analyst]

Yes, not necessarily for DDR4 -- DDR3, I mean, mostly DDR4...

[Pei-Ing Lee, executive]

DDR4, yes.

[Simon Woo, analyst]

Okay. Not necessarily DDR3?

[Pei-Ing Lee, executive]

Not DDR3.

[Simon Woo, analyst]

Yes. Yes. And then the idle cost, it sounds that the -- maybe some equipment now underutilized. So it sounds like asset impairment. Is it fair to say maybe -- so idle cost is still -- some capacity not utilized. That means your asset value is sort of lower and then you recognize some, what, some restructuring charges to asset impairment. How did you derive idle cost?

[Pei-Ing Lee, executive]

Idle cost means that when you have an equipment in production normally and then you have to cut down your production. As a result, some of the equipment will be idle and you have to take the cost from those equipments. For example, the depreciation cost has to be continue to be taken care of. Yes.

[Simon Woo, analyst]

Yes, but your total -- I got your point, [ per chip ] basis, we can say higher depreciation cost.

[Pei-Ing Lee, executive]

Yes. The bigger fraction is depreciation cost, yes.

[Simon Woo, analyst]

Yes. But total company-wise I didn't get the -- why your depreciation cost for the entire Nanya Tech Q3 results can be larger than the previous quarter?

[Pei-Ing Lee, executive]

The deprecation cost will be -- when you take this equipment for the production, okay, this depreciation cost will be in your cost. When you're not taking this equipment into production, it will still in the depreciation cost. So that's why you're seeing the same depreciation cost.

[Simon Woo, analyst]

Yes. Okay. Very quickly, so 20% production cost, it means out of your total, maybe how many wafers per month these days, capacity maybe 65,000 or 700,000, then you are inputting the only 80% versus the total capacity? That's the definition.

[Pei-Ing Lee, executive]

Yes, that's the -- roughly speaking, our input capacity in a certain amount. And we only loaded the fab with only 80%, means that we do the 20% of production cut.

[Simon Woo, analyst]

Your capacity of about 70,000, right, plus/minus?

[Pei-Ing Lee, executive]

It depends on what product portfolio, but roughly speaking, it's around 65,000 or so. Yes.

[Simon Woo, analyst]

Yes. And then lastly, do you believe the blended ASP anyway, down high single digits? But I just updated your competitor earnings model, but it is showing blended ASP increase, but I think it's a matter of the product mix trend. But do you believe that your blended ASP can go up for December quarter then?

[Pei-Ing Lee, executive]

I think there's a good opportunity for blended ASP to go up. But the extent of going up may not be as good as those companies who is already delivering DDR5. Okay? The reason what we see that some companies may be doing a little bit better than the other, mostly due to the DDR5 contribution is pretty significant, okay? And Nanya still working on our DDR5. We used to be [ distance ] #4. And hopefully, that distance is narrowing down. We can gradually catching up on this is DDR5 behind, okay?

[Simon Woo, analyst]

Yes. But overall, the Nanya Tech blended ASP for December quarter will be likely up quarter-on-quarter anyway.

[Pei-Ing Lee, executive]

Yes. There's a good opportunity for that.

[Operator]

The next one to ask question, Anthony Lau from Yuanta.

[Anthony Lau, analyst]

And my first question is, what is current like our customers' inventory level for like the niche DRAM product? And has it down to like healthy level? Or when will using that will down to maybe a healthy level in maybe this year or maybe next year?

[Pei-Ing Lee, executive]

The customer inventory level, if I look into different sectors of the customer, I see that the inventory level for a cloud customer in DDR4 may be a little bit -- still a little bit high, but it's coming down. And we're seeing that for PC customer inventory level is pretty healthy. We're seeing that the consumer side, the end customer inventory level is also pretty healthy. Okay? With the mobile side because Nanya is mostly in the low density, as well as special application mobile, okay? So our customer specifically inventory level is okay, not too bad. However, in the mobile side, okay, in the mobile side, I see that the -- some customers becoming more enthusiastic in terms of buying more parts. So you indicated that even the mobile phone side, inventory level is becoming healthier day by day.

[Anthony Lau, analyst]

I see. So I just want to figure out that in the third quarter, we see the higher bit shipments, like sequentially about like high-teens. So like which end application maybe like is PC contribute or maybe like what [ allocation ] contributes this like higher shipment like mix in this quarter?

[Pei-Ing Lee, executive]

We have pretty healthy bit shipment continuously for our biggest business sector, which is the consumer side, okay, that continued to be okay for Nanya. Okay? And are we seeing that the -- particularly the PC side and parts side has also helped, okay? And with the cloud computation, likely will be getting better, okay? We're not seeing the big momentum yet there, but we expect in Q4, the cloud competition will also get better, particularly with the help from DDR5 conversion, okay, and also the inventory digestion from the supplier side in DDR4.

