Welcome everyone to Chroma's 2020 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 the time if you'd 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 want to introduce CFO Paul Ying. Mr. Ying, you may begin.
Hi, my dearest friends and investors. This is Paul Ying from Chroma. I'm the CFO. Today, in Chinese tradition, we're still within the Chinese holiday season. First of all, happy New Year to everyone. Everybody, I think, for the year 2020, it's very difficult and also suffering from the epidemic.
Today, let us start it with the financial members for the fourth quarter of Chroma parent company. In fourth quarter of Chroma, the sales revenue reaches at the TWD 2.4 billion. This is 1% up quarter-over-quarter, and 6% down on a year-over-year base. However, the gross margin reached at 51%, and the operating margin approximately 22%.
The net income for the fourth quarter of 2020, approximately TWD 6,086,000,000. This is 18% growth on quarter base and up by 14% year-over-year. The major sales revenue growth is in fourth quarter.
It's contributed from the automation solutions definitely. If we go back to see the year for 2020, the parent only sales revenue reaches at the TWD 9,180,000,000. When compared to last year, this is a 13% growth. The gross margin was still maintained above 50%, which it reaches at the 53%. Compared to last year, this is a 19% growth and reaches at the TWD 4,867,000,000.
The operating margin reaches at the TWD 2.2 billion approximately, which is 25%. This is also a very high growth compared to last year. This is a 34% growth. Look at the income before tax, which is reached at the approximately TWD 2.8 billion. This is a 30% compared to the top line, 30% growth on a year-over-year basis.
After tax net income reaches at the TWD 2.3 billion, which is 25% compared to the top line, 25% growth on a year-over-year base. This brings up the earning per share for the year of 2020, approximately TWD 5.56. Again, this is a 24% growth compared to last year.
As to the consolidated base, if we look at the consolidated sales revenue, we reach approximately TWD 15,532,000,000. Compared to last year, it's a 12% growth. The composition of the sales revenue, the sales revenue coming from the testing equipment business, approximately TWD 12 billion, and the occupancy is approximately 78%. Compared to last year, this is a 14% growth. As to the operations of the MAS, they reached approximately TWD 618 million. Compared to last year, it's a drop by 39%.
Mainly it's due to the first is the COVID situation, and also the major market of the MAS is focused on the Chinese market and focused on the solar panel. These industries in China, especially in last year, I think it's pretty slow. The main reason for MAS drop, is that with them. As to the new material, they reached the TWD 2.5 billion, and compared to last year, this is a 22% growth.
For this gross margin of the consolidated sales revenue, it's approximately 49%. In here, we make the two records. One is for the sales of the testing equipment, we reached the record high. Also the gross profit percentage, we also reached the record high. As to the operating margins, we reached at the approximately TWD 2.8 billion, and compared to last year, it's a 36% growth.
As to the net income, again, this is TWD 2.3 billion, compared to last year, this is a 26% growth. The earnings per share, approximately, TWD 5.56. If you look at the numbers, along with the COVID situations, we still developed a pretty good check and records.
As to the product mix and the consolidated sales breakdown, again, if you look at the presentation material, slide number 17, you can look at the test instruments and the automation and testing system. Approximately, it's the legacy product of Chroma. It's around TWD 4.8 billion and it's a 5% growth on a year-over-year base. For the semiconductor and photonic tester solutions, and this is very strong growth, approximately TWD 3 billion, and year-over-year, this is a 31% growth.
For the IoT solutions, due to the selection base for the very competitive situations in China market, I think for the year of 2020, we made somewhere like TWD 456 million. Compared to 2019, this is a 28% drop. For the service and others, this is also a very strong growth on the 51%.
I think for one of the reason is due to the installation base for our equipment is increasing, and for the related fixtures and service and other component and parts kind of demand increase. In there, we see a bit of a growth in this area. In here, you can look at the numbers. Again, the total consolidated testing equipment business approximately reaches at the TWD 12 billion, this is a 14% growth compared to last year. Again, on the MAS, this is a 39% drop.
