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Novatek Microelectronics Corp
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[Foreign Language]
Dear investors, analysts and media. Good afternoon. Welcome to Novatek 2022 First Quarter Online Investor Conference. This is David Chen, Vice President and Company's Spokesperson. I'll be the host for today's conference. As local pandemic situation has become more serious and considering everyone's safety, we decide to maintain our investor conference online. Please be reminded that all questions can be sent in by text during the conference.
The agenda of today's event will be as follows. First, I'll be reporting Novatek's first quarter results in English. After that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q1 results and at the same time, give us the guidance for Q2. Following that will be our Q&A session. As mentioned earlier, if you have questions, you can send them to us by text. Our IR Director, Mr. Tony, will be processing and reading out the investor questions one at a time, both in Chinese and English. And our Vice Chairman, Steve Wang; CFO, Mr. Chou, and myself will try our best to answer all the questions first in Chinese and then translate them into English later on.
As usual, please take a look at our safe harbor notice. It's boring, but important So let's start with our 2022 Q1 financial highlights. Our net sales in Q1 was $36.51 billion, slightly down Q-o-Q 0.08% from $36.54 billion, y-o-y up 38.48% from $26.37 billion in Q1 2021.
Net gross profit in Q1 was $18.53 billion, down 1.47% from last quarter, $18.8 billion and up 16.99% from $11.51 billion in Q1 2021. Our gross margin in Q1 was 50.73%, down 0.72. percentage point Q-o-Q from 51.45%, y-o-y up 7.09 percentage points from 43.64%. Our operating expense in Q1 was $5.24 billion, down 2.02% Q-o-Q from $5.35 billion. Y-o-y up 22.07% from $4.3 billion.
Q1 operating income was $3.28 billion, down Q-o-Q 1.26% from $13.45 billion. Y-o-Y up 84.18% from $7.21 billion. Our OP margin in Q1 was 36.37%, down 0.43 percentage points Q-o-Q from 36.8%. Y-o-Y up 9.02 percentage points from 27.35%. Q1 net income was $11.13 billion, up Q-o-Q 1.84% from $10.93 billion. Y-o-Y up 89.52% from $5.88 billion.
Overall Q1 EPS was TWD 18.3 versus last quarter $17.97, a Q-o-Q increase of $0.33. And last year Q1 EPS was TWD 9.66, Y-o-Y increase of $8.64. Please take a look at our Q1 consolidated income statement. Next is our Q1 sales breakdown by product line.
SMDDIC, which is the small and medium driver accounts for 41% of our total sales; SoC, which is online DDIC accounts for 31%; and LDDIC, which is a large driver IC accounts for 28%. We have just released our April sales, which is $12.32 billion month-on-month, down 1.3%; Y-o-Y up 11.15%. The net sales for the first 4 months is $48.83 billion, Y-o-Y up 30.39%. SoC accounts for 34% of our sales and DDIC accounts for 65% of the revenue in April.
Comparing our 2022 and 2021 monthly sales, we are seeing significant constituted Y-o-Y growth for the first 4 months. Next, let's look at other key financial numbers. Our cash and cash equivalents in Q1 was $67.82 billion, increased Q-o-Q by 12.78% from $60.13 billion. Y-o-Y increased by 133.23% from $29.08 billion. Accounts receivable, Q1 was $23.93 billion, increased Q-o-Q 1.5% from $23.57 billion and Y-o-Y up 48.49% from $16.11 billion.
Inventory, Q1 was $16.34 billion, Q-o-Q up 15.16% from $14.19 billion. Y-o-Y up 68.41% from $9.7 billion. Short-term loans Q1 was 0. The following slide is a recap of our recent major events. Novatek Board of Directors approved the date of our AGM, which will be on June 8, 2022. And next, the Novatek Board directors proposed a cash dividend of $51.5 per common share with a total amount of $31.34 billion, which resulted in a payout ratio of 80.63%. And now I'll turn over the call to our vice Chairman, Mr. Steve Wang, to provide us more details on Q1 results and future guidance.
