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Chroma ATE Inc
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Welcome, everyone, to Chroma's 2021 Second Quarter Earnings Conference Call. [Operator Instructions] For 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'd like to introduce CFO, Paul Ying. Mr. Ying, you may begin.
Thank you, Mark. Hi, my dearest investor friends, and ladies and gentlemen, welcome to the year 2021 second quarter earnings conference call. And well, first of all, let me give you the quarterly highlights for the second quarter of 2021.
We made sales revenue to a level of the 2.4 -- almost TWD 2.45 billion. And this level pretty much is the higher than any quarter last year, although we had a little bit fall over the first quarter, due to the first quarter, we had ship out the -- some of the turnkey solutions. But at the same time, well, for the second quarter, it's still a high quarter compared to last year, every single quarter. And this is 8% down on a Q-over-Q base, but 6% up at a year-over-year base.
Our gross margin is still maintaining the higher tier of the -- more than 50%, which is the 54% for this quarter. And our operating margin reached at the high end of the 25%.
Our net income is contributing at TWD 481 million. This is down for the 79% on a Q-over-Q base. Basically, it's due to the first quarter very high on -- the setting of the -- our original Huaya headquarters. And this is down 18% on a year-over-year base. And mainly, it's due to the credit loss we provide at the second quarter, which is approximately at TWD 260 million.
And for the second quarter, the major growth sector in second quarter is contributed from the Test Instruments & ATS, which these sectors presented a growth of 18% on a Q-over-Q base and a 9% year-over-year, respectively.
And if we go to the detail for the income statement, you can look at the next page, which is the second quarter compared to the first quarter and last year's second quarter. So in here, you can see that there's a drop on the top line on 8%, and again, a 6% growth on the year-over-year base. And gross margin, we maintained 50-some percent and -- on the year-over-year base and also the Q-over-Q base.
And for -- as to the expense, well, we see some growth on the either G&A and R&D expenses, mainly coming from the -- we have a structuralized salary increase at the year-end of last year. And the main reason for that is compared to the mark-to-market and trying to attract the talent people. And operating income, we reached at the 25%, around TWD 610 million. And compared to last quarter, it's a 12% drop. But compared to last year, it's 7% up. And again, if we look at the extraordinary gain or losses, you can see from here we break even in the second quarter of this year mainly due to the credit loss from the MAS and for a single customer in energy. So in there, we pretty much take all the bad debt loss. That's the credit loss. So it's kind of 100% of provision for all the AR from the single customers already. So if we excluded this single factors, so it still give us back around TWD 0.60 EPS. So right now, we're making pretty much like TWD 481 million as the net income and give us TWD 1.14 EPS. But if we add back the credit loss, this gives us around somewhere TWD 1.7, which is even better than the last year second quarter. So this is the second quarter numbers.
If you look at the first half of the parent company, for the sales revenue for the first half of 2021, we made somewhere like 51 -- TWD 5.1 billion. And compared to last year, it's a 17% growth. And this is the record high for the first time of Chroma's history. So we are expecting that if we maintain these numbers and try to reach the same level of the sales revenue for the second half, then we are expecting that where -- we come to a level of over TWD 10 billion kind of club.
And even for this high growth of the sales revenue, we still maintain a gross margin at somewhere like 53%, 54% and similar to the -- to last year. And the gross margin is somewhere like TWD 2.7 billion. And again, this is a 17% growth.
And for the operating expenses for the SG&A and also the R&D expenses growing, well, again, that's mainly due to the structure -- salary increase for the employees and especially for those talent people.
So operating margin for the first half of this year is somewhere 26% and reached at the TWD 1.3 billion. Compared to last year, this is a 22% growth.
And again, for the nonoperating, well, we benefit from the -- we reached at the -- at TWD 1.9 billion for the extraordinary gain due to the sale -- the selling of the Huaya headquarters approximately somewhere like TWD 1.7 billion. And again, there's -- another factor will be the credit loss for the MAS for 100% write-off before the payout of the bad debt, and it gave us the TWD 1.9 billion net for the nonoperating items.
