Earnings Call: Q2 2021

Jul 29, 2021

Welcome everyone to Chroma's 2021 Second Quarter Earnings Conference Call. For information, a webcast replay will be available within an hour after the conference is finished. Please visit triple w.kroma.com.twinvestorindex under the Investor Relations section. I would like to introduce BFO, Paul Yin. Mr. Yin, you may begin. Thank you, Mark. Hi, BNB. 21 Q2 earnings conference call. And well, first of all, let me give you the quarterly highlights base. For the Q2 of 2021, we make sales revenue to a level of the 2 point BNB for almost NT2.45 million and this level pretty much is the higher than band base. 3 quarter last year, although we had a little bit follow over the Q1, due to the Q1, we have shipped out some of the ten band banking solutions, but at the same time, well, for the Q2, it's still a high quarter compared to last year, every single basis. Our gross margin is still maintaining the higher tier of the more than 50 3rd, which is the 54% for this quarter, and our operating margin reached at the high BAM. Our net income is contributing NT481 1,000,000. This is down for the 79% on a Q over Q basis. Basically, it's due to the Q1 very BAMBI. On the setting of the our original fire headquarters. And this is down 18% on a year over year basis. And BAMB. And mainly is due to the credit loss we provide at the second quarter, which is approximately BNB at $260,000,000 and for the second quarter, the major growth in 2nd quarter is contributed from the TESAN instruments and ATS, which these sectors billing. And if we go to the detail for the income statement, you can look at the next page, which is business. The Q2 compared to the Q1 and last year's 2nd quarters. So in here, you can see that There's a drop on the top line on 8% and again a 6% growth on the year over year base. And gross margin, we maintain BAM base. And as to the expense, well, we see some growth on the either BNB. G and A and R and D expenses mainly coming from the we have a structuralized salary increase ban base at the year end of last year. And the main reason for that is compared to the mark to market and trying to attract base talent people. And operating income, we reached at the 25% BAMB around TWD 610,000,000 and compared to last quarter is a 12% drop, but compared to last year band basis. And again, if we look at the extraordinary gain analysis, you can see from here, We're breakeven the Q2 of this year, mainly due to the credit loss from the M and A BNB for a single customer, Henergy. So in there, we pretty much take all the BNB. Take all the debt is up, that's the credit loss. So it's kind of 100% provision for all the BNB AR from the single customers already. So if we excluded these single factors. So it still give us back around $0.60 NT dollars EPS. So right now, we're making pretty much like 4.81 1,000,000 NT dollars as the net income and give us the 1.14 dollars NT dollars EPS. But if we add back the credit loss, it gives us around somewhere 1.7, which is even better than the last year, Q2. So this is the 2nd quarter numbers. If you look at the first half BN. For the sales revenue for the first half BNP. We make somewhere like BNB. 5,100,000,000 and compared to last year, it's a 17% growth and this is BNB. The record high for the first half of the promo history. So we are I think that if we maintain these numbers and trying to reach the same level of the sales revenue For the second half, then we are expecting that we come to a level of over a $10,000,000,000 kind of club. And even for this High growth of the sales revenue, we still maintain a gross margin at somewhere like 53%, 54% and BAM. Similar to the last year. And the gross margin is somewhere like 2 point pre BNP. And again, this is a 17% growth. And For the operating expenses, either for the SG and A and also the R and D expenses, that is growing. Well, again, basis. That's mainly due to the structure salary increase for the employees and base. Especially for those talent people. So operating margin for the first half of this year is somewhere BNB. 26% and reached at the RMB 1,300,000,000 compared to last year, this is a 22% growth. Base. And again, for the non operating, we benefit from the We reached at the NT1.9 billion dollars for the extraordinary gain Due to the sale the selling of the buyer headquarters, approximately somewhere like 1,700,000,000. And again, there's another factor will be the credit loss for the MAS for 100% ban bid. Write off before the AR of the bad debt and it give us the one 0.9000000000, net for the non operating items. And again, For the net income, we reached at the level of the TWD 2,729,000,000 and compared to last year, It's a 159% growth. And for the first half of twenty twenty one, the EPS bringing back somewhere like TWD 6.5 As to the Highlights for the balance sheet items. You can see from here that the cash status And it's growing. Well, due to the inflow of the transaction of the selling of BAM. Headquarters closing at the Q1 of this year, and then We'll pay back some of our debt, so give us a better net debt to equity to single digit 2%, and we are still At the double digit at end of last year, somewhere like 23%. So this is a quite improvement for the financial status. And if you look at the free cash flow For the first half, you can see that we reached somewhere like a $3,100,000,000 which As to the for the second half of This year, our guidance well, again, as a summary, if you look at the first half of twenty twenty one, Our total consolidated sales revenue reaches a year of TWD8.7 billion. This represents a growth of ban beta-21% on a year over year basis. As to the parent company, our sales revenue reaches at the RMB 5,100,000,000, And this is a growth of 17% year over year, and this is mainly contributed from the semiconductor and BN. B. Lowe:] Toniq's testing solutions and which was increased by 23% compared to the year of BNB. And for the second half of the year, twenty twenty one and also the whole year's business outlook, It seems to us that the semiconductor and the