ChipMOS TECHNOLOGIES Inc. (IMOS) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the ChipMOS 2Q 2016 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, David you may begin.

Thank you, operator. Welcome, everyone, to ChipMOS' 2016 second quarter results conference call. Joining us today from the Company are Mr. S.J. Cheng, Chairman and Chief Executive Officer and Mr. S.K. Chen, Chief Financial Officer. SJ will review highlights for the second quarter 2016 and then provide ChipMOS' third quarter business outlook. SK will then review the Company's key financial results. We will then have time for any 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 the Investor Relations section of ChipMOS’ website at www.chipmos.com. Before we begin today's prepared remarks and Q&A, we must make a disclaimer regarding forward-looking statements. During today's 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 U.S. Securities and Exchange Commission and in the Company's other filings with the U.S. SEC. At this time, I would like to now turn the call over to Mr. S.J. Cheng. Please go ahead, sir.

Yes. Thank you, David. Welcome, everyone, to our 2016 second quarter conference call. We had a pleasure of meeting with many of you at our two recent [indiscernible]. We thank you for continued support of ChipMOS and your support after post-merger with ChipMOS Taiwan. The result of the vote will be available after our Annual Shareholder Meeting on August, 12. We are confident; we will be able to report a positive outcome to you after both shareholders meeting for ChipMOS and for ChipMOS Taiwan. In terms of second quarter results, we saw a neat picture of both end market and customer. This is consistent with other report, we have seen. In our case, even with the variance up and down both our revenue and gross margin was in line with our outlook. This stability came out of [technical difficulty] we work through another logging [ph] in our business memory customers. The customers have been seeing low business favor in all our location. This was not a share [indiscernible] that's a function of another requirement we met from ChipMOS. We will look forward thus, we increase to gain in the future given our customer industry leadership position. We are starting to see transforming in new direction labor after the prior two quarters of growth trends of CapEx addition. Our Q2 capacity directed rates picked up to 67% but has more room for improvement as we move through the second half. We in fact to see the growth in demand for large panel LCD driver lead by 4K2K penetration. We also in fact, benefit from improvement small panel LCD driver demand also we'll improve in the mobile phone and the customer end market. Memory will remain tighter DRAM customer for now but as you've all seen, in recent consolidation in the china memory phase led by our potential strategic investor Tsinghua Unigroup. ChipMOS will strength to benefit directly from this demand over the long-term. The capacity need will probably outpace our current capacity labor. We are also seeing a future ramp in our Flash driver fingerprint sensor and AMOLED and OLED customer program. This our growth market ChipMOS have been working with customer in for a long time. Second together, the increased demand have given us an improvement outlook on the second half 2015 and then, as we move forward, we will continue to leverage our expertise in testing assembly technology into the new growth opportunity. As market continue to come online the key part is, we had a speciality with the high volume capability, thus set us apart in the market, this helped us to the market up and down and allowed us to always go back to prospects, of our performance by product segment in Q2, 2016. Revenue from the assembly and testing service of LCD driver increased 1.8% on validated in Q2 compared to the Q1. Presenting of our 27% of our Q2 revenue, referencing macro demand trend revenue from driver for last quarter decreased 14% on validated, while the revenue from our small panel driver increased about 33% [technical difficulty] and compared to Q1, 2016. The larger panel segment slowdown in Q2, 2016 was owing to the temporary inventory digestion in the channel. We are already seeing rebound in larger panel driver demand and replenishment. Our bumping business increased 11.1% in Q2 compared to the previous quarter, in trends of our 15% of our Q2 revenue. Revenue in our DRAM business increased 5.2% in Q2, 2016 on a dollar basis compared to the Q1, 2015. This represents about 33% of our Q2 revenue. As noted earlier, this was led by lower allocation in our top DRMA customer, with sales saw lower demand. Our SRAM business decreased in 10.2% in Q2, 2016 compared to Q1, 2015 representing just over 2% revenue in Q2. Flash revenue decreased 2.3% compared to Q1, 2015 including Mask ROM, representing 14.4% of our Q2, revenue. Mixed-signal product increase 5.7% compared to Q1, 2016 contribute nearly 8% revenue in Q2, 2016. Our wafer-level testing