Earnings Call: Q2 2021

Jul 29, 2021

Good morning and good evening, ladies and gentlemen, no matter where you are. Welcome to Windsemis' results webcast conference for the Q2 of the year 2021. My name is Joe Dun, the spokesman and Associate Vice President of Finance in Windsemi. Joining me on today's call is Steve Chen, General Manager of Corporate Administration in Windsemi. Today's call is organized into 3 sections. First of all, Steve will comment on the company's results and provide brief guidance for the 3rd quarter for 2021. Secondly, I will go through the financials in details. After that, we will open to the floor for Q and A. Please freely submit your question 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 1 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 these forward looking statements going forward. Now, let me hand over the call to Mr. Steve Chen, the General Manager of Windsemi. Thank you, Joe, and welcome, everyone. After a traditionally slow season in the Q1, we have seen a gradual pickup of customer demand and our revenue in the Q2 reached RMB6.2 billion in SGD, an increase of 3% quarter on quarter and 2% year on year. This was roughly in line with our previous expectation. Driven by changes in the programming, our gross margin in the 2nd quarter increased by 2.2 percentage points from the previous quarter, recovering to 35.7%. This also leads a sequential increase of our operating margin by 2.8 percentage points, returning to the level of 22.7%. EPS in the 2nd quarter was 2.32 in NT dollars and EPS for the first half of 2021 was 5.04 in NT dollar. Looking at the product mix in the Q2, apart from infrastructure revenue being maintained at the level of the Q1. The double digit sequential growth in cellular PA revenue was the most pronounced, especially the contribution of 5 gs PA revenue of the total standard PA revenue recovered to over 20% again. And a significant increase in the momentum of Chinese fabrics customer was also one of the drivers. After the Q3 of 2020, we could not no longer supply to our largest Chinese customer at that time due to the U. S. China trade conflict. However, as we had previously decided, after the reshuffle of the smartphone end market, our strategy of diversifying customers has served us well again. Many Chinese customers who have been working with us for many years, faced this opportunity to gain market share and choose to work closely with us given our strong support in R and D and production capacity. This was a win win for our customer and us, strengthened our confidence in delivering continuous revenue growth in 2021. In response to our customers' future growth and long term demand for the production capacity, we will adhere to our strategy of investing R and D resources to participate for the next generation product development of our customer and expanding production capacity. We believe our customers' market share again will further reinforce our leading position in the compound semiconductor foundry industry. Looking ahead to the Q3 of 2021, we expect revenue to grow by high single digits quarter on quarter and gross margin to be around the level of mid-30s. I will turn the call back to Joe. Thank you. Okay. It's my turn. It's our pleasure to present our financial results for the Q2 of year 2021. You can also refer our presentation slides starting from Page 4. Page 4 talks about revenue and the margin. With the continued gaining share on China smartphone market through China fabless customer and our Q2 our Q2 revenue was up TRY 6,200,000,000, QoQ was up 3% and Y o Y up 2%. And with the utilization 90% of the utilization rate as we expected, the Q2 driven by some changes in product mix, our gross margin improved by 2.2 percentage points to 35.7%, which is better than our original low 30s expectations. And therefore, the operating margin improved about 2.8 percentage points to 22.7%. We will discuss about product mix changes in Page 7 later. And next page, please flip to the Page 5, talk about earnings. The second quarter net profit was NT930 million, QoQ was down 15%, mainly because of the impact from one off foreign exchange loss due to the appreciation of New Taiwan dollar against U. S. Dollar in Q2. So therefore, the EPS coming at $2.32 and compared to Q1, Q1 was $2.72 And please flip to the next page in Page 6. Page 6 talks about free cash flow and the building. As a Q2 of a net outflow for our free cash flow, that's because we continue increasing in CapEx. And the Q2 interest bearing debt and the gearing ratio maintained at the similar level of the last quarter. So please flip to the Page 7. We may discuss more about our product mix. In Q2, the product mix of cellular was between the 50% 55%, which is higher from 45% to 50% last quarter. And the salary revenue for Q2 are actually QoQ double digit up and especially 5 gs. For 5 gs cellular was higher than 20% of the total cellular PA. And another one is infrastructure. Infrastructure actually infrastructure remain in the same range between 15% 20%, which is the similar label as Q1, but it's better than our expectations. And the 3 d sensing in this quarter down to 14% from 19% last quarter and which is as we expected. When last earnings call, we did mention that the 3 d sensing business will be experiencing product transition period. And Wi Fi business also went down a little bit, become between 