ASE Technology Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 25, 2024

There are 12 speakers on the call.

Operator

Hello. I am Ken Sheung, the Head of Investor Relations of ASA Technology Holdings. Welcome to our Q2 2024 earnings release. Thank you for attending today. Please refer to our Safe Harbor notice on Page 2.

Operator

All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows 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, including those presented by our subsidiary using Chinese GAAP. I am joined today by Doctor. Tian Wu, our COO and Joseph Tong, our CFO. For today's presentation, I will be going over the financial results and Joseph will give the company's outlook.

Operator

Doctor. Wu and Joseph will then be available to take your questions during the Q and A session that follows. 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. With that, let's get started. The Q2 can be summed up as the tale of 2 businesses, one business representing the leading edge products and the other the more traditional products.

Operator

For the traditional business, the Q2 had selective products with signs of reemergence. But by and large, general product demand lacked the strength and durability necessary to be considered a sustained healthy pickup in the immediate term. While the leading edge business saw increasing demand with the development of increasing product pipelines. Equipment utilization for traditional products look to be near 60%, while utilization for the leading edge products are effectively full. To support the bifurcated market, we will need to continue to increase our investment in the leading edge space, in particular labor and equipment.

Operator

From the labor perspective, we will need to hire more engineers as the level of product complexities are increasing with the leading edge. We will also need to invest in incremental capital equipment to provide for incremental demand. For our EMS business, in the second quarter, demand for our services was slightly ahead of our initial expectations. We believe this was principally the result of a slightly faster start to the manufacturing season. Please turn to Page 3, where you will find our Q2 consolidated results.

Operator

For the Q2, we recorded fully diluted EPS of $1.75 and basic EPS of $1.80 Consolidated net revenues increased 6% sequentially and 3% year over year. We had a gross profit of $23,100,000,000 with a gross margin of 16.4%. Our gross margin improved by 0.7 percentage points sequentially and 0.4 percentage points year over year. The sequential improvement in margin is principally due to NT dollar depreciation and product mix changes at both our ATM and EMS businesses. Our operating expenses increased by $700,000,000 sequentially and by $1,700,000,000 annually.

Operator

The sequential increase in operating expenses are primarily due to higher R and D labor related R and D labor related costs. Our operating expense percentage remained flat at 10% sequentially and increased by 1 percentage point year over year. The annual increase was also related to higher R and D staff up for both ATM and EMS, overseas expansion and higher incentive stock option and bonus expenses. Operating profit was $9,000,000,000 up $1,500,000,000 sequentially and down $400,000,000 year over year. The year over year decline in operating profit is primarily related to higher operating expenses related to the ramp up of our leading edge advanced packaging and overseas expansion.

Operator

Operating margin increased 0.7 percentage points sequentially and declined 0.5 percentage points year over year. During the quarter, we had a net non operating gain of $1,100,000,000 Our non operating 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 $1,200,000,000 Tax expense for the quarter was $2,000,000,000 Our effective tax rate for the quarter was 19%. Net income for the quarter was $7,800,000,000 representing an increase of $2,100,000,000 sequentially and flat year over year. The NT dollar depreciated 3% against the US dollar sequentially during the 2nd quarter while depreciating 4.2% annually. From a sequential perspective, we estimate the NT dollar depreciation had a 0.85 percentage point positive impact to the company's gross and operating margins.

Operator

While from an annual perspective, we estimate the NT dollar depreciation had a 1.21 percentage point positive impact to the company's gross and operating margins. 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 $24,000,000,000 with a 17.1 percent gross margin. Operating profit would be $10,200,000,000 with an operating margin of 7.3%. Net profit would be $9,000,000,000 with a net margin of 6.4%.

Operator

Basic EPS excluding PPA expenses would be $2.08 On Page 4 is a graphical representation of our consolidated financial performance. You will see a troughish, but gradually improving environment for both our ATM and EMS businesses. Gross margins are gradually improving also. On the operating margin front, as was stated earlier, operating expenses are increasing for expected ramps in leading edge advanced packaging products. We expect these leading edge advanced packaging products to be accretive to margins.

Operator

On page 5 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. For the Q2 of 2024, revenues for our ATM business were $77,800,000,000 up $4,000,000,000 from the previous quarter and up $1,700,000,000 from the same period last year. This represents a 5% increase sequentially and a 2% increase annually. Gross profit for our ATM business was $17,200,000,000 up $1,600,000,000 sequentially and up $1,000,000,000 year over year.

Operator

Gross profit margin for our ATM business was 22.1%, up 1.1 percentage points sequentially and up 0.9 percentage points year over year. The sequential margin improvement was primarily related to foreign currency and higher loading efficiency, offset by higher utility costs. The annual margin improvement is primarily the result of foreign exchange, product mix offset in part by higher utility costs. During the Q2, operating expenses were $9,900,000,000 up 0 500,000,000 sequentially and 1.2 expenses was primarily driven by higher compensation expenses from ramp up of leading edge advanced packaging. The annual operating expense increase was driven primarily by the continued scale up of R and D labor and other labor related expenses.

