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Novatek Microelectronics Corp
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[Foreign Language] Dear investors, analysts and media, good afternoon. Welcome to Novatek's 2022 Third Quarter Online Investor Conference. My name is David Chen, the Vice President and Company's spokesperson. I'll be the host for today's conference. We are so happy to see you all again online. 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 third quarter results in English. After that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q3 results and Q4 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 Tseng, will process and read out the investor questions one at a time, both in Chinese and English. And our Vice Chairman, Mr. Steve Wang; and CFO, Mr. Chou; and myself will answer all your questions in Chinese and will be translated into English thereon. As usual, please take a look at our safe harbor notice.
So let's start with our 2022 Q3 financial highlights. Our net sales in Q3 was NTD 19.56 billion, down Q-o-Q 37.82% from NTD 31.46 billion, Y-o-Y down 48.98% from NTD 38.35 billion in Q3 2021. Net gross profit in Q3 was NTD 8.3 billion, down 34.31% from last quarter [ NTD 14.98 billion ] and down 58.11% from NTD 19.92 billion in Q3 2021.
Our gross margin in Q3 was 42.65%, down 4.97 percentage points Q-o-Q from 47.62%, Y-o-Y down 9.29 percentage points from 51.94%. Our operating expense in Q3 was NTD 4.1 billion, down 18.18% Q-o-Q from NTD 5 billion and Y-o-Y down 14.73% on from NTD 4.8 billion. Q3 operating income was NTD 4.26 billion (sic) [NTD 4.25 billion] , down Q-o-Q 57.38% from NTD 10 billion, Y-o-Y down 71.86% from NTD 15.12 billion.
Our OP margin in Q3 was 21.75%, down 9.99 percentage points Q-o-Q from 31.74%, Y-o-Y down 17.68 percentage points from 39.43%. Q3 net income was NTD 4.31 billion, down Q-o-Q 49.27% from NTD 8.5 billion, Y-o-Y down 64.92% from NTD 12.27 billion. Overall, Q3 EPS was $7.07 versus last quarter $13.95, a Q-o-Q decrease of $6.88. And last year, Q3 EPS was $20.17, a Y-o-Y decrease of $13.10. Please take a look at our Q3 consolidated income statement.
Next, please take a look at our first 3 quarters' consolidated income statement. Our first 3 quarters' net sales was NTD 87.54 billion, down 11.42% Y-o-Y from NTD 98.82 billion. First 3 quarters gross profit was NTD 41.85 billion, down 13.87% Y-o-Y from NTD 48.59 billion.
Operating expense was NTD 14.33 billion, up 0.45% Y-o-Y from NTD 14.27 billion. First 3 quarters operating income was NTD 27.52 billion, down 19.82% Y-o-Y from NTD 34.32 billion. First 3 quarter net income was NTD 23.93 billion, down 14.34% Y-o-Y from NTD 27.93 billion. EPS in the first 3 quarters was $39.32, a Y-o-Y decrease of 6.58% from $45.90.
Next is our Q3 sales breakdown by product line. SMDDIC, which is small and medium driver, accounts for 38% of our total sales. SoC, which is all non-DDIC, accounts for 38%. And LDDIC, which is a large driver IC, accounts for 24%. We have just released our October sales, which is NTD 6.87 billion, month-on-month up 11.37%, Y-o-Y down 45.42%. SoC accounts for [ 38% ] and driver accounts for [ 63% ] of the total revenue.
So the next slide shows a brief picture comparing our 2022 and 2021 monthly sales numbers.
Next, let's look at other key financial numbers. Our cash and cash equivalent in Q3 was NTD 39.6 billion, decreased Q-on-Q by 43.64% from NTD 70.26 billion. Y-o-Y decreased by 7.46% from NTD 42.79 billion.
Accounts receivable, Q3 was NTD 13.97 billion, decreased Q-o-Q 34.373% from NTD 21.41 billion and Y-o-Y decreased 48.41% from NTD 27.08 billion. Inventory, Q3 was NTD 17.18 billion, Q-o-Q down 8.8% from NTD 18.84 billion, Y-o-Y up 39.94% from NTD 12.28 billion. Short-term loans Q3 was 0.
The following slide is a recap of our recent major events as you can see that we've been awarded numerous awards and then some rankings and then Novatek was selected as some of the [ constrained ] stock for various index. I'm not going to go through that in details, but this is just for reference.
