ChipMOS TECHNOLOGIES Inc. (IMOS) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the ChipMOS Technologies Inc. First Quarter 2019 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host today, David Pasquale, Global IR Partners. Please proceed, sir.

Thank you, operator. Welcome, everyone, to ChipMOS's First Quarter 2019 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 and Accounting Management Center. S.J. will review business highlights and then provide color on the operating environment. Silvia will then review the company's key financial results. We're also joined on the call today by Mr. Jesse Huang, Spokesperson and Vice President of Strategy and Investor Relations. 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 e-mail Global IR Partners using 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 make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the U.S. Securities and 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 20F, 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.

Yes. Thank you, David. Welcome, everyone, to our first quarter 2019 conference call. Hopefully, you all had time to review our earnings release. The biggest takeaway from Q1 are: First, we keep our focus and achieved nice revenue, gross margin and operational profit improvement in Q1 2019 over Q1 2018. Q1 is normally the seasonal low. There are few working days around the Chinese New Year holidays. 2019 was not different. Second, we exit Q1 with March revenue up over 19% compared to February. This was up 11.2% over the year ago period. Third, we continue to build value for the company and shareholder. The latest action was we realized a nice return in April on our investment JMC Electronics, and we will have another dividend pending shareholder approval at our June AGM. Overall, we are pleased with our execution, strong financials and demand profile. We will work to delivering improving results through 2019 as we support our customers. In terms of adding color on Q1, the overall capacity utilization rate level was about 70%. There were 2 driver which lowered revenue compared to the Q4 and the absorption of adding capacity in supporting of growth in DDIC. In the memory segment, including DRAM and Flash, revenue declined about 15% to 16% compared to the fourth quarter of 2018. This is in line with the recent trend as the inventory memory is absorbed. In terms of further line, DRAM product represent about 17% of total Q1 revenue while Flash product represent about 18%. We are ramping new customer program and expect this will benefit results. As for driver-related product, revenue was about 6% to 7% lower than the fourth quarter of 2018. Growth in this area was marked by the reduced Q1 working days and low period. Trend-wise, we continue to benefit from TDDI demand in supporting of new smartphone model with bezel-less panel. In Q1, DDIC represent about 35% of the revenue, which is up over the revenue percentage of Q4 2018. Gold bump revenue increased and represent about 19% of the total Q1 revenue. The combined gold bumping and DDIC revenue represent about 54% of total Q1 revenue. Meanwhile, TDDI revenue rose to about 28% to 29% of DDIC revenue in Q1. We are encouraged by further growth in COF demand. In Q1, around 27% of TDDI product adopt COF packaging, which is up from 21% in Q4 2018. We also benefit from COF demand for the TV driver ICs with stability from the higher penetration rate of 4K TVs with near fully capacity utilization. Revenue for our COF product in Q1 was flat with Q4 2018 even with the fewer working days in Q1. As a result, COF revenue represent about 65% of total Q1 revenue, up to 60% in Q4. As we look forward into second quarter of 2019, we are encouraged by our market position, financial health, customer outlook and market mix. We are confident as we benefit from strong demand in our TDDI business, particularly with COF. We expect further growth in DDIC revenue and adding capacity for wafer test and 12 inch COF assembly. This will come online later in Q2. We expect COF packaging demand of TDDI will remain strong with TDDI packaging by COF to steady growth as new current COF assembly capacity come online. Our DDIC 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. In memory. Product demand has been soft with the inventory adjustment and normal seasonality. We are encouraged by cooperation project with a new customer that are coming online. We expect those project will contribute to memory revenue and stability and growth and will help improve the assembly utilization rate level. With having confidence in your outlook and healthy financial position, our Board approved another dividend pending shareholder approval at our June AGM. We will distribute TWD 1.2 per common shares or about $0.78 per ADS. This is the latest [indiscernible] as we give value and reward shareholders. Our consistent return on capital benefit for shareholders and underscore the strength of our balance sheet and ongoing cash flow generation. Finally, before I turn the call to Silvia, I would like to report to you that ChipMOS completed the sale of 9.1 million common shares of JMC just after Q1 ended. This disposal gain was around $31.8 million after the deduction of related tax and expenses. ChipMOS continues to own 10 million common share of JMC representing 10% of total share outstanding while we remain confident in JMC's long-term business prospective. We are pleased to have realized this return on our strategic investment. The proceed will be used to further strengthen our company's financial structure while increasing our balance of working capital and decreasing the debt ratio. This is in line with our strategy of balanced approach of near-term customer growth and capacity demand, which ensuring the long-term success and financial health of the company. Now let me turn the call over to Ms. Silvia Su to review the first quarter financial results. Silvia, please go ahead.

