Welcome everyone to Chroma's 2019 first 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 the CFO, Paul Ying. Mr. Ying, please begin.
Thank you, Jason. This is Paul Ying, the CFO of Chroma ATE. Welcome to the first quarter financial release for Chroma. This conference will be conducted in mainly English. During the Q&A session, you're welcome to use Mandarin Chinese or English to ask. I think I will answer according to the language that you're using. Let's start it from the presentation material. I think we sent out this afternoon. We will be starting from the slide number 12, which is the condensed consolidated income statement. From here, you can see that first quarter of 2019, the sales revenue top line of Chroma consolidated will be TWD 2,742,000,000. This represents a 21% fall down compared to last year first quarter. Mainly, the biggest difference will be the consolidated sales of MAS, which has dropped by 55%.
For the parent company, consolidated sales of testing equipment business, it fall down by 14%, while the new material business fall down by 7%. For the gross margin, we enjoy 48%, which is a record high. The absolute number is TWD 1,317,000,000. This represents a 16% drop. Well, compared to the top line, it's due to the increasing of the gross margin ratio. For the expense, you can also see that we control expense well compared to last year first quarter on a YOY base, pretty similar. The operating income is TWD 289 million, represents a 48% drop compared to last year. The net income for the first quarter, it goes to TWD 297 million. Compared to last year's first quarter, it's a 30% drop.
That represents earnings per share on a basic basis, TWD 0.72 compared to last year, TWD 1.06. Again, this is a 32% drop. To the condensed balance sheet, if you look at this page, you can also see that it's quite similar to the last year, fourth quarter. The total asset amount is pretty similar. Due to the slow season effects, we can see that the inventory turnover a little bit high. Also the accounts turnover, again, with the same kind of effect compared to last year, fourth quarter. Again, return on equity and return on assets is still single digits due to the first quarter, again, the slow season effect. In there you can see the free cash flow for the first quarter is approximately TWD 387 million. This is the consolidated basis highlight.
If we go to next page, which is the quarterly highlight for the first quarter of 2019, you can see the parent company, the sales revenue reached TWD 1,541,000,000. This is a 9% down on a quarter-over-quarter base, and 22% down on a year-over-year base. The gross margin, maintaining upper 50%, reached 55%, and this is eight-quarter high, which the management is pretty satisfied with this gross margin. The operating margin reached 19%, also in expectation of kind of a frame. The net income reached TWD 296 million. This is 38% down on a quarter-over-quarter base and 31% down on a year-over-year base. Again, the first quarter, the highlight will be due to the slow season, which is the Chinese New Year period. The first quarter sales revenue reflected pretty low.
The gross margin, again, reaches the highest in the past eight quarters. This is the highlight for the first quarter. If you go to the slide number 15. You can see that the first quarter condensed income statement for the parent company. Again, the sales revenue, TWD 1.541 billion, represent a 9% drop by quarter-over-quarter base and 20% drop by year-over-year. You also can see that from the gross margin portion, you can see that 50% gross profit reached TWD 845 million. Well, pretty much the same as the fourth quarter of last year. This is only within a 4% drop. Compared to the first quarter of last year, this is a 17% drop.
Again, if you look at the expense level, you also can see that we maintain the expense level pretty stable so that we can enjoy the TWD 289 million of the operating income and reached 19%, which is a 4% growth on a quarter-over-quarter base, but a 31% drop on a year-over-year base. For the net income, again, it's TWD 296 million, and compared to the last quarter, it's a 38% drop, and compared to last year's first quarter, that would be a 31% drop. Again, the earning per share on a basic will be TWD 0.72, and compared to the last year, it's a 32% drop.
If you look at the next page, which is the balance sheet highlight and the financial ratio, again, it seems that still on the slow season effect for inventory turnover and accounts receivable turnover will be a little bit higher than the last year. In there, you also can see that return on equity and return on assets still in the single-digit area, which is we expect if we can improve the profitability, then it will go to the double digits in the next three quarters. For the free cash flow for the first quarter, we enjoy TWD 428 million. This is the highlight for the balance sheet for the parent company. We can go to the next slide, will be slide number 18. In this slide, you can see that the product mix and also the consolidated sales breakdown.
