Novatek Microelectronics Corp

TWSE:3034

Earnings Call Transcript 2022-Q2

[David Chen, executive]

[Foreign Language] Dear investors, analysts and media, good afternoon. Welcome to Novatek 2022 Second Quarter Online Investor Conference. This is David Chen, Vice President and Company Spokesperson. I'll be the host for today's conference. We are happy to see you all again online. Hope all is well. Please be reminded that all questions can be sent in by text during the conference.

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 future 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 online. Our IR Director, Mr. Tony, will process and read out investor's questions one at a time, both in Chinese and English. And our Vice Chairman, Steve Wang; our CFO, Mr. Chou; and myself will answer all your questions in Chinese and will be translated into English. As usual, please take a look at our safe-harbor notice.

So let's start with our 2022 Q2 financial highlights. Our net sales in Q2 was NTD 31.46 billion, down Q-o-Q 13.83% from NTD 36.51 billion, Y-o-Y down 7.77% from NTD 34.11 billion in Q2 2021. Our net gross profit in Q2 was NTD 14.98 billion, down 19.12% from last quarter NTD 18.52 billion and down 12.17% from NTD 17 billion in Q2 2021. Our gross margin in Q2 was 47.62%, down 3.11 percentage points Q-o-Q from 50.73% and Y-o-Y down 2.71 percentage points from 50.33%.

Our operating expense in Q2 was NTD 5 billion, down 4.69% Q-o-Q from NTD 5.24 billion, Y-o-Y down 3.42% from NTD 5.18 billion. Q2 operating income was NTD 9.99 billion, down Q-o-Q 24.82% from NTD 13.28 billion, Y-o-Y down 16.74% from NTD 11.99 billion. Our operating margin in Q2 was 31.74%, down 4.63 percentage points Q-o-Q from 36.37%, Y-o-Y down 3.42 percentage points from 35.16%. Q2 net income was NTD 8.49 billion, down Q-o-Q 23.78% from NTD 11.14 billion, Y-o-Y down 13.28% from NTD 9.79 billion. Overall Q2 EPS was $13.95 versus last quarter $18.3, a Q-o-Q decrease of $4.35. And last year, Q2 EPS was $16.08, a Y-o-Y decrease of $2.13.

Please take a look at our Q2 consolidated income statement. Let's look at our first half Y-o-Y numbers. Our first half net sales was NTD 67.97 billion, up 12.39% Y-o-Y from NTD 16.48 billion. First half gross profit was NTD 33.51 billion, Y-o-Y up 16.86% from NTD 28.67 billion. Operating expense in first half was NTD 10.24 billion, up Y-o-Y 8.14% from NTD 9.47 billion. First half operating income was NTD 23.26 billion, up 21.15% Y-o-Y from NTD 19.2 billion. First half net income was NTD 19.62 billion, up 25.29% Y-o-Y from NTD 15.66 billion, EPS in the first half was $32.25, a Y-o-Y increase of $6.51 from $25.74.

Next is our Q2 sales breakdown by product line. SMDDIC, which is small and medium driver, accounts for 39% of our total sales. SoC, which is all nondriver IC, accounts for 33% of our sales. And the third is the large display driver IC, which is -- account for roughly 28% of our total sales. We have just released our July sales, which is NTD 6.87 billion, month-on-month down 15.84%, Y-o-Y down 45.07%. SoC accounts for 34%, and the display driver IC accounts for 66% of the total revenue for July. Next is the monthly sales compared to 2020 to 2021 for your reference.

Next, let's look at other key financial numbers. Our cash and cash equivalents in Q2 was NTD 70.26 billion, increased Q-o-Q by 3.61% from NTD 67.82 billion, Y-o-Y increased by 94.56% from NTD 36.11 billion.

