Good day, and welcome to the ChipMOS Technologies Fourth Quarter Full Year 2019 Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to David Pasquale, Global IR Partners. Please go ahead, sir..

Thank you, operator. Welcome, everyone, to ChipMOS' Fourth Quarter and Full Year 2019 Results Conference Call. Joining us from the company today 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 e-mail Global IR Partners at imos@globalirpartners.com, where you can get a copy of the release off of ChipMOS' website at www.chipmos.com. As in 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 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, which was 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..

Yeah. Thank you, David. Welcome, everyone, to our fourth quarter and full year 2019 results conference call. Hopefully, you all had time to review our earnings release. 2019 was a strong year for us, as we executed on our business and financial objectives.

Our mission to diversify our business into higher-margin growth areas, prioritize meaningful improvement across financial metrics. As we keep our operating costs under carefully watch. Of note, we achieved a record higher revenue lever for the full year 2019. Revenue was up 10.1% for the full year, which is also the highest revenue growth since 2015.

We drive a 14.5% increase in gross profit to USD 131.3 million. We significantly expand - expect our net earning to NT$3.55 per common share or USD 2.38 per basic ADS, up from NT$ 1.37 and USD 0.92. As we had another dividend, pending shareholders' approval at our June AGM. Importantly, we generated USD 200.4 million in cash from operations in 2019.

This is allowing us to further strengthen our balance sheet, supporting our long-term growth opportunity and reward shareholders. For the fourth quarter of 2019, revenue growth 3.2% over Q3, as we benefit from demand related to our memory and smartphone related product.

This including high loading with our memory customers and a continuous ramping up of new customer programs. Q4 gross margin improved to 22.7% from 21.4% as we focus on higher ASP products, such as TDDI and our higher-margin product - production line, which offset some LCD driver companies related to macro softness in TV demand.

We also benefit from improvement utilization, labor and operating cost control. On the cost front, our operating expense ratio continues to improve. With the Q4 operating expense ratio dropped to 7.0% from 7.3% in Q3. For the full year 2019, we increased gross margin to 19.3% from 18.6% in 2018.

During the second half uptick in our memory business and continued growth in TDDI, we improved our overall utilization to 76% in Q4 from 74% in Q3. In terms - so adding color on Q4, revenue growth across all business compared to Q3, with the exception of DDIC. Memory further revenue represented 39.2% of total Q4 revenue.

In the memory, revenue from DRAM product growth around 10% in Q4 compared to Q3 and represents about 18% of total Q4 revenue. Revenue from price was also up in Q4 and represent 28.4% of total Q4 revenue. NAND for us continued to grow in Q4 and represent about 47% of Q4 price revenue.

As for driver IT-related product revenue, including gold bumping and COG and COF. This represents about 47% of Q4 total revenue. Demand benefit from increased TDDI product penetration for the HD panel segment. And OLED emerging for a full HD panel segment of smartphone along with the revenue growth from gold bumping and COG.

Taking together, those models have offset the COF revenue decline. Relative macro softness in Q4 TV demand. TDDI and OLED represents about 40% and 7.3% of DDIC revenue in Q4. Regarding to the end market, revenue from the smartphones, smart mobile grows 10.1% compared to 2018 and represents about 39.4% of 2019 annually, revenue.

The TV category growth 8.5% and represented about 21.7% of 2019 revenue. Automobile and industry growth around 6% and represented about 9.2% of 2019 revenue. Revenue from computing grow more than 12% compared to 2018 and represents about 9.6% of total 2019 annual revenue. As we look forward into the first quarter of 2020.

We are optimistic about the year, based on the start of Q1 in a good position. As you know, the industry typically in Q1, seasonality is down from Q4, referring that demand pattern and the lower Chinese New Year working days. For 2020, January and February is far out, good for us with solid demand.

