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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone to Chroma's 2019 Third Quarter Earnings Conference Call. [Operator Instructions]
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 Investor Relations section.
I would like to introduce CFO, Paul Ying.
Mr. Ying, you may begin.
Thank you, Mark. This is Paul Ying, and welcome, ladies and gentlemen, from the audience-- all the [ success ] institution and all the investors. Let me start off with the year 2019 first 3 quarter consolidated income statements to give you a highlight.
For the first 3 quarters of 2019, the consolidated net sales approximately is TWD 9.4 billion compared to last year 100 -- sorry, it's TWD 13 billion. It's a drop by 27%. But mainly, it was the decrease of the sales revenue of MAS compared to last year, TWD 3.9 billion. This year, we made approximately TWD 700 million. This is a drop of 82%.
But at the same time, if we look at the gross margin, I think this is an upside, which is that the gross margin is -- grows from last year 44% to 45%, mainly it's due to the proportion of the high-margin parent company sales is growing. And for the OpEx, the level, spending level is approximately similar to last year. So that give us the operating income close to TWD 1.3 billion in 2019. Compared to last year, TWD 2.4 billion, is a 47% drop, mainly, again, is from the decrease of the MAS. And for the net income, the year of 2019 first 3 quarters, the consolidated net income, approximately TWD 1.2 billion compared to last year TWD 2 billion. This is a 39% drop. And so in here, we can see that the EPS give us approximately TWD 3.03 in 2019. And then from the balance sheet side, if you look at the consolidated balance sheet highlights, you will see that there is a decrease in the cash and the short-term investments, but a pretty high growth on the short-term debt and long-term debt. I will expand that in the parent company. But mainly, it was due to the spending -- very high spending at -- on cash at the third quarter.
And for the turnover of inventory and accounts receivable, it reveals a pretty high turnover pace at the 2019 first 3 quarters. Whilst mainly is from the parent company or the inventory level is pretty much on a growing base and preparing for the fourth quarter all the way to the next year first quarter kind of shipment.
And for the accounts receivable, it was due to the -- last year, the consolidated sales revenue is growing pretty fast, and this year, it dropped due to the MAS decreasing on the sales revenue. So that it remains for those accounts receivable on the book, what keep the higher kind of turnover rate. And should be improved approximately on the 2020 next year. Okay. For the quarterly numbers for the highlights, the sales revenue of the parent company approximately TWD 1.9 billion. This is 4% down on a quarter-over-quarter base and a plus on a year-over-year base. The gross margin still maintaining 52%.
The operating margin, approximately 23%, which is pretty comply with the expectation of the management. And for the net income, it's TWD 480 million. This is a 1% up on a quarter-over-quarter base, but it's a down on the 22% on the year-over-year base mainly due to the -- for the net income contribution from the MAS. So for the third quarter highlights, the growth of the second quarter is mainly contributed from the semiconductor and photonics testing, which represent a growth of 20% on a Q-over-Q base and 24% on a year-over-year base.
And for the third quarter financial numbers, if we look at the third quarter itself, you will see that compared to the -- to last quarter, you will see there's a 4% drop on the sales revenue base. But compared to last year, it's pretty much flat. Well, this gives us the -- another observations which is normally third quarter will be the peak season. But this year, it seems to us that pretty comply with the number we made on the second quarter. The gross margin, still maintaining like 52%. And compared to the last quarter, it's a 2% drop, and compared to the last year, it's a 2% up. For the OpEx, if we look at the numbers compared to last quarter, the OpEx controlling pretty okay. So I think the level is pretty much the same. The absolute number is even a little bit lower than last quarter and compared to last year as well. So the operating income approximately TWD 444 million. And this is a 9% growth. And compared to last year, it's a 13% growth. But again, down to the bottom line, we made TWD 480 million at the fourth -- at the third quarter. And this is 1% up compared to last quarter and 22% drop compared to last year. And this gives us TWD 1.16 as the EPS for third quarter. If we look at the parent company for the first 3 quarter on 2019. Again, the net sales approximately TWD 5.5 billion compared to last year, TWD 5.8 billion, this is a 5% drop. But the margin is pretty much flat on the gross margin, which is up 52%. But on the amount, which is the 5% drop comply with the drop of the top line.
