For your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.eink.com under the investor relations section. Now I would like to introduce the Chairman, Mr. Johnson Lee, CFO, Mr. Lloyd Chen, and Financial Center Director, Mr. Patrick Chang. Now please begin.
Good day everyone. My name is Lloyd Chen, the CFO of E Ink. First of all, I would like to talk about the financial in the first quarter. Next page. I think before we talk about the financial in the first quarter, let's spend a few seconds on the safe harbor statement. Okay, next page. All right. For first quarter results. First things first, for the sales revenue, it's around TWD 2.9 billion. It's worthwhile to mention, you can see from the presentation in terms of the year-over-year comparison, the sales revenue was declined by 1%. However, if we translate it from the local Taiwan currency to the U.S. dollars, actually the sales revenue was increased by 1% and that was caused by the relatively stronger U.S. dollar against NTD in first quarter 2019. For the gross profit percentage, that was 46.2%, equivalent to TWD 1.3 billion.
For operating profit, that was TWD 68 million. In terms of the non-operating income, basically that was TWD 820 million. If we break it down, basically three major components. One is royalty income. The other is realized and unrealized foreign exchange evaluation gain. The last part was the financial income associated with the cash that we have on hand to be invested in those financial assets. That led to the net income in first quarter was TWD 790 million, and associated EPS was TWD 0.69. Okay, next page. After the numbers, I would like to talk about the accomplishments that E Ink has done in the first quarter. I think first of all, I would like to talk about a term that you may not be that familiar with, E Ink Gallery.
Basically, E Ink Gallery is the marketing name of the full color ePaper display module product that is using ACeP technology. ACeP basically is short for Advanced Color ePaper technologies. Basically, this ACeP is a high-quality, full-color reflective display. In the ACeP, the ink can produce full color at every pixel, achieving full color gamut without the use of color filter array. You may see another term, it's called E Ink Gallery Palette. Basically, it's using the same ACeP material but provides limited seven colors. With those new technology that we are working on, in first quarter, we shipped more than 1,000 samples to around 30 customers in terms of the E Ink Gallery Palette, especially on the 5.65-inch samples. Also in first quarter, we also teamed up with one of the leading TFT-LCD panel suppliers, Innolux.
The collaboration that we work with on large sized ACeP panels. Innolux is the first partner to work on the production and sales of large size ACeP. With this partnership, E Ink and Innolux will focus on expanding ePaper products in IoT and smart city applications. As you can see on the presentation, the 28-inch bar type signage will be mainly used for in-vehicle advertisement signage and retail signage, and also being used for the public transportation such as national high-speed railway, train, and bus. That's for the E Ink Gallery and Gallery Palette. We also have some achievements in the TCON T1000. That's the E Ink in-house chip that we have explored. In first quarter, one of our customers in China, iFLYTEK, they work with China Mobile and launched a new product on eNote, 9.7 inch.
In first quarter, basically upon the COVID-19 impact, around mid-March, we suffered the capacity problem in our Yangzhou module site. At the beginning of April, the capacity was fully recovered. Those are module capacities ready to go for the growing demand. I just mentioned our operating profit in first quarter, as well as the net income and associated EPS, basically. That was the best first quarter achievement in the past nine years. That's the accomplishments we have made in the first quarter. Next page. The next one also is about our color technologies. Once again, I'll talk about the term that you may not familiar with, which is the E Ink Kaleido. Once again, it's a marketing name for the color ePaper display module product, but with the technology, true color technologies.
It doesn't use the convention glass-based true color filter. It's just direct print on our ePaper materials. That make our product thinner, lighter, and with higher contrast ratio and less parallax. The most important is that provides a lower cost solution to potential customers. With these new technologies, some of our customers in China, such as iReader, BOOX, Hisense and iFLYTEK, they are all utilize this E Ink Kaleido technologies. Also one of our Europe customers, PocketBook, is also using these technologies. So far, the market feedback we have collected, basically, it's pretty much exceed the market expectations. What we need to work on harder is on how to scale up our E Ink Kaleido capacity. That's something we need to enhance and work on harder from the first quarter. Next page. This page is about our corporate recognition externally.
