Good afternoon, ladies and gentlemen. Welcome to the Chroma conference call. Our chairperson today is Paul. Paul, please begin your call, and I stand by for the question and answer session. Thank you.
Thank you, Regina. This is Paul from Chroma, and welcome, ladies and gentlemen, to the third quarter financial release of Chroma. Well, I think you have already get the from the internet, our financial statements. Let's start it from the 2023 third quarter condensed consolidated income statement. From here, you can see that the third quarter net sales is approximately TWD 4.847 billion. Compared to the last quarter, it's a 10% growth. But compared to last year, I think it's a, it's a 27% drop.
If you look down to the test equipment business, you can see that for the test equipment business, it stand alone, occupying like 96% of our top line, approximately TWD 4.627 billion. Compared to the last quarter, still it's a 10% growth, but compared to last year, again, I think this is the major reason for the drop, compared to the last year's third quarter. For the gross margin, you still can see that we are approaching to TWD 2.8 billion, which is a 57% of the gross margin.
Compared to the last quarter, I think, the absolute numbers is similar, but, again, the percentage for the gross margin, it's a little bit dropped from the 62%, 62 % of last quarter to 57%. But again, I have to emphasize that this gross margin still fall into our expectations, which is over or exceeding 55%. And compared to last year, third quarter, you still can see that last year, we make approximately 3.5 billion TWD and, but again, the gross margin for the last year is somewhere like 53%. It's over 50%, still good, but compared to this year, I think this is the difference.
As to the OPEX, you still can see that for the third quarter, compared to the second quarter, I think it's pretty much similar to last quarter. Compared to last year, we even maintaining pretty well and on approximately the same level. So the operating income for the third quarter of this year is somewhere like 1.238 billion TWD. Compared to the second quarter, it's a 2% growth, but compared to the last year, it's a 30% drop. So, for the income, well, for the non-operating sections in the third quarter, in this quarter, is somewhere close to 307 million TWD.
Compared to the second quarter of last quarter, it's although it's double the size already, and compared to the third quarter of last year, it's a 35% drop. So for the income before tax, it's TWD 1.545 billion. Compared to the second quarter of this year, it's a 14% drop, and compared to last year, it's a 32% drop. For the net income for third quarter, it's TWD 1.254 billion. It's compared to the second quarter, it's a 19% growth. But compared to last year, it's a 29% drop. So for the third quarter, standing alone, the basic earnings per share is TWD 2.91.
Again, compared to the second quarter, it's a 20% growth. Compared to the last year third quarter, it's a 29% drop. Well, if we turn to the accumulations for the first three quarters of this year compared to last year, you can see that for the net sales is TWD 13.652 billion. Compared to last year, it's a 15% drop. Mainly, the difference is coming from the test equipment business, which is a 11% drop alone, and another 4% coming from the MAS operations. As to the gross margin, you can see that the first three quarter accumulations for 2023 is TWD 8.179 billion, approximately 60%.
Compared to last year, it's a 5% drop, but for the gross margin ratio, it's 54% for last year. I think the performance of the gross margin of this year is a bit better. As to the OPEX, if you look at the numbers, it's pretty maintaining stable, so that the operating income for 2023, it's somewhere like TWD 3.639 billion, and op margin is approximately 27%... and compared to last year, it's a 9% drop.
As to the net income for this year, it's TWD 3.270 billion, and compared to the last year, TWD 4.987 billion, TWD 4.308 billion, it's a 24% drop. But well, there's another exceptions for the performance of the last year, which we is a disposal of investment of approximately TWD 500 million in last year first quarter. So that's one of the major reasons. The second reason for that is the disposal of the termination of the contract between the new material business between Chroma and the vendors.
In last year, first quarter, it contributed TWD 635 million. That makes the difference of the gross margin in this section. So this is the accumulation for the first three quarters of this year compared to last year. And if we go to the balance sheet highlights and financial ratios, you can see from this page that the major difference will be the debt. You can see that the short-term debt is a bit of increasing compared to the long-term debt is paid back. And the major reason for that is the short-term debt increasing normally at the third quarter due to our payouts of the dividends.