10% 15% for the total revenue. That's the product mix in this page. And then the next page is going to talk about the Q3 guidance. I think Steve has mentioned that on his management comment. So I I just repeat again. We expect Q3 2021 revenue to grow by high single digit Q02 and we expect Q3 gross margin to be around the level of mid-30s. Okay, then we can quickly go through the financial statements. We're starting from income statement for Q2 in Page 10. I have to remind you guys all of the figures below is all based on audited basis. The actual result should wait until the CPA's report. The Q2 net revenue was $6,195,000,000 QoQ up 3% and Y o Y up 2%. The gross profit was NT222 million dollars which is up about 10% QoQ. The gross margin become 35.7%, which is improved about 2.2 percentage points. The operating expense become $803,000,000 and the OPAT ratio was 13%. The operating income was NT1499 million dollars which is up 18% QoQ. The operating margin become 22.7%, which has improved about 2.8 percentage points. The non operating income and expense was $283,000,000 loss, which is the detail in Page 12. And the majority was the foreign exchange loss. The income before income tax was $1126,000,000 and the net the income tax expense was NT197 million. So the tax rate equivalent to 17.5%. The net income was NN930,000,000 so the net margin becomes 15%. So EPS come out at $2.32 And the ROE for Q2 was 12% and the utilization rate as I mentioned earlier in this quarter was 90%, which is increased from 80% last quarter. The depreciation expense was 1028,000,000. It's a little bit higher than last quarter. The car parts become 2702,000,000 NT, which is higher than last quarter. Okay. Then please flip to the Page 11 for the income statement for the first half in 2021. The net revenue was NT12,204,000,000, YOY was up 1%. The gross profit was NT4124 1,000,000. The gross margin becomes 34.6%. And the operating expense become NT1619 million. So the operating the OpEx ratio becomes 13% for the first half. The operating income was TWD2605 million, the operating margin become 21.3%. The non op item was NT92 million dollars NT loss. So the income before income tax was NT2513 million dollars and the income tax expense is about 488,000,000. The net income become 2,025,000,000. So therefore, the net margin becomes 16.6%. So the EPS for the accumulated first half become $5.04 The ROE for the first half accumulated become 13% and approximately utilization rate was 85%. Depreciation for the first half was NT127 million, the CapEx for the first half was NT 4,536,000,000. Okay, that's the first half for income statement. The next page will be a non op items. For your own reference, I just let you know that the major item is the foreign exchange loss. And the Page 13 is the balance sheet. Okay, stated at the June 30, 2021, the cash and the cash equivalent was NT19,899,000,000. The total assets was NT32,576,000,000 and the total liability was NT37,634,000,000. So the debt ratio equivalent to 52%. And the total ROCE was almost $35,000,000,000 and the book value per share is about 77.18 dollars And finally, the current ratio was 266 percent for the first half. Okay. So this is my presentation. Thank you. Now we now begin the Q and A and please submit your question in the input box on the webcast window now. Thank you. Okay. I think first, I will answer some question around the Q3 quarter trends. Because Q3 is the traditional peak season for the smartphone. So definitely, most of the smartphone related product that would be stronger in Q2 in this quarter, such as PA, even Wi Fi on optical. Yes. And infrastructure should be keep the same level of Q2. Yes. I think that would be the most likely trend for Q3 product. Okay. For the this some question was I want to know how's the margin because I think we still guidance the margin will be around mid-30s level. Yes, but yes, definitely, I think yes, it's although it it's in the same kind of margin level compared to Q2, but because of the revenue growth and the better UT, so yes, separately, even in the same kind of mid-thirty level, but compared to Q3 to Q4, the margin is still being increased from the Q2 and Q3. Q3 margin, that will be still a little better than Q2. And next question is about the capacity plan. I think we have discussed that in previous conference. Also that for 2021, our capacity will maintain at 41 ks per month in this year. And at the same time, right now, we are expanding our clean space in 5 C. So we will have some new capacity joined to production in next year. Okay. And there's a question, I want to know how's the status right now after we lose better customer in China since last year September due to the trade war conflict. Yes. I think it's already almost 1 year after that event, but you can see actually our revenue is still keep in a very stable situation. And at the same time, most of our Chinese customer actually they can share from this situation. So I think right now, no matter which new smartphone maker model, actually, right now, Chinese customer, actually, they all gain the shares in there. Okay. Just some question, I want to know how about some news in the market saying that the video sensing, digital chip size will become smaller. And how's the impact about Wind Famine? I think WindSpamy is developing the 3 d sensing technology since day 1, that product launched to