Welcome everyone to Chroma's 2021 fourth quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow instructions given at that time if you would like 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 would like to introduce CFO Paul Ying. Mr. Ying, you may begin.
Thank you. Hello, my dearest investors, ladies and gentlemen. Welcome to the 2021 fourth quarter earnings conference call of Chroma. This is Paul Yin. Well, I will be the one who will present the financial results for the year of 2021, including the fourth quarter's our achievement. Well, we started with the presentation number five. First of all, I would like to highlight is the, if you look at the consolidated sales, it's approximately TWD 17.6 billion, which reaches to the record high of Chroma in consolidated sales. This is also consecutively in five years, the core competency of Chroma test and measurement portion has grown year by year.
The net income for 2021 is approximately TWD 4.2 billion. As to the consolidated entity, it's including the Chroma parent company, and MAS for the automation equipment, and for the Chroma NMC, which is a special material business. I would like to highlight to you the Chroma NMC new material corporation will be terminated at the end of March of the first quarter. After the first quarter, you won't see the top line, including this portion of the business. I would like to highlight to you of the full numbers for the parent company. The sales revenue for the fourth quarter of Chroma parent company, approximately two billion four hundred and nineteen million NT dollars.
It's down by 13% quarter-over-quarter and flat to last year fourth quarter. The gross margin, we're still maintaining our expectation around 52%, and the operating margin is 18%, which is a little bit lower than the average. I think the major reason is for the exceptional expenditure for our investment in the Chroma Foundation and the exemption of the property tax for the fourth quarter of 2021. These two can be deducted from the fourth quarter. If you want to make the average kind of quarterly spending, I think the second quarter to third quarter will be an average kind of OPEX.
Considering the OPEX for the consolidated numbers, if we look at the write-off for the bad debt are around approximately TWD 250 million for the bad debt write-off for the MAS operations. Net income for the fourth quarter is approximately TWD 658 million. This is a 17% down compared to last quarter and a 4% decrease compared to last year fourth quarter. For the fourth quarter highlight, I think the major growth in fourth quarter contributed from the semiconductor and photonic sectors, which present a growth of 20% on a year-over-year basis.
You can refer to the page 18 for the breakdown of the consolidated product mix. To the guidance for 2022 this year, well, in 2021, our total consolidated sales revenue, which is somewhere around TWD 17.6 billion, and this is a record high. This represents a growth of 13% on year-over-year basis. The parent company sales revenue also hit record high. We kind of hit a double record high, both for the consolidated numbers and also for the standalone parent company top line, reaches at the TWD 10.4 billion.
This is quite as we expected and presented a growth of 12% on a year-over-year basis. This is mainly contributed from the semiconductor and photonic testing solutions, which is same as the fourth quarter. This was increased by 19% compared to 2021. For 2022, our outlook will be we assume the strong growth of semiconductor and photonics testing solutions will be driven by a strong demand of development of 5G related and high performance chips, which is HPC applications as well as the new VCSEL and auto LiDAR capacity ramp. Those key product drivers are as follows.
Like the high performance, high reliability testing solutions and burn-in tests in SLT test with the thermal control. For the CMOS image sensor and the VCSEL and the optical testing solutions. Third one will be the wireless RF high-frequency testing solutions. The turnkey solutions will be back to peak sales revenue level contributed by a mega trend of EV industry, especially for those battery formation. For the test instrument for ATE, for power testing solutions contributors benefit from the green energy. Those are the products including EV energy storage related components, battery cell, battery module, battery pack, and smart grid and 5G and server related power testing. Those are the guidelines for 2022, it seems to us. Okay. Now it's time for the Q&A.
Yes. We now begin our question and answer session. If you have a question for any of the speakers, please 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 Gina Kim from Schroders. Go ahead, please.
Thank you for this. Can you elaborate a little bit on the Chroma Foundation and the property tax you mentioned? Roughly how much of the fourth quarter OPEX was due to this?
The combining will be somewhere around TWD 60 million-TWD 70 million. Those including around 30-some million for the foundation. That will be one-time expense, and that will be a donation to set up the foundation. That's the first initial setup. Rest of that will be
I see. Will you be contributing more throughout the years?
You mean this year?
Well, yeah, 2022 onwards.
2022 onwards won't be that big. This is for the initial setup for the
Mm.
The first foundation that set up for the foundation set up. In the future, we approximately will be less than this kind of initial setup. Ideally, that will be in millions only in New Taiwan dollars.
Okay.
Which is set up in the budget.
Thank you.
Welcome.
Thank you. As a reminder, press zero one on your keypad if you would like to ask the question. Ladies and gentlemen, we are now in question and answer session. Please press zero one on your keypad if you would like to ask the question. The next question is coming from Jeff Ohlweiler from Macquarie. Go ahead, please.
