Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2023-Q2

[Operator]

Welcome everyone to Chroma's 2023 Second 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 the website, www.chroma.com.tw/investor/index under the Investor Relations section.

I would now like to introduce our CFO, Paul Ying. Paul Ying, please begin.

[Paul Ying, executive]

Thanks, Frank. Hi, everyone. This is Paul Ying, the CFO of Chroma. Welcome to the 2023 Second Quarter Earnings Conference. Today, it will be myself and Jennifer to give you a presentation regarding to the second quarter earnings and the forecast for the second half. I think we have already put the presentation material on the website. You already get that.

So in the Slide #5, you can see the condensed consolidated income statement for the second quarter. You can see from here the net sales for the second quarter will be TWD 4.41 billion compared to the first quarter, TWD 4.39 billion, it's a bit of a flat which is only 1% growth. But compared to last year, TWD 4.93 billion, it's 11% drop. Well, in there, you still can see that for the sales of the testing equipment, which is occupied like 95% of our total sales for the second quarter is nearly TWD 4.2 billion. Compared to the last quarter, it's a 4% growth, but compared to last year second quarter, it's a 10% drop.

So in there, you also can see that the gross margin for the second quarter reaches at somewhere like TWD 2.75 billion. And compared to the first quarter, it's a 3% growth, but compared to the last year, second quarter, it's a 5% drop, mainly due to the new material business was terminated at the first quarter of last year. So I think in there.

You also will see the OpEx is pretty much consistent with the top line and approximately 6% growth on a Q-over-Q basis and only -- flat to the last year for the second quarter. So for the operating income, it reached at the TWD 1.2 billion compared to the last quarter, it's a 2% growth and compared to the last year, it's an 11% drop.

For the nonoperating part, the main difference for the second quarter compared to the last quarter, it's not only -- it's 144% growth, but compared to last year, it's a 79% drop due to the -- our disposal of the investment approximately TWD 500 million. So that's the major difference from this quarter compared to last year.

So the net income, we make at little bit over TWD 1 billion and compared to the first quarter of this year, it's a 9% growth. And compared to the last year, it's a 37% drop due to the differences of the last year, the disposal of investment a little bit over TWD 500 million, that's the main reason. So the earnings per share for the second quarter is approximately TWD 2.42 compared to the first quarter, it's a 9% growth, but compared to last year, it's a 39% drop, again due to the disposal of the investment.

For the first half of the 2023 compared to last year, I think you can refer to the Slide #6, which is the first half of this year reached at the TWD 8.8 billion compared to last year TWD 9.3 billion, it's a 6% drop. But with the total amount drop, you still can see that consolidated sales of the testing equipment for this core business, it reaches at the TWD 8.24 billion occupied like 94% of the total amount. And compared to last year first half, it's a 2% growth. And for the margin, again, the differences of the first half of '23 is TWD 5.4 billion compared to the little bit over TWD 5 billion of last year, it's a 6% growth. And again, for the OpEx for the first half of this year compared to last year, it's a little bit over like 5% to 3%.

So the operating income, we're reaching TWD 2.4 billion compared to TWD 2.2 billion, it's a 9% growth. Again, for the nonoperating items, the differences will be the -- mainly is from the disposal of the investment makes 5 -- a little bit over TWD 500 million of last year. So this year shows a bit of a drop like 76%. So again, the net income for the first half will be little bit over TWD 2 billion compared to last year's TWD 2.54 billion. It's a 21% drop if we take the disposal of the investment, well, barely, I think the achievement of the earnings is pretty much similar.

So for the first half, the earnings per share for 2023 first half will be TWD 4.65 compared to last year, a little bit under TWD 6, it's a 22% drop. This year financial statement for the first half and also for the second quarter, as to the balance sheet, you also can refer to the Slide #7.

