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Novatek Microelectronics Corp
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[Foreign Language]
Dear investors, analysts and media, good afternoon. Welcome to Novatek's 2021 Fourth Quarter Online Investor Conference. This is David Chen, Vice President and Company's Spokesperson. I'll be the host for today's conference. First of all, we would like to take this opportunity to wish you all a very Happy New Year of the Tiger, wishing you all the best of health and safety. Currently, the global and local pandemic is still very challenging. And considering everyone's safety, we have decided to maintain our investor conference 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 fourth quarter results in English, after that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q4 results and Q1 guidance. Following that will be our Q&A session. As mentioned earlier, if you have questions, you can send them to us by text. Our IR Director, Mr. Tony Tseng, will be processing and reading out the investors questions one at a time, both in Chinese and English. Our Vice Chairman, Steve Wang; and CFO, Mr. Chou and myself will answer all your questions in Chinese and will be translated into English later on.
As usual, please take a look at our safe harbor notice. So let's start with our 2021 Q4 financial highlights. Our net sales in Q4 was NT$36.54 billion, down Q-o-Q 4.7% from NT$38.35 billion; y-o-y up 62.75% from NT$22.45 billion in Q4 2020. Net gross profit in Q4 was NT$18.8 billion down 5.6% from last quarter NT$19.92 billion and up 120.18% from NT$8.45 billion in Q4 2020.
Our gross margin in Q4 was 51.45%, down 0.49 percentage points Q-o-Q from 51.94%. While we're up 13.42 percentage points from 38.03%. Our operating expense in Q4 was NT$5.35 billion, up 11.59% Q-o-Q from NT$4.8 billion. Y-o-Y up 41.19% from NT$3.8 billion. Q4 operating income was NT$13.45 billion, down Q-o-Q, 11.06% from NT$15.12 billion. Y-o-Y up 183.24% from NT$4.75 billion. Our operating margin in Q4 was 36.8%, down 2.63 percentage points Q-o-Q from 39.43%. Y-o-Y up 15.65 percentage points from 21.15%. Q4 net income was NT$10.93 billion, down Q-o-Q 10.9% from NT$12.27 billion, while over up 200% from NT$3.64 billion.
Overall Q4 EPS was NT$17.97 versus last quarter, NT$20.17, a Q-o-Q decrease of NT$2.2, and last year, Q4 EPS was NT$5.99, a Y-o-Y increase of NT$11.98. Please take a look at our Q4 unaudited consolidated income statement.
Next slide is our 2021 unaudited consolidated income statement. Our net sales in 2021 was NT$135.37 billion, Y-o-Y up 69.3% from NT$79.96 billion in 2020. Net gross profit in 2021 was NT$67.39 billion, up 121.05% from last year, NT$27.96 billion. Our operating expense was NT$19.62 billion, up 48.85% from NT$13.18 billion last year. Operating income was NT$47.77 billion, up Y-o-Y 223.28% from NT$14.78 billion in 2020. 2021 net income was NT$38.87 billion, up Y-o-Y 220.89% from NT$11.82 billion last year. 2021 EPS was NT$63.87 versus last year, NT$19.42, Y-o-Y increased by NT$44.45.
Sales breakdown by product line. This is our Q4 sales breakdown by product line. SMDDIC, which is small and medium driver accounts for 42% of our sales. LDDIC, which is a large driver IC accounts for 29% and SoC which is online driver IC accounts for 29%. Monthly sales, if you look at comparing the 2021 and 2020 monthly sales, we can see significant Y-o-Y growth for each month throughout last year. We have just released our 2022 January sales, which is NT$12.32 billion month-on-month down 3.65%, but Y-o-Y up 51.65%. SoC accounts for 29% and driver IC accounts for 31% of the total revenue.
Next, let's look at other key financial numbers. Our cash and cash equivalents in Q4 was NT$60.13 billion, increased Q-o-Q by 40.52% to NT$42.79 billion. Y-o-Y increased by 162.86% from NT$22.88 billion. Accounts receivable. Q4 was NT$23.57 billion, decreased Q-o-Q by 12.97% from NT$27.08 billion and Y-o-Y up 76.27% from NT$13.37 billion.
Inventory, Q4 was NT$14.19 billion, Q-o-Q up 15.55% from NT$12.28 billion, Y-o-Y up 73.93% from NT$8.16 billion. Short-term loans Q4 was 0.
