ASE Technology Holding Co., Ltd.

Hello, I am Ken Shung, the head of investor relations for ASC Technology Holdings. Welcome to our first quarter 2019 earnings release. All participants consent to having their voices and questions broadcast via participation of this event. Please refer to our safe harbor notice. I would like to remind everyone on this call 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, our dollar figures are generally stated in new Taiwan dollars unless otherwise indicated. Like most Taiwan-based companies, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from other accounting standards. For today's event, I will be going over the financial results. Then we will have a Q&A session with Joseph Tung, our CFO. Following the event, our VP in charge of public relations, Eddie Chang will be available to address the media in Mandarin Chinese. As a reminder, because ASE Holdings was jointly formed on April 30th, 2018, during the second quarter, as a legal entity, our spill subsidiary's results are consolidated only as of that date going forward. Results for the legal entity are labeled legal entity basis in this presentation. For the sake of comparability, we have also included results which are compared against a pro forma set of results as if SPIL was a subsidiary and consolidated as of the beginning of 2017. This set of results is labeled as pro forma basis. Given that the transaction was completed during the second quarter, the legal entity and pro forma basis will have the same sequential comparisons between the first and fourth quarters. However, the pro forma numbers are still relevant for the quarterly year-over-year comparisons. From our point of view, the business is going through a period of lackluster demand for some products and ramping unprecedented demand for others. Some of our customers are cautiously managing inventories, while some of our other customers don't appear to have inventory concerns at all. We even have customers who are continuing to ramp their capacity requirements well into the second half of the year. I mention this because even though our seasonal revenue drop was somewhat stronger than normal, there are still some highlights that were not part of a broad-based softness. Recently, we have been frequently asked to comment on how much semiconductor inventory digestion has already occurred. And I would like to remind everyone that we do not have meaningful visibility of our customers' inventory levels. From our perspective, once the wafer comes out from fab, it proceeds to get packaged as quickly as possible to minimize wafer oxidization. As such, we cannot make any thorough determination that as to whether anything we build is for inventory accumulation or for immediate sell-through. Thus, through the small peephole, we have visibility over for just a fairly short moment of our customer's manufacturing cycle. From that short moment, we can say nothing appears particularly abnormal at this time. However, From a wider macro perspective, we do see signs that global politics are impacting regional consumer preferences. These preference shifts do appear to benefit some of our customers while being detrimental to some others. For our ATM business, the first quarter results were somewhat sluggish. Orders for the quarter came in on the lower side, of where we expected them to be. Our ATM revenues were down 15%, which probably represent a slightly stronger than seasonal decline for the first quarter. Some orders were pushed into the second quarter because of customer supply chain issues. However, when taken together with the last half of 2018, our first quarter results are probably best characterized as business being softer than expected because of end demand. For our EMS business, the first quarter came in behind our expectations. Our EMS revenues were down 31% sequentially. Softness within our consumer and communications segments were primarily responsible. We expect soft order volumes should persist following their seasonal trend, with orders being sluggish through the second quarter and eventually picking back up during the third quarter. Let's start the financial overview. On pages three and four, you will find our legal entity quarterly results for the holding company and our ATM business unit. On a legal entity basis, the first quarter year-over-year results are not particularly comparable between 2019 and 2018 because of the inclusion of spill in 2019 or the lack of spill in 2018. I will generally discuss the sequential and year-over-year comparisons as part of the pro forma basis slides. With that, let's briefly go over page three for the legal entity recorded fully diluted EPS of 46 cents and basic EPS of 48 cents. Sales were $88.9 billion with a gross profit of $11.4 billion and gross margin of 12.8%. Operating profit was $2.3 billion and net income was $2 billion. On page four, you will find our legal entity results for our ATM business. Again, we will discuss this in the pro forma section a bit later. Let's move to page five. Here we have our pro forma P&L for the consolidated holding company. To generate the historical pro forma periods, we added the historical P&Ls of each ASE and spill on a retroactive basis. We then added PPA and interest expenses related to the transaction as if the transaction was completed as of the beginning of 2017. And lastly, we removed relevant transaction fees and expenses. Given that the fluctuations from the holding company are comprised of the ATM and EMS businesses, I will try to keep explanations here short and provide detailed explanations during each of the business unit pages. For the first quarter, we had net revenues of $88.9 billion, representing a 22% decline quarter over quarter and a 6% increase year over year. The quarter-over-quarter decline is somewhat stronger than what we normally