ASE Technology Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 11 speakers on the call.

Operator

Hello. I am Ken Sheung, the Head of Investor Relations for ASC Technology Holdings. Welcome to our 4th quarter and full year 2023 earnings release. Thank you for attending today. Please refer to our Safe Harbor notice on Page call to having their voices and questions broadcast via participation in this event.

Operator

Quarter. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows call may contain forward looking statements. These forward looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in New Taiwan Dollars unless otherwise indicated.

Operator

As a Taiwan based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, quarter, including those presented by our subsidiary using Chinese GAAP. I am joined today by Joseph Tong, our CFO and Doctor. Tian Wu, our COO. For today's presentation, I will first be going over the financial results.

Operator

Doctor. Wu will then give a market update and the 2024 key points. Joseph will then give the official company guidance. Both Joseph and Tian will then be available to take your questions during the Q and A session that follows. Call.

Operator

During the Q and A session, each caller will be limited to 2 questions at a time but may return to the queue for further questions. Quarter. As per our expectations, the overall demand environment for our services remained sluggish during the 4th quarter. Quarter. However, there were pockets of stronger performers within the devices we serve.

Operator

But by and large, our our customers remain conservative in their ordering patterns. In general, higher end leading edge services seemed to be faring better than legacy services, but stronger wide breadth volumes remained elusive. For our ATM business, revenues were on the higher end of our expectations. During the quarter, key equipment utilizations rates quarter. We're still relatively low, averaging out between the low and mid-60s.

Operator

For our EMS business, in the Q4, revenues increased sequentially in line with our expectations. This was driven by customers' new devices and growth in computing and automotive segments. For the year as a whole, the seasonal peak was a bit later in the year. With that, please turn to Page 3, where you will find our 4th quarter consolidated results. For the Q4, we recorded fully diluted EPS of $2.13 and basic EPS of $2.18 Consolidated net revenues increased 4% sequentially and declined 10% year over year.

Operator

We had a gross profit of $25,800,000,000 with a gross margin of 16%. Our gross margin declined by 0.2 percentage points sequentially and declined by 3.2 percentage points year over year. Quarter. The sequential decline in margin is principally due to higher EMS business mix and slightly lower ATM business loading during the quarter. Quarter.

Operator

The annual decline in gross margin is principally the result of lower loading during the current downturn. Our operating expenses increased by $400,000,000 sequentially and declined by $400,000,000 annually. Quarter. The sequential increase in operating expenses are primarily due to higher compensation expenses, specifically higher bonuses due to stronger goal achievement and ESOP expenses. The year over year decline was primarily attributable hole to lower bonus and profit sharing expenses across the company.

Operator

Our operating expense percentage declined 0.1 percentage points quenching and increased 0.6 percentage points year over year to 8.7%. Quarter. The operating expense percentage changes were primarily related to lower operating leverage in a downturn environment. Quarter. Operating profit was $11,800,000,000 up $400,000,000 sequentially and down $8,000,000,000 year over year.

Operator

Quarter. Operating margin stayed flat at 7.4% sequentially and declined 3.7 percentage points year over year. Quarter. During the quarter, we had a net nonoperating gain of $600,000,000 Our nonoperating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other nonoperating income, offset in part by net interest expense of 1,300,000,000 quarter. Tax expense for the quarter was $2,500,000,000 Our effective tax rate for the quarter was 19.9%.

Operator

Net income for the quarter was $9,400,000,000 representing an increase of $600,000,000 sequentially and a decline of $6,300,000,000 year over year. The NT dollar depreciated 1.5% against the U. S. Dollar sequentially during the 4th quarter and 1.8% annually. From both a sequential and year over year perspective, we estimate the NT dollar depreciation had a 0.5 percentage point positive impact to the company's gross and operating margins.

Operator

On the bottom of the page, we provide key P and L line items without the inclusion of PPA related expenses. Consolidated gross profit excluding PPA expenses would be $26,700,000,000 with a 16.6% gross margin. Operating profit would be $13,000,000,000 with an operating margin of 8.1%. Net profit would be $10,500,000,000 with a net margin of 6.6%, basic EPS excluding PPA expenses would be $2.45 quarter. Please refer to Page 4.

Operator

Here you will find the 2023 consolidated full year result versus 2022 full year results. Fully diluted EPS for the year was $7.18 while basic EPS was $7.39 For 2023, consolidated net revenues declined 13% as compared with 2022. ATM declined 15% while EMS revenue declined 11% annually. Gross profit for the year was $91,800,000,000 declining $43,200,000,000 year over year quarter or by 32%. In 2023, our consolidated gross margin declined 4.3 percentage points to 15.8%, principally as a result of the electronics industry downturn for both our ATM and EMS businesses.

Operator

Operating expenses declined $3,300,000,000 for the year and came in at $51,400,000,000 given the lower operating leverage during the downturn, our operating expense percentage increased by 0.6 percentage points to 8.8 percent for the year. Operating profit for the year was RMB40.3 billion quarter for the year declining $39,800,000,000 Operating margin for the year was 6.9%, representing a decline of 5.1 percentage points from 2022. We recorded a net nonoperating gain of $2,300,000,000 for the year, including a net interest expense of $4,700,000,000 most of the nonoperating gains were associated with our foreign currency hedging activities. Total tax expense was $9,000,000,000 the effective tax rate for the year was 21.2%. We believe our ongoing effective tax rate for the coming year to be about 20.5%.

