Logo of jester cap with thought bubble.

Image source: The Motley Fool.

ChipMOS Technologies Ltd (NASDAQ:IMOS)
Q3 2019 Earnings Call
Nov 6, 2019, 7:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the ChipMOS Third Quarter 2019 Results Conference Call. [Operator Instructions] Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today. A recording will be available at 10:00 AM Eastern Time today. The replay dial-in number is +1-412-317-6671 with conference ID number 3755750. The replay will also be accessible at www.chipmos.com.

I would now like to turn the call over to David Pasquale of Global IR Partners. Please go ahead.

David Pasquale -- Global IR Partners

Thank you, operator. Welcome everyone to ChipMOS's Third 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 are also joined on the call today by Mr. Jesse Huang, Spokesperson and Vice President of Strategy and Investor Relations. All company executives will participate in the Q&A session after management's formal remarks. If you have not yet received a copy of today's results release, please email global IR Partners at imos@globalirpartners.com or you can get a copy of the release of ChipMOS' website 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 directly pertaining to results and the operating environment.

With that said, we must also make a disclaimer regarding the 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 which is filed with the U.S. Securities and Exchange Commission and in the Company's other filings with the SEC.

At this time, I'd like to now turn the call over to the Company's Chairman and President, Mr S.J. Cheng. Please go ahead, sir.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Yeah. Thank you, David. Welcome everyone to our third quarter 2019 conference call. Hopefully, you all had time to review our earning release. We are very pleased with the revenue and probably growth in our business. Our business strategy, a balanced customer and end market is driving a gross margin revamp and steady operating cash flow. The key take away for Q3 are first, Q3 was the highest revenue level for us, since Q1 2015. We achieved 10.1% revenue growth in Q3 compared to the Q2. Secondly, we achieved a major improvement in gross margin to 21.4% in Q3, from 17.1% in Q2 led by higher ASP product. TDDI increase utilization, our highest revenue level and cost control. Third, we achieved 45% increase in net earning in Q3 to $0.52 sales per basic ADS in Q3 compared to the year ago period. Finally, we reward shareholders with a cash dividends of TWD1.2 per common shares on August 30. This was $0.764 per ADS to holders on September 9.

Overall, we are seeing strong customer demand labor in most area, that we expect will continue through Q4. We are transforming our operating expense and driving for visibility. In terms of adding color on Q3, the overall capacity utilization, labor was about 74% down slightly from 75% in Q2. Owing that utilization rate was up in our key testing business to 74% from 69% in Q2. As we benefit from the recovery in our price business bumping and assembly rate both hosted it. While LCD driver utilization was 73% on soft TV demand at the end of the quarter.

Memory product revenue represents about 38.5% of total Q3 revenue. Growth in our price business from new module house customer program continue to strength our business. This have been a focus for us. Since last year, we move to diversify our business with the customer we could support and grow with. Revenue from Flash products grew 22.5% in Q3 compared to the Q2, and represented about 21% of total Q3 revenue. NAND flash revenue represent about 45% of Q3 products revenue. Revenue from DRAM product growth 10.8% compared to Q2 and represent about 17% of Q3 total revenue. As for the driver related product, including gold bumping and COD, COF customer demand driver remained strong, in our 12 inch gold bumping and TDDI business. With increased TDDI product penetration of the HD panel segment for smartphones. DDIC revenue had grown in Q3 compared to the Q2. After the increase, TDDI demand help -- I'll say the softness TV demand at the end of the quarter.

Revenue from TDDI further represent about 40.6% of DDIC revenue in Q3 and about 33% of our TDDI volume was packaging to COF. Meanwhile, OLED product revenue start to increase in Q3 and represent about 4% of total Q3 DDIC over there. As we look forward into the fourth quarter of the 2019, we are optimistic based on the customers' demand level and our strong market position. We are working to delivery, continue business improvement, as we build upon the momentum from the first nine months of 2019.

In Memory, we are encouraged by healthy demand for our memory customers. We expect our NAND products business from the new customer project and the NOR flash for the TWS product will help drive further revenue growth. In DDIC, TDDI demand has been increased with the launch of the new higher content smartphone model. Based on the customer indication, we expect the utilization rate of 12 inch COF packaging and testing will remain stable in Q4. We are also pleased to know, high end wafer testing capacity is tightened led by OLED panel driver IC demand. I think we're cautiously confident on DDIC's revenue in Q4, even with the soft TV demand. Meanwhile, we are also driving higher efficiency and profit to increase AI and automation to further reduce operating costs and enhance the revenue per head count.

Now let me turn the call over to Ms. Silvia Su to review the third quarter financial results. Silvia, please go ahead.