Thank you, S.J. The dollar amount cited in our presentation are in U.S. dollars. We have provided both U.S. dollar and NT dollars in our press release. The following numbers are based on the exchange rate of TWD 30.86 against $1 as of March 29, 2019. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards. For the first quarter of 2019, total revenue was $144.6 million. Net earnings for the first quarter of 2019 were $0.17 per basic ADS compared to $0.46 per basic ADS for Q4 of 2018. This represents net profit of $6.3 million and $0.01 per basic common share compared to net profit of $16.8 million and $0.02 per basic common share in the fourth quarter of 2018. Net profit was lower compared to Q4 on reduced revenue in the annual low period. Gross margin was low in Q1 2019 due to the lower revenue and lower utilization rate. Our upgraded expenses in Q1 were $11.7 million or 8.1% of our Q1 revenue compared to $11.9 million or 7.4% of our revenue in Q4 of 2018. Net non-operating expenses in Q1 were $2.1 million. In context, the exchange rate for Q1 was $1.9 million compared to $5.6 million in Q4 of 2018. On a segment basis revenue breakdown, our first quarter was 22.2% in testing, 23.1% in assembly, 35.1% in LCD driver business and 19.6% in bumping. We invested $20.4 million in CapEx in Q1 compared to $55.3 million for our fourth quarter 2018. The breakdown of CapEx was 25% for testing, 7.3% for assembly, 59.3% for LCD driver and 8.4% for bumping capacities. Depreciation and amortization expenses were $29.1 million or approximately 20.1% of revenue in the first quarter. EBITDA for Q1 was $39.4 million or 27.2% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. As of March 31, 2019, our balance of cash and cash equivalent was $164.3 million. This does not reflect the JMC stock sale S.J. noted earlier. That will be reflected in our Q2 results. Overall free cash flow in Q1 was $16.2 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 sum. As of March 31, 2019, our net debt balance was $191.1 million, which resulted in a net debt-to-equity ratio of 32.2%. While EBITDA, free cash flow and net debt-to-equity ratio are not defined by generally accepted accounting principles, we believe these are helpful indicators to measure our financial strengths. Accounts receivable turnover days in Q1 were 91 days compared to 87 days in Q4 of 2018. Inventory turnover days were 42 days in Q1 compared to 43 days in Q4 of 2018. As of April 30, 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.

[Operator Instructions] Our first question comes from [Scott Bichens] with [Cafin Holdings].

Just a couple of questions here. First of all, can you talk a little bit about the diversification from the memory business. I know at one time, Micron was our largest supplier. I was just wondering, have we added some new suppliers? And are we continually looking for new suppliers?

Okay. Since last year, we already looking for the new program to increase the, our portfolio flexibility. And actually this is a name for us because they can share same CapEx, which we invest for the period. And we are pretty successful to pass the qualification and engineering qualification. And starting from Q2, we can deliver with in a good result to the market. And starting from April, that the revenue already over our commodity driven revenue, and going forward, they will continue to increase. So from memory-wise, we are already looking for the good product and increase our assembly utilization rate. That would mean a pretty good contribution for us. But regarding to the memory testing, right now, we're still struggling, waiting for the recovery to fill up our vacancy. Is there anything you ...