Operator

Net income declined by 49% to $31,700,000,000 on a full year basis, we estimate that the depreciating NT dollar had a positive 1.3 percentage point impact quarter to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 16.4%. Our operating margin would be 7.7%. Our basic EPS would be 8 point $0.46 It's worth noting that despite the prolonged correction lasting throughout the entirety of 2023, our $7.18 EPS for 2023 represents the 3rd highest EPS the company has historically delivered. Only 2021 2022 COVID driven demand years had higher EPS.

Operator

On Page 5 is a graphical presentation of our consolidated financial performance. Quarter. On Page 6 is our ATM P and L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. Quarter.

Operator

For the Q4 2023, revenues for our ATM business were $82,000,000,000 down $1,700,000,000 from the previous quarter and down $12,300,000,000 from the same period last year. This represents a 2% decline sequentially and a 13% decline annually. Quarter. Gross profit for our ATM business was $19,200,000,000 up $600,000,000 sequentially and down $7,000,000,000 year over year. Gross profit margin for our ATM business was 23.4%, up 1.2 percentage points sequentially and down 4.4 percentage points year over year.

Operator

Quarter. Gross margin was higher than our original expectations. The sequential margin improvement was the result of product mix and the end of summer utility rates. The annual margin decline is primarily the result lower loading during the current downturn. During the Q4, operating expenses were $10,000,000,000 up $200,000,000 sequentially and down $400,000,000 year over year.

Operator

The sequential increase in operating expenses was primarily driven by higher labor based expenses. The annual operating expense decline was driven primarily by lower profit sharing and bonus expenses. Our operating expense percentage for the quarter was 12.2%, quarter, up 0.5 percentage points sequentially and up 1.2 percentage points annually. Sequential operating expense percentage increased as a result of higher compensation related expenses. The annual increase was due to lower operating leverage.

Operator

During the 4th quarter, operating profit was $9,200,000,000 representing an increase of $400,000,000 quarter over quarter and a decline of $6,600,000,000 year over year. Quarter. Operating margin was 11.2%, improving 0.7 percentage points sequentially and declining 5.5 percentage points year over year. For foreign exchange, quarter. We estimate the NT to U.

Operator

S. Dollar exchange rate had a positive 0.7 percentage point impact on our ATM sequential margins and a positive 0.9 percentage point impact on a year over year basis. Without the impact of PPA related depreciation and amortization, ATM gross profit margin would be 24.5 percent and operating profit margin would be 12.6%. Quarter. On Page 7, we have our ATM full year P and L.

Operator

2023 revenues for our ATM business line by 15% with our packaging and test businesses down 16% and 11%, respectively. Quarter. Gross profit for the year declined 35 percent to $68,700,000,000 gross margin was 21.8%, down 6.7 percentage points, primarily as a result of the prolonged correction. Quarter. Our operating expense percentage increased 1.1 percentage points to 11.7%.

Operator

Quarter. The increase was primarily the result of lower economies of scale. Operating profit declined 52% to $31,800,000,000 with operating margin declining 7.8 percentage points to 10.1%. Foreign exchange. On a full year basis, we estimate that the depreciating NT dollar had a 2.4 percentage point impact on margins.

Operator

Without the impact of PPA expenses, Gross profit margin would be 22.9 percent and operating margin would be 11.5%. One. Certainly, on its surface, the full year comparative results appear to be somewhat unappetizing. Call. But given the breadth and severity of the industry downturn during 2023 and the history of even more unappetizing results.

Operator

During previously even lesser downturns, We believe this annual performance on its whole shows a reset in our ongoing ATM profitability structure. Quarter. On Page 8, you'll find a graphical representation of our ATM P and L. This shows the long protracted downturn that we are slowly coming out of. On Page 9 is our ATM revenue by C market segments.

Operator

Our communications application took its seasonally larger position in the 4th quarter. Our Computing segment dropped from the previous quarter but still remains a point above historical levels. Quarter. On Page 10, you will find our ATM revenue by service type. Quarter.

Operator

We have seen a higher revenue mix of advanced packaging and testing business in the back half of twenty twenty three versus the first half of the year. Week. During the coming years, we expect a higher growth rate from these two segments given the increased complexity and content in newer generations of devices. On Page 11, you can see the 4th quarter and full year results of our EMS business. During the quarter, EMS revenues were $79,200,000,000 improving 8,200,000,000 or 12% sequentially and declining $4,800,000,000 or 6% year over year.

Operator

Quarter. The sequential revenue increase is primarily attributable to a slightly later than seasonal peak to our EMS business, while the year over year revenue decline is primarily due to the broad based soft electronics demand environment. Sequentially, our EMS businesses gross margin declined 0.7 percentage points to 8.4%, while our operating margin declined 0.4 percentage points to 3.5%. The operating margin decline was driven primarily by product mix. Our EMS Q4 operating profit was $2,800,000,000 flat sequentially and down $1,200,000,000 annually.

Operator

Quarter. From a full year perspective, our EMS business declined $33,700,000,000 or 11%. Full year gross and operating profit declined by $5,700,000,000 $5,000,000,000 respectively. Quarter. Full year gross and operating profit margins declined 0.9% and 1.3 percentage points, respectively.

Operator

Generally, the full year declines in our EMS business are the results of the soft electronics market leading to lower operating leverage. On Page 12, quarter. You will find a graphical representation of our EMS revenue by application. The shifts here quarter. Overall, we're generally due to product timing.

