Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2018-Q4

[Operator]

[Foreign Language] Welcome to Nanya Technology Fourth 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 fourth quarter of 2018, followed by our guidance for the fourth quarter of 2018 and key messages. Afterwards, Nanya Technology's Vice President, Mr. Joseph Wu; and financial executive, Mr. Philip Jao, will join us as we open our question-and-answer sessions both online and on floor. 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 now download them from Nanya Technology's website at www.nanya.com. As usual, we would like to remind everyone 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.

[Pei-Ing Lee, executive]

Welcome. My agenda today will cover our Q4 revenue and result and at this time also summarize our 2018 revenue and result and CapEx and bit shipment, market outlook and business outlook and review. Q4, in net sale, is 30% lower than Q3 '18 at TWD 16.958 billion; gross profit, TWD 8.97 billion; and operating income, TWD 7.09 billion, with EBITDA at TWD 10.2 billion, where the comparison will be shown in the next couple folio. Nonoperating income, mainly coming from the exchange rate and interest rate, TWD 894 million; and net income, TWD 7.953 billion. Earnings per share, TWD 2.57 per share, with the book value at TWD 54.01. Q-to-Q comparison, Q4 versus Q3 and Q4 versus Q4 last year. Versus Q3, down by 30% and mainly due to shipments down by low 20s and ASP down by low teens, with exchange rate about 0.58% plus. And year-to-year, it's about even, flat, with ASP decreased low single digit. Exchange rate, 2.5%. Q4 and Q3 comparison are 30% down in net sales mostly due to bit shipment and ASP, as were in my last folio, the bit shipment is down by low 20% and ASP down by low teens. Gross profit come down from TWD 14.3 billion to TWD 8.9 billion and the gross profit down by TWD 5.39 billion, mainly due to shipment and ASP decline. Operating profit, TWD 7.09 billion at 41.8%, come down from 51%, and this is mostly due to gross profit down for the same reason. And SG&A and R&D, pretty much about even. Net income, TWD 7.953 billion, come down from TWD 12.872 billion from Q3. And this, again, due to the gross profit down due to the same reason of bit shipment and ASP, with exchange rate and interest income gaining slightly. Our quarterly financial highlights, we have come down from the peak at Q3 2018. The Q3 come down from -- gross margin come down from 58.9% to 52.9%, and the operating margin come down from 47% down to 41.8%. The number here is shown as previous chart. SG&A expense at Q4, TWD 562 million is pretty much the normal number. For the year, it's at TWD 2.37 billion, which is very similar to SG&A for 2017. For R&D expense, TWD 1.3 billion for R&D expense, and total of the 2018 is TWD 4.88 billion. This is higher than TWD 3.67 billion and the increase mostly mainly for the 20-nanometer product deployment and new-generation technology development. Cash flow. Beginning of the Q4 at TWD 57.2 billion and the end balance at TWD 57.3 billion, pretty much similar, with the cash from operating activity income at TWD 15.4 billion; and CapEx, TWD 12.7 billion; and investments and others, TWD 2.6 billion. This is mostly coming from the share buyback. So the free cash flow of TWD 2.7 billion.