see relative to seasonality. This was driven primarily by a stronger-than-expected decline in our EMS revenue. The year-over-year increase is primarily the result of a higher revenue base within our EMS entity despite stronger-than-seasonal weakness. Gross profits were down 39% quarter over quarter and 7% year over year. These quarterly declines in gross profit are the product of lower than seasonal loading as a result of inventory control amongst some of our customers across both ATM and EMS. Gross profit margin declined 3.6 percentage points on a quarter over quarter basis and 1.7 percentage points on a year over year basis. Both of these declines were primarily driven by higher EMS revenue mix. Our operating expense percentage was up 1.3 percentage points to 10.2% from 8.9% in the fourth quarter and up 0.5 percentage points on a year-over-year basis. We believe this to be the peak of our OPEX percentage for this year. From a total year perspective, we are looking to contain the OPEX percentage increase to within a 30 basis point increase. Operating profit was $2.3 billion. This represents a seasonal decline of $6.3 billion quarter over quarter and $1.8 billion year over year. Sequentially, operating margin declined 4.9 percentage points and was down 2.2 percentage points year over year. During the quarter, we had a net non-operating gain of $0.3 billion. This includes net interest expense of $1 billion. The gain was primarily from our financial instruments and foreign exchange hedging activities during the quarter, offset by net interest expenses. Tax expense for the quarter was $0.4 billion, with an imputed tax rate of 15%. The imputed tax rate was low during the quarter due to high utilization of tax assets. For the second quarter, we expect to book a tax charge of $0.3 billion related to our annual undistributed earnings tax. We expect the imputed tax rate for the year to be 21%, inclusive of the annual undistributed earnings tax. Net income for the first quarter was $2 billion, representing a decline of $3.4 billion from the previous quarter. On a year-over-year basis, net income was up $1.3 billion from the same period in 2018, principally from lower non-operating costs and tax expenses. On the bottom of the page, we have again provided here key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $12.6 billion with a 14.2% gross margin. Operating profit would be $3.8 billion with an operating margin of 4.2%. Net profit would be $3.5 billion with net margin of 3.9%. Basic EPS, excluding PPA expenses, would be $0.82. On page six is our ATM pro forma P&L. For the first quarter, revenues for our ATM business were $54.4 billion, down $9.7 billion from the previous quarter, and down $1.6 billion from the same period last year. This represents a 15% decrease sequentially and a 3% decrease year over year. Loading levels for our ATM business fell somewhat short of our expectations, principally from softer loading and customer supply chain issues. Gross profits within ATM were down $5.5 billion quarter over quarter and $1.1 billion year over year to $8.4 billion annually. Lower gross profits were driven by lower seasonal loading and costs associated with ramping new products. Gross margin for ATM was down 6.3 percentage points sequentially and down 1.5 percentage points year over year. The sequential decline is primarily due to the lower seasonal loading and a higher raw material pass-through product mix. The year-over-year drop in gross margin is primarily the result of softer-than-expected loading and new product ramps. During the first quarter, operating expenses were $6.9 billion down $0.8 billion from the fourth quarter and up $0.6 billion from the same period last year. Year-over-year operating expenses were primarily up as a result of increased compensation expenses and ramping R&D expenses. And even though it may appear outwardly that we are just adding ongoing expenses, we believe the increased compensation expenses help us recruit and retain the individuals necessary to move the company forward to the next stage of evolution. Further, a portion of incremental R&D expenses spent are for projects meant to generate new streams of revenue by the latter part of this year. And a significant portion of R&D expense is specifically for helping support the ramp-up of our new panel-level fan-out technologies and processes. OPEX percentage was 12.7%, up 0.8 percentage points sequentially, and up 1.4 percentage points year over year. Sequentially speaking, the OPEX percentage increase was primarily the result of lower revenues. On a year over year basis, higher OPEX is due to higher R&D costs from new project ramp-ups and higher compensation expenses. We expect the first quarter to represent the peak operating expense percentage for the year, we expect the quarterly operating expense percentages to start trending downward going forward. During the first quarter, operating income was $1.6 billion, representing a decline of $4.8 billion quarter over quarter and $1.6 billion year over year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would have been 17.7%, an operating profit margin would have been 5.5%. On page 7, you'll find the graphical presentation of our pro forma ATM P&L. Here you can see the impact of the overall softer-than-expected growth environment starting from the middle part of last year. On page 8 is our ATM revenue by market segment. As you can see here, there hasn't been any substantial change in mix, or you can also interpret that the software environment has been fairly broad-based. On page 9, you can see here that during the first quarter, not much has changed from our fourth quarter. Test revenue fell off a bit as a result of it being on the tail end of our business cycle. So it will be the last to pick up. On page 10, you can see the results of our EMS business. During