photonics testing solutions remain strong in second half. So we are pretty Here, we are pretty optimistic. This is continued to drive by increasing demand of the Automotive IC and development of the 5 gs related and high performance chip HPC applications. And these key drivers are somewhere like wireless RF and MCU testing solutions, based on the CMOS image sensor and VCSEL and the TOF testing solutions Also combined with the high reliability testing solutions such as the burning test, SLT test with BAMB. The thermal control dedicated for industry like EV application and also The testing instrument of an ATS for power testing solutions continue benefit from the green energy. These sectors including EV based components, battery cell, battery module, battery pack and the smart grid and 5 gs banded server related power testing. And the last bullet point will be the developing we are entering into the developing of the BAMB augmented AR and virtual reality VR glasses and also This will be driving the demand of the testing solutions from the second half, we're starting from there. Okay. This is my presentation and the highlights. And any questions? We can move on to Q and A. Thank you. We are now being our question and answer session. Our first question coming from Jeff O'Weiler from Macquarie. Go ahead please. Yes. Hi, Paul and Jennifer. Thanks for your time today. First question, MAS write down, this. What steps you've taken to try to get that money back? Is there a possibility that you'll see write backs at some point? Is there anything you can do in terms of I don't know about court in China or if you can't if they need after sales service or something, how you hold that back. Is there any repercussions for them and expectation that you do get payment at some point? Well, no legal actions business yet, but since it's been a while and until this year, we've been providing more than 50% BNB. Yes, SDF provisions. And right now, we think probably it's time for us to get rid of those issues and then moving forward. So we just kind of put out on provisions and then just trying to move Does any of that equipment that you sold to them need after sales service or anything? Or I mean, how do they go about maintenance if you can't support Well, to my understanding, it seems to us that energy is freeze there. That if you back to year 2018, we the 10% was warranty BNB. That we couldn't collect according to the contract, we only could issue the BEMB employees after 1 or 1.5 years. Instead of continue to answer your provided comments regarding to Hananju. We just put everything on provisions. And basically, because according to our BNB. They do have several projects coming in the second half And we don't want to spend time to dealing with this kind of issue, especially if it's just a warranty. According to the contract, we just Every automation project, they all have a 10% warranty. Okay. On the strong ATS momentum, both Q on Q and year on year, was that mainly EV related or is that across the board? Many EV related, especially from Q2 and onward to move on to second half. Most of these to deal ATS and PNM is mostly deal with a battery pack, battery modules, not only limited to China market, but also include overseas based markets. Okay. And my last question before I jump back in the queue. The semiphotonic, Obviously, still a very strong first half and a pretty good number, but down Q on Q and year on year. So what's the reason for BNB. Relatively weaker than Q1. And how does that play out maybe 3rd Q4? Okay. Regarding the semiconductor BNB. Factors due to some components having a long lead times. And so we our lead time also extended, which is what we already during the Q2 to investors, our lead time period has to extend from 2 months to 3 months BNB to pretty much in line with recent long lead times to look some of the components. So some of the delivery times has rescheduled BNB and deal with customers and move on to second half. However, According to our order on hand and also delivered schedules, we believe our semiconductor and photonics factors second half will be better than BNB. First half and our target for more than 20% growth rate has not changed. BNP. Okay, great. Thank you. Thank you. Thank you. The next question is coming from David from HSBC. So I just have a quick question on augmented the virtual reality part. Yes. Is that the same type of supply chain that we've seen on the smartphone side of business? No. Well, it's Actually, it's new customers and it's from U. S. Those are top I think Yes. From this top five, yes, the joint companies. And we just We want to deliver that regarding to ARVR, this kind of a testing solution needs has business. It's continued to increase because of these top 5 joint companies that have started to invest on this kind of glasses products. And to our market share right now, I think we already gained like a 2 thirds more than I think 50% of market share. So we are in a well position regarding to this kind of ARVR glasses testing solutions. Okay. Very clear. Also, what is the magnitude like in terms of this BNB. Type of new end product, is it similar to what we've seen at the smartphone ages? Or is it smaller BNB. I couldn't comment on what would it look like for the customers' products because we only deal with their And what we provide is including the assembling, how to make those I don't think it's goggles. Glasses, food automation and plus the Testing. So, you actually combine 2 parts, assembling with the testing with the images. Yes. Got it. Got it. Thank you. Thank you. The next question is coming from Dan Oh from JK Capital. It. Go ahead please. Hi. Hi. I have two questions regarding first one is about the ARVR the equipment. Is it I want to know what kind of the how this equipment is actually the use or what is the testing method? Is it like first of all, I want to what kind of like modules or the applications this. Just a comment is testing and I want to know if it is like testing the signal or is it a testing like is it a visual like vision testing or