Chroma ATE Inc. (2360.TW) Q3 FY2025 Earnings Call Transcript & Summary

Everyone to Chroma's 2025 Third Quarter Earnings Conference Call. [Operator Instructions] And for your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.chroma.com.tw/investor/index under the Investor Relations section. Now I would like to introduce CFO, Paul Ying. Please begin.

Thank you. Hello, everyone. This is Paul Ying. I'm the CFO of Chroma ATE. And today, I will be holding this meeting with Jennifer Chieng, which is the Director of IR. And welcome to the 2025 Third Quarter Earnings Conference Call. Well, let's start with the 2025 third quarter income statement. If you look at this page on the website, you can see that the net sales for the third quarter of this year is TWD 6.4 billion compared to the last quarter, it's about flat and 1% drop, but compared to last year on a year-over-year basis, it's a 14% growth. And with this content, you also can see the consolidated sales of testing equipment for the main -- in the core business, it occupied like 96% of the total sales revenue, which is TWD 6.155 billion. Compared to last quarter, it's a 2% drop, but compared to last year, it's a 19% growth. And our gross margin approached TWD 3.8 billion and over 60%. And compared to last year, it's a 9% drop, but compared to last year, it's a 16% growth. And here, if you look at the percentage of the gross margin, I think mainly it is due to the product mix. So there's nothing that material to present. And as to the operating expenses, well, compared to the last quarter, it's a 4% drop on the general -- SG&A expense and R&D is a 3% growth compared to last year, it's a 4% and 28% growth consecutive separately. For the operating income, it's TWD 1.8 billion. Compared to the last quarter, it's a 16% drop, but compared to last year, it's a 23% growth. So if we go down to see the nonoperating items, you can see that net nonoperating items, it contributed TWD 3.6 billion, compared to the last quarter or to last year, I think it's a tremendous growth. Well, mainly it's due to we enjoyed the gain from the disposal of residential apartments held for sale and it's all to the employees of net value of the contributed to the bottom line straight approach to TWD 3.2 billion. So for the net income for this quarter, it's TWD 5.1 billion and compared to the last quarter, it's 155% growth. And compared to last year, it's a 253% growth. I think -- again, although it's mainly contributed from the sales of the residential apartment, for that part, I think for the single quarter, it contributed somewhere like TWD 7.6 for the EPS. But outside of that, we still enjoy TWD 4.4 EPS for the third quarter. Well, let's go to the next page. For the first 3 quarter condensed consolidated income statement. Here, you can see that the first 3 quarters of 2025, the net sales approach to the TWD 19.7 billion compared to last year, it's a 27% growth, and it's mainly coming from the sales of testing equipment business, which is TWD 18.9 billion compared to the last year, it's a 29% growth. As to the gross margin for the first 3 quarter of this year, it's TWD 12.2 billion compared to last year, it's a 34% growth. And Here, you also can see the operating income approached TWD 6.2 billion compared to the last year, it's a 58% growth. And here, you also can see that for these 3 quarters of this year, the operating income approaches to over 30% to 31% now. And again, for the nonoperating items, net of that is TWD 4.3 billion compared to last year, it's 4x growth, which is tremendous. And mainly it is contributed from the sales of the residential apartment to employees, and here, you also can see the first 3 quarters net income approached to the TWD 9.2 billion compared to last year, it's almost 1.5x of last year's contribution. And again, for the EPS for these 3 quarters this year, approached to TWD 21.67, which is, I think this is a good result we've contributed to our shareholders and investors. Well, again, let's see the balance sheet highlights and the financial ratios. Here, you can see that the asset mainly is increasing due to the sales of the residential apartments as well as the growth of the top line. So you can see the cash on hand, which is 42% growth compared to last year year-end. And inventory, we have a 20% of growth. And for those items like long-term debt -- short-term debt is decreasing due to the cash on hand -- full of cash on hand, but for the long-term debt is due to the capital expenditure for the second phase of our expansion plan and the building is still ongoing. And for those return on equity, I think approaches 30%, which is 29% for the third quarter end, and compared to last year, it's 22%. For the return on assets, it's over 20%, and compared to last year, 15%, which is a big growth. And for the -- we still net cash on hand and also the free cash flow is somewhere like TWD 5 billion, compared to last year, it's 166% of growth. Well, this is the financial highlights. And again, ask the Jennifer to take it over to give you some highlights of the product mix and sales breakdown.