And now I'll turn over the call to our Vice President, Mr. Steve Wang, to provide us more details on our Q3 results and Q4 guidance. [Foreign Language]
[Foreign Language]
Okay, let me translate that into English. Our 2022 Q3 revenue was NTD 19.56 billion was within our guidance, but Q2 down 37.82%. And this is mainly due to the rapid freeze of consumer demand and the brands and OEM makers' inventory digestions and also the panel maker production cut to cope with the weak demand.
And as for the margins for Q3, it was 42.65%, which is in line with our guidance, but Q-o-Q decreased by 4.97 percentage points, and this is mainly due to ASP erosion and cost up.
And looking at the Q4 outlook, the global economy is still impacted by inflation, rising interest rates, Russia-Ukraine war. Therefore, the macro economy is still full of uncertainties. The consumer market demand is still weak. And after period inventory digestion and capacity cut at panel maker site, the panel price has stabilized. And the brand and system maker OEM has started to place new orders and we see some rush orders to prepare for coming seasonalities like Double 11, Double 12 like Friday, Christmas and Chinese New Year. But we still need to watch closely the final sell to numbers.
So based on the above, our guidance for Q4 is as follows: The revenue will be within the range of NTD 18.8 billion to NTD 20 billion at an exchange rate of 1 to 32. And the gross margins will be 38.5% to 40.5% range. Operating margins, 18.5% to 21.5%. So thank you, Steve for the Q4 guidance.
Next, we'll move on to Q&A session. Please be reminded to send in your questions. And currently, we already have received some questions, and Tony will read it out and we'll try to answer them one by one. As I mentioned, if you have some questions, you can send them in, and we'll process them and we'll answer them. Tony, please.
[Foreign Language]
[Foreign Language]
Thanks for your guidance -- for quantitative guidance for quarter 4. Can management provide more color on the differential trends for your 3 business group or by application.
And by applications for the strong medium driver, we're expecting it to be up Q-o-Q, mainly due to OLED. And as for the SoC will be -- it will decline. And for the large driver IC will be flat to up slightly. And now for the small smartphone or DDIC, the OLED will be up but for the TDDI, it will be down.
[Foreign Language]
[Foreign Language]
Now when looking back to your quarter 3 results. First, on your revenues, which only achieved the low end of your target. So what are the major factors and also which product line or by application were weaker than others?
As mentioned earlier, the decline in revenue was due to the rapid freeze at consumer and demand like smartphone, notebook, PC or TV. And then the brand, the system maker, they're undergoing inventory digestions and panel maker production -- the production cut to cope with the weak demand. And based on the 3 product lines, the decline rate is the highest as the large DDIC side and then the small medium side. The relatively small magnitude is on the SoC side.
[Foreign Language]
[Foreign Language]
And a follow-up question on your third quarter gross margin, which also is a low end of your guidance. What are the major factors. And also which products were more affected by the pricing logic?
Well, the reason for the decline in gross margin was mainly due to cost up including the provisions for [ LTA ] and the ASP erosion and also the product mix. And among all the product lines, I think the smartphone TDDI ASP is relatively impacted the most.
[Foreign Language]
[Foreign Language]
Looking through your third financial guidance, operating margin only reached 21.75% quarter 3. But now your guidance of 23% to 25%. What are major factors?
While our Q3 operating margin was lower than our guidance, mainly due to softer revenue and lower gross margin and R&D expense was higher than expected. But the overall operating expense declined by 18.8% to NTD 909 million.
[Foreign Language]
[Foreign Language]
We also noticed you have a big jump in operating income to NTD 1 billion compared with around NTD 500 million in quarter 2. How are major factors?
Well, the Q3 non-operating was mostly contributed by ForEx gain of NTD 750 million and interest income NTD 145 million.
[Foreign Language]
[Foreign Language]
Next question about your quarter 3 financials. We noticed the inventory dollars decreased 9% quarter-over-quarter to NTD 17.1 billion. What are [indiscernible] now the inventory take? What were the major factors?
Well, the Q3 inventory, if [ DOI ] is around 111 days, 1-1-1 days, okay? And we think it is manageable. Well, due to the longer cycle time of 3 to 4 months, usually, the drop in demand will take about 2 to 3 quarters to adjust inventory. So taking into account consideration the supply chain stability, we will adjust our inventory dynamically. So basically, we have reviewed our inventory.
[Foreign Language]
So the other good reason why our inventory came down as we actually did manage our wafer start. So we actually controlled the wafer start, so the inventory level has come down.
[Foreign Language]
[Foreign Language]
Now we are switching gear to the overall big picture questions. The first question is about could the management provide a [ partial ] outlook into the first quarter compared with quarter 4 and also by the major applications? And also wonder if your quality revenue were back to the normal [indiscernible] in 2023?
