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Novatek Microelectronics Corp
Earnings Call Analysis
Q3-2024 Analysis
Novatek Microelectronics Corp
In the third quarter of 2024, Novatek reported a revenue of TWD 27.87 billion, reflecting a 10% increase quarter-over-quarter, which aligns perfectly with their guidance of TWD 27.4 billion to TWD 28.4 billion. However, this marks a 3.7% decline year-over-year, showcasing the ongoing challenges within the consumer electronics market, despite some positive momentum driven by the ramp-up of a new OLED smartphone model.
The company's gross profit for the same quarter was TWD 11.07 billion, up by 6.7% from the previous quarter but down 9.4% year-over-year. This brought the gross margin down to 39.74%, a decrease from 41.14% in Q2 2024 and from 42.25% a year prior. This performance was within the company's guidance range of 38% to 40%, attributed to adjustments in average selling prices and increased gold prices affecting costs.
Novatek's operating income saw a quarter-over-quarter increase of 13.4% to TWD 6.24 billion, yet it remained down 12.6% year-over-year. Operating margins improved slightly to 22.4%, exceeding their guidance of 20% to 22%. Meanwhile, operating expenses decreased nearly 1% quarter-over-quarter and about 5% year-over-year, totaling TWD 4.83 billion.
The net income for Q3 was TWD 5.26 billion, which represents a slight quarter-over-quarter decline of 2.4% and a more significant drop of 17.4% year-over-year. Correspondingly, the earnings per share decreased to TWD 8.64 from TWD 8.86 in the prior quarter and down from TWD 10.46 a year ago. This decline stems mainly from reduced non-operating income.
As they look towards Q4 2024, Novatek anticipates a decline in revenue, projecting figures between TWD 24 billion and TWD 25 billion, driven by typical seasonal variations in demand and a generally sluggish recovery in consumer electronics. Gross margins are expected to be lower, ranging from 37% to 40%, whereas operating margins are forecasted to lie between 17.5% and 20.5%.
The call highlighted a weak demand trend across key product lines, particularly in the System on Chip (SoC) segment, which is expected to face the most significant decline. The decline is partially mitigated by expected growth in small and medium display driver ICs, supported by new product launches despite tough competitive pressures.
Looking into 2025, Novatek is optimistic about growth prospects, particularly with the introduction of new AI-enabled products, which are projected to drive demand for advanced consumer electronics. As part of their preparation, they are expanding their R&D team and investing in advanced manufacturing processes, aiming to enhance their product portfolio and secure higher margins.
In conclusion, Novatek's third-quarter performance demonstrates a mix of resilience and challenges as they navigate a fluctuating market. The company remains focused on optimizing costs and enhancing its product offerings while addressing current pricing pressures. For investors, this translates into a cautious optimism considering its strategic repositioning for the expected growth in AI and advanced electronic products.
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[Foreign Language] Good afternoon, everyone. I would like to extend a warm welcome to everyone for joining Novatek 2024 Third Quarter Online Earnings Call. This is David Chen, Vice President and Company Spokesperson. I'll be the host for today's conference. Joining me on the call are Vice Chairman, Steve Wang; our CFO, Mr. S.C. Chou; and IR Director, Tony Tseng and [ Yvonne ].
The agenda for today's event is as follows: First, our IR Director, Tony, will report on Novatek's third quarter results in English. Following that, our Vice Chairman, Steve, will provide further details on our Q3 results and guidance for the fourth quarter of 2024. Next, we'll have a Q&A session.
We have already received some questions from our investors. And if you have any questions you would like to ask, please send them to us online. Tony will review and read out the questions one by one in both Chinese and English. Our Vice Chairman, Steve Wang; and CFO, Mr. Chou, myself will answer all the questions in Chinese first and will be translated into English later.
Now I'll hand over, turn to Tony to report our Q3 results.
Thank you, David who, after this briefing, [ will need that ]. First, let's take a look at our safe harbor notice.
Now let's look into our third quarter results. The first page is the consolidated revenue. Quarter 3, our revenue reached TWD 27.87 billion, which is up 10% quarter-over-quarter and slightly down, 3.7% year-over-year. The revenue in quarter 3 also met our guidance of TWD 27.4 billion to TWD 28.4 billion.
Now let's look at our quarter 3 gross profit. In quarter 3, our gross profit of TWD 11.07 billion increased 6.7% quarter-over-quarter but down 9.4% year-over-year.
Next. In terms of the gross margin trend, in quarter 3, our gross margin of 39.74%, down from 41.14% in second quarter this year and also down from 42.25% from a year ago, but the result, 39.74% also is within our guidance of 38% to 40% range.
Next. This slide shows our operating expense. For quarter 3, our operating expense of TWD 4.83 billion, down almost 1% quarter-over-quarter and also around 5% year-over-year from a year ago.
