ChipMOS TECHNOLOGIES Inc. (IMOS) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the ChipMOS Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Thank you. You may begin.

Thank you, operator. Welcome everyone to ChipMOS' third quarter 2020 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 email Global IR Partners at imos@globalirpartners or you can get a copy of the release off of ChipMOS' website www.chipmos.com. We have also posted a PowerPoint presentation on the IR site to accompany today’s conference call. Before we begin the formal comments, 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 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, including but not limited to the potential impact of COVID-19, which may cause the actual performance, financial conditions or results of operations of the company to be materially different from any future performance, financial conditions 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.

Yes, thank you, David. We appreciate everyone joining our call today. We are pleased with our result for the third quarter 2020 and continued progress, the quarter development in line with our expectations. Demand in our end market remaining strong with positive utilization labor. This was the important quarter for us, as we drive Q3 revenue through the fifth year’s record highs. Revenue was up 4.8%, compared to Q2 and growth 5.3% compared to Q3 2019, even more impressive is the 13% revenue growth we achieved for the first nine months of 2020 with a gross margin up 290 basis points to 20.9%. Let me give some color on this. Our Q3 assembly utilization labor significantly increased to 80%, as we benefit from demand in gaming, consumer, electronics and slightly rebound in auto and industry and led the tightened utilization of assembly wire bonder. Our 8-inch COF utilization remains soft. This was more than offset by strong TDDI demand, which was drove utilization of our middle high-end wafer testing platform hires to full utilization. We are also pleased to see DDIC utilization increased to 76% in Q3 after a decline in Q2. We continue to benefit from higher bumping demand led by our [indiscernible] bumping and other in our driver business. Our overall utilization level was 79% in Q3, up from 74% in a year ago and higher than 76% in Q2. Regarding our manufacturing side, assembly represented 25% of Q3 revenue. Package testing and wafer sort represented around 32% and wafer bumping represented around 23% of Q3 revenue, up from 19.1% in Q2. On the product segment basis, our DDIC, including COG and COF, our segment was around 30% of revenue and gold bumping increased significantly to represent around 19.5% revenue. Revenue from DRAM and SRAM represent 19.2% and our flash segment grew significantly to represent 23% of Q3 revenue. Mixing on segment revenue increase and represents around 8.5% of Q3 revenue. In terms of adding colors, our memory product revenue grew more than 3% and represents around 42% of total Q3 revenue. DRAM revenue was up 15% year-over-year, but declined 10% compared to the Q2. This reflects broader inventory level adjustments in the channel. Total price revenue grew 18% compared to Q2. We benefited from significantly growth of no and [indiscernible] strong demand from gaming. Lastly, our NAND flash business continued to grow and represent about 29.5% of total Q3 product revenue. As for driver IC-related product, we continue to benefit from new 5G smartphone launch, particularly large HD-grade panel model, driver IC-related product revenue increased around 10.7% compared to Q2 and represent around 49% of total Q3 revenue. [indiscernible] revenue grew significantly around 26% compared to the Q2. [indiscernible] supply limitation. Overall, DDIC revenue grew in Q3 compared to Q2 as we benefit from strong demand for DDIC, given the high penetration of HD-grade panel. As a result, TDDI business represents 34.3% of Q3 DDIC revenue with middle to high-end wafer ??????? ????????, fully utilization currently. When we look at our target end market, revenue increased in both smartphone and consumer, while TV declined and both computing and automobile and industry whole rate compared to Q2. As we look forward into the fourth quarter of 2020, we are encouraged by end market and inventory trend in our [indiscernible] market. Long-term opportunity like ongoing 5G buildout are positive for the industry and ChipMOS. New smartphones are likely to drive higher volume demand, while the global work from home trend and led the uptick in demand for consumer, electronic and gaming, We expect revenue from two major product segments, memory and DDIC related, will continue to grow and growth of the DDIC related product will be better than memory segment. As we benefit from increased demand, capacity addition and higher testing price in Q4. In memory, we expect DRAM will remain the similar momentum from Q3 and our product business, including NOR flash and NAND flash will continue to grow by global work from home trend. We are investing some wire bonder due to the patent wire bonder capacity. We expect the assembly deceleration could be maintained the healthy labor because the new increase wire bonder are all booked by our customers. In DDIC, we expect demand from middle large-sized panels for TV will remain healthy in the four quarters. For the small size panel, demand is being driven by increased demand for middle, low end new 5G smartphones and strong demand for TDDI from the higher penetration ratio of HD-grade panel. As I mentioned, the wafer test play from are fully utilized. We expect to maintain this level into 2021 based on the customer forecast. We are carefully investing in the new high-end test play phone capacity to meet strategic customers' request. Finally, given the tightened capacity utilization level with related wafer testing price on October 1. This will benefit our DDIC revenue growth and profitability in the Q4 2020. We are working with our customer and committed to providing the capacity they need, similar to the situation in second half in 2018 and 2019, our new testing capacity additionally are all secured by customer contract guarantee to reduce the investment risk. Before I turn the call to Ms. Silvia Su, I would just like to highlight the comment we made in our Q3 result conference call noticed last month. Starting in calendar year 2021, ChipMOS will be – being hosting only one [indiscernible] during the timing and resource issues. To ensure transparency and to facilitate a better understanding of the financial results and operating environment of the company for English-speaking investors. We plan to provide a English translate audio following the lending call on East West side. Silvia, please go ahead.