So that will create a bit of a high on the short-term debt, and it will be low down to the next quarter, until the first quarter of next year. This short-term debt will be paid out as well. For the inventory turnover, it's a bit high, but compared to the last year, I think it's due to our current inventory status, and our target is trying to lower that down to somewhere like six months. As to the accounts receivable turnover date, I think it's pretty much in line with our expectations, which is approximately three months.
As to the ROE and return on equity, it's 19%, and return on assets will be twelve percent, which is all double digits. We go down to see the cash flow from the operations. At first, it's approaching two billion, somewhere like 1.911 billion TWD, and the free cash flow is somewhere approximately 1.2 billion TWD. This is the highlight for the balance sheet. Then, if we go to the product mix and the sales breakdown, and let me hand it over to Jennifer.
Okay. Good afternoon, everyone. This is Jennifer, and I will brief our product mix in third quarter, and then move on to Q&A. You may refer to slide nine for third quarter and our first three quarters product mix and consolidated sales. Let's start with the product mix. Okay. For third quarter alone, semiconductors and photonic sectors was the biggest drivers, present about 70% growth compared to last quarter, which is second quarter. This is mainly contributed from the SLT shipments and then a demand from HPC and AI markets. And since most of the basic sales deliveries are scheduled in fourth quarter, so turnkey solution was kind of weak in third quarter. However, based on current schedules, the turnkey solutions in fourth quarter will be better than third quarter.
Year to date, first three quarters, testing instrument ATS is still the biggest driver for this year, present a growth of 26%. We think the testing instruments will continue, will present a consecutive growth of over 20% this year. This year, except for HPC and AI applications, other semiconductor demands remain weak. We expect overall semiconductor and photonic sectors will be lower than last year's. However, based on our current semiconductor product shipping schedules, we think the fourth quarter for semiconductor sectors will not be lower than third quarter. For consolidated sales breakdowns, for third quarter, the testing equipment business was better than second quarter, which is increased by 10%. We think the testing equipment business this year will present a linear uptick each quarter by quarters.
But the consolidated entity overall, if you consolidate all the entity together, this year, the total consolidated sales will be slightly lower than in 2022. Despite of the lower the sales, for this year's, I think we enjoy the better product mix, structures and well-managed in the all parts. We can remain our guidance no change. The profitability wise will be similar to last year's, without the capital gains. I think we could open now for Q&A.
Thank you, Jennifer. Ladies and gentlemen, we will now pull for questions. If you'd like to register for your question, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, that is star one for questions. Our first question comes from Wern Juan Chng with HSBC. Please go ahead. Thank you.
Hey, Jennifer. I just got a couple of questions on your SLT side, before moving over to EVs. The first question is: Have your yield rates for your existing AI customers, have they stabilized, moving forward? That's my first question. Thanks. SLT.
Sorry, what do you mean by stabilized?
So, are yield losses still increasing? Have they declined, have they stabilized from the first half of this year?
I don't quite understand the definition of stabilized, but because the customers continue to place orders and then we have a different delivery time.
Sure. Okay, let me rephrase the question a different way.
Yeah.
Are they still getting higher throughput from their existing lines, or it's kind of maxed out at the moment for your largest AI customer? Just in terms of, I mean, because in the past you've mentioned that the AI SLT demand is essentially.
Oh.
driven by higher power density
I think it's just.
Right.
Okay. So I think this, this valuation does not apply for equipment companies, but, this year, we mostly, most of our deliverables SLT this year is mostly dealing with, customers their new product next year. And we actually see more, see more customers coming on next year. Yeah, pretty much schedule some of the quarters in 2024. And I'm not so sure if is the, the meaning of, stabilize for you.
Okay, that's fine. Moving on to my second question, just regarding our ASIC customers, can you share some color just in terms of the, just in terms of the ramp? Do you expect the mix to be equal to your existing two customers that you have on hand for 2024?
Sorry, can you repeat the question?
For your ASIC customers,
Yeah.
Application-specific integrated circuits for 2024.
Mm-hmm.
Do you expect the product, the customer mix to be somewhat equal to your existing two customers that you have in 2023? Thanks.
