Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2020-Q4

[Operator]

Welcome, everyone, to Chroma's 2020 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please visit www.chroma.com.tw/investor/index under the Investor Relations section.

I want to introduce CFO, Paul Ying. Mr. Ying, you may begin.

[Paul Ying, executive]

Hi, my dearest friends and investors. This is Paul Ying from Chroma. I'm the CFO.

Well, today, we're still -- in Chinese position, we're still within the Chinese holiday season. So first of all, happy New Year to everyone. And everybody, I think, for the year 2020, it's very difficult and also suffering from the epidemic.

Well, today, let us get started with the financial numbers for the fourth quarter of Chroma parent company. In the fourth quarter Chroma, the sales revenue reached at the TWD 2.4 billion. This is 1% up quarter-over-quarter and 6% down year-over-year.

However, the gross margin reached up 51% and operating margin approximately 22%. The net income for the fourth quarter of 2020, approximately TWD 6.86 billion, and this is an 18% growth on quarter-on-quarter basis and up by 14% year-over-year. The major sales revenue growth is in fourth quarter. It's contributed from the Turnkey solutions, definitely.

And in here, if we go back to see the year for the 2020, the parent-only sales revenue reached at the TWD 9.18 million. When compared to last year, this is a 13%, 1-3, 13% growth. And the gross margin, we still maintained above 50%, which has reached 53%. And compared to last year, this is a 19% growth and reached TWD 4.867 million. And the operating margin reaches at TWD 2.2 billion approximately, and which is 25%, and this is also a very high-growth compared to last year. And this is a 34% growth.

And look at the income before tax, which has reached approximately TWD 2.8 billion, and this is up 30% compared to the top line and 30% growth on a year-over-year basis. After-tax net income reached TWD 2.3 billion, which is 0.5% of the -- compared to the topline and the 25% growth on a year-over-year basis. And this bring up the earnings per share for the year of 2020, approximately $5.56. And again, this is a 24% growth compared to last year.

As to the consolidated base, if we look at the consolidated sales revenue, we reached approximately and TWD 15.532 million. And compared to last year, it's a 12% growth. And the contribution of these sales revenue, the sales revenue coming from the testing equipment business, approximately TWD 12 billion, and the occupancy is approximately 78%. And compared to last year, this is a 14% growth.

As to the operations of the MAS, they reached approximately TWD 618 million. Compared to last year, it's a drop by 39%, mainly due to the first COVID situation. And also, the major markets of the M&A is focused on the Chinese market, which is -- and focus on the solar panel. And these industries in China, especially in last year, I think it's pretty slow. So the main reason for MAS drop is that winter.

And as to the new material, they reached TWD 2.5 billion. And compared to last year, this is a 22% growth. And for this gross margin of the consolidated sales revenue, it's approximately 49%. So in here, we make the 2 records. One is for the sales of the testing equipment, we reached a record high. And also the gross profit percentage, we also registered a record half.

As to the operating margins we reached 22.7%, approximately TWD 2.8 billion. And compared to last year, it's a 36% growth. As to the net income, again, this is TWD 2.3 billion. Compared to last year, this is a 26% growth. And earnings per share, approximately, well, $5.56. So if you look at the numbers, well, along with the COVID situations, we still developed a pretty good track records.

And as to the product mix and the consolidated sales breakdown, again, if you look at the presentation material, Slide #17, you can look at the test, the instruments and the automation and testing systems, approximately it's the legacy product of Chroma. It's around TWD 4.8 billion, and it's a 5% growth on a year-over-year base. For the semiconductor and photonic tested solutions, and this is very strong growth, approximately TWD 3 billion. And year-over-year, is a 31% growth. For the Turnkey solutions, due to the selection base for the very competitive situations in China market, I think for the year of 2020, we made somewhere like TWD 456 million. Compared to 2019, it is a 28% drop.

And for the service and others, and this is also a very strong growth on the 51%, I think one of the reason is due to the installation base for our equipment is increasing for the related fixtures and service and other components, parts kind of demand increase. So in there, we see a bit of growth in this area. So in here, you can look at the numbers, again, the total consolidated testing equipment business approximately reached at the TWD 12 billion, and this is a 14% growth compared to last year. And again, on the MAS, this is a 39% drop. And new material, this is 22% growth. So this brings us the consolidated sales revenue to the TWD 15.532. And compared to last year, this is a 12% growth.

