Win Semiconductors Corp

Good afternoon from Taiwan. Welcome to Winsani's second quarter 2024 earnings conference call. I'm Alex Lee, your host for today. I'm also the CEO at QIC. Participating in today's call will be Mr. Steve Chen, Winsani General Manager of Corporate Administration, and Mr. Joe Chen, Spokesman and Associate Vice President of Finance. Before we start, we would like to remind everyone that today's discussion will condemn forward-looking statements that are subject to significant risks and uncertainties. Please refer to safe harbor notice that appears on the presentation. Additionally, The financial results for second quarter 2024 and the presentation have been posted on the company website and the MOPS for your reference. By the way, the format for today's earnings call will be as follows. First, Steve will provide a key message of a WinSense operation and a future outlook. So after that, Joe will go through WinSense financial results for the second quarter and first half of 2024. Finally, in the Q&A session, Steve and Joe will jointly answer questions from investors. And now, I would love to turn the call over to Mr. Steve Chan for the key message of a win-win operation in the future outlook. Thank you, Steve.

Thank you, Alex, and welcome, everyone. Our consolidated revenue was $4.96 billion, up 12% quarter-on-quarter and up 26% year-on-year, which was in line with our previous expectations. Our gross margin was affected by the decline in the share price of a listed Chinese customers held by our consolidated subsidiaries in the second quarter. However, our capacity utilization rate increased from 55% in the previous quarter to 65% and the product mix was better than expected. Our gross margin increased from 22.4% in the previous quarter to 27.2% and operating margin also increased from 4.1% in the previous quarter to 10.1%. Net profit attributable to the parent company for the second quarter was 485 million NT dollars with an EPS of only 1.14 dollars. Looking at the revenue change for each product in the second quarter, Wi-Fi once again delivered the most significant quarter-on-quarter revenue growth. In addition to the increasing penetration of Wi-Fi 6E and 7, we have also seen older pooling momentum of Wi-Fi PA for the new smartphone launch in the second half of this year. Infrastructure revenue in the second quarter exceeds our previous expectations, with a double-digit quarter-on-quarter growth. We will continue to monitor the end demand of 5G infrastructure and the change of the inventory level in the second half of the year. For cellular PAs, prior demand from Android smartphones Customer in the second quarter was slightly lower than in previous quarters. The inventory for the new IOA is down in the second quarter. Second half of this year has started. As a result, the salary revenue in the second quarter is period. Mile quarter on quarter growth and year on year growth exceeding 50%. which was the highest among all product categories. This indicates that the industry has had its true and the inventory level for the smartphone has much healthier than last year. Lastly, Apico was the only product with a quarter-on-quarter revenue decline in the second quarter, primarily due to the product transition for the smartphone. As we focus on the massive data stream brought by AI, investing significant resources in optical sensing and data-centered data transmission, AI is also quietly impacting the future of the smartphone. During our latest conference call, we emphasized the importance of the high-end smartphone to win training and were pleased to see the return of the momentum. for a high-end smartphone. Recently, multiple major smartphone brands expressed that the smartphone equipped with the AI feature will be the mid- to long-term trend, and they look forward to the long-wait replacement demand in coming years, with high-end smartphones being the first benefit. This is consistent with our view. To me, the huge data transition Transmission Demand of the Future, we have not only developed the technology of the Wi-Fi 6E87 and the mass-produced reverse product, but also introduced the industry's most powerful 7th generation HPC technology. This year's process is designed for high-performance, high-end smartphones and is under-qualification process by several customers. Although the near-term and the market demand remain uncertain considering the agro-physical and of the China economic sector, we will continue to focus on our customer-first-foundry business model and with going investment in RMZ to maintain our long-term leadership. For the Chinese smartphone market, the inventory adjustment came to an end by end of the second quarter of 2023 and the customer-reviewed inventory pulled in for the fourth consecutive quarter since second half of 2023. Entirely the third quarter of 2024, we expect a demand from the Chinese customer will temporarily slow down, while iOS smartphones will enter a stronger season for the inventory preparation as scheduled. As a result, for the third quarter of 2024, we expect revenue to decline by high single digits quarter-on-quarter, which was large at around the mid-20 levels. Overall, for the whole year of 2024, we still expect revenue to be increased from last year. Thank you.

Thank you Steve. Over to Joe.

