© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello. Welcome to ASUSTeK's 2018 Fourth Quarter Online Investor Conference. Today's conference will be in 2 parts. The first will be presented by CFO, Nick Wu, on the financial results then co-CEOs, S.Y. Hsu and Samson Hu will present the business highlights. The second part will be the Q&A. Please key in your questions online and we will respond during the QA section. Now, let's welcome Nick Wu in presenting the financial results.
Please look at Slide 5. Here you can see our 2018 Q4 income statement. In Q4 of 2018, including our phone operations, we can see that our net revenue is TWD 88 billion. This is a Q-on-Q loss of 6%. This is mainly due to decreasing phone sales and revenue. Also in 2018 Q4, we have conducted a transition in smartphone strategy, including a onetime write-off. Therefore, after the onetime write-off in 2018 4Q, operating loss is TWD 6.3 billion with a net loss of TWD 2.8 billion. In other words, in this quarter, we have an EPS of negative TWD 3.8. On our next slide, Slide 6, this is our unaudited brand consolidated financials. In terms of smartphone operations in Q4, net revenue is TWD 8.6 billion. After the onetime write-off of TWD 6 billion, we have an operating loss of TWD 8.6 billion and a net loss of TWD 6.7 billion. We have simulated to exclude the phone operations, our net revenue would be TWD 79.4 billion, operating profit would be TWD 2.3 billion and our operating margin would be 2.9%. This is a drafted financial report. On Slide 7, we can see our non-OP items. In Q4 of 2018, net interest income is TWD 270 million; investment income is TWD 517 million, including TWD 320 million loss from our subsidiary, Askey. In Q4, we have an exchange gain of TWD 514 million. Also in Q4, we disposed of shares of our subsidiary, uPI. Therefore, we gained TWD 1.2 billion. Approximately TWD 600 million were disposed through other subsidiaries and this is listed under others in investment income. This is TWD 837 million. In 2018, non-OP income is TWD 2.5 billion. On the next page, Slide 8, we can see our brand balance sheet. As of the end of 2018, cash and equivalents is TWD 55.8 billion, which is down from the last quarter. This is mainly because in Q4, we had paid to the European Union approximately TWD 2 billion in royalties and fines. This also includes inventory expenditures and adjustments. Going from Q3 to Q4, things have moderated. Therefore, accounts receivable and accounts payable have also moderated. This is the summary of our balance sheet. I'm on Slide 9. Our income statement, including our smartphones for all of 2018, we have a net revenue of TWD 352 billion, down 10% Y-o-Y; operating profit is TWD 2.78 billion, a Y-o-Y loss of 78%; net profit is TWD 4.2 billion; Y-o-Y down 73%. Obviously, this includes our onetime write-off for smartphones and expenses incurred from the transition period. The 2018 EPS is TWD 5.7. In terms of important non-OP items, interest income accounts for TWD 1.2 billion. We have an investment loss of TWD 284 million. This is mostly incurred due to subsidiary Askey, which had a TWD 2.2 billion loss. Dividend income is approximately TWD 2.5 billion. Also, in terms of disposal of shares in Q4, as I mentioned, subsidiary uPI, we disposed of shares accumulating TWD 1.2 billion. Also in the previous year, we reached an agreement with EU and paid roughly TWD 65 million in fines and royalties. This is listed in other income, which is a loss of TWD 1.7 billion. This is our income statement for non-OP items. On Slide 10, this is our unaudited brand consolidated financials for all of 2018. For our phones, we have a net revenue of TWD 37.4 billion, an operating loss of TWD 14.1 billion. After tax, we have a net loss of TWD 12 billion. Excluding phones for 2018, our net revenue sits at TWD 315 billion, operating profit is TWD 16.9 billion. In other words, operating margin is 5.4%. This also includes in the first half of 2018 because of the high profitability of cryptocurrency. However, we understand that cryptocurrency is a very volatile and special industry. We do not expect it to be a long-term and stable area of profit. Looking at Slide 12. This is excluding our smartphones. This is our product mix for Q4 of 2018. PC accounts for 74%, components accounts for 21%. For all of 2018, PC accounts for 70% and components account for 23%. On the next slide in terms of region mix, in Q4, Europe accounts for 34%; Asia, 42%; Americas, 24%. For 2018, Europe accounts for 32%; Asia, 46%; and Americas, 22%. On Slide 14, this is our forecast and outlook for Q1 of 2019. We anticipate that