The following slide is a recap of our recent major events Novatek was selected as a continuos start of FTSE4Good TIP Taiwan ESG Index, Taiwan High Compensation 100 Index, Taiwan Employment Creation 99 Index, Corporate Governance 100 Index, and also the CommonWealth Magazine CSR Top 100, and also the TCSA Gold Award.
And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q4 results and Q1 guidance.
[Foreign Language]
[Foreign Language]
Thank you, Steve. Regarding the Q4 revenue, it was decreased by 4.7%, but Y-o-Y up 62.57%. The revenue decline was attributed to SoC and TV DDIC seasonal demand and year-end inventory adjustment. And as to Q4 margins, was 51.45%. It exceeded our quarterly guidance. This is mainly due to product mix and ASP increase for some of our products.
So looking at Q1 outlook. Traditionally, Q1 is presumably low season. And over has less number of working days due to Lunar New Year. But with the solid commercial and automotive demand Novatek still expects to have a decent quarter, maintaining roughly flat Q-o-Q revenue. And looking at the Omicron, we still see that it's spreading globally. Besides vaccination and also new COVID treatment dose is becoming available.
So hopefully, the border restrictions, traveling restriction will be lifted soon and hopefully, the economy can return to normal. And in the meantime, Novatek will continue to strengthen our partnership with our customer by developing and introducing more advanced design technologies, best quality product to our value customers to enhance our mutual competitiveness. So based on the above, our guidance for Q1 will be as follows: revenue will be from NT$35.8 billion to NT$36.8 billion with an exchange rate of 1:27.8. And the gross margins will be 48% to 51% and operating margins will be 34% to 37% range. And looking at the Q1 revenue, we expect SoC the nondriver portion to be slightly up and the small medium driver IC to be kind of flat, and I also expect large DDIC to be slightly down. So this is basically the overall scenario or the guidance for Q1.
So next, we'll move on to Q&A session. And please be reminded to send in your questions. If you have any questions, and we'll try to answer them one by one. And we already have some questions with us. So I'll ask Tony to proceed with the Q&A.
Thank you, David. Okay. [Foreign Language]
[Foreign Language]
Okay. First, will the same follow-up for the quarter 4 revenue. Just wondered if you can provide more color on the quarter-over-quarter comparison for your 3 business groups.
Well, looking at the 3 major product groups, we see that SoC has the highest quarterly decline then followed by large panel drivers. First, the small medium driver IC maintained its growth momentum.
[Foreign Language]
[Foreign Language]
Also, I wonder, as you mentioned, a small medium-size driver cost outperformance in both quarter 4 and likely in first quarter 2022, just wonder if you can provide more color in terms of units in quarter-over-quarter and also year-over-year performance for 2021 for your small medium size driver business?
Looking at the small, medium product, DDIC, we see that in Q4, the DDIC has all of slight quarter-on-quarter growth whereas the OLED was Q-o-Q kind of flat, and this was mainly due to the capacity constraint. And on a yearly basis of 2021, with TDDI shipment was slightly up Y-o-Y, while OLED shipment went up significantly.
[Foreign Language]
Once the management can provide more color for your operating expense ratio in quarter 4 versus quarter 3, which actually increased quarter-over-quarter.
Well, the operating expense increase was mainly due to the higher R&D expense and also the structural increase in salary.
[Foreign Language]
[Foreign Language]
The last question of our quarter 4 results about inventory level, which also are more -- also by a few investors, could you provide all why your inventory dollar increase further by meeting to a record high level?
Well, at this moment, what we see is that the capacity is still pretty tight. And then we have a longer cycle time. So we actually adjusted our production allocation, and so we're looking at the current inventory level because it is still very healthy. So if you look at days of inventory, in Q3, it was 67 days, Q4 it's 71 days. So it's still pretty healthy.
[Foreign Language]
[Foreign Language]
The first question is about the overall supply chain demand supply. And then the first 1 is, can you talk about the inventory prioritization for your foundry, as we have a little bit discussion of noise over the past couple of weeks.
Well, the overall wafer supply is still tight. And actually, they are still trying to secure more capacity. And currently note that we'll continue to adjust our product mix to maximize our offer.
[Foreign Language]
[Foreign Language]
Lastly, on your major foundry supplier was supported to mention about the potential oversupply for 28-nanometer in 2023. Just wonder your normal view of this comment.