Thank you S.J. All dollar amounts cited in our presentation are in NT dollars. The following numbers are based on the exchange rate of NT$28.95 against US$1 as of September 30, 2020. All the figures were prepared in accordance with Taiwan International Financial reporting Standards. We have provided a PowerPoint presentation on our investor relations website that will follow my comments on the call today. Page 12, consolidated operating results summary. For the third quarter of 2020, total revenue was US$196.4 million. Net profit attributable to the company was US$14.6 million in Q3. Net earnings for third quarter of 2020 were $0.02 per basic common shares or $0.40 per basic ADS. EBITDA for Q3 was US$61.5 million. EBITDA was calculated by adding depreciation and amortization together with operating profit. Return on equity of Q3 was 8.5%. Page 13, consolidated statement of comprehensive income. Compared to Q2, total revenue of Q3 increased 4.8%. Q3 gross profit was US$37.8 million with gross margin at 19.3% compared to 20.7% in Q2. Our operating expenses in Q3 were US$13.6 million or 6.9% of total revenue, which is about a 1% improvement compared to Q2. Operating profit for Q3 was US$24.8 million with Q3 operating profit margin at 12.6% compared to 14.5% in Q2. Net non-operating expenses in Q3 were US$6.2 million. The difference between Q3 and Q2 is mainly due to the increase of the share of loss of associates accounted for using equity method of US$1.8 million which was partially offset by a decrease of foreign exchange loss of US$0.3 million. Basic weighted average outstanding shares were 727 million shares. Compared to Q3 2019, total revenue for Q3 2020 was up 5.3%. Gross margin decreased 2.1% points compared to 21.4% in Q3 2019. Operating expenses were mostly flat compared to Q3 2019. Operating profit margin decreased 2% points compared to 14.6% in Q3 2019. As I noted earlier, the difference of net non-operating expenses compared to Q3 2019 is mainly due to the increase of the share of loss associated accounted for using equity method and the increase of the net foreign exchange loss. This was partially offset by a slight increase in the gain on valuation of financial assets of fair value through profit or loss. Page 14. Consolidated statements of financial position in key indices. Total assets at the end of Q3 2020 were US$1.18 billion. Total liabilities at the end of Q3 2020 were US$486.2 million. Total equity at the end of Q3 2020 was US$693.2 million. Accounts receivable turnover days in Q3 2020 were 74 days compared to 78 days in Q2. Inventory turnover days was 44 days in Q3, compared to 50 days in Q2. Page 15. Consolidated statements of cash flows. As of September 30 2020, our balance of cash and cash equivalents was US$165.4 million, increased US$2.9 million at the beginning of 2020. Free cash flow for the first three quarters was US$45.9 million, compared to negative US$4 million for the same period of 2019. The difference is mainly due a US$29.4 million, increase of the operating profit of US$28.3 million, decrease of CapEx and partially offset by a US$15.1 million increase of cash dividend pay. 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. Page 16. Capital expenditure and depreciation. We invested US$14.6 million in CapEx in Q3. The breakdown of CapEx was 10.6% for bumping, 43.4% for LCD driver, 30% for assembly and 60% for testing. Depreciation expenses were US$36.7 million in Q3. As of October 31, 2020, the company's outstanding ADS number was approximately 5 million units, which represents around 12.5% 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. Our first question comes from the line of Scott Bishins with Caffeine Holdings. Please proceed with your question.