Next. Now let's look at our operating income result in quarter 3. Our operating income of TWD 6.24 billion increased 13.4% quarter-over-quarter but still down 12.6% year-over-year.
Next. Now let's look at our operating margin trend. For quarter 3, our operating margin of 22.4%, up from 21.82% in second quarter this year, but down from a high level of 24.69% a year ago, and our result of 22.4%, slightly higher than our guidance of 20% to 22% for our operating margin.
Now let's move down to see our net income number. Our quarter 3 net income of TWD 5.26 billion, slightly down 2.4% quarter-over-quarter, mainly due to lower nonoperating income, but also decreased 17.4% year-over-year.
Next. Now let's look at our EPS. For quarter 3, our EPS of TWD 8.64 is down TWD 0.22 from TWD 8.86 in second quarter this year and also down TWD 1.82 from a year ago.
Now let's look at the summary of our income statement for quarter 3 and also compared with the results for second quarter this year as well as a year ago. Overall speaking, our revenue and the gross profit are both up quarter-over-quarter also, but down year-over-year. Operating expense is roughly down 1% from second quarter and also down year-over-year. Therefore, our operating income is up quarter-over-quarter but still down. And the net income, the EPS is down quarter-over-quarter as in year-over-year.
This page shows the first 3 quarters of income statement for 2024 as well as 2023. For the first 3 quarters, our revenue of TWD 77.5 billion is down around 7% year-over-year. Gross profit of TWD 31.5 billion is also down around 10% year-over-year. Operating expense of TWD 14.6 billion is almost flattish year-over-year and net income of TWD 15.5 billion is down 13.6% year-over-year. EPS of TWD 25.54 is down TWD 4.02 from a year ago. Okay.
Next. This page shows our quarter 3 revenue breakdown. The biggest portion now is small and medium-sized driver due to the launch of OLED driver IC for new business. The portion is up from 33% in the second quarter. SoC business percentage came down to 37% in quarter 3 compared with 42% in the second quarter. LDDIC only accounted for 21% in quarter 3, down from 25% in second quarter.
Next. We are also releasing our October revenue. October revenue of TWD 8.52 billion is down 10.5% year-over-year and also down 4.4% month-on-month. For the first 10 months, the revenue of TWD 86.0 billion is also down 7.28% year-over-year.
In terms of revenue breakdown between the SoC and Driver also is included in this table. We see the 2 business -- driver business down slightly more than SoC business month-over-month in October.
Next. This page shows our monthly revenue since the beginning of January as well as the year-over-year comparison for the first 10 months of 2024 for individual months.
Next. Now let's look at our summary table for the key financial numbers. The cash at the end of quarter 3 was TWD 41.997 billion. It's down quarter-over-quarter and year-over-year mainly due to the distribution of our TWD 32 per share cash dividend in quarter 3.
Account receivable of TWD 20.68 billion, up 11.18% is mainly due to also [ debt ] increase of around 10% and flattish year-over-year.
Our inventory dollar has been relatively stable over the past few quarters. And in quarter 3, inventory dollar of TWD 9.36 billion was down 0.5% quarter-over-quarter, but slightly up 2.71% year-over-year.
Now let me pass the call back to David.
Thank you, Tony. The following slide is a recap of our recent major events. And the Novatek 2023 ESG report has been published and ready for download.
And we are delighted to announce that we have been awarded the Commonwealth Top 100 Sustainability Award for our excellence in corporate social responsibility, ranking 18th among the manufacturing sector.
Additionally, we have also received the 2024 Talent Sustainability Award.
And the 2024 CHR Corporate Health Responsibility's Health 99 Enterprise Award was also received recently.
Another exciting news for us is that the groundbreaking ceremony for our TaiNan research and development building is scheduled to commence imminently.
Please also visit our website for more information on our ESG achievements.
And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q3 results and Q4 guidance. [Foreign Language]
[Interpreted] The 2024 Q3 revenue Q-o-Q of 10.4%. This increase is by 10.4% Q-o-Q. This is mainly contributed by the ramp-up of the new OLED smartphone model. And this is also in line with our guidance of TWD 27.4 billion to TWD 28.4 billion.
And the Q3 gross margin was 39.74%, which is down Q-o-Q by 1.4 percentage points, also in line with our guidance. And this is primarily attributed to the ASP adjustment for specific products and the recent increase in gold price and also the lower NRE numbers.
And as for the Q4 outlook, although China recently had surge in urgent orders due to subsidies, the overall momentum of the consumer electronics market recovery still appears to be insufficient. Combined with the gradual onset of the off-peak demand sessions in Q4, it is expected that Novatek's revenue in Q4 will decline compared to Q3.
So based on the above, our Q4 guidance will be as follows: Revenue will be around TWD 24 billion to TWD 25 billion with an exchange rate of USD 1 to TWD 32. Gross margin will be within a 37% to 40% range. Operating margins will be 17.5% to 20.5% range.
