Novatek Microelectronics Corp
TWSE:3034
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Novatek Microelectronics Corp
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[Foreign Language] Dear investors, analysts and media, good afternoon. Welcome to Novatek 2021 Second Quarter Online Investor Conference. This is David Chen, Vice President and Company Spokesperson. I'll be the host for today's conference.
Hope everyone is doing well, healthy and happy. Even though Taiwan pandemic situation has improved, but for security reason, we have decided to maintain online, and this enabled our foreign investor to be able to join in, too.
Please be reminded that all questions can be sent in by text.
The agenda for today's event will be as follows: first, I'll be reporting Novatek's second quarter results in English; after that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q2 results and Q3 guidance; 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 Tseng, will be processing and reading out the investor questions one at a time, both in English and Chinese. And our Vice Chairman, Steve Wang; CFO, Mr. Chou; and myself will answer all questions in Chinese and will be translated into English later.
As usual, please take a look at our safe harbor notice.
So let's start with our 2021 Q2 financial highlights. Our net sales in Q2 was $34.11 billion, up Q-o-Q 29.37% from $26.37 billion, Y-o-Y up 83.29% from $18.61 billion in Q2 2020. Net gross profit in Q2 was $17.17 billion, up 49.19% from last quarter $11.5 billion and up 175.52% from $6.23 billion in Q2 2020. Our gross margin in Q2 was 50.33%, up 6.69 percentage points Q-o-Q from 43.64%, Y-o-Y up 16.5 percentage points from 33.48%. Our operating expense in Q2 was $5.18 billion, up 20.45% Q-o-Q from $4.3 billion, Y-o-Y up 68.84% from $3.1 billion.
Q2 operating income was $11.99 billion, up Q-o-Q 66.31% from $7.2 billion, Y-o-Y up 278.8% from $3.17 billion. Our OP margin in Q2 was 35.16%, up 7.81 percentage points Q-o-Q from 27.35%, Y-o-Y up 18.15 percentage points from 17%. Q2 net income was $9.79 billion, up Q-o-Q 66.57% from $5.88 billion, Y-o-Y up 282.76% from $2.56 billion. Overall Q2 EPS was $16.08 versus last quarter, $9.66, a Q-o-Q increase of $6.42. And last year, Q2 EPS was $4.2, a Y-o-Y increase of $11.88.
Please take a look at our Q2 consolidated income statement.
Next slide is our first half consolidated income statement. Our net sales in first half was $60.48 billion, Y-o-Y up 70.35% from $35.5 billion in first half of 2020. Net gross profit in first half was $28.67 billion, up 142.2% from last year's $11.84 billion. Our operating expense in the first half was $9.47 billion, up 55.97% from $6.07 billion. 2021 first half operating income was $19.2 billion, up Y-o-Y 233% from $5.77 billion in 2020. First half net income was $15.66 billion, up Y-o-Y 228.48% from $4.77 billion last year. Overall, first half EPS was $25.74 versus last year's first half $7.84, Y-o-Y increased by $17.9.
Next is our first breakdown by product line. SMDDIC which is the small and medium driver accounts for 36% of our sales. SoC, which is all nondriver accounts for 34%. And the LDDIC, which is the large driver IC accounts for 30% of our total sales. We have just released our July sales, which is $12.5 billion month on month, up 7.94%, Y-o-Y up 85.35%. SoC accounts were 34% and driver accounts were 65% (sic) [ 66% ] of the total revenue. 2021 accumulated revenue, January to July, is $72.98 billion, Y-o-Y up 73%. Comparing our 2021 and 2020 monthly sales, you can see that there is a significant Y-o-Y growth for the first 7 months of this year.
Next, let's look at other key financial numbers. Our cash and cash equivalents in Q2 was $36.11 billion, increased Q-o-Q by 24.21% from $29.08 billion, Y-o-Y increased by 62% from $22.15 billion. Accounts receivable, Q2 was 21.4 billion, increased Q-o-Q 32.8% from $16.11 billion and Y-o-Y up 64% from $13.05 billion. Inventory, Q2 was $10.82 billion, Q-o-Q up 11.55% from $9.7 billion, Y-o-Y up 14.41% from $9.46 billion. Short-term loans, Q2 was $7.5 billion, Q-o-Q increased by 415% from $1.46 billion and increased Y-o-Y by 565.54% from $1.13 billion, basically mainly for short -- for the natural hedge.