business increased 4.6% in Q2 compared to the Q1. Let me now turn to our business outlook. [Technical difficulty] improved confidence in our outlook as compared to few weeks earlier. This is based on our market position specific customer feedback and demand indication. We now [technical difficulty] 3% to 7% revenue growth in Q3 compared to Q2, this will be led by a pickup in our driver business after we move into the second half of the year. We are also seeing the momentum in other technology area like touch driver, fingerprint sensor, MEMS, OLED, AMOLED. We extract gross margin on the consolidated basis to be in the range of about 16% to 70% [ph] for the third quarter of 2016. Let take a minute to discuss a few of the major initiative before turning the call over to SK. First we continue to make progress in the proposed merger ChipMOS Taiwan and ChipMOS Bermuda. Leading independent, partly voting and corporate governors [ph] advisor firm, ISS and Glass Lewis [technical difficulty] favorable recommendations in support of the proposed merger. Given the early compelling potential financial and strategic benefit, strategic to the shareholder and the Company. In addition to the [indiscernible] received from Bermuda regulator on our proposed merger. Our prospectus and the relative documents of the proposed merger was effective by the US Security and Exchange Commission of June 31, 2016. As you are aware, are scheduling to post Annual Shareholder Meeting to both for the merged proposal on August 12, 2016. We expect to confirm positive outcome in that transaction. And need to submit a prospectus to Taiwan Exchange for the capital increase and their approval from Taiwan SEC, issuance of the new ADS. We have conserved the target of November 13, for everything. We are working abrasively to complete the merger and thus in end of October is now possible. As always why, we can't guarantee any outcome we remain positive. Secondly, for issuance to our board authorization we'll be purchasing 16.7 million of ChipMOS Taiwan from the open market in Taiwan, during the second quarter, 2016. Related to repurchasing totally $16.1 million. Share the view with our shareholder that our stock is undervalued. Our board and management team has agreed and head long the buyback on regular basis. Aiming to maintain the value and trading liquidity. We will look to continue this strategy after completion of our proposed mergers. Third, we had talked about our branding experience in China. We currently have our first production line of LCD driver assembly and testing including bumping ready for customer qualification. Once production will commenced immediately after the qualification part, in late Q3, 2016 or early Q4, 2016. For the proposed value creation of Tsinghua Unigroup, we continue to work through the regulatory approval process in Taiwan like our proposed merger of ChipMOS Bermuda and Taiwan. We do not control [technical difficulty] regulatory approval process to determine outcome. We are however optimistic that we will be able to move forward and work through the regulatory process. [Indiscernible] decision at the earliest, the end of September which would add our growth opportunity, we heading after to quantify the potential business impact of our liquidity with Tsinghua. To give you a sense of the outset potential, we are looking at Tsinghua is branding to have a monthly output of at least 1 million piece of pair each memory wafer, which requires many time of our existing capacity to complete assembly and testing work. This does not even touch on their numbers of [technical difficulty] other area of potential operation that exist. In the event of the delay in approved process [technical difficulty] move 4K plan in place including funding the essential on our own and going back to the joint venture structure, we already lift off. Through including China when we start talking about this last year. ChipMOS is in great position of having expertise in a critical sought after areas. We have already made clear our expectations [ph] after strategic partner and having and consult with multiple potential partners. In order to give us additional resources of Taiwan [technical difficulty] TWD13.2 billion trying on May, 2016 our Board of Directors authorized ChipMOS Shanghai to enter $33 million syndicated loan agreement for purchasing of CapEx agreement. We signed a new agreement with a syndicate of two Taiwan banks on July, 2016. In summary, we feel very good about our business outlook and progress of our corporate branding. We are in position to benefit from steady growth and are using phase of customer with improvements through the year [technical difficulty]. The inventory is reviewed in the channel; we remain fully on track in our much processed [ph] in our experience in China. We have reached shareholder taking time prepared to be our update call and appreciate you on going to vote. Let me now hand the call over to SK to review the second quarter financial result. SK, go ahead.