From a lower term point of view, so far, we see the 28-nano high voltage capacity still under supply. And it still cannot meet our demand at this moment. So we are hoping to try and get more supply from our foundry.
[Foreign Language]
[Foreign Language]
The third 1 is about, can management provide your secured foundry supply in 2022 versus 2021?
Well, the capacity -- wafer capacity in 2022, we still expect to increase the supply. But it's still not enough. So we still are negotiating and continuing to negotiate with our foundry partners to increase our more supply to us.
[Foreign Language]
[Foreign Language]
The fourth question is -- has been reported while our foundry suppliers are intended to increase the foundry selling cost in first quarter, could you also provide some color and also any color on the full year project cost increase?
Well, now as you know, both cost and ASP are very dependent on supply and demand. And we are working very closely with our suppliers and with our customers to deal with the changing environment. But so far, Q1 is still under control, and we don't expect any big changes.
[Foreign Language]
[Foreign Language]
Also switching the gear to the other product supply. I wonder if you can also comment on demand supply synergy for the packaging and testing, any price increase at this area?
Well, regarding the back end, we maintain a long-term partnership with our back-end supply -- supplier. So currently, what we see is that Q1 supply is still manageable. So that's what we see at this moment.
[Foreign Language]
[Foreign Language]
The second question will be regard with the overall end demand and also the outlook. The third question is about the TV demand outlook that time management mentioned, I think March will be a critical timing. We'll see if there is any recovery of TV demand about the consolidated view on the TV side?
Well, looking at the market panel TV ASP, we see that it should be stabilizing gradually. So we believe the ASP will both stabilize in March. And we also see that Korean panel maker is also existing the TV market. So therefore, we think the market should be healthy and should maintain positive.
[Foreign Language]
Yes. Of course, we also have to look at it depending on the supply and demand of the demand, I mean, can rebound as expected.
[Foreign Language]
[Foreign Language]
As you mentioned about the TV demand, mainly could you also provide your view about the other applications in first quarter?
Well, looking at Q1, as mentioned earlier, consumer demand relatively weak. But looking at the commercial notebook or commercial IT product and then also the gaming, all these are pretty -- the demand is still there, and it's pretty solid. And of course, the automotive at this moment, we see also pretty solid. But the TV and Chromebook at this moment is not fully recovered yet. And looking at the smartphone, we see that it is kind of slow. But we expect to see many new models launched after March this year. So we still have some expectation on the smartphone side.
[Foreign Language]
[Foreign Language]
As now is already mid-February just want the arrangement and provide some preliminary view into the second quarter.
Well, we see that the COVID situation, I think the overall should be returning back to normal seasonality this year.
[Foreign Language]
[Foreign Language]
So it is hardly related to the panel industry. Just wondering if you can provide some color about the integration rate or panel product trend to share with us.
As I mentioned earlier, the Koreans are leaving the LCD market, and it will be left with just China and Taiwan mainly. And then the panel makers are also very dynamically adjusting the TV production based on the market demand. So based on the above, I think this should be positive and good for the display market.
[Foreign Language]
[Foreign Language]
2 quick questions there. Could you provide Goldwater or area for 2022 and even beyond?
Well, looking at the mid- to long-term and our 3 main product group, the large panel driver, we are expecting the trend moving to high-end IT applications both on note book and monitor. And then you have the gaming, which is also on the -- in high-end type and also the 8K resolution display. All these are some of the major trends or opportunity that we see in the large panel space. .
And then looking at the small medium size, and we see the -- on the panel side, all the drivers, the penetration rate will continue to go up, and this is a good opportunity for Novatek. And also OLED TDDI, we should pick up momentum. And then we also see the tablet especially in Novatek tablet solution has the cyber spend solution, which is very well accepted by our customers. And we also have some expectation in the tablet space. And of course, looking at the medium-sized automotive, just -- I mean, the TDDI IC and also the TDDI, also, we're seeing a lot of design in adoption of TDDI in the auto space.
And of course, we have the AR and VR display, which is our core competence. And we do have expectations in the mid- to long-term. And of course, on the last one is on the nondriver the SoC side. On the 4K and 120-hertz solution, TV solution, we are expecting to have more market share gain. And then we also have surveillance, also have expectation on that. And we also are seeing great demand on the gaming scaler controller. And all these are some of the stuff that I see should be contributing to Novatek in the mid- to long-term.
