Chroma ATE Inc

TWSE:2360

Earnings Call Analysis

Chroma Shows Strong Growth in 2024 Q2

In the second quarter of 2024, Chroma reported net sales of TWD 5.5 billion, up 25% year-over-year. Testing equipment, the major contributor, grew 23% from the previous quarter. The gross margin stood at 59%, maintaining similar levels to the last quarter. Operating income reached TWD 1.5 billion, a 68% rise from Q1 2024. Net income increased by 47% to TWD 1.4 billion, resulting in an EPS of TWD 3.34, marking a 38% year-over-year growth. The company expects semiconductor sector sales to drive growth in H2 2024, maintaining similar levels to H1.

Strong Quarterly Performance

The second quarter of 2024 was a strong period for Chroma, with net sales reaching approximately TWD 5.5 billion. This represented a 25% growth year-over-year and a similar 25% growth compared to the first quarter. Thanks to robust contributions from the testing equipment business, which saw a remarkable 23% quarterly growth, the company marked significant progress. Automation MAS also performed well with a 123% growth from the previous quarter and a 15% increase from the prior year.

Solid Financials

Chroma's gross margin during the second quarter was TWD 3.2 billion, equating to a 59% margin. This shows a 27% growth from the first quarter and a 19% year-over-year growth. Operating income also saw a significant jump, standing at TWD 1.5 billion, a 68% increase from the first quarter and a 25% increase year-over-year. Net income for the quarter was TWD 1.4 billion, which was a 47% rise from the previous quarter and a 36% year-over-year increase. Earnings per share (EPS) stood at TWD 3.34, again showing a 47% growth compared to the first quarter and a 38% increase from the previous year.

First Half Performance

For the first half of 2024, Chroma reported net sales of TWD 9.9 billion, a 13% increase from the first half of 2023. Gross margin for the first half was TWD 5.8 billion, reflecting an 8% growth compared to the first half of 2023, despite slightly higher operating expenses. Operating income remained flat at TWD 2.4 billion. However, the inclusion of non-operating items, which grew by 200%, led to a net income of TWD 2.4 billion, reflecting a 20% growth. The first half EPS was TWD 5.61.

Balance Sheet Highlights

As of mid-2024, Chroma's balance sheet showed a 33% growth in cash reserves, maintaining stability in inventory levels. Total assets saw a 7% growth from the previous year-end. Notably, the company maintained strong financial health with no net debt and a return on equity of 21%, which is a slight improvement from the previous year. EBITDA also grew by 15% to TWD 3.4 billion, while operating cash flow was approximately TWD 3 billion, with a free cash flow of TWD 2.2 billion.

Operational Highlights

The semiconductor sector was a significant contributor to Chroma’s first half performance, generating TWD 3 billion in sales, marking a 200% year-over-year growth. The second half of 2024 is also expected to be strong, with overall sales expected to surpass the first half. The semiconductor business will likely continue to be a major revenue driver, maintaining similar revenue levels in both halves of the year.

EV and Battery Business

Despite some concerns around the EV sector's slowdown, the business related to battery plants is transitioning from China to Southeast Asia. While this year may not be a growth year for EV/ATS, minor contributions are anticipated from battery cells and automation plans in 5G and AI products. The company's view on ATS remains unchanged from the beginning of the year, with no expected growth within the current year.

Outlook on Metrology

Metrology is expected to see meaningful contributions as Chroma progresses well with final-stage developments. The demand for metrology testers is forecasted to rise due to increases in advanced packaging, driven by customer projections for various applications. This indicates a positive outlook for this segment in the upcoming years.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome, ladies and gentlemen, to Chroma's 2024 Second Quarter Earnings Conference Call. [Operator Instructions]. And 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.

And now I would like to turn the call over to CFO, Paul Ying. Paul, please begin.

[Paul Ying, executive]

Thank you. Hi, everyone. This is Paul. Today, the 2024 second quarter earnings conference will be conducted by myself and Jennifer. I will start off with the financial review, and then Jennifer will follow up by the operation highlights.

