ChipMOS TECHNOLOGIES Inc. (IMOS) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the ChipMOS Third Quarter 2019 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today. A recording will be available at 10 a.m. Eastern Time today. The replay dial-in number is plus 1 (412) 317-6671 with conference ID number 3755750. The replay will also be accessible at www.chipmos.com. I would now like to turn the call over to David Pasquale of Global IR Partners. Please go ahead.

Thank you, operator. Welcome, everyone, to ChipMOS' Third 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 provide color on the operating environment. Silvia will then review the company’s key financial results. We are 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 at imos@globalirpartners.com or you can get a copy of the release off of ChipMOS' website www.chipmos.com. As with prior quarters, we hosted a call in Mandarin after the close of 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, directly, pertaining to results and the operating environment. With that said, we must also make a disclaimer regarding the 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 20F, which is 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.

Thank you, David. Welcome, everyone, to our third quarter 2019 conference call. Hopefully, you all had time to review our earnings release. We are very pleased with the revenue and profit growth in our business. Our business strategy, a balanced customer and end market is driving our gross margin [indiscernible], and especially operating cash flow. The key takeaway for Q3 are: first, Q3 was the highest revenue level for us since Q1 2015. We achieved 10.1% revenue growth in Q3 compared to the Q1. Secondly, we achieved a major improvement in gross margin to 21.4% in Q3 from 17.1% in Q2, led by higher HD product. TDDI increased utilization, our highest revenue level and cost control. So we achieved a 45% increase in net earning in Q3 to $0.52 per basic ADS in Q3 compared to the year ago period. Finally, we reward shareholders with a cash dividend of NT$1.2 per common share on August 30. This was $0.764 per ADS to holder on September 9. Overall, we are seeing strong customer demand level in most area that we expect will continue through Q4. We are controlling our operating expense and driving profitability. In terms of adding color on Q3, the overall capacity utilization level was about 74%, down slightly from 75% in Q2, meaning that utilization rate was up in our key testing business to 74% from 69% in Q2. As we benefit from the recovery in our Flash business, bumping and assembly rates both [indiscernible] while LCD driver utilization rate was 73% on soft TV demand at the end of the quarter. Memory product revenue represent about 38.5% of total Q3 revenue. Growth in our Flash business from [indiscernible] customer program continues to strengthen our business. This has been a focus for us. Since last year, we moved to diversify our business with the customer we could support and grow with. Revenue from Flash further grow 22.5% in Q3 compared to the Q2 and represented about 31% of total Q3 revenue. NAND flash revenue represent about 45% of Q3 Flash revenue. Revenue from DRAM product grow 10.8% compared to Q2 and represent about 17% of Q3 total revenue. As for the driver-related product including gold bumping and COG, COF, customer demand level remained strong. In our 12-inch gold bumping and TDDI business with increased TDDI product penetration of the HD panel segment for smartphones. DDIC revenue remained flat in Q3 compared to the Q2. After the increase, TDDI demand helped offset the softening TV demand in the end of the quarter. Revenue from TDDI further represent about 14.6% of DDIC revenue in Q3. And about 33% of our TDDI volume was credited to COF. Meanwhile, OLED product revenue start to increase in Q3 and represent about 4% of total Q3 DDIC revenue. As we look forward into the fourth quarter of the 2019, we are optimistic based on the customer demand level and our strong market position. We are working to deliver a continued business improvement as we build upon the momentum from the first nine months of 2019. In memory, we are encouraged by healthy demand from memory customers. We expect our NAND flash business from the new customer project and the NOR flash for the TWS product will help drive further revenue growth. In DDIC, TDDI demand has been increased with the launch of the new higher-content smartphone model. Based on the customer indication, we expect the utilization rate of 12-inch COF testing, and testing will remain stable in Q4. We are also pleased to note high-end wafer testing capacity is tightened led by OLED panel driver IC demand. I think we’re cautiously confident on DDIC’s revenue in Q4 even with the soft TV demand. Meanwhile, we are also driving higher utilization and profit through increased AI and automation to further reduce operating cost and enhance the revenue per headcount. Now let me turn the call over to Ms. Silvia Su to review the third quarter financial results. Silvia, please go ahead.

