Q1 2024 ASE Technology Holding Co Ltd Earnings Call

April 25, 2024

Hello, I am cash on the head of Investor Relations for ASE Technology Holdings.

Speaker Change: Welcome to our first quarter 2024 earnings release.

Speaker Change: Thank you for attending today, please refer to our safe Harbor notice on page two.

Speaker Change: All participants consent to having their voices and questions broadcast via participation in this event.

Speaker Change: If participants do not consent. Please disconnect at this time.

Speaker Change: I'd like to remind everyone that the presentation that follows may contain forward looking statements. These.

Speaker Change: These forward looking statements are subject to a high degree of risk and our actual results may differ materially.

Speaker Change: For the purposes of this presentation dollar figures are generally stated in new Taiwan dollars unless otherwise indicated.

Speaker Change: As a Taiwan based company, our financial information presented in accordance with Taiwan, I FRS results presented using Taiwan IR for us may differ materially from results using our accounting standards, including those presented by our subsidiary using Chinese gap.

Speaker Change: I'm joined today by Joseph Tung our CFO.

Joseph Tung: Today's presentation I will first go over the financial results and give the company guidance. Josef will then be available to take your questions. During the Q&A session that follows.

Joseph Tung: During the Q&A session. Each caller will be limited to two questions at a time, but may return to the queue for further questions with that let's get started.

Joseph Tung: As per our expectations. The overall demand environment for our services during the first quarter fell on a sequential quarterly basis, primarily due to seasonality of electronics products.

Joseph Tung: And as was the case at the end of 2023, higher and leading edge services generally fared better than legacy services.

Joseph Tung: For ATM business revenues were on the higher end of our expectations during the quarter key equipment utilization rates were still relatively low averaging out around 60% certain devices initiated a short, but unsustainably inventory refresh.

Joseph Tung: Using off initially more optimistic outlooks.

Joseph Tung: For our EMS business in the first quarter demand for our services was slightly ahead of our initial expectations as a result of improving customer inventory levels.

Joseph Tung: Please turn to page three where you will find our first quarter consolidated results for the first quarter, we recorded fully diluted EPS of $1.28 and basic EPS of $1 32, such consolidated at revenues declined 17% sequentially.

Joseph Tung: But increased 1% year over year.

Joseph Tung: We had a gross profit of $29 billion.

Joseph Tung: I think gross margin of 15, 7% our gross margin declined by 0.3 percentage points sequentially, but increased by <unk> nine percentage points year over year.

Joseph Tung: The sequential decline in margin is principally due to lower revenues due to seasonality of both our ATM and EMS businesses.

Joseph Tung: The annual improvement in gross margin is principally the result of foreign exchange.

Joseph Tung: Our operating expenses declined by zero point $6 billion sequentially, but increased by $1 7 billion annually for.

Joseph Tung: The sequential decrease in operating expenses are primarily due to lower compensation expenses.

Joseph Tung: The year over year increase in operating expenses is primarily attributable to R&D staff up overseas expansion startup costs and higher incentive stock option expenses.

Joseph Tung: Our operating expense percentage increased 1.3 percentage points sequentially and one one percentage points year over year to 10%. The sequential operating expense percentage increase was primarily related to lower operating leverage during our <unk>.

Profits from associates and other nonoperating income offset in part by net interest expense of $1 1 billion.

Tax expense for the quarter was $1 $9 billion, our effective tax rate for the quarter was 24%.

Speaker Change: Income tax expense was higher than anticipated mainly from a tax basis gain realized due to the U S dollar appreciation against the Korean won.

Speaker Change: Such tax expense may reverse itself when the U S dollar depreciated against the Korean won.

Speaker Change: Net income for the quarter was $5 7 billion, representing a decline of $3 7 billion sequentially and a decline of 0.1 billion year over year.

Speaker Change: The NT dollar appreciated 2% against the U S dollar sequentially during the first quarter, while depreciating to 96% annually.

Speaker Change: From a sequential perspective, we estimate the NT dollar appreciation, how does 0.55 percentage point negative impact to the company's gross and operating margins.

Speaker Change: While from an annual perspective, we estimate the NT dollar depreciation had a 0.86 percentage.

Ken Hsiang: Packaging services. However, we currently are only at the beginning. We see that the foundations that are being built now will lead to new generations of low, mid, and high-end devices alike. While AI will bring massive semiconductor volumes, step-ups in package-level requirements, and corresponding increases in ATM revenues, the vast majority of these devices are just starting to be developed. Going forward, we believe many products may take a fresh AI angle and may create a shorter than normal refresh cycle and thus kickstart overall demand. As such, although the market recovery appears to be playing out a bit slower than previous customer forecasts, we are not looking to adjust our full-year outlook. For the quarter upcoming, we still see a slightly improved demand environment for our services. On the expense side of things, we are seeing some impact to our electricity rate.

Services. However, we currently are only the beginning.

We see that the foundations that are being built now will lead to new generations of low mid and high end devices alike.

And while AI will bring massive semiconductor volumes step ups and packaged level requirements and corresponding increases in ATM revenues.

The vast majority of these devices are just starting to be developed.

Speaker Change: Going forward, we believe many products may take a fresh AI angle.

Speaker Change: And may create a shorter than normal refresh cycle and thus kickstart overall Matt.

Speaker Change: As such although the market recovery appears to be playing out a bit slower than previous customer forecast.

Speaker Change: We're not looking towards.

Speaker Change: Full year outlook.

Speaker Change: For the quarter upcoming we still see a slightly improved demand environment for our services on.

Speaker Change: On the expense side of things, we are seeing some impact to our electricity rate tie power the provider of electricity to Taiwan has increased electricity rates.

Ken Hsiang: Taipower, the provider of electricity to Taiwan, has increased electricity rates by 15% for us. The increase goes into effect at the beginning of Q2. Further, summer rates are starting in the middle of May. The combined effect, we believe, will have a negative 0.8 percentage point impact to our ATM gross margin in Q2. Despite this, we are looking to improve our gross margin in Q2, given an improving favorable product mix. From an operating expense perspective, we still continue to staff up for R&D and incur site expansion costs. However, with revenue improvement, we will look to keep our OpEx percentage flattish or close to the current range. We would like to summarize our outlook for Q2 2024 as follows.

