Welcome to Nanya Technology's 2022 first quarter earnings conference call. All lines are in 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 first quarter of 2022, followed by our guidance for the next quarter and key messages. 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 slide. Now, I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and the current quarter guidance. Dr. Lee, please begin.
Okay. Ladies and gentlemen, welcome to Nanya Technology Q1 2022 Investor Conference. I'm Pei-Ing Lee. My report to you will be first our Q1 revenue and result, and CapEx and shipment, then followed by market outlook, and then conclude by business review and outlook. First, for the revenue and result. Our Q1 net sale comes to NTD 19.946 billion versus Q4 last year, NTD 21.399 billion, down by 6.8%. Our gross profit comes to NTD 8.75 billion, down from Q4, NTD 10.56 billion. The gross margin at 43.9% versus 49.6% in Q4 last year.
Our operating income, NTD 6.26 billion dollars at 31.4% versus last year Q4 at NTD 8.0 billion at 37.5%. Move to our net income, comes to NTD 6.55 billion , 32.8% versus Q4 last year, 6.452 at 30.2%. Our earnings per share for Q1, NTD 2.11 per share versus NTD 2.08 per share Q4 last year. The book value comes to NTD 58.45 per share. Now it comes to quarterly revenue comparison in a little bit more detail. Our revenue was down by point.
6.8%, with the shipment down by around 1% and ASP decrease mid-single digit, with exchange rate favoring 0.5%. Versus Q1 last year, our revenue up by 12.5% and shipment decreased by 20%, and ASP increased in 40s, with exchange rate minus 1.3%. For the Q1 this year and Q4 last year's result comparison, for net sale, NTD 19.946 billion versus Q4 last year, NTD 21.3399 billion, down 6.8%, mostly due to ASP decrease by mid-single digit, with shipment also marginal decrease by 1%. Okay? Our gross profit, NTD 8.75 billion at 43.9% versus NTD 10.563 billion at 49.4%.
This gross profit decreased mainly due to ASP decrease. Our operating expense at NTD 2.488 billion, which is very similar to Q4 last year at NTD 2.54 billion. For operating income, NTD 6.262 billion versus NTD 8.023 billion. Our operating income decreased by NTD 1.761 billion, and mainly due to ASP decrease as well. Our net income comes to NTD 6.55 billion versus NTD 6.45 billion. Net income increased by NTD 96 million with the point one, first point there, operating income unfavorable decreased by NTD 1.761 billion, and followed by three favorable point.
That is exchange rate favored by NTD 1.09 billion, and facility expense favored by NTD 514 million, and income tax also favored by NTD 192 million. For quarterly financial highlights. For Q1 this year, as reported that our revenue comes to NTD 19.946 billion, and gross margin at 43.9%. Operating margin 31.4%, and a net profit at NTD 6.55 billion. It's marginally down from Q4 and Q3 last year. For operating expense, for the left-hand side, you're seeing the SG&A expense for Q1 this year at NTD 594 million. This is normal at around yearly average. On the right-hand side here, we see the R&D expense at NTD 1.895 billion.
This is also normal at the yearly average compared to last year. For the cash flow situation, Q1 this year, beginning balance at NTD 80.7 billion. With the cash from operating activity increased by NTD 11.19 billion and capital expenditure NTD 1.165 billion. With the financial activities, mainly due to exchange rate and cash equivalent at NTD 1.68 billion. End balance comes to NTD 92.409 billion. This is the historical new high for Nanya. Okay? However, for this year's plan, we plan to have a dividend distribution of over NTD 10 billion, which will be spent later. We also plan to have CapEx at around NTD 28 billion and which will also be spent later, okay?
By the end of this year, the cash balance likely to come back to around NTD 80 billion. For CapEx and bit shipment, this year planning is NTD 28.4 billion. So far, the spending is NTD 1.2 billion. The purpose of this is to prepare 10nm production, R&D, and general CapEx reason. Bit shipment-wise, on the right-hand side, we expect this year our bit shipment will be relatively flat. For the market outlook, we continuously seeing strong cloud demand in Q2 this year. The consumer market remains healthy as we see in smartphone and PC softening due to seasonality and also due to global uncertainty. For the component shortage, we are expecting alleviation coming up at second half this year.
