Welcome everyone to Chroma's 2020 third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After presentation, there will be a question and answer session. Please follow instruction given at the 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.
Hi. Good afternoon, everyone. Welcome to Chroma third quarter conference call. This is Jennifer speaking. Because the testing improvements and business models, the first quarter and third quarter results will be focused on only financial status. The operation status will be stay the same as the last we guide in the second quarter. This call will be hosted in English and begin with 5- 10 minutes of financial highlights hosted by our CFO, Paul Ying, then followed by some key issues addressed on the product mix. We will move on to Q&A afterwards. You may ask the questions either in English or Chinese, and we will comment accordingly. Now I will pass on to our CFO, Paul Ying.
Hi, everyone. This is Paul from Chroma. Well, for the first three quarters, Chroma consolidated income statement. The sales revenue for the first three quarters reached TWD 11,355,000,000. This is a 20% growth on a year-over-year base. For the gross margin, the number we made is around TWD 5,613,000,000. This is 49% on gross margin, 22% growth on a year-over-year base. For the operating margin, we reached a little bit over TWD 2 billion, which is TWD 2,028,000,000. This is a 51% growth on a year-over-year base. As to the parent company, for the third quarter alone, if you look at the sales revenue, approximately TWD 2,394,000,000, this is a 4% growth on a Q-over-Q base, 24% growth on a year-over-year base. For the gross margin for the third quarter of the parent company, which at the 55%.
For the operating margin, for the current quarter is 27%, and this is over decades of a record which was within over 25% of the gross margin ratio. For the net income, we reach at the TWD 583 million, and this is a flat to a Q-over-Q base, but 21% growth on a year-over-year base. As to the third quarter numbers, the sales revenue in third quarter is mainly contributed from semiconductor and photonics sectors and the testing measurement and ATEs. For these sectors, we've been doing pretty good. For the year 2020, our guidance is still maintained pretty similar to what we have on the last quarter. Please reference to the 2020 guidance, and this is pretty much my brief to the financial statements for the third quarter, and now open to any questions.
Thank you. We're now beginning our question and answer section. 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 is coming from Jeff Ohlweiler , Macquarie. Go ahead, please.
Yeah. Hi, Paul and Jennifer. Thanks for the questions and answer. First question, it looks like gross profit margin in third quarter, for both parent and consolidated, was up Q- on- Q, which was positive, but the OPM looked like it was down. Can you talk about why it looked like the OpEx was a bit high in the third quarter versus the prior quarter? Thank you.
Well, the main reason for that is for the provision for the bad debts. I think, well for the third quarter, we increased the provision for the bad debts. Mainly it's for the MAS.
What was roughly the number of increase for the bad debt?
Hi, Jeff. Are you focused on the consolidated financial statements, right?
Yes.
According to the emails we sent out, that includes some consolidated financial statements. In the third quarter, we do the valuation for the AR accounts for MAS. There is a provision for bad debt from MAS, if you look at it as a consolidated basis.
Yes.
Okay. Any thoughts about that coming back at some point, or is that a not looking good?
I think this issue we have been addressed several quarters ago, that the MAS, they have some warranty fees that's 10%, which is considered as a warranty fee. I don't think this year they're able to get more extra order to cover this kind of warranty cost and claim those warranty costs back. Our auditors have to evaluate those AR accounts. Without these parts, I think the operating expense is not as high as I think it's pretty similar as the last quarters, or not very much changes.
Okay. The second question, last question. Can you talk about fourth quarter outlook by parent product and also just overall consolidated, how the momentum is into fourth quarter?
Fourth quarter, currently based on our order, will be similar as the third quarter, maybe around slightly up or down, not very much changes. Yep. We do have several projects on hand planning to deliver, that's including EV battery cell. Also we do have another customer that's planning to relocate to Southeast Asia. I think this project being postponed due to pandemic, we're expecting the customer to able to deliver before end of this year. We don't have very much change according to the order guidance. Overall, I think we're still able to reach, I think no matter top line or bottom line, around double-digit growth. I think bottom line, top line should be, yeah, 20% growth.
I think we expect the year 2020 to go back to the traditional seasonalities, as well second quarter to third quarter probably to the peak, we're expecting fourth quarter probably somewhere like at third quarter or a little bit down like between first and second quarter. I think that's what we are expecting.
Okay. Great. Thank you very much.
Yep.
Thank you.
The next question is coming from Jerry Su, Credit Suisse. Go ahead, please.