We believe the catalyst does help drive our revenue, profit and cash generation growth in 2019 will continue in year 2020. In memory, we are encouraged by healthy demand from the memory customer, enhance the inventory level. We expect growth in our DRAM and flash business from Q4 will continue as we move into the 2020.

In DDIC, we are cautiously confident in TV demand can maintain a similar level in Q1 from Q4. We also expect to benefit from the continued strong demand level in smartphone for TDDI with higher penalization of HD gray panel and OLED emerging of full HD gray panel.

Leveraging confidence in our outlook and healthy financial position our Board approved another dividend, adding shareholders' approval in our June AGM. We will distribute NT$1.8 per common shares. This is a clear measure of uncertainty as the semiconductor supply chain navigated the ongoing coronavirus situation.

For ChipMOS, we quickly move to ensure the safety of our employees by borrowing government healthy regulation. We have seen some customers, working through navigating supply chain disruption in China after the normal Chinese New Year's holiday growth year.

This following the trend tension in 2019 and had reinforce Taiwan's importance in the global supply chain as customers seek to lock up, secure capacity and support. As you are aware, this is a very private situation. We are closely following the guidelines and regulation provided by the Taiwan Center for Disease Control.

We are taking a serious patient to ensure the health of our employees while maintaining the reliable and quality customer in our - ChipMOS [indiscernible] Giving a serious of the situation, we put in a internal task force important to allow us to better monitor the situation and to ensure faster across our operation, rephrasing the importance of these issues and how serious we are taking.

I'm charging - I'm sharing the top [indiscernible], our Senior Vice President and COO with [indiscernible]. We have been fortunate so far, not one our employees have been impacted. And we restart of our facility on schedule after the [indiscernible] New Year's holiday closure with no delay of disruption up to date.

Importantly, we are maintaining full inventory level, as we work to ensure uninterrupted service to customers. We are in close contact with vendors across the supply chain and had [indiscernible] Finally, we are taking a very conservative view on our CapEx as we balance support for long-term growth, while not over extending ourselves.

We are looking to reduce CapEx where possible. Meanwhile, we are continuously driving higher efficiency and profit through increased AI and automation to further reduce operating costs and enhance the revenue per headcount. Now let me turn the call over to Ms. Silvia Su to review the fourth quarter and full year 2019 financial results.

Silvia, please go ahead..

Thank you, S.J. All dollar amounts stated 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 NT$29.91 against USD 1, as of December 31, 2019.

All the figures were prepared in accordance with Taiwan International Financial Reporting Standards. To help make the presentation easier to follow. My comments will go along with the investor presentation on our Investor Relations website published today. Page 12. Consolidated operating results summary.

For the fourth quarter of 2019, total revenue was USD 486.3 million. Net profit attributable to the company was USD 17.7 million in Q4. Net earnings for the fourth quarter of 2019 were $0.02 per basic common share or $0.49 per basic ADS. Depreciation and amortization expenses were USD 32 million. We invested USD 57 million in CapEx, in Q4.

EBITDA for Q4 was USD 52.1 million. EBITDA was calculated by adding depreciation and amortization, together with operating profit. Return on equity of Q4 was 10.9%. Page 13. Consolidated statement of comprehensive income. Compared to last quarter, total Q4 revenue was USD 186.3 million, up 3.2% compared to Q3.

Gross profit was $42.4 million in Q4, with Q4 gross margin at 22.7%, up 1.3% points compared to Q3, 21.4%. Our operating expenses in Q4 were USD 13.1 million or 7% of our Q4 revenue, which is about 0.3% lower than Q3. This reflects the leverage in our model as we support higher revenue on the lower cost.

Operating profit for Q4 was USD 13.1 million and operating profit margin for Q4 was 16.2%. This represents a 1.6% points improvement compared to Q3. Net nonoperating expenses in Q4 were USD 7.5 million compared to a net nonoperating expenses in Q3, up USD 1.8 million.