Operator

Our operating expense percentage for the quarter was 12.8%, flat sequentially and up 1.3 percentage points annually. Sequentially, operating expenses kept pace with revenue expansion. The annual increase was due to higher compensation expenses, primarily at the R and D level. During the Q2, operating profit was 7,300,000,000 representing an increase of 1,200,000,000 quarter over quarter and a decline of $200,000,000 year over year. Operating margin was 9 point 3%, increasing 1.1 percentage points sequentially and declining 0.4 percentage points year over year.

Operator

For foreign exchange, we estimate the NT to U. S. Dollar exchange rate had a positive 1.47 percentage point impact on our ATM sequential margins and a positive 2.1 percentage point impact on a year over year basis. Without the impact of PPA related depreciation and amortization, ATM gross profit margin would be 23.3% and operating profit margin would be 10.8%. On page 6, you'll find a graphical representation of our ATM P and L.

Operator

As you can see here, the first half of twenty twenty four is shaping up very similarly with the first half of twenty twenty three. On page 7 is our ATM revenue by 3C market segments. Our communications application dropped 3 percentage points while our computing and consumer segments increased. During the quarter, we experienced some spotty pickups in our consumer space. However, end demand was insufficient to sustain a more robust growth rate.

Operator

As a note here, our leading edge advanced packaging services are recorded within computing and communications accordingly in line with their underlying usage. On page 8, you will find our ATM revenue by service type. There are only some small movements here with other services declining 2 percentage points and wirebonding and advanced services increasing 1 percentage point each. On Page 9, you can see the 2nd quarter results of our EMS business. Our EMS revenues came in a bit ahead of where we expected, mainly as a result of slightly earlier than expected start to the manufacturing season.

Operator

During the quarter, EMS revenues were $62,900,000,000 improving $3,500,000,000 or 6% sequentially and improving $2,500,000,000 or 4% year over year. The sequential and annual revenue improvements are primarily attributable to our customers' timing of this year's product manufacturing start. Sequentially, our EMS businesses gross margin improved 0.3 percentage points to 9.6%. This change was principally the result of better loading. Operating expenses within our EMS business was $4,100,000,000 increasing $200,000,000 sequentially and $500,000,000 annually.

Operator

Our 2nd quarter operating expense percentage was 6.5%, flat sequentially and up 0.6 percentage points annually. The higher annual operating expense percentage was primarily related to higher expenses related to MPI development. Operating margin for the Q2 was 3.1%, improving 0.3 percentage points sequentially and declining 0.4 percentage points year over year, primarily due to increase in compensation expenses on higher headcount, mainly due to the consolidation of an acquired entity. Our EMS 2nd quarter operating profit was $2,000,000,000 up $300,000,000 sequentially, while down $100,000,000 annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application.

Operator

As is typical in the Q2, there isn't much movement here on a sequential basis. However, on an annual basis, we are experiencing decent growth within our automotive products. On page 10, you will find key line items from our balance sheet. At the end of the Q2, we had cash, cash equivalents and current financial assets of 75,300,000,000 dollars Our total interest bearing debt declined by $11,400,000,000 to $183,900,000,000 Total unused credit lines amounted to $417,000,000,000 Our EBITDA for the quarter was $26,100,000,000 dollars Our net debt to equity this quarter was 0.34. On Page 11, you will find our equipment capital expenditures relative to our EBITDA.

Operator

Machinery and equipment capital expenditures for the Q2 in U. S. Dollars totaled $406,000,000 of which $215,000,000 were used in packaging operations, $154,000,000 in testing operations, dollars 31,000,000 in EMS operations and $6,000,000 in interconnect material operations and others. We continue to be excited by the expanding portfolio of products that our leading edge advanced packaging addresses. As we look further out, we continue to see signs that business is shaping up for the next super cycle.

Operator

However, if we look into the more immediate future, we believe we will continue to have a tale of 2 businesses, the leading edge and the more traditional business. When we look at the leading edge business, including AI and high end networking, business is continuing to boom. We cannot seem to get the capacity installed fast enough. For us, this is also not a single customer phenomenon either. And the interesting part is that it appears to be accelerating.

Operator

On the more traditional business side, there is some excitement regarding potentially shortened refresh cycles on a number of products due to new AI features. But by and large, our customers are still proceeding cautiously. For us, that means our customers generally are in a trial and error mode. They start with a conservative forecast. If their products hit, they will quickly adjust their outlooks.

Operator

There is an increasing optimistic sentiment in the market, and we are looking forward to when such optimism manifests into increasing forecasts. If we look at our overall cost environment heading into the Q3, we will need to continue to manage our costs of production with higher utility costs and ramping labor needs. On the operating expense front, we also see continued spending on R and D labor, tools and equipment related to leading edge advanced packaging and testing. And as I stated earlier, we will continue to bear higher operating expenses before the majority of revenues come into place towards the latter part of this year and next year. We are looking to hold our full year operating expense percentage increase to within 75 basis points of that of 2023.