Okay, it's our pleasure to present our financial results for the second quarter of 2024. We are starting from our presentation slide. Firstly, the second page Say Harvard notice, please read it over. And then we started from page four. Page four is talking about our revenue and the margin trend. The Q2 revenue was 4.96 billion NT dollars and QOQ was up 12% and YOY was also up 26%. and our Q2 growth margin, due to the decline in the share price of the listed Chinese customer held by our consolidated subsidiary, the impact for growth margin was negative 3.1 percentage points. However, given by the higher utilization rate, and also the better program mix compared to the last quarter. So therefore the gross margin for Q2 becomes 27.2% and operating margin was 10.1% which is an increase about 4.8 percentage point and a 6 percentage point from the previous quarter. And you can find out that the impact from the Chinese customers in the share price for Q2, you can find out actually our growth margin for this quarter is already exceed 30%. In Q2 2024, our next profits attributable to the parent company was 485 million NT dollars. And compared to last quarter, last quarter was 407 million NT. And the EPS for second quarter become $1.14 NT. And the last quarter is what, 0.96 NT dollars. So, accumulated, the first half gets become 2.1 NT dollars. Then, now, we discussed about our product mix in page six. When I mentioned this earlier, the Q2 growth margins are driven by the higher utilization rate and also the better product mix. And we can show you in this page, if you are new to our earnings call, and firstly, I would like to give you some kind of background. growth margin we enjoy the best growth margin for infrastructure and the second one will be the optical which is my optical router and cellular and Wi-Fi both are the smartphone related and high volume product so maybe suffer lower margin so in this in 2024, you can see that our granular PA is in the range of between 40 and 45 percent. Although compared to last quarter, last quarter was between 45 and 50 percent, which is This quarter is lower than last quarter because the whole quarter of Q2 revenue up 12%. So actually the value of the PA for Q2 still have single digit growth. The most significant growth happened in the Wi-Fi, which is more than 60% of the growth. That's because of the IOS customer for Wi-Fi actually has already triggered the inventory pool in Q2. I think the infra is a little bit surprised in Q2 because we do see a certain customer or industry has some kind of inventory pool and we're not supposed to see this kind of growth but it's actually growth more than 10% for infrastructure. And lastly, it's optical. Optical is about 12% of the total revenue which is, I think it's only the factor which is declined among the product mix. It's due to the end customer I mean any product during the product transition period. Okay, this is the product list. Please switch the page to page 7. We talk about the guidance. The whole China Android market has been restocking Since the middle of 2023, the inventory restocking, and after the fourth consecutive quarter, and we do see that our Chinese customer for Android can temporarily slow down. And so we expect that the Q3 of 2024 revenues will decline high single-digit QOQ. But also we do see that the utilization rate, because of the revenue decline, the utilization rate may suffer a little bit. So we guide the growth margin to be around the level of mid-20s. Okay, then we can talk about the financial statement quickly. In page 9, page 9 is Q2 income statement. And I still... I still want to remind everybody that all of the figures we mentioned today is under the un-audited basis. The actual results are based on the CTA report. The Q2-24 net revenue was $4,961,000,000, and Q02 was up 12%, and YOY up 26%. And the growth profit was $1,352,000,000, and Q02 up 36%, and YOY up 71%. And the growth margin for Q2 was 27.2%. and compared to last quarter, last quarter was 22.4%. And operating expense in this quarter was $850 million. And so therefore, the operating ratio become 17%. Operating income become 501 million NT dollars, CO2 was up 173%. So therefore the operating margin become 10.1%. Last quarter was 4.1. And another up item was 46 million NT dollars. Income before income tax was $455 million and the income tax expense was $62 million, so therefore the net income was $393 million NT dollars. This figure, CO2 was up 47%. So therefore, the net margin becomes 7.9%. And the profit attributable to the parent company was $485 million. And therefore, the EPS becomes $114 anti-data. And the return on equity was 5%, which is in line with last quarter. Approximately, liquidation rate has become 65% compared from the 55% last quarter. That's also driving the growth market up for this quarter. The depreciation expense is very close to last quarter. It's $1,159 million, and last quarter was $1,170. The car parts is $343 million. It's about $40 million more than last quarter. Okay, now we can take a look at the first half. The first half net revenue was $9,404 million and the YOY was up 38%. was $2,346 million and the YOY was up 110%. So the accumulator, the first half growth margin was 24.9% and the OPU ratio become 18%. The operating income was $685 million and therefore the operating margin becomes 7.3%. Enough items for the first half of the simulator. The first half was income $79 million. And the income before income tax was $764 million. And income tax expense was $103 million. and the next income was $660. So the net margin becomes 7%. The net profit attributable to the parent company was $892 million. So the EPS becomes $2.1. and compared to last quarter, I mean, the same period of last year was a loss. Last year was a loss, a dollar and 18 cents NT. Okay, so therefore the first half return on equity was 5.1% NT dollar. Approximately utilization rate for first half was 60%. Depreciation expense $2,329 million. The top was $646 million. It's much lower than last year. Okay, then that's the first half income statement. In the page 11, for Q2, I think I only want to show you that the significant figure is the financial cost. It's $203 million, which is interest expense. The rest of it is still quite normal and for your own reference. And finally, the last page will be the balances. The date of June 30th, 2024, the cash on hand was $6,296 million. And the total assets was $65,014,000,000 NT dollars. and the total liability is $27,129,000,000 and it's about $1,000,000,000 lower than last quarter and the total equity was up 1.3 billion NT become 37,884,000,000 NT dollars. Therefore, the book value per share also up from $83.28 NT to $86.52 NT, which is up 3.24 NT dollars. Finally, the key index, the current ratio is 110%, and the death ratio is 42%. Okay, this is all I have. Thank you.

