Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2022-Q3

[Operator]

Welcome, everyone, to Chroma's 2022 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 section.

I would like to introduce IR Director, Jennifer. Jennifer, you may begin.

[Jennifer Chieng, executive]

Good afternoon, everyone. Welcome to Chroma Third Quarter 2022 Earnings Conference Call. This is Jennifer, and I will host the event today. The presentation material is already posted on our company website under the Investor Relations. The agenda today will be first our CFO, Paul Ying, to brief you the financial for the third quarter and afterwards I will provide the highlights for our product mix and shipment in third quarter and key messages for 2022, then we will open up for Q&A. For Q&A section, you may choose to ask in English or Chinese and we will reply accordingly.

Now I would like to turn the call to our CFO, Paul Ying.

[Paul Ying, executive]

Thank you, Jennifer. This is Paul Ying. Well, ladies and gentlemen, welcome to the third quarter of 2022 financial results conference call. Well, if we look at our presentation material at Slide #8, I'm going to be starting from this slide. Well, this is the quarterly highlights for the parent company at the third quarter. And I think in reference to the bar chart on the right-hand side, you can easily see that for the year of 2022, it performed just like our traditional seasonalities starting from the lowest bar our first quarter and growing gradually to reach the peak at the third quarter.

So for the third quarter alone, you can see the sales revenue reaches at the TWD 4.17 billion. This is a 12% growth on a Q-over-Q base and a 50% growth on a year-over-year base. Regarding to the gross margin, we're still enjoying somewhere like 54% at the third quarter of this year and operating margin reaches the highest record high at 29% for the parent company.

For the net income performance, you can see that the net income we reached at TWD 1.731 billion and this is a 4% growth on a Q-over-Q base and double the numbers compared to last year. Well, the single-digit growth is regarding to the second quarter we enjoyed capital gain from the sales of our subsidiary investment. And for the third quarter highlights, you can see that the major growth in third quarter is mainly contributed from the test instruments & ATS and the semiconductors/photonics sectors. These represent a growth of 31% and 78% on a year-over-year, respectively. So this is the quarterly highlight.

If we turn to the Slide #9, we can see that for the third quarter's financial performance. Again you can see that the top line growing compared to last quarter and last year third quarter. The growth on the top line again is 12% on Q-over-Q base and 50% on year-over-year base. For the gross margin again it's 18% growth on a Q-over-Q base and another 59% growth on a year-over-year base.

And for the expense side, I think the OpEx is still maintaining -- not growing that rapidly compared to the top line, but the operating margin enjoyed like 16% growth on a Q-over-Q base and 72% growth on a year-over-year base. And for the nonoperating items, you can see that due to I just mentioned last year -- the second quarter we enjoy somewhere like approximately TWD 500 million capital gain from the sales of the investment of a subsidiary called ADLINK property disposal. So that brings a bit of crank-up on the nonoperating income.

Without that, we're growing like 50%. So the net income we reached somewhere like TWD 1.731 billion and this is a 4% growth on a Q-over-Q base and double the numbers of last year in the third quarter. So the EPS for the third quarter alone we reached somewhere like TWD 4.11 and compared to the last quarter TWD 3.95, again this is a 4% growth and compared to last year TWD 1.89, it's 117% growth. And this is for the third quarter alone.

If we turn to next slide, you can see that for the first -- accumulation for the first 3 quarters for the parent company, we pretty much achieved the top line at a little bit over TWD 10 billion. Compared to last year, this is a 36% growth and we pretty much -- well, the top line is pretty much equivalent to the last year the whole year's top line. For the gross margin, this is another 33% growth compared to last year first 3 quarters. And for the operating margin, we also reached at the TWD 2.882 billion, this is a 44% growth compared to last year. And for the net income this is a TWD 4.244 billion and compared to last year, this is a 21% growth. And for the first 3 quarters, we pretty much earned the paid-in capital pretty much TWD 10.09. So this is also a record for Chroma. Compared to last year, this is a 20% growth.

And for the balance sheet highlight of Slide #11, I think there's a growth on the short-term debt. Well, that's mainly is due to the third quarter of the payout for the cash dividend. But overall if we look at the return on equity for third quarter this year is 29% and for the return on assets is 21%. It's all across over 20%-some, which has reached the high end and we're still okay with the free cash flow. So this is pretty much for the parent company.

If we turn to the Slide #5, you can see that this is a page for the consolidated income statement. For this page, you can clearly see that for the first 3 quarters, the net sales reaches at somewhere approximately TWD 16 billion compared to last year around TWD 13 billion. It's a 23% growth and this growth is mainly contributed from the consolidated sales of testing equipment and for testing equipment business.

