ChipMOS TECHNOLOGIES INC.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good day, and welcome to the ChipMOS TECHNOLOGIES Second Quarter 2019 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Pasquale of Global IR Partners. Please go ahead, sir.

[David Pasquale:]

Thank you, Operator. Welcome, everyone, to ChipMOS' Second 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'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 at [e-mail] or you can get a copy of the 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 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.

[Shih-Jye Cheng:]

Yes. Thank you, David. Welcome, everyone, to our second quarter 2019 conference call. Hopefully, you all had time to review our earnings release. The key takeaway for Q2 are

[Silvia Su:]

Thank you, S.J. All dollar amount 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 TWD 31.01 against $1 as of June 28, 2019. All the figures were prepared in accordance with Taiwan International Financial Reporting Standards.For the second quarter of 2019, total revenue was $158.2 million. Net earnings for the second quarter of 2019 were $1.13 per basic ADS compared to $0.17 per basic ADS for Q1 of 2019. This represents net profit of $41.1 million and $0.06 per basic common share compared to a net profit of $6.3 million and $0.01 per basic common share in the first quarter of 2019.Q2 net profit includes the benefits of our disposal gain. We completed the sale of 9.1 million common shares of JMC in the beginning of April. The disposal gain was around $31.7 million after the deduction of related tax and expense. Our operating expenses in Q2 were $13.4 million or 8.5% of our Q2 revenue compared to $11.6 million or 8.1% of our revenue in Q1 of 2019. Net nonoperating income in Q2 were $29.6 million, including gain on disposal of JMC investment accounted for using equity method of $31.7 million, as just mentioned earlier.Income tax expense for Q2 was $3.1 million compared to $1.9 million in Q1 of 2019. On a segment basis, revenue breakdown of second quarter was 20.1% in testing, 24.7% in assembly, 36% in LCD driver business and 19.2% in bumping. We invested $23.1 million in CapEx in Q2 compared to $20.3 million for our first quarter of 2019. The breakdown of CapEx was 25.2% for testing, 8.5% for assembly, 56.4% for LCD driver and 9.9% for bumping capacity.Depreciation and financial expenses were $29.7 million or approximately 18.8% of revenue in the second quarter. EBITDA for Q2 was $44.3 million or 28% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit.As of June 30, 2019, our balance of cash and cash equivalents was $171.8 million. Overall, free cash flow in Q2 was $17.3 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 the sum. As of June 30, 2019, our net debt balance was $160.1 million, which resulted in a net debt-to-equity ratio of 26.6%. While EBITDA, free cash flow and net debt-to-equity ratio are not defined by generally accepted accounted principles. We believe these are helpful indicators to measure our financial strength.Accounts receivable turnover days improved to 81 days in Q2 compared to 91 days in Q1 of 2019. Inventory turnover days also improved to 38 days in Q2 compared to 42 days in Q1 of 2019. As of July 31, 2019, the company's outstanding ADS number was approximately 5 million units, which represent around 13.6% of the company's outstanding common shares.Operator, that concludes our formal remarks. We can now take questions.

[Operator:]

[Operator Instructions]. We'll now take our first question over the phone, which comes from Vipul Sagar from Blash Capital. Please note, you may have your mute function engaged. It appears we have no audio coming from this line, and we have no further participants signaled over this phone.

[David Pasquale:]

He may patch in again. I was just -- S.J., this is David. I was just actually e-mailed a question and one holder's asking, if you could add additional color in terms of margin -- gross margin trends that you're seeing in the second half, given the first half business strength, if it's sustainable? And if you think that you'll be able to continue to expand gross margins and where the expansion will be coming from whether it's on the cost side or mix side?

[Shih-Jye Cheng:]

Okay. Let me answer your question. In our Q1, our gross margin is up 15%. In Q2, our gross margin, we improved from 15% to 17.1% but this was gross margin. They had some since we disposed JMC sales. So we said the employees...

[Silvia Su:]

Employee compensation, 10% after net profit as employee compensation.

[Shih-Jye Cheng:]

So if -- with deduct this impact, our actual gross margin in the Q2 will be 18.6%. And we -- today, we also announced our July's result, which was 6.6% higher compared with June. And since the revenue is higher and gross margin also for the -- so we had a [indiscernible] flavor, pretty optimistic for the third quarter and second half, the revenue will grow quarter-by-quarter and gross margin will improve quarter-by-quarter based on the -- our product segment But David, did I answer your question?

[David Pasquale:]

Just perfect. Yes. And operator, it looks as though the Blash Capital gentlemen is back in, so if you could put him on.

