ChipMOS TECHNOLOGIES Inc. (IMOS) Q4 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the ChipMOS fourth quarter 2014 results conference call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Pasquale of Global IR Partners. Thank you, Mr. Pasquale. You may begin.

Thank you, Operator. Welcome, everyone, to ChipMOS' fourth quarter and full-year 2000 results conference call. Joining us today from the Company today are Mr. S.J. Cheng, Chairman and Chief Executive Officer, and Mr. S.K. Chen, Chief Financial Officer. SJ will review highlights from 2014 and then provide ChipMOS? first quarter 2015 business outlook. S.K. will then review the Company's key financial results. We will then have time for any of your questions. If you have not yet received a copy of today's results release, please email Global IR Partners at imos@globalirpartners.com, or you can get a copy of the release off of ChipMOS' website, www.chipmos.com. Before we begin, we must make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual performance, financial condition, or results of operations of the Company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the Company's most recent annual report, on Form 20-F, filed with the US Securities and Exchange Commission and in the Company's other filings with the SEC. At this time, I would like to now turn the call over to Mr. S.J. Chen. Please go ahead, sir.

Yes, thank you, David. Welcome everyone to our fourth quarter and full-year 2014 conference call. Hopefully you've all had time to review our earnings release. 2014 was a strong year for ChipMOS. As we outgrow the broader semiconductor industry, we achieved impressive growth in profitability and free cash flow, and we executed the long-term initiatives designed to ensure the Company's continued success. Our core strategy of focus on higher margin segments and serve customers we can support and grow, which continues to pay off for the Company. There are several key takeaways from today's call. First, ChipMOS maintains a strong market position. We continue to reap the attractive LCD driver market. Demand remains strong. Capacity remains very strong. Both drivers benefit ChipMOS. Second, Flash and DRAM remain healthy. We continue to benefit from industry consolidation; with supply in chip ASP has remained healthy. Third, content rising. Industry analysts report from Mobile World Congress last week that they expect memory content to only rise further. This is driven by new handset design and the increase rely on DRAM and Flash. Several models can now design out external memory slot, in favor of higher memory. And our customers are outsourcing more of their capacity. The same customer maintenance is being seen in the LCD driver, where 2 K 4K or ultra-high-definition TV continues to gain traction and drive a higher volume. Fourth, we expect continued market and ASP valuation in 2015. Demand and capacity are expected to remain steady, driving stable ASP in 2015. CapEx will remain strategic and conservative. We have been very conservative with CapEx. We invest when and where customer demand is. This makes ChipMOS a strong partner. We expect a slightly increase in total CapEx in 2015, to less than $135 million. This can be adjusted up our down, if our outlook changes. Fifth and we continue to make progress on our reorganization streamline. The latest phase is the merger of ChipMOS Taiwan and ThaiLin. As noted in our press release, the required vote occurred at the end of last December as we gave them a proposal subsidiary merge or submit to the relevant authority this month, when all the 2014 financial statement become available. Completion of the merge is expected to occur in June 2015, and is further subject to the classification of waiver of the conditions set forth in the merger agreement and the receipt of approval from relevant government authority, as indicated in the previous press release. Upon successful completion of the proposed subsidiary merge, we will continue to evaluate our structure and pursue opportunity where possible, to further maximize shareholder value. In terms of the Q4 results, revenue came in at $183.4 million, representing a decrease of 0.2%, compared to Q3 2014. This was at the higher end of our guidance hopefully to come in the lower single digits, as compared to Q3 2014. Gross margin for the fourth quarter was 25.2%, which was in line with our guidance of between 23% and 26% and compares to the 25.58% we posted in Q3 2014. Margin continues to benefit from product mix and higher capacity utilization. In terms of business segment, revenue from our DRAM business was up about 25% compared to Q3 and was about 33.6% of total Q4 revenue. Our Flash business, including mask ROM, decreased about 4.8% in Q4, compared to Q3, contribute about 16.4% of our total Q4 revenue. Revenue from our LCD driver, IC business, including bonding was about 2.5% higher in Q4, compared to Q3. Revenue from LCD driver business was about 42% of total Q4 revenue. Our mixed-signal business decreased 7% in Q4, compared to Q3, and represented 5.6% of total Q4 revenue. Finally, revenue from SDRAM business decreased 4.2% in Q4, compared to Q3, and represented 2.4% of total Q4 revenue. Let me now turn to our Q1 2015 outlook. As I mentioned earlier, we remain very optimistic in our outlook. Demand is strong. Capacity is rational. Price is stable. We have every confidence, based on the current customer input. As we saw in 2014, we expect 2015 to start seasonally slow and then to build up as we move through the year, reflecting regular seasonality in semi industry. We expect revenue in Q1 2015 to decrease about 8% to 12%, as compared to the fourth quarter 2014. This is in line with the typical seasonality, which normally calls for revenue decline of 10%. We expect to see our Q1 2015 gross margin in the range of about 21% to 24%, on a consolidated basis. Finally, we previously announced that our Board had authorized a new repurchasing program of up to $15 million for common share repurchasing. This program was completed in January 2015. There were about 638,000 common shares repurchased under the authorization. The Board has not put a new authorization, in advance of today's call, but we will revisit this issue later this year, giving a positive benefit. Let me now turn the call over to S.K. to review the fourth quarter financial results. S.K., go ahead.