Thank you, SJ. All dollar amounts stated in our presentation are in U.S. dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rate of TWD32.22 against $1 as of June 30, 2016. As SJ reviewed our revenue and margin, I will provide details on the results our second quarter 2016 results. Net income for the second quarter of 2016 was $0.6 million and $0.02 for basic and $0.02 for diluted common shares, compared to net incomes of $2.9 million and $0.10 per basic and $0.10 per diluted common share in the first quarter of 2016. Net income for the second quarter of 2016 was adversely impacted by $6.5 million or $0.24 for basic common shares for the accrual of 20% [technical difficulty]. ChipMOS Taiwan cash dividend distributions and offset by $3.2 million or $0.12 per basic common shares for the reversal of 10% income tax on the inappropriate earnings of ChipMOS Taiwan. Our operating expenses in second quarter were $14.7 million or 10% of our Q2 revenue, compared to $13.4 million or 9.1% of our revenue in Q1, 2016. We're targeting for operating expense to be approximately 8% to 11% of revenues in the third quarter of 2016. Other operating income in Q2 was $2.7 million and non-operating expenses in Q2 was $1 million. Income tax provision for Q2 was $4.6 million, compared to $3.2 million in Q1, 2016. The non-controlling interest for the second quarter of 2016 was $6.9 million, as compared to $4.1 million in Q1, 2016. On a segment basis, Q2 revenue breakdown was 25% in testing, 33% in assembly, 27% in LCD driver IC business and 15% in bumping. Total capacity utilization was 67% for the second quarter of 2016 compared to 63% for the first quarter of 2016. We are moving in right direction and expect to see further guarantee [ph] in the second quarter of 2016. Our Q2 testing capacity utilization was 67%, as compared to 60% of Q1, 2016. Assembly capacity utilization was running [technical difficulty] 59% in Q2, as compared to 57% in Q1, 2016. LCD driver IC capacity was running at 77% utilization in Q1, as compared to 76% in Q1 and 67% utilization for bumping capacity in Q2. We spent $26.1 million on CapEx in Q2, compared to $35 million for our first quarter 2016. The breakdown of CapEx for the second quarter was 20% for testing, 16% for assembly, 42% for LCD driver IC and 22% for bumping capacity. We expect CapEx spending to be approximately $43 million in the third quarter of 2016. Depreciation and amortization expenses were $25.8 million or approximately 17.6% of revenues in the second quarter. This was slightly higher compared to the first quarter of 2016. The increase of Q2 was due to capacity investment in Q1. We expect depreciation and amortization expenses for the third quarter of 2016 to be approximately $26 million with CapEx in the first half of 2016 accounting for the quarter-to quarter increase. EBITDA for Q2 was $38.9 million or 26.5% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. We entered Q2 with a strong balance of cash and cash equivalents of $402.6 million compared to $411.4 million at the end of Q1, 2016. Of June 30, 2015, we maintained our net cash position at $102.2 million which resulted in a net debt to equity ratio of minus 35.7%. This is after we invested $26.1 million on CapEx [technical difficulty] $15.1 million for repurchase of shares of ChipMOS Taiwan and invested $42 million into our Shanghai facility in second quarter, 2016. While EBITDA and net debt to equity ratio are not defined by generally accepted accounting principles, we believe that are helpful indicators to measure our financial strength. Our total short-term debt, including the current portions of long term debt, $44.6 million at the end of second quarter 2016, as compared to $87.1 million at the end of the first quarter. Long term debt was $255.8 million at the end of the second quarter, as compared to $192.7 million at the end of the first quarter, 2015. Our accounts receivable days sales outstanding in second quarter was 73 days compared to 73 days in Q1. Inventory turns were 45 days in Q2 compared to 41 days in Q1. Our net interest expense was $0.6 million in the second quarter which was approximately the same net for the first quarter of 2016. Operator that concludes our formal remarks. We can now take questions.