Well, as you all know, Q1 has a less number of working days due to Chinese New Year and also traditionally low season. We'll need to monitor the overall inventory digestion progress, the inflation and the potential demand rebound in March.
As for the TV, smartphone in Q1 inventory, we think it will likely return to normal level, but still highly depending overall our environment, especially the geopolitical development and the inflation situation. So the revenue in 2023 also likely to resume quarterly growth next year.
[Foreign Language]
[Foreign Language]
Altogether more color for 2023. Do you expect to solve your product with a positive unit or revenue growth year-over-year in 2023?
Yes. I mean the product lines that has potential growth will be like the OLED-related product, it's been adopted to for smartphone and it will be used on TV and also in some of the IT products. We're also seeing the opportunity on the old automotive TDDI, and we are expecting it to grow. And then we also have the VR/AR, DDIC -- for the VR/AR display and also mid- to high-end TV SoC, for example, the 4K 120 Hertz and the 8K TV. And last but not the least, the ASICs, we also are expecting it to have a good result moving forward.
[Foreign Language]
[Foreign Language]
Just a follow-up, do your past few comments [indiscernible] OLED. Could you provide more color on the opportunity and the challenge?
Regarding the OLED DDIC opportunity, we are seeing the higher OLED penetration rate, which is good for Novatek, and then it's a good opportunity. And the trend in replacing the richest OLED panel by flexible panel is also a positive for Novatek. And we're also seeing wider application to IT like notebook, tablet, automotive, and we also even moving to TV. So these are some of the good opportunities that we see. Of course, there are some challenges as you can see that the 28-nano high-voltage capacity is still tight at this moment. And of course, we also seeing there will be a new competitor in the market.
[Foreign Language]
[Foreign Language]
Could you provide the expected inventory dollar or days trend for -- into quarter 4 this year?
We are expecting our Q4 inventory dollar to further decline. And looking at our October inventory level, it is already moving down trend. And again, considering the stability of the supply chain, we'll be adjusting our inventory level dynamically.
[Foreign Language]
[Foreign Language]
A lot of questions about the gross margin trend. The first question about the pricing. Wonder if the [indiscernible] provide [indiscernible] , which timing, pricing can become more stabilized or other kind of circumstance? And also which product can be first get stabilized among the 3 product lines?
Well, basically, ASP and cost is -- they are subjected to supply and demand. So pricing at this moment basically is under pressure because -- due to the soft demand. However, looking ahead, room for further price erosion will be limited. And we are seeing that the ASP for OLED DD driver IC is relatively stable at this moment. And our focus will be on developing more value-added new products to improve our ASP margin.
[Foreign Language]
[Foreign Language]
The follow-up question is about the cost. The management have some view on the cost trend into 2023 for the year-over-year comparison for 2023 versus 2022 and also [ order ] which product or no profit still other type supply.
Well, as mentioned earlier, the consumer and product demand is relatively weak. And so we do expect the manufacturing costs for part of products will be lower gradually, and we do expect that moving forward. And I also mentioned earlier that the 28-nano high voltage, the supply is relatively tight compared to the others.
[Foreign Language]
[Foreign Language]
Now there's a lot of recent discussion on the provision on the foundry contract. Just wondering if Novatek will still incur some [ latest ] cost in quarter 4 or next year? If yes, would you provide some guidance?
Well, the LTA provisions actually already factored into our Q4 gross margin guidance. And basically, we'll continue to negotiate with our supplier to deal with the situation. And looking at the LTA in general, actually, it only accounts for a portion of our overall wafer and amount in 2023 will be manageable.
[Foreign Language]
[Foreign Language]
Now also invest [indiscernible] inventory provision. So could you provide now your accounting rule on this inventory and also roughly quarterly expense and will you incur any year-end inventory write-down?
Well, our inventory write-down of provisions have been reviewed on a quarterly basis. So based on accounting rules, like including low end of cost, net realizable value and aging days. So there won't be a one-off year-end adjustment.
[Foreign Language]
[Foreign Language]
Now the overall gross margin trend quarter the main bank. And when your gross margin will become more stabilized or under which circumstance? Or which product among your major driver IT line could get stabilized first?
Well, as we mentioned earlier, the pricing costs, they are all subjected to supply and demand. But moving forward, chances are there in lowering the manufacturing cost, and this is expected. And you can see that the inventory level also becoming -- also coming down. So because of this, chances of gross margin gaining stabilized is also expected.
[Foreign Language]
[Foreign Language]
Could management provide color on the potential impact in terms of competitors from China?
