Novatek Microelectronics Corp

TWSE:3034

Earnings Call Analysis

Q2 revenue grows 3%, Q3 guidance shows optimism

In Q2 2024, Novatek reported revenue of TWD 25.2 billion, a 3% increase from Q1 but a 17% drop year-over-year. Gross profit grew 3% sequentially to TWD 10.38 billion, with a gross margin of 41.1%, exceeding guidance. Operating income and net income also rose quarter-over-quarter but fell annually. For Q3, Novatek forecasts revenue between TWD 27.4 billion and TWD 28.4 billion, with gross margins of 38% to 40% and operating margins of 20% to 22%. Improvements stem from robust smartphone demand and cost control measures amidst ongoing market recovery【6:0†source】【6:1†source】【6:7†source】.

Solid Q2 Performance with Moderate Growth

In the second quarter, Novatek reported robust financial results. The company achieved a quarterly revenue of TWD 25.2 billion, which aligns closely with their guidance range of TWD 24.4 billion to TWD 25.5 billion. This marked a 3% sequential growth, although a 17% drop from the high revenues seen a year ago .

Comprehensive Financial Metrics

Novatek's gross profit for Q2 was TWD 10.38 billion, also showing a 3% quarter-over-quarter increase but an 18% decline year-over-year. The gross margin stood at 41.1%, surpassing the guidance range of 38.5% to 40.5%, and slightly above the first quarter's 41.06% . Operating income for the quarter was TWD 5.5 billion, which represented a 7% sequential rise but a significant 27% year-over-year decrease .

Net Income Improvement

Net income for the quarter amounted to TWD 5.4 billion, reflecting a 10% increase from the previous quarter. This improvement was partly due to a lower tax rate and higher non-operating income. However, there was still a 21% decline compared to the same period last year .

Segment Performance Breakdown

The revenue breakdown showed that the SoC (System on Chip) segment remained the largest, accounting for 42% of total revenue, an increase from 39% in the previous quarter. The small-to-medium-sized driver segment contributed 33%, down from 36% in Q1, and the large-sized driver IC segment stood at 25%, slightly up from 24% .

Strong Cash Position and Operating Expenses

Novatek continues to maintain a solid cash position, with cash and cash equivalents increasing by 9% quarter-over-quarter to TWD 62 billion. Operating expenses were well-managed, totaling TWD 4.88 billion for the quarter, which is relatively flat compared to the first quarter but down 4% year-over-year due to effective cost control .

Third Quarter Guidance

Looking ahead, Novatek has provided strong guidance for Q3 2024, with expected revenues ranging from TWD 27.4 billion to TWD 28.4 billion. Gross margins are projected to be between 38% and 40%, and operating margins are expected to be in the 20% to 22% range. The company anticipates a seasonal boost in smartphone sales and inventory restocking ahead of new product launches, contributing to these projections .

Challenges in Q3 and Market Dynamics

Despite the positive outlook, Novatek is cautious about several challenges. These include potential ASP (average selling price) erosion for certain products, rising material costs, specifically the increase in gold prices, and ongoing competition in the market. Smartphone driver ICs are expected to face significant pricing pressure, although efforts to optimize costs and introduce new designs should help maintain margins .

Strategic Focus and Recognition

The company remains focused on its ESG (Environmental, Social, and Governance) initiatives and was recognized by the Harvard Business Review, reinforcing its commitment to sustainable business practices. Additionally, Novatek has restructured its Board of Directors, achieving a higher ratio of independent and female directors .

Future Developments and Technology Advancements

Looking further ahead, Novatek is investing in advanced technology, including 4- and 5-nanometer chips, which, despite higher development costs, are critical for future competitiveness. The company is also developing OLED TDDI (Touch and Display Driver Integration) solutions expected to enter mass production by mid-2025, underscoring its commitment to innovation and market leadership .

Earnings Call Transcript 2024-Q2

[David Chen, executive]

[Foreign Language] Good afternoon, everyone. Thank you for joining Novatek 2024 Second Quarter Online Earnings Call. This is David Chen, Vice President and Company's Spokesperson. I'll be the host for today's conference. Joining me on the call today are Vice Chairman, Mr. Steve Wang; our CFO, Mr. Chou; and IR Director, Tony and [ Ivan. ]

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, our Vice Chairman, will provide more details on our Q2 results and 2024 Q3 guidance.

Following that will be our Q&A session. Currently, we have already received some questions from our investors. And if you have any further questions you would like to ask, please send them to us online and we will process and read out the questions one at a time, in Chinese and English. And our team will try our best to answer all your questions, first in Chinese and then translated into English later.

