ASE Technology Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025

There are 10 speakers on the call.

Operator

Hello. I am Ken Shan, the Head of Investor Relations for ASC Technology Holdings. Welcome to our fourth quarter and full year twenty twenty four earnings release. Thank you for attending our earnings release today. Please refer to our Safe Harbor notice on Page two.

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, Doctor.

Operator

Wu will be giving the company's key message. I will be going over the financial results, and Joseph will then go through our company's guidance. Both Tian and Joseph will then be available to take your questions during the Q and A session that follows. During the Q and A session, I will be moderating, receiving, and as needed, clarifying and condensing each interaction down to a single question. With that, let me hand the presentation over to Doctor.

Operator

Tian Wu. Tian?

Speaker 1

First of all, a belated Happy Chinese New Year to all of you. Let me give you the recap for twenty twenty four. Our consolidated revenues grew 2% year on year in 2024 with ATM revenues up 3% year on year. We have seen a very strong demand for leading edge packaging and testing, while the mainstream segment was a mix back. We saw a soft recovery in some segment and some other segment due to inventory correction as well as end market demand were lagging behind the general market.

Speaker 1

Leading edge advanced packaging and testing revenues were over US600 million dollars accounting for around 6% of ATM revenues, up from US250 million dollars in 2023. Our testing business grew 9% year on year in 2024 and in particular grew 18% year on year in Q4 of twenty twenty four. We do expect the testing revenue will have accelerated momentum into 2025 on increased turnkey as well as our expanding leading edge test. Our machinery CapEx was US1.9 billion dollars up by US1 billion dollars versus 2023, mainly driven by advanced packaging and testing. Next, let me give you a 2025 outlook.

Speaker 1

Our ATM business to outgrow the logic semiconductor market, driven by strong momentum of our leading edge advanced packaging and testing business. Leading edge advanced packaging and testing revenues to increase by US1 billion dollars versus 2024. That will account for about 10% of our growth in 2025. While the general segment will be better than 2024, we expect them to grow mid to high single digit year on year. On the investment in R and D, human capital, advanced packaging and testing capacity and also factory automation and all of the smart factory buildings, we will continue to accelerate in preparation for the AI led super cycle, which we believe have started in 2024 and we will see the momentum in 2025, '20 '20 '6 and beyond.

Speaker 1

Lastly, let me give you a market landscape and ASE's positioning. We believe the total semiconductor revenues are likely to reach $1,000,000,000,000 in the next decade, driven by AI, robotics, electrification of all systems, also the energy and the IoT related products. ASC is well positioned to benefit from the strong demand of leading edge advanced technology as well as the growing volume of peripheral chips on accelerating edge AI adoption. A comprehensive technology toolbox, three d, 2.5D fan out, large panel SIP, co packaged optics, power automation scale advantages as well as the geographic diversification of ASE make ASE the preferred partner for customers. ASE's strong financial performance and flexibility and agility in handling business model evolutions further widened the moat against competitors.

Speaker 1

Let me pass the floor back to Ken.

Operator

Doctor. Wu, I will now go over the financial results. The fourth quarter ATM and EMS businesses came in slightly better than originally anticipated. Our ATM businesses fourth quarter outperformance was driven primarily by some communications related business. Strength was driven by our test business with it growing 11% quarterly.

Operator

For the full year, our ATM business grew by 3%. Our leading edge advanced packaging business accounted for most of this growth. And though testing finished strong, we believe our test growth will be even stronger during 2025. Our overall equipment utilization was in the mid to high 60s. For our EMS business, despite a muted fourth quarter outlook due to earlier seasonality, Our SIP product flow came in slightly ahead of our expectations during the fourth quarter.

Operator

For the full year, our EMS business was flattish. We believe that this is somewhat in line with the electronics industry as a whole. It should be noted that an earlier seasonality somewhat distorts our annual comparisons for our EMS business and to a lesser extent also at the holding company level. Please turn to page six where you will find our fourth quarter consolidated results. For the fourth quarter, we recorded fully diluted EPS of $2.07 and basic EPS of $2.15 Consolidated net revenues increased 1% sequentially and year over year.

Operator

We had a gross profit of 26,600,000,000.0 with a gross margin of 16.4%. Our gross margin declined by 0.1 percentage points sequentially and improved by 0.4 percentage points year over year. The sequential decline in margin is principally due to lower profitability from our EMS business. Our operating expenses increased by $400,000,000 sequentially and by $1,500,000,000 annually to $15,400,000,000 The sequential increase in our operating expenses are primarily due to leading edge advanced packaging and testing services ramp up and timing of equity compensation related expenses from our ATM business. The year over year increase in operating expenses is primarily attributable to continued r and d staff up and other labor related costs.

Operator

Our operating expense percentage increased sequentially by 0.2 percentage points and annually by 0.8 percentage points year over year to 9.5%. Our operating expense probably requires a bit of explanation here. Extensive preparation and groundwork for our leading edge advanced packaging related businesses started in late twenty twenty three and ramps during 2024. We have been aggressively hiring and training new employees throughout 2024. We also needed to ramp our new product introduction efforts, including perfecting tooling and process flows that eventually needed to be in place.

Operator

Finally, semiconductor manufacturing has become very visible throughout the world. The skill sets necessary to prepare, manage, and run manufacturing also are in high demand. Retention of our employees has become increasingly important, and all of this has been done in an inflationary environment. As such, these expenditures have created a ramp in our operating expenses that started in 2024. We see our operating expenses continuing to rise on an absolute basis, but will level off in the middle part of twenty twenty five.

Operator

Further, as revenues related to these efforts grow, our operating expense percentage should start to decline during the back half of 2025. Operating profit was 11,200,000,000.0, down 300,000,000 sequentially and 600,000,000.0 year over year. Operating margin declined 0.3 percentage points sequentially and declined 0.5 percentage points year over year. We believe this margin decline was primarily driven by higher compensation and ramp up expenses related to leading edge advanced packaging and geographical scale up across our ATM and EMS businesses. During the quarter, we had a net non operating gain of $200,000,000 Our non operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other non operating income offset in part by net interest expense of $1,300,000,000 Tax expense for the quarter was $1,900,000,000 Our effective tax rate for the quarter was 16% The effective tax rate during the quarter was lower than expected primarily as a result of higher tax investment credit recognition.