E Ink has been the pioneer to utilize the renewable energy certificate. Basically, E Ink is the first company to purchase the renewable energy certificate in Taiwan. For all the renewable energy certificate that has been issued in Taiwan, E Ink has purchased more than 30% out of it. With other well-known companies such as TSMC, Foxlink, have been the green energy purchase progress biggest participants. That's for the green energy, renewable energy. For the corporate governance evaluation, E Ink was being ranked under top 20 companies listed in TPEX, basically Taipei Exchange, both in 2018 and 2019, in terms of the corporate governance evaluations. That's the corporate recognition that we achieved in the first quarter. Next page. For the gross profit on trend, as you can see from the presentation, the first quarter gross profit percentage was around 46%.
It has been increased from around 30% in first quarter 2016, all the way up to 46%. The reason behind was basically, we have been selling more E Ink material than the module. That create a better gross profit margin to us. On the other hand, we have been working very hard on the operation optimization and also improve the supply chain efficiency, as well as the automation. That leads a better gross profit margin in the first quarter. Gross profit margin remained high, basically, in the first quarter. Next page. The next one is the operating profit part. As I just mentioned earlier, this quarter was the best first-quarter achievement in the past nine years. Few reasons. Basically, in the first quarters, we have more material sales and basically offset the module sales decline.
Once again, we spend more efforts on automation and cost reduction on the supply chain efficiency and operating cost improvements. Basically that leads to a better operating profit in first quarter this year. Next page. The next one is on the balance sheet part. The first thing I want to talk about is the asset side. In the asset side, the cash and financial assets has been increasing. As you can see from the presentation, first quarter 2018, the total financial assets plus cash was around TWD 12 billion. After two years, the cash and financial assets we have on hand was around TWD 15 billion. Basically, we utilize the cash we have on hand to invest more on financial assets. That's for the asset side.
For the liability side, one thing to mention was, basically from fourth quarter 2019 to first quarter 2020, debt ratio just has been slightly increased. The bigger jump was from 2018 because the cash utilization strategy we have on hand is, just like what I just mentioned, we convert the cash on hand into financial assets to generate higher interest and investment income. On the other hand, we best utilize the bank loan at the lower interest cost to meet the operation cash needs. That's the reason why our financial assets plus cash has been increasing. Our debt ratio also slightly being increased from fourth quarter last year to this year. Okay. Next page. For the cash flow movement, so once again, few major points. We converted the cash on hand for financial investment and operations.
As you can see from the bar on the presentation, we utilize the cash on hand from 8 billion to around 6 billion, by the conversion from cash to time deposit and the financial assets. Those cash generated from royalty and operation, basically, is used for the CapEx, for expanding E Ink Kaleido capacity and material capacity. Next page is about the global R&D footprint. In the first quarter of 2020, we have 462 R&D employees globally. The global R&D spending in the first quarter was around TWD 600 million. In terms of the patents we have on hand, I mean, first of all, we have more than 5,000 patents globally. The way we build up our patents is from one layer to the other, just like we build the blocks.
We started from the basic principle patents and go all the way from optical layer, imaging film, and then to the electrical. For example, something relevant to the TFT backplane. On the module, display module design, and also driving the algorithm and waveform, and all the way up to the device and applications. Just like we are building the blocks from one layer to the next. Geographically speaking, the way we place our R&D resources, basically, in the United States, from Fremont to Billerica, basically two sites are specialized on the material, but also the advanced technologies. In Asia, in China, Yangzhou, basically, they specialize in the module. In Tokyo, Japan, this site that we spend most of our resources on the advanced technologies, and in Taiwan, Hsinchu and Linkou, a few things are specialized: module, advanced tech, material, and even the systems.
