Welcome to Nanya Technology's 2022 second quarter earnings conference call. All lines are in a listen-only mode. The conference will be held only in English for investors around the world. Today's conference will be approximately 60 minutes. Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2022, followed by our guidance for the next quarter and key messages. Then Nanya Technology's Executive Vice President, Dr. Lin-Chin Su, Vice President, Mr. Joseph Wu, and Financial Executive, Mr. Philip Jao, will join us as we open our Q&A sessions. Today's presentation materials are available for download at Nanya Technology's website at www.nanya.com. As usual, we would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements.
Please refer to the safe harbor notice that appears in our presentation materials. For now, I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and current quarter guidance. Dr. Lee, please begin.
Okay, welcome to Nanya Technology Q2 investor conference. I'm Pei-Ing Lee. As usual, my presentation will include Q2 revenue and result, CapEx and bit shipment, market outlook, and business review and outlook. For the revenue and result, our Q2 financial summary as follow. Net sale at TWD 18.031 billion versus Q1 at TWD 19.946 billion, down 9.6% Q- to- Q. Gross profit TWD 7.958 billion at 44.1% margin versus 8.75 at Q1 at 43.9% margin. For operating income, TWD 5.364 billion at 29.8% margin versus Q1, TWD 6.262 billion at 31.4% margin. For EBITDA, TWD 9.21 billion versus TWD 10.1 billion in Q1.
Non-operating income at Q2, TWD 1.74 billion versus Q1, TWD 1.76 billion. Income tax benefit, -TWD 530 million versus -TWD 1.478 billion. For the net income, TWD 6.574 billion at 36.5% margin, versus Q1, TWD 6.55 billion at 32.8% margin. For earnings per share, TWD 2.12 per share versus Q1, TWD 2.11 per share. Book value TWD 57.4 per share, already deduct TWD 3.7 per share dividend payout, versus Q1, TWD 58.45 per share. For quarterly revenue result, Q2 revenue versus Q1, down by 9.6%.
Year-over-year, down 20.4%. For shipment, Q2 versus Q1 decreased by high single digit. For ASP, decreased by mid-single digit. Exchange rate favored by mid-single digit. For Q1 and Q2 results comparison in a little bit more detail. First of all, net sales TWD 18.031 billion versus TWD 19.946 billion, down 9.6%. The reason is bit shipment decreased by high single digit and ASP decreased by mid-single digit, with exchange rate favored by mid-single digit. For gross profit, TWD 7.958 billion at margin of 44.1% versus Q1 TWD 8.75 billion at margin of 43.9%.
Q- to- Q is 0.2% up. Operating expense TWD 2.594 billion versus Q1 TWD 2.488 billion. Operating income TWD 5.364 billion at 29.8% margin versus Q1 TWD 6.262 billion at 31.4% margin. Net income TWD 6.574 billion at 36.5% versus TWD 6.55 billion at 32.8%. Net income increased by TWD 24 million, mainly due to operating income decrease TWD 898 million and income tax decrease TWD 948 million. For the trend chart for quarterly financial highlight at Q2 this year, as you can see that revenue TWD 18.031 billion is the blue bar.
The net income TWD 6.574 billion, the green bar, and the gross margin 44.1% and operating margin 29.8%. With the market downturn outlook, it is unlikely that Q3 will maintain at this high level. For operating expense, SG&A expense for Q2, TWD 663 million. This is at normal range. R&D expense TWD 1.931 billion, also normal. For cash flow, beginning balance at TWD 92.537 billion and end balance for Q2 at TWD 94.776 billion. For cash from operating activity, TWD 6.128 billion versus Q2 is a little low, which is due to income tax payment of TWD 3.5 billion.
CapEx, TWD 5.379 billion, and the financial activity TWD 1.489 billion NT dollars. For the right hand of the chart, you see that beginning balance for beginning of this year, TWD 80.7 billion, with the cash from operating activity up by TWD 17.446 billion and CapEx minus TWD 6.544 billion and financial activity plus TWD 3.173 billion, comes to the end balance at TWD 94.776 billion at the end of Q2. For CapEx and bit shipment. For this year, the original plan for the CapEx is TWD 28.4 billion, and we estimate this year spending maybe TWD 25 billion. On the right-hand side of the chart, bit shipment.
