ChipMOS TECHNOLOGIES Inc. (IMOS) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the ChipMOS Second Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Pasquale with Global IR Partners. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to ChipMOS' Second Quarter 2017 Results Conference Call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; and Mr. S.K. Chen, Chief Financial Officer. S.J. will review business highlights from Q2 2017 and then provide color on the operating environment. S.K. will then review the company's key financial results. We are also pleased to be joined on the call today by Vice President Mr. David Wang; Deputy Director Mr. G.S. Chen [ph]; Director, Ms. Silvia Su; and Mr. Lafair Cho, Senior Executive Vice President and COO. All of the company's executives will participate in Q&A after the prepared comments. If you have not yet received a copy of today's financial 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 prior quarters, Management has already 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 Taiwanese 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 operating environment. With that said, 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 operation of the company to be materially different from any future performance, financial conditions 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 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 Second Quarter of 2017 Conference Call. Hopefully, you all have time to review our earnings release. We are recently on the road to July and met with many investors, we appreciate everyone taking the time during the summer to talk to us. The meeting were very positive and gives us a chance to talk about the future of ChipMOS and the while we are positioned for continued success. Our April although the passing periods have put us in a strong competitive position. We had several catalyst for revenue and profit growth and we are expected to be outgrowth the progress and the inventory as the auto industry has done in the past. The key things for ChipMOS over the near term are first, our Q2 revenue was impacted by a lower allocation for one of our larger customer. We do commodities DRAM assembly for this customer. Our commodity DRAM revenue has decreased due to the lower allocation trend in other market regions from about 18% of our revenue in 2014 through about 14% in 2016. We expect this challenge will continue in the second half of 2017. Of note, this was a strategic procedure for us. We could have made a major investment in quantity, capacity with the shared facility with the customer. However, the assembly owning operation will not accommodate our another need to build up the IC capacity on time, which require a safety environmental evaluation work for the co-founding line. Thus, these are my sense to us given the lower margin revenue and first it would be limiting us from investing in the growth area. On the positive side, we had a good position interest with our partner. We expect this will allow us to maintain the relationship in the higher single digit percentage of the revenue neighbor. Second, we are excited of launching a new program. We are hoping this are key to our customer and revenue diversification and this will help us to more than offset the decreased allocation from our DRAM customer over the long term. In the near term, we will take time to ramp the program and there are several factors that are effecting timing. One is the continued softness in the China headset handset market. This is has a heavy ripple effect of one of our larger Korean customer. That said, the China market with his own handset and sales to another handset company that sell into the China market. This is additional pressure on our foundry business over the near-term. Based on the market report, we believe the China inventories duration will become healthy in the second half of 2017. A bigger factor will be introductory schedule for the highly anticipated handset model by the most American consumer U.S. only company. It looked like other company are waiting to see what is the final feature spec up and we feature-consumer are most interested in. Other handset company will likely to copy the most promising feature and rollout on new model. This will in turn drive higher pumping demands. Finally, the phasing for ChipMOS will be our China JV. We are very pleased to report that our Shanghai Joint Venture is now funded. Renting production and qualify additional customer program. I will give you some additional color on this near-term and the long-term growth catering to it in a minute. In terms of second quarter's result, the quarter's development are expected. We were able to focus on the higher market business on working and work to offset the pressure from the lower allocation from our DRAM customer. As a result, we are able to expand our growth margin to 20.1% in Q2 '17 from 17.9% in Q1 '17 on color TV spread revenue. This [indiscernible] enabled in our business model as we further improve our overall utilization to 77% led by strength in our higher margin signal [ph] business. The 77% brand utilization is important for us. We have 87% utilization in our LCD drivers segment and 