New material, this is a 22% growth. This brings up the consolidated sales revenue to the TWD 15,532,000,000 . Compared to last year, this is a 12% growth. If we look at the 2021, this year's, the guidance, the first paragraph, definitely we've been mentioned that before, is where we are right now for the 2020. The sales revenue, which is TWD 15.5 billion, and this is a 12% growth year-over-year.
The parent company reaches at the sales revenue, which is at the TWD 9.2 billion, and presented a growth of the 13% on a year-over-year base. Again, it's contributed from the semiconductor and photonic testing solutions. For these sectors, increasing by 31% compared to 2019. As to the 2021, this year, for our business outlook, we still continue to see the very strong demand of the semiconductor photonic testing solutions.
This is driven by a global semiconductor chip shortage, as you know, and the development of the 5G related and high-performance chip HPC applications. Those key drivers including high reliability testing solutions, say, the burn-in test or System Level Test with the thermal control, which is the different kind of temperature range kind of chamber simulations.
The second one would be the wireless RF and MCU testing solutions. The third one would be the CMOS image sensor, CIS and the VCSEL and the ToF testing solutions. Again, the fourth one is the semiconductor inspection and metrology solutions.
Those areas that we consider, it will give us the drivers for the growth of 2021. As to their power electronics or the traditional testing instrument and ATS, we still think it will continuously benefit from green energy, including EV-related components and battery cell, battery module, battery pack, and smart grid, and 5G, and server-related power testing, and will be steadily growing. This is for the 2021 business outlook, and this is my last presentation. Any questions?
Thank you. We are now beginning our question and 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.
We are now in question and answer session. Please press zero one on your telephone keypad if you would like to ask the question. The first question is coming from Jeff Ohlweiler from Macquarie. Go ahead, please.
Yeah. Hi, Paul. Thanks for your time. I guess the first question, looking in 2021, what's the expectations for the MAS accounts receivable, either write-off potential or write-back potential?
Well, I think for the credit status for the MAS, I think we're pretty much there already. We are not expecting it getting worse as of now, but it depends. Yeah.
Okay. For the nanoparticle tester, can you talk about, I guess that business overall in terms of new products, new customers, and what type of growth you're looking for that particular product or product group this year and beyond?
Hi, Jeff. This is Jennifer. I think you can refer to slide 27. We do have some update regarding to the progress of the nanoparticles. I think we already stepped from just a slurry testing to already cost out to cover H2O2. Apparently, this business is mostly target on foundry business, and of course, includes their outsourcing vendors, because they need to check or review their particles before they ship out to the users. This company already start profit from last year.
Okay, great. Thanks so much. One more question. On the AOI, is that a joint product with your acquired company, or is that a Chroma specific product?
Do you mean the semiconductor inspection and metrology solution?
Yes.
So far, it's on our own, but we do have a partner.
This is a new department that we set up last year. This is also another, you can say, product factor that we also target on the foundry customers.
Okay, thanks. There's one more quick one before I jump back in the queue.
Okay.
Did you mention the semiconductor tester growth outlook for this year? Is 20% plus still, is that a target, or is there a more specific target for that growth?
That's a preliminary. The growth rate we estimate should be based on our current order on hand.
Okay, great. Thank you very much.
Thank you.
Thank you.
Thank you. The next question is coming from Arthur Lai, Citi. Go ahead, please.
Hi. Thank you and congrats for the great results. One follow-up is on the SLT side. We learned that Advantest, one of the Japanese vendor, they actually try to break in into this new market. What's your preliminary thoughts on it? Also, they told investor that they categorize it as a service revenue. I wondered, do you have any reason to why they think the SLT is a service rather than an equipment? Thank you.
Okay. Hi, Arthur. This is Jennifer. Advantest, they actually acquired two company to step into SLT markets. I think we stepped into SLT markets, I think at least six or seven years earlier than the other two major competitor, include Advantest and Teradyne. We start out this SLT business as the first primary target is HPC markets.