Operator

Net income for the quarter was $9,300,000,000 representing a decrease of $400,000,000 sequentially and $100,000,000 year over year. The NT dollar appreciated 0.5% against the U. S. Dollar sequentially while depreciating 0.75% annually. From a sequential perspective, we estimate the NT dollar appreciation had a 0.1 percentage point negative impact to the company's gross and operating margins.

Operator

While from an annual perspective, we estimate the NT dollar depreciation had a 0.2 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 $27,300,000,000 with a 16.8% gross margin. Operating profit would be $12,100,000,000 with an operating margin of 7.5%. Net profit would be $10,200,000,000 with a net margin of 6.3%.

Operator

Basic EPS excluding PPA expenses would be $2.36 Please refer to page seven. Here you will find the 2024 consolidated full year result versus 2023 full year results. Fully diluted EPS for the year was $7.23 while basic EPS was $7.52 For 2024, consolidated net revenues improved 2% as compared with 2023. ATM improved by 3% while EMS business improved 2% annually. Gross profit for the year was $96,900,000,000 improving $5,200,000,000 year over year or by 6%.

Operator

In 2024, our consolidated gross margin improved 0.5 percentage points to 16.3%, principally as a result of foreign currency fluctuation and improved operating leverage from our ATM business offset in part by higher utility costs. Operating expenses increased 6,400,000,000.0 for the year and came in at 57,800,000,000.0. Higher operating expenses as discussed earlier are the results of the ramp up of leading edge advanced packaging services and higher labor related costs. Our overall operating expense percentage also increased to 9.7% as a result of these increases. Operating profit for the year was $39,200,000,000 for the year declining $1,100,000,000 Operating margin for the year was 6.6% representing a decline of 0.3 percentage points from 2023.

Operator

We recorded a net non operating gain of $2,500,000,000 for the year, including a net interest expense of $4,900,000,000 versus $4,700,000,000 in 2023. And though interest rates may appear to be moderating, we believe that our interest expenses will most likely increase or stay near current levels heading into next year given additional borrowing necessary to fund our expansion. Most of the non operating gains were associated with our foreign currency hedging activities. Total tax expense was $7,800,000,000 The effective tax rate for the year was 18.6. Current year income tax expense came in lower as a result of recognized deferred tax assets from increased government incentive programs on R and D.

Operator

For the coming year, we believe our ongoing effective tax rate will be lowered by increased government incentive programs and offset in part by recent global minimum tax applications. We expect that the effective tax rate for the coming year will be slightly below 20%. Net income for the year increased by 2% to $32,500,000,000 On a full year basis, we estimate that the depreciating NT dollar had a positive 0.8 percentage point impact to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 16.9%. Our operating margin would be 7.3%.

Operator

Our basic EPS would be $8.54 On Page eight is a graphical presentation of our consolidated quarterly financial performance. On a year over year basis, gross margins have been gradually improving. On the operating margin front, as was stated earlier, operating expenses increased in preparation of leading edge advanced packaging capacity, labor staff up, offshore site expansion costs from our EMS businesses and equity compensation. On page nine 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.

Operator

For the fourth quarter of twenty twenty four, revenues for our ATM business were $88,400,000,000 up $2,600,000,000 from the previous quarter and up $6,400,000,000 from the same period last year. This represents a 3% increase sequentially and a 8% increase annually. Gross profit for our ATM business was $20,600,000,000 up $800,000,000 sequentially and up $1,400,000,000 year over year. Gross profit margin for our ATM business was 23.3% up 0.2 percentage points sequentially and down 0.1 percentage points year over year. The sequential margin improvement was primarily related to higher tests and leading edge advanced packaging business offset in part by the impact of product mix shift.

Operator

The annual margin decline is primarily the result of higher utility costs and product mix shifts offset in part by favorable foreign exchange. During the fourth quarter, operating expenses were $11,200,000,000 up $600,000,000 sequentially and $1,200,000,000 year over year. The sequential increase in operating expenses was primarily driven by scale up of compensation costs, including headcount and timing of certain equity compensation. The annual operating expense increase was driven primarily by the continued scale up of R and D labor and timing of equity compensation. Our operating expense percentage for the quarter was 12.6%, increasing 0.3 percentage points sequentially and up 0.4 percentage points annually.

Operator

The sequential and annual increases were primarily due to labor ramp ups preparing for higher leading edge advanced packaging revenues. During the fourth quarter, operating profit was $9,400,000,000 representing an increase of $200,000,000 both quarterly and annually. Operating margin was 10.7% flat sequentially and down 0.5 percentage points year over year. For foreign exchange, we estimate that the NT to U. S.

Operator

Dollar exchange rate had a negative 0.2 percentage point impact on our ATM sequential margins and a positive 0.4 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% and operating profit margin would be 11.6%. On page 10, we have our ATM full year P and L. 2024 revenues for our ATM business improved by 3% with our packaging and test businesses up 29%, respectively. Gross profit for the year improved 6% to $73,200,000,000 Gross margin was 22.5, up 0.7 percentage points.

Operator

Margin improvement was the result of higher factory efficiency and a favorable foreign exchange environment offset in part by higher utility costs and factory supply consumption due to shifting product mix. Our operating expense percentage increased 0.9 percentage points to 12.6. Operating profit nudged up $200,000,000 to $32,000,000,000 while operating margin declined 0.3 percentage points to 9.8%. For foreign exchange, on a full year basis, we estimate that the depreciating NT dollar had a 1.4 percentage point impact on margins. Without the impact of PPA expenses, gross profit margin would be 23.5% and operating margin would be 11.1%.

Operator

On page 11, you'll find a graphical representation of our ATM P and L. On page 12 is our ATM revenue by three c market segments. You can see here the relative strength of our communications segment during the fourth quarter. As previously mentioned, our leading edge advanced services are currently spread across our computing and communications segments. On page 13, you will find our ATM revenue by service type.