Well, I think the best way to deal with this competitive landscape is to focus on the enhancement of our design competitiveness and differentiation and also value-added products with the optimal product portfolio for various display technologies and providing the total solution for our customers. And you can see that under our current environment, OEM customers are greatly in need of a stable and resilient supplier and Novatek definitely has a position and the capability to meet their needs and continue to be their reliable long-term partner.
[Foreign Language]
[Foreign Language]
Could management also provide comments [indiscernible] from the new driver [indiscernible] project capacity part of China?
Well, for Novatek, we will continue to leverage both the competitors and the advanced node process. And as for the foundry player, I mean, they will all suggest the product mix based on the market demand because they don't just supply driver. They also supply the process for CMOS sensor and the power management in applications.
[Foreign Language]
[Foreign Language]
What are the main [indiscernible] on your mid- to long-term trend for your gross margin?
Well, for the gross margin, the best way, again, is to continue to focus on some new technologies and to speed up the launch of new products and also try to broaden the product portfolio to enhance our competitiveness and also our gross margin. And looking at more details, for example, for the large panel side, we have application for high-end IT product drivers and the gaming 8K display and also the high-speed interface, for example, the DP 1.5 TED and also OLED for TV.
And for the small and medium-sized smartphone and all, we have like -- OLED also used for the notebook, and then we also have the OLED TDDI and also automotive adopting TDDI solution. And next year, we do have expectation on our AR/VR solution and also some special purpose ASIC on the small, medium segment.
And as for the SoC side, I mentioned earlier, we have the 4K 120 hertz solution. And also we have ASIC, especially for the picture quality and also the high-speed interface.
[Foreign Language]
[Foreign Language]
What [indiscernible] comes with the recent [indiscernible] tension between China and the U.S.?
For Novatek, our supply chain has already expanded into Taiwan, China and South Korea. And we'll try our best to make the best allocation and adjustments to meet our customer needs. And for those that -- our customers are also relatively diversified geographically. And Novatek will continue to focus on providing competitive and value-added products to our customers and making sure that they have the stable and resilient supply.
[Foreign Language]
[Foreign Language]
Now in terms of the cash usage in addition to the distribution of cash dividend, do you have any other plans, such as treasury or share buyback or M&A?
Well, cash will be mainly used for long-term [ cash ] development and expansion of product portfolio and the introduction of new product. And part of the cash will be also reserved to maintain flexibility when needs arise.
[Foreign Language]
[Foreign Language]
Now as we noted, there are big volatility in terms of operating expense ratio during 2022. I wonder if you can also provide some guidance for 2023?
Given the guidance for Q4, the operating expense ratio for 2022 will be around 17%. And the operating expense amount during 2023 will be stable. But the OpEx expense ratio will be subjected to the revenue fluctuation. So we've got you a lot of the questions. So Tony, if there are still follow-up questions. So if you have new ones, do let us know?
[Foreign Language]
[Foreign Language]
Okay. A follow-up question about your cash usage. Just wonder if you can provide some early thoughts for your dividend policy next?
Well, for the past many years, our dividend policy pretty much maintaining pretty high payout ratio. And we don't think there will be any major changes to that policy at this moment.
[Foreign Language]
And this is -- again, this has to be decided by the Board.
[Foreign Language]
[Foreign Language]
A follow-up question on inventory. Just wonder if you can provide some guidance for U.S.A. dollar and the [ date ]? Wonder the [indiscernible] inventory return to normal anytime early next year or what's your comment?
Well, based on the current inventory reduction rate, I think it should go back to a normal level. But as mentioned earlier, in order to take into consideration the stability of the supply chain we need to do some adjustments. But basically, I think the inventory level should be healthy. See if there's any more questions.
[Foreign Language]
[Foreign Language]
You mentioned about ASICs as one of the major growth opportunities into 2023. Could you provide more details on your ASIC product for next year?
Yes. As you all know, the core competence, for Novatek is the display and image technology. And our technology has been very well accepted by a lot of the big customers. And so that brings in a lot of opportunity for ASICs, including driver, picture quality, high-speed interface. So these are some of the areas that we'll be providing to our customers. So we can take one more question.
[Foreign Language]
[Foreign Language]
Earlier, you mentioned, OLED also is one of your major growth opportunity into next year. Also, you mentioned about some competition, just wonder if you can provide more detail.
Yes. And then for Novatek, we have developed quite a number of leading-edge OLED display technology. And it has been designed in to various customers. So we do have high expectations to move forward next year.
Well, thank you so much for joining in for our 2022 Q3 Investor Conference. And thank you so much and see you next quarter.
[Foreign Language]
[Foreign Language]