These sectors contributed TWD 14.459 billion compared to last year approximately TWD 10 billion, it's a 44% growth. And for the MAS automation application, here we can see that 26% growth over these sectors. But as to the new material business, we have mentioned that many times starting from next year it will just terminate. Well, starting from the first quarter -- after the first quarter, this business has been terminated due to the contract -- the supply contract with the Japanese supplier has been terminated. So these revenues still stay at the first quarter numbers. I think that's the reason why there is a 70% drop compared to last year. But again I think the gross margin we've been performing pretty well. You can see that the gross margin is somewhere like 54% and reach at the TWD 8.584 billion compared to the last year, it's a 36% growth. And regarding to the sales revenue, I think this is a record high for the third quarter that causes this kind of performance.

And for the operating income, you can see that approximately TWD 4 billion contributed to the income and reaches at the 25% gross margin and it's a 70% growth compared to last year's 3 quarters accumulation. And for the net income, again this is somewhere like TWD 4.3 billion and compared to last year, this is a 20% growth and reaches at the EPS TWD 10.09 and compared to last year, it's a 20% growth as well.

Again, I have to remind you that last year we do enjoy the sale of the property of our previous headquarters and that gives us somewhere like a 3.5% EPS contribution. So without that, we do have a very good year of this 2022 at least for the first 3 quarters. Next slide, #6. If you look at the third quarter stand-alone of the consolidated income statement. Again here we can see that the third quarter alone, we reached at the TWD 6.66 billion, again this is a record high. Compared to last quarter it's a 35% growth and compared to last year this is a 56% growth.

And within this top line, you can see that the sales of Testing Equipment business reaches at the TWD 6.341 billion and this is a 37% growth compared to last quarter and this is 91%, almost double the size of the numbers they made last year. And for the MAS, again it's a 24% growth on a Q-over-Q basis and another 61% growth on a year-over-year basis. Well, New Material, I did mention that before so we don't have any numbers now. For the gross margin for the third quarter it's somewhere like around TWD 3.5 billion and compared to last quarter this is a 21% growth and compared to last year this is a 63% growth. Well, for the operating income again this is TWD 1.781 billion. Compared to last quarter, this is a 30% growth and compared to last year, we pretty much doubled the size. And for the net income for the third quarter it's TWD 1.765 billion, again it's a 5% growth compared to last quarter and we doubled the size compared to last year.

And again for the third quarter EPS we made TWD 4.11. This is also a record high for our quarterly consolidated net income. As to the balance sheet on the next slide, I think you can also see that the short-term debt increase I think due to the parent company payout cash dividend at the third quarter. I think that's the main reason. As to the return on equity, we're still maintaining somewhere like 28%, return on assets 18%. Again the free cash flow is still pretty good shape.

Well, this is the highlight for the financial numbers and I will give it to Jennifer.

[Jennifer Chieng, executive]

Now we move on to the operational highlights. After we terminate the noncore trading business, the consolidated sales also represent overall the test instruments business as a whole. The parent company just to indicate about the tower shipment. In the third quarter our major growth driver are mainly contributed from the Test Instrument and ATS, which represents a growth of 31% compared to last year and this is the highest growth rate for this sectors.

As we continue to see the strong demand from the EV industry, which just means the EV industry is a major driver for these factors. And also at the same time, the Semiconductor / Photonics sector present a decent growth of 78% compared to last year mainly contributed from the SLT for HPC markets. And from a consolidated basis, as we mentioned in the beginning of the year, in order to maximize the capacity to fulfill the China EV battery cell demand, the China EV battery cell projects will be taken by China operation sites for final assembling.

In the third quarter we have delivered around TWD 1 billion for EV battery cell project from Suzhou operation sites, which is the sales consolidated under sales from overseas operations. So combined other operations sites, this sector in third quarter grew by 301%. Accumulated for first 3 quarters. test instruments & ATS is almost equivalent to the total annual sales of last year TWD 5.5 billion because in the first 3 quarters test instrument & ATS generated around TWD 5.3 billion presents a growth of 29% compared to same period of time.

Semiconductor / Photonics sector reached about TWD 3.9 billion. We have a strong -- we have high level of confidence to reach annual target, which is a growth rate of 20%. For the first 3 quarters, consolidated test instrument business already exceeds the last year total annual sales in 2021. And we expect this year for the whole group consolidated sales to do better than last year 2021, which is around TWD 17.5 billion.

And now we could open up for Q&A sessions. And again you may ask the question either in Chinese or English and we will reply accordingly. Thank you.