Operator

With that, I would like to hand the floor over to Joseph Tong to speak to our corporate outlook.

Speaker 1

Joseph? Thank you, Ken. Let me give you a guidance for the Q3. In terms of ATM and in NT dollar terms, our ATM Q3 2024 revenue should grow by high single digit quarter over quarter. And our ATM Q3 gross margin should be between 23% percent to 23.5 percent.

Speaker 1

In terms of EMS, in NT dollar terms, EMS Q3 2024 revenue should grow mid to high teensquarteronquarter. Our EMS Q3 2024 operating margin should be slightly above Q4 2023 level of 3.5%. And in addition to the revenue and margin guidance, I would like to also provide an update on our CapEx. In anticipation of the booming demand for leading edge ATM capacity and further technology advancement, we believe we will need to step up our CapEx investment and starting from raising full year 2024 consolidated machinery CapEx to double from last year's US914 million dollars level. And as these investments carry higher value contribution and are becoming more critical to the overall semiconductor manufacturing, we believe such investment will be both return and margin accretive.

Speaker 1

On geographical expansion, we started our Malaysia expansion 2 years ago, and now Phase 1 has been completed, and we will start volume production in Quarter 1 2025. Also, we are soon to close the acquisition of 2 Infineon operations, 1 in the Philippines and one in Korea, and expect revenue contributions of these two sites starting from Q3 this year. We have also acquired land in Mexico, and we've identified potential locations in Japan. The land will be developed and buildings be constructed in anticipation of future customers' demand. And all these efforts are made to shorten the lead time for capacity ramp up.

Speaker 1

With that, we will open the floor for questions.

Speaker 2

Yeah. Hi. Good afternoon, Joseph and Ken. Thanks for your comments. My first question is about the guidance.

Speaker 2

So when you talk about ATM high single digit, could you also help us to understand the full year growth prospects for ATM? Because I think, back in February or January, I think, Tian had talked about 6% to 10% for industry and similar growth for ATM. Any updates there given year to date, it looks like you'll be tracking at about flattish year on year on USD terms. And also gross margin, I think previously we were expecting 25% to 30% range in second half of the year. Any reason, Joseph, why it's a little bit lower?

Speaker 2

Are there any startup costs or any other additional costs that have come in? Or is it just that utilization is tracking lower? And lastly on CapEx, this double from FY 'twenty three, obviously a bigger number than previous. Any, breakdown in terms of test versus advanced packaging versus traditional packaging in terms of where you're putting in incremental CapEx? That's my first question.

Speaker 2

Thank you.

Speaker 1

I guess the full year in terms of from a full year perspective, I think the in the general market, the recovery seems to be a bit slower than we were expecting. So in the although in the second half, we will start to see the general market start to bottom out and we'll start to have some recovery, more recovery there. But the pace of it seems to be slower than originally expected. But on the leading edge, it still is booming, but we are aggressively trying to catch up with the capacity to meet the growing demand. But all in all, I'll put everything into consideration.

Speaker 1

I think for the full year, we're now looking at a more moderate type of growth in terms of our top line. And in terms of margin, I think again, because of the more muted recovery of the general market, I think in Q3, we will be we will come in a little bit short on the reach the structural margin of 24%. But on the full year basis, we still remain hopeful that going into second half, we will have a better pickup. And we're still I think the coming back to the structural margin is still in play at this point. What's the third question?

Speaker 1

CapEx breakdown. The CapEx breakdown, with the new CapEx that I just mentioned, I think the breakdown will be roughly 53% for assembly and 38% for test. We have another 1% for material and about 8% for EMS.

Speaker 2

Okay. That's very clear. Thank you. My second question, Joseph, is on the 2.5D advanced packaging barrier, obviously spending a lot of CapEx and the prospects are good. I think last time, I think, Tian had mentioned 250,000,000 additional revenues, from this segment.

Speaker 2

And I think recently, I think in your AGM, you had indicated there's probably some upside to that number. Could you talk a little bit about, A, what is the scale of this kind of business? Is it do you think that this could be 10% of your ATM revenues next year? And secondly, could you talk a little bit about your partnership with the leading foundry, given they also called out increased usage of OSAT partners to fulfill customer demand. How widespread is your kind of customer base?

Speaker 2

Is it mostly coming from this leading AI accelerator customer or is it kind of more broad based you're having multiple projects from many different customers for 2.5d packaging?

Speaker 1

Well, I think in terms of leading edge, I think mostly it's still coming from AI or high performance computing. And I think it's a broader base it's not just one customer phenomena as Ken mentioned earlier on. And we are having reactive engagements with the with the both of our foundry partner as well as customers directly. And I think the raising of our CapEx is toward building the needed capacity for this type of including packaging as well as

Speaker 3

Hello? Could you hear me?

Speaker 4

Yes.

Speaker 3

Thank you very much. So my first question is to follow-up on the testing opportunities that you just mentioned regarding the advanced packaging business. And so could you share a bit more details regarding the customer engagement? And for some of the key projects, how you compete with the existing suppliers?