Here you can see that for the first quarter, the Chroma consolidated sales reach at the TWD 2.742 billion. It comes from the Chroma consolidated testing equipment business, which is mentioned is the TWD 2.023 billion. This represents a 15% drop on a quarter-over-quarter base and a 14% drop on a year-over-year base. Across all the industrial applications from the testing instruments to the semiconductor and Photonics to turnkey solutions, it all dropped from 70% to somewhere like 10%. Well, still due to the effect starting from last year, fourth quarter, I think all the atmosphere from the trade war between the China and the U.S. So a bit of hesitate in the expansion and also in the new purchase of the procurement for the equipment slowing down. I think this is the final effect on that on the first quarter of 2019.
Another factor for Chroma to drop is the MAS. If you look at the MAS, first quarter of this year, it only goes to the TWD 274 million compared to the last quarter, it dropped by 71%. Compared to last year's first quarter, it dropped by 55%. That means the MAS is in between all of the project-based kind of a business, and it's in black. For new material business, well, stably, customers transfer the utilization of the gold wire to the copper wire, it drops from the first quarter top line, TWD 395 million, by 7% on a year-over-year base and 22% on a quarter-over-quarter base. In there, you also can see that for quarter-over-quarter base, the total consolidated Chroma top line dropped by 30%, and on year-over-year base comparison, it dropped by 21%.
That's the total breakdown of the top line from a consolidated point of view of Chroma. If you look at the 2019, I think we guide like this. Well, firstly, the Chroma first quarter consolidated sales revenue represent, well, a decline on either quarter-over-quarter base or year-over-year base on 30% and 21% respectively. The consolidated gross margin still can maintain on a higher level, which is a record high on 48%. For the year 2019, we still think that the testing equipment business sales will pick up from the second quarter and move into peak season, just like our ordinary kind of seasonality. The testing equipment business expects to grow quarter-over-quarter. For those overseas activities like U.S. market, European and the Japan markets will start to pick up from the second quarter after a short-term swing from a U.S.-China trade war.
Due to the 5G market demand, we think that the IC system level tester instrument will be started to contribute in second half, while those Photonics will continue to benefit from the VCSEL and optical fiber demand increase. For the turnkey solutions, mostly will be mainly contributed in the second half. For MAS, for the automation process business, will be started to pick up in the second half as well. I think this is our overall guidance for 2019. Thanks for your listening. Now we open for the question. 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. Now, please press zero one if you would like to ask the question. Thank you. The first question is coming from Steve Wang of Yuanta Research. Go ahead, please.
Hi Paul, Jennifer，你们好。请问可以听得到我的声音吗？
可以。
你们好，我想请教有关于我们刚刚 guidance 的部分。就是说这个跟我们在年初的时候，early this year，我们的 guidance slide 上面有放了一个说 2019 年的 earnings，it will be no lower than 17 跟 18 level。请问我们目前有改变这样的看法吗？
没有改变。
没有改变。好。所以说今天只是再多加一些细节跟seasonality下去。然后第二个我想请教就是说，我刚刚看了一下我们parent company的gross margin，它来到这个55%，那基本上是近几个季度的高点。因为合并的48%其实等于是它不完全是威光，或是MAS做得比较少，是母公司本身的margin也有提高。那这个在我们Q1淡季里面，是什么样的产品能让我们parent company的margin可以做得比往常的好？
所以我们大概不会提供breakdown的产品别的margin。不过我想其实应该是说product mix的改变通常就会影响我们每一季度的aggregate gross margin。所以它其实只是一个product mix的改变，也并没有说什么非常根本性的改变。就是每一季度因为交的这个产品不一样，那每一个产品它就有不一样的这种margin的属性。
好，谢谢。
如果我们做比较多 blend 的很多 automation 来说，这种 project 性的话，gross margin 比较容易被 blend。那如果你卖比较多 tester 或 testing system 来说的话，那当然不用 blend 很多其他外来的 robotic 或是 handler 来说的话，gross margin relatively 会比较高一点，因为你卖的是你的 R&D 的 talent。
Q1 在 parent company 里面做——
去年我们在第一季确实有交了部分的这种有 blend 的一些 automation 在里面，as a project based type of the business。
OK， 所 以 是 parent company internally 的 一 个 product mix 的 改 变 。
Right.