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

[Tony Tseng, executive]

Thank you, David. This is Tony. Let me start with our second quarter financial results. And the first page will be the safe harbor notice. Please take a look. Let's start with our financial results. The first page highlights our quarterly revenue. Our second quarter revenue of TWD 25.2 billion, was at the high end of our guidance of TWD 24.4 billion to TWD 25.5 billion. This is also a sequential growth of 3%, but still down slightly around 17% year-over-year from a high level a year ago.

Now the second page is our gross profit. Our second quarter gross profit of TWD 10.38 billion, also slightly up 3% quarter-over-quarter, but still down around 18% year-over-year from TWD 12.6 billion a year ago.

Now this page show our gross margin trend for second quarter as well as quarter-over-quarter trend and year-over-year trend. Our second quarter gross margin of 41.1%, once again exceeded our guidance of 38.5% to 40.5%. Also, this is up slightly quarter-over-quarter from 41.1% in first quarter, but slightly down from 41.7% a year ago. Now let's look at our operating expense. Our operating expense of TWD 4.88 billion in second quarter is flattish to slightly down quarter-over-quarter to TWD 4.9 billion in first quarter and also down around 4% year-over-year due to our good cost control.

Now let's look at our operating income. For second quarter, our operating income of TWD 5.5 billion increased 7% quarter-over-quarter, but still down 27% from high level of TWD 7.55 billion a year ago. Now let's look at our operating margin trend. Our second quarter operating margin of 21.8% once again exceeded our guidance of 19% to 21% and also slightly increased quarter-over-quarter from 21.06% in first quarter, but still down from close to 25% a year ago.

Now let's look at our net income. For second quarter, our net income of TWD 5.4 billion increased around 10% quarter-over-quarter from first quarter due to some help from lower tax rate and also higher nonoperating income, but still down slightly over 21% year-over-year. Let's look at our EPS. Our second quarter EPS of TWD 8.86 increased TWD 0.82 from first quarter, but still down from a high level of TWD 11.29 a year ago. Now let's -- to look at our overall income statement for second quarter compared with first quarter and a year ago, as we just highlighted.

The next page shows our first half income statement compared with a year ago, first half 2023. Look at the revenue line. The revenue TWD 49.66 billion down around 9% year-over-year due to the high base of our second quarter last year. Gross profit TWD 20.4 billion in the first half this year, also down slightly over 10% year-over-year. Operating expense slightly increased over 2% year-over-year. Therefore, operating income of TWD 10.6 billion still down 19% year-over-year. The net income of TWD 10.3 billion, also down 11.5% year-over-year. The first half EPS of TWD 16.9, down TWD 2.2 from a year ago.

Let's also look at our revenue breakdown for the second quarter. For second quarter, once again, SoC, the largest business segment accounting for 42% of revenue, is up from 39% a year from first quarter. Then the small medium-sized driver accounting for 33% of second quarter revenue, down from 36% in the first quarter. Lastly, the LDDIC, the large-sized driver IC, accounting for 25% of second quarter revenue, up from 24% in first quarter. We also just released our July revenue. July revenue of TWD 9.27 billion, which is still down about 4% year-over-year due to a high base a year ago, but see a moderate month-on-month growth of 9.5%.

Also looking at our revenue breakdown for the July revenue, SoC, once again, accounting for over 40% of the revenue in July. This page shows our monthly revenue trend for 2023 and the first 7 months of 2024. As you can see TWD 9.27 billion for July is the highest month year-to-date for 2024. This is also a brief summary for key items for our balance sheet as of second quarter. Cash and cash equivalent increased around 9% quarter-over-quarter to TWD 62 billion. We continue to have a very strong cash position. Accounts receivable of TWD 18.6 billion also increased 9% quarter-over-quarter, down 9.5% year-over-year and mainly due to moderate revenue growth in the second quarter. And for the inventory, inventory of TWD 9.4 billion in second quarter increased slightly over 3% quarter-over-quarter due to the high seasonality for end of second quarter and into the third quarter.

Now I'll pass the call back to David.

[David Chen, executive]

Thank you, Tony. The following is a recap of our recent major events, and our 2023 ESG report is newly published and is ready for download and we have the link below for Chinese and English version. And we have newly elected our Board member. And during this process, we have strengthened the structure of the Board of Directors by increasing the ratio of Independent Directors over 60%, and also increased the ratio of female Director to 50%. And Novatek also obtained the ASPICE CL2 certification, making it the world's first automotive TDDI chip manufacturer to receive this certification.