And for the OpEx, the first 3 quarters compared to last year is pretty much similar. So the operating income come to TWD 1.1 billion. And compared to last year, this is a 8% drop.
And down to the bottom line, again, for the first 3 quarters, the net income for the first 3 quarter of '19 is TWD 1.2 billion. And compared to last year, TWD 2 billion. This is a 40% drop. Again, the main reason still coming from the subsidiary MAS drop on the top line and also the contribution of the net income. So the -- for the first 3 quarters earnings per share is TWD 3.03, again compared to last year, this is a 40% drop. And about the balance sheet highlights, if we look up here, you will see that the cash and short-term investments dropped by somewhere like TWD 1.3 billion and the short-term debt, both short-term debt and the long-term debt is growing, but mainly it's from the short-term debt is commensurate with the dividends we paid on the third quarter. And again, the long-term debt is also due to -- long-term debt growth is also due to the spending that we made the -- we acquire the Camtek Israeli [ NY ] company, 20% shares, approximately TWD 2.4 billion, and also plus the new headquarters in A7 airport MRT station [ the construction ]. So in there, you will see that the growth of the short-term debt and the long-term debt. But I think along with the strong earning power and also the operation that we made this year, normally, I think the short-term debt will be recovered by somewhere like next year first to second quarter. But the long-term debt pretty much match up with the long-term investment. And that give us the -- a little bit high on the net debt to equity this year from last year 4% to 28%. But again, this was due to the spending all on the lending on the third quarter. I just mentioned one is for the cash dividend, we paid like TWD 1.7 billion and the other one is the Camtek investment realized at the third quarter. And the payment is around TWD 2.4 billion. And the rest of that will be constructed for the A7. So this is for the highlights of the balance sheet. And the next one will be the operation highlights. If we look at the third quarter total mix and the consolidated sales breakdown, you will see that in the third quarter, the test instruments and automatic testing systems, ATS, we made around TWD 1.1 billion, and this is a 5% drop on a year-over-year base and 14% drop on the Q-over-Q base. For the semiconductor and photonics testing solutions, we made around TWD 700 million, and this is 20% growth on a Q-over-Q base and a 24% growth on a year-over-year base, which is a very strong growth. And although it's quite along with our expectations. And Turnkey Solutions again on the third quarter we didn't make many contribution or the shipments for this quarter. And this is an 11% drop on the Q-over-Q base and a 54% drop on a year-over-year base. But again, for these sectors, we do believe that will be -- improve at the fourth quarter. And so that, the total consolidated testing equipment business that comes up to TWD 2.4 billion, and this is a 7% drop on a Q-over-Q base, but it's a 3% growing on the year-over-year base. Again, MAS will be dropped like 66% compared to last year. And new material again this is only 5% kind of [ net ] deviations compared to last year. And this is the third quarter. So the -- again, for the third quarter, the consolidated sales for the total Chroma Group comes to TWD 3.4 billion. And this is a 4% growth on a Q-over-Q. But on 13% drop on the year-over-year base. So for the first 3 quarter product mix and consolidated sales breakdown, we will see that again, for the total consolidated testing equipment business will be -- comes to like a TWD 7.1 billion. And compared to last year, this is a 3% drop. And again, for the traditional and the legacy product like Test Instruments and Automatic Testing System, that will be a 2% drop on the year-over-year base. And for the semiconductor, again, this is a 9% growth compared to last year. Turnkey Solutions, we're still waiting for the shipments on the fourth quarter. So this is a 61% drop on a year-over-year base. Again, for the MAS, this is an 82% drop on the total top line. We made around TWD 700 million. And for the total 3 quarter 2019 consolidated sales revenue comes to TWD 9.4 billion which is a 27% drop compared to last year. Well, for the first 3 quarters of 2019, the consolidated sales revenue, again, I just mentioned is TWD 9.4 billion, and this is a 27% decline on a year-over-year base. And the gross margin we can maintain to somewhere like 49%.