the first quarter, we had revenues of $35 billion, representing a decline of $15.7 billion, or 31% sequentially, and an increase of $6.3 billion, or 22% year over year. Our original expectations for the first quarter were based on higher run rates within a few of our key consumer and communication business lines. However, demand for our EMS services was trimmed during the quarter, and revenues for the quarter came in short of our expectations. The year-over-year increase was driven by higher revenues from our consumer product segment. Our EMS gross profit dropped to $2.9 billion, representing a decline of $1.7 billion sequentially and an increase of $0.2 billion year-over-year. Gross profit margin for the EMS business unit came in at 8.4%, representing a 0.7 percentage point decline from the previous quarter. This decline was driven by our product mix and slower than expected loading for the quarter. Compared with the previous year, EMS gross margin declined a percentage point. This difference was primarily the result of generational device differences in product mix. Operating profit for the quarter was $0.7 billion, which is a $1.4 billion decline sequentially and a $0.2 billion decline year-over-year. Operating profits declined as a result of expanded scale, ramp-up costs, and higher bonus. Our operating margin came in at 2.1%, which is a 2.2% decline sequentially and a 1.2% decline year-over-year. The operating margin was somewhat behind our expectations and was primarily the result of lower than expected loading of expanded operational scale. On page 11, you will see our product segment mix within our EMS business. Our consumer product segment declined 6 percentage points of segment share. Subsequently, while... while our communications segment also declined by three percentage points. Our automotive, industrial, and computing segments picked up that share. Page 12, you will find key line items from our balance sheet. At the end of the quarter, we had cash and cash equivalents and current financial assets of $70.4 billion. Our interest-bearing debt increased from $198.4 billion to $201.4 billion. Total unused credit lines amounted to $207.7 billion. Our EBITDA for the quarter was $16.5 billion. On page 13, you will find our pro forma equipment capital expenditures. Machine and equipment capital expenditures for the first quarter totaled $239 million, of which $156 million were used in packaging operations, $72 million in testing operations, $8 million in EMS operations, and $3 million in interconnect material operations and others. we continue to expect our 2019 capital equipment spending related to capacity expansion of existing product lines to be low that of 2018 levels. Going into the second quarter, we still see the overall environment as being somewhat unbalanced and a little bit volatile. There are certain pockets of strength as the industry gets its legs back underneath it. However, our customer mix seems to differ from the traditional customer mix at this time. If you wanted us to characterize the environment, we would say the overall competitive environment continues to be fierce. In this fierce market, we believe we can continue to earn the vast majority of the OSAT sector's free cash flow. With that free cash flow, we are paying off our debts, cleaning up our balance sheet, and continuing to pay our dividend. The free cash flow generation also allows us to continue to develop operational advantages, such as rolling out multiple lights-out factories and leveraging new technologies. Of particular importance to us this quarter is that we have just put in place one of the most advanced packaging lines ever. with the ability to achieve unparalleled fan-out yields while improving structural integrity and electrical performance of the device, and hopefully will become a principal building block of heterogeneous integration. On the test front, we will continue to invest in our own capacity. During this year, we will be executing an aggressive test business strategy by leveraging our unparalleled assembly capacity to reach its corresponding downstream test business. We believe test business sprinkled across Taiwan and other parts of the world can be precisely targeted with our turnkey solution. We believe such a campaign will allow us to gain market share against our competition. Looking into the second quarter, we believe the worst is most likely behind us and a moderate recovery is starting to happen. Our customers continue to give us consistently upbeat outlooks for the second half of 2019. And even though downward revisions are still common, The size of those revisions are becoming significantly smaller. Given that trend is somewhat unusual this year, we don't have much of a position to say whether such outlooks are accurate, overstated, or understated. We can rationalize them to the best extent we can and internally digest these expectations to generate our own outlook. With that said, we still see a strong seasonal uptick beginning in the latter part of the second quarter and sustaining through the latter half of the year. Things are still rather dynamic, and we will remain prudently cautious in our approach. So for our guidance, on a pro forma basis and in NT dollar terms, ATM second quarter 2019 business should be similar to – I got the old thing stuck back on here. So on a pro forma basis in NT dollar terms, ATM second quarter 2019 business should be similar to the quarterly average of the first half of 2018. On a pro forma basis, ATM business for the second quarter of 2019 gross margin should be similar to the first half of 2018. In U.S. dollar terms, EMS second quarter 2019 business should be similar to second quarter 2018 levels. In U.S. dollar terms, EMS second quarter 2019 operating profit should be similar to second quarter 2018 levels. We can start the Q&A.

