ChipMOS TECHNOLOGIES Inc. (IMOS) Q4 2018 Earnings Report, Transcript and Summary

Greetings. Welcome to ChipMOS TECHNOLOGIES Fourth Quarter and Full Year 2018 Results Conference Call. At this time, all participants will be in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I'll now turn the conference over to David Pasquale. Mr. Pasquale, you may now begin.

Thank you, operator. Welcome everyone to ChipMOS' fourth quarter and full year 2018 results conference call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; and Ms. Silvia Su, Vice President of Finance & 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 in the call today by Mr. Lafair Cho, Senior Executive VP and COO; and Mr. Jesse Huang, Spokesperson and VP of New Product Development Management Center, and Strategy and Investor Relations. All company executives will participate in the Q&A session after management's formal remarks. If you've not yet received a copy of today's results release, please e-mail Global IR Partners using imos@globalirpartners.com, or you can get a copy of the press release off of ChipMOS' website using 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'd 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 fourth quarter and full year 2018 conference call. Hopefully, you all had time to review our earning release. 2018 was marked by significant accomplishment for ChipMOS. Our accomplishments were on our business operation, financial, company structure and strategy. Taken together, [operation] [ph] have been meaningful and position us for success in 2019. We are pleased that we achieved a higher gross margin at 22.8% in Q4, up from 19.5% in Q3. We delivered this significant improvement of modest revenue growth, this show the leveraging our business and benefit of higher price level, a favorable mix and ongoing operation efficiency improvement. Our focus on profitability has helped us to move through up and down in the market. That there has been industry softness in Niche DRAM, related to ongoing conservative behavior around the trade tensions, for ChipMOS our end-market customer and geography diversity put us on a growth path and help isolate our business. We continue to have a higher utilization rate and our balance sheet remaining strong. We are able to invest in the area of our business, thus will drive our near and long term growth, while keeping the financial healthy to operate in up- and down-turn markets. Our result in 2018 benefits from the main growth in TDDI products. This is the major driver for our business, because TDDI allow customers to upgrade performance while reducing cost. This is the perfect value offering. And that we continue to see growth in narrow bezel panel requirement in new smartphone, particularly the COF format. In addition, large-size TV driver IC continues to increase due to the higher 4K TV penetration rate. Overall revenue in 2018 growth above 3% compared to 2017 and gross profit margin also increased to 18.6%. DDIC was a fuzzy area for us. Our DDIC business grows about 18.2% in 2018, compared to 2017. And that represented about 31.6% of our total 2018 end-year revenue. Demand continued to outpace capacity through 2018 and allow to [multi-city] [ph] increase pricing. The other positive outcome was customer move to set up the long-term capacity contracts to secure the capacity. This agreement helped us to streamline our CapEx trend and helped to reduce typical volatility. For Q4, DDIC product represented about 34.2% of total revenue, while gold bumping represent about 17.6%. The COF format packaging growth and represent about 60% of the DDIC revenue in the fourth quarter. And at same time, the TDDI product grows to 28.3% of DDIC revenue in Q4 from 22.8% of Q3. And there are around 21% of TDDI products, our packaging in COF format in Q4 from around 13% of Q3. The other area of our business was mixed, compared to 2017 price product benefit from higher automotive demand and other new applications such as smart speaker and gaming. Product revenue growth around 12% in 2018 compared to 2017 and represent about 21.5% of 2018 revenue. Memory product revenue however declined about 5% in Q4 compared to Q3, and represent around 38% of total Q4 revenue. This is in line with the broader market trend [further reported] [ph]. As we look into first quarter of 2019, Q1 normally represent the lowest period for the year, for the industry, followed by revenue growth in Q2, Q3 and Q4. This is due to fewer working days around Chinese New Year holiday and typically semiconductor churn inventory rebalancing. ChipMOS is in a strong position, entering 2019, having fortified our balance sheet and secured long-term financial agreement on favorable trends from our banking partners. We secured a new syndication credit line, NT$ 12 billion, with a five-year term in May 2018, will allow ChipMOS to refinance its existing banking debt on favorable financial terms, while maintaining financial flexibility to support company working capital for future growth and expansion. It is also important to know that, because we complete our 2018 capital reduction plan in Q4 2018, there was around 15% reduction of the number of common share in ADS. This will result in higher return to the shareholder and allow us to award shareholder distribution of NT$1.5 per company share, together with a cash dividend of NT$0.3. We are confident, we will be able to outgrow as we benefit from strong demand in our DDIC business, particularly with COF. We also encouraged by our progress in cooperation project with customer on OLED panel driver IC and DDIC for automobile application. Wherever you look semiconductor content and device complexity is increasing. For ChipMOS, we have to say in the past, the driver like TDDI require significantly higher testing time. Also more and more sales from auto shift to TDDI. We benefit from the volume upside and potential revenue per device. The same is true for automobile. The semiconductor content in the motor today has never been higher. It take incredible advanced system to make the entertainment and driver comfortable. And this does not even get into what is required with the vehicle connected to the cloud and self-driving auto. The 5G buildout is expected to be the main catalyst later in 2019 and in two years. Interconnection is not possible without higher reliability. Only specific large OSAT company like ChipMOS gain profitability making a critical ongoing R&D investment required to support the new technology requirement. We had a critical place in the supply chain and we are relied upon by customer worldwide. To support the strategic growth, we will continue to carefully invest in our DDIC testing and 12-inch COF assembly capacity to meet the strong TDDI demand environment. As I mentioned earlier, we have been able to eliminate market risk around adding capacity because TDDI customer are seeking long-term agreement to secure the needed capacity support for their expected growth. This adds further visibility and stability to our business and derisk our investment. Overall we are focused on achieving profitable annual revenue growth in 2019. Finally, before I turn the call to Silvia, I'm pleased to report that our board of directors had approved a cash dividend distribution to shareholder of around NT $1.2 for commercial or around US$0.78 per ADS. Shareholder will be able to approve at our AGM in June 2019. This is the [message that in similar operation] [ph] by ChipMOS over the passing two years to reward shareholders and to build, create value for shareholders. We appreciate your support as we continue to execute our business strategy. Now let me turn the call over to Ms. Silvia Su to review the full quarter and full year 2018 financial results. Silvia, go ahead.