I think these two years, 2022, 2023, 2023, mostly if you talk about production specs, mostly come from only one customers. I guess market is pretty much familiar, that particular customer. Rest of the.
Got it.
Customers, I think, is mostly dealing with the R&D or pilot runs. But however, I think if you, if you want to know the ASIC, ASIC customers, I would say yes, they do schedule the production phase next year, but I think mainly in second half.
Got it. And my last question is just on battery cell formation project. Any update on the ramp in Southeast Asia, and also if you could share some color on if you are considering projects in Europe or the U.S., that would be helpful. Thanks.
Okay. Battery cell. Yeah, I think, you know, battery cell business is pretty much, it's more like a global conversions. You know, every country has a different policy regarding to EV, you know, convert to EV models. Okay. We start, well, after several years, the biggest driver comes from China markets. Honestly, if you want to use that only ... Hey, can you, can you low down your keyboard?
Sure.
I barely cannot talk. Yeah. Okay, but what we have seen for next year, I think the biggest driver will be, come from other countries. Because I think, as you could see from current economy status, people would like to lower down their, I mean, the source from China. So we do start to see the picking up on a particular first one, Japan markets. As you could see year to date, I think Japan government already subsidize over JPY 100 billion for this EV developments. And we also see another sign. Maybe today I couldn't disclose this project, but we probably will start to comment on this project for next year, but we do start to see EU markets, well, you know, gradually shift back their capacity. Not really...
When I say shift back, it's not saying, "Okay, they want to move everything out of China." It start building out the local source in EU markets, and right now we are working hard on this kind of projects. So I think moving forward for next few years, I think most of the driver, particularly for EV markets, will be coming from other China markets instead of China.
. Thank you. I'll hop back on the queue. Thanks.
Okay.
Thank you. And our next question comes from Kevin with Citi. Please go ahead. Thank you.
Oh, hi. Thank you, Paul and Jennifer for taking my questions. My first question is also regarding the SLT. I'm just wondering for the SLT order momentum; it seems like it's picking up quite fast in the third quarter. I'm just wondering how is our order momentum outlook going forward, especially for next year? And is there any changes versus how we see it since last time we talked, I think back in August? Because recently there is in October, the U.S. announced some new regulation regarding export control. So such as certain product like A800, those China-specific product were also restricted. Do you see any impact from this new regulation?
I guess that's not really applied for equipment companies. Okay. Probably, first one, you know, we actually noticed customers have multiple applications under main trends. For example, under ASIC structures, they probably have multiple products, and under edge, they also have multiple products. So in this way, the reason why we can create such a very close or strong customer stickiness is because when we design those attached to customers, we even attach some change kits for to increase the this kind of flexibility for customer to, you know, cover different sections. So if one certain product is not, you know, big selling, but it doesn't impact, for every equipment first, it's not impactful. Every equipment we have shipped. And second, this is already bundled, whatever we delivered to our customers before. And as an equipment company, we are forward-looking.
So this year, most of our delivery is in dealing with the customer's new products next year. And if you ask, I think right now, HPC and AI is actually one of the only sectors that we, we do see have long-term visibility, eventually rolling out for let's first, and even extend up to second half of next year. So not only come from these HPC, particular HPC customers, we even start to see ASIC makers or other new competitor, I mean, competitor of our customers, moving to this market. But however, if you look at the overall semiconductors, our products, I think our drivers not come from SLT. As you could see, if you, if the demand for HPC and AI continue to increase, it also benefits from this so-called, optical fiber communication.
We also start to see picking up the order for optical fiber communication from fourth quarter and moving forward. Because every data how you transmit these days, all go through optical fiber communication.
Okay, I see. Yeah, I guess the second question is also regarding this optical communication part. Do you have any sense of what kind of growth we'll be looking at heading into the end of this year and next year?
If you just look at these certain SLTs that we normally market, you know, used to refer so-called B/B ratio, you only could see this order is continuing to increase. It is so far we could comment on particular products. But we haven't finished our budget, so maybe we'll just need some time to, you know, puzzle out or picture our budget before we actually make announcements regarding to our view for next year. But however, just like I said, HPC and AI markets can only have a longer visibility compared to other sectors.
