Novatek Microelectronics Corp

TWSE:3034

Earnings Call Transcript 2024-Q1

[David Chen, executive]

[Foreign Language] Good afternoon, everyone. Thank you all for joining Novatek 2024 First Quarter Online Earnings Call. This is David Chen, Vice President and Company's Spokesperson. I will be the host for today's conference.Joining me on the call today are Vice Chairman, Steve Wang; our CFO, Mr. S.C. Chou; and our IR Director, Tony and [ Ivan ].The agenda for today's event will be as follows. First, our IR Director, Tony will be reporting Novatek first quarter results in English. After that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q1 results and 2024 Q2 guidance. Following that will be our Q&A session. We have already received some questions from our investors. And if you don't -- if you have further questions, feel free to send it to us online. Our IR Director, Tony will process and read out the questions one at a time, both in Chinese and English. And our Vice Chairman, Steve Wang and CFO and myself will answer all your questions in Chinese and will be translated into English later.Now I'll hand over the time to Tony to report our Q1 results.

[Tony Tseng, executive]

Thank you, David. This is Tony. In the first page, please take a look at our safe harbor notice. This page show our first quarter consolidated revenues. The first quarter revenue of TWD 24.4 billion is down about 10% quarter-over-quarter, but increased slightly year-over-year, but exceeded at the mid end of our guidance of TWD 24 billion to TWD 25 billion.Next. Now moving to the gross profit. Our first quarter gross profit of TWD 10 billion is also down slightly over 10% quarter-over-quarter and roughly flattish year-over-year. Next page. Now looking at our gross margin. Our first quarter gross margin of 41.09% is slightly down both quarter-over-quarter and year-over-year, but exceeded our guidance of 38.5% to 40.5%. Next. Now let's look at our operating expense. Operating expense of TWD 4.89 billion in the first quarter is roughly flattish quarter-over-quarter, but up slightly over 10% year-over-year.Next page. Now let's look at our operating income for first quarter at TWD 5.1 billion, is down 18% quarter-over-quarter and also around 9% year-over-year. Next page. Now let's look at our operating margin for first quarter. First quarter operating margin stay at 21%, slightly came down from about 23% level in both quarter 4 last year and the first quarter last year, but still in line with our guidance of 19.5% to 21.5% range. Next page. Now let's look at our bottom line. For first quarter, our net income reached TWD 4.89 billion, which is down 8% quarter-over-quarter, but up slightly year-over-year by 3%.Next page. For EPS, our first quarter EPS stay at TWD 8.04 per share, which is down quarter-over-quarter, but slightly up year-over-year. Next. Let's take a look at our income statement. We already go through those key items. You can take a look. Now let's look at our revenue breakdown for the first quarter. SoC remains the largest of business group with 39% revenue in first quarter, which is up from 35% in quarter 4. The second largest one is small medium-sized driver, which accounted for 36% revenue in first quarter, but down slightly from 37% quarter 4. Lastly, our large-sized driver accounted for 24% of first quarter revenue, down from 26% in quarter 4 last year.Next page. We also just reported our April revenues at TWD 8.3 trillion (sic) revenue, [ TWD 8.3 billion ], which is down 16% year-over-year, but also slightly down around 3% month-on-month. In terms of revenue breakdown, SoC of TWD 3.6 billion, which accounts for 43% of our revenue, and the rate came from the driver business.Next page. Please take a look at our monthly revenue trend for [ 2023 ] and the year-to-date for [ 2024 ]. Due to a little bit high base a year ago, so over the past couple of months, year-over-year revenue or monthly revenue has been down year-over-year.This is the key financial summary for some key items. Our cash still stay at a relatively high level at TWD 57 billion level, which is roughly up slightly quarter-over-quarter, but roughly flattish year-over-year. Accounts receivable has been pretty stable at TWD 17 billion, flattish quarter-over-quarter and also year-over-year. Then lastly, on the inventory side, inventory of TWD 9.1 billion at the end of first quarter increased 6% quarter-over-quarter, but still down [ 14% ] year-over-year.Next. Now let me pass the call back to David.

