Welcome everyone to Chroma's 2019 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 the instructions given at that time if you would like to ask the question. For your 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. Now I would like to introduce CFO, Paul Ying. Mr. Ying, please begin.
Thank you, Jason. Hello, my dearest investors. This is Paul Ying from Chroma. Welcome to the fourth quarter's conference call for the financial release. Starting from the fourth quarter highlights, if you look at our presentation material at page 12, you can see that there's a bar chart on the right-hand side, this is a quarterly highlight for the sales revenue and also the gross margin, plus the operating margin. You can see that the fourth quarter, the last quarter, which is the fourth quarter of 2019, jumped the highest, the numbers, which is the sales revenue, which is at TWD 2.5 billion. This is a quarter- over-quarter 31% growth, a 52% growth on a year-over-year base. The gross margin, although slightly down to 47%, mainly due to the product mix sale at the fourth quarter.
You can see that the operating margin, we still keep it on the high end, which is 21%. Net income reaches to the TWD 600 million. This is 26% up on a quarter-over-quarter base, and the same percentage on a year-over-year base. For the fourth quarter of 2019, the major growth is contributed from the turnkey solutions, which represent almost six times growth on a quarter-over-quarter base and double the size of the 2018 fourth quarter. This is pretty good numbers that we made. If you look at the consolidated sales revenue, and we reach around approximately a little bit under the TWD 14 billion in year of 2019, which is TWD 13.9 billion.
This represents a decline of 18% on a year-over-year base, mainly due to the drop of the MAS, one of our major subsidiaries, which is the manufacturer and designer for the automation process and also the product. That was coming from the solar industry part of the sales revenue down at the 2019. For the testing instrument business, we still represent a growth of 18%, which is on the high end of the single digits. The consolidated sales of the testing instrument business hit a record high to TWD 11 billion, and this is a pretty good record, which is also the record high. For the current company sales revenue in 2019 also hit the record high, which is at the TWD 8.1 billion, and the last number, which is only approximately over the TWD 8 million.
This represents a growth of 7% as well, mainly contributed from the semiconductor and photonics testing solutions, which increased on a 22% compared to the year of 2018. Up to the 2020, this year, our outlook for this year, in couple of angles. The first one is we assume the rapid development of the AIoT, which is represent the AI plus the IoT, increase the demand of high performance GPU, CPU, sensors, RF connections, et cetera. This will be continuously drive the sales growth in semiconductor and photonics testing solutions, particularly from several areas. The first one is the high reliability testing solutions, such as the burn-in test or FOPLP testing. For the VCSEL and the time-of-flight testing for the 3D sensing. The third one is for the optical fiber communication testing, mainly used in the telecommunication applications.
The second one is for the test instrument and ATEs for power testing solutions. We assume it still will be focusing on the green energy. This will be including EV-related components, battery module, and pack, and smart grid, and the 5G generation-related power testing. The third one is for those EV battery cell, especially for the formation system, would be the key contribution for turnkey solutions in 2020. The last one is the inline nano particle monitoring system. This is a breakthrough technology developed by our subsidiary, Innovative Nanotech, which could precisely detect the particles down to as small as 3 nm, and have been adopted by foundry customers already. Those are the outlook for the 2020. This is my presentation, and right now open for any questions from anyone.
Thank you, Mr. Ying. Ladies and gentlemen, we will now begin 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 the 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. Thank you. The first question is coming from William Chin of JP Morgan Asset Management. Go ahead, please.
Hello, Paul. Thanks for taking my question. Can you hear me?
Yes.
Yes. Thank you.
Hi, Paul and Jennifer. Just one quick question regarding to your cash flow, particularly to your working capital. In 2018, based on your financial statement, the working cash consumption cycle was about 82 days. That actually rose to about 130 days in 2019. I noticed that the accounts receivables actually increased quite a bit. Can you share some of the reason why the cash conversion cycle has been increased? What's your view on 2020? Second, follow-up question on this is the cash flow. I noticed that you also had some of the increased debt. Can you talk about that? What's our balance sheet outlook for 2020, and what's the dividend payout for 2020?
You mean the AR days increase based on the consolidated basis, right?