Great. Thank you, Joe. Let's move on to the Q&A session. We've got a pretty easy kind of good quality question list today, both online and in the past, for those questions prepared and requested by the by the investor before the call. Just a little reminder, if you have any questions, please submit your questions in the chat box. The manager will answer the questions as soon as possible. That means we come up with questions in the packet in the first place. For the third quarter revenue, the guidance is down high single digit, Q1Q, so the whole year guidance is in on change. Can management provide more detail about the expectation for each product payment?

Okay, great. I think for the third quarter, I think it looks like optical applications are the only ones who will have slightly increasing. And the other, no matter Wi-Fi, uh... federal or infrastructure will have a slightly decline in this quarter yeah that's the reason why uh... for the whole for the whole quarter we will guide this uh... high single revenue fund and also uh... uh... details on about the uh... uh... course margin uh... from 37 to uh... The second question in the pack is in terms of smartphone segment, what are the order trends for US and Chinese customers in the second half of this year?

and how will the launch of the AI smartphone impact customers' order trends?

Yeah, I think this is the... Actually, you can say that's the first year after the COVID. So right now, what we see from the U.S. customer or the Chinese customer is a little different in... uh... uh... uh... uh... uh... uh... uh... Q1 and then Q2, we see that a little slowdown in Q3. Right now, I see a little slow in Q2. But at the same time, U.S. customers are still keeping the momentum, like the momentum traditional, like before the COVID. actually the peak region of the cellular PA that will be located in Q2 and part of the Q3 and also at the same time optical sensing application where the peak region will be Q3 and that's the little difference with different geography and also the other question is about AI function I think For AI function, it definitely will bring the new demand momentum for the smartphone, because especially for the high-end smartphone, because they have a better spec, which can provide a better AI experience function for later. So, from the point of view, we think the AI function smartphone, it definitely will bring the long-term demand for the smartphone growth. Thank you.

Thank you, Joe. Another question in the pack is about Wi-Fi 7. What is your expectation for penetration rate for the second half of the year and the next year? And how significant the content growth opportunity in PA usage with the upgrade to Wi-Fi 7? Lastly, And with the Wi-Fi upgrade trend, how many PAs will switch to gas-based from silicon-based?

Okay, thank you. For the Wi-Fi 7, actually, we already see the problem this year. A lot of the high-end smartphones is already adopting the Wi-Fi 7 in their smartphone flagship product. And We also see the next coming high-end smartphones, most of them will have Wi-Fi 7 in the air. So we think the penetration rate will keep going up, start from this year and even better next year. And the Wi-Fi 7 is really helpful for our gaming app companies and handheld devices because I think it's not only handheld but also router because from the Wi-Fi 6 to Wi-Fi 6 or 7 actually they were increasing a new band in the potential which means that they were using 3 bands instead of 2 bands compared to traditional Wi-Fi and also this new band is the The frequency is higher between 6 to 7 GHz, which we can see in most of the case, getting up by PA will provide a better performance than other materials. So, as the Wi-Fi 7's absorbing rate has been growing, I think The getting of demand for the Wi-Fi PA level increasing compared to the period for the traditional Wi-Fi. Yeah. Thank you.

Great. Thank you, Steve. Let's shift to those questions in the chat box. Thank you for all the online presentations. I will read each question before we manage to answer the questions. The first question from InvestOnline, does the signal pattern change for WinSemi eyeing on the revenue drop in the Q3?

