Novatek Microelectronics Corp

TWSE:3034

Earnings Call Transcript 2023-Q2

[David Chen, executive]

[Foreign Language] Good afternoon, everyone. Thank you for joining NOVATEK 2023 Second 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 our Vice Chairman, Mr. Steve Wang, our CFO; Mr. S. C. Chou; and our IR Director, Tony Tseng. And please be reminded that all questions can be sent during the conference. The agenda for today's event will be as follows. First, our IR Director, Tony will be reporting Novatek's second quarter results in English. After that, Steve will provide more details on 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 online. Tony will process and read out the investor questions one at a time, both in Chinese and English. And we'll try our best to answer all your questions in Chinese and will be translated into English later.

Now I'll hand over to Tony, our IR Director, to report our Q2 results.

[Tony Tseng, executive]

Thank you, David. This is Tony Tseng. Good afternoon. As usual, please take a look at our [indiscernible] audit. So let's start with our 2023 second quarter financial highlights. The first one will look at the revenues for second quarter, our consolidated sales grew 26% quarter-over-quarter to TWD 30.3 million and the high end of our guidance. Our year-over-year comparison to down slightly 3.7% compared with a year ago.

Now on the next page. The next page is on the gross profit. The gross profit in the second quarter is TWD 12.6 billion 25% quarter-over-quarter, still slightly over 15% year-over-year.

Now let's look at our gross margin trends. Our second quarter gross margin reached 41.74%. [indiscernible] by quarter-over-quarter exceeded our guidance of 38.5% to 40.5%. Our year-over-year comparisons still down from 47.6% a year ago. Now let's look at our operating expense. Operating expense in the second quarter at TWD 5.1 billion increased 15.4% quarter-over-quarter and slightly up 2% year-over-year. Now let's look at our operating income.

Due to the strong growth and over operating leverage, our operating income in the second quarter reached TWD 7.55 billion, up 33% quarter-over-quarter 24% year-over-year due to a much higher revenue and margin back a year ago.

This page shows our operating margin. Our operating margin in the second quarter increased 1.38% to 34.9%, but still down from 41.74% a year ago. Now we are looking at our net income. Net income in the second quarter increased 44.6% quarter-over-quarter to TWD 6.87 billion, but still down 19% year-over-year.

Now the last slide, our income statement EPS [indiscernible] of 11.29% increased TWD 3.48 quarter-over-quarter total 2.6 a year ago. Now this is a summary for our quarterly income statements or [indiscernible] operating expense and the cost of PPA. So we already highlighted in the previous page. This page shows the first half result. Revenue in the first half reached [indiscernible], down 20% year-over-year. Gross margin in the first half, down 32% year-on-year to TWD 22.7 billion. Operating expense also down 7% year-over-year to TWD 9.5 billion. As for operating income, also down 43% year-over-year to TWD 13.2 billion. Net income decreased 40.76% year-over-year to TWD 11.6 million. for EPS, also down TWD 3.15 to TWD 19.1 in the first half of Budapest.

This chart -- please page shows a revenue breakdown for the second quarter of sequential growth, small medium Driver IC, so and DDIC up to the biggest segment with 37% of revenue. SoC in this quarter percentage down slightly to 36% for L-DIC means large-sized driver IC, the revenue accounted for 27% in the second quarter, up slightly from 26% in the first quarter. We just released our July revenues. Our July revenue of TWD 697 billion is down slightly 4% from the June level increased 40.9% year-over-year. If you look at our revenue rate ACL decrease is down slightly and accounting for 38% of overall revenue and drive accounting for 62% of overall revenue. This shows our many revenue trends over the past 9 months since the beginning of 2020. But you can see this chart, we hit the trough level during the third quarter last year and start to recovery. On a quarterly basis, we already posted 3 quarters in a row on a sequential growth.

This is the key summary for some of our [indiscernible] on the cash side, the cash increased 11.3% quarter-over-quarter to TWD 63.4 billion at the end of second quarter. Account receivables due to the strong revenue growth also increased 21.3% quarter-over-quarter to TWD 20.6 billion. [indiscernible] down slightly year-over-year for the one inventory, our inventory are further down slightly to TWD 10.5 billion compared with TWD 10.6 billion a quarter ago and also down 44% year-over-year from 1 year ago. Now let me hand back to David.

[David Chen, executive]

Thank you, Tony. The following slide of our recent major events, including our ESG update. As you can see here that our AGM has approved the distribution of TWD 37 per share cash dividend and each dividend -- dividend record date on July 11, and the dividend will be paid on August 11, 2023, just a few days left. And we are very honored to be ranked in the top 5% company in 2023 among corporate governance evaluations. And then we have newly published our Novatek 2022 sustainability report, and we have provided the link here below and both Chinese and English versions are available and all of you are welcome to visit our website to download the report.

