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

Thank you, Operator. Welcome, everyone, to ChipMOS' Second Quarter 2019 Results Conference Call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; and Ms. Silvia Su, Vice President of Finance and Accounting Management Center. S.J. will review business highlights and provide color on the operating environment.

Silvia will then review the company's key financial results. We're also joined on the call today by Mr. Jesse Huang, Spokesperson and Vice President of Strategy and Investor Relations. All company executives will participate in the Q&A session after management's formal remarks.

If you have not yet received a copy of today's results release, please e-mail global IR partners at imos@globalirpartners.com or you can get a copy of the release off of ChipMOS' website at www.chipmos.com. As with prior quarters, we hosted a call in Mandarin after the close of the Taiwan Stock Market a few hours ago.

This is part of the company's ongoing efforts to broaden investor and analyst following in the domestic Asia market given the full Taiwan listing. The prepared comments management will cover here are the same as those covered on the earlier call.

The second call is intended to give the company's English-speaking investors the same opportunity to both hear directly from management and to ask questions pertaining to results and the operating environment. With that said, we must also make a disclaimer regarding forward-looking statements.

During this call, management may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 as amended and Section 21E of the U.S. Securities Exchange Act of 1934 as amended.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements.

Further information regarding these risks, uncertainties and other factors is included in the company's most recent annual report on Form 20-F filed with the U.S. Securities and Exchange Commission and in the company's other filings with the SEC. At this time, I would like to now turn the call over to the company's Chairman and President, Mr. S.J.

Cheng. Please go ahead, sir..

first, we achieved 10% revenue growth in Q2 compared to the Q1. Program we have been working on to diversify our customer bases and end market are driving this success. We are growing above prior trend line and seem to continue into the second half. Second, we improved gross margin to 17.1% in Q2 from 15% in Q1.

This gain was driven by our higher revenue and utilization level combined with our focus on lowering product cost. So we achieved nearly of $1.13 per basic ADS up from $0.17 in Q1. This include a benefit of the JMC share sales. We note on our last call, which Silvia review again in the minutes.

The overall improvement, showing the leverage in our business when we get utilization level up. Finally, we increased our cash generation and reduced our net debt by another $38.1 million. We're seeing, this is the important driver in our valuation and business health.

Our mission in improving performance are building value for the company and shareholders with another cash dividend just approved by shareholder for $0.70 -- $0.77 per ADS. In terms of adding color on Q2, the overall capacity utilization level was about 75%, which was led by strong demand from TDDI and NAND flash business from new customer programs.

We are gaining ground and seeing that continue into the second half. Growth in our flash business from new module house customer program is helping to stretch our business. We also benefit from Taiwan sales allocation in our electronic supply chain.

We are seeing customer shipping capacity to Taiwan from other geography, given the ongoing trade tensions. Revenue from Flash product grows 14.4% in Q2 compared to Q1 and represent about 19% of total Q2 revenue. While DRAM represent about 16%. Total memory product revenue growth around 9% compared to Q1 and represent about 35% of Q2 total revenue.

As for driver IC-related business products, customer demand remains strong in our TDDI and 12-inch fine pitch COF businesses. We expect this growth to continue led by a higher demand for new bezel-less smartphone panels, with increased TDDI product penetration of the HD panel segment from full HD panel for smartphone.

As a result, DDIC revenue growth around 13% compared to Q1 and represent about 36% of Q2 total revenue. Revenue from TDDI product grew 24% in Q2 compared to Q1 and represent about 32% of DDIC revenue in Q2. And 24% of TDDI product were packaged to COF.

In the first half of 2019, TDDI represent about 20% of driver IC and more than 25% of TDDI product will adopt to COF format. As the end market revenue from automobile and industry represented about 9% of total revenue in Q2. TVs represent about 24%. And smart mobile device slightly increased to 39%.

Revenue from computer product increased to 8.5% of Q2 revenue, led by the uptick in our NAND flash business. We are also diversified from the -- from DDIC to other wafer bumping of the DDIC product in our bumping facility. This is a potential, significantly growth opportunity.

We are currently ramping volume bumping for NOR flash, for smart mobile device peripheral product with 12-inch wafer-level packaging. And next year, with 12-inch redistribution layer, so-called [indiscernible]. Those customer program represent about 15% of total Q2 bumping revenue.

We are optimistic about NAND and NOR in the second half of 2019, capacity and the pricing looking stable. And COD demand had been growing with the huge need for storage. We are engaged with the key player and well positioned for growth.

As we move forward into the third quarter of 2019, we are encouraged by our market position, financial health, customer outlook and end-market mix. We are confident as we benefit from the diversification in our customer bases and improving [indiscernible] end-market conditions. Utilization level remained high and inventory level are healthy.

We are optimistic about the second half of 2019 and working to delivery growth. In memory, we are encouraged by healthy inventory of memory customer and some rush order of Flash and Niche DRAM customer. We expect NAND flash business from new customer project will help further improve assembly utilization level in Q3 and the second half of 2019.

In DDIC, TDDI demand has been increasing with a partial resumption of shipment by customer to Huawei. DDIC-related capacity had gradually tightened and turning to COF-pegged capacity is almost full. We expect this to drive DDIC revenue growth in Q3 and second half of 2019.

In addition, alloy panel driver IC DRAM has also increased a small alloy panel, top -- high-end smartphone. We also continued to deliver and diversified the product category portfolio of our bumping as I know [indiscernible] beyond gold bumping. This will help maintain the utilization level and further improve the gross margin.

