ChipMOS TECHNOLOGIES Inc. (IMOS) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the ChipMOS Fourth Quarter 2017 Earnings 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 with Global IR Partners for ChipMOS. Thank you. You may begin.

Thank you, operator. Welcome everyone to ChipMOS' Fourth Quarter and Full Year 2017 Results Conference Call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; Ms. Silvia Su, Senior Director of Finance and Accounting Management Center. S.J. will review business highlights and provide color on the operating environment. Silvia will then review the company’s key financial results. We are also joined today on the call by Mr. Lafair Cho, Senior Executive Vice President, COO and spokesperson; and also Strategy Investor Relations, Deputy Director, Dr. G.S. Shen. All company executives will participate in the Q&A session after management’s formal remarks. 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 press release off of ChipMOS' website at www.chipmos.com. As with prior quarters, 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 Taiwan 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 results and the operating environment. With that said, we must also 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 operation 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, which was 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.

Yes. Thank you, David. Welcome everyone to our fourth quarter and full year 2017 conference call. Hopefully, you all had time to review our earnings release. 2017 was the important year for ChipMOS. We can predict major initiative central to the company near and long-term success. This includes business, customer and geography diversification program. We remain focused on building up on our technical expertise, geography footprint and strong base of customer always. As we support customer effort in new market, including the high growth area, like auto industry and smartphone – smart mobile devices. We were able to build up our business and create shareholder’s values. And while we have met considerable progress, the benefit to the revenue growth have been offset by the allocation decline in our largest memory customers. We had talking about this on prior calls, giving the impact to our business. This is still a headwind, but we had did risk, the potential for revenue decline in 2018. The customer represent nearly 20% of our consolidated revenue in prior years period. As we ended 2018, thus revenue contribution have been reduced to a middle to high single digit level which we expect it to maintain. Despite a reduction, we maintain a very healthy relationship with the customer and work closely together on many programs. Without going into too much details, some of program are in auto sector. They qualify ChipMOS and want to continue working with us. This had given us a bit of stability and even the potential for growth. We are now modeling our future on the customer being a growth driven, rather we will try to maintain the current middle to high single digit level. The other area of our business have been generally positive. We have been successfully in our diversification effort into high growth market and are building up our revenue contribution in the industry, automotive and mobile device market. We also have many activity program underway, tied to the mobile, including new model smartphone, tablet and wearables. This is a really exciting time as new product rollout that are connected with each other. This are already becoming driver of semiconductor unit growth. And demand for our testing and service, assembly service. For example, the revenue of mobile devices, including TDIC and DDIC in electronic component. Gross double digit in 2017 and represent about 40% of our total revenue. This growth compared to the broader mobile device market, which was mostly flat in 2017. We are benefiting from TDDI, 3D optical sensing and 12-inch fine pitch COF led by increasing TDIC demand and NOR Flash from the smartphone market. Another bright spot was revenue from the automotive and industry market, which also grossing high single-digit in 2017 and represent around 10% of our total revenue. Our business driver including our geography diversification effort thanks to China, ChipMOS Shanghai. Our team spent a great deal of time over the passing few years, working to secure the right strategic investor to get ChipMOS the best strategic advantage in the domestic China market. We are very pleased in early 2017 to accomplish ChipMOS Shanghai equity interest transfer to Tsinghua unit the strategic investor, which result in the benefit to net income of NT$1.84 billion or $62.1 million in 2017. We are able to complete our first investment trends in 2017 and the second in early 2018. ChipMOS have very close relationship with Unigroup and serve as the management team for ChipMOS Shanghai. And while we are not able to comment for Unigroup. We can repeat what have been report in the past already. As the test and assembly provider for Unigroup, the ChipMOS Shanghai stand to benefit with higher volumes starting this year. Resource will be allocated to meet the highest growth and the profitability opportunity. We had a big competitive advantage and a major head start in serving the domestic China market. The bottom line of our effort is pure shareholders values. We are focused on driving growth in order to reward our shareholders. In the past, we have funded dividends program, cash contribution and share repurchasing in 2018. We are able to distribute cash to shareholder of NT$1 per common shares or $65.05 per ADS. We announced additional activity today. I am pleased to report that our Board of Director have approved 15% capital reduction plan. The capital reduction plan would result in a cash payment to shareholder of NT$1.5 per common shares, around $0.05 per common shares. In 2017, ChipMOS report only per basic common shares of NT$3.57, around $0.12 per common shares. In February, the Board of Director also approved a cash dividend distribution to shareholders around NT$0.30 per common shares or around $0.40 per ADS. The plan and distribution requires shareholders' approval and accompanies June 2018 Annual General Shareholder Meeting. We expect capital reduction distribution will be final and occured in Q4 of this year. This are just the latest step for us – us continuing to build shareholder’s value and increase our return on equity. We appreciate your support and reconfirm, plus our interest in – are directly aligned with our shareholders' interest. As additional color on our Q4 business. Flash revenue including Mask ROM grows 13.8% compared to the prior third quarters, represent 33.1% of our Q4 revenue. And flash revenue growth up to 19.5% of our revenue in 2017, compared to 15.9% in 2016. We are very encouraged by strong demand for NOR Flash, led by our wafer testing business for NOR Flash and as a result of all our NOR Flash wafer testing capacity still remain fully utilized. We also encouraged by the performance of our COG and COF of DDIC which grow revenue 8.3% in Q4 compared to Q3. This represent about 13.6% of our total Q4 revenue. As we look forward into the first quarter of 2018, we expect Q1 normally represent the lowest period for the years followed by revenue growth in Q2, Q3 and Q4. February, also has the lowest number of working days due to the Chinese New Year. As noted earlier, we expect headwind seeing in 2017 was softened in 2018 led by our customer business and geography diversification effort into higher gross market, including automotive industry and mobile device market. Other growth opportunity are like to improve 3D optical sensing, TDDI, OLED, 30-inch fine pitch COF and Flash product. Many of this other growth opportunity are related to mobile devices including 18 by 9 screen and new smartphone model, featuring bezel less panel along with tablet and wearable devices. And aside from the growth opportunity, I just covered, we are also working to develop new opportunity with other memory customer to offset the lower allocation to our logic customer in 2017. New application for various names and storage device such as multi-die and integrated packaging and a few area of our focus. Finally, we continue to work with our partner and are now well positioned in our optical sensing-related market. This is a developing area. We are moving forward conservatively. We are positive however, because we already have some project in production, how to gain initial acceptance in Q4. This product, we are able to capture broader market opportunity in 2018. With that, let me now turn the call over to Ms. Silvia Su, our Senior Director of Financial and Accounting to review our fourth quarter and full-years financial result. Silvia, please go ahead.

