Ladies and gentlemen, thank you for standing by. Welcome to ASPEED's fourth quarter 2018 results conference call. At this time, all participants are in the listen-only mode. There will be presentations followed by question and answer session, at which time, if you wish to ask a question, you need to press star one on your telephone. I must advise you that today's conference is being recorded on Tuesday, 12th of March 2019. I would now like to hand the call over to your host today, Mr. Daniel Yan from Morgan Stanley. Please go ahead.
Hello. Good afternoon, everyone. This is Daniel Yan, Morgan Stanley, Greater China semiconductor analyst. Today, we are very happy to host ASPEED's first online earnings conference. We have Chris Lin, the Chairman and President of ASPEED Technology, and Lili Wu, the deputy spokesperson, to attend our conference today. I will hand over to Lili right now to go through the company's 4Q18 results.
Good afternoon, ladies and gentlemen. Welcome to ASPEED Technology fourth quarter conference call. Now, let's start with the fourth quarter and full year financial result. Currency stated here are all in NT dollars. Revenue for the quarter was TWD 484 million, down 17% sequentially, and down 2.8% year-over-year. Revenue for the full year was TWD 2,150 million, up 13.7% from 2017. Gross margin for the quarter was 61.9%, up 2.1 percentage points sequentially and up 7.8 percentage points year-over-year. Gross margin for the year was 59.9%, up 3.4 percentage points from the previous year. Operating expense for the fourth quarter was TWD 117.9 million, compared with TWD 119.3 million in the previous quarter and TWD 112 million in the same quarter last year. Operating expense for the full year was TWD 489.9 million, up 9.1% year-over-year.
Operating income for the quarter was TWD 181.8 million, down 22.4% sequentially and up 5.5% same time last year. Operating income for the full year 2018 was TWD 799.9 million, up 23.5% year-over-year. Operating margin for the quarter was 37.6% in the fourth quarter, compared with 40.2% in the previous quarter and 35.8% in the same quarter previous year. Operating margin for the full year was 37.1%, up 8.6 percentage points from 2017. Net income for the quarter was TWD 117 million, compared with TWD 194 million in the previous quarter and TWD 145 million fourth quarter last year. Net income for the year was TWD 686 million, up 29.1% year-over-year. Net profit margin for the quarter was 35.1%, compared with 33.3% in the previous quarter and 29.3% in the year-ago same quarter. Net profit margin for the year was 31.9%, up 13.5 percentage points year-over-year.
EPS for the quarter was TWD 5.01, compared with TWD 5.72 in the previous quarter and TWD 4.29 in the same quarter last year. Accumulated EPS for the year was TWD 20.2, compared with TWD 15.7 in 2017. Thank you very much. Now, I would like to direct the call to CEO and President Chris Lin for Q&A.
Thank you for your joining this conference. We can go for Q&A.
All right. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you want to ask a question on the phone, please press star one and wait for your name to be announced. If you would like to cancel a request, you can also press the pound or hash key. Back to you. As a reminder, if you would like to ask question, please press star one. We have our first questions from the line from Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes. Thank you. Good afternoon, and thanks for hosting the call. The first question I wanted to ask, just if you could review a bit more on the sales decline in fourth quarter for the 17%. Just the factors on that decline, and then maybe for the start of the year, it looks like based on January, February, sales are starting to rebound. Maybe if you could discuss the market trend you're seeing to start the year, and maybe an outlook how you see the rest of the year playing out from the stage of visibility at this stage.
Hi, Randy. I still think fourth quarter last year, the major reason for the decline was the U.S. and China trade war issues. Going to first quarter, the audience have resolved the issues. We still see the pickup on our customers in the first two months. As for full year 2019, our guidance for this is the shipment growth will be low teen. Our cloud customer will grow slightly more, maybe 15%-20%. Our enterprise will be probably flat-ish. That adds up to be about low teen.
Okay, great. Do you have an update just on the, I guess in the first half, the first quarter, and the extent you see pickup continuing into second quarter?
I think as of from first quarter to second quarter, we think the second quarter will be quarter-over-quarter flat.
Okay, great. Yeah, I just have two other questions I wanted to ask. The first one, the gross margin came in better in fourth quarter, at 62%. It looks like a good trend on the margin. If you could give a view maybe what drove it between whether it was a product mix, pricing or improvement on cost structure. If you could give a bit like an outlook for gross margin and operating margin for this year.
