Novatek Microelectronics Corp
TWSE:3034
Earnings Call Analysis
Q3-2023 Analysis
Novatek Microelectronics Corp
David Chen opened Novatek's third-quarter earnings call by introducing the executive team, including Vice Chairman Steve Wang and CFO S.C. Chou. The company reported third-quarter revenues of TWD 28.9 billion, a 5% sequential decline but still a robust 48% growth compared to the same quarter last year.
Novatek's Q3 gross profit marginally decreased quarter-over-quarter but exhibited a significant 46% year-over-year increase. Their gross margin improved to 42.25%, outpacing their own guidance and reflecting benefits from inventory write-down reversals, cost reductions, and favorable foreign exchange rates. However, operational expenses saw a 24% rise due to higher R&D investments. Ultimately, net income decreased 7% from the previous quarter but was up 47.9% compared to the prior year.
For the first three quarters of 2023, revenues dipped slightly by 5%. Gross profit and net income also faced declines of 16.5% and 24.8%, respectively, when compared to the same period last year. Moreover, year-to-date EPS fell to TWD 29.56 from TWD 39.32.
The revenue distribution across Novatek's business segments showed the small and medium-sized driver as the largest contributor, followed closely by the System on Chip (SoC) segment. The large driver segment saw a decrease from the previous quarter. Meanwhile, the company's October revenues were up 38.6% from the previous year, though they exhibited a slight decline from the previous month.
Novatek maintained a positive trend in monthly revenue growth starting from June 2022, with the trend remaining positive through October.
Cash reserves were impacted by dividends paid out in Q3 but grew 15% year-over-year. Accounts receivable remained stable quarter-over-quarter but increased by 47.5% year-over-year aligning with revenue growth. Furthermore, the inventory levels were at their lowest in two years, marking a strategic reduction of 47% from the previous year.
Novatek was acknowledged for top-tier corporate governance, sustainability efforts, and its ISO-5001 certified energy management system, underscoring their dedication to responsible business practices.
For Q4 2023, Novatek anticipates revenues between TWD 26.1 billion to TWD 27.1 billion, with gross margins expected to range from 38.5% to 40.5% and operating margins from 21% to 23%. These projections reflect the company's cautious outlook amidst economic uncertainties and tepid consumer demand.
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[Interpreted]Good afternoon, everyone. Thank you for joining Novatek 2023 Third Quarter Online Earnings Call. This is David Chen, Vice President and Company's spokesperson. I will be the host for today's conference. And joining me on the call today are Vice Chairman, Mr. Steve Wang, our CFO; Mr. S.C. Chou and our IR Director, Tony Tseng and Yvonne.The agenda for today's event will be as follows: first, our IR Director, Tony will be reporting Novatek's third quarter results in English. After that, our Vice Chairman, Mr. Steve Wang, will provide more details on our Q3 results and our 2023 Q4 guidance. Following that will be our Q&A session. We have already received some questions from our investors, and if you have questions you would like to ask, please send them to us online and our IR Director will process and read out the investor questions one at a time, both in Chinese and English. And our Vice Chairman, Steve Wang; and CFO, Mr. Chou and myself will answer all your questions in Chinese and will be translated into English later.Now I'll hand over the time to Tony, our IR Director, to report our Q3 results.