Speaker Change: 15% for us.

Speaker Change: The increase goes into effect beginning of the second quarter further summarize our starting in the middle of May the combined effect. We believe we will have a negative 0.8 percentage point impact to our ATM gross margin in the second quarter.

Joseph Tung: Despite this we are looking to improve our gross margin in the second quarter, given an improving favorable product mix.

Joseph Tung: From an operating expense perspective, we still continue to staff up for R&D and incur site expansion costs.

Joseph Tung: However, with revenue improvement, we will look to keep our opex percentage flattish or close to the current range.

Joseph Tung: We would like to summarize our outlook for the second quarter 2024 as follows.

Ken Hsiang: For our ATM business in NT dollar terms, our ATM Q2 2024 revenues should grow by mid-single digits quarter over quarter. Our ATM Q2 gross margin should be slightly above Q1 2024 levels. For our EMS business in NT dollar terms, our EMS Q2 2024 revenues should be similar with the Q1 2024. Our EMS Q2 2024 operating margin should be slightly below Q1 2024 levels. That is the conclusion of our prepared remarks. I would like to open the floor to questions.

Joseph Tung: For our ATM business in NT dollar terms.

Joseph Tung: Our ATM second quarter 2024 revenues should grow by mid single digits quarter over quarter.

Joseph Tung: Our ATM second quarter gross margin should be slightly above first quarter 2024 levels.

Joseph Tung: For EMS business in NT dollar terms, our EMS second quarter 2024 revenues should be similar with the first quarter 2024.

Joseph Tung: <unk> second quarter 2020 for operating margin.

Joseph Tung: Should be slightly below first quarter 2024 levels.

Speaker Change: That is the conclusion of our prepared remarks, I would like to open the floor to questions.

Operator: Now we will start the Q&A session. If you have any questions, please raise your hand. When you ask questions, please hold two questions at a time. Thank you. We have a question from Mr. Gokul Hariharan of JPMorgan.

Speaker Change: Now we will start the Q&A session.

Speaker Change: Do you have any questions. Please raise your hand.

Speaker Change: When you ask questions. Please hold two questions at a time.

Speaker Change: Thank you.

Speaker Change: We have a question from Mr. Goku, how did Houghton of J P. Morgan.

Gokul Hariharan: Hi, good afternoon. Thanks for taking my question. First of all, on the overall end demand outlook, Ken, you mentioned you're not really changing your outlook, which I think was 6% to 10% growth for logic semis. Could you talk within that, what are you seeing in different verticals? Last time, I remember Joseph talked about auto potentially growing this year. Since then, we have seen some customer demand reductions in automotive demand. Is that still your view? Secondly, could you also comment about smartphone and communication demand, given some of the concerns there? That's my first question.

Goku: Hi, Good afternoon. Thanks for taking my question first of all.

Goku: On the overall demand outlook can you mentioned you are not changing our outlook.

Joseph Tung: 10% growth for.

Joseph Tung: <unk>.

Joseph Tung: Could you talk within that what are you seeing in different vertical last time I had one by Joseph talked about.

Joseph Tung: Potentially going to see are.

Joseph Tung: Since then you've seen some downward reductions in automotive demand.

And secondly could you also comment about.

Joseph Tung: Smartphone and communication demand given some of the concerns that that's my first question.

Joseph Tung: Yeah.

Joseph Tung: Yes. I think most of the sectors we're seeing bottoming out in Q2, but with automotive and maybe industrial still with some lingering softness. I think overall, I think things might digest itself. We're still not changing our view for our outlook for the whole year at this point.

Joseph Tung: Yes, I think most of the sectors, where we're seeing a bottoming out at second quarter.

Joseph Tung: But with automotive and maybe industrial still with some lingering softness.

Joseph Tung: But I think overall I think.

Joseph Tung: So.

Joseph Tung: Well, Matt Digest itself and.

Speaker Change: We're not changing our view for the outlook for the whole year at this point.

Gokul Hariharan: You still think, Joseph, that automotive will be growing this year for you?

Speaker Change: So you still think that automotive will be growing this year for you.

Gokul Hariharan: You still think, Joseph, that automotive will be growing this year for you?

Joseph Tung: Yes. We're still gaining market share in the automotive. In fact, we are making quite a bit of progress in moving that part of the business up.

Speaker Change: Yes.

Speaker Change: We're still gaining market share on the automotive.

Speaker Change: In fact, we are making quite a bit of a progressively moving out.

Speaker Change: Part of their business.

Gokul Hariharan: Understood. Okay. My second question is on your advanced packaging. The advanced packaging related to AI that Ken mentioned is tracking ahead of plans to double this year. Could you talk a little bit about some kind of longer term view, like how do you see this business evolve? Is it gonna get to 15% to 20% of revenues in the next 3, 4 years? Your key partner, TSMC, also raised their expectations on AI-related growth. Just wanted to pick your brains on that. Also related to that, now that you're doing some of the packaging for this leading GPU customer, do you stand a chance to start winning some test business also for them?

Speaker Change: Understood Okay.

Speaker Change: Question is on notice.

Speaker Change: Advanced packaging I'd wanted one second thing related to AI.

Speaker Change: Ken mentioned is tracking ahead of.

Speaker Change: Our plan to double this year.

Speaker Change: Could you talk a little bit about.

Speaker Change: Some kind of longer term, how do you see this business evolving.

Speaker Change: Is it going to get to 20% of revenue in the next.

Speaker Change: Hum.

You also raised the expectations on AI related growth. So just wanted to pick your brains on that and also related to that now that you are doing some of the packaging or.

Speaker Change: This lead.

Speaker Change: Customer.

Speaker Change: Do you stand a chance to start winning some business also for them I think.

Gokul Hariharan: I think, previously you didn't have much testing, whether it is final test or system level test. Is there a chance that you could start winning some test business with them as well in the upcoming product migration?

Speaker Change: Previously you Didnt have much testing.

Speaker Change: Asked all of us.

Speaker Change: You bet Scott.

Speaker Change: Some business with them as well in the upcoming product.

Speaker Change: Yeah.