[David Chen, executive]

Thank you, Tony. The following slide is a recap of our recent major event. Novatek Board of Directors has approved the schedule for our 2024 AGM, which will be held on May 31, 2024. And the Novatek Board of Directors also proposed a cash dividend of TWD 32 per common share with total amount of TWD 19.47 billion, which is a payout ratio of 83.51%. And thirdly, the Taiwan 2024 Corporate Governance Evaluation results has been announced, and we are proud to be ranked in the top 5%.And the Sustainalytics newly released 2024 ESG ratings, Novatek rating has improved from 17.9 low risk to 13.5 low risk, which means that Novatek stands of 7 among the global 375 semiconductor companies. And Novatek 2024 MSCI ESG ratings has moved up to BB from B. We do believe with our recent effort, our ranking should move further up. And Novatek CDP scores also improved from C to B minus, and we are working closely with CDP, and hopefully, the score will improve further. And for more detailed information, please also visit our website for more information on our ESG achievement.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]

[Steve Wang, executive]

[Foreign Language]

[David Chen, executive]

[Interpreted] As Tony already reported our Q1 results, the revenue for the first quarter decreased by 10.04% Q-o-Q, but up 1.59%. This is mainly due to Q1 consumer low seasonality plus Lunar New Year with less working days. And this is pretty in line with our guidance of TWD 24 billion to TWD 25 billion. And as for the Q1 margins, Q1 gross margin was 41.09% Q-o-Q, declined by 0.39 percentage points, but better than our guidance of 38.5% to 40.5%. And this is mainly due to product mix and better-than-expected NRE.And looking at 2024 Q2 outlook. The global economy and geopolitical situation are still unstable and consumer recovery is still slow. But nevertheless, there are a few major sports events approaching like Euro 2024 Soccer or the America Soccer Game or Paris Olympic or even the China 618 [ Sales ]. So we are seeing some restocking, especially for the TV, we are seeing some restocking demand picking up. And so based on the above, our 2024 Q2 guidance will be as follows. Revenue will be around TWD 24.4 billion to TWD 25.5 billion, and this is at exchange rate of [ 1 to 32 ]. And the gross margins will maintain around 38.5% to 40.5% range and operating margins will be 19% to 21% range.Okay. Thank you, Steve, for the Q2 guidance. Next, we'll move on to Q&A session. Please be reminded if you have any further questions, do send it to us, and we'll try to answer them one by one. So Tony, please.

[Tony Tseng, executive]

[Interpreted] Could management share the view on a sequential trend across major applications in terms of demand into the second quarter 2024?

[David Chen, executive]

Given the 3 international sports events just mentioned and the 618 promotion in China, the demand on TV is relatively better than the others. And as for notebook, demand is flattish, but we are seeing some recovery in June. And demand on gaming monitor is good. That's what we see at this moment. And then as for the smartphone, some of the brand or ODM, given the inventory adjustment, the demand on smartphone is soft. And as for automotive, the demand is kind of flattish.

[Tony Tseng, executive]

[Interpreted] Therefore, could you also provide the quarter-over-quarter trend across your 3 business groups into second quarter?

[David Chen, executive]

Based on the Q2 guidance that we've just given to all of you, we are seeing that the SoC will increase quarter-on-quarter, and the large DDIC will increase quarter-on-quarter to a lesser degree. And as for the small medium DDIC, will decrease quarter-on-quarter.

[Tony Tseng, executive]

[Interpreted] Given the weakness for your small medium-sized business in second quarter, could you provide more color on your small medium-sized driver of smartphones for second quarter and even to the second half?

[David Chen, executive]

As mentioned earlier, the second quarter smartphone demand is kind of weak, but we expect OLED DDIC for smartphone in the second half will be -- will increase or better than the first half of this year. And this is mainly due to the new customers ramp up.

[Tony Tseng, executive]

[Interpreted] You mentioned you are working with new customers, particularly on smartphone DDIC. Could you also give some color if you have the opportunity to expand to other business lines?

[David Chen, executive]

Well, for Novatek, our target is definitely to continue to broaden our customer base and also the applications, and we'll continue to cooperate with our customers to develop products to meet the market needs, whether on the PC or [ TCOM ], all this area.

[Tony Tseng, executive]

[Interpreted] Given the rising penetration of AI, PC and the smartphones, will Novatek benefit from this opportunity?

[David Chen, executive]

Well, for AI notebook or smartphones, they're seeing that there will be new functions and features, which will trigger the replacement demand for high specification, especially on display and particularly related to power consumption, and that's what we see at this moment.

[Tony Tseng, executive]

[Interpreted] Could you provide more color on your cooperation with ARM on Neoverse platform? Could you also provide some comments on the business model and the timetable for the potential revenue contribution?

[David Chen, executive]

The cooperation with ARM on Neoverse platform, basically, it is just an extension of Novatek's ASIC business. And this is to prepare us for customers' demand in the future. However, this cooperation will not contribute any revenue in the near term.

[Tony Tseng, executive]

[Interpreted] A follow-up question on your ASIC, just wonder what percentage of revenue in [ 2023 ] came from the ASIC business and also for which product line? Could you also provide some growth or revenue target for your ASIC business? And also could you comment about the margin for your ASIC business?

[David Chen, executive]

The demand on ASIC products basically comes from our customers' need for product differentiation. And currently, we have ASIC for both driver IC and SoC product lines. And we do expect revenue from ASIC business to grow year-over-year for 2024.