Operator

The most prominent thing here is that our wire bond services saw gradual declines over the last eight quarters. Traditional wire bond products are in everyday electronics like Wi Fi, televisions, and household appliances. Frequently, they are not the main chip but mainly serve supporting roles as peripherals like a screen or power controller. This chart shows a somewhat simple concept. More basic products like many of those upgraded during COVID have a longer replacement cycle.

Operator

We would expect to see a pickup in Wirebod when a general recovery starts to happen. A corollary you can see from this chart is that there's strength in our advanced packaging and test businesses. We believe our efforts involved with growing our test business are continuing to pay off. Our test services have also managed to outgrow the corporate average going from 16% to 18% of ATM. Our test business grew by 11% quarterly and 18% annually.

Operator

As Doctor. Wu mentioned earlier, we see our test business accelerating during 2025. On page 14, you can see the fourth quarter results of our EMS business. During the quarter, EMS revenues were $74,900,000,000 declining $500,000,000 or 1% sequentially and $4,300,000,000 or 5% year over year. The sequential and annual revenue declines are primarily the result of accelerated seasonality for the year.

Operator

Sequentially, our EMS business's gross margin declined 0.7 percentage points to 8.3%. This change was principally the result of product mix and lowering operating leverage. Operating expenses within our EMS business declined 100,000,000.0 sequentially and while increasing 300,000,000.0 annually. The sequential expense decrease was primarily attributable to lower compensation expenses, while the annual increase is related to geographical expansion and acquisitions. Operating margin for the fourth quarter was 2.7% declining 0.6 percentage points sequentially and declining 0.8 percentage points year over year.

Operator

The sequential and annual declines were primarily due to product seasonality. Our EMS fourth quarter operating profit was $2,000,000,000 down $500,000,000 sequentially while down $800,000,000 annually. For the full year, our EMS business experienced a somewhat muted electronics demand environment. For the full year, EMS revenues grew by 2%. Gross margin improved by 0.3 percentage points primarily due to product mix.

Operator

Operating margin for the year was 2.9%. The decline in our EMS operating margin was primarily due to geographical expansion and acquisitions with differing cost structures. Operating profit declined by $1,000,000,000 On page 15, you will find a graphical representation of our EMS revenue by application. There was a slight shift from consumer devices to communications devices. The shift here are generally due to underlying product seasonality.

Operator

On page 16, you will find key line items from our balance sheet. At the end of the year, we had cash, cash equivalents, and current financial assets of $85,900,000,000 Our total interest bearing debt increased by 700,000,000.0 to 213,900,000,000.0. Total unused credit lines amounted to 375,700,000,000. Our EBITDA for the quarter was 28,800,000,000.0. Our net debt to equity this quarter was $0.37 On Page 17, you will find our equipment capital expenditures relative to our EBITDA.

Operator

Machinery and equipment capital expenditures for the fourth quarter in U. S. Dollars totaled $640,000,000 of which $321,000,000 were used in packaging operations, dollars $290,000,000 in testing operations, dollars 23,000,000 in EMS operations and 5,000,000 in interconnect material operations and others. Machinery and equipment capital expenditures for twenty twenty four in U. S.

Operator

Dollars totaled $1,876,000,000 of which $957,000,000 were used in packaging operations, $815,000,000 in testing operations, $89,000,000 in EMS operations and $15,000,000 in interconnect material operations and others. In addition to spending on machinery and equipment, we also spent $655,000,000 on land and building or for simplicity's sake facilities during the fourth quarter while spending $1,100,000,000 for the full year. During the year 2024, we invested significantly in our facilities as part of our generational advancement in packaging technology. Given that our facilities spending is sporadic in nature, we have historically discussed our capital expenditures mainly as it pertains to our machinery and equipment spending for the sake of comparability. Our facilities were also previously more generic and not as specialized as our machinery and equipment.

Operator

But as factory automation, advancing technologies, and tighter building specifications are now driving new facility investments. The scale of investment steps up and now also represents significant technology advancements and competitive advantages for our businesses. At this point, I would like to hand the presentation over to Joseph for further discussion on our overall company outlook. Joseph?

Speaker 2

Thank you, Ken. Let me give you a first quarter twenty twenty five outlook. Based on our current business outlook and exchange rate assumption, we project overall performance for the first quarter of twenty twenty five to be as follows. For ATM, in NT dollar terms, our ATM first quarter twenty twenty five revenue should decline by mid single digit quarter over quarter. And the gross profit margin should decline by slightly more than one percentage point quarter over quarter.

Speaker 2

For EMS, in anti dollar terms, our EMS first quarter twenty twenty five revenue should decline slightly year over year. Our EMS first quarter twenty twenty five operating margin should decline by 30 basis points year over year. Now on top of our first quarter guidance, I would also like to give you some more color of our ATM business in 2025. First on revenue, as Tian mentioned, our leading edge packaging and testing business will continue to see very strong momentum and we expect to add another $1,000,000,000 of revenue in this area or 10% of our revenue ATM revenue growth. In terms of general market, we expect our revenue to grow in line with the industry, giving us above mid single digit ATM revenue growth.

Speaker 2

And to support such business prospects, we will need to further expand our CapEx in both capacity and matching facilities. For Machineries and Equipment, we expect our 2025 CapEx to be the annualized amount of fourth quarter twenty twenty four number and of which 60% will be used for leading edge to support the strong demand. Also to support the aggressive expansion of both turnkey and pure testing businesses, over 30% of the total CapEx amount for the year will be allocated to testing. Also as mentioned by Ken, smart factory buildings have become an essential part of our overall leading edge service offering. As such, we will need to double our capacity facilities to around US2 billion dollars in multiple new sites, both in Taiwan and overseas.

