On to Chroma's 2024 third 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 a question. For your information, a webcast replay will be available within an hour after the conference has finished. Please visit www.chroma.com.tw/investor/index under the investor relations section. And now, I would like to introduce the CFO, Paul Ying. Mr. Ying, please begin.
Thank you, Jason. Hi, everyone, ladies and gentlemen. This is Paul Yin from Chroma, and Jennifer Chien is with me today. Welcome to the 2024 third quarter financial release meeting. First of all, I will thank you for your attendance to this meeting simply because this is a public holiday for the typhoon. Outside of the window from the meeting room at Chroma, you still can see the raindrops and very windy weather outside. In typical Chinese traditions, I think the water, meaning the fortune. I wish you all make a big fortune in this year and, well, with the investment in Chroma as well. Okay, let's go to the 2024 third quarter's consolidated income statement. I think you can look at them from our presentation material at the website.
For the third quarter of this year, you can see that the sales revenue for the third quarter is TWD 5.6 billion. And compared to last quarter, it's a 2% growth on a Q over Q base. And compared to the last year's third quarter, it's a 16% growth. I think it's a pretty good record. And for the proportions of the consolidated sales and testing equipment business, it's TWD 5.1 billion representing 92% of the whole top line.
And this is kind of flat to the last quarter. And again, it's a 12% growth compared to last year. And for the automation sales of the MES, it's TWD 3.8 billion compared to last year. Compared to the last quarter, it's a 100% growth. And compared to the last year, it's a 133% growth. So for the gross margin, it comes to the TWD 3.3 billion representing 59% of the gross margin.
It's kind of flat to the last quarter and with another 20% growth compared to the last year's third quarter. For the operating income, you can see that for the third quarter, it makes TWD 1.5 billion. It's representing a flat compared to the last quarter. At the same time, compared to the last year's third quarter, it's a 22% growth. For the net income for the third quarter, it goes with the TWD 1.4 billion representing 26% of the top line. It's kind of 1% growth compared to last quarter, but with 16% growth with the YoY base. In here, you can see that the earnings per share for the third quarter is $3.39. This is the third quarter financial result for the year of 2024.
If we accumulated the first three quarters for the income statement, you can see that for the first three quarter, the net sales is TWD 15.5 billion compared to last year, TWD 13.6 billion. This is a 14% growth. And again, from the proportion of the consolidated sales of testing equipment business, it's TWD 14.6 billion compared to last year's first three quarter. It's a 14% growth. Again, for the automation portion, MES for the first three quarters this year, it's TWD 661 million.
Compared to last year, it's a 7% growth. So here you can see that the gross margin for this year is TWD 9.1 billion compared to the TWD 8.1 billion last year. It's a 12% growth on the gross profit portion. And for the operating income, you can see that for this year's first three quarters, it's accumulated TWD 3.9 billion compared to last year's TWD 3.6 billion. It's an 8% growth.
For the net income, it goes to TWD 3.8 billion, occupied 25% of the top line, and represents another 18% growth compared to last year's first three quarters. For the first nine months' accumulation of the earnings per share, it goes to TWD 9. This is the financial result for the income statement. If we look at the balance sheet portion, you can see from the next page the highlight for the balance sheet and the financial ratios. You can see from here that the cash is pretty much the same and the inventory a little bit higher than last year. Again, for the long-term debt, it is kind of accumulating due to the CapEx for our phase two expansion for our factories. The total assets is growing like 6%.
Again, for the inventory turnover, it's pretty much goes to the six months, a little bit over six months of the turnover days. Accounts receivable turnover is pretty much in line with our expectations on the three months. Another thing I would like to share with you is the return on equity. It goes to the 22%, which is falling in our expectations right now and has a bit of a growth compared to the last year and 18%. For those like cash positions, like free cash flows, it's all in pretty good positions here. This is the highlights for the balance sheet and the financial ratios. Then let's go to the operation highlights. Jennifer, you want to share us with those product mix and those sales breakdown, please?