[Foreign language]
OK。然后第三个一样就是想请教说，我们现在因为在年初，黄董在法说会上就有提到，那时候其实大部分的讨论都是中美贸易战。那过了几个月之后，不晓得我们 incrementally 过了几个月之后，我们看客户这边订单下来的积极度，跟年初比较起来，不晓得我们 incrementally 有没有什么样新的发现。
这个部分，我们目前也不能够conclude说中美贸易战是不是有什么乐观的结果。不过如果从订单上来看的话，像刚刚提到的，就是在欧美日的部分，我们其实就觉得他们的成长性开始增加，尤其是在东南亚部分，我们看到东南亚的成长会来得迅速而且快速。我想这个部分大概跟中美贸易纠纷都有完全的相关性。
对，所以就是说这个demand是过去这两三个月来的变化，发现有一个回温的迹象，可以这样说吗？
其实也不算是回温，因为基本上我觉得我们其实不太倾向用relocation这种字眼，我觉得应该是diversify，因为过去比较集中在中国，现在客人想要diversify到Southeast Asia。我们确实在过去，比如说从第四季开始，可能中国开始有些decline procurement部分，然后第一季开始，中南亚部分确实整个orders开始上升蛮多的。
了解。所以等于是之前在 planning，现在开始在做 execution。
Right.
然后，不好意思，我最后一个问题是想到这个TeamTech，它的share swap requirement的时间点，还有我们大概什么时候可以用权益法去认列他们的获利呢？这个有没有给我们一个guidance？
目前我们的法务是target在今年的6月。
6月。
就说最快也是下半年，甚至要看最后我们settle的状况是怎样。不过目前所有的进展大概就是as scheduled，所以都还好。我们大概在29号，台湾的部分已经过了投审会的核准，现在正在进行美国政府的核准。
29号其实就是昨天嘛。
对，昨天投审会的新闻稿出来，我们是通过了。
好，没问题。所以就是说最快下半年就可以用权益法去认列他们的获利。
Yes.
好的，谢谢。好，目前没有别的问题，谢谢。
OK.
The next question is coming from Jerry Su of Credit Suisse. Go ahead, please.
Jennifer 你们好。我想问一下，刚刚在 presentation 关于 guidance 部分有提到，海外的部分，美、日三个市场第二季开始会有 recover。能不能谈一下这是什么样的 end application 在 drive 这样的成长？另外，你同样这边也有提到，VCSEL 跟 optical fiber 的 demand 会 increase。因为其他的 segment 大概要谈到，一个是 2H，那不知道这个 VCSEL 跟 optical fiber demand increase 的时间点大概是在什么时候？最后就是 MAS 这边，全年之前有提到说这个会掉，那我不知道你们现在看的 decline 的幅度是怎么样，因为我看你这边 guidance 大概是写说 pick up 是在下半年。谢谢。
欧、美、日的部分，Jerry，我想欧、美、日的部分，其实本来我们喊着说欧、美、日要持续不断地成长，我想这个我们已经喊了很多年了。但是最近在目前看起来，由于中美贸易战是另外一个触发点，不管是要回美国投资，或者是欧洲持续不断，你要在欧洲自己做投资，或者是说像刚才Jennifer提到的，大家可能在中南亚建立backup的这种产能，我想这一个现在看起来它都有增长的这种趋势。再加上说，其实Chroma因为产品线越来越多，我们在海外就加大了我们这种certain marketing的力度，把这个部分的产品推出去。目前看起来这个斩获都蛮多，所以我很难说明到底是在哪个部分。但是还是一样，这种所谓的new application，包含像电动车，尤其是车用的电池，像这些大概都是其中之一。
了解。