For Q2, bit shipment decreased by high single digit, and for the year, we are expecting the bit shipment will be between flat to down marginally. We have launched a new fab plant, and the fab groundbreaking ceremony has been carried out. We are targeted to build a 12-inch DRAM fab, including R&D center and water resource recycling center. Total investment will be approximately TWD 300 billion. Investment plan will take three phases and up to seven to eight, or approximately 7 years. 10nm-class process will be implemented in this New Fab that including the next-generation 10nm-class. Will also include a separate EUV building. Approximately 45,000 wafers per month after three phases will be targeted.
The third phase production is scheduled to be started on 2025. For the market outlook. We've seen weaker demand and DRAM market outlook. We're seeing weaker DRAM market outlook due to high inflation, conflict between Russia and Ukraine, and also China control measure, COVID-19 control measure and supply chain disruption and consumer spending weakness. In short term, we see market correction. However, long-term DRAM demand remain positive outlook on 5G, AI, cloud computing and networking applications. For supply, DRAM demand softening trigger major DRAM supplier 2023 investment adjustment and equipment shipment delay may impact supplier capacity improvement plan. From demand point of view, server market, data center is still leading demand growth. However, adverse effect of inflation likely to impact server market as well in second half 2022. New CPU and DDR5 introduction will be likely delayed. Market.
For mobile market, average DRAM content has been increasing. However, smartphone shipment trimmed down due to macro-related downside, particularly consumer confidence. PC market, enterprise demand remains solid. However, consumer demand softening, and we're seeing notebook shipment declining. Consumer market, Wi-Fi 6, Wi-Fi 6E stimulate networking demand. Automotive, automotive demand also resume growth while component shortage alleviated. However, control measures have severely reduced local demand in China in first half 2022. Second half 2022 remain unclear. For business review and outlook. For finance, cash dividend of TWD 3.7 per share will be distributed on July 26th, 2022. Our Q2 EPS at TWD 2.12 per share and first half EPS total up to TWD 4.24 per share. For operation, our New Fab groundbreaking was carried out on June 23rd.
Our first generation 10nm-class product has started sampling and second generation is piloting and our third generation development is on track. For market outlook, we're seeing short-term market correction. However, long-term still remains positive on cloud computing, on 5G, AI and networking applications. With that conclude my presentation to you. Thank you.
Yes. Thank you, Dr. Lee. Ladies and gentlemen, before we begin the Q&A session, I would like to remind everyone to limit your questions to two at a time to allow all participants an opportunity to ask questions. We'll begin taking questions from dial-in. For webcast participants, please message your questions with your name and your company name to Nanya operator in the chat box. Now for dial-in participants, please press zero one on your keypad if you would like to ask questions. To cancel your questions, please press zero two. As a reminder, it is greatly appreciated that you turn off the speakerphone mode of your device to prevent possible echo effect. We thank you for your cooperation. Now for dial-in, please press zero one if you would like to ask questions. Thank you. The first one to ask questions is JJ Park from JP Morgan.
The line is open now.
Okay, thanks for taking my question. The first question is about the second half shipment growth outlook. Given that the second quarter shipment was down by high single-digit percent, is it safe to assume that the third and the fourth quarter shipment growth will be double-digit percent, to get to the full year shipment, either flat or marginally decline?
Conventionally, Q3 is the hot season for the year. However, there are some potential concern in the market as I described just now. The inflation issue, the regional political conflict issue and the control measure in China issue all becoming potential concern for the market demand. With the positive side of the hotter season and the downside of the negative effect, potentially also there are effect of economic stimulation factors may be carried out by different countries. Say, all these factors there are many uncertainty. Therefore, our target is still to resume some shipment gain for third quarter. However, we will be looking out closely for the overall demand situation and make adjustment accordingly.
Okay. My second question is also related to the ASP outlook. If I talk to the mainstream DRAM maker, they willing to carry forward inventory into 2023 to protect the DRAM price decline to some extent. Are you willing to carry forward inventory into next year if demand turn out to be much weaker than your expectation? Or you want to manage your inventory, selling some extra inventory into the market at the lower price? Thank you.
The question is the market situation and inventory carry. Okay? This is all depends on each of the company policy. Each of the product may have different inventory situation. For instance, you may have different inventory situation for DDR4, low power DDR4, DDR5 or DDR3. Also at different density as well. The inventory carry has becoming probably the policy of each of the company cannot be in general speaking in one way. Okay? For Nanya point of view, to some extent, we can carry some inventory to some extent. We have the potentially more flexibility in terms of our product portfolio and our customer base.