[Anthony Lau, analyst]

I see. So back to the customer size, do Dr. Lee see like some part of customers has started accepting price hike in this quarter like the third quarter or maybe the next quarter, maybe the December quarter? Do you see this kind of signals happening?

[Pei-Ing Lee, executive]

In terms of, say, DDR5 has already happened, okay? That already happened in both the cloud business, as well as the PC business, okay, mostly it's in cloud now because the supply is still not sufficient enough, okay? And in terms of DDR4, still a bit of negotiation happening as we speak. Maybe in a few weeks, this will become more clear. My expectation is that, DDR4 likely to have some small margin of improvement as well, okay? With at least 2 out of 3 suppliers are already getting into a healthy range of -- in terms of their inventory, okay? And for the DDR3, I'm seeing marginal improvement as well, okay, in the consumer side.

[Anthony Lau, analyst]

I see. Okay. And my last question is about like DDR5. So can you tell us about like the DDR5 shipment mix currently? And like which numbers of -- which targets about like the shipment mix or like the sales mix in next year?

[Pei-Ing Lee, executive]

Unfortunately, Nanya still don't have the DDR5 product to be delivered to market requirement. We had 1 8-gigabit DDR5. However, this is not the main market demand, okay? So we will not be doing a lot of business here. We are preparing 16-gigabit DDR5 on our second-generation, what we call, 1B generation process. And that's going to be qualified in the middle of next year and likely that we may have some shipment in second half next year. Hopefully, it started from Q3.

[Operator]

[Operator Instructions] Next one to ask question is Simon Woo from Bank of America.

[Simon Woo, analyst]

Thanks, again, moderator because no one is asking the question. So I'm taking this opportunity for another question. So the NAND maker, they announced the production cut already late September last year. So already 1 year long production cut in NAND Flash. [ Given earlier ], we think the production cut started in the Q4 December quarter last year. So maybe how about the Nanya Tech, would you recap the recent history, when the Nanya Tech started lower wafer input? And then what was the [ degree ] initially and then the 20%? And you think this 20% production cut versus maybe your competitor' 30% to 40% cut ratio. Do you think it is enough to make the industry more balanced, particularly for the DDR3 or consumer DRAM? So yes, let's revisit the chronology of the Nanya's product cut back history.

[Pei-Ing Lee, executive]

Simon, I guess, the NAND side, you know very well, right? And for DRAM side that you can see that, at least 2 of the companies already start doing some cuts on the beginning of the year. So it's Nanya and -- however, the degree of production cut is different for Nanya dynamically, which means that we may have some product we need to reduce our output more than the others, okay? And -- so maybe there's one company has at their production rearrangement a little bit later than the others, okay, in DRAM side, okay?And for Nanya, though, if we look at this rearrangement of our production strategy, we mostly do this according to our product portfolio and customer requirement, okay, and see which area we need to do more adjustment than the other, okay? And Nanya is now doing a lot of different product portfolio. We run in the near 30 different product portfolio at the same time. So we're making adjustment for those customers, maybe 700 or 800 customers according to their need, okay? That's what Nanya has been doing accordingly, what we've been serving the market, serving our customers.In terms of overall market demand supply balance point of view, Nanya is relatively small. Okay? We are only a fraction of those -- the big supplier. So our impact to overall demand supply balance is relatively small, okay? Therefore, we are not doing our production arrangement for that reason. We are doing it for our market reason, our product portfolio reason, our customer reason. So that's a little bit different strategy compared to the big supplier.

[Simon Woo, analyst]

Yes. Very clear, sir. So you don't feel -- you don't need to make the production cut ratio at 30%, 40%, no need, 20% for Nanya Tech is enough?

[Pei-Ing Lee, executive]

Yes. Yes. And actually, in the beginning of our -- as I said, that in the beginning of the year, we are already doing some cut, okay? But because at that time, we don't need to cut as substantial as Q3, okay? Q3, we cut a little more, okay? So quarter-by-quarter, the cut is different. That's why we say we're doing this cut dynamically according to our customer requirement and our inventory situation. So that's a little bit different from the major concern of overall market demand supply, instead, it's more small items than individual customer and product portfolio issue.

[Simon Woo, analyst]

Yes, yes. But when we look at your second quarter financial report, inventory amount hit record high, TWD 28 billion, but the year-to-date production cut more meaningful. So what's the financial amount to value the inventory in your balance sheet for Q3 or maybe [indiscernible]?