Finally, we plan to distribute a cash dividend of TWD 1.2 per common shares on August 30 with $17 -- $0.77 per ADS distribute to ADS holder short after. The latest dividends was approved by shareholder at our June AGM. Now let me turn the call over to Ms. Silvia Su, to review the second quarter financial results. Silvia, go ahead..

Thank you, S.J. All dollar amount stated in our presentation are in U.S. dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on exchange rate of TWD 31.01 against $1 as of June 28, 2019. All the figures were prepared in accordance with Taiwan International Financial Reporting Standards.

For the second quarter of 2019, total revenue was $158.2 million. Net earnings for the second quarter of 2019 were $1.13 per basic ADS compared to $0.17 per basic ADS for Q1 of 2019.

This represents net profit of $41.1 million and $0.06 per basic common share compared to a net profit of $6.3 million and $0.01 per basic common share in the first quarter of 2019. Q2 net profit includes the benefits of our disposal gain. We completed the sale of 9.1 million common shares of JMC in the beginning of April.

The disposal gain was around $31.7 million after the deduction of related tax and expense. Our operating expenses in Q2 were $13.4 million or 8.5% of our Q2 revenue compared to $11.6 million or 8.1% of our revenue in Q1 of 2019.

Net nonoperating income in Q2 were $29.6 million, including gain on disposal of JMC investment accounted for using equity method of $31.7 million, as just mentioned earlier. Income tax expense for Q2 was $3.1 million compared to $1.9 million in Q1 of 2019.

On a segment basis, revenue breakdown of second quarter was 20.1% in testing, 24.7% in assembly, 36% in LCD driver business and 19.2% in bumping. We invested $23.1 million in CapEx in Q2 compared to $20.3 million for our first quarter of 2019.

The breakdown of CapEx was 25.2% for testing, 8.5% for assembly, 56.4% for LCD driver and 9.9% for bumping capacity. Depreciation and financial expenses were $29.7 million or approximately 18.8% of revenue in the second quarter. EBITDA for Q2 was $44.3 million or 28% of revenue.

EBITDA was calculated by adding depreciation and amortization together with operating profit. As of June 30, 2019, our balance of cash and cash equivalents was $171.8 million.

Overall, free cash flow in Q2 was $17.3 million, which was calculated by adding depreciation, amortization, interest income together with operating profit and then subtracting CapEx, interest expense, income tax expense and dividend from the sum.

As of June 30, 2019, our net debt balance was $160.1 million, which resulted in a net debt-to-equity ratio of 26.6%. While EBITDA, free cash flow and net debt-to-equity ratio are not defined by generally accepted accounted principles. We believe these are helpful indicators to measure our financial strength.

Accounts receivable turnover days improved to 81 days in Q2 compared to 91 days in Q1 of 2019. Inventory turnover days also improved to 38 days in Q2 compared to 42 days in Q1 of 2019. As of July 31, 2019, the company's outstanding ADS number was approximately 5 million units, which represent around 13.6% of the company's outstanding common shares.

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

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

He may patch in again. I was just -- S.J., this is David.

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

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

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

So if -- with deduct this impact, our actual gross margin in the Q2 will be 18.6%. And we -- today, we also announced our July's result, which was 6.6% higher compared with June.

And since the revenue is higher and gross margin also for the -- so we had a [indiscernible] flavor, pretty optimistic for the third quarter and second half, the revenue will grow quarter-by-quarter and gross margin will improve quarter-by-quarter based on the -- our product segment But David, did I answer your question?.

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

Certainly, sir..

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

How does the remaining of the year in CapEx look?.

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

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

Okay. And then the next question was, I was really impressed with your free cash flow generation for the first two quarters of the year.

And if -- do you have any idea, if you can give us some idea about the remaining 2 quarters? What does the cash flow look like? Is it free cash flow year-to-date, we have done about $33.5 million free cash flow?.

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

Okay. Okay.

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

Actually, there's a joint venture in China, right now, Unigroup paid the majority, and we just recognized long-term investment of gain and loss. We started to recognize the revenue.

And so far, since they are pretty aggressive to ramping up new technology of the flash memory but as not fast as we expected, so we have really positive qualification, and they're waiting for their bumping up the new wafer up..

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

So is Q4 also sequential growth for revenue?.

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

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

Yes..

S.J., this is David, again, I was just e-mailed two other questions.

One on the mention about business from new module house customer programs, if you could give some color in terms of on where that is coming from? Is it one additional customer, or are there multiple customers? And do you see this as something that would continue to ramp in the second half?.

Yes. Actually, there's a -- previously, we had a assembly facility in our factory and as far as our commodity DRAM customer. They had a steady arrangement, so they reduced our allocation percentage.

Well, essentially, we have engineering team, and we are familiar with those manufacturing know-hows, so we introduced a new customer but not a commodity, it's a NAND flash, which maybe coming from the cover key major player for the margin half. So far, so good. And we already see a pretty good result. The margin is also reasonable.

So that can support our Q3 second half growth. And next day, we are going to qualify the Tier 1 flash customer. So that's where we offset our revenue loss in a commodity area..

Next one. And then just one other one follow up.

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

Yes. Just going to share with you the most significant one is NOR flash. NOR flash, since our key customers in the Asia, they gather a pretty strong request from China market, so they cleaned majority of the inventory in the June time frame. And they also significantly increased the wafer loading in our level of wafer.

So that's the reason we had a confidence table for our second half, for NAND flash and NOR flash, where we have many revenue, good contribution to us. They're also driving our high utilization rate number in assembly and further improve our gross margin..

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

Certainly, sir. [Operator Instructions]..

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

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

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