I think it's because of product mix. The product mix is higher, our pricing is better, our gross margin is much better now. I think going forward this year, Pilot is about 65%-70% of our shipment now. I think by end of this year, maybe reach to 80%-85%. If that's the case, gross margin will continue to up a little bit.
Okay. To clarify, the 80%-85%, that's mix of the new generation platform that's driving the improvement?
Yes.
Is it the view? Okay. Oh, for the Pilot platform.
Yes.
Okay. I guess as Pilot continues to ramp toward 80%-85%, could margin continue to improve slightly even from this level?
Yes, slightly.
Slightly, I think. Yeah.
Slightly, okay. Okay, great. The last question I just wanted to ask on, if you could give maybe an update on Cupola, just so you've showed it at a couple of the shows, just the latest traction you're showing for the 360 camera.
Okay. Right now, we just finished the show in MWC in Barcelona. At the show, we got very positive feedback from our customers, a lot of sales potential date is ongoing. Right now, we are quite positive on this new product line. I think this year, the major effort for us is to get more and more design wins. I think the major revenue coming from this new product line should be from 2020. By Q4 this year, I think that we still have some shipment potentially, the most important thing for this year is how to get more and more design wins.
Okay
I think we have two major category. One is for B2B and the other is for B2C. For B2C, we're driving for, like a Cupola360 brand name, Teleste brand name for consumer applications. We also found that we have a good potential business in security and in AI or in some other B2B applications, too. Both opportunities are good for our new product line. We are right now very positive on this new product line.
Okay. Just to follow up to that, I guess you mentioned more design wins. Is there a way to talk, if you already have it, like in number or the type of designs you already have secured? If there's a way, because it's kind of a new market, have you kind of put any initial sizing on the potential opportunity for this product, say, looking out 1-2 years?
Okay. As I said, we are at major 2 category. One is B2B, like a security or AI, those kind of applications. This revenue coming from a B2B will be faster than coming from B2C, because B2B, we needed to educate the market. It's a new application to most of the users. I think B2B will come in much faster than B2C. I think, for the coming years, maybe we have good potential, and for 2020, I'm quite positive on the revenue. Maybe more than 10% contribution is highly possible for this company, too, for this new product line to contribute to this company.
Okay. That 10% is-
At least a 10%, yeah
That's where you're thinking where by next year is a possible goal?
I think next year.
Is there
Should be highly possible for next year, more than 10% contributions. This year, maybe just some pilot run shipment or some small shipment, but next year should be the major contribution starting from 2020. I believe that more than 20% contributions should be highly possible for this new product line.
10%.
10%, sorry.
10%, okay.
More than 10%.
Okay.
More than 10%
All right. Okay, great. Okay. No, thanks a lot. I appreciate you guys hosting the call.
Thank you for the questions. Once again, to ask question, please press star one and wait for a name to be announced. We have no questions from the line at this time. I would like to hand the call back to Daniel. Please continue.
Hello. Okay, I will have some follow-up questions. Because you mentioned about your BMC growth this year about low teens. Could you give us some color regarding the difference between your U.S. clients and also your Chinese clients? Which one you show have the higher growth this year? Could you also give us some color on your outlook in the second half? There are a lot of companies, they are talking about the second half recovery, but also in the supply chain, there's some company talk like the cloud is still very weak. Could you give some view on this? Thank you.
Let me think about the question. For this year, I think, you're asking the U.S. and China customer for cloud or-
Right
in general?
If you can talk about what's the growth, outlook for these two customers.
Okay. For U.S. and Chinese customer, if you look in our whole year, I think the growth rate for this year, U.S. is slightly stronger than Chinese. However, we do see our U.S. customer begin to pick up, starting from first January and February. For first quarter and second quarter, part of the second quarter, we haven't seen the Chinese customer picking up yet. However-
the guidance they give us for the whole year is still relatively healthy and similar to our corporate average.
I see. Because you mentioned that in second quarter, your growth will be flattish quarter-over-quarter, so, is it fair to say that your growth in terms of the year-over-year momentum will be stronger in the second half?
Yes.
Yes. Second quarter will be stronger than the first half, based on the current forecast we can see now.
