ChipMOS TECHNOLOGIES Inc. (IMOS) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the ChipMOS First Quarter 2017 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, David Pasquale. Please go ahead, sir.

Thank you, operator. Welcome, everyone, to ChipMOS First Quarter 2017 Results Conference Call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; and Mr. S.K. Chen, Vice President. S.J. will review business highlights from Q1 and provide color on the operating environment. S.K. will then review the company's key financial results. We will then have time for your questions. If you have not yet received a copy of today's results release, please e-mail Global IR Partners at imos@globalirpartners.com or you can get a copy of the release off of ChipMOS website at www.chipmos.com. As with last quarter, we hosted a call in Mandarin after the close of the Taiwan Stock Market a few hours ago. This is part of the company's ongoing efforts to broaden investor and analyst following in the domestic Asia market, given the full time on listing. The prepared comments management will cover here are the same as those covered on the earlier call. The second call is intended to give the company's English-speaking investors the same opportunity to both hear directly from management and ask questions pertaining to the results and the company's outlook. With that said, 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 registration statement on Form F-4 that the company filed with the U.S. 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 the company's Chairman and President, Mr. S.J. Cheng. Please go ahead, sir.

Thank you, David. Welcome, everyone, to our first quarter of 2017 conference call. Hopefully, you already have reviewed our earnings release. We are pleased where we are at entering the second quarter. Of note, first, we are encouraged by our Q1 results. Revenue was above prior guidance in the industry's weakest quarterly season. Gross margin was in line with our guidance. Second, we closed our joint venture with Tsinghua Unigroup and the Tsinghua Shanghai equity transfer. I will add more on this point in a minute, but this formal close is a major development. Third, we issued Q1 results and the balance sheet in the strongest position in the company's history. We had cash balance of $384.9 million and a net debt variance of just $3.6 million. As noted on prior call, we will be investing a portion of the proceeds from our equity interest of Tsinghua into our Shanghai operation to fund working capital and expansion. We will also be making strategic capital investment in our Taiwan manufacturing facility to support our growth. Fourth, given control of our China JV and our historical strong balance sheet, we plan to move forward with our effort to return capital to shareholders. As a next step, our Board resolved that TWD 0.30 per share will be distributed to shareholders from earnings and TWD $0.70 per share will be distributed from capital surplus. The total amount of cash to be distributed is TWD 856.8 million or about $38.2 million. On an ADS basis, the total amount will be about $0.66 per ADS. The distribution pay will be determined by vote after approval of the distribution by shareholders at our coming Annual General Meeting. Separately, we do not have actually share repurchasing program in place at this time, but cannot rule out putting a new plan in place in the near future days. Finally, in addition to our historical strong balance sheet, we have a very positive outlook for the business. Our growth perspectives are strong with the inventory back to more normal levels in the LCD supply chain and [indiscernible] hardware. We are in a great position bolstered by the diversification of our end market, and our unique position in Taiwan and China supply chain. And then our key customer is increasing as we enter in Q2, which give us increasing confidence. With respect to the China market, we are pleased to report on March 24, 2017, that we complete the previously closed equity interest transfer to a group of strategic investors. We are excited to move forward with our partner, Tsinghua Unigroup, given the synergies, financial and strategic support, and critical advocacy of the powerful partner in the fast-growing China market, which we expect to be central to our long-term success. We are working with Taiwan regulators on the capital increase for bringing investors back into the Tsinghua Shanghai. In general, we expect that our investment will be made up of 2 separate transfers, with the first coming by end of the second quarter. I need to point out that we have already a few towers enabling capacity footprint in China, giving us the ability to support, in a sense, demand. This came from the center of [indiscernible] from our Taiwan facility over the passing years and routine CapEx investment. Overall, we are still in growth and in expansion mode, and do not see any growth coming in China. In terms of adding color, our Q1 results are above guidance revenue and reflect strength in our LCD driver business, led by demand from both small and large channels. We expect the LCD driver demand environment will continue to improve, as we benefit from ongoing 4K2K and UHD market development, combining with the anticipated smartphone recovery led by new model introduction and technology innovation, including OLED, 3D sensing and finger print sensor. There was a mixed performance in our memory business, with commodity DRAM demand slightly higher in Q1 and flash-related revenue down about 9.1% compared to the prior quarters. Revenue in our mixed signal business was down slightly compared to the Q4 '16, which was offset by uptick in our WLCSP revenue. Gross margin, including the higher accrual for April at 17.9% was in line with our guidance. In terms of performance of product segment in Q1 '17, turning to our flash business, including mask ROM increased 9.1% compared to 4Q '16 and represented 16.8% of our Q1 revenue. Mixed-signal product decreased 3.4% compared to 4Q '16, contribute 10% revenue in Q1 '17. Our DRAM business increased 1.3% in Q1 '17 compared to Q4 '16. This represented about 13.4% of our Q1 revenue. Revenue from assembly and testing service of LCD driver decreased 1% in Q1 compared to Q4, represented 25.7% of our Q1 revenue. [indiscernible] for demand trends. Revenues from driver for large panels decreased 2.1%, while revenue from our small panels driver increased 0.2% compared to 4Q '16. Our bumping business decreased 3.2% in Q1 '17 compared to the previous quarter and represents 15.2% of Q1 revenue. As we look forward into Q2, we expect LCD driver demand strength will continue as we benefit from the ongoing 4K2K TV and UHD market development. And then with the anticipated smartphone recovery led by new models introduction and technology innovation, including OLED, 3D sensing and finger print sensor. We expect to the memory segment, we are seeing the material uptick of demand on [indiscernible] and low price. Based on market feedback, the high demand in market is expected to last for a couple of quarters led by new application in the algorithm of image recognition and OLED panel for mobile device. Growth will also continue for our mixed-signal business in Q2. Let me now turn the call over to S.K. to review first quarter financial result. S.K., go ahead.