Thank you, David. This is Tony. This is our safe harbor notice. Please take a look. And the first page shows our quarterly revenues. Our third quarter revenue sequentially declined around 5% quarter-over-quarter to TWD 28.9 million, also at the high end of our guidance of TWD 28.1 billion to TWD 29.1 billion, but still a big year-over-year growth of 48% following a [ tough quarter ] during our recent visit a year ago.Our third quarter gross profit TWD 12.2 billion, down by slightly 3% quarter-over-quarter but still increased 46% year-over-year. As for gross margin, our third quarter gross margin of 42.25% increased from TWD 41.74% in second quarter and 42.65% a year ago, as it exceeded our guidance of 38.5% to 40.5%.As for our third quarter operating expense, the operating expense of TWD 5.08 billion down almost flattish quarter-over-quarter, but still increased 24% year-over-year, mainly due to higher R&D expense.As for operating income in quarter 3, TWD 7.1 billion in quarter 3 down slightly 5% quarter-over-quarter, still increased meaningfully by 67% year-over-year, also partly helped by operating leverage. This page shows our operating margin in quarter 3, at 24.69%, almost flattish quarter-over-quarter, but up from 21.75% a year ago and also higher than our guidance, 21.5% to 23.5%.As for net income, third quarter reached TWD 6.37 billion, down 7% quarter-over-quarter, partially due to a little bit lower non-operating income, but still increased 47.9% year-over-year. As for EPS, quarter 3 EPS reached [ TWD 10.46 ], down slightly from [ TWD 11.29 ] in second quarter but up year-over-year from [ TWD 7.07 ] a year ago.This is the summary for our income statement for quarter 3 along, with the quarter-over-quarter and the year-on-year comparison. Please take a look.The next page shows the accumulated result income statement for 2023 compared with the same period a year ago. For the first 3 quarters, revenue of TWD 83.3 billion, down around 5% year-over-year. Gross profit of TWD 34.9 billion, down 16.5% year-over-year. Operating expense of TWD 14.6 billion was roughly flattish year-over-year, operating income of TWD 20.4 million, down 26% year-over-year. Net income of TWD 18 billion, also down 24.8% year-over-year. As for EPS, the first 3 quarters reached [ $29.56 ] down from [ TWD 39.32 ]a year ago.This page shows a revenue break that down for our 3 business lines. The small medium-size driver accounted for 39%, followed by SoC at 38% and large driver accounting for 23%. Also for your comparison, in second quarter, these three numbers was 37%, 36% and 27%.We also just released our October revenue at TWD 9.5 billion, is up 38.6% year-over-year, but slightly down from September level. For the first 10 months, the cumulative revenue reached TWD 92.8 million, down 1.7% quarter-over-quarter.Looking at the revenue breakdown for October; SoC revenue reached TWD 3.4 billion, it's about 36% in October. The other operating income, mainly coming from the NRE part.This page shows our monthly revenue trends since the beginning of 2022. And you can see we start -- with revenue, have a positive year-over-year growth from June this year, and this trend continues to October now.Now, this page show brief of some key financial numbers, including cash account receivable and inventory; cash of TWD 45.6 billion, down 28% quarter-over-quarter and mainly due to cash dividend distribution during quarter 3, but still up 15% year-over-year. Account receivable reached TWD 20.6 billion roughly flattish quarter-over-quarter, but up 47.5% year-over-year mainly due to the revenue growth.As for inventories, inventory dollar decreased 13% quarter-over-quarter to TWD 9.1 billion, the lowest level over the past 2 years and also down 47% year-over-year.Now I'll pass the call back to David.
Thank you, Tony. The following slides is a recap of our recent major events. We have been ranked in the top 5% of companies in 2023 of the Corporate Governance Evaluation. And then we've been [ given ] the TCSA Taiwan Enterprise Sustainability Award, a gold award for our sustainability report. And then we are also among the top 100 winners of the Sustainable Citizens awards issued by the Commonwealth Magazine that Tian Xia [indiscernible]. And then we have published our Novatek 2022 sustainability report, and we have given the link, both in Chinese and English for your reference. And the last is that our ISO-5001 energy management system has passed the third-party verification.And now I'll turn over the call to our Vice Chairman, Mr. Steve Wang, to provide us more details on Q3 results and Q4 guidance.[Foreign Language].
[Foreign Language]
[Interpreted]Okay. Thank you, Steve. Tony has already reported our Q3 numbers. So our Q3 revenue were TWD 28.9 billion Q-o-Q down 4.52%, up by 47.80%. The revenue for the third quarter decreased by the 4.52% Q-o-Q, this is mainly due to customers' IT product pull in, in Q2 and hence, affected Q3 shipments. And the overall revenue reached near the upper part of our guidance.And as for the Q3 margins, Q3 margin is 42.25% quarter-on-quarter, which has improved by 0.55 percentage points. And this is also better than our guidance of 30% to 40%. And this is mainly due to the reversal gain from the inventory write-down and also the -- some from cost down and also the favorable ForEx.And looking at Q4, well, due to the economic uncertainty in Q4 and then the consumer end demand rebound is not very significant. And then we're also seeing some year-end inventory adjustment. And then most customers are managing the situation by relying on short and rush order.So based on the above, we anticipate our Q4 revenue guidance will be as follows; so revenue will be TWD 26.1 billion to TWD 27.1 billion. That will be at an exchange rate of [ 1 to 32 ]. And our gross margins will be within the range of 38.5% to 40.5% range. And the operating margins will be from 21% to 23% range. And that's the guidance for our Q4 2023 numbers.And so next, we'll move on to Q&A session. Please be reminded if you have questions that you would like to ask, you can send it online, and we'll collect them and try to answer them one by one.