[Tony Tseng, executive]

[Interpreted] Another follow-up on your ASIC business, just wonder how much revenue did you generate from NRE last year and also from which product? Do you have any guidance for your growth or revenue for your NRE in 2024 or even to provide some mid- to long-term target?

[David Chen, executive]

The NRE income reached about TWD 880 million in 2023 last year, and most of which came from SoC products. And Novatek expects our NRE to grow year-over-year in 2024.

[Tony Tseng, executive]

[Interpreted] Could you provide some color on your deployment on the high-speed interface IC?

[David Chen, executive]

As you all know, I mean, for Novatek, interface IC is one of our core technology. And for our product development, we'll continue to move towards higher transmission speed rate. And we are working on a lot of new product that has a higher -- high-speed interface.

[Tony Tseng, executive]

[Interpreted] What is your most advanced node process for your major SoC lines? Could you also provide the timetable for your next step at the node process?

[David Chen, executive]

Well, currently, the -- our most advanced process node is 6 nanometer. And this is basically -- and according with our customers' need and new product development and the new specifications, we have adopted this technology node. And the implementation of this advanced node is basically accretive to our long-term product development in ASIC business expansion.

[Tony Tseng, executive]

[Interpreted] Market expects OLED DDIC for smartphones to be one of your future growth drivers. Could you give more comments on a few items? First, your foundry partners in Taiwan and China. Two, how about your [ Beijing ] partners in China? Three, your timetable for your OLED TDDI and the customer feedback. And lastly, also your next step for your node process for your OLED driver?

[David Chen, executive]

Well, based on -- again, it's based on customer needs, Novatek will continue to look for and then evaluate competitive foundry partners, and that's a nonstop process. And as for the back-end of [ Novatek ], we've already been working with a Chinese supplier for a while now, and so far, pretty smooth. And Novatek will continue to develop value-added and differentiated product portfolio to meet our customer needs, not just you mentioned about OLED TDDI, including RAM, RAM-less and all these various products will continue to develop new product for our customers. And whether are we going to move forward to more advanced nodes like 22-nano or FinFET, well, it will depend on customer needs, and there's no limitation to that.

[Tony Tseng, executive]

[Interpreted] A follow-up question about the OLED-related products. Could you also give more color on other OLED-related products?

[David Chen, executive]

Well, in addition to smartphone OLED TDDI, Novatek actually has been working on various products, and we have also introduced and some of them are under development and some of them are already in development related to OLED product like for TV applications, for IT applications, for automotive or the related timing controller. We'll see if you have any further questions.

[Tony Tseng, executive]

[Interpreted] The recovery pace of the semiconductor industry seems slower and the TSMC has recently lowered the industry outlook. Does Novatek expect revenue to still grow quarter-over-quarter in quarter 3 or well into fourth quarter?

[David Chen, executive]

After the inventory adjustment, the inventory level basically are relatively healthy. And of course, the overall consumer electronics are pretty much related to the macroeconomics. But based on the existing situation, we do expect the second half revenue to be better than the first half.

[Tony Tseng, executive]

[Interpreted] Apple just released the supplier list for 2023, which Novatek was removed after the inclusion for 2022, just wonder if you have any comments?

[David Chen, executive]

We are not aware of the list. And so we don't have any comments on that.

[Tony Tseng, executive]

[Interpreted] Your first quarter gross margin exceeded the upper end of your guidance. What's the reason behind that? And also wonder if there's any contribution from NRE and the inventory reversal gain? Could you also provide the margin guidance for your 3 business groups, SoC, large-sized driver and small medium-sized driver in the first quarter compared with quarter 4?

[David Chen, executive]

As mentioned earlier, the gross margin came up better than expected. It's basically, it's a combination of better product mix and higher NRE. The NRE income was positive to gross margin by 1 percentage point, while there's no inventory reversal gain in the first quarter. And gross margin Q-o-Q change from Q4 to Q1 across all 3 product lines of 3 product groups basically are limited.

[Tony Tseng, executive]

[Interpreted] Why is your second quarter gross margin guidance is lower than what just you reported for the first quarter?

[David Chen, executive]

The Q2 margins guided lower than Q1 is mainly due to 3 reasons. First of all, it's the -- there are some ASP erosions for certain products. And secondly, we have a lower NRE in Q2. And also, the -- there is a change in the product mix. And as for the Q-o-Q margins change, basically it's for all the 3 product groups and the changes are relatively stable, similar to Q1.

[Tony Tseng, executive]

[Interpreted] Which product are facing more pricing competition into second quarter?

[David Chen, executive]

Looking at Q2, due to the low seasonality for smartphone, we are seeing the small and medium DDIC are facing more pricing competition in Q2. However, we actually are trying our best to maintain the gross margin by introducing cost-down products and also new products and some cost-down efforts also.