[Foreign Language]
[Foreign Language]
Thank you, everyone, for joining in our Q1 investor conference, and I would like to wish everyone the best of health. And our Q1 revenue pretty much in line with our guidance, Y-o-Y up 38.40%.
And our Q1 margin was 50.73%, which reached a high bar of our guidance also. So this is mostly contributed by the product mix.
[Foreign Language]
The following is the guidance on our second quarter. Recently, as you all know, the overall macro environment is full of challenges and we've this inflation and the rate hike issues. And then we have the Russia-Ukraine conflict, and these actually call in a lot of uncertainty. And we've also seen the China's pandemic lockdown in major cities. And all these actually have impacted the demand of -- the overall demand. And I think that some of the customers are in the process of inventory adjustment.
And we also think that the China lockdown has also impacted the manufacturing sector, which in turn has disrupted the supply chain. So based on the above macro situation of our guidance for Q2 will be, for the top line, we guided for $34.5 billion to $35.8 billion, $34.5 billion to $35.8 billion, and this will be at an exchange rate of 1 to 29. And the gross margins will be 46% to 49 percentage range, and the operating margin will be from 32% to 35% range.
And basically, if you look at the overall top line, our views on Q2 will be we are expecting SoC to be slightly up and the large fiber segment slightly down. And for the small, medium-sized, due to the inventory adjustments, we are expecting some decline for our small and medium-sized product line.
So this will be overall our guidance for our second quarter -- for the Q2 guidance. Next, we'll move on to Q&A session. And please be reminded to send in your questions. And we have already received some questions, and we'll start with those questions first, and I'll ask Tony to start with some of the questions that we already received.
[Foreign Language]
[Foreign Language]
[Foreign Language]
First up some questions regarding your first quarter results. The first question is regarding your revenue in the first quarter. The bigger amount at mid to high end of your guidance of $35.8 billion to $36.8 billion, just wonder if you can provide more color in terms of your 3 big design performance in terms of quarter-over-quarter trend?
As you can see that just reported that you can look at Q1 numbers are all in line with our guidance. So if you look at 3 major products lines, it is excited the SoC is slightly up and small and medium-sized DDIC slightly down and the large-sized, DDIC declined. So this is pretty much as expected.
[Foreign Language]
[Foreign Language]
Okay. Regarding your driver rating, could you provide some color in terms of the shipment as well as ASP trend for your small, medium-sized driver as well as your large-sized driver?
Well, the overall small and medium-sized driver in smartphone TDDI business shipment was flat, but the TDDI for was down. And the overhead was slightly down Q-o-Q. And this being Chinese New Year and less number of working days.
[Foreign Language]
[Foreign Language]
Now switch to the SoC business style, which provided quarter-over-quarter growth in first quarter. Could you provide more color in terms of [indiscernible] ?
As for the SoC product line, as mentioned earlier, Q2 slightly went up. And this growth was contributed by key controller and image-related product and [indiscernible].
[Foreign Language]
[Foreign Language]
Okay. Now switching to the margin ratio. You already mentioned about your gross margin. Could you also provide some color for your operating expense ratio in first quarter came down slightly quarter-over-quarter versus quarter 4?
The operating expense was down $108 million. This is mainly because last quarter, the Q4, we had a onetime IP usage expense.
[Foreign Language]
[Foreign Language]
We noticed you had a big jump as of your nonoperating income, far major item under lease nonoperating, what's the actual amount?
Well, the nonoperating, we have basically 2 major items, and that's one which comes down around TWD 308 million and then stock dividend of $133 million.
[Foreign Language]
[Foreign Language]
Now we also noted a critical financial item at your balance sheet, the inventory number also increased 15% quarter-over-quarter to TWD 16.3 billion, which actually up quarter-over-quarter and versus your flattish revenue, what are the major reasons behind that?
Well, due to the tight capacity, everyone knows that the cycle time has been extended. So we have actually a review of our inventory and in general, our inventory level is very healthy and basically manageable.