And again, for the net income, we reached at the level of TWD 2.729 billion. And compared to last year, it's a 159% growth. And for the first half of 2021, the EPS bring back somewhere like TWD 6.5.
As to the highlights for the balance sheet then, you can see from here that the cash status and -- is growing, well, due to the inflow of the transaction of the selling of Huaya headquarters closing at the first quarter of this year. And then we paid back some of our debts to give us a better net debt-to-equity to single digit, 2%. And we are still at the double digits at the end of last year, somewhere like 23%. So this is quite an improvement for the financial status.
And if you look at the free cash flow for the first half, you can see that we reached somewhere like TWD 3.1 billion (sic [ TWD 3.2 billion ] which is a pretty good performance.
As to the -- for the second half of this year, our guidance -- well, again, as a summary, if you look at the first half of 2021, our total consolidated sales revenue reached at TWD 8.7 billion, and this represents a growth of 2 -- 21% on a year-over-year basis.
As to the parent company, our sales revenue reached at TWD 5.1 billion, and this is a growth of 17% year-over-year. And this is mainly contributed from semiconductor and photonics testing solutions and -- which was increased by 23% compared to the year 2020.
And for the second half of the 2021 and also the whole year's business outlook, it seems to us that the semiconductor and the photonics testing solutions remained strong in second half. So we are pretty -- here, we are pretty optimistic. This is continuing to drive the increasing demand of the automotive IC and the development of the 5G-related and high-performance chip, HPC, applications.
And these key drivers are somewhere like wireless RF and MCU testing solutions, CIS and CMOS image sensor and VCSEL and the ToF testing solutions, also combined with the high reliability testing solutions such as the burn-in test, SLT test with the thermal control dedicated for industry like EV application. And also the testing instrument of -- and ATS for power testing solutions continues benefit from the green energy. These sectors including EV-related components, battery cell, battery modules, battery pack and smart grid and 5G, server-related power testing.
And the last bullet point will be the developing -- we are entering into the development of the augmented -- AR and virtual reality, VR, glasses. And also, this will be driving the demand of the testing solutions from the second half. So we're starting from there.
Okay, this is my presentation and the highlights. Any questions?
Yes. We can move on to Q&A.
[Operator Instructions] Our first question is coming from Jeff Ohlweiler from Macquarie.
Paul and Jennifer, first question. MAS write-down, what steps are you taking to try to get that money back? Is there a possibility that you'll see write-backs at some point? Is there anything you can do in terms of -- I don't know, about court in China. Or if you can -- if they need aftersales service or something, how you hold that back? I mean is there any repercussions for them and expectation that you do get payment at some point?
Well, no legal actions yet. But since -- it's been a while. And until this year, we've been providing 50 -- more than 50% at the provisions. And right now, we think, probably it's time for us to get rid of those old issues and then moving forward. So we just kind of put out on provisions and then just trying to move on.
Does that equipment that you sold to them need aftersales service or anything? Or, I mean -- or how do they go about maintenance if you can't support them many more if they're not paying?
To my understanding, it seems to us that energy is free there.
Jeff, if you -- back to year 2018, we -- the 10% was warranty that we couldn't collect. According to the contract, we only could issue the invoice after 1.5 years. In service, we'll continue to answer -- you provide a comment regarding to energy. We just book everything on provisions. And basically, because according to our, I mean, mass is order on hand. They do have several projects coming in the second half. And we don't want to spend time to -- dealing with this kind of issue. Especially if it's just a warranty, according to the contract, they -- we'll just -- every automation project, they all have a 10% warranty.
Okay. On the strong ATS momentum, both Q-on-Q and year-on-year, was that mainly EV related? Or is that across the board?
Mainly EV related, especially from second quarter and onward to move on to second half. Most of the ATS and T&M is mostly deal with battery pack, battery modules not only limited to China market but also include overseas markets.
Okay. And my last question before I jump back in the queue, the semi/photonics, obviously, still a very strong first half and a pretty good number but down Q-on-Q and year-on-year. So what's the reason for a relatively weaker than first quarter? And how does that play out maybe third and fourth quarter?
