Nanya Technology Corp

TWSE:2408

Earnings Call Transcript 2022-Q4

[Operator]

[Foreign Language]

Welcome to Nanya Technologies 2022 Fourth Quarter Earnings Conference Call. [Operator Instructions] The conference will be held only in English for investors around the world. Today's conference would be approximately 60 minutes. Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the fourth quarter of 2022, 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, would 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 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.

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 Q4 2022 Investor Conference. I'm Pei-Ing Lee. For the last quarter, the market demand has been weak. It's much weaker than our expectation, okay? So in my presentation, okay, I will share with you our view on market outlook as well as our business outlook at the end. But first of all, let me share with you our Q4 revenue and result and a summary of 2022 yearly revenue and results and our CapEx and bit shipment, okay? So as a start we have experienced weaker DRAM market that we haven't seen for maybe last 10 years, okay? As a result, Nanya technology has come into loss, financial loss situation for our Q4 2022 for many years, okay? This is our first quarterly financial loss for many years.

Let me get into a little bit more numbers of our Q4 results. First of all, net sales at TWD 7.954 billion versus Q3 at TWD 11.022 billion. That's a reduction of 27.8% Q-to-Q. Our gross profit comes to TWD 1.037 billion compared to Q3 at TWD 3.597 billion, which is 13% versus 32.6%, okay?

Our operating income comes to minus TWD 1.544 billion versus last quarter, we're still making TWD 922 million. Operating income come down to minus 19.4%. Our EBITDA comes to TWD 2.218 billion versus last quarter TWD 4.717 billion.

For the non-operating income, TWD 121 million versus Q3 at TWD 2.243 billion. This is mostly due to exchange rate unfavorable for TWD 2.336 billion, a small loss at the bottom of this table, is stable, okay? That's accountable for most of the major reason for non-operating incomes.

Income tax benefit at TWD 272 million versus last quarter at minus TWD 522 million. Our net income comes to minus TWD 1.151 billion and minus 14.5% versus last quarter at TWD 2.641 billion at 24%. Earnings per share for this -- for last quarter -- Q4 comes to minus TWD 0.37 per share versus Q3 at TWD 0.85 per share positive. The book value per share TWD 58.41 per share versus last quarter TWD 59.29 per share.

Now it comes to quarterly revenue result comparison from Q-to-Q comparison, Q4 versus Q1 (sic) [ Q3 ], revenue was down by minus 27.8%. The key reason is the shipment was declined by single -- low single digit and ASP declined by mid-20 percentage. Exchange rate increased low single digits.

For year-to-year comparison compared to Q4 last year, revenue is down by 62.8% and shipment down by low 30% and ASP down by low 50s, okay? So this is a summary of Q-to-Q comparison.

For Q4 and Q3 result comparison in a little bit more detail, the net sales TWD 7.954 billion versus TWD 11.022 billion, down by 27.8%. This is mostly due to ASP decrease by mid-20s and bit shipment decreased by low single digits, with exchange rate positive low single digit as well.

For gross profit, TWD 1.037 billion at 13% versus TWD 3.597 billion at 32.6%. The gross profit decreased by TWD 2.56 billion, mainly due to ASP and shipment decrease as reported just now.

For our operating expense, TWD 2.581 billion, which is very close to last quarter's TWD 2.677 billion, which is normal range. For operating income, minus TWD 1.5 billion versus last quarter TWD 920 million. And our operating income decreased by TWD 2.464 billion.

Our net income comes to minus TWD 1.151 billion at minus 14.5% versus TWD 2.641 billion positive at 24% last quarter. And the key reason on the remark is that net income decreased by TWD 3.792 billion with operating income decreased by TWD 2.464 billion under the last bullet, and exchange rate loss unfavorable by TWD 2.336 billion, interest rate income are favorable by TWD 281 million and income tax also favorable by TWD 794 million.

With that, come to our financial trends for quarterly. For the last quarter, has reported that we come down to pretty low value, both in our revenue and as well as our gross margin, OP margin, and we have come to the first financial loss quarterly for many quarters.

For operating expense, and on the left-hand chart, SG&A expense for this quarter -- for this fourth quarter, TWD 622 million is normal range, okay? And for the year, at 2022, TWD 2.498 billion, which is also normal compared to 2021.

For R&D expense, for Q4, TWD 1.959 billion is a normal range. And for the year 2022 TWD 7.841 billion, and which is normal range compared to 2021 as well.