Hi. Thank you for taking my question. I just want to follow up on your comments about the sample order that is scheduled in the fourth quarter. I remember previously you mentioned that some of the turnkey projects this year, I suppose they should be booking it to 3Q. Now it sounds like this will be in fourth quarter, right?
Is there any risk for further delay?
Okay. Well, the reason for delay postponed from third quarter to fourth quarter is due to customers that their factories construction schedule is being delayed. This order is already being secured by later of quarters. We still able to claim the order. Anyway, we hope everything could be delivered before end of this year. I think according to our guidance, that's already including those several projects on hand. I think it's already end of this year. Our guidance is not very much changed. I think we're still able to reach like a double-digit growth for top and bottom line for this year. I think we already start to move on to next year. I think several of our customers, especially for semiconductor sectors, already start to replace repeat order to us.
Due to lead time issue, we don't think we're able to deliver or helping out the fourth quarter to be a strong quarter like last year.
Okay. Thank you. Speaking of 2021, can you provide us some of initial outlook or what you think about each segment for next year?
For third quarter, I think our biggest deliver is SLT system level testers, and that's mostly covered from AI, many come from AIoT related. We just almost finished to deliver those big projects in the third quarter for the particular customers, and the customers already placed another similar size or even bigger sizes for next year. So you can see actually AIoT so far, especially for logic IC related, we can see the pretty much strong CapEx needed for coming next years. We do have several projects regarding to VCSEL coming on next year. Our customers are planning to launch new products by adopting new VCSELs and also solving today's some of the maybe facial recognition new spec for next year. Regarding to optical fibers related, it's also a photonic sectors.
Maybe this year, the biggest strong growth is coming from China. You may see these kind of trends in slowing down the second half. You see this year, mostly it's not from the U.S. Currently, we do see some several customers or vendors, similar peers, are planning to phase out this market because they think they couldn't compete the Asian vendor like us. We do see several order has been transferred to Chroma. We expecting next year, maybe the U.S. will start to building out those optical fiber related, when these 5G installations speed up.
Okay. Thank you. Lastly, maybe this question for Paul, or it's related to the expected credit impairment. I think this year you have already done that for two quarters. How much is left? Should we expect any impairment into the fourth quarter?
How much? Sorry.
Yeah, how much of the credit impairment related to the AR? I'm just wondering how much is still left on the AR that potentially could be written down?
I think the provision has been over 50% and more. I think the last of that will be, well, not the majority of the impairments left. Well, you can calculate it. Yeah.
Okay. Got it. Thank you.
Thank you.
As a reminder, press zero one on your keypad if you would like to ask the question. The next question is coming from Jeff Ohlweiler, Macquarie. Go ahead, please.
Yeah. Paul and Jennifer, can you remind us for how the headquarter sales going in terms of timing? What's the cash flow? What's the gain? When do you expect to see that gain, and what do you expect to do with that cash? Thank you.
I think, Jeff, for the construction of the new headquarters, I think this is your question, right?
Yeah. Then the sale of the old headquarters in terms of the cash coming in and also the profit and when that hits the top P&L?
I think for the CapEx spending for the construction of the new headquarters, right now it's reaching the final stage, probably we're going to see that new headquarters start to use that at December. For the disposition of the current headquarters, I expect that will be the cash inflow probably around the first quarter of 2021.
Can you remind us what's the gain on the sale of the old headquarters and what do you plan to do with that cash?
We expect to have the cash gain around billion, slightly over TWD 1 billion. Of course, we do consider as payout. Yeah.
Okay. Thank you.
Thank you.
Thank you. The next question is coming from Mark Lee, Citi. Go ahead, please.
Hi. Thanks for taking their questions. I would like to have some update about the SLT business.
Yes
I remember last time you mentioned this year you have a stand like reaching TWD 1 billion of the sales, mainly by U.S. chip makers and Taiwan players. Do you do the target of sales? Will you guys still have that target or any revision of it? Because one of the customer, the edge customer, has been in the Entity List, and we'd like to have some update about that? Thank you.
Okay. Let me summarize the overall operations lately. Okay. Our testing instrument business, I think somehow year-to-date is pretty much on schedule. We're pretty much in line with our explanation of what we guide before. As you may notice, our first three quarters, as we guide in the beginning of the year, is we expecting semiconductor and photonic sectors will be doing better than last year. First three quarter, we already generate over TWD 2.3 billion, and which is already over the last year total sales of semiconductor and photonic sectors. It doesn't mean we don't have any photonic sectors or semiconductor sales in the fourth quarter. We're continue to receive the order from semiconductor and photonics-related, especially for the SLT system level testers, as I just mentioned in the previous questions.
