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Chroma ATE Inc
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Welcome everyone to Chroma's 2019 Fourth Quarter Earnings Conference Call. [Operator Instructions] And for your information, a webcast replay will be available within an hour after the conference has finished. Please visit www.chroma.com.tw/investor/index under the Investor Relations section.
And now I would like to introduce CFO, Paul Ying. Mr. Ying, please begin.
Thank you, Jason. Hello, my dearest investors. This is Paul Ying from Chroma. Welcome to the fourth quarter's conference call for the financial release. And starting from the fourth quarter highlights. If you look at the -- our presentation material at Page 12, you can see that the partial on the right-hand side. And this is the quarterly highlights for the sales revenue and also the gross margin and -- plus the operating margin.
You're going to see that the fourth quarter, the last quarter, which is the fourth quarter of '19, jumped the highest, the numbers, which is the sales revenue, which is at the TWD 2.5 billion. This is a Q-over-Q, 31% growth and 52% growth on a year-over-year basis.
And the gross margin, although slightly went down to 47%, mainly due to the product mix sale at the fourth quarter. You can see that the operating margin, we still keep it on the high end, which is at 21%. Net income reached to the TWD 600 million, and this is 26% up on a Q-over-Q base and the same percentage on a year-over-year base.
For the fourth quarter of 2019, the major growth is contributed from the Turnkey Solutions, which represents almost 6x growth on a Q-over-Q base and double the size of the 2018 fourth quarter. So this is a pretty good numbers that we've made.
And if you look at the consolidated sales revenue, and we reached around approximately a little bit under the TWD 14 billion in year of 2019, which is at TWD 13.9 billion. And this represents a decline of 18% on a year-over-year base, and mainly due to the drop-out of the MAS, one of our major subsidiary, which is a manufacturer and designer for the automation process and also the product. And that was the -- coming from the solar industry part of the sales revenue, down at year 2019.
And for the testing equipment, the business, which still represent growth of 18%, which is on the high end of the single digits. And the consolidated sales of the testing equipment business hit a record high to TWD 11 billion and this is a pretty good record, which is also the record high.
For the parent company, sales revenue in 2019, also hit a historic record high, which is at the TWD 8.1 billion. And the last number, which is only approximately over the TWD 8 billion. And this will represent a growth of 7% as well, mainly contributed from the Semiconductor and Photonics testing solutions, which increased on a 22% compared to the year of 2018.
As to the year 2020, this year, our outlook for this year in couple of angles. The first one is the -- we assume the rapid development of the AIoT, which is represent the AI plus the IoT, increased the demand of high-performance GPUs, CPU, sensors, RF connections, et cetera. This will be continuously drive the sales growth in Semiconductor and Photonics testing solutions, particularly from several areas.
The first one is the High Reliability Testing Solutions, such as the burn-in test or SLT testing. For the VCSEL and the time-of-flight testing for the 3D sensing. The third one is for the optical fiber communications testing really used in the India telecommunication applications.
The second one is for Test Instruments and ATS for power testing solutions. We assume it still will be focusing on the green energies. This will be including, like EV-related components, battery module and pack, and smart grid and 5G generated -- and the 5G generation-related power testing. The third one is for those EV battery cell, especially for the formation system, will be the key contribution for Turnkey Solutions in 2020.
And the last one is the in-line nanoparticle monitoring system. This is the breakthrough technology developed by our subsidiary, Innovative Nanotech, which could precisely detect the particles down to as small as the 3 nanometers, and have been adopted by foundry customers already. Those are the outlook for 2020 and this is my presentation.
And right now, open for any questions for anyone.
[Operator Instructions] And the first question is coming from with William Chen of JPMorgan Asset Management.
Hello, Paul. Can you hear me?
Yes.
Yes, thank you.
Paul and Jennifer, so 2 quick question regarding to your cash flow. So particularly through your working capital. I saw in 2018, based on your financial statement, the working capital looking -- working cash -- I mean, the cash conversion cycle was about 82 days. But then that actually rose to about 130 days in 2019. And multi-type accounts, those actually increased quite a bit. Can you share how the informal accounts, some of the reason why the cash conversion cycle has been increased? And then what's your view on 2020?