[Operator]

[Operator Instructions] Our first question is coming from Jerry Su, Credit Suisse.

[Jerry Su, analyst]

So my first question I think is regarding the outlook for the EV turnkey business for this year. I think for the other segments, you probably have already touched a bit. But given the strong growth coming from EV 1 billion from Suzhou in the third quarter, how should we think about the outlook for fourth quarter or full year 2022 and also 2023? That's my first question. And then my second question. If you look at your operating expense for the parent company has increased a bit from last quarter. How should we think about the operating expense going forward and also what is the main reason for higher OpEx in 3Q? These are my 2 questions for now.

[Jennifer Chieng, executive]

Jerry, I go for the first questions regarding to the EV because first, we actually see quite strong demand from overall EV industry from upstream to downstream and particularly highlight EV battery orders and this type of order usually have a longer lead time about 4, 5 months. And even after our shipment in the third quarter and our current cash received in advance from this related project is still maintained. I think the balance is about TWD 1.5 billion by end of September. And this means our EV batteries order will be continue rolling to next year. And we haven't really wrapped up the budget for next year. But according to this quarter fourth quarter, we estimate this should be somewhere around -- because since it's end of the year so I think should not be -- I think it will be around third quarter's level or on that front. So this is what we have seen for the EV driver in the fourth quarter. We still have some backlog -- not some, we still have backlog for 2023 and we will probably comment about that in the beginning of next year. And I will leave this operating expenses question to our CFO, Paul Ying.

[Paul Ying, executive]

Jerry, this is Paul. Well, I think for the OpEx accumulation for the year 2022, I think has already been settled down and I think compared to last year, we have a bit of growth I think mainly it's due to the new headquarters. The learning curve is still stable. But for this year I think the main growth on here is mainly for the exporting expenses and the freight charges has been growing as well as the sales revenue growth and certain expense will be growing with the exporting. Outside of that, that would be the salary adjustment, but again this was somewhere like in the first half. So if you accumulate it for the first 3 quarters, then I would expect that we won't have any big jump on that average.

[Jerry Su, analyst]

Okay. So you mean that operating expense going forward should be around the average of the first 3 quarters?

[Paul Ying, executive]

Yes.

[Jerry Su, analyst]

Okay. And then maybe a quick follow-up. As Jennifer mentioned, the EV business in the fourth quarter could still be slightly up quarter-over-quarter. So how should we think about the overall revenue performance for the fourth quarter compared to third quarter for the overall company?

[Jennifer Chieng, executive]

I think future seasonality we think for current orders should move into low season. But I think we couldn't give -- actually numbers guidance should be lower than third quarter's, but it doesn't mean we don't have any order on hand.

[Operator]

[Operator Instructions] The next question is coming from Johnny Chen, CLSA.

[Johnny Chen, analyst]

Just 1 quick question in regards to any outlook for 2023 that we can expect from the semiconductor or SLT side of things that seems to be going quite well this year?

[Jennifer Chieng, executive]

Charlie, this is Jennifer. I think Chroma...

[Johnny Chen, analyst]

This is Johnny.

[Jennifer Chieng, executive]

Johnny, yes. This is actually -- regarding to our Semiconductor / Photonics sectors, our biggest growth for this year number one definitely comes from SLT, system level testers, for the HPC market. And then second driver apparently comes from the second quarter we delivered this new VCSEL for these U.S. customers. And coming up for next year, we do have some order on hand. We still mainly focus on these SLT system level testers because our customers actually target on the overall IC. They don't -- current sentiment from our customers' feeds regarding to the semiconductors next year is they don't think overall semiconductor will further grow compared to this year. But only the couple of them will maintain the strong growth, which may go like a double to tripled and the first one they highlight also IC.

So in the fourth quarter we mainly feel our R&D team mostly prepare for these customers' penetration on the auto IC areas. We expect our SLT specs will need to upgrade -- about 2,000 will have this kind of spec in order to fulfill customers' product road map planned in next year, which is auto ICs. Second thing we noticed that customers have mostly spent CapEx on this I would say wearable devices mostly focused on AR and VR.

We do have, I will say, several customers. They do have this kind of plans on hand. We think this supports this HPC demand plus it is possible that I think the market will migrate to so-called micro LED markets. So these are the -- well, if we look out for the next year 2023, the biggest growth driver I think number one still we'd like to point out is EV industry and follow-up by this, we decided to highlight a couple of things for the semiconductor sectors.

[Operator]

The next question is coming from Jerry Tsai, JPMorgan.