We also expect DDR5 supply increasing in second half this year. Also in the second half this year, Russia and Ukraine conflict and high inflation rate and China lockdown may impact overall demand. For the supplier side, we're seeing supplier inventory remain low, healthy. Supplier CapEx dynamic adjustment may affect supply growth. For the demand point of view, our server market data center leading the demand growth, and we are expecting DDR5 shipment start in second half this year. For mobile market, 5G model penetration continue to grow and average DRAM content increasing. However, shipment for mobile phone momentum is tapering. PC market, for enterprise and gaming demand remain solid, while consumer model demand are suffering as a result of global inflation and also seasonality issue. Consumer market, we're seeing positive outlook for networking, wearable and smart home device.
We're still seeing automotive sector dragged by supply chain issue. Finally, for Nanya business review and outlook. For finance point, we will plan to distribute cash dividend of NTD 9.4 per share, approximately. This will be proposed to annual shareholder meeting at May 26, 2022. For Q1, our EPS NTD 2.11 per share. From operation side, our first and second-generation 10nm-class product development is on schedule. Our CapEx plan for this year is up to NTD 28.4 billion. We also have signed a 250 million kWh renewable energy purchase agreement, which will give us about 10-year delivery of green energy. We have maintained appropriate inventory of laser gas mixture.
For the market outlook, Russia and Ukraine conflict and high inflation and China lockdown due to COVID may impact overall demand in the short term. With that, I'll conclude my report 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-ins first. For webcast participants, please message your questions and your name and 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 participants, please press zero-one on your keypad if you would like to ask questions. Thank you. The first one to ask questions, Haas Liu from Credit Suisse.
The line is open to you now.
Hi, Dr. Lee and Joseph. Congratulations on the good results, and thanks for taking my questions. My first question would be regarding on the pricing trend. Based on your comments, it seems the demand is still pretty healthy for consumer applications. While supply for specialty DRAM continues to decline as tier 1 DRAM makers shifting to other focus. Could you discuss about the competitive landscape for specialty DRAM and your expectation for pricing into Q4 for specialty DRAM and other mainstream DRAM? Thank you.
Pricing trend for Q2 is your question. Currently, we're seeing pricing trend will be either flat or marginally decrease. The reason for that is that we still maintain the global uncertainty that including like regional material instability, global inflation and component shortage still in place and also COVID lockdown. Overall speaking, we see the supplier inventory being healthy, okay? The demand side, there are some healthy signs and some tapering signs, okay? Overall speaking, this market is relatively balanced and healthy with the uncertainty still ahead of us. Pricing trend in the short term, we're seeing it could be relatively flat or marginally down.
For specialty DRAM-wise, will be similar to what I just described to you.
Okay, that is very helpful. Could you also discuss your progress on 10 nm technology and the technology roadmap and also production timing for the new fab? Thank you.
Okay. 10 nm technology, as I reported that, our first generation and second generation 10 nm product development and process development is on schedule. Actually, it is quite promising. We are expecting that, for second half this year, we may have some engineering sample available from first generation 10 nm technology, and that's including both DDR4 and DDR5 product, okay? For new fab, our new fab are still not yet under construction. We are still waiting for getting the license approval from government, okay? Likely our new fab will be ready by 2025, okay?
Because of all these delays due to licensing approval, plus recently, there are shortages in terms of labor and materials, in construction materials. We are expecting new fab will not be ready until 2025. Before that though, we still have the small space in our current fab and process that we plan to convert our 30 nm process technology into 10 nm. And also possibly some of our 20 nm production will be also converted to 10 nm generation production. With that, before 2025, we will have marginal, not very much of big growth, but we're still going to have marginal big growth between now and 2025.
Okay, I think just a quick follow-up on pricing. Do you think specialty DRAM pricing trend will be more favorable compared with mainstream DRAM in the near term, given your comments?
