Nanya Technology Corp
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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technology's Fourth Quarter 2019 Earnings Conference and Technical Briefing. [Operator Instructions] As this conference is being viewed by investors around the world, we will conduct this event in English only. Today's conference will be approximately 60 minutes. The format of 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 2019, followed by our guidance for the first quarter of 2020 and key messages. Then Nanya Technology's Executive Vice President, Dr. Lin-Chin Su, will present Nanya's technical briefing. Afterwards, Nanya Technology's Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao, will join us as we open our Q&A sessions, both online and on floor. For online participants, if you do not yet have a copy of today's earnings conference presentation materials, you may download them from 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 podium to Nanya Technology's President, Dr. Pei-Ing Lee, for summary and operations and the quarter -- current quarter guidance. Dr. Lee, please begin.
Okay. Thank you. Welcome to Nanya Technology Q4 Investor Conference. Happy New Year. I'm Pei-Ing Lee. Looks like a very warm welcome. Today, my agenda include Q4 revenue and results and 2019 yearly revenue and results, CapEx, bit shipment and market outlook, business review and outlook. First agenda, Q4 results. Our Q4 revenue TWD 13.116 billion versus Q3 of TWD 14.7 billion, down by 11%; gross margin TWD 3.377 billion versus TWD 4.137 billion, down by 18%; operating income, TWD 1.44 billion versus TWD 2.45 billion (sic) [ TWD 2.25 billion ], down by 36%; and EBITDA TWD 5.17 billion versus TWD 5.59 billion (sic) [ TWD 5.95 billion ], down by 13%. And net income comes to TWD 1.278 billion with net margin 9.7% versus TWD 2.205 billion last quarter. EPS, earning per share, TWD 0.42 versus TWD 0.72 last quarter and book value, TWD 49.78. And to compare quarter-to-quarter, Q4 to Q3 and year-to-year, Q4 last year versus Q4 the year before, revenue down by 11.4% and this is due to 3 reasons. Shipment has decreased by mid-single digit, ASP decreased by low single digit and exchange rate also unfavorable because of strong NT dollars by 2.1%. Year-to-year, revenue down by 22.7% with the shipment, however, increased very strongly by a high 40%, okay, this last Q4 versus Q4 '18. However, ASPs also decreased by high 40% year-to-year. This is the comparison result for Q-to-Q and year-to-year indicating the market shipment recovery and also the ASP decreasing is gradually reducing. For comparison of Q4 '19 and Q3 '19 results, net sales TWD 13.11 billion versus TWD 14.799 billion; bit shipment, mid-single digit down; ASPC (sic) [ASP], low single digit down; and the strong dollar also unfavorable, okay? Gross profit, TWD 3.377 billion versus TWD 4.1 billion and this is mostly due to these 3 same reasons. Our gross profit decreased TWD 760 million, mostly explains the difference in gross profit, okay? And the reason shipment, ASP and exchange rate impact, all these 3 reasons contributed to almost 1/3 each on the reason for this gross profit reduction. Operating expense, TWD 1.937 billion versus TWD 1.885 billion, is about the same, quarter-to-quarter. Operating income, TWD 1.44 billion versus TWD 2.25 billion, decreased by TWD 804 million (sic) [TWD 812 million]. This is mostly due to gross profit decrease. Net income, TWD 1.278 billion versus TWD 2.205 billion, again decreased by TWD 9.27 -- TWD 927 million and most of these are coming from the gross profit, operating profit with the exchange rate and income tax marginally making change -- making difference. This is the 4-year trend of our financial highlights including the revenue, which is improved, light blue as well as the net profit, which is on the light green or yellow green, okay, and the gross margin, the dark blue line and the light blue line is the OP margin. Our revenue as described just now, and net profit described just now. Gross profit come to -- gross margin comes to 25.7% and OP margin comes to 11%, okay? And this is above the lowest point, even lower than the previous low time. And we'll describe market outlook later, okay? For the SG&A expense, for 2018, the whole year, TWD 2.37 billion and 2019 TWD 2.05 billion, slightly a reduce in our expense. Quarterly, TWD 562 billion (sic) [ TWD 562 million ] is in the normal range for Q4, okay? For R&D expense, 2018, TWD 4.88 billion, okay, versus 2019, TWD 4.926 billion, okay? And this is also very stable with quarter number is also in