Thank you. Good afternoon, everyone. This is Jennifer. Please refer to Slide 9 for the product mix breakdown. For the third quarter only, test instrument and ATS have made another quarterly record high, reached TWD 3 billion. So last quarter was a historical high and the third quarter compared to last year further increased by another 12% and 74% compared to last year. This has been demonstrated strong demand of AI server power. Some for the first 3 quarters, the total sales have increased by 54% compared to last year, first 3 quarters and higher sales than total annual sales revenue in 2024. Since the new AI power infrastructure will start to build new capacity next year, we expect the power business, test instruments and ATS will continue to grow in 2026. For semiconductor sectors in third quarter has declined 5% quarter-over-quarter, but still increased by 15% year-over-year. The slight decline was due to some adjustment for the shipping and -- but we expect semiconductor remain strong compared to last year. Last year, our semiconductor sector had an outstanding growth of 135%. This year, year-to-date, first 3 quarters of semiconductor sectors have reached to TWD 6.9 billion, which has continued to increase by another 41%, an improvement to the annual sales in 2024. Based on our recent receipt from our customers' orders and plans for next year, we believe the semiconductor sector will continue to grow another year. The turnkey solution due to slow sentiment of EV industries and reschedule of deliver the automation of all AI applications year-to-date has declined around 40%. We don't expect this sector will have a large pickup in the fourth quarter. Overall, parent company sales reached TWD 5.5 billion in third quarter, similar to second quarter, but increased by 38% compared to last year. For first 3 quarters, the total sales revenue for parent company reached to TWD 16 billion, giving a growth of 40%. And for consolidated sales in the third quarter is about TWD 6.1 billion, kind of flat compared to last quarter and increased by 19% compared to last year. First three quarter was about TWD 18.9 billion, giving a growth of 29% compared to last year. The consolidated entity MAS, as we think should be similar to last year. So the total consolidated sales for first 3 quarters reached TWD 19.7 billion, a growth of 27%. And we think we will have another year of good growth. We can move on to Q&A.

[Operator Instructions] Alex Wang from Bernstein.

This is Alex from Bernstein. I have a couple of questions. The first one is about AI power tester. What's the lead time now for your product? I remember last time you mentioned it's about 6 months. Any update on that?

Willing to speed up for special customers. So now it's really short. We do everything we could. Otherwise, we couldn't digest. We couldn't really be ready for the next product capacity building next year. Because so far, I think this year is mostly build out the capacity for existing solutions. If you talk about new solution like 800 volt or other [indiscernible] I think they schedule next year.

I see, very clear. Yes, so about the 800-volt HVDC or 400-volt HVDC, so you do see more business opportunities for this new architecture. So you will have more product solutions for these power racks, [indiscernible]

I think power already is ready. We just need -- but the customer scheduled to next year start to build the capacity.

I see the product you have -- is this thing like your product for PSU, DDU, supercapacitor, the stuff you already sell?

Yes, because this is a new AI -- you could say new AI power infrastructure.

Okay. Okay. I see. And then a question about the SLT. How should we think about the testing time for Rubin SLT versus Blackwell? Do you have more color about that?

Okay. First, we already received the PO and the forecast for next year. And we think according to the number we received, it should be similar cycle time. But due to Rubin is quite -- higher level compared to GB. So the number of units is actually increased.

I see. So although Rubin is more compact and thermal design power is much higher than Blackwell, but you see the testing hours is similar to Blackwell. Is that right?

Based on how we preliminary forecast the units, I mean, the total units you may need full capacity. But as I said, this capacity start to build for next year. So this is just not yet [indiscernible] but start to build up capacity from next year. But as I said, the total unit according to customers' recent forecast to us is more than GB.