[Operator Instructions] and our first question comes from the line of Tim Arcuri from Cowen and Company. Please proceed with your question, sir.

This is Vivian Jones on behalf of Tim Arcuri. Thanks for taking my question. First for Q2, utilization up across the board, but it looks like that was all converted into inventory and we saw a jump in days of inventory and you guided to Q3 up revenue up from a month ago. You've mentioned that was driven by several specific customer demands. So I'm guessing that the additional inventory is just report customer needs in the second half of 2016, but wondering what's the story there, why you need to hold additional inventory. Who are you holding them for and how confident is the, if you need to convert them into revenue? Thanks.

In our business, normally the inventory will be hold as, in our local banks or at our customer sites. Right now what we're seeing that the inventory for the large panels pay up little bit and we have seen that the digestions [ph] of the inventories will continue to have and going forward. So we expect that in second quarter the demand on the driver will increase especially for the small panels business and for the larger panel we believe that the 4K2K penetration will lead the inventory position. So although in second half we're expecting that the business growth will be much more healthy as compared to what we've seen in first half. So we guided that, the revenue our top line growth will be in the range of 3% to 7%.

Okay, got you great. And then secondly to clarify the $42 million Shanghai investment, is that incremental to the $26 million CapEx and then you mentioned sequential growth and utilization improvement in CQ4, which means that you will likely get back to over $160 million revenue in CQ4. Did you include some revenues from the Shanghai investments?

This is SJ. To answer to your question actually for the first half and Q3, we are targeting new facility and moving part of agreement from Taiwan to Shanghai to install the capacity for the capital for qualification. We expected to take to three to four months to kind of fully qualification and after that we will start to mass production. So for this year, the Shanghai LCD Driver will contribute very limited revenue for us and that will start to improve in the next year 2017.

This is SK, let me give you more color on this. You're correct the $42 million for Shanghai capacity extension is additional CapEx and how else the $85 million to $90 million that we guided previously. I'm sorry, $42 million is the CapEx for shanghai project in 2016. So it will be spread over two quarters.

Okay, got you and then the last question. Can you give us the gross margin breakdown by segments for the second quarter and I think last quarter you said that you're ramping Shanghai operation and that will impact your gross margin in second half of 2016. Is that why you guided a critical revenue growth in CQ3, but only a small gross margin improvement and I'm just wondering, why not more leverage from the revenue growth?

The gross margin for our second quarter breakdown that is and the testing is around 27% and the assembly is about 10% and LCD driver and assembly test is about 21% and the bumping actually it is almost zero, since bumping capacity of Beijing is little bit lower than our breakeven point. And again I would like to explain you that, in second half of the year we expected capacity evaluation especially for the LCD driver IC and bumping will move up to the healthy levels above 80% or 85% evaluations as we expected. And to operate, those are newly added capacity at Shanghai may not create news in third quarter. But their revenue contributions will come in starting in Q4 and currently we are expecting the depreciation and amortization increase in for 18 new capacity in Shanghai will increase our cost of goods sold and the gross margin will be impacted slightly different at 80s.

Okay, thank you guys.

And our next question comes from the line of Mr. Jorge Rivas from Craig-Hallum. Please proceed with your question.

First, guys if you could walk us through the different steps that you have to go through and I apologize if I miss this on the prepared remarks, assuming that the results are positive on Friday on the shareholder meeting, so you have about two months and a half to achieve the closing of merger. So if you can just walk us through the process and the main milestones that you have to achieve to get to the goal of closing by end of October will be a big help.

This is SJ. To answer your question, the result of bard will available after the shareholder meeting on August 12. We are confident, we will be able to report a positive outcome to you after both shareholder meetings, both ChipMOS and for ChipMOS Taiwan. And we are going for the next [technical difficulty].

Okay, assuming you get positive result. I guess my question was what are next steps until the end of October that you need to achieve in order to close the merger?