Speaker 2

Secondly, I would like to talk about our profitability. We ended 2024 with an ATM gross profit margin of around 22.5%, which is a bit short of our structural gross margin target of twenty four percent due to a softer than expected recovery of general market, which consequentially and consequentially are sub 70% utilization rate. On top of that, our margin was also impacted by the inflationary environment with elevated costs including electricity prices and logistics costs etcetera. We're also experiencing higher ramp up costs of manpower and capacity as we're in the investment and expansion mode at this point. Entering 2025, once we progressively complete the full ramp of our leading edge capacity in the second half of this year, we expect ATM gross profit margin to reach the midpoint of our structural ATM range with twenty twenty five full year ATM gross margin recovering to a structural GM target of 24% to 30% and expect to see further improvement in profitability in 2026 as we continue to expand our business.

Speaker 2

Operating expenses. The higher operating expenses is mainly due to active R and D investment, including staffing up of R and D personnel, our Taiwan and overseas expansion and upfront costs of some new facility. We do expect in 2025 ATM operating expense ratio should decline by a notch, but remain to be higher than previous years as we continue the investment in leading edge technology, human capital, as well as very upfront costs related to new facilities. We believe the operating leverage of these investments will become more meaningful starting in the latter part of 2025 or into 2026. And therefore, OpEx percentage will start leveling off as we enter the full ramp up of the newly invested capacity.

Speaker 2

And finally, I would like to say that there are many uncertainties ahead that could very well change the overall landscape of our business prospect. But with that in mind, we will stay focused on effectively executing our plan for the year and hopefully we will have a very decent 2025 ahead of us. Thank you very much.

Speaker 3

During the Q and A session that follows, we would appreciate if questions can be kept concise and asked one at a time. Callers will be allowed to ask two questions per turn but questions are to be asked one at a time. I will be receiving each question and repeating the ask question to Joseph and Tian.

Speaker 4

Again, we will be limiting the

Speaker 3

number of questions asked to two questions per

Speaker 4

turn, but ask one at a time.

Speaker 3

We have a question from Ms. Laura Chen of TD Group.

Speaker 5

Hello. Hi. Thank you for taking my questions. Good afternoon, gentlemen. My first question is that, can I clarify, sir, what you mentioned about, like, 1,000,000,000 of revenue for the leading age contribution?

Speaker 5

Is additional new, another 1,000,000,000 contribution or the overall advanced packaging would contribute about 1,000,000,000? Sorry. Can you make it clear?

Speaker 2

He mentioned that on top of the $600,000,000 revenue achieved in 2024, we will add another billion dollar of revenue in the in the leading edge. Okay.

Speaker 5

Thank you. Yeah. That's very clear. And can you further also clarify that among that, can we kind of a breakdown of that advanced packages or two point five days between like a GPU or potentially AI ASIC or maybe HAI as well?

Speaker 2

It

Speaker 1

is a blended. We we will not give you the breakdown.

Speaker 5

Okay. Okay. Thank you. Thank you. My second question is, we know that recently based on the new restrictions from the US BIS, if, clients, Chinese clients at TSMC, the Vans nodes, they need to be packaging by, so called approved OSAT wireless.

Speaker 5

Yeah. So otherwise, TSMC may not really be able to ship to those Chinese customers. So from, ASE perspective, since we are in the wide list, I'm just wondering that, do we see that, surge request or order, what would that impact our, deterioration rate or like a potential, the order visibility or outlook in the near term? Thank you.

Speaker 3

Hi. Hi, Laura. Hi.

Speaker 4

You you are asking about the BIS impact on our business, right, in general?

Speaker 5

Right. Right.

Speaker 6

Okay.

Speaker 4

Please.

Speaker 1

Alright. The this is a new regulation from BIS and as we speak, we are working aggressively with our foundry partner as well as many customers. We're trying to understand the detailed execution, the rules and also the capacity requirement. So all of these are in the process right now. The number that we have provided currently does not include this potential upside.

Speaker 1

We do understand there will be upside. However, we do not have a definitive plan in terms of when this upside will happen, the pricing as well as the type of package that are required. So at this point in time, we do understand this is an upside and we are aggressively working with our partner and customer trying to fulfill that demand. But right now, we do not have any more detailed information to provide. Okay.

Speaker 5

Thank you. Appreciate it. Very clear.

Speaker 3

And Stanley.

Speaker 7

Oh, hey, gentlemen and Irish. Belated happy new year. So my first question is really about your, new business, developments, right? Especially, you at the beginning, the open remark you mentioned about the co package optics, can, can management talk about what the ASC group can do, for this, CPO, advanced packaging and testing, business. Can we start from this topic?

Speaker 4

Charlie, your question relates to, co package optics, or are you asking in general about our R and D efforts?

Speaker 7

The CPO, for example, what kind of service, ASC group can provide timing? But, would be great if you talk about kind of a big picture, right? How, you are working with, that AI GPU customer supply chain and your foundry partner, this, CPO development. Right? Because I I believe it's, like, new, and, there could be a lots of bottleneck in the supply chain.

Speaker 7

Right? So so I'm not sure how ASC is going to to contribute to to that.

Speaker 4

Okay. Charlie wants to know about, the overall CPO, involvement that ASC has at this time. If we could first answer that.

Speaker 1

I think you have already said it's a new technology and, like any new technology, it takes some time to incubate. ASC is is playing the critical role in the supply chain as part of the overall puzzle. So we're working with our foundry partner closely. The foundry technology is also evolving. We're working with our ASIC suppliers.

Speaker 1

Their architecture and system design as well as the request to the foundry partner are also evolving. And we're working with the end system, in other words, their overall thermal, electrical, power delivery. Under all of this constraint, we firmly believe the silicon photonics will be a vital incremental innovation to address many of these issues together with other innovation. So as I said that the ASC will play a critical role in this new innovation. In terms of how do we work with our foundry, ASICs and the system customers, I will not be able to reveal any development plan.

Speaker 1

The only thing I can say is we've been working on this for quite some time and then everybody is moving very hard as well as there are competing technology. But as we know, all of the competing technology will have a plateau and we have a ceiling. We firmly believe that the optics will be a critical innovation for the whole supply chain, the ecosystem. That's pretty much I can tell you so far. In terms of revenue ramp up, we are ramping up revenue.