[Jerry Tsai, analyst]

I think I got 2 here. First question is I think I'm just curious because your battery formation business is now a lot bigger versus the historical kind of pattern. Just in 1 quarter then we can generate TWD 1 billion or more of revenue. So just wondering with this kind of new scale, can you also compare the margin difference between now versus previous time? That's my first question.

[Jennifer Chieng, executive]

You mean our battery cell projects now compared to what we had before?

[Jerry Tsai, analyst]

Before, yes.

[Jennifer Chieng, executive]

You know we always fight for gross margin maintenance so I think that it's the reason why we decided to do the final assembly in China this time and not only in order to maximize our capacity, but also to make our product more competitive in the market.

[Jerry Tsai, analyst]

I see, okay. So you don't see -- you mean the margins tend to be stable versus previous?

[Jennifer Chieng, executive]

We don't comment certainly on product gross margin, but we always try to make our company maintain the gross margin absolute level overall around 60% something.

[Jerry Tsai, analyst]

Okay. That's fine. And also just maybe as a follow-up. I think because you mentioned about -- it seems like the prepayment at the end of the last quarter was about TWD 1.5 billion. Let's say if you do ship about 1 billion in the fourth quarter, does that probably suggest that will have some kind of project or some kind of -- some kind of project could be pushed out into 2023 and that will become the revenue in next year? Is that a safe assumption?

[Jennifer Chieng, executive]

I don't think those orders are so-called pushouts. I think just this is how the order schedule for the 2022 and 2023. Just we mentioned before the EV driver. This time it's more global trends so it probably will last longer than last time the driver, which has only come from the China market.

[Jerry Tsai, analyst]

So the chance for this revenue to be growing in 2023 is, I would say, pretty decent like if you compare -- because you have a pretty successful 2022. But if you say you can -- if you ask the question like can they continue to grow in 2023, would that...

[Jennifer Chieng, executive]

We haven't really developed our budget for 2023 yet. But according to current sentiment, we only pretty much can conclude the overall EV market's 2023 momentum should not be lower than 2022. This is what we have seen from the EV market because the EV driver does not only come from the EV battery cell alone, but also include other EV key components. And what other -- also another type of product will also come with EV related, which is energy storage. Not every possible -- not every party is still able to make EV, but some of them will go to like energy storage. And combining this kind of EV driver with ESG demand, we also see the energy storage demand continue to increase.

[Operator]

The next question is coming from [ Charlie Chen, CLSA ].

[Unknown Analyst]

I have 2 questions here. The first one is on the deferred revenue. How much deferred revenue will we have at the end of Q3 on a consolidated basis for all sectors? And the second thing is on the gross margin Q-on-Q we did see lower on a consolidated basis. So can you just help us understand a bit about what's moving around there to drive this slightly lower gross margin on a consolidated basis?

[Jennifer Chieng, executive]

Can you talk -- can you be more specific about you mean by deferred revenue?

[Unknown Analyst]

In terms of prepayments from your customers.

[Jennifer Chieng, executive]

Because we mentioned that the battery cell normally takes a longer lead time average about 4 to 5 months so for this kind of project, we always ask for down pay and the payments need to actually break down to around 3 or 4 phases -- basically 3 phases. So when we sign a contract, they need to pay upfront like 30%. So this explains where those [indiscernible] come from. But you may track this like in the first quarter -- sorry, second quarter and we have about TWD 1.8 billion even we deliver in third quarter.

I think end of September balance is still around TWD 1.5 billion, which is still actually an indication that we still have plenty of order on hand. Look, for gross margin, we are an equipment company. We are not the devices and components makers so unlikely we deliver some type of products every quarter. So sometimes our gross margin may be changed a little bit according to the product mix. So it depends on what will be the major for that quarter.

[Operator]

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

[Jerry Su, analyst]

Just a quick follow-up. I think for the -- on the test instrument & ATS side, we saw very strong revenue growth in third quarter or year-to-date. Can you just provide an update on your revenue breakdown for this segment, particularly the contributing contract EV?

[Jennifer Chieng, executive]

We actually see quite strong not only come from factors which I just mentioned like energy storage also attach the -- I mean the trend of demand with EV development. So we actually see quite strong from the downstream side that some customers -- we actually received several new customers who actually need to do ESG to generate so-called green revenue to cover their core business. So that's why these factors even we have quite a decent growth in the first half, but continue to grow in the second half.

[Jerry Su, analyst]

So any rough idea on what's the revenue split between EV and also the energy storage within this segment versus the others like consumer related, et cetera?