Here, you can see the level of the cash and the short-term investment a little bit drop, but again, at the same time, the short-term debt is also being paid off. So here, again, inventory is still growing. Well, a lot of other reasons, but that also should prepare for the future achievements. And for the inventory turnover, a little bit over our expectation, which is the 266 days compared to last year, a little bit under 150 days, I think it's beyond our expectations. So we expect it will be dropped back to somewhere like return it 2x every year. So we are expecting it return to the 180 days to 200 days somewhere over there.

And for the return on equity, it's double digit, 19% for this first half of 2023, and the return on assets is also 12%. And as to the free cash flow, I think it's a little bit low, I think due to the CapEx we're spending for our expansion for our second phase of our headquarters, I think this is the reason for that. So this is all the financial numbers. I would turn to -- well, pass it up to Jennifer to give you the first half -- second quarter and first half product mix and sales breakdown. Jennifer?

[Jennifer Chieng, executive]

Okay. Good afternoon, everyone. I will give a summary for the first half product mix and also give some color regarding to the second half. As you may see from the product mix, the first half compared to last year, I think the biggest drivers come from the Test Instrument and ATS. And the biggest driver behind that mainly come from the EV drive. And first half, we actually grew like 46% year-on-year both in Test Instruments and ATS. And last year, I think the biggest driver actually come from Semiconductor, especially for SLT started deliver from second quarter. But first half this year, actually, Semiconductor and Photonics sectors was the biggest drop around 56% compared to last year first 6 months.

Okay. Turnkey Solutions because they have quarter basis, so it will be better to look at the whole year. But I think the whole year is supposed to be -- able to reach somewhere around last year or even better and we can go down to more details later. And regarding to the overseas operations, first half, we generated about TWD 1.9 billion. And we only booked around TWD 150 million for EV battery cell. So most of the China EV battery cell orders will start to deliver in the second half.

Okay. And looking forward for the second half of this year. Apparently, the first half, the biggest drivers come from the EV industries. And the second half, I think the situation will start to change. Due to China's EV consolidation factors, we do see the slowing down from these EV drives contributes to these Testing Instruments and ATS. And however, I think this sector is still able to reach about double-digit growth year-on-year comparison. The driver for the second half definitely come from Semiconductor and Photonics factors, particularly come from first one is AI-related chips and HPC markets, demand for SLT testers. And plus, we do receive some rush order for these optical fiber communications.

So we're seeing these factors over for this year. Well, you could see [indiscernible] and growth much better compared to first half, okay? Because overall, for this year, we still believe that the second half will be better than first half. But the whole year basis, it's probably flat to slightly declined. Okay. And gross margin overall, I think we still just do our best to maintain the gross margin level around 55% plus or minus. I think it will be seen somewhere around this kind of level, okay? And now we open for Q&A.

[Operator]

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

[Kevin Chen, analyst]

Congratulations on the nice results. I have two questions here. So first of all, a little bit on the margin side. I see that in the second quarter gross margin, we have improved quite significantly quarter-over-quarter. I was just wondering what's the main reason behind the strength? What's this product mix? Or there's some other specific reason? Because I recall earlier this year, we're expecting the full year gross margin to be around 55%. Just wondering has something fundamentally changed?

[Paul Ying, executive]

Gross margin, we still think that -- we still consider 55% will be somewhere that we are pretty much satisfied, over that will be pretty much like a bonus. But again, in consolidated gross margin, we used to enjoy pretty much like 40-some percent up to 50% well, mainly due to the dilution from the material business. But starting from last year first quarter, I think we don't have this kind of a dilution anymore, we terminated the material business. So moving forward, I think -- again, we still pretty much like focus on 55% as our expectations. And over that we'll be somewhere like -- overall satisfaction. Thank you.