Next, Novatek is also selected as a constituent stock of FTSE4Good TIP Taiwan ESG Index and also the Taiwan High Compensation 100 Index and also the Taiwan Employment Creation 99 Index and also the Corporate Governance 100 Index. And next, we're very honored and happy to share with you that our Chairman, Mr. T.S. Ho was awarded the Top 1 best-performing business leader by the Harvard Business Review among the Taiwan Top 100. And this is not just a recognition of our financial performance, but also a recognition of our ESG effort for the past many years. And for further ESG related information, you're welcome to visit our website as below.

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]

[Interpreted] Okay. Tony just reported our Q2 results. And as you can see, the revenue for the second quarter revenue was increased by 3.3% quarter-over-quarter. And this is mainly due to the aggressive pull-in of TV panels and the increase in SoC-related demand. And this is pretty in line with our guidance of TWD 24.4 billion to TWD 25.5 billion. And as for second quarter margins. Second quarter gross margin is 41.14%. Q-o-Q improved by 0.05 percentage points. And this is mainly due to the cost reduction and better-than-expected NRE income.

And as for the 2024 Q3 outlook. Currently, the overall semi is in the process of recovery, but the recovery process is lower than expected. So moving forward, we need to keep watch on the developments in the Middle East and the outcome of U.S. presidential election and its potential impact, both on global economy and on the high-tech industry. And Novatek currently is expecting a Q3 smartphone to have a seasonal growth and anticipating inventory restocking for new model launch, thus, the Q3 revenue will be better than Q2. And based on the above, our Q3 guidance will be as follows: Revenue will be TWD 27.4 billion to TWD 28.4 billion at an exchange rate of $1 to TWD 32.5. Gross margins will be around 38% to 40% range; and operating margins, 20% to 22% range.

Thank you, Steve, for the guidance. Next, we will move on to Q&A sessions. And please be reminded if you have any questions, do send it to us online. So I'll hand over the time to Tony to look at the questions and some of the questions we already have on hand. We can start with that.

[Tony Tseng, executive]

[Interpreted] Could management share the view on the sequential trend across major applications into the third quarter?

[David Chen, executive]

Well, looking at some of our major segments, what we see now is that, first of all, looking at the TV side, due to the TV panel price increased in the first half, there was some pull-in during that period. And thus, they expect the shipment in the second half to be down, expecting Q3 will be down in Q3. And as for monitor, we are expecting it to decline in Q3, but the gaming monitor models relatively are better and should grow. As for notebook, it's kind of flattish. And for the automotive, expect inventory adjustment due to lower demand. And as for smartphone, demand is improving due to the year-end seasonality.

[Tony Tseng, executive]

[Interpreted] Consequently, could you also provide your quarterly revenue trend across your 3 business groups?

[David Chen, executive]

Yes. Based on the guidance that we gave, we're expecting smartphone TDDIC revenue will increase quarter-on-quarter the most. This is mainly due to the preparation for the new OLED phones. And as for SoC, it will increase slightly Q-o-Q. But for large panel driver, it will be relatively flat.

[Tony Tseng, executive]

[Interpreted] Could you also comment on your smartphone driver IC shipment to panel customers in China for third quarter in terms of the quarter-over-quarter trend?

[David Chen, executive]

The smartphone TDDIC shipment to our panel customers in China will increase quarter-on-quarter in Q3, largely due to the launch of new OLED models. And as for the TDDI, we're expecting it to increase slightly.

[Tony Tseng, executive]

[Interpreted] Given your strong momentum for smartphone driver IC in quarter 3, could you also give more color from the second half?

[David Chen, executive]

Well, as you know, the demand for smartphone is very dynamic and usually, suppliers need to adjust inventory accordingly. But for us, we do see there's a chance that the second half shipments should be better than the first half.

[Tony Tseng, executive]

[Interpreted] What has caused your soft revenues for smartphone driver ICs over the past couple of quarters?

[David Chen, executive]

The -- some of the reasons for the softness in the demand for smartphone, number one is due to competition, there was some price erosion that basically impacted our revenue. And secondly, the weaker demand in Q2 also contributed to weakness. And also the product mix. As you know, the OLED TDDI, in order to cost down some of our customer actually switched from RAM to RAM-less and the ASP for RAM-less is relatively lower than the RAM and thus impacted our revenue.

[Tony Tseng, executive]

[Interpreted] Given the ramp-up of 28-nanometer high-voltage foundry capacity from different suppliers, will that cause the impact to Novatek?

[David Chen, executive]

As mentioned in the past, for Novatek, basically, we'll continue to evaluate and adopt any foundry supply that are competitive. And as for OLED panel specification, we can see that it is continuing to evolve and enhance its performance. So IC design capability is also becoming the key factor in winning this race.