And for the 2019, the overall outlook, the testing instrument business sales in the second half, we expect, will be further improved compared to the first half due to the following couple of reasons. One of that is we expect a short-term weakening in the EV market due to the cooling impact on the China economy and the swing from the subsidy reductions. However, we still think that the long-term EV demand on a very positive attitude.
And for the China localized vendor policy and acceleration of the 5G market development continues to drive the sales of the semiconductor and photonic testing solutions and improving the VLSI testers and the VCSEL and the ToF for 3D sensing and optical fiber communication for 5G infrastructure CapEx. This is the second factor.
The third factor is the Turnkey project we expect in the second half including the automation project and EV battery sale formation systems will give us the contribution for the second half revenue. So this is for the 2019 overall guidance. Now any questions from anyone?
[Operator Instructions] Our first question is coming from Jeff Ohlweiler of Macquarie.
You mentioned you bought a lot of inventory or materials ahead of fourth quarter and first quarter sales. Can you talk a little bit about what's the outlook for fourth quarter? I don't know if you can give any kind of more detailed numbers or any kind of outlook for 2020 in terms of what's growing, what would be more difficult for growth?
In first -- in fourth quarter we think it will not be low season as the usual patterns. And major growth it obviously has come from our Turnkey Solutions. Based on our statements, we have like EV battery sale orders to be delivered in the fourth quarter and also another automation project. That will be made up -- the Turnkey Solutions the whole year will be similar as the last year. Last year's number is TWD 780 million, so you can do your little bit calculation probably come out with the fourth quarter how much we're going to deliver in Turnkey Solutions.
Another big driver actually come from the semiconductors. Maybe we mentioned before that from like third quarter into fourth quarter, I think should be fourth quarter to first quarter, [ sale ] projection will continue to do that capacity and prepare -- in prepare for next year component needs.
So I think first 3 quarters the biggest drivers do come from the 5G [ like IO ] wafer tester demand. And so the first 3 quarters semiconductors, I think it's pretty much ARPU for -- I think especially for second and third quarter. And the biggest driver as we stated mainly come from the VLSI, which is because the Chinese makers localized vendors' policies. And for the [ big sale ] cash mostly come from the [ IO ] Wafer, which is preparation for the 5G market.
So I think the whole year for testing equipment business I think parent only, you may -- I think -- I couldn't give you the financial guidance, but I think we'll not be pretty much different to what we guide at the beginning of the years, yes, so.
And one last question. What's you're CapEx for this year, next year given the headquarter building?
Okay. The CapEx this year, the biggest spending obviously has come from Camtek, almost TWD 2.4 billion. And I think a little bit it come from -- I mean not a little bit. I mean for -- investments for our new [ LAN ] is roughly TWD 700 million.
So these are our 2 largest spending in this year so far. And this -- next year, we are about to move to a new building, but we probably will have a disposal gain for our current buildings. So this is sort of the CapEx and we probably will need further CapEx needs in next year due to significant cash in float.
Our next question is coming from Jerry Su, Crédit Suisse.
I think just want to ask you about the -- on the semiconductor side. Apparently, you have that information that the momentum that it's still quite strong at least until 4Q and potentially what you still have in the first quarter next year. I'm just wondering what are your thoughts on 2020 especially with the continued China localization and potentially more 5G adoption?
For semiconductor, we actually benefit by 2 major driver, first one is Chinese localized vendors. And this will be a benefit from -- to our traditional semiconductor tester, which is primarily parts. And you can consider we definitely as a local vendor for China compared to U.S. providers or other country provider.
And the other one is I think we also benefit because of the trade war. Recent -- I probably wouldn't highlight the customer's name at this moment, but next year we do see several foreigner will be gradually moving out, especially semiconductor player will be -- have a relocation need to Southeast Asia due to these trade war -- in case for the trade war tension.
