Welcome everyone to Chroma's 2022 first quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there'll be a question and answer session. Please follow instructions given at the time if you want to ask the question. For 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. I'd like to introduce CFO Paul Ying. Mr. Ying, you may begin.
Thank you, Mark. This is Paul Ying, CFO of Chroma, in Taiwan. Welcome everyone, ladies and gentlemen, to joining our first quarter of 2022 financial release. Well, first of all, let us see the first full quarter consolidated income statement. This is on the slide five. If we look at the net sales for the consolidated of Chroma group, you can see that it reaches first quarter reaches at the TWD 4.3, close to TWD 4.4 billion . Compared to last quarter, it's a 4% drop. Compared to last year, it's a 3% growth.
Within that, you can see that our core business of the testing equipment business, it reaches the TWD 3.4 billion. This is a 2% drop compared to last quarter, but 4% growth compared to last year. For the MAS operation, it comes up to TWD 221 million, and this is 18% drop on a quarter-over-quarter basis. But compared to last year, it's a 55% growth. For the material business, it reaches TWD 618 million, and this is a 7% drop on a Q- over- Q basis, and another 11% drop on a year-over-year basis.
I have to remind you that this is the last quarter of the material business putting on the consolidated numbers because our material business has terminated the agreement with the Japanese original brand name owner, which is MMC of Japan. Starting from the second quarter, there will be no material business anymore. This aggregate gross margin gave us 50% on the gross margin. It comes to TWD 2.1, close to TWD 2.2 billion , and this is also a 2% growth compared to last quarter and a 4% growth compared to last year.
Again, on the operating income, it comes to the TWD 837 million, and this is a 15% growth compared to last quarter and a 6% drop compared to last year. On the non-operating parts, if you look at the numbers, well, I think the comparison for the numbers compared to last year will be a big drop. Well, this is simply because last year we had a gain from the disposal of property and the plant, approximately TWD 1.7 billion.
This part, if we exclude this part from last year, our net income of the first quarter of this year comes to TWD 858 million. Compared to last quarter, it's a 20% growth. Excluding the capital gain, it will be somewhere like a 17% growth. We enjoy a TWD 2.03 EPS on this profit on the first quarter of 2022, which is a record high of the quarterly net income and EPS. This is the first time that our quarterly EPS cross over the TWD 2.
For the balance sheets highlight and financial ratio, if you look at this page, I think the total assets is still growing. I think the return on equity is on target, which is 19%, close to 20%. Compared to the return on assets, it's 11% and over 10%, two digits. For the free cash flow for the first quarter of this year, it's TWD 1.1 billion. This is the highlight of the consolidated income statement and the balance sheet.
If we turn to see the parent company on the next slide, you can see that the bar chart for the last few quarters, and you can easily see that sales revenue of the TWD 2.8 billion. This is a 19% growth on a quarter-over-quarter base, and another 8% growth on the year-over-year base. This is also the record high of the quarterly sales revenue for the parent company. Although the gross margin comes to the pretty much like the average low for the last few quarters on 48%. I think I leave that up to the next page to explain.
Our operating margin is over 20%, it's which is 22%. Net income close to TWD 852 million. This is a 29% growth as compared to last quarter. Again, this is a 62% drop on a year-over-year base. Again, if we look at deduct the capital gain from the sales, the selling of the property and the plant, that will be somewhere like a 17% growth. The first quarter highlights of the growth is contributed from the test instrument and the ATS sectors. These sectors presented a growth of 4% on a Q-over-Q base and 36% on a year-over-year percent.
If we go to see the detail for the income statement for the first quarter of 2022, you can look at the income statement, which it shows that the first quarter the gross margin is 48%. I think there comes to two variances. One is for those long and short lead time material. I think these sectors is comes to the variance of the cost of those material costs. Will approximately give us another 1.5% of those differences.
