ASE Technology Holding Co., Ltd.

I am Ken Shung, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2021 earnings release. Thank you for attending our conference call today. Hello, I am Ken Shung, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2021 earnings release. Thank you for attending our conference call today. Please refer to our Safe Harbor Notice on page 2. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. these forward-looking statements are subject to a high degree of risk and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in new Taiwan dollars unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards including those represented by our subsidiary using Chinese GAAP. I am joined today by Dr. Tian Wu, our COO, and Joseph Tung, our CFO. For today's call, I will be going over our financial results, Tian will be providing our annual business recap and outlook, and Joseph will then provide an update on our China site dispositions and our quarterly guidance. We will have a Q&A session following the prepared remarks. please turn to page three where you will find our fourth quarter consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. During the quarter, we announced and completed the disposition of our subsidiary ASE Inc's major China sites. From a financial perspective, the sites were valued at an enterprise value of US dollar 1.46 billion And the final consideration was US$1.33 billion after adding cash balances and deducting the existing debt. We recorded in the fourth quarter a gain of US$551 million net of related expenses and taxes. Joseph will give more details regarding this transaction towards the end of our prepared remarks. For the fourth quarter, we recorded fully diluted EPS of $6.99 and basic EPS of $7.20. Without the inclusion of our China site disposition gain, fully diluted and basic EPS would be $3.45 and $3.66 respectively. Consolidated net revenue increased 15% sequentially and 16% year-over-year. We had a gross profit of $32.9 billion with a gross margin of 19%. Our gross margin declined by 1.4 percentage points sequentially and increased by 3.3 percentage points year-over-year. The sequential margin decline is principally the result of higher EMS business mix. The annual increase is primarily the result of higher profitability of our ATM business. Our operating expenses increased by $0.9 billion during the fourth quarter to $13.3 billion as a result of higher profit sharing expenses issued during the quarter. Despite the absolute dollar increase, our operating expense percentage declined 0.5 percentage points sequentially and 0.4 percentage points year-over-year to 7.7%. Operating profit was $19.6 billion, up $1.2 billion sequentially and $8.4 billion year-over-year. Operating margin was 11.3%, declining 0.9 percentage points sequentially as a result of higher EMS product mix, while operating margin increased 3.7 percentage points year over year as a result of higher profitability from our ATM business. During the quarter, we had a net non-operating gain of $17.7 billion. The gain from the China site dispositions accounted for $17.3 billion of this net non-operating gain. The remaining non-operating gain was from our foreign exchange activities, government grants, and other non-operating gains. This amount was offset in part by net interest expense of $0.6 billion. Tax expense for the quarter was $5.6 billion. The effective tax rate for the fourth quarter was 15%. The lower effective tax rate during the quarter was principally the result of differing taxation methodology related to our China site disposal. Net income for the quarter was $30.9 billion representing an improvement of $16.7 billion sequentially and an improvement of $20.9 billion year-over-year, excluding the gain net of taxes and related expenses from the sale of our China sites, our net income would be $15.6 billion, which would still represent substantial earnings growth of $1.4 billion sequentially and $5.6 billion year over year. The NT dollar-US dollar exchange rate was fairly stable from the third to fourth quarter. and as a result, did not impact holding company level margins meaningfully. However, from a year-over-year perspective, we estimate that the strengthening NT dollar had a one percentage point negative impact gross margin. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.3 percentage point impact to our holding company gross margin. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $33.8 billion with a 19.6% gross margin. Operating profit would be $20.8 billion with an operating margin of 12%. Net profit would be $32.1 billion with a net margin of 18.6%. Basic EPS excluding PPA expenses would be $7.48. Please refer to page 4. Here you will find the 2021 consolidated full year result. Fully diluted EPS for the year was $14.40, while basic EPS was $14.84. Fully diluted EPS for the year without inclusion of our China site dispositions would be $10.86, and basic EPS would be $11.30. For 2021, consolidated net revenues grew 20% as compared with 2020. ATM revenues grew 21%, while EMS revenues grew 17% annually. Gross profit for the year was $110.4 billion, increasing $32.4 billion year over year, or 42%. In 2021, our gross margin improved 3.1 percentage points to 19.4%, principally as a result of higher profitability in our ATM business and slight improvement in EMS. Operating expenses increased $5.1 billion for the year and came in at $48.2 billion. We were able to lower our operating expense percentage by 0.5 percentage points to 8.5% for the year. Operating profit for the year was $62.1 billion, improving 78% or $27.2 billion. Operating margin for the year was 10.9%, an improvement of 3.6 percentage points. We recorded a net non-operating gain of $18.2 billion for the year. As mentioned earlier, $17.3 billion of this was attributable to the disposition of our China sites. The remainder was primarily attributable to investment