Yes, thank you. First question is from Randy Abrams, Credit Suisse. I wanted to ask in the prepared remarks, Ken, you talked about investing for new streams, like new revenue streams in second half. Could you talk a bit more about those streams if it's more ICATM or on the EMS side? and maybe a bit more on magnitude, if this is just more industry recovery?

So during the year, we're expecting to spend more R&D expenses on basically developing the fan-out process lines a little bit better. There are technologies that could basically help in terms of – of the fan out, basically making things a little bit smoother, and also rolling out the panel level fan out. So there's a lot of R&D that, so there's a lot of different projects and revenue streams that are coming to fruition, but we don't, we generally don't see that level of rollout.

Okay, if I could ask on the EMS, I can run the full math, but it looks like second quarter is roughly flat for the EMS division after growing quite nicely, double digits. And I know there's been weakness in some of the consumer application or smartphone. How's the view, if you could give an updated view on full year or expectation for growth as we look towards second half? and pipeline for new projects?

For EMS, I think in the second quarter, I think the softness will persist into second quarter as well. So there was still a bit of a dip in terms of revenue, which is... seasonal, so there's nothing abnormal about it, and it really is in line with the customer's product cycle. Second half of the year, we will see a fairly strong pickup, again, in line with the product cycle as well. And also, as Cam mentioned, we have already started to scale up Our operation, both in terms of ATM and EMS, for the second half, ramp up some of the new products or new technology that we're going to bring in. So overall, I think both for ATM and for EMS, For EMS, as a whole, on a consolidated basis, without giving out a very specific guidance, I think the general trend is we will continue to see quarter-to-quarter growth in terms of our top line. And for both businesses, we are still expecting growth for the year.

I'll probably ask just a follow-up on both sets of margin. On gross margin, just year over year, you talked a bit about the factors, but the EMS down about a point and the ATMs down about a point, point and a half. Maybe talk about the factors year on year, what's been impacting the margin. And you referred to, and I don't know if you've referred as much in the past about fierce competitive landscape, but has it gotten... more challenging competition in either segment? Like, it seems like more are going after the SIP business, but are you seeing more... Is, I guess, competition and pricing a factor in the margin, or is it other issues?

Well, I think the second quarter is particularly tough for us. I think it's a combination of many different factors that is affecting our margin. Of course, the softer than expected margin does have an impact on the loading. and that translates directly to a lower margin for us. And also during the quarter, or starting from the beginning of the year, we have already started to scale up our operation, preparing for the second half ramp-up, including the scale itself and also putting a lot of resources into a new product that is coming on stream in the second half. Also, we are in the face of relocating some of our business to outside of China. We're expanding some of the facilities that we have outside of China as well. Also, in the first quarter, we did experience some issue in the supply chain that had an impact on the overall revenue as well. So put all things together, there is a bit of a larger impact on our margin than expected for the quarter. And also on the operating side, I think the more compensation expenses that are incurred because of the employee option that we put out last year. Also on the R&D side, we did spend quite a bit of money into our resources into some of the new technology and new products that we are coming on stream. mainly for FanOut as well as for SIP. As we mentioned in last quarter, we are seeing more projects, SIP projects, coming on stream. We are starting to entertain multiple customers. We're seeing the momentum starting to build, and we are actually starting from the beginning of the year. We're preparing for that.