Another one will be unrealized gross profits, which, although we got the orders and we have finalized the shipment from Taiwan to our subsidiaries in Mainland China. I think those lockdown for the eastern coast and also for the difficulties for the shipment gives those shipments still stay on the book of our subsidiaries. These parts in accounting they will not put up in the realized profit. It's putting on the cost adjustment, which is meaning the unrealized gross profit. Again, this part is kind of like a temporary difference.
It will be realized in on the next quarter, I think definitely. These parts, if we are putting that back, I think we approximately still maintaining somewhere like a 50%-51% of the gross margin. If you look at the operating margin, it give us the TWD 638 million. Compared to last year, compared to the last quarter, it's a 45% growth. Compared to last year, it's 8% drop. This is where we are.
For the non-operating items, you still can see that the effects of the disposal of the property and plant on the first quarter of last year, approximately TWD 1.7 billion . Again, if we deduct this part from the other income, that would give us another 17% growth on the net income. If we look at the balance sheet highlights, on next slide, you can see that again, the total assets still growing. Again, for those return on equity, it's 19%. Return on assets is 13%. Well, the free cash flow still maintaining somewhere like TWD 200 million . That's the highlight for the financial numbers.
For the next part, I will let the Jennifer to explain to you those operational highlights.
Okay. Thank you. Good afternoon, everyone. This quarter, our operation highlights, please refer to slide 11. Okay, I will go through each sector. In the first quarter, test instruments increased by 4% quarter-over-quarter and 36% year-over-year. Strong growth compared to last year's were mainly contributed by EV and the high power testing, such as battery related and the 5G power, 5G service power. Okay. Next sector is the semiconductor and photonics, which presents a growth of 7% quarter-over-quarter, but declined about 16% compared to last year. The first quarter, I mean, in the first quarter, the major growth coming from is mainly coming from photonic sectors, particularly come from this VCSEL equipment for optical fiber communications.
We have seen the peaking of the demand from this 5G communication sectors. Next one, turnkey solutions. As we said in the previous quarters, turnkey solution for power component here is mainly in charge of the non-China areas. In this quarter, we have delivered around TWD 176 million. Partially it come from this Japan's market, and then some is a battery cell, I would say the some of the key modules that is shipping to China for the final for the project in China. For China's part, we said from last quarter that it's still ongoing, and we have assigned Suzhou for marketing charge of those orders.
You may refer to our consolidated balance sheet, the contract liabilities, our current is, as a reference for this current order on hand. Current balance of that is around TWD 1.4 billion, okay? We expect this coming second quarter, the sales revenue will be faster than first quarter. This quarter will be mainly contributed from semiconductor sectors, that's including HPC, SLT testers will start to deliver from this quarter. The photonic testers for Pixel for 3D sensing. That pretty much wrap up as well as for the first quarter and also give a little bit colors on the second quarter. We move on to Q&A.
Thank you. We're now beginning our question and answer session. If you have a question for any of today's speakers, press zero one on your telephone keypad, and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question. Our first question is coming from Arthur from Citi. Go ahead, please.
Hi, good afternoon, Paul and Jennifer. I have, first of all, I'm impressed with the strong margin in the March quarter. Can I understand the margin trend is from photonics or is it from the other sector? Question number two is, did you hear any clients that had the feedback on the lockdowns and any further push out or production disruption from your side as well? Thank you.
Hi, Arthur, this is Jennifer. I think our CFO has mentioned about the gross margin issues. I think the first factor mainly comes from we do have those unearned gross profits. Because you could say, simply to explain is we already deliver our goods to China or other overseas. But overseas, maybe China, such for example, like China, due to lockdown, those goods probably still parked in these overseas facilities and not yet delivered to the client site. According to conservative accounting policy, the transfer from the facility to the client site, this part gross profit will be deducted from the gross profit. However, the orders do exist and those profits will be booked in the following quarters. Yeah. You may refer to that.