Okay, this is SK. I think we still have four and half hours, before the voting. So the final result is not available right now and after the shareholders meeting, we need to submit the prospectus to Taiwan Exchange for their approval on the capital increase to be able to use this new issued shares at the - to deposit to the depository agents for the ADS issuances. And after that, then we need to get the approval of Taiwan SEC to issue ADS. So after that then we can cover these mergers. So we see, we need roughly two months’ time for, to complete this regulatory approval at Taiwan.

Okay that's very helpful guys. Second question, so your press release mentioned something about you're seeing signs of, from a specific customers of demand that indicate for a better chance to versus second half. So I'm wondering how much of that is simply restocking of inventory levels going back to normal levels and how much of that is actually sustainable growth for your business going into calendar 2017?

This is very good question. For the year, driver business for the small panels, it will come in commence on new business. We're talking about the touch driver and the AMOLED driver which is not - it is different from our previous business. So this newly added product to the market will be added - actually we would be in very exciting about this business opportunity. And it was starting from Q3 and second half, we will [indiscernible] how this two new products. And for the 4K2K business, it is continuous from the second half of last year, this business continue from second half of last year. So the penetration of 4K2K for the large panels. We're expecting to continue forward to run into second half and 2017. So this business will continue to grow. So this will, both of this two piece of business will maintain [technical difficulty] healthy growth and top lines in second half.

Thank you, SK. And then one last question on the gross margins for the second quarter. Just curious to understand the different moving parts on the business. So your utilization grew about 4 percentage points, but your gross margins declined about 200 basis points. So you know they seem to be going on opposite directions. So I was just wondering what are the different drivers of gross margins, what that was mix or maybe you're seeing increased ASP pressure on your LCD part of the business.

This is SJ. To answer your question, currently regarding the price ratio resulted too much in the market right now. I think mainly coming from top memory customer, [technical difficulty] their reduce location for us, due to the current market events, so that cause assembly direction rate lower. So that impacts our gross margin.

Okay, guys that's all from me. Great work, thank you.

[Operator Instructions] our next question comes from the line of Mr. Eric Gomberg from Dane Capital. Please proceed with your question.

Couple questions. Couple things, I just couldn't hear that well in the opening remarks. Just to clarify it sounds like you're optimistic that the Tsinghua transaction is going to close and is going to successful, that the regulators will approve that's your view at this point?

To Tsinghua perfect. So actually we met the regulators last week and they're in process to hold review committee on this projects and they say that, they need time for internal to arrange this meeting and they also request us to submit additional informations for to clarify certain of their concerns, but we're not doing this and so in our view that it is going in quite smoothly and after that, they may, I think for the regulatory they say that, they may go to have an update report to the year, that is by [indiscernible] end at Taiwan and before they give us approval. I think the timing wise, it's not uncertain but our conversation is going on quite smoothly and again I would like to explain you that, on the other hand of Taiwan investments, we still have a 4K plant that we may resumed our, another project at Shanghai to arrange joint venture with Tsinghua using our ChipMOS Shanghai. So no matter what, we were partners with Tsinghua to go ahead to develop our China business, but in depth to this, the product features our cooperation with this strategy to partner with China.

Okay and just following on that, you have a new investor presentation on your website. So I was looking at Page 20 and it has actually very specific projections through ChipMOS Shanghai. I was just wondering if those projections are dependent on the Tsinghua transaction happening or if those are numbers that you feel comfortable without that transaction happening based on conversations and qualifications you're having with customers now.

Eric, this is SJ. I think we do in parallel. We use our own resource to these various - the facility and also it's nearly probably long, our forecast for qualification, so which will not delay our schedule. And in meanwhile, we're also working with Taiwan regulator to drive ChipMOS driver replacement project. We hope we can get through this at areas we can, at least we now control. So Shanghai is on profit, without any impact. So in both are successful, when live will be very different.

Okay, so to clarify you're saying that in your deck it says $40.6 million for 2016 in revenue in US Dollars and $118 million for 2017. I think you just said, the numbers could be very different as Tsinghua happens. So those are numbers that you feel okay about, without Tsinghua.

