Good afternoon from Taiwan. Welcome to Win Semi second quarter 2024 earnings conference call. I'm Alex Lee, your host for the today. I'm also the CEO at QIC. Participating in today's call will be Mr. Steve Chen, Win Semi General Manager of Corporate Administration, and Mr. Joe Chen, Spokesman and Associate Vice President of Finance. Before we start, I would like to remind everyone that today's discussion will contain forward-looking statements that are subject to significant risks and uncertainties. Please refer to Safe Harbor notice that appears on the presentation. Additionally, the financial results for second quarter 2024, and the presentation, have been posted on the company website and the MOPS for your reference. By the way, the format for today's earnings call will be as follow. First, Steve will provide a key message of Win Semi's operations and the future outlook.
Soon after that, Joe will go through Win Semi's financial results for the second quarter and first half of 2024. Finally, in the Q&A session, Steve and Joe will jointly answer questions from investors. And now, I would love to turn the call over to Mr. Steve Chen for the key message of Win Semi's operation and future outlook. Thank you. Steve?
Thank you, Alex, and welcome, everyone. 2024, our consolidated revenue was TWD 4.96 billion, up 12% quarter-on-quarter and up 26% year-on-year, which was in line with our previous expectation. Our gross margin was affected by the decline in the share price of a listed Chinese customer held by our consolidated subsidiary in the second quarter. However, as our capacity utilization rate increased from 55% in the previous quarter to 65%, and the product mix was better than expected, our gross margin increased from 22.4% in the previous quarter to 27.2%. Operating margin also increased from 4.1% in the previous quarter to 10.1%.
Net profit attributable to the parent company for the second quarter was TWD 485 million, with an EPS of TWD 1.14. Looking at the revenue change for each product in the second quarter, Wi-Fi once again delivered the most significant quarter-on-quarter revenue growth. In addition to the increasing penetration of Wi-Fi 6E and 7, we have also seen order pull-in momentum of Wi-Fi PA for the new smartphone launch in the second half of this year. Infrastructure revenue in the second quarter exceeds our previous expectation, with a double-digit quarter-on-quarter growth. We will continue to monitor the end demand of 5G infrastructure and the change of the inventory level in the second half of the year.
For cellular PA, while the demand from Android smartphone customer in the second quarter was slightly lower than previous quarters, the inventory pull-in of cellular PA for the new iOS launching in the second quarter, second half of this year has started. As a result, cellular revenue in the second quarter experienced a mild quarter-on-quarter growth and a year-on-year growth exceeding 50%, which was the highest among all product categories. This indicates that the industry has passed its trough, and the inventory level for the smartphone has much healthier than last year. Lastly, optical was the only product with a quarter-on-quarter revenue decline in the second quarter, primarily due to the product transition for the smartphones. As we focus on the massive data stream growth by AI, investing significant resources in optical sensing and data center data transmission.
AI is also quietly impacting the future of the smartphones. During our latest earnings conference call, we emphasized the importance of the high-end smartphone to Win Semi, and we're pleased to see the return of the momentum for the high-end smartphones. Recently, multiple major smartphone brands expressed that the smartphone equipped with the AI feature will be the mid-to long-term trend, and they look forward to the long-awaited replacement demand in coming years, with high-end smartphones being the first to benefit. This is consistent with our view. To meet the huge data transmission demand of the future, we have not only developed the technology of the Wi-Fi 6, 6E, and 7 , and mass-produced related products, but also introduced the industry's most powerful seventh generation HBT technology. This PA process, designed for high-performance, high-end smartphones, is under the qualification process by several customers.
Although the near-term and the market demand remain uncertain considering geopolitical and the China economic factor, we will continue to focus on our customer first foundry business model, and with growing investment in R&D to maintain our long-term leadership. For the Chinese smartphone market, the inventory adjustment came to an end by the end of the second quarter of 2023, and the customer resumed inventory pull-in for the fourth consecutive quarter since second half of 2023. Entering the third quarter of 2024, we expect a demand from the Chinese customer will temporarily slow down, while iOS smartphone will enter a stronger season for the inventory preparation as scheduled.
