Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the conference call today. And our management is Jennifer. Jennifer, please begin your call, and I'll be standing by for the question-and-answer session. Thank you.

[Paul Ying, executive]

Hi. This is Paul Ying and Jennifer. Well, welcome, everyone, to the first quarter of 2023 Chroma financial release. I think we have already put the -- our material on the website. The first page will be the first quarter condensed consolidated income statement. This is the first quarter Chroma started using only the consolidated income statement simply because the -- our consolidated -- one of our consolidated entity Chroma New Material. That sector has been terminated after the first quarter end of last year. So without this New Material, I think there's no need for us to show the [ turn ] on the financial statement.

Well, from this page, you can see that the first quarter our net sales amounted at TWD 4.388 billion compared to the last quarter of last year, it's a 28% decrease. But compared to last year first quarter, it's pretty much flat to last year first quarter. Again, the difference is due to the -- those battery-related formation project, which is pretty much a turnkey side. In that part, we didn't deliver any of the sales revenue at the first quarter of this year nor last -- first quarter of last year, that simply will be concentrated on the fourth quarter of last year. So in there, you can see -- also can see that consolidated sales of testing equipment business amounted to nearly TWD 4 billion compared to last year fourth quarter this is a 30% decrease. But again, compared to last year first quarter, it's a 17% growth. And for the MAS, it's amounted to TWD 283 million compared to last year's fourth quarter, it's a 51% growth. And compared to last year first quarter, this is 28% growth.

As to the New Material, again, you can see from here that the final numbers will be the last year first quarter, TWD 618 million. But without these factors, you can see that our first quarter for those core business of testing equipment, well, calculated by somewhere like a 17 -- 16%, 17% growth compared to last year. As to the gross margin, we have a very good performance for the first quarter, simply because -- we'll skip the low margin of the material business. First quarter of this year, reaching at the TWD 2.6 billion represent 61% on the gross margin, and compared to last year fourth quarter, 46% amount is a little bit decreased like 4%. But for the percentage-wise, it's a great improve and compare to on a Y-o-Y basis, TWD 2.1 billion, it's a 22% growth.

And if you look at the look at the expense side, but OpEx side, the first quarter compared to the last quarter and also on a last year first quarter, well, we have a little bit increase but not comparatively growth by the sales revenue growing. So in here, we have a very good operating margin like 27% on a TWD 1.187 billion. Compared to last year, fourth quarter, it's a 13% growth. And on Y-o-Y basis is another 42% growth. And down to the net income, it's TWD 963 million represented 22% of net income ratio. And compared to last year, fourth quarter, it's a 5% growth compared to last year. First quarter, it's a 12% growth. That gives us somewhere like TWD 2.23 as the EPS. And for the balance sheet side, if you look at the -- our balance sheet, it seems that we have a little bit of decrease on the cash, but again, we paid out the debt a lot. So in here, you can see that our -- the rate on our ROE is 18% and ROA is 11%. And the net debt to equity is 0. I think we're improving that as well.

And if you look at the operation page, you also can see our breakdown of the -- our product mix like a chart. The first quarter, when we said the parent company sales reaching somewhere like TWD 3 billion, it's composed by testing instruments and automatic testing system, which is reaching at TWD 2.33 billion, it's a 26% growth on a Q-over-Q basis and it's a 49% growth on Y-o-Y basis. For the semiconductor and photonic testing solutions again, due to the headwind for those semiconductor industry, first quarter reaching at TWD 388 million, and this is a 28% decrease on a Q-over-Q basis and another 56% decrease on a Y-o-Y basis. For the turnkey is small. But again, it's an 11% growth on a Q-over-Q and a 59% decrease on a Y-o-Y basis.

But again, if we look at the -- this is for the parent company sales. If we add up for all our overseas operations and subsidiaries sales revenue, it's reaching at the TWD 1 billion for the first quarter. And on a Q-over-Q basis, this is a 57% decrease and another 70% growth on a Y-o-Y basis. And for that, that compose the -- our consolidated test equipment business on TWD 4 billion for the top line, and this represent a 30% decrease on a Q-over-Q basis, another 17% growth on a Y-o-Y basis. So that's pretty much the breakdown for the sales product mix and I think for the first quarter, we have a very good performance on the gross margin side and also on the top line. So yes, I think this is a typical -- and flat to the last year first quarter. So this is a typical like first quarter kind of behavior. All right. Now turn to everyone, to you if you have any questions.