Our cash flow situation, beginning balance for Q4 last year is at TWD 83.012 billion in the beginning and the end balance comes down to TWD 74.3 billion. And this is as a result from 3 key points. Cash from operating activity is positive by TWD 690 million, CapEx expense by TWD 6.651 billion and also with other expense, okay? And other expense is mostly due to exchange rate change adjustment.

And if we're looking on the right-hand side, the chart for beginning of 2022, January 1, which is at TWD 80.7 billion. And at the end of the last year, it comes to TWD 74.3 billion for cash.

And among those cash in from operating activity is TWD 21.072 billion; and capital expenditure is minus -- is spending, which is negative, TWD 20.7 billion; with others, also explained just now.

For 2022, whole year, okay, for the unaudited result, this is the Nanya internal results. They are yet to be audit by accountants, okay? Net sales for the year is TWD 56.952 billion versus 2021 of TWD 85.604 billion, year-to-year minus by 33.5% due to market downturn, okay?

And it comes to gross margin, TWD 21.342 billion versus TWD 37.044 billion at 2021, down by 42.4%, and this is again due to downmarket. And SG&A and R&D spends pretty much in normal range. And our operating income, TWD 11.003 billion for the year 2022 versus TWD 27.186 billion at 2021, okay, and as a result of down market.

And the non-operating income TWD 5.87 billion versus last year only TWD 500 -- the year before, only TWD 581 billion. And net income before tax, TWD 16.873 billion versus 2021, TWD 27.767 billion.

When it comes to net income for last year whole year, TWD 14.61 billion, at EPS of TWD 4.72 per share for 2022 versus 2021, we make earnings per share TWD 7.4 per share. And with a book value TWD 58.41, slightly improved from 2021. And then results comparison for year-to-year 2022 and 2021, and I just explained a bit of those numbers, okay? And net sales comes down by 33.5%, and this is due to bit shipment decrease by 20s and ASP decreased by low teens year-to-year comparison, with the exchange rate positive by mid-single digit, okay?

And gross income down from TWD 37.044 billion for 2021 to 2022 at TWD 21.342 billion, and gross income decrease is due to shipment and ASP decrease.

And it comes to operating income, for year 2022, TWD 11.033 billion versus TWD 27.186 billion year-to-year comparison. And again, this is mostly due to market situation. And the net income of TWD 14.614 billion, at 25.7% for the year. And with the income remark also summarized on the right-hand side, basically, it's all due to operating income decrease and by TWD 16.184 billion, and exchange rate gain favorable by TWD 3.51 billion. Year-to-year, we had a 2022 favor exchange rate and 2021 unfavored in exchange rate.

The interest rate income also increased as a result from interest rate globally has been increasing. And income tax also favorable.

On the CapEx and bit shipment. CapEx for 2022, we had originally planned to spend TWD 28.4 billion. At the end of 2022, the CapEx has been reduced down to TWD 20.7 billion, mostly due to our slowdown in wafer, equipment move-in, okay? And for 2023, our plan to estimate is that our CapEx will be in the range of TWD 18.5 billion, subject to Board approval again, okay? And for the bit shipment point of view, on the right-hand side, for 2022, our bit shipment is down by 20s, due to weak demand and due to down market, okay? And as a result, we are planning to have production output reduction targeted for 2023, up to 20% dynamically, okay? And this according to what market and customer demand, making adjustment for the market and for the customer.

For CapEx update and forecast on the left-hand side is 2022, the actual number. As reported, the actual CapEx is 27% less than originally budgeted, okay? And we have cut wafer, equipment shipment CapEx for almost half for 2022. For 2023, we plan in TWD 18.5 billion CapEx, and wafer equipment CapEx will be less than 50% of that, okay? And we're still spending some CapEx for the construction, okay, and which it will take 3 years to complete, okay? And this will be ongoing for the next 3 years.

For the market outlook, Q1 2023 this quarter, the DRAM market may remain soft, and this is due to corporate spending and consumer purchase power decline. Globally, we see an economic downturn around the world triggered by high inflation and high interest rates. And regionally, we see Russia-Ukraine conflict that caused energy crisis and high inflation. We're also seeing China COVID measures impact on supply chain and also impact on China domestic demand.

And for Q2, some of the global and regional impact may remain uncertain or marginally improved. So Q2 is a quarter we need to continue to pay close attention to those key topics. And with some improvement likely potentially on the second half of this year, DRAM market may gradually recover from the downturn. And the degree of recovery will depend on how those uncertainty and how those global and regional impact is alleviated.

From the supply side, Q1 DRAM supplier inventory continued to increase, likely, okay? Some vendors already took actions on CapEx reduction and capacity adjustment and slowing down process migration to alleviate building up of inventory.