As a result, for the third quarter of 2024, we expect revenue to decline by high single digit, quarter-on-quarter, with gross margin at around the mid-twenty levels. Overall, for the whole year of 2024, we still expected revenue to be increased from the last year. Thank you.
Thank you, Steve. Over to you, Joe.
Okay, it's our pleasure to present our financial results for the second quarter of 2024. We are starting from our presentation slide. Firstly, the second page, safe harbor notice. Please read it over. And then, we started from page four. Page four is talking about our revenue and the margin trend. The Q2 revenue was TWD 4.96 billion, and QOQ was up 12% and YOY was also up 26%. And our Q2 gross margin, due to the decline in the share price of a listed Chinese customer held by our consolidated subsidiary, the impact for gross margin was negative 3.1 percentage points.
However, driven by the higher utilization rate and also the better product mix, compared to the last quarter. So therefore, the gross margin for Q2 become 27.2%, and operating margin was 10.1%, which is an increase about 4.8 percentage point and a 6 percentage point from the previous quarter. Excuse me. And you can find out that, if we exclude the impact from the Chinese customers decline in the share price for Q2, actually, our gross margin for this quarter is already exceed 30%, this kind of level. Okay. Then, please flip to the next page, page five, talk about earnings.
In Q2 2024 our net profit attributable to the parent company was TWD 485 million. And compared to last quarter, last quarter was TWD 407 million. And the EPS for second quarter become TWD 1.14. And the last quarter was 0.96 TWD. So accumulated the first half EPS become 2.1 TWD. Then now we discuss about our product mix in page 6. When I mentioned that earlier, the Q2 gross margin impact by driven by the higher utilization rate and also the better product mix.
We can show you in this page if you are new to our earnings call, then firstly I would like to give you some kind of background. Our gross margin, we enjoy the best gross margin for infrastructure, and the second one will be the optical, which is by the optical, the others. Cellular and Wi-Fi both are the smartphone-related and high volume product, so maybe suffer a lower margin. So in this quarter, in 2024, as you can see that our cellular PA in the range of between 40% and 45%.
Although, compared to last quarter, last quarter was between 45%-50%, which is lower than this quarter is lower than last quarter. But because the whole quarter of Q2 revenue up 12%. So actually, the cellular PA for Q2 still have single digit growth. The most significant growth happened in the Wi-Fi, which is more than 60% of the growth. That's because of the iOS customer for Wi-Fi actually is already trigger the inventory pull-in in Q2.
I think the infrastructure is a little bit surprised in Q2 because we do see a certain customer or industry has some kind of inventory pull-in and we're not supposed to see this kind of growth but it's actually grows more than 10% for infrastructure. And lastly it's optical. Optical it's about 12% of the total revenue which is it's a I think it's only the factor which is decline among the product mix. It's due to the end customer, I mean, the end product it's in the during the product transition period. Okay. This is the product mix.
Please flip to page 7. We talk about the guidance. As you know, the whole Android China Android market has been restocking since the middle of 2023, the inventory restocking. After the fourth consecutive quarter, we do see that our Chinese customer for Android camp has temporarily slowed down. So, we expect that the Q3 of 2024 revenue to decline high single digit QOQ. But we do also see that the utilization rate, because of the revenue decline, the utilization rate may suffer a little bit.
So, we guided the gross margin to be around the level of mid-20s. Okay, then, we can talk about the financial statement quickly, in page nine. Page nine is Q2's income statement. And, well, I still want to remind everybody that all of the figures we mentioned today is under the unaudited basis. The actual results should based on the CPA's reports. The Q2 2024 net revenue at TWD 4,961 million, and QOQ was up 12% and YOY up 26%. And the gross profit was TWD 1,352 million, and QOQ up 36% and YOY up 71%.
The gross margin for Q2 was 27.2%, and compared to last quarter, last quarter was 22.4%. Operating expense in this quarter was TWD 850 million. So therefore, the operating, the OP ratio become 17%. The operating income become TWD 501 million. QOQ was up 173%. So therefore, the operating margin become 10.1%. Last quarter was 4.1%. And another item was TWD 46 million dollar loss. The detail will be in page 11. And income before income tax was TWD 455 million, and the income tax expense was TWD 62 million.