And usually, [indiscernible] Usually it takes about 1 to 2 quarters to do so. But the thing is that if you look at the current situation, the pandemic has actually disrupted the production. So we have to take this into consideration whether there is a need, we might need to increase our inventory level to cope with that kind of destruction.
[Foreign Language]
[Foreign Language]
Yes. We already kind of break out the question for first quarter recap. Let's move forward to talk about business outlook. The first question is already provided its second quarter revenue guidance and also the trend for your 3 basic style. Could you also provide more color in terms of various end applications in terms of quarter-over-quarter trend?
Well, as I mentioned earlier regarding the macro environment with inflation, rate high, Russia and Ukraine conflict, all the lockdown issues, what we see is we have more conserve services on the consumer side. So like in application like smartphone, TV and some of the IT applications. So we are expecting [indiscernible] To be out Q-o-Q, and the large scale driver to be slightly down and small, medium-sized in terms of the inventory adjustment expected to decline.
So looking at some of the non-consumer side or the commercial side commercial local [indiscernible] we're expecting it to be more similar.
[Foreign Language]
[Foreign Language]
Now wonder if management can provide some very preliminary thought into the third quarter outlook.
Well, looking forward, to third quarter, I think we need to watch the changes in the environment as mentioned earlier, the Russia-Ukraine conflict and some of the China lockdown will depend on how these check out. So we need to keep a close watch.
But on the positive side, we have the China biggest [indiscernible] Which is planning promotion, we're expecting there will be new launch. And then, of course, in North America and Europe, that is getting under control, hopefully, the seasonality will return so like back-to-school. Some of these are something that we can expect.
[Foreign Language]
[Foreign Language]
Okay. Also, Wang, given the increasing uncertainty at end market, mentioned before you have signed some commitment -- contract with your customers and just wonder, can you provide more color in terms of how you get -- your customer can adjust these agreement with you?
Well, regarding the [indiscernible], usually, the way we get work is that we don't have to maintain the long term and a strong partnership with our customers and our suppliers. So it depends on the supply and demand situation when we try to resolve the issue together.
And on the other hand, you [indiscernible] products lines. And therefore, depending on the demand, we can always make adjustments to make the best use of the capacity. So maintaining that kind of flexibility is something that we have been doing.
[Foreign Language]
[Foreign Language]
Also your company product driver highly related to the panel business. Just wonder if you can overall give us some color on what you are seeing a trend on the panel production side?
Well, you can see that there is a recently -- there's changes going on, on the demand side on the panel. So the panel make usually they adjust the product mix according to the supply and demand situation.
[Foreign Language]
[Foreign Language]
Yes. Given the recent increasing uncertainties and [indiscernible] adjustments, could the management provide your outlook in this year or more in the near term in terms of product opportunities?
Obviously, looking to the mid- to long-term product opportunity, there are a few areas like the large-size driver. We are expecting on the high-end side for the IT applications between leading and still leading in this area in terms of technology and product margin. And we are expecting there will be more adoption of these high-end solutions. And then if you can see look at the gaming side, we have been doing very well on the gaming side, and we expect it to continue to the momentum.
And then [indiscernible] display, we're seeing the more and more buying and more and more customer adopting the [indiscernible] display. So there will be more opportunity in that area. And then we have high-speed interface product where you need very high speed interface and we have to provide a lot of good high-speed interface product.
And on the smaller, medium-sized area, we have the OLED for smartphone and then we have OLED for the notebook and tablet we just started providing our customers. And then the OLED TDDI and then automotive LCD TDDI. And then we have some ASIC TDDI and they all have DR.VR applications. And these are all potential markets and basically [indiscernible] technology already rating.
And then on the SoC side, we are seeing the 4K [indiscernible]. And especially if you look at on the picture quality and display-related side, we are expecting more ASIC business. So these are some of the mid- to long-term business opportunity or the product that we expected to ramp up in the near future.
