Welcome everyone to Chroma's 2024 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 section. Please follow the instructions given at that time if you would like to ask a 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 now like to introduce our CFO, Mr. Paul Ying. Paul, you may begin.
Thank you, Frank. Hi, ladies and gentlemen. This is Paul Ying. Good afternoon. Welcome to the 2024 first quarter earnings conference call. This conference call will be conducted in English, and conducted by myself, Paul Ying, and Jennifer Chien, our Director of Investor Relations. Afterwards will be the Q&A sections. In the Q&A sections, we will answer your questions on your language base. If it's English, we will answer by English. You are free to use Mandarin to take your questions, and then we will answer accordingly. Well, I think all of you have got the first quarter of 2024 presentation in our website. So regarding the first quarter consolidated income statement, you can see here the consolidated sales for the first quarter of this year is TWD $4.4 billion compared to the last quarter of last year. It's a 12% drop.
Well, mainly it's due to the drop on the test equipment business, which is dropped by 13%. And if we compare on a year-over-year base to the last year's first quarter, it's pretty much flat to the first quarter of last year. And for the gross margin, you can see here we flattened the gross margin compared to the last quarter of last year. But we have a 4% drop on the year-over-year base due to the gross profit margin is a little bit lower than last year. As to the operating expenses, I think due to the headcount increase and also the compensation adjustment, we have a bit of a higher OpEx compared to the last quarter of last year as well as the first quarter of last year. So for the operating income, it's somewhere like TWD 900 million.
This is a 13% drop compared to the last year fourth quarter. It's a 24% drop compared to the first quarter of last year. But for the non-operating items, it seems to us that this is a good year for the first quarter, which is a bit of growth. On the non-operating items, it's contributed mainly from the exchange gain as well as those profits gaining from the subsidiaries and the related corporations and make up somewhere like TWD 319 million. And compared to the negative numbers of the fourth quarter of last year and also very small numbers of the first quarter of last year, it's pretty much high growth. But for the net income, our first quarter number is TWD 976 million. Compared to the on the QoQ basis, it's a 16% growth, 18% growth.
It's flattened to the first quarter of last year on a YoY basis. So for the first quarter of 2024, the EPS is somewhere like TWD $2.27. Again, compared to the fourth quarter of last year, it's a 20% growth. And it's a 2% growth compared to the first quarter of last year. As to the balance sheet highlight, you can see from the next page, the cash and short-term investment is a bit of growth, which is a 13% growth. And inventory is pretty much flattened to the year-end of last year. And for the short-term debt, it's a bit of a decrease. And the long-term debt is higher than last year fourth quarter. And for the return on equity, it's 18% and flattened to the last year year-end. And return on assets, it's 11%. It's pretty much similar to last year year-end.
EBITDA for this year is pretty much flattened to the first quarter of last year. Cash flow from operations is TWD 1.2 billion. Free cash flow is somewhere like TWD 840 million. This is the short brief of the financial numbers. As to the operation highlights, let Jennifer take it over to have that presentation.
Okay. Thank you. Good afternoon, everyone. This is Jennifer. I will go through our product mix for first quarter and share some of the updates for each sector. We had a strong growth from semiconductors and photonic sectors and the turnkey solutions in the first quarter. As you may refer to slide 8 for details. Okay? First started with our test instruments and ATS, which has increased 11% quarter-over-quarter but declined about 28% year-over-year. Move on to semiconductors and photonic sectors, which will be the major driver for this year. It presents a 38% quarter-over-quarter growth and increased by 207% year-over-year. In the first quarter, the major growth is contributing from China legacy demand and followed by photonics applications.
As market expected, a system-level tester for HPC will be started shipping from second quarter. This is based on the customers' schedules. Next one, potential solutions, which has increased by 60% quarter-over-quarter and 279% year-on-year, mainly from overseas non-China EV battery cell projects. The total parent company sales in the first quarter was TWD 3.4 billion combined with overseas sales, TWD 866 million. The total consolidated testing equipment business entities, the sales is about TWD 4.3 billion. Our 100% subsidiary MAS, which generates about TWD 86 million sales in the first quarter with other subsidiaries was TWD 73 million. Total consolidated sales in the first quarter was TWD 4.4 billion, which were declined about 12% quarter-over-quarter and a flat compared to last year first quarter. Now it's the second quarter, and we move on to the peak season.
We expect the second quarter will be better than first quarter. We do see customers are going to increase more orders, not only for AI chips but also including auto-related chips. So overall orders are more than we have seen back to February. And I think that's quickly an update for our product mix. And now we are open up for Q&A.
Thank you. We will now begin our question and answer section. If you will have questions for any of today's speakers, please press star one on your telephone keypad, and you will enter the queue. After you are announced, please ask your questions. If you find that your questions have been answered, before it's your turn to speak, please press star two to cancel the questions. Our first question has come from Kevin Cheng with Citi. Kevin, please go ahead.