Next, we'll move on to Q&A session. Please be reminded if there are further questions, do send to us. We'll proceed with the questions that we have already received from our investors.
Tony, please.
Okay. [Foreign Language]
Could management share the view on the sequential trend across major applications in terms of demand into quarter 4 this year?
The recovery momentum of demand in the consumer electronics sectors basically remains weak in the fourth quarter, with all these smartphones expected to see sequential growth, while other products are experiencing declines.
Product-wise, demand for TV is expected to experience a slight decrease quarter-on-quarter. Despite, we see some rush orders supported by the subsidies program in China. And the demand for monitors basically remains weak and there's also a decline in demand for notebook. Despite rush orders for Chromebook, we see a better demand for Chromebook because of the subsidies program.
And as for auto, demand remains impacted by year-end inventory adjustment. However, there is expected growth in smartphone demand driven by the stocking of new models in preparation for year-end promotions.
[Foreign Language]
Therefore, could you also provide your quarterly revenue trend across your 3 busy groups?
What Steve just mentioned is that all the 3 product lines are projected to experience a quarter-on-quarter decline in the fourth quarter. Among them, SoC is expected to see the most significant decline due to the low season and followed by the large display driver IC.
As for the for the small and medium display driver IC, we will also see decrease quarter-over-quarter. And this is attributed to the drag from smartphone OLED DDIC and inventory adjustment in the automotive products segment. However, the sequential decline is expected to be more moderate supported by the sequential growth of TDDI products for smartphone.
[Foreign Language]
[Foreign Language]
Could management also provides very preliminary comments on the industry and your company in terms of the growth drivers and outlook into next year?
As we look ahead to 2025, the key trend in the market continues to be the demand for AI-related products with a significant focus on the anticipated replacement demand for AI-powered PC, notebook and smartphones. However, the outlook for demand in consumer electronics remains uncertain and needs to be monitored closely. But despite this uncertainty, Novatek remains optimistic about our revenue growth for 2025, especially with the introduction of new products.
[Foreign Language]
[Foreign Language]
Could you provide the base production timetable for your OLED TDDI?
Also, can you also give some color on the advantage of OLED TDDI on cost and the performance over your mainstream discrete DDIC?
And also how about the progress of your negotiation with the panel and the handset customers on this product?
The mass production schedule for our OLED TDDI remains unchanged for the second quarter of 2025. So the NPE schedule will be the second quarter of next year.
And as for the advantages of OLED TDDI technology, this includes improved in performance, cost efficiency and also the lower power consumption for the touch. And also we can also enhance the form factor, which means that they can provide more room for battery, okay?
And as for the development progress with our customer, currently, it is proceeding very smoothly.
[Foreign Language]
[Foreign Language]
Is it likely to further expand your market share at the smartphone DDIC for your new smartphone customer? And what's your competitive advantage over your competitors? And also how about the potential opportunity as the DDIC for other products and even for non-DDIC products?
What Steve mentioned is that one of our major goals is to further diversify our customer mix and also our product portfolio. And we'll continue to enhance our design capabilities such as advanced process nodes and also product quality and also, very importantly, the mass production capability to earn our customers' trust.
In addition to smartphones, we have also developed new products in response to our customers' demand and market needs. And as for ongoing projects, we are making very smooth progress in expanding our efforts, and we believe that the future development holds promising prospects.
[Foreign Language]
[Foreign Language]
Is it possible to supply OLED DDIC to Samsung's panels in the near future?
Well, as previously mentioned, diversifying the customer mix and product portfolio is our key goal. And basically, the current progress in this area is positive and also on track.
[Foreign Language]
[Foreign Language]
Could you also provide your comments on the development and opportunities for AI-related products?
For us, we are concentrating on the edge device and expect to gain from the great replacement demand for AI-enabled smartphones, PC, notebook. As the AI functionality continues to advance, we hope to gain some traction there.
And furthermore, the demand for surveillance TV, gaming monitors will be also driven by the integration of AI capability. And at the same time, the split specification will be also improved and, for example, power consumption, picture quality, et cetera.
[Foreign Language]
[Foreign Language]
Could you update your progress in our Neoverse platform and the 4- or 5-nanometer node process and also your assay business outlook in the mid- to long term?
The cooperation with Arm at Neoverse platform, basically, it is the extension of our current ASIC business. And basically, what we're doing is preparing in advance for customer potential future requirements. And for these projects, we are not expecting immediate contribution.
And as for new Novatek, as you all know that we have ASIC business in both driver IC and SoC product lines. And what we see is that the outlook for this business is pretty positive.
[Foreign Language]
[Foreign Language]
Your quarter 3 gross margin was at the upper end of your guidance, but still down quarter-over-quarter for our major factors. And how about gross margin trends across 3 business groups quarter-over-quarter?
