Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2017-Q4

[Operator]

Welcome everyone to Chroma's 2017 Fourth Quarter Earnings Conference Call. [Operator Instructions] After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. And for your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.chroma.com.tw/investors/index under the Investor Relations section.

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

[Paul Ying, executive]

Thanks. This is Paul Ying. Welcome, everyone. This is the first financial release for Chroma at the year of 2018 and we intended to release the 2017 fourth quarter financial result and also the whole year of 2017.

Well, first of all, I would like to share the good news with everyone. 2017, the consolidated sales amounted to TWD 14.9 billion and this is a record high in the sales revenue. And 2017 net income, we were reaching TWD 2.6 billion and this is another record high. And for the Chroma group total, we all the way grow to 2,871 employees as of the December of 2017. This is represent a little bit over 12% to 13% as a ratio.

And for the fourth quarter numbers, I would like to share with you firstly for the parent company, the sales revenue of the fourth quarter comes to the TWD 2 billion approximately. And this is a 10% down on a Q-over-Q base. And if you put on the year-over-year compare, this is represent a 27% growth.

For the gross margin, we're on 47%. It's a little bit lower than what we expected. But this is resulted from the Turnkey Solutions jumped to a very high numbers at the fourth quarter, which is approximately the half of the whole year of 2017. And on there, there is a few -- delivery is for the battery sections, which is bit of a low margin. And also we begin then to deliver the OLED, the first order in Chroma. So this is a strategic kind of low, the kind of profit and trying to begin the first learning curve from the OLED application.

So that makes the gross margin a little bit low to 47%. But fortunately we still maintain a 50% and above as the management expectations. And the OP margin approximately 16%. Net income well, reaching TWD 888 million. This is 3% growing quarter-over-quarter and 132% up from year-over-year comparison basis.

For the fourth quarter, you can see from the numbers, the growth, the sales growth, is mainly coming from the Turnkey Solutions. And this is a 90% growth on a Q-over-Q basis and 93% growth on a year-over-year basis. However for the net income, basically there is a very strong growth in the MAS delivery. So in there, we can -- they contributed to the fourth quarter numbers of the whole year -- of 2017 with the net income reaching TWD 543 million. This is a very strong growth. And this is just matched what we have committed that in the second half that MAS will have a remarkable growth. And for the total year of growth of the MAS, I think this is a very, very strong growth.

If you look at the numbers, I think it reaches almost 564% growth in MAS top line. And for the year of 2017, if you look at the whole year's numbers, you can see that due to, again, the test and equipment and MAS, we represent a growth of 15% growth and 564% growth respectively.

The semiconductor and photonics testing solutions are the key drivers for parent company sales growth. And this is the second year in a row. This is a very strong growth on a year-over-year 103% and this is the first growing kind of a trend. And for the core business of test instruments and ATS, and this is also a double-digit growth of 19% on a year-over-year base compared to the 2016. And for the 2018, we still guide that we will have continuous growth, due to the following reasons. The first one is the EV, we still think that EV will remain strong. The demand of the high power testing and related EV components as well as modules and battery sales as well as the pack testing equipment will continue to grow in the year of 2018.

And another growth in the semiconductor and photonics testing solutions is due to the 3D sensing equipment demand we think is still will be extended from the last year to this year. And new product launching from the ATE system and photonics related testing equipment will also drive the sales growth in the year of 2018. As to the MAS and the Turnkey Solutions, we expect still will be better than 2017.

So for the year of 2017, we make EPS TWD 6.41 as the basic EPS and we will declare that the TWD 4.5 as the cash dividend which just approved by the board this morning. Well, this is the brief of the 2017 fourth quarter and the whole year. And I am waiting for any questions, comments from anyone.

[Operator]

Thank you, Mr. Ying. [Operator Instructions]. Your first question is from Steven Pelayo from HSBC.

[Steven Pelayo, analyst]

Couple of questions and I will get back in the queue. First on the margins there, I understand that the Turnkey portion and the low margin deliveries for battery and OLED, but I am still reminded, I guess, back in 2016 you had Turnkey quarters where it was more than 40% of parent revenues and you still managed to do 50% gross margins. So I guess I am just trying to understand, is there going to be kind of a structural change or do you think going right back into the first quarter you are back in the 50% to 55% targeted range for your gross margins?

[Paul Ying, executive]

Well, there is no structural change but again, just like I just mentioned, firstly is the -- for those battery orders and second is the OLED first order from the Chroma history. And we would like to gain that orders in trying to strategically improve the -- and also work with the customers and -- as early as possible. So that is a very strategic move.