Silvia Su -- Vice President, Finance & Accounting Management Center

Thank you, S.J. For dollar amounted cited in our presentation are in NT dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rate of TWD31.05 against $1 as of September 30, 2019. All the figures were prepared in accordance with Taiwan International Financial Reporting Standards. For the third quarter of 2019, total revenue was $173.9 million. Net profit attributable to the company was $18.9 million in Q3. Net earnings for the third quarter of 2019 were TWD0.81 per basic common shares or $0.52 per basic ADS.

Depreciation and amortization expenses were $30.7 million. We invested $59.5 million in capex in Q3. EBITDA for Q3 was $56 million, EBITDA was calculated by adding depreciation and amortization, together with operating profit. Return on equity of Q3 was 12.4%. Compared to last quarter total revenue of Q3 was $173.9 million grew 10.1% compared to Q2. Gross profit was $37.1 million in Q3, gross margin rate was 21.4% and increased 4.3% points compared to Q2, 17.1%.

Our operating expenses in Q3 were $12.6 million or 7.3% of our Q3 revenue, and decrease of 5 -- decreased 5.7% compared to Q2. Operating profit for Q3 was $25.3 million and operating profit margin for Q3 was 14.6%. This represents a 5.4% point improvement compared to Q2. Net non-operating expenses in Q3 were $1.8 million, compared to net non-operating income in Q2, up $29.5 million. In Q2, there was $31.6 million gain on disposal up investment, which was a contact for using the equity method.

Net profit in Q3 was $18.9 million compared to $41 million in Q2. The gross profit in Q3 increased by $10.1 million from Q2, as we recognized $31.6 million gain on disposal of investment accounted for using equity method in Q2. Net earnings for this quarter of 2019 were $0.03 per basic common share compared to $0.06 per basic common share for Q2 of 2019. Basic weighted average outstanding shares were 727.2 million shares compared to the same period of last year.

Total revenue for Q3 was $173.9 million, which was up 7.9% compared to the same period of 2018. Gross margin was 21.4% as an improvement of 1.9% points compared to 19.5% in Q3 2018.

Operating expenses in Q3 were $12.6 million, which was up 7.3% compared to Q3 2018, in support of our higher revenue level. Operating profit margin in Q3 was 14.6%, an improvement up 1.9% points compared to 12.7% in Q3 2018. Net non-operating expenses in Q3 were $1.8 million compared to $2.3 million in Q3 2018. Net profit in Q3 was $18.9 million compared to $14.2 million in Q3 2018.

Net earnings for the third quarter of 2019 were $0.03 per basic common share as compared to $0.02 per basic common shares for Q3 of 2018. Total assets at end of the Q3 were [Technical Issue], including current asset up $398.8 million. Total liabilities at end of the Q3 were $489.2 million, including current liability of $161.9 million. Total equity at the end of Q3 was $616.8 million. Accounts receivable turnover days in Q3 were 83 days compared to 81 days in Q2 of 2019. Inventory turnover days were 38 days in Q3, the same as it in Q2 of 2019.

Cash and cash equivalents at the beginning of Q3 were $149.5 million. Net cash generated from operating activities was $123.8 million. Net cash used in investing activities was $82.6 million. Net cash used in financing activities was $41.5 million. As of September 30, 2019, our balance of cash and cash equivalents was $149.3 million, decreased $200,000 compared to beginning of the year. Free cash flow in the first three quarters was negative $3.8 million compared to free cash flow of $30,000 in the same period of 2018. This reflects the cash dividend we paid in Q3 of $28.1 million. Free cash flow was calculated by adding depreciation, amortization, interest income, together with operating profit and then subtracting capex, interest expense, income tax expense and dividends for the sum.

We invested $59.5 million in capex in Q3 in support of higher customer demand levels and indications of higher forward demand levels. The breakdown of capex was 12.8% for bumping, 17% [Phonetic] for LCD driver, 9.6% for assembly and 7.6% for testing. Interest rate expenses were $13.7 -- $20.7 million in Q3. As of October 31, 2019, the Company's outstanding ADS number was approximately 5 million units which represent around 13.4% of the Company's outstanding common share.

Operator, that concludes our formal remarks. We can now take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We can take our first question from Scott Bishins of Caffeine Holdings. Please go ahead. Your line is open.

Scott Bishins -- Caffeine Holdings -- Analyst

Yes, good morning. How are you S.J. and Silvia?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Good to hear you. How are you?

Scott Bishins -- Caffeine Holdings -- Analyst

Good. How are you?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Fine.