[Jennifer Chieng, executive]

I think so, but in the accumulated 3 quarter already over 30% actually come from EV and energy storage related because that's all tied up to so-called -- we actually see quite strong from this battery pack business.

[Operator]

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

[Jerry Tsai, analyst]

I think I have a question regarding the just SLT. I think the outlook for 2023 seems to be positive so far. But just wondering is it -- the growth, is it coming from also the additional customers or is growth coming from additional applications such as auto? Which one is the stronger driver?

[Jennifer Chieng, executive]

You mean the SLT to auto?

[Jerry Tsai, analyst]

Yes.

[Jennifer Chieng, executive]

I think the biggest driver for auto is next year. This year is mostly around 1,000 watts.

[Jerry Tsai, analyst]

My question is more like do we expect to see more customers like meaningful customers for 2023 to drive the growth?

[Jennifer Chieng, executive]

I will say foundry maybe -- people probably are a bit bearish about the semiconductor industry, but we are the newcomer when we've just been qualified this year. So this doesn't impact by any kind of CapEx changes.

[Jerry Tsai, analyst]

So the foundry customer, would they be also focusing outdoor or are they going to be focusing on more like HPC networking-related applications?

[Jennifer Chieng, executive]

For foundry customers, this year they qualified 2 type of testers from us. We probably couldn't indicate which application at the moment. But I would say mostly related to HPC instead of auto. Auto actually would come from the fabless demand.

[Operator]

The next question is coming from Jeff Ohlweiler from Macquarie.

[Jeffrey Ohlweiler, analyst]

2 questions for me. One, can you give any kind of information on your geographic sales breakdown whether you can break it down within ATS and semiconductor or just in general? And then number 2 is any comments on the impact from the U.S. semi export rules?

[Jennifer Chieng, executive]

Geographic breakdown, need to be break down by product sectors.

[Jeffrey Ohlweiler, analyst]

However you can break it down would be helpful. Anything you can give in terms of geographic breakdown either overall Chroma or within ATS and maybe semiconductor?

[Jennifer Chieng, executive]

Well, Test instrument & ATS because the strong demand is actually come from EV related. As you know, the EV these days due to the, I would say, manufacturing process mostly still manufacturing in Asia area and I would say China is the biggest at the moment. I think according to several research reports, you also indicate that EV driver or China actually got the biggest market share for the several key components for EV. So no doubt China portion will be quite big.

But actually this time the customers is not 100% from China local. I would say this time the driver could become -- also come from the dual markets, I mean those are European OEMs. And for Semiconductor / Photonic sectors, our biggest customers actually come from these U.S. customers. Just combines that with your second question, Chroma we basically only made 3 types of semiconductor equipment.

Number one, SLT system-level testers which is target on the HPC. The biggest customers all come from U.S. fabless and it doesn't matter. It just depends on where they want to ship and which also they sort but the payments made by those U.S. fabless major. Of course we also cover Asia fabless, but their adoption or the stack may be different to U.S. So I would say so far we actually use the most -- SLT most to U.S. fabless. And second half tester is legacy type.

We only deal with the 400 megahertz. So simple to explain that is we only deal with 28-nanometer. As well as not sure because so far it's up to like 16-nanometer, but I'm not sure. Just depends on whether I want to include -- even legacy is included, but so far legacy is not included. And lastly is related to VCSEL, which is photonic factors, but this is not under so-called IC related because these are all core objects.

[Jeffrey Ohlweiler, analyst]

Okay. All right. And then 1 follow-up question, maybe just kind of add up to the first question. For the cell formation systems that you sell. I know historically that's been mainly China, but I think you diversified a lot of geographies for that as well. Any kind of comment on the geography momentum for the cell formation?

[Jennifer Chieng, executive]

Okay. For Taiwan part, which you can see from the prior items call turnkey solutions, this is a part we sell -- we're building the project to non-China area so including Japan, Taiwan and couple outside of China area. And even including solid state, including very small project from the United States as well. For China area, as we indicated, is under sales from overseas operations. So it actually tells you the geography breakdown, the biggest portion still come from China.

[Operator]

[Operator Instructions] There are currently no questions. I will hand it back over to CFO, Paul Ying for closing remarks. Mr. Ying, please go ahead.

[Paul Ying, executive]

Thank you, Mark. And well, I think for the third quarter and for the first 3 quarter for Chroma, you can see that we work very hard and we make good financial performance. And we are looking forward to see what the trend will be on the 2023. And well, until then, we will report to you on the next quarter's numbers. Thank you again. Thank you and goodbye.

[Jennifer Chieng, executive]

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 Investors section. You may now disconnect. Goodbye.