[Foreign Language]
[Foreign Language]
That one about the overall outlook as we note it down your peers have provided 2022 or even longer term growth. Also in terms of wondering, if you also can provide some sort hedging number to share.
While on Novatek, we do not provide annual guidance. But our overall outlook should be positive, as we mentioned earlier, about of the new gross drivers we just mentioned, I think it should be positive.
[Foreign Language]
[Foreign Language]
The next question is about the gross margin trend. The first question is you -- we may have already provided the gross margin guidance for first quarter. Just wonder if your gross margin will become more dynamic going forward to reflect your cost as well as the demand situation.
Of course, if the market demand rebound of course, it is positive. But as ASP basically depends on market demand, supply and demand. So we maintain a very close relationship and work very closely with our customers and to deal with the supply and demand situation. So we'll continue to work closely with our customers.
[Foreign Language]
[Foreign Language]
Just as we noticed, no matter as a leader, as driver business providing more resilient revenue and the margins for quarter 4 and likely in the first quarter, just wonder maybe if you can share how you have -- what actions you have taken to outperform the market?
Well, achieving a decent margin is always -- as a designer, it's always our goal. And the only way to achieve this goal is to enhance our technologies and product mix and product quality in terms of providing value to our customers. And that's the only way, and that's what we've been doing, and we will continue to do that.
[Foreign Language]
[Foreign Language]
But just also tied to wrap up on the gross margin question. Just wonder management who provide some early view for your gross margin outlook in 2022?
Well, as mentioned earlier, we do not provide annual guidance. So we don't have a number for 2022. But this is our goal, and we will continue to work on it.
[Foreign Language]
[Foreign Language]
Now we also have a couple of interesting questions. The first 1 is given your very strong record earnings for 2021, just wondering if you will maintain your payout -- cash payout ratio is around 50% level?
Well, regarding the dividend policy, we need to wait for the Board for the final decision. But for Novatek, we'll maintain steady and solid dividend policy.
[Foreign Language]
[Foreign Language]
Now they have already provided some color for the inventory question. But your question about the expectation for the inventory dollars into the first quarter and also is management worried about the inventory level.
Well, first of all, we are not worried about our inventory level. Basically, it is still very healthy and manageable. And as mentioned earlier, due to the current type situation, a capacity tightness and the longer cycle time. And so we have some new products that we need to launch. So currently, the inventory level had gone up a little bit, but it's not an issue. So we are very comfortable with the inventory level.
[Foreign Language]
[Foreign Language]
Now switching the question to more on the 3 business goals, the first 1 or first focus the biggest and most important goal, small medium size driver and the first follow-up question will be on OLED in terms of 2022 growth outlook competition and also others.
Well, for the small medium size, especially looking at the OLED, we expect the unit shipment to grow in 2022. And we have secured more capacity this year. But our major task is trying to secure more capacity for the OLED.
[Foreign Language]
[Foreign Language]
Also just wondering more mid- to long-term, wonder if no matter had the opportunity to enter the non-China-based retail OEM.
Well, expanding our customer base is our major goal. So with our advanced process nodes and new design technology and high-quality products and also the supply capability, I think it's -- we've been able to earn our customers' trust and position ourselves as a reliable partner. And also, looking at the China market, basically, we're working on it, and we'll continue to try to best expand or to increase that market.
[Foreign Language]
[Foreign Language]
The second question is part of TDDI. Could you provide your growth outlook for 2022?
Well, looking at the TDDI market, we are relatively conservative on the smartphone TDDI growth. But looking at TDDI, we are relatively more positive, especially our tablet with stylus solution, we are more positive on the tablet TDDI.
[Foreign Language]
[Foreign Language]
Now also I wonder you can provide some color on your auto driver business?
Well, we are positive on our auto TDDI -- and driver IC and TDDI in 2022. And I think it should be a good year for us. And especially if you see the EV, the adoption of TDDI trend is very clear. And so this should be positive for Novatek. But as you know, the design cycle it's longer than the other product line. So it will take a little bit of time. But so far, we are positive for 2022.
[Foreign Language]
[Foreign Language]
Now moving to the last question that small medium size growth. Could you also provide an update for your new products such as the other display industry and also variable OLED drivers?
Well, our OLED fingerprint of the variable OLED TDDI, the driver IC, basically, Q4 already in mass production. And we expect to expand our OLED fingerprint and variable customer base in 2022.