Okay. Regarding the semiconductor sector, it's due to some components having a long lead times. And so we -- our lead time also extended, which is -- we already explained during the second quarter to investors. Our lead time vary, have extend from 2 months to 3 months to -- so pretty much in line with recent long lead times for some of the components. So some of the delivery times have been rescheduled and the deal with customers and move on to second half.
And -- however, according to our order on hand and also delivery schedules, we believe our semiconductor and photonic sectors' second half will be better than first half, and our target for more than 20% growth rate has not changed.
The next question is coming from Davy from HSBC.
So I just have a quick question on augmented reality and virtual reality part.
Yes.
Is that the same type of supply chain that we've seen on the smartphone side of business?
No. Well, it's -- actually it's new customers. And it's from U.S. So it's a top -- it's a -- I think it's -- yes, from the top 5, yes, the joint company. And we just want to deliver that -- regarding to AR/VR, this kind of a testing solution need has continued to increase because of these top 5 joint companies have started to invest on these kind of glasses products. And to our market share right now, I think we already gained like a 2/3 -- more than, I think, 50% of market share. So we are well positioned regarding to these kind of AR/VR glasses testing solutions.
Okay. Very clear. Also, what is the magnitude like in terms of this type of a new end product? Is it similar to what we have seen at the -- inside the smartphone [ Aegis ]? Or is it smaller than -- somehow?
I couldn't comment on what it would look like for the customers' products because we only deal with their manufacturing. And what we provide is including the assembling, how to make those -- I don't think it's goggles. It's glasses through the automation and plus the testing. So you actually combine 2 parts, assembling with the testing with the images, yes.
The next question is coming from Gun Woo from JK Capital.
I have 2 questions regarding -- first one is about this AR/VR equipment. Is it -- I mean, I want to know, what kind of the -- how this equipment is actually used. Or the -- what is the testing method? Is it like -- first of all, I want to -- what kind of like modules or the applications are -- this equipment is testing? And I want to know if it is like testing the signal. Or is it a -- testing like -- is it a visual like vision testing or like just the traditional like signal testing? Yes, those kind of things. That's the first question. And yes, let's start from there, yes.
Well, we actually train the new customers, and those customers already start to invest the production line regarding to make those glasses, AR and VR glasses. And what we provide is assembling line to put -- making these products 100% [ pure ] automation designed. And we also provide a testing solution to ensure those images' quality and also safety issues. Since those images are so close to your eyes, they need to make sure those images are reliable and also safety enough to pass the U.S. standards.
All right. All right. Very good. Okay. So second question is about the SLT machines. I want to know, what is the current revenue contribution within your top line and the number of clients currently.
Okay. Our SLT mostly deal with HPC markets. So application includes GPU, AI sensors, CMOS image sensors and auto related. And we mostly deal with fabless. Then -- they buy those equipment and consigned to all sets. So customers include like NVIDIAs, these pretty popular -- second half, mostly strong, delivered by CMOS image sensors. So you can look at, obviously, the image sensor makers. I think we had already covered most of the CMOS image sensor makers, right, on high, mid, low end. And we're also starting to deliver to -- related to RF because when we combine the final testing with SLT together, it's going -- one, they pretty much will fit into the markets. And so we're also getting some new customers like the IBM customers from U.S. So this are the -- pretty much our exposure to SLT markets.
And what is the current revenue contribution?
We don't give a breakdown regarding just SLT alone. But last year, we already comment that SLT reached a milestone, which is over TWD 1.7 billion, for last year. And this year, we'll look for another double-digit growth.
The next question is coming from Jeff Ohlweiler from Macquarie.
Yes. Just a follow-up on the last question on -- not necessarily SLT but for the 20% or just the semi/photonic growth. Where are you seeing the stronger growth in that area versus weaker growth for that category?
Strong growth. Mostly -- because our -- which is already answered regarding the SLT, which is second half mostly drive by this CMOS image sensor and RF related. Another issue, I think, pretty much like -- according to UMCs, those power management IC market is still under -- the demand is still very strong. I don't think this kind of MCU power management chips will be able to fulfill until end of this year.
