Novatek Microelectronics Corp
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Novatek Microelectronics Corp
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Dear investors, analysts and media. Good afternoon. Welcome to Novatek's 2023 First Quarter Online Investor Conference. This is David Chen, Vice President and Company Spokesperson. I will be the host for today's conference. We are so happy to see you all again online. Please be reminded that all questions can be sent in during the conference.
The agenda for today's event will be as follows. First, our IR Director, Tony, will 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 2023 Q2 guidance. Following that will be our Q&A session. As mentioned earlier, if you have questions, you can send them to us online. Our IR Director, Tony, will process and read out the investor's questions one at a time, both in English and Chinese; and our Vice Chairman, Steve Wang; and CFO, Mr. Chou, and myself will answer all your questions in Chinese and will be later translated into English.
Now I'll hand over the time to Tony to report our Q1 results.
Thank you, David. This is Tony. First, please take a look at our safe harbor notice. And from here, we will highlight our key financial figures and we already released our details about 2 weeks ago. So here, I will only brief some key numbers for your reference. First quarter revenue of NTD 34 billion increased, 7.3% quarter-over-quarter and also exceeded our guidance of NTD 22.2 billion or NTD 23.2 billion, but still down year-over-year. Now look at the gross profit, the gross profit of [ NTD 10.1 billion ] up 10.9% quarter-over-quarter and still down year-over-year.
Now let's look at our gross margin. Gross margin of 41.91% in the first quarter up from 40.6% -- 40.55% in the quarter 4 last year and also exceeded our guidance of 37.5% to 39.5%, but still down from a high level a year ago. Now let's look at the operating expense. Our operating expense of NTD 4.4 billion, up 13.8% quarter-over-quarter but down year-over-year over 15%. Now let's look at our operating income first quarter above NTD 5.66 billion, up 8.7% quarter-over-quarter but still down year-over-year.
Now our operating profit margin of 23.54% in the first quarter, slightly up from 23.24% in quarter 4 and exceeded our guidance of 20% to 23%, but still down year-over-year. Now let's look at our net income. Net income of NTD 4.75 billion, up 17.5% quarter-over-quarter but still down big way year-over-year.
Now moving down to the consolidated EPS number. First quarter EPS NTD 7.81, up 1.17% compared with NTD 6.64 in quarter 4 last year, but still down from a high level a year ago.
Now this is a summary of our first quarter income statement, as we just highlighted. Please take a look at the revenue breakdown for our first quarter. For first quarter, the biggest segment became the system-on a-chip, SoC [ business ] up last quarter was 35%. Now our third quarter was 39%. The small and medium-sized driver set for SMDDIC accounted for 35% in the first quarter, down from 39% in quarter 4 last year. Lastly, large-sized DDIC, smartphone OLED DDIC accounted for 26% of first quarter. Percentage was flattish quarter-over-quarter.
We are releasing our overall revenue. Total revenue of NTD 9.96 billion having received sequential growth of 8.5% but still down 19% year-over-year. For the first 4 months, accumulated revenue of 36 point -- NTD 34.0 billion, growth of 7.4% year-over-year.
At the bottom of the table, we also have the revenue breakdown for SoC and the drivers. First for April SoC accounted for 37% of revenue compared with 63% from the driver IC. This page shows our monthly revenue in the beginning of [indiscernible] latest release of April revenue. This page also highlighted some of our key financial numbers for first quarter. First to comment cash and accounts receivable increased slightly quarter-over-quarter in line with our revenue and the overall earnings growth, also payout ratio of inventory balance of NTD 10.6 billion in first quarter, came to decline 12% quarter-over-quarter and almost down 35% year-over-year.
We also like to just recap our recent major event in this page, we highlight 3 key events. First, our AGM will be held at the end of May. Second, the cash dividend proposal from the Board of Directors is NTD 37 per share for a payout rate of about 80.5%, which is similar to the level over the past few years. Lastly, also on the highlight is we also improved our ranking to the top 5 level in 2023 for the corporate governance evaluation.
Thank you. Now I'll hand over the call back to David.
Thank you, Tony. And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q1 results and Q2 guidance.
[Foreign Language]
Let me translate in English. The revenue for the first quarter increased by 7.25% Q-on-Q. This has exceeded the upper end of our guidance, and this is mainly due to the rush order of SoC and large DDIC. And for the Q1 margin. Q1 margins of 41.91%, also better than our last quarter of 40.55% up by 1.36 percentage points. It's also better than our operating guidance of 39.5%. This is mainly due to the better product mix and NRE income and gain from a price recovery of inventory.