[Jennifer Chieng, executive]

Sorry, Regina. Before we move on to Q&A, I just want to add a couple of points regarding to the product mix. And the first 1 is regarding the EV battery cell projects, in the first quarter, we only delivered very, very minimum, I mean, not very much contributed from the EV battery cell project. So actually, you can see that on the turnkey solution and also the pretty much standard rate from our sales of our overseas operations. And our EV battery sale projects remain the same, and will start to deliver from the second quarter. So the guidance will not change. And also move on to second quarter, we think the semiconductor sectors probably, in the first quarter, it's sort of -- will be the lowest level for this year. And we start to see the HPC market becomes more activated from second quarter. So overall, the semiconductors and the turnkey solution and also test instruments overall, I think, will be better than first quarter, okay? So now we open for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Jerry Tsai with JPMorgan.

[Jerry Tsai, analyst]

My first question, I think, obviously, is -- will be focusing on the ATS, which had quite strong performance. I think, correct me if I'm wrong, I think it's the best you've ever had. And then just can...

[Jennifer Chieng, executive]

Yes, that's the quarterly record high for the test instruments...

[Jerry Tsai, analyst]

Yes, Yes, also you shattered the previous record by a lot. I was just wondering, can you give us, first of all -- can you give us the latest breakdown in terms of end application? And also, what kind of visibility can we have for this particular business for the remainder of this year? That's my first question?

[Jennifer Chieng, executive]

Yes. Actually, I sent our subsectors on the test instrument in ATS, I think the biggest growth driver first 1 definitely comes from the EV, okay? We laid key components and combined with ESS demand. So according to our current order on hand, we think we will have another year of -- I mean a pretty good year from the test increments and ATS and mainly come from these continued conversion from the EV industry and also increasing demand from ESS.

[Jerry Tsai, analyst]

Okay. Maybe you can also comment a little bit on the competition landscape of this particular part for this ATS, which I believe is somewhat power-related most of it?

[Jennifer Chieng, executive]

We didn't see typical 1 biggest competitors for this industry as we -- this is actually -- is our brand by the factors, and we have been working on this kind of product for like almost 40 years. So despite of the -- I mean, the patent numbers, I think we have quite a strength on the development power-related applications started from the consumer electronic goods and gradually move on to clean tech and EV and ESS lately. So we pretty much growth according to market growth and combined we actually see picking up from this EV and ESS market. So we actually start to prepare these markets like 3 or 4 years ahead. So that's why we -- in general, actually cover -- we actually have quite a large market share from this, I mean power application, yes.

[Jerry Tsai, analyst]

Okay. And maybe just 1 -- maybe 1 or 2 questions about your semiconductors just quick and then I'll get back to the queue. Sure. I think another question I have is the for your SLT tester, do you have some idea of what is the percentage of the end market for HPC? Do you have some idea of the SLT end applications?

[Jennifer Chieng, executive]

Actually, our SLT is pretty much recover of HPC markets. So we -- our customers are actually using our test for all kinds of applications started from the gaming related and then gradually move on to sort of the encrypt currency. I think later this 5 years mostly related to data center servers and also those AI-related applications. And then we also start to cover auto related. And reason auto demand plus is the so-called ChatGPT concept. Actually, is the main driver for our SLT products. Maybe the first quarter is kind of weak could be the seasonality factors plus the customers see the low sentiment from the overall semiconductor success. However, we do start to see customers sort of moving ahead of the quarter, initially, they were considered to start picking up on the mid of this year, which is they believe the second half will be better than first half. But I think because right now, people would like to plan the market ahead, so we start to see those Americans HPC makers become more activate recently. So it's possible we'll start moving those equipments from second quarter. But however, the China ATE system remained weak due to low sentiment on the consumer electronic goods.

[Jerry Tsai, analyst]

So that's my next question, which is for the low frequency tester or things of those nature, what kind of -- do you expect a significant decline for that market for this year?