So therefore, the net income was TWD 393 million. And this figure was QOQ up 47%. So therefore, the net margin becomes 7.9%. And the profit attributable to the parent company was TWD 485 million. And therefore, the EPS become 114 TWD. And the return on equity was 5%, which is in line with last quarter. Now, approximately, utilization rate was become 65% compared from the 55% last quarter. That's also driving the gross margin up in this quarter. The depreciation expense, it's very close to last quarter.
It's TWD 1,159 million, and last quarter was TWD 1,170 million. The CapEx for it is TWD 343 million. It's about TWD 40 million more than last quarter. Okay, then now we can take a look at the first half. The first half net revenue was TWD 9,404 million, and the year-over-year was up 38%. Gross profit was TWD 2,346 million, and year-over-year was up 110%. So the accumulator, the first half gross margin was 24.9%, and OP ratio become 18%.
The operating income was 685 million TWD, and therefore the operating margin become 7.3%. The non-GAAP item for the first half, accumulated first half was income 779 million TWD. The income before income tax was 764 million TWD, and income tax expense was 103 million TWD. The net income was 660 million TWD, so the net margin become 7%. The net profit attributable to the parent company was 892 million TWD, so the EPS become 2.1 TWD. Compared to last quarter, I mean, the same period of last year was a loss.
Last year was a loss, TWD 1.18. Okay, so therefore, the first half return on equity was 5.1% NT dollar. The approximately utilization rate for first half was 60%, and depreciation expense is TWD 2,329 million. The CapEx was TWD 646 million. It's much lower than last year. Okay, then, that's the first half income statement. And page 11 for Q2, I think, I only want to show you that the significant figure is the financial cost. It's TWD 203 million, which is interest expense. The rest of it is, it's still quite normal and for your own reference.
Finally, the last page will be the balance sheet. As of June 30, 2024, the cash on hand was TWD 5,296 million, and the total assets was TWD 65.014 billion. And, the total liability is TWD 27.129 billion. And,
... it's about $1 billion lower than last quarter. The total equity was up 1.3 billion TWD, become 37.884 billion TWD. Therefore, the book value per share also up from TWD 83.28 to TWD 86.52, which is up TWD 3.24. Finally, the key index, the current ratio is 110%, and the debt ratio is 42%. Okay, this is all I have. Thank you.
Great. Thank you, Joe. Now, let's move on to the Q&A session. We got a pretty busy, kind of, good quality question list today, both online and in the pack, for those question prepared and requested by the investor before the call. Again, just a little reminder, if you have any question, please submit your question in the chat box. The management will answer the question as soon as possible. Let me read couple question in the pack in the first place. For the third quarter revenue, the guidance is down high single digit QoQ, though the whole year guidance remained unchanged. Can management provide more detail about the expectation for each product segment?
Okay, thanks. I think for the third quarter, I think look back it's optical application is the only one who will have slightly increasing. And the other, no matter Wi-Fi, server or infrastructure, will have a slightly decline in this quarter. Yeah. That's the reason why, for the whole quarter, we will guide is high single revenue down, and also little down about the gross margin from 27% to mid-20s% level. It's because of the product mix looks like it's a little not as good as Q2. Thank you.
Thank you. Thank you, Steve. The second question in the pack is, in terms of smartphone segment, what are the order trend for U.S. and the Chinese customer in the second half of this year? And how will the launch of the AI smartphone impact customers' order trend?
Okay. Yeah, I think this is the first year after the COVID. Actually, you can say that's the first year after the COVID. So, but not right now, what we see from the U.S. customer or the Chinese customer is a little difference in the momentum after the COVID. Yeah, like we say, things from this second half in 2023, the Chinese customer they start to rebuild the inventory and recover the demand. And quarter by quarter, their demand is increasing until Q1. And then Q2, we see that a little slowdown in Q3. Right now what I see is a little slower than Q2.