Yeah. Paul and Jennifer, thank you for the call today. Can you maybe discuss a little bit, you know, the semiconductor testing equipment? You talked about 20% revenue growth over the last couple of years and, you know, essentially achieved it. Can you talk about, you know, this year, next year, is that target still in place? Is there upside? Is it gonna be difficult to meet? Just some thoughts on semiconductor.
You mean the long-term growth target for semiconductor sector?
Well, I'd say this year, maybe question A, question B, next year, question C, five years.
Semiconductors, I think last year was, I mean, we have been continuing growth like between 20%-30%. This year definitely will be a good year for the semiconductor and photonics sectors. Just based on our current order on hand, I think we do have a confidence level to grow the similar growth or even better for this year. You know, we continue to increase the new customers, not only limited to fabless and OSAT, but also include the foundry as one of our target customers for the semiconductor sectors. I believe, we actually target decent growth every year for these sectors.
Okay. Thank you. Maybe can you talk a little about the overall SLT market? You know, how big is that market and how fast do you think that overall market is growing?
Well, I would say you probably heard that back to a year ago, 2020, we have ever mentioned that with the first year, the SLT system level tester is being stacking for the HPC products. Actually, last year sales still quite maintain. Okay? Even not a very strong growth. This year, I think we could expect quite a significant growth versus 2020. Well, not to talk about the latter we're going to receive the order from coming quarters. Just year to date, our order on hand already, I think, exceeds the numbers we had back to 2020. We believe this year, the HPC market is definitely a strong, quite a strong year.
Great. One follow-up. Can you talk a little bit about the competition in that SLT market? You know, do you think you can outgrow the market? You know, how do you assess that?
Okay. For semiconductor stocks, especially SLT, we cover most of the fabless. We also comment over, explained before, for these SLT tester currently mostly apply for SOC, which is HPC markets. This type of chips are mostly customized content. We actually allocate a lot of R&D and then even customers design very customized. We still are quite a big player for this HPC market. Only a little bit another type of the application which also needs SLT, which is the 5G mobile, and we have a little bit exposure. Well, we're still quite dominant and leading indicator for this SLT market at the moment, especially you can see from the past five years, we continue to acquire several, I mean, at least two or three companies to furnish our content in SLT.
Another issue is, we probably mentioned in the last quarter that this SLT has been qualified by these foundry customers. We believe the next adopters will definitely, you know, probably happen in the foundry industry.
Great. Thank you. I'll get back in the queue.
Okay. Thank you.
Thank you. The next question is coming from Jennifer Tseng from JP Morgan. Go ahead, please.
Hi. Thank you for taking my questions. First of all, I want to clarify that you mentioned that the OPEX required disclosure for the foundation and the expiry of the tax-exempt for property tax. Can you elaborate a bit more about the property tax? What does it mean, and is it one of expense as well? Second question is about turnkey. You mentioned it will be back to the peak level. I'm wondering how long will it last the strong growth? Like, can we expect even stronger growth in the next, say, two to three years or even longer? Thank you.
Which part of the growth?
turnkey for the-
Okay.
back to peak level.
Okay. I let the CFO to comment on this land tax issue first.
The land tax easily makes complicated things simple. It's just our new headquarters, I think, the tax exemption for the land tax will expire, and then it will go back to the normal charging rates starting from 2021 and then moving forward.
I think markets probably know that, you know, we moved to a new headquarters. It would be better people look at the OPEX for 2022 to use the basis or referring to the basis from the 2021. Because 2020, we were still located in the, you know, previous headquarters, maybe the depreciation rate and also the land tax or the, you know, those registration tax, which would be very different than, you know, if you compare new headquarters versus the, you know, the old headquarters. You can refer to 2021. Regarding turnkey solutions, I want to add a little bit information on that. This year, I want to sort of recap on our previous meetings in the Chinese version.
This year, due to we would like to, you know, further, you know, increase our capacity. It's sort of elaborate all our resources, not only limited to Taiwan manufacturing, but also the China resources. This year, in order to increase our competitiveness, we have the battery cell orders that deliver to China will be 100% in charge by Suzhou Chroma. They will receive the order and directly assign to the MAS, you know, in China. We can save the logistic cost and also saving some of component costs by this delivery or sourcing some of the cheapest components in China. Okay. Rest of the market, including United States and Japan, those are capacity needs.