[Jennifer Chieng, executive]

Currently, our customers did not cancel the order. They just put the order on hold. So we cannot refer that as a loss indicator for whole year. But as to say, we haven't seen any sign of picking up on the consumer last electronic good to be later.

[Jerry Tsai, analyst]

Okay. That's very helpful. And then let me get back to the queue.

[Operator]

And our next question comes from Jeff Ohlweiler with Macquarie.

[Jeffrey Ohlweiler, analyst]

Great. First question, SLT, can you talk about your customers? Is it 1 large customer predominantly? Or do you have several customers?

[Jennifer Chieng, executive]

We don't particularly highlight certain customers. So I will only say those top HPC maker for United States.

[Jeffrey Ohlweiler, analyst]

Okay. And for...

[Jennifer Chieng, executive]

We actually cover all of them. So we don't need to specifically highlight for certain party, yes.

[Jeffrey Ohlweiler, analyst]

Okay. Understood. For the cell business, you obviously you had a very strong year last year and a weak first quarter, but you said they'll pick up in second quarter. How about year-on-year for the cell business this year? Do you expect it to be up, flat, down? Any thoughts there?

[Jennifer Chieng, executive]

According to our current order on hand, if we compare whole year versus whole year last year, I think pretty much the trend is similar. Yes. But if you say the order visibility, yes, we started taking some orders which has already moved on to '24 and '25, yes. So -- but if you say '23, I think the order number is pretty much similar to last year. Yes.

[Jeffrey Ohlweiler, analyst]

Okay. And then if I look at -- if you assume kind of cell business is pretty flattish, you seem like your ATS business looks like it has a pretty strong growth this year. I guess, semi is the only one that's maybe more questionable about whether it can be flat this year? Or what's your thoughts on the semi business for the full year?

[Jennifer Chieng, executive]

Very conservative. Yes.

[Jeffrey Ohlweiler, analyst]

Okay. All right, I'll get back in queue.

[Operator]

[Operator Instructions] And our next question comes from Jerry Su with Crédit Suisse.

[Jerry Su, analyst]

Just wanted to follow up on the previous question about the semi outlook. I think previously in the results briefing earlier in February, I think the guidance was for semi to be flattish around that kind of level. So as you mentioned that you're turning a little bit more conservative now. I'm just wondering, is it only because of the low footprint for tester or for the other segments like photonics or SLT there has been any changes as well?

[Jennifer Chieng, executive]

Not changed. I think we still take the conservative view on the semiconductor sectors. However, I think the loss level probably will be situated in the first quarter. We think the second half will be better than first half. And we also start to see HPC market sort of moving ahead compared to other semi sectors. So HPC-related remains strong. It's pretty much conclude yes.

[Jerry Su, analyst]

Then a follow-up question on the EV battery business. I think in the past few quarters, the company has been providing the quarterly run rate. So although that you mentioned that very little bit. Could you still share with us the revenue for the battery.

[Jennifer Chieng, executive]

You mean our booking regarding to EV battery cell projects?

[Jerry Su, analyst]

Yes, yes.

[Jennifer Chieng, executive]

We don't provide these numbers, yes. But however, the overall this year regarding to EV batter cell projects, according to current order on hand will be similar as last year. This remains no change. But because EV battery cells normally takes a long lead times. And so if you want to do this kind of quarter-on-quarter comparison, that will be very volatile. So we will not give this kind of guidance. Because as I said, in the first quarter, we -- you could say we are not really booking any of the EV battery cell projects. But the second quarter, that we really want to compare to first quarter, that is quite a big jump. So we need to -- we will say we cannot provide these numbers.

[Jerry Su, analyst]

Okay. No problem. So can we assume that the remaining 3 quarters 2Q, 3Q, 4Q, we will see a linear ramp-up? Or it will be more for the EV battery project, you will be more certain half loaded.

[Jennifer Chieng, executive]

For this kind of business is never presented the linear this kind of delivery to close this asset. If we give this kind of total revenue numbers, that has actually come with several and multiple projects. And not to talk about actually our projects right now no longer just comes from China. We gradually to receive the orders around Southeast Asia. And recently, we also granted new order from the Japan battery cell makers. And we also see the picking up the demand from IRA, which is to build out the capacity in United States, which is rolling forward to '24 and '25. So it's very hard for us to give these kind of patterns.