Okay, like I just mentioned, I think after the COVID we see right now on the Chinese market momentum looks like it's a little different with other Geography so I think that the reason why this year we see the seasonality is a little different with previous before but I think that maybe because that's the first year after the COVID in China so like I was just saying they start to pull up the demand almost one year ago so look like right now it's going a little slow down it's still in a very common situation for that but at the same time the seasonality for our USA customers that still keeping the same pattern like before so I suppose that maybe only this year kind of special case not indicate the pattern will become change in the future. Thank you. Thank you, Steve.

The second question which leads back to the market share change in the optical. What is the outlook for the market share in the remainder of 2024. Do you expect it to remain flat or continue to decline?

Okay, I think we all know that since 2023, actually in the end, Cosmo, they bring a new player for the 3D sensing. Yeah, but this year I think they don't bring the other new ones. So, I think most of the change here should be much stable compared to last year. I think that's the reason why in this Q3 we see our optical revenue will better in Q2, yeah. So, I suppose those kind of changes Will Dimensional don't comment on the potential inflation point of Android smartphone market? Okay, I think for Android Chains, I think because right now most of Android Chains uh... proper or we'll see what you've got a look on from china so that that may be that that may be the reason why he uh... our injury camp uh... therapy and revenue is uh... we don't need her to be completed into yeah but uh... uh... because of the ability of uh... therapy eight only about right uh... for weeks I suppose right now it's not what we see for Q3. Yeah, but will Q4 keep the same kind of situation? It's still a new time to watch. Thank you.

Thank you. Could you help me understand why is our Q3 revenue guidance weaker than the typical situationality? Is it just because of the China slowdown? or iOS smartphone also weaker than CETA. Also, second quarter growth margin was very strong. Subsidiary. The share price related loss implied margin 30% past growth margin. So, why is the Q3 growth margin down so much to the mean 20%?

Okay, thank you. Yeah, I think like I just mentioned, I think for this year, the Q3, what we see for the federal is only China-related market, but our IOH smartphone can be still strong and they are also still building the inventory for the new product launch in Q3. So I don't think that the whole cellular market or the smartphone market become weaker. It's only a special situation in China for Q3. So So I think the total smartphone market doesn't mean that will become going to the weaker seasonality for Q3 and Q4. And I think for our Q2 growth market, it's true the season range share price evaluation lose. That was more than 30%. But as I mentioned in the manager's comment, it's not only contributed by the utilization rate increasing around 10%, but also we have a better product mix than our expected in Q2, such as the InfraCharger, which is our highest margin application. They perform very well in Q2, In Q3, we also, we still see exercise decline there also. Yeah, because for Q3, right now, we only see optical will have positive growth, and all the other applications maybe fell down decline there. So that's the reason why we will guide Q3 growth margin Thank you Steve. The last question.

Could you please help us with the breakdown of your hands exposure roughly by Chinese versus non-Chinese customers?

Maybe it's more reasonable to describe the iOS versus the Android will be easier because for Chinese Sometimes it kind of makes customers also on the different market. So we can say that, for example, the IOS approximately around between 20 and 30% of our total cellular which means the risk of the 70 to 80% is Android 10. Of course, Android 10 including the Chinese smartphone, China smartphone, Korean smartphone, and any other non-iOS. So, yeah, and so this kind of breakdown is also pretty matched The whole smartphone market breakdown from end smartphones I think the breakdown is pretty in line with the end smartphone breakdown. 20 to 30% of iOS, 70 to 80% of Android. Thank you.

Thank you, Joe. Next question. Is there any chance that we may get 100 outsourcing orders from other U.S. IDM players in the coming year or two?

Okay. Yeah, I think since we've already started, we always think the IDM company is our social customers and also we have that kind of policy things we build with them and actually most actually I think all the US RFIDM companies actually they are with them customers I think it's all more than 10 years ago yeah so I think in most of the case they will if process the major product in their own phase at all. For the other non-major IaaS related applications, they always will collaborate with WinSemi to use WinSemi technology to produce the waiver for them. Yeah, so it's definitely as the future IaaS demand going up, I think Next question What is your expectation on infrastructure related products sequential sales growth in future? Okay, like we just mentioned, our infrastructure application, they perform very well in Q2 and even better than our expectations. So I think going to Q3, what we see is a little back to the normal demand level. So compared to Q2, we think infrastructure will little decline in Q3. Thank you.