I see. And then final question is about metrology. Last time you mentioned this year, the guidance is over $1 billion revenue. Any update to that?

What kind of update you're looking for?

I mean for the metrology revenue guidance this year, is it still the multibillion? And then for next year, how would that compare to this year?

I don't comment on the numbers, but we just pretty match with -- we just support the customer schedules. I think how much people think about the capacity next year, that will be how much growth rate for the equipment.

Next one to ask question, Kevin from Citi.

So first of all, I would like to get a quick sense from the power sectors right now. So I think in addition, we have seen the strong strength at [indiscernible] customers. So I guess in addition to the [indiscernible] growth, are we also seeing -- how should we think about the content growth? For example, like we are testing more and more components inside those products. So are we -- how should we think about the content growth in terms of power tester as well? Are we seeing that value increase as well?

I think if you talk about those design and the content change, I think you may -- you probably need to ask Delta, yes, but I think current situation is they are going to change it to another new format of AI-powered infrastructures. So that's clear the new capacity built. It's not -- it's hard to do this kind of comparison. However, based on the preliminary customer forecast for next year, we supposed to have another double-digit growth.

Okay. Would this be like a high double digit similar to this year or...

I'm not going to comment on that. But, however, recently market mostly talk about like 800V, something, [indiscernible] is not yet built. So you need to think this is new capacity built.

Okay. So that will be the new capacity. Got it.

New driver. Yes.

All right. My next question is more on the SLT side. So I think you just mentioned that the -- about the -- I think that the unit wise might still need to have some upside compared to this year, right? So I was wondering how should I think about the ASP for the Rubin generation of SLT? Is it going to increase similar to the past generation, let's say, from the hardware to software as well?

Okay. Overall, according to our -- okay, Rubin is kind of final, it's final. So we already received a PO. And they -- of course, the price has increased and same is the number of units has also increased. So there's no doubt for the -- I think will be more than this year. I think overall system-level test, we think will be more than this year due to 2 factors. First one, of course, come from NVIDIA, I said, [indiscernible] on the unit price or number of units for new capacity, both are increased. Another factors are just everybody pretty much already aware that we are gaining the market share from AMD. So AMD [indiscernible] already released, and we will be acting as a sole vendor for AMD. So this is kind of gaining extra customer space. And not -- this thesis is not account of the driver for ASIC. We do see like 1 or 2 ASICs actually turning to more aggressive next year.

Lastly, I think just following up on the AMD part. So I think in the past few years -- yes, in the past few years that due to the strong growth of the key customer, so the contribution from SLT from these are rather limited. So are we seeing like a significant increase in terms of contribution from SLT for next year from the new customer? And how should we think about the automotive demand going forward as well for SLT?

I don't really clear about your -- I don't quite understand your question. But basically, we already guide -- since mid of this year, we already revised up our system-level tester sales contribution for this year. So this is already more than last year by double digits. And according to [indiscernible] , I think we do have a confidence level that next year probably will be more than this year by gaining market share. As you know before, we are not a system level test provider for AMD because they mostly cover CPU. So starting from MI 400, now we are big designer supplier.

All right. And lastly, on the automotive demand for SLT.

Sorry, I don't understand your question, sorry.

I think so far this year, much of the demand actually comes from auto chip testing, much of the SLT demand comes from the auto testing, right? So are we going to see -- yes, are we going to see similar strength for next year as well?

Well, same product continue -- due to our capacity doesn't apply for equipment making -- equipment company. So this year's driver, remember, we mentioned that some amount is -- small amount carried forward from last year GB plus ASIC. So initially, our guidance regarding the system level test is flat to decline. But later, we rewrite out because the customers want to build on non-GB products. Non-GB product customers actually position those chips are for autonomous driving plus edge AI. But if you want to know the really detailed split, I think it depends on MDR.

Next one to ask question, [indiscernible]

First one, I want to know about how do we imagine the [indiscernible] SLT about the amount and its units, is similar to which generation about NVIDIA's solution like Hopper or Blackwell. How -- just how to imagine it.