[Kevin Chen, analyst]

I think next question will be coming back from the AI-related prospects. I think I'm quite curious on what the management is thinking about AI-related revenue, especially around the SLT growth in the second half of this year? Because my understanding that the first half was probably turned out to be a little lower than previously expected. So I was wondering why we think about this growth in the second half of this year and possibly next year as well? As you know, the key foundry also mentioned that we're probably -- they're expanding their cohorts by 2x next year. So is this something that's being more accelerated than previously expected or something that's still somewhat within our expectations? Just wondering how our management is thinking about this part of revenue growth going forward?

[Jennifer Chieng, executive]

Okay. Kevin, this is Jennifer. Yes, we do see, I would say, quite significant pick up in the order, especially from the second half. As you know, I think previously because some of the output is pretty much stuck at the foundry site. And I think customers are pretty much ready to ramp out -- I mean, for their new products, which they're planning for the early next year. So what happened in the second quarter is I think we mentioned at the beginning of the year, they already placed the order even with the down paid, and they decide to -- maybe half the order, they decide to upgrade because it's no longer meting their product roadmap for the coming, I would say, next one or two years. So you could say, half of orders, which is their original place has been pushed out to the second half because they want to do further upgrades. And that is we need to charge for their further upgrades. And they also placed another order for their -- for building out a new capacity for their new product.

So the current market that you have seen for those AI chips is not -- I would say, currently, our customers are planning to build out capacity for their new products and not really intent on their existing products. And couple of new customers, someone who are planning to -- for the ASIC, I think they already start to buy testers, but the biggest capacity ramp is supposed to be next -- the planning is '24 and '25 since they already gave us their product roadmap and the capacity planned for next two years.

So if we launch everything together, as you know, just like we mentioned before, this year, as you can see, interest rate continues to increase, so the CapEx become more expensive. So in this day, people mostly spending their CapEx either on the EV-related or AI-related and these two industries are normally quite high, I mean, it's quite expensive. Yes. And other sector, we haven't seen any sign of a recovery. I mean, especially for, if you just talk about additional CapEx or additional demand.

[Kevin Chen, analyst]

Right. Just one quick follow-up. When you're talking about half of the order being upgraded, was this upgraded for higher specs or higher throughput and if so, is that going to be how much up, AST upside would that be?

[Jennifer Chieng, executive]

We actually -- yes, I think our Chairman mentioned about this, so I can recap a bit. We actually -- regarding order upgrade, we actually raised around 70% of pricing for the higher -- it's not -- cannot be a throughput because, okay, in -- current markets have two parties, one part mostly focused on the big sides, design. And the other party mostly focused on chiplet. But either side, they couldn't enjoy due to their design and the size. It is very difficult to come up with like a huge throughput.

Normally, even our highest throughput, the most high levels of -- high class of the SLT, currently we're able to process the throughput is 20 die size, plus or minus, you need to use like 4x, like either it's 16 or 24. So it is not really like -- this is why we find it very tricky from some other analysts, how come they calculate such a big amount of AI chips. So far, we haven't seen this kind of -- that kind of throughput at the off stream.

[Operator]

Thank you. And our next question is come from Jerry Su with Credit Suisse.

[Jerry Su, analyst]

I just want to go back -- circle back to Jennifer's previous comment about Semiconductor second half to be better than the first half. So how should we think about full year basis? How did Semiconductor/Photonics segment perform compared with last year?

[Jennifer Chieng, executive]

Well, we can't give the numbers guidance, but we can give you some color. Well, to do better than last year, probably will be very challenging. But to do similar as last year, this is something we can work on. So if you look at our Semiconductor sales, we only book 1 billion, and then you can think about how much we need to book in the second half. And that probably equivalent to how much order we have received. As usual, we normally comment the order we received. We don't give like some kind of dream or covers for the unreachable stuff.

[Jerry Su, analyst]

Okay. So probably just -- are we seeing like 10% different consumers last year than something we cannot target for?

[Jennifer Chieng, executive]

I don't comment on numbers or on target numbers.