Scott Bishins -- Caffeine Holdings -- Analyst

Good. I just have a couple of questions. First of all, congratulations on a great quarter and really turning around the business, it looks like, we haven't seen this kind of a steady momentum in the last couple of years and seems to be by some of the statements that you've made, and also by the results that we're certainly definitely moving to a level that we've been for a while, wherever there is a little stagnant. But now it seems like we're getting some growth and also some increase in gross margin. So congratulations to that. A couple of questions here.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Thanks you [Indecipherable].

Scott Bishins -- Caffeine Holdings -- Analyst

You're welcome. Couple of questions I have, any idea what the capex is going to be in the fourth quarter?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

I would let Silvia to answer the question.

Silvia Su -- Vice President, Finance & Accounting Management Center

Okay. Our capex for Q3 is around $59 million, and Q2 will be less than that. Would be -- I think in the range $50 million to $55 million, that's we'll confirm.

Scott Bishins -- Caffeine Holdings -- Analyst

That's for the fourth quarter, $58 million?

Silvia Su -- Vice President, Finance & Accounting Management Center

For the Q4, yes, $50 million to $55 million.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. Do you also see having strong capex also for the full year, next year or is this just a building -- to have enough equipment to start to maintain the revenue stream?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Scott, this S.J. I think in the next years, we said the internal target for management team is organical growth for revenue is 5% to 8% per year. And the gross margin we said 17% to 22% for gross margin. And capex, we set the target is 30% to 35% of our annual revenue. And for next year, we will reserve portion for purchasing of build a new building, because all our space are fully occupied right now. So by total capex numbers still maintain at same rates, 20% to 25%. And we had a confidence, Q4 also see a little bit better than Q3 and next year will better than this year.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. Let's see, also. This morning our Novatech, came out with some bullish statements for 2020 on the TDDI outlook. I was just wondering, is $81.50 also seeing the same bullish outlook?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Actually our performance for this Q3 and Q4 is better than Novatech. For the DDIC label we are almost the same performers. But we had a big growth in the flash memory, and NOR products especially for NAND products and NOR products for TWS. And also, we see steady demand from our DRAM customer. So this again support us, good Q3 and also better outlook in Q4. And next year is a pretty stable.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. How do we stand with Micron, I know that we were, I guess reducing our capacity for Micron, and it seems like Micron has started to bounce back on their side. I was just wondering will we be gaining any of that business that we've launched in the past, going forward?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Actually I should say, since we are benefit for China and U.S. this is a business company. So, we are benefiting on that. Yes, they have impact to us.

Scott Bishins -- Caffeine Holdings -- Analyst

They you are. Okay, that's good -- that's good news, too. I'm sure you have a lot of older equipment, I shouldn't say old equipment. Equipment that's been totally depreciated that you could use for Micron will allow the gross margins to be better than they have been in the past, because of the lack of having to depreciate them anymore.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

We hope so.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. So just to reiterate, you're looking at it, now as the fourth quarter should be stronger than the third quarter?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

We have confidence there, because today we also announced October's revenue is around 8.2% higher than the September and November is stable, and so I think we have confidence we at least that can keep better than the Q3.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. Two other questions. Last year, we paid out I think about 80% of our earnings to the dividend. What kind of percentage do you think you'd be looking to for this year's earnings to pay out next year?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Actually, there is -- we said our internal target for management team is 50% to 60%, earning we'll pay as a cash dividends.

Scott Bishins -- Caffeine Holdings -- Analyst

50% to 60%?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Yes.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. And that would be on the total earnings including the gain that we took in JMC?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

We try, by at least operating there that we were paid 50% to 60%. That's our commitment to shareholders and the Board...

Scott Bishins -- Caffeine Holdings -- Analyst

Okay, well, then I'll take it for granted that includes also the JMC profit. But one last question, could you give us a little color what's going on in China, we really haven't talked about the facility. I see some, I read some articles that the Yangtze River facility is coming online earlier than it was supposed to for NAND flash. And also, are there any DRAM customers that were providing services for also in the Shanghai facility?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Yeah, actually -- for, you're right. The Shanghai situation is getting quarterly by quarterly is getting better and better. And [Indecipherable] also give close relationship with Shanghai, so they are the [Indecipherable]. And material wise, we're not seeing a -- it is from the other customer, nothing from [Indecipherable].

Scott Bishins -- Caffeine Holdings -- Analyst

Right. Any idea on when you think you could be at a breakeven now? On your margins?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Single month for the...

Silvia Su -- Vice President, Finance & Accounting Management Center

Yeah, in Q3, there was a single month breakeven.

Scott Bishins -- Caffeine Holdings -- Analyst

This year there was a single month that we breakeven?