And the last question I want to ask, to clarify... The OPEX, I think you mentioned 30 basis point. And I just want to know, is that a year-over-year, just that OPEX percent of sales for consolidated? And then is there a way to think about it year-over-year growth in OPEX for the company?

You want me to confirm that?

Yeah, I just wanted to clarify with the 30 basis point. Is that expectation versus last year OPEX percent of sales 30 basis points higher?

Yeah, I think we, like I mentioned, we are beefing up our R&D, and also because of the additional compensation expenses out of the ESOP. As we mentioned already last quarter, we are expecting our OPEX ratio to come up a bit this year. Although at this point we are working very hard to see if we can still manage to keep the OPEX ratio at last year's level. But there's going to be some challenge in front of us in terms of maintaining that. But nevertheless, if there is any increase, we will keep it below the 30 basis points.

Yeah, no, thank you. It seems, I guess, with the low first half base, OPEX still not growing much. I mean, to only be up 30 basis points, still pretty flat OPEX.

We're trying to keep it in place. Okay. All right, thank you.

Yeah, hi. Good afternoon. This is Rick Xu from Daiwa Securities. My first question against housekeeping questions, utilization rates across the board of the wire-bound testing and free chip for Q1 and second quarter?

I think for Q1, across the board, it's about 70%. And in second quarter, ATM-wise, there will be some in our revenue, so the loading we're expecting to be at around high 70s.

Okay, thank you. Can you, second question, can you talk about a little bit about your pricing environment, especially for your ATM sales, because it looks your first quarter job was kind of below seasonal. Is there any pressure in pressure?

Pricing is never a pleasant topic. There's always pressure. And in first quarter, I think the softness is an overall situation. It's an overall phenomenon. There's a normal pricing adjustments on a quarterly basis or an annual basis. We don't see anything abnormal.

Okay, last question, just a little, I just want to clarify. I think Randy asked about your four-year revenue. Is it going to still grow on your basis, your four-year revenue?

Yeah, we're still expecting to have top-down growth on an annual basis, yes.

Right, okay, so same as your guidance last time. Yes. All right. Okay, thank you so much.

Do we have any more questions from the floor?

Hi, this is Sebastian for Sailor Securities. So first question, just to follow on the EMS operating profit guidance, it is similar to second quarter last year, which implies that the upside level is better than Q1 this year, while the revenue is down Q1Q. Is that right? so which means the margin is improving.

There will be better control on the OPEX at the EMS business unit, and therefore we're expecting OPEX ratio to come down a bit. The operating also on the growth level, because of the different product mix, at the growth level the margin should have some improvements. Okay.

And looking at your second quarter guidance of EMS and ICATM, it seems like moving toward a different direction. So I just wonder what's driving your second quarter ICATM business growth, sequential growth? Is it mainly from mobile or some 5G, high-performance computing technology?

I think it's mostly because of the different revenue mix. I think EMS does have a higher consumer revenue, and therefore the movement really should be in line with the product cycle of our customers. So there's a little bit different direction in the second quarter. But all in all, going into second half, I think the direction will be in sync.

How about the ICATM, the strength, which applications is driving the sequential growth in second quarter?

Well, I think the second quarter is actually quite broad-based, except that communication seems to have a stronger momentum.

When you say communication, does it include both consumer type of the smartphone communication and also the infrastructure-based communication, right?

Both.

Okay, so both are seeing strength. Relative to other segments. Okay. On the second half recovery, I think Cam seems to be pretty optimistic about that. So I just wondered how much of that is based on a typical seasonal product launch cycle, and how much of that is driven by a very clear visibility on the new products, new technology ramp?

I think, by and large, the second quarter is really seasonal uptake. The new products or new technology ramp up will be mostly in the second half. I was asking about second half. Okay.