Operator

Relative to previous years, some products were earlier while others were later in accordance with customer requests. Further, our computing revenues were also higher driven by stronger networking, server and general restocking revenues. On Page 13, you will find key line items from our balance sheet. At the end of the 4th quarter, we had cash, cash equivalents and current financial assets of $72,000,000,000 our total interest bearing debt was down $27,500,000,000 to 191,700,000,000 quarter. Total unused credit lines amounted to 373,800,000,000 quarter.

Operator

Our EBITDA for the quarter was $28,600,000,000 while our EBITDA for the year was 106,000,000,000 Our net debt to equity this quarter was down to 0.38. On Page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the 4th quarter and U. S. Dollars totaled $234,000,000 of which $130,000,000 were used in packaging operations $76,000,000 in testing operations $21,000,000 in EMS operations and $7,000,000 in interconnect material operations and others.

Operator

Quarter. Machinery and equipment capital expenditures for the full year of 2023 and U. S. Dollars totaled $914,000,000 of which $460,000,000 were used in packaging operations, dollars 314,000,000 in testing operations, $114,000,000 in EMS Operations and $26,000,000 in Interconnect Material Operations and Others. Current quarter EBITDA of US0.9 billion dollars continues to outpace our equipment capital expenditures of $200,000,000 At this point, I would like to hand the presentation off to Doctor.

Operator

Tian Wu. Doctor. Wu?

Speaker 1

Hi, everyone. This is Tian Wu. Quarter. Year 2024 will be a year of recovery. In the last few years, there have been many changes.

Speaker 1

So I think it is appropriate for me to give you quarter. A market update, take a snapshot of what we see today and how ASE is competing in this new environment before I go to the year 2024 full year outlook. Let me talk about the semiconductor landscape. Quarter. As you know, the semi organization and many analysts has been talking about $1,000,000,000,000 industry target by quarter.

Speaker 1

Year 2030, we believe that the industry is likely to reach $1,000,000,000,000 revenue target in the next decade. Quarter. It can be 30, it can be 31, 32, 33, but with high confidence, we think the revenue will be 1 trillion mark quarter in the next decade, driven by AI, robotics, EV and all of the new applications. Call. The industry has a clear understanding about our responsibility in net 0, ESG, circular economy, quarter as well as recycling throughout the whole supply chain.

Speaker 1

As a matter of fact, ASE has been putting a lot of endeavor in this area. Quarter. Industry is facing challenges, geopolitical tensions, regionalization, market bifurcation. And with all of this new effect, it will be at a cost. Quarter.

Speaker 1

Also the reduced scale, those are new variables that industry need to learn how to manage. Industry call. We'll have a few things we need to do. 1st, industry has to propose more innovations with higher value. I think AI It's a perfect example in that regard.

Speaker 1

Structure improvement of efficiency and cost, everyone, the whole supply chain He's putting a lot of effort into in that. Also talent, we need to align talent workforce with the new complexities of doing business. Quarter. With that, I would like to turn to the next page. How do we see ASC competing quarter in this new environment.

Speaker 1

So let me list a few competitive advantages and this is based on the feedback from all of our customers quarter as well as internal via discussion. The first competitive advantage is technology. And here, quarter. I'm splitting the technology content into 4 large sector. Let me talk about the high performance computing quarter, the AI arena.

Speaker 1

In that arena, I think the Taiwan ecosystem with foundry, with design companies, quarter. As well as the whole supply chain becomes very critical, ASC in this regard, we're in the center of the Taiwan ecosystem. Also, quarter. Specifically for AI and HPC, we do have the assembly and packaging and testing technology leadership. Quarter.

Speaker 1

On the SiP, no doubt in the last 10 years, AES has demonstrated a clear leadership in heterogeneous integration quarter as well as embedded devices. In the optical, we are slowly revealing quarter. Our endeavor with all of our key customer in silicon photonics as well as co packaged optics. We believe that will be the next paradigm shift, quarter, which will mark the new growth spur for the whole semiconductor industry if that becomes a reality. Quarter.

Speaker 1

And the last one is automation. ASC has been working on fully automated light of factory, quarter, including software development, data collection, as well as design ecosystem, including collaboration quarter with designers as well as customers. So we believe this full area will mark a strong competitive advantage for ASC quarter in this new environment where the higher value of innovation becomes a key competitive requirement. Quarter. The next one will be scale efficiencies.

Speaker 1

From the financial performance in the up cycle, quarter. Also in the down cycle, we can pretty much see how do we compare to our peers quarter. In the industry, the financial performance as well as cash flow. ASA will continue to abide for the strong financial discipline quarter. And we will make all of the necessary investment according to our customers' requirement as well as the technology trend in the industry.

Speaker 1

Quarter. The next one will be flexibility and agility to handle business model evolutions. We believe that in the next 10 years, call. We have to work with different geography in a different business model. For example, we might choose, we might have to work with Tier 1 or OEM or system house directly in a different kind of business environment.

Speaker 1

Quarter. I think ASE in the last 20 years has demonstrated we have a clear flexibility and agility to work with different companies in different geography throughout the whole different business model and evolution. Lastly, will be the geographical diversity. I think quarter. ASC as was ASC HOKO including USI, we do have the most diversified geographic presence throughout the world.

Speaker 1

Quarter. With that advantages and also the resources, we should be able to handle all of the customer requirement quarter in the next 10 years depending on how the political environment varies. Quarter. Please turn to the next page. I will talk about 2024 outlook.

Speaker 1

First, I want to talk about the revenue recovery. Quarter. 2020 4 will be a year of recovery. We will be coming out of inventory adjustment in the first half. Quarter.