[Pei-Ing Lee, executive]

So as I explained just now, generally speaking, our inventory is high. However, our value of our inventory still higher than our cost, okay? And generally speaking, we do take some inventory write-off only on specific small quantity product portfolio that we need to do that. But generally speaking, we don't need to do major inventory right down, okay? So that's case-by-case situation for Nanya.

[Simon Woo, analyst]

Yes. But my question is, according to your Q3 financial statement, you may have some preliminary data. So what's the amount of the inventory versus the second quarter? Second quarter was TWD 28 billion. In September quarter how much now, TWD 25 billion or...

[Pei-Ing Lee, executive]

I don't have that number. But in terms of dollar value, it may not be a huge difference. But in terms of number of days of inventory, maybe substantial improvement already because we sell in a lot more than before.

[Simon Woo, analyst]

Yes, sir. And then sorry almost largely to derive a single-digit bit growth, mid-single-digit bit growth -- annual bit growth for 2023, what's the implied bit growth for December quarter? Still need about 10% quarter-on-quarter increase or negative bit growth quarter-on-quarter? What's your December bit growth outlook, sir?

[Pei-Ing Lee, executive]

Okay. I need some help on this question. Okay? Yes, okay. We are expecting mid- to high-single-digit improvement in shipment.

[Simon Woo, analyst]

Okay. And then through the Q3, Q4, over the second half of bit growth is better than first half. Why you think this can happen? Is the per box content increased or is more channel inventory restocking? Or who is taking your extra shipment growth?

[Pei-Ing Lee, executive]

Both. I think generally speaking, as I say, that there are some demand improvement and there are also some customers feel like the market may be already low, okay? They are more enthusiastic. And there are also some recovery in secular market expected, including, say, mobile business and cloud computation, we are expecting quarter-by-quarter likely to be some improvement.

[Simon Woo, analyst]

Yes. All clear, sir. Maybe I think no question from the queue, but for now, so maybe one last question should be your long-term view for the memory cycle. Is it fair to say in up cycle will eventually come, but the question is when? So -- but do you -- what's your rationale to expect the better cycle maybe next year or 2025? Would you share your insight on the DRAM cycle going forward?

[Pei-Ing Lee, executive]

Simon, you have an excellent question. And it's also very difficult to answer on this question. If you're talking about overall demand point of view, as I indicated that there are some opportunity seeing and sign of improvement have been shown in terms of improvement in the market. However, I don't see a very big jump in terms of market recovery because still, there are so many uncertainty out there, okay? This time, I would say, the market demand come down severely from a cloud computation point of view, from the mobile application point of view. So that's not -- that was not very good and come to a very, very low market. Luckily, this area, probably good opportunities is that, the only way to go is going up, okay? It's already very, very low, okay? And so, there are some demand improvement likely to be seen.The biggest concern, okay, is geopolitical issues, okay? Now, with the global inflation, maybe people are already getting used to that. Interest rate issue, people are really getting used to that, okay? And the COVID impact is actually getting better, been relieved, some relief, supply chain issues, some release already happened. But biggest uncertainty is still geopolitical issues like European war, Ukraine-Russian issue, the U.S.-China trade conflict issue. Now, on top of that, the Middle East issue, is that going to be impacting on the energy sector. Last time, it's because of energy sector, okay? The Russian petroleum issue causing energy sector, that basically kicked off all the global inflation. How is this Middle East issue is going to be improve or getting even worse? That's something that we have to be very careful and wait and see. Okay?So overall speaking, if the global economics is still hindered, still influenced by this geopolitical issue. The overall demand for all memory, including DRAM, NAND Flash and/or even larger devices could be a slow down to some bit. Luckily for DRAM is that, we now have an AI trigger issue. We now have a DDR5 conversion topics that may help, okay? That may help the production been focused more on the new product, deviate existing inventory, okay? And also on top of that, with the production control, the balance between supply and demand can become slightly healthier day by day, hopefully, okay? But I think still we have to be very careful about geopolitical conflicts around the world.

[Simon Woo, analyst]

Yes. So I appreciate your great color, sir. But if this happens, you have to continuously underutilize your capacity. Then, though, should we expect further idle costs for December quarter or at least another...

[Pei-Ing Lee, executive]

And based on historical results, every year that the bit demand is increased by 15% or so every year, okay? That means that the suppliers typically had to spend money in terms of new capacity or in terms of technology conversion. And now with the CapEx situation, likely they don't have to make more spending and then recover those existing CapEx as a first priority, okay? And before they see that, likely more spending on CapEx or new equipment is not making a lot of sense, okay? So that will be, in general, true for the situation. And then the adjustment will be gradually quarter-by-quarter, okay? First of all, to digest the existing capacity and then gradually resume the 15% bit growth yearly, hopefully, and that likely will happen. And if the geopolitical issue has been resolved, which is so much uncertainty, then maybe there's a bigger recovery may happen. But again, that's so much uncertainty there. Okay?

