Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2021-Q3

[Operator]

Welcome, everyone, to Chroma's 2021 Third Quarter Earnings Conference Call. [Operator Instructions] For information, a webcast replay will be available with within an hour the conference is finished. Please visit www.chroma.com.tw/investor/index under the Investor Relations section.

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

[Paul Ying, executive]

Thank you, Mark. Hi, everyone. This is Paul Ying from Chroma. Welcome to the third quarter financial release for Chroma Group.

I think everybody already got the -- our presentation from the website. And let's start with the Slide #6, which is a new page for the third quarter, condensed consolidated income statement.

For the third quarter, you can look at the numbers. The third quarter, the top line Chroma Group remain somewhere in TWD 4.276 billion. Compared to last quarter, it's a 4% drop. But it was 3% growth on a year-over-year base.

If you look into the mix, you can see that it's fully flat for the Test and Management and for the Testing Equipment business. And also, there's a strong growth on the others, which is combining all those Chroma other consolidated entities contribution. So in there, there's a strong growth. So combining with the MAS drop on the top line on the 34%. So that makes the quarter-over-quarter drop by somewhere like 4%.

But if we look at the gross profit. Due to the product mix change, especially for those high-margin portion still maintain or even grow. So you can look at the gross margin ratio from 40-some percent to 50% on the third quarter stemming along. We resulted in somewhere like TWD 2.144 billion. And compared to last quarter, it's a 4% growth when compared to last year. It's a 7% growth as well.

And OpEx side for the third quarter, you can look at the operating income which is somewhere like TWD 864 million, and this is a 47% growth compared to last quarter and a 22% growth on the year-over-year basis. And for the last -- for the last quarter, higher OpEx is due to the write-off of the bad debt for MAS. I think we mentioned that in our last financial release conference.

And for the income before tax, it's somewhere like TWD 1.013 billion. And compared to last year, it's a 47% growth and 36% growth on a year-over-year basis. So for the net income, it comes to the TWD 822 billion, and this is a 61% growth compared to last quarter and 40% growth compared to last year.

So in here, for the third quarter spending alone, the EPS we make is somewhere like TWD 1.89. And compared to last year, it's a 30% -- 36% growth and compared to last quarter, it's a 66% growth. And this is the third quarter standing alone consolidated income statement.

If we go back to see the Page #5, you can look at accumulation for the first 3 quarters of 2021, consolidated income statement stated as the -- for the sales revenue, we made somewhere like nearly TWD 13 billion. And compared to last year, this is a 14% growth. And for the Testing Equipment business, it's a 13% growth standing alone. And quite flat for the MAS. And for the others, it's also a 44% growth. So in here, you also can look at the gross profit for the first 3 quarters is somewhere like TWD 6.316 billion. And compared to the last year, it's a 13% growth. And for the operating income, it comes to TWD 2.344 billion. When compared to last year, first 3 quarters, this is a 16% growth.

And for the net income, you also can see that we make TWD 3.590 billion. And compared to last year, it's 115% growth. And for the first 3 quarters, earnings per share remains somewhere like TWD 8.39 compared to last year, again this is a 114% growth.

Well, basically -- well, even without the capital gain we make in the first quarter for the selling of the original headquarters, we think we still make a very good records on the bottom line.

And for the highlights for the financial ratios and the balance sheet, you can see from the next slide, on Slide #7. If you look at here, you can see that the total asset is pretty flat, but some changes in the inventory, which is growing. But for the debt, it's decreasing due to the increasing of the cash status. And for the inventory turnover, it's a bit higher due to the sort of or a slow delivery for the material. And also for the higher of the selling kind of forecast.

So in here, the return on equity is somewhere, well, similar to last year, 15%. And the return on assets, it's nearly 9%. And compared to last year, 7%, which is a growth. And EBITDA in the first 3 quarters, we made somewhere like TWD 4.838 billion. And compared to last year, it's also a 94% growth. So the cash flow from operations is also growing by 29%. And free cash flow is a big chunk of our growth.