Thank you, S.J. All dollar amounts cited 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 NT $30.61 against US$1 as of December 31, 2018. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards. For the fourth quarter of 2018, total revenue was US$162.4 million. Net earnings for the fourth quarter of 2018 were $0.46 per basic ADS compared to US$0.37 per basic ADS for Q3 of 2018. This represents net profit of US$16.9 million and $0.02 per basic common share compared to net profit of US$14.4 million and $0.02 per basic common share in the third quarter of 2018. For 2018, total revenue was US$603.8 million. Net earnings for 2018 were $0.90 per basic ADS with $2.34 per basic ADS in 2017. All operating expenses in Q4 were US$12.1 million or 7.4% of our Q4 revenue, compared to US$12 million or 7.3% of our revenue in Q3. We continue to carefully manage our operating expenses as we work to drive improved profitability. Net non-operating expenses in Q4 were US$3.3 million. Income tax expenses for Q4 were US$5.7 million compared to US$4.1 million in Q3. On the segment basis, revenue breakdown of fourth quarter was 23.5% in testing; 24.6% in assembly; 33.7% in LCD driver business; and 18.2% in bumping. We invested US$55.7 million on CapEx in Q4 compared to US$32.6 million for our third quarter 2018. The breakdown of CapEx for the fourth quarter was 21% for testing; 5.6% for assembly; 69.5% for LCD driver; and 3.9% for bumping capacities. Depreciation and amortization expenses were US$28.1 million or approximately 17.3% of revenue in the fourth quarter. EBITDA for Q4 was US$54 million or 33.3% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. As of December 31, 2018, our balance of cash and cash equivalent was US$151.7 million after distributing cash dividend of US$8.4 million and capital reduction of US$42 million to shareholders in Q4. As of December 31, 2018, our net debt balance was US$168.7 million, which result in a net debt-to-equity ratio of 28.6%. While EBITDA and net debt-to-equity ratio are not defined by generally accepted accounting principles, we believe these are helpful indicators to measure our financial strength. Accounts receivable turnover days in Q4 were 87 days compared to 83 days in Q3. Inventory turnover days were 43 days in Q4 compared to 41 days in Q3. As of February 28, 2019, the company's outstanding ADS number was approximately 5 million units, which represent around 13.7% of the company's outstanding common shares. Operator that concludes our formal remarks. We can now take questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. First question is from the line of David Haberle with Susquehanna. Please proceed with your question.

Hi, guys. Thanks for taking my question.

Hi.

You mentioned in your press release that you're focused on achieving annual growth in 2019, which could be a bit difficult given the start of the year for handsets here. But can you talk about your two or three biggest growth drivers for 2019?

This is S.J. Let me answer your question. For 2019, I will saw the internal goal for the organic growth is high-single-digit. And we see the gross margin very conservative, because there is the uncertainty in memory. We set the target is 15% to 30%. And key driver for the 2019 was LCD driver, especially for TDDI and fine pitch COF smartphone model. And then, I can give you some actual results. January, our revenue increased around 15.93% compared with same period of last year. In February, our revenue increased around 9.75% compared with the same period last year. So it means our Q1 is stronger than last year and we had confidence level by the new capacity install for LCD driver. And we already had a long-term contract with our customer. So utilization rate is guaranteed. So that's the confidence level we are going to increase by quarter by quarter. But regarding the memory still a bigger asset for us.

Got it. That's great color on January and February, and good results there. In terms of memory, I guess, what are your expectations on when pricing might stabilize?

Actually, you can see for the Q1, thus from the market report. I think first time I see that for DRAM pricing around 20% drop. Then the one month data 25% drop. Then, recently they report actually the 30%. So this will be the biggest pricing drop for quarter since 2011. So under this kind of situation, we still start to see any good sign, yes, for the recovery. So our customer just feedback to us, once the inventory was clean they might have a good sign in the second half of the memory. So our assumption for 2019 was based on this scenario.

Got it. Thank you.

Yes.

[Operator Instructions] Thank you. At this time, I will turn the floor back to management for closing remarks.

Yes, thank you everybody for joining our Q4 2018 and whole year's conference call. Thank you very much. Please direct contact with company channel, if you have any further question. Thank you very much. Bye-bye.

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