[Simon Woo, analyst]

Yes. I think the Q4 idle cost will continue, sir, sorry for the fourth question?

[Pei-Ing Lee, executive]

It may continue, but the degree of the idle cost may change dynamically as I explained to you many times just now.

[Operator]

Next one to ask questions, Charles from Bloomberg Intelligence.

[Charles Shum, analyst]

Hello. Can you hear me?

[Pei-Ing Lee, executive]

Yes, yes, please.

[Charles Shum, analyst]

Dr. Lee, I have 2 questions. First, I just want to know more about your production planning. So you mentioned that you are going to cut by 20% in the fourth quarter [ vis-a-vis ] the third quarter. So can I know -- is this 20% is the -- on the bit shipment or on wafer volume? And also, in what situation you think your company will actually back to the full capacity production status? Is that will be depending on the -- your customer demand like in the server, PC or actually maybe more depending on your inventory level? So that's my first question.

[Pei-Ing Lee, executive]

Okay. So, let me answer your first question first. First of all, our Q4 plan dynamically up to 20%, which didn't mean it's going to remain 20% flat, okay? We will be doing this dynamically, okay? Likely to be in-between somewhere, okay, depends on different products, depends on customer requirements, okay?And when are we getting back to full production? Actually, in the last question asked by Simon Woo, I explained that already, okay? The industry is likely to digest the idle equipment, resume the idle equipment to production as a priority first okay, before we move on for more bit growth with the new equipment or more technology conversion, et cetera, okay? So when that will happen? That's likely to be happening gradually quarter-by-quarter, okay? And, again, it depends on -- the market recovery depends on DDR5 conversion and also depends on all the uncertainty, geopolitical effect is going to be coming down one way or another, okay? So that's a complicated question to answer. I don't know I can give you specifically when, okay? But I think that there are some signs of opportunity of happening gradually as we speak.

[Charles Shum, analyst]

Okay. Sorry, I just want to clarify. So can I assume that in the worst case, in the fourth quarter, I can assume that Nanya will actually have the capacity utilization rate keep at 80%. Is that correct?

[Pei-Ing Lee, executive]

My hope is that, keeping 80% is more, okay? Not -- we are already taking quite a bit of production cut in Q3. My hope is that, we can somehow reduce that cut with our customer and our product portfolio can react better to the market demand.

[Charles Shum, analyst]

Okay. Got it. All right. My second question is about your shipment. I just want to have a more clear picture on your operation details. So do you like to -- can you give an introduction about what is your shipment mix by products by DDR3, by DDR4 and DDR5, how much percentage is that in your current shipments?And also, I just want to know a lot more about your coming launch of the second 10-nanometer class DDR5 chips. So when do you think that will be actually going to mass production and shipping to your end customers?

[Pei-Ing Lee, executive]

We still don't have DDR5 shipment, okay? And we're expecting -- we can get some DDR5 shipment second half next year, okay? And DDR4 -- our major shipment now is DDR4, DDR3 and some low-power, okay? And the low-power by itself is taking around 10% plus/minus of our shipment now. And the rate of the shipment, DDR3 and DDR4 is about roughly similar.

[Charles Shum, analyst]

Similar. Okay. That's by bit or by wafer?

[Pei-Ing Lee, executive]

That's probably by wafers. Yes.

[Operator]

Thank you, ladies and gentlemen, for all your questions. Now, we are going to continue our Q&A session from webcast. Dr. Lee, please proceed.

[Pei-Ing Lee, executive]

Okay. We have a first question by JPMorgan. Mr. Lee -- [ Shun Lee ]. Your question is, with memory ASP now expected to recover, what would be your CapEx outlook for 2024?Okay. Our CapEx outlook for 2024 still need to be approved by our Board. So I don't have a specific number for you. However, our equipment CapEx will continue to be conservative for some time, okay?The question also -- the next question is, do you expect CapEx to move up compared to 2023?And I already explained that just now.The second question by SinoPac, Stanley. Your question is, could you please recognize idle costs, explain idle cost, largest to smallest as compared to Q3, Q2 and fourth quarter, Q2, first quarter 2022?And yes, we are -- we had more idle costs in Q3 2023 compared to Q2 and Q1, which is relatively smaller compared to Q3 this past quarter. Okay?

[Operator]

Thank you, Dr. Lee. And ladies and gentlemen, we thank you for joining us today. 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 lines now. Thank you, and good-bye.

[Pei-Ing Lee, executive]

Thank you.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]