For the specialty DRAM, that's including both DDR3 and DDR4. Okay? Of course, DDR4 also been used now in server, also in PC, as well. For the low power, it's using a mobile low power DDR4 primary. Okay? The application wise, DDR3 is mostly in the specialty. But also in the consumer side, it's also DDR4 as well. Okay? If you're looking into just DDR3 versus DDR4 though, DDR3 has different density, mostly from 4 Gb down to 2 Gb, down to 1 Gb, and then even lower. Okay? On the other hand, for DDR4 though, it has 4 Gb and up to 8 Gb and 16 Gb up the other side. Okay? With a common at the 4 Gb. Okay? 4 Gb has both DDR3 and DDR4. Okay?
Both been used in consumer side and specialty side. Okay? At this time that the pricing for DDR3 and DDR4 is coming to narrow down the gap, the price difference is coming closer. Okay. However, different density has its own different price trend. For the future price trend on specialty, I would say, DDR3 likely to be continue to be stable. Although DDR3 has been price increasing since Q1 last year until Q3 last year, then gradually coming down. Okay? Now coming down to about a similar price like DDR4. Okay? From now on, I'm expecting the pricing will be more stable in the DDR3. Okay? At least from the quarterly price point of view, we already see that for second quarter. Okay.
However, monthly, we still have to watch closely on this global uncertainty we just talking about. Is it going to be becoming more stable or not? Okay. With all this in mind, we expect overall speaking Q2 the price trend still going to be relatively flat or marginally down.
That is very helpful. Thank you so much. I'll be back in the queue.
Next one to ask questions, Jeff Ohlweiler from Macquarie. The line is open to you now.
Yeah. Dr. Lee, thanks for the questions. First one, can you talk about when you expect the, you know, material production of 10 nm in terms of actual real shipments?
As I reported that, we will begin some engineering samples second half this year.
Possibly that very small volume, small production volume by end of this year, very end of this year. The contribution likely will happen on next year, beginning next year, first half, and then gradually increasing to second half also.
Okay. Do you expect pretty flattish bit growth throughout each quarter this year?
Pretty flattish until the end of this year as an opportunity of some contribution from 10 nm class.
Okay. You also mentioned facility expense reduction of NTD 514 million this quarter. Can you explain that a little bit more, please?
You're talking about a facility cost reduction?
Yeah. Yes.
Oh, okay. That's because we had some facility costs planned long time ago. We took some of the costs. After all the conclusion that we don't have to spend so much in facility cost. Basically that's a reduction in the cost of NTD 514 million.
Lastly, can you talk a little about the tax rate that you expect going forward?
Tax rate?
Yes. Yeah.
Okay. Tax rate, generally speaking, is 20% in Taiwan.
Okay. Will you get any benefit of, you know, your R&D expense with 10 nm ramp up with the CapEx or how will that work?
The CapEx planning for this year is NTD 28.4 billion, up to NTD 28.4 billion. Mostly will be used for the 10 nm equipment preparation, as I just described to you. Some of them will be used for R&D, okay? General use.
Okay, great. Thank you very much.
You're welcome, Jeff.
Thank you.
Ladies and gentlemen, we are now in Q&A session. For dialing participants, please dial zero one on your keypad if you would like to ask questions. Thank you. Next one we have Simon Woo from Bank of America. Go ahead, please.
Okay, great. Thank you very much, Dr. Lee. First question is, your China, you know, sales exposure, according to the Q1 results. I remember you said previously 20% range, but your annual report is still showing about 40%. Could you recap, your revenue I mean, the sales exposure for China according to Q1 results versus the last year annual results? Thank you, sir.
Okay. China exposure, in general speaking is 20%. It's slightly lower than 20%. That's our direct customer. However, many of our customer, like U.S. or European customer, Japanese customer, they buy from us, but they ship to China for their own production. You may be seeing some ship-to difference. That's why you see the difference, 20% versus 40%. Okay. Our direct customer is relatively around 20%.
Yeah. Great. Thank you, sir. Not much change from mix of Asia.