So I think -- because those like -- well, simple like MCU, the biggest -- one of the biggest markets is -- actually come from China. And regarding to the China market, those liquid markets, you can say Chroma pretty much dominates, and we have very high market share after several years of [indiscernible]. So this is where we see the strong growth coming from. And I think we're able to maintain the -- our target regarding the semiconductor and photonics sectors.
Does that mean photonics is on the lower end of that growth for this year?
I wouldn't say that because, for example, AI sensor -- AI-related category is still one of the biggest customers. I don't really compare photonics versus so with the IC testers. You could say, yes, just this year, particularly IC test is very strong, but it doesn't mean the for photonics sector has kind of really slowed down because I think the major issue is optical objects or optical-related components having a very long lead time. This is pretty much in line with like the comments on laggards. Like lens, the lead time is much longer than some of the key components on semiconductor sectors, I mean, IC.
Okay. And then one last question before I jump back in the queue, I guess.
Yes. Yes.
Your -- yes, your sales from overseas operations and related subsidiaries have seen strong growth last year and also year-to-date this year. So what's driving that strong growth? And is that also very accretive to margins? Or is that mostly like a -- just a revenue line but not necessarily a lot of margin in that line?
We don't -- because the overseas does not only deal with markups. So it's very hard to tell what kind of gross margins because those markup is just a -- it's actually showing our final selling price to our customers. But they actually indicate a sign that -- the rebound from the U.S. market and Japan markets after pandemic.
And also Chinese market.
Yes. But Chinese actually remained really strong last year because China didn't impact very much from pandemic. But I think this year, the overseas rebound is mostly come from U.S. and Japan markets, yes.
Okay. And maybe one last quick question. Any forecast for MAS revenue this year?
According to the order on hand, I think they will be better than TWD 600 million to last year. Last year was low.
And the second half will be a bit of shipments. So I think second half will be better than the first half.
According to the current pipeline, I think first quarter mostly related to probably new customers. And fourth quarter, they will be -- fully supports our battery business. I think we will see this as the trending up from the EV industry. And you probably can expect another CapEx cycle regarding to EV battery cell. I think several EV makers already deliver power EV battery cells under shortage.
[Operator Instructions] The next question is coming from Gun Woo from JK Capital.
The -- I wanted to know about the EV. So you just mentioned about the EV industry. And can you remind us about the revenue contribution from the EV battery equipment recently like last year and, well, this quarter? And what do you see in the second half?
Okay. Our EV business, we cover 2 parts. First one is related to EV battery cell. And this cell is chemical stuff. So you need to combine, you need to provide a full solution, which is integrated with automation. And we book this business under turnkey solutions. Rest of EV components, no matter charging, power modules, battery pack, battery module, adapter, charger, because they only need testers like testing, field testing, and we will book under test measurement and ATS.
So I think your question is regarding to EV battery cell in the past few years. I think in the past 5 years, especially for '16 and '17, we do enjoy the height, strong demand, picking up on China moving to EV battery cell, to manufacturing. So at that time, I think most of the China, the capacity was -- come from, let's say, Chroma. And at that time, most of the capacity build is for European cars. The standard is much higher. Of course, profit margin-wise, it's better.
For a few years, we mostly -- most of the time, most of the projects, we tend to be very selective because we're more cautious about the -- some of the batteries cells, especially for local cars. Maybe margins were not as good as like -- due to the standard differences. So rest of the years, we mostly deal with overseas projects, or we just delivered the testers from China local SIs to do the integration for the capacity build in china.
So if you can follow up our turnkey solution, it actually shows the progress of the EV battery cell business. And I think that particularly, the things we highlight today is we are very under preparation [ underprepared ] for next year or 4 years these CapEx cycles, especially investing in the EV battery cell. The reason for that, number one, is first, because of political reason. Some of -- people -- as you will see from these research reports, people -- several countries would like to reduce their manufacturing reliance -- relied on the China manufacturing. So you -- we'd start to see like in particular u.S. and China would like -- or the U.S. and Japan would like to build out their capacity for them.