PC will decrease Q-on-Q, 5%. In terms of components, we anticipate a loss Q-on-Q of 5%. Overall, we expect that Q1 and Q2 or the first half of 2019 will be a rough transition for our company. Generally speaking, ASUS focuses on emerging and consumer markets and we are a outstanding PC brand. However, we face several adverse factors. First, key components such as processors are in shortage and this is a huge impact on the consumer market. Second, ongoing trade conflicts is also a huge effect on emerging markets and currencies, bringing volatility and uncertainty. Third, we must face the fluctuations in cryptocurrency and its effect on inventory and how we must make adjustments. Cryptocurrency reached a peak in the first half of 2018. In the second half of 2018, there were huge fluctuations. So starting from the second half of 2018 to the first half of 2019, we must do some adjustments and management of inventory. This will affect our operations in the first half of 2019. Our smartphone business transformation has been confirmed. However, our old models, their sales and the management will be completed in 2019 -- in the first half of 2019. So in the first half of 2019, we face several adverse factors. Our management goals are to operate with stability during this transition period. And after transition and readjustment, we hope that in the second half of 2019, we can come back to a normal development. Next, our co-CEOs, S.Y. Hsu and Samson Hu, will present our key business objectives.
Hello, investors. I am S.Y. Hsu. I will present our key business objectives and product strategies. Just as Nick said, our PC business in the first half of 2019 faced many challenges. First, everyone knows, starting from the second half of last year, we faced an Intel CPU shortage. This issue is not yet resolved and may have to wait until the second half of 2019 to be resolved. Second, cryptocurrency brought a lot of volatility to graphics cards and the loss of demand has resulted in some inventory issues. So from the second half of 2018 to the first half of 2019, we have to undergo many adjustments. As for the U.S. trade conflict, obviously this causes some tariff and economic uncertainty. These are the challenges that we face in the first half of 2019. Secondly, a major change for ASUSTeK is our announcement of our smartphone business transformation in December of last year. We are now focusing on power users and gaming. In December of last year after Jerry Shen's announcement, we have made many adjustments. After the launch of the first generation of our ROG phone, we received many wonderful reviews. Last year, we were rated against our competitors. In fact, we were rated against the second generation of their products. So comparing our first generation with their second generation, we were still selected by more than 70% of gamers as the best choice. This means that our product is very competitive and we will continue in this area and build our business. After Samson and I took over as co-CEO, we have made several adjustments in terms of our business culture and organization. We hope that in the second half of 2019 after new product launches, our profitability can return to normal levels. Now, I will turn it over to Samson.
Friends of the media, investors, hello. I am Samson. I will talk about 2019 product strategies and give more details. First, in terms of motherboards and cards, we will continue to gain market shares and market position to maintain our leadership in the industry. In terms of notebook products, we will optimize our product line to increase profitability to boost product value and user experience. So mainly, we will focus on the thin and light segment. In 2018, we accounted for more than 1/3 of the shipment. And in 2019, we hope to achieve 40% or higher and maintain our leadership role. In gaming notebooks, we will continue to increase our product competitiveness and work with the gaming community to maintain our position in ASUS ROG. We are currently #1 in market share outside of China. In products that are priced over USD 1,000, we have achieved 26% market share in premium gaming. In 2019, we are very confident that we will continue to maintain our position and sales and market share. Overall, we hope to sustain our motherboard and PC business and hope that in terms of PC, that in 2019, the second half in our next product cycle, we can recover our normal operating momentum. In gaming notebooks, we will continue to pursue market share and leadership in pricing. Looking at the long term, we have begun deployment in AIoT in order to grasp our long-term development.