Silvia Su -- Vice President, Finance & Accounting Management Center

In Q3.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

In Q3.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. Alright. Any chance that's going to continue into the fourth quarter and also into 2020?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Actually there is a I'm not a right person to answer this question, because Unigroup they had a very tightened focus and assistance. So we can announce the result, but we cannot give any forward-looking statement, yeah.

Scott Bishins -- Caffeine Holdings -- Analyst

It is getting better and better, right?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Yes.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. Let me just, I think I had one more. Just on the gross margin, that was a very nice increase going from 17.1% to 21.4%. Do you see that still on a higher trajectory, as we move in and how far your utilization rates? And how high do you think we could get?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Actually the -- Scott, let me put this way. Not only from the product mix contribution, we're managing also, invest a lot of effort in automation and AI. So you can see this year as an example of revenue compared to last year. We grow a lot, but the headcount was increased anyway, even it is. So the revenue growth we still want to kick the same headcount. So that's the reason we can increase our efficiency and gross margin just through automation.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay. And I guess, I guess the only other question is I know as we keep increasing the capex and you're looking at between 20% and 25% for capex going forward. The only issue with that is, that it naturally when you bring more equipment in, you end up having higher depreciation, which cuts into the gross margin. Is there any point where you see we could level back off to the old days where we were 15% of revenue -- 15% to 18% maybe of capex or is this ongoing that you believe that will going to be in this 20% to 25% rate?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Currently, I think we have sufficient cash on hand. So that we prefer we are processing that capex ourself. We had tried to reduce the capex, the only way is our customer consign. Then that would be my increased by our gross margin and also increased some interest rate.

Scott Bishins -- Caffeine Holdings -- Analyst

Okay.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Silvia control money very tightly. So don't worry about it, yeah.

Scott Bishins -- Caffeine Holdings -- Analyst

And any, are you trying to qualify any new customers who are going forward? Any major kind of customers?

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Actually we had a very good progress for automobile, top 10 automobile customer we are qualified by, a, in the mass protection. So we hope this year we can get 100%.

Scott Bishins -- Caffeine Holdings -- Analyst

All right. That'll be great. That will be great.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Safer and margin is greater. Yeah.

Scott Bishins -- Caffeine Holdings -- Analyst

That will be great. I believe you answered all my questions, I'm sure we'll have some more next conference call, but looking forward to a solid fourth quarter and keep up the great work.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Thank you.

Scott Bishins -- Caffeine Holdings -- Analyst

Thank you very much.

Silvia Su -- Vice President, Finance & Accounting Management Center

Thank you.

Operator

[Operator Instructions] We will now take our next question from Vipul Sagar of Blash Capital. Please go ahead. Your line is open.

Vipul Sagar -- Blash Capital -- Analyst

Good morning S.J and Silvia. It was a really good quarter, good gross margin, good October revenue. I only had one question and that was about free cash flow. Silvia, what do you see as the free cash flow for the fourth quarter approximately and for the year?

Silvia Su -- Vice President, Finance & Accounting Management Center

Okay. So the Q4, the free cash flow will be negative $5 million to $10 million as for Q4.

Vipul Sagar -- Blash Capital -- Analyst

Negative $5 million?

Silvia Su -- Vice President, Finance & Accounting Management Center

Yeah, $5 million to $10 million -- in the range $5 million to $10 million.

Vipul Sagar -- Blash Capital -- Analyst

The positive or negative?

Silvia Su -- Vice President, Finance & Accounting Management Center

Negative.

Vipul Sagar -- Blash Capital -- Analyst

Is that negative?

Silvia Su -- Vice President, Finance & Accounting Management Center

Yeah. Negative.

Vipul Sagar -- Blash Capital -- Analyst

Okay. So for the full year it will be a negative free cash flow, am I right?

Silvia Su -- Vice President, Finance & Accounting Management Center

Yes.

Vipul Sagar -- Blash Capital -- Analyst

Okay. And that was the only question I had, a good job with gross margin really good October revenue. Thank you so much.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Thank you.

Silvia Su -- Vice President, Finance & Accounting Management Center

Thank you.

Operator

We have no further questions at this time, I would now like to turn the call back to the speakers for any additional or closing remarks.

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Yeah, thank you everyone for joining our third quarter conference call. We will keep in touch. If you have any further questions, you can contact through our website or our IR Channel. Thank you, very much. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

David Pasquale -- Global IR Partners

Shih-Jye Cheng -- Chairman, Chief Executive Officer & President

Silvia Su -- Vice President, Finance & Accounting Management Center

Scott Bishins -- Caffeine Holdings -- Analyst

Vipul Sagar -- Blash Capital -- Analyst

More IMOS analysis

All earnings call transcripts

AlphaStreet Logo