Ladies and gentlemen, thank you for standing by. Welcome to AAC Technologies 2018 Interim Results Investor Webcast and Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time if you wish to ask a question, you will need to press star one on your telephone. I will now hand over to your host today. Please go ahead.
Good evening. Welcome to our 2018 Interim Results Webcast and Conference Call. I am Eddie Gong, Head of IR of AAC. Joining us today, we have our CEO, Mr. Benjamin Pan, and our Managing Director, Mr. Richard Mok. Before we start, we would like to remind you some information you may hear during our discussion today may contain forward-looking statements. Actual results or trends could turn out different. I will now turn the call over to Richard for a brief review of the results before opening up the call.
Hi, good evening, everyone. Thanks for joining our call today. For the first six months in the year 2018, sluggish market and RMB appreciation affected our performance. A slight decrease of 2.5% in our first half revenue. Dropped to RMB 8.4 billion. Sales to Android customers achieved satisfactory growth across different business segments. Gross profit margin down by 4.3 points to 36.7%, impacted mainly by a 7.2% RMB appreciation in this first half period. Just the RMB appreciation has cost 3 percentage points. A slight change in the product mix cost a 1.3 points drop in the gross margin. Net margin was 3.4% down to 21.1%. To confirm the company is in a solid financial position, the board has declared an interim dividend of HKD 0.40 per ordinary share. For segments review, I shall start with acoustic.
Acoustic sales rose 4% in the first half, driven by strong growth of 16% in speaker modules, including the new platform, SLS. SLS experienced both ASP and volume increase based on pursuit of better stereo sound quality, there is continued migration from standalone receiver and speakers. The SLS platform offers better audio performance in terms of higher fidelity and stronger bass. That has continued widening market penetration. We expect more customers to adopt this SLS design in both their flagship and mid-tier models. This proprietary structural design has set a new milestone in acoustic and a very clear upgrade roadmap leading to mini hi-fi performance in the very near future. Correspondingly, we will expand SLS production capacity for meeting increasing demand.
For acoustic, we believe the company is very much capable of improving gross margins from current level through continued better product mix and production efficiency gain from volume growth. The second segment, which we talk about the combined haptics and precision components involving mechanical, although sales have declined 17%, mainly due to reduced volume shipments in haptics and in particular in the second quarter, weaker customer sales through. The two sub-segments have different features of development. In haptics and precision components, it is based on electromagnetic motion. There is great potential for significant growth. The active solutions are very suitable for increasing meeting the demand for virtualization designs and provide rich tactile feedback. In addition, the audio display actuator is based on haptic capability as well, is ideal for portless design for genuine full-screen design, which has become a trend, high user experience, innovation, smartphone devices.
Extending on the electromagnetic expertise, there are opportunities that fit very much in the company's core competencies in this area, such as what we are seeing more in the new models, the kind of stepping motor, decelerator, and VCM designs. We believe in this segment, customer diversification will carry on. Stack cycle upgrade will appear. In the other sub-segment of precision mechanical, apart from metallic frames and casing, we have already developed advanced proprietary precision molding and glass processing know-how, that would be a very interesting opportunity for us to resolve challenging new 3D cover glass designs that our customers have in mind. This precision mechanical segment, we expect to carry on to gain market share, and at the same time, will be very capable of generating higher rate of returns.
As we don't perceive any significant CapEx investment will be required to match the future revenue business opportunities growth. With high efficiency and better process management, we also believe the gross margin in this sub-segment will also improve. The third very interesting segment of optics business segment, as we have said in the past, with our unique advanced, highly efficient manufacturing system for the wafer level glass, hybrid lens, and plastic lens, we expect to deliver the next-generation optical specs demanded by the market and our customers. Revenue for this segment for the first half derived from sales of plastic lens amounted to more than RMB 240 million. Our plastic lens monthly production capacity, 20 million per month, is fully utilized, and expansion plan is in progress. We strongly believe production yields and margins will continue to improve when capacity expands.
The production expertise as well as capacity for plastic lens will serve us well in preparation for scaling up production of WLG hybrid lens. We believe differentiation of the hybrid lens solutions will enable the company to have additional source of income in the market. Finally, in the MEMS component segment, we are pleased to report the increase of revenue of 25% on a year-on-year basis, based on shipment growth. We continue to focus on technology upgrade and vertical integration. Not only have we strengthened in-house capabilities on MEMS designs, we continue to allocate R&D resources of MEMS technology to develop more advanced applications. This strategy enables our footprint to extend from the current smartphones market into the smart speaker areas. Going forward, we will be able to offer a broader range of solutions of meeting requirements from different tiers of customers and to gain market share.
