Welcome everyone to Chroma's 2021 second 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 the time if you'd like to ask the question. For information, a webcast replay will be available within one 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, Mark. Hi, my dearest investor friends and ladies and gentlemen. Welcome to the year 2021 second quarter earnings conference call. Well, first of all, let me give you the key highlights for the second quarter of 2021. We make a sales revenue to a level of almost TWD 2.45 million. This level pretty much is higher than any quarter last year. Although we are a little bit, fall over the first quarter, due to the first quarter, we have shipped out some of the turnkey solutions. At the same time, well, for the second quarter, it's still a high quarter compared to last year every single quarter. This is 8% down on a Q-over-Q base, but 6% up at the year-over-year base. Our gross margin is still maintaining the high tier of more than 50%, which is the 54% for this quarter.
Our operating margin reached at the high end of 25%. Our net income is contributing TWD 481 million. This is down for the 79% on a quarter-over-quarter base. Basically, it's due to the first quarter, very high on the setting of our original Hwa-Ya headquarters. This is down 18% on a year-over-year base. Mainly it's due to the credit loss we provide at the second quarter, which is approximately TWD 260 million. For the second quarter, the major growth sector in second quarter is contributed from the test instrument and ATS. These sectors presented a growth of 18% on a quarter-over-quarter base and a 9% year-over-year, respectively. If we go to the detail for the income statement, you can look at the next page, which is the second quarter compared to the first quarter and last year's second quarters.
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. The gross margin, we maintain 60-some percent and on the year-over-year base and also the Q-over-Q base. For us to the expense, well, we see some growth on either G&A and R&D expenses mainly coming from the We have a structuralized salary increase at the year-end of last year. The main reason for that is compared to the mark-to-market and trying to attract talent people. In operating income, we reach at the 25%, around TWD 610 million, compared to last quarter, it's a 12% drop, compared to last year, it's a 7% up.
If we look at the extraordinary gain or losses, you can see from here, we break even the second quarter of this year, mainly due to the credit loss from the MAS, for a single customer, Hanergy. In there, we pretty much take all the bad debts out as the credit loss. It's kind of 100% provision for all the AR from the single customers already. If we excluded these single factors, it still give us back around TWD 0.60 EPS. Right now we're making pretty much TWD 481 million of the net income and give us the TWD 1.14 EPS. If we add back the credit loss, it give us around somewhere TWD 1.7, which is even better than the last year second quarter. This is the second quarter numbers.
If you look at the first half of the parent company, for the sales revenue for the first half of 2021, we make somewhere like TWD 5.1 billion. Compared to last year, it's a 17% growth. This is the record high for the first half of Chroma history. We are expecting 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 TWD 10 billion kind of club. Even for this high growth of the sales revenue, we still maintain a gross margin at somewhere like 53%-54%, similar to last year. The gross margin is somewhere like TWD 2.7 billion. Again, this is a 17% growth.
For the operating expenses, either for the SG&A and also the R&D expenses are a little bit growing, where again, that's mainly due to the structural salary increase for the employees and especially for those talent people. Operating margin for the first half of this year is somewhere 26% and reach at TWD 1.3 billion. Compared to last year, this is a 22% growth. Again, for the non-operating, we reach at TWD 1.9 billion for the extraordinary gain due to the selling of the Hwa-Ya headquarters, approximately somewhere like TWD 1.7 billion. Again, there's another factor will be the credit loss for the MAS for 100% write-off before the AR of the bad debt. It give us the TWD 1.9 billion net for the non-operating items.
For the net income, we reach at the level of the TWD 2.729 billion. Compared to last year, it's a 159% growth. For the first half of 2021, the EPS bring back somewhere like NT$6.5. The highlights for the balance sheet items, you can see from here that the cash status and is growing well due to the inflow of the transaction of the selling of Hwa-Ya headquarters closing at the first quarter of this year. We pay back some of our debt. Give us a better net asset equity to single digits 2%, and we are still at the double digits at end of last year, somewhere like 23%. This is a quite an improvement for the financial status.
If you look at the free cash flow for the first half, you can see that we reach at somewhere like TWD 3.1 billion, which is a pretty good performance. For the second half of this year, our guidance, well, again, as a summary, if you look at the first half of 2021, our total consolidated sales revenue reaches at TWD 8.7 billion. This represents a growth of 21% on a year-over-year basis. As to the parent company, our sales revenue reaches at TWD 5.1 billion, this is a growth of 17% year-over-year. This is mainly contributed from the semiconductor and photonics testing solutions, which was increased by 23% compared to the year of 2020.