Thank you, S.J. All dollar amounts stated in our presentation are in NT dollars. We have provided both US dollars and NT dollars in our press release. The following numbers are based on the exchange rate of NT$31.05 against $1 against as of September 30, 2019. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards. For the third quarter of 2019, total revenue was $173.9 million. Net profit attributable to the company was $18.9 million in Q3. Net earnings for the third quarter of 2019 were NT$ 0.81 per basic common shares or $0.52 per basic ADS. Depreciation and amortization expenses were $30.7 million. We invested $59.5 million in CapEx in Q3. EBITDA for Q3 was $56 million. EBITDA was calculated by adding depreciation and amortization together with upgrading process. Return on equity of Q3 was 12.4%. Compared to last quarter, total revenue of Q3 was $173.9 million, grew 10.1% compared to Q2. Gross profit was $37.1 million in Q3. Gross margin rate was 21.4% and increased 4.3 percent points compared to Q3, 17.1%. Our operating expenses in Q3 were $12.6 million or 7.3% of our Q3 revenue and decreased 5.7% compared to Q2. Operating profit for Q3 was $25.3 million, and operating profit margin for Q3 was 14.6%. This represent a 5.4 percent point improvement compared to Q2. Net non-operating expenses in Q3 were $1.8 million compared to net non-operating income in Q2 of $29.5 million. In Q2, there was a $21.6 million gain on disposal of investments, which was accounted for using the equity method. Net profit in Q3 was $18.9 million compared to $50 million in Q2. The gross profit in Q3 increased by $10.1 million from Q2. As we recognized $31.6 million gain on disposal of investments [Technical Difficulty] in Q2. Net earnings for the third quarter of 2019 were $0.03 per basic common shares compared to $0.06 per basic common shares for Q2 of 2019. Basic weighted average outstanding shares were 727.2 million shares compared to the same period of last year. Total revenue from Q2 was $173.5 million, which was up 7.9% compared to the same period of 2018. Gross margin was 21.4%, at an improvement of 1.9 percent points compared to 19.5% in Q3 2018. Operating expenses in Q3 were $12.6 million, which was up 7.3% compared to Q3 2018, in support of our higher revenue level. Operating profit margin in Q3 was 14.6%, an improvement of 1.9 percent points compared to 12.7% in Q3 2018. Net non-operating expenses in Q3 were $18.9 million compared to $14.2 million in Q3 2018. Net earnings for the first quarter of 2019 were NT$ 0.02 per basic common share compared to $0.02 per basic common shares for Q3 of 2018. Total assets at end of the Q3 were [Technical Difficulty] including total assets of $398.8 million. Total assets at end of the Q3 were $489.2 million, including current liability of $161.9 million. Total equity at the end of Q3 was $616.8 million. Account receivables turnover days in Q2 were 83 days compared to 81 days in Q2 of 2019. Inventory turnover days were 38 days in Q3, the same as in Q2 of 2019. Cash and cash equivalent at beginning of Q3 were $149.1 million. Net cash generated from operating activities was $123.8 million. Net cash used in investing activities was $82.6 million. Net cash used in financing activities was $41.5 million. As of September 30, 2019, our balance of cash and cash equivalents was $149.3 million, decrease $240,000 compared to beginning of year. Free cash flow in the first three quarters was negative $3.8 million compared to free cash flow of $30,000 in the same period of 2018. This reflects the cash dividend we paid in Q3 of $28.1 million. Free cash flow 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. We invested $59.5 million in CapEx in Q3 in support of higher customer demand levels and indications of higher forward demand levels. The breakdown of CapEx was 12.8% for accounting, 70% for LCD driver, 9.6% for assembly and 7.6% for testing. Depreciation expenses were $20.7 million in Q3. As of October 31, 2019, the company’s outstanding ADS number was approximately 5 million units, which represents around 13.4% of the company’s outstanding common shares. Operator, that concludes our formal remarks. We can now take questions.

[Operator Instructions] We can take our first question from Scott Bishins of Caffeine Holdings. Please go ahead. Your line is open.

It’s Scott Bishins. I just have a couple questions. First of all, congratulations on a great quarter and really turning around the business. Looks like we haven’t seen this kind of a steady momentum in the last couple of years, and it seems to be by some of the statements that you’ve made and also by the results that were certainly – definitely moving off the level that we’ve been for a while, where it was a little stagnant, but now it seems like we’re getting some growth and also some increase in gross margin. So congratulations to that. A couple questions…

Yes.

You’re welcome. A couple of questions I have. Any idea what the CapEx is going to be in the fourth quarter?

Okay. Our CapEx for Q3 is around $59 million, and for Q2, would be less than that, would be I think, in the range $50 million to $55 million – that’s for Q4.

That’s for the fourth quarter, $58 million?

For the Q4, $55 million.

Okay. Do you also see having strong CapEx also for the full year next year? Or is this just a building year to have enough equipment to start to maintain the revenue stream?

Scott, this is S.J. I think that next year, we set the internal target for [indiscernible] organic growth for revenue is tied to 8% per year, and the gross margin we set at 17% to 22% for gross margin. And CapEx, we set the target at 20% to 25% of our annual revenue. And for next year, it seems we will reserve a portion for processing or build a new building because all our spaces are fully occupied right now. So total CapEx numbers, we’ll maintain at same rates, 20% to 25%. And we have a confidence Q4 also see a little bit better than Q3 and next year will be better than this year.

Okay. Let’s see also. This morning, NOVATECH came out with some bullish statements for 2020 on their TDDI outlook. I was just wondering is 8150 also seeing the same bullish outlook.

Actually, our performance for this Q3 and Q4 is better than NOVATECH. For the DDIC level, we are almost at the same performance, but we had a big growth in the flash memory, and NOR products especially for NAND products and NOR products for TWS. And also, we see a steady demand from our DRAM customer. So this, again supports us, good Q3 and also a better outlook in Q4. And next year is pretty stable.