[Operator]

And next, we have a follow-up question from Jeff Ohlweiler with Macquarie.

[Jeffrey Ohlweiler, analyst]

Paul and Jennifer, I don't know if it's me, but it seems like your outlook now seems a little more positive for the full year than it was in February. Is that true? Or do I get the wrong impression?

[Jennifer Chieng, executive]

We do our best.

[Jeffrey Ohlweiler, analyst]

Well, I guess maybe it's an ATS number was surprisingly strong in the first quarter. I mean was that a surprise to you? Or is that pretty much in line with what you expected?

[Jennifer Chieng, executive]

Yes, pretty much surprise.

[Jeffrey Ohlweiler, analyst]

Okay. But like you think you see the same good momentum into the second quarter, so it's not like a 1-quarter jump and then slow down.

[Jennifer Chieng, executive]

We used to -- 5 years ago, we still have quite a big portion that comes from the consumer electronic goods. At the end of '21, we end up around 35% of consumer electronic goods. Maybe last year is around less than 35%, close to like 30% come from consumer electronic goods. In first quarter, I'm sure the consumer electronic goods to be later continue to decline. And -- but overall, we still end up with quite a strong growth come from the test instrument ATS. So you can assume that the EV and ESS is combined actually present quite a strong growth I mean, the sales contribution for our overall ATS state.

[Jeffrey Ohlweiler, analyst]

Okay. How about the solar LED, LCD portion of the ATS, anything exciting there that's not worth mentioning.

[Jennifer Chieng, executive]

Well, if you allow something like the LED driver, solar inverter, I think it's less than -- I think it's low single digits only. So overall, our green tech. I think in the first quarter, our green tech definitely reaches about 50%. I'm sure if you combine -- if you also improve ESS as a part of green tech, I would say. Yes.

[Jeffrey Ohlweiler, analyst]

Okay. So if you have green tech 50%, consumer accounts for 30%, what's the other 20%?

[Jennifer Chieng, executive]

5G power.

[Jeffrey Ohlweiler, analyst]

What power?

[Jennifer Chieng, executive]

5G, 5G, 5G server, data center.

[Jeffrey Ohlweiler, analyst]

Okay. And then one last question maybe for Paul. When you look at the gross margin last year, we had a nice, I said 340 basis point jump. I guess a good part of that is because the closing of CNMC at the end of the first quarter. So you had a 51.5% gross margin last year. Obviously, a very strong start to this year with over 60%. Any thoughts on the full year gross profit margin?

[Paul Ying, executive]

We still think that, that will be somewhere like 55% around 60% is a little bit a surprise to us as well. I think one of the factor is that due to the elimination or the termination of the material business, that would be one of the dilution for our gross margin, definitely. But again, if you look at the overseas all subsidiaries, they've been doing very hard to grow themselves and that will be a chunk of the contributions to the aggregated gross margin. I think that's that we are expecting. But again, everything is due to the product mix. So this year, first quarter, I think we have a very good record. I think this is also the record high for Chroma as well.

[Jeffrey Ohlweiler, analyst]

Okay. Great. Sorry, one quick last question. OpEx for this year, any thoughts on what type of OpEx growth?

[Paul Ying, executive]

I think probably we won't see any very strong growth on the OpEx, but just maintaining the quality numbers and we just finalized the salary survey and increase for this year. So we're pretty much there. So I think it's pretty much like the trend, yes.

[Operator]

Our next question comes from Jerry Tsai with JPMorgan.

[Jerry Tsai, analyst]

Okay. I think -- sorry, I need to clarify about the semi outlook for the whole year because it sounds like some of the demand has been put ahead, some of the demand still remain quite a lackluster. How should we think about the full year semi for this year versus last year? Is it -- do you think you see a stronger chance for you to grow Y-o-Y? Or do you think it's mostly likely going to be ending up flat or even decline?