[Operator:]

Certainly, sir.

[Vipul Sagar:]

I just want to say that was -- this was a good quarter and everything looks good, but I had a few questions about, a, CapEx for the remaining of the year, if you can give us some idea. Year-to-date, you did about $43.4 million in CapEx. How does the remaining of the year in CapEx look?

[Shih-Jye Cheng:]

Yes. I will let our CFO to answer your question.

[Silvia Su:]

Yes. According to our CapEx, actually, our target -- usually, our target is -- we hope to keep our CapEx -- is under 20% of our total revenue. And for 2019 -- for the total CapEx for 2019, we will keep in the range 20% to 25% of our total revenue.

[Vipul Sagar:]

Okay. And then the next question was, I was really impressed with your free cash flow generation for the first two quarters of the year. And if -- do you have any idea, if you can give us some idea about the remaining 2 quarters? What does the cash flow look like? Is it free cash flow year-to-date, we have done about $33.5 million free cash flow?

[Silvia Su:]

As for the free cash flow for the total year 2019, the free cash flow will be in the range, I think, $5 million to $10 million. And for Q3, there will be a negative free cash flow because of the bonus and also the cash dividend.

[Vipul Sagar:]

Okay. Okay. And then any color you can give us about the joint venture in China?

[Shih-Jye Cheng:]

Actually, there's a joint venture in China, right now, Unigroup paid the majority, and we just recognized long-term investment of gain and loss. We started to recognize the revenue. And so far, since they are pretty aggressive to ramping up new technology of the flash memory but as not fast as we expected, so we have really positive qualification, and they're waiting for their bumping up the new wafer up.

[Vipul Sagar:]

I was really impressed with the July revenue number, that was the highest since 2014. So the last question I had was about the revenue for Q3 and Q4, do you see sequential growth for Q4 also? I know Q3, you're looking at sequential growth. So is Q4 also sequential growth for revenue?

[Shih-Jye Cheng:]

Based on the current forecast, since right now, there's a lot of uncertainty. But based on our current forecast, we see that Q3 is pretty good. In Q4, a little than it was in Q3.

[Vipul Sagar:]

So a sequential growth potentially also in Q4, just like your historical pattern?

[Shih-Jye Cheng:]

Yes.

[David Pasquale:]

S.J., this is David, again, I was just e-mailed two other questions. One on the mention about business from new module house customer programs, if you could give some color in terms of on where that is coming from? Is it one additional customer, or are there multiple customers? And do you see this as something that would continue to ramp in the second half?

[Shih-Jye Cheng:]

Yes. Actually, there's a -- previously, we had a assembly facility in our factory and as far as our commodity DRAM customer. They had a steady arrangement, so they reduced our allocation percentage. Well, essentially, we have engineering team, and we are familiar with those manufacturing know-hows, so we introduced a new customer but not a commodity, it's a NAND flash, which maybe coming from the cover key major player for the margin half. So far, so good. And we already see a pretty good result. The margin is also reasonable. So that can support our Q3 second half growth. And next day, we are going to qualify the Tier 1 flash customer. So that's where we offset our revenue loss in a commodity area.

[David Pasquale:]

Next one. And then just one other one follow up. I just got another one on the market-wise strength in auto and industrial that it's both been 2 very good segments and in terms, if you had additional color on where that's coming from? Is that across multiple customers? And with regard to geographically, if it's coming from any specific area? And if it is something that you see is accelerating or moving forward?

[Shih-Jye Cheng:]

Yes. Just going to share with you the most significant one is NOR flash. NOR flash, since our key customers in the Asia, they gather a pretty strong request from China market, so they cleaned majority of the inventory in the June time frame. And they also significantly increased the wafer loading in our level of wafer. So that's the reason we had a confidence table for our second half, for NAND flash and NOR flash, where we have many revenue, good contribution to us. They're also driving our high utilization rate number in assembly and further improve our gross margin.

[David Pasquale:]

Operator, can you just repoll and see if there's any additional questions?

[Operator:]

Certainly, sir. [Operator Instructions].

[David Pasquale:]

Okay. S.J., it appears as though there's no additional questions now. If you want to turn the call back for any closing comments.

[Shih-Jye Cheng:]

Yes. Thank you, everyone, to join our Q2 conference call. Manager team, pretty happy to deliver the good result and good free cash flow in the Q2. And we are also very optimistic to see the Q3 and the second half. And I appreciate all the investors and suppliers. And thank you very much to join us in conference call. Bye-bye. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.