The difference between Q4 and Q3 is mainly due to the increase of net foreign exchange loans, USD 4.2 million and share of -- loss of associates, accounted for using equity method USD 1.8 million. Net profit in Q4 was USD 17.7 million compared to USD 19.6 million in Q3, which decreased to USD 1.9 million.

Net earnings for the fourth quarter of 2019 were $0.02 per basic common shares compared to $0.03 per basic common share for Q3 of 2019. Basic weighted average outstanding shares were 727.2 million shares. Compared to the same period of last year, total revenue for Q4 was USD 186.3 million, which was up 12.1% compared to the same period of 2018.

Gross margin was 22.7%, decreased 0.1% points compared to 22.8% in Q4 2018. Operating expenses in Q4 were USD 13.1 million, which was up 6.5% compared to Q4 2018 in support of our higher revenue levels. Operating profit margin in Q4 was 16.2%, an improvement of 0.3% points compared to 15.9% in Q4 2018.

Net nonoperating expenses in Q4 were USD 7.5 million compared to USD 3.4 million in Q4 2018. The difference is mainly due to the increase of net foreign exchange loss, USD 6 million and partially offset by the decrease of the share of loss accounted for using equity methods, up USD 2.3 million.

Net profit in Q4 was USD 17.7 million compared to USD 17.3 million in Q4 2018. Net earnings for the fourth quarter of 2019 were $0.02 per basic common share compared to $0.02 per basic common shares for Q4 of 2018. Page 14. Compared to last year, total revenue for 2019 was USD 680 million, which is up 10.1% compared to 2018.

Gross margin increased to 19.3%, up 0.7% points compared to 18.6% in 2018. Our operating expenses in 2019 were USD 52.3 million, which was up 5.7% compared to 2018, in support of our higher revenue levels. Operating profit margin in 2019 was 12.1%, an improvement of 0.7% points compared to 2018.

Net nonoperating income in 2019 was USD 19.2 million compared to net nonoperating expenses in 2018 of USD 10.6 million. The increase was mainly due to the recognized USD 32.8 million in our disposal of investment accounted for using equity method in 2019.

Net profit in 2019 was USD 86.4 million compared to USD 36.9 million in 2018, mainly due to the operating profit in 2019 increased by USD 11.9 million from last year, and we recognized USD 32.8 million gain on disposal of investment accounted for using equity method in 2019.

Net earnings for the year of 2019 were $0.12 per basic common share compared to $0.05 per basic common share for 2018. Page 15. Consolidated statement of financial position and key indices. Total assets at the end of Q4 was around USD 1.15 billion including current assets of USD 393.3 million.

Total liabilities at the end of Q4 were USD 490 million, including current liabilities of USD 163.9 million. Total equity at the end of Q4 was USD 657 million. Accounts receivable turnover days in Q4 were 80 days compared to 83 days in Q3 of 2019. Inventory turnover days was 38 days in Q4, the same as in Q3 of 2019. Page 16.

Consolidated statements of cash flow. Cash and cash equivalents at the beginning of 2019 were USD 155.2 million. Net cash generated from operating activities was USD 200.4 million. Net cash used in investing activities was USD 142 million. Net cash used in financing activities was USD 56.1 million.

As of December 31, 2019, our balance of cash and cash equivalents was USD 157.3 million, increased USD 2.1 million compared to beginning of the year. Free cash flow in 2019 was negative USD 4.5 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 dividend from the sum. Page 17. Capital expenditure and depreciation. We invested USD 57 million in CapEx in Q4.

The breakdown of CapEx was 8.6% for bumping, 59.2% for LCD driver, 15.5% for assembly and 16.7% for testing. Depreciation expenses were USD 32 million in Q4. We invested USD 163.8 million in CapEx and depreciation expenses were USD 124.8 million in 2019.

As of February 29, 2019, the company's outstanding ADS number was approximately 5 million units, which represent around 13.2% of the company's outstanding common shares. Operator, that concludes our formal remarks. We can now take questions..