We now have the more than 30 product portfolio and more than 800 customer that we can flexibly adjust the customer demand accordingly.
Okay. It's very clear, Dr. Lee. Thank you.
Thank you, JJ.
Now, for dialing participants, if you would like to ask questions, please press zero one on your keypad. Thank you. Next one to ask questions, Simon Woo from Bank of America. The line is open now.
Okay. Yeah, thank you very much, yeah. Dr. Lee, well, it seems to be a little bit tough these days, but, any rough idea which application, you know, was better than expected or worse than expected regarding your second quarter result? It's probably matter of the consumer electronics area, China issue, or what's the key factors for the, you know, the price cut or negative bit growth for second quarter results? Thank you.
Your question is particularly for Q2?
Yeah. I wanna review which maybe PC or smartphone, consumer electronics or application collectively lower bit growth or ASP cut, or any particular applications are showing the negative bit growth quarter-on-quarter or ASP cut quarter-on-quarter. Thank you.
In general speaking, as I discuss, let me start with the cloud computing. The market as of today, cloud computing is still the leading sector for the demand point of view. However, as I described it that, with the worldwide inflation, all kinds of consumer confidence declining, all of the cost inflation, et cetera. Okay? So all these factors plus the regional geopolitical conflict has not been alleviated. If the control measures in China are not alleviated either, the situation could become very mixed for Q3. I will come back to Q2. We're seeing that, as I say, cloud computing still most healthy. Notebook, we're seeing that there are some downside in the notebook area, as I reported.
They are particularly impacted by the supply chain, particularly the control measure in China as well. Okay. For the low power, the mobile phone has not been going too well for Q2. Okay. For consumer, beginning of quarter in Q2 was okay until the heavy control measure happened in China, as a result has significantly reduced the consumer confidence. The local demand in China has been severely influenced by control measure as well.
Yeah. Yeah, very clear. Then I know some investors checking the current cycle versus 2019 downturn. Sorry for asking this, but you know, how do you assess the maybe second half of headwind versus the first half, 2019, where the chip makers really suffered, right? Early 2019 or second quarter 2019. Do you expect any, you know, similar patterns, cyclical trend for second half this year versus 2019? Or still you think memory cycle will be very resilient, still better than the previous downturn case this time? Thank you.
Simon, it's quite complicated, you know, quite difficult to answer your question because there are so many uncertain factor. Basically, uncontrollable factor out there, that's including the worldwide inflation, the petroleum, gas, foods, all kind of goods. The pricing going up, okay? Including the regional conflict, it's not been resolved. Including the control measure in China is also don't know how it's going to become better, okay? All these uncertain factor. Then plus the Q3 potentially supposed to be hot season, supposedly some stimulus policy may be happening in certain country, okay? Also including from the supplier side, the inventory level has been discussed, okay? CapEx planning has been discussed, okay?
All those factors are going to be quite dynamic, happening in the next few months, okay? It's quite difficult to anticipate the cycle. Is it going to be exactly the same as 2019 or not? My recommendation is to continue to pay close attention to those factors I just described. Then, maybe from there we will be able to tell, you know, how the market trend will go.
Yeah. Yeah, very clear, sir. Oh, sorry, one quick question, maybe from some investors. Which product showing the relatively better or, you know, the growth momentum, I mean the price momentum for, I mean DDR3 better than DDR4 or vice versa, sir, these days? Which product showing the worse or better momentum? I mean between the DDR3 and DDR4. Thank you.
At this moment, probably all the product portfolio is in decline mode, okay? They're all in downturn, okay? It's just a matter of one is probably more severe than the other, okay? As I described is cannot be generalized, say DDR3 or DDR4, because each of the product may have different density as well, okay? I would say in the future will continue to be the situation like so. Will be each product, including the different density, may have different demand and supply in smaller sector. By itself then will have the different price trend. Okay? Overall speaking, I would say likely, with the product diversification, likely the consumer may have more stable situation compared to, say, particular commodity.
Yeah. Thank you very much, Dr. Lee.
You're welcome.
Ladies and gentlemen, we are now in Q&A session. For dialing participants, if you would like to ask questions, please press zero one on your keypad. Thank you. Next one to ask questions, JJ Park from JP Morgan. Go ahead, please.
