MDS — Investor Presentation 2021

Apr 22, 2021

Mercuries Data System 2021 Investor Conference Code: 2427

Financial Results Banking Automatic System Public Construction Integration 2021 Outlook

The information contained in this presentation, including all forward-looking information, is subject to change without notice, whether as a result of new information, future events or otherwise, and Mercuries Data Systems, Ltd. ("MDS" or the "Company") undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is the information intended to be a complete statement of the Company, markets or developments referred to in this presentation.

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Consolidated income statement 2018 – 2020							Unit : '000
	2018	%	2019	%	2020	%	YoY %
Revenue	3,354,042	100.0%	3,039,686	100.0%	3,021,959	100.0%	-0.6%
Cost of Revenue	(2,416,260)	-72.0%	(2,115,174)	-69.6%	(2,037,049)	-67.4%	-3.7%
Gross Profit	937,782	28.0%	924,512	30.4%	984,910	32.6%	6.5%
Operating Expenses	(840,346)	-25.1%	(869,431)	-28.6%	(871,815)	-28.8%	0.3%
Operating Income	97,436	2.9%	55,081	1.8%	113,095	3.7%	105.3%
Non-Operating Income	22,822	0.7%	67,480	2.2%	31,808	1.1%	-52.9%
Net Income before Tax	120,258	3.6%	122,561	4.0%	144,903	4.8%	18.2%
Income Tax	(4,699)	-0.1%	(6,465)	-0.2%	(29,216)	-1.0%	351.9%
Net Income after Tax	115,559	3.4%	116,096	3.8%	115,687	3.8%	-0.4%
EPS	0.63		0.63		0.63

2020 is the best year in the last 3 years in terms of the performance and the ratios of gross profit, operating income and net income before tax.

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2018 – 2020 Consolidated income statement

Revenue and gross profit (GP) / gross profit rate (GP%):

• Revenue slightly declined 0.6% YoY if excluding the subsidy of Technology Development Programs (TDP), but GP rose 6.5% and GP% went up from 30.4% to 32.6% simultaneously. GP% grows for 2 consecutive years.
• Although the sales volume of RATM still declined in 2020 (the amount decreased from 1,316 to 866 units, and sales volume dropped 23.6% from NT\$558,851 thousand to NT\$426,949 thousand) , the ASP climbed 16.1% YoY. The reason why the ASP grew up is no bulk orders in 2020.
• Fortunately, the maintenance revenue from banking division kept increasing (YoY +7.24%) and the GP% also rose from 84.3% to 88.2%, offsetting the volume drop of ATM hardware.
• The revenue increase of public construction integration offset the drop of the banking division. The momentum came from TRA's South-Link line project (Revenue boosted 1.28 times YoY to NT\$438,604 thousand). The sales of 3,000 TETRA handsets also helpful. The total TRA hardware revenue rose 1.19 times YoY to NT\$82,293 thousand (GP%: 16.7% to 24.9%).
• Expenses slightly increased 0.3% and expense to revenue ratio stayed on the same level (28.8%).
• Operating income grew 105.3% yearly (OP income rate rose from 1.8% to 3.7%).
• Non-operating income decreased 52.9% due to the absence of lawsuit gain on reversal, the drop of gain from fix income investments and fewer subsidies of TDP.
• Because Income tax rose 3.5 times YoY, net income after tax conceded 0.4% to NT\$115,687 thousand despite a material progress before tax. EPS remained the same as previous year, 0.63 per share.