[Steven Pelayo, analyst]

So once again, you expect to sustain kind of above 50% the traditional business model for Chroma, the parent gross margins in 2018, is that correct?

[Paul Ying, executive]

Yes, for 2018 we still try to -- we still will maintain that 50% as the expectations and try to maintain that.

[Steven Pelayo, analyst]

And then I guess we got some mixed messages out there from a bunch of different companies, some automotive related chip makers who may be complaining about having a little excess inventories, yet companies like Paradigm reported 40% to 60% bookings growth in their tester business. So a little bit of mixed messages out there. I am wondering, it looks like on a full year basis, you are talking about growth in every one of your segments but just as you look out into first quarter, do you have some pretty solid visibilities in the first quarter to kind of buck traditional seasonality or what is your outlook kind of in the near term as opposed to the full year?

[Jennifer Chieng, executive]

Steven, are you asking the EV market overall or you just talk about the -- just the first quarter?

[Steven Pelayo, analyst]

Nothing specific about EV. I am just talking about general trends that we are seeing in the industry here from various different end markets here, and I am wondering how that is applying to Chroma's outlook specifically for the first quarter.

[Jennifer Chieng, executive]

We don't really state comments on the [indiscernible] quarter but overall, based on our current order on hand, we think we had to have very high level of confidence that this year the sales will be better than last year sales.

[Steven Pelayo, analyst]

I will get back in the queue.

[Operator]

And your next question is coming from Jeff Ohlweiler from Macquarie, Taipei.

[Jeffrey Ohlweiler, analyst]

My first question is after a very strong year in MAS last year, you are also forecasting this year to be up again. Can you talk a little bit about the product mix for MAS in 2017 and how that may differentiate 2018?

[Jennifer Chieng, executive]

Okay, yes based on -- I think based on our -- for the MAS policies, we need to receive the down pay first and based on the down pays that we collect, we think this year the total sales is supposed to be better than last year. And what is really different for these 2 years the MAS business, first I think now MAS is no longer just a very tied up to certain customers. We just think [indiscernible]. I think currently, we got like more than 3 or 4 different solar sales customers. And the other changes is MAS is no longer just doing the module automation line, no pick and play [indiscernible], pick one. We also had to migrate through the front end process equipments, I mean the front end, the manufacturing part of automation. So that's why this gross margin has improved and also that those structure also improved. But we do understand that the solar business industry [indiscernible] sequentially, yes.

[Jeffrey Ohlweiler, analyst]

And then my last -- second last question, margin impact from OLED, is that a one quarter phenomenon, you are not going to expect to see that this year or is that you still need a grip on OLED orders this year?

[Jennifer Chieng, executive]

Honestly, that OLED business is not -- I would not say the big part or big portion of this sales that influence the fourth quarter [ GP ] went down. I think that is because the low margins of the -- the related low margin of Turnkey plus this OLED business. The OLED business is that it's more like not really cutting the prices, just more strategies concerns because what we want to try out with the latest next 3 phases including module, and I think the -- our concern is first, this is the first time we step into OLED and then same as our customers. Second issue is the first time for us to migrate from module sections. Before we are very specialized in modules, providing module related testing equipments, but this is the first time we step up to [ delay ] this part. So that is why we do -- happy that we gained this opportunity to cut into OLED and try a [indiscernible] business. And our customers -- also the third consideration is we also want to try out the rest of the phases they plan to rent out this year. So that is why that OLED business is strategy thinking.

[Operator]

[Operator Instructions] And the next one is from [ Arthur Lee ] from Citi Research.

[Unknown Analyst]

Actually I have 2 questions, 1 is on the OLED part. Can you share a little bit more color on this new engagement, which region you will receive the order and can we think about the gross margin will be better in the branded margin in the future? This is my first question.

[Jennifer Chieng, executive]

First the customer is from Japan.

[Unknown Analyst]

Yes.

[Jennifer Chieng, executive]

And the second is -- if you -- because that the whole -- the think the whole phases, I mean, maybe I should say the whole project including 3 phases of LED and 1 phase of module. So we think the blend everything together, gross margin should not be too bad. But just the customer only delivered first phases or arrays in the fourth quarter last year. So we still have another 3 phases combined with modules, yes.

[Unknown Analyst]

And second thing is on the trend of the company, you guided this year to be a better year than last year. Can we comment -- or can we conclude that it's because the adjustable market expansion or is it because you gain share at the expense of the competitor?