I have just two follow-up questions. I think that actually, you're saying is that the lack of visibility for the demand side, and then, it's well known that all the consumer electronics products across the smartphones, PCs, TVs, set-top boxes have been weak. Are you seeing the order cuts from your customers in the recent months, or you just see the lack of visibility, but you don't really see any order adjustment from your customers?
Consumer side, as you can see, the TV market has not been going well. You mentioned that TV set-top box may not be so good. However, networking has been stable. For automotive, which has long been suffering from the component shortage, now is actually getting better, okay? They are upmarket in some regions, maybe smaller region, and they're also downmarket in some different product. In general speaking, I would say this very much depends on the future, those big, big topics that I just mentioned, a few of them, and also including, the, stimulation, policy may be, carry out in certain region, certain country, that may help regional economic. I don't know if I answer your question specifically.
If I don't, please ask again, so I can understand better.
My question was that, I mean, are you seeing any order cut from the major customer, that's why you guide the lack of the visibility for the second half outlook, even in terms of your shipment growth? Or you just don't know how the demand will shape up in the second half?
This will depend on what I just say. I mean, in the Q2, particularly May and June, many consumer sectors have been, the customers have reduced their ordering, but also, commodity, in particular PC side, okay? As you also see that, mobile phones are also severely impacted worldwide, okay? All these areas have caused reduction in demand.
Okay.
As for recovery, on the other hand, will depends on all these region, if the consumer confidence regain due to easing restrictions or due to stimulus package or due to easing control measure, et cetera.
Okay. My second question, I mean, look at your shipment growth. Last year was flat, and this year is flat, probably down year on year. What about the next year? Do you expect the next year production growth to be to increase given 1B nano, the ramp-up?
Yeah. The shipment is due to, first of all, market situation as we discussed, okay? But also due to our production limitation, okay? Our manufacturing capacity can also been built to certain range, okay? Our next growth potential is the 10 nanometer self-developed process and product generation being introduced, okay? We are expecting that to gradually happen in sometime next year or 2023, okay? I have reported that we can start sampling our first generation, and our second generation is now in piloting. Our third generation development is on schedule.
Okay. I think.
Those will be our next growth potential, okay? You are right, we hasn't been grown last year and this year. Even though with the slight market downturn, we may be even shipping less than last year. Okay. All those is two major factor. One is our capacity restriction limitation currently. Then is the-
Okay. Thank you very much, Dr. Lee.
You're welcome, JJ.
Next one to ask questions, BW Chang, Nomura. The line is open to you now.
Okay, thank you very much for taking my question. From 2023 to 2025, what's your technology roadmap and how much bit per wafer growth per each technology is likely to be the case? Second question is, I feel that your New Fab construction to first phase production takes more than 2.5 years. I just wonder why it takes so long time. Yeah, that's it. Thank you.
Yeah. Fab construction takes some time, okay? Particularly with the shortage in many factors, in labors, in materials, and also construction contract, et cetera, okay? In general speaking, fab construction would take probably 1.5-2 years.
Mm-hmm.
It would take a little bit more for us. One of the reason also, we are building a two-deck clean room fab, okay? Instead of single deck. It takes a little bit more construction time.
Mm-hmm. Understood.
Okay. You, your question, another question is about between 2023-2025, where is our big growth will be coming from? Okay? I guess that's your question.
Yeah.
Yeah.
That's right.
As I mentioned that we are currently sampling our 1A generation and 1B generation. Our second generation is currently under piloting. Between now and 2025, we will have marginal capacity increase because our current fab, the full space is almost occupied with only small areas still available. We will use those areas and with some of the conversion from current generation to future generation to achieve a marginal peak growth for the next couple of years.
Okay. Can you please tell me what the bit per wafer growth per tech migration between current 1 and 1A and 1B?
Hello? Listen, BW Chang, can you hear me?
Yeah, yeah, I can hear you. Yeah.
Okay.
I just wonder what the bit growth per wafer from the migration?
Yes.
From 1A to 1B kind of? Yeah.
Yes. We are targeting 30% CPW growth for each generation. Namely, our first generation 10nm will be 30% more than current generation that we are in manufacturing. The second generation will be another 30% more beyond the first generation, and et cetera. That's our current target. Likely, we'll be very close to the number. May not be exact, but will be very close to that number I just described to you.
Okay, thank you very much.
You're welcome, Mr. Chang.
Ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press zero one on your keypad. Thank you. There seems to be no further questions at this point. We thank you for all your questions. Now we'll move on to the webcast Q&A session. Dr. Lee, please proceed.
