ChipMOS TECHNOLOGIES Inc. (IMOS) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the ChipMOS's First Quarter 2018 Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded and a replay can be accessed by dialing 412-317-6671 and using ID number 13679178. I’ll now turn the conference over to David Pasquale of Global IR Partners.

Thank you, operator. Welcome, everyone to ChipMOS's First Quarter 2018 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’re also joined today on the call by Mr. Lafair Cho, Senior Executive Vice President, COO and spokesperson. 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 to 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 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, 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.

Yeah, thank you, David. Welcome everyone to our first quarter of 2018 conference call. Hopefully, you all had time to review our earnings release. The key points of Q1 are first, we see Q1 as normal seasonal low that was again, the case in 2018. Coming of the normal Q1 season low, we expect quarter-over-quarter revenue growth in Q1, Q2 and Q3 2018. We are confident based on the demand labor and market anticipation. And then we report 20.9% increase in revenues for March 2018 compared to February 2018. Second gross margin was lower in Q1 due to the lower revenue and lower utilization rates in Q1 2018. We expect gross margin will improve as we move through the years. Third, net profit was lower in Q1 versus Q4, representing the seasonal low revenue and gross margin along with higher foreign exchange loss at $4.3 million. Net profit was lower compared to Q1 2017, because we recognized our $65.6 million benefit to the net profit last year from our equity and interest transfer to signal unit group strategic investor. This did not repeat in 2018. Fourth on the positive side, we started increased price more broadly in our COF and COD product and got bump in demand. Much of the demand is coming from the move to full-screen smartphone model. This reflects our substantial market-leading dealership position, and favorable business mix. Five, also, on the positive side, as you know, we are repurchasing some agreement from, that COF agreement is going to be online giving adding capacity to meet strong customer demand. Finally, we continue to execute on our growth strength, and return capital to shareholder, we are now a dividend distribution and capital reduction distributions totally $1.34 per ADS. Both distribution are expected in the second half of 2018. Overall we feel confident about ChipMOS' business position and we expect headwind from 2017 will have less of the impact in 2018. Our business is strong so far in 2018, with healthy demand indicator. Importantly, our business is diversified. We are not relying upon one specific customer or one specific market for our success. For example, we are building our revenue contribution in the industry, and automobile market. The revenue from automobile and industry market grew in the high single-digit in Q1, and represented around 9% of our total first quarter revenue. And TDDI product also grew single-digit level in Q1 and represents more than 7% of our total first quarter revenue. We are continuing to work on improving our capital efficiency. At one stage [ph], we are working to refinance existing syndicated loans at more favorable sense this will potentially include secure five years credit line for around US$400 million for syndicated of ChipMOS Taiwan Bank in middle of May. The new syndicated credit line will help as we plan our future expansion of capacity strategy to meet investment trench [ph] and customer demand in high gross market, to maintain ChipMOS' dealership position. [Indiscernible] ChipMOS Shanghai, the second investment trench was complete in Q1 2018. As everyone on the call knows, we are not able to comment for Unigroup, we expect a continued ramp moving forward based on the current and projected demand labor with a focus on memory over the near term. As for the test and assembly provider for Unigroup, ChipMOS Shanghai tends to benefit with higher volume starting this year. And the biggest competitive advantages in a major [indiscernible] started serving the domestic China market. We expect this to be a catalyst for shareholder value growth in 2018, and beyond as the domestic China market continues to involve in growth in a fast pace. As we look forward into the second quarter of 2018, Q1 normally represents a seasonally low period for the year, following by the revenue growth in Q2, Q3 and Q4. As I noted earlier, we are already seeing positive sign, including March and February