Earnings Call: Q4 2018

Mar 11, 2019

Quarterly report

Ladies and gentlemen, thank you for standing by. Welcome to ASP's 4th Quarter 2018 Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that today's conference is being recorded on Tuesday, 12th 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's Chris China Semiconductor Analyst. Today, we are very happy to host ASP's 1st online earnings conference. We have Chris Lin, the Chairman and CEO of ASP Technology and Lily Wu, the Deputy Spokesperson to attend our conference today. I will hand over to Lily right now to go through the company's 4Q 2018 results. Good afternoon, ladies and gentlemen. Welcome to ASP Technology 4th quarter conference call. Now let's start with the Q4 and full year financial results. Currency stated here are all in NT dollars. Revenue for the quarter was $484,000,000 down 17% sequentially and down 2.8% year over year. Revenue for the full year was $215,000,000 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 4th quarter was $117,900,000 compared with $119,300,000 in the previous quarter and $112,000,000 in the same quarter last year. Operating expense for the full year was $489,900,000 up 9.1 percent year over year. Operating income for the quarter was $181,800,000 down 22.4% sequentially and up 5.5% same time last year. Operating income for the full year 2018 was CNY 799,900,000, up 23.5 percent year over year. Operating margin for the quarter was 37.6 percent in the 4th 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 $170,000,000 compared with $194,000,000 in the previous quarter and $145,000,000 Q4 last year. Net income for the year was $686,000,000 up 29.1 percent year over year. Net profit margin for the quarter was 35.1% compared with 33.3% in the previous quarter and 29.3% in a 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 $5.01 compared with $5.72 in the previous quarter and $4.29 in the same quarter last year. Accumulated EPS for the year was $20.2 compared with $15.7 in 20.17. Thank you very much. Now I would like to direct the call to CEO and President, Chris Wing, for Q and A. Thank you for your joining this conference. Now we can go for Q and A. All right. Thank you. Ladies and gentlemen, we will now begin the question and answer We have our first question from the line from Randy Adams 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 4th 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. So 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 you have visibility at this stage? Hi, Randy. I still think 4th quarter last year, the major reason for the decline was the U. S. And China trade war issues. However, going to Q1, the OEMs have resolved the issues. So, we still see the pickup of our customers in the first two months. And as for full year 2019, our guidance for this is the shipment growth will be low teens. Our cloud customer will grow slightly more, so maybe 15% to 20%. Enterprise will be probably flat, flattish. So that adds up to be about low teens. Okay. Great. And do you have an update just on the I guess, in the first half of the first quarter and the extent you see pickup continuing into second quarter? I think as of from Q1 to Q2, we think the Q2 will be Q on Q flat. Okay, great. And yes, I just have 2 other questions I wanted to ask. The first one, the gross margin came in better in 4th quarter at 62%. So 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? And then 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. Now the product mix is higher, so our pricing is better. So our gross margin is much better now. I think going forward this year, currently it's about 65% to 70% of our shipment now. I think it will be by end of this year maybe reach to 80% to 85%. So if that's the case, gross margin will continue to up a little bit. Okay. And to clarify, the 80% to 85%, that's mix of the new generation platform that's driving the improvement? Yes. And is it the view I okay, for the Perley platform. Okay. So I guess if Perley continues to ramp toward 80%, 85%, could margin continue to improve slightly even from this level? Yes, slightly. Slightly, I think, yes. Slightly. Okay. Okay, great. And 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 Barcelona. At the show, we got very positive feedback from our customers and a lot of sales potential date is ongoing. So 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. And by Q4 this year, I think that we still have some shipment potentially, but the most important thing for this year is how to get more and more design wins. And for the big side, I think we have 2 major categories. 1 is for B2B and the other is for B2C. For B2C, we're driving for like a corporate safety brand name, Tianan's 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. So, those opportunities are good for our new product line. So we are right now very positive on this new product line. Okay. And just a follow-up to that. I guess you mentioned more design wins. Can is there a way to talk if you already have it like in number or the type of designs you already have secured? And 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 to 2 years? Okay. As I said, we are in the middle two category. 