Hi, S.J. and Silvia. It looks like a great quarter. It looks like a lot of things have been accomplished this year. Just a couple of things I want to go over. I saw the October revenues this month and there are $72 million approximately brand new high up about 9% year-over-year or so about 9% quarter-over-quarter. Do you see that sustainable going through the rest of the quarter?

Scott, this is S.J. To answer your question, in the May conference call, was other we asked the same question. At that, I will add Silvia to answer how kind of our gross margin will reduce 1.4% compared to Q2, okay. And…

That was my next question, why don’t you answer that?

I’ll answer you later.

I will let a lady to answer your question, okay?

Okay.

Let's give you the October – October starting from October, October revenue, which we already announced today, which was – revenue was growth almost 9% compared to 2019. And November and December is to maintain the strong momentum similar like October. And starting from October 1, we increased the pricing for DDIC due to the fully utilization rate. And so both revenue and gross margin will better than Q3. In the whole year's, in beginning of this year, we give the forecast for whole year's growth – revenue growth compared with last year was high single digit. But based on the October results and first nine months results and existing strong demand from customer side, our revenue growth for the whole year is larger than 10% and whole gross margin will be higher than 20%. And earning will be better than last year. So our cash dividends for next year will be better than this year because we are too much better than last year. So that means our shareholders can enjoy the high cast dividends compared to the last year.

Well that’s incredible news.

Yes. But I will ask Silvia to answer your question.

Yes. Regarding the gross margin, the Q3 gross margin is around 19.3% and it decreased around 1.4 percentage points as compared to Q2. And there are three major factors. The first one is for Q3, there was a higher electricity rate for summer season, and the impact will be around 0.9 to 1 percent points. That's the first one. And then the second one is U.S. dollar depreciation, and that impact around 0.5 to 0.7 percentage points. And the last one is higher gold price, and that impacts around 0.1 to 0.2 percent points. That's the major three factors for the...

What was the first one again? I missed the 1%, the first one.

Yes, the first one is higher electricity rate for…

Okay, okay. So in other words, you would have come in assuming that there would have been normal charges you would have come in with a higher gross margin than the second quarter.

The answer is yes.

Yes, you can say that. Yes.

Okay.

If you got to the Q4, is going through the wintertime. So not this factor and gold price are already higher and usage is also higher So these three negative factors can be eliminated. And we also are already having continuous growth in Q4. We also increased the pricing. So you can forecast year 2030 will be a good year for the company. And November and December was also stronger, yes.

Okay. Don’t put up the heat too high. We don’t want spend a lot of money on heat the fourth quarter. Try to keep it down.

But all wafer just highlighted in front of my office…

Right, let me see just a couple of other questions. Any news on the negotiations with the China factory?

We are in a good progress but once everything is clear, then we will let everybody know.

Okay. Do you think there are any chance we might know that before the end of the year, is there a possibility?