Okay, I got a question from web, from ProCapital, Vincent. Your first question is that bit shipment guidance for Q3 2022 is +0%-5%, Q4 0% to -5%. Listen, I don't recall that we do a bit shipment guidance for Q3 and Q4 like that, but we in general predicted that the whole year will be marginal down year-over-year. Okay? Vincent, your second question is, may I know company's second half 2022 depreciation and OpEx, SG&A, and R&D? In general speaking, our SG&A and R&D it will be reported just now for Q2. In general, we expect to be in a normal range and depreciation also in a normal range. Okay? Very similar to first half. Okay? Okay. Now I have another question from SinoPac.
Stanley, your question is, what is the main driver for non-operating profit 2Q 2022? There are two main driver. One is the exchange rate favoring, and the other one is the cost down from our non-operating. Or mainly is the exchange rate favoring. Q2 question 2 from Stanley. Since we adjust our CapEx guidance in 2022, what should we expect the full year depreciation level at this time? The adjustment, actually, we are targeted for about similar number. Instead of the TWD 28 billion, likely to be around TWD 25 billion, only marginal decrease due to maybe equipment shipment or delayed payment, et cetera. Also, the depreciation for the year level would not be changed significantly. Will be only a very minor difference.
Question three is that since 1A nanometer DRAM product has been sampling, should we expect this meaningful increase for R&D expense in second half 2022? R&D expense will not be increased, okay, in second half 2022. For the reason, we have been doing R&D for many years, okay? You can see the R&D expense for each quarter for the last few years has been reasonably stable. We don't expect that 1A will change the R&D expense in a big way. If there's any, it would be minor situation. Instead, we'll gradually shifting some of the 1A R&D expense into 1C instead. 1A by itself will gradually go down in R&D expense. Okay? Is there a next question? Okay.
That's all your questions, Stanley? Oh. Over here. Okay.
One more question.
Yes.
Okay.
Pei-Ing Lee, it seems that we still have a late entry for Q&A from dial-in. This one will be Simon Woo from Bank of America. Go ahead, please.
Okay.
Oh, yeah. Sorry, sir. Yes, thank you. Very quick question, sir. You know, I remember your cost guidance previously saying very minimal, right? Flattish year-on-year. However, when we look at the second quarter results, your OP margins still, you know, pretty good, you know, high 20%. It was a matter of just the FX impact, right? 5% NT dollar depreciation versus US dollar that really helped to your margin, you know, versus the price cut, high demand, high mid to high single- digit, right?
Yeah. The price went down. However, exchange rate favoring, and also we had marginal decrease in our cost, okay? That's all factor into what you just described.
Double check with the ASP cut mid-single digit in second quarter, that's a U.S. dollar basis rather than NT dollar conversion base.
Oh, that's in-
U.S. dollar.
U.S. dollar basis.
I see. In terms of your, you know, maybe not necessarily guidance, but you know, over the next maybe two or three quarters, your cost reduction will be very minimal, right? Because your 10nm-class not really meaningful for your chip production.
Yeah.
It's fair to say.
Of course.
Cost reduction very minimal or your cost will be up quarter-over-quarter because of the R&D or new investment for the new technology? Thank you.
The cost will not be increased by R&D and also new equipment installation and depreciation. Those increases will be very small. Okay?
Yeah.
However, the cost may increase due to all the material increase, equipment, cost increasing, and also there are some issue. Recognize that, recently the electricity has been, the cost has been increased, okay? Worldwide inflation may be impacting some of the costs, okay?
Yeah.
We will continue to have some operating cost reduction. You know, there are all kinds of different things that you can do to reduce the cost, including yield enhancement, including cutting costs in certain areas. Okay? All those factors in, we still don't expect major cost reduction in the upcoming quarter.
Yeah. Very clear, sir. Thank you very much, Dr. Lee.
You're welcome.
Ladies and gentlemen, we thank you for all your questions. Dr. Lee, may we close the conference call now?
Oh, yes. Thank you so much for joining us.
Yes. Thank you, Dr. Lee, and thank you, ladies and gentlemen. That concludes our conference call today. Please be advised that the replay of the conference call will be accessible within three hours from now, which will be available through Nanya Technology's website at www.nanya.com. We hope you will join us again next quarter. Thank you for your participation, and have a wonderful day. You may disconnect your line now. Thank you and goodbye.
Thank you, and bye-bye.