82% in IC. This is essential for utilized labor even though we involved 51% our CapEx dollar into LCD driver capacity in the quarter. DRAM in the second leg continue to grow as the 4K2K TV in our second leg is ramping up, and driver requirement increasing. We do not expect this trend to slow. For example, many needs from model are expected to have 18x9 screen with the nanophase; this model will used a more advanced TV solution driver with [indiscernible]. As additional color on Q2, there was a mixed performance in our primary business with we talked about 4.6% in Q2 '17 compared to Q1. This is due to allocation I mentioned earlier. For us revenue including [indiscernible] growth 9.6% compared to the previous first quarter represented 18.4% of our Q2 revenue. Revenue in our mixed-signal business grew 11.1% compared to Q1 '17, contributed 11.2% revenue in Q2 '17. Turning for our assembly and testing services, our LCD drivers in Q2 was straight compared to Q1 represent 25.7% of our Q2 sales. Rephrasing make out the main trend from the driver of larger panel increased 6.1% while the revenue from our small panel drivers decreased 7% compared to Q1. Our bumping business decreased 9.6% in Q2 '17 compared to the previous quarter, representing 14.7% of our Q2 revenue. Please note, total revenues, that's not including revenue from Tsinghua Shanghai. For the purpose of the background, revenue from Tsinghua Shanghai was about $9 million in Q2 2017, which is up from about $7.5 million in Q1 '17, and up from about $7.3 million in Q2 2015. Overall, we did mainly strong financial position. We are investing in the area that will drive our revenue and profit growth over the near and long term. This include in capacity area in both Taiwan and China. Our focus remain on the business execution in order to deliver a higher return to our shareholders. In line with our however, we are able to distribute another cash dividend of $81,000 for common share on July 10, 2017. And $0.65 per EPS on July 19, 2017. We will continue to evaluate the best possible way to reward the shareholders based on the company's success. As we look for into the Q3 '17, we are expecting further softness in our commodity business as low allocation create a headwind. This was regularly settled and stabilized in the second half, making it a near term issues and one we are already addressing. Meanwhile, we continue to see material uptake of demand on mixed DRAM and low price. Based on our customer and market impact [indiscernible] and midstream product remain healthy and is expected to last for the couple of quarters led by product upgrade and the new application of the mobile device. For new sensor product releasing to production, growth also continue to our mixing in of business in Q3. We also expect the IC [ph] will continue to improve as we benefit from the ongoing 4K2K USV TV market development, combining with the new model feature introduction and the requirement across including OLED, TDDI, Nanofibers and screen [ph]. In addition to increased driver volume, this trend makes longer testing time and require largest testing capacity from us. With respect to the China market as noted earlier, we are pleased to report that our China JV is now funded. Revenue production and qualify a variety of the new customer programs. Our strategic partner few other semiconductor ecosystem is now expected to be even more aggressive and on larger scale than original; in this face ChipMOS is positioned as a service company we in the Unigroup ecosystem, it gave us excellent growth perspective as TDDIC in the near-term, followed by the growth in domestic China memory business over the long-term. Finally, we likely saw the broader solutions 6-K [ph] we filed with the SEC today. Following that resolution related to the appreciation for retirement of Dr. S.K Chen in the end of the third quarter. I would like to personally thank S.K. for his tireless effort on behavior of ChipMOS. He has played a dynamic role in our managed [indiscernible] in heading our financial department. We will miss him on our team, but wish the S.K. and his family the best. S.K. will remain as a Consultant after his retirement to ensure smooth transition through end of this year. We greatly appreciate his willingness to stay with us to ensure orderly transition. S.K. has been transitioning his role to another financial executive at ChipMOS, Director Ms. Silvia Su. Ms. Su has been with us in year 2000 and was also directly working strategic effort related to compoundation of subsidiary merger ChipMOS Taiwan and Bermuda, and our China JV. She has benefit from S.K.'s professionally reach there and financial leadership and will ensure that ChipMOS remain in the good hand moving forward. In addition, Ms. Su was appointed as the Supervisor of ChipMOS Shanghai. I'm also pleased to note that Mr. Lafair Cho, Senior Executive Vice President and COO was appointed as the spokesperson for the company from October 1, 2017 and onward. Finally, one more manager, Dr. GSM who was inviting our company's IIT activity has now been working more with investing in IIT. With that, let me now turn the call over to S.K. to review second quarter financial results. S.K., go ahead.