I think keep in Q1, maybe more safe, yes.

Okay. Let's do just a couple of things here. Now that you're going to be not doing the New York time conference call going forward will there be any times during the year that maybe you could do an update for the IMOS investors through a little question-and-answer, maybe not a full conference call, but something we'll – maybe we could just dial-in anybody that’s interested.

I was let David Pasquale to answer your question, yes.

Okay, we really have the needs for our investors in U.S.A., I think, we can go through David Pasquale our IR representative in U.S.A. to arrange that one or such kind in fall conference call. However, S.J. just mentioned, right after our formal Mandarin Conference Call, we will make sure that all the information will be provided. Yes, make sure all U.S.A. investors can get an equal base information, during the mentoring conference call.

Is there any chance if we have some questions prior to your first call in Taiwan that we could email in to David or directly to Taiwan that possibly could be asked by somebody during the conference call?

Okay. We’ll take your request into consideration and work with David to see how we can work it off.

Okay. I'm sure between myself and David and a couple of other investors, we could come up with some questions, maybe just even after we read the report, the quarterly report and maybe just a couple of questions that could be asked on that call this way, when you translate it into English, we'll be able to see your question and what the answer was. So that would be very helpful, I believe. Let me just see anything else. I didn't see the Taiwan dollar strength and it's been coming down dramatically over the last four quarters, I guess, which also has been incurring a foreign exchange loss has been pretty – it's been pretty substantial throughout the year. How do you see that going forward? Do you feel now maybe with the U.S. with the change in government in the U.S. do you think that there'll be a change in maybe how the Taiwan dollar acts?

Sure, Scott, to answer your questions, we use a very conservative foreign exchange based on the Central Bank announcement for next year's positive. So as far as our understanding right now, the gold price is more than $1,950 for us and foreign exchange is 28 point something. So I think that will be there high tides. So we used this one as an assumption for budgeting. So I don't think – that's why we are pretty conservative.

Okay. Let's see. Just one more question. I guess the change in the value of the facility, I imagine the charge for lowering the value the equity loss was that attributed to the China factory or was that attributed to something else?

Yes, that's related to the China factory.

Okay. Is that also – was that affected also by JMC, the last 10 million shares we have, I’m not sure…

Yes, as for JMP in is gain for JMC investment.

JMC was a gain.

Yes.

Okay.

Yes.

Let's see. Do you have any plans on, I guess, at this point you've already renegotiated all your loans with longer term payouts, do you see that that's going to be enough at this point that you don't need to do anything else on a financial side, as far as any kind of raise of capital or anything else that might be needed, or do you feel that we have enough cash and we're able to pay down the debt that won't cause us any shortage of cash? And what the CapEx might be going forward for next year?

Okay. Regarding the – actually, I think we had a position – cash position, and actually, we also have a sufficient short-term loan and long-term loan, especially in syndicating loans, credit lines. Yes. So, I think for the future investment, there should be no problem for the company and regarding the CapEx for 2020, actually, we try to control it under 20% of our total revenue of 2020. Yes. That’s the best thing of – yes...

That’s the plan for 2021 also...

For 2021, the target – I think that the target is given by the board is 20% to 25%, but we will try to keep it lower. Yes. Trying to under – like this year, to under 20%, that it’s still hard to say, it depends on the business. Yes.

Okay.

Let me just answer your question. The big difference is if business is too good that we need to view the new view of the new building or buy a new building in order to expand our capacity. But if you have enough space, that's not needed for the facility increase just by the CapEx increment only that can maintain around 17% to 18% of total revenue for next year.

Okay. Well, that sounds great. Do you have a building in mind right now that you’re negotiating on?

Answer right now? Is that a good timing? It seems their beauty and their prices continue to increase. Yes.

Okay. And just the last question, just to verify what I think this is, the GAAP earnings came to $0.58 for 8150, correct.