Well, this is the consolidated financial status. Let's go into the quarterly highlights for the third quarter for the parent company. The sales revenue for the third quarter, the highlights will be as follows. That the sales revenue is approximately at TWD 2.774 billion, this is a 13% growth on a Q-over-Q basis and 16% growth on a year-over-year basis. Gross margin still maintaining upper the 50%, which is at 51%. The operating margin is approaching at 25%, which is pretty match up with the management forecast or expectations. Net income approximately $793 million, and this is a 65% growth on a Q-over-Q basis and 36% growth on a year-over-year basis.

And for the third quarter, the major growth sector in this quarter is contributed from the Test Instruments and ATS, and this is pretty much like a 15% growth on a Q-over-Q basis and a 23% growth on the year-over-year basis. So in the third quarter standing alone, I think for the parent company, we make another historical high.

I think not too long ago at the first quarter, I think we made all historic by brand. But now we break up the record and then make another peak for quarterly numbers at the third quarter of this quarter.

And we go to the next page, you can see that standing alone for the third quarter, the parent company. The sales revenue TWD 2.774 billion. It's a 13% growth on a Q-over-Q basis, again, and 16% growth on a year-over-year basis and maintaining upper than the 50%, which is 51% for the first quarter gross margin and reaching somewhere like TWD 1.419 billion. And Q-over-Q, this is a 7% growth. And year-over-year, this is a 9% growth.

For the OpEx, well, on a Q-over-Q basis, well, maintain pretty similar kind of numbers on a Q-over-Q basis. Compared to last year, it's pretty much like a 9% growth, and mainly it's coming from the salary adjustment for this year. We make a strong structural adjustment and also kind of inflation adjustment for the salary increase. So for the operating income for third quarter standing alone, we made somewhere approximately TWD 700 million and stand for 15% growth on a Q-over-Q basis and 8% growth on a year-over-year basis.

And for the net income, we made somewhere like TWD 793 million. Again, this is a 65% growth compared to the Q-over-Q basis and year-over-year basis, this is also a 36% growth.

And for third quarter, again, for the third quarter, standing alone, the EPS is somewhere like TWD 1.89.

And again, the next page will be the first 3 quarter accumulation for the income statement for the parent company. And for the first 3 quarters, the top line we made somewhere close to $8 billion, which is TWD 7.890 billion. And compared to last year, it's a 17% growth. And for the 3 quarters, accumulation of the gross margin, we still maintain somewhere like 53% compared to last year. On the absolute amount, it's approximately TWD 4.149 billion and it's a 14% growth on a year-over-year base.

Well, on the OpEx side, well, compared to last year, it's a little bit growth for selling and general -- SG&A on 11% for the research and the R&D spend is a 14% growth where mainly that will be coming from the salary adjustment, just like I've said.

And the operating income is somewhere like TWD 2 billion. And compared to last year, it's a 17% growth. And overall, it occupies pretty much like a 25% compared to the top line, which is what we expected.

For the nonoperating items, you can see that, well, mainly a big chunk of that, which is approximately before tax, that will be TWD 1.7 billion is coming from the capital gain at the first quarter. But even if we take that away, we still make a very good record for the growth in the top line and also a very strong growth on the operating margin.

So for the first 3 quarters accumulation of the EPS is TWD 8.39. And compared to last year, it's not even doubled its 114% growth compared to last year.

Regarding to the balance sheet highlights and the financial ratios. Again, you can see from here that the cash status is improving and also the debt ratio is decreasing. Well, inventory is still, well, growing is due to, again, due to the forecast for the following months and the backlog and prepared for the long lead time for the delivering for those materials. So the inventory turnover will be a little bit higher.

But again, return on equity, which is about 16% and the return of assets is 11%, a little bit improving than last year's year-end. And for EBITDA and also free cash flow, I think the status is pretty healthy. And mainly, that will be the highlights from the financial side.

Well, for the next page of the operating highlights, I will let Jennifer to take the lead to report to everyone.

[Jennifer Chieng, executive]

Thanks. Good afternoon, everyone. Let's move on to operations. On Slide 13, this slide will present overall our product mix breakdown and also our consolidated entities. And let's go through each product sectors.