Speaker 1

Existing suppliers?

Speaker 3

For for testing, for these HPC projects.

Speaker 1

Oh, okay. I think the, you know, there's there's plenty to go around as we see the demand for for leading edge, both for packaging and tests are booming. And we are currently still a little bit capacity constrained and we are beefing up our CapEx in this area to build the capacity as well as to further our technology investment. I think the as I mentioned, the demand is coming from different customers and also a part of it from the foundry as well. So we will entertain whatever business that is needed from our customers.

Speaker 1

And, you know, in terms of meeting competition, there's always competition. And we will do whatever we can to further penetrate whatever business that's in front of us.

Speaker 3

Got it. Thank you. Maybe let me try to, ask from a different angle. And so from some of the for some of the accelerator products, there are some pretty solid existing suppliers that have very close relationship with the customers. They are willing to customize the burning tools and also the boards.

Speaker 3

And therefore, just wonder, what's your competitive strategies? And, if you manage to get some of these products, when should we expect the revenue to start to come through?

Speaker 1

We we are giving up gearing up on our leading edge testing capacity, and capability, including burn in. We are basically leveraging on our turnkey services. And we do expect to have good progress starting from next year.

Speaker 4

Our next question is from Mr. Charlie Chen.

Speaker 5

Hello. Good afternoon, Joseph, Ken and Iris. Thanks for taking my question. So maybe to begin with, I'm wondering, Joseph, your view about TSMC talking about the foundry 2.0, they include the back end foundry also to their 10. Do you think going forward there would be more competition from Foundry or you believe there should be more collaborations?

Speaker 5

Thank you.

Speaker 1

Neil, that is really a testament that the back end packaging test, it is becoming a more and more critical part of the overall value chain. And we are excited about the opportunity in front of us. And we will be closely working with our partners, both on the upstream and also downstream to make this thing happen, you know. So I think the overall relationship with the with both our customer as well as upstream foundries, We are, you know, working very closely with both of them, and we'll try to come up with the capacity and the technology needed to suit their needs.

Speaker 5

Got you. Thanks, Joseph. So my follow-up question is also to clarify your potential expansion of the advanced packaging business. So a couple of speculations, maybe it's a good chance for you to clarify here. So first of all, my understanding is that you only do the waveform substrate, right, WOS, But the chatter suggests that you want to expand to chip out wafers.

Speaker 5

That's the first part. And secondly, there's a rumor talking about you probably will do a new fab very close to Taishong or Changhua area. And there's kind of offloading TSMC's burden. And number 3 is really the capacity number. As far as I know, probably in terms of a deadweight OS capacity, you have a 6,000 wafer per month.

Speaker 5

But rumors talking about you're going to more than double the capacity for AWS. So on those kind of rumor or speculation, can you clarify a little bit? Thank you.

Speaker 6

We're not going to clarify the speculation, by the way. But I will give you a qualitative description about the current engagement model. The technology takes years to develop. So whether the OS or the COW or the equivalent of OS or the equivalent of COW has been developed together with the foundry partners as well as key customers for years. So in the current landscape because of the capacity constraint, there has been active engagement with our partner as well with our customer to see which route will give you the most efficient alternative to fulfill the customer demand in the shortest amount of time.

Speaker 6

So this is kind of the, the partnership that we have developed the, the, with the leading foundry suppliers. We have also gained confidence from multiple customers over years of product development, trial and error, process, materials or different equipment set and the reliability. So in this round, as we can see, the OS ramp has been pretty successful. And we will continue to measure and monitor the progress of ramp up to make sure the yield, the quality, and the cost model are all in check. We cannot give you the specific comment based on the number that you have outlined.

Speaker 6

However, if you go back to the capex number we have provided, the I think you can clearly understand that we're trying to ramp up rapidly on the OS. The CoW has been engaged with multiple customers as well as with our foundry partner. So we have active conversation together with partner and customers, again, just to seek the best alternative way to fulfill the customer demand. I think the, we're not in a position to comment detail of the engagement model as well as the quantity. But over time, the just to give you a rough number, at the beginning of the year, we estimated we will have about $250,000,000 incremental advanced technology revenue.

Speaker 6

I also commented we are slightly ahead of that curve. So right now the status is we are ahead of the original number. The momentum most likely will accelerate into next year. Also as indicated by Joseph and Ken's comment that we're adding the, we're doubling the capex. In 2025, we will continue to monitor the situation and based on the business landscape that we will decide what would be the right way to do it.

Speaker 6

Okay.

Speaker 4

Next question is from Mr. Rick Xu of Daiwa Securities.

Speaker 7

Hello? Can you guys hear me?

Speaker 8

Yeah.

Speaker 7

Oh, okay. Sorry. Sorry for this technical issue again. Just my the first question is my usual housekeeping question about your utilization rates for wirebonding and the testing for Q2 and Q3. And also a little follow-up.

Speaker 7

When Ken says something about your advanced ticket utilization rates was already 4, what's your quantitative definition of the 4? Thank you.