As you notice, the HPC market are very, very customized and very sticky business because the HPC type of chips cannot be as standardized as mobile chips. We think the advantage of their first target, according to the economic scales, would be mobile chip, because the 5G mobile chips with I would say most of the 5G mobile chip need to add the SLT testing process.
Of course, since we already been doing the SLT business for almost 10 years, we do have some solution, and we already start to cover some of their SLT testing for mobile chip as well, not only limited to HPC markets.
Regarding to service and others, these factors, I think the one concept that the investor could bear in mind is, recently, the SLT become the protocol type of testers because the testing process is under a Teradyne shift. We used to test the chips based on the software content to stimulate the chips, but now, due to this temperature thermal control issue over the stimulation and also high power consumption. You need to add SLT testing. Apparently, SLT, the content is hardware content.
Once you change the testing method from just software to become a hardware, you start to having additional sales, which is come from the so-called consumable parts. That includes handler, sockets, contact points, and burn-in board, load board, and others.
That will also explain why our service and others has significantly increased in last year by 50%. This is not exactly like a software type of a services contract that we provide to our customers. Instead, actually, it's more like a consumable part that we sell to our customers. Actually, this also help to create a stickiness between Chroma with our pools of customers.
Okay. Thank you. One follow-up, if I may. There is one of the investment you accept that in the other industry called GENNET, G-E-N-N-E-T. Can management comment on why we invest in this company, and what's the long-term strategy? How to synergy between the investment and also your company. Thank you.
You mean, that is the company you mentioned that's related to PCR testing?
Yeah. GENNET.
Okay. SLT content is unique when you design SLT. The basic concept of SLT is to do, you can say micro size of the automation. Micro size.
When the biotech industry start booming, we consider maybe we could use our design in the micro size, those automation that we use for chips, could also use it for biotech. It doesn't mean we do chemical stuff, but we just provide.
Yeah, mechatronics, the automation that apply for all bio industries. That's why, because of synergy, they rely on us. Sort of mutual, because when you have a tester, you also need to have the testers you know the chemical stuff. They want to increase the tightness and meaning relationship between the both parties. We actually invest around 15%.
I think this is the equipment. They want us to further improve their design in the equipment.
Okay. Thank you.
Thank you. The next question is coming from Jerry Su from Credit Suisse. Go ahead, please.
Thanks for taking my question. I have two questions. One is that, I think as Paul, you mentioned that we're seeing the parent company, the service and others, saw pretty significant growth. That is probably mainly related to some of the fixture or some of the service you provide associated with the semiconductor-related business.
Do you have a breakdown of what portion of that service and others is more related to the semiconductor, and how should we think about the growth rate into the next couple of years?
This is the factor that our chairman, I think one or two years ago, he set up a separate department just to focus to improve or further enhance our service provide. I think especially from the SLT business start to picking up, this kind of the business also increase correspondingly. You could say service and other, I would say maybe close to 2/3 is mostly related to semiconductor service and selling those parts.
Okay.
Their parts, the test part.
Okay. That's very helpful. Second question is related to that the disposal gain you're going to book in Q1 on the Taoyuan headquarter. What are your plans about the use of the proceeds you receive?
Well, as you can see that we're going to pay out like 81% as the dividend. The rest of that, I think, for the increasing of the debt, we're going to pay off the debt as well.
Hi, Jerry. In the past few years, we always continue to acquire either small or medium size of the M&A projects just to furnish our products or technology. We do have several projects on hand, and we are evaluating at the moment. Either we probably spend on M&A, continue to furnish our products, especially for semiconductor industry, or otherwise, we mostly just pay out.
Okay. Because I think you have mentioned that the payout ratio this year is about 81%, which is a little bit higher than the past few years. I think this disposal gain is one of the reasons. How should we think about the payout in the next two years? Is it coming back to the more normal level, like 70%? You're considering to do some of these, either share buyback or special dividend as well?
I think we do appreciate that investors' considerations on our low payout in the last two years, because we need to wrap up our new headquarters. Last two years, our payout ratio is maybe only close to 70%. I think chairman this time just wants to increase this payout ratio to maintain our payout ratio, maybe around 75% plus or minus around, to even out. Just to ensure that our payout policy is not changed.