a stable regime, and we spend money in new process and new product development for R&D. For cash situation, our beginning balance for cash in Q4 is TWD 43.18 billion, okay, and ending balance is TWD 44.147 billion. Cash from operating activity is mostly from profit and the depreciation. And capital expenditure, TWD 840 million. Financial activity, TWD minus 3.21 billion. And most of this number is due -- we acquire FATC share by using TWD 2.05 billion, okay, and another TWD 1.1 billion is the currency translation due to strong dollars. That's due to our cash situation evaluation for strong dollars making a difference of TWD 1.1 billion, okay? Even so, with a net balance of TWD 44.147 billion our cash, still a positive flow, and free cash flow is TWD 4.17 billion, okay? And compared to Q3, Q3, we had a big spending item on financial activity of dividend payout of TWD 21.7 billion in Q3 is the number here. So to net out for 2019 cash flow situation, beginning balance, TWD 57.384 billion and cash from operating activity, which is positive [indiscernible] for TWD 17.623 billion and capital expenditure of TWD 5.49 billion, and the dividend payout, this number and also this number, dividend payout and also some of the bonus distribution income by here come to TWD 44.147 billion end balance for cash in 2019. That pretty much summarizes the Q4 results.
Let me try to summarize the 2019 consolidated income statement. Net sales for the year, TWD 51.727 billion versus TWD 84.722 billion, mostly due to ASP reduction, okay? So the gross margin, TWD 16.494 billion versus TWD 46.616 billion, okay. And operating income TWD 9.51 billion versus TWD 39.3 billion, pretty significant drop in operating income, mostly due to ASP drop as well. And the net income, TWD 9.816 billion versus TWD 39.3 billion, also a significant drop due to ASP. EPS, TWD 3.22 versus TWD 12.8 year-to-year. And the difference between book value mostly due to the dividend distribution mentioned just now. Okay, now the comparison for 2019 and 2018. The drop in revenue by 38.9%, mostly due to ASP decrease by a high 40 percentage, okay? Bit shipment helped a little bit by increasing low teens, okay, and exchange rate also helped slightly. Gross income, TWD 16.494 billion versus TWD 46.616 billion, and again the reason is for the same reason or ASP drop, 40 -- high 40%. Operating income, TWD 9.517 billion versus TWD 39.355 billion for the same reason. And net income TWD 9.816 billion versus TWD 39.36 billion, and again this is due to almost identical reasons, okay, for the ASP reason with the exchange rate, other income and income tax all this combined is pretty much even up. Next topic is our CapEx and bit shipment. Our CapEx for 2019, TWD 5.5 billion, okay? And our plan for 2020, CapEx is not yet ready to be announced because we still need Board approval. However, I can tell you that our 2020 CapEx likely to be more than 2019, okay? 2020 likely to be more than 2019. And bit shipment decreased by mid-single digits, as I described just now. Year-to-year shipment grew by low teens. And Q1 next year -- this year -- this quarter, okay, this quarter, we expect bit shipment to be low single-digit increasing. We are seeing the markets are getting steady, better, okay? Year-to-year bit shipment growth guidance for approximately teens, okay, and I will continue to allocate 5% to 10% of our capacity for process and product development. For the market outlook, overall speaking, the macro, we're seeing that -- optimistic market outlook throughout 2020. We're seeing inventory level in the industry continue to normalize and supply and demand gradually stabilize, okay? Sector outlook. We're seeing server demand recovery, this already happened for a couple of quarters. Mobile DRAM content growth, this is likely to happen due to 5G phone, okay? We're also seeing healthy outlook on PC shipment and consumer demand. And from a supply side, we're seeing conservative 2019 CapEx already happen. As a result, disciplined bit shipment growth likely to happen in 2020. And for the demand from each sector, the mobile, smartphone unit shipments grow only slightly, okay? We're not expecting to be very -- not very strong unit growth; however, the content growth due to 5G phone increase and also high content unit is also expected in Android phone. For the server market, we're already seeing solid server demand growth, okay, and demand increase with 5G base station deployment is happening. And also 64 gigabyte high-density module is also happening and edge computation increasing. PC market. Strong enterprise and gaming PC demand is