But, at the same time, the U.S. customers are still keeping the momentum, like, the traditional momentum, like, before the COVID. Actually, the peak season of the cellular PA, that will be located in Q2 and part of the Q3. And also, at the same time, optical sensing application, their peak season will be Q3. Yeah. And, so that's a little different with different geography. And also the other question is about AI function. I think, for AI function, it definitely will bring the new demand momentum for the smartphone. Because, especially there were for high-end smartphone , because of, they have a better spec, which can provide a better AI experience function for layer.
From Win's point of view, we think the AI function smartphone, it definitely will bring a long-term demand for the smartphone growth. Thank you.
Thank you, Joe. Another question in the pack is about the Wi-Fi 7. What is your expectation for penetration rate for the second half of the year and the next year? And how significant the content growth opportunity in PA usage with the upgrade to Wi-Fi 7? Lastly, and with the Wi-Fi upgrade trend, how many PAs will switch to GaN based from silicon based?
Okay, thank you. For the Wi-Fi 7, actually, we already see start from this year. A lot of high-end smartphone is already adopting the Wi-Fi 7 in the smartphone flagship product. And we also see the new, the next coming high-end smartphone. Most of them will have Wi-Fi 7 in there. Yeah. So, we think the penetration rate will keep going up start from this year and even better in the next year. And the Wi-Fi 7 is really help for our gallium arsenide content in the handheld devices, because I think it's not only handheld device, also routers, because from the Wi-Fi 6 to Wi-Fi 6E or 7, actually, they were increasing a new band in the applications.
Which means that they were using three-band instead of two-band, compared to traditional Wi-Fi. And, also this new band is the frequency is higher, between 6-7 gigahertz, which we can see in most of the case, the gallium arsenide PA will provide a better performance than other materials. So, I think, as the Wi-Fi 7 adopting rate keeping going, I think, the gallium arsenide demand for the Wi-Fi PA that were increasing compared to the period for the traditional Wi-Fi. Yeah. Thank you.
Great. Thank you, Steve. Let's shift to those questions in the chat box. Thank you for all of the online, just kind of patience. I will read each question before management answer the question. The first question from investor online: Does the seasonality pattern change for Win Semi, eyeing on the revenue drop in the Q3?
Okay, like, like I just mentioned, I think after the COVID, we see right now on the Chinese market, momentum looks like it's a little different with other geography. So I think that's the reason why this year we see the seasonality is a little different with previous before. But I think that may be because that's the first year after the COVID in China. So, like I was just saying, they start to pull up the demand almost one years ago. So look like right now it's going a little slower, it's still in the very common situation for that. But at the same time, the seasonality for our USA customers, they're still keeping the same pattern like before.
So, I suppose that maybe that this only this year kind of special case, not indicate the pattern will become changed in the future. Thank you.
Thank you, Steve. The second question, with respect to the market share change in the optical, what is the outlook for the market share in the remainder of this 2024? Do you expect it to remain flat or continue to decline?
Okay. I think we all know that since 2020, 2023, actually, the end customer, they bring a new player for the 3D Sensing. Yeah, but this year, I think they don't bring the other new one. So I think in most of the case, the share should be much stable compared to last year. I think that's the reason why in this Q3, we see our optical revenue will better than Q2. Yeah. So I suppose those kind of share in 3D Sensing, I think it's much stable right now.
Okay, Steve, thank you. Will the management also comment on the potential inflection point of Android smartphone market?
Okay, I think for Android camp, I think because right now, most of the Android camp customer for Win Semi, I think that will come from China. So that's the, maybe the, that's maybe the reason why we see our Android camp cellular PA revenue is a little weaker in Q3 compared to Q2. Yeah, but because the visibility of the cellular PA is only around, like, four weeks, so I suppose right now it's not what we see for Q3. Yeah, but will Q, Q4 keep the same kind of situation? It still need time to watch. Yeah. Thank you.