Okay, thank you. Oh, just one quick check. When you previously mentioned that the, when we look into the fourth quarter, for the.
Yes.
-semi and photonics, do you say that the revenue is not going to be lower or going to be.
Yeah.
Lower compared to?
Well, I think at least will not lower than third quarter, according to current schedule. Yeah.
Got it. Got it. Thank you.
Thank you. Our next question comes from Jerry with JP Morgan. Please go ahead. Thank you.
Hi, hey, Paul and Jennifer. Thank you for taking my call. My first question will be on the ATS. I think we noticed that in the third quarter, it's down 16% QOQ. I think maybe we can, you can share like what... Do you see any kind of change in the geographical mix in the third quarter versus first half, and also maybe product mix? And also, another related question would be what kind of visibility do you have beyond, say, the end of this year? Because I think you mentioned something about ATS will not be growing less than 20%, so that probably means the fourth quarter will be, you know, probably roughly same as third quarter or even better.
What we wonder, what do you, what kind of visibility do you have for the first half next year for ATS? Those are my first questions.
Yeah, I actually double-checked the major growth driver for the test measurement, test instruments this year. I think first half is because, including China, they have this kind of height, the patients for, will be, maybe confidence levels really, was really high at that time, they're able to sort of re-wrapping up the economy status. And so you do, we do see the strong growth in the first half, mostly come from China markets, and particularly highlight to energy storage and EV business. And moving to second half, as you can see, the China's economy status doesn't turn out to, you know, shape market expected. So honestly, we start to see more shipments. I think in this day, when we talk about relocate outside of China, it's not, it's no longer talking about like, oh, we move equipments out of China.
Instead of that, actually build more capacity outside of China. So you could say, second half this year, if you look at ATS orders, I think most of growth momentum, it actually come from first Southeast Asia and also other non-China markets. And particularly some of the Southeast Asia, because, it's gradually become a satellite, factory for several industries, like a consumer electronic goods and also including EV business. Because as you can see, Thailand is, you know, halfway. So several European, customers, they will build out some capacity in Thailand specifically, and mostly will be focused on EV-related service, energy storage. Of course, we do see some picking up order from these kind of AI servers or power devices, but I think the biggest contribution is supposed to be 2024, instead of 2023. Yeah. And-
Great.
Yeah, last year's our ATS increased by 26%, I think 20-something%. And I think this year we're still able to maintain about over 20% growth.
I see. Okay, thank you. That's very clear. My second question is, I think you mentioned about the turnkey could be up in the fourth quarter. Can I ask if it's driven by battery? And then if not, then when can we see kind of turnkey we see in a more meaningful contribution from battery formation? Thank you.
Okay. For EV battery cell approaches, yeah. Let me give some colors regarding to this. I think that's really up to China market and non-China markets. Yeah, for non-China markets, several orders from Japan and other regions, and most of the deliveries is scheduled in, fourth quarter. But be honest, their total capacity were not, you know, as big as the China's. Yeah, China still is the biggest contribution for this year. But due to some of schedules, you know, or customers, you know, changing their departments or reorganize their, structures. However, I think most of the EV battery cell project from China will start booking from, October. And honestly, first six months, first six months this year, we only book about TWD 100 million and about TWD 100 million, for sec, sorry, for third quarter only.
You could say year to date, we only book roughly TWD 200 million. Yeah.
Jennifer, to confirm, you say $200 million in this U.S. dollar, right?
First nine months. No, this is NT dollars.
Okay. So from China. Okay. So, sorry, do you mean that for next year, there's still gonna be some contribution coming from Chinese customer?
I think we do have orders on hand, but I don't think the dollars will be bigger than these two years.
I see.
However, I think if you want to look at EV market-
My last question.
If you want to look at EV markets, I think from next year, most of the driver will come from non-China regions.
Okay. That's very helpful. Thank you. My last question is on SLT. Do you, because so far, majority of the discussion about SLT seems to be related to AI applications. Do you see non-AI applications, those computer chips also be adopting this SLT? And is that gonna help you in the coming years? Thank you.
How do you define for non-AI chips?