We will now begin our Q&A portion. [Operator Instructions]. Our first question is from JPMorgan.
There are 2 questions. First, can you quantify the effect of graphics cards to the profits in 2018 as well as the inventory of graphic cards? In the first half of 2019, will you be able to clear the inventory of graphic cards? This is the first question. Second, can you please elaborate, in terms of PC products, how will you boost the lagging market share? Also, what are the key performance indicators for the new team?
In terms of graphic cards, Nick had already explained, in terms of our 2018 profit, our graphics card in Q1 of 2018, we had an excess demand. Therefore, we had very high profits. However, starting in Q2, demand dropped significantly. Obviously, in Q1, we have too much inventory causing excess inventory in Q2. However, in Q1, we had outstanding sales and profit. So in 2018, graphics cards contributed double-digits to our profits. As Nick said, after Q2 of 2018, we have started to clear inventory. However, this process will continue to the first half of 2019. So this will, of course, affect our profits for the first half of this year.
Friends in the media are asking when our next product cycle will begin, in Q3 or Q4?
I think everyone knows that Q3 is back-to-school time, especially in Europe and America. So Q3 is a very important time. So at the end of Q2, we will prepare all of the back-to-school products, including products for Q4. So our objective is that we can return to normal operations in Q3.
Our next question is from Capital.
In the future, how will you categorize ROG revenue? What is the profitability of the current ROG business?
This can be described in 2 parts. ROG can be divided into profits in motherboard and PC and our profits in ROG phones. In terms of ROG phones, we had mentioned that first generation was very well-received by the market. Obviously, we will strike while the iron is hot and this year, we will launch the second generation of ROG phone. We also are working closely with major players in the gaming ecosystem. Currently, ROG phones, in terms of profitability compared to our more mainstream products, are much more profitable. So we expect that this year, ROG phones will make a significant contribution to our phone business. Second, we have a very large ROG line, including cards and PCs. So I will ask Samson to elaborate on PCs.
As I mentioned before, in terms of PC, we hope that in the second half or Q3, we can return to normal operations. To achieve this objective, we will optimize our product line. In our observations, thin and light notebooks can create better value and better user experience. So in 2019, we will work to optimize our products. Second, we will continue innovation. We plan to make an announcement at COMPUTEX this year. So I hope that you will all support us.
The next question is from Crédit Suisse.
When do you expect CPU shortages to be resolved? And can you give us more details on your gaming business in 2019?
I will report on this. Regarding the CPU shortage, S.Y. had reported on this earlier, I believe that the shortage will continue in the first half of this year. According to our suppliers, we will start recovering in Q3 and the issue will not be fully resolved until Q4. In response to this issue, we have increased our supply from other brands to lessen the impact to our PC business. As for our gaming business, as I reported earlier, in 2019, we will actively maintain our market share and position and pursue larger market share. First, we have to return to fundamentals. In our gaming product line, we need to focus on the gamer and their needs. For example, we will focus on cool designs, performance boosting, thermal cooling as well as game title supports and user friendliness. Secondly, in terms of gaming business, we also focus on the gaming community and ecosystem. In this aspect, we work closely with game title providers, publishers and various competitions and events. In competitions, you might know that in China market, we have an ASUS team. This team is a great help to boosting the ROG brand and our connection to the gaming community. I'd like to share with you that our ASUS team in China's League of Legends, our team was #3. Recently in KPL, we were ranked #1. So these are all helpful to our gaming business whether we are talking about products, gamers or the community.
Our next question is from Citibank.
Could you please elaborate the margin impact from component price decline this year?