Relocation, you have a decision.
Yes, so there will be another capacity brand in Southeast Asia. And this is all -- relates -- this will be -- contribute to our [ VCSEL key ] demand. And another part is the continued driving our semiconductors is VCSEL -- sorry [ the force ] related. And based on the 5G market demand, plus the VCSEL as you noticed has continued to add the capacity. I think the semiconductor probably will be have some progress next year.
And another side is we do have some progressing of our foundry business. So there will be another catalyst.
Okay. Got it. And then secondly, on the MAS business, I don't know if you can give us more update on what's going on. I think apparently, the numbers looks to be tracking way below what you have been guided during the year.
Well, MAS is still maintaining -- we still observe the situation changes. Again, we're pretty [ under assist ], so if there's no downpay, then there will be no deal. So we still update that. But again, they're still maintaining connections and also discussion for the project. So project's still ongoing. But the matter is we are not going to prepare anything for them unless they pay out the down payment. I think that's the situation right now.
Based on our connection so far, as you can notice for first 3 quarters we already reached about TWD 700 million, but we do have some down payments, which will be converted to sales in the first quarter. So you probably just added some, I mean, so definitely we will have some sales revenue from MAS in the fourth quarter, so you just add it from TWD 700 million.
Okay. Got it. And then lastly, I think still on the further -- on the relocation definition. Beside these semiconductor customers for SLT, which you have mentioned, how about the progress on the other power or EV or other customers that are using -- that, that could potentially drive your demand on the electrical testing. What is the progress there?
I think China especially for battery cell demand I think this part of it is due to subsidy costs, this kind of slow down. Battery cell particularly. So next year, I think the EV drop rate especially for battery cell portions will be mainly come from overseas. And as you -- as we mentioned in -- back to July, the earnings call, we mentioned that we do have another order in Thailand, which is rescheduled to next year. So maybe, our exposure next year regarding the battery cell will be mainly outside of China, yes.
Okay. Then how about for other components [ where is ] the EV on the relocated side?
We see some of -- yes, we think, actually for the trade war situation starting from last year's second quarter all the way to first quarter of this year, I think this is kind of like a headwind, very strong. So everybody have to make their decisions and to move or not to move. But if it's a moving decision, when and where.
I think until around second quarter to third quarter, I think most of the situation has cleared up. So since we are here and there, we pick up some of the additional orders from the expansion. They already make up their minds, they're moving back to Taiwan or to Southeast Asia or to somewhere else like India. So that type of a decisions will be, I would say, being decided, but not that fast happening if they don't have that kind of hurry.
Relocations are always ongoing. I think as we stated before, it takes at least 1 or 2 years and we even receive some kind of [ rash ] holding in fourth quarter for our product testings because relocation. So business just continue on.
The next question is coming from Angus Lin, HSBC.
So on -- I'm curious about that you previously you said that a -- you just said that a second half strength may come from semi customers relocation out of China, right? Is that a new incremental demand or is that just more of a CapEx, which supports the issue that has been happening late -- early this year but not the start to second half of this year? So I'm just wondering if that relocation demand for you guys is an incremental demand or not just a push back to your --now and you're starting to ship your past year's in second half or around to make that fiscal of next year.
Angus, it's not a push to next year. I just -- as you can notice, I mean the trade war issue, and also the Hong Kong and then China tension we just couldn't. The south foreigner will need -- decide to pull out from China. And this is -- and then they also planning to add more capacity. Maybe Southeast Asia government provides some incentive scheme or other reasons, but customers not only move out of China side but also expecting to add doubled capacity in Southeast Asia, yes. This is impossible to happen in the first half of next year, honestly. I want to special highlight, we mostly deal with logic, I think. We don't deal with memory.
Okay. Also for -- I think for the battery cell order that you guys -- so you just mentioned that battery cell order in overseas market, is that the project from -- made by other customers -- the overseas customers or made by Chinese customers but they are relocating out of China into overseas factory?