1 is B2B, like security or AI, those kind of applications. And this revenue coming from A2B will be faster than coming from B2C because B2B, we need to educate the market. It's a new application to most of the users. So I think B2B will come in much faster than B2C. And so I think for the coming years, maybe we have good potential. And for 2020, I'm quite positive on the revenue. Maybe you have maybe more than 10% contribution is highly possible for this company to for this new product line to contribute to this company. Okay. And that 10% is That is a 10%. And that's where you're thinking more by next year is a possible goal? I think last year is highly possible for next year, more than 10% contributions. This year, maybe some pilot shipment some pilot shipment or some small mass production shipment, but this year should be the major contribution starting from 2020. And I believe that more than 20% contributions should be highly possible for this new product line. 10% 10%, sorry. 10%, okay. More than 10% more than 10% of us. Okay, great. Okay, thanks a lot. I appreciate you guys hosting the call. Thank you for the questions. We have no questions from the line at this time. I would like to hand the call back to Daniel. Please continue. Hello. Okay. So I will have some follow-up questions. So because you mentioned about your B and C growth this year about low teens. So could you give us some color regarding the difference between your U. S. Clients and also your Chinese clients? Which one you show have a little higher earnings higher growth this year? And could you also give us some color on your outlook in the second half? Because there are a lot of companies, they are talking about the second half recovery, but also in the supply chain, there are some companies talk a lot like the cloud is still very weak. So could you give us some view on this? Thank you. Let me think about the question. For this year, I think you're talking about you're asking the U. S. And China customers for cloud or in general? If you can talk about what's the growth outlook for these 2 customers? Okay. For U. S. And Chinese customer, if you look at 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. Customers begin to pick up starting from January February. But for Q1 and Q2, 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. So because you mentioned that in Q2, your growth will be flattish Q on Q. So is it fair to say that your growth in terms of Y o Y momentum will be stronger in the second half? Yes. Yes. So second quarter will be stronger than the first half based on the kind of forecast that we can see. I see. So just one last follow-up question. So regarding the Chinese customers, you've mentioned that you haven't seen a very initial you haven't seen an initial pickup for the orders. So do you have any view that when will you see the orders start to pick up? No. As of now, our running forecast doesn't show us yet. Because for cloud business, I think maybe we have we can just make a see with 1 quarter. So out of 1 quarter, it's nice for us to see the demand. I see. So, okay. Yes. So I will hand over to operator to see if there is any follow-up questions. Yes. You have a follow-up question from Randy Adams from Credit Suisse. Please go ahead. Okay. Thanks. Since there's no others, I wanted to ask just a few others. If there's a way to just clarify for Q4 just the product mix where it ended up in terms of like if you have the units and the percent that was BMC versus the other products just for the actual? I think our 4th quarter mix is similar to our annual mix. So 93% BMC, 7% are non BMC. Okay. And then for this year, maybe the other two products, the iCAFE and AV extension, if you expect much incremental traction from those products? So right now, last year, our non BNC business contribution around 7 close to 7%. And for this 7%, the gross margin actually is much better than the BMC. The gross margin is 80 something plus. So, our mix, our right now, our gross margin, 17 something percent, actually, we still needed to sense for the contribution from AirBe extension. And then for iCarpay, I think our 1st generation for iCarpay solution, the specification doesn't fully meet its market requirements. But good news for us is for the chips we developed for iCafe still won many, many design wins, actually more than 20 design wins. And the major potential for the chips of the market we target to maybe we can say is PC extension. So users can centralize PC and they can extension from the host machine to the client side. So these new applications for centralized is good for management, it's good for some office online. So, we can see a good potential for this new product line. In order to fulfill our region of iCafe, we are developing new chips for this market. So the code name for the product is 1630, 1630, the product code. And we are going to have the first sample by Q3 this year. And so 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. So in the coming years, I think for this iCafe extension, speech extension still can contribute in this company, good gross profit in the coming years. Okay. And I guess as a percent of revenue, do you think the BMC because it's growing pretty healthy, low teens, like it will maintain pretty similar rate or with the growth from these products, they could rise percent of sales this year? Okay. I think ADP is thinking contribution the growth for this company too, but I think the major driver the growth driver for this company, I think, should be coming from new product line. So, we are quite positive on like the CUBOS 3 CFT, even no matter it's B2B or B2C applications. In 2020, I think they can contribute significantly to this company revenue. Okay. And the 5 gs, I guess, is one other opportunity. For BMC, do you see I guess what are you seeing in terms of design traction at the networking companies or for like 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. So we actually started