Thank you, S.J. All dollar amounts cited in our presentation are in US dollars. We have provided both US dollars and NT dollars in our press release. The following numbers are based on the exchange rates of TWD31.6 against $1, as of December 31, 2014. As S.J. reviewed our revenue and margin, I will provide details on the rest of our Q4 results. Net income for the fourth quarter of 2014 was $18.7 million and $0.64 per basic and $0.63 per diluted common share, compared to the net income of $18.1 million and $0.61 per basic and $0.60 per diluted common share, in the third quarter of 2014. Our operating expense in Q4 decreased to $12.4 million or 6.8% of our Q4 revenue, compared to $13.4 million or 7.3% of our revenues in Q3. Other income in Q4 was $3.1 million and non-operating income in Q4 was $5.2 million. Income tax provision for Q4 was $10.2 million, compared to $63 million in Q3. The non-controlling interest for the fourth quarter of 2014 was $13.2 million, as compared to $13.5 million in Q3 2014. On a segment basis, Q4's revenue breakdown was 22% in testing, 36% in assembly, 25% in LCD driver IC business, and 17% in bonding. Total capacity utilization was 81% for the fourth quarter 2014, compared to 81% for the third quarter of 2014. Our Q4 testing capacity utilization decreased to 74%, from 77% in Q3. Assembly capacity utilization was at 80%. LCD driver IC capacity was running at 89% utilization in Q4 and 81% for bonding. We spent $50.1 million on CapEx in Q4, compared to $19.6 million for our third quarter. The breakdown of CapEx for the fourth quarter was 9% for testing, 25% for assembly, 55% for LCD driver IC, and 11% for bonding capacity. The CapEx for the full-year 2014 was $112.9 million [indiscernible] and audit. We continue to be conservative in our CapEx investments. We are investing in the strategy market, where we can drive revenue and profit growth. We are also investing in the specific programs that allow us to support customer formats and we are partnered with. Depreciation and amortization expenses were $22.5 million or approximately 12.3% of revenue in the fourth quarter. This is slightly lower, compared to the third quarter. EBITDA for Q4 was $59.4 million or 32.4% of revenues. EBITDA was calculated as earnings before income taxes, foreign currency gain or loss, net interest expenses, depreciation and amortization expenses, and special charges. While EBITDA is not defined by generally accepted accounting principles, we believe it is a helpful way to measure our financial strengths. The free cash flow in Q4 was negative $18.6 million, which was calculated by adding depreciation, amortization, interest income, together with operating income, and then subtracting CapEx, non-controlling interest expenses, income tax expenses, and dividends from the sum. Negative free cash flow was primarily from the higher CapEx spending in Q4 2014. We ended Q4 with a strong balance of cash and cash equivalents of $483.1 million, compared to $453.2 million at the end of Q3. As of December 31, 2014, we maintained our net cash position at $2,035.2 million, which resulted in a net debt to equity ratio of minus 50.8%. Our year-end cash balance also reflects our repurchase earlier in September; the 1 million shares from [indiscernible] at a cost of approximately $22.4 million. We also repurchased 73,000 common shares on the open market, at a cost of about $1.7 million during the fourth quarter. We purchased an additional 554,800 common shares at a cost of about $13.3 million during the first few weeks of January. This completed the authorization -- the authorized repurchase programs. Our total short-term debt, including the current portions of long-term debt was $103.6 million at the end of fourth quarter 2014, as compared to $92.5 million at the end of the third quarter 2014. Long-term debt decreased $144.3 million at the end of the fourth quarter, as compared to $153 million at the end of third quarter. Our accounts receivable days sales outstanding in Q4 was 75 days, compared to 71 days in Q3. Inventory turns were 36 days, compared to 35 days in Q3. Foreign exchange recorded a gain $5.6 million in Q4, compared to a gain of $3.5 million in Q3. Our interest expense was $1 million in the fourth quarter, which was the same as the third quarter. Operator, that concludes our formal remarks. We can now take questions.

