The investor conference is about to begin. Good morning and good evening, ladies and gentlemen. No matter where you are. Welcome to WIN Semi's result webcast conference for the second quarter of 2022. My name is Joe Tsen, the Spokesman and Associate Vice President of Finance in WIN Semi. Joining me today on today's call is Steve Chen, our General Manager of Corporate Administration. Today's call is organized into three sections. First of all, Steve will comment on the company's results and provide brief guidance for the third quarter 2022. Secondly, I will go through the financials in detail. After that, we will open to the floor for Q&A. Please freely submit your questions in the input box on the webcast window throughout the conference. Before we begin, I would like to draw your attention to the safe harbor notice on page one of the presentation slides.
Please note that this presentation contains forward-looking statements. These statements are based on our current expectations. Actual results may differ materially from our expectations, and the company undertakes no obligation to update the forward-looking statements going forward. Now, let me hand over the call to Mr. Steve Chen, General Manager of WIN Semiconductors.
Thank you, Joe, and welcome everyone. For the second quarter of 2022, WIN Semi's revenue was TWD 5.3 billion, a decline of 5% quarter-on-quarter and 14% year-on-year. As our capacity utilization rate further declined to 60% in this quarter, our gross margin was 13.2% and operating margin was 14.1%, with EPS TWD 1.52. Looking at the product mix in the second quarter, Wi-Fi PA, infrastructure and 3D sensing-related optical business all had different level of growth compared to the previous quarter. Among which 3D sensing had the highest quarter-on-quarter growth, driven by the seasonal effect as the first quarter was a traditionally slow season. Infrastructure and Wi-Fi PA both delivered quarter-on-quarter growth.
However, cellular PA revenue declined significantly as expected due to the ongoing inventory adjustment in China's smartphone market. While China's smartphone market has been undergoing inventory adjustments since the first quarter, the ongoing war between Russia and Ukraine beginning in the first quarter, together with the fact that China enforced strict COVID control in the second quarter, both not only affects local consumer demand in China, but also leads to shortage of raw material and disruption of the global supply chain. This has pushed the already high inflation and further affected demand. As a result, the inventory digestion in the smartphone market has been slow. Currently, the overall demand visibility for smartphone remain at a low level. While the U.S. high-end smartphone customer is still placing orders at the same pace as in the past.
The high inventory of Android smartphones leads to uncertainty in demand in the second half of this year. In this challenging macroeconomic environment, WIN Semi continues to invest in R&D capability to develop new applications for customers and the required technologies. We believe the volatility in macro this year could be short-term and the long-term growth trend for 5G remains unchanged. Deployment of the related infrastructure and low orbit satellite is still incomplete. The technology migration to Wi-Fi 6, Wi-Fi 6E, and Wi-Fi 7 is ongoing. The optical communication and optical sensing related applications are still at an early stage. We continue to be optimistic about the long-term growth trend of the industry. Looking ahead to the third quarter of 2022.
Due to continued inventory adjustment at the Android smartphone and the uncertainty of the macro environment, our revenue expected to decline mid-20% from the previous quarter and the gross margin will be around the level of low 20%. I will turn the call back to Joe.
Okay. Thank you. It's our pleasure to present our financials results for the second quarter of 2022. You can also refer to the material for our presentation slides. Okay, we're starting from page four, but do remember to read over the safe harbor notice on page two. Page four, we talk about revenue and the margin trend. The second quarter's revenue was TWD 5.3 billion, and the QoQ was down around 5% and the YoY is down around 14%. Due to the decline in capacity utilization rate and of course combined some change in the product mix.
The Q2 gross margin declined by 0.4 percentage point to around 30.2%. The operating margin declined by 2.3 percentage points to around 14.1%. Please flip to the next page five, and then we'll discuss the earnings. The Q2 net profit was TWD 544 million, which is a QoQ down around 31% and YoY was down around 41%. The EPS came in at TWD 1.52. Compared to last quarter was TWD 2.08. Please flip to the next page, which discusses about product mix in page six.
The pages, the product mix, page six, you can see that, in Q2 the product mix, the cellular business, cellular PA, the percentage significantly went down to between 40% and 45% from between 50% and 55% in last quarter. In Q2, cellular PA was the only product went down, I mean, declined. Other than that, no matter 3D sensing, Wi-Fi or infrastructure have a different level of growth. Of course, first of all, the significant growth in 3D sensing, which is the others, going up from 14% last quarter to 20% this quarter.
