Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2020-Q3

[Operator]

Welcome, everyone, to Chroma's 2020 Third 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 like to introduce CFO, Paul Ying. Mr. Ying, you may begin.

[Jennifer Chieng, executive]

Hi. Good afternoon, everyone. Welcome to Chroma third quarter conference call. This is Jennifer speaking.

Because the test equipment business models, the first quarter and third quarter results will be focused on only our financial status. The operation status will be stayed the same as the last we guide in the second quarter. And this call will be hosted in English and beginning with 5 to 10 minutes of financial highlights, hosted by our CFO, Paul Ying; then followed by some key issues addressed on the product mix. We will move on to Q&A afterwards, and you may ask the questions either in English or Chinese, and we will comment accordingly.

Now I will pass on to our CFO, Paul Ying.

[Paul Ying, executive]

Hi, everyone. This is Paul from Chroma.

Well, for the first 3 quarters, Chroma consolidated income statement, sales revenue for the first 3 quarters reached at TWD 11.355 billion, and this is 20% growth on a year-over-year basis. And for the gross margin, the number we made is around TWD 5.613 billion, and this is 49% on gross margin and 22% growth on a year-over-year basis. And for the operating margin, we reached a little bit over TWD 2 billion, which is TWD 2.028 billion, and this is a 51% growth on a year-over-year basis.

As to the parent company, for the third quarter alone, if we look at the sales revenue, approximately TWD 2.394 billion. This is a 4% growth on a Q-over-Q basis and 22% growth on a year-over-year basis. And for the gross margin for the third quarter of the parent company reached at the 55%. And for the operating margin for the current quarter, it's at 27%, and this is over decades of record, which were -- will be made over 25% of the gross margin ratio. And for the net income, we reached at the TWD 583 million, and this is flat to Q-over-Q basis but 21% growth on year-over-year basis.

As to the third quarter numbers, the sales revenue in third quarter is mainly contributed from semiconductor and photonics sectors and the testing measurements and ATS. For these sectors, we've been doing [ equilibrium ].

And as to the -- for the year of 2020, our guidance still maintain pretty similar to what we have on the last quarter, so please reference to the 2020 guidance. And this is pretty much my brief to the financial statements for the third quarter. And now I open to any questions.

[Operator]

[Operator Instructions] Our first question is coming from Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

First question, it looks like gross profit margin in fourth -- sorry, in third quarter for both parent and consolidated was up Q-on-Q, which was positive, but the OPM, like it was down. So can you talk about why it looks like the OpEx was a bit high in the third quarter versus the prior quarter?

[Paul Ying, executive]

Well, the main reason for that is for the provision for the bad debt. I think, well, for the third quarter, we increased the provision for the bad debt, mainly is for the MAS.

[Jeffrey Ohlweiler, analyst]

So what was roughly the number of increase for the bad debt?

[Jennifer Chieng, executive]

Jeff, are you focused on the consolidated financial statements, right?

[Jeffrey Ohlweiler, analyst]

Yes.

[Jennifer Chieng, executive]

Coming to the e-mails we sent out, that includes some consolidated financial statements. And in the third quarter, we do the valuation for the AR accounting for MAS. So there is a provision for bad credit -- bad debt for MAS if you look at the consolidated basis.

[Paul Ying, executive]

Yes.

[Jeffrey Ohlweiler, analyst]

Okay. And any thoughts about that coming back at some point? Or is that a -- not looking good?

[Jennifer Chieng, executive]

I think this issue, we have been addressed a couple of several quarters ago that the MAS, they have some warranty fee that's 10%, which is considered as warranty fees. And I don't think this year, they're able to gaining more extra order to cover this kind of warranty cost and claim those warranty costs back. So our auditors have to evaluate those AR accounts.

So without these parts, I think the operating expense is not as high. I think it's pretty similar as of last quarter's or not very much changes.

[Jeffrey Ohlweiler, analyst]

Okay. And then the second question, last question, can you talk about fourth quarter outlook by the parent product and also just overall consolidated, how the momentum is in the fourth quarter?