Joseph Tung: Yes. I think we still see very good growth momentum in the AI related or the leading edge packaging and test. We're ahead of our schedule for this year, and we're expecting a continuous strong growth over next year as well. In terms of tests, I think overall we are increasing our full-year CapEx by another 10%. The bulk of the increase is in tests. We are making further investments to raise not only our turnkey ratio, but also to penetrate more into the test-only kind of business. That, of course, includes the advanced testing.

Speaker Change: Yes, I think we still see very very good growth momentum in the related or the leading edge.

Speaker Change: Payable to packaging and test.

Speaker Change: And we are well ahead of our schedule for this year.

Speaker Change: And with <unk>.

Speaker Change: Expecting a continuous strong growth over the next year as well.

Speaker Change: In terms of test I think of.

Speaker Change: But overall speaking.

Speaker Change: We are increasing our full year capex by another 10%.

Speaker Change: And the bulk of the increases in test.

Speaker Change: We are.

Speaker Change: Making further investments.

Speaker Change: To win only to raise not only our turnkey ratio will also too.

Speaker Change: Penetrate more into the testimony that kind of business and that.

Speaker Change: Of course it includes the events testing.

Operator: The next to ask questions, Charlie Chan of Morgan Stanley.

Speaker Change: The next to ask questions Kelly Chen of Morgan Stanley.

Charlie Chan: Hi, Joseph. Ken Hsiang. Good afternoon. I have a few questions. First of all, it's also related to your advanced packaging. May I know your progress in the AI GPU testing business opportunity, especially burn-in? There seems to be very important process. Do you think the company will gain a much market share this year?

Speaker Change: Hi.

Kelly Chen: Ken good.

Kelly Chen: Good afternoon, so I.

Kelly Chen: I have a few questions first of all.

Kelly Chen: So related to your advanced tagging no.

Kelly Chen: Progress in the GPU.

<unk> testing business opportunity of fishery burning there seems to be a very potent.

Kelly Chen: Process do you think coming work in a much much yet this.

Kelly Chen: This year.

Joseph Tung: We are investing in CapEx in tests, and that also includes burn-in and we're hopeful that we will be seeing some volume by the later part of the year.

Kelly Chen: We are investing in cabinet.

Kelly Chen: Yes.

Speaker Change: Yeah that that also includes bruni and.

Speaker Change: We're hopeful that we will be seeing some volume.

Speaker Change: But later part of the year.

Charlie Chan: Okay. Thanks, Joseph. Another one is more on the end demand and the cycle recovery. We continue to hear that, you know, China smartphone related semiconductor is seeing some forecast cuts, de-stocking. Does the company see similar trend? Do you think it's a kind of short-lived, or you think Q3 from a smartphone segment, US also seeing very muted growth into Q3?

Speaker Change: Okay. Okay.

Speaker Change: Yes.

And another one is more on the end demand and the cycle recovery.

Speaker Change: We continue to hear that.

Speaker Change:

Speaker Change: No it's not.

Speaker Change: Really the semiconductor is seeing some.

Speaker Change: Okay, Scott, Okay as cuts a destocking.

Speaker Change: Does that can see similar.

Speaker Change: Trend and do you think is that kind of choice for.

Speaker Change: You think third quarter from the smartphone segment U S.

Speaker Change: <unk> seen very muted growth into the quarter.

Joseph Tung: No, I think, you know, overall we are still looking at the whole market, and most of the sectors will be bottoming out. We're seeing steady but, you know, kind of moderate growth in the cell phone area. You know, the strongest is still high performance computing. You know, the other areas we're seeing, you know, gradual recovery and coming into H2, we will see a much more substantial growth momentum.

Scott: No I think overall, we are still looking.

Scott: Looking at the whole market.

Scott: And most of the sectors will be bottoming out.

Scott: We are seeking.

Scott: Steady, but kind of.

Scott: Moderate growth in the.

Scott: So if one area.

Scott: And.

Scott: That's the strongest we've still.

So high performance computing.

The other.

Scott: Other areas that we're seeing.

Scott: Sure.

Scott: Gradually recovery and.

Scott: Coming into second half we will see.

Scott: It was substantial.

Scott: Gross momentum.

Operator: The next to ask questions, Brad Lin of BofA.

Scott: The next to ask questions.

Lynn: Lynn of BFA.

Brad Lin: Thank you for taking my question. I have two questions. One is on the advanced packaging. As we learn that, the OSAT, including probably ASE, prefers non-silicon-based interposer solution for this leading-edge, advanced packaging. When or what time does the management see a faster adoption in this type of solution, and contribute to ASE?

Lynn: Thank you for taking the question.

Lynn: I have two questions. One is on the the best packaging, so as we learned that a well.

Lynn: Was that including probably a S E T first non silicon base in process solutions for this hedge.

Lynn: Yeah.

Lynn: Packaging so when.

Lynn: When our hotline this dimension is the faster adoption.

Lynn: And this type of solution.

Lynn: And contribute to ashy mess.

Joseph Tung: Well, we are in mass production at this point, and we are having a lot of engagement with some other customers as well. You know, I can't predict the pace of it, but we certainly see very good growth potential in this area as well.

Mass production at this point and so we're seeing we're having a.

Lynn: A lot of engagement with another customer.

Lynn: Other customers as well.

Lynn: And I can predict the pace of it but we.

Lynn: We certainly see a very good.

Lynn: Good.

Lynn: Growth potential in this area as well.

Brad Lin: Got it. For the strong growth that we just mentioned into 2025 currently is still based on the, well, silicon-based solution. Can I assume that?

Lynn: Got it so for the strong.

Lynn: Strong growth that we just mentioned in 295 currently is still based on the <unk> on this solution.

Joseph Tung: Well, it can be both. I think with our own solution, we'll see some pickup in next year as well.

Can I assume that.

Speaker Change: It can be both I can.

Speaker Change:

Speaker Change: Well the whole solution.

Speaker Change: We will see some pick up in the next year as well.

Brad Lin: Got it. Thank you very much.

Joseph Tung: As we grow with the existing packaging.

Got it thank you very much.

Speaker Change: As they grow with the existing packaging.