So if we look at the 2021, this year's -- the guidance, the first half work, definitely, we've mentioned that before, it's where we are right now for the 2020. The sales revenue reached TWD 15.5 billion, and this is a 12% growth year-over-year. And the parent company reaches at the -- sales revenue reached TWD 9.2 billion and presented a growth of 13% on a year-over-year base. And again, it's a contributor from the semiconductor and photonic testing solutions. And for these sectors, increasing by 31% compared to 2019.

As to the 2021, this year for our business outlook, we still continue to see the very strong demand of the semiconductor photonic testing solutions. And this is driven by global semiconductor chip shortage, as you know, and the development of the 5G-related and high-performance chip HPC applications. Those key drivers, including hybrid liability testing solutions, say, burn-in test or system-level testing with the thermal control, which is the different kind of temperature range kind of a [ camber ] simulation. And the second one will be the wireless RF and MCU testing solutions. And the third one will be the CMOS image sensor, CIS and the VCSEL and the ToF testing solutions. And again, the fourth one is the semiconductor inspection and metrology solutions. So those areas that we consider, it will give us the drivers for the growth of 2021.

As to their power electronics of traditional testing instrument and ATS. We still think it will continue to benefit from grid energy, including EV-related components and battery cell, battery module, battery pack and smart-grid and 5G and server related power testing and -- will be steadily growing. So this is for the 2021 business outlook. And this is my last presentation.

So any questions?

[Operator]

[Operator Instructions]

The first question is coming from Jeff Ohlweiler from Macquarie.

[Jeffrey Ohlweiler, analyst]

I guess the first question, looking in 2021, what's the expectations for the mass accounts receivable, either write-off potential or write-back potential?

[Paul Ying, executive]

Well, I think for the write status for the MAS, I think we're pretty much there already. So we are not expecting it getting worse now, but it depends, yes.

[Jeffrey Ohlweiler, analyst]

Okay. And for the nanoparticle tester, can you talk about, I guess, that business overall in terms of new products, new customers and what type of growth you're looking for that particular product or product group this year and beyond?

[Jennifer Chieng, executive]

Jeff, this is Jennifer. I think you can refer to Slide 27. We do have some update regarding to the progress of the nanoparticle. And I think we already stepped from just slowly testing to already cost out to cover H202. Apparently, this business is mostly target on foundry business and, of course, include their outsourcing vendors because they need to check or review their particles before they ship out to the users. And this company already started over from last year.

[Jeffrey Ohlweiler, analyst]

Okay, great. One more question. On the AOI, is that a joint product with your acquired company? Or is that a Chroma-specific product?

[Jennifer Chieng, executive]

You mean the semiconductor inspection and metrology solutions?

[Jeffrey Ohlweiler, analyst]

Yes.

[Paul Ying, executive]

So far, it's on our own. But we do have a...

[Jennifer Chieng, executive]

This is a new department that we set up last year. And this is also another, you can say, product factors that we also target on the foundry customers.

[Jeffrey Ohlweiler, analyst]

Okay. One more quick one before I jump back in the queue. Did you mention the 7-factor tester growth outlook for this year? Is 20% plus still -- is that a target? Or is there a more specific target for that growth?

[Jennifer Chieng, executive]

That's a preliminary -- the growth rate we estimated should be, yes, based on our current order on hand.

[Operator]

The next question is coming from Arthur Lai, Citi.

[Arthur Lai, analyst]

Congrats for the great results. One follow-up is on the SLT side, we learned that ADVANTEST, one of the Japanese vendor, they actually tried to break in into this new market and what's your preliminary thoughts on it?

And also, they told investor that they categorized it as service revenue. And then I wondered, do you have any read-through to why making the SLTs service rather than equipment?

[Jennifer Chieng, executive]

Okay. Arthur, this is Jennifer. ADVANTEST, they actually acquired 2 companies for -- to step into SLT markets. But I think we stepped into SLT markets, I think at least 6 or 7 years earlier than the other 2 major competitors include Advantest and Teradyne. And we start out this SLT business as -- the first primary target is HPC markets.

And so as you noticed, the HPC market are very, very customized. A very sticky business because HPC type of chips cannot be a standardized as like mobile chips. So we think that Advantest, their first target, according to the com scale, will be mobile chip because from 5G mobile chips, all their, I would say, most of the 5G mobile chips need to add the SLT testing process.