First sector come with the Test Instrument and ATS. We have a greater result in the third quarter due to the strong EV demand. So in third quarter, Test Instrument and ATS quarter-on-quarter growth rate is about 15%. Year-on-year, it decreased by 23%. I think this is the highest quarterly sales for the Test Instrument and ATS. The first 3 quarters for this sector increased by 10%. As we guided in last first half earnings release that we were expecting the factors to reach about low double digits. And I think the whole year include the fourth quarter. I think these factors will be maintained at these growth rates just like the first 3 quarters, okay?

Let's move on to semiconductor sectors. Semiconductor sector fell in last quarter, which has increased by 16% quarter-on-quarter and year-on-year basis increased by 11%. And for 3 quarters, we were increased by 18%. As we guided in years, we expect these sectors to maintain having another 20% growth this year. I think we're able to make up in the fourth quarter which maintain what we've guided in the beginning of the year, okay?

And Turnkey Solutions, I think this year will be a bit weak, okay? So I think these factors will be dropped compared to last year's. And so with this rating will be lower than last year TWD 460 million results, okay? This is due to several components that having the long and short lead time. So several projects that we will be start to deliver from early next year's. So due to long lead time of the Turnkey Solutions, it's helping to having a strong growth in the fourth quarter.

Service and others, I think, due to increasing the semiconductor sector that we start to having a better sales service and others by selling -- providing the servers and also the building extra components will change peaks. So this year, I think every quarter is around $250 million to $270 million per quarter. I think this will be similar in the fourth quarter. So I think overall this year, I think, we still maintain a double-digit growth on our top line. This will be the consecutively the second year despite of the pandemic, we increase the top line by -- I mean, for the Testing Instruments business by double digits.

I think the bottom line, last year, we increased by like 20%. I think this year, the bottom line is to -- I think we'll also maintain this kind of growth rate for the whole year.

So the consolidated -- if you look at all our consolidated entities, I think these 2 years, the most of growth drivers actually come from our Testing Equipment business. The other 2 factors include the MAS where new material would remain the same. So this is about our updates regarding to our product mix as well as our consolidated entities.

So we are happy to open up the question-and-answer section.

[Operator]

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

[Jeffrey Ohlweiler, analyst]

My first question, on Page 13, Jennifer, the turnover, the line about sales from overseas operations and related subsidiaries had a big drop Q-on-Q and year-on-year, which was very strong in the first half. Can you talk a little bit about that line, the TWD 541 million?

[Jennifer Chieng, executive]

Overseas sales. This is because of pricing that we pass on to subsidiaries. So I think we just -- because in order to reflect some of the components of price increase, so we just starting from the third -- I mean, second half of this year, we start to adjust these prices to our customer pass on and maybe some overseas is not yet to reflect these kind of changes.

So maybe you have temporary this kind of -- the difference is having slightly lower than last 2 quarter or the markup is slightly different to what we have seen before. So there's no particular reason for that just because we start to do some price adjustments, just to reflect the raw material price increase.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And then this is my last question. Can you talk a little bit about fourth quarter momentum by each product group?

[Jennifer Chieng, executive]

Jeff, I already delivered the full year guidance. I think if you do a little bit calculation, you should come up with the fourth quarter. So clearly, you will the exactly number regarding the fourth quarter.

[Operator]

[Operator Instructions] The next question is coming from Jerry Su, Credit Suisse.

[Jerry Su, analyst]

I just wanted to ask on the semiconductor business. I think in the third quarter -- or year-to-date, the growth is a little bit lower than the 3-year target, of your target of 20%, although you think you can make it up in 4Q. Can you give us some color as why the semiconductor business in the first 3 quarters is a little bit tracking behind? What is the issue around there? And why do you think that Q4 could be better? That's the first question.

Second question is regarding the EV business. You had a very strong growth for your Test Instrument and ATS. How should we think about that into next year for both this segment and maybe perhaps on the turnkey side?