Talking about exposure, so far we've seen that the COVID lockdown may be causing some imbalance in terms of supply chain. Okay? We have some customer was not able to receive the shipping, okay? Some customer had difficulty in shipping out, and some customer had difficulty in shipping in. Okay. That issue has been also dynamically changing from South China to Shanghai and to Inner China, et cetera. Some of the customer has been trying to flexibly adjusting their receiving point, okay? Including the beginning they may be shipping. They may be receiving from Shenzhen, and they switch it to Shanghai. Then Shanghai becoming locked down, then they ship it to other places, okay?
Some even changing their manufacturing location to like Thailand, okay? Things like that continue to be happening.
Yeah, thanks, Dr. Lee. Very quickly for the revenue mix by applications. So consumer still 60% range versus the other 10% range? Or would you recap your revenue mix for the Q1 result? Thank you, sir.
It's very similar to the previous quarter. In general, it has approximately 65% on consumer. Okay? Around, say 10% or so, a little bit more than 10% in the low power. Then the balance is the server as well as the commodity.
Yeah. Yeah. Again, your consumer 65% includes the auto, automotive and industrial, right?
Yes. Yes.
Okay. Lastly, sir. Sorry. You are saying your new fab construction not yet started?
Yes. Yeah. Our groundbreaking for the new fab is not yet started due to we're still waiting for license approval from government. Yeah.
Yeah. However, you are saying second half, I mean, the fab operation will start in 2025.
Yes.
Okay. Sorry, lastly, you know, media saying equipment from U.S. and Europe, you know, the delivery is actually getting delayed. Also from U.S., you know, chemical company which operates their facilities in Europe, you know which material, right? We are not talking about laser source, but what other material seems to be some in the situation of the very tight time in the etching process. Could you share your view on the equipment, you know, the delivery delay and also some etching, you know, I mean, the current material, you know, the shortage? Thank you, sir.
It's in general. I mean, this is not just in DRAM, but also in the logic semiconductor manufacturing in general. Okay? That continued to be the case. Some of the equipment suppliers still are in shortage for their component, okay? That situation recently has been gradually alleviated in the equipment side, okay? Coming up is what you just described, the laser gas concern, okay? I'd like to add a comment that Nanya has prepared appropriate inventory for laser gas, okay? So far, we don't have any operational abnormal situation due to the case.
Yeah. Yep, yeah. All clear, sir. Maybe today, the conclusion is, your operation okay, long-term plan, you know, to add the new capacity also okay. The last three, the ASP down, losing the digit, sure, but second quarter maybe flat or very marginal decline. Second half, maybe we can say some upside, right? Yeah. The industry and the DRAM trend. Thank you, sir.
I think currently the market situation from a demand side is without the uncertainty we just discussed is actually quite okay. We have to look back a couple years. Like beginning of 2020, we had this COVID interference, the global economic interference, and then gradually come into shipment issue, come into supply chain imbalance issue, component shortage issue. Okay? Well, we're gradually seeing that improving. Okay? Unfortunately, we now have a new issue. Okay? Ukraine and Russia conflict. Okay? That's causing, even though the regional consumption is not very large percentage worldwide, however, still causing worldwide concern on global inflation and also discontinuity of certain supply chain. Okay?
All this uncertainty is still there, still exists. It could be prolonged. Unfortunately. We still have to watch those developments very closely. Even though so far maybe still okay. We know that Q2, at least from April, I confidently say that April will be okay. May and June, we have to see how bad it is, all those uncertainty continue to prolong. First of all, the regional military conflict issue, also the lockdown issue, COVID lockdown issue, all those cause quite a bit of manufacturing disruption. If that continue, certainly it will become a concern. At this point, I have to be very cautious on those uncertainty.
They change so rapidly.
Yeah. Thank you very much, Dr. Lee. Appreciate it.
Ladies and gentlemen, we are still in Q&A session. Next one we have Simon Woo from Bank of America. The line is open to you now.
Oh, sorry. Yeah, thank you.
Okay.
Other guy is not asking the question. Maybe two things. Number one, your payout ratio of 50% will continue, sir?
Or, you mean the dividend distribution?
Yeah.
It's supporting.
With the.
Yes. Our dividend distribution policy will be between, say, 45%-55% of our yearly earnings. Likely this number will remain the same now.