The following slide is a recap of our recent major events. AGM approved the distribution of $15.6 per share cash dividend. Ex-dividend record date on August 23. And the dividend will be paid on September 11, 2021 (sic) [ September 17, 2021 ]. And Novatek was selected as a constituent stock of FTSE4Good TIP Taiwan ESG Index and also the Taiwan High Compensation 100 Index. And also the Taiwan -- RA Taiwan Employment Creation 99 Index.
And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q2 results and Q3 guidance. [Foreign Language]
[Foreign Language] Stay safe and stay healthy. [Foreign Language]
Thank you, Steve.
The -- regarding the 2021 Q2 revenue, after experiencing above seasonality in Q1, Novatek Q2 business continued to grow and has exceeded our Q2 guidance high bar. The main reason as follows: our SoC-related product unit shipments increased significantly. And also our driver IC demand continued to be strong due to COVID work-from-home demand, and this includes the large-, medium- and small-sized driver.
As for the Q2 margins, Q2 margin was 50.33%, up 6.69 percentage points Q-o-Q. This is mainly due to the ASP adjustment to reflect our rising costs and also the strategically adjusted our product mix.
And looking at Q3 outlook. As we can see, there are -- most countries have speeded up the vaccination process. Hopefully, the pandemic will soon be contained and our lives return to normal and economy can be back on track for positive growth. As we enter Q3, which is normally a high season, we expect overall demand to continue to grow, and we see that the old foundry supply is still very tight, with limited expansion. And currently, we are still unable to fulfill the market demand. So both our driver IC, SoC lines are expected to maintain growth momentum.
So based on this, our guidance for Q3 is as follows: revenue will be $37.8 billion to $38.8 billion at an exchange rate of USD 1 to TWD 28. And the gross margin will be from 48% to 51% range. And operating margin, 33% to 36% range. And if you look at more in detail, we are expecting both SoC and driver to have similar teens growth. And the large panel driver will be a little bit stronger than the small and medium size. And the overall SoC will be similar to this medium- and small-sized driver.
Next, we'll switch to Q&A, and I'll turn the call to Tony. And Tony will be reading out the questions our investors have for us.
Thank you. [Foreign Language]
[Foreign Language]
[Foreign Language]
Management mentioned about your gross margin, but could you provide the amount for your NRE in the second quarter? Also provide some explanation for your reduced operating expense ratio in the second quarter.
Okay. The second quarter NRE is around $90 million. 9-0 million, okay? And the question is for this -- the OpEx. Basically, if you look at our OpEx, even though percentage-wise, it seems to be down, but if you look at Q-o-Q, the absolute amount has increased by $878 million Q-o-Q, Y-o-Y increased by $2.1 billion, and a lot of these are mostly on R&D.
[Foreign Language]
[Foreign Language]
You had an impressive growth from SoC in the second quarter. You mentioned both quarter-over-quarter and the year-on-year. Would you like to provide more color around your individual major product line and the SoC in terms of the contribution from a shipment versus ASP as well as the gross margin trend across different lines?
Basically, what we are seeing is that in Q3, all the -- I mean, Q2 SoC lines, all the product line, no matter whether the revenue or gross margin has improved.
[Foreign Language]
[Foreign Language]
Do you also like provide some shipment number for your OLED driver and the TDDI in the second quarter in terms of quarter-over-quarter? Also, how about the year-over-year growth for -- in the first half for these 2 products? And any view for your whole year shipment target?
Our OLED DDIC has returned to normal momentum. We are expecting 2021 to outgrow 2020 in terms of unit shipments. And we're expecting second half to be stronger than the first half. And Q3, we are expecting our unit shipments to have a record high for the OLED DDIC. And as for TDDI, as everybody knows that in 2021, days of wafer constraints, so the growth will be limited.
[Foreign Language]
[Foreign Language]
So we noticed the inventory dollar continued to rise quarter-over-quarter to a new record TWD 10.8 billion, which is up 12% quarter-over-quarter. Could you provide some color on your inventory?
The overall SoC -- this is basically because of the SoC line, has a very good momentum growth. And as you know, the SoC lead time is relatively longer than the DDIC. So the -- basically, this will -- it turns out the inventory level will go up because of the lead time.