Okay, got it.
Yeah.
Okay, 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 would like to ask the question. The next question is coming from Gun Woo, JK Capital. Go ahead, please.
Hello.
Yes.
Thank you for the good results. I have some general questions. I have two general questions. First one is somehow related to the question before us. First question about the optical inspection machine. Well, if you compare your revenue contribution from traditional signal testing versus optical inspection machine, what is your revenue contribution from the optical machine in the recent year? What is your plan in the next five years? This is the first question. Second question-
Sorry, hold on. I didn't pick up, what kind of machine you want us to compare?
Okay. It's comparing to your traditional signal testing.
Signal testing.
What is the revenue contribution with the optical inspection machine within your total testing sales? That is the first question.
Can you ask No.
Sure. Yeah. The second one is about the System Level Test. What is the total addressable market of this System Level Test currently, and what will it be in the next five years? Thank you.
I'm not quite clear about the first question, the equipment, so I'm sorry. I answer the second one. SLT, as I mentioned before, we are the first runner for doing this SLT, I think, back to 10 years ago. Now we do see the SLT become portable type of tester. You can say, if you talk about HPC market, if you talk about CMOS, AI, or GPU, or some of the RF, we are pretty much dominated.
I also mentioned that because the HPC is very customized system, normally it's hard to see our customers shifting to different vendors. If you talk about the market share, we pretty much cover. For mobile, just starting from 5G. Before 5G, I think the exposure to using SLT is very limited. I think that before, I think the biggest provider is Teradyne, and that's Teradyne.
Yes Teradyne, its Teradyne b ecause migrating to 5G is mostly related to high power consumption, the testing method is very much different compared to 4G. I think if you talk about the 5G mobile type of SLT, I think either Chroma or Advantest have covered several of the required features. What was the first question, the equipment?
Sorry. For the first question, what is your revenue contribution from the optical inspection machine now, and what will it be in the five years later?
Okay. This is the factors we set up from last year. The reason why we set up that is because we do SLT for many years. We already pretty much cover most of the fabless companies. We always focus on the foundry as our main target customers.
Besides the flow-through testers that we've been qualified by foundry customers, and they already start to adopt these testers, another drivers or another products we are getting there is optical inspection. This is the product that we prepare to having more exposure for the foundry customers. We probably so far will not disclose the sales at the moment.
Very good. Just a quick follow-up.
Yes.
on the SLT side.
Yep.
I can understand that there are more System Level Testing on the HPC side.
Yeah.
Because there are more different variety, various chips are combined together on the HPC side. Why 5G mobile phone should use a testing machine more in the future?
Okay, I give you one example.
Sure.
Okay. 5G signal is very short compared to 4G. When you do testing, okay, this is one of the product we deliver to the mobile chip makers. When you do testing, you need to turn on the signal. Because the signal for 5G is very short, they start to interfere each other. You barely can do any further testing.
You need to have so-called, we call it, okay, a tester to isolate the signal, but without turning off the signal from the mobile chips. This is one of the features. Not to talk about if you talk about some several chips, if you want to ensure the reliability testing, they need to add a burn-in testing. If the chip's very sensitive to temperature, you probably need to add a thermal controls as well.
The basic concept for mobile, especially 5G, is to solving a signal problem.
Very good. Thank you very much.
Thank you.
Thank you.
Thank you. Please press zero one on your keypad if you would like to ask a question. As a reminder please press zero one on your keypad if you would like to ask a question. Currently there are no questions. Now we hand it over to CFO Paul Ying for the closing remarks. Mr. Ying, please proceed.
Thank you, Mark. Hi, everyone. I think, for 2020, we're experiencing the epidemic situation, but we still overcome the difficulties and then perform pretty well. For 2021, we still see some difficulties because the COVID situation still going on. I think, thanks for all. We appreciate all the consideration and attention from the investors and friends. We'll still move on and to give our very good records. Thank you, and 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/investor/index under the investor relations section. You may now disconnect. Bye.