income, government grants, and other non-operating income offset by net interest expense of $2.3 billion. Total tax expense was $14.3 billion. The effective tax rate for the year was 17.8%. Our full year effective tax rate was primarily lower as the result of differing taxation methodology related to our China site disposals. For ongoing purposes, we believe our effective tax rate to be about 20.5%. Net income increased by 132% to $63.9 billion. On a full year basis, we estimate that the strengthening NT dollar had a negative 1.6 percentage point impact to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 20%. Our operating margin would be 11.8%. Our basic EPS would be $15.96. On page five is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. During the fourth quarter, our ATM business continued to run at a fully loaded rate. Operationally, it was almost a continuation of the third quarter with slightly more business. We had a reclassification of bonus expense from cost of goods sold to operating expense during the quarter. We will explain sequential fluctuations that are impacted by this after the reported numbers are presented here. For the fourth quarter 2021, revenues for our ATM business were $92.0 billion, up $1.9 billion from the previous quarter, and up $19.2 billion from the same period last year. This represents a 2% increase sequentially and a 26% increase year over year. Our ATM revenues came in slightly ahead of our expectations due to higher than expected customer loading. Gross profit for our ATM business was $25.7 billion up $1 billion sequentially and $9.3 billion year over year. Gross profit margin for our ATM business was 28%, up 0.6 percentage points sequentially and up 5.4 percentage points year over year. The year over year gross profit margin improvement was primarily attributable to higher loading, improved efficiency, and a friendlier ASP environment offset in part by a stronger NT dollar appreciation. During the fourth quarter, operating expenses were $9.7 billion up, $0.6 billion sequentially, and $1.2 billion year-over-year. The year-over-year increase was primarily driven by a higher employee headcount and incremental bonuses tied to corporate performance. Our operating expense percentage was 10.5%, up 0.4 percentage points sequentially and down 1.1 percentage points year-over-year. During the fourth quarter, operating profit was $16.1 billion, representing an improvement of $0.5 billion quarter-over-quarter and an improvement of $8.1 billion year-over-year. The year-over-year mark represents a 101% increase from last year. Operating margin was 17.5%, improving 0.2 percentage points sequentially and 6.5 percentage points year-over-year. The NT dollar exchange rate did not have a significant impact on our ATM sequential margins. On a year-over-year basis, we estimate that the strengthening NT dollar had a 1.5 percentage point negative impact. During the quarter, we made a one-time reclassification of $0.4 billion relating to how bonuses were classified between cost of goods sold and operating expenses during the first three quarters of the year. In the fourth quarter, this reclassification lowers cost of goods sold compensation expenses while increasing OPEX-level compensation expenses. Adjusting for bonus reclassification, our gross profit margin would be 27.6% or flat sequentially. Our sequential operating expenses would be flattish, up $0.1 billion, and our operating expense percentage would be 10.1%. down 0.2 percentage points sequentially. This reclassification has no impact to ATM operating margins. It also has no impact at a full-year level. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 28.9%, and operating profit margin would be 18.7%. On page 6, we have our ATM full-year P&L. On this page, you can see how that we saw significant improvement in all aspects of our business during the year. 2021 revenues for our ATM business increased by 19% with our packaging business and test business up 22% and 6% respectively. Gross profit for the year improved 49% to $88.7 billion. Gross margin was up 5.3 percentage points primarily as a result of higher loading and efficiency, a friendly ASP environment, and offset in part by NT dollar appreciation. Our operating expense percentage declined by 0.9 percentage points from 11.4% to 10.5%. operating profit improved 94% to $53.4 billion, with operating margin improving 6.2 percentage points to 16%. On a full year basis, we estimate that the strengthening NT dollar had a 2.3 percentage point impact to gross margins. Without the impact of PPA expenses, gross profit margin would be 27.5%, and operating margin would be 17.3%. On page seven, you'll find a graphical representation of our ATM P&L. The commentary we would like to reinforce here is that we believe the improvements in our business are not only related to a prolonged semiconductor cyclical uptick. We strongly believe that we have substantial systemic improvements from our combination with spill. And while cyclicality in the industry is a given, from a longer-term perspective, we believe that our margins still have further room to rise given our strengthened market position after the combination with spill. On page eight is our ATM revenue by market segment. There's not a significant change here. However, it is worth noting that our computing segment appears to be outperforming our communication segment. This appears to be driven by strong demand from high performance commuting products. On page nine, you will find our ATM revenue by service type. As we have mentioned, we expected a significant uptick in our advanced packaging services during the quarter. We expect continued strength within advanced packaging to persist through 2022. We also expect our testing revenues to outperform during 2022 after a muted 2021, which was impacted by EAR-related business adjustment. As a percentage of revenue, our wire bond revenues have declined