like just traditional like signal testing? Yes, those kind of things. That's the first question. And yes, let's start from there. We actually bring the new customers and those customers already start to invest the production line regarding to make those glasses, AR and VR glasses. And what we provide is a sampling light to making these products 100% through automation design. And we also provide solution to ensure those are images quality and also safety issues. Since those images are so close to your eyes, they need to make sure those this. All right, all right, very good. Okay, so second question is about the SLT machines. I want to know what is the current revenue contribution within your top line and the number of clients currently. Okay. Our So we mostly deal with HPC markets. So application includes GPU, AI sensors, BNB sensors and auto related. And we mostly deal with fabless, they Buy those equipment and consigned to all set. So customers include like Nvidia, recently pre BNB. Pretty popular second half mostly strong delivered by SIMO English sensors. So you can look at those SIMO English sensor makers. I think we already covered most of the semi industry sensor makers right from high, mid, low end. And we're also starting Deliver to related to RF because we combine the final testing with SLT together, 2 in 1 pretty much fit into the market. And so we're also getting some new customers like IDM customers from U. S. So this is pretty much our exposure to SLT markets. And what is the current revenue contribution? We don't give the breakdown regarding just the SoT alone, but last year, we already commented that SoT reached the milestone, which is over 1,000,000,000 of sales for last year. And this year, we look for another double digit growth. BNP. Very good. Thank you. Thank you. Thank you. The next question is coming from Jeff O'Weiler from Macquarie. It. Go ahead please. Yes. Just a follow-up on the last question on not necessarily SLT, but for the 20% Or 20% plus semi photonic growth. Where are you seeing the stronger growth in that area versus weaker growth for that category? Strong growth Mostly comes from which is already answered regarding the SLT, which is second half mostly drive by This is a similar image center and IF related. Another issue, I think, pretty much like according to BNB. You have seen those power management IC market still under the demand is still very strong. I don't think this kind of MCU power management chips will be able to solve until end of this year. So I think Because you know those like, for example, like MCU, the biggest one of the biggest markets is actually come from BNB. China. And regarding to the China market, those low frequency markets, you could say Chroma pretty much dominates and we have very High market share after several years of COOL. So this is where we see the strong Growth coming from, and I think we're able to maintain our target regarding the semiconductor and photonics sectors. Does that mean Photonics is on the lower end of that growth for this year? I wouldn't say that because for example, AI sensor AI related account is Tier 1 is the biggest customers. I don't really compare Photonics versus with the IC testers. You could say, yes, just this year, particularly IC testers, very strong, but it doesn't mean the portfolio factors kind of really slow down because I think the major issue is optical objects BNB. Optical related components having a very long lead time, this is pretty much in line with like the comment BAM. Lagan, like the length, the lead time is much longer than some of the key components on semiconductor sectors, I mean, I see. Okay. And then one last question again before I jump back in the queue, I guess. Yes. Your sales from overseas operations and related subsidiaries have seen strong growth last year and also year to date this year. So what's driving that strong growth? And is that also very accretive to margins? Or is that mostly like a just a revenue line, but not necessarily a lot of margin in that line? We don't because the overseas is no longer deal with markups. So it's very hard to tell what kind of gross margin because those markups is just It's actually showing our final selling prices to our customers. But it actually indicates the sign that the rebound from the U. S. Market and Japan markets after pandemic. And also Chinese market. Yes. But Chinese actually was strong last year because China didn't infers very much from pandemic. But I think this year, overseas response is mostly from U. S. And Japan markets. Yes. Okay. I mean one last quick question. Any forecast for MAS revenues this year? According So the order on hand, I think they will be better than RMB600 1,000,000 last year. Last year was low. And the second half will be a bit of a shipments. So I think second half will be better than the first half. According to the current pipeline, I think 3rd quarter mostly later to probably new customers and Q4 they will be fully support our battery business. I think we do see this as the trending up from the EV Industry and You probably can expect another CapEx cycle regarding to EV battery sales. I think several EV makers already deliver current EV battery sales under The next question is coming from Gang Woo from JK Capital. Go ahead, please. Hi. Thanks for the opportunity again. I want to know about the EV so you just mentioned about EV industry. And can you remind us about the revenue contribution from the EV battery equipment Okay. Our EV business will cover 2 parts. First one is related to EV battery cell. And because cell is a chemical stuff, So you need to combine, you need to provide a full solution, which is integrated with automation. And we put this business under 10 key solutions. Rest of the EV components, no matter charging, power module, battery pack, battery module, adapter, Charger, because they only need testers like end of live testing, CO testing and we will book under test measurement ATS. So I think your question is regarding to EV battery cell in the past few years. I think in the