Okay. Good afternoon, everyone. This is Jennifer. I will go through the product mix in third quarter and give some colors for each sector and please refer to slide nine. First, the ATE sectors in third quarter were similar to second quarter, but down about 11% compared to last year. Overall, in the first three quarters, down about 22% compared to previous year. This is mainly due to low CapEx sentiment, particularly from EV and ESS markets. For fourth quarter, which is a typical low season for power testing for power industries, so we think it may be lower than third quarter. Okay. Our semiconductors and photonics sectors remain strong. Third quarter is similar to second quarter, but compared to 2023, it had an increase of 70%. The breakdown in third quarter was 85% IC testing related and 15% for photonics sectors.
System-level testers under IC was a major shipment for it. As our major HPC customers continue to increase orders, so we may have a strong sales momentum in fourth quarter. We believe this year will be the turning point for Chroma. It will be the first year our semi sells over our power business. For turnkey sectors in the last three quarters, the major delivery was automation projects. The EV battery sale project's contribution is pretty much limited. Okay. Our key highlights for this call regarding the operation. First, our views in July, which is our second half, will be better than first half, remain no change. We still have very high level of confidence our second half will be doing better than first half. The key driver will be coming from our semiconductor sectors. As you know, this year is Chroma's 40th anniversary.
We're still expecting to have some achievement, no matter for ourselves or our profits. So to jump to conclusion, we think we're able to have a good quarter in fourth quarter despite our low seasons. So I think we're able to move on to Q&A. Please follow the instructions.
Thank you, Jennifer. And 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 star 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 star two to cancel the question. Thank you. First question, Warren Jin Zhang, OCBC. Go ahead, please.
Thank you. Thanks, Jennifer and Paul.
Yes.
Hope you guys are staying safe, given the typhoon season is currently. Yeah, so my first question is regarding metrology. Just to clarify, you guys are doing surface film metrology for RDL, not inspection. That's my first question. Thanks. I have a couple of follow-ups.
Metrology cannot be called as inspections. So metrology is you can't use inspection equipment for RDL. So for this kind of measurement and inspection equipment for RDL, it's normally called metrology.
Yeah, so you guys are doing metrology.
Yes.
Essentially assessing the film thickness for RDL, right? The film thickness for RDL.
What do you mean by film?
Is that correct? The surface film thickness. So understanding essentially the film composition.
I have no idea what you mean by film. I don't understand. But basically, what are the two major specs we cover under our metrology. First one is the interposer alignments. Second one is measuring the TSV.
Okay. Okay. That's really helpful. Okay. So essentially, I talked to a couple of your competitors and also industry participants at the fair out there. They are talking about $200-$400 million in terms of the market, USD million. So my question to you is, how much market share will you be willing to take? So obviously, this metrology is very small and it's new. So if you assume 10%-20% market share to metrology, that will be about $40-$60 million in terms of USD contribution to your overall revenue. And that will be high single digits of 2023 revenue. Is that a reasonable assumption? Is that fair? Is that the way to think about it? Yeah. Yeah.
Okay. First, actually, foundry customers have very restricted selection process, and this kind of selection process takes about one year. I only could say I have no idea how you define the competition and market share, but we are the only one being qualified for the new capacity ramp. Another key message I could deliver is according to our foundry customers speak in the semiconductor ones, RDL equipment, which is metrology, is one of the major equipment will continue to increase and become, I mean, the percentage-wise will be continued to increase for the overall CapEx spending. Yeah.
But high single digits to your revenue next year is reasonable, right? Or is it?
We haven't finalized our budget. We couldn't comment. Yeah. Sorry.
Okay. Okay. Got it. But okay, in my opinion, I think that's fair. But you can correct me later on if I'm wrong. Then I guess any plans venture into inspection or not really? You just stick with TSV and alignment?
No, we stick with metrology, but metrology spec and also metrology application will continue to increase. That's why metrology equipment have this kind of upside, not inspection, so currently, we don't consider to move into inspections.
Yeah, but I guess growing from a low base, it's still it'll be a while before you offset essentially system-level tests and EVs, right? It's not going to be anytime soon. It will take a while because.
Which one?
The metrology's contribution to your overall sales will take a while.