Yeah. Yes.
Secondly, you mentioned that the DDR5 will be available maybe small volume late this year, more meaningful next year. You are using the new equipment, and then the cost must be higher than maybe DDR4. Is it fair to say your overall, the second half cost structure maybe will be unfavorable? I mean, sequentially up in the second half versus first half, and even next year, your cost should be up year on year because of the new equipment depreciation cost. Thank you, sir.
Simon, regarding the DDR5, Nanya is early adopter. We will be doing engineering sample this year. We don't expect our DDR5 will be in volume this year or even most of the next year. DDR5 affecting our overall cost or value will not be very significant for Nanya this year and next year. DDR5 likely will not be introduced in the consumer market yet. Likely will start in the server market first, and then the PC market. However, most of server market and PC market will remain largely DDR4 even for next year. DDR5, in general speaking, we are preparing. We will not be very aggressive in getting to DDR5 market.
However, we need to prepare DDR5 as it grow in server market, PC market, and also it may gradually introduce into consumer market as well. Okay. That's the reason why Nanya prepare DDR5. Okay.
Yeah. All clear, sir. Maybe lastly, DDR4 portion is now bigger than for DDR3 in your consumer and the compute mobile area overall, or the DDR3 volume for 18 months larger than for DDR4.
Overall speaking, for Nanya, we still have DDR3 more than DDR4. DDR3 contribute to still most of the consumer market today, specialty market today. With DDR4 gradually replacing DDR3, particularly in 4 Gb density. However, in 2 Gb, 1 Gb or smaller density, still maintaining DDR3. Some of the customer also like to remain on DDR3 even at 4 Gb. For Nanya point of view, we make it available for both DDR3 and DDR4, even at 4 Gb. Such that when customer would like to move from their DDR3 to DDR4, they can also buy it from us in a consumer and specialty market.
It's a little bit clear. Okay.
Yeah.
Yeah.
I don't know if I give you the answer you expected.
Yeah. We hear your point. DDR3 is the larger volume versus DDR4 in terms of bit shipment. But it would be great if you can share when the crossover, when the DDR4 shipment volume can be bigger than DDR3 or whether it will not happen maybe even end of this year. Yeah.
That very much depends on customers, demand. At this point, as I described to you, customers in a specialty side, consumer side, still in higher percentage in DDR3. Some customer may be shipping from 4 Gb DDR3 to 4 Gb DDR4 in certain product, but not overall product. Also some customer may be using low power DDR4 instead of DDR3 as well. Nanya has been making both DDR3, DDR4, as well as low power DDR4 and low power DDR4X available for our customer.
Yep.
Especially in the specialty market.
Very clear, sir. Sorry, sir. You know, one of the investors asking your new equipment with the twenty-eight billion dollar CapEx spend, you are putting the new equipment for, you know, 10 nm plus upgrade. This new equipment, these sort of etching, you know, PVD machines, depreciation period, it could be longer than the previous or same. I mean the depreciation period for the new equipment is, what, seven years, eight years, or?
Yeah.
Or.
It will be similar. Similar to previous.
Similar to previous. Yeah. Been in it for now probably eight years. Yeah. Yeah.
I see. No changes.
Yeah, no change.
I see. All clear. Thank you so much. I appreciate that.
Ladies and gentlemen, there seems to be no further questions from dial-ins at this moment, so we will continue our QA session from webcast. Dr. Lee, please begin.
I'm seeing the first question from SinoPac Securities, Stanley Wong. Your question is, since you are transferring process into 1A and 1B nanometer, what should we think about your depreciation number this year? Our depreciation number will be only marginally increasing this year and next year as well, because we have the new equipment, but meanwhile we also have older equipment is gradually depreciating. The depreciation will be about NTD 1.3 billion per month. The number is likely to be not too far not too much change.
Okay. Thank you, Dr. Lee. Thank you for all your questions. We will close the conference call now. Ladies and gentlemen, we thank you for your participation, and that concludes our conference call today. Please be advised that the replay of the conference 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. We thank you for your participation today and have a wonderful day. You may disconnect your line at this moment. Thank you and goodbye.