Overseas customers, not the Chinese makers. Okay. China subsidy cost, I think the major impact is on battery cell industry particularly. But the euro markets continue to promoting the EV [ concept ], so still have this kind of battery cell demand. But recent case, we mostly receive the -- for next year, is overseas, foreign makers and foreign [ SAT ].
Okay. I see. So for next year based on your current visibility [ let me order again ] next year's starting to look mostly strength will come from -- coming from overseas customers?
Yes.
Okay. And my last question for now is, I still remember for 5G in China, you guys were [ like ] testers for [ EL ], right? And that's mostly for the 5G infrastructure. And I'm just curious about it because right now, we are seeing more, like smartphone OEM, and smartphone really supply chain are building up for next year's maybe eventually 5G enabled smartphones. I'm wondering because based on my knowledge, you guys provided mostly to 5G infrastructure but maybe next year and going forwards it's going to be more 5G smartphone and devices kind of CapEx [ win ]. So do you guys also adjusting that?
I discussed this topic with another investor the other day. How to say, actually, if you really run 5G smartphone there is not really a difference. I mean for optical fiber there won't be like infrastructure or phone. Because eventually if you based on -- refer to like an [ Intel ] concept, optical fiber essentially will become not only for infrastructure but door-to-door and even on PCB boards and all devices. So there is -- I mean if you just talk about optical fibers applications, there's no limit. So according to customers' plans, I think I mentioned before, customers' plan if the demand this year compares with last year -- if you compare to last year is a 1, this year it may double, next year it may triple versus this year. So it's just that infrastructure that I don't think they probably will not need that much.
Our next question is coming from Jerry Tsai, JPMorgan.
Just I think, as a follow-up question, during -- I think Paul was mentioning something about the EV weakness, is something you have just -- is it something you have recently started to witness or maybe you can tell us a little bit more detail about and how it is impacting your ATS business?
Short term.
Yes, short term you will see that the Chinese government, they're trying to restructure the policy for the EV especially for those EV manufacturing business all the way to the battery business. So I think there's a restructuring for that business but good or bad. But short term, I think that will be still be affecting those investment on the CapEx spending for that industry.
So does it mean that -- when you say short term, does it mean that it was -- it should be finished sometime this year or it could actually last into 2020?
Short term means we will see that the momentum for the investment for the EV industry in Mainland China is getting weaker and at least from the third quarter all the way probably to next year. We still -- well, just like Jennifer mentioned, I think for EV systems, we still think that, that will be like a trend for the energy-saving industry. But just in China, I think it's pretty strong in the last few years due to the subsidy politics from the government. But right now, as long as the subsidy cover -- policy has been cut or restructuring, then it will reduce the -- that kind of investing momentum.
So from a 2019 perspective, is it -- could you actually see decline on a year-on-year basis for ATS because of this kind of weakness that you see?
First 3 quarters, not much. I think first 3 quarters I think is still the biggest contribution for our ATS to come from the EV market. And the fourth quarter, a really large decline, but we just foresee it could be -- have some correction in the coming quarters. I think and also throughout yesterday's built out guidance, I think that implies the same thing. But as I say, how market's very fragmented, I just say this could be -- have some impact. The long...
I'm sorry, did you just say you expect ATS to be down a lot in the fourth quarter? I'm sorry?
No, I say no. So far, we don't see a lot of decline.
So [ UV ] is rather stable versus -- okay.
But we're just expecting this could be because the battery cell in China becomes very conservative. Where these battery cells market slowing down maybe influenced to downstream, which you need to keep an eye on this. But currently fourth quarter is not a very big amount of change.
Okay. That's good. One more question about this MAS, because I understand there's some -- this is probably difficult to be -- to be come up at this point. But I'd like to know at this point that on your accounts receivable do you have any sizable exposure to this counterpart?