I think the order will be 100% in charge by Taiwan. I think those are Taiwan, which the parent company turnkey solution will have a significant improvement compared to last two years, 2021 and 2020. Consolidated-wise, we suggest to look at if you want to see the overall picture about the battery cell order we receive for this year, you'll be better to look at the overall consolidated testing instrument business, because it will be Taiwan's turnkey plus the Suzhou Chroma as a whole. Last year, our consolidated sales reached record high. Ended up with TWD 17 billion, and with this combined with three consolidated entities. This year, we do have a confidence level that our consolidated sales will not drop. Despite we are missing one consolidated entity, which is new material.
This year, only two consolidated entities, I think we should be able to maintain our consolidated sales versus last year.
I'm sorry, just to clarify. For Suzhou Chroma, that all will be listed in overseas revenue? Did I get it right?
Yes. Yes. Jerry can just confirm this question. Yes.
Thank you.
Thank you.
Thank you. The next question is coming from Jerry Su from Credit Suisse. Go ahead, please.
Thanks for taking the question. Hi, Paul and Jennifer. I just want to follow up, you know, given that you have a pretty good visibility for semi and also turnkey. I'm just wondering-
Mm-hmm.
How should we think about the seasonality, you know, based on your current, you know, order on hand or visibility for, you know, Q1? Particularly for turnkey, you know, as you expect revenue to go back to the previous peak level.
Mm-hmm.
Which quarter do you think we will see a more meaningful, you know, revenue boost from this segment? Thank you.
Right from first quarter.
Starting from this quarter, we'll see a boost.
Yes.
in turnkey?
Actually, we already booked some in the fourth quarter.
Okay.
Because, yeah. Maybe we are not start deliver, but in, for the China area, if you receive down payments, you need to issue invoices. We could say right from this quarter. You need to look at it as a consolidated as a whole.
for your revenue booking, if you receive the down payment, you can start to book the revenue?
Yeah. Based on the China regulation.
Okay. Got it. For your-
You will not see it from the balance sheet because it's already turned into revenue.
Okay.
We will put the assumption, you know, sort of the cost of consulting for this project.
Okay. Got it. Which means that the first quarter this year should be a pretty strong quarter, you know, even though, you know, shorter working days, traditional, solar seasonality?
I couldn't say February has no impact, but we will have some in February too. Yeah.
Okay. Got it. Thank you. That's all my question.
Yeah.
Thank you. Ladies and gentlemen, we are now in question and answer session. Please press zero one on your keypad if you would like to ask your question. The next question is coming from John Chang, Inveest . Go ahead, please.
Hi, guys. Could you talk a bit about how you see expenses trending going forward? Because, you know, both on R&D and SG&A, it seems like you're experiencing quite a bit of inflationary pressure from the wages, much more than you would have expected two or three quarters ago. Should we expect this pace of increase to go into 2021 as well?
Can I just recap your question? You mean the OPEX part, right? Overall.
Yeah. Yes. OpEx. Yeah.
What's on the growth rate we are looking for, right? This is your question.
Yeah. I think on, you know, year-on-year right now it's at easily over 20%. So I'm just wondering how long we should expect that to stay.
Well, Jennifer just explained that, since we moved to the new headquarters, I think, we have seen some changes in the OPEX. Eventually, I think, 2021 will be a very good reference. If you compare to our past experience on the growth of the OPEX, definitely it will be. Well, if we grow top line, I think the growth rate of the OPEX tends to be more flexible than the top line growth. This year, we see some of the changes due to the restructuring for the salary adjustment, plus the depreciation for the new headquarters. We see some growth which is higher than the historic growth rate.
If you look at the second quarter to third quarter, I think that quarterly OpEx will be kind of like a flat to an annual base. Fourth quarter will be a typical quarter that we have some exceptional expenditure such as the donation to the foundations and also the land tax. Outside of that, I think the growth rate will be not that material.
Are you finding it sort of, any pressure to raise wages to keep, you know, R&D and production level staff? Is that-
You mean raise or
You know, Taiwan. Yeah, like raising their salaries to try and keep retention.
Every year we raise the salary package according to CPI. This is basic. Because, you know, Taiwan right now is under sort of labor shortage, especially for well, those qualified R&D people. Yeah, I think this is the part we were, you know, most trouble with, and probably give a little bit more than CPI rate. Yeah.
Okay. All right. Thank you. Thank you, guys.
Thank you.
Thank you. The next question coming from Gina Kim, Schroders. Go ahead, please.
Hi. Just one follow-up question. At the parent level, I'm just looking at your sales. Is the QoQ sort of decline more to do with seasonality or were there some exceptions like, you know, shipping issues, logistics issues at your client end?
Yeah. Mostly deal with this seasonality patterns due to fourth quarters. I couldn't deny that last year, I think the whole years all have this kind of short and long lead time raw material issue. It's very hard for us to really forecast what this seasonality pattern would look like. Fourth quarter, I think-
Mm-hmm.