indicated by the dual monitor PC, 5G laptops and creators. This will sustain some DRAM demand plus the Microsoft Windows transition and the new Intel processor introduction all will help new demand. On consumer side, we're seeing demand sector including many different area, including TV, set-top box, SSD, gaming, smart speaker, routers, smart switch, et cetera. They all grow steadily given the consumer markets have pretty healthy outlook. A review summary. We have complete DDR4, low-power DDR4 and lower power DDR4X, low power DDR3, high-density product portfolio on 2019. We also begin volume shipments in server market by the end of 2019. We acquired additional 13% of FATC share, total holding is 32%, and we're seeing optimistic market outlook throughout 2020. In 2020, bit shipment will increase by teens, and we will grow in line with market demand growth. And we also successfully develop proprietary core cell technology based on 10-nanometer class process technology. And with this, today, we will have a special presentation presented by our Executive Vice President, Dr. Su, in a minute, okay? Okay, Dr. Su. Please give him a good welcome.
Thank you, Dr. Lee. Followed by the -- Dr. Lee's financial result, I will present the technical briefing. Since following content belong to Nanya's proprietary, and -- please do not take picture and not any of the video recording. So thank you for your cooperation. [Foreign Language] Okay. Thank you. [Foreign Language]. Okay. My presentation for the technical briefing will cover Nanya's DRAM R&D strategy and our DRAM cell feature for the next generation and Nanya patent portfolio. Last one is the Nanya's DRAM technology road map. Talking about the strategy of Nanya's DRAM R&D. As you can see here, the 20-nanometer, which is licensed from Micron, it's our -- one of our current generation of production. And our next node, the first generation of 10-nanometer class [ classic ] technology, which will be developed by our own, is called 1A. And based on 1A technology, our second generation of 10-nanometer class technology, we'll call the 1B. And we are targeting to increase 30% productivity gain per technology node, which is in -- for each of the generation of the 10-nanometer class technology. We expect to increase by 30% of the gross die per wafer compared with this previous generation. And what are the key cell feature that Nanya will introduce for 1A and 1B? This is the schematic diagram of the cell layout. And as we all know that DRAM stores each bit of the data in memory cell consisting of a transistor and a capacitor. And each unit cell has active area as shown here and also wordline. This is wordline and also the bitline and tiny area for the capacitance. And the unit cell we use for 1A is a 6F square cell design with minimum pitch at active area. So minimum pitch, it means this is active area and the minimum pitch is between the active area. So this is different from all the previous generation we have been used in production. And for more cell features, this is also the cross-section schematic diagram for our cell layout. And as you can see, this is the container area, and through the container, we have 0 contact to the active area. And as [indiscernible], the contact area is also getting small. So we introduced epitaxial silicon growth on cell line -- cell contact to enlarge the cell contact area. And additional to the silicon epitaxial, so we also introduced cell landing pad to enable the hexagonal close-packing capacitor, which is also called the honeycomb container. And the other feature is, we introduced bitline air gap. As you can see here, bitline is right on the top of the AA and also the [indiscernible] mean the air gap. And the purpose of the bitline air gap is to reduce parasitical bitline capacitance to improve the signal margin. And here is Nanya's patent portfolio. As you can see from the -- in the past 4 years, there are about 400 to 500 patents increase per year. And Nanya has accumulated more than 4,000 patents. And this established strong patent portfolio is very beneficial to Nanya's technology development. For the technology road map, we use active area minimum pitch for the cell layout. And this is for -- not only for 1A, it's also scalable for 1B and beyond. For 1A leading product will be 8-gigabit low-power DDR4 using Nanya's proprietary design and process platform. And the product will be starting for the piloting in the second half of this year. And 1A and 1B technology platforms will also enable DDR5 and 16-gigabit products. That's all my technical briefing today. Thank you for your attention.