Thank you, S.J. and thank you for your kind words. This was a difficult decision for me to make, but the right one for my family. There is never a good time for these things, but now makes sense given my age and a great position I'm leaving to Mosain [ph]. We have been working around the clock the past few years as we compress our ownership structure and consolidated molecule subsidiaries. The successful merger of ChipMOS Taiwan and Bermuda was another major effort in the start of promising new chapters for the company. The last steps was securing the company's future growth path in China with the close and funding of our China JV, we have successfully completed the efforts as well. I took great personal satisfaction, they know we've have accomplished we have accomplished and I'm confident that after a very long and successful career at ChipMOS, I will be leaving the company in the strong position and in good hands with some very capable financial teams to led by Ms. Silvia Su. Then we move now to the second quarter results. All dollar amounts said in our presentation are in U.S. Dollars. We have provided both the U.S. Dollars and NT Dollars in our press release. The foreign numbers are based on the exchange rate of TWN 30.37 against $1 as of June 30, 2017. Net earnings for the second quarter of 2017 was $0.25 per diluted ADS compared to $1.82 per diluted ADS in Q1. This represents net incomes of $10.6 million and $0.01 per basic and $0.01 per diluted common share compared to the net income of $78.3 million at $0.09 per basic and $0.09 per diluted common shares in first quarter of 2017. Please note, net income for the first quarter of 2017 included the positive benefits of $52.8 million related to the completions of ChipMOS Shanghai equity interest transferred to Tsinghua Unigroup debt investments. The benefit did not repeat in Q2 2017. We recognize that net foreign exchange gain of $1.8 million in 2Q '17 compared to a net loss of $12.8 million in 1Q '17. Our operating expense in Q2 was $16.2 million or 10.8% of our Q2 revenue compared to $14.6 million or 9.7% of our revenue in Q1 '17. Other operating income in Q2 was $1 million. Income tax expense for Q2 was $2.3 million compared to $4 million in Q1 '17. On the segment basis, Q2 revenue breakdown was 28% in testing, 32% in assembly, 25% in PDIC business and 15% in bumping. Total capacity utilization was 77% for the second quarter of 2017 compared to 76% for the first quarter of 2017. Our Q2 testing capacity utilization was 82% as compared to 81% of Q1. Assembly capacity utilization was rounded at 73% in Q2 as compared to 68% in Q1 '17. PDIC [ph] capacity was running at 87% utilization in Q2 as compared to 85% in Q1 '17. And bumping utilization was 53% in Q2 compared to 70% in Q1 '17. We spent $45.9 million on CapEx in Q2 compared to $37.3 million for our first quarter 2017. The breakdown of CapEx for the second quarter was 19% for testing, 13% for assembly, 51% for PDIC and 17% for pumping capacities. Depreciation and amortization expenses were $23.3 million or approximately 15.6% of revenue in the second quarter. EBITDA for Q2 was $38.1 million or 25.5% of revenue. EBITDA was calculated by adding depreciating and authorization, together with operating profit. The free cash flow in Q2 was negative $11.5 million where it was calculated by adding, depreciating, amortizations, interest income together with operating profit and then subtracting CapEx interest expense, income tax expense and dividend from the sum. We ended Q2 with a strong balance of cash and cash equivalents of $364.7 million, compared to $384.9 million at the end of Q1 '17. As of June 30, 2017, our net debt balance was $48.8 million, which resulted in net debt equity ratio of 8.3%. Our EBITDA, free cash flow and net debt to equity ratio are not defined by [indiscernible] accounting principles. We believe loans are helpful indicators to measure our financial strength. Our total short-term debt including the current portions of long-term debt was $130.6 million at the end of second quarter as compared to $70.1 million at the end of the first quarter 2017. Long term debt was $282.9 million by the end of second quarter as compared to $318.4 million at the end of the first quarter 2017. Our accounts receivables days sales outstanding in Q2 was 71 days compared to 76 days in Q1 '17. Inventory turns were 48 days in Q2 compared to 46 days in 1Q '17. Our net interest expense was $1.4 million in the second quarter, which was slightly higher as compared to $1.2 million for the first quarter 2017. As of July 31, 2017, the company's outstanding ADS number was approximately 14.5 million units, which represented around 33.8% of the company's outstanding common shares. Operator, this concludes our formal remarks. We can now take questions.