Okay. I received your question the other day regarding to AR and accounts receivable, okay. After IFRS, there is a term, which the -- that we define this. We do have a receiving year [ debit ] but now the term has been changed to so-called contract liabilities. So we do a little bit adjust to reflect our true AR turnover. So actually that AR is not that big amounts as it will be for the final statements because that is not taking out the dollar we have been collecting at the bank. So actually, our credit exposure is not as big as you stated. And also, we do some provision based on our accounting policy.
Well, basically, I think for the residue accounts receivable for the MAS, I think probably only 6% -- percentage of the sales revenue we made on the 2018, and approximately, that will be somewhere like 10% for the warranty and the rest of the profits.
I'm sorry, Paul, you mean like if this -- MAS revenue was brought back in 2018 was about close to TWD 5 billion. So you say the accounts receivable in quarter about 6% of that?
10% percent of that.
10% of that? Okay.
For the warranty. Yes, that's for the warranty for the shipments.
If you -- okay. What CFO means, if you really want to talk about further risk, and then you have to reverse, then that will be 10% ARPU, which is really -- according to contract, we only can collect 1, 1.5 years later. If these companies went bankrupt and then we -- the part we couldn't collect.
The next question is coming from George Chu, Fubon.
Could you help us to just try to picture the MAS business for the year 2020? Would it be -- what will be a baseline case in terms of revenue size? Obviously, this is actually quite volatile in the last couple of years. Do you think a TWD 2 billion revenue contribution is more or less reasonable?
I think except for last year, last year, was just a totally exceptional high for MAS. I think in the past, the average was strong -- it's around between TWD 1 billion and TWD 3 billion. So we want to project like a very conservative style with the TWD 1 billion, that's quite reasonable. But I think the key point here is MAS is a project-based company. So every year, project could be big, could be small. And our key to decide the size is collection.
The next question is coming from Jerry Su, Crédit Suisse.
Two follow up questions. One is that I think I remember you previously said that a semi plus photonics, this segment of revenue could be going back to a 2017 level. I'm just wondering, if this still holds after the third quarter results.
Possible.
Sorry?
Possible.
Possible, well how -- we'll still meet that...
Should I offer a number? Should I give you?
No, okay. That's fine. And then another question is on the nonoperating gains in the third quarter. I think you have started to consolidate or -- well, not consolidate, start to book the contribution from Camtek. Could you quantify how much you have booked from Camtek in the third quarter?
Not yet. Camtek not yet goes to the book of Chroma yet. We only forecast as the investment after the third quarter end.
Okay. Starting from 4Q, we could see some investment gain from Camtek, as long as...
Yes, but minimum. Yes, but not that material based on the top line expectation from them, which is somewhere around, I think, USD 130 million, I think, to USD 150 million, somewhere like that, I think. That's the top line.
Okay. So then on the third quarter, on nonoperating side, where -- what is the main contribution then?
It still come from the consolidated item, the group net income.
Okay. The -- from the overseas subsidiary.
From the overseas operation, yes, and from the 100% owned subsidiaries.
Okay. And then you also mentioned that there will be some divestment of your buildings. Can you give more colors on that?
We already have buyers. We already...
You mean the current existing headquarters?
I think for both currently the headquarter and also the new A7.
Okay. I think we just finalized that contract with the outside contractors for the residential buildings, so with the [ customer ] that will be somewhere like 4 years after. So it's a long-term kind of a project. But for the current headquarters, we already have potential buyers, and we signed a preliminary kind of NDA, I think 2 years ago, and expect this year will be nearer down the line like next year.
Okay. So it will be more a 2020 event?
Yes, that will be 2020.
[Operator Instructions] There are currently no questions. I will hand it over to CFO, Paul Ying, for closing remarks. Mr. Ying, please proceed.
Thank you, Mark. Well, I think for the third quarter, it's a pretty untraditional kind of a third quarter compared to the past few years. So here, we are still expecting that fourth quarter can give us some improvement on the top line and then give us a stronger second half of 2019. And let us -- can have at least match up with the sales revenue on the parent company compared to last year.
So thanks for your attention, and until next time. Thank you. Bye-bye.
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 Investor Relations section. You may now disconnect. Goodbye.