past BN. For 5 years, especially for 2016 2017, we do enjoy the high, strong demand Picking up on China moving to EV battery cell to manufacturing. So at that time, I think most of the China's the loss of the capacity to build is for European card, the standard is much higher. Of Of course, the profit margin wise is better. For a few years, we mostly most of time, most of the projects, we tend to be very selective because we're more cautious about Some of the battery sales, especially for local cards, maybe margins are not as good as like since due to the standard differences. So rest of the year, we mostly deal with overseas projects or we just deliver the testers for based. China local SI through the integration for the capacity build in China. So you can follow BNB. Our Lutanki solution actually showed the progress of the EV battery cell business. And I think particularly the things we highlight today is we are currently under preparations for next year following years, these CapEx cycles, especially investing in EV batteries sold. The reason for that, Number 1 is first, because of political reason. Some people as Financial reliance is relied on the China manufacturing. So we start to see like especially U. S. And China would like also U. S. And Japan would like to build out the capacity for themselves. And of course, China also going to add the capacity. BNB. And then I think according to our current strength and also we are about to deliver new solutions and I think we are well positioned So well, in terms of competition in the U. S.-European market for EV orders, how does it look how is it different from that time like 5 years ago. We'll continue to highlight this issue. EV, it's very much based on the safety issues. So most of the EV components require for very high standards of reliability. You could say not only for EV components, but also especially for EV battery sales. Globally, not many makers, especially for testing equipment. And normally, those carmakers or automakers, business. They are, you could say, reluctant or very changed their suppliers. So price is not very elastic in this market. So if you look at those, for example, battery cell formation system, I would say probably not more than 5. And if you look at who supply the full integrated solutions, I would say definitely less than 5. So after 5 or 6 years today, if you only look at only those few players, including Chroma, Korea's PME, U. S. Marcor and just both peers. And not to talk about 5 years, of course, our technology definitely migrates for step up. So to To be more competitive, not only the price, but also the functions. Very good. Lastly, can you comment on Like what is the revenue contribution in the Q2 from DEP, like for the testing If you look at like the test measurement ATS, I think first half, we generate let me I think we generated CNY 2,500,000,000, which is with the single digits. And I think our first I think we look for like a high single digit growth for this year because second half, we do have several order regarding banded to the overseas battery module. And if we if the market runs faster band business. Maybe we can have like a low double digit this year. But this business, our ATS and test measurement, Every year, we just stable growth might we haven't seen them have a significant decline in the past over a few 5 or The next question coming from Paul Rothman from shareholders. Go ahead please. Hi, Paul. Hi, Jennifer. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Just On metrology, any update there, please? Metrology, yes. I only say, yes, you take more longer time. We do have order, but you know this customer side, you already heard their investor conference. Their schedules and progress is still struggle with a little bit struggle with a new technology. So honestly, I think it will be similar as the last year as our target regarding to metrology orders. But I need to be to be honest, I think the progress is longer seems longer than we expected. Based. Yes. All right. What specifically is CXU? You mentioned technology? One of the customer, EBIT customer is the Taiwan foundry, right? And the reason they are sent out through. And so regarding to the You could move in, it takes longer times than we expected. Oh, I see. Yes, just a schedule issue. It's not an order issue. I see. Okay. All right. Thank you. Thank you. Thank you. The next Question is coming from Jeff Wether from Macquarie. Go ahead please. Yes, one more question. Just to clarify, the ARVR product you're talking about, is that through turnkey? The Yes. Okay. And then next question, ESS, Energy Storage Systems, anything interesting going on there for Chroma? Sorry? Your question again? Sorry. Yes. I know you haven't mentioned this before. I was curious since you guys do a lot Our testing, whether ESS, like the energy storage systems, if there's anything that Chroma does in that area? No. I think because if you talk about battery recycling, because those batteries being tested, I don't think we have it. Sorry, they don't really need testing. Okay. Yes. And then lastly, any update on how's the nanoparticle tester In terms of year on year momentum, are you seeing more orders on that product? Do you have any additional products coming from that Subsidiary? Okay. Nanoparticle, their testers already been stacking testers for these foundry customers. But the same situation as metrology, it's all because the customer schedules is too tight. So the equipment moving We tend to be kind of behind schedule, to be honest. Okay, great. Thank you. Thank you. Thank you. Thank you. There are currently no questions. I will hand it over to CFO, Pony Yin, for closing remarks. Mr. Yin, please proceed. This. Thank you, Mark. Thanks for everyone's questions and attendance for this meeting. And it seems to us that we deliver a a very good result at the second quarter and the first half. And moving forward, we are still looking at the second half, well, the to give you even better results. Thank you. 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.kroma.