Speaker 1

However, nothing major at this point in time, if that's what you're interested. Thank you.

Speaker 7

Gotcha. Thanks, doctor Wu. So my my I I have a second question, but, somehow, can I have a clarification on Laura's question on the, your 1,000,000,000 revenue as well? Is it okay?

Speaker 4

Charlie would like to, so you're you're asking that this not count as your second question. Right, Charlie? Yeah.

Speaker 7

Yeah. It's just a quick clarification. Is it okay?

Speaker 4

Okay. Yeah. That sure. Sure. If we can clarify for Charlie and and for Laura, the the 1,000,000,000, extra revenue and the components of that.

Speaker 7

Yeah. Yeah. And and then I have the second, more important question. Why why why don't we go go for the second one? I think that is also important to, your your investors, because you can see, oh, there's the geopolitical dynamic.

Speaker 7

So your fundary partner may need to accelerate their US production plan. So there has been some discussion about whether TSMC should also do, coas capacity in The US. And we kind of think that ASC becomes a more important partner with TSMC in in in COAS. So the the reasonable question you said that whether AS is considering your, kind of advanced packaging, opportunity, or operation in The US.

Speaker 4

Okay. Charlie would like first clarification on the 1,000,000,000 number. And then if we could follow-up with, the the the current US, geopolitical climate's impact on our overall business at this time.

Speaker 7

Yeah. Thanks, Ken. Yeah. So so because the last time you talked about beverage packaging, total revenues of 1,000,000,000, but now you're talking about 1,000,000,000 US dollars additional. And when you answer to Laura, you kind of, took about, is combining the the niche and the package in.

Speaker 7

So so I kind of get very, very confused.

Speaker 4

We we gotta let them answer first. Thank you.

Speaker 2

Alright. In terms of the billion dollar extra revenue, from Leading Edge, I think three quarter of it three quarter of the $1,000,000,000 will be from packaging and another and another 25% will be coming from, Advanced Testing. Does that answer your question on the first part?

Speaker 7

Okay. So 25% is from advanced packaging and 35% from leading edge packaging. You said

Speaker 4

75% related to advanced packaging. 25% related to testing.

Speaker 7

Oh, I see.

Speaker 4

I see. Of leading edge type products.

Speaker 7

Oh, I see. I see. Then then there's a huge upside, right? Because, last year you did, 600,000,000 USRs. And your original guidance said, you know, above 1,000,000,000.

Speaker 7

So so so the original guidance is you said there you're you're going to grow 400,000,000 USRs revenue, but now you are growing 1,000,000,000 USR revenue. Is that the right comparison compared to your

Speaker 2

Let me let me start with the numbers again. I think in 2023, we have leading edge revenue of around $250,000,000 and we grew that business in 2024 to over $600,000,000 And this year, we will add another billion dollar extra revenue from this new technology.

Speaker 6

So

Speaker 2

altogether, it will be over $1,600,000,000 from leading edge.

Speaker 7

Oh, okay. And that your previous guidance above one, but you didn't say how much above the 1,000,000,000.

Speaker 2

Correct. Correct. Okay.

Speaker 7

Okay. Oh, then it's a super clear. Thank you. And can we go back to that major question? Thank you.

Speaker 7

Your your US Feb plan?

Speaker 1

It's, I'm trying to figure out the best way to answer that question. We have been working very closely with our end customers as well as a partner to explore what is the most efficient as well as physical way to ramp up all sorts of packaging, including leading edge anywhere in the world. The current plan is ASC would like to figure out the methodology, the process, the automation, and all of the yield and all of the design database in Taiwan. And this is where our resource are mostly concentrated. Before we have a full confidence, we can fully execute the ramp with reasonable results, we will not go outside of Taiwan.

Speaker 1

Mhmm. But once we have achieved that, we will consider how to move the personnel that we have trained by then, the equipment, the building material that we have already mastered by then into other part of the world. The reason being as we transfer some of the leading edge, by the way, the leading edge are constantly evolving. Every year is different. We are in this time chase against resource and technology know how.

Speaker 1

The yield, the investment and the qualification requires so much R and D resources. It simply cannot be executed for ASC in any kind of a satellite situation. It has to be a headquarter where all of our resource are concentrated. So we can constantly maneuver and change the configuration and the resource requirement and do all of the relevant experiments to know the right things to do. Until we really master that, going to overseas will not do our customer and the country that we're moving to the correct service.

Speaker 1

And that has been the agreement that I have we have with our founder partner as well as with our end customers.

Speaker 3

And

Speaker 1

so the the the short answer is yes. Mhmm. We have all of this in the plant. However, we are in good communication to all the relevant parties about the status we're in, the volume we have created, and also the learning, that we have acquired. And I believe the end customer like that kind of rationale because I don't think this is just a money thing.

Speaker 1

At the end of the day, it's the utilization, the cost and for leading edge packaging is really about the yield. So we really have to measure this.

Speaker 8

Today

Speaker 1

we just simply do not have the knowledge, we do not have the resource to create a satellite situation.

Speaker 7

I see. Yeah. It's a very, very clear thanks, gentlemen, and thanks, Iris. Thank you.

Speaker 3

A question from Mr. Gokul Hariharan of JT Morgan.

Speaker 6

Hi. Happy new year. My first question, is on test. I think, you mentioned, Doctor. Wu, that, test will accelerate, in terms of growth this year.

Speaker 6

Is that an acceleration from the 18% year on year growth that we saw in q four? Is it like further acceleration? Any color you can give us on the test growth this year? Also previously, I think you talked about reaching 25% of revenues as like a midterm target. Could you talk a little bit about when do you have that insight, for test to reach 25% of revenues?

Speaker 6

And lastly, I think just wanted to understand, what are the margins for testing like? Are they still in the low to mid 30% levels? Or is there some upside given that you're doing a lot more advanced testing?

Speaker 4

So Gokul, you you're asking about our general test business, in relation to how it's gonna grow, and then eventually the target in terms of where we wanna get it to and then overall margin structure. Right, basically the test business as a whole?

Speaker 6

Yes, that's right. Yeah. Okay. Thank you.