As for our Novatek commitment to renewable energy, as we have mentioned earlier, we are committed to use 50% renewable energy in 2030 and 100% renewable energy in 2050. And just an update for all of you here. In 2022, we have achieved 0.29% using renewable energy in 2023, we'll achieve at least 5% using renewable energy. And in 2025, will reach 20% using renewable energy.

And as for the clean tech products, over the past many years, we have made a lot of effort in developing clean tech products. And as you can see here that in 2022, the clean tech product has reached TWD 24.9 billion, which accounts for 22.6% of our total revenue.

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

[Steve Wang, executive]

[Foreign Language] Looking at the -- our Q2 revenue, it is up Q-o-Q by 26%. It's reached the upper part of our guidance -- and this is mainly due to the combination of the solid demand from broad-based applications and the ramp-up of new products. And as for the gross margin, it's 41%, also higher than our guidance. And this is mainly due to better product mix and cost reduction.

[Foreign Language] Looking at the Q3 outlook, we have the following observation. As mentioned by Q3, we see a sign of inflation slowing down, but the interest rate is so high. And the overall economy outlook is weaker than expected. This has impact on consumer electronics end market and the current demand is more on the conservative side. And we also see that the China post-pandemic to recovery is lower than expected, and the 618 cells is not as good as expected. And due to the full visibility, customer has tightened their inventory level and more conservative in placing orders. And we see more rush orders instead. And Novatek has been growing for the past 3 consecutive quarters, and we had a relatively higher base. So based on the above, we anticipate our Q3 revenue guidance will be as follows: revenue will be around TWD 28.1 billion to TWD 29.1 billion, and this is at an exchange rate of TWD 1 to TWD 31. And the gross margin will be around 38% to 40% and the operating margins were 21.5% to 23.5%.

And as for Novatek, the 3 main product lines, the SM DDI, which is the small and medium size, we are seeing Q-o-Q, it will grow mainly due to new product ramp-up like OLED auto DDI. And as for the SoC and LDDI both will be down Q-o-Q and mainly because of the IT demand is low, and it has impacted the high-end notebook and this basically impact our key comp timing controller business and also the large panel driver business for the high-end notebook.

So this is the update and the guidance for Q3. And now we'll move on to Q&A session. Please be reminded to send your questions. So back to you, Tony.

[Unknown Analyst]

Thank you, David. First, congratulations to your strong second quarter results and also your guidance for the quarter 3. You also mentioned briefly over but trend applications. So for quarter 3, which locations will still grow sequentially quarter-over-quarter?

[Steve Wang, executive]

[Foreign Language] So I think Tony already asked in English, okay. So I'll just first lead that. As for Novatek, the equation growth by application in Q3 includes our driver IC and the VR driver IC and then the automotive and also the TV SoC. And these [indiscernible] growth mainly due to the preparation for Q4 sales.

[Unknown Analyst]

[Foreign Language]

[Steve Wang, executive]

Conversely, for quarter 3, also [indiscernible] applications will decline quarter-over-quarter.

[David Chen, executive]

Well, for Novatek, the sequential declines for applications include IT-related product, particularly for the high-end notebook and this is due to the order adjustment and then also the TDDI, which are affected by the replacement of OLED DDIC.

[Unknown Analyst]

Thank you for your follow-up for your quarter 3 guidance. And I also wonder if you can have any preliminary revenue outlook into quarter 4 on intensive demand or inventory across major applications or could inventory cost demand application returned to normal levels at the end of quarter 4.

[David Chen, executive]

[Foreign Language] The inventory levels at customers have returned to normal. And -- but the actual sell-to at end market is critical for order pull in. So due to the macro uncertainties, the basically in 4Q is limited because customers tend to release rush orders and -- or conservative orders. So we still need to keep watching our Q4 dynamics.

[Unknown Analyst]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language] The market has been conservative or enjoy for brands in second half. However, it is late release for second quarter results, a couple of new brands such as [indiscernible] and China. Just wonder if they will cause any impact to Novatek smartphone [indiscernible] business. Well, the impact of market share shifts from handset brands should have very limited impact, given that Novatek, we have very broad and complete and very competitive product offerings.

[Unknown Analyst]

[Foreign Language] You also covered on your growth drivers for 2024, such as OLED driver for smartphones, the recovery of [ PCTV ], the opportunity for our promoted as well as AR/VR products.

