Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2021-Q4

[Operator]

[Foreign Language]

Welcome to Nanya Technology's 2021 Fourth 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 fourth 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. And 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 proceed.

[Pei-Ing Lee, executive]

Welcome to Nanya Technology's Q4 2021 Investor Conference. I'm Pei-Ing Lee. My agenda will be first, Q1 2021 revenue and results and the whole year summary of revenue and results, followed by CapEx and bit shipment, market outlook, and concluded by business review and outlook. For the Q4 2021 financial results summary, our Q4 net sales comes to TWD 21.399 billion, Q-to-Q down by 10%. Gross margin, TWD 10.563 billion, also Q-to-Q down around 10%. And operating income, TWD 8.023 billion and also Q-to-Q down around 11%. EBITDA comes to TWD 11.850 billion, down by 8.6%. And with a smaller nonoperating income, our net income comes to TWD 6.45 billion versus TWD 7.527 billion, down by 14.3%, with Q4 earnings per share comes to TWD 2.08 per share and book value per share comes to TWD 55.85 per share.

For year-to-year on the right-hand side, 2021 has been significantly better than 2020, which I will now go to item by item in this chart. For Q4 revenue result, Q-to-Q revenue are down by 10%, mostly due to shipment decreased by mid-single digit, and ASP decreased by low single digit, with the result of overall revenue down by 10%. And year-to-year on the right-hand side, revenue up by 44%, with shipment decreased by mid-teens and ASP increased by 80s, which means that most of the 2021 has much better ASP compared to 2020.

For Q4 and Q3 result comparison on the top of this chart, net sales, TWD 21.399 billion versus TWD 23.837 billion. The decrease is mostly due to bit shipment decreased by mid-single digit and ASP decreased by low single digits. Gross profit TWD 10.563 billion versus TWD 11.735 billion in Q3. Again, the main reason is due to the same reason as ASP and shipment both decreased. And our operating expense, TWD 2.54 billion is slightly lower than Q3 of TWD 2.662 billion, mostly due to SG&A and R&D expense decreased marginally TWD 122 million.

Our operating income is TWD 8.023 billion at 37.5% versus Q3 of TWD 9.073 billion at 38.1% and operating income decrease is mostly due to gross profit decrease, and as a result from ASP and shipment decrease. Net income at TWD 6.45 billion, 30.1% versus TWD 7.527 billion at 31.6% at Q3. Our net income decreased by TWD 10.077 billion, and the key reason is operating income decreased by TWD 1.05 billion with the exchange rate impact of TWD 193 million unfavorable and income tax of TWD 190 million favorable balance out.

For 5 years financial highlight results Q-to-Q. As you can see that for the 5 years that DRAM Nanya performance going through 2 big cycles, okay? One big up cycle and down cycle. The key reason mostly related to market situation as a result. For the most recent quarter, Q4 last year, on the trend chart, you see that it's marginally decreased from Q3 last year, but still it's pretty good from Q-to-Q point of view.

Our operating expense on the left-hand side of the chart, SG&A expense for the quarter Q4 TWD 585 million, and for the year 2021 TWD 2.359 billion. And this number is pretty normal for Q-to-Q point of view. On the right-hand side, R&D expense for the quarter TWD 1.955 billion, and for the year 2021 comes to TWD 7.499 billion. The increase of R&D spend from 2020 to 2021, mainly for the increase of 10-nanometer class technology and product development.

For our cash flow situation, beginning of the balance in Q4 2021 is TWD 71.558 billion, and end balance for the end of Q4 last year is TWD 80.692 billion, with free cash flow being TWD 9.157 billion. Within the detail, the cash from operating activity is TWD 13.899 billion, mostly from the profit mix and equipment depreciation. And capital expense, TWD 4.741 billion, with financial activities of minus TWD 24 million.

For the year, on the right-hand side, beginning of the year, last year, TWD 51.726 billion cash. The end of the year, TWD 80.692 billion. And for the cash from operating activities, the same reason from the profit mix and depreciation, TWD 44.034 billion, with capital expenditure of minus TWD 11.26 billion, and financial activities of minus TWD 3.808 billion, mostly this financial activity is as a result from dividend payout.

Then I come to 2021, the whole year consolidated income statement. For 2021, the whole year, the net sales comes to TWD 85.604 billion versus TWD 61.006 billion, is an improvement of 40.3% year-to-year 2021 versus 2020. For gross margin, TWD 37.044 billion at 43.3% versus TWD 15.692 billion at 25.7%. And year-to-year improvement is 136%. And for the operating income, TWD 27.186 billion and is also an improvement from 2020. Net income, TWD 22.845 billion is also a very good improvement from 2020. Earnings per share TWD 7.4 per share and a book value of TWD 55.85 per share.

