Novatek Microelectronics Corp

TWSE:3034

Earnings Call Transcript 2022-Q4

[David Chen, executive]

[Foreign Language] Dear investors, analysts and media, good afternoon. Welcome to Novatek 2022 Fourth Quarter Online Investor Conference. This is David Chen, 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 and would like to wish you all a very Happy and Prosperous New Year of the Rabbit. Please be reminded that all questions can be sent in 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 fourth quarter results and 2023 Q1 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, Steve Wang; and CFO, Mr. S.C. Chou and myself will answer all your questions in Chinese first and will be later translated into English. As usual, please take a look at our safe harbor notice.

So let's start with our 2022 Q4 financial highlights. Our net sales in Q4 was NTD 22.42 billion, Q-o-Q up 14.6% from NTD 19.56 billion, Y-o-Y down 38.65% from NTD 36.54 billion in Q4 2021. Net gross profit in Q4 was NTD 9.09 billion, up 8.94% from last quarter's NTD 8.34 billion and down 51.65% from NTD 18.8 billion in Q4 2021.

Our gross margin in Q4 was 40.55%, down 2.1 percentage points Q-on-Q from 42.65%, Y-o-Y down 10.9 percentage points from 51.45%. Our operating expense in Q4 was NTD 3.88 billion, down 5.09% Q-o-Q from NTD 4.1 billion, Y-o-Y down 27.48% from NTD 5.35 billion.

Q4 operating income was NTD 5.2 billion, up Q-o-Q 22.42% from NTD 4.26 billion, Y-o-Y down 61.27% from NTD 13.45 billion. Our OP margin in Q4 was 23.24%, up 1.49 percentage points Q-o-Q from 21.75%, Y-o-Y down 13.56 percentage point from 36.8%.

Q4 net income was NTD 4.04 billion, down Q-o-Q 6.09% from NTD 4.31 billion, Y-o-Y down 63.02% from NTD 10.93 billion. Overall, Q4 EPS was NTD 6.64 versus last quarter NTD 7.07, a Q-o-Q decrease of NTD 0.43. And last year's Q4 EPS was NTD 17.97, a Y-o-Y decrease of NTD 11.33.

Please take a look at our Q4 consolidated income statement. Again, this is unaudited.

Next, please take a look at our 2022 consolidated income statement. Net sales was NTD 109.96 billion, down 18.77% Y-o-Y from NTD 135.37 billion. Gross profit was NTD 50.94 billion, down 24.41% Y-o-Y from NTD 67.39 billion. Operating expense was NTD 18.21 billion, down 7.17% Y-o-Y from NTD 19.62 billion. Operating income was NTD 32.73 billion, down 31.49% Y-o-Y from NTD 47.77 billion. Net income was NTD 27.97 billion, down 28.04% Y-o-Y from NTD 38.87 billion. EPS was NTD 45.96, a Y-o-Y decrease of NTD 17.91 from NTD 63.87 in 2021.

Next is our Q4 sales breakdown by product line. SMDDIC, which is small and medium driver, accounts for 39% of our total sales. SoC, which is small long driver IC, accounts for 35%. And LDDIC, which is the large driver IC accounts for 26%.

This page shows you the comparison of our 2022 and 2021 monthly sales, and we can see a drastic change in momentum starting from last year June rapidly picking up in October. We have also just released our January sales, which is NTD 7.22 billion, month-on-month down 7%, Y-o-Y down 41.36%. SoC accounts for roughly 39% and driver IC accounts were 61% of the total revenue. So this page, I'll show you the comparison of our 2023 and 2020 monthly sales.

Next, let's look at other key financial numbers. Our cash and cash equivalents in Q4 was NTD 49.17 billion, increased Q-on-Q by 24.17% from NTD 39.6 billion, Y-o-Y decreased by 18.22% from NTD 60.13 billion. Account receivable, Q4 was NTD 15.77 billion increased Q-o-Q 12.83% from NTD 13.97 billion and Y-o-Y decreased 33.12% from NTD 23.57 billion.

Inventory. Q4 was NTD 12.03 billion Q-o-Q down 29.98%, nearly 30% from NTD 17.18 billion, Y-o-Y down 15.21% from NTD 14.19 billion. Short-term loans Q4 is zero.

A recap of recent major events. Novatek was selected as a constituent stock of FTSE4Good TIP Taiwan ESG Index and then the Taiwan High Compensation 100 Index and the Taiwan Employment Creation 99 Index and then Corporate Governance 100 Index.