the market. So every year, we're making the progress and generation change of our technology process. So definitely at the same time we will bring the better performance and also the smaller size of the chip every year. Yes. So the size link definitely that will happen along with the technology roadmap keep change. So at the same time, for the size even the size is keeping smaller, but at the same time that will bring the technology barrier becomes higher because if you want to size on the chip, definitely you need to based on the previous technology and making some new progress of that. Yes. So and at the same time, because of the technology process was become better and become a new generation, actually we can leverage those technology capability to diversify our optical business, not only the 3 d sensing, but other related sensing or optical radar in there. So I think for single product, yes, the seismic maybe will bring the revenue become a little lower, but compared to the technology progress, actually, we can gain more business from other optical projects. So I think for the whole year to see, I don't think the optical revenue will be going down year by year because of the size shrink. Thank you. Okay. There are a couple of questions regarding the depreciation expense for this year. And we'd like to know that we will where we remain the same view as the depreciation expense guidance. And yes, actually, we did provide that in early this year, we mentioned that this year, we roughly we probably our depreciation expense probably will increase about between 20% 30% in this kind of range. And actually from the result, we see that the first half Y o Y basis was increased very close to the lower label and in this range. So we believe that even including the second half probably won't be over this range. So the whole year, the depreciation expense guidance, we probably will keep the same as before. Thank you. There is another question asking about our Q2 OpEx ratio, which is 13% of OpEx ratio actually was lower than Q1, but still a little bit higher than the normal OpEx ratio. But we check into the detail of the administration and the sales expense pretty in line with before. But in Q2, the R and D expense looks higher than normal. We are we thought that the it should be the second quarter, we do more R and D activity with the customers no matter the new type out or the development project for the second half or even the next year's project, it's happened on the same time. So making the R and D expense a little bit higher as normal. But normally, the for 2nd quarters, the experiencing a higher R and D expense, it's not abnormal, especially the if we still have the capacity to support R and D project, then we definitely will do that. And I think Q2 with although higher utilization, but we're still not 100% yet. So I believe that that's what's the reason. Thank you. Okay. There is a question on is to talk about ASP. I want to know where we send the rising our ASP at this moment or in the future. But I think first, we've only had a very long relationship with our customer for most of the customers. So in most of the case, we discussed the ASP year by year. Yes. So before the agreement duration is coming actually And agreement period, actually, we will not rise up the ASP without the reason. Yes. So and also for the ASP, I think for Windsemi compared to other competitor is more complicated situation for Windsemi because we are not only providing the technology for single product or single PA. And actually, in We Semi, we produce all the tailor made PA by different customer with different handset makers. So actually, the ASP was totally different customer by customer and also product by product. But if you check Wixen is average ASP for the past few years, actually, I think it's kept in a very good health endeavor and even we because of the every time when we have a new technology launch, actually the ASP were going up. Yes. So for Winstanley, the ASP is not just compared to the same technology, because wind semi technology is keeping developing the new generation year by year. So the ASP for wind semi, definitely the new technology ASP is better than old one. Okay. There is another question still, investors still want to know about the 5 gsPA in Windsemi and the percentage of the revenue, the ASP compared to the 5 gs to 4 gs, such question. Okay. I think we start to shipping the 5 gs PA since the second half of twenty nineteen and starting from about 10% and gradually up and the highest level in the year 2020, I think maybe Q1 or Q3, I can remember and the highest level was about 25% and average is about between 20% 25% this kind of level for the whole year 2020 and the rest in Q1 below the 20% and come back to above 20% 20 something in the Q2. So you see that Wind Fairey, we develop a 5 gs PA many years ago and some mass production for our important customer since 2 years ago and even long before our competitors, not even the 5 gs PA recently. And so, of course, the wafer pricing, the price for 5 gs should be better than 4 gs, especially 4 gs, it's a kind of 4 gs PA, it's kind of the legacy product and experiencing kind of price erosion year over year. And there was almost no new band, almost no new design. But the 5 gs, it's still early stage for 5 gs PA. So theoretically, the new product, new application, it's all the