but were flattish on an absolute dollar basis. On page 10, you can see the fourth quarter and full year results of our EMS business. The information we provide in regards to USI may differ materially from the information directly provided by our A share listed subsidiary as they report independently using Chinese GAAP. During the quarter, demand was stronger than anticipated, driven by stronger than expected demand for our SIP services. As production was slowed by component and chip shortages in its third quarter, Such operating conditions continued to persist throughout the fourth quarter. Further, in 2020, our consumer SIP business had a significantly later start as compared to the current year, 2021. We believe the combination of these two factors distorts fourth quarter year over year comparisons. And as such, we believe that comparing back half numbers may be more telling of our EMS business's performance in such situations. For our EMS business, during the fourth quarter, EMS revenues increased 33% sequentially and 3% year-over-year. As a result of component and chip shortages, this year's production cycle of certain SIP products was more evenly spread out across our third and fourth quarters. Some production will push into the first quarter of 2022. In 2020, the production cycle for some of our consumer SIP products launched later than 2021. As such, the year over year percentage increase was a bit muted. If we compare second half numbers between 2020 and 2021, we saw a 13% improvement in revenues. Our EMS gross profit was $7.1 billion, improving $1.2 billion sequentially and $0.1 billion year-over-year. The sequential gross profit improvement is the result of the seasonal ramp of our SIP-related products. The year-over-year improvement is again the reflection of comparing two manufacturing cycles at different times. Comparing second half gross profits, we saw a 7% improvement from 2020 to 2021. Gross profit margin for the EMS business unit came in at 8.7%, which is a decline of 0.9 percentage points sequentially and 0.1 percentage points year over year. The margin declines are primarily the result of product mix shifting to higher material pass-through products. Our EMS business unit's fourth quarter operating expenses were $3.5 billion, increasing $0.3 billion sequentially and flat year over year. Operating expenses increased primarily as a result of increased employee profit sharing recorded during the year end. Our EMS unit's operating expense percentage was 4.3% down 1%. percentage points sequentially and 0.2 percentage points year-over-year. The sequential decline in operating expense percentage is primarily attributable to higher revenues while containing operating expenses. Our EMS operating profit improved $0.9 billion sequentially and $0.1 billion year-over-year. The sequential improvement was primarily due to increased seasonal demand for SIP products. Our EMS operating margin was 4.4%, which is up 0.1 percentage point sequentially and is flat year over year. On a full year perspective, our EMS business, in challenging conditions, delivered another strong year. On a full year perspective, our EMS business revenues increased 17%. Gross profit increased 14%. In these challenging operating conditions characterized by wafer and component shortages, our full year gross and operating profit margins each declined by 0.2 percentage points. On page 11, you will find a graphical representation of our EMS revenue by application, with sales increasing 33% sequentially. Interpreting this chart gets a bit tricky. What is fairly straightforward to see is that our consumer segment increased by five percentage points as a result of product seasonality. Other categories generally grew in absolute dollars. However, their growths were not as pronounced as that of the consumer segment. On page 12, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents, and current financial assets. of $79.1 billion. Our total interest bearing debt was $227.2 billion. Total unused credit lines amounted to $278.8 billion. Our EBITDA for the quarter was $51.9 billion. EBITDA for the year was $136.8 billion. and our net debt to equity was 54% at the end of the year. On page 13, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the fourth quarter and US dollars totaled $472 million, of which $231 million were used in packaging operations, $160 million in test operations, $68 million in EMS operations and $13 million in interconnect material operations and others. For the full year, machinery and equipment capital expenditures were $2 billion. $1.3 billion was spent on packaging, $0.5 billion on tests, and $0.2 billion on EMS. Our ATM business continues to be constrained by substrate and wafer availability, in addition to a lack of our own manufacturing capacity. Given that we can generally put in capacity faster than our upstream foundry partners and our substrate suppliers, we can be a lot more nimble in our approach to our business. Although our smart factories do take somewhat more investment and time to build, we still believe that many of our investments are granular, which allows us to adapt quickly to market conditions. We continue to provide our EBITDA and US dollars here as a reference. The earnings related to the China site disposition are separated for better comparability. We believe that the company's EBITDA relative to our equipment capex serves as a key financial performance metric for the company. Before we move on to Dr. Tianwu and Joseph Tang's sections, I would like to inform everyone that they will make forward-looking references on a pro forma basis, removing the results of the China factory sold. As a reference, we have included an appendix to the slide deck that has a set of quarterly pro forma financial statements for the consolidated holding company and one for our ATM business unit. With that said, I pass the presentation over to Dr. Tian Wu. Dr. Wu.