[Foreign Language]
[Foreign Language]
Investors wonder why you expect to enjoy higher quarter-over-quarter growth from large-sized driver than your small-, medium-sized drivers into quarter 3.
Basically, the overall -- if you compare the large and the small, medium driver, the small, medium driver is relatively weaker than the large. And because of the large-sized TV, there's some shortage on some of the components and some mismatch. So basically, a lot of the panel makers are moving their panel to the high-end product. So that's basically helping the high-end product to go up.
[Foreign Language]
[Foreign Language]
Just wondering if you can give more color on your gross margin trend in quarter 3 as well as about the -- your price hike for your major product line.
As Steve just mentioned, for DDIC, our cost has gone up. So moving forward, we'll be reflecting the cost to our ASP.
[Foreign Language]
[Foreign Language]
Okay. First question is about overall demand across different major applications, particularly with the weakness from smartphone and TV over the past couple of months as well as some potential slowdown from the TCO tablet space.
What just Steve mentioned is that we can see that the -- TV-wise, you look at the TV, the larger-sized TV, relatively weak -- but the smaller-sized TV is relatively weak, but the larger-sized TV demand is very healthy. And what we are seeing now is that the Chromebook demand has weakened a bit, but commercial notebook and the automotive are still strong. And the smartphone in China, India, Southeast Asia were weak in Q2, but due to COVID and some of these issues, but we are seeing that new models are ramping up in Q3. And the [ offer that's ] mentioned earlier, the current situation is that the supply is still very tight and we are still not able to fulfill the total demand.
[Foreign Language]
[Foreign Language]
Okay. Just wondering if the growth momentum slowed down, how will Novatek to -- react to reduce the potential impact?
Well, the core value of IC design houses technology and quality. And besides short-term profitability, Novatek is working hard to enhance our long-term position in a few areas. And technology-wise, we are developing our core technologies to support our customers. And product-wise, we are expanding our product lines and applications and bundled solutions and to enhance the customer long-term stickiness. And in terms of customer-wise, we try to establish long-term and stronger partnerships with our suppliers and our customers and also expand our market to various areas.
Maintaining long-term health of the market is of utmost importance for Novatek. Novatek is committed to support our customers and dedicated to work alongside with our customers to face the challenges to gain their support and trust.
[Foreign Language]
[Foreign Language]
We noticed that 2 of your major clients -- panel company just reported their numbers. Just wondering if you can share their inventory situation as well as the correlation between their panel price and then your key components such as driver IC price trends going forward.
We think the panel inventory currently is still very healthy. So we're not very worried about that. And as you can -- as you know that the -- for the panel maker, they are also very dynamic in terms of adjusting their production line, allocating to different products. So basically, if there's any changes, for example, in the smaller size this week, they will reallocate the capacity for the larger size. And in terms of driver IC ASP, this is basically more related to the foundry tightness. So in case if the foundry price goes up, so basically, that will directly impact our ASP.
[Foreign Language]
[Foreign Language]
Just provide some update on the foundry supply in second half as well as 2022. Also, had a lot of discussion on the potential impact from the next chip expansion. Could you also provide some update?
Well, looking at the driver IC process -- and usually, there's 8-inch and also 12-inch below the legacy process, you have 28-nanometer above. And basically, the legacy process, no matter 8-inch or 12-inch, clearly is still very tight, and we don't see it will be eased until the end of this year, we don't see any chance of becoming loose.
And regarding 2022, the supply, we are already working very closely with our suppliers. But so far, what we are seeing that -- is that even in 2022, the supply is still tight. And we don't think it will be able to fulfill our customer demand at this moment.
And as we look at the other question that asked about the next chip, we don't think there will be any major impact in short period of time because as you can see, all major product lines are experiencing shortage, not just DDIC. Therefore -- I mean, if you look at the capacity as a whole, the shortage will not be resolved in a short period of time. And the foundry supplier will also be thinking about adjusting to more favorable product mix for various different applications.
So at this moment, we also noticed that besides foundry, there are also other materials or components like some substrate, PCB and all these are also in shortage. So this is also some of the reasons why we think that the -- for the -- our founding partners, they will be always very dynamic to adjust the -- some of the extra capacity for other -- if there is any shortage in other areas, they will do some adjustments. So we don't think there will be any impact.