[Jennifer Chieng, executive]

Let's start with the first question, the semiconductor sector. I think first 3 quarters, we're still pretty much in line, and we do have high confidence levels to be able to reach the growth rate guidance that we saw in the beginning of the year. And this is based on our order on hand, the delivery schedule. So I think based on what we're going to deliver in October and November, I think we'll not be -- one estimate will -- will be similar to the third quarter. So I think based on calculation we'll to lead up to the growth rate, yes.

And I think we also mentioned before that the first half, photonics was kind of low due to the long lead time components that we already mentioned in the last quarter. So I think probably give you this kind of impression that we are able to make kind of lag.

And regarding Test Instrument and ATS, just why we guided last quarter that we started seeing the picking up or growing the demand from the EV sector, includes the EV components as well as a battery-related sector, low-cost sectors. And they all have pretty strong CapEx plan in the coming years. So we do see that just like we see the last time, the Test Instrument and ATS increased by double digit. That was back in 5 years ago when submit this of strong in the cycle. So as you already see the cycle from second half this year, we do have confidence that the Test Instrument and ATS will continue to grow in next year.

[Jerry Su, analyst]

Okay. And just one follow-up on the photonic side, you state how has the longer lead time components supply, has that improved in the third quarter?

[Jennifer Chieng, executive]

Regarding raw material, I don't think there's a shortage just because it's kind of mixed. We are still having like a long and short lead time issues regarding the components we adopt and not to talk about those Turnkey Solutions, which is most is lead-time projects up to 4 months. So we're actually planning to deliver most of their order starting from early next year. So there's no particular [indiscernible].

[Operator]

[Operator Instructions] The next question is coming from Jerry Tsai from JPMorgan.

[Jerry Tsai, analyst]

I think I have 2 quick questions. First of all, I think given the strong demand from EV, I think in the third quarter, can you give us some idea about the potential like the -- or what's the geographic breakdown of these customers who saw the very strong pickup? That's my first question.

And also, I think for the second question is regarding the semi and photonics. I think you answered some of that before. But I'm wondering that if it's possible to compare the potential growth for the semiconductor related kind of growth momentum for next year versus like a photonics-related product lines for next year?

[Jennifer Chieng, executive]

Jerry, first question in these markets, we guide that we start to see several countries. I think this type, the EV CapEx cycle is not limited to only China, but also including other countries like United States and Europe. As we also see the India start to do that or adopt having more exposure to EV industry. And like second half this year or maybe I should say coming quarters and -- we have one delivered to India regarding to EV factory module and PAT. So we could see why that's not only to China, but also in other countries start, they're increasing the exposure to EV market, okay? So this is not specific just to one country.

And regarding semiconductor and photonics, I think I could elaborate a little bit more. I think, to be honest, this year, I think IC testers accounts for the biggest portion for our semiconductor business sectors. I think, every quarter, like over 60%. Last year overall, I think semiconductor sectors break down about 45% to [ 255% ] IC testers. But this year, most of IC sector over 60% actually come from IC testers.

One of the factors I already mentioned because the long lead times, especially for those [ photonic ] factors related.

And regarding to the IC cluster this year, mostly related to mature -- around 28-nanometer around the related type IC, including power management [indiscernible] that's because the increase comes from not only to China but also other countries demand. And I think this is the biggest growth drivers come from. And I think the full contribution in last year, actually slightly down.

So coming to the first half next year, we start to see the picking up from these so-called like SOT and also photonics sectors, especially [indiscernible] first on the market that our customers probably will have a new design for [indiscernible] next year. So now we're already moving to the building of the capacity, and this will start to contribute from the first half of next year. So I think maybe next year, the [photonics] and [indiscernible] EV sectors will become the biggest growth driver to support our income growth.

[Jerry Tsai, analyst]

I see I think maybe -- I think you spoke about a very strong demand from the -- with a more mature semiconductor tester. That has been a strong driver for this year. How is that looking for next year? And that's why I like to understand.

Also maybe, I think, in general, can you also comment on the recent power supply issues happened in China? And what does it do to the overall demand of your business? Like I think it could be related to ATS or even other segments. Just wondering how does that impact your business?