Accounts receivable. Q2 was NTD 21.41 billion, decreased Q-o-Q 10.52% from NTD 23.83 billion and Y-o-Y slightly up 0.04% from NTD 21.4 billion. Our inventory level, Q2 was NTD 18.84 billion, Q-o-Q up by 15.31% from NTD 16.34 billion, Y-o-Y up 74.09% from NTD 10.82 billion. Our short-term loans Q2 was 0.

The following slide is a recap of our recent major events: our AGM has approved the distribution of $51.5 per share cash dividend. Ex dividend record date was on July 12, and the dividend will be paid on August 12, 2022.

And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on our Q2 results and Q3 guidance. [Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Okay. Let me just translate what just our Vice Chairman just said. For 2022, Q2 revenue was NTD 31.46 billion and was lower than our guidance at NTD 34.5 billion and Q2 down 13.8%, and this is mainly due to increasing global inflation, pandemic lockdowns and the traffic drop in consumer-related product demand, for example, smartphone, TV, notebook. And as for the Q2 margins, it was 47.62%, which is in line with our guidance, but Q-o-Q decreased by 3.11 percentage points, and this is mainly due to cost increase and ASP erosion.

Looking at the Q3 outlook. The global inflation, interest rate hike and pandemic, et cetera, continues to impact our third quarter, and macroeconomic uncertainty has led to the weak demand in consumer-related products. And on the inventory level, as you know earlier, there was supply chain shortage, mismatch, transportation, harbor ship oversubscriptions and port backlog, all these issues have caused the channel inventory to pile up. So the brand and OEM players are aggressively making inventory adjustment and thus turning more conservative.

And on power maker side, we can see that they're also cutting down capacity and lowering down the utilization rate to cope with the weak demand. And the above scenario actually has impacted Novatek's business, and we're expecting our revenue moving forward to Q3 to decline. And so our guidance for Q3 revenue will be between NTD 19.1 billion to NTD 20.3 billion at an exchange rate of [ $1.1 to $29.8 ]. And the gross margin will be within the range of 42% to 44% -- gross margin will be from 42% to 44%. And the operating margins will be from 23% to 25% range, 23% to 25% range.

Thank you Steve for the Q3 guidance. Let's move on to Q&A session. Please be reminded to send in your questions. So Tony will be collecting the questions, and we have already have some questions on our hand, and we'll try to answer those questions first. So Tony?

[Tony Tseng, executive]

[Foreign Language].

[David Chen, executive]

Yes, management has already mentioned about overall trend for revenue and gross margin in the second quarter. Just wondering if you can provide more color for your 3 business lines in terms of quarter-over-quarter trend as well as the margin trend in the second quarter.

Well, in the second quarter, the revenue was mostly impacted by the display DDIC and [indiscernible] the smartphone PDDI. And as for the SoC, it's relatively stable. And the volume was mainly impacted by ASP erosion and the cost increase.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Operating margin was 31.74% in second quarter, lower than the guidance of 32% to 35% because of the major reason. While the Q2 OpEx decreased Q-o-Q by about NTD 246 million. Our revenue was lower than guidance. And this, in turn, affected our OP margin missing the guidance.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

We noticed that our operating income in second quarter stayed at a high level of NTD 512 million compared with NTD 485 million in the first quarter [indiscernible]. While the Q2 nonoperating income of -- maybe ForEx gain of NTD 407 million and interest of NTD 96 million.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

We noticed inventory dollar further increased by 15% quarter-over-quarter to $18.8 billion, under which means how many inventory days and [indiscernible] product. While based on the inventory level, Q2 the inventory will be around 103 days. And looking at the inventory level, management, I think that it should be manageable. It shouldn't be a problem.