You could try Hopper, yes.

And the second one is to update about the photonics solution and so from -- maybe some [indiscernible] and they mentioned about them, will have some progress in November. Is there any update about this?

Are you asking [indiscernible] CPU?

CPU, yes.

Sorry, are they being qualified, yet.

Still on -- yes, it progressed. But I'm not sure [indiscernible] about rumors. So I just want to check about is there any update or not?

I think they need to get qualified by customers before we talk about capacity built.

Okay. Got it. And sorry, the final one is about -- could we update about integration about power testing and -- yes, just power testing. Thanks.

Too many to account for integration.

Next one to ask question [indiscernible] from Bank of America.

A couple of questions, probably just from the third quarter first. How much contribution from data center-related power equipment now? Last time it was 40%. Would you provide some update? And how much of it is coming from China?

I think we still forecast 40%. I think just -- I think the proportion wise, maybe next year will be more than 40%, maybe, maybe because according to recent order received, still mostly the capacity is from the AI power because as I said, because AI power infrastructure migrate to another format, that's the key driver. I [indiscernible] for China because you know, [indiscernible]

Okay. Yes, that's right. So 40% for full year at the end of this year and could be higher for next year. So that's pretty helpful. And then just on the gross margins, down [indiscernible] versus same quarter in third quarter. But I think compared -- from a year-on-year comparison perspective, it is still improving and still compared with the historical rate, it is still on the high end. So should we think about this as a new norm going forward at least going to be like 50% levels or it is going to be dropping back to like high 60% level.

I think we see where we are, anything above 55%, we're very happy, that's it. Yes.

Okay. So you're not seeing your structural profitability guidance yet?

No. If you ask me the gross margin, which is we mostly reluctant to comment. I think we will maintain we are happy over 55%.

Okay. Okay. That's helpful. And then just on the forward outlook, could you share a little bit on the book-to-bill? I understand there is someone asked this question, but I mean, just from the qualitatively speaking perspective, would you say that the current book-to-bill for both power and also the semiconductor business is actually at the high end or even probably [indiscernible] high at this stage?

Okay. This is only 2 months left. So if you're using 3 months rolling, I can't do the BB ratio because the customers mostly place the order for next year. So -- but customers sometimes they give you the orders, which need to break down by 3 different period. How could I really provide you the BB ratio with 3 months rolling. Yes, we have to skip this question. Thank you.

Sure, sure. Okay. I won't follow up on this one. But just on the semi business versus the power business. Previously, you guided semi is going to outgrow, but with stronger than-expected power demand year-to-date, are you still holding the guidance? Or it seems that power is going to outperform semi for this year at least?

Maybe semi will catch up next quarter.

That sounds pretty promising. Okay. And then initial view in 2026 -- this is going to be my last question, and I'll be back in the queue. Do you have a view which segment is stronger? Is it semis or power because you mentioned that power is going to grow double digit. And I assume that based on your comment on [indiscernible] metrology just now, semi should also be at least growing double digits as well. So just wondering if you could comment based on the current customer backlog, which segment is probably going to outperform the other?

Okay. Next year, 2026, our new -- our second step will start ramping. And we're glad to receive those orders and to meet the customers' needs. So this already answered your question.

[Operator Instructions] Next one, we have Jerry Tsai from JPMorgan.

Jennifer, yes, two questions for me. I think, first of all, the -- yes, for the power business, we understand like [indiscernible] key customers. But just wondering if the international U.S. power ODMs such as Vertiv, Flex, are those are -- do they also use your equipment -- testing equipment extensively? That's my first question.

I think Vertiv mostly is very, very high power like a power station type. We don't cover those high-end. And if you want to say initial period, someone like AI. But the fact is you talk about those AI components, especially for server data centers, I think those have already account for quite a big chunk.

My question is basically, you probably still see some newcomer or people want to grab a piece of the very strong data center power inside the data center, right? So just wondering if the new -- anyone new come to this market, would they mostly buying the Chroma equipment?