And cash flow situation for the whole year, beginning of the year, TWD 33.7 billion; the end of year, TWD 57.3 billion. Whereas the cash from operating activity, up by TWD 48.3 billion; capital expense, TWD 20.4 billion; and investments and others, minus TWD 4.2 billion. So for the 2018, we have a free cash flow come in for TWD 27.8 billion. For the status for the share buyback program, this is a 2-phase program. For the Phase 1, the share buyback of 20 million shares in average price of TWD 57.35, which was 100% executed. And this is targeted to be distributed to employees for employee retention program. And the Phase 2, this is to safeguard the shareholder interest, and the execution was now up to 50.1 million at average price of TWD 53.17. And this is not 100% complete. We have considered the safeguard of shareholder interests and market consideration. So overall speaking, totally, the execution is about 58.5%, with the percentage of outstanding share of 2.26% and average price of TWD 54.30. We've now come to the second agenda, comparing 2018 versus 2017 financial results. And 2018 is unaudited results versus 2017 audited results. Net sales, TWD 87.72 billion (sic) [ TWD 84.72 billion ] versus TWD 54.91 billion. This is mostly due to ASP increase by mid-teen percent and bit shipment increase by mid-30%. Gross income, TWD 46.6 billion versus TWD 24.6 billion and 55% versus 44.9%. And operating income, TWD 39.3 billion, 46.5%, versus TWD 18.7 billion, 34%. And net income, TWD 39.3 billion versus TWD 40.282 billion, and majority of this net income depression coming from nonoperating income of TWD 24.64 billion, mostly coming from the disposition of Micron share in 2017 and versus the 2018 is nearly -- mostly from the operating income. Financial highlight comparison between 2018 and 2017. Net income, TWD 39.3 billion versus TWD 40.2 billion. And Micron share disposal is TWD 32.11 billion, contributing to the depression of this income. Earnings per share, TWD 14.36 versus TWD 12.80 for this year, unaudited results; book value, TWD 44.5 versus TWD 54.01; and gross margin, 55% for '18 and operating -- OP margin, 46.5%, and net margin, 46.5%, with EPS and book value summarized in this chart here.

For the last 6 years' financial results, this chart here shows net margin, and the light blue is net income. The 6th consecutive profitable year was this 2-year, 1-year contribute -- that's percentage from Micron share disposal, and this year, some percentage contributed by the share disposal. Overall speaking, every year, the operating income, all positive. CapEx and bit shipment for 2018. Fourth quarter CapEx, TWD 12.7 billion. In total, 2018 CapEx, TWD 20.4 billion. This is trimmed down 15% from original plan. And target 2019 CapEx estimate, about TWD 10.6 billion, and this is still subject to board approval. And majority of this CapEx is basically from the final payment from previous purchase. Bit shipment, '18 bit shipment. Q4 bit shipment decreased by low 20%, as described just now. And the whole year, the bit shipment increased by mid-30%. We targeted 2019 bit shipment in mid-teens. And for Q1, we target to be flat to mid-single digits up versus Q4 last year. Market outlook-wise, the first half of DRAM market expected to be conservative due to global economic slowdown and also due to U.S. and China trade conflict. And tariff increase resulted in supply chain relocation and also Intel CPU shortage. This impact mostly in the PC and mobile, and the trade issue and tariff issue impact on consumer as well as server market. And also, the mobile smartphone sale has been disappointing overall. Major suppliers delayed capacity expansion since Q4 '18 and conservative CapEx plan in 2019. Demand-wise, smartphone sale is disappointing. However, the upside is the multi-lens, AI lead in memory specification upgrade. And 5G mobile phone commercialize, we expect that the content per smartphone will increase.

Server market. Inventory adjustment will likely happen in Q1, and this could even extend to Q2. And AI and networking will sustain server market long-term growth. PC shipment is impact by CPU shortage. Most of the PC maker has -- made comment that if not because of CPU shortage, they will have very good shipment beyond what they've already done. So expectation is that CPU shortage will be eased by mid-'19.

Consumer market is impact by the U.S. and China trade and continue to interfere with this consumer market in short term. However, set-top box, smartphone, SSD, IP CAM also grown will increase DRAM demand in the long run. For Nanya business review and outlook, 2018, we achieved record high in revenue, gross margin and operating income. Share buyback, TWD 3.8 billion common stock in buyback, repurchase, and reduced total share by 70 million or approximately 2.26% of shares outstanding. And DRAM demand impacted by conservative global economic, tariff trade and CPU shortage in first half '19. And conservative '19 CapEx plan, year-to-year bit grows below industry average. With that, that concludes my report for you.

[Operator]

[Operator Instructions] The first question is coming from Stefan Chang, Maybank.