[Jennifer Chieng, executive]

Fourth quarter outlook is based on [indiscernible] will be similar as the third quarter or maybe around [ 40 ] up or down, not very much changes, yes. And we do have several projects on hand planning to deliver. That's including EV battery cells. And also, we do have another customers planning to relocate to South Asia. I think these projects being postponed due to pandemic. And we're expecting the customer to be able to deliver before end of this year.

And we don't have very much change according to the older guidance. So overall, I think we're still able to reach, I think, later top line [ opportunity ] is like 20% -- sorry, around double-digit growth. I think bottom line, 20% should be -- yes, 20% growth.

[Paul Ying, executive]

Well, overall, I think we expect the year 2020 is go back to the traditional seasonalities; well, second quarter to third quarter probably to the peak. And we're expecting fourth quarter probably somewhere like third quarter or a little bit down like between first and second quarter. I think that's where we expect it.

[Operator]

The next question is coming from Jerry Su, Crédit Suisse.

[Jerry Su, analyst]

Just want to follow up on your comments about the -- some order are -- that is scheduled in fourth quarter. I remember previously, you mentioned that some of the turnkey projects this year are supposedly should be booked in the 3Q. So now it sounds like this will be in fourth quarter, right?

[Jennifer Chieng, executive]

Yes.

[Jerry Su, analyst]

And then is there any risk for further delay?

[Jennifer Chieng, executive]

Okay. Well, the reason for delay, postponed from third quarter to fourth quarter is due to customers that [ factors ] construction schedules being delayed. But this order is already been secured by later of quarters. So we're still able to plan the order. Anyway, we -- hopefully, everything could be delivered before end of this year. So that, I think according to our guidance, that is already including those several projects on hand.

And I think it's already end of this year. We don't want -- maybe our guidance is not very much changed. I think we're still able to reach like a double-digit growth for top and bottom line for this year. And I think we already start to move on to next year. And I think we already -- I think several of our customers, especially for semiconductor sectors, already start to replace -- repeat order to us. But we don't think we're able -- due to lead time issue, we don't think we're able to deliver or helping up the fourth quarter to be a strong quarter like last year.

[Jerry Su, analyst]

Okay. And then speaking of 2021, can you provide us some of your initial outlook? Or what do you think about each segment for next year?

[Jennifer Chieng, executive]

For -- okay. For third quarter, I think our biggest delivery is SLT, system level testers. And that's mostly covered by AI -- mainly come from AIoT-related. We just almost finished to deliver those big projects in the third quarter for the particular customers. And the customers already placed another single size or even big sizes for the next year. And so you can see actually AIoT so far, especially for mostly IT-related, we can see the pretty much strong CapEx needed for coming next years.

And we do have several projects regarding to VCSEL coming on next year. Our customers are planning to launch new products by adopting new VCSELs and also solving today's some of the maybe facial recognitions new spec for next year.

And regarding to optical fibers-related, it's also photonics sectors. Maybe this year, the biggest strong growth coming from China, and you may see this kind of trends slowing down in the second half. But you see this year, mostly is not from the United States. So currently, we do see some several customers or vendors, similar peers, are planning to phase out this market because they think they couldn't compete the Asia's vendor like us. So we don't see several order has been transferred to Chroma. So we expecting next year, maybe U.S. will start to building out those optical fiber-related when this 5G installation speed up.

[Jerry Su, analyst]

Okay. And then lastly, maybe this question is for Paul or -- it's related to that, the credit -- the expected credit impairment. I think this year, you have already done that for 2 quarters. So how much is left? Should we expect any impairment into the fourth quarter?

[Jennifer Chieng, executive]

How much, sorry?

[Jerry Su, analyst]

Yes. How much of the credit impairment related to MAS, the AR? I'm just wondering how much is still left on the AR that potentially could be written down.

[Paul Ying, executive]

I think that the provision has been over 50% and more. So I think the last of that will be -- well, the -- not the majority of the impairment left. So -- well, you can calculate it, but -- yes.