Thank you. Ladies and gentlemen at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Timothy Arcuri from Cowen & Company. Please proceed with your question.

Hello. This is Wayne Lowe for Tim Arcuri. Thank you for taking my question. My first question is on the share collapse. You mentioned June as the time when it would be finalized. How long do you really expect it to be completed? Will it be totally complete then? And are you still convinced that this is the best use of your cash

Thank you. Tim, this is S.K. Right now we are in the process to merge ChipMOS Taiwan and ThaiLin. We considered that it is the best use of our cash. And we may -- I think that we will revisit this issues since to simplify corporate structure is Company strategy and policy. So this is a very good question and we've been asked by many, many investors and shareholders about these corporate structure issues. And right now we focus our resources and efforts to complete the merger of ChipMOS Taiwan with ThaiLin. Thank you.

Next question is could you give us some sense of guidance for the non-controlling interest for the end of Q1 and Q2?

Sure. The non-controlling interest for the year 2015 should be roughly 56% of the -- 36% of the net income before tax. In our estimation there will be around $9 million in Q1, will be around $11 million in Q2.

Thank you. And also, could you give us some sense of your expectation for the amount of cash in Bermuda at the end of March?

Right now the cash position with Bermuda is around $51 million and we expect that we'll maintain at around $60 million by the end of March. Based on our current discussion we expect that we could maybe receive some dividends ChipMOS Taiwan in Q2.

Our next question comes from the line of Jerry Su from Credit Suisse. Please proceed with your question.

Hi, S.J., S.K. A few questions from my side. Firstly, could S.J. give us some ideas of our industry dynamic in Q1? Especially I think you mentioned that memory is a little weak and also our small/medium size. And also for the full year on both segments. And then second question is related to the CapEx. I think you have guided slightly increase on the CapEx. Is it possible to give us a breakdown of the CapEx by LCD, driver IC, bumping, testing/assembly?

Jerry, thank you. Thank you for your question. I think regarding to 2015, the pattern should be similar like in 2014. So we're past a weak Q1 and we will continue to see the growth, starting from Q2, Q3, and also Q4. And this is a typical seasonality. This year we don't see any special change with this pattern. Just one issue I would like to share with you. Q4 2014 was the best Q4 I ever had for the past seven years, which is almost equal to Q3, both in memory and LCD driver. And for 2015 we just increase a little bit in our CapEx, that's mainly we invest more in LCD driver, testing capacity, because of the more and more 2K4K TV. The device is more complicated than original design, because higher resolution, higher speed and this requests for more testing capacity.

Jerry, I think I will provide more color on this CapEx breakdown. In our budget for 2015, 30% will be spending on testing tools, including final test and web assault, 25% for assembly, 25% for LCD driver IC and roughly 20% of the CapEx will be spending on bumping capacity.

Okay, got it. So in terms of your capacity for bumping, what is it right now and then what do you expect that capacity to be by the end of this year?