Hi, everyone. I would like to give you the 2021 recap as well as the outlook for 2022. I will also touch base on the industry perspective from where we can see. First of all, 2021 was a good year. We have seen a revenue and margin improvement better than target. For example, in 21, the ATM revenue grew 26% year-over-year or 45% year-over-year, if we exclude the year-affected business. The ATM margin, gross margin was 26.5%, approaching historical peak level of 27%. ASE consolidated revenue grew 26% year-over-year. and ASE consolidated operating margin improved 3.6 percentage points versus the target that we set at the beginning of the year of 2.5 to 3%. So overall, 21 was a good year. We have seen broad-based growth in all sectors with momentum that carry over to at least 2022. For example, The 2021 wire bond revenue grew 36%. We continue to see the wire bond to be fully loaded, and we do expect wire bond revenue in 2022 will achieve double-digit growth. Even with the EAR impact, which was very significant in test business, the 2021 test revenue grew 12% year over year. We do expect a test business in 2022 without the EAR impact. The growth rate will double from the 2021 level. So we do expect the testing business to play more of an important role for our business in 2022 and beyond. Advanced packaging based on the customer's requirements we're seeing more complexity and more demand. In 2021, we have seen the advanced packaging revenue grew 23% year over year. We do expect the growth rate in 2022 to be better than that number, which is another important sign that we're migrating more mix to the testing business as well as advanced packaging business while we're maintaining the established base in Weyerbach and everything else. ATM automotive revenue grew over 60% year over year. The momentum will continue in 2022 and beyond. The good news is we do expect to achieve 1 billion automotive revenue in 2022, which will be a significant milestone for ATM business.