Thank you. Could you help me understand why is our Q3 revenue guidance weaker than the typical seasonality? Is it just because of the China slowdown, or iOS smartphone also weaker than season? Also, second quarter gross margin was very strong. If subsidiary, the share price-related loss implied margin 30%+ gross margin. So why is the Q3 gross margin down so much to the mid-20%?
Okay, thank you. Yeah, I think, like, I just mentioned, I think for this year, the Q3, what we see for the cellular is only China-related market was slowdown, but our iOS smartphone camp is still strong. And they are also still building the inventory for the new product launch in Q3. Yeah, so I don't think that the whole cellular market or the smartphone market become weaker. It's only a special situation in China for Q3. So, so I think the total smartphone market doesn't mean that will be become going to the season weaker seasonality for Q3 and Q4. Yeah.
I think for our Q2 gross margin, exclude the subsidiary share price valuation loss that was more than 30%. But, as I mentioned in the manager comment, it's not only contributed by the utilization rate increasing around 10%, but also we have a better product mix than our expected in Q2, such as the infrastructure, which is our highest margin application. They performed very well in Q2, but in Q3, we still see a slight decline there also. Because for Q3, right now, we only see optical will have a positive growth, and all the other application maybe fail slow down decline there.
So that's the reason why we will guide the Q3 gross margin back to around the mid-20%, because the highest application infrastructure-related product is also down in Q3. So that's the reason we don't think it's that easy to maintain the margin better than 30%. Thank you.
Thank you, Steve. The next question: Could you please help us with the breakdown of your GaAs exposure roughly by Chinese versus non-Chinese customers?
Okay. Okay. I think maybe it's more reasonable to describe the iOS versus the Android will be easier. Because it's the Chinese. For Chinese, sometimes it's kind of mixed customer also on the different market. So we can say that, like, for example, the iOS approximately around between 20% and 30% of our total cellular PA. Which means the rest of the 70%-80% is Android camp. Of course, Android camp including the Chinese smartphone, China smartphone, Korean smartphone, and any other non-iOS. So, yeah, it's...
For this kind of breakdown, it's also pretty match the whole smartphone market breakdown from any smartphone. I think the breakdown is pretty in line with the end smartphone breakdown. 20%-30% of iOS, 70%-80% of Android. Thank you.
... Thank you, Joe. Next question, is there any chance that we may get foundry outsourcing orders from other US RF IDM players in the coming year or two?
Okay. Yeah, I think since Win Semi start, we always think the IDM company is our future customers. And also, we have that kind of policy since we built Win Semi. And actually, most actually, I think all the US RF IDM company actually they are Win Semi's customer. I think it's all more than 10 years ago. Yeah. So I think in most of the case they will process their major product in their own fab, but all for the other non the major IF related application, they always will collaborate with Win Semi to use Win Semi technology to produce the wafer for them.
Yeah, so it's definitely, as the future RF domain going up, I think it's definitely we think that's a very good situation for Win Semi to have a better product that outsourcing from those IDM company. Thank you.
Thank you, Steve. Next question: What is your expectation on infrastructure-related products, sequential sales growth in Q3?
Okay. Like, like we just mentioned, our infrastructure application, they performed very well in Q2 and even better than our expectations. So, I think, going to Q3, what we see is, a little back to the normal demand level. So, compared to Q2, we think, the infrastructure will little decline in Q3. Thank you.
Thank you, Steve. Next question: Given industrial conditions have improved, when will management plan 2024 and 2025 CapEx in the Kaohsiung factory longer term?
Okay, like we mentioned in the previous conference call, we will finish the shell of the Kaohsiung factory at the end of Q2 or Q3. And then we will waiting for the clean room and the equipment prepare, since we see our utilization rate coming back to around 80%. Yeah, because I think in most of the case, our lead time for a new fab is around 1 year to 1.5 years. So, for the utilization rate range right now, is only around like 60% up and down. I think we still have plenty of time to watch the market and to see what kind of the equipment mix is we needed in the future for Kaohsiung. Thank you.
Thank you. Thank you, Steve. The next question: Could you please guide us how many percentage of your revenue related to data center? Would you put in infra and opticals? And could you please also highlight how the cloud trend benefit Win Semi now and in the future?
