Chroma ATE Inc

TWSE:2360

Earnings Call Analysis

Chroma's 2023 Performance and 2024 Outlook

Chroma concluded 2023 with TWD 18.7 billion in consolidated sales, a 15% decrease from the previous year, mainly due to a downturn in the semiconductor industry. Net income fell by 22% to TWD 4.1 billion, and earnings per share (EPS) stood at TWD 9.45. Despite the drops, gross margins improved to 58%, up from 52% in 2022. The fourth quarter showed some recovery with a 4% quarter-over-quarter growth, although year-over-year, it dropped by 17%. Test Instruments and ATS system grew by 15%, countering a 34% decrease in the Semiconductor Photonics sector. For 2024, Chroma expects the Semiconductor and Photonics sectors to be the primary growth drivers, with anticipated stronger performance aided by HPC and AI market developments.

Chroma's Financial Overview for 2023

Chroma, led by CFO Paul Ying, reported a sales revenue of TWD 18 billion for 2023. The year marked a significant change as the company disentangled from its material business NMC after terminating a partnership in Q1 2022. Chroma now focuses only on its core business, which comprises Chroma Ate, the parent company, and MAS, the consolidated business unit. Despite a challenging year, the company's overall net income reached TWD 4.1 billion, with a workforce of approximately 3,500 employees.

Transition Year with Improved Margins

2022 set a record high for sales, while 2023 saw a slight decrease to TWD 18.6 billion, a 15% drop. However, Chroma's financial tact allowed them to improve the consolidated gross margin, raising it from 52% in 2022 to 58% in 2023. The parent company's margins remained steady, and profits sustained with a TWD 4.6 billion operating income, signifying a dip of only 7%. A noteworthy point for investors is the company's consistent R&D investment, which stayed at 12%, underscoring their commitment to innovation. The company maintained a generous payout ratio at approximately 70%, corresponding to an EPS of TWD 9.45. This strategic balance between growth and shareholder returns speaks to the company's financial prudence.

Performance Dips and Fourth Quarter Insights

Consolidated profit and earnings reflected volatility. Net income for the year fell by 22%, amounting to TWD 4.09 billion with an EPS of TWD 9.45. The fourth quarter showed some recovery with a 4% growth over the previous quarter. However, it also highlighted a 17% year-over-year drop in the top line and declines in both the gross and operating margins by 7% and 2%, respectively. The EPS for the fourth quarter stood at TWD 1.89, accentuating a decrease from prior periods.

Sector Analysis and Forward-Looking Statements

Jennifer Chieng provided insights into Chroma's sector performance. Test Instruments and ATS systems witnessed a notable 15% increase, while the Semiconductor Photonics sectors plunged by 34%. The anticipation of recovery in the semiconductor and photonics sectors, driven by the HPC and AI markets, bodes well for prospective growth. Moreover, Chroma expects a resurgence in the 28-nanometer technology space, which could bolster sales of their ATE systems. These factors could lead Chroma to potentially surpass the peak performance seen in 2022, indicating a positive momentum moving into 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome, everyone, to Chroma's 2023 Q4 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 under the Investor Relations section.

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

[Paul Ying, executive]

Thank you, Regina. Welcome, everyone, ladies and gentlemen. This is Paul Ying from Chroma. I'm the CFO of Chroma and today, I will start with the financial performance of Chroma for the year of 2023. And afterwards, Jennifer, will be following up with the operations, well, explanation.

Well, if you can search it from the website, you can see that our corporate profile, on this page you can see that with the sales revenue, TWD 18 billion at the year of 2023. There are 2 entities, which is the Chroma Ate, the parent company with the MAS, which is the consolidated business unit. This is the first year.

We move out the NMC, which is the material business. Since the -- at the first quarter -- after the first quarter of 2022, we terminated the cooperation with the NMC Japanese company. So starting from this year, you can clearly see the core business of Chroma with itself. So again, the consolidated sales for 2023, TWD 18.7 billion, and the profit we made at the net income at the TWD 4.1 billion and would be at the end of '23. The total head count for Chroma Group is approximately 3,500 employees.