Brad Lin: Got it. Thank you. My second question would be about the on-device AI. How will the increasing value addition from ASE in the on-device AI, and when do we think the growth to be meaningfully pick up in the future?

Speaker Change: Thank you and then my second question would be about on device AI, so far where BD.

Speaker Change: Increasing well value addition for ISC and the on the buy side.

Speaker Change: And when.

Speaker Change: Quinn.

Speaker Change: When do we think the well that growth to be meaningfully pick up.

Speaker Change: In the future.

Joseph Tung: Yeah. I think, you know, this year we are ahead of the schedule in doubling that part of the business. You know, for next year, we still see very strong momentum going on, not just from the business from the foundry, but also we're having engagement with multiple customers, including design houses, system houses. So I think there's a momentum building at this point, and we do have fairly good confidence in growing that part of business quite substantially next year as well.

Quinn: Yeah, I think this year, we are well ahead of schedule and doubling that part of the business.

Hmm next year was you'll see very strong momentum going on and.

Quinn: We are.

Quinn: Not just from the business from the foundry Rosso.

Quinn: We are having engagement with multiple customers, including.

Quinn: Design houses the system houses.

Quinn: Although etsy.

Quinn: There is a there was a momentum building.

Quinn: Building at this point and we are.

Quinn: We do have a fairly good confidence.

Quinn: They're part of this is quite substantially next year as well.

Operator: The next to ask questions, Randy Abrams of UBS.

Quinn: The next to ask questions Randy Abrams of UBS.

Randy Abrams: Yes. Hi. Thank you. Yeah, wanted to ask a follow-up on your CapEx, the 10% higher CapEx. Could you go through, is some of that also tied to advanced packaging? I think you mentioned the test. Could you remind us, you're now. Because equipment CapEx was still fairly low in Q1, what's the CapEx guidance full year now for the equipment or for overall? To follow up, with the optimism into next year, are we starting another CapEx cycle? Like, we're at a low base, but do you think directionally there could be a good increase with you noting more AI opportunities to go after?

Quinn: Yes.

Randy Abrams: Thank you.

Randy Abrams: Hello.

Randy Abrams: Your capex at 10% higher Capex.

Randy Abrams: Could you can see some of that also tied to <unk>.

Randy Abrams: Packaging I think you mentioned.

Randy Abrams: And could you remind us you are now.

Randy Abrams: Because equipment Capex was still fairly low in the first quarter, which the capex guidance full year or for the equipment or for overall.

Randy Abrams: Follow up with the optimism into next year are we starting another.

Randy Abrams: Capex cycle like we're in a low base, but.

Randy Abrams: Do you think directionally there could be a good increase.

Randy Abrams: AI opportunities to go after.

Joseph Tung: Yeah. I think for this year, we are upping our CapEx by another 10%. We mentioned last time that this year will be 40% to 50% growth CapEx, and we're upping that. I think in terms of overall CapEx, roughly 61% for packaging and 24% for tests. For test portion of it, the percentage has increased from last quarter's about 18%, now to 24%. We're making quite a bit of investment or expending quite a bit of our investment in test CapEx, aiming to leverage on our turnkey services as well as trying to get more of the test-only business as well.

Speaker Change: Yeah, I think Uh huh.

Speaker Change: This year, we are upping our capex.

Speaker Change: Another 10%.

We we mentioned last time that.

Speaker Change: This year.

Speaker Change: Peter.

Peter: Got it.

Peter: Okay.

Peter: Yes.

Peter: I think the.

Peter: So sort of overall capex.

Peter: Roughly 61% for packaging and 24%.

Peter: Tests.

Peter: No.

Peter: Test portion of it.

Peter: The percentage is.

Peter: The increase from last.

Peter: Last fall, we were budgeting about 18% now to 24, so we're making a quite bit of investment.

Peter: Or expanding quite a bit over expense.

In test Capex.

Peter: Aiming to.

Peter: Leverage on their Turkey.

Peter: Services as well as.

Peter: Trying to get more of the tests only business as well.

Joseph Tung: I think in terms of the overall CapEx, roughly, I would say 50% of it will be for advanced, and the other half will be for the maintenance and also some of the upgrades.

Peter: So I think in terms of the overall capex.

Peter: Hopefully.

Peter: I would say 50% of it well before then.

Peter: And the other.

Uh huh.

Peter: Before they maintained is it also some of the upgrades.

Randy Abrams: Okay, great. Thanks for the color, Joseph. I'll ask a quick follow-up on that, and then the second question. For the test, could you clarify, is that application more HPC, like high performance compute driven? And then the second question I wanted to ask on, it looks like a few things happening on margins. So on the gross margin, could you talk about the mix change, which you're getting some product mix change, both ATM and sounds like EMS as well. And on the OpEx side, with some more of this investment in R&D, the view for OpEx, I guess I should say OpEx growth, how much you think the OpEx has to grow?

Speaker Change: Okay, great yeah, thanks for the color Josef.

Speaker Change: A quick follow up on that and the second question.

Speaker Change: For the test could you clarify that application more PC like high performance compute driven and the second question I wanted to ask.

Speaker Change: It looks like a few things happening on margins. So on the gross margin could you talk about the mix change, which youre getting some product mix change.

Speaker Change: ATM and EMS.

Speaker Change: Ms as well.

Speaker Change: And on the Opex side.

Speaker Change: Some more of this investment in R&D.

Speaker Change: Or.

Opex I guess I should say opex grows.

Speaker Change: Do you think the opex for asset growth.

Joseph Tung: Well, I think testing CapEx is both for the HPC as well as other applications. As I mentioned, we do have a lot of opportunities in raising our overall turnkey ratio, and that includes all products. Of course, in terms of the more advanced or AI-related tests, we are also investing into that area. We expect to make some inroads in that area as well. Well, as far as the margin, I think the improvement is of course coming from revenue increase as well as our more favorable product mix as we grow our more leading-edge packaging and test.

Speaker Change: Well as we test the Capex is both for <unk> as well as to other applications.

Speaker Change: And that's as I mentioned, we do have a lot of opportunities in raising overall turnkey ratio.

Speaker Change: That includes oil product.

Speaker Change: And of course, we are in terms of the atmos more vessel related deaths.

Speaker Change: We are also investing into that area.