Speaker 1

In terms of utilization in quarter 2, we have both our packaging and testing running at slightly above 60%. And that ratio will go above 65 for both in quarter 3. When we talk about full, we mean, you know, everything is being used up or capacity.

Speaker 7

All right. Making us clear.

Speaker 1

Adding to what Tian just mentioned, I think when we talk about expanding our capacity, we are talking about expanding capacity for all kinds of demand coming from our customer, whether SLCOW or OS or testing. Also, not just on the machinery itself, we are also adding spaces, factory spaces, new factory buildings that are being built or being putting on stream online. We are also investing heavily like we are beefing up our R and D as well, making a lot of investment in the R and D. And also in terms of hiring talents, it's an all around effort for us to meet the customer demand.

Speaker 7

All right. Thank you. The second question is about your CapEx. We see very strong your very strong commitment in building the advanced packaging testing capacity such as the found substrate and also the CoA's equivalent. Would you worry about any potential risk of overflow business model I.

Speaker 7

E. That when the foundries resolve their core bottleneck issue would they cancel the outsourcing? I mean, that's what I said about the overflow risk.

Speaker 6

Well, I think the business model, the, of course, anything is possible. But the collaboration been in place for many, many years. We're also very used to the up and down cycle. So in this round, it really depends on the across the whole platform. We're looking at the multiple customer product development.

Speaker 6

Then we look at their utilization and their the volume roadmap. Then we look at our investment. Of course, we will examine the flexibility of the investment we put in place. So the nature of the OSAT business is we will build a flexible and fungible capacity and that can be easily move around to accommodate the different the product mix as well as volume. So right now we're quite confident the capacity we put in place will be here and will be very useful for our customers and our partners for, for quite a few years, at least.

Speaker 6

So the short answer is no, we don't worry about it.

Speaker 4

Next question is from Mr. Brad Lin of BOA.

Speaker 9

Hi, good afternoon. Thank you for taking my questions. I have two questions. The first one is on the, well, overseas expansion. So, does the firm have any new thought on the US expansion?

Speaker 9

I know that we come about overseas, but that seems to, well, we did not mention much about the US side. So on the new subsidy program by the US government and also the well increasing political dynamics there. So it does ASE have any new thoughts on the US expansion? And also we also see the expansion of the ISE labs there in California. Does that qualify for applying to the new subsidy programs?

Speaker 9

Thank you.

Speaker 6

Just to give you an answer, the, well, let me comment on the ISE facility. The ISE facility only has one purpose. That is to support the innovation at a chip level or at a system level in Silicon Valley for either AI or the future edge device or any advanced technology, high performance computing or silicon photonics, or power management. So the lab is put in place to provide system level testing, system level development, as well system level reliability. The lab is in California, Silicon Valley.

Speaker 6

The main mission is to bridge whatever technology are available domestically in U. S. And whatever technology that are needed that are available globally. Right? So the the the the the, the chip off the chip at office just announced the R and D funding, as well as the manufacturing funding.

Speaker 6

We will consider how to apply and for ISE and ISE similar or the phase 3 or phase 4. We will consider the chip app R and D as well as the manufacturing. The U. S. The U.

Speaker 6

S. High volume manufacturing establishment are still being considered. We do not have a tangible plant yet, mainly because the customer request on the volume they are still being investigated.

Speaker 9

Got it. So can we say that, well,

Speaker 6

we do have Mexico facility, and that is also available for North America. Just just clarification.

Speaker 4

We have a question from Ms. Laura Chen of Citigroup.

Speaker 10

Hello. Hi. Good afternoon. Can you hear me?

Speaker 4

Yes.

Speaker 10

Thank you. I have a questions about the gross margin trends. On one hand, we are seeing that we are accelerating our investment in the advanced packaging, but the broad based recovery on the traditional application seems to be, remain muted. So, my question is that how would we expect this advanced packaging investment to bear fruit? If it reached a satisfied year rate and also the loadings, how would you see that will be the normalized gross margin?

Speaker 10

That's my first question. Thank you.

Speaker 1

As I mentioned earlier around, the CapEx that we're making for the leading edge packaging and tests, those investments are of higher margin or or these investments are of, you know, accretive margin as well as return. So as we continue to grow that part of the business, also on tests, I think it will help the overall margin for our ATM business as we as time goes on.

Speaker 10

So can we expect that, there will be over corporate average, say, like, if the overall ATM business reached say like 80% utilization rate, usually we can expect like 25% gross margin. But with the COAs, if that's reached to satisfy its utilization rate and also the loadings, that will be much higher than that what we we expect before?

Speaker 1

At such point, such capacity is also higher than the corporate average margin.

Speaker 10

Okay. Got it. Thank you. And also, my next question is on the EMS business. You mentioned that the better than expected near term is due to the earlier ramp for the new products.

Speaker 10

So would you expect the sustainability will continue into the peak seasons into Q4? Or can we expect that the q4 will be even stronger like the historical pattern?

Speaker 1

No. I think the first half versus second half pattern should be similar to a typical seasonality.