How much of that is seasonal driven? How much of that is you're doing something else that you didn't do before? Like new products, new socket, content gains, market share?

That would be a very tough question to answer. I need to go back and check

I don't know if we can break that down so... I'm just curious because you have a very strong confidence in the second half recovery.

I think certainly you have some clear visibility and that confidence may probably come from like, hey, I win this socket and this is something I didn't do before and that made me confident. Even if there's no strong season recovery, you can still grow on top of that. Or even if there's a season recovery, you can grow... Above that.

So our second quarter numbers aren't... I mean, they're not particularly... They're not above seasonality or typical seasonality. No, no, no.

I'm asking about second half.

That's correct, right? So if we lead to a third quarter growth, then we're still kind of coming from a general semiconductor environment improving category. Even if we throw out wonderful, spectacular numbers, it's still kind of a recovery, right? We're just kind of getting back to where we were.

Well, let me say this. I think if you look at our CapEx for the year, I think roughly 25% of the CapEx will be spent on some of the new product or new technology. If that's any indication, I think that will be the likely split between the seasonal and the new product that are being introduced.

So the sick and have recovery is driven equally strong by both businesses? Both what? EMS and ATM.

They both will experience recoveries, but in different, I think they have different customer bases too.

I think this is a very, very difficult question to answer because there's going to be fluctuations in the organic part of the business or the new products that's coming out. It really depends on the end market sell-through, which side goes up more, which side goes down more. So I really can't tell you what is really the – The split between the two. All I can say is we are preparing ourselves by spending 25% of our CapEx for the year for new products. So if there's any synergy there, that could be the analogy for it.

Okay. The last question for me is on the... I think Ken mentioned that your ASC holding is still gaining share, gaining free cash flow share in OSI industry in this downturn and utilize the cash to pay back debt and pay dividend. So on the debt payback... Do you have any – what should we model? Like you pay down like 15%, 20% per year?

The original guidance on terms of debt payback was roughly two to three years from transaction initiation.

So let's say we can assume that in three years' time, all the debt will be repaid. So like 30% per year paid down.

Well, if we're talking about this transaction-specific debt that we incurred, that part has been partially repaid by our own cash flow and partially by other different funding sources. But by and large, the total amount of the syndicated loan is about $90 billion NT. And we have... paid it down to roughly $20 billion now within a year's time. And we are, although roughly 60% of it or 70% of it is being paid down by other funding sources that we've raised in the year, the rest is being paid down by our own cash flow.

Okay, thank you. Hello? Hello? Yes, let's take a question from the call or audio.

So we have three online.

So can we take the first one?

The first question comes from Bruce of Goldman Sachs. The line is now open. Please go ahead, Bruce.

Thank you for taking my question. I think the first question is regarding to the panel level of packaging. I'm happy to hear that the company is developing a new technology. Can you give us some picture about this technology, what kind of addressable market, when can we expect some revenue, what kind of location, etc.? ?

Hi, Bruce. We're not stating exactly the amount of revenue related to it, but we have actually put it in place during the first quarter. We do expect revenues starting in the second quarter. Hopefully this revenue ramps during the year. This panel revenue right now is currently, we're obligated to put it for just one customer, but we will be able to release this capacity to other customers by next year.

I'm sorry, the connection is pretty bad. Your voice is breaking down. So I just hear that the revenue is isolating one customer and what else?

It's for one customer right now. We are only able to sell it to one customer at this time. But the capacity will be available to be sold to other customers, hopefully before the beginning of next year.

So let's put it this way. When can we expect to see meaningful revenue contributions from panel-level pathogens? 5% of arriving, 5% of alien visits.

We do not have a – I don't have that right now.

I think, as Tan mentioned last quarter, I think we are expecting to grow our fan-out revenue by $50 million and above on an annual basis. And right now, things are moving on track. I think we're in the face of increasing our capacity by another 50% at this point.

So what kind of profitability can we expect from this new business?

Well, I think we're still at the early stage, so it's kind of difficult to anticipate a COVID average return or margin at this point until it gets to economic scale. But I think the overall return, we are making investment based on the return requirement that we have, which is an ROIC of over 15%. So that's still the criteria that we're looking at.