Speaker 2

I think the, the momentum of our test business is, continue continuously growing and we do have a fairly aggressive growth plan for our test business as well in terms of further increasing our turnkey ratio as well as trying to grab more pure testing business as well. So, this year, as I mentioned earlier on, our investment in test will continue to occupy a large chunk of overall CapEx, roughly over 30% of the CapEx will be spent on test this year. And again, I think this year, our test business will outgrow our packaging business by twofold at this point.

Speaker 3

Okay. Does that answer your question?

Speaker 6

Yes. Could you also talk a little bit about the gross margin? So 2x of packaging, that's quite clear. So that's definitely an acceleration compared to Q4. Could we also talk a little bit about the margins for test?

Speaker 6

I think, previous understanding has been, like, low to mid 30% gross margins. Is that consistent or, is it even higher given that you have a lot more advanced testing business right now?

Speaker 2

I think that business, we continue to have a relatively stable margin at 35% ish kind of margin that year in year out, and we're seeing that continuing into 2025 as well.

Speaker 6

Got it. Thank you very much. My second question is on the leading edge advanced packaging and testing revenues. I think our understanding and the market's understanding is right now that most of this is in partnership with the leading foundry. How was the business momentum for full stack leading edge advanced packaging and testing going?

Speaker 6

Are we starting to get more, full stack business also, either on our own steam or in partnership with the leading foundry? And also, I think, TSMC also talked about potentially COOS being applied to some non AI applications also. Doctor Wu, could you talk a little bit about what are you seeing on this 2.5 d, and three d packaging for non AI applications given right now most of it is AI?

Speaker 4

So, Gokul, you're asking about our leading edge advanced packaging. And in terms of, our the developments within our focus, type solutions, and then to a certain extent, whether, whether there's, there there's other r and d applications related to fan out at this point.

Speaker 6

Yeah. Outside of AI, because, right now it seems like mostly AI, but are you seeing this, being adopted by other customers? Would that be in the HPC or even in the mobile space also? Okay.

Speaker 1

Alright. Like all new technology, you always start with a bulldozer and then the industry will find an anchor application or anchor customer or set of customers. I think that's what we have seen. So you create a brand new packaging technology, which has been around for a few years. But in the last two years, it has gone through a rapid ramp up.

Speaker 1

So now become more sophisticated, more mature with a better known yield as well as the yield for any kind of evolution. That's what we have. After that, the other customers will start adopting the same type of methodology. So the answer to your first question, yes. We have seen other non AI.

Speaker 1

Well, I'm not sure exactly, you know, what is non AI now. It seems like everything is AI related. But anyway, if you really need to differentiate, there are other type of application also adopting the same type of platform. We have seen that. Now what we have seen more is in the related field AI or AI peripheral, we will have the AC customers as well as system customer start pushing for their own vintage or their own version of the architecture and that incidentally will fall into the similar type of platform.

Speaker 1

So from ASC's perspective, we abide for two things. We keep a very transparent communication with our partners, our end customers or our foundry customers. So we're fully aware of what we're doing across the board. So there's no confusion about who does what. After all, our joint objective is to make sure we deliver as much as we can to what the ecosystem required, okay, first thing.

Speaker 1

The second thing is as we're going through this ramp, we will make sure we have the good yield, it doesn't matter which route that you're taking through. So this is a process that we're going through right now. 2023 is where we started, 2024 really is a year of transition. I think the all companies including ASC, we spend a majority of the time trying to figure out in which direction do we ramp and how do we ramp. So it has been quite painful for everybody.

Speaker 1

2024 will be the 2025 will be the first year we start seeing the effect of all of the deployment and the investment, which should be followed through by 2026 and 2027. Now in order to ramp from 2023, '20 '20 '4 and 2025 and become bigger impact in 2026 and 2027, you need to have all of this coming in, non AI or other type of application to come in and also not just the deep chip design, the ASIC guys needs to come in, the system people needs to come in. And more importantly, as the AI algorithm become more efficient it will enable or entice a different kind of algorithm and different kind of applications. So I think the AI edge devices will also be, we will have a lot of incentive, which means that there will be more hardware or integrated system level hardware that are required. And all of this will use a similar type of platform, although different configuration, different building materials.

Speaker 1

It's a very long answer, but it's a good question. Thank you.

Speaker 6

Thanks, Doctor. Wu. Maybe one clarification on the outsourcing part from the partnership with the foundry versus your own full stack solutions including Focus and FocusBridge, like what is the kind of mix that you're expecting over the next maybe, I think this year and maybe next year in terms of your visibility?

Speaker 4

Coco, can we take that on the circle back a little bit later?

Speaker 6

No worries.

Speaker 4

Yeah. Apologies.

Speaker 3

Next question is from mister Brad Lin of BOA.

Speaker 9

Thank you, management, for taking my question. I have two questions. So the first one, I would like to follow-up the component of the well growth of leading edge advanced packaging for this year. Obviously, the at least DKK1.6 billion kind of the well revenue from this segment is well clearly pretty strong upside and 75 percent from packaging and 25% from testing. And then while we I would like to know, is the there was there anything change in management's mind in terms of this revenue target for 2025?

Speaker 9

Or that was simply in line with the expectation versus three months or six months ago? And then if there is upside, is that coming from the packaging side or is there any significant breakthrough in the, from the testing side? Thank you.

Speaker 4

So Brad, you're looking for, what changed in the meantime that that, we that you perceive that the the number has, has ramped up. Right? What what are the factors that changed?

Speaker 9

Yes. Yes. And then for the components in 2025, if that there is upside, then, well, aside to previous expectation, is that coming from packaging or testing?

Speaker 4

Okay. We can take that. Brad wants to know about the components and then what changed in the meantime to, within those components for us to come up with our $1,600,000,000

Speaker 1

target? To answer that question, I think the best way is there was no surprise. The The only thing that Garban, Joseph and myself, our previous estimate is our own ability to execute. The demand, the I think I don't have to talk about the demand is there. Clearly, how do we ramp our resources, facility, equipment set, we don't necessarily use all of the same materials.