Now, we would be pleased to answer your queries or your questions. Thank you.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or the hash key. We are limiting to two questions at each time. Our first question is coming from the line of Yu-Chen Tsai from Morgan Stanley. Please ask your question.
Hello. Yu-Chen. This is Eddie. How are you? My first question is about the revenue guidance. Before, you mentioned double-digit growth for the whole year. I want to know if there are any changes to that, and also the outlook for profit. Thank you.
Yu-Chen, I'm going to answer in English. It's kind of universal for the participants. I think early on in the year, we have issued some guidance, as we have reported first-half revenue results. At this moment in time, we are not going to make further comments on the guidance anymore. At a more important basis, the company, as we have pointed out in the announcement, the second half will be a traditional peak period. The company will strongly be prepared and work on delivering successful business with all our major customers in the second half. We are not going to comment on the sales guidance. Thank you.
The follow-up question is on the Android side. You commented that in the first half, they all have quite satisfactory growth. I wonder if the growth here into the second half, will that accelerate, or do you think that will maintain quite the same level as in the first half?
I think there are, for example, different development for individual business segments of acoustic haptics, precision components, and mechanical, also optics and managed components. In the Android phones, as you know, we have a very successful track record of developing and penetrating in all the Android customers. In the first half, I think we have disclosed in the interim results that the top five customers of our mobile phone industry kind of contribute more than 90%. We believe similar kind of contributions will be made by this kind of large group of customers we have. In terms of growth, I think it is not strictly appropriate just to refer to growth of Android as such. I think growth of Android in all our business segment is an area that warrants different growth rates.
For example, in our optic plastic lens, we have successfully extended our customer base. Now we are shipping to different Android customers already. In terms of our mechanical structure solution as well, not only we have continued to be penetrating in the high-tier devices of our customer, but also we are shipping to most of our Android customer in the mid-segment as well. I would answer by saying the growth in Android and the particular penetration increase in Android phone are very much on progress and is more than satisfactory.
Your next question is coming from the line of William Young from Citi. Please ask your question.
My question is about haptics. What's the chance we will see more than one haptics for smartphone in the next 12 to 18 months? The second one, is there any chance on a tablet product as well? That's my question. Thank you.
Thank you for your question. I think haptics are ongoing. As we have said in the past, not only AAC has obtained industry recognition that we are a very strong hardware solution provider, we also work very hard in the ecosystem, understanding the software as such. At the end of the day, I think we use the description of tactile feedback. I think tactile feedback to create new user experience can come from, I think, what we call in terms of the areas of the virtualization, also from gaming applications as well. These two areas demand different tactile feedback, precision specification. I think equally, the opportunity, the proposition to see more than one haptics or stronger haptics, et cetera.
At the end of the day, I think what is most important is that user experience generated from haptics continue to demand better design, more complicated structure, better performance, and also consideration for the form factor and how it fits with the overall inner design of the smartphone. That has not changed.
The next question is coming from the line of Wei Chen from Goldman Sachs. Please ask your question.
Hello. My question is on gross margin. You have disclosed in the first half, both acoustic and haptics precision component gross margin was about 37.5% and 39.6%. Both look quite healthy, but the corporate gross margin is lower at 36.7%. I think the logic here is that it's suggesting that other businesses is seeing very low profitability in the second quarter, bringing down the average. I think the question for Richard is this thinking correct? What is actually diluting margin? Is it a WLG business that's ramping up in the process? Generally, more detailed explanations on how product mix is impacting gross margin in the second quarter. Thank you.
Thank you for your question. First of all, as we pointed out, the overall gross margin of the group in the first half and also to a large extent, also in the second half, because the RMB appreciation continued throughout the 3 months in the second quarter as well.
In the first half, as we have explained it for the first half, 3% adverse effect was caused by RMB appreciation. To some extent, that happened a lot, that effect is also significant in the second quarter. The revenue contribution from optic segment, as we have disclosed, over RMB 240 million income accounted for roughly 3% of our revenue. Thus, at the moment, we believe there is improvement in terms of what we call production efficiency of yields, and also as capacity expands, as you heard just now, we have full utilization for the current capacity of 20 million, and we intend to enlarge our capacity, thus creating even further opportunity for gross margin improvements. We tried to explain that the acoustic segment, which at the moment the first half accounted for more than 50%, 51% of revenue, continues to play a positive, healthy contribution, most likely because of the fact that SLS is a proprietary design of AAC. We have very good kind of ramp-up already achieved in the first half.
As we grow our customer base and projects, we certainly would like to leverage each opportunity to deliver better and better gross margins. I think the remaining last segment to discuss is about haptic and what we call haptic and precision components with mechanical.