Speaker Change: Uh huh.

Speaker Change: We expect to have some oh.

Speaker Change: Making some inroads in that in that area as well.

Speaker Change: What's the other part of it.

Speaker Change: Oh, Okay, Oh, well most profit margins I think.

Speaker Change: The improvement.

Speaker Change: This of course coming from <unk>.

Speaker Change: Revenue increase as well as all.

Speaker Change: Favorable product sets, we're going to as we grow our more leading edge packaging and test.

Joseph Tung: In terms of operating expenses, I think the increase mostly coming from our beefed up R&D investments. We're staffing up in R&D, putting more resources into our more advanced packaging and test. Of course, you know, we are in the process of expanding our overseas sites as well. There will be some more initial investment put into it. Also, in terms of compensation, we've granted our new round of employee stock options, so we will be including that part of the expense increase as well for this year. All in all, I think for the whole year, operating expense percentage will have about 1% increase from last year, or less than 1%.

Speaker Change: Hum in terms of operating expenses I think.

Speaker Change: Uh huh.

Speaker Change: The increase mostly coming from our a beefed up R&D investments.

Speaker Change: And we're staffing up in R&D.

Speaker Change: Putting more resources into a more.

Speaker Change: Packaging and test.

Speaker Change: And of course, we are in Nebraska.

Speaker Change: Renting overseas.

Speaker Change: Safe as well so there'll be some.

Speaker Change: More initial investment put into it.

Speaker Change: So in terms of compensation.

Speaker Change: We granted a new round of.

Speaker Change: Employee stock options.

Speaker Change: So we will be including that.

Speaker Change: Okay.

Speaker Change: This increase has slowed this year.

Speaker Change: Oh, no I don't think painful.

Speaker Change: Creating a.

Speaker Change: Yeah.

Percentage, we will have about 1% increase from last year.

Operator: The next to ask questions, Rick Hsu of Daiwa Securities.

Speaker Change: Less than 1%.

Speaker Change: The next to ask questions, Rick Shea dialogue Securities.

Rick Hsu: Can you guys hear me?

Joseph Tung: Yeah.

Rick Hsu: Okay. Hi, thank you for taking my question. The first question is how can you share with us your utilization rates across ATM for the coming Q2?

Rick Shea: Can you guys hear me.

Yeah Okay.

Rick Shea: Thank you for taking my questions. So the first question is a housekeeping one can you share with US you will utilize and raised across both.

Rick Shea: And with the coming second quarter.

Joseph Tung: We have about slightly below 60% in Q1, and Q2 with the revenue growth, I think the overall utilization rate could be slightly above 60%.

Speaker Change: We had a ball.

Speaker Change: Slightly below 60, presenting in quarter, one and quarter two with the revenue pool with I've seen the overall.

Speaker Change: The real issue rig be slightly above 60%.

Rick Hsu: All right. The second question, also, about your H2. I remember last quarter, Joseph, you said your ATM gross margin will go back to your softer target, which is mid-20 to 30. Is that still viable for your H2 this year?

Alright.

Speaker Change: Second question also.

Speaker Change: About the second half a little last quarter.

Sure.

Speaker Change: ATM growth margin.

Speaker Change: Like who you are.

Speaker Change: No.

We're pumping which is mid 20 to 30.

Speaker Change: Uh huh.

Joseph Tung: Yeah. I think from the Q4 forecast we have, we're still pretty confident that we will be re-reaching our structural margin in H2. I think we have a fairly good chance that for the whole year, we can also reach that level.

Is that still viable or your second half of this year.

Speaker Change: Yeah, I think from the front.

Speaker Change: We have we are we feel pretty confident that we will be reaching structural margin in the second half of the year.

Speaker Change: And.

Speaker Change: I think we have a very good chance that for the whole year it will be.

Speaker Change: We can also reached that level.

Operator: If you have any questions, please raise your hand. The next to ask questions is Bruce of Goldman Sachs.

Speaker Change: If you have any questions. Please raise your hand.

Speaker Change: The next to ask questions Firstly of Goldman Sachs.

Bruce Lu: Okay, thank you for taking my question. I want to ask about your US expansion plan. You know, the advanced packaging business, you know, major chunk of it is coming from the foundry outsourcing partner. Only, on the other hand, you probably, you know, be the most important outsourcing partner for TSMC. As TSMC mentioned during the call that they are very happy to see Amkor is going to have another, advanced packaging facility in US, which ASE doesn't really have a sizable facility there. Do you have any plan to do that? Do you see any change in terms of landscape, how you do the business with TSMC in the future?

Goldman Sachs: Okay. Thank you for taking my question I wanted to ask about your U S pension plan.

Goldman Sachs: The advanced packaging business.

Goldman Sachs: A major chunk of it coming from foundry outsourcing partner.

Speaker Change: On the other hand, you probably.

Speaker Change: The call will be.

Speaker Change: Most important also.

Speaker Change: Therefore TSMC.

Speaker Change: But as Jason mentioned during the call that they are going to happen.

Speaker Change: <unk> is going to have another.

Speaker Change: Advanced packaging facility in U S, which.

Speaker Change: It doesn't really have a sizable safety data do you have any plan to do that do you see any change in terms of landscape. How you do the business in voice carefully in the future.

Joseph Tung: We're not precluding any possibility, but then any investment that we make needs to make economic sense. Right now, you know, we're not sure that a greenfield operation set up in the US fits into that category. You know, we are monitoring the situation at this point. I think bulk of the advanced packaging and test can still be serviced out of Taiwan and or other area locations as well.

Speaker Change: Were not precluding any possibility, but then.

Speaker Change: Any investment that we make and needs to make economic sense and right now.

Speaker Change:

Speaker Change: We're now we're not sure that you know.

Speaker Change: A greenfield operation set up in the U S.

Speaker Change: Fits into that category so.

Speaker Change: We are we are mining.

Speaker Change: Feeling the situation at this point.

Speaker Change: And I think the bulk of the events packaging of our test.

Speaker Change: Can it still be serviced out of Taiwan.

Speaker Change: Other locations as well.

Bruce Lu: Even with, you know, government subsidy, you still don't think that's a profitable business or a good returns business?