Speaker 1

We do expect growth to accelerate in the second half. Full year ATM revenue quarter. Quarter. We expect a higher revenue mix of advanced packaging on technology leadership as well as testing quarter. Revenue on the increasing turnkey ratio, just like what Ken has just shown you in the 20222023.

Speaker 1

Quarter. We will target higher investment in machinery and building and smart factory compared to 2023. Quarter. We believe we are entering into a new industrial up cycle and increasing adoption of advanced technology quarter based on our customers' feedback. Please turn to the next page.

Speaker 1

Let me talk about the advanced packaging and also the AI boom. Call. In 2024, we're on track to double our leading edge advanced packaging revenue quarter. From our existing customers, we expect to have additional US250 $1,000,000 revenue in 2024 quarter and we think the momentum will continue in the next few years. ASC does have a comprehensive technology toolbox, quarter, including 3 d, 2.5d, fan out, SiP, co packaged optics, automation, etcetera.

Speaker 1

Quarter. Our scale advantages and technology leadership will make ASE the preferred partner for our customers. Quarter. As it is apparent today, we have many new MPI as well as collaborative project with many Tier 1 system customers also the design house. ASA will not only benefit from the adoption of leading edge advanced packaging, quarter, but also the expansion of mainstream packaging, which will be utilized to address the growing semiconductor demands for all of the surrounding chips quarter of the booming AIE's.

Speaker 1

I'd like to turn the floor to our CFO, Joseph.

Speaker 2

Quarter. Okay. Thank you, Tan, and hello, everybody. And to give you the guidance for Q1 of 2024, quarter. Based on our current business outlook and exchange rate assumptions, our guidance for the Q1 of 2024 to be as follows.

Speaker 2

In NT dollar terms, our ATM Q1 2024 revenue and gross margin quarter. Should be similar to the Q1 of 2023. Again, in NT dollar terms, our EMS quarter. 1st quarter 2024 revenues should be similar to the Q1 of 2023 and EMS Q1 2024 operating quarter. I'd

Speaker 1

quarter.

Speaker 3

We have a question from Mr. Gokul Hariharan of JPMorgan.

Speaker 4

Call. All right. Happy New Year

Speaker 5

and thanks for taking my questions. Could we talk a little bit more about how we think about growth this year? I think, quarter. Doctor. Yu, you mentioned close to the logic industry growth.

Speaker 5

What does that number look like for you? Is it more like a 10% number or more than that? Quarter. And maybe give us a little bit more color on how you think about growth by vertical. Communication is still a very important, more than 50% revenue For your ATM business, so how do you think about communication versus computing versus the consumer auto segment?

Speaker 2

That's my first question. As Chen mentioned, this 2024 will be a year of recovery. We are expecting to see on the ATM to see sequential growth quarter. On a quarterly basis throughout the year, but with the second half being having a stronger momentum. Quarter.

Speaker 2

And as the overall full year growth, also as Tim mentioned, we will be growing At a similar rate with the logic semi market growth, which is projected by different sources of Anything from 6% to 10% in the industry now.

Speaker 5

Okay, understood. Also, quarter. Any guidance for margins? Are we expecting margins to get back to high 20s to 30%? Quarter.

Speaker 5

And could you also talk a little bit about your approach to the AI related packaging? Call. Some of your competitors are setting up capacity to compete with the leading foundry. Is that ASC's approach as well in terms of seeking out these high end AI accelerator packaging? Or are you quarter.

Speaker 5

Kind of partnering with the leading foundry in terms of potential opportunities in this advanced packaging business.

Speaker 2

Well, I think we will certainly Increase our overall CapEx for equipment for this year and given the pipeline that we're seeing today, I quarter. I think we would likely to have 40% to 50% more equipment CapEx budgeted for the year, although that's still subject to Board approval. Quarter. And the bulk of the more than 65% of the CapEx will be put in assembly and both part of it is ready for the advanced packaging. And if we're looking at the breakdown of the CapEx that we are looking at today, roughly 67% will be for assembly, 18% for tests and 13% for EMS and a lot of it most of it is really for the New packages of new products that we'll be bringing up this year.

Speaker 2

In terms of margin, I think we are very, very confident that quarter. The second half of the year, we will be going back to our structural margin within our structural margin, quarter, which is set at mid-20s to 30%. And we believe that for the whole year,

Speaker 1

quarter. I think there's a question about the collaboration with leading foundry supplier for advanced packaging as well as investment quarter. Maybe in the other part of the world. So our position has been clear. We're working with all of the leading Foundry, and we have made public announcement that, for example, the ASC and TSMC collaboration It's been ongoing for years and we'll continue to work very closely working on all of the required advanced packaging.

Speaker 1

Quarter. The investment and the R and D readiness has always been in place, which is another reason why we can ramp up, quarter. For example, the OS in later part of last year as well as the early part of this year, quarter. And you will see the good results are coming out. So the collaboration, the readiness has always been here.

Speaker 1

Quarter. Now in terms of going to different part of the world and making a big investment that we need to have a better understanding quarter. About the product and also the technology requirement, right now, we do not have any plan to go to U. S, for example, quarter to make a leading edge capacity investment. However, we will be very careful closely working with our customer and try to examine the situation.

Speaker 1

But today, we're going to focus in Taiwan first quarter. To make sure we can fulfill all of the ramp up technology variation requirement based on the leading edge Foundry suppliers as well as our customer. I think that will be the first order of business. As we move to 'twenty five, 'twenty six or 'twenty seven, quarter. Depending on the environment, including political as well as business environment, and we will make the different decision accordingly.