So -- and of course, China is also going to be -- add capacity, and then I think -- according to our current strength. And also, we're about to deliver new solutions. And I think we are well positioned regards -- or to -- for these coming CapEx cycles.
So -- well, in terms of competition in the U.S., European market for EV orders, how did it look -- how is it different from the time like 5 years ago?
We'll continue to highlight this issue. EV is very much related to so-called safety issues. So most of the EV components required very high standards of reliabilities, you can say, not only for EV components but also especially for EV battery cells. Globally, not many makers, especially for testing equipments. And only those are -- those carmakers or automakers, they are -- because they're reluctant, so were -- barely change their suppliers. So price is not very elastic in this market. So if you look at those -- for example, battery cell for major systems, I would say probably not more than 5. And if you look at who supply the full integrated solutions, I would say definitely less than 5.
So after 5 or 6 years today, if you only look at only those few players, including Chroma, Korea's [ P&E ], U.S. [ SmartCore ], and -- just those peers. And not to talk about 5 years, of course. Our technology definitely migrate or step up, so -- to be more competitive, not only the price but also the functions.
Very good. Just lastly, can you comment? Like what is the revenue contribution in the second quarter from the EV like for the testing machines only?
If you look at like the test measurement and ATS, I think first half, we generate -- let me see. I think we generate TWD 2.5 billion, which is with the single digits. And I think our first -- I think we'll look for like a high single-digit growth for this year because second half, we do have several orders regarding to the overseas battery pack and the battery module. And if we -- if a market runs faster than we expected, maybe we can have like a low double digits this year.
But this business, our ATS and test measurement, it's -- every year, we -- just stable growth. We hardly see them have a significant decline in the past over few -- well, 5 or 6 years. Yes, it's our bread and butter sectors.
The next question is coming from Paul Griffin from Schroders.
Jennifer, just on metrology, any update there ,please?
Yes. Metrology, yes, I'll only say, yes, you take more longer time. We do have order, but just customer side, you already heard their investor conference. Their schedules and progress is -- still struggle with -- a little bit struggle with the new technology. So honestly, I think it will be similar as the last year as our target regarding to metrology orders. But I need to be honest. I think the progress is longer -- seems longer than we expected, yes.
Sorry, what specifically is the issue? You mentioned technology.
Oh, we -- our -- one of the customer -- EV customer is [indiscernible]. And the reason is their hands are full. And so regarding to the equipment moving, it takes longer times than we expect.
Oh, I see.
Yes. Just a schedule issue. It's not an order issue.
The next question is coming from Jeff Ohlweiler from Macquarie.
One more question. Just to clarify, the AR/VR product you're talking about, is that through turnkey?
Yes. Yes.
Okay. And then next question. ESS, energy storage systems, anything interesting going on there for Chroma?
Sorry?
Your question again?
Sorry.
Yes. I know you haven't mentioned this before. I was curious since you guys do a lot of power testing, whether ESS, like the energy storage systems, if there's anything that Chroma does in that area.
Oh. No. I think because if you talk about battery recycling, because those batteries have been tested, I don't think we have a -- probably they don't really need testing.
Okay.
Yes.
And then lastly, any update on -- how's the nanoparticle tester in terms of year-on-year momentum? Are you seeing more orders in that product? Do you have any additional product coming from that subsidiary?
Okay. Nanoparticle, the testers -- already been stacking testers for these foundry customers. So the same situation is metrology. It's all because the customer schedules is too tight. So the equipment moving tend to be just kind of behind schedule, to be honest.
[Operator Instructions] There are currently no questions. I will hand it over to CFO Paul Ying for closing remarks. Mr. Ying, please proceed.
Thank you, Mark. Thanks for everyone's questions and attendance for this meeting. And it seems to us that we delivered a very good result at the second quarter and the first half. And moving forward, we are still looking at the second half, well, to give you an even better result. Thank you. Bye-bye.
Thank you.
Thank you. 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.