Now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on our Q4 results and Q1 guidance. [Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[David Chen, executive]

Thank you Steve for the update. Let me rephrase in English. The 2022 Q4 revenue was NTD 22.42 billion, and it exceeded our guidance and Q-o-Q, up 14.6%. This is mainly benefited from a large panel-related products like TV and some IT rush order. And then also seeing the smartphone OLED-related products, orders were better than expected. So this is regarding the Q4 revenue.

As for the Q4 margins, it was 40.55%. It's in line with our guidance, but Q-o-Q decreased by 2.1 percentage points. This is mainly due to the higher inventory costs and also some ASP erosion. And as for Q1 outlook, due to the lunar new year, Q1 usually is a low season. Our customers are still in the process of inventory digestions. And we are seeing that consumer demand is still soft, but we're seeing rush order in part of the high end notebook IT-related product starting from March. We are seeing some rush orders like 16x10 aspect ratio in gaming, some of these high-end products.

And so based on the above, our guidance for Q1 will be roughly flat to slightly up. So revenue will be from NTD 22.2 billion to NTD 23.2 billion and at an exchange rate of 1 to 30. And gross margin will be 37.5% to 39.5% range, and operating margins will be 20% to 23% range.

Next, we'll move on to Q&A session. Please be reminded if you have any questions, do send to us and we'll process and try to answer your questions one at a time.

[David Chen, executive]

We already have some questions on our hand. So I'll ask Tony to process and read out the questions, and we'll try to answer one at a time. So Tony...

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Thanks for your guidance for first quarter, regarding your revenue guidance in the first quarter, could you provide more of a sequential guidance for your 3 business lines or by application?

[David Chen, executive]

Based on the Q1 guidance, we are seeing different situation for our 3 main product lines. And if you look at the large driver IC-related Q-o-Q, it will be up. And as mentioned earlier, this is mainly due to the large orders, particularly from high-end notebook and monitor. For the TV, it will be roughly flat. And as for SoC, we're also seeing Q-o-Q up. And as for this fall, the medium-sized DDIC, we are expecting it to be down Q-o-Q, mainly due to the weak demand in smartphones. Even though there's a weak demand in our OLED shipment, we'll be able to maintain the Q1 unit shipment.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

First, we have seen some questions with regard with the end demand margin and the overall outlook. The first question is could management provide some guidance or outlook for the major applications during 2023?

[David Chen, executive]

As for the overall 2023, for the first half, we're seeing that the Q1 is still undergoing inventory digestions. So we'll likely -- we are seeing that likely, there will be some seasonal pickup in Q2. As for the second half, given the recent China reopening and inflation under control and also the interest rate hike stabilizing, so demand recovery is well anticipated.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Among your major product lines, do you expect to see some plan to have positive unit growth or revenue growth year-over-year? And it's the same view as your last time you provided during last time in November.

[David Chen, executive]

Well, we are holding similar views as we provided last November. The product line that has potential growth are like OLED-related products like for smartphone, for TV, monitor and also the automotive TDDI. And then we also have the VR, AR product and also our mid- to high-end TV SoC like the 4K 120 Hertz or even the higher resolution 8K TV. And also, we have our ASIC product, which also should see significant growth.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Could management also provide your growth driver in the next 3 years among your product lines? What are the major factors behind that?

[David Chen, executive]

Well, some of those products, as I mentioned earlier, will continue to grow for the next 2 to 3 years. As we just mentioned, OLED related and automotive TDDI or even OLED for automotive, especially VR/AR, we have expectation for growth in this area. And of course, ASIC, which provides solution for customers regarding the pitch quality of gaming or some specific customer spend driver or SoC.

So for us, I mean, for the next 3 years, we'll continue to double high-end products and add value for our end customers, such as like the high burn-in rate, high-resolution, high-speed interface or power saving or picture quality. And these are some of the core confidence that we have, and we'll utilize this to provide the value to our customers. And we do expect these product lines will bring more revenue.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Management already provided some factors for your better-than-expected quarter 4 revenues. But could you also provide quarter-over-quarter growth in terms of the ranking among your 3 product lines? Also your first quarter is guiding slightly up quarter-over-quarter above the normal seasonality. Could you also provide some preliminary view for the second quarter revenue?

[David Chen, executive]

Well, the fourth quarter, as I mentioned earlier, upside came from rush order of large driver IC, mainly TV and smartphone OLED DDIC. So both are better than expected. And as for the Q4, the major growth or the large driver IC and then the next small and medium IC and the last is SoC. And for Q2, I think Q2 likely, it will be up because you're seeing in Q2, we have a new product getting into mass production. And also on our customer side, there will be a new model launch in Q2. So these are some of the reasons that we think Q2 likely will be up.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Your inventory dollar decreased 30% quarter-over-quarter to NTD 12 billion in quarter 4. Could you provide the inventory days? And also provide the trend for your inventory dollar and the days for the end of first quarter? When will you return to more normal level for your inventory?