Hi. Thank you, Jennifer, for taking my question. So my first question is regarding the semi-photonic division. As we see, there is quite a bit of very strong growth in the first quarter. And Jennifer just mentioned that this is mainly driven by China legacy demand as well as photonics. I was wondering, first of all, how long of this demand increase is going to persist into the second quarter? And heading to the second quarter, do we see what will be the main driver for this segment going forward? This will be my first question. Thanks.
Hi, Kevin. So your question is mainly to China legacy. Is that right?
Right. That's correct.
I think I only could say it's not only one for the first quarters. We do have some order visibility for coming this quarter. Yeah.
Okay. I remember this segment, typically, the visibility is about three months. So that means so far, second quarter, the order momentum is still quite strong, right?
We couldn't guide the numbers. But as you know, second and third quarter are the peak season for our business. And as we guide in the beginning of the year, semiconductor and photonic sectors are the major growth driver for this year. So definitely, the factor that's bringing out the peak season will mainly come from semiconductor and photonic sectors.
All right. All right. Thank you, Jennifer. My next question is regarding, I see our R&D expenses increased quite a lot in the first quarter. So I was wondering if you can share what is our key focus area for our research right now? And when do you think our R&D is going to turn into a new product or new contribution going forward? Is there any new product in the pipeline that we can be expecting?
The R&D expense, Kevin, I think it occupied like 12%-13% averagely each of the years. I think it's an investment. But I couldn't tell you what area or what category we are focused on because well, when we say R&D, it's research and development. So for our business operations, I think for our business unit, they will focus on the development of the current product series or product group. But for the corporate R&D, they will focus on the research for longer term of the technology development. So they are pretty much diversified, just similar to our product range. So in there, I couldn't give you any that kind of guidance because if you count the project right now, probably it's hundreds of projects in the company right now and working on each of the single R&D departments.
Right. Right. Okay. Just quick follow-up. I guess for the AI chip, you also mentioned the automotive-related chip orders also increasing. Can we share a little bit more detail into this part? Is this going to drive faster growth in the ATS or other division?
I think the key message here is to compare what we're guiding back to February and what actually has increased compared to last time we guided about the semiconductors orders. We do see the customers are planning I mean, not planning. They are actually increasing the order mainly coming from these two applications.
Okay. All right. Thank you, Jennifer.
Thank you. Our next question has come from Wern Juan Chng with HSBC. Please go ahead.
Thank you. Thanks, Jennifer and Paul, for taking my question. I have two questions. My first question is regarding your legacy EV power testing business. I'm just curious to know, what are your expectations for growth into 2024? Do you expect this to track 2023? Because a lot of your customers, based on our conversations, seem to be seeing better-than-expected demand. So just curious to hear about that. Thank you.
Hi. Are you pointing on this EV demand or China legacy, which is ATE system?
EV power testing, the modules, not the battery cell formation, not the China legacy. EV power testing. Yeah.
Okay. So you are pointing out at this test instrument, ATS, right?
Yes. Yes.
Okay. Basically, I actually checked the breakdown for these sectors. I think the major dropped, I mean, the decline versus last year is mostly coming from these EV-relateds. So as you know, for the EV market, we cover both upstream and downstream. Upstream mostly related to EV battery cell, which is a formation system. We normally book under Taiwan or overseas. Okay? In the past, we mostly book under these two factors. But we also cover downstream, which is EV components testing, including battery pack, motor, power modules, charger, charging station. And this is mostly just selling a tester instead of combining with automation. And this part, we book under test instruments and ATS. As you could see, this year, overall demand for EV markets is relative slow compared to last year.
The major drive is actually coming from the downstream, also will be I mean, lower in the downstream. I mean, not only for upstream is slow, but also the downstream is also slow.
So, your downstream EV demand. Thanks, Jennifer, by the way. So, would this be similar to growth last year?
Similar? What do you mean similar growth? I think if you remember, actually, there are quite a strong sales from the test instrument, ATS, last year first six months. Mostly comes from those EV-related downstream. And also, we do have a battery cell business, right, if you look at the whole year projects. But however, if you look at the last year, if you say last year, why we generate such high sales, it's mostly coming from EV downstream. It's very hard for us to say, "Okay, it's really 100% because of EV." Because as you could see, battery pack also covers energy storage, ESS. So we could say, "Oh, that's all the same." And this year, relatively slow.
Got it. Understood. Very clear. My second question, Jennifer, just trying to understand your system, your AI SLT portion, just broadly, right, broadly, do you see higher competition in the space? And then also, could you comment on the testing intensity for AI GPUs? Do you see higher testing requirements for the AI GPUs or same as last year?