[Stefan Chang, analyst]

I have 2 questions here. The first is, would you please advise about your end of Q4 inventory level? And also, at the same time, for the same question, can you advise us if Nanya Tech already detect any actions, like to lower the production or right know the situation is still to continue the production but leveraging the balance sheet to get rid of inventory.

[Pei-Ing Lee, executive]

Well, the first question is about inventory. Obviously, the inventory has been increased based on my report to you on Q4 results. The inventory has been increased to 6 to 7 weeks for Nanya Technology. And what is the second question again?

[Stefan Chang, analyst]

Okay. That is actually the second part of the question. Also regarding the inventory part, I was just wondering if the company has already taken action to reduce production or right now be able for DRAM to compete or just use balance sheet to carry the inventory. And also, I have a follow-up on this.

[Pei-Ing Lee, executive]

Currently, we have no plan to reduce any production plan.

[Stefan Chang, analyst]

Okay, understood. And quick follow-up is on the bit growth guidance. So the bit growth guidance, I -- we assume that this includes both the output capacity growth and also some of the bit growth will be based on the selling of the inventory. If this is the case, could you advise us what is the capacity growth for 2019? And also if you can split between 20-nanometer and 30.

[Pei-Ing Lee, executive]

The 20-nanometer contribute -- will contribute around 80% versus 30-nanometer, around 20%. And the -- that's the percentage of the 20-nanometer. And the bit growths are partially contributed by inventory, partially contributed by the production output.

[Stefan Chang, analyst]

Yes. And if you possibly can provide us the real capacity growth on a year-over-year basis for 2019.

[Pei-Ing Lee, executive]

Okay. Around 10%.

[Stefan Chang, analyst]

Around 10%.

[Pei-Ing Lee, executive]

Yes.

[Operator]

[Operator Instructions] Now we're having Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

My first question is related to the prior question. So what is the current capacity? And what capacity do you expect to get to by the end of 2019 for the current CapEx plan?

[Pei-Ing Lee, executive]

Current capacity is 68,000 wafer per month, and we expect to increase to around 73,000 wafer per month.

[Jeffrey Ohlweiler, analyst]

And what does that mean for a 20-nanometer percent? Or how much of that is 20-nanometer now? And what will that be by year-end?

[Pei-Ing Lee, executive]

Currently, it's around 70%, and we expect to achieve around 80%.

[Jeffrey Ohlweiler, analyst]

Okay. And then my last question, can you give us an update on server-related shipments in fourth quarter 2019?

[Pei-Ing Lee, executive]

Yes. We target to around 10% at year-end. We hope that we can achieve 10% at year-end.

[Jeffrey Ohlweiler, analyst]

Okay. And then anything -- have you started shipping already?

[Pei-Ing Lee, executive]

I'm sorry?

[Jeffrey Ohlweiler, analyst]

Have you started shipping to server companies already?

[Pei-Ing Lee, executive]

Yes, yes. Small quantity.

[Operator]

Now the line is open to Mark Newman, Bernstein.

[Mark Newman, analyst]

Firstly, on the CapEx and production plan, you, Page 17, talked about TWD 10.7 billion for CapEx for this year. Can you clarify -- you mentioned something about what it's for, but I didn't quite hear your comment. But I'm trying to understand, is there -- is the 5k capacity increase from 68,000 to 73,000, is that already paid for in 2018?

[Pei-Ing Lee, executive]

Most of this, yes.

[Mark Newman, analyst]

Or does this TWD 10.6 billion pay for that?

[Pei-Ing Lee, executive]

Yes, you're correct. Most has been paid, and the final payment is in 2019.

[Mark Newman, analyst]

My question really then -- follow-on question is why -- considering the sharpness of this downturn in pricing and considering, and you commented that also on your slide, there's already been some significant CapEx adjustment from pretty much all the DRAM makers and also NAND Flash as well, there's been some significant changes in their CapEx plans, why is Nanya also not spending less and potentially reducing capacity or at least keeping capacity flat? It seems a little bit -- I'm confused why Nanya would continue to add capacity despite the weak environment.