From a demand point of view, server market, we see in enterprise cloud demand remain pretty healthy. However, consumer cloud vendor are reducing investment due to sluggish economy. For second half of this year, as the components supply imbalance issue being resolved and a new CPU platform and DDR5 may stimulate server demand and also largely depend on global economic recovery.

Mobile market, we've seen that U.S. and Korea mobile phone makers shipment are relatively healthy when compared to China brand smartphone is relatively sluggish. For Q2 2023, inflation and inventory impact may gradually ease, which may trigger more mobile phone consumption. So second half 2023, potentially smartphone shipment may recover. Again, it will be largely relied on globally and regional economic recovery and so on.

For PC market, annual PC shipments continued to decline and average DRAM content may remain growth. For consumer market, for Q1 2023, TVs and general consumer electronics sales remain conservative. And this may improve in second half 2023 as economy gradually improve. On the other hand, networking, industrial good sector and automotive demand relatively healthy when compared to general consumer electronics.

For Nanya's business review and outlook from a finance point of view, our Q4 2022 EPS is minus TWD 0.37 per share. And for the whole year, EPS is plus TWD 4.72 per share. From an operating side, we are flexibly adjusting our product mix and production output and CapEx to better respond weaker market demand.

In our first generation 10-nanometer class product is now reaching the stage for small volume production. And our second-generation piloting is smooth as our expectation, and we targeted to have small volume production by the end of this year.

And on the ESG side, Nanya has continuously been selected into DJSI, Dow Jones Index Sustainability Index are our world-class index as well as Emerging Market Index. Nanya also received CDP Water Security "A" list, the Climate Change leadership level.

For market outlook, Q1, the global economic may continue to be slow. And the DRAM market may remain soft. And for Q2, we need to monitor a few of those economics factors, both regionally and globally, okay, and also the inflation trend, okay?

So with that, I conclude my report to you.

[Operator]

[Operator Instructions] The first to ask question is Simon Woo from Bank of America.

[Simon Woo, analyst]

Maybe 2 questions. Number one is inventories of Nanya Tech and also maybe some OEM guys who are hyperscalers. So would you update your inventory situation? You already commented your inventory amount getting maybe, I mean the memory makers inventory is getting higher these days. So would you update Nanya specific inventories versus some OEMs or channels?

[Pei-Ing Lee, executive]

Nanya inventory also gradually increase, as I reported to you as the market situation gets weak, okay? And since that we are starting to manage our production mix and ARPU control. And also -- we also very actively try to encourage more shipment as well, okay? From the inventory in the market side, okay, the -- as I reported that for the enterprise sector of the cloud center looks like the inventory is maybe still relatively healthy. And on the other hand, for the consumer side, may have some more inventory than the enterprise side.

[Simon Woo, analyst]

Yes. Yes. Great color, sir. The last question is overall the demand outlook. You said maybe Q1 is weak, second quarter may be sort of a stable, second half a decent recovery. But the -- number one, the price elasticity, because when we look at the Nanya Tech ASP trend maybe current price should be already 50% to 60% lower than a year ago. So you don't see any demand recovery per box content because 50% to 60% lower price. And also, the overall China smartphone correction period already for 2 years, PC down to more than 1 year, consumer electronic source almost 1 year long correction. Don't you think it's time to see some price elasticity function or some replacement demand recovery in the consumer smartphone PC areas?

[Pei-Ing Lee, executive]

Yes, Simon, you have a very good point is that the price is already down substantially for 2 to 3 quarters, okay? And also sector-wise, there are some correction already happened for some time, likely may be experiencing some price elasticity. However, in generally speaking, overall, that DRAM market still remain -- depends on demand and supply balance as a whole. And good thing is that sector-wise, there are some sectors may become -- may recover sooner than the other. And there are some sectors may be already bottoming up at a very low range, okay?

If I may see that -- I see that mobile and consumer side and PC side, it's already probably at its lowest demand hasn't been seen for many years, okay? So you may say that possibly that's already bottomed up, okay? However, demand and supplies gear gauge the ASP as a whole. I mean, still, which means that the inventory situation in each of the sector as well as the demand balance could still play a role in terms of the price trend, okay? Likely, though, we are expecting that price decline, the range of price decline may narrow down gradually, okay? And that's likely to happen starting on the Q1. And hopefully, it could be even more positive in Q2.

[Operator]

[Operator Instructions] Now the questions are coming from Simon Woo from Bank of America.

[Simon Woo, analyst]

Sorry, Dr. Lee, I think other guys maybe not raising the occasion. So maybe let me share some investors' questions. If you don't mind.