[Foreign Language]
Regarding the Q2 outlook, after going through the period inventory digestion in the supply chain, we noticed that some of the end customers' inventory level has returned to a normal level and hence we anticipate our various product lines, our market demand will have a moderate growth. So we also expect [indiscernible] Q2 revenue will continue to grow. The growth will be driven by demand from various product lines and the new product entering mass production and the ramp-up of new design win our products and also some of the seasonality like 618. So based on the above, our guidance for Q2 is as follows: Revenue will be NTD 29.5 billion to NTD 30.5 billion, exchange rate at 1 to 30.5. And as for the gross margin, we are guiding for 38.5% to 40.5% range and operating margins will be 22.5% to 24.5% range.
Okay. Thank you Steve for the Q2 guidance. Next, we'll move on to Q&A session. Please be reminded to send in your questions. [Foreign Language]
[Foreign Language]
[Foreign Language]
Congratulations to your strong first quarter and the second -- strong second quarter guidance. Could you provide more color on your [indiscernible] growth in terms of quarter-over-quarter sequential growth trend in second quarter.
Among the 3 major product lines, we are expecting the small and medium DDIC to have the strongest growth due to the combination of increasing OLED shipment and the mass production of VR projects and the rising [ TDDI ] demand from refurbished cell phones in China. And the second and line growth rate will be the large driver IP. The demand came from TV and IT inventory replenishment. And as for the SoC Q-o-Q group, it will be the relatively lower than the others.
[Foreign Language]
[Foreign Language]
Let's look at the outlook. Based upon the recent guidance for your peer or semiconductor supply chain, the outlook for [ quarter ] book seems pretty conservative or flattish. However, your second quarter guidance seems pretty strong and sound, which should provide the factors for your outperformance in the second quarter?
Well, the 3 -- reason for the relatively better quarterly results and guidance are the new products -- so our new products like, VR, entering into mass production. And then we also see the improvement in our product mix towards the high-end products by giving a notebook. And the third is we think of customer margin new models for 6-month promotion. So above 3 are some of the factors that contributed to our better second quarter guidance.
[Foreign Language]
[Foreign Language]
We noticed you already hoping strong revenue growth over the next couple of quarters along with strong guidance for the second quarter. Just wonder how you reduce overbooking risks and monitoring your customers' inventory levels.
Our view is that after a period of time, like 3 to 4 quarters of inventory digestion in the supply chain, some of the -- our end customers will see the inventory level has returned to a relatively normal level. And in addition, note that we also are working very closely with our customers in monitoring the inventory level to ensure that the -- some of the orders are the real demand.
[Foreign Language]
[Foreign Language]
Thanks for your explanation for your second quarter revenue guidance. Also, we wonder, if you look at the year third quarter revenue can continue to grow quarter-over-quarter, in addition to the normal scenario any company set us the reason to support your momentum.
Well, regarding the Q3 or even the second half view, what we see now is that the visibility of market demand remains limited due to the global inflation peers and interest rate, economy uncertainty -- but that said, year-end seasonality or seasonal demand from like Western countries, like Europe or U.S. and also China is still well anticipated. And the other reason is that the our new product, and we have seen that like OLED or VR, the new product demand will probably continue the current momentum.
[Foreign Language]
[Foreign Language]
You -- a part of this call, you already mentioned about the OLED and when you recall, you also -- you were very positive for your online shipments over the past analyst meeting call. S whether you still remain positive on your smartphone OLED driver shipment for 2023 and also what your key advantage over competitors?
Well, as you can see that the replacement of a rigid OLED by flexible OLED will continue. And the 5G penetration will also help to the increase adoption of OLED panels and thus benefit OLED DDI. So based on this reason, note that retain our view on 2023, OLED driver shipment to exceed around 2022. And as for the Novatek's to take of this advantage over our period. I think that it is a combination of various factors.
Number one, the leading technology with superior design capability. And the second one is the better product mix to a fuller key of overall display and we also have -- another reason is the foundry capacity or what we call supply capability. And last fall, we have seen that we have a broader and more diversified customer base that will help us to sustain our growth and competitiveness in this area.
[Foreign Language]
[Foreign Language]
Also wondering if you have also a positive outcome on your other product lines for 2023?
The potential unit growth products are, first of all, the OLED-related drivers. And then the -- on the higher end TV SoC, which like the 4K 60-hertz and even the 8K high resolution and also guessing the VR, DDIC. It's already in huge volume production in this quarter. And we're also seeing the high end especially the gaming for notebook monitor DDIC and SoC also see potential growth in 2023.