And second, a follow-up question on this is the cash flow. I noted that [ you mentioned ] some of the increased debt. And I'm thinking about that, what's our balance sheet outlook for 2020 and what's the dividend payout for 2020?
You mean the AR sales increase stays on consolidated, right?
Correct, correct. Consolidated.
Well, basically, I think for the consolidation basis, that will be consolidated for all the business for Chroma. That will be the parent company plus the subsidiary like MAS and the [ procured ] company. So in there, you can see that it's a little bit long. Well, due to the increasing for the top line at the 2018. And 2018, we see the level with some of the accounts receivable for those warranty and the guarantee. So that will be left over for the accounts receivable.
But if you look at the turnover dates, I think it's -- to us, I think it's still under the controllable kind of a situation, especially for the current company. If you look at the current company accounts receivable turnover date, I think it's still improving. And I think that's also the attitude from the management, trying to keep it as current as possible and moving over.
But to the increasing debt, I think 2019 is the particular year that we have a lot of cash outflow. One of that is due to the consumption for the -- our next headquarters on the subway A7 station project. In there, it's -- 2019 is under the kind of the construction peak and the payment as well. And for -- and others, cash flow is due to the investment on the -- equity investment on the Camtek, an Israeli company. That cost us somewhere like TWD 2.4 billion. So that's where we are. So we are not like 2, 3 years ago, we are on the net debt to equity, which is a net cash. But we're kind of using a long-term debt to kind of adjust this kind of a situation and trying to keep that as current as possible and trying to pay out the cash dividend.
I think cash dividend for this year, we're still maintaining the 68% payout, which is TWD 3. This was discussed in the -- this morning from the Board, and this is a suggestion from the Board to the shareholders' meeting.
Will, I think the -- our debt book is gradually paying back. As you may notice, for our third quarter balance and then move on to fourth quarter balance, the net debt-to-equity is gradually decreased. I think the situation for the cash flow and the debt positions will be further reduced, I think, this year second half after we move to new headquarters, and the current building will be sold.
Can I have one follow-up question?
Sure.
Yes. So this is regarding to the OpEx. I think that 2017 and '18 was probably not a comparable base because the -- there was contribution from MAS. But if I look at 2016 when we don't have -- didn't have the MAS contribution, the -- you have -- of course, margins pretty similar to the -- in 2019, but in OpEx level in 2019 is actually much higher than for 2016.
So do you have any like expectation regarding to the OpEx going forward? I think margins are -- gross margins should not be an issue because you have an interesting product mix. But then just on the OpEx side, what should we forecast or what's the guidance on OpEx in 2020 onwards?
I think if you compare to year 2016, I think the OpEx increase is due to 2 major reasons. First one, headcount increase, of course. Especially we enjoyed 2-year high from the '17 to '18. Now we further penetrate into like a photonics factors and then we recruit several R&D. And the second thing is, every year since we are a public company, every year we will increase the salary bases around 2% to 3% according to [ CDI ]. So this is normally what will happen every year, to increase the salary. But these 2 years, since the trade war issue, so we already pretty much have [ reached ] our headcount numbers.
Because you [ showed ] a more stable OpEx, like that absolutely -- OpEx numbers?
I think this year, you probably -- we still need to add like very low single-digit due to salary increase according to [ CDI ]. We used last year the TWD 6, and then multiple maybe low single digit, maybe around 2% or 3% according to the [ CDI ] influence, yes.
[Operator Instructions] And next question is coming from Jeff Ohlweiler from Macquarie.
Yes, Paul and Jennifer. First question. In the third quarter earnings conference, I think you sounded a little more cautious on EV momentum in the ATS business. But it looked like, fourth quarter, the ATS business was very strong. So my question is, was that really EV-driven? Or -- and if that's so, what's changed? Or else what was really driving the strong ATS number in fourth quarter sequentially?
Okay. As you may note that the first 3 quarters for ATS is still behind the schedule and the budget still present a decrease. And -- but we overall see the whole year is [ mapped ] to the growth above 4% leading to our larger pooling in the fourth quarter. And mainly comes on 2 major products: the first one, battery pack and battery module-related; and second thing is panel-related.