For the second half of 2021 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. Here, we are pretty optimistic. This is continuing to drive by increasing demand of the automotive IC and the development of the 5G-related and high-performance chip, HPC applications. These key drivers are somewhere like wireless RF and MCU testing solutions, CIS and CMOS image sensor, and VCSEL and the ToF testing solutions. Also combined with the high reliability testing solutions such as the burn-in test, HALT test with the thermal control dedicated for industry like EV application. Also, the testing instrument for an ATS for power testing solutions continue benefit from the green energy. These sectors including EV-related components, battery cell, battery module, battery pack, and smart grid and 5G server-related power testing.
We are entering into the developing of the augmented AR, and the virtual reality VR, glasses. 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. Any questions?
We can move on to Q&A.
Okay. Thank you. We're now beginning our question-answer session. If you have a question for any of today's 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 coming from Jeffery Tan from Macquarie. Go ahead, please.
Yeah. Hi, Paul and Jennifer. Thanks for your time today. First question. MAS write-down, what steps are you taking 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 they need after-sale service or something, how do you hold that back? Is there any repercussions for them and expectation that you do get payment at some point?
Well, no legal actions yet. Since it's been a while, and until this year we've been providing more than 50% as the provisions. Right now, we think probably it's time for us to get rid of those old issues and then moving forward. We just put that on provisions and then just trying to move on.
Does any of that equipment that you sold to them need after-sale service or anything? How do they go about maintenance if you can't support them anymore, if they're not paying?
Well, to my understanding, it seems to us that the Hanergy is freezed there.
Back to year 2018, the 10% was warranty that we couldn't collect. According to the contract, we only could issue the invoice after one or 1.5 years. Instead of continue to answer, you provide comments regarding to Hanergy, we just put everything on provisions. Basically because according to our, MAS' order on hand, 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. 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 was that across the board?
Mainly EV related, especially from second quarter and onward to move on to second half. Most of these deal, ATS and T&M, is mostly deal with battery pack, battery modules. Not only limited to China market, but also include overseas markets.
Okay. My last question before I jump back in the queue.
The semi-photonic, obviously still very strong first half and a pretty good number, but down Q- on- Q and year- on- year.
What's the reason for a relatively weaker than first quarter and how does that play out in maybe third and fourth quarter?
Okay. Regarding the semiconductor sectors, due to some components having long lead times. Our lead time also extended, which is we already explained during the second quarter to investors. Our lead time generally have extend from two months to three months to pretty much in line with recent long lead times for some of the components. Some of the delivery time has rescheduled to deal with customers and move on to second half. However, according to our order on hand and also delivery schedules, we believe our semiconductor and photonic sectors second half will be better than first half. Our target for more than 20% growth rate is not changed.
Okay, great. Thank you.
Thank you.
Thank you. The next question is coming from David from HSBC. Go ahead, please.
Hi, thanks for taking my question.
Yes.
I just have a quick question on the augmented reality and virtual reality part.
Yes.
Is that the same type of supply chain that we've seen on the smartphone side of business?
No. Well, actually, it's new customers and it's from U.S. Those are top. I think it's from these top five giant companies. We just want to deliver that regarding to AR/VR, this kind of a testing solution need has continued to increase because these top five giant companies have started to invest on these kind of glasses products. Through our market share right now, I think we already gain 2/3, more than, I think, 50% of market share. We are in a real position regarding to these kind of AR/VR glasses testing solutions.
Okay, very clear. What is the magnitude like in terms of this type of a new end product? Is it similar to what we've seen at the smartphone ages, or is it smaller somehow?
I couldn't comment on what would it look like for the customer's products, because we only deal with their manufacturing. What we provide is including the assembly, how to make those, I don't think it's goggles, glasses, through the automation and plus the testing. You actually combine two parts, assembly with the testing with the images. Yeah.
Got it. Thank you.
Thank you. The next question is coming from Gong Wu from JK Capital. Go ahead, please.
Hi.
Hi. I have two question regarding.