I see. Just one last follow-up question. Regarding the Chinese customers, you mentioned that, you haven't seen the initial pickup for the orders. Do you have any view that when will you see, the orders start to pick up?
No. As of now, our rolling forecast doesn't show it yet.
For cloud business, I think maybe we can just maybe see with one quarter. Other one quarter is nice for us to see the demands. Yeah.
I see. Okay. Yep. I will hand over to operators to see if there is any follow-up questions.
Yes. You have a follow-up questions from Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yeah, no, thanks. Since there's no others, I wanted to ask just a few others. If there's a way to just clarify for fourth quarter, just the product mix where it ended up, in terms of if you have the units and the % that was BMC versus the other products, just for the actual.
I think our fourth quarter mix is similar to our annual mix. 93% BMC, 7% are non-BMC.
Okay. For this year, maybe the other two products, the iCafe and AV Extension, if you expect much incremental traction from those products.
Right now, last year, our non-BMC business contribution around close to 7%. For this 7%, the gross margin actually is much better than the BMC. The gross margin is 80 something plus. Our mix, right now our gross margin, 17% , actually we still needed to transfer the contribution from AV Extension. For iCafe, I think our first generation for iCafe solution, the specification doesn't fully meet market requirements. Good news for us is for the chips, which is for iCafe, still won many design wins, actually more than 20 design wins. The major application for the chips of the market we target to, maybe we can say it's a PC Extension. Users can centralize PC and they can extension from the host machine to the client side. Yeah. This is new applications.
For centralized, it's good for management, it's good for some office outline. We can see a good potential for this new product line. In order to fulfill our vision, our iCafe, we are developing new chips for this market. The code name for the product is AST1630, the product code. We are going to have the first sample by Q3 this year. At that time, I think it will be a good chance for us to retarget our new products for iCafe and some other new applications too. In the coming years, I think, for this iCafe, AV Extension, PC Extension, still can contribution this company good gross profits.
Okay. I guess as a % of revenue, do you think that BMC, because it's growing pretty healthy, low teens, it'll maintain pretty similar rate or with the growth from these products, they could rise % of sales this year?
Okay. I think ABT is thinking contribution, the growth for this company too. I think the major driver, the growth driver for this company, I think should be coming from new product line. We are quite positive on Cupola360, even though major is, it will be a B2C applications. In 2020, I think, they can contribute significantly to this company revenue.
Okay. The 5G, I guess, is one other opportunity. For BMC, I guess, what are you seeing in terms of design traction at the networking companies or for storage switch? If you can maybe go through the opportunity, is that for the expansion of the business?
I think our storage and switch design for BMC, the design cycle has been done. We actually started shipping some little simple shipments end of last year. They're doing the final testing now. Once they finish that, they will start shipping. As for the 5G networking service, we are co-working with our customers now. We do have some customers designing for this project already, and we're discussing with some of the Chinese 5G networking company as well for this BMC to be added on for their future 5G.
Okay, great. One last final small question. Just the OpEx, if you have an expectation, because I guess sales or shipments will grow low double digit, but, if you expect to see what rate of OpEx that you might get some leverage on the operating margin.
Yeah, from the operating cost point of view, because we are driving a new product line, so I think it's naive to reduce the operating cost. We still can see some operating cost growth in 2019. Yeah. This is what we can see at this moment.
Okay. It probably grows about in line with revenue, is the rough way to think about it. Okay. All right. No, thanks a lot. Appreciate you taking the time to answer the questions.
Thank you.
Move on to the new questions from the line of Michael Lin. Please go ahead.
Chairman Lin and Lili, can you hear me?
Sure.
Congratulations on the very bright outlook for 2019. Please remind me, did you guys ever give guidance for first quarter of 2019? If yes, sorry about that. If you haven't give guidance, could you please let us know about the revenue and the gross margin, operating margin, et cetera, guidance. Thank you.
Hi, Michael. Sorry, we only give out shipment guidance for 2019 and also gross margin guidance for 2019. Rest of it, we haven't given out the quarterly guidance yet. We give customers very flexible order and cancel policy, sometimes it's very difficult for us to give a very accurate guidance.
We'd rather not give a guidance for quarterly, especially we only have the outlook for one quarter.
Okay. Got you. I heard you mention that second quarter revenue will be flattish to first quarter.