Correct. The consolidated basis. Cash flow.
Basically, I think for the consolidation basis, that will be consolidated for all the business for Chroma. That will be the parent company plus the subsidiary like MAS and the material company. In there, you can see that it's a little bit long. Due to the increasing for the top line at the 2018. 2018, we still left over some of the accounts receivable for those warranty and guarantees. That will be a leftover for the accounts receivable. If you look at the turnover days, to us, I think it's still under the controllable kind of a situation, especially from the parent company. If you look at the parent company accounts receivable turnover days, I think it's still improving, and I think that's also the attitude from the management, trying to keep it as low as possible and moving over.
As to the increasing debt, I think 2019 is the particular year that we have a lot of cash outflow. One of that is due to the construction for our next headquarters on the MRT A7 station project. In there, 2019 is under the kind of the construction peak in the payment as well. For another cash outflow is due to the equity investment on the Camtek and LED company. That cost us somewhere like TWD 2.4 billion. That's where we are. We are not like two, three years ago, we are on the net debt, which is the net cash.
We kind of are using a long-term debt to kind of adjust this kind of a situation and trying to keep that as current as possible and trying to pay out the cash dividend. I think cash dividend for this year, we're still maintaining the 68% payout, which is a TWD 3. This was discussed this morning from the board, this is a suggestion from the board to the general shareholders meeting.
Hi, William. I think our debt is gradually paying back. As you may notice from our third quarter balance and then move on to fourth quarter balance, the net debt to equity is gradually decrease. I think the situation for the cash flow and debt position will be further reduced. I think this year, second half, after we move to a new headquarters, and then current building will be sold.
Thank you so much. Can I have one follow-up question?
Sure.
This is regarding the OpEx. I think that 2017 and 2018 was probably not a comparable base because the main contribution from MAS. If I look at 2016, we didn't have the MAS contribution. You have the gross margin pretty similar to in 2019, OpEx level in 2019 is actually much higher than 2016. Do you have any expectation regarding to the OpEx going forward? I think gross margins should not be an issue because you have interesting product mix. Just on OpEx side, what should we forecast or what's the guidance on OpEx in 2021?
I think if you compare to year 2016, I think the OpEx increased due to two major reasons. First one, headcount increase, of course, especially we enjoy two year highs from the 2017 and 2018. We further penetrate into a photonic sectors, then we recruit several R&D. The second thing is, every year since we are the public company, every year we will increase the salary basis around 2%- 3%, according to CPI. This normally will happen every year to increase the salary. These two years, since the trade war issue, we already pretty much freeze our headcount numbers.
should we expect a more stable OpEx, like absolutely flat OpEx numbers?
I think this year you probably still need to add a very low single- digit due to salary increase according to CPI.
Okay.
You use the last year as a base, and then multiple, maybe a low single digit, maybe around 2% or 3% according to the CPI influence. Yeah.
Okay. That's very clear. Thank you.
Thank you.
As a reminder, please press zero one on your keypad if you would like to ask a question. Thank you. The next question is coming from Jeff O'Connor of Macquarie. Go ahead, please.
Yeah. Hi, Paul and Jennifer. Thanks for answering my question. First question, in the third quarter earnings conference, I think you sounded a little more cautious on EV momentum in the ATS business. It looks like fourth quarter, the ATS business was very strong. My question is, was that really EV driven? If that, what's changed? Else, what was really driving the strong ATS number in fourth quarter sequentially?
Okay. As you may note that the first three quarter for ATS is still behind the schedules and the budget, and still present the decrease. Overall, the whole year is made up to the growth above 4%. This is due to our larger pulling in the fourth quarter. Mainly comes from two major products. The first one, battery pack and battery module related. Second thing is panel related.
Okay, great. Thanks. Another ATS related question. Roughly what percent of sales in the ATS for your business goes to China?
Oh, this is very large question. Very hard to estimate, especially after one year of relocation. I would say, it's hard to say. So far, because they gradually back on work, maybe half, 50%. Yeah. I don't know. We still continue shifting to China, so I don't know.
Has that been disrupted at all so far this quarter or no?
No, not really. I don't know.