Definitely have some infrastructure for the seasonality.
Okay. Thank you.
Thank you.
Thank you. The next question is coming from Jeff Ohlweiler from Macquarie. Go ahead, please.
Yeah. Hi. Question on turnkey. You mentioned that this year you'll see turnkey go back to kind of peak revenues, which was in 2016. I mean, the EV market's been growing pretty steadily since, you know, over the last, say, even 10 years. What happened in the last five years that caused things to decline? What's happening now that's gonna cause it to come back up? How sustainable is that going forward?
Okay, well, if you look at the past five years, I mean, especially EV battery cell industry, I think the last CapEx cycles was mainly due to China's increase quite quickly their EV exposure. We do have a chance to participate in the first two years. Mostly at that times, the first phase, they mostly manufacturing for European car with the better margin. Later a few years because we are very cautious about the margins, and at that time I think China mostly support the local car. I think we take very selective for the project we deal with. As you may notice in the past two years, most of our turnkey solutions are dealing outside of China, like Thailand or other projects. Yeah.
From last year, we keep saying that we see this time the EV CapEx cycle trends is for global market instead of just one region. We see this battery cell demand is now limited. Of course, today we see from China has got a very strong demand. That's because the European car assigned a lot of capacity to them. But we also received the order outside of China. That's why we believe the CapEx cycle trends would take longer than last time because currently, I think battery cells still under severe shortage. A lot of you know, especially this year, is a turning point that European car would like to take over or have ambition to increase their market share in the EV industry.
Okay. Thanks. Does that mean that the China projects have, you know, good margins as well?
You can say that most of the projects are dealing with European car. Because I think, some of the key European car, they say, they wanted to have a battery cell, you know, capacity built in Europe. But look at the demand, also taking the market share. You know, if you wanna start everything from this year, then that would be too late to have a factory in China, in Europe and start to ramp up capacity. So the easier or the easy access part is, you know, just ask directly from, you know, take it from the China markets. So that's why China has been built up by several phases, large, you could say larger phases for European car. Still, we are doing very much related to local car.
If you look at like the top five, China battery cell makers, I think those ones who deal with a lot of foreign cars are typically our customers.
Okay. Thanks. Maybe one more question.
Yeah.
You mentioned, okay, so you're closing NMC, which was about 16% of sales last year. You know, maybe take away about 15% of sales this year, and you're still gonna at least, you know, be pretty close to flatish year-on-year for sales, which is very good. But seeing NMC was a very low margin business.
Yeah.
Can you talk about what the impact is on margins this year and, you know, where can they go and, you know, on flat sales, I imagine you can still have some pretty good EPS growth?
Well, I have done a little bit, you know, calculation for our last two years. If we take out the new material business, what would be the consolidated gross margin look like? I think we able to comment is better than parent company.
Oh, okay. Great. Thank you.
Yeah.
Thank you.
Thank you.
Ladies and gentlemen, we are now in question and answer session. Please press zero one on your keypad if you would like to ask a question. The next question is coming from Jerry Su, Credit Suisse.
Hi, Jerry.
Yeah, hi. Just a quick follow-up on the fourth quarter's current business. I think that we've seen besides the turnkey semiconductor and also the ATEs, there's another category which is, you know, service and others. That one saw a pretty big decline in the fourth quarter. Any particular reason? And how should we think about this for 2022?
You meant service and others?
Yeah. I think in the past quarter.
Uh-
They have been like 200-300 million TWD per quarter. But
Yeah.
Fourth quarter it dropped to, you know, TWD 36 million.
I think we don't have a specific reason for this. You know, just these. I think in fourth quarter we didn't sell that much about those consumable parts. I mean, in the fourth quarter.
Okay. For this year, should we be thinking that they could be going, you know, start to improve, and then go back to the previous, you know, that kind of run rate?
I think these two years, the service and others pretty much maintained around TWD 800 million.
Okay.
I think it's already quite a big jump versus years ago, you know, around TWD 500 million-TWD 600 million. That already indicates that we start to have selling those consumable parts according to semiconductor testers sales increase.
Okay. Got it. Thank you.
Thank you. We are now in question and answer session. There are currently no questions. Now we'll hand it over to CFO Paul Ying for the closing remarks. Mr. Ying, please proceed.
Thank you. Thanks for joining this earnings conference call for 2021 fourth quarter of Chroma. It seems to us that 2021 we have very good years and we are looking forward to see 2022 with a very good start on the first quarter. Thanks for your support as always and bye-bye.
Thank you.
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/investor/index under the investor relations section. You may now disconnect. Goodbye.