Yes.
I thought, maybe you have a view about first quarter right now.
We have
It's okay to give a range.
We have an internal view, but to be honest, it's difficult to tell you now.
Sure. No problem. Thank you. That's my question.
Thank you.
Congratulations again.
Thank you.
Thank you.
The next question comes from the line of Irene Liao from Arete. Please go ahead.
Hi. Thanks. I have a question on China cloud demand. As you mentioned, you haven't really seen any recovery yet from the Chinese cloud guys. Could you give us some color as to why this is the case? Do you think this is still a result of the U.S.-China trade tension? Is it an inventory issue? Are these guys actually just waiting for component prices to go down further? If you have any color on that. Thank you.
Hi, Irene.
Hi.
To be honest, we're really not too sure what's going on in China. For third quarter last year, we did see the U.S. customers start to be more conservative on their orders. The Chinese came in later. I think now U.S. pick up first, so maybe China will pick up later. Maybe that's just the timing schedule. Also, I think the component pricing could be other factor. Realistically, we really don't know.
Got it. Okay. In China, are there actually new players or maybe not new players, but are there actually players that are emerging to become more aggressive in taking market share this year that you see?
We do have some of our customers are relatively very aggressive when they give us a guidance this year.
Some are flattish, it really depends on the customer. I think there's a market share shift.
Right. Okay. Got it. The market share shifts are, is it the big getting bigger, or do you see some sort of relatively smaller players trying to become bigger?
I think bigger getting bigger.
Okay. Also, one question about the pricing of the, I think it's called the Cupola, the one that Randy was talking about, the 360 camera. I'm just wondering, in terms of price points, can you disclose what sort of price points these products will be?
Around TWD 15.
The ASP, I think it should be around TWD 15, yeah. We can see that right now, the gross margin for Cupola, actually, it's better than BMC business. We are very positive on the future of gross margin growth.
Right. Okay.
for the new product line revenue contribution.
Got it. Okay. I guess you mentioned earlier that the B2B business would actually grow faster at an earlier stage. I guess in terms of the security type of customers, are these sort of customers sort of few customers, but ordering large quantity or many different kind of customers sort of ordering smaller quantities?
For B2B customers, I think it's more centralized. There aren't very many different customers. For B2B internet security, we have advantage, we can provide the 360 video recordings. This is not, right now, the market don't have. We can provide a good quality for VR, like 180-degree security camera based on two sensors or three sensors, for example. Actually, we found that we can provide much different products to the market, and many customers are quite interested in this new kind of architecture, new kind of application, and new kind of quality.
Right
I can say, right now, we talk to the potential customers. Actually, they are big. The project is still ongoing, and not yet fully finalized. What you can say, we have the opportunity there.
Okay. I guess in terms of the solution that you're offering for this market, is it sort of more giving these security companies actually more functionality, or is it actually giving them a better cost?
More functionality. Because the current solution for security, for example, the field of view are quite narrow, and they expect to have a wide-angle security solutions. The current solution in the market, they're coming on fisheye lenses. Fisheye lenses cannot provide a good quality. This maybe we can have a, for example, we have two lenses, two sensors, wide angle-
We can do real-time stitching that we can record in the recording machine. This is a new application and new features to the market. Right now, we talk to many customers. They are quite interested in this kind of application.
Right.
This is new to security kind of market.
Got it. On the B2C side, I think the only other sort of product that I have come across, it's Ricoh from Ricoh.
Yeah. For Ricoh, for example. Yeah. We have good chance to cooperate with customers like Ricoh, this kind of customer, for example. Yeah.
Right. Okay. Got it. Okay. Thank you very much.
Thank you.
Thank you for the questions. Once again, to ask question, you may press star one. At this time, we have no questions, so I'll hand the call back to Daniel. Please continue.
Yeah. Thank you. Just one follow-up question. We have discussed the outlook for the cloud side for your BMC business. Could you also give us some update for your enterprise or Emulex business? Is there any change in terms of the order placement from your customers? Also, how do you look your first half momentum, and also the second half, the growth trajectory for the enterprise side? Thank you.