[Tony Tseng, executive]

[Interpreted] The company mentioned about the competition at entry to mid end segment of smartphone OLED drivers before. Could you also provide more updates?

[David Chen, executive]

Yes. I mean we are continuing to seize the competition at the entry level of the OLED TDDIC. But at the same time, as we mentioned earlier, we are also seeing the OLED panel technology continue to evolve and thus need higher-performance chips to support to meet that kind of requirements. And as for Novatek strategy, our strategy is to improve the design capability, such as developing more better IPs. And as you can see, that the panels move for LTPS to LTPO, et cetera. So we need to have different design capability in IP to meet those demands.

And also, we're also trying to best to develop value-added and differentiated products. For example, like lower power consumption, like higher picture quality like, for example, Demura. How can we resolve those Demura issues. And at the same time, we are also optimizing the product portfolio to support our customers. And also very important, as you can see that how to enhance ourselves to become a resilient supplier, and that's also very important.

[Tony Tseng, executive]

[Interpreted] Congratulations to your penetration into a new customer. However, we also heard its supply from previous models has recently received the qualification of the new model. How will that impact the order allocation? And what will cause the offerings in the future?

[David Chen, executive]

As you know, we do not make any comments on any particular specific customers or competitor. But for Novatek, we'll continue our efforts in improving the design capability, our product quality and our mass production capability to earn and secure our customers' trust. And that's what we did in the past many years.

[Tony Tseng, executive]

[Interpreted] Given the rising penetration of AI PCs at the smartphones, how will Novatek benefit from this opportunity?

[David Chen, executive]

For AI PC or AI smartphone, the new function and features will definitely trigger the replacement demand. So that will be very positive for our growth. At the same time, there will be higher demand for better display quality and particularly related to power consumption and other picture quality-related specs.

[Tony Tseng, executive]

[Interpreted] What percentage of your revenue in first half came from ASIC product? And also, for which product line? Could you also provide some growth or revenue target for your ASIC product? Also, wonder if your ASIC product enjoys higher-than-average gross margin?

[David Chen, executive]

The custom chip demand, actually, just arises from our customer needs for product differentiation. And currently, Novatek ASIC business, both driver ICs and also on the SoC product line. And as for the ASIC business, we mentioned in the previous investor conference, that we're expecting ASIC business to grow Y-o-Y in 2024, and we maintain that kind of views. And as for the margins, whether it is relatively better? The answer is, yes.

[Tony Tseng, executive]

[Interpreted] Given you already make production of 6-nanometer products, could you also provide the timetable for your 4- and 5-nanometer and common product? Also, wonder how will this impact your competitiveness? Also, could you provide some guidance for the associated expense compared with the previous version of 6- and the 12-nanometer product?

[David Chen, executive]

Well, as you know, the adoption of the advanced process node and the advanced packaging, and this is very critical to long-term product development and our future ASIC business opportunity. And so we're working on it. And as for the cost, the development cost for 5- and -- 4- and 5-nanometers are definitely higher than those of the 6-nanometer.

[Tony Tseng, executive]

[Interpreted] There are still some follow-up questions on the OLED driver business. Could you also give more comment on, first, your OLED TDDI timetable and also any expectation for the penetration? And two, could you also give us more color on your node process into the FinFET timetable?

[David Chen, executive]

For Novatek, we'll continue to develop a series of differentiated product portfolio to meet customer needs such as RAM, RAM-less, OLED TDDI. And as for the -- our overhead TDDI, this is under development, but we expect to enter mass production in the second quarter of next year 2025. And as for the high-voltage FinFET process node, we will adopt it in a timely manner depending on our customers' needs.

[Tony Tseng, executive]

[Interpreted] You have mentioned about a lot of things about your smartphone driver IC business. Could you also give some color for your other OLED related business?

[David Chen, executive]

In addition to the smartphone OLED TDDI, the driver IC, we have also introduced and we continue to develop other related OLED, no matter it's driver IC or timing controller for TV applications, for IT applications and for automotive. And at this moment, all the schedules are pretty much on track. However, the revenue for these OLED products' contribution will be limited in 2024.

[Tony Tseng, executive]

[Foreign Language].

[David Chen, executive]

And as for all these products, even though the contribution in 2024 is limited, but we do have expectation for the contribution moving forward.

[Tony Tseng, executive]

[Interpreted] As you mentioned at the beginning of the call, recovering pace of the semiconductor industry is slower. Does Novatek expect revenue to still grow for the quarter into quarter 4?