Actually, I think we do need to have a strategic partner in China, that will reduce our investment risk because we're going to approve that joint venture structure, at first, in Tsinghua we also meet local investor to qualify at the supply chain in local, so that's our fallback plan.

Eric, this is SK. And financially, we should find to support our own growth at ChipMOS Shanghai there is no doubt about it. And as you know, as we got the several syndication loans either in Taiwan or in Shanghai, but what we need is the, we need partners to be able to enter into the domestic opportunity in China, that's what we're planning for right now. Financially, yes we can support our own growth, no problem including Shanghai expansions.

Great, whether you partner with them whether they invest directly to Taiwan or you partner with them locally in China, if I understand correctly what you're saying, that's the plan.

Yes, as of today that Tsinghua getting closed that we prefer to invest their money into ChipMOS Taiwan that's because the business side and profit is much more and evidenced here in ChipMOS Taiwan. So they will allow it to participate ChipMOS Taiwan after first part of this.

Okay and just one last question, if again I didn't hear the opening remarks that clearly. Did I hear that you said it's reasonable to expect more repurchases I guess when the transaction closes in October, November assuming the claps happens and that you think, you think your shares are undervalued?

Eric, this is SJ. Thank you for your participation in the conference call. I think in the long run, I think that ChipMOS the whole structure is very complicated. So I'll start right with [indiscernible] market compared with other peers. So meditative and both, all were in this position. So we try for the corporate streamline structure in order to further reduce the cost. For example, in October we will complete the merger. Now we can face 21, first thing withholding tax as a distributor [indiscernible], that working are benefit to the our Bermuda shareholder. And after we complete the streamline corporate structure. I think, obviously give us reasonable feedback and you know ChipMOS-wise we're pretty competitive in our stock value is undervalued than we don't do any partiality to continue the purchasing from the local market and both Bermuda team and [indiscernible] will be in a good strategy for the company.

So just one last, I guess this is more a comment than a question. You know it sounds like you're fairly optimistic that Tsinghua. It sounds like business should accelerate reasonably and it sounds like the collapse is going to happen, so unless there is a legal restriction about it. I'm just curious I would encourage you to do an 8150 buyback now as oppose to waiting till October because if Tsinghua gets approved, you'll be buying back stock at probably much higher prices. So why not buy at when you're less popular then when your stock is probably higher. It's just my opinion, I tend to think many investors would agree with me. So on that deal, anyways thanks very much for taking all my questions.

[Operator Instructions] our next question comes from the line of Robert Wiseman, Private Investor. Please proceed with your question.

I'm glad to hear that you're confident that the merger will be approved and that the share conversion will be occurring soon. I've been a shareholder for many years and from my perspective it's taken - it's good that this is happening, but its take far too long and I think to a large degree that this is due to the Board of Directors and the board not being responsive to the US shareholders. So like I say, it's good that the conversion is happening now but you know there is many more things that need to happen to grow the revenue and the profits and things like you're pursuing in China. And to get the stock value in line with the peer group companies because we're still at very discount and I think the senior management team gets this, but I don't have confident that the board gets this and the fact that most of the board members don't even have any stock ownership in the company that's a concern of mine. And I know and I and many other long-term shareholders want to see a more responsive board and board that has more US shareholder representation with some board members that have both, Wall Street experienced and the good thing is that, we have shareholders like for example Dave Steinberg [ph] who would be an excellent board member and I think he can contribute and I'd like to know what plans there were to add shareholders to the board?

Robert, this is SK. Thank you very much for your recommendations and my views on the merger is that, we actually sound on track. And we will have a conclusions tomorrow and actually we share the same view as you, that we would like to have this merger happen earlier and your recommendation that to invite a staff member to be our directors. We can discuss this at this call, we won't answer to you, right now. Thank you very much for your - and recommendation.

[Operator Instructions] there are no further questions at this time. I will turn the conference back over to management for any closing remarks.

Thank you everyone, who joined our Q2, 2016 conference call. Thank you very much, we hope we had a good news to share with you at tomorrow shareholder meeting. Thank you. Bye.

Have a nice evening, bye.