Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2018-Q4

[Operator]

Welcome, everyone, to Chroma's 2018 Fourth 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.

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

[Paul Ying, executive]

Thank you, Jason. This is Paul Ying. Welcome, everyone, to the fourth quarter financial result release for the year 2018. And let's start it with the 2018. The consolidated sales amounted to TWD 16.9 billion; this is the growth. And 2018 net income totally amounted to around TWD 2.5 billion. And that Chroma group total approximately around 3,000 employees all over the world as of December of 2018.

And regarding to the quarterly highlights, if we look at the 2018 fourth quarter, the sales revenue of the parent company amounted to TWD 1,697 million. This is 13% q-over-q down and another 17% down on a y-o-y base.

Although the drop of the sales revenue q-over-q and y-over-y, the gross margin we'll still maintaining above 50% pretty well, which is 52%. The operating margin is approximately 17%. And the net income for the fourth quarter of 2018 amounted to TWD 479 million. This is 22% down on a q-over-q base and 46% down on a y-o-y base, simply because the year in 2017 the fourth quarter has a very strong base of the automation, of MAS. And 2018 fourth quarter highlights is the -- the sales contribution in fourth quarter of 2018 is mainly coming from the turnkey solutions. This is 60% growth on a q-over-q base.

So this is the fourth quarter's financial results. If we look at the 2019, the guidance for the 2019, well, mainly the Chroma consolidated sales revenue has grown on a consecutive of 4 years growth and this is represent a CAGR of 15%. The year of 2018, the consolidated sales represents another year of growth in 14% compared to 2017. And this result in 2018 was mainly contributed from the MAS. The automation business represents a strong growth of 92%, almost doubling the numbers of 2017, while the Chroma testing equipment business is flat compared to the last year, 2017. The net income in 2018 was TWD 2.5 billion and also flat compared to 2017.

On the outlook of the 2019 of the Chroma business, well, we presume the first quarter will be low due to the supply chain relocation and the Chinese New Year. And we expect the shipments will pick up from the second quarter and the earnings in 2019 will not lower than last 2 years.

The test measurement business expected to grow in 2019. Well, that will be mainly from the EV market and OEM/EMS relocation and it will continue to drive the growth of power electronics testing equipment and solutions base (sic) [ sales ]. While the semiconductor and the photonics testing solutions will be mainly contributed from the VCSEL capacity build and the pilot run of ToF, time-of-flight.

Well, this is the guidance for the 2019. And now we come to the section of the Q&A. Any question from anybody?

[Operator]

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

[Jeffrey Ohlweiler, analyst]

Can you talk a little about -- you mentioned 2019. Did you see earnings growth and also ATS growth? Can you talk about maybe turnkey year-on-year and also the semi year-on-year. And within semi photonics, can you talk about maybe the traditional semi testers versus SLT versus photonics?

[Paul Ying, executive]

Basically, I think we don't guide each of the single solutions. And regarding to the turnkey solutions, I think we expect in 2019 this full year, well, similar to last year and slightly we believe that it will be a little bit better than last year. I think that's full year and that's for the turnkey.

[Jeffrey Ohlweiler, analyst]

Okay. And then obviously you come up 2 very strong years for the MAS business. And any thoughts on 2019 there?

[Paul Ying, executive]

I think 2019 for the MAS operations we expect it won't be that rapid growth like doubling the price of the -- as 2018. So currently we pretty much expect that MAS operations will be similar to the achievement as the 2017.

[Operator]

And then the next one is from Jerry Su, Credit Suisse.

[Jerry Su, analyst]

I like to ask you about Camtek. I think you announced the transaction after the Chinese New Year. So can you talk about what kind of synergy you can achieve by licensing their technology, which end application you're looking for? And also I think in the presentation you mentioned that you want to develop some lower cost products. Can you also elaborate on that?

[Paul Ying, executive]

I think for the Camtek, well, the main purpose of this investment is not only for the financial purpose, but also the synergy that we can achieve from both sides. I think you can treat Camtek as a very much concentrated and focused on the semiconductor industry and also application kind of technology company. But at the same time, the white light triangular (sic) [ triangulation ] technology, which is then sitting in the middle of the 2 ends of that kind of inspection technology of Chroma, is kind of like compensate to Chroma in the application. So that we can use it to the several kind of different applications such as the -- certain case kind of inspections and like the cell pack of the battery cell for the lithium battery cell, for that kind of application, which is -- it's brand new for the Camtek kind of industrial applications. But to us, we've been providing a solution and also facing the inquiry from the customer base for a period of long time. And this will be one of the synergies. And the other one is, for Camtek for their current market occupation -- to them -- I think they are developing -- they are trying to develop a series or a model of the low cost kind of application to -- shooting for those lower end kind of a market. And there, they will leverage the manufacturing capability of Chroma and also the channel and the marketing efforts of Chroma in Asia markets, so that we can have a major benefit in there. So these are the synergies that we can look at right now. I hope I answered your question already?