In the first quarter, our financial statement states about TWD 80 million regarding to the so-called unearned gross profit and will be booked in the following quarters. If you add on to that, I think our gross margin will back down to around 15%-51%. Second factor is because we have these pretty fluctuated raw materials, you know, in the first quarter, you see the Russian war and also those economic factors. We definitely have some impact since our order is very strong and we need to buy out those raw materials. Those factors probably influence about 1% of our gross margins. Second question regarding to China lockdowns. Well, we don't really have the manufacturing in China. I think the lockdown factors, which we already stated, for example, something like unearned gross profit.
Not really, we didn't see any significant impact from these so-called people canceled orders or postponed orders. I think pretty much it's on schedule at the moment. You may see, as I referred to from our consolidated balance sheet, we already start to book those down payments, which current balance is around TWD 1.4 billion. Yeah.
Great. Thank you, Ms. Jennifer.
Thank you. Ladies and gentlemen, as a reminder, please press zero one on your keypad if you want to ask a question. We're now in question and answer session. Please press zero one on your telephone keypad if you'd like to ask a question. Please press zero one on your keypad if you'd like to ask a question. The next question is coming from Jennifer Shen from JP Morgan. Go ahead, please.
Hi, Jennifer and Paul. I would like to ask if so ATS was quite strong in first quarter. Can we know about what your opinion second quarter, if it will still be like sustainable? Second question from me is the U.S. dollar appreciation. Can I know if the appreciation impacts to the margin? Thank you.
I think test instruments, of course, because, you know, we deliver based on the, you know, PO schedules. Probably we already highlight in the second quarter our major strong growth will be coming from semiconductors, which is scheduled to deliver. It doesn't mean that, well, maybe the test instruments will not present another 36% year-on-year, but I think they still quite have a good solid order on hand at the moment. I think that any target is still achievable. You are asking about U.S. dollars appreciation?
Yes. Yes, yes.
I think for exporting companies, if U.S. dollar is strong, I think it's a benefit to our company.
Understood. Okay. Thank you.
Thank you.
Thank you.
Thank you. The next question is coming from Brenda, Bell Partners. Go ahead, please.
Hi, Jennifer and Paul. This is Brenda. Just a very quick follow-up question on the previous discussion. First on the cost margin side, because there is also some impact you mentioned on raw material parts, while at the same time, some of the, maybe, the components which might be able to have some easing situation towards the later part of the year. I just want to get your view on if that cost pressure impact happen in first quarter, will it be a recurring one in your view towards the later part of the year, or there could be a easing pressure on this?
I think our long and short lead time raw materials mainly comes from the high power chips. We have several strategies. Even we see this kind of pricing will start to stabilize from maybe mid of this year or from after second quarter. One part of our strategy is we change our design. You know, our testers most are mostly customized. So for some of the long time components, we already decide to change our design because maybe we don't use the first tier of components, but we could start to use new second tier. We do have this experiences before, because before we do some, you could say, trial or just experiment in your past, so testers by using like a tier two components.
With this further, like growth margins we further improve, like cost down by 30%, 25%-30%. I think we will start to adopt this kind of strategy from second quarter. You know, the first quarter due to these are very unstable economic factors and also the war, so actually raw materials gets really volatile, and this is not something we're able to prepare for it.
Understood. The second quick follow-up is, you mentioned second quarter, you're still seeing the orders are quite healthy and no revision, etc. The Q-over-Q increase on second quarter's revenue. May I double-check, is it for parent level or is it for consolidated level, given we are accepting the materials business?
I think based on our current order on hand, including battery business, it's highly possible even consolidated will be better than first quarter. Yeah, because the parent company actually have quite a decent or strong in the second quarter. Yeah.
Understood. On the order outlook side, it is actually year to date, because there are a lot of worldwide events happening, but on the order book side, you are actually seeing it quite aligned with what you have been seeing.
Maybe I have in your opinion.
Well, okay, this year we have about, you could say, half of our orders are mainly due to customers' new technology adoptions. Loading on new technology or new technology investment is kind of R&D investments, pretty much inelastic for those, inelastic compared, you know, to these market changes. Unless you have to see some situation, you know, back even worse than 2009. Okay. So far, we didn't see that customers planning to postpone or cancel order. Then also another factor is, this year, most of the orders not really deal with the consumer markets. Mostly deal with 5G and the EV, but even for EV, it's not the downstream yet. Still very much for the upstream, like battery cell projects.