shipping some little simple shipments end of last year. Okay. So they're doing the final testing now. So once they finish that, they will start shipping. As for the 5 gs networking service, we are co working with our customers now. So, we do have some customers design in for this project already, And we're discussing with some of the Chinese 5 gs networking company as well for this BNC to be added on for their future 5 gs. Okay, great. And last 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 like what rate of OpEx that you might get some leverage on the operating margin? Yes. From a price cost point of view, because we are driving a new product line, so I think it's naive to reduce the operating cost. So we still can see some operating cost growth in 2019. Yes, this is what we can see at this moment. Okay. Like grow it, it probably grows about in line with revenue is the rough way to think about it. Okay. All right. 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 Ding and Didi, can you hear me? Sure, sure. Congratulations on the very bright outlook for 2019. Please remind me that did you guys ever give guidance for Q1 of 2019? Yes, sorry about that. If you haven't given guidance, could you please let us know about the revenue and the gross margin, operating margin, etcetera guidance? Thank you. Hi, Michael. So we only give out shipment guidance for 2019 and also gross margin guidance for 2019. Rest of it, we haven't given our guidance for quarterly guidance yet because we gave customers very flexible order and cancel policy. So sometimes, it's very difficult for us to give a very accurate guidance. So we'd rather not give a guidance for quarterly, especially we only have the outlook for 1 quarter. Okay. Got you. Because I heard you mentioned that second quarter revenue will be flattish to 1st quarter. So I thought maybe you have a view about the Q3 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, sure. No problem. Thank you. That's my question. Congratulations again. Thank you. Thank you. The next question comes from the line of Irene Lau from Architec. 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? Or is it an inventory issue? Or are these guys actually just waiting for component prices to go down further? If you have any color on that. Thank you. Hi, Irene. To be honest, we're really not too sure what's going on in China. But we did for Q3 last year, we did see the U. S. Customers start to be more conservative on their orders and then the Chinese come in later. So I think now U. S. Pick up first, so maybe China will pick up later. Maybe that's just the timing schedule. And also, I think the components could be the other component pricing could be other factor. But realistically, we really don't know. Got it. Okay. And in China, are there actually new players that 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 the customers are relatively very aggressive when they give us the guidance this year. Some are flattish. So it really depends on the customers. So I think there's a market share shift. Right. Okay. Got it. And the market share shift, is it big getting bigger? Or do you see some sort of like relatively smaller customers trying to smaller players trying to become bigger? I think bigger, getting bigger. Okay. Okay. And also one question about the pricing of the I think it's called the Cupola, the one that Randy was talking about, the 3 60 camera. So I'm just wondering in terms of price points, what can you disclose what sort of price points these products will be? Around $15 The ASP, I think, should be around $15 So we can see that right now, the gross margin for Coupe, actually, it's better than DMC business. So we are very positive on the future gross margin growth for the Newport Online revenue contribution. Got it. Okay. And so I guess you mentioned earlier that the B2B business would actually grow faster at an earlier stage. So I guess in terms of the security type of customers, are they sort of like are these sort of customers sort of like few customers but ordering large quantity or many, many different customers sort of ordering smaller quantities? For B2B customers, I think it's more centralized. There are very many different customers, but for customer for B2B and for Internet security, we have advantage we can provide 360 video recordings. This is not right now the market don't have. And we can provide like a good quality for via like 180 degree security camera based on 2 sensors or 3 sensors, for example. So 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. So maybe I can say, right now, we talked to the preliminary customers, actually, they are big. They are big. But the project is still ongoing and not yet fully finalized, but what you can say, we have the opportunity there. Okay. And I guess in terms of the solution that you're offering for this market, is it sort of like more giving these security companies actually more functionality? Or is it actually giving them a better More functionality because the current solution for security, for example, the focus of view, Quineo, and they expect to have a wide view security wide angle security solutions. But the current solution in the market, they're counting on fisheye lenses. But fisheye lenses can provide cannot provide a good quality. So this spend maybe we can have a for example, we have 2 lenses, 2 sensors, wide angle and we can do real time stitching, and we can record in the recording machine. This is a new application and new features to the market. So right now, we talk to many customers, they are quenched in