Good day, everyone and welcome to the ChipMOS First Quarter 2020 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference to David Pasquale of Global IR Partners. Please go ahead, sir..

Thank you, operator. Welcome everyone to ChipMOS’ first quarter 2020 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 e-mail Global IR Partners at imos@globalirpartners.com or you can get a copy of the press release off of ChipMOS’ website, 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 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 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 that is 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..

Yes. Thank you, David. We appreciate everyone joining our call today. This has been a challenging quarter for all of us as we manage in the coronavirus ‘19 world. As a result of our effort, we were able to restart also the manufacturing facility of Asia after the Chinese New Year targeted closure with no additional delay or disruption.

We have worked closely with our customer and supply chain allowing us to maintain full inventory level to ensure uninterrupted service to customers. We are taking coronavirus ‘19 seriously and then we will continue to improve all safety measures.

Let me now turn to our Q1 results, the big takeaway for Q1 first, Q1 was a great quarter for us with the revenue up 25% over Q1 2019 and as of 5 years, the highest record level. We achieved this despite few working days due to Chinese New Year’s closure and coronavirus ‘19.

Q1 revenue was up 0.3% over Q4 ‘19 while the impact has normally caused the seasonal decline. Second, gross profit increased 90% in Q1 ‘20 compared to Q1 ‘19 and up 0.3% compared to Q4 ‘19. We have been driven highest profit with a more favorable end-market mix and key product cost out.

Third, net earnings increased 233% in Q1 ‘20 compared to the Q1 ‘19 and was up 34% compared to Q4 ‘19. Finally, our overall utilization rate improved to 79% in Q1 ‘20 compared to 70% in Q1 ‘19 and 76% in Q4 ‘19. This is significantly improved and is allowing us to drive the improvement across our financial metrics.

We feel confident about our capacity footprint moving into Q2 and that we are taking a very conservative approach of CapEx.

We are lowering our capacity investments where possible as we focus on improvements through automation, while maintaining a strong balance sheet and liquidity in order to maintain our leading market position in the uncertain market. For the first quarter of 2020, we have benefit from growth in our DRAM, NAND flash and AH COF business.

Demand was driven by ongoing 5G growth. We also see strong uptick in Q1 in demand for work and school from home. This combined positive demand help us offset fewer working days in Q1.

As I mentioned at the start of the call that our focus has been on employee health and delivery for our customers, we occupied a critical space in the supply chain for our customers. By providing service during the coronavirus ‘19 crisis, we have helped ensure inventory stability for our customers.

This helped us increase our overall utilization level to 79% in Q1 ‘20 from 70% in Q1 ‘19 and 76% in Q4 ‘19. With major utilization aimed in both our assembly and bumping production line, we saw pickup in demand from applications related to process, storages, set-top box and 5G base station, demand for memory.

Our utilization of assembly and testing fell at the same level with Q4. Utilization rate of the LCD and bumping significantly improved led by demand for COF tablet, laptop and notebook for work and school from home demand.

In terms of adding color on Q1, [indiscernible] product represents between 10% to 11% of total Q1 revenue, assembly product line represents around 26%, [indiscernible] and package testing represent 9% and 13% respectively. Memory total revenue growth around 3% and represents 42.1% of total Q1 revenue, up from 39.2% of Q4 ‘19.

Revenue from DRAM and end-to-end product represents about 30.1% of total Q1 revenue. Revenue from flash represented about 22% of total Q1 revenue, NAND flash business continued to grow and represent about 50% of Q1 gross revenue. As for driver IT-related products, revenue increased to 47.4% total Q1 revenue, this including gold bump and COG and COF.

Demand growth from tablet, desktop and notebook from work and school from home offset seasonal low for few working days in Q1. TDDI product revenue represents about 39% of Q1 DDIC revenue and was impacted by broader market softening in smartphones in Q1. We see benefit from appreciation using OLED standard for full HD grade panel in smartphone.

OLED driver product revenue increased significantly and represents about more than 9% of Q1 DDIC compared to 7% of Q4. [indiscernible] revenue in Q1 represent about 50% of DDIC revenue as the TDDI penetration rate continued to increase in HD grade panel, average price for OLED panel emerging full HD grade panel.