[Foreign Language]
[Foreign Language]
Now we shift the question to more on supply chain situation. The first question is about the update on the foundry supply as well as I wonder if you can provide some comments on your LTA with your foundry supplier?
First of all, looking at the foundry supply side, for the large-sized driver of TDDI supply. Currently, the supply are null. And some of the process nodes, for example, the logic process nodes are relatively tight due to rush orders.
[Foreign Language]
[Foreign Language]
Regarding to the foundry supply, could you also comment supply demand situation for the packaging and also possibly the ASP trend for this area?
For packaging side, there is no supply issue. But sometimes, there is market lead time due to some of the logistic issues.
[Foreign Language]
[Foreign Language]
I also wonder, can you provide the demand supply that you are issuing for your other parts supply?
Well, in general, I mean the other parts are pretty much normal. And of course, if there is any supply demand or some other cost issues, reduce it down with our supplier and work on it. So we maintain a long-term partnership. So whenever anything changes or any need, we collaborate with our supplier.
[Foreign Language]
[Foreign Language]
We noted the inventory dollar for some of your competitors have increased sequentially and significantly. Just wonder if this will impact the competition or ASP to new market?
I mentioned earlier, our inventory level is pretty healthy and manageable. But of course, if there is any inventory, it always can be adjusted. And whenever there is any cause or ASP issue, we reduce it down to our supplier to work on it.
[Foreign Language]
[Foreign Language]
Given your gross margin guidance for second quarter, the rate will be down quarter-over-quarter. Just wonder which product will experience more sequential margin decline? And also, could you provide some color for your second quarter?
Well, as mentioned earlier, I mean, these issues are always dealt with, with our supplier and customer altogether. And currently, the overall pricing issue or cost issue is still manageable. And on the future margins that we have not released earlier, basically, they have already factored in all these issues.
[Foreign Language]
[Foreign Language]
Given downward margin guidance, I wonder if the management has taken some activity to limit the [ APL ] margin downward trend?
Of course, I mean, as a company, this is something that we need to -- continues to make effort. And the best way to do it is enhance the technology from the design level and from the [ vat ] nodes that they're using. And we also need to develop on new value-added products and enhance our product mix. And these are some of the ways that we can do to enhance our margins.
[Foreign Language]
[Foreign Language]
As for the gross margin trend, I wonder if management can provide your view for 2022 or even a little bit [ on margin ]?
Basically, we don't provide annual guidance. But as a company, I mean, improving margin is always our top priority and goal. And as I mentioned earlier, with efforts with the enhancing our technology and expanding the customer base and making -- and providing a more better product mix and also require the total solution for our customers so then to help them add value to the products.
And these are some things that, as we are working on it, and this will bring more contribution to our margin.
[Foreign Language]
[Foreign Language]
We noticed you already announced a pretty general dividend payout for 2021 earnings. Just wonder if you have any other point for your hedge usage, such as share buyback?
Well, as I said, I mean, we have been maintaining [ hedge usage ] for a number of years. And this is what we try and best to do to return to the investor. But of course, it is always wise to maintain some cash level, especially due to this volatile environment. So maintaining this type of flexibility is a good thing for the company.
[Foreign Language]
[Foreign Language]
Okay. But this is difficult for me to translate. But the cash on hand is always easier to deal with when there is any price [ assessed ]
[Foreign Language]
We noticed even the dollar has an upward trend over the past few quarters. Just wonder if the dollar will continue to go up at the end of the second quarter and also on the amount of days towards a more [ stable ] to normal level?
The -- again, our inventory is always well under control. So the increase in inventory, as I mentioned earlier, is mainly due to longer cycle times. And also, to adjust inventory level, it usually takes about 1, 2 quarters. And as mentioned earlier, we also have to take into consideration the current supply chain uncertainty. And if we think that uncertainty is high, then we might need to increase the inventory level. But so far, I think the inventory level is very well managed, and it's pretty much under control.