Thank you, S.J. All dollar amounts in our presentation are in U.S. dollars. We are providing -- provide both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rates of TWD 30.38 against $1, as of March 31, 2017. As S.J. reviewed our revenue and margin, I will provide details on the rest of our first quarter 2017 results. Net earnings for the first quarter of 2017 was $1.82 per diluted ADS compared to $0.47 per diluted ADS in Q4. This represents net income of $78.3 million and $0.09 per basic and $0.09 per diluted common shares compared to net income of $20.2 million and $0.02 per basic and $0.02 per diluted common shares in the fourth quarter of 2016. Net earnings per common shares of first quarter of 2017 were impacted by a net foreign exchange loss of $12.8 million compared to a gain of $6.3 million in Q4 '16. Our operating expenses in Q1 were $14.6 million or 9.7% of our Q1 revenue compared to $15 million or 9.8% of our revenue in Q4 '16. Other operating income in Q1 was $22.4 million, which was primarily from the net gains on disposal of property trend and equipment of $5.6 million and insurance settlements of $16 million from the 2016's earthquake. Income tax expenses for Q1 was $4 million compared to a benefit of $4 million in Q4 '16. On a segment basis, Q1 revenue breakdown was 27% in testing, in 31% in assembly, 25% in LCD driver IC business and 17% in bumping. Total capacity utilization was 76% for the first quarter of 2017 compared to 74% for the first quarter of 2016. Our Q1 testing capacity utilization was 81% as compared to 81% of Q4 '16. Assembly capacity utilization was running at 68% in Q1 as compared to 57% in 4Q 2016. LCD driver IC capacity was running at 85% utilization in Q1 as compared to 79% in Q4 '16, and bumping utilization was 70% in Q1 compared to 68% in 4Q '15. We spent $37.3 million on CapEX in Q1 compared to $31.7 million for fourth quarter 2016. The breakdown of CapEX for the first quarter was 27% for testing, 12% for assembly, 43% for LCD driver IC and 80% for bumping capacity. Depreciation and amortization expenses were $21.9 million or approximately 14.6% of revenue in the first quarter. EBITDA for Q1 was $56.6 million or 37.7% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. The free cash flow in Q1 was $14.1 million, which was calculated by adding depreciation, amortization, interest income together with operating profit then subtracting CapEX interest under common control interest expense, income tax expense and dividend from the stock. We ended Q1 with a strong balance of cash and cash equivalents of $384.9 million compared to $249.2 million at the end of Q4 '16. As of March 31, 2017, our net debt balance was reduced to just $3.6 million, which resulted in a net debt-to-equity ratio of 0.6%. Our EBITDA, free cash flow and net income -- and net debt-to-equity ratio are not defined by generally accepted accounting principles. We believe those are helpful indicators to measure our financial strengths. Our total short-term debt, including the current assumptions of long-term debt, was $78.1 million at the end of the first quarter of 2017 as compared to $35.3 million at the end of the fourth quarter 2016. Long-term debt was $318.4 million at the end of the first quarter as compared to $319.9 million at the end of the first quarter 2016. Our accounting receivables days sales outstanding in Q1 was 76 days compared to 81 days in Q4 '16. Inventory turns were 46 days in Q1 compared to 50 days in 4Q '16. Our net interest expense was $1.2 million in the first quarter, which was slightly higher as compared to $1 million for the fourth quarter of 2016. As of April 30, 2017, the company's outstanding ADS number was approximately 15.9 million units, which represents around 39.5% of the company's outstanding common shares. Operator, that concludes our formal remarks. We can now take questions.

