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

Welcome, everyone, to Chroma's 2026 First Quarter Earnings Conference Call. [Operator Instructions] For your information, a webcast replay will be available within an hour after the conference call is finished. Please visit www.chroma.com.tw/investor/index under the Investor Relations section. I would like to introduce our IR Director, Jennifer Chieng. Ms. Chieng, please begin.

Okay. Thank you, Frank. Good afternoon, everyone. Welcome to Chroma First Quarter 2026 Earnings Conference. My name is Jennifer, and I will be your host for today's session. Today's agenda includes our CFO, Paul Ying, will begin by presenting the financial results for the first quarter. I will then provide an overview of the product mix for the first quarter too. Afterwards, we will open the floor to questions and answers. All presentation materials are available for download from the company website. With that, I will now turn the call over to our CFO, Paul Ying.

Thank you, Jennifer. This is Paul Ying. I'm the CFO of Chroma ATE. Thanks for coming to this earnings release of the first quarter of 2026. Let's go through the first quarter condensed consolidated income statement. We can start it from the 2026 first quarter's net sales, which is reached to TWD 11.8 billion, and this is a record high at the first quarter of '26. And well, please keep in mind that normally, first quarter is a low season in all four seasons every year. So this is quite exciting achievement for Chroma at the first quarter. And from here, you can see that compared to last year fourth quarter, Q-over-Q, we have a 38% growth. And compared to first quarter of '25 last year, this is 73% of growth. If we look at the gross margin and the gross profit, it reached approximately TWD 7.4 billion and reached 63% of the gross margin. And this is, I think, the second highest on our quarterly gross margin achievement. And compared to last year fourth quarter, this is a 42% growth and another 79% growth compared to first quarter of last year. As to the operating expenses, if we look at the percentage, well, on a Q-over-Q base, it's approximately 17% growth. And compared to last year first quarter, it's approximately 32% of growth so that we reached an operating income by 4.7 -- nearly TWD 4.8 billion and occupied like 40% of the top line. And this is a 61% growth on a Q-over-Q base and another 122% doubling the size of the -- compared to the last year first quarter. So our net income reached by TWD 3.9 billion and occupied 33% compared to the top line. And this is a 49% growth compared to last year fourth quarter. And on a Y-o-Y basis compared to the first quarter of last year, it's 83% growth. So in there, you can see that we reached somewhere in TWD 9.12 of the earnings per share. And compared to last year, fourth quarter, it's a 51% growth and another 81% growth on a year-over-year basis. And this is the achievement on the bottom line. And let's go to the next page. On the Slide #6, you can see the balance sheet highlights and the financial ratios. Here, you also can see that the consolidated balance sheet highlights. From here, you can see that our cash and short-term investment grows by 10% compared to last year, year-end and inventory grows by another 14%. And total assets reached up by TWD 54.6 billion. It's a 16% growth. And on the inventory turnover days, it is approximately less than the 6 months, reaching by 172 days, which is pretty much the expectation of the management. And accounts receivable turnover days is less than 80 days, which is 77 days. And net debt to equity is still net cash. And our return on assets is reaching 51% and compared to last year, year-end, 29% is a pretty good growth. And for the return on assets, it's 30%, it's also another 10% growth compared to last year. And for the cash position, our EBITDA reached by TWD 5.3 billion -- and our cash flow from operation is approximately TWD 1 billion. And free cash flow due to the investment on the fixed income financial instrument, it reached a negative TWD 825 million. And this is the highlight for the balance sheet. And let's go through the operation highlights and Jennifer, I turn it to you.

Okay. Thank you, CFO. Please refer to Slide 8 for details on our product mix for the first quarter. The key drivers during the first quarter, the primary driver of growth was our test instruments and ATS sections, which saw a remarkable increase of 105% quarter-over-quarter and 145% year-over-year. This surge was mainly contributed by AI server power applications. In addition to AI server power, we anticipate the battery cell project will start to contribute in sales revenue from second quarter. Moving on to semiconductor sector performance. The semiconductor sector achieved revenue of TWD 3.4 billion in the first quarter, representing 19% growth over quarter-over-quarter, and 31% year-over-year. The main contributors to this growth were system-level testers and photonics sectors, rank by sales revenue contribution. Looking ahead, we expect orders to increase in the coming quarters. Currently, the world's top 3 AI HPC companies have adopted our system-level testers. And in addition to NVIDIA, both AMD and Google are expected to make meaningful contributions this year. As the demand from the customers continue to increase, plus the cycle times also increase, we are considering revising our forecast upwards for the coming quarters. For photonics and CPO development, another area exceeding expectation is the photonics. The demand from the transceiver market, CPO will also make a meaningful contribution beginning this year. The CPO section is now structured into 4 insertions, Insertion 1, PIC testing, Insertion 2, EPIC testing. Insertion 3, optical engine testing. Chroma has already received the purchase order for these insertions. Insertion 4 break down into 2 process. First one is Insertion 4.0, testing optical light in and out 100% Chroma. The confirmed purchase order has been received. Another Insertion is so-called Insertion 4E, BER testing. It's kind of a signal testing. The customer is ready and plans to begin a pilot run from June of this year. The same optical engine will be applied for both scale-out and scale-up scenarios. According to recent customers released their vendor list and PO. And that's our highlights for this quarter. And now we move on to Q&A.