Especially for logic and especially for AIoT, customers choose just almost complete the current orders, and customers already finalize another new order, and we expecting to deliver in the first half next year. Based on this kind of trend, you may see when 5G installation continues to speed up, it actually brings up the related products continue to launch in the market, especially for image process related, which you consider as AI or AR/VR features. Okay. Photonic sectors, we're expecting VCSEL, there will be new solution. As you may see, the iPhone 12 is already have been gradually launched by several series type. Our customer is planning to launch another new product, which may elevate their current devices, and we're expecting this project could be finalized in next year.
Regarding to optical fibers related, maybe this year, the biggest growth probably come from China, but maybe it looks like a second half, this slows down, but it doesn't mean China will phase out the 5G market. However, I think this kind of tension or whether they want to speed up still needs to be like the U.S. elections, and then how this policy will go. We do see the U.S. customers like Cisco or Ciena are coming up speed up this kind of 5G development. We're looking for some hope, maybe, or expectations from U.S. markets next year.
Thank you. Very clear. Once you have some update about, do you guys have the target of SLT maybe in the first half of next year or the whole year for next year?
I think this year we already reached over [TWD 1 billion, so TWD 5 billion]. Currently, we don't give a very clear breakdown between semiconductor and photonics sector. As you know, we have another quarter to go, but it doesn't mean we don't have any delivery to be delivered in the fourth quarter. We're still doing our budgeting at the moment, so maybe it's too early for us to really give you a clear comment regarding what we see for next year semiconductor and photonics sectors. You see, we just finished the third quarter, and customers already gave us another big order. You may see the semiconductor is pretty strong even despite of the current market status.
Mm-hmm. Got it. My second question is, in the last conference call, you have mentioned about the nanoparticle monitoring system.
Yeah.
Do we have any target of revenue contribution about this year and next year? Because I think it is related to the advanced node, and as we see more and more devices and chips are using the advanced nodes for that?
This year, like we guide at the beginning of the year, I think nanoparticle already reached over TWD 100 million sales this year based on the order they received. Then I think this order already been booked. We book under, there's a sub-sectors called sales from overseas operations and related subsidiaries. We book the nanoparticle, this company sales under this sectors. We are planning to launch another solution to this leading foundry customer, which is related to H2O2. These testers already become a protocol type for these foundry customers. Because this is so new, maybe both Chroma and the leading foundry customer couldn't really figure out how many testers they actually need for their current capacity. We continue to develop the new solution to secure our market position.
Maybe as I say, regarding anything regarding to our forecast next year, it is too early for us to give a comment or clear conclusion at this stage. Maybe we will make a comment in the beginning of next year.
Okay. Thank you.
Thank you.
Thank you. Our next question is coming from Jeff Ohlweiler, Macquarie. Go ahead, please.
Yeah. Jennifer, just to clarify, so the nanoparticle, does that mean in your presentation materials, it's not included in the semiconductor testers?
No.
No.
Because we're only holding 75%, 25% is holding by original technology founder.
Okay. It falls under parent or that goes through the actual?
It's already book under Chroma consolidated testing equipment.
Okay.
Already book under. As you may notice, we say that sales from overseas operation and related subsidiaries, that's where nanoparticle booked.
Okay. What was the biggest quarter for that? Was that over a few quarters, or was that only in one or two quarters?
We are not so sure because this is only 15 people company. The lead time is like a four months. It's very hard for me to give a clear say on which quarter will be.
Okay.
I think the whole year is definitely over TWD 100 million, for sure. Yeah.
Okay. Two more quick questions. 2021 growth, SLT or Photonics, what do you expect to grow faster at this point?
Since we already got the new order for SLT, maybe at current stage, I would say maybe SLT have more higher visibility.
We are in the middle of progress about U.S. markets optical fiber penetration. It's hard to say. Yeah.
Okay. Last question, can you talk a little bit about how the EV downstream battery pack, how the demand for that has been 2020 year-to-date, how it was in third quarter, what do you look at in fourth quarter, and what's your outlook for next year? Just downstream EV related.
Hi, Jeff. I want to highlight two things regarding our product mix. You may notice on the product mix slide on slide 13. Our first three quarters, test solutions and ATE generating about TWD 3.7 billion sales, represents about 4% growth compared to last year's first three quarters. This actually indicates two things. The first thing is actually power business or power industry remains very strong. Another issue is actually this kind of strong contribution comes mostly from China, and why is that? I want to highlight business sector because actually across the board, no matter consumer electronic goods, 5G, and EV, are all strong demand. Why is that? It's because of pandemic. Because pandemic, and also the tension between U.S. and China, everything stopped in China.