That's how we build up our patents and spend our R&D resources. Next page. The last page is about the business opportunity after the COVID-19 crisis. I believe the COVID-19 impact still on, especially in the States and also Europe. We do identify three major business opportunities there. The first one is e-learning. The second is grocery retail. Third one is information board. For the e-learning, basically, we still target the education market. The targeted market, basically, still on the distance education, homeschooling, and those test homework being done on cloud. With the product feature of our product, for example, easy on eyes, lower power consumption, creates a long-sustaining, basically, we combine the function, not only on reading but also on writing. That gave us more opportunities in the e-learning business.
At the beginning of the COVID-19 outbreak, we understand, in the long run, Europe and U.S.A. market would be more impacted. We spend more time on build up a better ecosystem in China. In the first quarter, for example, the brand Hisense and another brand, the iFLYTEK, they all launch the new e-learning ePaper products in this field. For the grocery retail, because of the outbreak of the COVID-19, basically, we believe that will speed up the installation after the epidemics. Same thing for the information board. During the COVID-19 epidemic, we believe a real-time update information board for the emerging trusted message would be very important, especially that the nature of our product tend to be easier to be installed. We believe we can take advantage on the COVID-19 crisis. That's three potential business opportunity that we notice in the first quarter.
That's about my presentation. If you have any further questions, feel free to ask. Johnson, myself, and Patrick, we're happy to answer. Thank you.
Yes. Thank you, Mr. Chang. Ladies and gentlemen, we will now begin our question and answer session. If you have a question, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question. Thank you. Now, please press zero one on your keypad if you would like to ask the question. Thank you. We are now in question and answer session. If you would like to ask the question, please press zero one on your telephone keypad. Thank you.
Hi, Michael. We noticed, I think you have a big problem to ask questions. Feel free to ask the question online. We are happy to answer.
Yeah. I think I saw one of the comment is color EPD cannibalizing the black and white e-reader. Could you give me more explanation on this? Basically, yeah, I do believe that once there's color, people will choose color over black and white, as long as the black and white on the color is just as good as the current black and white. I think people today are still buying e-readers because the black and white experience with an E Ink display is quite good. Once we can achieve just as good black and white and with additional color, it will definitely cannibalize the black and white business. We do believe that the market TAM will be bigger than what it is today. That's our goal.
Our goal is really to expand the market TAM for the e-readers and really move the E Ink technology, not just for e-readers, but for other applications, because once we get color, there is more applications we can go after. Okay?
Okay. From the question online, a few questions about the outlook in the second half. Johnson, would you-
Okay
would you like to?
Yeah. Basically, Q2 looks okay. We're still bullish. Looks better than last year. Looking for the second half of this year, there's a lot of uncertainty because of COVID-19 and also because our color e-reader, the demand is quite strong, but we really don't have that enough capacity to fulfill that, and it is really impacting the black and white business. We do expect some turbulence, moving into Q3 and possible Q4, but we'll see. It's how quickly we can build up the color capacity to meet that. It's really when we can pull in the equipment and start doing that manufacturing. That's roughly the situation for us. ESL overall, we do expect it to grow compared to last year.
We're not allowed to give you the exact numbers, but if you were to look at our partner that's downstream, most of our partners has issued a positive growth rate for the ESL market. We think, yeah.
These [turn around] about dollar average cost.
I think Harvey is asking another question, is how does ACeP, which is our marketing name, is called E Ink Gallery, and Kaleido, which is our print color, but Kaleido is our marketing name. I guess Harvey has been following us for a while. He knows our technical name for Gallery is ACeP. Yeah. ACeP, the color saturation is well-liked. It's good. It does have one big issue, it's the speed of the update and that flashiness. The market that's good enough for that is mostly signage and price tags and different paper replacement that wanted to have good color performance, doesn't care too much about update, but it does require it to update that it can replace paper.