[Operator Instructions] First question is coming from Arthur Lai with Macquarie.

Paul and Jennifer, first, congrats on the strong results. So I have a very simple question, maybe to both of you guys. So this quarter, we have a very good ATS revenue year-over-year up 145%. Is it sustainable or not? Based on our experience, this sector actually is our strength, but usually, we don't see so strong growth rate. So this is the first question. And if I may, and I have a second question on the gross margin. And we also see your very strong gross margin as well. I personally believe it's a mix, right? Do you foresee any mix change in the second half or when the other semiconductor products impact your mix? My two questions.

Arthur, I comment on your first question. You mean the growth rate or the dollars?

Growth rate.

That means every quarter, we need to present like 100%. We cannot give guidance like that. But I'm sure this year, we definitely will have some very good results from the testing instruments and ATS. And regarding to the second question, we usually don't comment on gross margin as you've already assess this kind of number from our financial statements.

The next question come from Kevin Chen with Citi.

I have two questions also. The first one was for this quarter in the semi and photonics division, I just want to get a sense of how much of that come from photonics-related? And also, I think so far this year, most of this photonics revenue was still driven by pluggable transceiver. So I want to get a sense of how much incremental opportunity can we expect from CPO ramp-up starting, let's say, second half this year and also into next year?

I think at the time we did our forecast for this year, we didn't include the CPO because at that time, the CPO was not very clear. So you could think CPO is actually extra on top of the transceiver despite we actually see very strong transceiver growth this year at the time we make the forecast for 2026. And currently, our customers already finalized the scale-out and scale up. They were using the same type of design of optical engines. So yes, I think customers already gave us the forecast, especially for Insertion 3 for '27. So I think you could have some expectation from the second half this year.

Okay. Got it. My second question is on the SLT. I think you just mentioned that we're seeing very strong demand increase as well as cycle time getting longer. I was wondering what kind of incremental cycle time or order size are we seeing? And also, if I may, I was wondering how are we seeing the SLT upgrade cycle? Because I think in the past, we usually see a two major upgrade driven by power density increase because all the -- right now, the AI chip systems are migrating faster and faster. But let's say next year's key custom upgrade. Are we going to see another round of faster upgrade next year as well?

I think your thesis is based on NVIDIA solution, but I think please don't forget that this year, we are also having the other 2 giant HPC company. So like include AMD and Google. And AMD will be -- we haven't really finished all the Rubin, all the delivery, but AMD is coming up. And AMD actually have a very heavy weight, especially on system level testers. Based on their power density, AMD, the cycle time is started from the design for 4 hours. And now is actually running much more than 4 hours. So actually, orders increased too.

And our next question is coming from Haas Liu with Bank of America.

This is Kathy on behalf of Haas. And the first question is regarding the burn-in. Could you be able to share more detail on your current engagement with customers on the burn-in solution? And how should we think about the long-term opportunity?

We already received one CS customers placing order for our new burn-in systems. And for the others trial or you could say in the middle process for adopting our burning systems. I think this will be one of the drivers for coming years for sure.

Sure. And my next question is related to power testing. Given the continued uptake in the AI power solutions, could you provide some updates on the backlog from your customers? Are you seeing more traction across your long-term power solution partners along with more requests from your ESS and battery customers?

I don't quite understand your question. You mean the AI server powers or everything. Yes, it has nothing to do with AI server power.

Both from the AI powers and also from the ESS and battery customers.

I guess everyone knows about AI server power, someone like Delta, Foxconn, AI photonics and some Chinese makers.

And would you like provide some updates on the backlog you are seeing right now or...

We can't comment on individual customers' their backlogs.

And my last question is related to system-level testing. Would you be able to provide like how do you think about the addressable markets into 2027 and 2028?

We'll let you know when we finalize the forecast for next year.

And our next question is coming from Alex Wang with Bernstein.

This is Alex from Bernstein. Great results. My first question is, I understand that in the past, photonics normally represents 15% to 20% of your semi revenue. So looking at this year, what will be the ballpark of photonics mix, do you think?

Honestly, I have no idea.

Because it's too strong.

We just guide before, we didn't include the CPO as a projection for this year. So -- and then we also do see the increasing demand from transceiver. I think -- I only could say please do not underestimate our contribution from CPO.

I see. I assume the mix will be higher than previously, 15% to 20%.

Yes. But as we just mentioned, our system-level tester, the orders also increased. We probably will only have this kind of idea about the breakdown by end of this year.