Our result comparison for 2021 and 2020, net sales improved by 40.3% as reported, mostly due to ASP increase, okay? The bit shipment remained pretty flat. And exchange rate negative impact by 5.3%. And gross income, TWD 37.044 billion, and the improvement also mostly due to ASP increase. With the operating expense, TWD 9.858 billion. This is due to SG&A expense increased by TWD 240 million and R&D expense increased by TWD 2.36 billion for 10-nanometer product and process technology development.

Operating income TWD 27.186 billion at 31.8%. And net income TWD 22.845 billion at 26.7% for the whole year and a net increase for year-to-year increased by TWD 15.159 billion, mainly due to operating income increase, and with exchange rate favorable by TWD 432 million interest fee income, unfavorable by almost TWD 400 million, and income tax also unfavorable by TWD 3.6 billion.

For CapEx and bit shipment, first of all, for the quarter, Q4, CapEx about TWD 4.7 billion, and for the whole year 2021 comes to TWD 11.26 billion. And for 2022, our plan is to estimate around TWD 28 billion of capital expense, and this number still subject to Board approval. On the right-hand side, for the bit shipment for the whole year last year was relatively flat. And this year, we also expect bit shipment to be relatively flat.

Now it comes to market outlook. From a demand point of view, 2022, we've seen the demand from cloud computing, smartphone, PC and consumer remain healthy. However, there are some component shortage issues, but we expect the component shortage issues will be gradually alleviated in second half this year. Also, we think that DDR5 and new CPU introduction will gradually increase the demand. We have to caution high inflation and geopolitical tension may impact on the demand growth.

In general speaking, for 2022, we have cautiously optimistic outlook for the DRAM market. From the supplier side, at the end of Q4 2021, we are seeing supplier and channel inventory remain low. And for 2022, currently expecting the suppliers will be increasing their supply according to market demand increase. However, we have to watch closely dynamic capital expense increase could change DRAM supply outlook. From a demand point of view, server market, we continue to drive demand growth. Component shortage still lingering, and we expect component shortage issue to be easing in second half this year. And we expect DDR5 and new CPU will start shipment in several markets.

Mobile market. 2022 shipment growth led by both 5G and 4G segment, 5G leading in flagship shipment and 4G is driven by emerging markets. This will drive overall average DRAM content growth. For the PC market, global demand remains healthy. Component shortage and international shipping has been continuing to impact on delivery. We expect it to be eased by second half this year. Consumer market. We're seeing positive outlook for networking, wearable, smart speaker, SSD, TV, VR, and new game consoles, et cetera. And we also expect that automotive chip shortage to be eased by year-end.

For Nanya's business review and outlook. Nanya has been named to the Dow Jones sustainability World Index, DJSI index.

The second point, Nanya's 2021 financial results, we see a revenue of TWD 85.6 billion, gross margin 43%, OP margin 32%, EPS TWD 7.4, a very good improvement from 2020.

For 2022, DRAM market outlook is cautiously optimistic. Our first 10-nanometer class technology, we expect to have small volume production in Q3 2022. And our second-generation 10-nanometer class product development is on schedule. And we also plan to have new fab ground-breaking scheduled for first half this year.

With that, I conclude my report to you.

[Operator]

[Operator Instructions] The first to ask questions, Simon Woo from Bank of America.

[Simon Woo, analyst]

Congratulations. That's pretty great result, great achievement. We appreciate. There is simply, sir, the -- your bit growth guidance flat year-on-year even for this year. Any extra efforts to achieve even 5% increase, or 10% increase. So does this mean it's kind of Nanya's long-term trend, continuously the flattish bit shipment growth, and then your own timeline growth will be continuously dependent on the price and maybe margin contribution.

[Pei-Ing Lee, executive]

Thank you, Mr. Woo, for a very important question. Our guidance for bit growth flat for 2022. For 2021, we don't have any new capacity, so is 2022. And 2022, because we had consumed most of the inventory, so we don't have additional inventory for 2022. However, we're expecting that 2022, by the year-end, we will add some 10-nanometer contribution to our bit growth. So as a result, combining all those factors that we expect in 2022, we will not have bit growth. However, no bit growth is not our long-term policy. We would need to have our 10-nanometer technology and product development introduced to our production in order to resume bit growth. And that we expect to be happening next year and the year beyond. And in addition to that, as I just reported to you that for the long term, we will be groundbreaking our next new fab by first half this year and that will be targeted for 2025 contribution for our future bit growth.

Before that, we will be converting our current process technology to 10-nanometer within the current fab. And our current fab is mostly filled already, with a small space still remaining. So that's a good bit growth situation that Nanya has for now.