report revenue and led by strong demand from Niche DRAM and 12-inch gold bumping for TDDI product. We are encouraged by strong demand for our NOR Flash business, with the resulting of NOR Flash wafer testing capacity to be fully utilized. We expect to see the revenue growth quarter-over-quarter through the 2018 with improvement in the gross margins through the years. We expect the headwind seen in 2017 was soft in 2018, led by our customers business and geography diversification enter into high-growth market. According to the industry and customer feedback, we expect to benefit from strong demand of Niche DRAM and an increased revenue contributed from TDDI OLED and 12-inch fine pitch COF for the new smartphone model, especially in narrow bezel and full screen panel. Finally, we continue to work with our partner and then are now well positioned in the optical sensor related market. This is the developing area and we are moving forward conservatively. We are positive, however, because we already have some project in production with the potential to capture broader market opportunity in the second half of 2018. With that, I would like to turn the call over to Ms. Silvia Su, our Senior Director of Financial and Accounting to review the first quarter of 2018 financial results. 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$29.1 against $1 as of March 30, 2018. All the figures were prepared in accordance with Taiwan International Financial Reporting Standards. For the first quarter of 2018, total revenue was US$137.8 million. Net earnings for the first quarter of 2018 were $0.02 per diluted ADS compared to $0.13 per diluted ADS for Q4 of 2017. This represents net profit of US$0.8 million and $0.01 per basic and $0.01 per diluted common share, compared to net profit of US$5.6 million, and $0.01 per basic and $0.01 per diluted common share in the fourth quarter of 2017. As S.J mentioned net profit was lower compared to Q4, because Q1 is the low period, net profit was lower compared to Q1, 2017, because we recognized $65.6 million benefit to the net profit last year from our equity and interest transfer to Tsinghua Unigroup Led Strategic Investors. Gross margin was lower in Q1, this is due to the lower revenue and lower international rates in Q1 2018. Our operating expenses in Q1 were $12.4 million, or 9% of our Q1 revenue compared to $12.7 million or 8.4% of our revenue in Q4 of 2017. Other operating income in Q1 was $1.1 million. Net operating expenses in Q1 were $7.1 million including foreign exchange loss of approximately $4.3 million. Income tax expense for Q1 was $0.9 million. On the segment basis, revenue breakdown of first quarter was 28.8% in testing, 26.5% in assembly, 27.1% in LCD driver business and 17.6% in bumping. We spent $43.4 million on CapEx in Q1, compared to $36.2 million for our fourth quarter 2017. The breakdown of CapEx for the first quarter was 29.3% for testing, 8.1% for assembly, 55% for LCD driver, and 7.6% for bumping capacities. As you can see, the majority of our CapEx was invested in expanding our LCD driver capacity which is mainly for DDIC test and 12-inch COF capacity and to meet current and expected customer levels. Administration and other expenses were $27.9 million or approximately 20.2% of revenue in the first quarter. EBITDA for Q1 was $36.7million, or 26.6% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profits. As of March 31, 2018, our balance of cash and cash equivalents was $229.8 million. A decrease from Q4 finally reflects our second and final investment in Tsinghua Shanghai. Overall, free cash flow in Q1 was negative $8.7 million, which was calculated by adding depreciation, amortization, interest income, scaled with operating profit and then subtracting CapEx, interest expense, income tax expense and dividends for the sum. As of March 31, 2018, our net debt balance was US$138.6 million, which resulted in a net debt to equity ratio of 21.7%. For EBITDA, free cash flow and net debt to equity ratio are not defined by generally accepted accounting principles. We believe those are helpful indicators to measure our financial strength. Accounts receivable turnover days in Q1 were 88 days compared to 84 days in Q4 of 2017. Inventory turnover days were 50 days in Q1, compared to 48 days in Q4 of 2017. As of April 30, 2018, the Company’s outstanding ADS number was approximately 8 million units, which represents around 18.72% of the Company’s outstanding common shares. Operator, that concludes our formal remarks. We can now take questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Richard Shannon with Craig-Hallum. Please proceed with your question.