这个Photonics的部分嘛，跟VCSEL。我们今年的Photonics目前的order on hand应该是overall会比去年多。主要的driver就是来自于VCSEL，还有optical fiber。但是如果year to date，到今天这个时间点来说，optical fiber确实比较多一点。我们先谈一下VCSEL部分。VCSEL来说的话，目前我们已经finalize，Apple这边提了projected order，整个contract或者是议价部分已经complete了。目前how fast他们会启动这个mass production，要看他们目前的pilot run，因为我们总共是收两个order，一个是pilot run的order，另外一个是mass production order。另外Android的VCSEL的话，要看他们下半年的扩产计划。所以我们目前比较uncertain部分，for VCSEL来说的话，应该是Android这边。可是今年因为5G市场infrastructure要upgrade的关系，所以optical fiber的demand其实是蛮强劲的，从去年开始到现在。比如说像有部分中国的做laser的客人，基本上会同时间买VCSEL related，还有optical fiber。以目前的接单来说的话，我们发现optical fiber部分的客人也有增加趋势，order也有增加趋势。所以如果year to date order on hand的话，optical fiber其实好像也不会少于VCSEL部分，所以整体Photonics目前的接单的状况是优于去年的。另外一部分，5G市场来说的话，同时间有贡献我们在IC handler的contribution，主要是RG、RF的部分。这部分的话，因为我们才刚收到order，应该会从第三季开始交货。对。威光的status目前是no change。
不好意思，所以刚刚VCSEL跟optical fiber，应该是从第二季开始就会有一些增长吗？
应该说VCSEL是每个quarter几乎都有。其实我们第一季来说，你可以看到我们quarter on quarter来说，是成长的。虽然是有些许的增长，但是主力是Photonics。我觉得现在我会觉得比较倾向用Photonics这个字眼，原因是因为我们目前有两大driver，一个是VCSEL，一个是optical fiber。那测试的机台是完全不同的。
了解，那威光的部分呢？
威光目前的進度是沒有改變，還是一樣。如果說這個down pay有下來的話，我們老闆應該會在下一次的法說會會update。
下一次的法说会更清楚了。
对啊。
所以目前还是维持 TWD 2.5 billion 这个不变。
目前是没有打算。
目前是没有改变。
好，了解，好，谢谢。
谢谢。
As a reminder, please press zero one on your keypad, if you would like to ask a question. The next one is coming from George Chu from Fubon. Go ahead, please.
Jennifer 你好，两个问题。第一个就是关于，我记得在上次法说的时候，你们有提到中国的 EV customer 会是一个蛮重要的 driver。那这一次的 guidance 没有提到这一类的 driver，这是已经在第一季 deliver 了，还是已经有一些改变？
EV 一直都是我们 constantly 的每个 quarter 都有 contribute，所以我们就没有特别 highlight。但是我们已经在我们的 guidance 里面讲说，在这一 quarter 的 guidance，我们公司如果二Q 要开始拉起的话，主力当然就是 test measurement。
了解。
在 guidance 里面了。
了解，了解。那第二个问题又回到MS方面，这方面我们有得到在客户方面任何的cash commitment或者其他相对一些guarantee吗？还是要再等几个月才会有比较好的visibility？
你也知道说我们公司比较喜欢guide比较solid的order，所以我们会等这个down pay付完以后的状况，再进行一个update的动作。
了解。谢谢。
谢谢。
The next question is coming from Jerry Tsai of JPMorgan. Go ahead please.