[Simon Woo, analyst]

Okay. Great. And then lastly, any color for the maybe [indiscernible] revenue mix trend for this year versus last year, for example, consumer. Consumer earlier continued to be 60% range versus other applications like the commodity PC team maybe single digit. Any color for the mix trend.

[Pei-Ing Lee, executive]

The market -- our product portfolio percentage adjustment is mostly according to our customers' demand. And Nanya's policy is that we try to make it available to the market in the consumer, low-power mobile business and also commodity business, including low book and server market. Our policy is to be diversified and flexible for the market and for the customer. Generally speaking, we like to have more percentage of consumer market for the company. So as a result, our consumer is roughly between, say, 60%, 70% time to time. And with mobile around 10% to 15% time to time, with the remaining balance by commodity and server market. And the server market, we originally expected it to reach a target of 10%. However, we only achieved around 5% for the last year. And we'll continue to work hard from our server market to increase our flexibility and also to get ready for future opportunity in the market.

[Simon Woo, analyst]

Yes. How about the auto portion of that, maybe 5%?

[Pei-Ing Lee, executive]

Automotive percentage has been including within our consumer portion of 60% to 70% and on and off is, say, 5% to 10% range.

[Operator]

[Operator Instructions] Now the line is open to Winnie Tao from Millennium.

[Winnie Tao, analyst]

So the first question is about the growth. I think in our previous results call, we talked about 2022 bit growth could be like less than 10%, but this time we are talking about like relative to flat, which I guess is lower than the previous guidance. So can you share with us what led to the change in terms of your bit growth guidance?

[Pei-Ing Lee, executive]

Mostly the bit growth guidance is also related to our inventory consumption. And last year, for the first 3 quarters, because the market demand, customer demand is better than our expectations, so we have consumed much more inventory compared to what we originally planned for. That's the main reason. And second reason is, we don't have additional new capacity, as I just described to you. And we will need to introduce our next generation of 10-nanometer product and technology in order to resume bit growth. And that we expect to start to happen this year and toward the second half of this year.

[Winnie Tao, analyst]

Is it fair to assume some of the bit growth reduction is because we are [indiscernible] equipment to preparing for the 10-nanometer production. So that's why we've reduced a little bit on the bit growth assumption.

[Pei-Ing Lee, executive]

Mostly, I would say, inventory issue is probably the most important factor for that. Our 10-nanometer generation development and introduction equipment purchase is mostly according to our schedule, and yes, equipment delivery may be a little bit behind what we expected because of equipment market has been very tough, but that's not a major factor. The major factor is steer inventory consumption.

[Winnie Tao, analyst]

Understood. And my second question is about the cost reduction. So for the December quarter, even though our ASP is down low single digit, but the gross margin is actually kind of flat quarter-on-quarter. So can you share with us a little bit about like how you think about the cost reduction going forward into the first quarter or 2022? Would that be as smooth as in the December quarter?

[Pei-Ing Lee, executive]

December quarter, yes, we do have some marginal cost reduction. However, we don't expect to have a major cost reduction for the upcoming quarter. Because we need to put in more effort into our R&D. As a result, we will be spending money in R&D as well as additional equipment purchase for the small volume ramping of our next-generation technology. So we don't expect to have major cost reduction shortly.

[Operator]

[Operator Instructions] There seems to be no further question at this time from on-line participants. We will move on to webcast Q&A session. Dr. Lee, please begin.

[Pei-Ing Lee, executive]

Okay. Let me repeat the question from J.J. Park, JPMorgan. The first question is, can you provide ASP outlook focus on specialty DRAM relative to mainstream DRAM in 2022?

Let me answer the first question. There's possibly a second. The specialty DRAM relative to mainstream DRAM, our current outlook is still good. With specialty, mostly you're talking about maybe DDR3 versus DDR4. However, the DDR4 also moved into specialty as well. So generally speaking, we're expecting to see specialty continue to be better than the mainstream DRAM in 2022.

And the second question is, how can you achieve flat bit shipment in 2022 given capacity reduction upon transition to 10-nanometer class? Our transition to 10-nanometer class will begin in the second half of this year. And as I reported to you that this is only the beginning for the 202, so the old contribution to 2022 will not be significant. And also, our current space, flow space with only a small space lab, not very much more room for the expansion. So our conversion likely to include, we have to reduce some of the capacity from 30-nanometer and more to 10-nanometer. And that more equipment in and out also needs time.

And Third question is, can you provide your branded ASP guidance versus mainstream DRAM in 2022? How much 10-nanometer class likely accounts for total production output by year-end?