[Foreign Language]
[Foreign Language]
For you inventory days of first quarter 2023 is based upon the inventory of NTD 10.6 billion, down another 12% quarter-over-quarter. Also I wonder if you can provide down trends on your inventory on days into second quarter? Or will it be back to the normal level. We also notice your inventory control has been pretty good and then your peers in the service sector also one of the major factor for your better inventory management.
While Q1 inventory level decreased to 92 days from 98 days in Q4 last quarter. The Q2 inventory dollar will be at similar levels as Q1, our base of inventory should probably come down. And the current inventory level is close to a reasonable level, but it will be adjusted dynamically according to supply chain status. And the other question that's asked is the reason why we have a better inventory management, I think there are a few reasons.
One is that the panel-related application is more diverse and Novatek has a broader product offerings. And therefore, we have better views on some of these applications and these applications and then help us to respond ahead. We also maintained a good interaction with our end customer. And thus, we can adjust inventory in a more timely manner.
[Foreign Language]
[Foreign Language]
I'll switch the question to more on the margin trend. Your first quarter gross margin exceeded the upper end of your guidance in all major sectors and also could you also provide some comments on the gross margin trend across your 3 major product group in first quarter 2023 versus last quarter of 2022?
The first quarter gross margin Q-o-Q up by 1.36 percentage points. This -- better than our guidance of 37.5% to 39.5%. And this is mainly due to the combination of better product mix and the NRE income and the reversal of inventory write-down and as for Q1 margins for the 3 new product lines, we are seeing that it is remaining relatively stable quarter-over-quarter.
[Foreign Language]
[Foreign Language]
Wonder why your second quarter gross margin guidance is lower than the first quarter results.
Well, the Q2 margin in -- we are guiding for lower than Q4 mainly due to the lower NRE income and the reversal of inventory write-down despite the gross margins for all 3 product lines in Q2 are stable.
[Foreign Language]
[Foreign Language]
Now I also wonder is it possible for the company to stay gross margin at 40% or above the second half and what would be the possible sectors.
Well, aiming for a better margin always Novatek's primary goal. And we'll continue to improve our margins through new product launch like better performance -- better cost performance and also our product mix enhancements like going to more high-end products and also we'll continue to ,monitor the costs and try to tighten the cost and improve our margins through these 3 ways.
[Foreign Language]
[Foreign Language]
We noticed all of our private company enjoys superior gross margin during the upcycle of -- during the COVID, but due to the downtrend, Novatek aimed to deliver, higher than others and more resilient gross margin for major vectors for your superior outperformance.
As for the more resilient or more better module performance than our peers, there are a few reasons that I have in mind. One is we have a broader product offering with better margins like we have TV, we have IT product, we have smartphone, the automotive, the VR and variable devices. So we have a very broad product offering.
And then secondly, we've also seen that -- we also have a moving towards more high-end products which needs more advanced technology and more skills. And -- another very important factor is that we do provide not just driver for our customer -- but we provide a total solution to our customers so that they can have just one-stop shopping which makes their life more easier. And last but not the least, we continue to tighten our inventory and also monitor our cost. And these are some of the factors that help us to relatively be more resilient.
[Foreign Language]
[Foreign Language]
Thanks for detailed [indiscernible] from your management teams. Now let's shift the question about the pricing trend. Just wondering in terms of the quarter-over-quarter decline in the first quarter which one down more in the first quarter versus which one has been more receiving in the first quarter, also will price trend will become more stabilized into second quarter?
Well, for the ASP-wise, I think that the [ TDDI ] ASP fell more than the others due to the fierce competition in first quarter 2023, it was relatively stable. And based on our observation, we are expecting the ASP will be more stable as we get into second quarter as panel prices gradually rebound.
[Foreign Language]
[Foreign Language]
Now moving to a question about the cost. Have your major manufacturing cost, such as founder and hedge equity decreased more quarter-over-quarter in second quarter versus first quarter. Also wonder if these cost will further decline in second half of this year?
Yes. As for the cost, the Q2 cost has come down and for part of the product and it has been factored into our second quarter margin guidance. As you all know, the costs are subject to the supply and demand distribution. So Novatek will continue to negotiate with our suppliers and work very closely with them to gain better support.
[Foreign Language]
[Foreign Language]
Now let me ask a question about margin. Just wonder if our new sales book any [ LTA-rated foundry ] costs for 2023 and also any impact to the margins from an inventory, either write-down or reversal.