Of course, since we've already been doing the SLT business for almost 10 years, we would have gotten a solution. And we already start to cover some of the SOE testing for mobile chips as well, not only limited to SPC markets.

And regarding to servers and others, these factors, I think one concept that the investor could bear in mind is, recently, the SLT become the "tablet passage," because the testing process is under a paradigm shift. We used to test the chips based on the software content to stimulate the chips. But now due to these temperature, low-control issue over the stimulation and also high-power consumption. So you need to add SLT testing.

But apparently, SLT, the content is hardware content. So once you change the testing method from just software to become a hardware, it's like you're having additional cells, which has come from these so-called consumable parts. That's including [ heavier ] sockets, contact points and [ burn-in board ], low board and others. So that's what also explains why our service in others has significantly increased in last year by 50%. This so not exactly like a software-type of a services contract that we provide to our customers. Instead, actually, it's more like a consumable part that we sell-through our customers. Actually, this also helped to create a thickness between Chroma with our pools of customers.

[Arthur Lai, analyst]

Okay. Got you. And one follow-up, if may. There is one of the investment that you had talked about in the other industry called [ Genet, G-E-N-E-T ]. Can you -- can management comment on why we invested in this company, and what's the long-term strategy, we try to grow there -- how's the synergy between the investment and also your company?

[Jennifer Chieng, executive]

[ UB ], that is the company you mentioned that related to PCR testing?

[Arthur Lai, analyst]

Yes, yes, yes. [ '19/9 ]. Yes, yes. Yes.

[Jennifer Chieng, executive]

Okay. Because we -- SLT content is -- you need -- when you design SLT, the basic concept, SLT is to do, you can say, micro-size of automation, micro-size. So when the biotech industry start to -- you can say, start booming. We considered maybe we could use our design in the micro-size, those formation that we use for chips could also use it for biotech.

So it doesn't mean we do chemical stuff, but we just provide this kind of mechatronics, the automation that apply from by all industry. So that's why -- because of the synergy, they rely on us -- pretty mutual, because when you need -- when you have a tester, you also need to have the testers, the chemical stuff. So they wanted to -- they want to increase the tightness, I mean, the relationship between both parties. So we actually invest about -- around 15%. And I think this is the equipment. They want us to further improve their design and equipment.

[Operator]

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

[Jerry Su, analyst]

I just have 2 questions. One is that, I think it's Paul, you mentioned that we're seeing the parent company, the service orders saw pretty significant growth. And that is probably mainly related to some of the fixture or some of the service you provide associated with the semiconductor-related business. Do you have a breakdown of what portion of that service to others is coming from? Is it more related to the semiconductor? And how should we think about the growth rate into the next couple of years?

[Jennifer Chieng, executive]

This is the factor that our Chairman, I think, 1 or 2 years ago, he set up a separate department just to focus to improve or further enhance our service provide. So I think, especially from the SLT business start to picking up, this kind of business also increased ordinarily. And you could say, servers and other, I would say maybe around -- close to 2/3 is mostly related to semiconductor servers and selling those parts, their parts, replaceable parts.

[Jerry Su, analyst]

Okay. That's very helpful. And then second question is related to that -- the disposal gain you're going to book in Q1 on the higher headquarter. What are your plans about the use of the proceeds you receive?

[Paul Ying, executive]

Well, as you can see that we are going to pay out, like, 81% as the dividend. And the rest of that, I think for the increasing of the debt, we're going to pay [ out ] the debt as well.

[Jennifer Chieng, executive]

Jerry, we also -- in the past few years, we always continue to acquire either small or medium-sized software. I mean, sort of an air project just to furnish our part or it or technology. So this -- we do have several projects on hand and we're evaluating at the moment. If we -- well, either we spend -- probably spend on M&A to continue to furnish our work, Chroma's, especially for semiconductor industry. Or otherwise, we mostly just pay out.

[Jerry Su, analyst]

Okay. So because I think you have mentioned that the payout ratio this year is about 81%, which is a little bit higher than the past few years. And I think this disposal gain is one of the reasons. So how should we think about the payout in the next 2 years? Is it coming back to the more normal level, like 70%? Or you're considering to do some of these either share buyback or special dividend as well?