There is a possibility the customer may pull in earlier the demand from the new product ramp up in Q3 and it's possible, possibly there is a pull-in earlier. Another one will be the infrastructure. You can see that our infrastructure revenue went up to between 25% and 30% from between 20% and 25% in last quarter. Normally, infrastructure revenue is not a month-over-month or quarter-over-quarter. It's not a regular demand which is unlike the cellular or Wi-Fi.
Sometimes it depends on the project base from a different customer, which is related linked to some telecom communications company's projects or any infrastructures or the satellite launch. They all have the different schedule. It's not a regular business month-over-month or quarter-over-quarter. Obviously, in Q2, the demand is better than Q1. The Wi-Fi business since earlier this year, our Wi-Fi business, it's kind of weaker amongst most of our product mix. In this quarter, we have a slight growth in Q2.
Okay, in next page, please flip to page seven. We talked about the Q3 guidance. I think Steve has mentioned that in his management comment. I just go ahead read it repeat again. We expect Q3 2022, the revenue to decline mid-20% QoQ. We also expect that Q3, the gross margin will be around the level of low-20%. Therefore, now we can quickly go through the financial statement starting from page nine. It's this is a consolidated statement for income statement for Q2. Before I begin, I still have to remind everybody this is on unaudited basis from the company.
The final result should be based on the auditing report from the CPA and approved by the board meeting. Q2's net revenue was TWD 5,297 million. QOQ was down around 5% and YoY down 14%. The gross profit is TWD 1,501 million and gross margin becomes 30.2%, compared to 30.6% last quarter. The QoQ was down about 0.4 percentage points. The operating expense in Q2 was TWD 853 million. The OpEx ratio equivalent to 16%, compared to last quarter it's a little bit higher.
Well, if we take a look at the R&D expenses compared to the total revenue, it's a little bit around 1-2 between 1 and 2 percentage points higher than before. That's because during the utilization going down, our staff have more resources to allocate it to the R&D activity, no matter the internal new technology project or external customer engineering demand. Therefore, we can see that in the past one or two months, we see the new is in a higher level from the customers. The operating income is around TWD 747 million.
QoQ was down around 18% and YoY was down around 47%. Operating margin is 14.1%. The non-operating items was a - TWD 79 million. The details in page 11, we will discuss it a little bit later. Income before income tax was TWD 669 million, and income tax expense was TWD 125 million. Therefore, net income becomes TWD 544 million. Net income QoQ was down around 31% and YoY was down around 41%. Finally, net margin was 10.3%. The EPS for this quarter was TWD 1.62.
The ROE, return on equity, for this quarter is around 8%. Approximately utilization rate in Q2 is 60%. It's going down from 70% last quarter. The depreciation expense in this quarter is TWD 1,051 million. It's pretty close to last quarter's number. The CapEx is TWD 3,136 million. It's much higher than last quarter. Now we can flip to the next page, talk about the first half for 2022, the income statement, in page 10.
The first half total revenue is TWD 10,894 million. YoY was down around 11%. The gross profit is around TWD 3,315 million, and the gross margin 30.4%. The operating expense around TWD 1,651 million, and the ratio equivalent to 15%. Operating income is around TWD 1,663 million. The YoY was down around 36%. Operating margins equivalent to 15.3%. The non-IFRS item for the first half is - TWD 4 million, and the detail is in page 11.
Income before income tax around TWD 1,659 million, and the income tax expense equal to TWD 329 million. The net income was TWD 1,330 million, and the YoY was down around 34%. The net margin become 12.2%. The EPS for the first half was TWD 3.60. The accumulated ROE for the first half 2022 was 9%. Approximate utilization rate accumulated first half was 65%. The depreciation expense for the first half in total was TWD 2,109 million. The CapEx was TWD 4,456 million.
At this moment, we just finished the first half. I would like to share with you an overview for 2022 of the total depreciation expense and the CapEx for the whole year. First of all, the CapEx. Originally, we in the early part of the year mentioned that we expect the whole year's CapEx around TWD 12 billion ±. Now our view is around TWD 8 billion ±, which means around 1/3 of the original CapEx will be postponed.
The depreciation expense for the whole year, our view was revised, and also revised. Originally, we expect the depreciation expense will increase between 10% and 20%. Now we expect it should fall into the lower level in this range. Okay. This next page, we're gonna discuss about non-IFRS item in page 11. I think the major one I would like to highlight that to the investor is the item of gain on financial assets or liability at fair value through the profit or loss. In the Q2, for this item, it's -TWD 300 million.
Actually, the major in this one is coming from a valuation loss on the ECB, which we issue early of last year. The number was TWD 367 million loss. That's a valuation loss, TWD 367 million, valuation loss on ECB. Those are the non-cash flow items. So, there's no impact for cash flow. This is the non-IFRS item I would like to highlight it only. Finally, we're gonna discuss our balance sheet in page 12.