Okay. Great. And then another ATS-related question. Roughly what percent of sales in the ATS part of your business goes to China?
So this is a very large question. Very hard to estimate, especially after 1 year of relocation. I would say -- so far, because they gradually back [ onwards ], maybe you have 50%, I don't know, if you continue shipping to China. So I don't know.
Has that been disrupted at all so far this quarter or no?
No, not really.
Well, Jeff, I think at least for the first quarter, the first 2 months of first quarter, I think it looks okay. And at least from our point of view for the first half of 2020, I think we -- currently, we feel comfortable. So this is where we are. And for the COVID, for the virus hysteric kind of issue, right now, it seems to us that we don't have a broken chain for the supply chain kind of issue.
And also, for our customer base, as long as they are on a certain side, I think they're still demanding us for those backlog and trying to prepare for the shipment as long as they have started to -- their operation. So it seems to have that only had limited kind of influence. And probably part of that is the delay, but nothing, yes, that...
Okay. We understood recently, several industry has been impact by the viruses. But currently, our customers are no -- have no plan to change their new product development in the sector, particularly in the second half. So if they want to have their new product launches, they definitely need to build out the capacity or rolling their plans on schedule.
And certain first things I can highlight is semiconductor sectors mostly are not in China, okay? No matter SLT, VCSELs, these parts, I think maybe partial of the EL part is to China. But 5G is the key developments that China want to adopt. So far, we don't see anyone is really canceling their order.
And for power testing, I think -- maybe the first half of February, we have some concerns due to customer issue, but I think that China is very aggressive to make everything back on track. So once we're able to deliver in the end of the month, I think our sales contribution will not be a big issue. And we haven't seen really a big impact for the first quarter forecast.
Okay. One more question before I get to the queue again. Somewhat related on the Turnkey business. You said this year should be EV-focused, information-focused? What is the rough kind of China versus non-China breakdown there?
Well, first quarter this year, we do have the one project which has been postponed or rescheduled from fourth quarter last year. So -- but we already start to deliver as you may notice from our general results, and continue to deliver in February and March. And we also have another order, is going to deliver between second and third quarter. And this one is non-China, which is to like the Thailand area.
[Operator Instructions] And the next question is coming from [ Mel Rose of Marshall Wallace ].
So I have one questions regarding like your new product, nanoparticles. So can you help me like have some idea regarding how big could this be maybe addressing markets? Or how should we think about the revenue contribution from this product? Is it -- for example, like VCSEL. Is VCSEL a good benchmark for us to think about the revenue contribution for the first year? And also regarding the customer -- new customer acquisitions for these products, what's the trend for this? Because right now, we have one foundry customer. So what's the specific outlook for the customer acquisition?
Okay. We -- this project has already been qualified by our foundry customers in fourth quarters. And general lead time is about 3 to 4 months. And according to our Chinese calls, I think our Chairman did highlight that this perspective, the pricing is around TWD 19 million, close to TWD 20 million, yes. And then based on the -- if this is not the big milestone, only sell a couple of sets, I think our Chairman will definitely not want to highlight.
I think we do have 2 targets. The first one, it seems that currently we only cover 2 solutions, we haven't really covered assets, really the liquid. So of course, we would like to increase our development capability to cross to other liquid type of special asset parts of instrumentation, I mean particle instrumentation. And the other one is that we would like to -- having set up is the first customer for -- having a solid position before we move on to second foundry customers. So first, we would like to expand to powder mix. And second one is the volume from this particular type of customers, yes.
But you know this year is definitely, we -- as we mentioned, this year definitely is semiconductor upgrade cycles because customers need to upgrade those testers, so equipment -- to meet the, first, the 5G markets and the second is the technology department. So we have greatest order book for our exporting type and then we also migrate to the new customers, which is the foundry customers.
And the next question is coming from Jerry Su of Crédit Suisse.
Paul and Jennifer, so 2 questions from me. First is that I think in the Chinese call you had mentioned the fourth quarter gross margin were impacted by the higher mix from Turnkey and also some intercompany transaction between former parent company of MAS. I'm just wondering, do you think we -- you do foresee any of these kind of products or transaction to happen in 2020 based on your current outlook?
You mean all the Turnkey?
No, no. Just for that particular item, display related.