Regarding to the end market, revenue from smart mobile represents about 36% of total Q1 revenue. The TV category represents about 19% and consumer category represents about 22%. Revenue from computing represented about 12% of total Q1 revenue. Automobile and industry contributed to increase to 11% and to be a long-term growth area for us.

As we look forward into the second quarter of 2020, I am very proud of the ChipMOS’ team for remaining focused during this challenging period. Area in Asia, are starting to see the demand pickup with working returning to normal. Other parts of the world, including Europe and the U.S., continue to be impact.

We are managing our expense and cash and keeping the conservative approach to CapEx as we work through the coronavirus ‘19 environment.

Our gross long-term relationship with the banks recently had given us credit line of around $80 per billion with good terms, including lower rates for the hedging level accountability and then the confidence of our balance sheet and operations. From demand standpoint, we are positive about the market position.

In general, we expect growth of the memory product will be higher than DDIC product in 2019. We are encouraged by healthy demand from memory customer. We expect dealer will be stable with a steady demand for cloud storage and set-top box.

We also expect NAND flash business will increase, led by continued pricing in 5G network throughout globally and gaming demand. NAND flash should be continued to grow as we move into Q2. In DDIC, flat panel for tablet/notebook demand should remain stable. Large panel for TV demand have been soft, but with everyone trying that may change.

Small flat panel have been impacted by smartphone weakness recently. However, TDDI continues to grow with higher penetration rate of HD grade panel and OLED in emerging of the full HD grade panel in 2020 despite ongoing pressure on other unit sales. Silicon flat panel is still going up in particular more and more display panels are being used in cars.

These are big long-term opportunity for ChipMOS given our customer base. Finally, you may have already read the full resolution we filed with SEC today. One of the resolutions related to application for retirement of Mr.

Lafair Cho, Senior Executive Vice President and COO, I would like to thank Lafair for his tireless effort to the company on behalf of ChipMOS and personally, I expressed my appreciation to him for assisting me over the years.

Lafair will continue to contribute his expertise and experience, inclusive of Japan business and customer maintenance as a consultant to the company. After his retirement effective of July 1 from on then he will be assisting the two newly appointed Executive Vice President, Mr. D.Y. Tsai and Mr.

Vincent Hsu to smooth take over all operation responsibility during the transition period. Now, let me turn the call over to Ms. Silvia to review the first quarter 2020 financial results. Silvia, please go ahead..

Thank you, A.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 exchange rates of NT$30.25 against $1 as of March 31, 2020. 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 first quarter of 2020, total revenue was $184.7 million. Net profit attributable to the company was $23.6 million in Q1.

Net earnings for the first quarter of 2020 were $0.03 per basic common share or $0.65 per basic ADS. Depreciation and operation expenses were $33.2 million. We invested $37.6 million in CapEx in Q1. EBITDA for Q1 was $52.9 million. EBITDA was calculated by adding depreciation and amortization together with operating profit.

Return on equity of Q1 was 14.3%. Page 13, consolidated statements of comprehensive income. Compared to last quarter, total Q1 revenue was $184.7 million, up 0.3% compared to Q4 2019. Gross profit was $42 million in Q1, with Q1 gross margin at 22.7% was same as Q4 2019.

Our operating expenses in Q1 were $13.1 million or 7.1% of our Q1 revenue, which is about 1% higher than Q4 2019. Operating profit for Q1 was $29.7 million and operating profit margin for Q1 was 16.1%, decreased 0.1 percent points compared to 16.2% in Q4 2019.

Net non-operating expenses in Q1 were $0.1 million compared to net non-operating expenses in Q4 2019 of $7.4 million. The difference between Q1 and Q4 2019 is mainly due to the increase of net foreign exchange gains, $6.7 million and the decrease of the share of loss of associates accounted for using equity methods, $0.9 million.

Net profit in Q1 was $23.6 million compared to $17.9 million in Q4 2019. The difference between Q1 and Q4 2019 is mainly due to increase of net foreign exchange gains, $6.7 million. Net earnings for the first quarter of 2019 were $0.03 per basic common shares compared to $0.02 per basic common shares for Q4 of 2019.