Our branded ASP will be in general better than mainstream DRAM per bit wise. And this is because of the mostly branded -- most of the specialty DRAM has a mix of different products, different density. The density could be 2 gigabits, 4 gigabits, 1 gigabits, all different density, and it could be DDR3, DDR2, low power DDR3, low power DDR2, et cetera. So as a result, branded ASP, in general speaking, will be better than mainstream DRAM ASP per bit-wise.

And how much 10-nanometer class is likely to account for Nanya production output by year-end.

We are trying to work on around 10% output, not probably by month, by month at the end of this year, hopefully, we've targeted for that. And we are working on that. And that will require some time.

When it comes to second question from Cathay Life Insurance, Mr. Huang. Mr. Huang's question is, how did you sustain your gross margin stable when your DRAM ASP decreased?

The ASP, if it is decreased without any further action, of course, the gross margin will be decreased. The only way to sustain gross margin is cost reduction. However, we can work on not to have ASP decrease by as much by our product mix. With the flexibility of Nanya to now shipping more than 30 different products. And we are working with more than 800 customers in different sectors of the market. And each of the market may have its own demand and supply. And with this market diversity and flexibility, also our support and technical support and business support to our customer, we will have a better position for ASP to be more stable compared to the market average.

Second question from Exodus Financials from Marco. Marco's question is, would like to ask your view on the industry DRAM ASP by different products; PC, mobile, consumer in 1Q, 2Q, 3Q, 4Q of 2022. Unlikely. I will not be able to forecast a precise for 4 quarters, okay? As I report to you for the short term, we're seeing that the market is cautiously optimistic. And quarter-to-quarter wise, we had Q4 last year, has basically some correction, small correction compared to Q3 last year. As I indicated to you, our revenue down by 10% with ASP and shipment both small correction downward.

And for Q1 this year, we are expecting the market will continue to have some adjustment, some correction compared to Q4 last year. However, we're seeing some improvement already. For instance, in smart market, the memory price has already been recovering for a couple of months already. And for instance, the contract pricing, the decrease on the ASP has been narrowing down. So both have been giving indication that the market is slightly uptrend already in Q1. However, an overall combined average Q1 will be still marginal correction compared to Q4 last year.

And for the sector or market, PC probably will be more influenced by the spot closing. With spot moment the trend, PC likely to follow first and with the others follow behind, like server and others will follow behind. With consumer mostly dominated by its demand and supply by itself plus also gradually maybe some adjustments on production portfolio from the supplier side could also make a change. So the impact will also follow behind that. So in general speaking, we will expect that overall speaking, Q1 will continue to have slight adjustment okay. Q2 could be flat or even steady recovering. And hopefully, Q3 will continue upward beyond. And in terms of percentage-wise, I cannot give you a very precise prediction for that.

And the second question is, I would like to ask your development progress in 1A. And as I reported to you that both our 1A and 1B, the 2 generation development has been on schedule, and we had some pretty good progress on 1A and we are expecting that we're going to have small volume production in second half of this year. And we are expecting that we can start to do some sampling also in Q3 this year for our 1A product. And 1B, we are currently doing [indiscernible]. We're expecting next year we'll have opportunity to start to have small volume production next year. So I answered more than just 1A, also including 1B.

So number 4 question is from Taishin Bank, Justin. The question is, how can we understand that 4Q 2021 gross margins stay flat when the DRAM ASP decreased? On this, as I said, we had some marginal cost reduction in Q4 last year.

Next question from Bank SinoPac, Stanley. Stanley's question is, would you please provide your inventory level of days of inventory at end of 2021?

Our inventory, in generally speaking, is healthy -- quite healthy. And my apologies, I cannot provide you specific days. In general speaking, all the suppliers, including Nanya, has been in pretty healthy inventory level. And Nanya is only market share of around 3%. Our inventory level really will not make a very big impact to the market situation.

Next question, please. The next question is from ProCapital, Vincent. Vincent's question is -- let me translate to English. Can you comment on Q1 bit growth and 2022 our equipment depreciation?

And the question for Q1 bit growth, as I indicated, we have consumed most of our inventory. So we will not have much of bit growth in Q1. And hopefully, towards the end of this year, we'll have marginal bit growth.

And our depreciation is about TWD 1.2 billion per month.

Our next question is, 2023, there's no inventory assumption. Is there any potential for bit growth or bit decrease. This is for Nanya specific. Likely, 2023, hopefully, we have our next-generation technology and product conversion gradually coming up. 2023 and 2024, likely we have marginal bit growth instead of decline.

Okay. Thank you for all your questions, and this is the Nanya Technology's best wishes to you. Happy Chinese New Year.

[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. We thank you for your participation, and have a wonderful day. You may disconnect now. Thank you, and goodbye.

[Pei-Ing Lee, executive]

Bye-bye. Thank you.