Okay. I think right now, data center-related revenue is a mix with the different application or technology, Win Semi. For example, we have the GaAs laser source revenue, and also we have a lot of infrastructure and related technology that also is related to the data center for the latest optical communications. So, I think we should say the percentage for our overall the total revenue is still in a very low percentage. But year on year, they are growing. And the cloud trend will definitely benefit for Win Semi because of the cloud trend, that means everyone needs more wireless communication than before. Yeah.
So, more of the cloud trend that definitely will bring up Win Semi's wireless communication demand in the future. Thank you.
Thank you, Steve. In terms of infra sales, could you please break it down by application, like for telco, data center, and defense, et cetera?
... Okay, thank you. I think right now, most of our infrastructure revenue, that will coming from base station. Still, it's a major application. And the second one maybe that will be satellite. Yeah, because of we all know, for the recent past few years, the LEO satellite become launched and become more popular year on year. And also, in this year, we already see the end customer, they, they start the generation two LEO plan launch again. So I think that's the other reason why we have seen our Q2 infrastructure revenue is better than our expectation. Yeah. Thank you.
Thank you, Steve. The market has been talking about Win Semi may be the key beneficiary to the recent supply chain shifts by the Korean smartphone brand. What is your view about this?
Okay, thank you. Yeah, I think that also we have heard and also got a feedback from our customer. Looks like the Korean end customer, they are increasing their supply chain base, and also invited more design house to join their supplier. Yeah. So I think in the future, definitely, that will help Win Semi to diversify more our end customer diversification. And also, I think that will bring our design house customer have a better customer diversification also. Thank you.
Great. Before I read my last question in the pack, let me remind you, if you have got any question, please submit it at the chat box. My, my next question, we know that Win Semi has a leadership in the, an advanced process of a compound semiconductors. What kind of industrial development will accelerate the adoption of advanced process of a compound semiconductor, and thus further enlarge Win Semi's competitiveness?
Okay. Yeah, I think, Win Semi was a pure foundry for the compound semiconductor. And, we all know, compound semiconductor was have a better performance, especially for the wireless communication and also the optical communication. So, I think, in the future, because of the AI become more booming in the future, and the demand of that kind of data communication will also upgrade their speed and the performance because of the cloud or the AI application. So I think Win Semi will still more focusing on our technology to developing relate to the high-end wireless communication, such as a more advanced HBT for the cellular PA, and also the more advanced PA technology for the infrastructure, no matter for the base station or for the satellite.
At the same time, I think we also allocate more resources to the optical device, such as the indium phosphide, or the for the PIN diodes , photodiodes, that kind of data communication, and also the pixel optical communication also. So, I think in general, because of the AI trend, or the data center trend, I think the future demand for the compound semiconductor demand as will keep growing in the future. Thank you.
Well, the next question. In terms of automotive demand, what is Win Semi's order visibility? Should it outperform auto market?
Okay. I think that's maybe the question relate to the LIDAR application for the optical device. I think right now most of our LIDAR project is still in the project phase. And definitely in some of them is already maybe going to the mass production. But I think most of the reason for the LIDAR is not going to a very big contribution to our revenue, is because of the government regulation for the autopilot, especially upgrade to Level 3 or even higher than that. Because upgrade to Level 3, that means the car maker they need to take some risk responsibility about the accident.
So, look like, I think the LIDAR technology is ready, and also the autopilot technology is ready. But right now, it's the adoption willing for the car maker can be very quick upgrade to Level 3, or they want to maintain in Level 2 or Level 2+ for several time. Yeah. Thank you.
Well, due to the time constraint, this is possibly the best place we can conclude the meeting today. Well, thank you for all of your great questions from the investor online and the question before the call. Again, thank you for the management, very transparent communication as before. Please be also advised that a replay of the call will be accessible within few hours from now through WIN Semi's website. If you have any further question, please also feel free to contact WIN Semiconductors Investor Relationships. This will conclude today's call, and have a nice day.
Okay, thank you.
Thank you.
Bye-bye.