Basic weighted average outstanding shares were 727.2 million shares. Compared to the same period of last year, total revenue for Q1 was $184.7 million, which was up 25.2% compared to the same period of 2019. Gross margin was 22.7%, up 7.7 percent points compared to 15% in Q1 2019.

Operating expenses in Q1 were $13.1 million, which was up 9.8% compared to Q1 2019 in support of our higher revenue level. Operating profit margin in Q1 was 16.1%, an improvement of 9 percent points compared to 7.1% in Q1 2019. Net non-operating expenses in Q1 were $0.5 million compared to $2.1 million in Q1 2019.

The difference is mainly due to the increase of net foreign exchange gains, $1.1 million and the decrease of the share of loss associated accounting for using equity method of $1 million. Net profit in Q1 was $23.6 million compared to $6.4 million in Q1 2019.

The difference is mainly due to the increase of gross profit $19.9 million, net foreign exchange gain, $1.1 million and partially offset by an increase of income tax expense, $4 million. Net earnings for the first quarter of 2020 were $0.03 per basic common share compared to $0.01 per basic common share for Q1 of 2019.

Page 14, consolidated statement of financial position and key indices. Total assets at the end of Q1 were $1.3 billion, including current asset of $513.8 million. Total liabilities at the end of the Q1 were $592.5 million, including current liability of $149.1 million. Total equity at the end of Q1 was $671.4 million.

Accounts receivable turnover days in Q1 were 75 days compared to 80 days in Q4 of 2019. Inventory turnover days were 44 days in Q1 compared to 38 days in Q4 of 2019. Page 15 consolidated statement of cash flow. Cash and cash equivalents at the beginning of Q1 were $155.5 billion. Net cash generated from operating activities was $24.2 million.

Net cash used in investing activities was $47.4 million. Net cash generated from financing activity was $415.9 million. We took the opportunity in the first quarter to add to our cash balance through local bank loans at favorable low rates. This allowed us to add an additional $115.3 million in cash on our financial position.

As of March 31, 2020, our balance of cash and cash equivalents was $248.3 million. Free cash flow in the first quarter was $18.3 million. Free cash flow was calculated by adding depreciation of financial interest income together with operating profit and then subtracting CapEx, interest expense, income tax expense and dividend.

Page 16 capital expenditure and depreciation. We invested $37.6 million in CapEx in Q1. This is down from $56.3 million in Q4. The breakdown of CapEx was 10.1% for bumping, 46.2% for LCD driver, 5% for assembly and 34.7% for testing. Depreciation expenses were $33.2 million in Q1.

As of April 30, 2020, the company’s outstanding ADS number was approximately 5 million units, which represent around a 12.8% of the company’s outstanding common shares. Operator that concludes our formal remarks, we can now take questions..

Thank you. [Operator Instructions] We will go first to Scott Bishins with Caffeine Holdings LLC..

Yes, hi, Silvia, hi, S.J. How are you? I just want to say a great quarter all around, probably the best I have seen at least 10 years if not longer. Couple of questions I have. Maybe I will just go through these.

It looks like your revenue is stronger than the overall industry can you keep up that high level through the rest of 2020?.

Scott, to answer your question, I think for the first half will be pretty good, because we also published the April revenue we interfaced and for May and June will be slightly down.

And for the second half, only speaking, right now, the memory is more stable than the LCD driver, because of the – our memory customers are more stable and also give us a commitment for the second half. Regarding the driver, only speaking, the pictures here are also of uncertainty, but we will carefully walk step-by-step.

And for the second half, we are conservative for the CapEx investment in order to maintain more cash in this uncertain environment. So I hope this can answer your question..

Okay.

Where do you think the CapEx would be for the second half? Exactly how much do you spend?.

Previously, the past 2 years, our CapEx investment is around at 25% of total revenue. I think this year, management team set a target to the company, will be less than 20% of our – this year’s revenue..

Okay. That’s great.