Speaker Change: So evenly.

Speaker Change: Government subsidy you still don't in that.

Joseph Tung: No. I don't think it's wise to make any commercial decision based on subsidy.

Speaker Change: I'll say the books since a while good returns business no I don't I don't think it's wise to make.

Make any commercial decisions based on subsidies.

Bruce Lu: Okay. I would tell Amkor that, but

Speaker Change: Yeah, I would tell him for that.

Joseph Tung: I think they know that too.

Speaker Change: [laughter] I think I know that too.

Bruce Lu: Okay. The next question is for the SiP business. I mean, you know, what do we see that says this is SiP business growth, you know, in this year and the coming years? I mean, it has been muted for quite some time already. When can we see another, you know, growth momentum for the SiP business?

Speaker Change: Okay.

Question is for the.

Speaker Change: S business.

Speaker Change: Business I mean do.

Speaker Change: Do we see that business aside here.

Speaker Change: Business growth.

Speaker Change: This year and coming years, India has been noted for quite some time already when can we see the.

Speaker Change: Yeah.

Joseph Tung: I think the SiP business for this year, we could see a flattish or a little bit down for the whole year, given the fact that there are less products being introduced. You know, there are seasonalities, and we are seeing, you know, market conditions are a little bit different from previous years. But we are still quite actively engaging with customers. Some of the products are going to be mass-produced, and some are in earlier stage. But we do feel that, come next year, the growth in, you know, SiP business will resume.

Speaker Change: Gross momentum for those businesses.

Speaker Change: Oh I think the this.

Speaker Change: This IP business this year.

Speaker Change: We could see a flattish or a little bit down.

Speaker Change: For the whole quarter caused to allow for the whole year.

Speaker Change: Given the fact that there are less.

Speaker Change: It's being introduced.

Speaker Change: And there.

Speaker Change: There is seasonality and we are seeing.

Speaker Change: You know.

Speaker Change:

Speaker Change: Market conditions are a little bit different from previous years.

Speaker Change: But.

Speaker Change: We are still.

Speaker Change: Actively engaging.

Speaker Change: With customers and Oh, sorry.

Speaker Change: Some of the products are.

Speaker Change: I'm going to be mass produced and some are in earlier.

Speaker Change: Earlier stage.

Speaker Change: But we do feel that.

Speaker Change: Next year.

Speaker Change: The growth.

Speaker Change: Is that purpose as well.

Operator: The next to ask questions, Laura Chen of Citigroup.

Speaker Change: We'll resume.

Speaker Change: The next to ask questions Laura Chen of Citigroup.

Laura Chen: Hello. Hi, good afternoon. Thank you for taking my question. Just quick follow-up on the growth margin. Just you mentioned that for the structural growth margin target of 25% to 30% is achievable or not just for the H2, but also for the full year. Is that correct?

Liyen Chen: Oh Hi, good afternoon. Thank you for taking my question just a quick follow up on the gross margin.

Liyen Chen: Justin you mentioned that or does the gross margin targets of 25% to 30% is achievable or just.

Liyen Chen: For the.

Liyen Chen: Second half, but also for the full year.

Joseph Tung: Yes. I think for H2, we will certainly reach that level. We are trying very hard and working very hard for the whole year. We're working hard to reach that level as well.

Liyen Chen: Correct.

Liyen Chen: Yes.

Speaker Change: For the second half we will Lewis.

Speaker Change: We sell level and.

Speaker Change: We are trying very hard.

We're working very hard to.

Speaker Change:

Speaker Change: For the whole year we've.

Speaker Change: We're working hard to reach that level as well.

Laura Chen: Thank you. I appreciate that.

Joseph Tung: Bear in mind that, you know, that's with the increase of our utility cost. The recent rate increase is for us, it's about 15% in our electricity in Taiwan. That will have roughly about a 0.8% impact on us. That needs to be offset as well. It's even with that kind of increase in cost, we are still confident that in H2 we'll reach that. We're feeling at this point quite comfortable that for the whole year, we should be able to reach that as well.

Thank you I appreciate it.

Speaker Change: Bear in mind that that's with the.

Speaker Change: Uh huh the increase of our utility costs.

Speaker Change: Yeah.

Speaker Change:

Speaker Change: Our rate increase.

Speaker Change: Is.

Speaker Change: For us it's about 15%.

Speaker Change: They're true city.

Speaker Change:

Speaker Change: In.

Speaker Change: Taiwan.

Speaker Change: And that will have roughly about 8%.

Speaker Change: But all of us.

Speaker Change: So that needs to be offset as well so.

Speaker Change:

Speaker Change: It's a it's a.

Speaker Change: Even with that kind of.

The increase in cost.

Speaker Change: We are still confident that in the second half.

Speaker Change: And we have a well.

Speaker Change: At this point quite comfortable with that for the full year, we should be able to really set as well.

Laura Chen: Thank you. May I understand that aside from the utilization rate improvement, do we also assuming that more mix change toward to the advanced packaging, or AI related, or the increasing like testing revenue, which would lead to higher growth margin?

Speaker Change: Thank you I understand that aside founder Rachael Ray until nine.

Do we also are assuming that that more of a mix change towards advanced.

Speaker Change: Advanced packaging.

Speaker Change: Or AI related or the increasing.

Speaker Change: His team venue, which would lead to higher gross margin.

Joseph Tung: Yes, that's correct. We believe the higher advanced packaging as well as our test business will definitely help our margin.

Speaker Change: Yes, that's correct we believe.

Speaker Change: The higher advanced packaging as well as our test business will.

Laura Chen: Okay. Thank you. That's very helpful.

Joseph Tung: Thank you.

Speaker Change: Definitely help our margin.

Speaker Change: Okay. Thank you that's very helpful. Thank you.

Operator: The next to ask questions, Jason Tsang from CLSA.

The next to ask questions Jason came from.

Jason Tsang: Questions. You previously mentioned that it makes sense for ASE to enter the new AP business when it is mainstream enough to reach the AP mass production stage for ASE. If that's the case, as for leading-edge service that you talk about, how should we expect the volumes or contribution for this kind of advanced packaging or your new business? Thank you.

Speaker Change: Telus is saying.