[Foreign Language]
[Foreign Language]
We know you have -- pay currently a competitive [ salary ] as well as the bonus over the past 6 months. I just wonder if you have any target for your head count increase for 2022 and how about the progress?
Well, as you know, as [ happens, IT and ] in-house talent is the most important thing for us. So for this year, we are expecting to hire at least 500 engineers. And so far, so good.
[Foreign Language]
[Foreign Language]
Let me repeat that in English. The ESG, when you look at over the past many years, Novatek was selected as a constituted stock for the FTSE4Good or the TIP Taiwan ESG Index, TWSE RA Taiwan Employment Creation 99 Index, Corporate Governance 100 Index. And then we also received a lot of awards on ESG reports. And then recently, we are adding the TCFD into our ESG reporting framework and all related greenhouse gas and the certifications will be completed soon.
And Novatek have started to use green energy in 2022, and our goal is to reach 25% of green energy in 2030. And we are also opening a lot of effort in reducing and recycling and the reduce of our water resources. And that will be very strong in terms of reduction. And then our 2021 ESG report will be published around June, very soon. So feel free to downward it from our website for details.
[Foreign Language]
[Foreign Language]
Now getting to more color on the individual business lines. First start with small, medium-sized driver, which is your biggest product group. First of all on OLED, could management provide more color in terms of the shipment target, your foundry partnerships, the competitive landscape as well as your relationship with key customers?
Well, in terms of the OLED drivers for the small and medium-sized, we are expecting our unit shipments growth this year. And as you know, we consume a lot of wafer each month. And for these kind of new products, we always -- it's always wise to diversify to make sure that the supply is enough.
And then this year, we have also continued to launch new products and also retain our technology competitiveness, especially on the OLED side. So we're seeing a lot of profits. And our goal is to penetrate all the OLED panel makers, to expand our customer base and to win our customers' trust by providing advanced design technology, value-added products, and of course, maintaining our strong supply capability. And so far, all this progress are actually pretty on track, and we are getting good results.
[Foreign Language]
[Foreign Language]
Now switch to the TDDI. Could you also provide some guidance or outlook for the shipments? Also the competition from other suppliers as well?
Well, regarding the LTE TDDI for smartphones, we are relatively conservative on the growth in 2022. But we are positive on other applications like the automotive TDDI and some others using TDDI. So these are some of the areas that we see potential growth.
[Foreign Language]
[Foreign Language]
Now moving to the automotive. Could management also provide some color on your progress on the automotive driver business?
Well, yes, it's very exciting as to the automotive. No matter on the DDIC or the TDDI. And as you can see that the adoption of TDDI for the electric vehicle EV, I think it's a trend. And it's definitely positive for Novatek. And recently, we've seen a lot good progress in the new model designing. So we have high expectation on automotive.
[Foreign Language]
[Foreign Language]
So moving to the mainstream product, it is small, medium-sized driver. Could you also provide some update on your new products such as the [ under the swipe ] fingerprint as well as the wearable OLED driver?
Regarding the fingerprint OLED of the wearable OLED TDDI IC, I mean, these products are already in mass production. I mean, our major goal this year is to expand our customer base.
[Foreign Language]
[Foreign Language]
Now switch the question to the large-sized drivers. Could you also provide the business outlook for your large-sized driver in 2022 in terms of the shipment, new products as well as the relationship with your key customers?
Looking at the SoC application, we're expecting like a large-sized driver or the [ SE ] 120-hertz for [ CT ] applications or for the higher resolutions for [ kid's games ] the commercial local - it's migrating from [ SE to 4SE ] and it is ongoing. And then for some of the gaming monitor and then also in industrial applications and also the medical applications. And these are some of the areas that we're seeing more opportunity.
And then regarding some of the customers or some of the industry change, for example, now we see the existing the [ hedge ] market, and this is a good opportunity for Novatek.
[Foreign Language]
[Foreign Language]
The large-sized driver for more legacy product, which you also have seen some newcomers from China. Just wonder how the market can differentiate with them from a competitor?