pricing is better than the old one. And so that's why the 5 gs generation is very important for a PA maker. And we I think and especially 5 gs, the frequency band so far it's still limited to sub 6 gigahertz like N41, N47, N79 and we expect there will be more frequency band coming out the maybe even coming from 4 gs band reforming to 5 gs. For those, it's all new to the 5 gs PA in the future. So we're working on several important customer globally and of course different customer have different pricing and which is probably cannot discuss it, but definitely the 5 we enjoyed the better pricing and a better margin from 5 gsPA over 4 gsPA. Yes, exactly. Thank you. It looks like there is no further question, but we will still keep online for a few minutes. And if still the same, then we're going to finish the conference. So if you have any question, please do it as soon as possible. Okay. There is one question come out asking about one of us to do some kind of comparison between Windsemi and our competitor. And this is really it's difficult for us to do such comment because our major competitor also in Taiwan, they also listed in Taiwan, they are listed company in Taiwan. If something will impact their stock price, which is we know it's we are not willing to see that. And that's from of course, I can comment on something about ourselves, including that the technology. I think we first of all, when I mentioned our technology means maybe they are different, but you have to find out how different it is. And we develop our own technology since day 1 and we don't do technology porting from our customer and we keep migrating from 2 gs, 3 gs, 4 gs and 5 gs now. The customer our customer keep using our technology to penetrate into their market they want and also expanding their market share and which is quite different from our competitor. And also the timing, as I mentioned that we developing 5 gs PA technologies several years ago and mass production since 2 years ago. And I think we exceed our competitor for a long time for this kind of record and also because we input a lot of resources in R and D and the capacity. So the our customer attract a lot of Tier 1 customer, our player to work with Windsemi, we create a lot of number 1 in the record, including the 3 d sensing and also when the most important moment happened, then we always the first choice to our customer. So that's why making us the no matter the capacity several times compared to our competitor, our revenue also same several times higher than our competitor and our customer size is also several times compared to our customer. That's exactly what I can say right now. So I think even the market share based on strategy and that is we have already have approaching 80%, 70 something of a market share. So compared to our competitors, they still probably still very low anyway. So you guys can check that. So that's pretty much I can describe about how different between Windsemi and our competitor. Thank you. Okay. Looks like today's investor here is very shy and I got to answer one last question and then close the meeting. And the last question was asking about the relationship between Windsemi and our U. S. Customer for 3 d sensing anyway. The okay, I think, so I keep talking about recently input a lot of resources for R and D and the capacity. I think that's approved since in 2017 when U. S. Tier 1 smartphone would like to have the first three d sensing phone and what our U. S. Customer choose outsourcing instead of in house to produce that VISO chip leverage our 6 inches gallium arsenide and a compound semiconductor production experience and we successfully helping our customer become the important supplier to the U. S. Tier 1 smartphone maker and we continually work together for the sequential few years, although in between, every year has a little bit change on design and the process and we always support them and to do our best to in the no matter the process or the capacity support and even last year in year 2020, other than the structural light on the front side, the best side TOF is the first time launch in the last year's model and we also successfully suppose our customer become probably the only supplier to that model. And even this year, there is a design change. We're still working and support our customer and keeping the major source, major market share to for this year's 3 d sensing for the front side face ID. So keeping the resources all together with our customer, U. S. Customer, we're working very close. And I think what we just like our customer also mentioned that on their earnings call, they like to make their customer to remember that when even the next generation or even the next and the next generation when they need them, make sure they're still there. And then we keep the same thought. We also work together with every single customer and make sure that we were there, then when customer need us. So we become the best partner to all of our foundry customer, no matter 3 d sensing or the RF or anything else. So, okay, this is my our last question to answer. So still have no things have no further questions. And thank you for your participation in Windsemis conference today and there will be a webcast replay within hours. Please visit www.windfoundry.com under the Investor Relations section. Thank you very much and you may now disconnect and goodbye.