Well, let's go to the second quarter condensed -- consolidated income statement. You can see from here that the net sales of the second quarter of 2024 is approximately TWD 5.5 billion and compared to the first quarter, TWD 4.4 billion, it's a 25% growth. And similar to the 2023 second quarter on a year-over-year basis, TWD 4.4 billion. It's also a 25% growth. And within the TWD 5.5 billion, you can see that most of that will be contributed from the consolidated sales of testing equipment business, which is TWD 5.2 billion compared to the last quarter, it will be a 23% growth. And compared to the last year, it's another 25% growth as to the consolidated sales of the automation MAS, M-A-S.

It contributed [indiscernible] TWD 192 million, it's 123% growth compared to last quarter, and it's a 15% growth compared to last year. So for the gross margin in the second quarter of '24, it's approximately TWD 3.2 billion represents a 59% gross margin. And it's quite -- the gross margin is quite similar to the last quarter, but the absolute numbers, it's 27% growth compared to the first quarter of this year. And compared to last year's second quarter, TWD 2.7 billion is a 19% growth. And for those operating expenses, well, although -- well, along with the growth of the sales revenue, you can see that for the expense, it's a little bit growth. But for the operating income, for the second quarter is TWD 1.5 billion. And compared to the first quarter, TWD 900 million, it's a 68% growth. So the -- compared to the second quarter of last year, it's a 25% growth on the TWD 1.2 billion last year.

So we can see that the second quarter is -- I think the performance is quite good. And for the net income, the final result will be TWD 1.4 billion. And compared to the TWD 976 million of the last quarter is a 47% growth. And compared to last year's second quarter, it's a 36% growth. And this is -- if we deduct the capital gain from the previous year's performance, well, this is the second best or the second highest record of the quarterly financial results and for the single quarter, our second quarter, the EPS will be TWD 3.34. And again, compared to last quarter, 47% growth and compared to last year, it's 38% growth, but this is the second quarter financial results.

And let's see the first half of 2024 on a comparison base. For the 2024 first half, the net sales will be a little bit less than the TWD 10 billion, which is TWD 9.9 billion compared to the TWD 8.8 billion for last year first half. It's a 13% growth and mostly was contributed from the testing equipment business, which is in 2024 first half is 96% occupied by the TWD 9.4 billion, approximately TWD 9.5 billion in that sector. And compared to the last year, TWD 8.2 billion is a 15% growth. So for the gross margin, on the first half of this year, it's TWD 5.8 billion. And compared to the last year, TWD 5.4 billion, it's 8% growth. And along with the OpEx spending, again, it will be a little bit high.

So for the operating income for the -- for this year first half, it's TWD 2.4 billion and quite flat to the last year first half. But if we add up with the nonoperating items, which is TWD 610 million compared to last year, TWD 200 million, it's almost a 200% growth. So that gives us the net income for first half is TWD 2.4 billion compared to last year's TWD 2 billion. It's another 20% growth. So for the first half of this year, the EPS approximately TWD 5.61.

So that's the financial results. Let's go to see the balance sheet highlights. You can see from the comparison of the 2024 first half and compared to the last year year-end, you can see that the cash is pretty much grown by 33%, and it's flat -- almost flat on the inventory. And for those short-term and long-term debt, it's a kind of like a shift due to the CapEx spendings. And for the total assets, it's compared to the last year year-end, it's a 7% growth. And for those turnover days, I think it's quite similar to the year, a little bit better for the inventory turnover, and quite flat to the accounts receivable turnover days.

And for the net debt to equity, again, we are a net cash. And for the return on equity, that will be 21% for -- at the end of the 2024 first half. And compared to last year, its growth and return on equity and return on assets is 14%, which is also a little bit better than last year. And for the EBITDA, it's a 15% growth to the TWD 3.4 billion, and cash flow from the operations is approximately TWD 3 billion as well. For the free cash flow, it's TWD 2.2 billion. Again, the performance will be better than the last year first half. And this is the highlights for the balance sheet and the income statement.

And then let's go through the operational highlights. Jennifer?