For the Q4, the bumping capacity utilization rate is around 80% to 81% and because we continue to install more currently into capacity in order to meet customer demand. And I think we can get a high utilization rate in Q1 and also fully utilize in the Q2. And even then, certainly, we are going to build more capacity for the second half season.

Our next question comes from the line of Richard Shannon from Craig Hallum Please proceed with your question.

Hi, S.J. and S.K. How are you guys doing?

Pretty good. How are you?

I'm doing well, thank you, and congratulations on a very good 2014. You guys did a very good job, so congratulations to you and your team. A few questions from me. You've got the very solid CapEx guide for the year and you clearly for a few years have only been adding -- growing that as you see a demand in front of you. So can you give us your thoughts about what kind of topline revenue growth rate you're expecting this year based on that CapEx guide, please?

Richard, this is S.J. I think we gave the CapEx criteria is around 15% to 20% of total annual revenue. So we slightly increased our CapEx. It means that we will get a very good case here of set a target 2015 for total revenue, we will continue to grow. Based on our internal target, we will grow 5% to 10% as an internal target for revenue-wise. But normally we don't provide a guidance for this one. I think that you can compare with Q1, this year and last year, we still see the growth, so I think we can see the positive momentum for the rest of the year.

Okay. Great. Good to hear. My second question is on gross margin. So you've got a nice guide here in place and a great finish to last year. I'm curious about how that gross margin should cascade throughout the rest of the year. You're talking about stable pricing here. How does mix utilization plan to where you could go with gross margin? What kind of a peak do you think you could hit on a quarterly basis this year?

Yes. I think that we gave a guidance for Q1. It's from 21% to 24% and this is better than that last year. And you can see that even though the value, we see a decline around 10%, we still can maintain the higher gross market, because of different product mix. We continue to focus on the higher-margin areas and in order to fully utilize our capacity in a higher beta margin process. And you can see for LCD driver, I think more and more companies get devices available for the markets, because the end application is going to strong requirements, so that helps us to further improve our margins. And then regarding to the memory side, I think we continue to depreciate our user agreements and we still can maintain the high utilization rate, so that further helps we maintain the gross margin.

Okay. Perfect. So one last question, then let me get out of line. S.J., can you talk about the progress you've been making in adding new NANDs, NAND flash business. By my numbers it looks like you did very well in 2014 adding new allocations. So can you talk about, going forward here, allocations with your current customers, adding new customers and should we expect to see NAND growth above your overall corporate rate this year?

Actually, right now the memory occupy around total are very close to 50% of total revenue. 33% -- 32% coming from DRAM and we expect the NOR and NAND flash and SRAM will contribute the other 20%. And currently we have a very solid position in DRAM and NOR flash. And NAND flash is the target we are going to target for. You know that I don't want to spend too much time to individual customer. I can tell so far, so good, on the right track. I think you will continue to see the [design] quarter by quarter.

Okay. Fair enough. I appreciate the perspective, S.J. I'll jump off-line. Thank you.

Our next question comes from the line of Joe Locke from ABR. Please proceed with your question.

Hi. Yes. Thanks for your time. Just a quick question, just about from actually last quarter we talked about. Now until the ThaiLin deal is done, would you consider doing a further collapse of the US shareholder structure before that happens and is that something that could be considered? Or does the ThaiLin deal have to be completed before this can even be proposed? That's my first question. And the other question I just want to ask you about is, looking at your guidance into Q1, it looks like March is going to be a little bit soft, roughly about the same level of January. Is that the right way to think about it? And then, as you pick up into April and into Q2, what do you think is going to be main driver? Is it going to be more on the memory side or the LCD side?

Yes. This is S.J. Let me answer your first question. I think that for the corporate structure streamline is the Company and management are committed to further evaluate it. And we already step by step achieved our commitments. And we also put very aggressive schedule for ThaiLin and ChipMOS merge together. That will be the first step. And after doing so, we will continue to further streamline and evaluate any possibility, but under our current situation based on the legal advice, we cannot talk too much. But management can commit to all our shareholders we will speed up and do our best in order to further streamline the corporate structure, in order to generate much more shareholder value.

Great, but it sounds like -- sorry, it sounds like nothing can really proceed beyond ThaiLin, until ThaiLin is totally closed in June, right? Correct?