Thank you. [Operator Instructions] Our first question comes from the line of Chris Rolland with Susquehanna Financial Group. Please proceed with your question.

Hey, guys. This is David [ph] on behalf of Chris Rolland. Thanks for taking our questions and congratulations, S.K. on your retirement. First one, is the start off with the gross margins. I think you guys typically, given them by segment, could you provide those if you have them?

Okay. This is SK. Thank you very much, David.

All right. Definitely will do. Go ahead.

Okay. In general, the margin for our testing's operations in general are higher than 30% including product testing and other testing's. The assembly operations, the margin is around 11% and the margin for LCDs driver IC is about 24% and the margin for the bumping operations is negative, since the lower [ph] capacity. So the margin is slightly below zero as of today.

Right. And then to get to the 20% gross margin second quarter, can you talk about some of the moving parts there? I realized that the bumping revenue is lower, but can you just give some color on how you got to the 20% this quarter?

David, this is S.J. To answer your question, starting end of this July, we see the strong recovery in both PDIC, which contribute significantly in our pumping toleration. Thus, the management are very optimistic from second half for PDIC and pumping business; were continue to strong contribute the revenue growth in the second half.

Great. Thanks. And then to shift gears a little bit. You talked a lot about your largest DRAM customers in your prepared remarks. I believe that you mentioned lower allocation through 2017, but should we expect that revenue headwind to be cleared up as we enter 2018?

Actually since we work in with this large customers for more than 15 years and we will try to maintain the minimal business relationship with them. But since this is a strategic decision division which we made four years ago, we are now turning the CI campus program. Once the CI was stable, we already know this issue and this potential challenge for us. I think we will try our best to maintain other [indiscernible], I mentioned our higher single-digit percentages, with this customer. They also provide other 10-Q position to sell the new product portfolio with these customers.

Great. Thanks a lot, guys.

Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of David Steinberg [ph], Private Investor. Please proceed with your question.

Hi, guys. S.K., I wish you all the best and you've done an absolute spectacular job. Good luck to you and your family and I'm disappointed that we're not going to be having you around. Question is your revenues look flat, but they're not really because of what's going on in China. Could you repeat what the quarterly increase was in revenue? I know you can't [indiscernible], you don't want to or you're just trying to want regulators from quarter one to quarter two. From the first quarter when you had the company come together to now. So I'd like to know what that number is because that's a big part of where all your money is going and it's tough dealing with Taiwanese regulators. In fact, I'd suggest that you try to get a waiver of dispensation as your lawyers talk to Taiwanese regulators because it's such a big part of the growth. Anyway, the question is what is that number for the second quarter from Shanghai in sales?

The revenue from China from Tsinghua Shanghai was $9 million in second quarter and which revenue grew roughly 19.8%. Compared to Q1, there was $7.5 million and we're expecting that this revenue will ramp in twice in second half of the year.

Okay. I did hear that number. I'm sorry, I didn't quite get them. The next question is, is Shanghai going to cannibalize some of the sales from Taiwan over time? And what [indiscernible].

Not really.

No?

I'm sorry. I will say that not really cannibalize, that since that China were focused on local market and on the other hand, that unit growth uses too much live capacity and part of the business will throw back to Taiwan. So I think that for [indiscernible] will benefit from this trend and arrangements. Shanghai joint venture is not really taking the business from us in Taiwan.

Okay. Two more questions. One question is how many quarters do you think it's going to take you to reach capacity utilization that's good in Shanghai? Is it one, two, three or four quarters? What is it? Given its estimate without holding to the fire.

[Indiscernible].

I guess.

