Phison: Fiscal 3Q23 Financial Results

Phison Electronics Corp. discloses Taiwan-International Financial Reporting Standards (TIFRS) financial measures and also provides Non-Taiwan-International Financial Reporting Standards (NonTIFRS) financial measures as supplemental information. Non-TIFRS financial information should be considered in addition to, not as a substitute for, TIFRS financial information.

Earnings distribution is made in accordance with financial statements based on TIFRS.

• The consolidated operating revenue for 3FQ23 was NT$12.389 billion, an increase of 23.8% from 2FQ23 and a decrease of 15% compared to 3FQ22.
• The consolidated gross margin rate for 3FQ23 was 32.2%, a decrease of 0.3% from 2FQ23 and an increase of 7.8% compared to 3FQ22.
• The consolidated operating income for 3FQ23 was NT$0.525 billion, a decrease of 26.8% from 2FQ23 and a decrease of 57% compared to 3FQ22.
• The consolidated net income for 3FQ23 was NT$0.86 billion, with earnings per share of NT$4.32.
• The consolidated gross profit for 3FQ23 was NT$3.989 billion, reflecting a 22.7% increase from 2FQ23 and a 12.1% increase from 3FQ22.
• The consolidated gross margin for 3FQ23 was 32.2%, marking a 0.3% decrease from the 2FQ23 and a 7.8% increase from 3FQ22.
• The operating expenses for 3FQ23 amounted to NT$3.464 billion (28% of operating revenue), compared to NT$2.533 billion (23.5% of operating revenue) in 2FQ23, and NT$2.338 billion (16% of operating revenue) for 3FQ22.

Operating expenses for the quarter included:

• R&D expenses totaled NT$2.896 billion (23.4% of operating revenue), which is higher than 2FQ23’s NT$1.983 billion (19.8% of operating revenue) and higher than the 3FQ22’s NT$1.786 billion (12.3% of operating revenue).
• Marketing expenses amounted to NT$0.325 billion (2.6% of operating revenue), higher than 2FQ23’s NT$0.3 billion (3% of operating revenue) and higher than 3FQ22’s NT$0.322 billion (2.2% of operating revenue).
• General and administrative expenses amounted NT$0.238 billion (1.9% of operating revenue), higher than 2FQ23’s NT$0.19 billion (1.9% of operating revenue) and higher than 3FQ22’s NT$0.209 billion (1.4% of operating revenue).

Consolidated Operating Income and Operating Margin

• The operating income for 3FQ23 was NT$0.525 billion, which was a decrease of 26.8% from 2FQ23 and a decrease of 57% from 3FQ22.
• The operating profit margin for 3FQ23 was 4.2%, lower than the 2FQ23’s 7.2% and also lower than 3FQ22’s 8.4%.
• Consolidated Non-operating Income (loss) and Income Tax
• The non-operating incomes for 3FQ23 was NT$0.427 billion, or 3.4% of revenue. This was mainly due to the net foreign exchange gains and gains on financial assets at fair value through profit or loss. The income tax expense for 3FQ23 was NT$0.094 billion.

Consolidated Net Income, Net Profit Margin and EPS

• The net income for 3FQ23 was NT$0.858 billion, an increase of 94.7% from 2FQ23 and a decrease of 28% from 3FQ22.
• The net profit margin for 3FQ23 was 6.9%, higher than the 2FQ23’s 4.4% and lower than 3FQ22’s 8.2%.
• Earnings per share (EPS) for 3FQ23 was NT$4.32, higher than 2FQ23’s NT$2.28, and lower than the 3FQ22’s NT$6.13.

Consolidated Cash and Financial Assets-Current
Cash and financial assets at fair value-current at the end of 3FQ23 was NT$15.329 billion, which presents 25.4% of total assets. Cash and Financial assets at fair value-current was NT$13.366 billion in 2FQ23 and NT$14.475 billion for 3FQ22, respectively. Financial assets-current portfolio includes funds, domestic listed stocks and
derivatives and so on.

Consolidated Accounts Receivable
The net accounts receivable for 3FQ23 totaled NT$8.599 billion, with an average accounts receivable turnover of 67 days (calculated based on the average net accounts receivable for 3FQ23 and the annualized current sales revenue), which is higher than the 63 days of 2FQ23 and also higher than the 50 days of 3FQ22.

Consolidated Inventory
The net inventory for 3FQ23 amounts to NT$21.331 billion, with an average inventory turnover of 259 days (calculated based on the average net inventory for 3FQ23 and the annualized cost of goods sold), which is lower than the 274 days of 2FQ23 and higher than the 163 days of 3FQ22.

Revenue and Shipments for October 2023
The consolidated revenue for October reached NT$5.159 billion, a 3% month to month growth, making it the second highest in history for the same period. Accumulated revenue up to October reached NT$37.633 billion, a 27% Y/Y decline compared to 3FQ22.

Compared to 3FQ22, total PCIe controller shipments in October increase 290% Y/Y. Among which, total PCIe SSD storage module shipments increased 110% Y/Y, reaching a new monthly record high. In addition, total bit shipments also increased 100% Y/Y, hitting a new monthly record.

Market Overview
As NAND suppliers started cutting production from 4FQ22 and further expanded reduction in production scale starting in 2FQ23, coupled with inventory digestion by system vendors over the past 3-4 quarters, the NAND storage market has gradually recovered with restocking demand, driving NAND pricing to stabilize and even increase. According to market research institutes, the global NAND storage market value will possibly exceed $85 billion in 2025 (compared to $35 billion in 2023 for the global NAND storage market). In other words, the NAND storage market may maintain relatively stable growth and demand in coming quarters.

Phison Proposed to Prepay to Secure NAND Supply
Due to NAND suppliers cutting production and capital expenditures (Capex), it has experienced some tightness in NAND raw material supply in 4CQ23. In addition, in preparation for the expected demand recovery in 2024 predicted by market research institutes, it plans to strengthen partnerships and ensure stable supply through prepayments to NAND suppliers, to fulfill global customer and partner demand for NAND storage products in future quarters.

Phison Proposed to Issue Second Domestic Unsecured Convertible Bonds for R&D Spending and Business Expansion
As NAND controllers migrate to advanced process nodes (e.g. firm’s flagship PCIe 5.0 SSD controller E26 uses 12nm process, and the new PCIe 5.0 DRAM-less SSD controller E31T uses 7nm process), coupled with the continuous evolution of NAND flash technology and various custom system value-add service collaborations with global customers, the company plans to issue its second domestic unsecured convertible bonds of around NT$6 billion. The funds are expected to be used for R&D spending and business expansion, to ensure firm maintains its technology leadership. We believe this strategy, along with vendor’s IC design-based system value-add service business model, will help the company capture the next wave of growth opportunities.