[Operator Instructions]. Our first question comes from the line of Timothy Arcuri with Cowen & Company.

S.K., can you give us a sense for the March quarter of what the margins were by segment? And then also, as you look on to June, can you give us a sense of what you think the different business segments will do in June to come up to the total guidance for June?

Okay. The margins for 2017 Q1, the testings -- the average gross margin is higher than 30%. And for the assembly, the average is -- gross margin was 6.5%. LCD driver IC 27%, and bumping is about 2% gross margin in Q1. And regarding the margin for second quarter, we are not able to -- we're unable to provide you any of those numbers today because of the -- Taiwan's regulations. But I would like to point out that as of today, that we're looking to the business -- new business from our customers. So we may have for a couple of percentage points of the margins higher than Q1 numbers.

Okay. And then, I guess, just for the full year. Can you give some comment on -- I mean obviously just talking more really about the back half of the year, but can you give us some sense in terms of how you see the full year playing out, sort of in terms of year-over-year revenue?

This is S.J., I'll take your questions. Based on our current input for the second half of this year, our customers' input and new product we are cooking, we think the half will be better than the first half.

Okay. Okay. And then could you make any comments, S.K., on sort of what you think the June revenue, the -- June revenue guidance and maybe what's the big driver of that?

Actually the -- for the second quarter, since we report our April revenue and right now are almost in the middle of May, based on our current input, the -- especially for the HD RAM and the low-flash is pretty strong. And in our [indiscernible] also pretty good. And we're also seeing in our LCD driver business more and more function will be added in the new driver especially for [indiscernible] so the testing time is getting longer. So that will give us probably the levers, volume valuation rate of Q2 even better than Q1. Second half will be better than the first half.

Our next question is from the line of Jorge Rivas with Craig-Hallum.

So S.K., S.J., so first, if you can walk me through, it seems like you are not being able to provide guidance for the second quarter. Can you explain to investors why that is? And whether that will change in the future?

Okay, thank you very much. As we noted in our announcements on March 15, 2017, that we are not able to provide the details financial guidance for now is because Taiwan's application stipulations. It reads that a public-based company is prohibited to provide any financial forecast or business guidance updates in sum totals of the non-operating income and expenses on the consolidated financial reports for the most recent fourth quarter to account for more than 10% of the sum total of the profit before taxes. It means that once we have pretty large non-operating expense or income, that they will prohibit us to provide any quantitative guidance for the topic, I think this is -- it's just -- I think that is we're not -- as the company tries to avoid misguide the market has -- this is a pretty strong request by the regulators, some of the regulators, it is also the reason why we made an announcement of the -- of our business focus and our market [indiscernible]. And right now, the company is trying not to mislead the investor's next decision, so we will not provide any qualitative information for market.