[Jennifer Chieng, executive]

Okay. Initially, we think the semiconductor success will have largely impacted from this slowing down from the consumer electronic goods related application, which is impact to our ATE system. And overall, we probably the worst year we think will be lower than last year, okay? Last year, we generated TWD 4.5 billion. And then -- but we couldn't give like exactly the numbers. But these 2 months, we start to notice that the HPC makers become more activate. Maybe they want to get more market share or they actually see the demand picking up from the AI performance. So we probably need to watch like a couple of months to see how strong from HPC market and also picking up the -- I mean, building out capacity for these photonics factors. So -- but however, even, okay, we sort of acquired concerted view regarding to semiconductor sectors. But in general, within the second half will definitely better than first half.

[Jerry Tsai, analyst]

Okay. That's very helpful. And also just some quick follow-up question on the battery formation. You mentioned about in the second quarter, you will start to see some pickup. Can I ask some of the order coming from, say, the new customers? Or another way to ask a question is that do you expect some meaningful new customer contribution for this year's battery formation?

[Jennifer Chieng, executive]

For new customers, sure. Yes, I think we will definitely get I think 2 new customers other than China markets. But I think we just want to highlight is the battery cell project will start to deliver from second quarter, yes. But the pattern is very hard to forecast. Yes, because every project, it actually link out with the customer's contract, they put on the deadlines for each project.

[Jerry Tsai, analyst]

Okay.

[Jennifer Chieng, executive]

But however, I think the end of the first quarter, we still have about TWD 1.6 billion cash received in the banks, which is down payment.

[Jerry Tsai, analyst]

At the end of first quarter, right?

[Jennifer Chieng, executive]

Yes.

[Jerry Tsai, analyst]

Okay. Also one a little bit more longer-term question about the battery formation. I wonder this IRA, do you feel it is positive for Chroma if you consider the -- versus your competitor? Like if you think about the competition landscape in -- for this battery formation because you have some Korean makers, you have some Chinese makers also maybe some American suppliers in this field. And I'd like to know what do you think when -- if IRA does become more and more -- it is becoming more and more important factor. Do you think it is beneficial for you guys? Or do you think it's kind of neutral or negative? Yes.

[Jennifer Chieng, executive]

I think we have a better market position compared to the other similar peers because we are probably neutral. I think we can cover all kinds of different markets. But if you consider geopolitics and also the nature of IRA, which is U.S. would like to build out their own ecosystem regarding to EV battery cell and also develop the EV markets. And also, if you consider that recently just rent a new customer who Japan battery cell makers, this is actually a bridging for us to get into the IRA or become part of IRA project. But however, we believe since the EV conversion already start to kick off and the demand continues to increase, we believe that they will definitely attract the newcomer to join these EV market. Recently, we also acquired working quite hard to grant the new customers upon Southeast Asia.

[Operator]

And our next question comes from Kevin Wang with Mizuho.

[Kevin Wang, analyst]

Two questions. First of all, regarding your ATS, you -- because we have the record high for ATS revenue in Q1, you mentioned it continue to grow into Q2 due to the EV business strength. And you also mentioned -- you mentioned that semi revenue will grow in the second half better than the first half. So do you also expect that your ATS to be better than the first half versus your second half outlook? And what is your current order visibility for your ATS to go into the second half?

[Jennifer Chieng, executive]

We actually see the ATS, the second half will be better than the first half. I think right now, this is because we do have I wouldn't say a lot, the few we consider is so-called long lead time components because EV is kind of quite strong areas. So some of the -- we call it the strategic material, actually still under long lead time, which is our order on hand regarding ATS is continue to increase, but we only could do our best to deliver as many as possible. So according to our capacity plan, we actually expect in second half, probably will be different in the first half. This is our current plan. Yes.

[Kevin Wang, analyst]

Very helpful. And also a second question also regarding SLT. People are very interested in this area. And you also mentioned Q2 is driven by a HPC applications and the U.S. customers. And I remember you also have some SLT business in foundries and I believe they also have this kind of HPC product. So do you also see this demand also increase in the near term? Or when should we expect this kind of the revenue contribution to ramp up in which quarter, maybe this year or next year?

[Jennifer Chieng, executive]

I think this year because the market has already started to talk about, yes, like a U.S. company, someone like Google and Microsoft will decide to chip themselves. This is -- I think this is also part of the plan regarding to adopting SLT.

[Kevin Wang, analyst]

I see. So is this also [ already ] in Q2 or...?

[Jennifer Chieng, executive]

I think it should be this year, but not sure. I think should not be second quarter. Yes.