[Pei-Ing Lee, executive]

No, I don't mind at all. Thank you for your questions, Simon. Go ahead.

[Simon Woo, analyst]

Number one, the DDR5, some engineers are saying to use the DDR5 in the data centers to quality can be the issue, because the ECC extra module and also suddenly 100% higher performance, very high expediting, it may could be some concerns for the engineers. So there's no issue, I think LP DDR5 for the mobile, but -- and also the DDR5 for the PCA earlier, no problem, but DDR5 can be the challenging thing for the data center cloud areas. What's your view on the DDR5 in the cloud area, sir?

[Pei-Ing Lee, executive]

I personally think DDR5 will come anyway. However, I don't expect DDR5 to come as abrupt, okay, a very sudden jump situation. Likely DDR5 will come in a gradually transition point of view, that's not only considering the ECC, but also considering performance as well as the price balance as well as the system requirement, okay? So I would say that DDR5 was started to gradually move in, okay, more and more as we speak by the end of this year, okay, and gradually more and more by next year and the year after.

[Simon Woo, analyst]

Yes. And then the quick question on behalf of some investors. The China fab, maybe your competitors, which operate the China, Mainland China, DRAM FAB. Do you see that any near-term disruption or issue for the China memory fab with the U.S. control announced October 7? So or it will take time to see the lower amount of the supply from China fab.

[Pei-Ing Lee, executive]

Well, I think China fab, in my personal opinion, they will not stop, okay? However they may experiencing some problem in operation and more and more, okay? However, early there will find some solution also more and more as well, okay? It certainly will not stop China from -- from doing -- China fab from going out, okay? But likely, it will be slowed down.

[Simon Woo, analyst]

Yes. Maybe given some analysts are not asking the question this time, but one last question, should it be the Nanya Tech specific, you know migration plan with your -- a little bit lower CapEx spend. So would you recap your plan, maybe sub-20 nano node migration trend? And the meanwhile, do you think that your customers are okay using continuously 20, 30 nano node legacy DRAM for 2023 or maybe Korean makers promote the maybe 1 Y-node or 1-Z node, even for the consumer electronics. This may hit the Nanya Tech's business for 2023?

[Pei-Ing Lee, executive]

From Nanya point of view, our consumer market account for 65% or some -- at times 70% of our business, okay? And in this area, it's much more diversified in product portfolio, okay? And in some of the areas, we can continue to utilize our 20-nanometer capacity. In some area, we will, of course, gradually move into our future 10-nanometer technology as well, over the time, okay? So in terms of the market situation as of today, very weak. And also it's given us maybe opportunity to think about how fast are we going to be ramping up, okay? Maybe this is a good opportunity for us to weigh a little bit not ramping up too much in our first generation, okay, not too aggressive in our first generation and maybe wait for a little bit of time to do more capacity ramping on our second generation and third generation, okay? And that strategy will be discussed, okay? And what we -- as we find out that advantages to us, we will make adjustments.

[Simon Woo, analyst]

Yes. Great. Yes. By the way, so when we consider your 10-nano node class DRAM wafer output, maybe in mid this year or ...?

[Pei-Ing Lee, executive]

We are targeting by this year and reaching hopefully 10% to 15% of our output could be in 10-nanometer class, okay? And again, that's yet to be decided, depends on what I just described, just now.

[Operator]

[Operator Instructions] There seems to be no further questions at this point from dial-in participants. We thank you for your questions. And we will now move on to the webcast Q&A session. Dr. Lee, please begin.

[Unknown Executive]

We have this question comes from Crédit Suisse, Haas Liu. He will ask questions through verbally.

[Haas Liu, analyst]

My first question is to follow-up on the inventory trend. You mentioned DRAM market is up, and you will consider the lower that you highlighted by 20% due to higher inventory levels. How much time do you think it will take for this inventory to go back to the normal level?

[Pei-Ing Lee, executive]

Inventory level will very much also depend on the shipment, okay? If a shipment as of today is actually quite low, as I reported to you that our shipment has declined quite a bit compared to beginning of the year 2022, okay, as a result from the weak market.

If the market can resume to the original stage, the inventory level will be consumed relatively quick, okay? So this all depends on the market dynamic situation, as I just reported to you that in Q2, there are some observation point we have to pay attention to, okay? And if those observation point is positive likely inventory level will get healthy in a much quicker way, okay? However, if the market situation remains uncertain beyond Q2 or -- Q2 or beyond Q2. Likely, the inventory level will be dragging much longer time.

So in generally speaking, I cannot give you specific numbers, okay? This is very market dependent. It's also very dynamic, okay? And also related to our behavior in terms of our output and product mix and our customer demand. And that's ongoing situation, okay?