We do think there's a big enough market just in that field, replacing the paper that's out there, the posters, the paper tags, the price tags, and signage and these kind of applications. For e-readers, speed is very important. The black and white experience is very important. With the Kaleido, we think it can serve that market. Also the color, although the Kaleido color is not as good as our Gallery product. I'm also getting used to the name. Our Gallery product, it's still good enough for educational market, especially in China. We compare the color saturation of our Kaleido, and we think that it may be good enough to serve that market. That itself is a big market.
As you can see from our slide that Lloyd was presenting, our R&D expense has actually gone up. We're still able to squeeze some profit out of it, our R&D expenses went up. That's mostly because we want to continue to reinvest into our technology. We think that we can do a better Kaleido product moving forward. We also believe we can do a better Gallery product. We're still investing to these two technology. At the end of the day, they might compete because once Gallery speed is fast, it can potentially replace the Kaleido product. Kaleido, as the color saturation improves, it can potentially replace Gallery. That's okay. We're competing with ourselves, that's good. We have this notion that we shouldn't be complacent.
We should continue to innovate, and sometimes because our competition, there's not much competition in the field of ePaper, so we really need to compete with ourselves to really move forward. That's one of our main goal, is really how we can speed up our R&D development and launch new products one after another. Once we can start doing that, I think E Ink will be in a much better shape than where we're at today. We're still in that stage of trying to build our pieces together and building this ecosystem to create the 3rd category for displays. There is an LCD mature industry that's out there already. There's the OLED that's up and coming, that's trying to compete with LCD.
We're really trying to create that third leg, the third industry that's really replacing the paper that's out there, that's easy on the eyes and that can replace textbooks or used in the educational field. Really to offer a better e-reader experience that's out there. Also just the paper itself we're trying to replace. That's billions of TWD of market. We're building this ecosystem and we're trying to do it with our partners to grow it. That's why when you look at our financial statement, we'd actually break it down in terms of modules and material sales. One of the highlights that Lloyd was talking about was, we partnered with Innolux to go after the large size ePaper modules, where E Ink provides the E Ink materials to Innolux, and Innolux acts as a module partner that sells to the customers.
I think it's super important to build that ecosystem of partnerships to really grow this market. We're in the process of doing it. You can tell from our financial statement or income statement that our material sales is growing. Sometimes it actually compete with our module. Our partner's module compete with our own module, which is fine. It's part of the game. It's part of building that ecosystem and growing it. Okay.
If you would like to ask the question, please press zero one on your telephone keypad. Thank you.
Jerry is asking our gross margin for color versus black and white. I think E Ink is really running at a pretty high gross margin already, and it's actually getting higher because we're doing more material sales. I think that the key for us is really to grow the ePaper industry or ecosystem and to have more applications that's going to adopt ePaper. It's great that we have a gross margin that's quite healthy. The goal is really to get E Ink everywhere. We're still in that phase of trying to get there. Yeah. For our color, it doesn't matter if it's Kaleido or Gallery. For Kaleido, we're just printing ink on top of our materials, so the cost added is quite minimum and that's not a big issue for us.
For our Gallery product, we've demonstrated that we can have good margins on it by selling materials. Gross margin is hard to predict because one day we might start really dropping the price or usually it goes down, doesn't go up. Somehow our margin has been improving because our efficiency and everything else is really improving. Also launching new products also helps with the margins. Okay.
Okay, next we'll have Michael Li of Antipodes Partners for questions. Go ahead, please.
Hey, Johnson, Lloyd. Can you guys hear me?
Yes, we can hear you properly. Yes.
Yeah. All right. Thank you. Okay. Sorry about the dial-in. I'm glad I'm on the call now. Yeah. Thanks for the quarter results. Looks really good. Yeah, I'm seeing the share price react the way it has I think you guys are probably pleased yourself. Just a few quick questions from me, if that's okay. I sent them online, I'll just touch on a few of them if that's okay. One of the ones I want to ask about is, I understand electronic shelf labels are still very strong. My understanding of it is the gross margins on that is around 55%-60%. I'm wondering if you guys can confirm that.