Hi, thanks for taking my questions. Lot of interesting things going on and to ask about here, I guess, my first question is, I think if I recall correctly it’s the first time you’ve called out your industrial and automotive exposure, which I think you quantify as something like 7% or 9% of sales in the first quarter. Two questions on that. I’m wondering what the products are there you exposed there? I assume it’s mostly a niche DRAM or NOR Flash. I just wanted to get a confirmation there. And what do see is the growth dynamics of that business going over the next year or even longer?

This is S.J. Richard, let me answer your question like this way. Things right now, we have [indiscernible] in niche DRAM and also had a very solid product for low price and also had a 2N NAND Flash. Those customer in order to get into the better profit, so they are pretty aggressive to increase the market penetration into the automobile. In the meanwhile, the automobile market also needs high-quality service and environment and also engineering capability, which is our expertise in assembly and testing area. And up till now it represents around total 9% of our revenue. I think our target is going to continue to increase this percentage quarter-over-quarter. We hope end of this year, we can increase to around 15% to 20% of our total revenue.

Okay, excellent. Follow-up on the comments post on your prepared remarks and press release regarding a price increases for a few different products as you get into the second half of the year, I wonder if you can describe the level of increases and how should we think about your gross margins as we exit the year? Obviously we’re interest as much just – not on just on the price increase, but also any thoughts on the foreign exchange changes that might be affected as well over that time period?

Yes. Regarding the foreign exchange, the impact and the benefit, [indiscernible] Regarding the price increase, I guess, let me explain to you. Since one of the product – LCD product the TDDI, since the [indiscernible] is getting complicated and so it is longer testing time compared with standard LCD driver. So they do need a longer testing time. You also heard us to increase the capacity. And since when our capacity is very tightened, and so negotiate with the customer to increase the pricing for this one, this is first . The second is as you know, trends are more and more smartphone – high-end smartphone especially for full-screen smartphones, the LCD driver goes to COD into COM, because of the – they don’t had a pesos in the Edge so they do need COM. They also need a longer testing time [indiscernible] capacity, and this is pretty tightened. And also output is – needed more accuracy and their impact efficiency. So after the negotiation with our customer that we start to increase the price for the five piece COM and also mobile COM. And this will execute starting from the beginning of the May, which will be contribute a result for the second quarter and also the second half of this year.

Okay. S.J. any that you can help us think about where this can help your gross margins go by the end of the year?

Exactly.

Is there anyway you can quantify what that might be or give us a range or anything like that?

I think for the Q2 we really see a very good recovery from gross margins…

I think our gross margin in the second half we can go back to the Q4 2017 levels.

Okay. That is helpful. Maybe one last question for me and I’ll jump out of line. S.J., I think in your prepared remarks you talked about Unigroup’s expansion into demand market and your expectation of working with them. Wondering if you can give us a sense of the scale of that potential business in 2019, I know it’s looking a little bit far out but given the scale of what those guys maybe doing, it’s seems like any notable allocations you can get a fairly material size business from them. So wondering if you can characterize how big that can be.

Richard, let me answer your question by this way. See the relationship between Taiwan and China is pretty sensitive and also pretty religious. So actually, we can not comment too much for Unigroup. Probably that you know that we have enough financial proceeds for the future expansion and we spent and invest on the forecast and which is pretty older coming from Unigroup.

Okay, I guess certainly understandable.

Yes. And I think starting from this year especially for second half, we can report increasing revenue of growth in that area. And next year, I think that what the new work that coming out it will significantly improve and also help to increase the capacity, and revenue growth in 2019.

Okay. Fair enough. I think that’s all the question for me. I’ll jump in line and see for someone else ask more. Thanks a lot.

Thank you. [Operator Instructions] The next question is from the line of David Haberle with Susquehanna. Please shoot your questions.

Hi, thanks for hosting this call and for taking our questions today. As we entered into kind of 2Q 2018 here, may be you could provide us with an update of where you're at with your largest DRAM customer? Are all of those revenue headwinds behind us at this point? And if that customer kind of mid to high single-digit customer for you in 1Q 2018?

Yes. Just let me explain to you. Yes. And see if right now, with customer occupy around 7% to 8% of our total revenue and are pretty stable right now, because both of them are automobile and industry engaging customers. So they are pretty stable. In the meanwhile, recently we also can maintain it. This label and maybe we can increase a little bit.

Great to hear that headwind that is behind you here. My second question would be, I guess, in the press release, you guys have mentioned the first quarter of 2018 had benefited from demand growth and cryptocurrency applications. Maybe you can just give us some color on what you're doing in cryptocurrency as its related to NOR flash? And then was that growth quarter-over-quarter that you referenced to 1Q 2018, was that quarter-over-quarter for 4Q 2017? Thank you.

Can you repeat your question again, David?

Yes. It's related to cryptocurrencies, you highlighted it in the press release, and you said that there was growth in the first quarter of 2018. Could you add some color around what you're providing for cryptocurrency applications as this is a NOR flash product?

Actually, this -- you mean, while revenue going to grow quarter-over-quarter, what is the major contribution from this growth? Am I correct?