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

Yes. Hi, S.J. and Silvia, looks like it was a great year. Looks like, at this point, the momentum is also moving into 2020. I have a couple of questions.

Number one, could you give maybe reasons why taking a look at all the OSAT companies that reported in February, that ChipMOS was the only one that had substantial increases in revenue month-over-month versus the other OSAT companies that mostly were either flat or negative?.

Scott, Let me - this is S.J., thank you for previous questions you asked. The things of every -- the customer requirement is pretty strong, especially from memory side, those, including the commodity DRAM and niche DRAM, low flash and also and also NAND flash. So that's the first one to driving for us.

And the March time frame also maintain the same pattern. And we're also optimistic to see the forecast this year, increase in the whole year, especially memory side. Second one is we increased a lot of LCD driver bumping business for memory operation and also the [indiscernible] appreciation and idea of something like that.

And we also convert our COF equipment, especially tested to COG to support the OLED and TDDI. So that's our three segment to support the February - is a record high for the revenue. And we also invest a lot of automation and AI to increase our efficiency and also increase our revenue per headcount.

That's also further help to drive our gross margin and profit for the company..

That sounds great.

Would you say, at this point right now that the factories are running at a full utilization or about what percentage will you say they are running at?.

Actually, right now it's around 76%, in Q4. And Q1, some - the memory-wise was increase utilization rate will increase. But regarding to a driver, we see the COF, they had a softness in the TV. But we see the TDDI and OLED can offset this kind of decline. So for this quarter, the memory was increasing and LCD driver was decreasing..

And how do you see that moving into the second quarter? Would you say the same scenario?.

Yes, that's - from my personal viewpoint, I think right now, a lot of like story in the street about -- for our product segment and for example, our memory customer, all their wafer fab is located in Taiwan. So all the supply chain is in Taiwan. So we are pretty confident on the supply chain. We will take this as a value chain.

But for the LCD driver, that would depend on the TV and the smartphone business, that would be vis-à-vis uncertainty. But the overall demand are still existing that they might had a one quarter delay or something like that. That depends on the coronavirus situation is under control now. So for the whole year, we feel committed.

I think we had a good Q1, and our product segment right now is pretty strong..

Okay. What are gross margin percentage should we model in for 2020? Last year, we came in at around 19% for the year. I know the back half of last year was a much stronger. We were probably closer to about 22%.

How do you see the whole -- the full year of 2020 on a gross margin percentage?.

I think they can use the average for Q4 last year and Q1 this year….

Okay….

Deliveries. Yes….

Is Q1 going to be a little stronger than Q4 of last year?.

Actually, I will see the break of the low single-digit decline that depends on the -- in [indiscernible].

Okay.

So would you feel safe if we -- if I modeled around 21% for the year?.

I think 20% to 21% will be pretty reasonable..

Okay, good. A couple of other questions.

What kind of impact on demand do you see in the first quarter from the virus?.

Actually, we can see the transportation from the China supply and the Korea test supply. The total quality will not impact, but the supply is nonlinear. For example -- or previously, maybe they supply every 2 days in one price. Right now, maybe one price, in 1 week or 2 weeks, one price. That will create some impact for our supply chain.

But we see how we'll counter. So we grow our inventory and supply chain and labor to support customer demand. And customer also would like to invest, also take this kind of inventory risk with us..

Okay. Also, I've noticed in the last 2 or 3 days that the coronavirus has started to slow down in China.

Do you think that quarter 2 will be affected at all by the virus? Or do you believe that it's contained most of the most of the issues with, I guess, supplies to make sure there are enough supplies and inventory in the first quarter?.

Yes. Scott, actually I'm not the right person to answer your question regarding the coronavirus situation. But we prepare and when -- we have prepared for us and we even had a worst-case scenario preparation. But at least today in China, it is under control. But outside of China -- still not -- we had to control yet.