[Jennifer Chieng, executive]

Okay. Thank you, Paul. You may refer to Slide 9 for our product mix breakdown for the second quarter and the first half. And apparently, in the first half, the biggest contribution was coming from our semiconductor status. The total sales in the first half generated about TWD 3 billion, and then actually even already over the total semi sales last year. And so presenting the growth from this sector is about 200%. And moving to the second half of this year. We actually expect the overall sales will be better than the first half. And the semiconductor will be continuously as a major contribution to our sales, okay? And for semiconductor sectors alone, we actually think the second half will be similar to the first half.

And I think that's pretty much highlights for our operations. And I think we can move on to Q&A, see whether you have any further questions.

[Operator]

[Operator Instructions] The first one to ask question, correct me if I'm wrong with the pronunciation, sorry. So Wern Juan Chng from HSBC.

[Wern Juan Chng, analyst]

My first question is regarding your ATS segment. Have you seen any pickup in EV downstream? We've heard from your certain customers that the European EV side is doing well. So in that context, have you seen any pickup in EV ATS downstream? And are you still expecting overall ATS to be flat or slight decline for 2024?

[Jennifer Chieng, executive]

As you know, our [ power ] business is kind of -- it's already become our recurring [ sales ]. And as we guided in the beginning of the year, due to EV slow down this year. So we think overall will not be better than last year. I think we will remain similar sentiments of guidance for this year regarding to ATS.

[Wern Juan Chng, analyst]

Got it. And my second question is regarding the semi and photonics segment. [indiscernible] given that for the SLT orders, you've obviously gotten a significant uplift in the second quarter of this year. Is it fair to assume that the customer will digest some of this equipment? And do you have any expectations or whether this SLT booking for this year can remain same into the next year? Then I'll leave my last question for later.

[Jennifer Chieng, executive]

So your questions would be like the SLT over this year and next year, right? As you know, we're dealing with the global Tier 1 customers. So this order being conclude will not be very much changed. And then I think just like we guide last time, they're already increasing order during April and May. I think if you -- if there is any increase in order, I think will be -- should be after they start to shipment this [indiscernible] series. And if your rates, because they need to increase the cycle time, it's likely they will need to buy more testers.

And however, I would like to give a little bit of color regarding to our semi sectors. I think in the first half, I think we have roughly about 85%, it's come for IC testing and 15% that has come from photonic sector. And then you could say the first half, our major -- as you know, we manufacturing and order received. So first half, mostly what we deliver has come from this kind of legacy. But it doesn't mean we don't have any SLT at all. But the second half, we think the breakdown may change because I think the second half of the driver will be many content system-level testers plus their photonic sectors. So you could see 85%, 15% may not be the whole year's breakdown.

[Wern Juan Chng, analyst]

Got it. That's really helpful, Jennifer. My last question -- sorry, go ahead.

[Jennifer Chieng, executive]

So move on to next year, of course, we definitely have some backup orders when [indiscernible], okay, basically, we definitely have some visibility. But we will provide more for guidance in the coming quarters.

[Wern Juan Chng, analyst]

Got it. And then my last question is really on the metrology segment. Essentially, how can you think about contribution moving forward? As you already pointed out, this process is also used in 3D packaging, and there are certain customers in smartphone and high-performance compute adopting this next year or at least qualifying it, but the contribution may not be large. So just wanted to hear your thoughts really on how you see metrology going forward? And if there's going to be anything update in order? That's it.

[Jennifer Chieng, executive]

Obviously, we are progressing at the moment and progressing quite well, yes, in a well position. And since it is in final stage, we won't elaborate too much in details. However, cost will not be the only advanced package. I think in the next coming few years, customers also have other advanced package plan. So -- and this will definitely increase the metrology testers need. So we definitely see this future trials.

[Operator]

Next one to ask questions ,[ Alice Wong ] from Bernstein.

[Unknown Analyst]

Yes, can I ask for the advance package -- sorry, for the metrology business. What's the revenue mix now? And do you think there will be significant in 2025 or even in 2026?

[Jennifer Chieng, executive]

Before final, the answer is for sure. Definitely meaningful.

[Unknown Analyst]

I see. I see. Got it. And then a follow-up question about the EV battery and the power testing business. You mentioned that over the past 2 years, you see here the transition of like battery plant building in China -- from China and moving to Southeast Asia. So I'm wondering if this year is a [ strong ] year for Chroma, what about 2025? And do you see like the recovery of ATS coming in 2025?