We do a lot of homework, yes.

Okay. Great. Thank you.

Can you repeat your second question again?

March is looking to be kind of a January-levels, possibly a little bit softer, but not much higher. I just want to confirm that that's what you guys are looking on the revenue side there. And also looking into Q2, where do you expect that momentum to be coming from? Is it going to be more on the memory side or more on the LCD side? Anything specific in the memory. I'm assuming probably more flash than DRAM, but I'd love to hear what you guys are saying.

Yes. For the LCD driver for 2015, we are very optimistic, because currently we see a very strong demand in the 4K2K TV. For [indiscernible] side, that's much better than our expectation. And for smartphone, we see a little bit [slow] in Q1 and we see continue the positive starting from Q2 this year. So the whole business for the LCD driver will not change, very similar like 2014. Regarding to the memory, according to our customer feedback and the customer forecast, we will continue to see requirement pick up, starting from Q2 and see very healthy growth quarter by quarter.

Great. Thank you.

[Operator Instructions] Our next question comes from the line of Brian Grad a Private Investor. Please proceed with your question.

Hi, S.K. Hi, S.J.

Hi, Brian.

A great year. Your guys did a wonderful job managing the Company for all of us. I just want to clarify a couple of things if I can. S.K., I thought I heard you say that cash and cash balance was $61 million. Is that correct in Bermuda?

Yes, correct. This is for Bermuda.

Any idea, can give us any ideas what the dividend planned payout ratio is going to look like this year for Taiwan?

The Taiwan is about 60%.

60%.

Our ratio.

Okay. So that's what we should expect to see upstreamed to IMOS on a proportional basis --

Right.

-- minus the 20% withholding.

Exactly. Yes.

Right, right. So you bought back to your stock. I think it looks like you repaid around $23.5 million for that, which is an outstanding price, given what the value of the package is trading at in Taiwan. It's been a little bit frustrating and disappointing and I'm going to speak for myself but I think I speak for other investors as well, whom I've spoken to some in the last couple of months, that we've got all this cash. It's just piling up and we're going to have more cash piling up upon receiving the dividend from local share. I would just admonish you guys to be a lot more aggressive in using the Bermuda cash to buy back stock. Clearly, today was not a good day for it, but opportunistically I think it makes a lot of sense to deploy more of that. And I'd urge and know others that might come on after me would say the same thing, please, buy back more shares. $15 million was a good start, but we'd love to see something $25 million or $30 million and accelerate it if possible, because the stock is just at crazy prices down here. There's no reason not to be doing it. So that's all I'm going to say about that. And just continue the good work. We're hoping for some resolution on getting the capital structure streamlined in everybody's favor. We know you're working hard on it behind the scenes, but it's just been a slower process than I think many of us would hope for.

Brian, this is S.J. Appreciated. Your message is loud and clear for us. Actually for 2014, the total buyback, full money amount, is not $15 million. It's $37.4 million, which includes [Multiple Speakers].

Yes, you're right. I forgot about -- I did forget about SPIL shares. You are right about that. I'm sorry.

No, no, no. No problem. Because I remember all the money I spend. And you are right, regarding to the corporate structure, they had a lot of complicated processes and legal concerns. So we need to very carefully, step by step, in order to prevent any negative impact. But I can commit to you -- currently I receive a lot of messages from shareholders our stock price still are kind of discount because of the complicated corporate structure. But compare with couple of years ago, we already have improved. And I can commit to you; we will do further in the future in order to benefit all the shareholders. But I think this is a complicated process. My lawyer gave me the advice, before the picture is not clear, don't mislead all the investors. So please give us some time. We are on the right track.

Right. I understand. I know and I know it's a process and it takes time and you have to deal with regulators. So keep up the good work running the Company, the rest of it should take care of itself. But just voicing my opinion that we should be more aggressive in using cash and buying back more shares. That's all I've got to say. Thanks, guys.

Thanks.

Thank you.

Sorry, we do not have any other questions in the queue at this time.

Thank you, everybody, for joining our 2014 full-year conference call. Thank you very much. Bye-bye.

Bye-bye. Have a nice day.