Thank you, Dr. Su. [Operator Instructions] Now the first to ask questions is Mark Newman, Bernstein.
If I may ask a question first on the technical side. So there's a lot of interest in technical details here, but can you explain what is the high-level strategy for Nanya for beyond 20-nanometer? And are you going to cease to collaborate with Micron? And is this all your own development that's independent from Micron? Or is this a collaboration with Micron? And if it's separate, can you explain why that is? What's the reason for not working together with Micron? Is it a cost decision? Or is it something else that's important that we should know?
Okay. Thank you, Mark, for your question. Okay. Your question regarding to R&D, if the R&D for the next-generation is Nanya-independent development. The answer is yes, it's a Nanya independent development and it's been going on for a couple of years already. We did announce a couple -- every quarter that we're making some progress. And we're taking this opportunity to announce to you that we are successfully developing the DRAM cell technology that enable us to [ stream ] for the next 3 generations or more, okay? Your second question is what is the reason. Okay. The reason is quite straightforward, is that we need to have independent way to decide our future growth, and our future technology path, road map and product road map, okay? With this, we can independently determine Nanya's own process and product road map, okay? On top of that is also cost reason on top of that, yes. So all the reasons in combine such that we have decided to come up with our own process and product technology. And Nanya has been working on R&D for more than 20 years. This is not the first time, okay? We have been working not only joint development with major company, but we also are working independently for DRAM technology development and process development before. And we actually also successfully introduced a couple of the process technologies before, okay, a little bit longer because since then we had -- went into joint development with IBM, with Infineon, Qimonda and Micron. In between, we actually developed at least 2 generation of technology and implemented and ship it to the market before. So Nanya is not without experience for the technology development.
Could I just clarify, you said there's some cost reason. So that's some kind of fee you were paying to Micron in the past. The fee you were paying, was that -- can you just remind us because it was a while ago, was that fixed one-time or was that ongoing? The reason I ask that is I'm wondering if there's any cost benefit, like cost advantage going forwards from not using Micron or if it was one-time, then it's probably no major difference.
Certainly, I cannot give you the detail of those contractual details, okay? That's not allowed in our confidentiality agreement, and also the trade secret, okay? But I can generally tell you that by going to independent development, we can reduce substantial in cost. By spending R&D costs on our own is still much cheaper than cooperating with the partnership.
That's great. And just one final follow-up, and I'll go back in the line. There's no comparison here to others. So is there anything that you can explain in terms of anything that's different here versus competitors versus Micron, different in terms of the technical details or different in terms of cost benefit or what you call productivity gain per node? If we look at that and compare it to say, Samsung, Hynix and Micron, can you make any comparison there?
As I -- as Dr. Su just presented, this is actually developed and structured independently as it's based on our Nanya proprietary process and product technology platform.
Yes, I understand that. I'm just asking what is different. And what is the advantage or because -- how does it compare in terms of...
The difference is big inside the detail, okay, because we did not describe to you any previous generation of technology. We just described to you what we have developed, okay? Basically, they are totally different in cell technology in the way it's been built and the way it's been structured.
And in terms of the 1A and 1B, would that be similar to, say, Samsung and Micron, Hynix, 1X, 1Y? Approximately, would that be similar or slightly better or slightly worse, could you mention that?
Well, this basically depends on -- rely on our own independent proprietary development and process role. Everyone may do it a little bit differently, and we don't know the detail of how they do it.
[Operator Instructions] Next to ask questions, Jeff Ohlweiler, Macquarie.
Dr. Su, one follow-up question. You mentioned that you have 30% more gross die per wafer for each generation jump from 20-nanometer. Can you talk about cycle times or number of layers? And is that a true kind of 30% cost down for the -- each generation?
[indiscernible] generation, if you compare with our current generation, cycle time will be a little bit longer, also the process has also increased. So for the gross die, as I just mentioned, that we'll be designing about a 30% increase for each of the generation. And for cost effective, probably, we will focus on the product performance and [ cost will ] depend on how much volume you introduce for the next production for each of the generation.