[Pei-Ing Lee, executive]

Mark, your comment is very valid. Your common purchase has a certain lead time. And our plan, original plan is to -- moving the increment on Q4 last year. As you see that Q4 last year, we have a lot of CapEx increase. And that increment was ordered 2 quarters before that. Basically, it was ordered in Q2 last year. And since then, we did not change all the order. We allow the shipment to happen.

[Mark Newman, analyst]

I've got to tell you. You already ordered that, so the equipment is already coming.

[Pei-Ing Lee, executive]

Yes.

[Mark Newman, analyst]

But you haven't ramped it yet.

[Pei-Ing Lee, executive]

No, we -- basically, we only canceled 15%, allowed 85% to move in.

[Mark Newman, analyst]

Okay. You did trim down a little bit. I see.

[Pei-Ing Lee, executive]

Yes.

[Mark Newman, analyst]

Out of what -- I see. So you did trim down some. That's good. But I'm wondering, out of what you did spend, when -- there's still 5,000 wafer capacity. Although it's relatively small from an industry perspective, I'm wondering if that hasn't yet been ramped, considering the weak environment, will you possibly delay ramping that until 2020 if the demand continues to be weak for a few more quarters?

[Pei-Ing Lee, executive]

As I say, the money already been spent, equipment already purchased.

[Mark Newman, analyst]

Yes, I understand that. But the -- so the equipment, you're already getting, but the capacity has not actually -- the equipment has not been installed. It's not producing yet, I believe.

[Pei-Ing Lee, executive]

But the equipment has already been installed.

[Mark Newman, analyst]

I see. It's already installed, effectively.

[Pei-Ing Lee, executive]

Yes, yes.

[Mark Newman, analyst]

I see. Okay. So any other potential change that Nanya could have to essentially reduce the production growth?

[Pei-Ing Lee, executive]

Yes, yes. We may just do more R&D. We may spend more manufacturing capacity for R&D activity. That could possibly slightly reduce the output.

[Mark Newman, analyst]

I see. And if I could clarify. In earlier question, you said that production growth -- cause you said, Page 17, bit shipment, mid-teens. There's an earlier question. I think you said you have inclined the production growth more like around 10% year-on-year. Is that...

[Pei-Ing Lee, executive]

Yes.

[Operator]

We are now having Eric Chao, Morgan Stanley.

[Eric Chao, analyst]

So first of all, the question is that, can you tell me a little bit more about -- do you have any further plan for share buybacks and the dividend payout for 2019? And when are you going to announce it? And then the second part of the question is that, can you comment a little bit on the progress of your in-house 1x DRAM technology development and the OpEx trend?

[Pei-Ing Lee, executive]

Your first question is share buyback. Your question is, are we considering more share buyback or not?

[Eric Chao, analyst]

Yes.

[Pei-Ing Lee, executive]

So far, we don't have more plan yet, but we will evaluate necessity to protect the shareholder interest. If we determine that there are going to be interests for protecting shareholder interest, we will propose additional phase in the future. But at this time, there's no plan so far. And what is your second question again?

[Eric Chao, analyst]

Second part of the first question is about dividend payout for 2019. Is there -- when are you going to announce the plan for the dividend number this year?

[Pei-Ing Lee, executive]

Okay. Dividend payout, our target is going to be 50% or more of our net income, and that's subject to our board approval. Do I answer your question?

[Eric Chao, analyst]

Yes. Okay. And so my second question is about the progress of your in-house DRAM technology, 1x DRAM technology development and the OpEx trend.

[Pei-Ing Lee, executive]

Are you talking about the development activity that we have?

[Eric Chao, analyst]

Yes.

[Pei-Ing Lee, executive]

Yes. We have option of a license -- additional technology from Micron. And meanwhile, we are developing our own process technology, and that's -- we're going to have 2 options. We'll have to choose about 1 year from now, a little bit more than 1 year from now. And so far, the -- our development work has been on target, meeting our milestone.