Well, you all know that at Novatek, we provide a total solution for our customers like driver, timing controller, [ palm ] management or even we provide some of those picture forming enhancement chips. For us, our main job is to provide value-added product to our customers, how to resolve the issue, how to bring value to the product.
I think at Novatek, we're in the best position to provide all the technology for various applications, different technology and different pad sizes. I think even though it's a commodity, but you still can make a big difference by providing all these technologies.
[Foreign Language]
[Foreign Language]
Now we will switch the question to the SoC line. Could you also provide a color on your performance within your SoC line, particularly you mentioned about the outperformance for your [ QV ] SoC in first or third quarter and the second quarter compared with [ Sony's ] driver basic? Also, could you also provide more color on your [ 3, 4K ] business?
Well, in 2022, we're expecting more 3K, 4K 120 hertz to increase the market share. And so far, the progress is very positive. So we expect to gain more market share in that area. And regarding the timing controller, I think there is a great opportunity, especially for the high-end application. But as we move forward, we'll be also launching the [ DP 1.5 ]
And then on the automotive side, we also have provided timing controller solution for our customers, and they're starting to adopt those solutions. And on the top management side, we are also working on new applications beyond display, and we do expect the business to grow there, too.
[Foreign Language]
[Foreign Language]
I also wonder could management provide some color on the new business opportunity regarding your SoC line?
For the new cars, we mentioned some of it already, but in some part [ in the mid ] turns. I think AR/VR provide a good opportunity for us, and we expect to gain more business in this area. And then, of course, as you all know that the -- for Novatek, despite the image, that is the core competence for Novatek.
So moving forward, we're expecting more picture quality of display-related business. And this will be something that we're looking forward to.
[Foreign Language]
[Foreign Language]
Okay. The management did mention about the sequential decline on a small, medium-sized driver in the second quarter. But on the -- how far the trend for your OLED DDIC shipment in the second quarter?
Our OLED shipment in the second quarter will be flat.
[Foreign Language]
[Foreign Language]
Okay. The next question is about financial guidance regarding OpEx ratio. Just wondering the full year OpEx guidance?
Well, the OpEx ratio would be roughly around 14% to 15%.
[Foreign Language]
[Foreign Language]
Just wonder your management already provided second quarter revenue guidance and it also released the revenue. Just wonder can you provide more monthly trends for the second quarter?
Yes. We already announced -- released our April numbers. So basically, the guidance for whole quarter are maintaining that what we just mentioned.
[Foreign Language]
[Foreign Language]
Management already mentioned about how to differentiate itself from competitors for small, medium-sized driver -- sorry, from large-sized driver. Just wonder if management can provide more color how to cope with the competition for other product lines such as large-sized driver and small and medium-sized drivers and SoC products?
Well, we already mentioned earlier that the -- for the large-sized panel driver, we're always trying our best to bring value of the value-added products to our customers. And as you all know, looking at these small, medium-sized, currently, Novatek, technology-wise, we are the clear leader in this area. And we'll continue to maintain this kind of lead by introducing or launching more, better products, for example, high-speed interface or some of the better picture quality or lower power consumptions.
And so far, I think that most of our customers are very, very happy with our products and really appreciate for those kind of products that help us in terms to win in the market.
[Foreign Language]
[Foreign Language]
The next question is about some technology migration of the so-called [ ready ]. Just wondered if you can provide the progress for this [ ready ] OLED driver?
Well, depending on the different customers, some of them because they might select or adopt some of using [ RAM ]. But as you know, if you use the [ RAM ] of course, cost will be lower, but performance-wise with the [ RAM ], Novatek has better picture quality, and then you can have a lower power consumption. So my view is, I think both of them [ ready ] at the same time.
Yes. So Tony see if there is any more questions, and it's about time.
Okay. I think pretty much we already went through most of the questions. And thank you so much for your time, and I wish you all the best and keep safe and keep healthy.
[Foreign Language]