大家好，这边有两个问题都是跟optical fiber有关系。第一个是我想了解一下，我们目前的这种类型的tester里面，主要的竞争对手可能是像是什么样的厂商，可以透露一下吗？第二个就是，我想知道像这个东西的demand会跟所谓的technology的migration有关系吗？比如说像你现在数据中心可能会开始用，比如说所谓的400G的optical communication device，那我想问这是不是跟这些trends会有关系？还是纯粹只是跟5G的infrastructure build out比较有关系，谢谢。
我说明一下，我们本来就是做optical fiber起家的，只是说在3G跟4G的时代的时候，你的量没有这么多，而且在那时候的infrastructure是不用upgrade到速度这么高的，比如说gigahertz的状况，就是现在这种5G的market status。那我觉得这个几个层面，我先说明一下，optical fiber跟VCSEL是非常不一样的东西。Optical fiber它基本上是edge emitter，它是侧面打出镭射，所以你在测试的时候是完全不同的method。那坦白讲，它主力在测试的部分来说的话，有部分我们没有cover到，我们客人主要问我们买的是两种商品，一个就是optical inspection。因为你侧边发光的话，他们没有办法vertical检测，你要把它cutting，出来以后，你才能做检测，你才能做这个inspection。第二个部分是burn-in。我之前有提到说burn-in这种机台，在过去你burn-in是不需要的，burn-in是一个aging process，但是现在很多产品是需要burn-in process的，包含比如说尤其是这种communication、这种infrastructure的东西，就是数据中心这种东西，在burn-in是非常重要的，包含auto的related跟communication related。所以其实我们有看到几个趋势，当然第一个量会上来，因为你现在讲5G市场，infrastructure是第一个一定要improve的。所以在你的demand量会变多。第二个来说，量变多的时候，你进来的supply chain的人会变多，跟我们在3G跟4G市场的时候更多。甚至比如说我们之前曾经有讲过，美国Cisco也想要cutting这个industry，今年我们收到Cisco的order其实比去年还要多。那还有其他两个player，也是进来要做这个5G的这个市场，但是这些都是属于infrastructure部分。比如说光纤这种东西一定是从infrastructure做起，然后再都做到你的PC板上面，也可能eventually会采光纤的方式。但是光纤这种东西来说的话，它的测试方式是跟这个VCSEL是有点不太一样的。我们本来就是做这个起家，我们在这个本来就已经有很一定的knowledge跟know-how。
所以说我们在全球可以讲是一个领先的地位。
目前可以算是。
好，谢谢。
Right.
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. The next question is from Jeff of Macquarie. Go ahead, please.
Yeah. Hi, Paul and Jennifer. You mentioned SLT pick up in the second half.
Yes.
Can you talk about how SLT growth has been over the last, say, three or four years?
Okay. SLT demands, actually, these days, most of the chips are using these kind of integrated designs. They need to stimulate those. Those chips are very sensitive to environmental change, and they need to do this kind of physical condition testing. If you want to implement so-called physical condition testing, the IC handler, fast pick up, this kind of so-called IC handlers demand has to increase. We call it pick and place. These demands, they actually come from, first is RF. Okay? RF, sometimes they will also combine with temperature simulation. Currently, we do have one international RF maker. They are replacing their old systems in Southeast Asia. This is the order we're planning to deliver in the third quarter.
We also receive another RF maker from Europe, they also have this kind of demands, they constantly drop us the orders. We're seeing our IC handler, which is so-called SLT testers, will be start to have even quite a big contribution from these parts. Yeah.
Okay, thanks. Just one more related question. Just overall, can you talk about competition in the SLT market for you guys? Thank you.
Currently, if you combine thermal control, which is able to stimulate the temperature from -50 degrees to 150 degrees, or -20 to 120 degrees, we don't see any competitor at the moment. Yeah. It's quite a niche market.
Okay. Thank you.
Thank you.
If you would like to ask the question, please press zero one on your telephone keypad. 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 will hand it over to CFO, Paul Ying, for closing remarks. Mr. Ying, please proceed.
Thanks, Jason. Well, the first quarter of 2019, it looks a bit slow, which is also fill up into the expectation of traditional seasonality or ordinary seasonality. We are expecting that second quarter will be warm up and then pick up by the third quarter on the peak season. If that's the case, let's see, we definitely is going to deliver what we committed. Thanks for your time, and yeah, see you next time. Thank you.
Thank you.
Thank you. We thank you for your participation in Chroma's conference call. 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.