Speaker Change: Gotcha.

Jason: Preferably mentioned that mesh us for it.

See you enter the new AP business when it is mature enough to reach a.

Jason: Mass production stage for ASC. So if that's the case for a leading your surveys that you talked about how shall we expect the volumes or 100 producer for this kind of divest X genes.

Jason: Or a new business.

Joseph Tung: Are you talking about percentage of revenue?

Jason:

Jason Tsang: Yeah. Can you the contributions or your outlook in the future?

Jason: Are you talking about percentage of.

Jason: Revenue.

Speaker Change: Oh, yeah, yeah, or can you give us more colors maybe.

Speaker Change: Uh huh.

Speaker Change: <unk> contributions or your outlook.

Joseph Tung: Well, last year we have about low single-digit percentage of revenue coming from what we call the leading edge. We are, as we pointed out last time, we expect to double that to mid single-digit. You know, as I pointed out that, next year we still continue to see strong momentum and. In terms of exact percentage, we don't have. I don't have that number yet, because we're expecting not only the advanced packaging will grow, the other, what's local traditional advanced packaging or tests and all the other areas will grow as AI development continues to expand.

In the future.

Speaker Change: [laughter].

Speaker Change: Well look.

Speaker Change: Last year, we have about <unk>.

Low single digits.

Speaker Change: Uh huh.

Speaker Change: <unk> of revenue coming from the Oh, we called the leading edge.

Speaker Change: We are S. S E.

Speaker Change: At our last time.

Speaker Change: We expect to double that.

Speaker Change: With.

Speaker Change: A single digit.

Speaker Change: And you know.

Speaker Change: As I pointed out that next year, we still continue to see.

So momentum and.

Speaker Change:

Speaker Change: In terms of exact percentage.

Speaker Change: We have we don't have I don't have that number yet.

Speaker Change: Because we're expecting not only the events.

Speaker Change: Grow.

Speaker Change: Yeah.

Speaker Change: The other.

Speaker Change: So called traditional advanced packaging or tests and all the other areas will grow as a.

Speaker Change: Yeah.

Jason Tsang: Okay. Got it. My second question is in terms of your outlook in H2 this year. Can we expect seasonality or half season for any demands to sustain our gross momentum for maybe traditional packagings of flip chip or even mature testing or any kind of service or products in Q3 or Q4?

Development continues to expand.

Speaker Change: Okay got it got it so my second questions in your outlook. This year. So can we expect a shifting T or holidays for Andy man to sustain our cost our gross momentum for <unk>.

Speaker Change: Traditional Pac James or flip chip or even mature testing or any kind of service or products.

Joseph Tung: I think Q3, Q4 or H2, we will see, you know, all kinds of products to start to grow. I think leading edge may be above the corporate average.

Speaker Change: Q3, or Q4, I think Q3 Q4 or second half, we will see all kinds of.

Speaker Change: Oil prices start to grow.

Speaker Change: I think leading edge.

Speaker Change:

Speaker Change: We may be above the corporate average.

Operator: The next to ask questions, Gokul Hariharan of JPMorgan.

Speaker Change: And to ask questions.

Gokul Hariharan: Yeah, hi. Thanks for the follow-up opportunity. First one I wanted to explore a little bit is the partnership with the leading foundry for the advanced packaging. Could you help us understand a little bit the nature of this agreement or arrangement? Is that something that you have visibility into the long term, and it's kind of like a strategic partnership that ASE has entered into? Or is it something that doesn't have that kind of visibility given they're also expanding their own in-house capacity as well? I just wanna understand how this partnership works over the next, let's say, 3, 4 years.

Speaker Change: Oh cool Holly Houghton of J P. Morgan.

Holly Houghton: Yeah, Hi, thanks for the follow up opposite the first one I wanted to explore a little bit.

Partnership with <unk>.

Speaker Change: Leading foundry for the.

Holly Houghton: <unk> packaging.

Holly Houghton: Could you help us understand a little bit the nature of this agreement arrangement.

Holly Houghton: Is that something that you have visibility into the long term and strategic partnership at E&P entered into.

Holly Houghton: Or is it something that doesn't have that visibility given that also for finding their own in house.

Holly Houghton: Our capacity as well as I, just don't understand how all of this partnership.

Joseph Tung: Well, obviously, we work very closely with the foundries and we do have, you know, continuous dialogue with them to set up a expansion plan for our own capacity. You know, this is something that between us and the foundry, I don't think it's proper for us to discuss what exactly the arrangement will be.

Holly Houghton: The next let's say people yet.

Speaker Change: Obviously, we work very closely with the foundries and so we are.

Speaker Change: We do have continued.

Speaker Change: Continuous dialogue with them.

Speaker Change: Two.

Speaker Change: To setup.

Speaker Change: Our expansion plan for our own capacity.

Speaker Change: And but you know this.

This is something that.

Speaker Change: Between us and the foundry.

Is.

Speaker Change:

Speaker Change: I don't think is proper for us to discuss.

Gokul Hariharan: Okay. Do you think it's kind of something that will continue to drive the growth for the next 3, 4 years?

Speaker Change: Exactly the Richmond will be.

Speaker Change: Okay, but do you think it's something that we'll continue to drive the growth for the next three months.

Joseph Tung: Yeah.

Gokul Hariharan: It's not like a-

Joseph Tung: We do have good visibility, but I don't want to get into the detail for it.

Speaker Change: Yes.

Speaker Change: We do have a mountain.

Speaker Change: Good visibility, but I don't want to.

Gokul Hariharan: Okay. No worries. Thanks. Thanks, Joseph.

Joseph Tung: Yeah.

Gokul Hariharan: A couple of quick follow-ups. One is on pricing. Any changes you're seeing on pricing and, for the electricity tariff increase, is there any chance you're able to pass through some of these cost increases to customers? And also-

Speaker Change: Get into the details of it.

Speaker Change: Okay. Thanks, Thanks for that.

Couple of quick follow ups, one is on pricing.

Speaker Change: Any any changes youre seeing in writing and for the electric Steve tariff increase.

Speaker Change: Is there any chance you are able to pass through some of these cost increases to customers.