No, we already start. I think we already start. I mean, well, if you talk about new capacity, we'll start to deliver from next year. But if you talk about, if you say the actual timing to deliver the metrology, I think will be started from this year, which is fourth quarter. So this is okay. Qualification process is already complete and we got qualified. Yeah.
Okay. Okay. Got it.
Thank you.
I'll call back to the queue, and I got a couple more questions about yeah.
Okay.
Thank you.
Next one, House Liu, UBS. Go ahead, please.
Okay. Hi, I'm Man Kim Hsin. Congratulations on your summary results, and thanks for taking my questions. My first question would be regarding your near-term business outlook. When you talk about second half, business will be better than first half. Could you quantify the percentage of their contribution to full-year sales and how it would compare with the historical seasonality of down 10% in fourth quarter? Thanks.
We can't give the numbers of guidance. I mean, we couldn't provide guidance with the numbers. So we already give a very clear guidance regarding to it seems you already have first three quarters. And then you also have the first half numbers, which is close to TWD 10 billion. And then we definitely will have more than TWD 10 billion in second half. So we think fourth quarter, we already using words called good. So despite of low season, so don't consider it's a low season.
Okay. Yeah. That's pretty helpful. And I guess just from the magnitude of the momentum for fourth quarter, could you just try to elaborate more detail about which business segments will be the main driver because you just mentioned semiconductor will still outperform.
Semiconductor products.
But yeah.
Yeah. Semiconductors actually bring out the overall, I mean, the fourth quarter delivery. As we mentioned before, our major HPC customers have continued to place order. And we believe this kind of order size will meet majority will be booked in fourth quarter. And then some of it will be carried forward to next year first quarter because the size is quite big.
Okay. Yeah. That's pretty good.
Yeah.
And for first quarter next year, what is your initial view because you still have some spillover into first quarter next year? So it seems that it is still going to be somewhat above seasonal for first quarter next year, if we can assume.
Maybe we talk about that early next year.
Okay. Yeah. No problem. That is super helpful. And my second question would be regarding the competitive landscape. I believe the first question was regarding that about your metrology and also SLT dynamics. So I was just wondering if you could share what is the competitive edge that you think you could hold as the key supplier to your supply chain or customers in the next two to three years?
I think customers' adoption is already just like I mentioned, customers do have very restricted, and I mean, the policies and also qualification process, and normally takes about one year. And this is already a conclusion. So the decision made after qualified with all the new capacity go to Chroma. So we will in charge with the phases for coming next two years. So our order visibility is already up to 2026 regarding to this metrology equipment.
Okay. Yeah. Got it. And then lastly, if you want to move back to the queue because I still have some follow-up questions.
Sure.
But I think others can ask first. I think just regarding the margins, when I look at your third quarter business segment, it seems that semiconductor from the parent company level has actually been underperforming power business, although from a very high base to first half this year. But I was just wondering, your gross margins was actually able to hold pretty resilient during the quarter. So can we expect that kind of resilience or even the expansion could continue as you move your mix toward or still toward your mix toward more semiconductor equipment contribution?
We still insist that we will try to maintain our overall gross margin around 55% plus or minus. But to indicate which sectors have a better gross margins, this is already touched our confidentiality.
Yeah. I mean, if you could just, do you think you can reiterate that kind of gross margins, or you can actually provide some of the upside to the structural gross margins that you have been providing?
We always try our best, as you know. Yeah.
Okay. Got it. Thank you so much, Jennifer.
Thank you.
Thank you. Next one, Kevin Chen, Citi. Go ahead, please.
Hi, Kevin.
Hi.
Hello. Hey, Jennifer.
Yes.
Thank you for hosting the call during the typhoon day.
Yes.
Hope everyone's all right there. Yeah. I have, first of all, a question on metrology.
Yes.
I think we're still kind of just making the budget for next year. I was just wondering, do we have any sense on the, let's say, the rate of the revenue recognition to climb?
What do you mean?
Is it going to be like a fairly straight line increase throughout the year, or it's going to be more back-end loaded? And yeah.
I think you should check with our customers. We follow everything according to their plan. But this plan, the AP7 and AP8 is already confirmed. Yeah.