[Jerry Su, analyst]

Okay. And then on a full year basis, you mentioned that the revenue will be around flattish to a slight decline. So I think looking at those numbers, it seems like that the Testing Instrument, yes, this should still be one of the -- although the growth will be a little bit accelerating, but I think second half should still be similar or compared to first half? Should we think it that way?

[Jennifer Chieng, executive]

No, I think second half, I mean, the sales for Testing measurement --, I mean, we sales before Test Instrument in the second half will be lower than first half. But overall, this year, we're still able to achieve double-digit growth, but not quite double like the first half. Just like we guided in the beginning of the year, our biggest constraints come from the China semiconductors, which is the legacy product. Because just like we guided, in the second half Semiconductor sectors, biggest sales contributions, many -- number one, comes from SLT; second rush order for the Photonics sectors optical fiber communication.

[Operator]

Thank you. And our next question is coming from Jeff Ohlweiler with Macquarie.

[Jeffrey Ohlweiler, analyst]

First question, you mentioned rush orders from fiber optics. Is that U.S. or China?

[Jennifer Chieng, executive]

Can I not comment on client basis. So that is -- yes, because actually second quarter, we already start to -- actually, second quarter biggest contributions come from optical fiber communication, I mean, for the semi side. And then we also received the rush order for third quarter. Yes.

[Jeffrey Ohlweiler, analyst]

How about if you can't comment on customer, how about just hemisphere, Eastern Hemisphere, Western Hemisphere?

[Jennifer Chieng, executive]

Sorry.

[Jeffrey Ohlweiler, analyst]

Okay. I'll go on next. Long-term growth, if you're looking at next year 2025, do you still think ATS and EV downstream package related testing can still see very strong growth? Or do you think would kind of peak short term? And kind of the same question for Semis. I mean, what do you think, looking at the next couple of years, without talking about numbers, what's going to be the fastest growth area do you think? And where are we going to see maybe some negative growth?

[Jennifer Chieng, executive]

So your first one is asking about ATS, right?

[Jeffrey Ohlweiler, analyst]

Yes. Because it's been so strong over the last, I'd say, 4 quarters at least, it has been very strong, and you say down half and half, and second half. So do you think we peaked or...

[Jennifer Chieng, executive]

Yes. This year mostly comes from EV. I don't think second half will -- we only could hope for next year, we'll have some recovery from consumer electronic goods. We didn't see any kind of CapEx recovery come from like a traditional sector like consumer electronic goods, et cetera. Yes. But for Semi, I think Semi because you need to take a long-term view. So yes, '24, '25, our customers, they do have a schedule of a capacity build plan, especially for those [indiscernible] customers. But we are currently granting some other HPC makers. We are almost to finalize couple of new customers.

[Jeffrey Ohlweiler, analyst]

If you look at just this year for SLT, is your larger customer still a very large percent of the SLT sales? Or is it getting more diversified?

[Jennifer Chieng, executive]

Start with diversify. I have to say, okay, we are not serving one customer, but that customer has been worked with us for 10 years. But we actually cover most of the ASIC and HPC makers, more or less, it depends on which product they default. Because some customers like Qualcomm, Intel, they probably only focus on auto. So they just -- today, they mostly focus on buying thermal control. They probably don't looking for something like a full testing function, like our series of 3200, something like that. So it really depends on the customers they planned. Yes, but we actually cover most of the HPC makers.

[Jeffrey Ohlweiler, analyst]

Okay. All right. Maybe one last question. I know, Paul, you get a lot of questions on gross profit margin, which, from our perspective, it's very hard to forecast given you're over 60% in the first half, you're guiding for 55%, but you're certainly tracking well above that number, so you'd have to have a very low number in the second half to get near your 55%. So it sounds like you're being very conservative and still trying to understand better. If you look at the parent company gross margin over the last 5 years, they don't even include CNMC, you're tracking well above that. So I'm just trying to understand is -- I mean, 60% just the couple of quarter anomaly or is that possible to sustain or at least well over 55%, that sounds like a conservative number?