[Operator]

And our next question comes from Wern Juan Chng with HSBC.

[Wern Juan Chng, analyst]

Just a follow-up on the ATS side. Was that driven in the first quarter by 1 customer or 1 particular customer or many customers? That's my first question.

[Jennifer Chieng, executive]

You mean ATS, right?

[Wern Juan Chng, analyst]

Yes.

[Jennifer Chieng, executive]

That's -- actually, ATS is a very, very fragmented market, so actually come from multiple customers. Yes. So you only can give you like a broadly application breakdown.

[Wern Juan Chng, analyst]

Got it. And for Southeast Asia, I mean, it seems the like a slight shift in -- just in terms of contribution or rather your discussions for these projects? Do you expect the contribution for Southeast Asia cell formation projects to be -- to pick up significantly this year? Or is it more a 2024 story?

[Jennifer Chieng, executive]

We will have some. Yes.

[Wern Juan Chng, analyst]

Okay. Sure. And I'm guessing it from 1 particular customer rather than many.

[Jennifer Chieng, executive]

I think should be multiple customers. Yes. So far, we only have 1 or 2 at the moment, but several projects under discussion. So I wouldn't say today -- by today, it's very significant, not yet, yes. But we started taking some of this order from Southeast Asia, and we also see the demand.

[Operator]

And our next question comes from Kevin Chen with Citi.

[Kevin Chen, analyst]

I just want to go into a little deeper because you mentioned that for the battery cell formation business, we're getting some new customers. I'm just wondering, do you have an expectation of how much percentage of these battery formation revenue will be coming from the new customer beyond China? And also approximately if their profitability will be, how is that compared to the ones we currently have in China?

[Jennifer Chieng, executive]

Okay. I -- we actually mentioned before, last year, we start to see the global EV conversion and the first trigger is actually come from European OEMs. And due to this kind of energy risk. So most of those capacity will start to build in China. So this kind of momentum sort of grows for -- from 2022 to 2023. So if you say year-to-date, maybe I would say about -- I would say definitely like over 80% is actually come from the capital demand from China. But the actual user is come from the European OEM. And just like our Chairman provided guidance, it doesn't mean we were not taking any orders since from the beginning of the year, even we already have some order on hand. So we continue to receive the orders. So from February to now, we start to gain like a couple of small projects from Southeast Asia, and we also gain the new customers. Actually, the -- not the pilot is really a capacity built from these Japanese factory cell makers. And we already start to move into some kind of penetration of U.S. IRA projects. So we do see a lot of opportunity come from this kind of EV industry, yes.

[Kevin Chen, analyst]

Right. Just a quick follow-up. Because recently, we are seeing some aggressive price pressure from Chinese automakers. Do you think this will impact in our cell formation from China business in any way?

[Jennifer Chieng, executive]

Okay. I wouldn't say -- this market was 100% no competition, but I think the competition mostly come from the EV battery cell spec. And of course, when you expect more -- due to its complexity, into better gross margin, et cetera, normally competition is mostly comes from standard model over mid-to-low-end type of EV battery cell. So I would say we're quite selective for the project when we go for base, we go for proposal, but it doesn't mean we actually miss out all the opportunities. Yes. So, so far, we're still pretty much selected those projects according to the gross margin because you're already spending like 5 months like a lead time. And then you're able to carefully to penetrate some opportunity not to dilute your margin overall yes? But the project that we dealing with in China, okay, we do everything first, we do cost down. So that's why I suggest to investors to look at our consolidated basis because of some of the capacity or I would say, majority of capacity, which is delivered to China, we decided to do final assembly in China to set the shipping costs and local sourcing some of the components to balance our gross margin, okay? And for some area probably we were adopting different strategies. Okay. I think there's no more questions. So Paul CFO, want to do the closing.

[Paul Ying, executive]

Well, thanks for attending this conference. And I think we have a pretty good performance on the first quarter, and we will keep on moving and trying to improve that for the consecutive few quarters in the later this year. And well, thank you for your attending, and bye-bye.

[Jennifer Chieng, executive]

Bye-bye.

[Operator]

Thank you. Thank you for your participation. This concludes the conference. You may now disconnect. Goodbye.