But Taiwan, this time since we had soft retailers, 10 or 15 years ago. So the Taiwan Government and people how to have a very serious and the know-how, how to prevent this one. So this time, I think, we will try our best, but so far, so good..

Okay. For 2019, I guess, our CapEx was about $163 million. I know you just mentioned that you're looking to -- try to hold down the spending and should be less than last year.

What do you -- what should I model in for CapEx for 2020? And what -- even just give me a percentage of maybe how much it might drop?.

Yes. To date, in the moment, we also had this kind of discussion. At least for the new factory preparation, we are put on hold or postponed to the next year. That's around -- pretty close to the one third, our CapEx for the 2020 and the rest of the capacity increase.

I think we were focused on the efficiency improve, automation itself, capacity expansion. But right now, it's still too early to say..

Yes, if we exclude the land and building expansion, and I think - we hope we can control the CapEx under 20% of our total annual revenue..

To a under 20%, okay. I know last quarter, we talked about, I guess, running out of space in the facilities. And you just mentioned now that you're looking to put that off for possibly, for next year.

Will that constrain the amount of revenue that we could grow still for this year? Or do we still have enough space, and is the automation in the AI, is that going -- take up the slack and be able to produce more revenue..

Actually, Scott you can see the utilization rate we increased around 76%. But actually, the total cash generation is much higher than this one because of the same equipment. They can - during the efficiency improvement and the process step improvement. We can generate more revenue, given in the same utilization rate neighborhood. So that's….

That's great to know. Just two more questions. Talking about the China JV. A couple of questions about that.

Number one, how have they've been affected by the coronavirus? And are they -- are all the employees back to work there? And what capacity would you say we're running over there?.

Yes. Actually, there's two issues. There's - thank you in putting this question. The first one is, as in end of February, the ownership for China investor already convert or transferred from Unigroup to YMTC. So right now YMTC or Shanghai facility more than 50%. And the new Chairman is also -- is the CEO of YMTC.

So that's the first one, just like you know. And ChipMOS, we see around 45%. And in the similar Chinese New Year's, since the demand is good. So they maintained around 50% run rate during the Chinese New Years. So at a higher run rate and [indiscernible]. So right now, there's a new business is continuing.

And a lot of operational people from outside of China - outside of Shanghai. When they arrive at Shanghai city, we'll need to stay away from the bakery by say a healthy manageable at least for 2 weeks. So they were ramping up by a weekly basis, right around it's 60%..

Okay. Would the YMTC now taking over the new -- the position of Unigroup. First of all, will there be a change or a shift in the, I guess, the flash memory that they are doing versus what you were doing before? Or is it still the same company since Unigroup? I believe they haven't own a big percentage of YMTC..

Yes. I think, eventually, since YMTC, they already invested a lot in the front end [ph]. They are very eager to have their own bigger facility to establish their R&D and also [indiscernible] for the future expansion. So you are right. They will continue to go to the look alike IBM business model..

So do you believe that, it could become a larger and profitable business fast than [ph] now with the new ownership?.

Exactly. About that or after the coronavirus under control..

And my last question is, I know we talked about a couple of years ago that at one point in time, we were going to hope to take the JV in China and do a listing for over in Shanghai.

Is that still part of the plan to take a public? Or is that just going to fall under the umbrella of YMTC?.

Actually, we selected the original strategy. But timing wise maybe postponed..

Okay.

Is YMTC, are they listed under - in Shanghai?.

No. Not yet..

Not yet.

So they're still a private-public company then, right?.

Yes. And a major ownership is Government and Unigroup..

Right. When you say the timing might be different now? I know, originally, we were hopefully shooting for 2019 when we first discussed it a couple of years ago.

You think it's a possibility for end of 2020, 2021?.

I think, you need to give us some more time to develop our network infrastructure. And - yes..