Speaker 1

We don't necessarily use all of the same equipment. And there has been a lot of collaboration on everybody's side. The, I think, as we walk through 2024, we start to gain confidence that we can execute the to our plan. So I think the short answer is there was no upside or surprising news throughout the 2024. I think, likewise, in 2025, while we're executing the delivery on manufacturing side, we will continue to expand based on the roadmap that we have committed to our end customer and to our partner.

Speaker 1

In terms of the assembly and the testing portion, there could be minor adjustment, but largely because it was a turnkey, so we pretty much know what the ratio is. I think Joseph and I, we talked about this. This is really the first time that both of us agree to be explicit in giving you a very special number and also the mix, because we do have sufficient confidence in delivering this at least to 2025 level. Around mid year, we'll probably give you a better color about the 2026. I do understand that there has been concern about the whether there's end market fluctuation either up or down.

Speaker 1

But based on our visibility for hardware demand, I think we're still in the undersupply situation. So again, we're just trying to ramp up to the best our capability. In terms of the long term, the capacity and there are other concern if you put in all of this capacity, let's just say five, ten years down the road, can you use them? Our belief is the AI is at the early stage. We're seeing the hyperscaler at a high level.

Speaker 1

And over time, the other application, which I've answered previously, as well as the real volume is going to be in the edge. I think the kind of capacity we put it in will be fungible and flexible in nature. We will be able to tailor for many of the application and many of the customers long term. And most importantly, I think Ken talked about this. I think this is the right time we need to widen the mode by making the appropriate affordable investment and trying to create the smart factory and also large number of database because the know how on the AI and the platform and the brain level will help us tremendously in terms of credibility and also confidence to our system customer when they want to when they're ready to create the edge devices for their edge system, which will involve many of the things that we're doing at the, HPC level.

Speaker 1

Thank you.

Speaker 9

Thank you very much. That's very clear. And then, well, may I follow-up? May I follow-up also what was the mix?

Speaker 4

Go ahead.

Speaker 9

Yeah. So how was the mix of the, well, testing and packaging for 2024, if I may?

Speaker 4

I hope that depends on your second question?

Speaker 9

No. No.

Speaker 4

Well, why don't we go on to a wider question?

Speaker 9

Okay. So yeah. Yeah. Yeah. So my second question, would be on the well, obviously, we are very happy to learn that that this kind of advanced packaging, leading edge of advanced packaging will be applied to main application across GPU, ASIC, and even the edge devices.

Speaker 9

And so, does the management seeing seeing the strengthening momentum maybe in the non well, non non GPU side or if there is any, well, well, option that management can take with the management prioritize either ASIC, GPU or edge device and what would be the criteria, maybe profitability or margins? Thank you.

Speaker 4

Brad wants to Brad, your question relates to our preference or even what devices potentially outside of AI that we are being exposed to in terms of these leading edge advance packages. Is that primarily right?

Speaker 9

Yes. And then, well, it would be good to know if well, whether, well, ASIC or GPU or the edge device, well, with this kind of the advanced packaging techno architecture, which one will doing better or, well, providing better margin for the firm? Thank you.

Speaker 2

Oh, I

Speaker 4

could probably answer that, but I'm gonna let I'm gonna pass that along.

Speaker 1

Well, the the correct answer is we're working with all of them, which is the truth. I mean, in this space, there are limited end customers. So I will not be able to go down to the detail because, you know, whatever I said, you can immediately link that to the end customers. There aren't that many of them. The truth is we're working with all of them trying to develop the appropriate architecture based on their requirement and their requirement would change, will evolve based on our yield and manufacturability and cost.

Speaker 1

And we will provide you a better clarity when we believe it is the time to disclose. But right now, we won't be to give you any kind of priority or who is taking what status. I only lump all of the leading edge and there's one confusion I would like to clarify a little bit. The ASC versions of leading edge is a very leading edge defined by our foundry customers, which is why two fifty ramp up to 600 ramp up to 1,600,000,000. The other advanced packaging, for example, a seven nanometer is also advanced, but we do not count that as the leading edge.

Speaker 1

The such that we can give you a better clarity, a little bit more specific, right. But there are other opportunity, I don't know, seven nanometer, the 14 nanometer. They also use pretty leading edge, the pretty advanced packaging. It's a little bit confusing there, but I just want to make sure you understand what we're referring to for the RMB 1,600,000,000.0. Thank you.

Speaker 9

Thank you. Yes, I do. Thank you very much.

Speaker 4

Thank you, Brad.

Speaker 3

We have a question from Mr. Jason Dong of Deal

Speaker 8

Securities. Okay. You hear me?

Speaker 3

Yes. Yes.

Speaker 8

Thank you for taking my question. May I follow-up the lower question in terms of the white list? Because we hear some rumors suggest that ASC's production line in China cannot support the client who are not in the white list. So, wondering if you can give us more detail is your whole group can all support, the client or or our Chinese production cannot support. Wondering if you can give us more detail.

Speaker 8

Thank you.

Speaker 4

So, Jason, your your question relates to The US BIS specifications in terms of, our ability to to work with, the white list or be on the white list. Is that correct?

Speaker 8

I mean, your production line in China can also support, the client who are not in the white list. Is that okay? Or or only non China production line?

Speaker 4

Okay. Jason would like to know more about our capabilities to support, white list and non white list customers, within our China facilities.

Speaker 8

Yeah. Yeah. Thank you.

Speaker 1

Well, we want to be careful here because I don't want to give you any information that is not pertinent, if that does not stick to the BIS requirement. Right now, we're in the process clarifying, for example, our factory located inside of China, which set of customer can we serve? Until this is clarified, we will not give you any kind of official statement. We are in the process of working with our foundry partner as well as with the authority on the precise requirement pertinent to that questions. But what I can tell you is, in case our China facility cannot support any customer per se, then we will explore the maximum probability of supporting that customer in Taiwan.