So we'll move on to Q&A sessions. And Tony, we already have some of the questions on hand, so please go through some of those questions first, and then we'll collect more as we approach the end of that questions list.
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[Interpreted]Could management share the view on the sequential trends across major applications in terms of inventory levels and demand into quarter 4 this year?
[Interpreted]The smartphones, we are seeing some demand rebound, particularly on the TDDI restocking and seeing some rush orders. And as for the notebook, we are seeing some small rebound, notebook and PC, including PC. And these are on the back of preparation for the year-end promotions, such as Double 11, Christmas and Chinese New Year.And then as for the TV, we're seeing that it is entering the low season, and so it will decline Q-o-Q. And the automotive side is also seeing inventory adjustment. So the demand will also decline. And for the VR product line, it's entering at the end of the delivery. So the -- also the unit shipment will come down in Q4.
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[Interpreted]Could management also provide a quarterly revenue trend across 3 business groups for quarter 4?
[Interpreted]Well, looking at the large driver IC product line, we are expecting that it will increase slightly quarter-on-quarter. It's basically helped by notebook restocking. And as for the small and medium driver IC, despite sequential growth for smartphone TDDI -- OLED TDDI -- OLED driver IC. But the overall small and medium driver IC product line will decrease slightly quarter-on-quarter. This is mainly due to the lower VR and auto product shipment.And as for the SoC product line, will also decrease, but with a larger Q-o-Q trend. This is mainly due to the slow season for both TV SoC, monitor scaler, and also some of the surveillance product line.
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[Interpreted]Could management also share your view on the opportunities and the challenges on the recent market share shifts among the major TV or smartphone brand name?
[Interpreted]Well, in short, this is a good opportunity for Novatek, because we'll take advantage of this share shift among customers, given our broad product portfolio and wider customer base and also managing our brands is our major target.
[Foreign Language]
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[Interpreted]Could the management also share a view on the industry growth for major applications such as TV, PC smartphones into 2024, and also your views of the recent discussions of AI PC and the AI smartphones?
[Interpreted]Well, as you all know, in 2023, the whole year has been going on with the inventory adjustment. So with the normalized inventory level across applications, I think the customers' order are expected to resume to normal level, while smartphone, TV, PC, auto shipments in 2024 will return to positive growth.Well, as for AI PC or smartphone, I think it's still at the early stage. So the penetration of AI, particularly at the high end will increase as the ecosystem improves, and that will bring a lot of opportunity of the product replacement. So we are very happy to see this kind of trend moving forward.
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[Interpreted]Can you also share you our revenue growth drivers into 2024, after you already talked about some opportunities for the industry application?
[Interpreted]Well, Steve just mentioned that the growth drivers in 2024 for Novatek includes the following; and as for smartphone, OLED DDIC, particularly from foldable phones and also RAM Plus, and also LTPS, OLED, LTPO with RAM. These are some of the products that we are seeing -- expecting a good opportunity for smartphone. And as for the TV SoC, we are expecting to have new products and new customers joining in. And the high-end PC replacement demand on the back of AI trend, will also be very helpful for the growth in 2024. And also, the automotive-related products, will see growth also. And of course, last but not the least, the increasing opportunity at the ASIC side, also will contribute to our growth in 2024.
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[Interpreted]I was wondering if you have any estimate on the penetration ratios of OLED panels into smartphones and other applications? And also provide some partial guidance for related revenue contributions in the mid-term to long term?
[Interpreted]Well, the penetration at the smartphone side for OLED, I think will reach about 40%-plus -- 42% around 42.5% and will continue to increase. While the penetration and the other applications like tablet, notebook, automotive, I think is still at the early stage, but will gradually rise, as we move forward. And for Novatek, we have provided solutions for various OLED applications and revenue definitely will grow along with the market.
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[Interpreted]Given your partnership with PlayNitride microLED, would also provide your view on the next-generation display product and your positioning?