[Foreign Language]
[Foreign Language]
Now moving to the second business goal, large size drivers. First, could you provide the opportunity and the outlook for this business growth in 2022?
Well, looking at the 3 main applications. First of all, looking at TV, we've seen that the TV is adopting the higher resolution and also higher frame rate from 60-hertz to 120-hertz even going up to 144-hertz. And of course, with this high resolution, high frame rate is positive for driver meter like Novatek. And on the IT side, the notebook -- commercial notebook is also -- the trend is moving to the -- from HD to full HD. So the resolution also migrating to full HD, which is also good for us. And on the monitor side, the gaming market is still very solid. And for gaming monitor, the major demand is on the performance and on the picture quality, which is our core content.
[Foreign Language]
[Foreign Language]
I just had a follow-up on the potential opportunity on the back of the LCD of South Korean capacity on that, if you can also provide more color?
Well, as we reported earlier, the Korean LCD panel maker existing the TV market. And this gives us a good opportunity to expand our market share. And clearly, we are working very closely with the Koreans. And so far, the partnership is very good.
[Foreign Language]
[Foreign Language]
The second question on the large size driver is a result with the growth opportunity from some new products.
Well, for the large size driver, we especially look at the OLED TV driver, the OLED, and we are expecting it to grow, but currently it's relatively account for a small percentage of our revenue, but this is very meaningful for Novatek as we have the product and not as in mass production.
And also the OLED notebook, we just started the OLED notebook solution. So this is small, but we do expect the trend to move forward. And the last 1 is the Mini LED backlight and display. And the trend is also very positive for Novatek.
[Foreign Language]
[Foreign Language]
The large size driver is a legacy product, and we have seen new comments from China along with China already become the largest panel country. Just wonder if you have seen any impact to your business from China.
Well, as you know, Novatek, we are not just a driver supplier. We are a total solution provider. So we provide driver, we provide timing controller, we provide power management IC. Right now these are all our core competence. And this is also something which will differentiate ourselves from the others. So currently, moving on high frame reading or the high resolution and all these involve a lot of technology, and this is our core competence.
[Foreign Language]
[Foreign Language]
Now we move into the third business goal SoC, which accounts for about 30% of our revenue. Just wondering management had also provide more color on the business outlook for your 4 major lines within the SoC product?
Well, for the nondriver side, especially on the TV SoC. We are expecting the 4K ultra-def LED and 120-hertz. We expect to increase market share. And on the image which is the surveillance, we have expectations to grow, continue to grow. But where on TCAM, we are relatively conservative because it's a more mature market. And then for TCAM, we are seeing a lot of good opportunity, especially when things are moving to commercial notebook where it needs high-speed interface. And so these are also some of our strengths.
And of course, on the Ultra TCAM, you're also making a lot of progress in the automotive. We also provide the TCAM solution for the automotive. And also on the power match IC, as you know, we are already a leader in the display power side, but we're also trying to expand or go beyond display application. And also -- currently, we're also going to the -- on the display side we are also going to the OLED power management side. So currently, what we are trying to do is, we have the product and we are not trying to invest to secure more capacity.
[Foreign Language]
[Foreign Language]
[Foreign Language] You have to ask in English, okay. Sorry, Jeff, no we are still compiling the incoming questions.
Steve just mentioned about the metaverse. Basically, how far metaverse is mostly VR and AR. And this is supposed to be a great opportunity for Novatek in the mid- to long term because AR/VR, a lot has to do with display and display is our core competence, and within the display, a lot of the VR/AR they need to have some good picture quality solution, which this is our core competence, be a lot of the major supplier of this picture quality solution. So with all this, it's good for us that we're going to have a more ASIC business as we move forward.
[Foreign Language]
[Foreign Language]
Just mentioned that I will provide some wrap-up for the Q&A -- questions before we finalize some up coming -- incoming questions.
Well, overall 2022 should be -- should continue to be a good year for Novatek. And after going through last year, supply chain challenges of our customers consider Novatek as a reliable and trustworthy partner and have great faith in Novatek's technology, quality and supply capability. So we'll continue to work hard to service our customers.
[Foreign Language]
[Foreign Language]
So if you have any further questions, please send it to us.
If no further questions, then we'll end our Q4 investor conference here. Thank you so much for joining in.
[Foreign Language]
Thank you so much, and have a good evening.