You mean the share price.

No. the GAAP earnings – the earnings per share.

earnings...

Earnings per share on a GAAP basis was $0.58.

Non-GAAP, so can you say again?

you mean a study from first nine months?

No, no. For the quarter, so that the earnings per share was $0.58. Is that correct?

Yes.

Okay. And then also if I just do a little non-GAAP number, just so that we could see what it looks like with maybe, some one-time non-expenses – non-operating expenses, it looks like the $6.2 million with a reference or another $0.24 cents in earnings, which would have brought us on a non-GAAP basis to $0.82. Does that sound correct?

You mean, non-GAAP, what do you mean non-GAAP, can you explain?

Well, you said there were about $6.2 million in charges that were associated with the third quarter. A part of it was the write-down in the equity value and also some foreign exchange losses. So, which I think you mentioned was two points with $6.2 million, so if you add the $6.2 million back into Taiwan dollars and then per share, it would be about $0.24, which would have brought earnings up to $0.82.

[Indiscernible]

Do you know that you just give me your population and then I double check that for you?

Okay. The earnings that you posted that I saw on the MOPS was $0.58 per share for 8150, correct for the third quarter?

Yes.

Yes.

Yes.

Okay. And then you also mentioned that there was a US$6.2 million loss on foreign exchange loss and also the value of the equity – using the equity method of the assets that we hold that are non-operating that totaled $6.2 million. So if you take the $6.2 million converted back into Taiwan dollars and then divide it by the amount of shares outstanding, I see it should be about another $0.24.

Yes, yes.

That would bring us – that would have brought us up basically on a non-GAAP basis of $0.82.

Yes, yes.

Okay. I just want to confirm that. The only reason why I’m saying that is because I just looked at in some of the, I guess, reports that just came out, and it’s saying that I most missed on the price per share, the earnings per share. But if you factor in the $6.2 million, which was taken – which was deducted from the GAAP earnings. Actually, you would have had a gain. I think the street was looking for $0.71. So now coming at $0.82, actually, you did better even with a lower third quarter gross margin percentage, which means that if – without some of those onetime charges in the third quarter, assuming that we had another 1% or 2% in gross margin percentage, we look have even done much better.

Yes, you just want to exclude the – you can say, onetime expenses like foreign exchange loss or the investment loss, right, trying to calculate.

Yes.

Okay.

That’s probably something that’s good to do also just to reference it, so people understand when they take a look and they see headlines. Sometimes it’s misleading. When it says you missed for the quarter, when actually most companies, most technology companies always give GAAP and non-GAAP earnings. They’re usually on the non-GAAP, they take out the onetime charges and add it back to the GAAP earnings.

All right. Understood.

Yes. Thank you for your question. We have the visibility, yes.

It’s not too high, if you need a help, just let me know. By again, thank you very much. Look has been great. The last 15 years for me anyhow, I’ve been an investor since 2004. So for me, it’s been a great ride. I’m very happy to see how things are going. I love waking up and seeing all brand-new highs on revenues and gross margins and profitability and also raising of dividends. So keep up the great work. And yes, again, I would love to be able to, if possible, sometimes send some questions into David and maybe some other investors that maybe could be asked on that on the Mandarin call, and then we’d be able to actually see the translation the same day and have our questions answered.

Okay, okay. We take your message. Thank you.

Thank you. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Vipul Sagar with Blash Capital. Please proceed with your questions.

Thank you. Good evening, S.J., and Silvia. The first question I have is about free cash flow. It seems like you had a negative free cash flow on Q3. Is that right?

Yes. Because of – we pay our dividend in Q3.

Perfect. And then Q4 – go ahead.

I mean the dividend payout for Q3 is around US$45 million. That’s the reason why we have negative free cash flow in Q3.

Okay. So my next question is for Q4, you go back positive free cash flow.

It depends on the CapEx, but I think, yes, that maybe around – yes, I think there is a chance, but it’s still depends on the CapEx, how much the CapEx we spent in Q4.