Let me talk about the 2022 outlook.

We do expect the revenue and margin to continue to see improvement in 2022. Our demands and forecast indicating a very strong 2022 And Joseph will talk about the specific guidance for Q1. Again, we're seeing a better than seasonal Q1 followed by our traditional pattern of quarter to quarter growth for the remainder of the year. The logic semiconductor industry without a better number, we believe will be in the five, 10% range for reference. And our ATM revenue year over year growth should be 2X of that. And we have been following this traditional pattern for at least the last 15 years. And 2022 will be of no exception. And the reason being market demand is very strong and we are seeing signs of IDM outsourcing accelerating. The pricing environment is friendly and stable with a higher mix of testing and the VEX package business and our margin, also our position, will continue to be improved. We are expanding the SIP customer portfolio, and we're happy to report that in 2022, our new SIP customers with a diversified background from all sectors, for the first time, our new SIP customers' revenue will break the half a billion mark in 2022. It's another good news. The 2022 ATM growth and operating margin should surpass historical peak levels set in 2014. Consolidated operating margin should see further improvement versus 2021. Next page, let me comment a little bit on the industry. We do see a solid outlook for year 2022. Capacity and supply constraint. Last year, I commented in Q1 timeframe that sometime in 2023, we'll see the holistic balance of the supply versus demand. Right now, we believe the capacity and supply constraint will last maybe beyond 2023. Scale, technology leadership, flexibility, and proven record. for the past two years is making AAC an indispensable manufacturing partner. And we're gaining trust, support from customers, which is signified by the long-term service agreement, as well as the design in a socket that we have been receiving for the last two years, particularly. Customer long-range service agreement are in place through 2023. We will continue to discuss, collaborate with our customer and see how do we extend this beyond as we're building additional capacity for our loyal customers. IDM outsourcing, ratio accelerating. We do see healthy growth of HPC, automotive, 5G migration, IoT, and also the expanding silicon content leading to a quite robust and market environment. So we are optimistic about a long-term prospect. I would like to comment a little bit on what ASE is doing to prepare for years beyond 2022. We have started a new round of smart factory building and infrastructure investment. As you know, building takes the longest time and the smart manufacturing environment infrastructure does take a long time to develop. In 2021, 2022, as well as in years beyond, we have launched a new wave of smart manufacturing building. The purpose of that is working with our customer. We do believe that in 2023 and beyond, there will be impending wave of wafer supply coming. In case the market demands a much higher volume of wafer and silicon devices supply, AAC should be ready for that. With that, I would like to pass to Joseph. Joseph?

Thank you. Let me start with a bit of a recap of what we did on our China sites. In fact, we actually sold AAC Inc.' 's major manufacturing sites in China, and the deal was closed on December 16, 2021. The total value of these sites that we sold, the combined enterprise value was about $1.46 billion. And as Ken mentioned earlier on, after adding the cash balance and deducting the existing liabilities or debts that we had, the total consideration was $1.33 billion. Now, the disposed sites accounted for about 7.6% of our oil overall ATM revenues in 2021 and about 4.5% of our consolidated revenues in 2021 as well. The EPS wise, it generated about a little below 80 cents, NT dollars in 2021. And the purpose of doing this transaction is really to better realign our resources and to focus on the investments in our mega sites, which is namely Spill Suzhou, to continue to address the China opportunity. In fact, in this year, we're expecting very high growth in our Suzhou sites, Spill Suzhou site. And as a result of revenue coming from the expanded customer base, mostly Chinese customers in the region. And this transaction does provide us with more cash resource for our continuing organic expansion, as well as we see the opportunities for them to make further strategic investments to enhance our overall market position. Now, with that, let me give you a bit of a first quarter outlook. Based on the current business outlook and exchange rate assumptions, Management projects overall performance for the first quarter of 2022 to be a very strong quarter to start with and with the details as follows. Now on the pro forma basis in US dollar terms, our ATM first quarter 2022 business will slightly be impacted around 4% because of the lower working days in the quarter. and also the SIP seasonality. That really implies that, aside from the SIP business, our overall ATM business continues to be running at full loading, and the momentum is continuing throughout the year. On a performance basis, our ATM first quarter 2022 gross margin should be slightly higher than our second quarter 2021 gross margin. The margin will be slightly, will be a bit lower than fourth quarter, largely because of the, first of all, of course, the lower revenue, but more so on the increase of labor costs and also depreciation as we continue to plan for the support, our overall business going forward. In terms of EMS, first quarter business level, should be similar with the quality average of a full year 2021, which follows a normal seasonality pattern. In terms of operating margin, it should be close to the average of second and third quarter 21 operating margin as we continue to run our EMS business following the seasonality pattern. Now, a bit of a comment on the Okay, and this is the guidance on the first quarter. And we will now open the floor for questions. Thank you.