[Jennifer Chieng, executive]

I'm not so sure you're asking about ATS or [indiscernible], particularly.

[Unknown Analyst]

How about the overall EV and battery business, combined?

[Jennifer Chieng, executive]

It's very hard for us to combine. Anyway, ATS is very broad sector. It's not only constitute from EV sectors because ATS mostly contribute from EV downstream like a battery pack and other accessories. And Turnkey is mostly related to battery sales. And this year, we're actually seeing Turnkey will [indiscernible] may not be a super growth year, but we probably have some minimal contribution from the cells. This is due to not only we do receive the battery cell projects from Southeast Asia, but we also have some like -- maybe I mentioned last time like 5G and AI product automation plan from customer base.

Okay. So ATS just what I mentioned in the beginning, this is -- this is like on the current cells, like a base cell for our business. You will not see really, okay, EV down and the rest of their CapEx spending, it's also down. So I think our view regarding to ATS is not very much to change for what we got in the beginning of the year.

[Unknown Analyst]

Yes. I see. And maybe last question, your slide, you also show that this AI server power and test solution. So I would love to know that compared to power testers for traditional server, is there an ASP or spec upgrade for AI server power tester?

[Jennifer Chieng, executive]

Because the [ power ] is higher, of course, ASP is higher. Just like I said before, do you see, okay, EV is a demand slow down. But okay, that's the use of delta as a reference, okay? Do you really see delta's overall CapEx spend in the year down? No, right? Because they probably spend that for EV, but they probably increased the CapEx for AI server later. So we also cover this kind of business. But we didn't say we are very optimistic about ATS going for the coming quarters.

I think we just say this year due to these kind of EV infrastructures and we think, well, will not be better than last year. And these kind of balances will not be changed in the coming 2 quarters. But we already give you overall guidance regarding the whole total set will be done in the first half, okay? So rest of that I think analysts could be figured out.

[Unknown Analyst]

I see. And in overall power testers, do we have a number of like what's the mix of AI-related power testers?

[Jennifer Chieng, executive]

We didn't do this calculation.

[Operator]

[Operator Instructions] Next one to ask question, jeff Ohlweiler from Macquarie.

[Jeffrey Ohlweiler, analyst]

Jennifer, for metrology, can you talk a little about that? You mentioned meaningful contributions at some point. Can you clarify, was that meaningful contribution from next year?

[Jennifer Chieng, executive]

My condition is we -- okay. I think this is -- okay, first, advanced package [indiscernible] trends, and you will not limit to just CoWoS. It's also including other package. And honestly, before it can be -- I mean -- okay, the product we focus on is metrology for RDL, and this kind of focus is not limited to just, okay, [indiscernible] RDL, TSV, but we also come with other occasions. We also need to have a metrology. And this is the first driver.

So based on future trends, you will see no matter which kind of package, advanced package, the demand for RDL testers will continue to increase. Second, of course, just like I said, since we are already located at final stage, we already see the customers' projections. So that -- yes, that's why we say it's meaningful.

[Jeffrey Ohlweiler, analyst]

Okay. And then just kind of a follow-up. Can you talk a little about the development of that product? Is that a Chroma branded product designed together with Camtek or is that a Camtek product that you guys are marketing in Asia? Or how does that work with your acquisition company?

[Jennifer Chieng, executive]

No. This is developed 100% by ourselves. I don't know why you have this kind of thought that it would be involved with Camtek.

[Jeffrey Ohlweiler, analyst]

Well, just because you acquired Camtek, you may have metrology technologies. That's why I thought...

[Jennifer Chieng, executive]

Well, that's different...

[Jeffrey Ohlweiler, analyst]

Okay. All right. I'll strike that from my mind. Okay. Great.

[Operator]

[Operator Instructions] There are currently no further questions. 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 disconnect now. Thank you, and goodbye.

[Paul Ying, executive]

Thank you, everyone. Well, this is a very good result for the second quarter. But yes, thank you. Bye-bye.