Well, Jeff, I think at least for the first quarter, the first two months for the first quarter, I think it looks okay. At least from our point of view for the first half of 2020, I think we currently feel comfortable. This is where we are. For the COVID, for the virus pandemic kind of issue, right now, it seems to us that we don't have a broken chain for the supply chain kind of issue. Also for our customer base, as long as they are on a certain size, I think they still demanding us for those backlogs and trying to prepare for the shipment as long as they have started their operation. It seems to us that only has limited kind of influence and probably part of that is delayed, but nothing.
Okay. We understood recently, several industries has been impacted by viruses, but currently our customers have no plan to change their new product development, particularly in the second half. If they want to have their new product launches, they definitely need to build out the capacity or rolling their plans on schedule. First thing I can highlight is semiconductor sectors mostly are not to China.
No matter SLT, VCSELs, these parts, I think maybe partial of the EV parts is to China, but 5G is the key development that China wants to adopt. So far we didn't see anyone really canceling orders. For power testing, I think maybe the first half of February, we have some concerns due to customs issue, but since then China is very aggressive to make everything back on track. Once we're able to deliver in the end of the month, I think for ourselves, contribution will not be a big issue, and we haven't seen really big impact for first quarter's forecast.
Okay, thanks a lot. One more question before I get in the queue again.
Sure.
Somewhere related on the turnkey business. You said this year should be EV-focused, formation-focused.
Yes.
What is the rough kind of China versus non-China breakdown there?
Well, first quarter this year, we do have one project which is being postponed or rescheduled from fourth quarter last year. We already start deliver, as you may notice from our general results, and come to delivering in February and March. We also have another order that's going to deliver between second and third quarter, and this one is non-China, which is to like a Thailand area.
Okay, great. Thank you.
Thank you.
You're welcome.
We're now in question and answer session. Please press 01 on your telephone keypad if you would like to ask a question. Thank you. The next question is coming from Mel Rose of Marshall Wace. Go ahead, please.
Hi, Paul and Jennifer. Thanks for taking our questions.
Yes.
I have one question regarding your new product, nanoparticles.
Yes.
Can you help me have some idea regarding how big could this be, maybe addressable market, or how should we think about the revenue contribution from this product? Is it, for example, like VCSEL? Is VCSEL a good benchmark for us to think about the revenue contribution for the first year? Also regarding the new customer acquisitions for this product, what's the plan for this? Because right now we have one foundry customer. What's the outlook for the customer acquisition? Thank you.
Okay. This project's already been qualified by our foundry customers in fourth quarter. Generally time is about three to four months. According to our Chinese calls, I think our chairman did highlight that this perspective, the pricing is around TWD 19 million, closer to TWD 20 million. Yeah. If this is not the big milestone, only sell a couple sets, I think our chairman would definitely not want to highlight. I think we do have two targets. The first one, I think currently we only cover two solutions. We haven't really covered assays relating to liquids. Of course, we would like to increase our development capability to cross to other liquid type, especially the assay part of the equipment, I think particle implementation.
The other one is that we would like to set up this first customer for having a solid position before we move on to second or foundry customers. First, we would like to expand to product mix, and second one is volume from these particular customers. This year, we ever mention this year definitely is a semiconductor upgrade cycles, because customers need to upgrade those testers or equipment to meet the first 5G markets, and the second is the technology development. Now we have greatest order book for our SLT type, and then we also migrate to the new customers, which is the foundry customers.
Got it.
Yeah.
Thank you.
Thank you.
You're welcome.
The next question is coming from Gary Xu of Credit Suisse. Go ahead, please.
Hi, Paul and Jennifer. Two questions from me. First is that I think in the Chinese call you mentioned the fourth quarter gross margin were impacted by the higher mix from turnkey and also some intercompany transaction between Chroma parent company and LMS. I'm just wondering, do you foresee any of these kind of products or transaction to happen in 2020 based on your current outlook?
You mean all the turnkey?
No, just for that particular display-related.
You mean the lower margin?
Yeah. I mean lower margin display turnkey product.
Turnkey product always depending on the product mix. It will be hard to answer this kind of a question, but I think the overall target for the parent company is still maintaining over 50% gross margin as the target.