Speaker 4

Next question is from Mr. Bruce Lu of Goldman Sachs.

Speaker 8

Hi. Thank you for taking my question. I think I want to ask again for the advanced packaging, right. So Joseph used to comment that the CapEx to revenue ratio. Can you comment about like, you know, what is the CapEx revenue ratio for the advanced packaging?

Speaker 8

You know, you spent a lot of money this year, how much revenue you can generate next year. In addition, TSMC commented that the Advanced Packaging gross margin is somehow approaching to the corporate average, which is 50 plus percent, right? So can we expect is there any reason that we can assume that your profitability was somehow similar with TSMC for your advanced packaging?

Speaker 6

I don't think we should make that kind of, the simple comparison because TSMC, the, the, the package that they do, as was the business model are slightly different for IAC. Joseph has already talked about it. The, the, for the, the OS that we're doing right now, the margins are higher than the ATM, the corporate average. And that's where we're going to stay. We're not going to comment comparing to the, the TSMC margin because the equipment, the process, the, all of the, everything they use are slightly different than the, than the ASE.

Speaker 6

Now in terms of the, how do we bridge the dollar? The, I think normally we're talking about the CapEx dollar. I think it's a dollar for dollar.

Speaker 8

So for the rent taxing, it's also a dollar for dollar?

Speaker 1

That's the, that's the current solve, Amit. We will actually need to, once it gets to volume, then we'll have a we'll have better assessment of that.

Speaker 5

I see.

Speaker 1

But in general, that seems to be still the case. Yes.

Speaker 8

Thank you. The second thing is that I want to ask about seasonality for your EMS business. I think, the Q3 guidance seems to be a little bit lighter than historical seasonality. So what was the reason for lower seasonality because of because of there we didn't hear any delay for the for the, flagship model smartphone is because of the smartphone or because of other applications?

Speaker 1

I think the people are expecting the new phone volume since people are sending an uptick on the shipment. So this quarter and because of the earlier launch of the product, we're seeing a better than expected Q2 and that same kind of momentum should go into, quarter 3. But as a whole, the other general markets, the recovery is still a bit slow. So I think from a full year perspective, I think EMS will have also have a muted year for the in terms of our top line.

Speaker 4

Next question is from Jason Zhang of CLSA.

Speaker 11

Hello. Can you hear me? Yes. Okay. Thank you for taking my questions.

Speaker 11

My first question is regarding on the proportion of your advanced packaging. Can you give us how many percentage is that advanced packaging account for your total revenue? And you mentioned about 250,000,000. Is that your targets in coming years, or is expectations on the contribution from advanced packaging in this year? Thank you.

Speaker 1

As we guided before, Neil, this year, we're expecting to double the our revenue in terms of leading edge packaging and test. And we and the incremental revenue should be over $250,000,000 And as Tian mentioned, we are currently slightly ahead of our schedule. And I think the momentum continues to be strong. And going into next year, we're expecting another doubling of revenue in this segment.

Speaker 11

Okay. Thank you. My second question is is

Speaker 1

The percentage of our leading edge revenue is about 5% this year, growing from 2.5% to over 5% this year.

Speaker 11

Thank you. 5% of ATM business, right?

Speaker 1

Correct.

Speaker 11

Okay. Thank you. My second question is in terms of the industrial and auto business, because, prefacedly, we merged the new fab from IDM players. And we know that currently those segments remain weak. So have we found any synergy or upsides coming from those kind of new business?

Speaker 11

Or can we comment that whether we see any improvements or recovery on those segments? Thank you.

Speaker 1

Well, I think in terms of automotive, overall sentiment is still very soft. But we have been continuing our growth in the automotive business, largely because of the market share gain and which we are leveraging on our automation to continue to expand our market share. For this year, I think in terms of ATM, the automotive part of the business will represent roughly 11% of the overall sales. And we'll see that momentum continue to go.

Speaker 4

We have a question from Mr. Charlie Chan of Morgan Stanley.

Speaker 5

Thanks for taking my follow-up question. So actually, 2 follow-up questions from me. So first of all, I think Tian seems to suggest that the new CapEx for Advanced Tagging margin should be above the corporate margin. But Joseph may clarify, he said above corporate average margin or above ATM margin. Thank you.

Speaker 1

Above corporate ATM margin.

Speaker 5

Corporate ATM margin. Okay. Okay. That's clear. Thanks.

Speaker 5

Yeah. And also doubling this revenue next year, so it's a doubling of 5% or doubling that 2.50 1,000,000 USRs incremental revenue.

Speaker 1

By doubling, I mean, next year's leading edge revenue will be doubling this year's leading edge revenue.

Speaker 5

Okay. So if this year is around 5%, next year should be close to 10% or more than 10%.

Speaker 1

Well, we are expecting other part of the business to grow as well. So that remains to be seen. Yeah. Whether it will be exactly 10% or a little over or a little under 10%.

Speaker 4

Next question is from Mr. Bruce Lu of Goldman Sachs.