[Interpreted]While we just mentioned about the microLED, this is one of the emerging display technologies. As you all know, currently, the cost for this kind of display is relatively higher, and it's mainly used for special applications. But we are seeing also there is a chance, that it will expand to other applications. And Novatek is currently involved in developing related products.
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[Interpreted]Inventory levels in the supply chain across products are returning into normal levels, where your quarterly revenue during 2024 to be back to the normal seasonality?
[Interpreted]Well, as we just mentioned earlier, 2023 inventory adjustment is pretty much done. So given the current visibility, there is a possibility, the overall industry will return to the normal seasonality in 2024.
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[Interpreted]Total inventory days as of quarter 3 this year? And also could you quantify the trend in terms of either inventory dollar or days into quarter 4?
[Interpreted]Based on our CFO, Mr. Chou, he just mentioned that the inventory days for the first 3 quarters decreased to 74 days and down from 80 in the first half and 92 for the first quarter. And inventory dollars at the end of fourth quarter, will be at the similar level as third quarter.
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[Interpreted]One of the foundry providers, TSMC, mentioned its quarterly revenue has reached the bottom in quarter 3 and will improve sequentially in quarter 4, for both driver IC and memory. So is Novatek increasing your foundry orders across product lines?
[Interpreted]Well, Novatek has largely completed our inventory adjustment, and we currently have resumed a normal wafer ordering at this moment.
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[Interpreted]Would you also share your view on the foundry supply across major product lines and the progress on your foundry diversification?
[Interpreted]Based on the existing demand forecast that we see at this moment, the foundry supply in 2024 across all the nodes should be adequate should be adequate. And according to our customer needs, Novatek, we have already negotiated with our foundry suppliers for the allocation of 2024. So far, things are pretty much in place.So that's most of the questions regarding some of the outlook. So Tony, please check if there's any other further questions online?
[Interpreted]I think that's pretty much about all on the outlook side. So now we will switch the gear on to some questions about the cost pricing, the margin trend.[Foreign Language]
[Interpreted]Mr. CFO will answer the question, okay?
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[Interpreted]Quarter 3 gross margin exceeded the upper end of your guidance, what are the major factors?
[Interpreted]Well, the gross margin of Q3 was 42.25%, increased by 0.5 percentage point quarter-on-quarter. And as mentioned earlier, it exceeded the guidance. So this is mainly due to a combination of improved product mix, NRE income of TWD 78 million and a reversal gain of TWD 302 million from inventory write-down.
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[Interpreted]Why is the quarter 4 gross margin guidance is -- the midpoint is lower than the quarter 3?
[Interpreted]Well, the gross margin -- we have seen that the gross margin for Q3 benefited from a reversal gain of inventory write-down and also favorable ForEx, whereas such benefits are not available in Q4. And then we also think that the product mix and ASP erosion in Q4 will also have some impact to our Q4 margins. And that's the reason why the Q4 margin is guiding lower than Q3.
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[Interpreted]Your gross margin has been higher than peers and also [ low ] before COVID-19, will you maintain your gross margin in 2024 at a similar level as 2023?
[Interpreted]Well, maintaining competitive gross margin is one of Novatek's key targets -- key goals. And for Novatek, we'll target to improve our gross margin via the combination of new product launch and product portfolio, better product portfolio, particularly for the high end and also the effective cost management. So based on the above for 2024, we'll try our best to maintain the margin.
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[Interpreted]As for pricing, which products are facing more pricing competition into quarter 4, where pricing for large sized driver and SoC remained stable into quarter 4?
[Interpreted]The pricing for the large DDIC and the SoC currently remains relatively stable. And as for the -- some parts of our product in Q4, we do have some pricing pressure, but the trends have become more stabilized.
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[Interpreted]As for cost, given the order recovery at your suppliers, where your major manufacturing costs such as foundry and packaging further decreased in quarter 4 and even early part of next year, how about other efforts on the cost reduction?
[Interpreted]As for our Q4, there is some cost reduction in Q4, and we have already factored it into the gross margin guidance for Q4. And more importantly, I think the best way to maintain our cost competitiveness, is by enhancing our overall competitiveness by design capability, and also improving the year rate.See if there's any further questions on margins and -- okay. Then we can proceed with that. Okay.