If you have any question, please raise your hand. We have a question from Randy Abrams of Credit Suisse.

Randy?

Okay, yes, sorry. Okay, I'm unmuted. Okay, I wanted to ask the first question on the new view that you have further out, so extending the period of tightness in the industry beyond 2023. We have seen more CapEx announcements from the supply side, so I'm curious on your commentary on which drove the change, and then how much it's a reflection of what you're seeing supply, if that's a commentary on the front end, the foundry, the back end or substrate, or if it's a commentary on demand side, a different confidence on the demand driver.

The comment that I made was referring to a holistic supply chain line balance. What we're seeing today is the foundries are making major investment. The IDMs are making the front end investment. The OSAT industry, equipment industry, the substrate industry, lean frame, epoxy, everyone has increased the capex. But judging on the fact that the equipment delivery are still being slow, comparing to historical norm. And that typically is the first indicator that we're not back to normal yet. The second indicator is amount all of the whips. Sometimes we're waiting for age wafer. Sometimes we're waiting for 12 inch wafer for different technology nodes. And sometimes we're waiting for substrate of different technologies. Sometimes we're waiting for lead frames. So we do not see a holistic squareness all of the material equipment capacity balance versus the overall demand. Now, in 2021 timeframe, we were calculating, we believe in 23, sometime in 2023, we should see the squareness of that. But based on the last year, as was all of the conversation with our supplier and customers, now we believe that line balance on the holistic view will be beyond 2023. For example, some of the technology substrates were confident that the demand will be oversupply for a much longer than 2023.

Just as an example,

Okay, great. No, that's helpful. And the other question on the IDM, and you mentioned about the CapEx that we're seeing the investment. And a few, I mean, TI was one that talked about raising the ratio. And I thought all the time they'd mainly focused on outsourcing that, but they're mentioning the ratio. A few other IDMs are talking about actually adding capacity as well to back. And so I'm curious your comments on, Are they seeing that as a fix over the next year as they try to put in capacity? Are you seeing a different trend that's multi-year for behavior of IDM? Because some of their tone on calls sound like they want to also do more just for self-sufficiency, add some more capacity on the back end.

I'll try to be more careful in making this comment because you're asking very sensitive questions, right? Now, based on our discussion, as was news release, in general, the US-based IDM, they will declare they will reduce their outsourcing. But let's put that comment in a separate category. Let's focus on everybody else. In all other geography, no one comments on increasing the internal, or everyone agree in public a specific milestone to talk about increasing outsourcing ratio. But what that is telling us is as the foundry in the OSAP world is gaining technology positioning, I won't even use the word leadership, but you can make that judgment yourself. The economic scale and in the last two years, the foundry world has clearly demonstrated a flexibility and agility that the IDM cannot match. Otherwise, we will not have the automotive issues until today. So if you judge all of the facts and you fast forward, you look at the total dollar amount of CapEx of all company, IDM included, what is the percentage they want to put it into the design, service, as was front end? What is the percentage you want to allocate to the backend? It is not difficult to go figure out because the competition is a multi-dimensional. You do a parametric study in the OSEP world with the scale, with the fungibility, agility, and flexibility, and the supply chain or the cost, in fact, and the economic benefit. How do you judge upon the outsourcing ratio? Now, the U.S. base, we do understand politically and also incentive-wise, there are reasons. But at the end of the world, this world is competing. Semiconductor industry is competing on efficiency. So that's why we have a solid trend, socket complexity that we're leveraging the foundry world of technology and we're trying to position ASE as well as our partner and our customer. And I think the outsourcing ratio absolutely is increasing. You can use the same argument, go back to 25 or 30 years ago, how does the outsourcing started? And today in the outsourcing world, much stronger, much more flexible, and even politically, it makes a whole lot more sense. So I think the outsourcing ratio per se, it will increase. But geographically, where do you do the manufacturing? How do you manage the logistic route? That can be discussed, right? I mean, it's a long answer, but I have to answer this carefully because it's very politically sensitive. But I feel obligated to give you my best perspective explaining the difference between the declaration or the sentiment and the reality.