Speaker 6

Quarter.

Speaker 3

Next question is from Ms. Laura Chen of Citi.

Speaker 7

I also have a question about the advanced packaging. I think you mentioned about like an additional 2 And RMB50 million revenue contribution for this year. That's the new engagement with the Advanced Packaging. Can you elaborate more For what kind of the application, is that including some of the bumping business or is more focused on substrate, That kind of advanced packaging? Thank you.

Speaker 1

The $250,000,000 revenue includes all of the What we call the advanced packaging, for example, the on substrate, if you're referring to substrate business quarter. And that includes like a COOS, the TSMC version of the COOS and the on substrate portion and that is inclusive. Quarter. Also, the ASE has the 6 pack, the VIP pack that includes the all kinds of advanced packaging. Quarter.

Speaker 1

So this year, we're seeing the OS customers. We are also seeing the VI pack customers.

Speaker 8

Quarter.

Speaker 1

And then the hopefully by the second half of this year, we can start announcing key customer quarter.

Speaker 7

Thank you. Quarter. And with that also the expansion, what kind of the margin impact are we looking for?

Speaker 2

We don't normally comment on specific product margin, quarter. As a whole, I think the overall corporate margin will continue to improve quarter. As we see volume to come up and also bringing in the new technology that we are in our overall offering.

Speaker 7

Okay. Thank you very much.

Speaker 3

Next question is from Charlie Chan of Morgan Stanley.

Speaker 2

Hello. Yes.

Speaker 9

Hi. Yes, Happy New Year. So call. I also have a question regarding to advanced packaging that CPO, it seems to be very, very future technology, but quarter. And company comment about the potential timing, penetration, TAM, especially how are you going to work out with quarter.

Speaker 9

The key foundry event at TSMC, because I heard that TSMC may want to produce their Silicon Photonics. So how are you going to collaborate with the foundry partners or other vendors? Thanks.

Speaker 1

Okay. The silicon photonics is a big subject. The whole idea is That will represent another paradigm shift. And as we enter into ability for all of the designers. So it is good for the whole industry, right?

Speaker 1

The timing of silicon photonics quarter. And that has been the big question. We have been working on this for many, many years. There are many, many people working on this. So this is really a future technology quarter as well as incremental growth driver for the whole industry.

Speaker 1

In terms of the how do we partition the role and responsibility, That is less of a concern. For example, the foundry will have foundry's role in terms of making the photonics chips quarter, either in a stack format or isolated format. And for ASE, we will focus on co packaged optics. Quarter. For example, if we take the IDM photonics chips or the foundry photonic chips, how do we bundle that with everything else?

Speaker 1

Quarter. So each sector of the player will have a good responsibility and role to play in that new arena. Now, ASC has been talking about the CPO or silicon photonics, mainly because This is really an important innovation. The whole industry is focusing on this and ASA today is working with all of the major driver in the industry in this arena. I'm not sure that answers your question, but that's what I have.

Speaker 1

Thank you.

Speaker 9

Quarter. Yes, it's super helpful, very, very fair and indeed curve lots of my questions. Quarter. My second part of the question maybe is on near term. So since the, I guess, late Q3, quarter.

Speaker 9

We see so called foundry rush orders. That means that demand is coming back and also quarter. So, I'm not sure Tian or Joseph, who want to answer this question, do you think this kind of rush order patterns will continue quarter. Or actually on the kind of negative side, rush orders now already disappear.

Speaker 1

Quarter. Okay. Roche Water, you can view it from 2 different angles. For example, if you look at the well, let me offer you my perspective first.

Speaker 9

Quarter. Sure.

Speaker 1

Industry is going through a very prolonged inventory correction, right, after COVID. Quarter. And so then we have a lot of wafer bank. And then the people looking their inventory days, they look at the order pattern, they're trying to make 2 adjustment on the inventory days as well as the foundry order and the supply chain cycle time pipeline. Quarter.

Speaker 1

Now what we have seen a few months ago is, for example, in China, The high end cell phone was selling really well. And therefore, some of our customers start having the rush order

Speaker 2

quarter.

Speaker 1

On different wafer, different devices. I think that's what you were referring to. And this is really good, right? So the next question is, Can this be prolonged? Our belief is, this is the beginning quarter of the to the boom cycle or this is nearly we're at a tail end of the inventory control.

Speaker 1

Quarter. For example, the first customer that started the inventory control was back to like January of 2023. And there's some customers, they start doing inventory control at a much later of the year. So every company, every sector will go through a different inventory adjustment. But I believe by the Q3 of this year, quarter.

Speaker 1

They're pretty much done. And then we're really going back to the sell through cycle. There's a lot of uncertainty call. What exactly the sell through cycle because high inflation, the China economy, the war that's going on. And I think so complicated comment, But the general belief is this year, the semiconductor will grow.

Speaker 1

The logic will grow around high single digit like 10%. So everybody is working towards that goal. All of the order pattern that we're seeing today with every sector in a different pace, different tempo, they all pointed to that direction. The best way we can judge is In January, February, we give you this position based on the snapshot. And every quarter, we'll give you a different snapshot.

Speaker 1

I think that's probably the best we can do, because there's really no right or wrong. And both side of the fact is can be correct, but we believe that quarter. We are seeing towards the tail end of the inventory adjustment. So the order pattern will start coming in and become more persistent and consistent. Thank you.

Speaker 3

Next question is from Bruce Liu of Goldman Sachs.