We still think that cloud will continue to gain market share from enterprise. The mix between the cloud and enterprise today for the total server market is cloud has about 45%, enterprise has about 55%. I think the right ratio between cloud and enterprise should be cloud should have about 60%, and enterprise should have about 40%. I think enterprise will continue to lose market share to the cloud. Going from first quarter and second quarter, usually the first three quarters for enterprise are relatively flattish, and then they usually pick on the fourth quarter. I think this is the same case this year. First three quarters are weaker, flattish, weaker this year, and hopefully will pick up in fourth quarter.
I see. Thank you. Just one final question. Regarding your tax rate, how should we think about your tax rate fluctuation from quarter to quarter this year?
Our tax rate is 20%.
Okay. I see. Thank you.
Thank you. We have two more questions from the line. The first question is from Li Ke from Ashmore. Please go ahead.
Hi. Good afternoon, Chris and Lili. I just have a quick follow-up question. Last year, you mentioned about the new opportunities to win business from HP, Dell, and also you have done some sample test with Google. Can you comment about the feedback from clients and the potentials from those new business? My second question is that, you mentioned that you are ramping up your sales volume from your 360 camera. Potentially it will contribute 10% of your group sales. Just wondering, is there margin drag from this new business line, or will we see some impact for this year and 2020? Lastly, just wondering, you mentioned about B2B business. I'm just wondering, for this security, is it more like a public securities or it's more like security for manufacturing or like a private security company?
Thanks a lot.
Hi. We are doing our design-in and design win, end of this year. We will approach all the customers. However, it's not going to be easy to gain any market share again, to be honest. However, our sample for next generation will be out in end of June. We'll give to Intel for testing and verification. By early next year, we'll know the result.
For those big OEM customer like HP or Dell, one of the key issue is they have some many legacy features owned by themselves. It's not easy for them to adapt a third-party BMC chips, because our chips are the specification coming from Intel, not coming from HP or Dell. We cannot support their legacy features. This is one of the most difficult barrier for us to gain to HP and Dell. We're still trying hard to get some business from them as well. For Google, for example, we have got opportunity over there, but it takes time for us to get more and more revenue contribution from them.
Okay, got it. You comment on the sales contribution from the 360 camera, and what kind of margin next 2 years for this business? When we can see the business reach your target margin level?
I think the margin for 360 camera, the chip will be better than our corporate average next year. Of course, this year, next year. However, 2021, I won't be able to comment on that.
Okay. Lastly, regarding the B2B consumers, the potential clients, are they your targets public security or more like enterprises level?
You mean for B2B application?
Yeah, B2B, like the security for the 360 camera.
I think we can cover both of them, public or private.
Okay. Which part of the clients do you think is relatively easier, or it's easier for you to win orders from?
We're engaging with both customers now.
Okay. Thanks a lot.
Thank you. I'll have next questions from the line of Edward Yen from JP Morgan. Please go ahead.
Yes. Hi, thank you for taking my question. I guess my question is more on the general pricing trend, when you kind of consider how all the moving parts kind of fit in, with cloud growing faster, enterprise probably going to grow slower and all these different kind of early developments, maybe even next generation products. I'm just curious, in terms of how we should think about how the pricing trend will probably move, maybe for this year or maybe even down the road next year and beyond. How should we think about it? Thank you. Hello?
I think our blended ASP for BMC will be slightly up. I won't be able to comment on OEM or ODM market, but they are not much different.
I see. One more follow-up question is on your cost side. How should we think about we talked about maybe GPM getting a little bit better this year, I'm just curious as to whether there's any cost savings happening. You're getting more scale, any other ways we should think about when we think about that GP margin, is there something that we should also think about on the cost side?
We're working on new project, 360 camera, also have new BMC and third generation PCIE extension coming out all this year. Our OPEX, we're not going to be lower this year.
I'm curious also on the cost side as well, cost of goods sold side as well.
On the cost.
Yeah.
No, I think it will maintain quite stable.
Okay. Appreciate it. Thank you. That's all from me. Appreciate it.
Thank you.
Thank you for the questions. There are no questions from this line. I would like to hand the call back to Daniel. Please continue.
Hi. I think I don't have any follow-up questions. If there's no follow-up question, I think we can just conclude the call here.
Okay.
Okay. Thank you for your chance to join.
Thank you very much.
Thank you, ladies and gentlemen. That does conclude our conference call for today. Thank you for your participation. You may now disconnect your lines.