How much of the revenue growth is coming from higher ASPs or from more unit growth?.

From both, because of the product mix. For LCD driver, as an example, the OLED and TDDI, their penetration rate, getting higher and higher. That is a favorable product mix for us, that being the LCD driver area, there being longer testing time and also more bumping service.

And then for – memory wise, more and more customers getting for automobile and industry, that need a higher quality and also more stable forecast for the long term. So – and for quality wise, we also increased a lot because we invest a lot of resource into the separate [indiscernible] for process and also automation in online and AI in online.

So like in 2019, our revenue increased around 10%, while our total headcount is reduced around 10%. In case, our gross margin also maintain the variable income continue to increase, and this year will be same.

We will try to maintain the same headcount and continue to increase our revenue in order to further contribute the benefit to the company and also share the benefit to the shareholders..

That sounds great. That’s very encouraging.

Seeing that there’s tight utilization, are there opportunities for increasing prices also?.

Actually, under the current environment, for memory wise, yes, we see that a little bit. But regarding the LCD driver, I don’t think that is a good timing, yes..

Okay.

Do you need a good recovery in the LCD driver between the smartphones and the televisions’ demand to continue on a double-digit growth path?.

Only speaking for this year, I think, the second half LCD driver, pace of the current demand will be a little bit weak compared with the first half due to the weak smartphone demand, yes..

Right. I mean so far, this year, you’ve been on a very strong path the first quarter and looks like April was a very good month, too, actually the best, I guess, in the history of ChipMOS.

Do you feel that if we stay on the same product mix that we have today, will that allow us, for full year, to be still at double digits in growth?.

Only speaking, you can – Scott, let me put this for the first half. For the Q1 compared with that period of last year, we increased revenue around 25%. And for the Q2, I think still has around 30% discounted rate. So for the first half, our revenue increase compared with same period last year will be more than 20%.

And even we take a very conservative forecast for the second half or it will be same like last year. So maybe we still had a high single-digit revenue growth for – compared with the last year. So we have strong confidence we can deliver good results to the market and also maintain the high cash dividend policy to the shareholder..

That’s great. Considering all the adversity that’s going on now with the virus and the unknowns for us to have a growth trajectory like that for year 2020 is – it’s amazing. It just shows you how well the company is doing and how well you guys are running the whole operation. It’s really great. I have just a couple more questions.

I think I saw somewhere in your remarks. It said something about seeing a lot of demand coming from, I guess, for computing from people that are working at home and school also being thwarted at home.

Do you see that continuing into the second half also?.

Yes. The answer is yes. Not only for the work from home, but also the other one is very important, it’s gaming requirements..

Okay. Yes, that’s where it seems to be. I’ve seen other reports from other companies, talking about how they’ve lost themselves, I guess, in the retail stores, but they’re picking up a lot of sales that are buying and computers and also other devices that – to use them from home. So that seems like it could be a trend for a while.

Is there any more opportunity, you believe, that – I know the gross margins were great at 22.7%.

Do you see any chance that, in the short-term, that, that might improve also?.

Through automation and UPS improvement without a new CapEx investment, we try our best to do so..

Okay. I didn’t – I haven’t seen the depreciation numbers.

Do they still stay on an upward trend or they start to decline coming into the second half of the year?.

Yes. For the depreciation, as you know, that we could invest the CapEx, so the depreciation for quarter-over-quarter, it will increase, I think, 3% to 4% quarter-by-quarter for the depreciation..

Okay, when does it start to get down, any time this year or not until next year as your CapEx?.

Yes, maybe in the fourth quarter or the first quarter of 2021..

Okay. Yes, I just want to model that into my financials. Let me just see – a couple – just a couple more questions. Is more capacity still moving out of China into Taiwan based on what’s going on with the U.S.

tariffs?.

The answer is yes. We take a lot of advantages, especially for U.S., Europe and Japan, a lot of other competitors, which is great and sure. And for auto, they also would like to ask between the capacity for them. Therefore, outside China company.

And inside China, we also get lot of like benefit because the coronavirus issue, because the local logistic system will get another impact due to the coronavirus issue. So previously, China is pretty aggressive to the infrastructure by their sales, would like to keep majority in supply chain in China.

