Innolux Corp

TWSE:3481

Earnings Call Analysis

Significant Q2 Growth, Focus on High-Margin Segments

In Q2, Innolux achieved a revenue of TWD 56.8 billion, a 12.6% quarter-over-quarter increase. Their gross margin improved significantly from 4% in Q1 to 10% in Q2. However, the company still reported a bottom-line loss of TWD 1.18 billion. Innolux anticipates challenges in Q3 but remains optimistic due to their diversified product strategy, especially in high-margin segments like non-display and non-commodity sectors, which enjoy margins between 20% to 25%【6:0†source】.

Overview of the Display Market

Jin-Yang Hung, the CEO, opened the call by discussing the display market, including automotive applications. A healthy market dynamic is supported by balanced supply and demand. He highlighted that with made-to-order discipline and low inventory levels, both prices and shipment volumes align well with market demand and component costs. Interestingly, no new capacity for larger-sized products is expected in the upcoming two years, which should support a stable market.

Product Segment Developments

James Yang elaborated on the product segments, noting particularly that TV sales saw a moderate improvement in the second quarter, driven partly by international sports events. This has helped in pushing the average selling price up, as consumers are looking for larger, better-quality displays. For IT products, while notebook sales remained flat, the upcoming end of Windows 10 is expected to drive new sales in 2024. Additionally, the automotive display market continues to grow, driven by the shift to electric vehicles (EVs), where displays serve as major control interfaces.

Strategic Initiatives and Financial Performance

The focus has shifted towards higher-margin non-commodity and non-display products. The gross margin for commodities is between 6% and 10%, while non-commodities boast a much higher margin, ranging from 20% to 25%. The second quarter saw the company achieving TWD 56.8 billion in revenue, marking a 12.6% quarter-on-quarter growth. The gross margin improved to 10%, up from 4% in the previous quarter, and the bottom line saw a reduction in operating losses to TWD 1.18 billion.

Future Outlook

Looking forward, while the sentiment for the third quarter remains uncertain, management is optimistic. They believe the company’s lean management and flexibility will allow them to navigate upcoming challenges effectively. The focus on automotive displays, particularly for EVs, and innovative display technologies like mini-LED and micro-LED, is expected to drive future growth. Furthermore, Innolux's commitment to high-end IC packaging and Fan-out PLP is aimed at transforming the company and enhancing its long-term sustainability.

Earnings Call Transcript 2024-Q2

[Operator]

[Foreign Language] [Interpreted] Good afternoon, everyone. Welcome to Innolux Second Half Investor Conference. [Operator Instructions]. Today's meeting, we will have Mr. Jin Hung, Innolux Chairman and CEO; and Mr. James Yang, our President, to provide us information on market overview, corporate strategies and financial results. [Operator Instructions]. Now I will hand it over to Jin.

[Jin-Yang Hung, executive]

Good afternoon, ladies and gentlemen. Thanks for joining us today. In today's call, we would like to share with you about our view on the display market as well as the automotive. Also, we will share with you our whole modern panel strategy in the whole transformation process. We will be also very happy to share with you that our turnaround result in the second quarter. I will let James to lead to the whole presentation first.

[Chu-Hsiang Yang, executive]

Thanks, Jin. Good afternoon, everyone. It's James. I will walk you through the overall display industry status in near term and short term. A healthy market is supported by balanced supply and demand. Based on continuous practice made-to-order discipline and a low inventory level, we see both the price and shipment franchise with market demand and also component costs. When the component cost increase, it could means either our supply is optimistic about market sentiment or reflection or inflection either way for Innolux, it could be a factor to support our price getting stable and higher.

Number two, quarter-on-quarter from [indiscernible] was shipment and price is normal. A structure price side, we observed the growth of averaging shipment size across all the product types. Larger sized usually means a higher price and a faster consumption of capacity. Number three, in the overall market view, we don't see any upcoming new capacity for larger sized products in two years. On top of a few fab out or transform of original factories. We expect the display market is healthy in a structured way for a manufacturing factor to focus and compete in quality and more innovation.

Next page, please. Talking about the products, TV first. The international sports events pushed for the some restocking order in the beginning of the second quarters. It paved the foundation and supported a moderate improvement for TV, especially in price. In [indiscernible] promotion in China, the shipment of total sales was not good, but as good as the last year. But the major improvement mark was the average selling price. Our interpretation is that consumer is looking for larger size and better visual quality products. With the growth of every shipment size, it will consume the panel capacity in a faster pace and better video quality means more room for value-added products. We see it was a healthy demand trend of the TV industry.

And then IT products. Notebook product sales was flat. But we expect a growing momentum will happen in next year 2024. The end of life of Windows 10 will push for replacement of a commercial notebooks followed by consumer level by estimations.

The growth of average size in IT product is also noticed, AI PC and the Notebook are no doubt the most trendy topics. We believe the market will accept both the high-end and entry-level products. Innolux could provide flex products combination from an LCD for NG level to mini-LED for high-end products. But our experience caused the competitiveness is one of the key factors for new commodity to become more popular. And then talking about automotives.

Automotive belong to Innolux non-display demand since we serve Tier 1 role to offer display module with system integrations. The shipment and the average size of automotive panel marked the race through the new vehicle shipment goes in 2024. Innolux automotive display could serve both fuel car or the EV car, both the importance of a display in EV car is irreplaceable since it is the most major control interface.