All right.
I'm not able to disclose their schedules regarding how fast they're going to ramp up AP7 and AP8.
Sure. Yeah. Just to get a rough sense on, I guess, because this is a very promising business, would you say that this is going to be comparable to our current SOP business, let's say, within the next year or two or maybe like half? Just some rough idea based on our current visibility.
You mean current visibility metrology compared to system-level testers?
Right.
Honestly, both of them are major contribution for next year, for sure. I think next year, our biggest driver still come from semiconductors. If I have to rank, then it's very hard. It's very difficult for us to comment on that because first, metrology is new to us and we work really hard for it. And then as you know, capacity, especially for manufacturing parts, we only see signs of increase. But to where, it's not something we're able to conclude because it depends on the user.
Okay. Thank you. That's helpful. Okay. My second question is, I guess I want to go back to SLT, semiconductor tester a little bit. I'm just wondering because we're seeing very strong order increase toward sometime mid-year and second half this year. I was just wondering, how do we see this business going for next year? Could that be the case where the customers are building up pretty much most of the capacity they needed to? And before the next generation of product, there might be a little bit of a slight window in between the two products.
Okay. Regarding to system-level testers, next year, we do have several catalysts, for example, like existing the biggest HPC makers and also other HPC makers. But according to our current sentiment and the preliminary views, we think the momentum is pretty much the same as this year. Similar.
Okay. Similar. Are the other, I guess, secondary or ATE customers ramping up really fast?
No, because the biggest customers continue to build up more capacity. And also, we have a new other customers decide to shift their order to us. For example, the one who just published their result yesterday.
Okay. Okay. All right. Thank you very much.
Thank you.
Thanks for your patience. Thank you.
Thank you. Next one, Ken Chien of Ken Capital. Go ahead, please.
Yes. Hi, Ken.
Hi, Paul and Jennifer Chien.
Hi.
First, for this year's outlook, can we read your previous comments as the consolidated revenue for this year is likely to reach a high level?
We try, but I think profitability is something we can work on.
Okay. Thank you. And question is that, do you recently receive more SLT orders from key HPC customers like the leading AI GPU player?
Yes. That's true. That's why we have a peak season for the fourth quarter.
Okay. Got it, and third question, for the semiconductor photonics segment already reached 46% in third quarter. Could we expect this segment to reach 50% or even 60% in next year?
I think we will have 50% in fourth quarter and then.
Oh, 50% in fourth quarter.
Yeah, and overall, the whole year should be overpowered business.
Okay. And how about?
And so we think this kind of breakdown will also apply for next year.
Okay. Okay. Gotcha. And my last question is also for metrology.
Yes.
Are we scheduled to shift to one or two or more steps for the foundry players based on current visibility?
Just like I said before, they continue to revise out their forecast for the new capacity. So I only could say the revised version is more than our preliminary version they provide to us.
Okay. Okay. Gotcha. No question from me.
Okay. Thank you.
Thank you. Next question, Anthony Liu, Yuanta. Go ahead, please.
Hi, Anthony.
Hi. Dear CFO Paul Ying and Jennifer, hope you are staying safe in this typhoon day. And I have a couple of questions related to your semiconductor business.
Yes.
Yes. So the near-term question is, we saw your semiconductor business sequentially a little bit down, about 2% in third quarter. Is this mainly impacted by the accelerated China ATE demand? And do we think the semi business can turn to positive sequential growth in the fourth quarter of this year?
Semiconductor. Okay. I think your first question is a very good question. Yes, I will consider third quarter is a transition quarter, which is China legacy start to decline. And then system-level testers start to taking is picking up. And currently, our forecast regarding to fourth quarter, just like we mentioned, because the major HPC makers, they do place in more orders. So yes, our semiconductor in fourth quarter will be more than third quarter.
That's very clear, Paul. And so talking about the SLT business, so we also saw that your SLT business realized a triple-digit growth year to date. And now we also see not just your parts in SLT, but also FT tester and handler have very strong momentum in this year and next year.
You mean the FTs for legacy, right?
FT, I mean in the HPC clients.