[Operator]

[Operator Instructions] The next question is coming from Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

Yes. Can -- Paul and Jennifer, can you remind us for how the headquarter sale is going in terms of timing? What's the cash flow? What's the gain? When do you expect to see that gain? And what do you expect to do with that cash?

[Paul Ying, executive]

I think for the -- Jeff, for the construction of the new headquarters, I think this is your questions, right?

[Jeffrey Ohlweiler, analyst]

Yes. And then the sale of the old headquarters in terms of that cash coming in and also the profit and when that hits the P&L.

[Paul Ying, executive]

I think the construction -- I think for the CapEx spending for the construction of the new headquarters, right now, it's reaching the final stage. And probably, we're going to see that the new headquarters, start to use that at December. And for the position of the current headquarters, I expect that will be cashed in at the cash inflow probably on the first quarter of 2021.

[Jeffrey Ohlweiler, analyst]

And can you remind us what's the gain on the sale of the old headquarters? And what do you plan to do with that cash?

[Jennifer Chieng, executive]

We expect to have a cash gain around TWD 1 billion, slightly over TWD 1 billion. And of course, we do consider as a payout. Yes.

[Operator]

The next question is coming from Mark Li, Citi.

[Mark Li, analyst]

I would like to have some update about the SLT businesses. I remember last time you mentioned, this year, we'll have this -- like reaching TWD 1 billion of the sales mainly by U.S. chip makers and Taiwan [ OS ] players. Do the target of sales -- you guys still have that target or any revision of it? Because one of the customer that -- the edge customer has been in the [ entity ] list and would like to have some idea about that.

[Jennifer Chieng, executive]

Okay. Let me summarize the overall operations of [ SLT ], okay? Our Test Instruments business, I think somehow year-to-date is pretty much on schedule or pretty much in line with our explanation of what we guide before. As you may notice, our first 3 quarters, as we guide in the beginning of the year, is we're expecting semiconductor and photonics sectors will be doing better than last year. So first 3 quarters, we already generated over TWD 2.3 billion and which is already over last year's total sales of semiconductor and photonics sectors.

But it doesn't mean we don't have any photonic sectors or semiconductor sales in the fourth quarter. We coming to -- continue to receive the order from a semiconductor and photonics-related. Especially for SLT, system level testers, as I just mentioned in a couple of the previous questions, especially for logic and especially for AIoT, customers just almost complete the current orders, and customers already finalized another new order. And we expect them to deliver in the first half next year.

So based on this kind of trend, you may see when 5G installation continue to speed up, we actually bring out the related products come to launch in the market, especially for image process-related, which is considered as AI or AI VR features, okay?

And photonic sectors, we're expecting VCSEL, there will be new solution. As you may see, the iPhone 12 have been gradually launched by several series types. And our customer is planning to launch another new product, which just may elaborate their current devices. And we're expecting this project to be finalized next year.

And regarding to optical fibers-related, maybe this year, the biggest drivers come from China. But maybe it looks like the second half of this slowdown, but it doesn't mean kind of will phase out the 5G market. But however, I think this kind of tension or whether they want to speed up [indiscernible] like the U.S. elections and then how this policy will go. But we do see the U.S. customers by the fiscal are coming up, speed up this kind of 5G development. So we do see -- we're looking for some hope maybe or expectations from the U.S. markets next year.

[Mark Li, analyst]

Very clear. So don't you have some update about do you guys have the target of SLT maybe in the first half of next year or the whole year for next year?

[Jennifer Chieng, executive]

I think this year, we already reached over TWD 1 billion sales. But currently, we don't give a very clear breakdown between semiconductor and photonics sector. As you know, we have another quarter to go, but it doesn't mean we don't have any more to be delivered in the fourth quarter.

And we're still doing our budgeting at the moment, so maybe it's too early for us to really give you a clear comment regarding what we see for next year in semiconductor and photonics sectors. But you see, we just finished the third quarter, and customers already gave us another big order. So you may see the semiconductor is very strong even despite of the current market status.