Here in Q4 this year, we can see the high mentioned [ph]. The reason there is delays because the funding are delayed. So final timeframe and basically, we will take a very conservative measure across regarding investor for the CapEx before we kind of funding. So finally in June 29, we already completed the funding. Right now we had enough financial results to do the investment and qualification. So I think we can see the good results Q4 this year.

12 months? A year from now maybe we'll see full capacity a little bit? 18 months?

Actually, I think that we already are funded. So we were based on the market deliberation to edging the capacity in China [indiscernible] which we got from saving.

Okay. And then the last guess, your investors are very interested in what is going on in China. Has your legal counsel gone to the Taiwan regulators and cut them for waivers so you can provide more disclosure at all? Have you asked petitions for that at all?

David, this is S.K. I think that we have been trying many times. I'm afraid that we couldn't get this lift, this recession lift. On the other hand, we would release - I think we will disclose some of the financial information to the investors by a different way. I think that's what we can do as of today.

Okay. All right, well, good job and once again, S.K., good luck to you and thank you so much for bearing with us or the investors. Over the last few years you've been throughout the United States and kind of have been the face for ChipMOS out here. We really appreciate your candidness and your hard work. Again, thank you very much.

Thank you. I appreciate your support.

Thank you. [Operator Instructions] Our next question comes from the line of Charles Loving-DeCoster with Craig Hallum. Please proceed with your question.

Hello. Thanks for taking my questions. Hello?

Hello, Charles.

Good morning.

Yes. I'm in for Richard Shannon who normally calls in on these. But again, separate engagements. So thanks for taking the questions again. My first question has to do with the Chinese joint venture. You already explained quite a bit in your answer to a previous question, but can I ask what do you feel the sales growth will be going forward after the next couple of quarters?

You mean for Tsinghua Shanghai, right? The China Joint Venture?

Yes.

We have seen the revenue growth close to 20% in Q2, compared to Q1 and we're expecting that this trend will go on up and expecting that we may see the Shanghai [indiscernible] by the end of Q4 or early next year. Right now, I'm afraid that I couldn't share with you the revenues information for Tsinghua Shanghai.

Okay. Thank you. That is helpful. Next question regarding the joint venture in Shanghai. What are the gross margins for that and when do you expect those to be going forward also?

This is S.J., Charles, to answer your question. I think that once we've reached the high [ph], the gross margin between Taiwan and China will be almost in the same rate. Yes.

Okay, thank you. And your second quarter gross margins were up materially in a multi-quarter high. Do you expect those to remain and do you expect them to do so lower DRAM allocations?

I think the biggest answer that they will be tiered allocation. This is a headwind we are going to place and which we are already addressing for this issue. On the other hand as I mentioned, we see an uptake for both [indiscernible]. That will be offset by the allocation for us. The other one is as I just mentioned, it's that we see a strong recovery in PDIC and bumping area, which will help us for this rate, both volume and utilization rate. We hope that we can offset this allocation impact from a commodity customer. We also try to provide other product portfolio with this customer since we had a long-term [indiscernible] with that. That's the challenges we are going to face and this also a strategic decision which we made a couple of years ago and we're already prepared for that.

Okay. Thank you, that is helpful. And my last question is regarding your CapEx outlook. So you did $46 million this quarter versus $37 million last quarter. What is your outlook going forward with that?

The CapEx for the 2017 full year will be around $150 million and we're expecting that we will spend approximately $15 million in Q3 and around $20 million in Q4.

All right. Thank you very much. I appreciate you taking my questions and that's all for me.

Yes, thank you.

Thank you. [Operator Instructions] Gentlemen, it seems there are no further questions at this time. I will turn the floor back to management for any final remarks.

Thank you everyone for joining our Q2 conference call. Thank you and I would like to take this time to appreciate S.K.'s effort to help the company almost 20 years and also we would like to spending with us until retirement until the end of this year as a Consultant in order to ensure the smooth transition and also the new succession [ph]. So, thank you again, S.K.

Yes.

Also, thank you, everybody that joined us. Thank you. Bye, bye.

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

Thank you. This conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.