[Jerry Su, analyst]

Yes. But one follow up is -- so if you successfully develop a low cost product and then -- so will you be booking this revenue or you will be booking by Camtek and then you'll enjoy the -- your 20% equity investments in cash?

[Jennifer Chieng, executive]

All right. Jerry, I just want to add some information regarding to the synergies that our CFO highlight. Regarding the second synergy that is mainly proposed by Camtek to develop the low cost 2D inspections, this is because one of their target this year is to increase the Asia penetration. According to current Asian markets, this kind of low cost 2D inspections, they do have their own market. Camtek in the past many years, they mostly focused on high-end, need to high-end, especially for pumping testing. And they probably have about -- 60% of their sales actually come from this compound pumping contribution. As you know, this is kind of a -– it's advanced package on this kind of [ co-wide ] technology by measure the size of each pump. According to their statements -- after we visited their factories -- per wafer basis, they actually have over millions for this compound. And then their measurement time is very, very efficient. But we don't want to just pay a 29% premium just because of the pure financial investment or the market they have right now. We would like to lever this technology to other sections, first, to their target to increase the penetration in Asia, which is to develop this kind of 2D low cost equipment. They already have a design model, but they think if they're manufacturing this kind of testers in Israel, U.S. markets will be quite expensive. So they want to use our -- first, our manufacturing skill, plus our distribution channels in Asia. So that's the -- they want to -- since they already covered the needs in high-end, they want to go down to also cover some of the low-end markets. And second one is, we -- during this kind of negotiation period -- we're running these cases for almost 8 months, okay. We have [ applied ] other several cases other than semiconductors, including phone casing, plus these kind of touch type of EV batter cells. And it actually works. Efficiency is much -- really about 2 or 3x times faster than -- if you're using these kind of white light thing...

[Paul Ying, executive]

Triangulation.

[Jennifer Chieng, executive]

No, white light [ infra montrate ] -- sorry, I can't think of -- because they are -- according to current inspection capability, they are very good, at about 2 microns to 10 microns. But while our [indiscernible] is better because our solution right now -- that ability we have right now is best designed for 2-nanometers low, which is 1 micron low. But current market, most are setting to these 2 microns or 10 microns for current bonding testing. So we would like to -- during this period -- we also can elaborate this technology, which is the application we already tried and it works, which is casing as well as EV pouch type of a battery cell and plus some solar cells applications.

[Jerry Su, analyst]

Okay. And then the other question is I think regarding an invention that is seeing some CapEx allocation by you. And can you elaborate a little bit on that and then how will that benefit Chroma's revenue? So I think besides [ technician ] and -- it's also going to help semiconductors as well?

[Paul Ying, executive]

Well, regarding this kind of reallocation inquiries from customers' base, I think starting from last year we've been facing a lot of big either OEM or EMS kind of manufacturing brand name owners. They are looking for non-China manufacturing capabilities. And several of the location has decided, mainly in other places in Asia like Vietnam, like India or even Thailand or back to United States or to Taiwan. But since the trade negotiations between China and United States right now is still ongoing -- and not so much concern right now, so nothing really decided and we didn't see anything that followed yet. But it seems to be that will be kind of a trend at least starting from last year all the way down to probably this year or to the year after.

[Jerry Su, analyst]

So there's no clear order that is coming from this reallocation right now?

[Paul Ying, executive]

We are facing dozens of inquiries from different kind of company or customer base right now, but it really took time to find out new sites and also layout and put the construction of the new site, then moving the installation of the equipment. So it will take time.

[Operator]

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

[Paul Ying, executive]

Thanks, Jason. Well, if we look at 2018, we started with a very high first quarter and then all the way to the third quarter, although third quarter is not a peak. But fourth quarter due to the uncertainty of the trade negotiations between China and the United States and other kind of headwinds for those semiconductor business, it seems to us that we still can maintain the profitability ultimately on the net income compared to 2017.

So 2019, although first quarter is definitely due to the low trend of the -- starting from last quarter, we do expect that 2019 the legacy product and also the original business, the core business of the test and measurement for Chroma still will be ongoing, growing. And for that, we can expect that 2019 we really do not -- pessimistic on that -- the real outcome. So thanks for your attention and see you next time. Bye-bye.

[Operator]

Thank you. And ladies and gentlemen, 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. Goodbye.