Yes. Jeffrey, this is Pei-Ing Lee. Let me continue to comment on the question you just asked, okay? In general speaking, for all the suppliers, each of their new generation did not offer a substantial reduction in cost. That's basically what you see for the past few years, okay? That's the data, already it is there. For Nanya, it will be -- cost wise, it will be very similar. We will have some cost down, marginal cost down, but not going to be very significant cost down, okay? And again, Dr. Su comment very important point is that also depends on the volume, depends on the product portfolio that you've been doing, okay? So it's complicated. Regarding to cycle time, yes, it's going to be marginally increasing, yes. And important point for the new generation of process technology and product technology is that you will introduce our opportunity into serve only higher end market, okay, value-added market. For example, in the future, DDR5, low-power DDR5, 16-gigabit or even higher density, the opportunity to come by the new process technology. So that's the overall competitive point of view that will help us establish our own platform, and on top of the cost down from the R&D cost.
Okay, great. Dr. Lee, kind of a separate question. Can you talk a little bit about what you're seeing on pricing trends for first quarter?
We've seen the market outlook in general positive, okay, optimistic throughout 2020. With that, please keep in mind, last year we had some seasonality also happening or also new product introduction by different quarter [ happen ] in between, okay? But in general speaking, the market outlook should be optimistic, okay? And Q1 versus Q4, we -- Q1, this year -- this quarter versus Q4 last year, we are seeing optimistic trend as well, both in the shipments as well as the pricing point of view, we're seeing some slight improvement at least Q-to-Q, okay?
[Operator Instructions] And right now, we are having Julie Tsai, UBS.
Dr. Lee, I have 2 questions. First question is, the quarter 4 result that you just reported, it seems a little bit weaker than what the market has forecasted. I was just wondering, is this what you have anticipated. If it is not what you have anticipated, what would be the reason for a weaker-than-expected Q4? That's my first question.
Okay. Your first question is Q4, okay? And I'd just answer that question first. Q4, as I described, we had the Q-to-Q variation seasonality issue. Typically, Q3 is [ best ] quarter for the year, typical, okay? Q4, this year, is actually not bad, okay, compared to Q4 last year. I just show you Q4 last year versus Q4 '18, we have shipments increasing of 40% more, okay, which indicated that Q4 last year, actually, it's a good Q4. However, compared to Q3, a serious seasonality issue from Q-to-Q point of view. Plus Q4 has a lot of inventory reduction strategy from major suppliers, okay? The major suppliers are quite aggressive in reducing their inventory level, okay? So for Nanya point of view, our shipment is only slightly decreased, not major decrease, okay?
And the pricing is also slightly decreased and exchange rate is not helping, okay? These 3 reasons contribute to reduction. They are responsible for almost 1/3 each of the reduction, okay? And however, I'm still quite positive on Q4 results with the -- as I say, the pricing decline is actually coming to low single digits, okay, overall speaking for Q4 last year and while shipment is really due to the reason I just described to you, okay? Q4 is not as hot as Q3 in general speaking. And our Q3 performance was outstanding. Our Q3 versus Q2 shipment has increased by more than 30%, if you recall. And our Q2 shipment versus Q1 shipment last year, is also increased by more than 30%. So basically, we have a very steep increasing Q2 and Q3 last year. And Q4, performance is actually not so bad, but compared to Q3, the momentum is slightly slowdown due to seasonality reasons and also due to major suppliers try to reduce their inventory level aggressively, okay?
I see. So Q4 is actually relatively good compared to your own previous guidance or estimate. I think market may be just a bit too optimistic or too rush into looking at the cycle, I understand that. My second question is that, yes, Dr. Su share with us the technology road map. I'm just wondering, in terms of this -- in April 30% of productivity gain per technology and all things like that, do we have a timetable for this as well?
Can you repeat your question?
Do we have a timetable?
Oh, timetable. Yes, I just -- we just described to you just now that our first generation will be at product piloting second half this year, and the preparation is about ready, okay? And the next generation, we'd like to be able to do some product early [ early test run ] by 2020 or earlier -- 2022, I'm sorry, 2022. Yes.