I'm sure everyone isn't aware that component price has decreased significantly this year, including DRAM and flash. Obviously, they affect our profits. So we are very concerned with these key parts. However, the effect may be delayed because for the security of operations, we have some inventory and, therefore, when calculating costs, we use the average cost. So we may have to wait a quarter to see profitability. These components obviously have fluctuation. I feel that after a few quarters, the profitability will return to normal levels. Obviously, the key parts companies do not wish to see low prices for very long.
Our next question is from Manulife.
Why do you intend to keep 2 models in the handset business? Without the economy of scale, how do you intend to turn this business profitable?
In terms of strategy, we focus on power users and gaming, but we do not limit ourselves to just 2 models. There might be some misunderstanding. Two years ago in Brazil, we announced our cooperation with Qualcomm. So you can see, if we only focus on 2 models, our cooperation with Qualcomm would exceed that limit. So the definition of power user can be expanded. In terms of PC, the power users in PC may only be demanding in terms of performance. However, in terms of handsets or smartphones, a power user may have different demands. For example, they may need a very powerful camera. So they may be a power user in terms of camera. Our collaboration with Qualcomm in Brazil, it involves a handset with 3 cameras. And this is aimed at camera power users. So we are not limiting ourselves to 2 models. We focused on power users and gaming in order to focus our resources. When we are considering which models to pursue, we are actually considering how to best use our resources in the segments that we want.
The next question is from Nomura.
Can you please elaborate your plans for AIoT products and businesses?
Everyone can see that AIoT will have a very large market. However, there is a feature of AIoT products, which is that it is not a one size fits all kind of product that can satisfy different customers, countries and different uses. Obviously, with different clients, end customers and markets, there is a lot of customization. Therefore, I feel like AIoT strategies and PC strategies would be very different. In terms of AIoT products, we have different approaches. Our team and our subsidiaries are working on this. Our team in ASUSTeK includes 200 to 300 people working on AIoT products. We also focus on many different aspects, including smart programs, smart manufacturing and smart medicine. For example, in smart program, we have smart transportation and retail. In smart transportation, we focus on building smart [ films ] and billboards and lights with Askey. In retail, we work with vendors in Taiwan. In smart manufacturing, we have worked with many suppliers that are in the pipeline. In smart medicine, we will focus on long-term care or home care or collaboration with medical organizations. We want to focus on product fundamentals at ASUSTeK and we are developing operating models and building strategic cooperations with companies and we hope to have concrete achievements in 3 years.
Our next question is from KGI.
What is the demand situation for the newly launched NVIDIA product?
As we all know, NVIDIA's new product, RTX, was launched on January 29. Comparing NVIDIA's RTX and GTX from the last generation, we can see that there have been substantial improvements, but there is also an increase in cost. Its new feature includes ray tracing. This still requires content support and currently, there are only single-digit that provide this contact support. Therefore, we feel that in terms of pricing or the support of the new feature, ray tracing, it requires more time. So currently, in terms of market momentum for RTX is not there yet. It's not reached our expectation. We feel that after ray tracing has more title support and after clearing of inventory for GTX, we feel that this requires another 1 to 3 months.
Our next question is from DigiTimes.
Qualcomm announced the cloud VR ecosystem. Will ASUS participate? How do you view this opportunity? How will 5G affect the PC or notebook market?
Okay. In AR or VR new applications, ASUS has invested some R&D resources in these new areas. We feel that we will make some preliminary investment in new technology. However, when do we develop the product? This requires analysis of market timing and we will make a decision on when is the best time to invest. In terms of VR, we feel that the timing is not quite right for a VR product. So we are still observing the right timing. In 5G, as for its effect on PC and notebook, obviously there will be some effects just as smartphone affects the PC and notebook market. When Microsoft cooperated with Qualcomm in Windows Snapdragon, we were already participating. When Qualcomm were discussing Windows Snapdragon with Microsoft, they wanted to create products that were always connected. So since we participated with Qualcomm in the first generation, we will continue to cooperate with them. When 5G affects PC products, I believe that ASUSTeK is well-positioned when that time comes.
The next question comes from Capital.
What is your outlook for Askey in 2019?
