Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2024-Q1

[Operator]

Welcome, everyone, to Chroma's 2024 First Quarter Earnings Conference Call. [Operator Instructions] For your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.chroma.com.tw/investor/index under the Investor Relations section.

I would now like to introduce our CFO, Mr. Paul Ying. Paul, you may begin.

[Paul Ying, executive]

Thank you, Frank. Hi, ladies and gentlemen, this is Paul Ying. Good afternoon. Welcome to the 2024 first quarter earnings conference call. This conference call will be conducting in English. Well, and we -- and conduct by myself, Paul Ying; and Jennifer Chieng, Directors of the Investor Relationship. And afterwards, will be the Q&A section. In the Q&A section, we will answer your questions on the -- on your language base. If it's English, we will answer by English and you are free to use the mentoring to take your questions, and then we will answer accordingly.

Well, I think you all -- all of you have got the first quarter of 2024, the presentation in our website. So regarding to the first quarter consolidated income statement. You can see here the consolidated sales for the first quarter of this year is the TWD 4.4 billion. Compared to the last quarter of last year, it's a 12% drop.

Well, mainly, it's due to the drop on the test equipment business, which is dropped by 13%. And if we compare to the -- on a year-over-year base to the last year first quarter, it's pretty much flat to the last -- to the first quarter of last year.

And for the gross margin, you can see here, we flagged the gross margin compared to the last quarter of last year, but we have a 4% drop -- due -- on the year-over-year base due to the gross profit margin is a little bit lower than last year. As to the operating expenses, I think due to the headcount increase and also the compensation adjustment, we have a bit of a higher OpEx compared to the last quarter of last year and as well as the first quarter of last year. So for the operating income, it's somewhere like TWD 900 million, and this is a 13% drop compared to the last year's fourth quarter, and it's a 24% drop compared with the first quarter of last year.

But for the non-operating items, it seems to us that this is a good year of the first quarter, which is a bit of growth on the non-operating items. It's contributed mainly from the exchange gain as well as the -- those profit gaining from the subsidiaries and the related corporations and make up somewhere like TWD 319 million. And compared to the negative numbers of the fourth quarter of last year and also a very small numbers of the first quarter of last year, it's pretty much a high growth.

But for the net income, our first quarter number is TWD 976 million compared to the -- on the Q-over-Q base, it's a 16% growth, 18% growth and it's flattish to the first quarter of the last year on a Y-o-Y base.

So for the first quarter of the 2024, the EPS is somewhere like TWD 2.27. Again, compared to the fourth quarter of last year, it's a 20% growth, and it's 2% growth compared to the first quarter of last year.

As to the balance sheet highlights, you can see from the next page, the cash and the short-term investment is a bit of growth, which is a 13% growth. And the inventory is pretty much flatted to the year-end of last year. And for that -- for the short-term debt, it's a bit of a decrease and the long-term debt is higher than the last year's fourth quarter.

And for the Return on equity, it's 18% and flatted to the last year, year-end and return on assets is 11% is pretty much similar to the last year year-end. And EBITDA for this year is pretty much flatted to the first quarter of last year, and cash flow from operations is TWD 1.2 billion and free cash flow is somewhere like TWD 840 million.

And this is the short brief of the financial numbers. As to the operational highlights, let see Jennifer to take it over to have the presentation.

[Jennifer Chieng, executive]

Okay. Thank you. Good afternoon, everyone. This is Jennifer. I will go through our product mix for first quarter and share some of the updates for each sectors.

We had a strong growth from Semiconductor and Photonics sector and the Turnkey Solutions in the first quarter. As you may refer to Slide 8 for details, okay? First, to start with our Test Instruments and ATS, which has increased 11% quarter-over-quarter and -- but declined about 28% year-on-year. And this is due to a slowdown in EV market demand compared to last year.

And move on to Semiconductors and Photonics sector, which will be the major driver for this year. It presents a 38% quarter-over-quarter growth and increased by 207% year-on-year. In the first quarter, the major growth is contributing from China legacy demand and follow-up by Photonics applications. But market expects a system level tester for HPC, will be started shipping from the second quarter and this is based on the customer's schedule.

And next one for Turnkey Solutions, which has increased by 60% quarter-over-quarter and 279% year-on-year mainly from overseas non-China EV battery cell projects. The total parent company sales in the first quarter was TWD 3.4 billion, combined with overseas sales of TWD 866 million. The total consolidated testing equipment business entity, the sales is about TWD 4.3 billion.

And our 100% subsidiary MAS which generates about TWD 86 million sales in the first quarter with other subsidiaries with TWD 73 million. Total consolidated sales in the first quarter was TWD 4.4 billion and which were declined about 12% quarter-over-quarter and flat compared to last year's first quarter. And this is now in second quarter and we move on to the peak season. We expect the second quarter will be better than first quarter. We do see customers are going to increase more orders not only for AI chips, but also improving auto-related chips. So overall orders are more than we have seen back to February.

And I think that's quickly update for our product mix. And now we are open up for Q&A.