[David Chen, executive]

Well, first of all, we think the OLED driver IC for smartphones, there is a good opportunity for growth next year in 2024. And then we also see the -- for the PC and notebook, there will be some replacement cycle, particularly for high end. It's on the back of AI trend. And we're also seeing that on the TV SoC side, we are expecting new customers to join in. So that will also make some contribution. And as for the automotive, we will continue to see steady growth, especially on the TDDI. And for AR, [Foreign Language] just dated, but we still have our anticipation that we will continue to grow as we move forward to next year. And last but not the least, the opportunity for display ASIC also are expected to grow moving forward.

[Unknown Analyst]

[Foreign Language] [indiscernible] percentage of revenue has come from the AI-related product, could you also provide some comments on the potential growth opportunity for AI?

[David Chen, executive]

Well, for Neurotech, we'll be more focusing on edge AI. And all of our products will include engines for edge AI, and the AI engine will help to enhance the video quality, the recognition capability and processing speed. And as for generative AI, it's still at the early stage, as the interaction and distribution between the cloud and the current loan is still under adjustment. But we do believe it will create lots of opportunities for innovative applications moving forward.

[Unknown Analyst]

[Foreign Language] Your inventory days as of second quarter 2023 were compared with first quarter based upon your inventory of TWD 10.5 billion. Also, would you provide a trend on either inventory dollar or debt into third quarter this year?

[David Chen, executive]

Well, the inventory days improved to 80 days at the end of second quarter, down from 92 days in the first quarter. And the inventory dollars at the end of Q3 is expected to decrease sequentially.

[Unknown Analyst]

[Foreign Language] As your second quarter gross margin, again, exceeded the upper end of your guidance. Could you provide the dollar amount of trend for your NRE and inventory reversal in the second quarter compared with the first quarter this year. Also, I wonder if you can provide a gross margin trend across 3 business grow in the second quarter versus first quarter.

[David Chen, executive]

Well, the -- in the second quarter, the NRE was TWD 51 million, down from TWD 265 million in the last quarter, Q1. And the Q2 reversal gain of inventory was TWD 52 million, down from TWD 260 million in Q1. And the -- regarding the gross profit margin, basically, it was helped by cost reductions and the improved product mix.

[Unknown Analyst]

[Foreign Language] Your third quarter gross margin midpoint guidance will be lower than the second quarter results.

[Steve Wang, executive]

Well, the lower margin guidance for Q3 compared to Q1, I think it's largely due to the product mix change and is the adjustment for some of our products.

[Unknown Analyst]

[Foreign Language] Why your company enjoy higher and more resilient gross margin than you're here?

[David Chen, executive]

Well, I think due to various reasons, -- as you all know, at Novatek we provide a combination of very broad product offerings like we have TV, IT, smartphone, automotive, AR/VR wearable device. So all these are very broad offerings that be able to develop to our customers. And you also care from structurally, you also can see that a lot of our products are more on the high-end side. And then we also try our best to provide one-stop shopping for our customers, and we provide them not just one chip. We provide them a total solution so that it saved a lot of their energy. And in order to provide all these broad product, better product, high-performance product, we ductal need a strong design team. And I think these are some of the reasons why Novatek able to have a better margin than our peers.

[Unknown Analyst]

[Foreign Language] Now let's [indiscernible] to the prices. The product will face more pricing pressure into quarter 3 or even second half this year, how our price trend for the other 2 product groups, such as large-sized driver and SoC?

[David Chen, executive]

Well, in general, we see the TDDI, which is used for the smartphone, they are more competitive competition in that area. So we do believe -- we do see that the ASP pressure in this TDDI will be more severe than the other. But for SoC, I think it's relatively stable. And for the large panel driver, we're seeing the [indiscernible] is gradually stabilizing because we see the gradual rebound of final parts. So we do expect the -- the large panel driver of ASP will gradually stabilize.

[Unknown Analyst]

[indiscernible] Now give us limited demand recovery in the second half for new major manufacturing costs such as [indiscernible] and packaging, continue to fall in quarter 2 or even second half or do you have other actions to reduce costs.

[David Chen, executive]

Well, regarding the cost reduction, I think the -- some part of our products have cost reduction and has been factored into our Q3 margin guidance. And in addition, on Novatek, we are reducing our cost by further diversifying the supply chain and, for example, improving our yield and then enhancing our design with better technology. So I think it's all worked together to break down the cost.

[Unknown Analyst]

[Foreign Language] Now the next couple of questions about the competition. The first one is could you also update us the demand supply situation for the driver, I think strongly into second half or even next year. Also wonder if you see any impact to your company if other foundry suppliers such as TSMC or SMIC ramp up the 28-nanometer capacity.

[David Chen, executive]

Well, the demand and supply seems a balance for the second half of 2023. While the visibility into 2024 is still limited. So we still did [indiscernible] watch. As for Novatek, we'll continue to adopt competitive and also the advanced process nodes to enhance our competitiveness.