Speaker 8

I want to know again for the device packaging in terms of investment direction because advanced packaging for me there are like 10 different technology from TSMC, code OS S, AOR, you know, SOICP, X or whatever. I mean, it seems to me it's very complicated. And how do you decided which one is the direction to go for AEC to invest? That's one thing. The second thing was like TSMC is talking about ramping up the panel level packaging in 3 years.

Speaker 8

So which means that it could be the case that they don't want to invest in the current cohorts because in 3 years, they're going to migrate to panel and they're going to lease that to the current wholesale partner. So that could be a short term business potentially. So how can we prevent this kind of risk or what is the direction to go?

Speaker 6

It's a good question. For example, ASE has been working on the panel solution for over 5 years. Just to give you a status report, we started with a form factor of 300 millimeters by 300 millimeters square. We've been doing that with quite a few key customers for a number of years, qualified a few products. Then we decided the 300 millimeter by 300 millimeter would be naturally expanded to 600 by 600.

Speaker 6

And then we're doing a lot of the study with customers, partners, equipment suppliers, and materials. Right now, we have firmed up the business plan. So out of the CapEx that we talked about it, the 600 by 600 panel also is part of the overall capex that we make the investment. We believe that by Q2 of 20 25 next year, we will have all the equipment ready. In the meantime, we are collaborating with our partner as well as customers in terms of the detailed volume ramp.

Speaker 6

I think technology development typically would take 10 years. In terms of volume readiness, that's always the tricky part. How do we do the overall capex whether OS, COW, panel or different kind of equivalent of technology. That's really the IP of OSAT. We have to work with partner as well as multiple customers, not a single customer or a single partner.

Speaker 6

Now there will be fungibility between all of the technology. The common usage, the sheer usage, and the flexibility to convert if needed. I don't think we're easy to say one technology can easily replace another technology. Each technology will cater for a different set of target customers. So when you talk about the COOS, there'll be different level of COOS.

Speaker 6

You already said that even with the panel, the panel will be targeting at different line width, different line space. Each one is different. It's very complicated, but our job is to prepare the whole portfolio of toolbox. Wherever the customer has a specific product mix they need to ramp, we are readily available to do that ramp for them. And that's why we need to work very closely with our foundry partner, as well as customers, because it's a very, very dynamic time.

Speaker 6

You can't really know a priori what the volume mix is going to be, but our job is to make sure we have all of the technology development. We have all of the, the, the building ready. And then when we need to, then our team will be very busy to convert one line to another or the other back to another, the just to make sure we have the operational efficiency.

Speaker 8

Your panel size seems to be different with, you know, TSMC was trying to do. Is that going to be a different? Is that going to be an issue?

Speaker 6

I'm not going to comment on TSMC's panel size. I think you have to ask TSMC. But ASC is pretty determined. We will do 600 by 600. Our customer seems to be comfortable with that dimension.

Speaker 6

The equipment will be different. The process will be different. But again, as I said, we cannot say one panel. There is no universal definition of any process. Well, AES is working on the 60600 as a certain feature size, as a certain cost model.

Speaker 6

And then the, we're working with our partner as well as our customer to make sure they're comfortable.

Speaker 8

Can you can you discuss the application for the panel's customer? This is for power management or for AI for, you know,

Speaker 6

it Oh, actually, it's for all the, all of the above.

Speaker 8

I see. Okay. Thank you. My next question is for gross margin in second half. I think, you mentioned that in second half ATM gross margin.

Speaker 4

Our next question is from Mr. Gokul Hariharan.

Speaker 2

Hey. I had one quick question on your smartphone segment, which is the largest segment. I think, Youssef, you talked about some improvement in demand from a particular set of customers. Could you talk a little bit about what is the status of the smartphone segment, both for high end SOC as well as for other auxiliary products. How does the inventory level and, are you seeing a more broad based enthusiasm from customers to actually order more or things are still quite sluggish?

Speaker 2

2nd part of that is for Tian. Tian, I think you talked about the, your toolbox of portfolio of packaging technologies that you have. Smartphone has been a area where the packaging technology has largely been stagnant for quite some time, I guess. Could you talk a little bit about, are we seeing anything in the horizon where packaging technology could evolve towards something similar to 2 d, 2.5 d fan out for the smartphone segment in the next couple of years?

Speaker 6

Okay. The first question is regarding the cell phone and Q1 of this year, we're seeing an uptick on cell phone. And if we look at the Q3 and Q4 forecast that the cell phone is ramping up in the, just the overall. So I think overall this year, the cell phone over our shipment, I mean, we're not in the position to comment on that. But based on the forecast we're looking at, it seems to be a moderately positive comparing to, for example, automotive and industrial.

Speaker 6

Okay. That's the first comment. In terms of the toolbox and also the, how could cell phones specifically, that segment can utilize some of the new technology we put in place. The, we believe on the on the technology roadmap with all of the AI initiatives. Over time, you have 2 types of devices.