What is the scale of economics?

I think it will go over $100 million when we start to see some scale.

If we get more than 100 million U.S. dollars, can we expect the profitability to be better? Is margin accrued there?

It should, yes.

Great. The second question is regarding to your strategy in taxing business. The taxing business, you have a very strong competition in KFC about having a lot of taxing business. And you also have a lot of, like, testing service provider whose average, you know, ROE is less than 10% at the industry. So the ASA is turning more aggressive in testing business. Can you tell us a little bit more about, like, you know, what's your strategy?

Well, I think at this point, I think as we mentioned last time, I think in the past few years we have been quite passive in terms of making investment into tests. And now we're seeing the turnkey services requirement has been increasing, and we do have a much larger scale after the combination with spill. So we believe that at this point, this test is something that we want to be putting more focus on, and we do have the scale and also the toolboxes to penetrate this more. And we believe the return of this test business is still justifiable at this point for us to expand.

So basically, you know, I still don't understand because the second tier of testing, why should I say second tier? A lot of our independent testing companies, their RE is below a percent. And how do you make sure or how confident it is that you can do it like, you know...

So right now, we're not quite as aggressive on test, right? And test is also more margin accretive. So we believe that we do have room. And then post-November 23rd, 24th, we should have better capability to generate a turnkey test solution. So I think our customers are interested in being able to shorten up their cycle time. They're able to move their test product in quick order, right, instead of having to wait in multiple lines and multiple queues.

Can I explain that, you know, Because spilled traditionally has much less testing capacity compared to AAC. And once, you know, integrated in terms of like, you know, packaging testing is not as balanced in terms of capacity allocation. Can I expand somehow from this angle as well?

Yes, we do expect some level of low-hanging fruit to be able to go after or approach a business that was not approached before.

I see. I understand. Thank you.

I'll go back to you. Thank you. The next question comes from Cities Roland. Roland, please go ahead. Your line is open.

Thank you for taking my question. First, the follow-up question for the testing business. So for the testing business, are you referring to the final testing or are you also doing the testing for the wafer pro as well?

Both. We will target both.

Yeah, so now for the percentage-wise, what's the allocation for this wafer pro and final testing?

I didn't get the question. One more? One more time?

For the wafer probe and the final testing, what's the percentage of each for your total testing business now?

Actually, we don't know. I don't think you can necessarily make any rational decision out of that because you could balance your tests more towards wafer probe or more towards final test. It doesn't really state anything.

Okay. Going forward, if you are going to invest more on testing, what kind of business are you going to invest in? Is it more for the probe business or more for the final testing business?

Both. So your tester, it's a matter of peripherals that you attach to the tester. So we would attack both. We would buy further peripherals for probe if we get more probe business. We would buy more handlers if it were for final test.

Okay. Thank you. Last quarter you said going forward for your SIP and thin-out business, every year you are going to see incremental revenue around $100 million for SIP and $50 to $100 million for thin-out business. So our question is how much capital you need to invest in both technologies in order to maintain such incremental revenue every year?

As I mentioned earlier on, I think first of all, this year's CapEx will be similar to last year. And I mentioned that 25% of the CapEx will be, right now it's still budgeted for the new technology that we're bringing in.

Yeah, and how about going forward?

Well, it depends on how the market shapes.

Okay. And then in the past, you also said for every dollar you invest in Assembly, it generates about $1 return for the first year after you invest. And the test team actually will be generating more. How about the investment on this advanced technology?

I think we need to put everything into one basket to see. We want to maintain... For assembly and test combined, a dollar of investment generates a dollar of revenue for us.

Yeah, sorry, I did not hear you clearly. Can you say again? Sorry.

As a whole, for assembly and tests, I think the FANAU or other technology in terms of assembly and tests is still in the same basket, and we want to maintain that ratio to a dollar of investment generating a dollar of revenue for us on an annual basis.

Okay. Okay. Thank you. These are all my questions. Thank you.

Thank you. The next question comes from Gokul of JP Morgan. Please go ahead. Your line is open now.