[Jennifer Chieng, executive]

I think we do appreciate that investors' considerations, our low payout in the last 2 years because we need to wrap out our new headquarters. So last 2 years, our payout ratio is maybe only close to 70%. I think Chairman, this time is -- just want to increase this payout ratio to maintain our payout ratio maybe around 75% plus or minus around to even out. So just to ensure that our payout policy is not changed.

[Operator]

[Operator Instructions] The next question is coming from [ Gang Hu ], JK Capital.

[Unknown Analyst]

So thank you for the good results and I have some general questions. I have 2 general questions. First of all -- first one is somewhat related to the question before us. It's about the -- first question is about the optical inspection machine. Well, if you compare your revenue contribution from, well, traditional signal testing versus optical inspection machine, what is the revenue contribution from the optical machine in the recent year? And what is your plan in the next 5 years? This is the first question.

[Jennifer Chieng, executive]

What do -- sorry, I -- could you repeat speak what kind of machine you wanted us to compare?

[Unknown Analyst]

It's comparing to your traditional signal testing.

[Jennifer Chieng, executive]

Signal testing?

[Unknown Analyst]

What was the contribution within -- with optical inspection machine within your total testing sales. That's my question. Yes. And the second one is about the system-level testing. What is your total addressable market of this signal level testing currently? And what would it be in next 5 years?

[Jennifer Chieng, executive]

I'm not quite clear about the first question, they're equal, so I'm sorry. And now I'd answer the second one. On SLT, I think we -- as I mentioned before, we are pre -- we are the first one there for doing this SLT, I think, back to 10 years ago. And then now we do see this is the SLT become portable private tester. You can say -- if you talk about HPC market, if you talk about like CMOS, AI or GPU or some of -- we are pretty much dominated, and I also mentioned that because the HPC is a very customized system. Normally, you it's hard to see our customers shifting to different vendors. So if you talk about the market share, we pretty much cover.

And for mobile, just starting from 5G. So before 4G -- before 5G, the -- I think the exposure to using SLT is very limited. I think that before, I think the biggest provider is Teradyne -- not Teradyne. Yes, Teradyne. It's Teradyne. Well, because migrate to 5G. 5G is mostly related to high-power consumption. So the testing method's very much different compared to 4G. So I think if you talk about the 5G mobile type of SLT. I think either Chroma or Advantest have covered several of the required features. So what was the first question's equipment?

[Unknown Analyst]

All right. For the first question, what is your revenue contribution from the optical inspection machine now? And what would it be in -- 5 years later?

[Jennifer Chieng, executive]

Okay. This is the factors we set up from last year. The reason why we set up that is because we start to -- you know do SLT, right, for many years? We already pretty much cover most of the fabless companies. And we always focus on the foundry as our main target customers. And besides the flurry of testers that we've been qualified by foundry customers and already start to adopt these testers, another driver or another product, we all -- we are getting there is optical inspection.

So this is the product that we prepare to having more exposure for the foundry customers. So we probably -- so far we will not disclose the sales at the moment.

[Unknown Analyst]

Very good. And just a quick follow-up on the SLT side. Well, I can understand that there are more system-level testing on the HP -- HPC side. But because there are more different variety -- I mean, various chips are combined together on the HPC side. But why 5G mobile phone should use the Turnkey machine more in the future?

[Jennifer Chieng, executive]

Because -- okay, I use -- I give you one example. Okay. 5G signal is very, very short compared to 4G. So when you do testing, okay, this is one of the products we deliver to the mobile chip makers. When you do testing, you need to turn on the signal. And because the signal for 5G is very short, they start to interfere each other. You're barely to do any further testing. So you need to have so-called, like, we call it a test -- okay, a tester to isolate the signals, but without turning off the signal from the mobile chips. This is one of the features. And not to talk about -- if you talk about some -- several chips, if you say, if you have -- want to have to elaborate -- ensure the elaborate testing, mainly, you need to add, like, burn-in testing or if the chip is very sensitive to temperature, you probably need to add the thermal controls as well. So the basic concept for 5G is mobile, specially 5G is still solving a signal problem.

[Operator]

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

[Paul Ying, executive]

Thank you, Mark. Hi, everyone. I think, for 2020, we're experiencing the epidemic situation, but we still overcome the difficulties and then performed pretty well. And for 2021, we still see some difficulties because the COVID situation is still going on. But I think -- thanks for all -- we appreciate all the consideration and attention from the investors and friends and we're #1 and to give out very good records. Thank you, and bye-bye.

[Operator]

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