Speaker 10

Call. Yes. Thank you for taking my question. Again, I still want to ask about advanced packaging. I think call.

Speaker 10

In the past, the difficulty for us in terms of the wax packaging is that there are so many different solutions. Quarter. And H1 require different capacity, different CapEx. And obviously, we do see a clear quarter. So can you tell us that is that quarter.

Speaker 10

The direction for moving into the specific advanced packaging is more confirmed. Do we see a clear CapEx our CapEx is Somehow focus on that. Do we get a reasonable ROIC or ROE for this business moving forward? Is that a credit tier business for us Moving forward, basically that's the question I'll just ask.

Speaker 1

Quarter. Okay. This is a loaded questions. Now the how long would the AI last? Quarter.

Speaker 1

We believe it will be a long time. So initially, it could be 1 or 2 representative customers, But over time, the other players will come in. So I think we're seeing the beginning or the tip of the iceberg, right? Now, if we believe that is the case, Then the leading edge foundry, which says, okay, this is a capacity they're willing to put in. And the other capacity, the other OSAT players, if you can do it, You will come in to help us.

Speaker 1

I think that was the situation pretty much described last year. The company has decided, call. We think we have the technology. We have the initial capacity. We understand the investment.

Speaker 1

We understand the return profile. Call. So we want to do this business, not just from the leading edge foundry customer, but also from all of the end customer and The potential system customer, they asked us to do this. Now we're doing the OS or we're doing the VIPAC quarter. As of now, but as AI become more evolved, in other words, once you evolve beyond The brain, the logic or the memory, you will start adding the other requirements.

Speaker 1

Quarter. And all of this will require a similar capacity to build that required system over time. So we think company will be more, quarter. The application will be more. The system requirement will be more, but all going back to automation, Going back to the understanding of the basic technology and also the company has enough quarter.

Speaker 1

So this is one area which is quite definitive for ASC. Quarter. So we're not doing this for 3 to 6 months, if that answers your question.

Speaker 2

I want to add a point. I think call. The AI is really at its early stage and we believe that As we continue to proliferate, we'll go to some other applications and create another round of replacement market for us. So it's not just the to us, it's not just the advanced packaging that will start to quarter. Very strong growth, but also as they expand into other applications, all the other chips will be coming out.

Speaker 2

The overall volume for the, also high end, but the mainstream packages will also benefit quarter. So that will create another round of volume growth for us going forward, but not just on VFS packaging.

Speaker 10

Well, the question is more like in the early stage of the Vets Packaging, which you acquired a bit quarter. R and D and CapEx, are we seeing that the best packaging margin or how accretive quarter. In 2024, in the early stage of the AI?

Speaker 2

Quarter. As I mentioned, we don't particularly comment on different packages profit margin. Quarter. As a whole, I think as long as technology continues to advance, I think our margin quarter. We'll reflect that.

Speaker 2

And as I said, if we look at this year, we'll continue to see our margins starting to

Speaker 3

Next question is from Randy Abrams of UBS.

Speaker 4

Okay. Yes. Thank you. I wanted to ask the first question, if you can elaborate quarter. On the growth profile for this year, Q1 looks like seasonal or slightly lower than seasonal.

Speaker 4

For the outlook, it sounds like more confident in the second half, but I'm curious for Q2, do you see we get back to the point, it at least look Seasonal from the low base, so we start getting back to like high single, low teens type of recovery. And then for applications, quarter. What I'm curious, the auto is very strong through the upturn. How is that application weathering the downturn in correction? And do you see the content growth where I'm sure Sal Auto is faring through all this.

Speaker 1

The Q1 quarter. The Q1 typically, if you go back to my 20 years with ASC, the Q1 typically is 10% to 15% down, quarter. Right. And the typical number that we work with is 12%. So I think the this year, if we can quarter.

Speaker 1

The flattish to Q1 of last year, I think we're better than the typical Q1. Of course, our Q4, quarter. You have to look at the relative. So that will be the first comment. And then Q2, we believe that will go back to quarter.

Speaker 1

Our typical growth path, so I think this year we're looking at a typical quarter. Year were Q1 low, Q2 growth, the second half stronger. I think we're looking at that patterns now. Quarter. In terms of the automotive, some of the IoT and the analog and mixed signal customer.

Speaker 1

I think they're having a lot of inventory concerns. So we are seeing a sluggish order quarter. In the first half, in those arena, some of the customer do supply to the automotive. However, quarter. The ASE Automotive business per se is growing, mainly because of quarter.

Speaker 1

I think the auto line has a lot to do with it. And Joseph will comment more

Speaker 2

quarter. We did see a fairly good growth in auto quarter. And we're expecting Higher growth also in 2024. Right now, I think quarter. The automotive related business has sorry quarter.

Speaker 2

It's had a quite decent growth and in 2023, LOD represents close to 10% of our overall business. Quarter. And we're seeing that continue to grow into 2024. And in terms of the quarter. Overall growth rate, I think it will outpace the other sectors for 2024 as well.

Speaker 2

Although we are seeing quarter. Softer market condition for first half of the year because selectively quarter. There are a few areas that we're seeing some inventory adjustments. But overall, I think the overall growth momentum will continue into 2024 in terms of our automotive business.

Speaker 4

Okay. Thanks for that color. And there's a quick follow-up on that and then I'll ask the second question. There was some IoT analog mixed signal because the consumer downturn lasted a lot longer. Do you think we are through that based on the customer feedback That we should also improve in second half or risk just given the inventory and how long it was strong, it stage.