Okay. All right. Also - last question. I know I asked a lot of questions, but this is the last one. On the last conference call, you mentioned that one of the quarters that we had or one of the months, I don't remember, if it was a month or a quarter. You said, we actually ran at a profit.

Is that something that you could expect for 2020, that we could start to be profitable and maybe, hopefully, end the year with a profit?.

You mean, Unimos, right?.

I'm sorry?.

You mean, Unimos, right? Unimos, Shanghai. Unimos..

No, I'm talking about the JV in China?.

Yes, that's Unimos..

Yes, that's Unimos..

Oh I'm sorry..

But because now - you know now there is coronavirus. So I think, it's really hard to predict..

Okay..

Yes, I think it's a trading change. Yes..

Do you feel, based upon the information that you've been getting? Do you feel that the coronavirus in China is subsiding? I mean, that's what I've been seeing on the -- on a bunch of the newspapers and articles, I've read, that it looks like the -- even yesterday, they mentioned they had 14 mix shift hospitals and they've just closed down 11 of them because a lack of a new patients.

So that sounds to me that's encouraging that we should be certainly on the downside as far as new cases and hopefully, getting back to full production in most areas of China..

Yes, inside in China the answer is yes. But outside of China is out of control..

Right….

You are - like Korea, like Japan and like Italia. Yes..

Okay. Well, that's it for me. But again, congratulations. I really think last year was certainly a turning point in getting ChipMOS to start to become a revenue producer again, and growth and also nice to see the gross margins have moved up dramatically over the last couple of years by taking on businesses that now have a better profit margin.

And I just hope that it continues, and it sounds like you've taken on also a lot of new businesses from some other accounts. And I'm just keeping my fingers cross that the virus will subside and we'll be back to heavy growth. So congratulations again, and looking forward to the next conference call..

Okay. Thank you..

Yes. Thank you..

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

Thank you, S.J. Thank you, Silvia. Really good year and….

Hi..

Hi, there. And I was very impressed with your revenue numbers in January and February, especially February. I heard the CapEx number. Last year, you spent about 24% of your revenue and CapEx and this year, you're saying you can come under 20%. So my question is about free cash flow.

Does that mean for the full year, you will show a positive free cash flow?.

Yes.

You mean 2020, right?.

Yes..

Yes, for the 2020, yes, we will have positive free cash flow..

Fantastic. That is great news. And my next question was about gross margin. Again, for the second half last year, your numbers were really good. And I know, Scott asked you about gross margin.

And then for this year, do you see the same pattern where second half, again, you see a little better gross margin than the first half or about 20%, 21% overall for the year?.

Yes. To answer your question, I think, the second half will be better than the first half..

Oh, fantastic..

Basically based on the coronavirus….

Yes, yes….

Can we work also with being Q2 on that. But the total - I think maybe slightly a little bit delay, depends on the situation..

Okay. That is a good news. And the last question I had was about the China joint venture. When did YMTC, take over the ownership of the China equity, I mean, the China joint venture.

When did they become owner of the joint Unimos?.

February....

It used to....

Yes in last year of - YMTC, last year December 2019….

Okay….

Maybe the shareholders of Unimos. Yes..

Okay. Yes, I thought it was Shanghai and ChipMOS, but now it's YMTC and ChipMOS..

ChipMOS. Yes..

ChipMOS. Yes..

Okay. Got it. Thank you. You answered all my questions. And I appreciate it and again, really good revenue numbers. Thank you..

Thank you..

Thank you..

Thank you. There are no further questions in the telephone queue at this time. I would now....

Thank you, everyone..

Yeah, I'd now like to turn the call back. Please go ahead..

End of Q&A:.

Thank you, everyone, to join our 2019 full year's conference call. Thank you very much. Management team will keep - effort to continue to drive the revenue and with good profit and also reward to the shareholders. Thank you very much. Bye-bye..

Bye-bye..