2019 – 2020 Stand-alone income statement by BU

Unit : '000

		Banking automatic sys.		Public construction integration
	2019	2020	YoY%	2019	2020	YoY%
Rev. of Product Sales	912,934	715,560	-21.6%	1,327,889	1,358,259	2.3%
Cost of Product Sales	(664,653)	(521,416)	-21.6%	(1,109,203)	(1,094,173)	-1.4%
GP-Products	248,281	194,144	-21.8%	218,686	264,086	20.8%
GP Rate-Products	27.2%	27.1%		16.5%	19.4%
Rev. of Maintenance	389,563	417,762	7.2%	400,752	503,814	25.7%
Cost of Maintenance	(61,302)	(49,298)	-19.6%	(266,242)	(367,489)	38.0%
GP-Maintenance	328,261	368,464	12.2%	134,510	136,324	1.3%
GP Rate-Maintenance	84.3%	88.2%		33.6%	27.1%
Total Rev.	1,302,497	1,133,322	-13.0%	1,728,641	1,862,073	7.7%
Total Cost	(725,955)	(570,714)	-21.4%	(1,375,445)	(1,461,662)	6.3%
Total Gross Profit	576,542	562,608	-2.4%	353,196	400,410	13.4%
Expenses	(318,984)	(320,569)	0.5%	(392,540)	(394,964)	0.6%
Operating Income	257,558	242,039	-6.0%	(39,344)	5,446	N/A
Operating Income Rate	19.8%	21.4%		-2.3%	0.3%

*Note: Rev. of product sales from Public construction integration sector includes government project subsidy of NTD 24,605,170 in 2019 and NTD 9,277,326 in 2020, which are disclosed in non-operating income originally.

2019 - 2020 Stand-alone income statement by BU

Banking automatic system:

• Product sales (H/W + S/W) decreased 21.6% but GP% kept the same at 27.1%.
• 1. The main reason is the sales volume of RATM decreased (the amount decreased from 1,316 to 866 units, and sales dropped 23.6% from NT\$558,851 thousand to NT\$426,949 thousand) . But less competition in 2020 made the RATM's ASP and GP% rise.
• 1. The sales of software decreased from NT\$59,503 thousand to NT\$29,306 thousand.
• Maintenance income increased 7.2% to NT\$417,762 thousand. GP and GP% both rose to NT\$368,464 thousand (YoY +12.2%) and 88.2% (from 84.3% in 2019).
• The growth from maintenance cannot compensate the drop from product sales. The GP of banking division declined 2.4% YoY to NT\$562,608 thousand. Net income declined 6.0% YoY to 242,039 thousand (Net income % was 21.4%).

Public construction integration:

• Product sales (projects, H/W and S/W) grew 2.3%, GP climbed 20.8% and GP% rose from 16.5% to 19.4%. Those were mainly attributed to the TRA's South-Link line project and the sales of 3,000 TETRA handsets.
• The maintenance performance was poor. The maintenance revenue increased 25.7% to NT\$503,814 thousand but the GP merely increased 1.3%. The GP% dropped from 33.6% to 27.1%. The main reason was the cost of TRA's maintenance project rose significantly, causing the GP% fell from 30.3% to only 13.3%.
• Although the public construction integration division turned around, the contribution to net income was minor. NI% was only 0.3%.

2020 Outlook and results

• Revenues from both banking automatic system and public construction integration system will drop in 2020. >Banking automatic system dropped 13.0% but public construction integration rose 6.7%. Consolidated revenue only fell 0.6%.
• The operating income of public construction integration system will leap despite poor performance in revenues. On the contrary, the operating income of banking automatic system will decrease with weak revenues. > The operating income of public construction integration system turned around. The revenue and operating income of banking automatic system decreased 13.0% and 6.0% respectively.
• Revenue from H/W and S/W of banking automatic system keeps dropping. Fortunately, the maintenance revenue will keep strong. > Revenue from H/W and S/W dropped 21.6% but maintenance revenue increased 7.2%.
• The performance of some public construction integration projects will make progresses because of the end of the warranty. >Although the operating income turned around, the improvement was worse than we thought.
• The progress of public construction integration system will make up the recession of the banking automatic system. The operating income and net income before tax will be better than those in 2019>Operating income rose 105.3% YoY and net income before tax climbed 18.2%. Meet our expectation.
• The impact of new coronavirus pandemic to MDS is not significant in short-term. However, capex of banks and government will slow down if the crisis keeps for a long time. By the time, MDS will be hurt inevitably.