[Tony Tseng, executive]

[Interpreted] Could you also provide some comments on impact from competitors in China and your large, small medium driver, particularly for OLED smartphone driver?

[David Chen, executive]

Yes, we do see more competition at the entry segment. But at the same time, we are also seeing on the OLED panel side, there's the demand for higher specification and also we need to upgrade our product for those OLED panels. And for Novatek to maintain our competitiveness, the only way is to improve our design capability and also introduce depreciated products like by introducing or improving our product portfolio and offer competitive solutions such as like on the low power consumption and also on the high picture quality side.

[Tony Tseng, executive]

[Interpreted] What major reasons why [indiscernible] is not in your director list?

[David Chen, executive]

Well, I've been asked this question many times by media a few weeks ago. The reason for the new Board of Director list is quite simple. Basically, we are striving to adhere to the corporate governance direction set by the regulatory authority, basically by increasing the proportion of independent directors like also the female directors as well. Currently, the vast majority of our shareholders are institutional investors, and they would like to see company continue to put an effort to enhance our corporate governance. So based on this rationale, there shouldn't be any impact to our partnership with our suppliers.

[Tony Tseng, executive]

[Interpreted] What are the factors about your improvement in MSCI ESG rating to BB from B? Also wonder your next step to further improve the score.

[David Chen, executive]

Well, for Novatek, we have been trying our best to improve the communication with MSCI team. The purpose is to make sure the accuracy of the data that they collected, even though Novatek has been ranked top 5% at corporate governance based on the government standard. However, due to the MSCI different weighting, and there will be some difference in the results, but we do see some improvement in our scores at corporate governance. I mean, one of the reasons given the establishment of the nominee committee, which should add some points to our ranking. And we do believe that as we are trying our best to improve our ESG, including the Board adjustment, we do expect that our score at corporate governance in MSCI should improve further as we move forward.

[Tony Tseng, executive]

[Interpreted] What are the major reasons behind our recent announcement of the establishment of data center in [indiscernible]?

[David Chen, executive]

The major purpose of this data center is to ensure mid- to long-term R&D computing capacity and capabilities. The another reason is for BCP, which is -- which means the Business Continuity Plan. In other words, it's for risk management.

[Tony Tseng, executive]

[Interpreted] What are the major items for your nonoperating income in first quarter?

[David Chen, executive]

The nonoperating income of TWD 756 million in the first quarter, and this is largely came from our ForEx gains, which is about [ TWD 414 million ] and interest income of TWD 331 million.

[Tony Tseng, executive]

[Interpreted] How are your inventory days as of first quarter? Could you also provide some comments on inventory dollar or days into second quarter?

[David Chen, executive]

The inventory days for first quarter were 67 days, with dollar amount of TWD 9.1 billion, up TWD 0.55 billion from fourth quarter. Inventory dollars at the end of second quarter will be at the similar level as Q1, which should be at the healthy level.

[Tony Tseng, executive]

[Interpreted] Will management maintain your previous guidance for OpEx ratio and the tax rate guidance for 2024?

[David Chen, executive]

The OpEx ratio for 2023 was 17.7%. And looking into 2024, OpEx amount will increase year-over-year, mainly due to higher R&D, while OpEx ratio basically subjected to the revenue side. And as for the tax rate in 2023, it will be 17.4%. As for 2024, due to benefits of new Tax Act, the tax rate in 2024 will be slightly lower than 2023.

[Tony Tseng, executive]

[Interpreted] Given the payout ratio of 83% for 2024, will lease ratio further increase? Will also you consider to increase the payout frequency?

[David Chen, executive]

The payout ratio has been about -- around 80% to 85% over the past few years. And while we are not expected to change significantly in the future, but however, the actual payout ratio is still subjected to the Board meeting. And as for the payout frequency -- cash dividend distribution frequency, at this moment, we have no plan to increase the frequency.

[Tony Tseng, executive]

[Interpreted] Given the popularity of high dividend ETF fund in Taiwan and the inclusion of Novatek into these funds, will this impact your dividend policy?

[David Chen, executive]

No, there won't be any impact to our policy. Well, I think we have covered most of the questions here. And Tony, please check if there's any further questions? So we can take 1 or 2.

[Tony Tseng, executive]

[Interpreted] You mentioned about you are facing a bit more pricing competition for your small medium-sized driver in the second quarter. Just wonder if this trend will get you more stabilized in later of this year? Could you also provide some margin guidance for your business in the second half of this year?

[David Chen, executive]

Well, as mentioned earlier, second quarter, we are seeing the kind of slow and -- on the smartphone demand, and there are some ASP pressure. But we also mentioned that we are putting in a lot of cost-down effort also introducing new product to stabilize the margin.Okay. That's about it. So thank you so much for joining in, and wish you all the best.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]