First one is about this AR/VR equipment. I want to know how this equipment is actually used, or what is the testing method? First of all, I want to know what kind of modules or the applications this equipment is testing, and I want to know if it is testing the signal, or is it a vision testing or just a traditional signal testing? Those kind of things. That's the first question.
Right.
Yeah. 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. What we provide is assembling lines, through making these products 100% through the automation design. We also provide a testing solution to ensure those images qualities and also safety issues. Since those images are so close to your eyes, they need to make sure those images are reliable and also safety enough to pass the U.S. standards.
All right. Very good. Okay. Second question is about.
Sure
SLT machines.
Sure.
I want to know what is the current revenue contribution within your top line, and the number of clients currently?
Okay. Our SLT mostly deal with HPC markets. Application includes GPU, AI sensors, RF, CMOS image sensors, and auto-related. We mostly deal with fabless, they buy those equipment and consign to OSAT. The customers include like NVIDIA, really pretty popular. Second half, mostly strong delivered by CMOS image sensors. You can look at those CMOS image sensor makers. I think we already cover most of the CMOS image sensor makers right from high, mid, low end. We also starting to deliver to related to RF, because we combine the final testing with SLT together, two-in-one, to pretty much fit into the market. We also getting some new customers like the IDM customers from U.S. This is pretty much our exposure to SLT markets.
What is the current revenue contribution?
We don't give the breakdown regarding just the SLT alone, but last year we already commented that SLT reached the milestone, which is over TWD 1 billion sales for last year. This year we look for another double-digit growth.
Very good. Thank you.
Thank you.
Thank you. The next question is coming from Jeffery Tan from Macquarie. Go ahead, please.
Yeah, just follow up on the last question on, not necessarily SLT, but for the 20% + 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 to SLT, which is second half, mostly drive by this CMOS image sensor and RF-related. Another issue, I think pretty much according to UMC, those power management IC markets, 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. I think, because those, for example, MCU, one of the biggest markets actually comes from China. 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 work. 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 currently is still one of 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 photonics sector is really slowed down because I think the major issue is optical objects or optical-related components having a very long lead time. This is pretty much in line with the comments on larger. Like a lens, the lead time is much longer than some of the key components from semiconductor sectors, IC.
Okay. One last question again before I jump back in the queue, I guess.
Sure.
Your sales from overseas operations and related subsidiaries.
have seen strong growth last year and also year to date this year. What's driving that strong growth, and is that also very creative to margins, or is that mostly just a revenue line, but not necessarily a lot of margin in that line?
The overseas is normally deal with markups, so it's very hard to tell what kind of a gross margin, because those markups, it's actually showing our final selling prices to our customers. It actually indicates a sign that the rebound from the U.S. market and Japan markets after pandemic.
Also Chinese market.
Yeah. Chinese actually remained strong last year because China didn't influence very much from pandemic.
Yeah.
I think this year, the overseas rebounds is mostly come from U.S. and Japan markets.
Yeah.
Okay. Maybe one last quick question. Any forecast for MAS revenues this year?
According to their order on hand, I think they will be better than TWD 600 million last year. Last year was low.
The second half will be a bit of a shipment. I think second half will be better than the first half.
According to the current pipeline, I think third quarter mostly related to probably new customers, and fourth quarter, they will be fully support our battery business. I think we do see this as the trending up from the EV industry. You probably can expect another CapEx cycle regarding to EV battery cell. I think several EV makers already deliver currently EV battery cells under shortage.
Okay, great. Thank you.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, press zero one on your keypad if you would like to ask a question. The next question is coming from Gong Wu from JK Capital. Go ahead, please.
Hi. Thank you for the opportunity again. I want to know about the EV. You just mentioned about EV industry, can you remind us about the revenue contribution from the EV battery equipment recently, like last year and this quarter, and what do you see in the second half?
Okay. Our EV business, we cover trwo parts. First one is related to EV battery cell. Because cell is chemical stuff, you need to provide the full solution, which is integrated with automation. We book this business under turnkey 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-line testing, cell testing, we will book under T&M ATS. I think your question is regarding to EV battery cell in the past few years. I think in the past five years, especially for 2016 and 2017, we do enjoy the hype, strong demand, picking up from China, moving to EV battery cell to manufacturing. At that time, I think most of the China, the capacity build was come from, you can say, Chroma.