[David Chen, executive]

Well, the inventory days decreased to 98 days from 111 days back in third quarter 2022, and that's a very good reduction. And inventory dollars will continue to decline Q-o-Q in first quarter 2023 and then will return to the healthy normal level. But both depend on the situation and to the market needs. We'll have a dynamic adjustment depending on the needs.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Now we are moving to some more discussion on our gross margin trend. Management already provided factors for quarter 4 margin decline. Could you also provide factors for your sequential decline into the first quarter this year?

[David Chen, executive]

Well, the first quarter gross margin actually mainly because of a lower selling price and also some high inventory costs.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

I think you mentioned about [indiscernible] has been one of the major factors for your downward growth margins, could you provide a sequential trend among your products in quarter 4 or even into the first quarter?

[David Chen, executive]

Well, we have seen weak demand in smartphone TDDI, and we are seeing some inventory adjustment and then more competition. And so there is a higher price volatility. And conversely, our SoC price has been relatively stable, so the SoC ASP has been relatively stable.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

So another key data for your gross margin trend, do your cost -- or have your cost -- or your cost continue to come down in the first quarter? Mainly from which raw material or for which product line?

[David Chen, executive]

Well, cost in Q1, we're expecting to be down Q-o-Q. Some of the product will have costs coming down. And this has been already factored into our guidance, the Q1 guidance. Well, as you know, the costs are usually subjected to the demand. So Novatek will continue to communicate with our supplier to go through the business cycles together.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Also, question about the long-term agreement with the public suppliers, wonder where you still incur some related costs in the first quarter or for the rest of 2023.

[David Chen, executive]

Well, currently, we don't expect any LTA costs. So for Q1 or for the whole of 2023 because the wafer start actually are going back to normal, so we take the likely zero for 2023.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Okay. Now regarding the overall gross margin what are the major reasons for your gross margin at the high end of your guidance in quarter 4 last year? And secondly, also I wonder could you say a point your gross margin could become more stabilized under what kind of circumstances?

[David Chen, executive]

The Q4 margin reached a further bar basically helped by product mix -- that's mainly helped by product mix. And as we move forward with new product launch and costs under control, the gross margin should be stabilized Q-on-Q gradually starting from the second quarter.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

We noted Novatek has possibly higher than peers gross margin, which is more resilient. What are the major factors?

[David Chen, executive]

Well, as you all know, Novatek has positioned ourselves to be the smart display and smart image solution provider. So for us, we have a very broad -- very focused and very broad product offering for different various applications. And also structurally, you have a much better product on high end side that can help provide value to our customers.

And also with the product portfolio, not just drivers of SoC and also our total solution, which can provide a complete solution for our customers and to meet their needs. And of course, the other reason that we have a more resilient or better margin is also have to do with our more discipline. Disciplined inventory management, and this is very, very crucial for [ public ] companies.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Yes. Now talking about the competition. Would you talk about the competition, mainly from Mainland China? And also the impact from the new positive supply also out of China, particularly on driver IC?

[David Chen, executive]

Well, we did get our views during our last investor conference. So basically, there is no change to our earlier views. And again, Novatek, we will continue to focus to enhance our design capacity systems and differentiation and value added product and also the optimum product portfolio like a total solution for various displays like OLED, AR/VR or automotive, whether TDDI or OLED.

And then, of course, we already also are working on the 6-nanometer chip for SoC. So these are some of the new product technology competitiveness that will continue to enhance. And of course, under the current environment, OEM customers are greatly in need of stable and resilient supplier. And I think with our competitiveness, I think we definitely have position and capability to meet such kind of needs and should continue to be the reliable long-term partner. And because for Novatek, we're also neutral in IC design hub, we looked at all the panel makers.

And as for the China fab, I mean as long as there's any competitive fabs available, we'll definitely use those fabs or resources. And of course, and for the China fab, I mean, they're not just producing drivers, they also produce other products like CMOS sensor, power management IC. They can -- they have to make profit, so they will do different allocation. So far, I think we'll continue to maintain our competitiveness through our core value, core strength and with that composition, I think our customers will continue to work closely with Novatek and become our long-term partner.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Okay. Now also given the recent continued tension between China and the U.S., could management also talk about some opportunity and challenge behind that?

[David Chen, executive]

Well, regarding the U.S.-China conflict or the geopolitical instability, I think it does bring in some opportunity. We are seeing more regional demand coming in as we work with all the different customers in various areas. The challenges that we see that do not cope with this kind of changes, we need to allocate more resources to service our customers and also require more flexible or more resilient supply chain management skill, and this is part of our strength.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Now there are some follow up. First question will be more related to the financial side. First one is what was the major reason to cause the operating expense to decline from quarter 3? Two, what were the major items for the nonoperating loss in quarter 4? Three, management already provided the operating expense ratio for first quarter. Could you also provide some direction for your overall 2023? And lastly, given the recent volatility for FX rate, could you also provide direction or guidance in terms of the impact on FX to your gross margin at the bottom line?