And for the financial performance, again, you can see from the 5-year comparison for the year, consolidated sales and gross margin, you can really see that the 2022 is the year of record high on the sales revenue.

In 2023, we have a little bit down to TWD 18.6 billion, but with the improve of the gross margin for the consolidated base, you can see that we improved that from 52% of the 2022 to 58%. Again, if we look at the parent company sales and the gross margins, and R&D expense chart, you can see from this page, we maintained the gross margin of the parent company, pretty stable on the range of the 51% to 54%. So at the year of '23, you can see that the parent company, the top line, we made the TWD 12.5 billion with the 12% investment on the R&D expenses, with the 54% on the gross margin.

And then if we look at the return on equity, you also can see that the highest one will be on the 24%, 25% on the year of '21 and '22. But with these 2 years, the capital gain from the sales -- of the sales of property and also the investment, those capital gains achieved at the '21 and '22, well, makes the higher return on equity. But with the approval from the Board, our payout ratio approximately 70%, of the year of '23, which is the EPS of TWD 9.45. We payout like TWD 6.6, which is approximately at the 70%.

And if we look at the 2023 consolidated income statement. You can see from the page -- of Slide #10, you can see that with the 2023, the total net sales TWD 18.6 billion compared to last year's TWD 22 billion. It's a 15% drop which is mainly coming from the test instrument and equipment business dropped by 12% and the MAS consolidated sales dropped by 21%.

Well, this is mainly due to the -- starting from the second half of 2021 or 2022, all the way to 2023, the drop of the semiconductor industry. So again, for the gross margin, you also can see that the year of '23, we made TWD 10.7 billion, compared to the TWD 11.3 billion. We are pretty much improved in the gross margin percent, but we only dropped by 5% in absolute numbers. And operating the margin, we made 25% at the year of '23 compared to 23% at the year of '22. Again, for the operating income, absolute numbers, we dropped by 7%, which is TWD 4.6 billion at the year of '23.

And for the net income, the year of '23, we make TWD 4.09 billion, represents 22% of the top line. And compared to last year, this is a 22% drop. So for the year of 2023, the EPS we made is TWD 9.45.

And for the fourth quarter stand-alone consolidated income statement, you can see from the Slide #11. This is a 4% growth on a Q-over-Q basis at the base of TWD 4.025 billion. (sic) [ TWD 5.025 billion. ] And compared to last year's fourth quarter due to the product mix, it's a 17% drop on the top line.

So for the gross margin of the fourth quarter, again, due to the product mix, if you look at the gross margin, that's 51% at the fourth quarter and it's a 7% drop on a Q-over-Q basis. It's another 7% drop on the year-over-year based on the gross margin.

But for the operating margin, for the year -- for the fourth quarter is approximately over TWD 1 billion compared to the TWD 1.2 billion for the last quarter. It's a 16% drop on a Q-over-Q basis. But compared to last year's fourth quarter, it's a 2% drop on the operating margin.

For the net income itself, again, fourth quarter is approximately TWD 825 million compared to the third quarter, it's a 34% drop and to the last year it's a 10% drop.

So the EPS for the fourth quarter, it's TWD 1.89. Again, it's a 35% drop compared to the -- on a Q-over-Q basis, it's a 8% drop on a year-over-year basis.

For the balance sheet, again, for the total assets, it doesn't have too much differences, it's only 1% at differences. And the decrease on the cash and the short-term investment, which we'll be spending on the CapEx at the second phase of our future expansion on the second phase of our plant. And for that, that itself, I think it's pretty much equal to last year.

And to the inventory turnover, well, 2022 is a little bit slower than the 2023, which is due to the sales revenue is, it's a bit fall off compared to 2022. But for the accounts receivable turnover day, I think it's pretty much on the what do we expected around the -- within the days.