[Paul Ying, executive]

Well, agree and disagree. Basically, I think for the parent company, we always show you the expectation for the gross margin somewhere like 55%. But for the consolidated, again, due to the product mix, we're still expecting that 55% as an expectation. Over that, it will be pretty much beyond the satisfactory. But again, it's customer's call on the combination or the product mix. So I'm not telling you that the -- for the first two quarters, it's somewhere over 60% and it definitely will be over 60% for the next few quarters. I think we're still expecting that somewhere like 55%, and that's somewhere that, yes, we expected.

[Operator]

Thank you. And our next question is come from [indiscernible]

[Unknown Analyst]

I'm just wondering if you can please introduce a bit more about your competitive advantage in SLT product. I'm just wondering if you can maybe share some data point on it as well. Like say, for example, what was your share on SLT testing to your biggest customer? And also, I know other your bigger competitors like Advantest and they are ramping up their SLT testing capability as well. So just wondering how competent are you in kind of taking majority of the growth going forward?

[Jennifer Chieng, executive]

We couldn't do this kind of comparison because both of us were Chroma to other peers, we actually launched a different stack. And our strength mostly focused on thermal control. If you look in the market today, well, to build the SLT markets, you need to -- honestly SLT mostly benefit by 2 things. One is advanced package, the other thing is power density continue to increase.

I think last year, HPC average power density already I think, average about 800 to 1,000 watts. And according to, as I just mentioned, our new order, customers are planning to escalate to more than 1,000 watts. So based on these patterns, we're able to -- capable to manage the power and also do the thermal control. Currently in the markets, we couldn't see any second party, so we couldn't do this kind of comparison because both -- I think each of us actually focus on different section of testing. And we only could comment only AI-related or HTC-related need during this SLT process because SLT process is final, final testing. Actually using Advantest testers for single testing and after that, you do this kind of so-called physical testing.

And regarding to thermal, actually, we registered several patents. And even next year, we're going to launch a new design, especially to further improve our thermal control on a stock basis. And this is -- we just -- you could say, very exclusive. And then currently, customers already decided to adopt and we do have a pattern couple of years ago. So it's very hard for us to say we won't position ourselves a full vendor. But based on this kind of technology, this is like why most of the customers pick our solution.

[Operator]

[Operator Instructions] Our next question come from Wern Juan with HSBC.

[Wern Juan Chng, analyst]

Jennifer, I have two questions. My first one is which regarding your competitive edge in SLT. Can I clarify that your competitive edge is really regarding SLT? Because you customize on SLT side, you are able to provide better test coverage compared to larger peers like Advantest. That's my first question.

[Jennifer Chieng, executive]

Okay. Our position is not for SLT as a whole market. I think our position is SLT for AI-related and HTC use. So we don't cover SLT, like for example, handler for signal testing, like Advantest tester because even you do signal testing, you still need to have a handler, but can you say handler is not part of SLT? I think they're part of SLT because SLT needs to have a handle. And we don't cover SLT for CPU. And memory, you don't need to have SLT. So to better describe our position is we only remotely cover the SLTs for AI-related and HTC.

[Wern Juan Chng, analyst]

Got it. And my second question is just regarding our battery cell formation project. Can I get some color just in terms of the delay in terms of the second quarter ramp? What was the reason from your Chinese customers -- sorry, your European customers via China?

[Jennifer Chieng, executive]

This is based on contract. Because they pay us down paid and the payment schedule is based on the contract. We couldn't convert the respective revenue, mortgages against the contract terms. So mostly booked in the second half.

[Operator]

And our next question is come from [indiscernible].

[Unknown Analyst]

So my first question is that for SLT because this is a very final, final product testing. So I just wonder if this kind of ethic or GPU become more complex, do you think we will need more SLT going forward? Because I don't think -- I was just wondering, can we improve the SLT throughput because if player has more transistors, I don't think that ATE can cover all the testing. So I just wonder what kind of competition between SLT and ATE going forward?