The data on June 30th, 2022, the major item of the balance sheet, like, cash and cash equivalents, we still have TWD 12.96 billion. The total assets around TWD 72.767 billion. The total liability was around TWD 37.796 billion. The common stock remained the same as before, which is around TWD 4.24 billion. The total equity is around TWD 34.971 billion, and the book value per share was increased to TWD 77.67 from TWD 77.22 last quarter.
Finally, the key index for the current ratio was, 210%, the same as last quarter end. The debt ratio is a little 1% lower, become 52% from 53% last quarter end. Okay. Okay, that's that's my report for financials. Now we're gonna begin the Q&A, and please submit your question in the input box on the webcast window now. Thank you. Okay, well, I think we have investor curious about what makes. What's happening for the China smartphone inventory such high level and then what happened. Maybe they're curious about what happened for the future.
Anyway, I can share with you that as everybody knows that since the end of 2020 Huawei ban, we no longer can ship any wafer to Huawei in China, and then starting from 2021, the other brand names, not smartphone, almost everyone you named, they all set up a very aggressive target try to gain share from existing share in Huawei. On the same time, our China PA design house customer went up, and I can say that localization happening.
We have several China customers. I mean the PA maker design house. They also gaining share and work together with the brand and smartphone maker and to cooperate with this kind of aggressive target. They accumulated the PA starting from beginning of last year. Then you can see when in Q4 2021 our revenue reached a record high in Q4. Actually those PA design house still place a lot of order to us. Still accumulate a lot of PA on hand.
Unfortunately, in the end of the last year, those smartphone maker, no matter Oppo, Vivo, Xiaomi or even Honor, they started to revise down their forecast. Then, they talking about their inventory is getting higher and higher. Unfortunately, our customer who are at that time, they actually are still in a very high level. They still placing orders to us at that time. Even in this Q1, they recognize that they cutting order, but it's still the order is still there.
I think we analyzed it and read a lot of different news and analyst report and find out that not only a smartphone maker may have a lot of inventory on hand and maybe part of it in the channel. Also our customer also have a lot of PA inventory on their side. It looks like the inventory adjustment period a little bit longer than everybody expect or even longer than the core chip maker like MTK or Qualcomm. That's the reason why.
I think the truth is that not only the China smartphone, but also the whole Android phone. I think later on, one of the Tier 1 Android phone maker also mentioned that they’re gonna start collecting the components. Yeah. I think the whole thing’s just like that. Yeah, that’s why the inventory adjustment is keep happening. So far, unfortunately the macro environment also changing very fast and it kind of making the demand even weaker. Yeah.
I think part of some of the investor wondering and how about the U.S. Tier 1 smartphone supply chain and Q3 I can say that the schedule's on track, everything on track. The trend of going down from Android actually is still very strong. That's why we guide the Q3, the revenue it's kind of weaker like that. Yeah, that's exactly what happened. Thank you.
Okay. Let's see. Other question wants to know better detail about the Q3 application situation. As I just mentioned earlier, for Q3 the revenue were going down around more than 20%. It's mainly due to the smartphone market. I think right now what we see the cellular PA will decline the highest percentage is for the cellular PA. At the same time, Wi-Fi and the infrastructure still facing some slight decline in third quarter. But at the same time, I think optical because of the seasonality they are shifting peak season. Compared from Q2, I think optical still has a positive growth in Q3. Yeah.
That's the four different application situation in Q4. Thank you.
Q3.
Sorry, in Q3. Okay. Let's see. Other question, want to know how, what's the biggest factor about the margin decline from Q2 to Q3. I think it's mainly because of the utilization rate decline because the revenue was declined more than 20%. At the same time, I think the utilization declined double digits in here. Primarily because once the utilization rate is lower than 50%, I think then secondary will impact margin a lot because you don't have enough economic scale to cover all the depreciation and fixed costs in there. Yeah. Thank you. Okay.
Because Joe just say that actually our tablets now will have some postponement or delay shift to next year. This year's tablets now will be only around TWD 8 billion ±, compared to original TWD 12 billion at the beginning of the year, this year, we forecast. Yeah. A lot of investors want to know how's our capacity trend right now. Yeah. Right now, our capacity is 41,000 wafers per month in 6-inch right now. At the end of this year, I think we will likely ramp up around 2,000 wafers per month in here.
at the end of this year, we will have around 40, 43 thousand wafer in six-inch wafers a month. That's right now the new capacity trend right now. Thank you.