Yeah, hi. First of all, I just wanted to follow up on the testing question. So right now, for ATM, we are running at about 15%, 16% of total revenues coming from testing. Given your comments that you're underinvested in testing over the last few years, Where does that look like settling in maybe in the next couple of years? Do you think that goes to 25%, 30%? Or is it just a minor increase from the 15% to 20% kind of levels over the next couple of years once you complete your investments and testing capacity?

There is no preset target percentage for us in terms of our revenue split between assembly and test. What we're saying is that we see very good potential in the test business once we get the scale now. So we are putting more focus or putting more resource into test. and we are confident or we are expecting this effort will lead us to gaining shares in test business, which we believe still makes economical sense for us. But having said that, it really depends on the execution, how successful we are in terms of getting more business and how fast. the business will start to come in. And, you know, it really depends on we'll just go with the flow to see how much resource we need to put in further to continue to grow that part of the business. But, you know, there is no preset goal, say, oh, you know, we want to get to 25% or 30% at any given time.

Okay, fair enough. Just a quick question on SIP. It looks like, based on your Q2 guidance, the EMS revenues have basically flourished year on year. How should we think about the acceleration potential for this business as we get into second half, given that you have some new projects in second half for SIP as well? And secondly, could you also comment about your efforts with Qualcomm in terms of the SIP1 or QSIP kind of business that Qualcomm has been incubating? It looks like they've started shipping some volume for some of their customers. Could you talk about what you think is the potential for that business long term?

We are actually expecting some growth in the business. Growth on the top line for EMS as well on an annual basis for this year. And also we are entering, you know, not just the, what is it, the QSIP. Did you call it the QSIP project? Yeah.

Yeah.

Okay, that's just one of the SIP projects that EMS is engaging in now. But for that particular project, we are expecting sizable but not a whole lot of revenue for us this year. But we do see potential that it will grow to maybe even to other customers or other applications as well. So this is one area that the EMS will continue to put resources in.

Okay, thank you.

Thank you. Ladies and gentlemen, if you have other questions, please press star 1 on your telephone touchpad.

Hi, I have one follow-up. With regards to the EMS business growth for full year this year, If we look at the second half, is the second half year-over-year also positive? Yes. So the first half is already positive, so based on your guidance for second quarter, and so second half will still be positive? That's correct. Okay. And how much of this is driven by SIPP?

Yeah, I don't know if we're talking about that numbers.

No, I mean, I don't want to be specific on the numbers, but just trying to see that the Yovia Grove or the EMS this year, is it mainly driven by the SIP project?

I would say both for SIP as well as for the non-SIP type of businesses. Right now, I think the overall SIP represents about 42% of our EMS revenue now. And we are expecting this revenue to basically more or less at the same level by the year end.

Thank you. Actually, I wanted to ask if it's Q-CIP that we should call it. For that particular project, you had announced the Qualcomm Brazil. So I just want to understand, like, that is it still limited to, one, is it still more limited to Brazil where you're doing that production, or is it now more of a global opportunity? And do you also have potential, or is there any exclusivity, or could you go to MediaTek, Huawei, and other platforms to do these type of SIP for 5G? Yeah.

Well, I think it's primarily targeted at the Brazilian market, and we still think there's a market that is the most suitable for this type of SIP solution. There's still a lot of room for us to expand. And to serve that particular market, there will be other suppliers as well, which could be our potential customers. That's what I'm saying. So if it's for the... If it's for the current application, then yes, it's pretty much for the Brazilian market. And we will expand this to other customers as well. But QSIP also has the potential for other applications. Then it will be a different market or a different aspect of it.

And to clarify other customers' applications, so because I would think just Brazil, but is there an opportunity in China or global for these type? Like I guess why only, I mean, I know this customer is a Brazil project, but is there a global opportunity to do these type of modules?

Well, we'll see how things evolve. But primarily at this point, we're still talking about Brazil.

You mentioned the prepared remarks pass-through, and I think it was in the ICATM on margin. Is there much, like, module pass-through growth in the ICATM? Like, is it a piece of the SIP that's flowing in?

That was more in reference to higher substrate content. Okay, thank you. Any more questions from the floor? No more? Okay, thank you very much for attending our earnings release. See you next quarter.