Sorry, I didn't hear the last part of the question. You compare AI chips this year to last year of what?
The testing intensity. So the chips you test, do you see more testing requirements from the customer because the chips have they need to cover the chip fault rate? So there are defect rates on the chip side, right? So they need to order more equipment. Or do you think it's the same as last year in terms of testing requirements for AI? Yeah.
Well, for our system-level testers, actually, customers use our tester for 100% testing. So actually test every single bit of the chips. That's number one. Second, so last year, we just delivered small portion. And you could say consider as a first phase regarding to B-series, no matter you think about B100, B200, GB200. And I think this year, customers are building on the capacity to fill out the capacity they need for this series of products. So I'm not so sure how you define for intents, but that's including the spec B is much higher compared to Edge and plus the throughput and also the complexity.
Yeah. That's very clear. That's very helpful. Thanks a lot, Jennifer. That's all from me. Thank you.
Yeah. Thank you.
Thank you. As a reminder, please press star one on your telephone keypad if you would like to ask a question. Our next question has come from Jeff Ohlweiler with Macquarie. Jeff, please go ahead.
Yeah. Thank you for coming, Jennifer. First question, for ATS, even though EV is down this year, at the fourth-quarter conference, you said that overall ATS should still be up. So can you talk about, one, is that still true? And two, outside of EV, where is the strength in the ATS? What end markets?
Hi, Jeff. Basically, the major decline compared to last year first quarter is just EV or ESS-related. And I think the overall this year, probably just like we guide in the beginning of the year, probably flat or slight declines. And probably do see, just overall, mostly it comes from the EV-related slow compared to last two years. And as you know, we do this kind of ATS business I mean, power testing business for like 40 years. So we are very much diversified into different applications, not only into consumer but also 5G power, clean tech, etc. So you probably could expect maybe EV slowdown, but 5G power demands increase. But however, overall, we just guide about flattish or slightly decline compared to last year, overall for this year.
Okay. Great. And then one kind of follow-up question. You said EV cell and downstream should be weaker this year than last year. Do you think this year should be the bottom, and you'll start to grow again next year?
You mean EV? I mixed up the question. You mean EV cell and the downstream. We still have an EV battery cell project. But just like we mentioned before, EV battery cell this year is shifting. As you could see, China is pretty much saturated and reached out to several overcapacities. So the demands definitely come from the rest of the countries instead of China itself. So you could consider this year is like a transition year for EV markets, transition from China demand to the rest of the world, including Southeast Asia, and planning to move on to Europe and U.S. So I think we are not the person who manufactures the EV and also EV components. Maybe we are not the right person to come and say, "Oh, really, this is EV boom.
Okay. Great. And maybe one last question. If you look at kind of around all your products, any change in competition or intensity of competition now versus a year or so ago? Or are things pretty much normal across the board?
So far, not really the one sectors we could highlight. Yeah. I think especially most of the product is customization. So this is how we differentiate to others. Yeah. But just go back to your first question. Basically, we still have an EV battery cell project, but just not coming from China markets as we had in the past two years. I'm not going to drive.
Okay. Great. Thank you. Yeah.
Thank you.
Thank you. Our next question has come from Derrick Yang with Morgan Stanley. Derrick , please go ahead.
Hi, Paul and Jennifer. Thanks for taking my question. So I got two questions. The first one is regarding your semiconductor and photonics business. So could you give us some guidance regarding the growth rate that you are looking at for 2024 as a whole for this business? And the second question is yeah, maybe I'll ask the second question later. Yeah.
Hi, Derrick . I think back to February, our chairman just guided, we will probably be able to reach back to 2022 level, which is implied of that 50% growth rate. But based on our current sentiments and also the order visibility, we do see customers planning to add more orders. I think we should be doing better than what we're guiding back to February. Yeah.
Okay. So a little bit of upside to that back to 2022 level guidance?
Yes.
Okay. Thanks. The second question is regarding your battery cell formation business, including your turnkey business and also the business included in the overseas and other segments. For that battery formation business, do you expect that to grow or to decline on a full-year basis in 2024 versus last year?
This is somehow a pretty good question. Overall, EV battery cell project this year, conservatively speaking, probably definitely not more than last year. Yeah. But we do have other maybe we probably will have other turnkey projects. But we probably will give this more clear pictures next time we have a second quarter's earnings release. Yeah. Because we actually process at the moment.
Okay. Thank you.
Thank you. As a reminder, please press star one on your telephone keypad if you would like to ask questions. Sorry. There are currently no questions at this point of time. Thank you for your participation in Chroma's conference. There will be a webcast replayed within an hour. Please visit www.chroma.com.tw/investor/index under the investor relations sections. You may now disconnect. Goodbye.