No, we don't cover FT for HPC.
Yeah. Yeah. I know other players such as Advantest or other peers. Yeah. So, looking forward into 2025, we just mentioned about that we can have the same momentum in this year. So, your means is mean the total amount or you mean the year-to-year growth in the 2025 can similar to in this year. And so it means that we have the share against opportunity in some CPU and GPU cases.
I think your question, the volume is similar to dollar, right?
Yeah.
Yeah, so what's the difference? Yeah. But we already give you our view is similar to 2024. Yeah.
I see. I see. So do you think the CPU, GPU, this new cases will happen very quickly in the next year or maybe need to wait for until second half of next year?
I can't disclose which quarter we're going to deliver, but we already have these new customers for sure. Yeah.
No problem. Congratulations.
But okay. But I think, according to the major HPC makers, I think we're even not seeing they are slowing down, so.
Yeah. It's very graceful. Yeah. Because the demand is very strong.
Yeah. Because you probably heard recently they decide to increase testing times. So initially, they plan to just test for one hour, but now has been extended to two and probably move on to two and a half hours. So depends on the service results and performance. It's highly possible to go maybe over 2.5 hours. So I think system-level test takes a very important role compared to other process, we believe.
I see. This is very great news. Okay. So I think my last question is regarding to your metrology business. I saw the market is very excited to this business. And first, congratulations for your cutting into this CoWoS blue ocean market.
Yep.
Yeah. And I'm very curious about that. The reason why the foundry client choose our product is because the 7981 model can detect RDL layer mark precisely in the CoWoS-L in this process? Or is there any reason that they choose our product but not other peers?
Of course. We are the local small player. If we got qualified, definitely we are not only outstanding on the performance, but also the throughput. So yeah, I think we will definitely have other opportunity for the advanced package, not only limited to CoWoS.
I see. Okay. So my last question will be, since Blackwell, this chip is more intended to be packaged by CoWoS-L than not the CoWoS-S. So do we think we can replace the former metrology machine in foundry customer fab? So it's not just AP7 and AP8. Do we think we can have more opportunity in the AP6 or even older fab?
We are trying on it.
I see. Very clear and thank you for answering my question. Now back to the few.
Thank you.
Thank you.
Thank you. Next one, Arthur Lai, Macquarie. Go ahead, please.
Hi, Arthur.
Hi, Jennifer. Hi, Paul. Hope you stay safe and dry.
Yes.
So I think a lot of analysts and Jennifer already discussed the product. So maybe I switch gears to the AP7. I'm surprised about the free cash flow actually for the three quarters. We already reached TWD 1.9 billion. And also the year-to-year comparison is also surprising. I guess there is some good things going on. It's driven by business. So my question is quite simple. Can we talk about long-term shareholder return plan or dividend policy? Anything to share with our long-term investor?
You mean our?
Dividend.
but I think I will actually reach out our targets, which is over 20%. So you mean.
Will we consider to increase the payout ratio in the future?
I think the 70%, I think right now is pretty much the highest one.
If we have extra cash flow.
If we have extra cash, yes. But right now, I think we still maintain that somewhere like 70% payout ratio.
Yeah. Thank you. Good enough and the other thing is, if we look at the future, we have a more fascinating photonics business in terms of the total revenue. Will it change our free cash flow? For example, will it become healthy, better and stronger?
I think our new factories, I mean, our phase two is under progress at the moment, and then the phase two will not be ready until 2026. So I think if your questions point on improved cash flows, maybe not for these two years. Yeah.
Okay. Okay. Got you. Yeah. The reason I ask this question is, do we have an ATE? So what's the accounts receivable difference between the ATEs and also the semiconductor business? So is it all the same AR days or is it actually case by case different by the segment?
I think it's pretty similar. I don't think it will be.
It's pretty similar.
Yeah. I don't think there will be a very big difference on that.
Okay. Got you. Thank you. So yeah, I don't have any questions. Congrats for the strong result in 30 years. Thank you.
Thank you.
Thank you.
Okay. Hi.
Hi, John.
We're now in question and answer session. If you would like to ask a question, please press star one on your keypad. Thank you.