At that time, most of the capacity they built is for European cars. The standard is much higher. Of course, the profit margin-wise is better. For a few years, most of time, most of project, we tend to be very selective because we're more cautious about some of the battery cell, especially for local cars, maybe margins are not as good due to the standard differences. Rest of the years, we mostly deal with overseas projects, or we just deliver the testers for China local SI to do the integration for the capacity build in China. You can follow our turnkey solution. It actually shows the progress of the EV battery cell business. I think particularly the things we highlight today is we are currently under preparations for next year or following years, these CapEx cycles, especially investing in EV battery cell.
The reason for that, number one is first, because the political reason. As you receive on recent research reports, several countries would like to reduce their manufacturing reliance on the China manufacturing. We start to see, especially U.S. and Japan, would like to build out the capacity for themselves. Of course, China also going to add capacity. I think according to our current strength, and also we're about to deliver new solutions, and I think we are well-positioned for these coming CapEx cycles.
Well, in terms of competition in the U.S., European market for EV orders, how is it different from the time like five years ago?
We'll continue to highlight this issue. EV, it's very much related to so-called safety issues. Most of the EV components require for very high standards of reliabilities. You could say not only for EV components, but also especially for EV battery cells.
Globally, not many makers, especially for testing equipment. Normally, those car makers or auto makers, they are, you could say, reluctant or very change their suppliers. Price is not very elastic in this market. If you look at those, for example, battery cell formation system, I would say probably not more than five. If you look at who supply the full integrated solutions, I would say definitely less than five.
After five or six years today, if you only look at only those few players, including Chroma, PNE Solution, Maccor, and just those peers. Not to talk about five years, of course, our technology definitely migrate for step up. To be more competitive, not only the price, but also the functions.
Very good. Lastly, can you comment on what is the revenue contribution in the second quarter from the EV? For the testing machines only.
If you look at the test measurement ATS, I think first half, we generate TWD 2.5 billion, which is with a single digits. I think we look for a high single-digit growth for this year, because second half, we do have several order regarding to the overseas battery pack and battery module. If the market runs faster than we expected, maybe we can have a low double digits this year. This business, our ATS and test measurement, every year, we just stable growth. We hardly see them have a significant decline in the past over five or six years. Yeah, it is our bread and butter sectors.
Understood. Thank you.
Thank you.
Thank you. The next question coming from Paul Rokes from Schroders. Go ahead, please.
Hi, Paul.
Hi, Jennifer. Hi. Just on metrology, any updates there, please?
Metrology, yes. I only say, it takes more longer time. We do have order, but just customer side. You already heard their investor conference, their schedules and progress is still a little bit struggle with the new technology. Honestly, I think it will be similar as the last year as our target regarding to metrology orders. To be honest, I think the progress seems longer than we expected.
All right. What specifically is the issue? You mentioned technology.
One of our big customer is Taiwan foundry, right?
Yeah
Run self-reliance, regarding the equipment moving, it takes longer times than we expected.
Oh, I see.
Yeah, just a schedule issue. It's not order issue.
I see. Okay. All right. Thank you.
Thank you.
Thank you. The next question is coming from Jeffery Tan from Macquarie. Go ahead, please.
Yeah, one more question. Just to clarify the AR/VR product you're talking about, is that through turnkey?
Yes.
Okay. Next question, ESS, energy storage systems, anything interesting going on there for Chroma?
Sorry?
Your question again?
Sorry.
Yeah. I know you haven't mentioned this before. I was curious, since you guys do a lot of power 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, so I don't think probably they don't really need testing.
Okay.
Yeah.
Lastly, any update on how's the nanoparticle tester in terms of year-over-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 being stacking testers for these foundry customers. The same situation as metrology. It's all because the customer schedules is too tight, so the equipment moving tends to be behind the schedule, to be honest.
Okay, great. Thank you.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, please press zero one on your telephone keypad if you would like to ask a question. We are now in question and answer session. Please press zero one on your telephone keypad if you would like to ask a question. There are currently no questions. I will hand it over to CFO, Paul Ying, for a closing remark. Mr. Ying, please proceed.
Thank you, Mark. Thanks for everyone's questions and attendance for this meeting. It seems to us that we deliver a very good result at the second quarter and the first half. Moving forward, we're still looking at the second half to give you an even better result. 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.chroma.com.tw/en/investor-relations/investor-contact under the investor relations section. You may now disconnect. Goodbye.