Speaker 4

And then the second question is actually the EMS business where it's coming off a slow year. There hasn't been that much. It feels like end customer innovation on new SIP projects. How do you see EMS if it's also just general environment recovering or applications they're pushing And if there's you're seeing new activity for SIP that could jumpstart that part.

Speaker 1

Okay. We already said that Second half, we believe that will be the beginning of the recovery, all right, for the first question. The second question is EMS. Quarter. And I think if you hear the EMS earning announcement, I think they will also have a similar growth quarter.

Speaker 1

With ASE this year, I'm not sure how to answer the SiP part of the question, because we don't typically comment quarter. On the specific SiP or product or customers?

Speaker 2

Quarter. I think for 2024, I think in terms of EMS, SiP business, it will stay relatively flat from this quarter. From last year, because of the different dynamics that's happening in this business. So all in all, I think we still remain very, very active In engaging with the different products and different customers in the SAP arena and we believe that we will see quarter. Very strong momentum quarter.

Speaker 2

Start to happen in 2025. I think 2024 is really the year that we're entering a lot of NPIs, a lot of the

Speaker 3

Our next question is from Seoho Ng of China Renaissance.

Speaker 6

Quarter. Hi, good afternoon. First question regarding Q1 guidance, right, we are looking for revenue ATM business to be down double quarter. Can I know how much is volume or loading driven and how much is ASP related?

Speaker 1

ASCP is quite stable right now. So I think the when we talk about quarter. Well, first of all, let me just clarify a little bit. I think 2024 is the year of recovery. Quarter.

Speaker 1

Our Q1 is flattish comparing to last year. Our Q2 will grow. When I talk about the second half inventory adjustment, quarter. I'm mainly referring to most of the customers that we have. Some of the customer has already start ordering.

Speaker 1

Some of the customer, it is still waiting. Although we do not know for sure, starting July, all of the inventory adjustment will be over. Quarter. Macroscopically, we think that in the Q3 of this year, most of the customer will start the recovery path, quarter. All right.

Speaker 1

So I think that was a clarification. Now in terms of the ASP or volume, I think I am referring to quarter. Volume driven, assuming the ASP, it is stable from now on. If that answers your questions.

Speaker 6

Yes, yes, yes. Very clear. And second question relating to advanced packaging portfolio. Is it fair to assume that right now the overall portfolio for advanced packaging is largely relative to the ATM business? Or under what circumstances We should expect the Advanced Packaging to command margin similar to the Vision margin.

Speaker 1

Call. I think the first answer is yes. When I talk about $250,000,000 that's all ATM. In terms of margin, I think Joseph has Repeat it over and over again. We don't comment specifically, but the overall margin contribution to the business will be accretive.

Speaker 1

I think it would just force us to say that.

Speaker 2

I was going to say, I'm not dilutive.

Speaker 1

Sorry, does that answer your question?

Speaker 3

Quarter. Next question is from Mr. Gokul Hariharan of JPMorgan.

Speaker 5

Yes. Hi. I had a question on the test side of the business. How are we seeing the progress in Trying to improve the bundling ratio for turnkey test. And could we also talk a little bit about your quarter.

Speaker 5

Market presents in some of these advanced AI chips, how much testing business are we able to quarter. And Doctor. Wu, if you could give us any milestones in terms of how we should be looking at your quarter. Test business given I think the funding ratio is still quite low compared to what you want to be in the medium term.

Speaker 2

Well, in terms of our test business, we have been growing that part of the business quarter. Percentage wise, in terms of our overall revenue composition, I think from 20 quarter. 1 to 43, I think we have been growing that from below 15% to now Over close to 16% now. And we believe that ratio will continue to grow in 2024 quarter. To approach 17%, and we will continue to make efforts In growing our test business through the increasing our turnkey ratio with our customers, quarter.

Speaker 2

That includes the various packaging today, which is at this stage is at a low percentage quarter. We believe that percentage will continue to rise quarter. And we will strive to reach our peak test revenue percentage Around 18% in the next couple of years.

Speaker 5

Got it. My second question is on mobile since that is still the primary revenue driver. We've been hearing that there are some changes quarter. Turning to the mobile side with more customers looking for 2.5d or fan out package in package kind of solutions. There's also some discussion about the biggest flagship mobile customer starting to potentially At least the foundry part of the mobile packaging stepping out of foundry towards OSAT.

Speaker 5

Quarter. Are these opportunities that are likely to benefit ASC? How is ASC positioned to benefit from these? And could you talk a little bit about this potential change from flip chip to fan out package in package on mobile? Quarter.

Speaker 5

How beneficial is that to the OSAT profits and revenues? Thank you.

Speaker 1

Call. Well, I'm not sure I can answer the all of your questions, but let me try this. Not just the mobile, quarter. Right. If you look at the high performance computing and the router, the server, I think they all go through the similar trend.

Speaker 1

So initially, they want to go with a foundry supplier to make sure The turnkey service will guarantee yield and also the just in time delivery. As time goes on, quarter. A portion of the it can be packaging, it can be testing and can be on substrate, And they will decide to go to the outside of the foundry service. And then the first question is, is ASE ready? Quarter.

Speaker 1

I think ASC has been, this is really our business and we are working with almost all of the customers in terms of the development quarter. Just to make sure, apple to apple, we're at least at par, the efficiency cost Reliability wise at par with the foundry suppliers and depending on the business model and also the volume, supply demand requirement. And I think we're seeing the 1st wave of the outsourcing activity. Once the door opens, quarter. I think this trend will continue.