[David Chen, executive]

Well, as we all know, the recovery of the semiconductor industry is very much related to the overall macroeconomic and particularly for consumer electronics. And based on the current observation, as we enter Q4, we're entering into the production low season. But for Novatek, we still expect the second half revenue to be better than the first half.

[Tony Tseng, executive]

[Interpreted] Your second quarter gross margin once again exceeded the upper end of your guidance. What are the major sectors and how did NRE helped? And how about the gross margin trend across 3 business group quarter-over-quarter?

[David Chen, executive]

The gross margin upside actually came from the cost reductions and higher-than-expected NRE. And as with gross margin across our main product line -- product group, the gross margin, not expecting too much changes. So the changes will be very limited.

[Tony Tseng, executive]

[Interpreted] Why is your third quarter gross margin midpoint guidance is low than the result in the second quarter?

[David Chen, executive]

Okay. The -- there are 3 main reasons. As for the second -- the third quarter margin guidance because there are some ASP erosions for certain products and the NRE also not factored in, in Q3 guidance. And also, the last is the material cost. As you know, for the driver, we use a lot of gold. The gold price went up in Q3 and also the [indiscernible] costs also went up. But what we see here is that the gross margin for smartphone driver IC will increase slightly quarter-on-quarter. But as for the large panel driver and SoC, the margin will be down slightly.

[Tony Tseng, executive]

[Interpreted] Also, what -- which products are facing more pricing competition into third quarter?

[David Chen, executive]

So far, what we see is that the driver IC product line is facing relatively more pricing pressure in Q3. However, we also target to maintain or even enhance our gross margin by more effective cost down efforts and also some new designs.

[Tony Tseng, executive]

[Interpreted] Would you rank your gross margin amongst 3 product lines, namely SoC, large-size driver and a small, medium type driver?

[David Chen, executive]

Basically, the SoC-related product enjoy higher gross margin.

[Tony Tseng, executive]

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

[David Chen, executive]

The nonoperating income of TWD 619 million in second quarter, largely came from interest income of TWD 372 million and then ForEx gains of TWD 146 million and then dividend income of TWD 90 million, 9-0 million.

[Tony Tseng, executive]

[Interpreted] What are your inventory days as of second quarter 2024? Could you also provide some comments on your inventory dollar or days into the end of quarter 3?

[David Chen, executive]

The inventory days of -- for second quarter 2024 were 67 days, flat from first quarter. While the dollar amount of TWD 9.4 billion rose slightly by TWD 0.31 billion quarter-on-quarter. The inventory dollar at the end of third quarter will be at the similar level as of second quarter and staying healthy.

[Tony Tseng, executive]

[Interpreted] Why did your operating expense in second quarter decreased from first quarter? Would you also provide your updated OpEx dollar and the ratio guidance for 2024? Could you also provide some comment on impact following your investment of 4- and the 5-nanometer?

[David Chen, executive]

The operating expense dollar amount in second quarter is similar to first quarter while OpEx ratio decreased slightly due to a 3.29% of sales increase. The OpEx ratio for 2023 was 17.7%. And looking into 2024, OpEx amount will not change much Y-o-Y despite higher R&D, while OpEx ratio is subjected to the revenue size. The investment in advanced node will increase the R&D expense, and that's for sure. And the dollar amount will depend on the product specifications.

[Tony Tseng, executive]

[Interpreted] What caused your lower tax rate in the second quarter compared with first quarter? Could you also provide your updated tax rate guidance for 2024?

[David Chen, executive]

The tax rate in second quarter was lower than first quarter, and this is mainly due to higher benefits of new tax act. And for the same token, the tax rate in 2024 will be around 16% compared with 17.4% in 2023.

[Tony Tseng, executive]

[Interpreted] Given the payout ratio of 83% for 2024, which is slightly higher than the previous year, will lease ratio further increase? Will you also consider to increase the payout frequently?

[David Chen, executive]

The payout ratio has been around 80% to 85% in the past years. And it's not expected to change significantly in the future. However, the actual payout ratio is still subjected to the Board meeting. And as for the frequency, Novatek has no plan to increase the frequency of cash dividend payout at this moment. And yes, that's -- we covered most of the questions, and we'll see if there's any further questions that's not covered.

[Tony Tseng, executive]

[Interpreted] Just wonder if the company can provide some outlook for potential contributions from the foldable phones?

[David Chen, executive]

Regarding the foldable phones, yes, we have developed a SaaS solution for our customers and it has been adopted to some of the models. But currently, the penetration rate for the foldable phone is still low, relatively low.

Okay. I think we've covered most of the questions. So thank you so much for your time, and hope to see you again next quarter. [Foreign Language] Thank you so much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]