Country around the world continues to offer subsidies to encourage the shift from fuel car to EV, including both original or luxuries models. The market scale will grow bigger and bigger. Innolux approach is to offer a module with integrated system for high-end value. Number four, for next-generation display technology. If a consumer -- if a customer is looking for better visual solutions, Innolux is really compact our products with mini-LED and micro-LED solutions.

And next page, talking about the long-term product mix and the technology. First, the panel industry evolves, it's not a game of capacity expansion right now, instead of flexibility in the product mix with the value creation is a key. The business model is also different. We need to provide different products and service to secure and meet customers order.

The definition of a premium product will change in a very fast pace. The correct approach for new -- for now is to identify our capability and realize the best value across all fields to meet the client-side demand.

AI no doubt the growth driver, powering the whole industry value chain from software to hardware, from the IC component to end products like the AI PC, notebook or high-performance servers.

Number 4, Innolux regards our core competitors in chance to provide different class of display for high-end, for end products and also serves as a service provider in advanced IC package, especially our experiences in glass handling could be effective pain killer to enable and help our clients to overcome glass-related pain points. I will stop here and hand over it to Jim. Thanks.

[Jin-Yang Hung, executive]

Thanks, James. As we talk about the more than panel strategy in our last analyst conference. Usually to our customers, we will provide them with our whole technology road map. So In this investor conference, I also want to offer you our whole diversification road map. As you can see on the presentation slides, we used to be more linear business model, which we take orders.

We make it through into the array and the CF, the whole TFT process and send to customers. What we are trying to do is we review back again our core competence, which we believe is our over two decades experience on the TFT process on the glass substrate. So we take that as a core and make a twist of it. So when we do this planning, that's how we do it, we take what people usually take for granted saying the TFT only for panel, we divert into the -- out from the original way.

So it's a totally unexpected change and that's how the whole Fan-out PLP pointed our radar screen. Of course, the production process similarity of over 60% to our array process is only the initial, it's only the beginning. We also did a lot of the market review, the feasibility study and even internally, our employees' capability and IP so on and so forth. And by now, we can very sure to share with you that Fan-out PLP is a confirmed direction for Innolux. Next page, please.

So on this page, you can see that we're simplifying I'm saying that on the whole semiconductor process from IC design to IC manufacturing, packaging and testing while we are positioned very clearly from day one is that we aim to perform the high-end IC packaging. That includes like a good hit discussion, which is also coupled with the ESG team and also the low signal interference and also like power consumption, so on and so forth.

And also, we have believed that our -- we leverage the -- our current 3.5 generation fab into the whole packaging process that is equal to about 7x of the 12-inch wafer. So in that kind of a size, you can easily see that our yield rate and our productivity will be significantly improved. So that's where the initial competitive advantage, we believe, and that also show our [ cheapest ] process. So in combined of that, we believe that the Power IC and some of the computing IC will be our key target.

Our next step is the RDL first, which we are also in the process of getting the certification from the clients. The RDL can further reduce the thickness of the substrate compared with the ADF and also with the fine pitch patterning that also improved the whole performance of the IC and also in the lab stage, we are doing the research on the TGV, which we make a micro host on the glass substrate and that is prepared for the following materialization process. And you know, obviously, that is the key process for the 3D IC manufacturing.

So all in all, we believe that with our new direction, Fan-out PLP, who will be able to reposition the company and transform to help the whole Taiwan's semiconductor value chain in the global value chain and build Taiwan with an even stronger foundation. We are also offering great feasibility on the various kinds of the products we can work with the customers include the IDM and then other companies. Also, we are happy to work with existing also companies to provide a gross subtrate. So we are all open on the various kind of business model. On the next page, here, you can see that we also offer the great area utilization when we do the simple comparison on the Fan-out PLP versus the conventional packaging way.

So that is one of the key advantage. We believe that Innolux Fan-out PLP would have. And other than that, our direct copper interconnection also can shorter the trade, which means that though the resistance and though the signal interference. So this will be our key advantage. The next page, please.

On our overall operation performance, you can see that we categorized our revenue in three different categories from non-display to non-commodity and then the commodity, even with the last six months improvement on the TV market, as James mentioned, the margin -- the gross margin is ranging between 6% to 10%. While the noncommodity, which is much higher margin in between 20% to 25%.

The nondisplay has enjoyed the margin premium versus commodity somewhere around 11% to 15% in the first half of this year. So you can easily see from this page that when we continue to devote our resources into the nondisplay and the noncommodity. On one hand, we enjoy the benefit on the margins improvement. On the other hand, we also enjoy the longer-term sustainability or less deviation on our margins Fan-out PLP.

So that's one thing we want to commit to the shareholders and the investors on the longer-term operating performance. Next page, please. Overall, our second quarter revenue has announced, where we reached the revenue of TWD 56.8 billion, which is about 12.6% Q-on-Q growth.

Our gross margin of 10% in Q2 also see a significant improvement from the second quarter 4%. And our bottom line has improved on the first quarter's operating loss to TWD 1.18 billion. That is thanks to the whole team efforts and also great support from our suppliers, a lot of the customers. So looking ahead into the Q3, we see some headwinds, and also the sentiment is still unclear. However, we are confident that with our lean management team as well as our flexibility to offer to the clients on the various display products. we'll be able to cope with it and continue to deliver a good financial result to the investors.

So I will stop here to take any further questions on the Q&A session. Thank you.

[Operator]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Operator]

Thank you for joining us today. We are going to conclude the call now. Conference replay will be available in an [ hour ] from now at the company's website, www.innolux.com. Goodbye, and have a great day.

[Jin-Yang Hung, executive]

Thank you.

[Chu-Hsiang Yang, executive]

Thank you.

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