Okay. Okay, understood. So then on your new initiatives for the LCD business. You mentioned OLED, fingerprint sensors, and 3DS. A couple of questions. So any idea of what the market opportunity is for those 3 applications combined? That's #1. And 2, what's the timing for -- I don't know if you're seeing revenue uptick coming from those initiatives.

This is S.J. Regarding the -- this is a question also we ask [indiscernible] a couple of hours ago. First one, I already shared with you that for the fingerprint sensors, we're seeing more and more applications will be applied in [indiscernible] especially for pay. So the -- right now, we're already in the beginning phase. So a lot of customers have [indiscernible]. I think that starting from the second half, we can see the a more significant revenue contribution from this area. And regarding to the fingerprint sensor and 3D, so we are looking, I guess, LCD application. So right now, we -- it's in the beginning stage. So in the long run, [indiscernible] for the second half of this year.

Okay. So 3D sensing is something that could materialize in 2017, then? Is that what I heard?

Can you repeat your question again?

Yes. No, I'm -- when you mentioned 3D sensing, it seems that you're implying that we could see revenues coming from that application in 2017. I just wanted to confirm that what I heard was correct.

Yes, second half.

Second half. Okay. And what is the -- I guess what is the -- I guess what is the -- what is it that you're in 3D sensing exactly? I think this is the first time I've heard you talk about that application in particular. No need to be too technical, but what is that your [indiscernible] testing of the sensor or...

According to the agreement with our, [indiscernible] we cannot discuss much.

Our next question is from the line of [indiscernible] with Argent Capital.

A few questions for you on the guidance. I understand you can't provide any longer specific financial guidance, but I just wanted to first make sure I understood the qualitative guidance you gave. So I heard you say that you expected the second quarter to be better than the third quarter, and for the second half to be better than the first half. When you talk about that improvement, is that improvement with respect to both revenue as well as margins?

This is S.J. to answer your question based on the -- we are already reported our April revenue and right now, it's the middle of May but based on our current input right now, we are critical with this, Q2 will be better than Q1, okay? And the second half, you can see the recently that low-flash and mixed DRAM is pretty hot due to more and more application, need more memory in this area. And this is the true area which we are talking out there. So -- and this trend will be continued for a couple of quarters. So we are very optimistic this was revenue contribution for the second half and also contribute in revenue impact. And I would reiterate increase that would be a further improved margin.

Okay, okay. So I guess you're saying that you would expect both revenue and margins to improve as we go throughout the year. One other question. You guys had some deterioration in your EBITDA margins over the last couple of years as you've been adding some capacity, and utilization has been a bit lower than historical. Would you expect that as we move forward over the next couple of years, you should be able to get your EBITDA margins back to historical levels or at a minimum, back above or near 30%? Is that a reasonable expectation?

Yes. This is S.K. Let me answer your question, Sir. The EBITDA margin depends on the product mix. Actually as we have more testing business, that will bring us higher EBITDA margins compared to assembly operations. And in the past, the revenue from testings, operations accounting for more than 50% of our total sales. So it contributes. The EBITDA margin is higher than 40% or even 45%, 50% of our revenues. But right now, the testings operations declined over time too offset financial crisis so we didn't invest that much of the testing capacity after the financial crisis because of the DRAM operation. I think Taiwan DRAM companies added this business. So we -- it all depends on the product mix and the operations of the company. We're expecting that in the near future, the company may see some of the -- some more memory business coming back, then you can see that our EBITDA margin will come in -- will come back again but not to 50%, as in the past. I think we will not return to 50% in a short period of time. Maybe 40% level is reasonable and achievable for us in 3 years' period of time.

And at that 40% level, if you're able to get there, what would that imply for your EBITDA margins if you're at a utilization level that you would hope to be at?