[Operator]

[Operator Instructions] Our first question has come from Kevin Chen with Citi.

[Kevin Chen, analyst]

So my first question is regarding the Semi/Photonics division. As we see, there is quite a bit of very strong growth in the first quarter. And Jennifer just mentioned that this is mainly driven by China legacy demand as well as the Photonics. I was wondering, first of all, how long this demand increase is going to persist into the second quarter? And going heading to the second quarter, do we see -- what would be the main driver for this segment going forward? This would be my first question.

[Jennifer Chieng, executive]

Kevin, so your question is mainly to China legacy, right?

[Kevin Chen, analyst]

Right. That's correct.

[Jennifer Chieng, executive]

I think I only could say it's not only one-off for the first quarter, we do have some order visibility for coming this quarter. Yes.

[Kevin Chen, analyst]

Okay. I remember, the segment typically, the visibility is about 3 months. So that means so far like second quarter, the orders momentum is still quite strong, right?

[Jennifer Chieng, executive]

We couldn't guide the numbers for -- as you know, second and third quarter are the peak season for our business. And as we guide in the beginning of the year, Semiconductor and Photonics sectors are the major growth driver for this year. So definitely, the fact that bring out the peak season will be mainly come from Semiconductor and Photonics sector.

[Kevin Chen, analyst]

All right. My next question is regarding the -- I see the -- our R&D expenses increased quite a lot in the first quarter. So I was wondering if you can share what is our key focus area for our research right now? And when do you think our R&D is going to turn into new products or new contribution going forward? Is there any new product in the pipeline diluting that you are expecting?

[Paul Ying, executive]

The R&D expense, Kevin, I think it's occupied like 12%, 13% averagely each of the year. I think, it's an investment, but I couldn't tell you that the -- what area or what category we are focused on, because when we say R&D, it's research and development. So for our business operations, I think for our business units, they will focus on the development of the current product series or product group. But for the corporate R&D, they were focused on the research for the -- for longer term of the technology development. So they are pretty much diversified, just similar to our product range. So in there, I couldn't give you any that kind of a guidance, because if you count the project right now, probably it's hundreds of projects in the company right now and working on each of the single R&D department.

[Kevin Chen, analyst]

Right. Okay. Just a quick follow-up then, for the -- I guess, for the AI chip, you also mentioned the automotive related chip order is also increasing. Can you share a little bit more detail into this part? Is this going to drive faster growth in the ATS or other division?

[Jennifer Chieng, executive]

I think the key message here is to compare what we're guiding back to February. And what actually has increased compared to last time we guided about the Semiconductors orders. And we do see the customers offering, I mean, not planning. They are actually increasing order mainly come from these 2 applications.

[Operator]

And our next question is come from Wern Juan with HSBC.

[Wern Juan Chng, analyst]

I have 2 questions. My first question is regarding your EV -- legacy EV power testing business. I'm just curious to know what are your expectations for growth into 2024? Do you expect this to track 2023? Because a lot of your customers are, based on our conversations, seem to have been seeing better-than-expected demand. So just curious to hear your thoughts there.

[Jennifer Chieng, executive]

Are you pointing on this EV demand over China legacy, which is ATS system?

[Wern Juan Chng, analyst]

EV power testing, the module is not the battery cell formation, not the China legacy EV power testing.

[Jennifer Chieng, executive]

Okay. Well, okay, so you are pass wording of at this test instrument ATS, right?

[Wern Juan Chng, analyst]

Yes, yes.

[Jennifer Chieng, executive]

Okay. Basically, I actually take what we -- the breakdown to both the sectors, I think the major drop, I mean, the decline versus last year is mostly come from this EV-related. So as you know, for the EV market, we cover both upstream and downstream. Upstream mostly related to EV battery cells, which is a formation system. We normally go under 20 on overseas, okay? In the past, we mostly booked under these 2 sectors. But we also covered downstream for this EV components testing, including battery pass motor, power modules, charger, charging stations. And this is mostly just a selling a tester instead of combined with automation. And this part will book under test instruments and ATS. As you could see, this year, overall demand for EV markets related flow compared to last year. So the major driver is actually coming from the downstream. Also will be, I mean, lower in the downstream, I mean, not only for upstream is lot slow, but also the downstream also slow.

[Wern Juan Chng, analyst]

So your downstream EV demand -- Thanks, Jennifer by the way. So your downstream EV demand has been quite resilient. So would this be similar to growth last year?

[Jennifer Chieng, executive]

Similar, what do you mean similar growth? I think, if you just remember, as we generated quite a strong sale from the test instrument ATS last year first 6 months. It mostly comes from those EV-related downstream. And also, we do have a battery cell business, right? If you look at the whole year project. But however, if you look at the last year, if you say the last year, why we generate such high cells, which is mostly come from EV downstream. I think, it's very hard for us to say, okay, it's really 100% because of EV. Because as you could see, battery power also covers energy storage, ESS. So we could say, "Oh, that's all the stuff. And this year, we are a little slow.