For example, like, if I, for the same GPU, it could be using for AI purpose, and then that's obviously been a very big driver for you. But let's say, for gaming GPU or consumer, you know, related applications, you know, or consumer CPU, would that be a driver for you for the SLT?
We don't cover CPU, and we actually, customer using our tester right from the gaming chips. So if they really want to build out more gaming chips, I think they will also adopt our tester. But the issue is, we didn't see the customers building out capacity for gaming chips.
I see. So, okay, thank you. Thank you very much. That's it.
Yeah.
Thank you. Our next question comes from Derek with Morgan Stanley. Please go ahead. Thank you.
Hi, Paul and Jennifer. Thanks for taking my question. I just have one small question. When Jerry was asking about your turnkey business, you say that year to date, you only booked TWD 200 million as your revenue.
I just wanna make sure, when you say that, you were referring to just turnkey or also the battery formation business, including in your overseas and others segment?
The TWD 200 million is only for China projects, which is put under overseas operations.
Okay.
Non-China markets, I think you may have these numbers from the turnkey itself.
Okay. Got it. Thank you.
Thank you. Once again, ladies and gentlemen, if you have any questions, please press star one on your telephone. Thank you. Our next question comes from Jeff with Macquarie. Please go ahead, Jeff. Thank you.
Yeah, thank you, Paul and Jennifer. Quick question on semiconductor photonics in general. I know in the past you've talked about, you know, very strong growth long term, you know, maybe 20% plus. Obviously, this year you said down, it's been a tough, be a tough year for non-AI especially. Are you still confident beyond this year that we get back to very strong growth in the semi-photonics area?
Based on current order visibility, we do have this kind of confidence level. Because we already start to see the general type, you know, legacy parts of the business, I think getting stabilized. It's no further declined. And start some of the makers already prepared to pull in equipment. So actually, if you look at ATE system, fourth quarter is even, even better than the quarter or previous quarters.
Okay, great. You said overall semi-photonics down year-over-year this year, but if you just look at SLT, is that actually down year-over-year this year versus last year?
We have one more quarters. I probably don't comment on individual products.
Okay.
Mm. But we do have.
All right, and then maybe.
Okay. I think this year, fourth quarter will be a bit different compared to last year fourth quarters. I think this year, fourth quarters... Last year, fourth, last year, fourth quarter, we, we, I think the sales mostly come from the China EV battery cell projects, and other rest of the factors, it's not the biggest contributions. But this year, fourth quarters, I think if you look at only Perion alone without China market, I think we'll be better than last year, fourth quarter. So due to this kind of product mix, I think it's highly possible, we still, we're able to maintain our guidance.
Okay, great. And then.
Maybe it will work better on third quarter.
Okay, great. And then last question, you talked about, you know, photonics and, and fiber. Can you talk a little more, more about your customers in the photonic side that are, you know, the non-kind of iPhone-related fiber customers? You know, whether you can talk about names or at least geographies?
Can I not comment on customers' name?
Geographies?
I think it's very hard to comment on geography because these customers have multi-site. They have both in Southeast Asia and China.
Mm-hmm.
So this is the best I could answer.
Well, say hypothetically, Cisco would be U.S., like Fujitsu would be Japan, I think.
Okay. Optical fiber communications made by a wafer called EEL, Edge Emitter laser , and this is optical objects. This is not under restriction. It is a transmitted fibers. So.
Mm-hmm.
Anyone could make it. It's a commoditized product. But we do see the picking up of demand due to this, the demand contribute from the HPC and AI products.
Okay, great. Thank you.
Thank you.
Thank you. Once again, ladies and gentlemen, if you'd like to register for question, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, that is star one for questions. Jennifer, there seems to be no further question at this point in time. Thank you.
Okay. Thank you.
Yeah, thank you. Well, ladies and gentlemen, thank you for your participating in this financial release for the third quarter of 2023 of Chroma. And this is Halloween, but I hope we can give you a very good and well the performance for third quarter and expecting for another, you know, fourth quarter coming in. And it's not a trick or treat, but happy Halloween. Yeah. Thank you, and bye-bye.
Thank you. Thank you for your participation. This concludes our conference. Goodbye.