[Haas Liu, analyst]

Okay. And I noticed your inventory level is close to the highest level in the past decade. Could you share whether you will start cutting output? And do you think the industry correction will continue to early 2024?

[Pei-Ing Lee, executive]

I just reported that we're doing the product mix and output adjustment, and it's actually already been done, okay, already been started, okay? And we'll continue to dynamically making such an adjustment.

[Haas Liu, analyst]

Very, very helpful. And my second question would be about CapEx. You mentioned the CapEx come from 2022 is mostly for equipment and the equipment spending will be less than 50% of your budget 2023. Does it mean you are slowing down the technology migration? And could you share the breakdown of your CapEx for this year?

[Pei-Ing Lee, executive]

I also commented on the last question is that for our first-generation 10-nanometer class, okay? Maybe we should be not ramping it up as aggressive and waiting a little bit for second-generation and third-generation for ramping up. And that strategy will be -- is still under discussion and will be finalized as we move on for the next couple of quarters.

Okay. Let me repeat a question from SinoPac Securities, Stanley. Stanley's first question is what is the 2023 CapEx allocation like managed WFE? And I already reported out that 2023, our CapEx likely to be in the range of TWD 18.5 billion, subject to for approval. And among those, within that range will be around 50% for wafer equipment. The rate is likely to be the others, including construction.

And the second question from Stanley is, could we expect our bit shipment will increase in 1Q 2023? And Q-o-Q-wise, okay, as I reported, Q1, the markets may still remain weak, okay? But we are looking pretty hard every month, okay, as we speak. Is there an opportunity for us to have better shipments in Q1? I would say there are some opportunity, but still very dynamic, it depends on every month's performance.

Okay. Then let me come to the next question, which is coming from ProCapital from Vincent. Vincent, your question one is that, how about our 2023 full year depreciation and SG&A and R&D costs?

And likely, our full year depreciation is not going to be -- just only slightly up, right? Single digit -- will be single digit, higher than 2022. And likely SG&A will be even and R&D will be also within a single-digit difference from 2022.

And if I may go to the next question from Fubon Securities, Richard Tsai. Okay. Richard, your question one is that Q1 2023, in Chinese, [Foreign Language].

Next question is that, Q1, also in Chinese, [Foreign Language].

In Q1, the inventory evaluation of financial loss, okay? Is it possible? This is a question regarding to that. And based on our current forecast, Q1, we still had -- may still have a slight margin for that, okay?

And is it possible? I would say, if the ASP decline narrowed down, it's very possible. And if ASP decline continued to be a severe as Q4 last year, there's a possibility that may happen, okay? Okay. The next question from [ EDN ], Mr. [ Tsang ]. And your question also in Chinese. 2023, [Foreign Language].

And I already reported that, okay? And for 2023, Q1, the market may remain soft. And potentially, we need to observe a few critical points for Q2. And if those critical points has some indication of improvement likely second half of this year will have some improvement in the market.

Okay. Now comes next question. [Foreign Language]. Okay. The next question is from Fubon, [indiscernible]. What is the difference between consumer cloud and enterprise cloud, okay?

And this first question is that for the cloud center some of cloud centers serve to enterprise customers, that's what we call consumer enterprise cloud. And for the cloud center that service to consumers, we call it consumer cloud. And in general speaking, you know what I meant in the market, okay?

And the second question is Q4 2022 inventory level, it's pretty high. I don't have the number for you. And 2023 full year depreciation, as I reported just now, will be single digit higher than 2022, okay?

Okay. We had one question from Mr. Lee from JPMorgan. Our question is, given loss making in DRAM, could there be potential inventory evaluation nodes in Q1 2023 or Q2 2023?

And I believe I just answered the exact question just now, okay? Based on the current outlook, Q1, we still have some margin not to take evaluation loss, okay? However, it depends on the ASP decline situation, there may be a chance, we may take some evaluation loss. If the ASP decline to be -- continue to be severe, which as our discussions go on -- went on just now, likely the ASP decline will be narrowed down due to several factors. So first, the market in certain area is already at its bottom, very bad, couldn't be worse, okay? And second, we still have some margin for now.

Okay. So that concludes our Q&A sessions. Thank you for joining.

[Operator]

Yes. Thank you, Dr. Lee, and thank you, ladies and gentlemen. 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 Technologies website, www.nanya.com. We hope you will join us again next quarter. Thank you for your participation, and have a wonderful day. You may now disconnect. Thank you.

[Pei-Ing Lee, executive]

Thank you, and have a happy Chinese New Year.