So HSBC?
Yes. Next one, Warren Jin Zhang, HSBC. Go ahead, please.
Yeah. Hey, Jennifer. Hey, Paul. Just a couple of follow-up questions for me again.
Sure.
So on metrology, right? Yeah. Yeah. Just to clarify, obviously, your other competitors like Dragonfly, the product, and all that, they have a very strong software AI learning platform, which will essentially allow them to assess alignment TSV better. And so my thinking is that my thought is just that you will likely be second source supply, 10%-20%, unless obviously, the trust is there between you and your main customer, for sure. But I'm just curious to hear your thoughts on how you are going to compete with these U.S., Israeli competitors moving forward. What is your competitive edge in product? And I have a couple of follow-up questions. Thanks.
Oh, John, okay. Several issues I would like to clarify because just I keep repeat this vendor selection process is already complete, and it is very restricted and long-term process. If once being concluded, there won't be a competition issue, and the only thing I could tell you today is our current order on hands is already, I mean, based on the units, is already over the existing makers. So because at that.
Sorry?
Our total orders on hand is already more than the current existing vendors. So, let me recap a bit. The conclusions we just made back to maybe August and September is a new capacity all go to Chroma. And how to replace the existing, there'll be another issue subject to discussion. So how to take action and how to replace will be subject to the client's strategies. And we are unable to comment. So there won't be existing so-called market share issue.
That's extremely helpful, Jennifer.
Yeah.
Appreciate it. Appreciate it, Charlotte.
Thank you. Yeah.
My second question is, you mentioned 2-2.5 times increase in test times.
Yes.
So SLT is obviously 20 minutes more than one to two minutes for existing burn-in final test, etc.
No. System-level test for.
Hold on.
System-level test for H series testing time is half hour to one hour. Initially, they planned for Blackwell, which is GB series, is around one hours. But because recently they find that GB series is too critical and too complicated, so they decide to extend to two hours to 2.5 hours. This is already decision made.
So, Blackwell, the offer is 2-2.5 times. Is that correct? If I may check, is that correct?
Yeah. This is already a final decision. So that is why I guess all of us got the increasing orders. Remember I mentioned to you before, number of units, it depends on the cycle time. If cycle time increase, then unit number will have to increase.
Okay. Last question. Your EV power orders, right? Given some of your key customers have reported over the last week or so, they're guiding about 30%-40% decline. Your EV power orders are about 30% down this year. Fair to assume EV power decline by half. EV power decline by half, right? Essentially.
I haven't really.
Because.
Yeah. Please.
Because U.S. is weak. I mean, give or take, plus or minus, still having competition from China, still strong. But if you combine U.S. and Europe together, they're still going to decline by half. Is that something you have internally assessed or more comment? Yeah.
Okay. That's a fact. Just like we mentioned, we think the power business down about 22% in the first three quarters mainly come from the low sentiment CapEx from EV and ESS sectors. We even guide like the fourth quarter will be lower than third quarter. So how much will be down to this is not something, as I said, we couldn't give or provide a guidance with numbers. I think this kind of guidance is already very clear.
Yeah. Just to share with you, I mean, some of your customers at least about 30%-50% down. But I think that's within range, your semi and metrology shop. Thanks.
Okay.
Just talk on me. Thanks.
Thank you. Okay. We are taking the last questions. Thank you.
Please go.
Of course. Right. Next one, Ken Capital. Go ahead, please.
Hi, Ken.
Yeah. Just want to clarify some previous answers just in case I mislead. So first of all, for the SLT, do you just mention the momentum for next year could be similar to the momentum for this year?
Yeah. Overall semiconductor sector system-level testers. This is based on the customer's preliminary order guidance.
Okay. Okay. And second is about the metrology. You just say for the all new capacity, that will all go to Chroma, right?
New capacity, yes.
Okay, and then so do you expect this to be multiple billions revenue for next year?
Yes.
Okay. Okay. It's very clear. Thank you.
Thank you. Okay. Thank you, everyone's participated. So operator, can you close out the call? Thank you.
All right. Thank you for all your questions. That would be the end of the conference.