Thank you, S.J. 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 exchange rate of NT$28.60 against $1 as of December 29, 2017. Net earnings for the fourth quarter of 2017 was $0.13 per diluted ADS compared to $0.13 per diluted ADS in Q3. This represent net income of $5.5 million and $0.01 per basic and $0.01 per diluted common share in the third quarter of 2017. For 2017, total revenue was $605.3 million, net earnings for 2017 was $2.36 per diluted ADS, with $0.12 per diluted common shares in the same period. Our operating expenses in Q4 were $12.4 million or 8.4% of our Q4 revenue compared to $13 million or 8.7% of our revenue in Q3. Other operating expenses in Q4 was $1.6 million and net nonoperating expenses in Q4 was $4.1 million. Income tax expense for Q4 was $4.1 million compared to $1.7 million in Q3. On a segment basis, revenue breakdown of fourth quarter was 26.6% in testing, 26% in assembly, 29.8% in LCD driver business and 17.6% in bumping. Total capacity utilization was 74% for the fourth quarter of 2017 compared to 76% for the third quarter of 217. Our Q4 testing capacity utilization was 79% as compared to 75% of Q3. Assembly capacity utilization was running at 60% in Q4 as compared to 63% in Q3. LCD driver capacity was running at 85% utilization in Q4, as compared to 87% in Q3 and bumping utilization was 66% in Q4 compared to 77% in Q3. We spent $35.6 million on CapEx in Q4 compared to $37.7 million for our third quarter 2017. The breakdown of CapEx for the third quarter was 7.4% for testing, 19.2% for assembly, 67.3% for LCD driver and 6.1% for bumping capacity. As you can see, majority of our CapEx was invested in expanding our DDIC test capacity to meet current and expected customer demand levels. Depreciation and amortization expenses were $26.3 million or approximately 17.7% of revenue in the fourth quarter. EBITDA for Q4 was $37.6 million or 25.3% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. We reduced our bank loans by about $30.1 million in Q4 and our balance of cash and cash equivalents decreased by about $21.3 million, as compared to Q3. Overall, free cash flow in Q4 was negative $0.8 million, which was calculated by adding depreciation, amortization, interest income, together with operating profit and then subtracting CapEx, interest expense, income tax expense and dividend from the sum. As of December 31, 2017 our net debt balance was $87.9 million, which resulted in a net debt to equity ratio of 14.2%. For EBITDA, free cash flow and net debt to equity ratio are not decided by Generally Accepted Accounting Principles. We believe those are helpful indicators to measure our financial strength. Accounts receivables turnover days in Q4 were 84 days compared to 78 days in Q3. Inventory turnover days were 48 days in Q4 compared to 48 days in Q3. As of February 28, 2018, the company’s outstanding ADS number was approximately 9.2 million units which represent around 21.5% of the company’s outstanding common shares. Operator, that concludes our formal remarks. We can now take questions.

Thank you, [Operator Instructions] Thank you, ladies and gentlemen. There are no questions at this time, I’ll turn the floor back to management for any final comments.

Yes, thank you, everyone to join our Q4 2017 and full year’s conference call. Thank you very much. Have a good day. Bye-bye.

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