this kind of application. So this is new to the security market. Got it. On the B2C side, I think the only other sort of product that I have come across is Ricoh from Ricoh. Yes. Ricoh, for example, yes, yes. We have a good chance to cooperate with customers like Ricoh, this kind of customer, for example, yes. Yes. Right. Okay. Got it. Okay. Thank you very much. Thank you. Thank you for the questions. At this time, we have no questions. I'll hand the call back to Daniel. Please continue. Yes. Thank you. Just one follow-up question. So we have discussed the outlook for the CAL side for your BMC business. So could you also give us some update for your enterprise or ImmuneX business? Is there any change in terms of the order placement your customers? And also, how do you look like your first half momentum and also the second half, the growth trajectory for the enterprise side? Thank you. I think we still think that cloud will continue to gain market share from enterprise. So 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%. So I think enterprise will continue to lose market share to the cloud. Going from Q1 and Q2, usually, the 1st three quarters for enterprise are are relatively flattish, and then they usually pick on the 4th quarter. So I think this is the same case this year. 1st 3 quarters are weaker flattish, weaker this year and hopefully will pick up in 4th quarter. I see. Thank you. So 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. So okay, I see. Thank you. Thank you. We have 2 more questions from the line. The first question is from Li Ke from Ashmore. I just have a quick follow-up question because I think last year you mentioned about the new opportunities to win business from HP Bell and also you have sent some sample test with Google. So can you comment about the feedback from clients and the potentials from those new business? And then 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. But just wondering, is there kind of margin drag from this new business line or will we see some impact for this year and 2020? And lastly, I was wondering because you mentioned about B2B business. I'm just wondering, for this security, is it more public securities or is it more like security for like manufacturing or like private security companies? Thanks a lot. Hi. We are doing our design in and design win, I think, end of this year. So we will approach all the customers. However, it's not going to be easy to gain any market share gain, to be honest. However, we our sample for next generation will be out in end of June. So we'll give to Intel for testing and verification. So I think by early next year, we'll know the result. Yes. I think for those big OEM customers like HP or Dell, one of the key issues is they have many, many legacy features all by themselves. So it's not easy for them to adopt a 3rd party BMC chips because our chips are the specification coming from Intel and not coming from HP or Dell. So we cannot support their legacy features. So this is one of the most difficult barrier for us to get into HP and Dell, but we're still trying to try hard to get some business from them as well. But for Google, for example, I think we have got opportunity over there, but it takes time for us to get more and more revenue contribution from them. Okay. Got it. And look, I also comment on the potential kind of you comment on the sales contribution from the 360 camera and what kind of margin next 2 years for this business? What's kind of the when we can see the business reach your target margin level? I think the margin for 3 60 camera, the chip will be better than our corporate average next year of course, this year and next year. However, 2021, I won't be able to comment on that. Okay. And lastly, I mean, regarding the B2B consumers, the potential clients, are they like kind of your targets public security or more like enterprises level? You mean for B2B application for Yes. B2B like the security for the 360 camera. I think we can cover both of them, public or private. Okay. But which part of the clients do you think is relatively easier or you can it's easier for you to win orders from? We are engaging with both customers. We're engaging with both customers now. Okay, okay. Thanks a lot. Thank you. I'll have next question from the line of Edward Yen from JPMorgan. Please go ahead. Yes, hi. Thank you for taking my 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 DMC will be slightly up. I won't be able to comment on OEM, ODM market, but there are not much. I see. And then one more follow-up question is on your cost side. Basically, how do we how should we think about obviously, we talked about maybe GPM getting a little bit better this year. But I'm just curious as to whether there's any cost savings happening. Of course, you're getting more scale, but any other ways we should think about when we kind of think about that GP margin, is there something that we should also think about on the cost side? Okay. We do have we're working on a new project, three sixty camera and also have new BMC and 3rd generation PCAV extension coming out only this year. So our OpEx is not going we're not going to be lower this year. I guess I'm curious also on the cost side as well, cost of goods sold side as well. No, I think it was quite maintained quite stable. Okay. Appreciate it. Thank you. That's all for 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. So if there's no follow-up question, I think we can just conclude the call here. Okay. Okay. Thank you for your time 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.