There's no impact from inventory write-off for [ LTA ] agreement in 2023.
[Foreign Language]
[Foreign Language]
Now we switch the question to -- about the competition. Could you update the time table for new 28-nanometer high wafer foundry? And also wonder any impact to your company?
Well, Novatek, we will adopt any foundry that can provide competitive and advanced new process. So we don't move out any possibility. However, foundry supplies between 8-nano highly remains tight at this moment. So currently, we don't see any impact from this issue.
[Foreign Language]
[Foreign Language]
Could you provide your comments on impact from competitors from China, particularly for driver IC?
Well, the best thing to compete in the market to face this competition is to enhance our capability. So we enhance our design capability and by introducing value-added and differentiated products and develop and provide broader application particularly for high end and also provide competitive total solution and not just driver IC but a total solution to help our customers become more competitive.
[Foreign Language]
[Foreign Language]
Could management provide some updates of progress for your customers in Japan, Korea or even in the States, any targets or plans?
Expanding customer base is our primary goal. And so far, the progress is carrying out as scheduled.
[Foreign Language]
[Foreign Language]
Could you provide update on your supplier diversification such as foundry advantaging particularly in China?
Well, Novatek has been able to maintain a relatively stable, resilient supply to service our various customer needs. And as for China family and back end, Novatek has been engaging with these China partners for a number of years and so far so good.
[Foreign Language]
[Foreign Language]
We notice your operating expense as a percent of revenue increased in the first quarter compared with quarter 4 last year. What major factors where your OpEx ratio in 2023 now be higher than what you mentioned at that time.
While the OpEx ratio in first quarter of 2023 was 18.37% increased from fourth quarter 2022, and this is mainly due to higher R&D expense. As for second quarter revenue -- as we see the second quarter revenue to grow, the OpEx ratio will probably be down Q-o-Q.
[Foreign Language]
[Foreign Language]
Also, what are major items for your nonoperating income in the first quarter -- also wonder if you can provide some comments in terms of impact of FX to your gross margin or earnings?
The nonoperating items in the first quarter largely came from interest of NTD 276 million. And the CapEx has -- basically has a limited impact to our gross margin due to the U.S. dollar-denominated sales and procurement. But that has an impact on the net earnings and the impact depends on the degree of gross margin and [ FX ] fluctuation.
[Foreign Language]
[Foreign Language]
Based upon dividend proposal for 2023 will your payout ratio will stay high at about 18%. Just wonder if you have continued to increase the payout frequency to, say, twice year or others.
Currently, we have no plan at this moment to make any changes, so we maintain the current status.
[Foreign Language]
[Foreign Language]
You have recently announced CapEx of over NTD 2 billion for the construction of your office building in Tainan [ Science ] Park. Would you talk about your expansion plans for your employees?
Tainan will be one of Novatek key R&D sites in the future and especially for our Tainan engineers. So therefore, Novatek will be constructing a new R&D office building in the [ Tainan Science Park ]. The purpose is to provide quality and comfortable working environment for our engineers. And basically, this is our long-term commitment to our Thailand employees.
[Foreign Language]
[Foreign Language]
Still if you have any questions, please send it and we'll try to answer them.
So we still have few questions -- time for a few questions. Is there any other questions?
[Foreign Language]
[Foreign Language]
As mentioned about OLED driver [ IC ] a couple of times during the early part of your call. Just wonder if you can provide some guidance in terms of percentage over year-over-year revenue or your growth projections for these 2 products?
Novatek expect our OLED driver IC revenue share contribution will gradually increase in 2023. And we also are anticipating that the momentum for this growth will continue into 2024. And as for -- as we know, this is a very new product line, but we do have expectations and it's we're expecting as we move forward. Maybe you can have one more question.
Maybe you can have one more question. Okay.
[Foreign Language]
[Foreign Language]
Can you also talk about our ASIC product going forward, you mentioned in your previous earnings in March during early part of this call.
Regarding ASIC, this is basically based on our customers' special needs and special requests. So we'll continue to double up our ASIC for our for our customers. And as for the revenue contribution moving forward, we're also expecting this ASIC business will gradually increase as we move forward.
Okay. Thank you, Tony. If -- we are pretty much -- so I think we will stop here. So if an investor or shareholders or anyone of you have any further questions, you can call any time, to Tony or to myself. We'll try our best to answer your questions. Thank you so much for your time and wish everybody a very happy and -- investment and happy investor.