Okay. Yes, so good. Just couple of other questions also. With the trade war that's going on between the U.S. and China, is that affecting the growth of our subsidiary, Unimos, in China?

Yes. Actually, right now we don't recognize the revenue. We just...

Recognize and invest...

Investment, promoting investment.

Investing a lot.

I think right now, we are not appropriate to talk before we can recruit legal department approval. But we can report the revenue and growth and loss. So if you...

But how about the growth? Is there, were you able to sustain any type of growth projection even with the U.S. tariff issues?

Well, actually right now the Shanghai's revenue is not grows as we expected as quickly. But since we had a regular meeting, a routine meeting between ChipMOS, Unimos and [YPC]. So we keep very close contact to do so.

Okay. Also, do we have any other subsidiaries or investments that we're looking to monetize? Like the JMC investment that we just monetized.

Can you repeat again?

Do we have any other subsidiaries that we're able to monetize or sell our shares to increase capital also, just like the JMC investment did?

So far, we don't have. We still maintain a 10% outstanding share of JMC. We had a confidence level there long-term perspective. And I think the, we were in a superior time, we don't have this idea to do the further disposition.

Okay. So then at this point in time you're also, you're not looking to sell the rest of the shares in JMC?

No. No. We will keep 10% holding on JMC.

I'm sorry. Can you say that again?

We will keep the current holding 10% of JMC total outstanding, we will keep such holding percentage.

You will keep that? Yes.

Yes, we will keep. Yes. We will.

Okay. I just want to do a follow-up on the JMC. Do we have any other investments like the JMC investment? Or the only 2 investments we have the JMC and also the Unimos?

Yes, JMC and Unimos, they are the only 2 investment company we have.

And we also had one small company working with us for current time frame. That's for being substrate supplier. That's located in Japan. That's RYOWA. But the investment amount is fairly limited compared with JMC.

Okay. And I guess last question is, how do you see the growth in revenue second quarter, third quarter, fourth quarter?

I think based on the currency devaluation, this year, we increased our CapEx due to the strong demand from customer side regarding with the TDDI, and the penetration rate continue to increase. Just to give you a rough number. For Q1 and this year is 27%; and Q4 last year, 21%. So significant increase, and we just see the penetration rate continue to increase. And testing time is getting longer so we increased our CapEx. And what those CapEx with 3-year long-term guarantee with minimal utilization rate, that what reduced our risk and also can guarantee our full utilization rate for rest of this year. And the revenue actually continue to increase starting from Q2 because our installation base were, start from end of the Q1 and Q2 and Q3. So you can see the driver for whole year will continue to increase. And margin-wise, it will further improve. That's first one. And second one is regarding to the memory side. We are really looking for the new customer program, which can offset commodity impact. The only solution we don't have right now is memory testing. We already will see warm sign starting from this month. And, but recovery-wise, it's not as good as we expected. Maybe go to the second half.

Okay. The other thing is also years ago, when you used to put out some of the bullet points for the month, you would put in free cash flow. I noticed now, especially in this month, our CapEx was $20 million. And it looks like depreciation was $29 million. So basically, we have about $9 million more in free cash flow on top of the $6 million profit that we made. Would you agree that we had about $16 million in free cash flow in the first quarter?

Yes. The free cash flow for first quarter is around $16 million. Yes.

$16 million? So you do agree with those numbers?

Yes. Yes, our free cash flow for Q1.

Right. Well, yes. Okay. Let's just see. One other thing, have you put out the full CapEx requirements for 2019 yet?

You mean the CapEx of 2019?

Yes.

Okay, okay. Then actually, it's around 20% to 25% of our total revenue of 2019. Yes.

Okay. Because it was pretty low in the first quarter. Should we expect that to build up? Or stay equal going to the next?