Joseph Tung: Well-

Gokul Hariharan: Secondly, on the traditional packaging side, utilization in the early 60s definitely seems quite low. Based on your current customer forecast, any view on when we get back to like 70-75%? Will it happen this year, or we'll have to wait for next year to kind of get back to 70-75% utilization? Thank you.

Speaker Change: And also secondly on the traditional packaging size utilization in the early sixties definitely seems quite low.

Speaker Change: Based on your current estimate forecast.

Speaker Change: Any any new one when we get back to the 70, 75% when it happened the Seattle, Let me for next year to end up getting back to that.

Joseph Tung: Well, I think going into H2, we will start to see our utilization to grow. I think it's safe to say that we'll be above 70% for H2.

Speaker Change: Thank you well I think going into the second half, we will start to see our utilization to to grow.

Speaker Change: And I.

Speaker Change: I think it's safe to say that we will be above 70% for the second half.

Gokul Hariharan: Okay.

Joseph Tung: In terms of pricing, I think we're still, I think the pricing, overall pricing for us is still resilient. There are a bit of a price pressure on the legacy products. Overall, I think on average, I think our pricing still remains to be resilient and, I think overall pricing structure will be much better than past cycles.

Speaker Change: Yeah.

Okay and.

Speaker Change: In terms of pricing I think we're still.

Speaker Change: I think the pricing overall pricing for us is still resilient.

Speaker Change: And Uh huh.

Speaker Change:

Speaker Change: Bit of a price pressure on the legacy product.

Speaker Change: Overall, I am seeing on average pricing.

Speaker Change: Pricing still remains to be done.

Speaker Change: And I think overall pricing structure.

We will be.

Gokul Hariharan: Okay. Any chance you can pass on some of this electricity tariff? Because it seems like it's not a one-year thing. It's essentially happening every year now.

We started it in the past cycles.

Speaker Change: Okay any any chance you can pass on some of the electricity tariff because it seems like it's not a one year thing.

Joseph Tung: Yes. I think all costs are being considered, and when we try to set up the proper pricing that we have. Whether it's 100% passed on or it's shared with our customers, I think you know, we will just come up with the suitable pricing considering all the costs that we need to bear.

Speaker Change: It actually happening every year now.

Yeah. So I think all costs are being considered and when we are prepared to zero.

Okay.

Speaker Change: Pricing that we have.

Speaker Change: So.

Speaker Change: Whether it's a percent or so share with our customers.

Speaker Change: We would just come up with the suitable pricing.

Speaker Change: Yeah.

Gokul Hariharan: Got it. Yeah. Thanks, Joseph. Thank you.

Speaker Change: Considering all the costs that we need to bear.

Joseph Tung: Thank you.

Speaker Change: Alright, thank you.

Operator: There are no more questions.

Speaker Change: There are no more questions.

Joseph Tung: Okay. To sum up.

Operator: Sorry. There is a follow-up question from Jason Tsang of CLSA.

Speaker Change: Okay too.

Speaker Change: I'm, sorry, sorry errors that follow up question from Jason Kim of CLSA.

Jason Tsang: Yeah. Sorry, I have follow-up questions.

Joseph Tung: Sure.

Jason Tsang: I wonder if you can provide more details on your comments regarding the leading edge service. I mean, can you provide some types of cutting-edge packagings, like 2.5D or 3D or chip-on-wafer or substrates? What kind of type of the advanced packaging or testing can you currently enter into the mass production stage or have the contribution right now? Thank you.

Jason Kim: Sorry, I have a follow up question.

Well if you can provide more details on your.

Jason Kim: Thomas regarding leading edge service right I mean.

Jason Kim: Can you buy something tie for cutting edge Pac Pac James like 2.5, D or three D or a chip on wafer ourselves for substrate.

Jason Kim: What kind of the type of advanced packaging or testing Kent.

Jason Kim: Can you currently.

Joseph Tung: We have fan-out. We have 2.5D. We have 3D. I think those are our focus, those are the type of packages we call leading edge.

Jason Kim: Enter into the mass production stage or have the contribution right now thank you.

Jason Kim: We have fan out we have a we have a 2.5 D. We have all this I think.

Jason Kim:

Jason Kim: Those are they're all focused those are the one.

Jason Tsang: Okay. All of them account for, right now, low single digit of ATM business, right?

Jason Kim: The type of packages, we call leading edge.

Jason Kim: Okay, and then the cow for right now low single digit of the TN business right.

Joseph Tung: Like I said, for this year, we're expecting mid-single digits.

Like I said.

Jason Tsang: Okay. Got it. Thank you.

But this year we're expecting.

Joseph Tung: Yeah.

Jason Kim: Michigan visit.

Operator: There are no more questions.

Speaker Change: Got it thank you.

Joseph Tung: Okay. To sum up, I think, you know, we had a better than expected Q1. Going into Q2, we are on track of things. For the whole year, we're also expecting same kind of outlook that we presented last time. I think overall this is, all sectors are bottoming out, maybe with some different tech sectors with different time, well, pace or time schedule. But all in all, we are comfortable with the current situation, and we'll continue to make the necessary investments to service whatever customers' needs, including the leading edge. Also, on the test side, we are increasing our CapEx as well to try to win more test business. Thank you very much.

Speaker Change: There are no more questions.

Speaker Change: Okay to sum up I think you know we had a.

Speaker Change: Better than expected first quarter.

And going to second we are on track office and for the whole year. We're also expecting a same kind of outlook that we presented last last time I think overall this is.

Speaker Change: Uh huh.

Speaker Change: All sectors are bottoming out.

Speaker Change: Maybe.

Speaker Change: With.

Speaker Change: Different test sectors with different now.

Speaker Change:

Speaker Change: We have paid or time schedule.

Speaker Change: But all in all where we are.

Speaker Change: Comfortable with the current situation and we will continue to make necessary investments.

Speaker Change: Two services.

Speaker Change: One of our customers.

Speaker Change: These include India.

Speaker Change: Leading edge and also on the test side, we are increasing our capex as well to try to remember our test business.

Joseph Tung: I'll see you next quarter.

Speaker Change: Thank you very much.

Speaker Change: You next quarter.

Q1 2024 ASE Technology Holding Co Ltd Earnings Call

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