[Foreign Language]
[Foreign Language]
Just wondering if you can provide some bit of idea into quarter 4?
Okay. Steve just mentioned that looking at the quarter 4, we don't think the supply tightness will be resolved. And especially on the wafer side, it will be tight, and we don't expect it to be resolved in a short period of time.
And in 2022, that's for next year, I think the situation will continue. The tightness will still be there. And currently, we don't think we'll be able to 100% fulfill our customer demand based on the numbers that they have received at this moment.
[Foreign Language]
[Foreign Language]
Just one. You mentioned about the outlook from the supply side, but I just wonder how about from the demand side as well as the -- which implies a quite solid price trend as well.
Yes. As we mentioned earlier, the -- besides supply, the demand is still very strong and steady. So we are expecting the ASP should be solid.
[Foreign Language]
[Foreign Language]
Would you like to provide more color on your small-, medium-sized driver? You mentioned about TDDI briefly earlier, but could you provide more color on -- in particular on the OLED side?
Yes. I mean the -- we talked about the TDDI. But as regarding OLED, everybody can -- knows that the China OLED panel capacity is increasing. And because of that, I think a lot of the smartphone player will be ready to adopt OLED panels more and more. And therefore, we are expecting the penetration rate of OLED panels to increase as we move forward.
And for Novatek, what we've been doing is we will be increasing our R&D into the OLED product line try to develop more products for our customers. And as we mentioned earlier, we are expecting the second half of this year, the unit shipment for OLED driver will be greater than the first half. And we are expecting this coming quarter, Q3, we will have a record high unit shipment for OLED drivers.
[Foreign Language]
[Foreign Language]
On the OLED drivers, I have some follow-up questions, such as your progress at the 10-nanometer as well as TDDI or for the competitive landscape, such as [ high peer game ] in China.
Well, I'm looking at our OLED TDDI. Currently, we already have our sample ready, and we are working very closely with our panel maker and -- to develop this technology and to have it in mass production. But currently, we are in the -- working closely with our customer. And as for us, we'll continue to enhance our technology, not just the design, IC chip design, but also in terms of the process. We currently will continue to use more 28-nanometer and to enhance our chip performance moving forward to support our customers in the OLED space.
[Foreign Language]
[Foreign Language]
Okay. As for small-, medium-sized driver, could you also provide an update on your auto driver as well as new products such as -- under display OLED fingerprint, your wearable OLED driver and also your FTDDI?
Okay. I'll explain one by one. Regarding the auto pure driver and -- currently, the demand is still very healthy and strong. And because of the foundry capacity shortage, we are unable to fulfill the demand 100%. So we're still working on it.
But as for the automotive TDDI, we are already engaging with our customers, designing in and fine-tuning those solutions. We are expecting end of this year, it will go into mass production.
And as for the wearable device, currently, our wearable solution is designing in, and we're expecting in Q3, it will be in small volume production.
And as for the fingerprint because of the module player delays -- so it has delayed a little bit, but it's already in mass production now. So we're expecting Q4 -- to have huge volume production in Q4 of this year.
And regarding the FTDDI, the -- since the panel maker is using LCD and they need more mass player, so -- but what we are seeing now is that FTDDI still has its value. So we are working very closely with our customers to design those solutions into their panels.
[Foreign Language]
[Foreign Language]
How we switch to the SoC lines? We have already delivered very impressive growth for the first 7 nights in July -- in 2021. Could you provide some outlook for 2022, particularly on the surveillance side?
Well, as mentioned about surveillance, we are making very good progress both in the front end and the back end, and we are engaging very closely with our customer, and we are expecting this product line to grow moving forward. But as I've mentioned earlier, we still face a wafer shortage, the capacity constraint for all the product lines, including surveillance. But nevertheless, we are expecting our surveillance product line to grow moving forward.
And on the other product line -- for example, recently, we are seeing the LED public display, the large format display is also picking up momentum, and we are expecting this business to grow. And besides that, our TV product line, we have a share gain this year, market share gain. And moving forward to next year, I think the demand will still be very healthy.
[Foreign Language]
[Foreign Language]
Now we switch the question to the large-sized driver. Investors also wonder if what are the [ reservable gross margin for large-sized driver going forward, given the recent take -- over the page amount, price higher than ] margin, right? And also, could you provide some color on your competitive landscape, particularly from China?