[Wern Juan Chng, analyst]

Got it. Understood. Very clear. My second question, Jennifer. Just trying to understand your systems, your AI SLT portion, just broadly, right, broadly, do you see higher competition in the space? And then, also could you comment on the testing intensity for AI GPU. Do you see a higher testing requirements for the AI GPUs or same as last year?

[Jennifer Chieng, executive]

Sorry, I didn't hear the last part of the question. You see you compare AI chips this year to last year of what?

[Wern Juan Chng, analyst]

The testing intensity. So like -- so like the chips you test, do you see more testing requirements from the customer because the chips have -- they need to cover the chip spot rate. So there are defect rates on the chip side, right? So they need to order more equipment or do you think it's the same as last year in terms of testing requirements? Yes.

[Jennifer Chieng, executive]

Well, so our system-level testers actually customers use our tester for 100% testing. So actually test every single bit of a chip. That's number one. Second, the last year, we do deliver more portion -- and you could say, considered as the first phase is regarding to B-Series no matter you think about the 100 GB, 200 GB. And I think this year, customers are building on the capacity to fill out the capacity they need for this series of products. So I'm not so sure how you define those intent, but that's including the spec, B is much higher compared to Edge and plus the throughputs and also the complexity.

[Wern Juan Chng, analyst]

Yes. That's right. That's very helpful.

[Operator]

[Operator Instructions] Our next question is come from Jeff Ohlweiler with Macquarie Research.

[Jeffrey Ohlweiler, analyst]

First question, for ATS, even though EV is down this year, you -- at the fourth quarter conference said that overall ATS should still be up. So can you talk about, one, is that still true? And two, outside of EV, where some strength in the ATS, what end markets?

[Jennifer Chieng, executive]

Jeff, basically, the major decline compared to last year first quarter, it's just BOE as is related. And I think the overall this year probably just like we guided in the beginning of the year, probably flat to slightly decline and probably do see that, yes, just overall mostly come from the EV related flow compared to last 2 years.

And as you know, we do this kind of ATS business, I mean, power testing business for like 40 years. So we are very much diversified into different applications, not into consumer, but also 5G power clean tech, et cetera. So you probably expect maybe EV to slowdown, but like the 5G power demand increase. But however, overall, we describe are flattish or slightly decline compared to last year overall for this year.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And then one kind of follow-up question. Do you think, you said EV cell and downstream should be weaker this year than last year. Do you think this year should be the bottom and you'll start to grow again next year?

[Jennifer Chieng, executive]

You mean, EV, sorry, I mixed up the question with battery cell. We still have an EV battery cell project, but just like we mentioned before, EV battery cell this year is shifting. As you could see, China is pretty much saturated and reach out to so over capacities. So the demand definitely comes from rest of the countries instead of China itself. So you could consider this year is like a transition year for EV markets, transit on China demand to rest of the world, including Southeast Asia and planning to move on to Europe and U.S. So I think we are not the person who manufacturing the EV and also EV components. Maybe we are not the right person to come and say, oh, really, this is EV bottom.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And maybe one last question. If you look at the kind of around all your products, any change in competition or intensity competition now versus a year or so ago? Or are things pretty much normal across the board?

[Jennifer Chieng, executive]

So far no. Not really, the one sectors we could, like I highlighted. I think, especially most of the products customization. So this is how we differentiate with others. Yes. But just go back to your first question, basically, we still have EV battery cell projects, but just not confirmed, China markets as we had in the past 2 years. Yes. Thank you.

[Operator]

And our next question is come from Derrick Yang with Morgan Stanley.

[Hong Ji Yang, analyst]

So I've got 2 questions. The first one is regarding your Semiconductor and Photonics business. So could you give us some guidance regarding the growth rate that you are looking at for 2024 as a whole for this business? And the second question is yes, maybe I'll ask the second question later. Yes.

[Jennifer Chieng, executive]

Derrick, I think back to February, our Chairman, just guided we will probably be able to reach back to 2022 level, which is a imply a start at 50% growth rate. But based on our current sentiment and also the order visibility we do see customers going to add more orders. I think we should be doing better than what we're guiding back to February.

[Hong Ji Yang, analyst]

Okay. So a little bit of upside to that -- back to 2022 level guidance.

[Jennifer Chieng, executive]

Yes.

[Hong Ji Yang, analyst]

Okay. And the second question is regarding your battery cell formation business, including your Turnkey business and also your -- the business included in the overseas and other segments. So for that battery-formation business, do you expect that to grow or to decline on a full year basis in 2024 versus last year?

[Jennifer Chieng, executive]

This is somehow pretty good question. Overall, EV battery cell project this year, probably considerately speaking, probably that was definitely not more than last year, yes. But we do have other -- maybe we probably will have other Turnkey projects. So we probably will give the more clear pictures in next time, we have second quarter's earnings release, yes. Because we actually process at the moment.

[Operator]

[Operator Instructions] There are currently no questions at this point of time. Thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit www.chroma.com.tw/investor/index under the Investor Relations section. You may now disconnect. Goodbye.