[Operator]

[Operator Instructions] Next, Simon Woo, BofA Merrill Lynch.

[Simon Woo, analyst]

First question. How should we understand your 5% quarter-on-quarter bit growth for the March quarter? Because everybody is talking about further eco impact from the trade or OEMs mostly stay cautious on the demand but what could be the rationale to achieve a positive quarter-on-quarter bit growth? Is it a matter of the -- your another round of the price promotion or kind of that your customers are now starting the inventory build-out? That's the first.

[Pei-Ing Lee, executive]

Quarter-to-quarter bit shipment increased by 20%, and this is -- majority impact is -- that is why on the -- our original target to ship into server market as well as the commodity market has been less than expectation and also consumer market also impacted by this trade issue.

[Simon Woo, analyst]

Yes. But my question is, after that, the March quarter, you are still expecting 5% quarter-on-quarter bit growth. Any inventory recovery or inventory build-out among your customers? I'm sorry, I'm talking about quarter-on-quarter.

[Pei-Ing Lee, executive]

Are you talking about future, yes?

[Simon Woo, analyst]

The 5%.

[Pei-Ing Lee, executive]

You're talking about future, right? Q1, we're expecting to be about flat versus Q4 or single-digit up. And now based on our effort on recovery on our business, that will continue...

[Simon Woo, analyst]

How do you see -- yes.

[Pei-Ing Lee, executive]

Of course, that continue -- going to be engagement with customers in the market.

[Simon Woo, analyst]

Yes. But do you expect a further significant price cut for the first half this year?

[Pei-Ing Lee, executive]

First half this year, likely, the price is going to be declined, okay? First half this year.

[Simon Woo, analyst]

Yes. I see. Okay. So second question, just back to the economy rationale for your strategic partner, Micron. Micron has been supporting the Nanya [ to new 10 ] migration. But meanwhile, your gross margin, OP margin, pretty much very high or somewhat similar to Micron's level. So what could be Micron's benefit from providing their technology to Nanya? So how can we find your -- some payment or your kind of indirect -- of course, for the Micron because you are a bit sticky in the Micron technology.

[Pei-Ing Lee, executive]

I'm sorry. Our contract with Micron is confidential to both companies so that I cannot disclose the contract detail, okay? And of course, the contract was signed many years ago, so it's -- the 20-nanometer licenses, when we negotiate the Inotera capacity and the future 1x, 1y generation is when we negotiate the disposal of Inotera share. So this is part of the package deal that we did. But the detail, I cannot disclose.

[Simon Woo, analyst]

Yes. At least we can say, up to 1y nodes, almost a done deal. But the [ 1d node ] or below, maybe [indiscernible]. Is it fair to say like this?

[Pei-Ing Lee, executive]

I'm sorry. I did not quite understand your question.

[Simon Woo, analyst]

Yes. So far, your agreement with Micron is up to 1x and 1y nodes. But the [ 1d node ] or [ EUV-related ] technology to [indiscernible].

[Pei-Ing Lee, executive]

Right, right. We negotiate for action for 2 nodes only.

[Operator]

[Operator Instructions]

[Pei-Ing Lee, executive]

Okay. [Foreign Language]

[Operator]

[Operator Instructions]

[Pei-Ing Lee, executive]

Okay.

[Unknown Attendee]

[Foreign Language]

[Pei-Ing Lee, executive]

[Foreign Language]

[Unknown Attendee]

[Foreign Language]

[Pei-Ing Lee, executive]

Mid-teens bit growth.

[Unknown Attendee]

Mid-teen bit growth.

[Pei-Ing Lee, executive]

Yes.

[Unknown Attendee]

[Foreign Language]

[Pei-Ing Lee, executive]

[Foreign Language]

[Unknown Executive]

Thank you for joining us today. Please be advised that the replay of the conference will be accessible within 3 hours from now, which will be available through Nanya's website. We hope you will join us next quarters, and have a great day.