On the overall inventory level maybe due to the longer cycle time, which takes about 3 to 4 months. And under the current weak demand, it will take around 2 quarters to adjust the inventory level. But basically, we'll be strategically maintaining a slightly higher-than-normal level of inventory because of the -- considering the supply risk due to pandemic. So the main inventory level of the display-related products and we have reviewed our current inventory level and expect [indiscernible] the market. It shouldn't be a problem.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Well, as for the second half, the demand, we still need to look at the overall macro economy. Basically, looking at the Q4, it will really depend on the market demand recovery. And what we see at this moment that a lot of the OEM and brands to launch new products in order to stimulate the market demand. So hopefully, Q3 will be the lowest point of 2022.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

We all know that the TV demand has declined earlier than the other product lines. So it is relatively at a lower point. And we're expecting in the fourth quarter that TV demand would get better. And as for the smartphone, there will be new smartphone model launch in Q4, and we need to monitor the sell-through situation. And as for the monitor this year and local inventory adjustment will extend to Q3 and Q4.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

While working with our customers, we need to keep a very close kind of relationship and working closely with our customers to maintain and try to maintain a certain degree of flexibility. For example, extend execution period or replace with new products. So these are some of the flexibility that we're working with our customers.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Which product line will still grow revenue or units year-over-year positively in year 2022? Well, there are that we still expect growth, and there will be automotive and industrial application of image-related product like the surveillance should expect growth this year.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Also, I wonder if the management can share your mid- to long-term view for OLED, automotive and other new products.

So we maintain a bit long-term positive view on our new product line. And for example, looking at the OLED, we are expanding those -- the OLED to other new applications, for example, TV, tablet, notebook, [indiscernible] and controller. And for example, automotive side, beside DDIC, [indiscernible], and we are already shipping to Tier 1 customers. And again, not just a driver, but also for timing controller and also to the EV vehicles. And also, we are seeing a lot of opportunities on the VR and AR. And it's already in mass production now. And of course, we also see a great opportunity in the ASIC product, which a lot of the customers have that special needs and we can provide them the kind of basic products.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Now we switch the question to about the supply chain. First is how about [indiscernible] in the second half of this year for both DDIC and SoC? Any chance to lower the cost?

[Steve Wang, executive]

Well, the overall supply and demand on the company side is normal. But there are some orders that need to be put in for some special products. Currently, we are working closely with our vendor to survive the storm together and expect some cost down for certain products.

[Tony Tseng, executive]

[Foreign Language].

[David Chen, executive]

Also I wanted to know your view on the foundry demand supply for next year for both DDIC and SoC.

Well, that will really depend on the overall demand. Currently, the supply is normal, and only certain nodes have supplied tightness that we're negotiating with our suppliers.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Also wonder how the management executed or negotiate with suppliers for your contract.

We'll continue to negotiate with our supplier and try to maintain degree of flexibility. But as for our Q2 and Q3 numbers, actually, we have already booked provisions in Q2. And for Q3 guidance, we have also included related provisions.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

[indiscernible] Also, wonder how about the demand/supply situation and the [indiscernible] for DDIC and SoC, also wonder any chance to lower the cost in the second half of this year.

All the supply and demand on the back end currently is normal. And we're expecting partial product line to have some cost reduction. Again, we're working closely with our back-end vendor in order to weather the downturn together.

[Tony Tseng, executive]

[Foreign Language].

[David Chen, executive]

Also wonder if demand/supply situation or price trend for other parts and also an inventory situation for this product -- or for this part.

As for the other parts, currently, the supply and demand is also normal, and the inventory level on our side is pretty healthy.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Wonder your gross margin will [indiscernible] if a dealer in that clear year. How about a sequential trend into the quarter 4 compared with quarter 3?

Well, we haven't provided Q4 guidance at this moment. But moving forward, we are expecting the cost out to get us to the pace of price decline. Therefore, expect our margins decline to be more moderate in Q4.

[Steve Wang, executive]

[Foreign Language].

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Maybe already mentioned about the trend for your overall company, I just wonder if you can provide more color over 3 product lines in terms of the steady cost of the net gross margin trend?