Second is, from my understanding, speaking to suppliers like Pricer, they tell me that the average selling price of one of your labels is around $1 on a three, four-inch shelf label, which could cost you $5. That, to me, sounds like you get 20% of the sale. I'm just wondering, are those numbers roughly correct? Could you correct me if I'm wrong?
Michael, you know we can't really give you the guidance on the exact number. It's illegal in Taiwan to do that.
Right.
Yeah. for ESL.
Qualitatively? Yeah, sorry. Say qualitatively.
I really can't give you the numbers for that, and I don't think it's right either. It's illegal in Taiwan, the Taiwan stock market, to give those kind of guidance.
Sure.
I can share with you something, though. For ESL modules, assuming the market TAM is 150 million, we probably do less than 5% of that volume. Most of it we sell as mostly material to our partners, and they sell it as a display module to the system integrators like SES-imagotag or you mentioned Pricer. Yeah.
Okay.
You mentioned about, I'm noticing your comment. We really shifted our marketing effort to online because of COVID-19. We're doing a lot of more online marketing to promote our technology, to promote the different industries that we want to go after. Because we've got to repivot to the situation. There's less trade shows you can go to. You just got to do everything online now.
Yeah.
Yeah. That's how. We got to deal with the situation.
Thanks, Johnson
Yeah.
Can I just ask about the marketing feedback? When you're using things like LinkedIn, as I noticed, or Facebook, do you pay any marketing cost for that, or is that all just free?
No. Personally, the stuff I post is, no, I don't have to pay personally. We don't have to pay. I think corporate-wise, if you do advertisement on Facebook or LinkedIn, you do have to pay, though.
Right
corporate-based stuff. Yeah.
Can you give any sense of the organic kind of flow? I'm just thinking, can you give any sense of the organic customers coming in from Facebook or LinkedIn? Are there any customers actually being attracted from those channels? That's just kind of saying.
Right
Does that flow well for you guys?
Yeah. We do see an uptick in terms of people buying our development kit from our website. There's more people buying our development kit. Maybe because we're launching a lot of new technology, so people are buying more kits from us.
Trying to understand how our display can fit into their business plan and for their product plan, whether it makes sense or not. Which is great. I think it's more efficient that way. We're actually beefing up a lot of effort that's online, either our website or our online shopping for our kits. We're working on that part to service our potential customers, the new customers, people who think about using E Ink. Yeah. I think that's super important for new applications.
Yeah.
I think you mentioned about budget.
Yeah.
Yeah, go ahead.
I was just going to ask a quick question on that, is there a big marketing team behind that? Can you quantify how many people are in that marketing team, or no? Has it increased or decreased? Can you give any sense about that? Yeah.
Yeah. Marketing budget has actually went down because we're going to less trade shows.
Wow.
Yeah. It went down. I think the effect is actually better than when we were doing it offline. We have, I'd say, in U.S. team, we have four people doing it. In Taiwan, four to five people doing it. Less than 10 people added. Not a lot of people in that team.
We're also learning how to do more online marketing in China as well because we think that our color ePaper with the Kaleido product is actually quite good for the educational market in China. We're actually learning to do more online marketing in China in that space as well. Yeah. When you mention about bargaining power, more favorable bargaining power, so we think less about bargaining power. We think about how do we help our customer grow. For us, another main topic here today for us is how do we make the e-reader to grow? Our ESL has been growing. Its organic growth every year is growing. The TAM is getting bigger and bigger. How do we get that e-reader to start growing again? We really believe that our color will be a good catalyst to get this to grow.
In the short term, it does impact our black and white business, because we don't have enough capacity right now to service the type of demand we're seeing today for the color ePaper, Kaleido product line. We're building up that printing capacity in our module site, as Lloyd has mentioned. What we do believe that TAM will expand and will help get us into the educational space, and really grow the e-reader, eNote market product line and to grow from there. I do believe once we can get that momentum growing on the e-reader and eNote part, I think E Ink will be in a very good shape.