[Jennifer Chieng, executive]

I think the key point is not 100% come from -- okay, the throughout is determined by, number one, the customers' die size, and second is the power density because power density actually is quite a critical point that related to thermal control design. And thermal is quite physical features, you can't use software to stimulate this kind of testing. Yes.

[Unknown Analyst]

Yes. So if this kind of GPU defined architecture is becoming more complex and it will require some more high voltage and high -- I would say, higher temperature for thermal testing. So can we increase the throughput for the clients or the clients need to upgrade or buy more SLT for the testing?

[Jennifer Chieng, executive]

Okay. According to the current customers, the next -- well, maybe not in 5 years, but next, say, 3 years, product road map. And according to their designs and power density, I don't think they could increase the throughput. Yes. Because as I said, one party is mostly focused on the big die models, and the big type of die size will continue to increase according to current plan.

[Unknown Analyst]

Got it. One more follow-up is that in addition to ship the new equipment to the client, do the client needs to upgrade their current installed equipment for the next generation or the further testing requirement going forward?

[Jennifer Chieng, executive]

Sorry, I don't quite get this question.

[Unknown Analyst]

In addition to ship the whole new equipment, cap the machine to clients, can clients just upgrade or they need to upgrade already installed equipment for the further because -- for the next-generation GPU testing?

[Jennifer Chieng, executive]

Okay. I know your point, okay? The answer is no, because that is -- yes, probably our customers have no plan to add the current model of [indiscernible] because this is not -- the reason why they need to do this kind of upgrades because they decide to move on to new products. And if they want to do new products, then they need to go for higher throughput, 3200 model. Because the 20 -- I would say, between 16 die to 24 die, this is the maximized throughput. And -- but current back-end process, they -- most of their tester is using legacy models. And this is not able to upgrade and not meet the customers of new products.

[Unknown Analyst]

Got it. So my next question is regarding the cohorts because I remember you -- management team mentioned this kind of cohorts in [indiscernible] system. Could you give us some color, what kind of product you provide for this cohort technology.

[Jennifer Chieng, executive]

Yes, our Chairman particularly highlights -- I think it's on the slide, he mentioned about on the slide -- I think this system called 7980. This was mostly to test [indiscernible]. I think he covered this one. I think the other model is only for this kind of -- yes, mostly for RDL process. Yes, I think we start to ship, I think, this quarter. Yes.

[Unknown Analyst]

Because TSMC mentioned this kind of AI demand will like have like 50% CAGR and they need to increase a lot of capacity in terms of cohorts. So I'm just wondering how the company calculate or estimate this kind of cohorts demand or contribution to the firm?

[Jennifer Chieng, executive]

I'll probably couldn't comment how many testers that customers place to us. But as you can see, even they did -- half of the first order upgrade is still not enough, they need to place another order. So we can't interpreted the upstream which is to foundry process their capacity, but we can tell you that most of the new capacity or the older that customer plays to us is for the new product early next year. Because those upgrade orders and new orders have the -- we have to deliver 100% by end of this year, yes, so it will be all contributing in the second half. But I don't know how this is equivalent to the foundry capacity. Yes.

[Operator]

[Operator Instructions] There is currently no questions. Thank you.

[Paul Ying, executive]

Okay. Thank you, Frank. Well, thanks, everyone. I think this is the end of the second quarter earnings conference and moving on to the third quarter and the fourth quarter of the second half of this year, we are making more efforts in trying to make our commitment happen. So thank you so much until next time. Bye-bye.

[Operator]

Thank you for your participation in Chroma's conference call. There will be a webcast replay within an hour. Please visit our website, www.chroma.com.tw/investor/index under the Investor Relations section. You may now disconnect. Bye-bye.