[Interpreted]Okay. And we have some questions about competition. [Foreign Language]
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[Interpreted][ Few questions about ] competition. Could you share also with us about the capacity timetable and the bottleneck for TSMC and SMIC 28-nanometer high voltage with new OLED foundry capacity into next year, Will this cause impact on the industry as well as your company?
[Interpreted]Yes. For Novatek, we'll continue to collaborate with foundry partners, that can provide us competitive and also advanced process nodes. As long as they can provide us these, we will continue to collaborate with them. And also on the advanced nodes side, we'll continue to move forward to develop more advanced nodes -- to help us stay competitive, such as 22-nano high-voltage process for our driver IC. And in addition to some of these process nodes, I think product design also plays a major role in improving our competitiveness. So it all works together.
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[Interpreted]Could also management give some comments on the impact from the competitors, particularly from China on the large-size driver, TDDI and OLED driver?
[Interpreted]Yes, regarding competition, so on the low-end side -- on the low-end product, yes, we do see some impact due to the competition. But for Novatek, we'll continue to improve our design capability and also try to introduce differentiated products and also provide broader applications, particularly on the high end and try to offer the total solutions for customers like driver plus timing controller plus power management IC, so that -- so that this solution has -- the total solution also, in turn, help our customers to maintain their competitiveness.
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[Interpreted]Could you also provide some updates of progress on your customers in Japan, Korea, even in the States? And also the progress for your newly set up U.S. office?
[Interpreted]Well, expanding our customer base is one of our key targets, and we'll continue to move on with that target. And currently, the progress has been on schedule. And Novatek recently did set up an office in U.S. and the purpose is to meet the market needs, and also to provide on-site service to our customers.
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[Interpreted]Could you also provide the ratios in test of the sourcing of foundry and packaging from China? Any mid to long-term targets?
[Interpreted]Regarding the foundry and the packaging testing, well Novatek has been collaborating smoothly with our foundry and back-end partners in China for a period of time now. And our goal is to meet our customers' needs for stable, resilient supply chain. And so based on our customer needs, Novatek will plan accordingly.So is there any further questions?
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[Interpreted]Management mentioned about ASIC will be one of your growth drivers into 2024. Just wonder if you can provide more details on some projects or NRE income regards with your ASIC project?
[Interpreted]Well, we did mention about the ASIC business is an opportunity, and this is an ongoing project. But it's very difficult to predict the NRE. What we do see is an opportunity for us.
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[Interpreted]Can management provide some very preliminary guidance for your OpEx ratio into 2024, compared with 2023, as well as for your tax rate next year?
[Interpreted]Based upon Q4 guidance, OpEx ratio for 2023 will be in the range of 17.6% to 17.8%. And looking into 2024, OpEx amount will be similar to 2023, while OpEx ratio is subjected to the revenue side. And the tax rate in 2023 will be around 18% and at a similar level in 2024.
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[Interpreted]What are your major items for your non-operating income in quarter 3 this year?
[Interpreted]Well, the -- our CFO just mentioned that the non-operating income has come down to around TWD 623 million in the third quarter. And this is largely from our interest income of TWD 280 million and then a ForEx gain of TWD 330 million.
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[Interpreted]What are your recent employee turnover ratios? How about this compared with your previous performance and peers, and what are the major factors?
[Interpreted]The employment turnover rate for the past 2, 3 years, has been around 5% to 6%. And I think this is relatively lower than our previous years and also compared to our peers. And the reason why we've been able to maintain the lower turnover rate, I think it's mainly because we provided a relatively better package and incentives for our employees. For example, we do have some benefits to encourage our employees to increase the birthrate and provide them a special package, so that like incentives for them, on a monthly basis.So I think we have gone through most of the questions. Tony, please check if there is any further questions that we have not covered.
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[Interpreted]You mentioned about the OLED driver will be one of your key growth drivers? Could you provide your view on OLED pricing competition into next year?
[Interpreted]Well, looking at the OLED for 2024, we do expect there will be some competition next year. But for Novatek, we'll continue to enhance our product and with differentiated product and value-added product, for example, foldable phones and then OLED TDDI, some of these products that will really enhance our competitiveness.I think if we have covered most of the questions, and it's about time. So thank you all for joining in, and wish you all the best[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]