[Jennifer Chieng, executive]

You mean In the China power shortage [indiscernible]?

[Jerry Tsai, analyst]

Yes.

[Jennifer Chieng, executive]

Yes. This year, actually, 28-nanometer related actually contributed [indiscernible] decent amount of growth for our legacy type of IC testers. I think this year probably above type of growth versus the years before. And [indiscernible], of course, we do have other solutions coming up, for example, OIS will be integrated into ATE system or SLT testers. This will be further supporting -- I don't think in coming years, we will be still that much and then continued to growth of these sectors. But I think still we have maintained a certain degree of solid contribution for this legacy. As I say, next year the growth driver will be come from [indiscernible] and SLT, we are dealing with CapEx spending. We don't expect the customers buying spend or building up the spend capacity every year, okay?

And this is just to answer what do you think of the low frequency or legacy type of IC testers, okay? Last one, [indiscernible] okay, most of the industry recovers are the -- maybe I should say, China, the industry, they wanted to [indiscernible] support. So if you look at the semiconductor sectors, we don't see the power cuts to shortage [indiscernible] from the semiconductor sectors.

[Operator]

The next question is coming from Arthur Lai from Citi.

[Arthur Lai, analyst]

Congrats management for strong quarter 3 results. And I have 2 questions. The first question is a follow-up with what Jerry asked. The power shortage issues in China. I wonder if that will further extending their inventory turnover. And the reason is because we actually do the general checks with China, the automation maker, they say a lot of projects are delayed because their client didn't want to certify their equipment at this moment. I wonder do you share this view, especially we saw the inventory turnover days right now is 191. I understand it's not entirely from the client side. But were you concerned that client actually also push out the new machine?

[Jennifer Chieng, executive]

Currently, we didn't see this kind of situation. Actually -- is the reason why you asked this question is because you see our inventory turnover increase or other...

[Arthur Lai, analyst]

No, no I just wonder because I know -- yes, go ahead.

[Jennifer Chieng, executive]

No. Actually, for the coming quarters, all the order we received, we haven't seen the situation you have mentioned, yes.

[Arthur Lai, analyst]

Okay. Perfect. And the second question actually is on the Photonic. Yes, I'm actually quite surprised that you say photonic tester would be also doing quite good in next year. I think that's a good surprise. And if we recall in the year 2017, actually last year, do you think the equipment demand in next year will be as big as the demand was in 2017?

[Jennifer Chieng, executive]

After -- I think back to year 2013, when the customer first adopted this, of course, the building of the so-called standard line is started from process level down to module levels. And we also anticipated include process level and module levels. And later on, I think most of the module level is -- need to change or upgrade.

So you couldn't assume every time that they change or upgrade or adopting the new design of the VCSEL means they have to change all the test instruments from process down to modules. But regarding this time, the new VCSEL designs, I only could say it needs a new tester for process level. So that's why we think that the task photonic testers will start picking up. I mean, will be better than this year.

Another issue is because China still have this kind of ambitions where road map to having -- to increase exposure, especially to 5G, so wafers. So we believe [indiscernible] the wafer tester will start to -- will be better than this year includes some of the inventory that [indiscernible] last year to already start to fully into the production. So however, I think for photonic sector for next year, I think the right on the first half, we've seen -- do better that this year.

[Operator]

The next question is coming from Jerry Su from Credit Suisse.

[Jerry Su, analyst]

Just one follow-up on the SLT side. Can you give us some update on SLT's status for next year? And then for next year, I think you mentioned that, that business will see some better growth outlook. Can you elaborate a little bit on the key drivers behind that?

[Jennifer Chieng, executive]

SLT this year, it's pretty much in line to what we have seen. But next year, current order I think still mostly come from the 5G application or IoT applications. I think it still comes from our existing customers. Mostly target on -- It's very hard for me to say, this is GPU now it's no longer to show as the GPU. If you today look, we've got those goggles, glasses, those image process. And then those image process needs to come back with single [indiscernible]. And next year, we have seen [indiscernible] numbers, not only on your car but also our consumer devices will be doubling. Then I think it's very hard for us to say, okay, we'll just say GPU, then you probably think that's same story. But actually, I would say more application on this kind of image process related design as chips will be driving the SLT demand.