In 2018, Askey was heavily impacted mainly because of its transition in terms of its sales model from distributor to direct sales. Therefore, there was a huge impact in terms of the number of orders lost. Therefore, in the future, they have also made some investments in future tech, including 5G, which will not be realized in the short-term. So in 2018, Askey faced great operating pressure. Askey has also proposed some adjustments in strategy, in terms of product development as well as its transition to direct sales. So currently, Askey operations will continue to improve in the first half of 2019. As for when it will be in a positive development, we believe that in the second half of 2019, we will see better performance in its balance sheet.
Our next question is from Citibank.
Will ASUSTeK continue to launch ZenFones? And what is the time line of our smartphone strategy change?
In December of 2018, Jerry Shen announced the strategy change. Many of our customers and suppliers have asked the same question. In this year's MWC, we released a teaser for this year's ZenFone. So we are still planning to launch one new ZenFone model a year. Next -- last year was ZenFone 5. And so this year, we will launch ZenFone 6. Since our focus is now on power users and gaming, many people might be curious as to how we define power user. As I said before, in smartphones, we have a wider definition of power user. We will focus on performance. So our next ZenFone, ZenFone 6, will be a flagship phone.
The next question is from Daiwa-Cathay Securities.
What is your dividend strategy for 2019? And will you consider providing better dividends to shareholders?
Today, the board also convened to approve the 2018 balance sheet and confirmed that this year's dividend will be TWD 15 per share, which will also be proposed to the shareholder meeting in June. This maintains our promise made in 2017 when we were undergoing company organization that we would maintain dividend of TWD 15 per share for 2 years. Over a longer period, ASUS will consider our operating situation as well as the industry average for cash dividend and dividend yield. We hope to offer a dividend better than the market average. This is our goal. In reality, depending on our transition and reorganization, we can provide a clearer outlook for everyone.
Our next question comes from DigiTimes.
The announced SoC smartphone by Qualcomm and ASUS in Brazil doesn't really fit into the positioning of a power user or a gamer. Can you talk about your collaboration?
As I mentioned before, our definition of power user in phones is a little bit broader. The SoC product includes 2 models. One of the models has 3 cameras. So the application of the camera in a phone is very, very important. Everybody uses your phone to take pictures every day. So providing users who rely heavily on cameras, providing them a good product is one of our main concerns in this collaboration. Other than power users and cameras, initially when Qualcomm was discussing the SoC phone, they worked with the Brazilian government. It's not just us. Also, ASE is involved in investment. They have asked companies that collaborate to invest in Brazil and set up plants in Brazil. So the SoC phone collaboration will bring about some incentives in investment, and that is our collaboration with Qualcomm.
Our next question comes from UBS.
When can we see the gaming phone start making profits or at least breakeven?
Everybody is very concerned with this question. I would like to say that we believe the gaming phone will have a significant share in the market. If you have a child at home, you know that all children play games on their phones. So we feel that this market segment has great potential. Of course, we need to educate the market and educate users and work with the entire ecosystem to develop the gaming phone market. So it will involve initial investments. Obviously, we need to excel. And we have spent a lot of time in phone design to fit the expectations of gamers. We have also spent a lot of time to work with the gaming ecosystem in discussing how to expand and develop this market. When this market is mature, I believe that it has great potential. However, before the market matures, we still need time and -- to educate the market and we need to invest. Our conservative view is to achieve our goal in 3 years.
Our next question is from UBS.
What percentage of ASUS computers are AMD-based? Is the AMD mix going to increase this year and to what levels?
In the past, we have worked closely with Intel. So the percentage of AMD-based computers is very low, less than 10%. In the second half of 2018, because of the CPU shortage, we have started to increase our AMD supply. In-house, we have increased our AMD percentage in the low single digits. I believe we have answered most of the questions received. If you have any questions, please key in into the question column. Thank you for participating in ASUSTeK's Online Investor Conference. If you have any further questions, please contact our IR team. Thank you very much.