Okay. 2022. So the first one would be second half 2020 and then the second phase -- the second one would be 2022?
Yes, yes.
Next, we're having Abhishek Moody (sic) [ Abhishek Tyagi ] from Moody's.
So I wanted to check about the lower CapEx. So initially guidance on the company for the 2019 year was around [ TWD 7 billion. ] But I see that you have invested around TWD 5.5 billion. So is some CapEx from this year moved over to 2020? That's my first question. And I have a follow-up as well.
The CapEx -- your question is on CapEx, right?
Yes.
As I described to you, our CapEx for the year is not yet finalized, okay? Although we know that the CapEx will be likely more than 2019. So 2019, only TWD 5.5 billion is relatively very low, okay? And 2020, toward the end of this year, we are preparing for next generation of 10 nanometer and that will require some new CapEx, okay? But we don't expect to be very technical, okay? Likely develop it, distribute between 2020 toward the second half of this year and 2021.
Okay. And what about the R&D, like cost with regards to the 10 nanometer, which will be coming up in the second half of the year? So will we see an increase in the R&D cost as well?
The R&D cost, 2019 and 2018 are pretty much even at TWD 4.8 billion as described. 2020 R&D costs will be approximately around -- less than 10% of our revenue -- our target is less than 10% of our revenue.
Okay. And can you give us some color on the inventory, specifically like DRAM inventory?
Okay. The industrial DRAM inventory is becoming healthy, okay? And of course, this is different from company to company, okay? So the inventory level is getting better and better, okay? And Nanya is actually very small compared to major supplier. So our inventory level is really very insignificant compared to industry level, so it will not impact the market.
But what's the inventory level of Nanya currently? Is it higher than third quarter or lower than third quarter?
It's similar.
Similar. Okay.
Yes.
[Operator Instructions] Next to ask questions, Mark Newman, Bernstein.
I had 3 quick follow-ups. On the market outlook, you commented about a lot of improvement coming this year, we also see that. So that's great. But I wonder on -- specifically on the PC side, there's been this Intel CPU shortage for a while. If there's any update on that, if you have any specific news on that? And also on your mix, apologies if I've missed it, but I don't think you gave your mix in this presentation, but perhaps I missed it. So has that changed recently? Or what is the mix roughly?
Okay. Your question is on Intel CPU? Okay...
Yes, first one on Intel CPU and second one on mix.
Pardon me?
Yes, the first question was on Intel CPU shortage.
Yes. The CPU shortage, probably, I'm not the best person to comment in detail, okay? Basically, we're getting secondary information from the customer, also from the -- from some of the suppliers, the CPU supplier. But it's not really the first-hand information. From what we know though, last year, most of the major PC suppliers, major ones, they had insufficient CPU supply, okay? And as a result, the shipment in PC actually in some way reduced, okay? And this year, they are expecting some improvement and this improvement has actually already been discussed among the customer, okay? And in terms of detailed numbers, I don't have the detailed number. Please discuss with maybe the major ODM or OEM company, they will know better in their number than I do. And in terms of Nanya technology product portfolio, we will continue to focus on our consumer market sector, which will be around 50 to 65 percentage, and time to time will be different, okay? So our major market sector is still [ only ] consumer, and we like to improve our low power sector as well as our server sector, okay? We are targeting low-power sector to be 10% to 15% and our server sector to be 5% to 10%. And I just described to you that we had successfully beginning volume shipments in server market. We are -- in Q4, month-to-month, we are coming to around low single digit to mid-single digit through our -- for the overall shipment, it's already in the server market. And it's slightly worse than our expectation, not as good as my original target plan due to the server market was pretty slow in the beginning of the year, but we are seeing that market becoming to be more enthusiastic now, okay?
Thank you, ladies and gentlemen. We are now going to open the Q&A session on floor. Dr. Lee, please begin.
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[Foreign Language] Thank you. That concludes our conference and conference call today. Please be advised that the replay of the conference will be accessible within 3 hours from now. We hope you will join us again in coming quarters. Happy New Year. [Foreign Language] You may disconnect your line now. Thank you.