There's no way, even if you are expecting the EV to come back next year, you can't leave it without the battery cell. I can tell you battery cell is still under shortage.
Understood. Mm-hmm.
Yeah.
Of course. Understood. Thank you very much.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, we are now in question and answer session. Please press zero one on your telephone keypad if you'd like to ask a question. As a reminder, press zero one on your keypad if you'd like to ask a question. Please press zero one on your keypad if you'd like to ask a question. There are currently no questions. I will hand it over to CFO Paul Ying for closing remarks. Mr. Ying, please proceed.
Sorry, Mark, can I take Katie Wang's call, question, please?
Okay. The next question is coming from Katie Wang from Nomura side. Go ahead, please.
Hello, Paul. Hi, Jennifer. Do you hear me?
Yes.
This is Katie.
Yeah, Katie, can you?
Okay. Yes. Great. May I ask this year's seasonality? Could you tell us about the seasonality this year? Is it still going up quarter by quarter, no matter parent company or consolidated basis? This is my first question. Thank you.
We can say like the second and third quarter are quite a peak for this year, but-
Okay.
... we couldn't really be sure whether second is highest or third quarter will be the highest. Yeah.
Putting that on the consideration of the material business will be terminated starting from the second quarter. That will be a part of the top line on the material. Yeah. On the consolidated.
Yes.
Without that, well, I think Jennifer.
Yes, without that, please.
Yeah. Yeah. Jennifer just answered your questions. Yes.
Yes. We're not sure the peak season will be second quarter or third quarter. Is that correct?
Yeah, because some of the orders already scheduled up to third quarter. Definitely, battery cell and the SLT has been scheduled these two quarters. Yeah.
Okay, great. Then my following question is about the new material. As you say, well, if we exclude new material revenue, where will the company's consolidated basis gross margin be? Could you give us a range for reference? Thank you.
Okay. I tracked previous quarters, and even I track back to, you know, 2020, 2021, and I see normally without new material, consolidated gross margin is sometimes around 1%-2% higher than parent company. Yeah.
1%-2% higher than-
Yeah.
... parent company?
Yeah.
Great. Okay. My third question is, compared with the period, previous result conference call, we know the market environment has changed a lot. I know, you feel that the order has not changed, but, could you give some more detail? Which ones have stronger? Which ones are weaker, such as, could you tell us about it, such as ATS, such as semi, could you give more color? Thank you. That's my last question. Thank you.
Okay. Obviously, we noticed this year we have less exposure to consumer markets. We still see quite strong from these HPC markets. We were quite surprised at the picking up of demand for this optical fiber communication. Actually, you could say that quarter-over-quarter, the semiconductor sector is growing or even if you compare to last year. Photonics actually is quite a large portion in the first quarter of this year. As you see last year, first half of photonics sector is significantly down. If we combine the upcoming next 2 months, we're going to deliver these photonics for VCSELs. You could see that photonics sector this year will have quite a decent growth rate compared to last year.
Not only, you know, limited to these, U.S. customers, but also including optical fiber communication is still increased. Yeah. Honestly, I mean, China is still- I mean, I shouldn't say China. I think I should say Shanghai is still under lockdown. We do see the Chinese semiconductors too, progressing. We still have a certain demand from these so-called, legacy type IC testers from these Chinese markets. Yeah. Besides that, we see quite a strong from this SLT. Yeah.
Great. Thank you.
Sure.
Thank you. Now, there are currently no questions. I will hand it over back to CFO Paul Ying for closing remarks. Mr. Ying, please proceed.
Thank you. I think based on the financial performance of our first quarter of 2022, I think we are pretty in line with our expectations. We will keep on the pace and reaching to the second quarter up to third quarter of this year. Thanks for your support. Thank you and bye-bye.
Bye-bye.
Thank you. Thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit www.chroma.com.tw.