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I am pleased to report that FY2017 was an inflection year for Globetronics in new product breakthroughs and significantly improved financial performance. This was contributed by a strong turnaround in our sensors division in 2H 2017 and supported by stable contributions from our quartz timing devices and LED division. We closed the year with revenues of RM305 million and net profit of RM51.1 million, which represents an increase of 41% and 99% respectively over FY2016 financial numbers.

The challenges that we faced for FY2017 were definitely a set of pleasant pressures, where we witnessed strong loadings and ramp up for key products in all our business divisions. The ability to support our customers in delivering all the volume ramps whilst maintaining the quality of products were the key performance indicators (“KPIs”), where a lot of hard work and perseverance were needed to achieve the following:

  1. The hiring and integration of hundreds of employees to support the huge ramp up in the sensors division as well as quartz crystal timing devices. This involved a massive effort by the Human Resource department to obtain the workers and for Training to certify and integrate them into the production lines on a phase by phase basis.
  2. The on-time delivery of all the CAPEX equipment, in phases, that we spent RM107 million on for FY2017. The timing, installation and qualification of all these equipment/tools were crucial in enabling our customers to successfully launch their products into the market on time.
  3. The dedication by our production and supporting teams in spending many 24/7 workweeks to support the key ramp periods were crucial and very much appreciated. Our team had also continue to deliver an outstanding set of KPIs in manufacturing excellence.
  4. New Product Introduction (“NPI”) team in continually working on and delivering new products to offset the volume and Average Selling Price (“ASP”) erosion of the matured product lines.

Globetronics Sdn Bhd / Globetronics Manufacturing Sdn Bhd / Globetronics (HK) Limited

The sensors division was the most exciting unit for our Group in FY2017 and is expected to remain so coming into FY2018 as well. After almost 18 months of lower demand for our existing proximity sensor product and no new components adopted in FY2016, our NPI efforts and perseverance finally paid of with 2 important components of light sensors being designed into our end customer’s products in 2H 2017. The light sensors started mass production in July 2017 and managed to achieve optimum volume loadings of more than 30 million units per month starting in October 2017 to become the key product of the sensors division. We spent a total of RM80 million in CAPEX for this product and the equipment was delivered in 2 phases to cater for the volume requirements of the end customer.

As for our existing and mature sensors operation:

  1. Our proximity sensors monthly volumes have actually increased from end 2016. They continue to form an important component to our customer’s older version of the smart phone.
  2. Motion sensor monthly volumes are stable and have been incorporated into the new wearable devices.
  3. We have put in approximately RM20 million capex to increase significantly our gesture sensor monthly volumes, where the end application goes to a peripheral product of our end customer.

Overall, our sensor volumes ended FY2017 at more than 50 million units per month, which is more than double our previous peak of 22 million units per month achieved in FY2015, showing the strength and progress we have made in this area.

Our wafers and optical lens processing segment was generally weaker and quite volatile in FY2017. The sawing and sorting for general lighting and automotive products were weaker than FY2016 due to soft demand from our European customer.

As for the IRIS LED sensor supplied to a smart device customer, this was the more volatile segment as it had very strong loadings up till mid Q3 and saw a significant drop in volumes, before rebounding again toward December 2017.

The Integrated Circuits (I.C) segment remains flat and we do not see improvement in this area as growth is dependent on economies of scales from higher loadings and Capex investment, something which we are not providing equal focus in term of resources in view of the matured products and cost competitiveness involved.

Globetronics KL Sdn Bhd (“GKL”)

GKL continues to be a reliable manufacturing partner to our Japanese Quartz/timing devices customer. We are producing averagely 120 million units per month of various timing components for automotive, consumer electronics and mobile devices. In total, we manufacture around 10 product models for our customer who is the world’s biggest producer of timing devices in terms of monthly production output.

To maintain their leadership position in this space, our Japanese customer puts a lot of focus on product streamlining and re-allocation, relentless productivity and cost reduction drives to ensure that the ASP of their products remain competitive globally. The key to achieve win-win with them lies in our efforts and creativity to make continuous breakthroughs in reducing our operating costs and deliver manufacturing excellence.

Our aggressive efforts in driving a lean and competitive organization paid off when we were allocated more volumes loadings in Q4 2017 when our customer decided to transfer volume from their Japan and China factories. This represented a challenge to us as the simultaneous ramp of the sensors division resulted in us being in a headcount deficit situation for operative and technical supporting staffs.

The team had to catch up with overtime support until the entire headcount shortage was met in November 2017. While volume loading expanded healthily from this new volume allocation, revenues would not show a corresponding increase as we needed to support our customer with further ASP reduction to maintain their competitive advantage.