Right. Thanks, Johnson. Just maybe just something on the color e-readers, as you mentioned. You don't have to give me numbers or anything, but can you give me any sense of what the premium is or the high price point you can charge on color versus black and white? Can you give any sense of that or?
Okay. Our plan is not to charge more for color. Our plan is trying to enable this market. It seems like so far, a lot of our customers are very excited. I think in last call on the conference, we mentioned that we're expecting two customers to launch our Kaleido product, but end up being four or five that have already announced that it's going to launch a product. They're doing really well. They're doing a lot better than they expected, a lot better than we expected. We're really trying to build up that capacity. We're not thinking about charging more. We already have very healthy gross margins that we're working with. Trying to get that even higher may hinder the market to grow. That's not our goal. Our goal is to grow that market.
In the short term, it does impact our black and white, because I think our Kaleido product line, we can still have the same black and white experience, like what we did with our black and white e-reader, but with addition of a color. The color is not as saturated, but there is some color to it. Having that a little color, I think it makes a big difference in terms of visibility in the user scenario. Also, we really improve on our speed. That responsiveness of using E lnk technology in a consumer space. We used to be very slow, so every time you turn a page, you see that big flicker, and then you have to wait almost a second. Now we kind of really fixed that. We believe our speed is good enough to even play video rate.
We're doing 20 frames per second today, and we believe we can bring that even higher. Once you hit over that bar of nine frames, you can do animation on nine frames. Getting over that speed limit, I think, yeah, we're excited. We're waiting for the market feedback. Our customers are excited, but at the end of the day, it's how the consumer responds to this. That's the main thing.
Yep. Understood. Maybe just one last question, if I may, for you guys. I recall, like in the past, you guys had a few competitors and they've kind of gone away. I'm just wondering, do you see any competitive threats to your business at the moment? Are there any other Chinese players that I should be watching catching up to you guys? Can you give me any sense about the competitors?
We're always worried someone will beat us out and take us out the market. There's a lot of improvement in LCDs and OLEDs, micro LEDs, we're really targeting a different category. I think our biggest competitor is ourselves. If we can innovate fast enough, launching our new generation of product quicker. I'm not really looking at competition. I'm really looking at how fast we can come up with the latest technology and really capture the market. You're seeing a lot of change at E Ink, or at least that's what our customer's telling us. It's like, now you can launch a new technology platform a lot quicker than before. We spent a lot of time looking internally at how do we fix this issue? How do we launch the latest platform much quicker? I think it's exciting.
Yeah.
I don't think the competitive focus makes sense. There are some startups that want to do reflective displays. Some want to do color video. It's really us. Can we beat them to a punch, right? Target an even bigger market. I think it's up to us, and especially with the amount of dollars we're spending on R&D, I better hope that we can take our technology to something that everybody wants.
Yeah. Thanks so much, Johnson. Good result.
Thank you, Michael.
Thank you. That's all the questions I have.
Thank you, Michael.
As a reminder, please press zero one on your keypad if you would like to ask the question. Thank you.
Hi, Jerry. I saw your question about the projected OPEX. Basically, with those supply chain efficiency and better control on the SG&A, we believe those reduction can better offset the increasing R&D expenses. Yes, I kind of agree with you on the 2020 OPEX would stay flattish, yeah. Basically, I would say OPEX is in control.
There are currently no questions. We thank you for all your questions, and I'll pass the call back to the management team. Please proceed.
Hi, thank you for your participation today. A lot of challenges ahead of us. We will work harder and talk to you soon next quarter. Thank you.
Thank you, guys.
Thank you.
Thank you for joining our investor conference.
Thank you. Ladies and gentlemen, we thank you for your participation in E Ink's 2020 first quarter earnings conference call. There will be a webcast replay within an hour. Please visit www.eink.com under the investor relations section. You may now disconnect. Goodbye.