2021 Banking Automatic System

ATM market analyses

• The ATM's demand surprisedly kept growing 2.4%, or 721 units, YoY in 2020. Based on the feedback from banks, the ATM's demand will remain a 1.9% growth rate, or 550 units, in 2021, and will reach 31,800 units totally. The demand is mainly driven by the increase of CVSs.
• The screen size of ATM will migrate from 15" to 19 in 2021. This trend will give us an optimal forecast in 2021: revenue from ATM sales will increase 25%, get a total 1,300-unit orders (1,185 in 2020), and recognize 1,200-units (866 in 2020) as well.
• The feedback from ATM Sidecars is positive and the application attracts the Post Office. We can foresee the demand of sidecars will boost soon.
• The OS of ATMs will upgrade to W10, which will become the main source of our S/W income. We predict S/W revenue will rise 70% in 2021.

2021 Banking Automatic System

The competitive analysis of the ATM market

represents the get-order volume, not the amount recognized in each year.

2018 % 2019 % 2020 % 2021(F) % MDS 2,456 54.4% 778 58.3% 1,185 52.8% 1,300 61.9% DN 1,501 33.2% 157 11.8% 875 39.0% OKI 311 6.9% 280 21.0% 30 1.3% NCR 247 5.5% 119 8.9% 155 6.9% TTL 4,515 100.0% 1,334 100.0% 2,245 100.0% 2,100 100.0% 800 38.1%

2021 Banking Automatic System

2016 - 2021 (F) The trend of maintenance revenue

Maintenance revenue will keep growing and GP% is stable.

Phases of Construction, warranty and maintenance are a full cycle of a public construction integration business. With our close clients, MDS is looking for new businesses to duplicate our business cycles and pursuits stable profits.

The communication systems with TRA, NPA and Freeway Bureau

MDS constructed the TETRA system for TRA years ago and has been running the maintenance contract which is NTD 120 million in 2021 for 12 years. MDS will also complete the South-Link line project (NTD 150 Mn) and the optimization project for TRA Electric Affairs (NTD 127 Mn) this year. We will also engage in getting the TRA signal replacement project (NTD 1.6 bn).

MDS has built the P25 police digital handset system in 12 administrative districts of Taipei City. The other cities/counties will execute the analog/digital replacement in 2021 with NTD 3.6 Bn budget.

MDS has constructed the DMR system for the Northern, Central and Southern Construction Divisions of Freeway Bureau. MDS now executes the warranty contract and will enter maintenance contract with Freeway Bureau in 2022.

TPC and NCC

MDS has completed the NBS, NDCIS and HVCSP of TPC. The maintenance contracts of the above systems are NTD 8.7Mn, 13Mn and 6.8Mn respectively in 2021. In addition, we also got the NBS Phase II project (NTD 618Mn) last year and will recognize revenue of NTD 250Mn.

MDS's main goal this year is to complete the High Frequency Monitoring System (NTD 78Mn).

2020-2021 Revenue from major accounts and projects

• The project revenue from major accounts will increase 18.7% YoY.
• Although the revenue from TRA account will drop this year, new momentum could last several years if we can get the signal replacement project (NTD 1.6Bn).

2016 - 2021 (F) The trend of maintenance revenue

Maintenance revenue will keep growing but GP% might slide due to higher cost.

2021 Outlook

• Regarding the banking automation business, the market is going to enter a new replacement cycle because of the delivery of 19" ATM. 2021 is just a beginning and this trend will last for several years.
• The maintenance revenue from banking automatic system will keep growing for several years. The stable gross profit rate and operating income rate are the fundamental issues of MDS's profits.
• Regarding the public construction integration business, revenue might increase while operating income drops. The reason is a lot of labor input makes the expense increase on early stage, however, few revenue could be recognized.
• To sum up, revenue, GP and GP% could grow but operating income might decrease a little due to increasing expenses in 2021.