Yes. It will go higher quarter by quarter. Yes, it will go higher next quarter, yes.

[Operator Instructions] Our next question comes from [Vipul Saha] with [Blas Capital].

My first question is about revenue growth for 2019. What kind of revenue growth are you looking for 2019?

Yes. The, actually the, as a policy, we do not provide a detailed financial guidance given the Taiwan regulation. What we can let you know the, although we expect revenue will grow sequentially as we move through the 2019. First driving bullet point is the LCD driver. I think we continue to install new capacity. And right now we only draw in the full capacity. So through the new equipment installation and thus with capacity secure long-term agreement. So this is first driving fully for us. The second one is in the memory. As I mentioned, we're already looking for the plus memory product to increase our assembly capacity utilization rate. So we confident this level from quarter-over-quarter will growth. And I seeing the pace of our integration, Q2 at least, we can see the almost 2 digits growth revenue-wise.

Double-digit revenue growth? Excuse me?

Yes.

So can you talk for the second quarter?

Yes. For second quarter compared with the first quarter. And for the whole year, since yesterday, [indiscernible] published their modeling. So have pretty good progress in 2019 for the second half.

Okay. So let me understand this. For second quarter, you're looking at double-digit revenue growth. And for the year, you're looking at second, third and fourth quarter sequential revenue growth just like last year?

The modeling, yes.

Okay. And then for CapEx, what is the approximate, I know you said 20% to 25%. Last year, your CapEx was $161 million for the whole year. So that was about 26% of your revenue. So this year, you're looking at between 20% and 25% of your revenue? Is that what you said?

Yes.

Yes. Yes.

Okay. And then last year you had a price hike. You raised your prices in the second quarter. You raised your prices a little more in the fourth quarter. Any price hikes in 2019?

Yes. Actually, I think the first one, we are just signing a contract with our customers. So that was based on the market situation.

Okay. So no further price hikes in 2019 because you signed a contract last year. Is that right?

The new capacity, we signed a contract. But existing capacity, which we invested before, still had a good opportunity to raise.

So there is a chance that you might raise prices in 2019? Is that right? You may raise prices in 2019?

Yes, yes. We may, yes.

Okay. And gross margin, [indiscernible].

Yes. For margin-wise and profit-wise, since you can see our utilization rates are fully utilized. So we also drive a lot of automation and simplification and AI projects to reduce our headcount. And so you can see this year from operation cost-wise, headcount-wise were reduced even we increase our capacity. So the revenue per headcount and the profit will be continue to improve, not only from new capacity investment, but also for automation.

Okay. And last question is, any chance of taking some of the money that you raised by selling your JMC stake? You raised about $38 million. Any chance of using some of that money to buy back your stock?

Yes. Actually, there's, currently we don't have this kind of plan yet. But since we had a lot of net profit on the pocket, so we are going to discuss with our Board how do we share the benefit with all the shareholders. But not finalized yet.

Okay. So maybe when you, at your Annual Meeting on June 10, maybe then you will, be possible...

We will produce whether you know or yes, yes.

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to Mr. S.J. Cheng, we have another follow-up from [Vipul Saha].

One more question, that was about the free cash flow. Hello?

Yes. Yes, we can hear your line.

Yes. Your free cash flow was $16.2 million first quarter. For rest of the year, do you think in 2019, will there be free cash flow for the whole year?

2019, yes, for the whole year 2019, there will be net free cash flow.

There will be a net free cash flow?

Yes, negative.

There will be a net free...

Negative. So free cash flow out.

Okay. That's what I want. Okay. For the whole year '19, it will be negative cash flow? Okay.

Yes.

At this time, I would like to turn the call back to Mr. S.J. Cheng for closing comments.

Yes. Thank you everyone who joined our Q1 2019 conference call. Thank you very much. Bye-bye.

Bye-bye.

This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.