People still want to make the high-tech industry this year is still not slowing down and still on the same path. Relocation kind of a synergy being still to Asia, Southeast Asia, and India locked down. This kind of project has been postponed or slowed down. You see actually China, especially for power industry, is very strong. Because also Chinese people would like to reduce the proportions by adopting U.S. equipment. With countries gaining market share and also because people couldn't relocate to Southeast Asia due to lockdown. Overall, our industry from China is very strong, and also including the factors of EV adoption.
Thank you. Does that mean that next year could be more difficult, or does that mean just next year should also be decent but maybe for different reasons?
It's hard to say, especially, wait until when the U.S. complete the election issue. So far, beginning of the year, we expecting this kind of relocation sentiment will go on, especially the tension between U.S. and China. Because of lockdown and also pandemic take so long, it's almost a year, people still want to make the product, we see the demand from China become stronger.
Okay, great. Thank you.
Thank you.
Thank you.
Thank you. 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 from Arthur Lai from Citi. Go ahead, please.
Hi, CFO and Jennifer. Thanks for taking my question. I want to ask about the TOF question. We understand one of the major trends, they are just released their new product. Look at the feedback. Actually, the people give a good feedback on the photo taking using the TOF. My question is that, do you see this product can play the more powerful function in the future, and do you think the equipment demand will be also accelerating in the future? Thank you.
I think after iPhone Max and the Mini launch in the market, I think just like our customers state, I think regarding to the VCSEL or TOF developments, they're already ahead of their competitors more than two years. Android camp decide to redesign, and because the VCSEL is a quite expensive element, you may also can be noticed from the U.S. customers try to remove several accessory because need to support some of the expensive items like VCSEL. For Android camp, I think Huawei couldn't seem to further progress, and then Samsung, and they consider to redesign because they find maybe the specs need to be even further improved.
If you look at from the VCSEL being launched in the market since year 2017 and 2018, I think you could say our customers, these U.S. customers, are already holding more than, I would say, including two new designs coming out next year, I would say more than four or five different patterns were designed. Next year, they believe the new product launch will build up more confidence regarding to their phone sales because next year maybe will be some kind of accessory to be elaborated with their current devices. I think next year, I think regarding to this kind of smartphone, these kind of devices will really move on to so-called AI feature or AI devices. We continue acting as a kind of R&D for supporting our customers design these kind of features.
So far, it's very hard to tell whether Maybe going forward, the similar new design will be mostly elaborated by [Qorvo's] designs. We learned here they will gradually remove their structured light. Yeah.
Okay. Thank you, and congrats on the good result.
Oh, thank you.
Thank you.
Thank you. The next question is coming from Mark Lee, Citi. Go ahead, please.
Hi, Jen. Just want an update about questions previous investors have asked at the power business.
Yes.
If we break it down in this year due to the EV and consumer electronics and other 5G power components, would you like to give us some of the breakdown of these parts?
We think the breakdown is not changed, because I just mentioned in the previous questions that this year the power business could have more than 10% growth versus last year. It's possible. Every factor pretty much grow at the same pace, including consumer electronic goods and then 5G and then EV. We just highlight, I think the key point is we see those demands actually come from China. Why comes from China? It's because most people couldn't relocate to Southeast Asia, so they just continue spending in China. They need increasing capacity.
Got it. Do we see any slowdown or recovery of the 5G infrastructure, the demand in China?
I don't understand what you mean by recovery, because makers, yes, maybe the CapEx spending, they try to speed up in the first half. CapEx spending in the first half looks very strong. Second half, yeah, versus first half, I think it is lower than first half. Overall, we don't see the so-called slowdown or give up 5G in China.
Got it. Thank you.
Thank you.
Ladies and gentlemen please press zero one for questions Thank you. They are probably no questions I will hand it over to CFO Paul Ying for closing remarks,
Thank you. Hi, everyone. It seems to us that for the first three quarters, although for the pandemic situations, I think we stay in Taiwan is pretty safe, and well, we enjoy our life and also enjoy the growth from the corporation. We are lucky. We are expecting fourth quarters maintain this kind of a momentum, and waiting for 2021's coming and also our completion of our construction of the new headquarters. Thank you. Until next time. 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. Goodbye.