And for the net debt-to-equity right now it's net cash. And again, for the cash positions, the EBITDA is TWD 5.9 billion and the free cash flow is somewhere at TWD 2.0 billion.

Well, this is the highlight for all those numbers. And again, yes, any requests for Jennifer? Yes, give us some of the highlights for the product mix and the sales growth now.

[Jennifer Chieng, executive]

Good afternoon, everyone. This is Jennifer. I will go through some of the key highlights for our product mix and some of the guidance regarding to the 2024. And the year of 2023, our biggest growth actually comes from our Test Instruments and ATS system.

And last year, these tests have increased by 15%. And then so, move on to Semiconductor Photonics sectors was down by 34%. So last year, semiconductor and photonic sector is actually quite weak. And we just made up to about TWD 12.5 billion total of our parent company sales.

Last year, totally, we booked around TWD 2 billion from the company so called EV battery cells. So, most of these numbers will be comes up under our overseas consolidated sales. So we just end up with last year, our total consolidated sales from -- I mean, for Testing Equipment Business is about TWD 17.8 billion.

Okay. And another math, which is about TWD 600 million and with other minority subsidiaries. Last year, our consolidated sales generated about TWD 18.7 billion, okay, which is about 13% down compared to year 2022.

I move on to 2024, our highlights will be -- first, we actually expect the semiconductor and photonics sectors would be the biggest growth driver for this year. And first, because we actually see the accelerating development and also the function and the performance improvement actually comes from HPC and AI markets. We're expecting actually the merge will be even better than last year, which is '23.

Second, we also benefit from this kind of recovery of 28 nanometers and which is, will be increase our sales to our ATE systems. On combination of several factors, which is under Semiconductor and Photonics sector, we actually foresee -- we think we're able to reach out to like the '22, the peak of the semiconductor sectors or even better.

So this is very much wrap up of our '23 deposits, breakdowns and also some of the colors regarding to 2024. And now we'll be able to move on to Q&A.

[Operator]

[Operator Instructions] And our question is from Wern Juan Chng of HSBC.

[Wern Juan Chng, analyst]

Just wondering what is the guidance behind the increase in 28 nanometers legacy mode? I'm assuming this is from China, and that is a little bit -- provide any additional color on that would be helpful.

[Jennifer Chieng, executive]

Okay. So your first question is regarding to our 28 nanometers right? The legacy testers. Okay. Sorry, because your question, I mean, the voice is from your side is not very clear. So, I just want to reconfirm your question.

Regarding to the 28 nanometers, as you know, Chroma, so the semiconductor sector is especially for IC testers. We only cover 2 parts. One is the very high envisaged HPC and AI sectors and also the legacy "28 nanometers" around.

And the biggest -- actually, there is no overlap for these 2 groups -- I mean, 2 different products. So 28 nanometer mostly sell to China. I think, you see last year, maybe because overall semiconductor sentiment was kind of low, and but this year, we do see acquire ambitions on China, I want to speed up this kind of 28-nanometer development.

So started from this year, actually, from last year fourth quarter, year-on-year comparisons have already not further declined compared to first 3 quarters last year. That's the first sign. And on -- I would say, beginning of this year, we do see a quite strong demand coming from the China regarding to 28 nanometers.

[Wern Juan Chng, analyst]

Okay. Just to clarify, my first part of my question is, so the application is just broad base across industrial power [indiscernible] Would you be able to tell what kind of applications or end markets that this 28-nanometer is [indiscernible] in China?

And then the second part of my question is, is there any change in your expectation of the AI tool SLT product mix for say, the leading AI customer in the U.S. compared to the second customer AMD for 2024? So 2/3 is the leading customer and then 1/3 AMD.

[Jennifer Chieng, executive]

I don't quite understand your second question, but I can comment on the first question. The 28-nanometer, that we cover the biggest part, mostly related to something like a fuel power related ATE. So this is across products. So over -- we actually quite dominated this market. So there is no, I would say, quite majority of market share.

[Wern Juan Chng, analyst]

Okay. And then for the AI side in terms of end customers?