[Jerry Su, analyst]

Okay. Got it. And how about the HPC, high-performance computing?

[Jennifer Chieng, executive]

I think that's exactly what we are doing, but just no longer simple as the GPU.

[Paul Ying, executive]

Yes.

[Operator]

The next question is coming from Kevin Wang from Mizuho.

[Kevin Wang, analyst]

I have 2 questions. One is regarding the turnkey solution. I think that we have some new projects with U.S. and Japan customers for EV battery. So how should we expect that for this year and the next year? I think that will be bigger for next year. So how should we expect that?

And also, the second question is regarding -- we have more customers in the foundry space. And this could be -- maybe also small this year, but how should we expect that for next year?

[Jennifer Chieng, executive]

Kevin, regarding turnkey solution, I think it's made [indiscernible] the long lead times. So most of our accounting schedule is next year. I think -- I think, able to see it from, I mean, no need to waste the like many quarters later. So I think starting from next year, we will start to deliver like the [indiscernible] actually come from the battery cell centers, okay? It's not limited to the China adoption. And just like we mentioned, you could refer to the last cycle, which is back to '16 and '17 levels that we have achieved, okay?

And regarding the foundry customers, I think everything is on progress, and they're also interested because these customers also dealing with numbers of HPC customers, the [ fabless ]. So they're also interested in some of those [ fabless ] customers on what they purchase from outside. And so after some of the discussions and the reviews, they already start to -- also start to fund some of our other [indiscernible], especially for SLT sectors.

I think one of the key factors that [indiscernible] to deliver is that will come from. I think because you see -- you could see, glasses, the 5G those [indiscernible] or glasses with kind of applications, especially for EV and more specs as related to this kind of projects. They are very much related and so-called thermal control. So this one -- this become one of the major drivers for several foundry and semiconductor customers are interested and they would like to -- we'll start to see the peaking of orders from this side.

[Operator]

The next question is coming from Arthur Lai from Citi.

[Arthur Lai, analyst]

I have a quick follow-up. So a lot of analysts already asked like EV actually looking pretty strong in the pipeline and also the SLT. So I kind of wonder, how do you think of your automotive exposure at this moment and the trend of revenue from the smart car or EV car?

[Jennifer Chieng, executive]

You mentioned about auto, means the traditional one, the [gasoline] one?

[Leo Huang, executive]

Gas car?

[Arthur Lai, analyst]

Essentially EV and smart car.

[Jennifer Chieng, executive]

Okay. We believe those [indiscernible] EV will also include the smart indeed. I think there are 2 critical components that we involve very much, and then we also cover. One is EV battery cell. And the other one is sensor, which is more in sensors. And I think these 2 parts actually account for -- if EV sector is strong, we're able to reach by [indiscernible] in these 2 products.

[Paul Ying, executive]

You're talking about charging stations and this and that?

[Arthur Lai, analyst]

Yes, you include charging stations, yes.

[Paul Ying, executive]

That's always included.

[Arthur Lai, analyst]

Sorry can you say that again?

[Paul Ying, executive]

The growth, you mean the future growth?

[Arthur Lai, analyst]

The revenue exposure, including losses in parts.

[Jennifer Chieng, executive]

Including sensors and everything, I would say, around 30% to 35%. Because actually sensors, the capacity continues to add. No matter you talk about center sensor or similar sensors, actually, they all have pretty strong CapEx. CapEx going strong in the second half to first quarter next year.

[Operator]

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

[Paul Ying, executive]

Thank you, Mark. Hi, everyone. Thanks for your time. And if we look at the third quarter standing alone, well, we hit a record high on the top line and also still maintaining our profitability, and I think we'll make a pretty good record. And looking at for the rest of the quarter of this year, we still have the confidence that we will maintain the commitment, and we'll keep on our pace and trying to bring the -- maximize the benefit for all the investors and expecting to see you again on the next quarter. Thank you for your time, and bye-bye. Thank you.

[Operator]

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.