I think in 70%, 80% levels utilizations that will help us to return to the 40% levels.

Okay. And what would that imply for your EBITDA margin at those levels, with the mix that you're talking about of test?

It will depend on -- as I mentioned, it will depend on the product mix, as we have the testing revenue coming up to above 50% of our sales -- total sales. And highly likely that we will have the 40% EBITDA margins.

[Operator Instructions]. The next question is from the line of David Steinberg with DLS Capital.

You got a lot of stuff that we wanted to get done behind us. That's a comment. Here's what I want to know is how are you going to be reporting going forward and how far investment is in China is? You had put out information in March, are we going to be seeing -- and just recently, we didn't have any information on what was going on in China in the last revenue release. What can we expect from you guys in terms of a report on the progress, sales and so forth on our large investment in China?

Sir, this is S.K. Let me give you more colors. The revenue from China operating in April is about $2.5 million. Actually, we included this information into our press release. But to be honest, we have many, many discussions with our advisers and auditors and internally, we have a couple of rounds of discussions, and we consider that Shanghai -- Tsinghua Shanghai is no longer a consolidated subsidiary. So we shouldn't provide disinformation to, I think -- public announcements. We may talk about this. So we -- as things are, we may provide more information orally but not in written form.

Okay. Well, then I'm going to strongly suggest that you remember or record or whatever to be able to provide us that because that's going to be a big driver of future prospects of the company. And I think it's dependent upon you to give us growth in revenues, growth in EBITDA, some basic stuff because this is the gateway to a lot of growth in the future, and it's an important material variable on how the company is going to valued. Does that make sense to you?

Yes, sure. We are working on -- we get to all that and I think that's the -- we're also trying to do visitations. Thank you.

Okay. The second thing is this has been a long road back since 2008, and I've been hard on you over time and you've got a lot of hard work. Right now, your company is, as you have said, is in a stronger position than you have been financially in many years and that you have a great opportunity. I will come back to the point I made 2 quarters ago that the company is still undervalued, and your management team has done a very good job, a spectacular job operating. I think that you need to reexamine your stock repurchase or something to get the stock higher because if you do not, you folks are vulnerable to a predatory acquisition by one of your competitors. And I don't think anybody is as positioned well as you are in China. And I just want to make that point that the company is worth more, obviously had been owned it for 10 years. But with the cash balance and the prospects now of rising EBITDA sales and what's going on in China, I think you may underestimate that you are probably on the list of a lot of your competitors' radar screens. And I strongly suggest, for your personal benefits, that you guys listen to what I'm saying and maybe take some action or at least put it on the top of your priority list.

This is S.J. You bring this point to us in a conference call. I think for the coming several years, management team is working very hard for streamlining the corporate structure and we spend a lot of our major resource to streamline the corporate structures. So you also -- the company for more efficiency, reducing the costs and also, can reduce our pay structure and also can benefit the shareholder. Now only speaking, yes, we know we see a lot of the room to be improved. So then we're working on our China story and talking before, management team will keep working very hard in operations and also trying to improve our share price. But you are right, that this is a long-term value to be improved to the stockholder optimized level. Somebody might be interesting to us. So -- but we are not -- over the management is going to keep on the right track, right? You have mentioned this but many times over the years to us.

Okay. I'm on your side. I mean I know I've been hard with you guys before and I'm just trying to give you my observations from the outside. So I'm going to get off now, but my -- the conclusive thought that I'll leave with you is this issue in China on reporting data is very, very important to investors, especially here in the U.S. because it's a big investment and it has a lot to do with the future value. So I would like to see you guys figure out a way in getting this resolved with the regulators and will you say anything either some way verbally, in print and maybe, S.K., you can send me an e-mail on this topic when you get a chance. Okay?

I understand.

I will turn the floor back to management at this time for closing remarks.

Thank you, everybody, for joining our First Quarter 2017 Conference Call. Thank you very much. Bye-bye.

Thank you. Have a nice day. Bye-bye.