To ensure continued growth in our business portfolio, we remained steadfast in reinventing our manufacturing processes to stay lean and competitive to support our customer in remaining the market leader in this segment. While we continue to focus on fully supporting our customer as key manufacturing partner, we also remain on the lookout for new business opportunities with the experience and capabilities we have built up to further consolidate and diversify our volume loadings.

Pending the fruits of new business opportunities, we are expecting FY2018 to be marginally up due to the above new volume allocation.

ISO Technology Sdn Bhd (“ISO”)

The LED business division saw growth overall in FY2017, although individual customers showed a mixed bag of fortunes. Volumes for the niche LED segment for general lighting to a US customer continues to show strong growth in FY2017, as the end products gains acceptance globally. The average monthly volume for this product have tripled if compared to the average for FY2016, so this represents one of the key bright spots in the LED division. We also saw good progress with our fibre related products for a big US customer where volumes had also grown by more than 20% toward end of FY2017. While FY2017 would be a relatively flat and stable year for this subsidiary, our efforts to bring in revenue growth with our existing and new potential customers are bearing fruits. The materialization of these new businesses would grow ISO to be a much bigger subsidiary toward the end of FY2018.

We are working to secure 2 new projects that can potentially be a new contribution factor to the Group in the coming years:

  1. If our laser auto headlamp successfully goes into mass production, we will become one of the 3 major manufacturers of this product globally. The product development and qualification is making good progress and samples have been given to end customer for testing and design-in. We are expecting to have some small mass production in end of FY2018. It will initially be targeted at the premium models of the automobiles, and subsequently to move into mass adoption as product, technology and costs improve. A successful adoption of this product would diversify our portfolio into the exciting automotive segment and away from our heavy concentration on consumer electronic products. Overall, this US customer is shaping up to be another very exciting growth area for ISO, and we look forward to it having an even more significant contribution once the laser headlamp products turn on.
  2. Together with a new US start up, we are in the engineering build phase for a Bio sensor that will be adopted into premium smart phones as a standard feature. Initial samples presented to 2 major smart devices customer were very positive. Both customers had given strong indication and commitment to design in this feature into the next smart device that will be launched at the end of FY2018.

Prospects

We are excited at our prospects for FY2018 and beyond. The adoption of our light sensors into the new smart devices would be seeing a more pronounced contribution, as compared to only about six months of strong loading in FY2017. This alone would provide us with a very strong foundation base for the upcoming year.

The NPI team has already started work on version 2 of the light sensor and this is expected to further complement the existing light sensor to provide an even more robust product in FY2018, with some mass production expected to happen by Q2 2018. We are also expecting more upside potential for our gesture sensor product, if the downstream box build supply chain issue is resolved, we expect the peripheral product to be bundled in with the smart phones (as opposed to being sold separately now), thereby providing more opportunities for growth in this area.

On top of this, the many new products still in development stage like imaging, health and depth sensors also have the potential to be incorporated into the end customer’s products in FY2018. For sensors, there is also another new MNC customer we are working with on a new sensor product that could potentially start mass production by Q3 2018. So if you look at our product pipeline, there are many new exciting products that drive growth further especially from the sensor segment.

With so many new technological applications coming in like augmented reality, virtual reality, autonomous driving, etc, there are many areas that we can contribute our expertise and experience to make these into reality. The laser headlamps we are working on that is getting close to mass production is another example of how we are going to combine our LED expertise with sensor technology to not only provide long distance illumination, but to navigate the respective safety concerns as well when it is utilized on the road.

Risks

In view of the steep ramp up in the sensors business, customer concentration would be one of the risk areas for us in terms of dependence on our immediate as well as end customer. This is due to the fact that our product loadings would be directly correlated to the end demand of the smart devices. Through our experience of working with this customer for the past 5 years, we are aware that the loading linearity may fluctuate periodically and this may result in us not being able to enjoy the optimum cost benefit of a linearized monthly loading during certain months. We are anticipating some volume drop for our new sensors in late Q1 and into Q2 2018 due to excess in the supply chain and as the product transitions to the next generation model.

Overall, with LED and quartz timing devices being the other two major revenue contributors, we can say that our top five customers of the Group make up a very significant portion of revenues. While we acknowledge the concentration risk, it has been our business model for the past 26 years, and we believe that delighting our key group of customers and making them successful would eventually translate to more business for us. On the other hand, we have to be mindful of the fact that volume expansions from our mature, labour intensive businesses come with ASP erosion, and coupled with input cost increases in labour, make these businesses not a strategic fit for us due to the big margin compression. We will continue to evaluate these factors when making decisions on expansion and capex investment, and remain flexible to reorganize our business portfolio to one that makes the most sense to the group.

On the forex front, as approximately 50% of our revenues are generated in USD, we would suffer some non-operational losses should the ringgit continue to strengthen.