[Jennifer Chieng, executive]

You mean, 28 nanometers?

[Wern Juan Chng, analyst]

For AI. For AI as well as the [indiscernible]

[Jennifer Chieng, executive]

Okay. Last 2 years, I think -- I guess most of the -- I mean, most of the investors already are pretty -- are quite familiar of our biggest customer, is actually is NVIDIA. This year, actually, yes, it actually see more new commerce. But like -- including like ATE maker like Google, Microsoft and even [indiscernible] And I think there is no point to compare like NVIDIA with [indiscernible] newcomers actually like [ MVO, ] and other ATE makers. This show they are still very much smaller compared to NVIDIA. So we will not be doing this kind of comparison.

[Operator]

[Operator Instructions] And our next question comes from Jeff Ohlweiler with Macquarie.

[Jeffrey Ohlweiler, analyst]

A question and a follow-up. You also said you're going to see good momentum for Photonics this year. Can you give more details on what geographies or what type of end products that is for?

[Jennifer Chieng, executive]

From last year, especially from the second half last year, we do, we see quite decent last order, especially for -- regarding to this kind of OFC, optical fiber communications. But we will not comment on the company space. Because, I think, in the global market actually there's no more than 5 players making these type of wafers. And top 3 probably about 70% to 80% in the market share. And they are our customers. So we probably will not comment on the customer space.

[Jeffrey Ohlweiler, analyst]

Okay. And then also, you stated that 2024 test instruments and ATS for power testing solutions sustained steady growth?

[Jennifer Chieng, executive]

Yes.

[Jeffrey Ohlweiler, analyst]

So that means ATS is up this year?

[Jennifer Chieng, executive]

What do you mean by up this year?

[Jeffrey Ohlweiler, analyst]

Or so the testing instruments and ATS for power testing solutions are same?

[Jennifer Chieng, executive]

I think steady growth, that means, is already accountability. So we will not comment on strong growth towards, are going to decline. Okay. First ATS sector, which is our power business, we -- this year is our 14 years anniversary. So we have been doing this sector for 14 years. And in the past 14 years, we already made these sectors very diversified into different applications and with a very wide range of customer space like we have 2,000 and 3,000 customers in portfolio cover Greater Asia.

So I wouldn't say every sector under power testing will increase. So one sector has been declined and the other sectors may pick up this year. So this is our view regarding to ATS sectors.

[Jeffrey Ohlweiler, analyst]

But the point of that -- overall, we should see year-on-year growth this year.

[Jennifer Chieng, executive]

We will not comment on certain sectors, each sectors -- go through each sectors growth rate. But we already gave you a clear guidance.

[Jeffrey Ohlweiler, analyst]

A steady growth. Does that mean year-on-year up this year for the whole...

[Jennifer Chieng, executive]

You mean ATS or overall the company?

[Jeffrey Ohlweiler, analyst]

Overall ATS. Just ATS.

[Jennifer Chieng, executive]

No, we already say stable growth.

[Jeffrey Ohlweiler, analyst]

Okay. And you mentioned maybe one subsector in there that doesn't grow this year. I assume that's EV. Is that...

[Jennifer Chieng, executive]

Yes, you could say that. Because there's no point, markets already are aware EVs. Well, I think for our EV sectors including EV bus cell, we still have an order to deliver this year. So we're going -- not going to comment on the time frame. But I think the demand will be shifting away from China. Most of the growth will actually come from non-China area, particularly highlight to Southeast Asia. These are all consent orders.

[Jeffrey Ohlweiler, analyst]

Okay. And to clarify, you said TWD 2 billion in EV cell sales last year, is that correct?

[Jennifer Chieng, executive]

Yes. Along TWD 2 billion.

[Jeffrey Ohlweiler, analyst]

And that was down from about TWD 3.6 billion in 2022.

[Jennifer Chieng, executive]

TWD 3.5 billion in '22.