Thank you Steve. Next question. Even industrial conditions have improved. When will management plan 2024 and 2025 cap in a Kaohsiung factory longer term?

Okay, like we mentioned in the previous conference call, We will finish the show of the Kaohsiung factory at the end of Q2 or Q3 and then we will waiting for the cleaning and equipment prepared since we see our acceleration rate coming back to around 80%. Yeah, because I think in most of the case, our lead time for a new step is around one year to one and a half year. So, for the acceleration rate range right now, it's only around like, 60% up and down. I think we still have plenty of time to watch the market and to see what kind of equipment mix we need in the future for Kaohsiung. Thank you.

Thank you. Thank you, Steve. The next question, could you please guide us how many percentage of your revenue related to data centers? Would you put in interest and Opticals. And could you please also highlight how the cloud trend benefits WinSandy now and in the future?

Okay. I think right now, data center-related revenue is mixed with different applications of technology, WinSandy. For example, We have a lot of infrastructure related technology that also is related to the data center for the optical communication. So I think we should say the percentage for our whole, the total revenue is still in a very low percentage. But year on year they are keeping growth. And the Caltrain is definitely will benefit for Winslany because of the Caltrain that means everyone needs more wireless communication than before. Yeah, so more of the that definitely will bring up wireless communication demand in the future. Thank you. Thank you, Steve.

In term of infra sales, could you please break down this by application, like for telco, Data Center, and Defense, etc.

Okay, thank you. I think right now most of our infrastructure revenue that will coming from base station still is a major application. And the second one maybe that will be satellite. Yeah, because we all know for the recent past few years, the Leo satellite has come launched and become more popular year on year. And also in this year, we already see the end customer, they start the generation two Leo train launch again. So I think that's the other reason why we can see our future

The margin has been talking about WinSemi may be the key beneficiary of the recent supply chain shift by the Korean smartphone brand. What is your view about this?

Okay, thank you. Yeah, I think that also we have heard and also got feedback from our customers look like the Korean end customer. They are increasing their supply chain list and also invited more design house to join their supplier. Yeah, so I think in the future, definitely that will have reason to diversify more our end customer and also I think that will bring our design house customers have a better customer satisfaction also. Thank you.

Great. Before I read my last question in the past, let me remind you, if you have any questions, please submit it at the chat box. My next question, we know that WinSemi is has a leadership in the advanced process of compound semiconductors. What kind of industrial development will accelerate the adoption of advanced process of a compound semiconductor and thus further enlarge Winsami's competitiveness?

Okay, yeah, I think Winsami was a pure foundry for the compound semiconductor and we all know common semiconductor was a better performance especially for the wireless communication and also the optical communication so I think in the future because of the AI become more booming in the future and the demand of that kind of data communication will also upgrade their speed and performance because of the cloud or the AI application. So I think we certainly will still more focusing on our technology to see better things related to the high-end wireless communication, such as more advanced HPT for the cellular PA and also the more advanced PM technology for the infrastructure, no matter for the PlayStation or for the satellite. and also at the same time I think we also located more resources for the optical device such as the Indian Far Try or for the for the dial, photodiode that type of data communication and also the pixel optical communication also. So I think in general because of the AI train or the data center train. I think the future demand for the compound semiconductor demand will keep growing in the future.

Thank you. Well, the next question, in terms of automatic demand, what is the WinSAM's order visibility? Should it outperform auto markets?

Okay, I think that maybe the question relates to the LiDAR application for the optical device. I think right now most of our LiDAR project is still in the project phase. And some of them is already are mainly going to the main production, but I think most of the reasons for the LiDAR is not going to a very big contribution or revenue because of the government regulation for the autopilot, especially upgrade to level 3 or even higher than that because upgrade to level 3 that means the car maker they need to take some responsibility about the action so looks like I think the LiDAR technology is ready and also the autopilot technology is ready but right now it's adoption waiting for the car maker can be very quick upgrade to level 3 or they want to maintain in level 2 or level 2 plus for several times.

Yeah, thank you. Well, this is possibly the best place we can conclude the meeting today. Well, thank you for all of your quick questions online and the questions before the call. Again, thank you for the management. Very transparent communication as before. Please be also advised that a replay of the call will be accessible within a few hours from now through WinSandy's website. If you have any further questions, please also feel free to contact WinSandy Semiconductor Investment Relationships. This will conclude today's call. And have a nice day.

Okay. Thank you. Thank you. Bye-bye.