Again, the ASP costs are subjected to supply and demand. So -- but what we see now is that the SoC lines are relatively more stable moving forward to the next 1 to 2 quarters. But for the smartphone TDDI, we're expecting to have more fluctuation in terms of pricing. But for us, our main focus is to enhance the technology strength and to book more value-added products and further improve our product portfolio to enhance our gross margin.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

I wonder if management can comment on the potential impact from competitors and the [indiscernible] supply from China, particularly for DDIC business.

Well, there's a -- Novatek strength basically is in the display total solution. It's not just the drivers, but also the timing controller and [indiscernible] and is across the board from small, mid to large-sized display. And we're also expanding that to more different applications and more customer base. And I expect you know, this involves a lot of core technologies.

And as for the foundry, no matter whether here in Taiwan or in China, but we -- as long as it is more competitive or [indiscernible] process node, we'll try to adopt those nodes to maintain our competitiveness. And as for the tax, we always retain the flexibility in our product allocation depending on the demand situation.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Also, I wonder if management can provide your view on your mid- to long-term gross margin trend.

As [indiscernible] Novatek will continue to invest into technology and speed up our new product development and divert our technologies to build various new applications and also to enhance our gross margin. For example, if you look at it for the large panel, we have high-end IT applications, and we also have applications into gaming, which you need high-speed interface or high frame rate technology. And also moving to high-resolution 8K display. And then we also have the high-speed interface like the DP, the [indiscernible] 1.5 and also lead to the OLED TV.

And as for the small and medium size. And as you all know, we already launched the OLED smartphone driver, and it's already in mass production. And then we're moving this to notebook OLED and also the OLED TDDI. And then for the automotive, we have also started production of TDDI for the automotive. And of course, the new area is the AR and VR, which is also an exciting area.

And last but not the least, you can see that there is also a good opportunity and good progress in the -- some specific ASICs, where a lot of our customers that they have need and are making good progress in those areas. And as for the SoC side, a lot of the TV are moving for 4K secured to high-end [indiscernible]. And then we're also seeing a lot of good opportunity in the image-related area, for example, the surveillance.

And from the ASICs for the SoC side, we have -- a lot of this is picture quality and also several of those that relate to very high-speed interface. And we are launching a lot of these new technology. And all these will together help to enhance the value that we can provide for our customers and, of course, in turn, help us to improve our margins.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

I wonder if management can provide your expectation for inventory dollar or days at the end of quarter 3 [indiscernible] to a more normal level?

As you know, we started inventory adjustment in Q2. So we expect our inventory dollar to decline in Q3 and further decline in Q4. But as we mentioned earlier, we'll maintain a slightly higher-than-normal seasonal level of inventory in order to cope with the supply risk.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Which cash position, in addition to the dividend distribution, do you have any other plan?

Well, the cash position -- mainly we're going to invest into long-term R&D to broaden our product portfolio. We also need to maintain a certain level of cash for future needs.

Yes. Tony, I think you have some of the questions. If you do have any further questions, please.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

With your third quarter guidance, just wonder if management can provide more color by 3 business lines as well as our other units and the ASP trends.

As for the revenue, we're seeing that the March channel driver will have a bigger decline. And as with SoC, the decline rate will be relatively smaller. And as far as the pricing ASP, again, we mentioned earlier, the SoC ASP will become stable. But for the smartphone, TDDI, we will have a bigger fluctuation.

So remind all of you again, if you have any further questions, please send them.

[Tony Tseng, executive]

[Foreign Language].

[Steve Wang, executive]

[Foreign Language].

[David Chen, executive]

Well, the -- what just Steve just mentioned is that the second half, the revenue correction is mainly due to the macro and the inventory adjustment. And basically, what Steve just mentioned is that there is no change in our competitive position. And we are maintaining our technology needs and is confident that we'll be back on track soon.

So if there is no further questions, then we'll end our second quarter investor conference here. And thank you so much for joining in, and hope to see you again next quarter.

[Steve Wang, executive]

[Foreign Language].

[Tony Tseng, executive]

[Foreign Language].