Okay. Well, there is a question asking about several different perspectives. Well, of course, they cover around our maybe U.S. Tier 1 smartphones supply chain or and also would like to know what's the difference between this year and the 2018's cycle. First of all, as I did mention this earlier, I think the U.S. Tier 1 smartphone supply chain is the most stable. It's relatively stable than the Android. The schedule is pretty on track. Of course, I think maybe there's some difference from several years ago.
Several years ago, the U.S. Tier 1 smartphone, we have better PAs, we have 3D sensing, we have Wi-Fi business, so we have a very good customer in the supply chain. Starting from last year, I think we actually mentioned this in earlier before, Wi-Fi customers kind of losing share. In this year, I think, for the cellular, for the 3D sensing, they're all on track. The schedule is still pretty on time. Okay.
For the 2018 compared this year in the 2018 cycle, it looks pretty similar, the trend, which is from the quarter by quarter, actually. The first half looks still maybe still okay, although it's already weaker than a year before. The second half is even weaker. It looks like now Q3 looks like pretty in line with last year, 2018.
It looks, I think the reason is quite different because as you recall that in 2018 is after the peak season of the 3D sensing of 2017, which is you remember the first 3D sensing phone came out in the Q4 2017, and at that time, I think in the supply chain the yield rate is not that good and gradually quarter-over-quarter, year-over-year, the yield is kind of improved. It's the demand, I mean the for WIN Semi, we don't.
In the beginning, we already have a very good yield, but in the supply chain, actually still have some problems. When everybody improve, the yield improve, the wafer consumption become not that strong later on. In the second half, I think we have third in 2018, we have a cellular and Wi-Fi customer also lose part of the share in that year.
For this year, 2020, I think it's all because of the macro environment and also the market inventory. I mean, the PA inventory or the Android inventory, it was too high and it kind of impacted demand for the Q2 this Q3. It's an environment. I mean, there is a macro environment issue rather than the single customers issue. Yeah, it's pretty much that. Thank you.
Okay. Next, some investor wanted us to update some of our LiDAR status. Okay. I think, as we discussed before, actually, LiDAR, I think, is more related to the autopilot level, which will be adopted in the market. Definitely, from Level 2 to Level 4 , Level 5, that will tremendously increase LiDAR demand at that time. I think until right now, what we see in most of the cars in the market right now is all just Level 1 and Level 2 autopilot devices, which means the demand for LiDAR at this moment is still quite small.
I think we still have a very good confidence about the LiDAR contribution in the future once the market adopts the autopilot level from Level 2 right now to Level 3 or Level 4. Yeah. I think again right now we still are pushing this technology and keeping a lot of high-volume projects with different customers to make sure we can provide most of the advanced technology here. The revenue contribution still need to wait a few years. Thank you. Okay. I think there's still a lot of investors were very concerned how the progression will end or when that will end. I think until right now like we just saying that the visibility is pretty low.
Right now we only can say that the Q3 demand is very weak. For the Q4, because every year most of the smartphone will launch their premium model, flagship model in Q3 or in early of the Q4. I think the demand for the Q4 or if the inventory progression will last to Q4 or even longer. I think we need to wait to see how those new flagship products launch the market reaction. Yeah. I think for the market right now, it's been quite slow. We need to watch if those new flagship model will launch at the end of Q4.
Sorry, at end of Q3 or around, like, last September or October, can they bring the new demand in the market? Otherwise, if they can bring the demand to the market, maybe the correction can be shorter. But if the demand is still flat at that time, then this correction may be less longer. Thank you.
It looks like there's no further question. We're gonna wait another one minute. Otherwise, we will end the meeting. Thanks.
Okay. I think there's a new question wants to know about the foundry competition status for GaAs outside right now. Yeah, I think for the past few years, I think most of the new competitors was coming from China. Yeah, everybody know about that.
Compared to WIN Semi technology and those Chinese competitors can provide, I think it still has a lot of gaps there, especially for the 5G PA. I think it needs a very new advanced technology from WIN Semi in areas. I think for WIN Semi point of view, it's always a competition in the market. WIN Semi spend a lot of time to developing the new advanced technology. Certainly we are more targeting for the customer and their demand for those new advanced technology such as the 5G or even the new Wi-Fi 6E. Those are high frequency and high performance PA.
Because for those kind of application and technology, WIN Semi still have a very good advantage compared to those other competitors because of the own tech, the unique technology that WIN Semi provide to the customer. Thank you.
Okay. If there are no further questions, we wanna thank you for your participation in WIN Semi conference today. There will be a webcast replay within hours. Please visit www.winfoundry.com under the investor relations section. Thank you very much again, and then you may now disconnect it. Thank you and goodbye.