Okay. How do we stand with Micron? I know that we were I guess, reducing our capacity for Micron, and it seems like Micron has started to bounce back on their side. I was just wondering will we be gaining any of that business that we’ve lost in the past going forward?

Actually, I’ll just say, since we are benefiting from China and U.S. This is a business company, so we are benefiting on that. Yes, they are coming back to us.

They are. Okay, that’s good news, too. I’m sure you have a lot of older equipment, I shouldn’t say old equipment, equipment that’s been totally appreciated that you could use for Micron that will allow the gross margins to be better than they have been in the past because of the lack of having to depreciate them anymore.

We hope so, yes.

Okay, so just to reiterate, you are looking at it now as the fourth quarter should be stronger than the third quarter?

We are confident there because today we also announced October’s revenue is around 8.2% higher than the September, and November is stable, and so I think we have confidence we at least can keep better than the Q3.

Okay. Two other questions. Last year, we paid out I think about 80% of our earnings to the dividend. What kind of percentage do you think you’ll be looking to for this year’s earnings to pay out next year?

Actually, as we said, the internal target for management team is 50% to 60% earning we’ll pay as a cash dividend.

50% percent to 60%?

Yes.

Okay, and that would be on total earnings, including the gain that with took in JMC?

We try by at least operating that we would pay 50% to 60%. That’s our commitment to the shareholder and the Board.

Okay, okay. Then I will take it for granted that includes also the JMC profits. Let’s see. One last question, could you guys give us a little color what’s going on in China? We really haven’t talked about that facility. I see some – I read some articles that the Yangtze River facility is coming online earlier than it was supposed to for NAND flash. And also are there any DRAM customers that we’re providing services for also in the Shanghai facility?

Yes, actually for – you’re right. The Shanghai situation is getting, quarterly by quarterly, getting better and better. And [indiscernible] with Shanghai [indiscernible]

Right. Any idea on when you think you could be at a breakeven now? On your margins?

Single month for the...

Yes for – in Q3, there was a single month breakeven.

This year there was a single month that we broke even.

In Q3.

In Q3.

In Q3. One month of Q3.

Any chance that’s going to continue into the fourth quarter and also into 2018?

Actually, I’m not the right person to answer this question because you need to have a very tightened focus and assistance. So we can announce the result, but we cannot give any forward-looking statement, yes. But later…

It is getting better and better, right?

Yes.

Okay. Let me just – I think I have one more let me just – just on the gross margin. That was a very nice increase going from 17.1% to 21.4%. Do you see that still on a higher trajectory as we move in and have higher utilization rates? And how high do you think we could get?

Actually, Scott let me put this way. Not only from the product mix contribution, we’re managing also, invest a lot of effort in automation and AI. So you can see this year, as a example, our revenue compared to last year, we grow a lot, but the headcount was not increased anyway, even it is. And – so the revenue growth we still want to kick the same headcount. So that’s the reason we can increase our efficiency and gross margin just through automation.

Okay, and I guess, the only other question is I know as we keep increasing the CapEx and you’re looking between 20% to 25% for CapEx going forward, the only issue with that is that it naturally – when you bring more equipment in, you end up having higher depreciation, which cuts into the gross margin. Is there any point where you see we could level back off to the old days, where we were 15% of revenue, 15% to 18% maybe of CapEx? Or is this ongoing that you believe that we’re going to be in this 20% to 25% rate?

Currently, I think that we have sufficient cash on hand. So that we prefer we are processing that CapEx ourself. We had tried to reduce the CapEx. The only way is our customer consign. Then that would be my increased by our gross margin and also increase some interest rate. [indiscernible] Silvia control money very tightly. So don’t worry about it.

And any – are you trying to qualify any new customers going forward? Any major kind of customers?

Actually, we had a very good progress for automobile. Top 10 automobile customer, we are qualifying by, a, in the mass protection. So we hope this year we can 100%.

That’ll be great, that will be great.

Safer and margin is greater.

That’ll be great. All right, you’ve answered all my questions. I’m sure I have some more next conference call. But looking forward to a solid fourth quarter and keep up the great work. Thank you very much.

[Operator Instructions] We will now take our next question from Vipul Sagar of Blash Capital. Please go ahead. Your line is open.

Good morning, S.J. and Silvia. It was a really good quarter, good gross margin, good October revenue. I only had one question, and that was about free cash flow. Silvia, what do you see as the free cash flow for the fourth quarter, approximately? And for the year?

Okay, okay. So for the Q4, the free cash flow will be negative $5 million to $10 million. That’s for Q4.

Negative $5 million?

Yes, $5 million to $10 million, in the range of $5 million to $10 million.

Positive or negative?

Negative.

You said negative?

Yes, negative.

Okay.

Negative.

So for the full year it will be a negative free cash flow, am I right?

Yes.

Okay. And that was the only question I had. Good job with the gross margin, really good October revenue. Thank you so much.

We have no further questions at this time. I would now like to turn the call back to the speakers for any additional or closing remarks.

Yes, thank you, everyone, to join our third quarter conference call. We will stay in touch. If you have any further questions, you can contact through our website or our IR channel. Thank you very much. Bye-bye.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.