[Jennifer Chieng, executive]

I think according to the guidance, I think our Chairman highlights several points. Okay, as you know there's -- our cash [indiscernible] whole of this year due to EV market. And second, I think the semiconductor business 3D sensing product has been extended from last year. I think the demand still exist, I mean the market is still doing a lot of capacity, plus we have a new product we call ATE system and sound photonics, which is Mini LED business. And Turnkey Solutions, I couldn't deliver the numbers but I can tell you, based on our order on hand already, I think already over last year total results based on our current order on hand, yes.

[Unknown Analyst]

And one small follow-up question, you mentioned that ATE equipment. Are we confident we can gain a share in the mid-end testing equipment and so that we can actually gain a share in the market?

[Jennifer Chieng, executive]

Yes, it already happened last, year since last year. I think the biggest driver for last year's semiconductor business is not 100% because of VCSELs. I think half of I would say -- not say half, I would say like a 30% or 40% growth mainly come from ATE systems, yes.

[Operator]

[Operator Instructions] And next we'll have Steven Pelayo from HSBC for questions.

[Steven Pelayo, analyst]

Yes, can you comment also -- you commented on MAS and some of the mix there for Jeff's question. I'm curious on Turnkey what kind of breadth of projects going on, what type of end markets? And you said you already have enough, I guess, backlog that kind of equals last year's revenues. Do you think that maybe this year you're on track to maybe get back to kind of the level you did in 2016 in Turnkey?

[Jennifer Chieng, executive]

Okay, so far it's not yet reached that level, so I think as we state for Turnkey and both Turnkey and MAS based on order on hand already existed last year '17.

[Steven Pelayo, analyst]

And what type of projects are in Turnkey, what are the end-market applications?

[Jennifer Chieng, executive]

We have both EV battery cells and solar, yes.

[Steven Pelayo, analyst]

And then your core business, your ATS business is growing 18%, 19% each of the last 2 years. Clearly the strength in EV is very strong there. It is the majority of revenues 50 plus percent or 55% of revenue of parent revenue in the fourth quarter. Can you help us understand just a little bit more how much of Chroma is auto related and do you think that is setting up for you guys to grow another kind of mid-teens growth in that ATS segment in 2018?

[Jennifer Chieng, executive]

I think the reason why we think the EV continue to support the testing instruments growth, one of the main reasons because EV continue to grow. It's not just because the people familiar with just battery cell, battery pack something, our key components, but they do so -- during these few years of development in EV, people continue to develop the new type of the modules and new type of components, which has [ bring down ] efficient of the EV and that is why increased demand for testing. And we don't have this number because both solar testers and the EV testers are at the same range of power, over take it will up to 50 or close to 100 kilowatt. So it's very hard for us to tell all the system go to score on EV. But I would say it's not less than 30% of test instrument sales is from EV.

[Steven Pelayo, analyst]

So 1/3 is ATS. Excellent, thank you. Paul, on the tax rate in the fourth quarter on a parent basis actually came down quite a bit or so only about 5% or so. What type of tax rates you will be thinking about in 2018 I guess if I model from a parent perspective?

[Paul Ying, executive]

See we still maintain the expectation of the 15% as the tax rate. But however, fourth quarter due to the -- we have got tax filing being determined by the tax authorities and we got some tax rate refund and then it will affect the current quarter's numbers, so that's the reason. So that's not the -- it's abnormal but again this is on the good side.

[Operator]

[Operator Instructions] And next, we will have Steven Pelayo from HSBC for questions.

[Steven Pelayo, analyst]

Yes, just one quick question on the new materials side. I guess, on a full year basis it was revenues are down about 9%, but profits maybe down about 50% or so. Is this kind of winding down now or what's your outlook for 2019 for new materials both revenue and profit?

[Paul Ying, executive]

So we still maintain the expectation that slightly climb down due to the transition of the [indiscernible]. And I think the utilization of the total length or the quantity is still growing. However, the dollar value will be decreasing. And I think the contributions to the parent company I think to maintain the same kind of expectations, well TWD 40 million, TWD 50 million a year up and down.

[Steven Pelayo, analyst]

But in 2017, it was only TWD 23 million.

[Paul Ying, executive]

Yes, that I think that basically that's due to the currency.

[Operator]

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

[Paul Ying, executive]

Thank you. I just mentioned that we have 3, a record breaking at the top line and also the bottom line plus the EPS. And hopefully, we can deliver what we committed in 2018 with a very prosperous Year of the Dog, we call it the golden dog. So I wish to everyone a Happy New Year and a very good 2018. Thank you and bye-bye.

[Operator]

Thank you. We thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit www.chroma.com.tw/investors/index under the Investor Relations section. You may now disconnect. Good bye.