Speaker 1

As more people coming in, as more technology becomes available, as the data points start going up. The confidence level of the supply chain diversity and the resilience, I think it will be a natural force to drive that. Call. So in this regard, I think ASE will benefit because this is the business which is incremental quarter and also in the core portfolio of our business objective, right? Now in terms of quarter.

Speaker 1

How fast, how much and the margin contribution, we believe the margin contribution will be accretive. Quarter. We also believe that as this is coming in, the testing turnkey becomes a natural extension And the testing will be of higher margin to begin with because of the investment and also the IP. Quarter. So as we approach more of the turnkey, as we approach more of the high end, quarter.

Speaker 1

Also, there's a natural margin requirement based on the technology content. Quarter. So in the higher margin requirement, in the higher turnkey ratio, so I think all of this will be very beneficial for ASC future. I hope that answers your question.

Speaker 3

If you have any question, please raise your hand. Charlie Chan or Dylan Liu of Morgan Stanley has more questions.

Speaker 8

Yes. Hello. Yes, I'm asking this is Dylan. So I'm asking on behalf of Charlie. So the first question is, do we see any competition coming from question coming from Chinese OSATs because we heard some of our customers are surveying the possibility of shifting some of the capacity to Chinese OSAT and if so, how do we tackle that?

Speaker 8

Will we lower our price just because of the market share or we tend to focus more on the ASP and shift more of our focus to advanced factoring as such?

Speaker 1

Quarter. I think for competitor is ongoing for 30, 40 years. We're very used to this, right? I think customers We'll always survey the worldwide suppliers. The decision point is going to be under the new geographic Regulatory control.

Speaker 1

If you're comfortable going to a different part of the region, that will be the first screen, the first filter. I think for now, we have less concern for some of our key customer going to China because of that reason. But over time, this might change. Quarter. Then we're going back to the cost, the efficiency, as well as the reliability and also the data traceability.

Speaker 1

So at least what I cannot comment on a competitor, but what ASA has been doing is we're trying to have full traceability on everything we do. We're having to have 100% fully automated. Therefore, everything's logging in the data with a full transparency to our customers. We're trying to improve our scale by working with leading foundry partner. We're trying to work with All of the key Tier 1 system IDM suppliers, customers trying to increase the data point and our knowledge.

Speaker 1

And Not only we're trying to do manufacturing know how, we're trying to do the design simplification know how because We'll enter we're trying to make the more simple design more complex. That's where the value is. And immediately, we'll make a more complex expensive design quarter. So only with all of these positive cycles can we secure the key customer and this is why ASE has been having very high traction with all of the leading edge customer. So in terms of Competition to Japan, Korea, China including, the it's always the same.

Speaker 1

You can use the same analogy On all of the legacy, over time, people are concerned about the legacy supply and demand. ASC is increasing quarter. Our fully automated fab as well as our design simplification capability precisely to anticipate that. On top of it, we're trying to improve the silicon carbide, we're trying to improve the silicon photonics, as well as all of the high performance computing like the VIPAC. So all of the innovation are meant quarter.

Speaker 1

To offer additional toolbox to our customers in their future design, complexity as well as simplification. Call. I don't think any of our Chinese competitor are having this kind of ecosystem and the data and the AI know how for now, quarter. Which is why I presented the ASC competitive advantage. I think we have a few years of clean leadership.

Speaker 1

Quarter. We can leverage this window of opportunity to make sure our scale and efficiency and know how can expand quickly quarter ahead of our competitors.

Speaker 8

Got it. Thanks for sharing the insights. Quarter. And the second question is also circling back to the advanced packaging. So we're curious about the business model because First thing is that how will we frame our competitive advantage 1st is the incumbent, for example, those IDMs and foundries.

Speaker 8

And because in our mind, we tend to think that More of a targeted market will be top dies coming from different foundries and we can work as a collaborator. Quarter. And if so, how do we guarantee the yield? Because sometimes it could be packaging, thing. Sometimes it could be top tie, but if the and it ended up the production yield is suboptimal, who will be responsible with it?

Speaker 1

Call. I'll try to give you the simplified version of it. It's a big challenge. We struggled with this for a long time. All right.

Speaker 1

Quarter. The beauty of this is the, all of the customers, all of the suppliers has been working with 1 or 2 leading suppliers for a period of time. So the data log is there. They understand the memory yield. They They understand the logic yield.

Speaker 1

They understand the so called assembly yield overall. Quarter. So the benchmark is very clear. All right. So the simple answer is such, quarter.

Speaker 1

If ASC can produce the overall yield based on the overall benchmark quarter. At par to the benchmark, then we got this business. If we're below that, either we'll lose the business or there'll be punitive damage, Which is why you were referring to. So the best way to look at is, can we retain this business going forward quarter and still making money, all right. It is too early to tell, but I'm telling you, we do have a confidence quarter.

Speaker 1

We will manage this, right. In terms of the other question you asked a little bit too complicated and too detailed, so I will not answer. My apology.

Speaker 3

There is no questions.

Speaker 1

With that, I would like to wish all of you a Happy New Year wherever you are. Quarter. And we have gone through quite an exciting 2021, 2022. 2023 quarter. Was a little bit of break, all right.

Speaker 1

I think 2024, we'll enter into a new era. Quarter. And I think the I look forward to working with all of you. Thank you. Joseph?

Speaker 2

Thank you all. Happy New Year. We'll see you next time. Okay. Bye bye.

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Earnings Conference Call
ASE Technology Q4 2023
00:00 / 00:00
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