[Unknown Analyst]

[Foreign Language] You also provide our commerce impact by competitors, particularly from Mainland China or also for your driver IC barriers lines.

[David Chen, executive]

Well, facing the competition, I think there are a few things that we can work on. First of all, we'll continue to improve our design capability to introduce the differentiated products. And then we also will continue to provide broader applications, particularly for high-end and offer a total solution and more competitive solution for our customers. And of course, we also need to have a better inventory and cost controls to support our customers.

[Unknown Analyst]

[Foreign Language] Could you provide some updates on progress for your customers in Japan, Korea or even in the States. As one big spread recently released 2022 supplier list, including Novatek, could you also comment on the product offering or even present your revenue for these cuts?

[David Chen, executive]

Well, for Novatek, our key target is to continue to broaden our customer base, and that's something that we've been working on over the past many years, and we'll continue to do so. And currently, some of the projects that we're working on is all on track and on schedule. As for the other questions that you mentioned, I think we have no comment, and we cannot comment on individual customers.

[Unknown Analyst]

Given the geopolitical test, which also percentage of manufacturing from China in terms of foundry and packaging or any mid- to long-term targets?

[David Chen, executive]

Well, I think for novated we have been working with supply in China across foundry, packaging for a number of years now. I think that our major is to -- the reason why I got China is this is to cope with our customers' needs of a resilient supply chain. So for us, we made this proper arrangement according to our customer needs.

[Unknown Analyst]

[Foreign Language] What are the major factors as operating expect specific revenue decreased quarter-over-quarter in the second quarter or first quarter. And also in your tax rate also decreased in the second quarter compared with first quarter and any tax rate guidance for third quarter even for second half this year.

[David Chen, executive]

While the Q2 operating expense rose by only TWD 679 million Q-o-Q or roughly about 15%, which is lower than the sales growth of 26%. Therefore, the year Q2 operating expense rate was down by 1.5 percentage points. As for the tax rate in second quarter, it decreased mainly due to higher incentives from [indiscernible] investment. And as for the tax rate in Q3 will be at the range of 18% to 19%.

[Unknown Analyst]

[Foreign Language] What are the major items for your nonoperating in the second quarter?

[David Chen, executive]

Well, the nonoperating income totally around TWD 721 million mainly came from a combination of interest income of TWD 335 million, or gain of TWD 274 million and dividend income of TWD 90 million.

[Unknown Analyst]

[Foreign Language] For your cash usage, do you have any other point addition to steady cash dividend also for M&A do you have any particular target in terms of technology or revenue side.

[David Chen, executive]

Well, in addition to cash dividend, our cash flow will be mainly used for long-term technology development and the expansion of the product portfolio and the introduction of new products. And the part of the cash also will be reserved to maintain flexibility when need to rise. As for M&A target, we have no solid target at this moment.

[Unknown Analyst]

[Foreign Language] [indiscernible]

[David Chen, executive]

Well, as I mentioned earlier, Novatek, we have put in a lot of effort in developing the clean tech products for our customers. And so far, as you can see from the earlier slides, our [indiscernible] in 2022 has reached TWD 24.6 billion, which is roughly about 23% of our total revenue. So we'll update these data to MSCI to help them out the latest.

[Unknown Analyst]

Given your product offering across defense product advocations also water, if you can provide some commerce industry trends into the second quarter in terms of third quarter in terms of the sequential change?

[David Chen, executive]

What we see is that on the TV side, we see it will be -- we think there will be roughly flat or even slightly down. But as for the locals I mentioned earlier, the demand is kind of weak, especially on the high end and on the gaming side Q-o-Q will be weak. And also, the monitor also will be down. And as for the smartphone side, we are seeing some of the inventory digestion. So we see as kind of flat to slightly up. And we think that OLED will be up and the TDDI will be down. And as for the resolution, the HD demand, high definition, I think we'll maintain the demand. But for the HD, I think it will be down. Basically, it will be -- part of it will be replaced by OLED -- and as for automotive, we are seeing that Q3 since in Q2, the overall China market was very weak, and now we are seeing some pickup in Q3.

[Unknown Analyst]

So-called Taiwan Chip effective recently, would you also provide comments on potential impact to Novatek?

[David Chen, executive]

As for the Q PAT, Lower Tech does welcome this Taiwan because this layer a level playing field for us to compete in the same industry globally. And we have checked some of the criteria, I think we are eligible for these incentives. So we'll definitely apply for it.

Well, we have a couple of most of the questions, so we see Tony, there's still some questions now, then I think it's about time. So we'll end our Q2 investor conference here. And all of us here would like to wish all of you the Happy Father's Day.