It's turnkey solution, really case project by project. It's not all the turnkey project is low gross margin. Like the first quarter, we probably deliver this battery cell order. Maybe we blend everything together. So far it's not that low, so it's really case by case. I couldn't deny that the turnkey solution is a blended gross margin. Sometimes it's not as high as if you sell a single set of testers.
Okay, thank you. The second question is on the effective tax rate in the fourth quarter. I think on both consolidated and parent level, the tax has increased quite a bit. Can you give us some color on that?
You mean the parent, the tax rate?
I think for both parent and consolidated, both tax were higher than third quarter.
Well, it's nothing particularly that needs to be focused on, which is decided by the tax return being decided by tax bureau for the previous year. Its up and down will be affecting our current tax rates.
Going forward, how should we think about the tax rate?
Well, we still maintain the expectation on somewhere like 14% or 15% as the average. I think the only incentive that we can get from the government is for the R&D investments. That's upon the tax bureau's investigation and also the approval. That's the reason why every year, our tax return will be reviewed and checked by the tax bureau. After a few years, then they decided which is the right tax that we should pay. That's the absorption for the up and down.
Okay, got it. Thank you.
You're welcome.
Now please press zero one if you would like to ask the question. Thank you. The next one is coming from Jeff O'Connor of Macquarie. Go ahead, please.
Yeah, a few more questions for me. The first one, any thoughts on any projects along with the Camtek acquisition this year or next year that you can talk about yet?
Camtek?
Yes.
Other acquisition projects?
Well, no, just saying any projects that you're doing in terms of we'll see any Camtek related revenues hitting your consolidated this year or next year yet?
No. Camtek, we're not consolidated. I think they just book us the equity profit under our non-operating cost.
Any projects that you're doing for them, though, that will hit your actual revenues? Any projects you're doing for them or with them outside of the equity income?
Okay. We are in the middle of progress doing the technology migration, and I exchange those optical inspections with technology. So far it's in progress, so I don't think what is the key, but based on Camtek's projection this year still look quite positive. I think they are the only one being out-performed compared to their peers.
Mm-hmm. Okay.
Yeah.
The real estate sales this year, roughly what quarter do you think you'll see the gain from that sale?
Well, it won't be that fast, like this quarter or next quarter, simply because it will be a long process for the migration of technology. Well, okay.
You're talking about the new construction headquarter and also the existing headquarter for the future?
Yes, correct. Well, we plan to sell it as early as the 2020 last quarter or push it to probably 2021. Well, according to the process of the completion of the construction. For the amount, well, we didn't have the exact number yet, according to the regulations for the SEC, as long as we have the contract, then we have to disclose to the public.
Okay. Sorry, one last question. For your semiconductor related and photonics growth this year, can you give roughly within that kind of breakdown, what's growing the most or fastest this year?
Honestly, I do a little bit calculation. I think based on our chairman's comment, I think this year semiconductors could probably at least can have the same similar growth rate as last year. Yeah. Then test and measurement, I think maintain a stable growth. In turnkey solution currently, we have two focuses on hand, mostly EV battery cell. Then you can also plus a little bit from the Nanotech, their sales contribution.
Okay, great. Thank you very-
Yeah.
Oh, sorry.
Oh, that will be consolidate everything for the testing instrument business.
Okay, great. 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. Thank you. There are currently no questions. I'll hand it over to CFO, Paul Ying for closing remarks. Mr. Ying, please proceed.
Thank you, Jason. Well, my dearest investors, ladies and gentlemen, thank you for your attending for this conference call. For the 2019 fourth quarters and also 2019, I think we enjoy a pretty rollercoaster starting from low, then we come up the record high on the fourth quarter. This is, I think, it's a good result. Right now we're still keeping on the pace and trying to improve everything and trying to give out the best records. Before we meet next time, still, again, I wish you everyone have a very good health and very good prosperous futures. Yeah. Thank you. Bye-bye.
Thank you, Mr. Ying. Ladies and gentlemen, we thank you for your participation in Chroma's conference. There will be webcast replay within an hour. Please visit www.chroma.com.tw/investor/index under the investor relations section. You may now disconnect. Goodbye.