[Mark Li, analyst]

My second question is, in the last conference call, you have mentioned about the nanoparticle monitoring system. Do we have any like target of revenue contribution about this year and next year? Because I think it is related to the advanced nodes, and so we see more and more devices and chips are using the advanced nodes for that.

[Jennifer Chieng, executive]

This year, like we guided at the beginning of the years, I think nanoparticles already reached over TWD 100 million sales this year based on their order they received. And then I think this order already been booked. We booked under the sectors -- sub-sectors, called sales for overseas operations and related subsidiary. And we booked nanoparticle. This company sells under these sectors.

And we are planning to launch another solution to data foundry customer, which is related to H2O2. And this is -- these testers already become a protocol type for business foundry customers. But because these are so new, maybe both Chroma and then these foundry customer couldn't really figure out how many testers they actually need for their current capacity. But we continue to develop a new solution to be -- to secure our market position.

So maybe, as I say, regarding anything regarding to the forecast next year, it is too early for us to give a comment or clear conclusion at this stage. Maybe we will give comment in the beginning of next year.

[Operator]

Our next question is coming from Jeff Ohlweiler, Macquarie.

[Jeffrey Ohlweiler, analyst]

Yes. Jennifer, just to clarify, so the nanoparticle, does that mean in your presentation materials, it is not included in the semiconductor testers?

[Jennifer Chieng, executive]

No.

[Paul Ying, executive]

No.

[Jennifer Chieng, executive]

Because we're only holding 75%. 25% is holding by regional technology [ funder ].

[Jeffrey Ohlweiler, analyst]

Okay. But it falls on your parent, or does that go through the actual [indiscernible].

[Jennifer Chieng, executive]

It's already booked under Chroma consolidated testing equipment, already booked under -- but as you may noticed, we say that sales from overseas operations and related subsidiary, that's where nanoparticle booked.

[Jeffrey Ohlweiler, analyst]

Okay. And what was the biggest quarter for that? Was that over a few quarters? Or is that only in like 1 or 2 quarters?

[Jennifer Chieng, executive]

We are not so sure because this is only 15 people company. And then there are lead time in like 4 months. It is very hard for me to give you clear, say, which quarter will be. But I think the whole year, it's definitely over TWD 100 million for sure, yes.

[Jeffrey Ohlweiler, analyst]

Okay. Two more quick questions. 2021 growth, SLT or photonics, what do you expect to grow faster at this point?

[Jennifer Chieng, executive]

Since we already got the new order for SLT, maybe at this -- at current stage, I would say maybe SLT have more higher visibility. But we are in the middle of progress about U.S. markets optical fiber penetration, so it's hard to say. Yes.

[Jeffrey Ohlweiler, analyst]

Okay. And then last question, can you talk a little bit about how the EV downstream battery pack, how the demand for that has been 2020 year-to-date, how it was in the third quarter, what you'll look at the fourth quarter, and what's your outlook for next year? Just kind of downstream EV-related.

[Jennifer Chieng, executive]

Jeff, I want to highlight 2 things regarding to our product mix. You may notice on the product mix slide on Slide 13, our first 3 quarters, the Test Instruments and ATS is representing or generate about TWD 3.7 billion sales, represents about 4% growth compared to last year's first 3 quarters.

This actually indicates 2 things. The first thing is actually power business or power industry remain very strong. And another issue is, actually, this kind of strong contribution has come from -- honestly, from China. And why is that? And I wouldn't cover -- I wouldn't highlight [indiscernible] sector because actually across the board, no matter consuming [ are 20 groups ], 5G and EV are all -- have a -- yes, are all strong demand. And why is that? It's because of pandemic, because pandemic and also the tension between U.S. and China kind of get -- everything stopped in China. And people still want to make that. High-tech industry this year is still not slowing down and still on the same path. So relocation kind of synergy is due to Asia, Southeast Asia and India lockdown. So this kind of project has been postponed or slowed down.

So you see, actually, China, especially for power industry, is very strong. And because also Chinese people would like to reduce the proportion by adopting U.S. equipment show we continue gaining market share and also because people further relocate to Southeast Asia due to lockdown. So overall industry for China is very strong and also including the factors of EV adoption.