Speaker 1

And we're confident we will be able to come up with enough capacity in due time to support that. For other customers that would like to move to Taiwan, we are in the process of defining the required capacity, the investment, while we're ramping up all of the other leading edge. However, ramping up other advanced capacity will be an easier task because ASE factories in Taiwan are all highly automated. So we don't believe that challenge is too daunting for us. However, we cannot give you a definitive answer because we do not have a definitive clarity yet at this point.

Speaker 1

Maybe towards the second quarter, we'll have a better clarity and we'll be able to give you the right answer without misleading you. Thank you.

Speaker 8

Thank you. That's helpful. My second question is in terms of your outlook for your different kind of applications. So could you please give us some colors in terms of your gross momentum, in terms of communication, computing, consumer or industrial, etcetera? And which kind of growth momentum did you expect for this year?

Speaker 8

Probably, SPAN migrations or new market shares or end demands improvement. Thank you very much.

Speaker 4

Jason, you're looking for clarification or more color on the the various growth opportunities available to us. Is that correct?

Speaker 8

Yeah. In different kind of applications for this year.

Speaker 4

Okay. If we, if we could answer the, what the growth is via the various applications that that we are seeing, what or what we're expecting.

Speaker 2

Well, I think it's it's logical to assume that, you know, in the in the coming quarters, I think HPC or computing will have will show the strongest momentum. In terms of the general market, we're seeing communication is recovering better than other sectors. I think except everything else, but maybe automotive is in a recovery mode and we are seeing business in these areas will start to come back in 2025. Automotive would take a little while before, and I think the most recent consensus is that, it would be maybe third quarter this year when we start to see automotive coming back to a more stable level. So I think in terms of the revenue components, I think it's logical to assume that computing will continue to occupy more percentage of our revenue going forward in the coming quarters.

Speaker 8

Thank you. I have no more questions.

Speaker 6

Thank you.

Speaker 8

Thank you very much.

Speaker 3

Ken, do we have any other questions from analysts?

Speaker 4

Yes. We actually have a question that was sent over from us from Sunny Lin of UBS. I think she may be having some problems with her, with her Internet. She asks, regarding our collaboration with Foundry on advanced packaging. Would we be able to do more with them?

Speaker 4

And in particular, whether, you know, whether the on substrate component is is is is the, the the main business that that we're seeking with them.

Speaker 1

I think the right way to answer that question is the I think our foundry partner is open to all suggestion and feasibility. And then the requirement is can we fulfill the capacity with an acceptable yield and ramp up quality. And then there is a step by step process with the strong support from our foundry partner to guide us together with our partner and customer and trying to achieve that. And I think we're trying to execute to that target, to that objective. In terms can we expand the current portfolio into something else?

Speaker 1

I don't think our foundry partner is objecting to it. I think everything is possible, but at this point in time, we would like to hold that comment until we have better clarity. Okay.

Speaker 4

And then, her second question here, relates to our, our investment, leading edge advanced packaging, whether it is, whether it's highly concentrated in terms of ultimate device or whether we view that this type of investment is widely usable or fungible going forward.

Speaker 1

I thought I just answered that question.

Operator

Yes, kind of. Yeah, I

Speaker 1

just did.

Speaker 4

Okay. Okay. Do we have another question?

Speaker 3

Yes. We do have, Mr. Gokul Hariharam returning to the call.

Speaker 6

Hi. Thanks for taking my follow-up. So just belaboring this point on the leading edge advanced packaging and testing. Your foundry partner has talked about AI revenues for them growing mid 40% over the next five years. And when I look at, ASC's, leading edge advanced packaging exposure, it also keeps track with this leading boundaries, AI revenues with pretty much like a one year lag.

Speaker 6

So is that is that kind of like the growth rate that we could expect for, your business also given your very tight partnership with this, with this, foundry, foundry foundry partner? Like, should we expect that you should also be able to grow these revenues at, like, 45% CAGR over the next four, five years?

Speaker 2

Is

Speaker 6

that how you're planning about the CapEx spend? Yeah.

Operator

So, Goku, you're you're asking regarding whether our leading edge advanced packaging tracks with,

Speaker 4

or how that tracks with, Foundry HPC growth. Right?

Speaker 6

Foundry AI growth. Exactly. So they have given a 40 to 45% target for the next five years. Yeah.

Speaker 1

We would like to take this one year at a time. I think there's a leading indicator. If you look at our announcement on CapEx on machinery, that normally will give you a very good indicator, are we on the right track or not. If we're not on the right track, we will try to reduce the spending because we know our trajectory is not heading in the right direction. So at this point in time, we would like to take a more conservative approach.

Speaker 1

Let's just take one year at a time. I think 2024, we deliver, we execute it. 2025 is the first year we're trying to give a preposition. We give you a target for the full year, which we have never done that. I think we would like to be wait at least to the second quarter or the third quarter before we give you the '26 and '27 projection.

Speaker 1

Thank you.

Speaker 6

Got it. And on this CapEx, could we talk a little bit about what is your kind of like, payback or, like, how do you how do you think about that CapEx and the ROI or ROC attached to it? Maybe, Joseph, how do you think about that CapEx and, like, are we do we have a return number attached to it that we can we can share, and in terms of what kind of timeline that you're looking at?

Speaker 4

So you're looking for a a general philosophy in terms of how how we look at our CapEx.

Speaker 6

Exactly. Because this year, I think the total CapEx seems like it's going to be like north of 4,000,000,000 or so, right, including facility and missionary.

Speaker 2

I think we're not yet at the steady state of these new investments. So I think it's a little bit premature to pinpoint exactly what kind of return or what kind of capital intensity that's required for the business. So we would like to reserve that until later. Maybe in the second half, we will have more accurate numbers to address this issue. But what I can say is by the business that we're running today, I think the leading edge is margin accretive business for us.

Speaker 6

Got it. Understood. That's very clear. Thank you.

Speaker 2

Thank you. There is

Speaker 3

no other questions from the floor.

Speaker 4

If there are no other questions, I think we can end it right here. We're we're getting close to about an hour and a half. Thank you for attending, our full year earnings release. We will see you next quarter.

Speaker 2

Thank you.

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ASE Technology Q4 2024
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