Speaker 6

First, the when do we expect the high performance computing type of architecture to permeate it into the cell phone? Okay. That would be the first question. And we believe the, with all of the AI features coming in, if the market response is very good, I'm pretty sure the leading cell phone technology suppliers will start adding either more higher level of memory or higher level bigger chips into it. If that is the case, then the current technology that only be applicable to high performance computing naturally will take some shape into the cell phone market.

Speaker 6

Now the second type of thing will be the edge device. I think one of the earlier comment that we did not get a chance to answer is with all of the fabs, I think statistically we have like 84 fabs coming up right now. They're pretty much in the traditional, not the leading edge. So in the next few years with all of this traditional fab capacity coming online, how do we balance the semiconductor over our demand versus supplier? The, I think the general industry view is with AI at the top over the next few years, there will be more edge devices such as autonomous driving, such as robots, such as drones start coming out.

Speaker 6

Now in any kind of edge device or edge device system, you will utilize a lot of actuator MEMS sensors microcontrollers in an integrated and hydrogenous integration fashion. So if you think about the potential robots, the potential autonomous driving, the potentials drones, They will use a lot of conventional semiconductor devices as well as the AI engine or the AI brain. Now the semi talk about it in 2030, 31, the 32, the industry will hit $1,000,000,000,000 The, if we want to hit 1,000,000,000,000, naturally we will use up all of the fab in the leading edge as well as the the traditional package level. And the OSAT or ASE, out of the automation that we put in place, out of the building blocks we put in place, our target to capture not only the high performance computing as well as the next generation AI brain to the edge device as well as to robotic fingers for all of the heterogeneous integration or the any kind of system package that our customers or system designer would like to do. It's a very long answer to your question, but I hope that's comprehensive.

Speaker 2

Yeah, that's very clear. So one follow-up on that, Tian is if, if you had to assert a guess, when do you think smartphone or cell phone SoC starts using chiplet? Is it in the next 2 years, next 3 years or is much further than that in terms of technology readiness and market acceptance?

Speaker 6

I think the chiplets already started. The chip has really, is a concept. In other words, now when you have, when you start integrating chip, it becomes a chiplet. So today we're seeing the chiplet architectures in a supercomputing high performance computing. But even when you carefully go to the the electrical vehicle or ask the current generation of cell phone, you can pretty much argue this is the beginning of the chiplet.

Speaker 6

So I think the chiplet concept, the platform, are being validated by the market. Over time, I think the chiplet will become more pervasive. Therefore, the hydrogen integration, the power management, the embedded all of this technology that we're developing today will become very useful. And that's where the panel, for example, that the panel, I did not get a chance to comment. We think about at a power management level, there will be a lot of integrated devices, integrated package, they're thinking about it.

Speaker 6

So the panel needs to be lower cost, flexible enough to accommodate the power management integrated package but also needs to go high enough to accommodate the current form of high performance computing. But any kind of package will have a different set of target customer. If you're talking about 3 d, you're talking about 2.5 d or interposer, that feature size can continue to move up, become smaller and smaller together proportional to the lithography and also the density requirement. So our job is to make sure we have a whole spectrum of technology in our pocket. Whenever the customer come in, they need 10% of high end, 40% of mid end and 50% of low end.

Speaker 6

We can easily provide them a comprehensive selection of tools in an automated manner. Okay.

Speaker 4

If you have any questions, please raise your hand. Bruce, sorry about interrupting your question earlier. Please keep 2 questions at a time. Thank you.

Speaker 8

Okay. Just one quick question. Joseph, you did mention that earlier, the second half gross margin for ATM will go back to 25%, 30% due to better product mix, better testing, more events. It seems to be slightly lower than our guidance. Can we expect that to go back to 25%, 30% in gross margin in 4th quarter?

Speaker 8

What slows us down for the gross margin recovery?

Speaker 1

I think the overall recovery was slower than we were expecting. And because of the volume shortage or the gap, we are now the margin prospect for the second half seems to be a little bit lower than what we were originally expecting. We do expect that going into Q4, we should be able to go back into our structural margin range. And when the overall utilization goes beyond 70%. And as I mentioned, it's more challenging now, but I think for the whole year, we're still trying to struggle to see if we can still reach the lower edge of the structural margin, which is about 24%.

Speaker 6

But not but

Speaker 8

for the product mix improvement and more testing revenue still intact in third quarter. Is that right?

Speaker 1

I'm sorry. The what?

Speaker 8

The the more testing revenue or the more advanced packaging contribution in third quarter still intact. Just the traditional packaging, the efficiency lower. That was the main reason for lower gross margin in 3rd quarter. Is that the right understanding?

Speaker 1

That's correct. In terms of testing, we are progressing as planned, but the overall general market recovery seems to be slower. That's dragging the margin a bit. Yes.

Speaker 8

Okay. Thank you.

Speaker 4

There is no question from the floor.

Speaker 1

Okay. If there's no more questions, we will end the conference call today. Thank you very much for attending, and we will see you next quarter. Thank you.

Speaker 6

Thank you.

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Earnings Conference Call
ASE Technology Q2 2024
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