[Jeffrey Ohlweiler, analyst]

Okay. And maybe last question. Within testing instrument and ATS, in addition to EV related, can you talk about some of the other key subsectors there?

[Jennifer Chieng, executive]

Sorry, I don't...

[Jeffrey Ohlweiler, analyst]

Like, what other -- if you break down overall sales in test instruments and ATS, in addition to EV related, can you talk a little bit about some of the other key subsectors there, whether solar, LCD, et cetera, if you can just list them?

[Jennifer Chieng, executive]

We only can -- because we're dealing -- we don't deal with manufacturing, we only can give you roughly breakdown. I think we're expecting like 5G power-related devices will pick up this year and also some of consumer sectors, we have about 10% that's related to [ cleantech. ]

[Operator]

[Operator Instructions] And our next question is from Jeff.

[Jeffrey Ohlweiler, analyst]

Yes. Yes, I have a couple of follow-up. You talked about the fourth quarter margin down to 51%. So if I look at your breakdown of sales by product mix, you have ATS down, semi down. So essentially turnkey is up. So essentially, you're saying the reason why the margin is down because the EV sale was high in fourth quarter, everything else was a little bit low.

[Jennifer Chieng, executive]

Okay. Jeff, basically, this is -- you look at the gross margin that regarding to the consolidation sales. And last year, as we stated we booked around TWD 2 billion EV batteries or orders. So most of around TWD 1.5 billion is coming from China, which is booked under as I say, overseas consolidated sales. And then particularly -- and then you could say mostly booked on the -- in fourth quarter. So this is already shown in the product mix.

[Jeffrey Ohlweiler, analyst]

Okay. And then despite very strong AI momentum in the market last year, was your SLT sales still down last year?

[Jennifer Chieng, executive]

I don't comment on the individual product sectors because, as you know, these factors particularly point on certain customers.

[Jeffrey Ohlweiler, analyst]

Okay. And maybe last question. Can you talk a little bit about margin? Is there a big margin difference between your overall ATS business and your semiconductor tester business?

[Jennifer Chieng, executive]

I couldn't comment on gross margin because we do customized systems. But basically, I think our Chairman is on-site earnings release already pretty much comment because EV battery sales orders, which is turnkey, because we spend a lot, especially for China projects, doing a lot more automation to roughly the gross margins about 30 plus. The rest of the factors, we couldn't comment about the testers.

[Jeffrey Ohlweiler, analyst]

And I know Paul, most of last year he was talking about gross profit margin about 55%. Is that still the case this coming year, around 55% despite the...

[Jennifer Chieng, executive]

I think, last year we stood by the 55%. So we still meet our target.

[Jeffrey Ohlweiler, analyst]

Okay. So this year, it's still 55% kind of target.

[Jennifer Chieng, executive]

Annually.

[Operator]

As our next question comes from Will Chen of JPMorgan.

[William Chen, analyst]

So regarding for your guidance for 2024 Semi and Photonics, right, did you mention that your sales in 2024 will be comparable to 2022? Is that what, because I -- okay. So do you think that the growth will be compared -- I mean, the sales number will be comparable 2022, right?

[Jennifer Chieng, executive]

Yes.

[William Chen, analyst]

And then if you look at the TWD 3 billion sales you generated last year, can you give us a breakdown between among opticals, SALT and then traditional SoC testers?

[Jennifer Chieng, executive]

Rought 25% to 30% is come from [indiscernible] sectors, remaining the IC testers.

[William Chen, analyst]

Okay. Remaining IC testers. Okay. Got you.

[Operator]

[Operator Instructions] At this moment, Jennifer, there are currently no questions.

[Paul Ying, executive]

Hi, everyone. Thanks for your attention, and I thank your keep on consideration to Chroma will be the -- our momentum for the growth in the future. So thank you for your attention. And well, this is a pretty late kind of Chinese New Year blessings to all of you. Thank you. Bye-bye.

[Operator]

Thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Just visit www.chroma.com.tw under the Investor Relations section. You may now disconnect. Goodbye.