But for new solution, the new structures need to be approved by the customers. This is not something all you want to make and you can sell.

So maybe you can give us some indication about the competition landscape.

What do you mean by competition? You mean our competition or Delta's competition?

Yes, yes, your competition, yes. Or you don't see any competition?

I wouldn't use the word [indiscernible] vendors, but Delta -- we could say Delta [indiscernible] others AI that prefers. So I have to say product is ready, but just scheduling to build out the capacity next year. So my key point is scheduling next year. So with me everyone is ready for that.

Okay. Understood. Okay. Maybe move on to the next question. Next question is related to potential future acquisition. I was just wondering -- because I think I recall a few years ago, you bought some start-up that focused on the thermal technologies. Are you looking to do that in the future?

We always do. Every year, we have 5 to 10 acquisition opportunity and under evaluation. Yes.

We always keep the radar out, yes.

Yes.

Yes. Well, without reviewing the details, but can I say thermal management will be one of the key areas that you're looking into?

Not only to that.

Not only that. All of them.

Next one to ask question, from [indiscernible] Capital.

Also a follow-up on AI server power-related business. Based on your customers' capacity expansion plan, it seems like next year or 2027 onwards will be even bigger years for them. And I understood you have many power testing products. May I assume on 800V HVDC, your products are ready, but not yet shipped to the customer?

Yes. [indiscernible] this year. So all of these driver of sales contribution only for current [indiscernible] product, is not yet to ramp up 800V and HVDC.

Yes, sure. And then -- but based on this, we already saw 3Q deliver quite strong growth for this business. But you have still so many projects on hand and we can assume the 800V HVDC will be very big. So can we assume still quite strong growth for power business next several quarters or several years?

I would say like several, like 5 years, but you say a couple of years, yes.

Next one to have question, Arthur Lai from Macquarie.

I would like to ask non-power question. So in the semiconductor on the same test solution, we know the 15% year-over-year growth. And can you give us more color on the future booking.

What do you mean by future booking. Okay.

Probably quarter 4 or next year, right, yes.

Okay. Equipment company, some has -- actually most [indiscernible] forecasting the schedule. And they cannot be just like the components makers, equally break down into like 3 or 4 quarter like this. They couldn't do that. To be honest, on the semiconductor sectors, I don't think this evolves -- was kind of disappointment because I think third quarter, we just, I would say, mostly is the system level testers. And the photonics sectors have not been changed, as I -- I probably mentioned before, all this year remains strong due to the migration to 1.6T. So it was dollar-wise, I think photonic sectors in every quarter is not very much -- by dollars, it's not very much change. But I have to say maybe system-level test is the biggest contribution and metrology really need to support the foundry date schedule. So that's why I said we still remain the whole year strong, will be strong. But that's why I said I will probably know, you would not start do better than what we have for the third quarter, I mean, for the coming fourth quarter. But, you know, this year is the -- this year is -- okay, this year is only 2 months left. I think for equipment company, those numbers, whatever we could have is pretty much that kind of level. I think we will pretty much somehow meet the market expectation. But I think people should look forward for the '26 because currently all the orders, including metrology, system level testers, customer order, customers all asking for '26 already.

I think we -- already we're having strong demand from the '26, we [indiscernible]

Some of the critical component, maybe a little bit [indiscernible] not seen any shortage.

Just to followup on next year. You just [indiscernible] looking through the -- actually, hoping how much percentage [indiscernible] system actually.

From a stake wise...

I think from a stake wise, I think we have at least, we can probably at least 50% to double.

I know we are based on floor space turnover, it doesn't mean we could fully occupy [indiscernible] we gradually extend...

Exactly...

But you know, we're glad to have this second phase. As you could see, foundry definitely, you always need to maintain certain level of inventory to support whatever they want the equipments. And then as you could see from want to sell short for those deltas and light on demand, we're willing to build up a special growth phase to them.

Currently, there are no questions. So ladies and gentlemen, we 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 the Investor Relations section. You may now disconnect. Thank you again, and goodbye.