I think as we have said, we have a much clearer that haptic progress is bound to happen because of the full screen, the virtualization, and also on stronger tactile requirements by our customer. Haptic components or solutions that AAC are working with customers, definitely in terms of complications, in terms of ASP trends are very positive. To some extent, I think as we have stressed in the strategy part, electromagnetic is a core knowledge that AAC has a very strong base, not only in terms of design, but in terms of automation and production process in place. We sure should be able to drive better return on net assets related to haptics equipment and machinery.
There's no reason that we are kind of changing our strategy in terms of providing high technology value in the haptics components. In mechanical structure, I think it's very clear that this year we now have successfully been acknowledged by the customers in the Android VCM market that our mechanical solutions are of very good kind of cooperation and meet their requirements. With more and more, kind of in terms of volume per project, definitely as we improve on the scale, the gross margins of mechanical business are on the uptrend. I think all in all, gross margins of the growth, including some specific clear upgrade trends of ASP and complicated stacks, higher stacks, should give AAC opportunities to deliver better gross margins.
Okay, thank you, Richard, for a very detailed explanation. I have a follow-up for Ben. [Non-English content]
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Ben wants to reiterate that it has always been our priority to align ourselves to determine how we could provide our expertise fittingly in considering the value we provide in solutions to customer in terms of user experience. He mentioned the two components that derive from our strong electromagnetic capability of SLS acoustic platform and haptics. Both of these are capabilities that we have been developed and tested out in the customer's application, but also from the fact that the machinery that we equipped for the automation production of these solutions are well kind of fittingly adaptable to the ongoing upgrade of the design of the components or the complicated solutions that our customers are seeking to differentiate themselves.
We believe that at certain point in time, our competitors, maybe due to some of their different background reason, may come in a short time basis to present what we call short-term pricing competition. At the end of a focused user experience solution provider, we believe our value of creating the genuine user experience upgrade, the customers have acknowledged AAC position very clearly and trusted us in this in the past and will continue to do so. On top of this, we believe this is a very clear kind of path that this kind of solution we are heavily targeting for, kind of what we call double-digit % growth in this business opportunity. Because of the fact that as we have experienced the upgrade in the solutions that the customer have demand in the next generation devices.
AAC continue to not only defend but outperform competition, not only because we pay attention to the user experience and the general usage of our production equipment, but also we always bear in mind the kind of what we call the leader of costing and delivering long-term user experience solution.
Our next question is coming from the line of Pao-Kai Chang from JPMorgan. Please ask your question.
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In terms of plastic lens, confirm that for this month already, we have already exceeded the 20 million number, and is on target to deliver 25 million-30 million. The previous plan of reaching 30 million into the third quarter has not changed. The progress on plastic lens expansion is on track. In terms of WLG preparation, again, nothing adverse or in terms of what we have expected have changed. We are going forward with building up tooling capacity, molding capability in the range we have indicated. If we don't reach 10 million, it will be definitely approaching the 10 million capacity per month capacity. From the market side, the customers' intention or instruction or indications of strong interest in adopting WLG hybrid lens solutions have not changed. We remain very confident about the optics business development.
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We agree what you have pointed out is the interest for the audio display actuator has markedly increasing interest in the market. Especially I think next year, 2019, clearly some customers' projects are looking at that direction, and we are very much expected to be a major player in this new business.
What's more important is that we have already been working on performance upgrade in the design from its current performance. At the same time, we are very conscious that in terms of what we are able to offer is a stability in the pricing increase that the market could adopt. Needless to say, we have already established a strong portfolio of related IPs. I think the competition, like all the other interesting business segments that AAC are in, will clearly try and enter into similar areas. What's more important is that, as we have pointed out just now, not only we have been proving our haptics capability or our understanding of electromagnetics to build a strong R&D roadmap, but also from the fact that we already have been deploying fixed production asset platforms in the production of haptic components, including what we have briefly mentioned, stepping motors and decelerators, haptics precision components. I think those are key differentiate parameters that would add to our distance or differentiation with competition coming in this area.
The next question is coming from the line of Leping Huang from CICC. Please ask your question.
Thank you to take my question. [Non-English content]
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We strongly believe the trend for gross margins to deliver 40% above is very clear that it's within achievable. Mainly, the new SLS platform is only in its beginning of adoption early this year in the Android camps, as we have discussed that the Android customers will have more penetration in the different Android customers. In terms of generation of spec upgrade in SLS, we are very much very positive on that to deliver the next upgrade. On top, as we have said, the automation efficiency of the current production process, etc., we see a lot of improvement scope. These are all very genuine, very achievable targets that in the past AAC, and will continue to do so on good execution to obtain what we have targeted for our gross margin.