Okay, okay. But right now, The Q3 was down because of dividend and then Q4 is going to be based on how much you spend on CapEx in Q4, correct?

Yes, yes.

Okay. You said your Q4 revenue is going to be sequentially higher than Q3. What about Q1 2021? Do you see above seasonal better than seasonality on Q1 2021?

To answer your question, since everybody has, how come our Q3 gross margin is not as good as Q2. So I think Scott’s question already, let’s all the investment in a clear picture, okay.

Yes.

And Q4 is a pretty strong – we also increased the unit price. And all the negative onetime event was disappeared. So revenue will be higher and market will be significantly improved, not only for price increase, but also the negative onetime event when we disappear. And for the first half of next year, based on the current order, we’re still very optimistic, but only speaking for the second half, still a lot of uncertainty. But all our investors for the new CapEx was secured by two years contract, which can reduce our investment risk and also guarantee our revenue growth. Is that answers your questions?

Yes, yes, it does. It does. Thank you. Yes. You did say why the gross margin was down. You explained that very well. Thank you. You did say the guidance for revenue, EPS, gross margin, and even cash dividend for next year is going to be better than 2020. I appreciate that. And then I had a question about the price hike that you started in October was that like a 5%, 10% or somewhere around there or even more, what was the price you started?

For the testing, water testing for driver is around 5% to 10%. For a summary wise, it means that we are going to refrain the gold price increase to the customer’s side. That’s will be around like 1% to 3%.

There was a fire at AKM recently.

Yes.

And does that help, ChipMOS, bringing more business?

Yes, actually we try our best to help them to pass this critical time period, and we will do our best to support the extra capacity needs, but we don’t make any comment for the single customer until AKM’s statement.

Now. Here’s the thing that your revenue is growing. Your free cash flow will be better than the previous year. And I know you’re going to pay a little better dividend than in 2021. Here’s my question about the value of your company. It’s close to book and it’s barely about one time revenue. And I see Chipbond has about a 1.4 book it’s trading above at least almost two times its revenue. What is management going to do about something like, let’s say, share buyback, because if your growth is coming and the stock is near the lows, what – I mean is 8150 has been listed in Taiwan for seven years, and it’s pretty much there it was. So, my question is any thought about buyback, and especially once you settle the sale of Unimos in China and you bring back cash, what is management thinking about that cash that comes down the road, or what is management thinking about buyback?

And actually, we don’t do any prosperity. We are also talking about just kind of a subject. How can we reprice our fair market value and share price. And first one is, I think we will continue to delivery our performance and then stable cash dividends and then the shareholder can enjoy the higher premiums. I think the – what we are going to be recognized now share price will be increased. And you’re not – and we don’t do any possibility to increase in order to put best benefits for the shareholder.

What do you mean by repricing? I didn’t understand that.

Mean, we are going to continue the delivery that could resolve by quarterly basis and a stable cash dividends policy, which is higher 6% to 7% per year.

Yes.

I think that by shareholder our stock price should be improved. You see a nice improve that we had enough cash, we don’t do any possibilities to do something else.

Okay. Okay. Thank you S.J. Thank you, Silvia. You answered all my questions. Let me see if I have any more questions saved up. Let me see. Now, it’s a seasonality Q4 and Q1 2021 is going to be better. There’s a possibility of a higher dividend next year, Q4 everything is going to be up from revenue to margin to free cash flow. Yes, that answers all my question. Thank you so much.

Thank you.

Thank you. Thank you. Ladies and gentlemen, that concludes our question-and-answer session. At this time, I’ll turn the floor back to Mr. S.J. Cheng, the company’s Chairman and President for any final comments.

Yes. Thank you everyone to join our Q3 conference call. If you have any question you can direct contact with IR team. Thank you very much. Bye-Bye.

Thank you. Bye-Bye.

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