Well, as I mentioned earlier, the large panel driver product line is also facing the wafer shortage issues, a constraint, limitation. But even though there is a limitation, but we are still maintaining our market share in 2021. And from a competitive side, what we are now doing is that we are bundling our solution, and we're trying to supply the total solution for our customer so that they can resolve the mismatch issue because, as you know, there are a lot of different components and different IC chips required for a display. And Novatek is one of the very few that can supply the total solution, all the various IC chips required for the display system.
So what we are doing is we're trying to supply them the bundled solution so that they won't be caught up in the mismatch situation. And also because from a system level, we're able to supply them value-added differentiation solution so that they can have the better performance, better cost, better competitive solution.
And if you look at the large-sized driver, we no longer look at it as a -- just a pure driver, it's more like a system solution. So moving forward, we'll work very closely with our customers not just drive pure driver, but as a system-level solution.
And for example, a lot of the high-speed interface, EDP 1.4, a lot of the other or even the power consumption, a lot of these will be -- add all these into the solutions to help our customers to compete in the market.
[Foreign Language]
[Foreign Language]
We got a lot of questions about the gross margin trend in quarter 3 because the midpoint at 49.5% is lower than the 50.3% in the second quarter. They just wonder if our price hike will cover the cost increase and the margin on individual product will at least maintain into the quarter 3.
Well, if -- the question is whether the ASP can cover our costs, okay? Basically, if the -- our supply cost goes up, we will work very closely with our customers to reflect the cost. Of course, the whole process is a rolling process, so it's difficult to give a very exact number. But basically, we don't think the third quarter margin will be lower or anywhere getting worse. But we do expect to work very closely with our customers. So the margin should be okay.
[Foreign Language]
[Foreign Language]
Okay. The next question also about the third quarter guidance because based upon your guidance for gross margin or on the operating expense, OP margin -- looks like operating expense ratio will be stable quarter-over-quarter. Would you provide more color, please?
Well, basically, our OpEx will increase. I mean, actually, [ in time, it will ] increase. But the growth rate will be lower than our revenue growth.
Now any more questions?
[Foreign Language]
[Foreign Language]
Just wondering if the management could provide more overview for 2022 outlook. And also, you mentioned about some way to improve your competitiveness. Could you also provide more color on that?
Well, the -- we're not worried about the demand, but we are worried about the supply more than worrying about the demand because the -- currently, the wafer shortage is -- the constraint is the main thing that really impacts the group. So we're aggressively working with our foundry partners to try to increase the supply, and we are still working on it. And as for the other growth, I mean, we mentioned earlier, OLED definitely will grow and there's no doubt about that.
And then TDDI, basically, the growth will be -- depends on the wafer supply. But currently, I think we still have some wafer constraints on the TDDI.
Also, you mentioned about your positive outlook for your OLED driver. Over the past couple of months, we also heard some discussion for potential outsourcing from Korean customers in the future. Novatek, as a leader in this area, could you also provide some color here? [Foreign Language]
[Foreign Language]
Well, the question was about the potential Korean customer on the OLED. Well, Steve just mentioned that for Novatek, our target is all the major smartphone, tablet players. So we're aggressively working with everybody. So it's very difficult for us to specifically talk about a specific customer.
[Foreign Language]
And not just the smartphone that will be adopting the OLED display. What we are seeing now is that even the tablet and even moving forward, notebook potentially will be adopting the OLED solution also.
Any more questions?
[Foreign Language]
[Foreign Language]
Some follow-ups on OLED. First, I'm wondering if you can give some quantitative guidance for your OLED driver shipment growth next year. And two, could you also talk about the potential contribution of penetration for your OLED TDDI next year?
One thing for sure, our OLED TDDI will grow next year, no doubt about that. But as to what extent, how many -- how much? Or how many percentage? It's difficult. It all depends on the wafer supply, but we're working on it. We are working on it.
And so OLED TDDI, it really depends on the panel maker, the progress. So we are working very closely with our customer, engage with them in developing that technology.
[Foreign Language]
[Foreign Language]
So we would like to wish everyone healthy -- stay safe during this pandemic. And I hope everyone will be outperforming the market and getting better.
Okay. We'll end our investor conference today. Thank you so much for joining in.