Okay. Fair enough. And second question is that last quarter, you showed a slide about your AI FT handler. So I'm wondering if you have any update on that regarding client tractions, order size, et cetera?

It's everything on schedule. You will see the results coming up.

Okay. I see. And then maybe my last question is that I understand equipment shipment is very lumpy every quarter, but you have so many types of equipment that might smooth out the seasonality. So what do you see the quarterly sales trend in the remainder of this year?

This is actually a very good question, but we do -- I wouldn't say -- yes, it looks lumpy sometimes, but not that lumpy because sometimes we deliver like all in one just because to meet the customer's supply, their schedule or ramping up schedule. We do everything to maximize customer satisfaction. So based on our current order visibility is quite low. So it's very hard for me to comment on seasonality pattern.

Because I'm looking at your last year seasonality, the first few quarters, like TWD 6 billion to TWD 7 billion and jumped to TWD 9 billion. And this first quarter is too strong, TWD 12 billion. So in the remainder of this year, should we expect something similar to first quarter number?

I have no idea. As you can see, we maybe just started because we have nothing booked for the battery cell at the moment, and we will not stop taking order from today.

And our next question is coming from Jerry Su with UBS.

First question on the SLT side, I think Jennifer previously, you commented that you'll potentially raise your forecast. Any idea how much of upside you are seeing right now for this SLT business?

Jerry, we do seriously consider to revise up because first, we have not complete the delivery for our big customers. And we currently would like to increase the cycle time. So they recently also add up more orders. And I really have to especially highlight that we are very strong in the liquid cooling. So that's why we're glad to have this customer. And Google is starting up. So I think maybe they will be located in the second half this year. And our big customers, which is NVIDIA, they're also planning to ramp up LPU. So this is also one of the reasons we do consider to revise our system.

So any ballpark idea compared with previous forecast, what kind of magnitude you're expecting right now?

But since we are not releasing individual factor forecast, so we will not provide any further numbers regarding to that.

Okay. Understood. Then on the metrology side, can you give us some update on this business?

We do everything to support the Taiwan foundry. So whatever the schedule or plan, that's the statement to be able to comment.

Okay. outside of the main foundry, I think a lot of OSATs are also helping or developing similar process as the foundry. Should you think that this should be your opportunity as well?

Yes, that actually happened started from last year. And as you could see, we also designed another metrology tool which is ProMark. And then we do see the order continue to contribute from this year too.

And our next question is coming from [ Michael Xu ] with Hyundai.

Jennifer, can you hear me?

Yes, please go ahead.

Congrats for the great results. And first one, I also want to follow up on transceiver and Photonics business. And because we also have very strong supply chain no matter transceiver or CPO has a very strong demand. So could we have more color about for CPO product, like is there any like the contribution for Insertion 4, is there similar -- fully similar to the Insertion 3 or will be higher or lower?

I think I would suggest analyst to break these CPO things into wafer levels and die level. But if you look at the die level according to current customers' forecast for coming up 2027, the volume ramp, I would say Insertion 3 is more higher addressable dollar overall.

And -- and like the other chips, is there likely for the CPO which have SLT test or it's still uncertain?

Depends on how you define because right now, as I just briefed, Insertion 4 right now break down into 2 sections, Insertion 4.0 and Insertion 4E. But if you also could consider because under Insertion 4.0, which is even its optical light in and out, this is also kind of concept of system-level testers. So it just depends on how you define that. If you say this kind of real practice is also in line with the thesis of design like GPU system-level tester, I would say this is some kind of optical type of system level testers. Insertion 4E is just a signal testing. It's not about -- it's not like a final testing back to Insertion 2. It just measure the signal how it is BER testing, we just turn the light between light and electrical. That's like IO-IO testing.

Great. It's helpful. Great detail. And my second question is about do we have more color for the first quarter on the ESS and the power business for ATS? Could we have a breakdown like it's more on how -- because you mentioned it's mainly driven by the AI power demand. But could we have some more color on power parts and also ESS part. And could it sustain to the further quarters in 2026?

Well, first quarter mostly come from AI server power. And you actually can expect the contribution from ESS from second quarter, but it doesn't mean we don't have AI server power in the second quarter because we do have customers which just booked up the whole year's orders capacity. So you need to consider maybe some of the months we have to like one shot regarding to this battery cell project.

Got it. My last one is for the capacity plan, sorry, because we saw the really strong demand for '26 and '27. So what's our plan for, like, '27 or '28? And will we need to have more space in like second half of '27 or '28?

That's a very good question because actually, regarding to our Phase 2, originally, we decided for 2 tower North and South towers. And then due to the kind of strong visibility in the coming years, we decided not to sell any of the towers. So we will keep it for our later capacity ramp. So we're supposed to have a sufficient capacity in the coming maybe 3 or 5 years.

And there are currently no more questions. Thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit the website, www.chroma.com.tw/investor/index under the Investor Relations section. You may now disconnect. Goodbye.