You mean the lower margin?
Yes. I mean lower margin display Turnkey product?
Turnkey product, always depending on the product mix. So it will be hard to answer this kind of questions. But I think the -- overall, our target for the current company is still maintaining the over 50% gross margin past year targets.
This Turnkey Solutions really [ depends ] project by project. It's not all the Turnkey products is low gross margins. Like the first quarter, we probably delivered this battery cell order. Maybe blend everything together, so far is not that low. So it's really case by case. But I couldn't deny that Turnkey Solutions is a blended gross margin. Sometimes it's not as high as you view the -- I think as that of the testers, yes.
Okay. And then a second question is on the effective tax rate in the fourth quarter. I think on both consolidated and parent level, the tax has increased quite a bit. Can you give us some color on that?
You mean the parent, the tax rate?
I think for both parent and consolidate, both tax were higher than the third quarter.
There's nothing particularly needs to be focused on, which is decided by the tax return being filed, being decided by the tax bureau for the previous year. And then its up and down will be affecting our current tax rate.
So going forward, how should we think about the tax rate?
Well, we'll still maintain the expectation on the -- somewhere like a 15% -- 14%, 15% as the average. I think the only thing that we can get from the government is for the -- incentive that we can get from the government is for the R&D investments. But that's upon the tax bureau's investigation and also the approval. So that's the reason why every year where our tax return will be reviewed and checked by the tax bureau. And after few years, then they decided which is the right tax that we should pay. So that's the absorption for the OpEx gap.
[Operator Instructions] The next one is coming from Jeff Ohlweiler of Macquarie.
Yes. Two more questions from me. The first one, any thoughts on -- any progress along with the Camtek acquisition this year or next year that you can talk about yet?
Camtek or other acquisition projects?
Yes. Or did not -- just any projects that you're doing in terms of will we see any Camtek-related revenues sitting in your consolidated -- this year, next year, yes.
So I think Camtek was not consolidated. I think they just booked us equity profit under our nonoperating income.
But any projects you'll be doing feeling for them though, that will hit your actual revenues? Any projects you are doing for them or with them outside of the equity income?
Okay. We are in the middle of progress doing the technology migration. I exchange those optical inspection or technology. So far, it's in progress. So I don't think what -- what is of key? But based on Camtek's projection this year, still quite positive. I think they are the only ones doing -- outperformed compared to their peers.
And then the real estate sales this year, roughly, what quarter do you think you'll see the gain from that sale?
Well, it won't be that fast like, well, this quarter or next quarter, simply because it will be a long process for the migration of technology. Also -- okay. So you're talking about the new construction headquarter and also the existing headquarter for the future?
Yes, correct.
Well, we plan to sell it at the early -- as early as the year 2020 last quarter or push it to probably 2021. So this -- well, according to the process of the completion of the construction. And for the amount, well, we didn't have the exact number yet. But around to the -- but according to the regulations for the SEC, as long as we have the contract, and then we had to disclose to the public.
Okay. And then sorry, one last question. For your semiconductor-related and photonics growth this year, can you kind of give roughly what -- within that kind of breakdown, what's grown the most, or factors this year?
Semicons -- honestly, I do a little bit calculation. I think based on our Chairman's comment that this year semiconductors could probably, at least, can have a similar growth rate as last year, yes. And then transformation, I think, maintained a stable growth. And Turnkey Solutions currently we have [ seen growth since 2010 ], mostly EV battery cells. And then you can also plus a little bit some nanotech there, sales contribution.
Okay. Great. Sorry?
So we consolidate everything for the testing business.
[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, Jason. Well, my dearest investors, ladies and gentlemen, thank you for your attending for this conference call.
And for the 2019 fourth quarter and also 2019, I think we enjoyed a pretty -- like a roller-coaster, starting from low and then we come up with the record high on the fourth quarter. So this is a -- I think it's a good result. And right now, we're still keeping on the pace and trying to, well, improve everything and trying to give up the best records. And before we meet next time, still, again, I wish you, everyone, have a very good health and very good and prosperous futures. Yes. Thank you. Bye-bye.
Thank you, Mr. Ying. 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/investor/index under the Investor Relations section. You may now disconnect. Goodbye.