But right now, this coronavirus issue, they were like 50:50, both in China and outside. So we get a benefit..

Okay. Actually, two more questions.

Are you maintaining the normal level of inventory during this pandemic or do you need to stock up because of shortages in components needed to do final assembly?.

Yes. Actually, we increased around two weeks to one month material inventory in order to support the customer, because during this critical period, the transportation and logistics are big issues. That’s first one. The second one is seeing that IC requirement is pretty strong, so material supply lead times are getting longer.

So we negotiate with customers with the guarantee. So we expect an increase in our material inventory in order to present enough capacity and materials to support customers..

Okay. Yes, that sounds good. That sounds like it’s the prudent thing to do. One last question, I have been reading a lot of articles about our partner in China, the memory – I believe it’s Tsinghua Memory..

Yes..

I see there is a lot of reports out that they’re really starting to ramp up their 128 NAND flash components’ chips. And it looks like they say they’re going to be going into full production sometime between – around the end of the year.

Is that going to bode well for our China factory as they are now under the same umbrella?.

To answer your question, as you can see, the Q1 result is better than Q4. One of the key reason is Shanghai operation performance improved a lot due to the YMTC support and COF capacity for that – and that’s, I think, for last quarter. Right now, to have the major shareholders into YMTC and new Chairman also is the CEO of the YMTC.

So they had a full obligation and apparently to few other Shanghai operations..

How do we stand as far as – are we close to a breakeven?.

I think what we previously laid out has given this very data, yes. After the virus, each of this will be overcome. I think that we will breakeven pretty soon, yes..

Pretty soon. Okay. Well again thank you very much like I said before, this is the best report I’ve seen in many, many years. And it certainly seems like there’s a lot of growth ahead for us. Just continue doing the great job and we’re here. And we’re just very excited about what the future looks like. So thank you very much, to both of you..

Just go ahead to buy more stock and you will benefit on it, yes..

I will, for sure..

Thank you..

Thank you..

[Operator Instructions] We’ll go next to Vipul Sagar with Blash Capital. Please go ahead..

Good evening S.J. Good evening Silvia. I just want to say a really impressive April revenue number, really impressive gross margin number. And I was really, really happy about the free cash flow so I just want to ask a question about the rest of the year. Last quarter, you told us that you expect positive free cash flow for the whole year.

Is that still the case?.

Yes. Yes, for 2020, we expect that we can have a positive free cash flow. Yes..

Okay. And Scott already asked the question about the Shanghai, and that is really impressive that they had a good improvement in the Q1.

Down the road, how do we get more information on how it’s contributing to ChipMOS Taiwan? I mean, how do we – do you – are you planning to like include some stuff in your press release about the things that are happening in ChipMOS Shanghai with YMTC being the major shareholder now? Or you just keep that separate?.

Actually, I think according to regulations, we don’t make [indiscernible] regarding the shareholder change. Because they transferred from Unigroup to YMTC, that’s a major shareholder succession. So right now, the one they occupy more than 50% of the share for Shanghai. The company name already changed from ChipMOS Shanghai to Unimos Shanghai.

And the YMTC CEO also took the Chairman position of the Unimos Shanghai. And government upped their program, this is China government and also Shanghai given about the R&D project fee and also for the tax incentive. So – and YMTC also supported voting for the proximity.

So I think under this kind of situation, the situation will be improved better and better. And YMTC also can benefit from this investor. So this will be a win-win situation..

Okay. Thank you so much. I just want to say, once again, a really impressive quarter. And obviously, Taiwan is doing so much better with the coronavirus. I mean that government has done an amazing job in keeping its population safe. So thank you, again, and talk to you next quarter..

Thank you..

Thank you..

[Operator Instructions] And it appears we have no questions at this time. I’d like to turn it back to management for closing remarks..

Yes. Thank you everyone who joined our Q1 conference call. Thank you very much. And please get in touch if you have any further questions. Thank you. Bye-bye..

Bye-bye..

And that does conclude today’s conference. Thank you all for your participation. You may now disconnect..