[Jeffrey Ohlweiler, analyst]

Does that mean that next year could be more difficult? Or does that mean just next year should also be decent but maybe for different reasons?

[Jennifer Chieng, executive]

It's hard to say, especially -- or wait until when the U.S. complete the U.S., I mean, election issue. Because so far, beginning of the year, we're expecting this kind of relocation sentiment will go on, especially the tension between U.S. and China. But because of lockdown and also pandemic takes so long, to almost a year, so people still want to make the product. So we see the demand from China become stronger.

[Operator]

[Operator Instructions] The next question is from Arthur Lai, Citi.

[Arthur Lai, analyst]

So I want to ask about the ToF question. We understand that one of the major plans, they are just released [indiscernible]. And then look at the feedback, actually, the people are -- give a good feedback on the photo-taking using the ToF. So my question is that do you see this product can operate a more powerful function in the future? And do you think the equipment demand will be also accelerating in the future?

[Jennifer Chieng, executive]

I think after iPhone [ latest ] and mainly launch in the market, I think just like our customers, they -- I think regarding to the VCSEL or ToF developments, they're already ahead of their competitors more than 2 years. And Android cams have decided to redesign and -- because the VCSEL is quite an expensive element, you may also can be noticed on. They -- so U.S. customers tried to remove several accessories because maybe to support some of the expensive items like VCSEL.

And so for Android cams, I think Huawei couldn't go to further progress. And then Samsung, they consider to redesign because they find maybe the spec need to be to be even further improved.

And if you look at -- from the VCSEL being launched in the market since year 2017 and '18, I think easy to say our customers -- these U.S. customers are already holding more than, I would say -- including 2 new designs coming down next year, I would say, more than 4, 5 different patterns were designed.

And next year, they believe the new product launch will be even -- build up more confidence regarding to their phone sales because the next year maybe will be some kind of accessory to be elaborated with their current devices. So I think -- next year, I think regarding to this kind of like a smartphone, these kind of devices, we'll really move on to so-called AI feature or AI devices.

So we continue acting as kind of an arm or supporting our customers design these kind of features. And so far, it's very hard to tell whether -- maybe going forward that the several new design will be mostly elaborated by ToF designs. But we didn't hear they were -- likely remove their structural light. Yes.

[Operator]

The next question is coming from Mark Li, Citi.

[Mark Li, analyst]

Just want an update about questions. Previous investors have asked that the power business, so if we break it down in this year to the EV and consumer electronics and other like 5G power component, would you like to give us some of the breakdown of this point?

[Jennifer Chieng, executive]

We think the breakdown has not changed because I just mentioned in the previous question that this year, the power business could have more than 10% growth versus last year. It's possible every factors pretty much go at the same test, including consumer electronic goods, and then 5G and EV. So -- and I would just highlight, I think the key point is we see those demands actually come from China. And why comes from China? It's because most people couldn't relocated to Southeast Asia, so they just continue standing in China, the existing capacity.

[Mark Li, analyst]

Got it. So do we see like any slowdown or recovery of the like 5G infrastructure, the demand in China?

[Jennifer Chieng, executive]

I don't understand what you mean by recovery because -- makers. Yes, maybe the CapEx spending, they spend quite -- they tried to speed out in the first half. So CapEx spending in the first half looks very strong. And second half, yes, versus first half, I think, is lower than first half. But overall, we don't see the so-called slowdown or [ recovery ] of 5G.

[Operator]

[Operator Instructions] There are currently no questions. Then I will hand you over to CFO, Paul Ying, for closing remarks. Mr. Ying, please proceed.

[Paul Ying, executive]

Thank you. Hi, everyone. It seems to us that for the first 3 quarters, although for the pandemic situations, I think we stay in Taiwan, it's pretty safe. And well, we enjoy our life and also enjoy the growth from the operation. We are lucky. And we are expecting, well, fourth quarter maintain this kind of momentum and waiting for 2021's coming and also our completion of construction of the new headquarters. And thank you. Until next time. Bye-bye.

[Operator]

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.