As mentioned earlier, the decline in gross margin in third quarter by 1.4 percentage points was primarily attributed to 2 factors: the adjustment in average selling price for specific product; and the increase in gold price. And among the 3 product lines, the gross profit margin slightly decreased Q-o-Q for SoC product line but remains flat for the large DDIC and the small and medium DDIC.
[Foreign Language]
[Foreign Language]
Why is your quarter 4 gross margin midpoint guidance is slightly lower than result in quarter 3? And also how about gross margin trend again across 3 [ basic growth ] quarter-over-quarter in quarter 4?
The declining Q4 gross margin guidance, I mean, midpoint guidance is primarily attributed to 3 factors: one is the adjustment in product mix, as mentioned earlier, the SoC will be down; and the second one is the increase in gold price; and also the adjustment in ASP for specific products.
And as for the 3 major product line, the margins, the small and medium and the large display driver IC, they will be moderately declined. And SoC will be kind of flat.
[Foreign Language]
[Foreign Language]
As for pricing, which products are facing more competition into quarter 4?
Due to the slow seasonality and we are seeing that driver IC products are experiencing more pricing pressure. And to address these challenges, we have -- we are focusing on maintaining or even enhancing our gross profit margins through cost-reduction initiatives and also the introduction of new models.
[Foreign Language]
[Foreign Language]
As for cost, could you also comment on the cost trend on edge and [ turning to ] foundry and the packaging into 2025 compared with 2024, particularly about 28-nanometer high-voltage products? And also any comment on the impact from LTA?
The trends in costs are basically highly correlated with the demand and supply balance. And for Novatek, we are currently engaged in active negotiations with our suppliers to secure favorable terms and also trying to manage the cost more effectively.
[Foreign Language]
[Foreign Language]
After discussion on the cost pricing, could you also provide a very preliminary view on your gross margin trend in 2025 compared with 2024 or highlight any positive or negative factors?
Again, Novatek's key objectives is to sustain and stabilize the gross margin. And to achieve this goal, Steve just mentioned that we'll be focusing on launching new products to drive growth and innovation and also enhancing our product portfolio with a particular emphasis on the high-end segment. And we also will adopt cost-control measures to optimize expense and also maximize the profitability.
[Foreign Language]
[Foreign Language]
What are major items for your nonoperating income in quarter 3?
The nonoperating income of TWD 169 million for Q3 came from interest income of TWD 303 million and ForEx loss of TWD 165 million.
[Foreign Language]
[Foreign Language]
What are your inventory days as of quarter 3 this year? Could you also provide comments on inventory dollar or days into end of quarter 4?
Inventory days for Q3 were 63 days, down from 67 in the second quarter. While the dollar amount was TWD 9.36 billion, down Q-on-Q by TWD 48 million. And we expect the inventory dollars to decline slightly quarter-on-quarter in fourth quarter, maintaining the healthy inventory level.
[Foreign Language]
[Foreign Language]
Why was your operating expense dollar in quarter 3 similar to that in both first and the second quarter this year?
Also, given your OpEx dollar for first 3 quarters is similar to the same period of 2023, could you also provide your thoughts on your operating expense into 2025 compared with 2024?
The quarterly operating expense very largely are due to the R&D expenses. The relatively stable operating expense over the past 3 quarters are primarily due to the stable R&D expenses.
And we anticipate a year-over-year increase in the operating expense for 2025. And this is mainly driven by the expansion of our R&D team and also investments in advanced process node. And we are currently finalizing our 2025 budget to account for these expected changes.
[Foreign Language]
[Foreign Language]
Given the tax rate of 15.7% for first 3 quarters, could you maintain your guidance of a tax rate of 16% for 2024?
Yes. I mean due to increased R&D investment tax credits, our estimated effective tax rate for 2024 is approximately around 16%, which is lower than the 17.4% rate recorded in 2023.
We've covered most of the questions. I'm not sure if there's any further questions. Tony, could you just check again if there's any further questions that we haven't yet covered?
[Foreign Language]
[Foreign Language]
Just wonder why this time, your gross margin guidance range of 300 basis points is slightly wider than you used to provide? And also the low end of the guidance at 37%, what is the reason behind?
There's not really any specific reason, it's just to take into account all the variables. So it's pretty much around this kind of range.
[Foreign Language]
[Foreign Language]
So you mentioned about your OLED DDIC shipment will be down quarter-over-quarter in quarter 4. Just wonder if this will be caused by the new competitor. And also, any comment on the competition into next year?
As mentioned, the China market in Q4 basically looks good. And -- but there's always some seasonal adjustment in between.
Okay. If most of the questions covered. Okay. And thank you all for today's -- joining us in today's conference. And I wish you all the best.
[Foreign Language]
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]