[David Chen, executive]

On the operating expense in our fourth quarter decreased by $208 million. This is mainly due to lower R&D expenses. And on the nonoperating loss, we have about NTD 225 million in Q4, and this largely came from our ForEx loss of about $463 million. And we don't provide the full year 2023 financial forecast. But in 2022, our operating expense is around 16.56%. And you could take that as a reasonable reference. And as for ForEx, it has a limited impact to our gross margin due to U.S. dollar-denominated sales and procurement but does have some impact on the net earnings.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

I wonder if will you also still maintain the similar payout ratio in 2023 for your 2022 earnings. Also for your cash, in addition to the cash dividend, do you have any other plans?

[David Chen, executive]

Well, our dividend policy basically is decided by the Board of Directors. But in the past years, our payout ratio has always been around 80% over the past many years. So most probably, we'll maintain that kind of ratio, but it will depend on the Board of Directors.

And cash flow, we maybe use for the long term in the R&D development and the expansion of the product portfolio and the introduction of new products. And also part of the cash will be reserved to maintain our flexibility when needs arise.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

During the beginning of the year, I can see that -- we have seen some press release from your peer Himax, which mentioned about the collaboration with Novatek. Could you provide more color for this collaboration?

[David Chen, executive]

Well, this is -- basically, this product is a newly launched product for Novatek. It's basically an AI vision processor. And it can be used in various areas, so various applications. And then the one that we use -- with the collaborate Himax is just one of our customers for this SoC happen to choose Himax solutions to work as I said. So this is just one of the application of one of these -- the application that we see. They can be applied to many areas.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[David Chen, executive]

Okay. As for the ESG-related issues or event, as I mentioned earlier during my presentation, Novatek was selected as a constituent stock of the variable index. And then we -- Novatek has also received various awards, like the TCSA Taiwan Enterprise Sustainability Award, it's gold, and then Excellent Group for Promoting Youth Volunteer Service; and then the Sports Promoter Award - Long-term Sponsorship Award and a 2020 (sic) [ 2022 ] Social Education Contribution Award. And then we're also the winner of the 2022 Sustainable Citizens Award. We came in 37. That's by Commonwealth Magazine [Foreign Language].

And then the top 10 carbon competitive companies of our Business Suite. And then there's also the Harvard Business Review, the Harvard Top 100 Best Performing Business Leaders and our Chairman came in #4. So these are some of the events or some of the related awards that we received.

And the most importantly -- our Board has also approved our plan of adopting 50 at 2030, which means that by year 2030, 50% of our energy will be using renewable energy by the year 2030. And by year 2030, 100% of our energy will be renewable energy. So this basically is our policy and we'll be moving to that direction, and we'll try to achieve this commitment. So this is the ESG-related event and some of the issues that are a bit big.

Okay. Tony, any further questions?

[Tony Tseng, executive]

Okay. I think you mentioned about, I think, for 2023 and the next 3 years, the OLED and AR/VR will be your key growth drivers. Could you also provide more -- a little bit more color on this product?

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

I think you mentioned about OLED and AR/VR as your 2023 and also 3-year growth drivers. Could you provide more color on these 2 product lines such as OLED and AR/VR?

[David Chen, executive]

So as for the OLED product line, as you all know, from a technology point of view, we are still a leading player. And we are expecting this year unit shipment should be better than last year. And then as for the AR/VR, whether it's applied to the metaverse of gaming, we do have expectation. And starting from Q2, some of these products will start mass production. And so we do have expectation for the next 2 or 3 years for this product to continue to grow.

[Tony Tseng, executive]

[Foreign Language]

[Steve Wang, executive]

[Foreign Language]

[Tony Tseng, executive]

Management last time mentioned about the tight supply, 28-nanometer will be a critical factor for your OLED shipments in 2023. Could you provide an update on this [ profit-nil ] situation?

[David Chen, executive]

Regarding 28 nano or even 22 nano, the overall capacity is indeed tight. It's not just for the high voltage, but also for the large 28, 22 nano, those are still tight. So for Novatek, we are trying out best to look for more capacity or more supply. So we are still working on it.

[Tony Tseng, executive]

There are no further questions.

[David Chen, executive]

If there's no further questions, I think then we will end our conference. Thank you, everybody, for taking part in our Q4 Investor conference. I wish you all the best. [Foreign Language]. Thank you so much.