Yes.

Okay. First one is our LCD driver was the most bigger driving force for us. That's based on the 5P CRM, and the application is for full-screen smartphone and also the five-pitch COF for high-performance TV. And now also TDDI product that is in the LCD drive side. On the other hand niche DRAM is pretty stable. We also increased some testing capacity for that. And in the meanwhile, they also can absorb some of idle capacity, which led from our previously biggest DRAM customer. And so is NOR flash and then to DRAM flash is still pretty strong. Our existing capacity is fully utilized for more than one year. So we are going to invest more capacity for that. That would be the key driving force for the whole year for 2018.

All right, great. Thank you very much.

Thank you.

[Operator Instructions] Our next question is from the line of Vipul Sagar with Blash Capital. Please go with you question.

S.J., I had a question about your comment about revenue growth from second, third and fourth quarter. What kind of revenue growth are you looking at?

Actually, I think, on a second quarter, we see a higher single-digit and very confident 10%, kind of, range. In the third quarter, again, the same path. In the fourth quarter, maybe middle-single-digit something like that. That's based on the current focus from our customer and capacity we prepared for us.

Okay. Thank you. And then Silvia said that the margin will improve back to the Q4 2017 level, which was about 18%, – which was about 18% in?

So far it is around 17%.

Okay. So are you saying that for the whole year, you are going to get back to 17% or second, third, fourth you're seeing closer to 17%, 18%?

I think the second half.

Second half, you're going back 17%?

Yes.

Yes. If the foreign exchange rate is favorable to us, that was the ratio we made here.

Okay. But you are going through a little price hike in some of your services, you know, TDDI and COF, you said you're going to start implementing the price hike? What kind of price hike is it? Is 5%, 10%, 20%, what kind of price hike is it?

First number you mentioned.

So about 5%.

Yes, around this kind of range. If the situation is getting as we expected, we might do the second half.

Okay. Just the big picture I have, I'm looking at your revenue in 2007, it was $727 million, 2014 $695 million, 2017 $605 million, your revenue is ticking down. Okay. Your gross margins are ticking down, I look at your competition ChipBond just posted 21% in the first quarter. Powertech has 25%, 26% revenue growth. When can we see some kind of growth in revenue like more than 10%. I mean, what are you doing to – the OSAT industry is over $30 billion, you are a 2% player in that business. In 10 years, you haven't grown your revenue. What I'm asking is, when is S.J. going to say I'm going to capture even 2.5% of the market or 3% of the market? When will that revenue grow, because without revenue growth, nothing good happens in the commodity business. What is the plan for revenue growth?

Yes, you can see the past years, we had -- first one, we had some headwinds, which are with respect to the numbers. So we need time to diversify new product, new customer to fulfill the capacity, and we also tried to increase our financial restructuring. So we've got new 5-year syndication long in the mid of May, which give us a sufficient financial capacity so we cannot any possibility to growing more aggressive in capacity increasing or through merger and acquisition.

My counting that, that was a strategic decision a couple of years ago, I understand that. But if you look at seven years or 10 years, you haven’t captured, you haven’t even gone to $750 million in revenue. I mean your competition, other people are growing the revenue, they are going 5%, 10%, 20%, so it’s just not Micron going out, it’s a low margin business, I understand, you made a decision. But my point is what about other pieces that micron is not the only business, you do more than that. You have more.

Yeah.

you have Novatech; you have so many other customers. I mean, why aren’t you getting a bigger allocation?

You can see right now that we are continuing to increase our revenue in the industry in the automobile side. That is a good progress to us. And you can see starting from this year, our revenue is giving growth quarter-over-over and gross volume will mostly improve. And once our business is better then we will go into more aggressive to increase our capacity. So we’re organic across our new product to participate again.

Okay. And in the past two to three years, we’ve spent some financial results on the company restructure like [indiscernible] also the joint venture uniquely. So we have been also intact by our major DRAM company. So, I think as we mentioned that we just got, we are going to get syndicated loans. So, I think we are ready for the growth in the near future.

Thank you. At this time, I would turn the floor back to management for closing comments. Thank you. At this time, I would turn the floor back to management for closing remarks.

Yeah. thank you everybody for joining our first quarter conference call. Thank you very much. Bye-bye.

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