Okay. No, and I appreciate that. And I feel in their comments, they're mentioning back end, there's an efficiency to the clusters in Asia. A question on the CapEx. If you could give a sense now, also with the growth outlook and confidence, the view relative to it. I think last year it was about $2 billion equipment CapEx. How you're seeing that? And then it sounds like the mix, it's an instant test with bonder decent, but coming down from last year.

Well, this year the CapEx dollar amount will be either equal or more than $2 billion. And we will have a different mix, you know, maybe more towards the testing, maybe more towards the advanced technology. But we have the way for how the years evolved. And then we'll just move dynamically. But the comment that I was making is, in addition to the equipment CapEx, we're spending more on the building and the smart factory and the infrastructure of CapEx. And that number, we normally don't report it. Now, the reason why we're doing that is, you know, it shows our aspiration as far as our customers' collective confidence that they really would like us to get ready. In case 2023, the market demand doesn't come down and there's a surge of wafer and the line balance is better, you will have a lot of back-end demand. And then the question is, you know, who will have the most readiness, flexibility, and also the willingness to support that search.

Okay. And the last one, it's a couple kind of housekeeping, but a few metrics. One is the wire bond and tester. If you could find out how many actually sold with the venture, because it did drop. So trying to see how many you added. And then a couple others, I was curious, since you gave us the 2022 for SIP and auto, if you could give the base for 2021. And then the other housekeeping, because of the one-time gain, how do you see the payout because you have that sale in terms of the dividend?

Let me comment on a few questions I'll pass the floor to Joseph for the payout. The automotive in 21, the basis was 700 million. ATM. ATM, sorry, ATM. Now the wire bonder, the roughly, I think we add 4,000 wire bonder in 21.

No, I'm sorry.

Let me give you the- Joseph, why don't you talk about it?

Yeah, at the end of... fourth quarter, our total wire bound account was about 25,800. And that number is actually reduced from third quarter, given the fact that we sold the four factory or the China sites. And the number of boundaries that we sold is over 4,000 units, 4,221 to be exact. And in terms of testers, our total count at the end of fourth quarter is 4,890 testers. And in the quarter, along with the sale of the sites, the testers that we sold out is about 1,522 units of testers that we sold out.

Okay, and then the last one was the, or last two, the SIP, I think 500 million, if you have what the SIP other customers was, and then also your view on the payout, just factoring the big one-time gain.

I'm sorry? The SIP revenue will break the 500 million, the SIP. in 2022. Okay.

And what was that in 2021?

In 2021, I think the revenue from new customers was about $340 million. Okay. And the payout? In terms of the dividend payout, we do not plan to have a special dividend payout. I think for this year, the dividend will continue to be paid out from the earnings that we made for the year from operation. Okay. And the payout rate will remain at about 60 to 65%.

Okay, and that includes the gain. You'll pay out a proportion, even on the additional amount.

No, that does not include the special gain that we get from the transaction. Okay. It will be paid off from the operational earnings that we made. Okay, great. Thanks a lot, and congratulations.

Thank you.

Thank you. If you have questions to ask, please keep two questions at a time. Our next question is from Goku Hariharan of JP Morgan.

Yeah, hi.

Good afternoon and congrats on the good results. A couple of questions from my side. I think obviously second half 2020 and 2021, we have seen some degree of price adjustment especially in the older technologies like wire bonding, but also in some of the advanced packaging. If we think about the roughly 10 to 20% pro forma growth that you're guiding for, could we talk a little bit about how much of that is roughly units? How much of that is roughly pricing? Are we expecting any further adjustments in price? Or we think pricing is basically going to be largely settled and kind of stable from here on?

Well, I think it's very, very difficult to break it out by the volume growth as well as the price increases. I think the so-called pricing adjustment is really a plus through many different ways of adjusting our pricing, including some from expediting fees, some from discontinuing discounts and longer-term agreements and so on and so forth. There are many ways of dealing with the pricing issue. I think the bulk of the growth will still come from the volume increase that we have and also the different product mix that we generated in the year. But in terms of overall pricing environment, I think 2022 will continue to be what we call the pricing-friendly year for us. And at this point, we're seeing very, very stable pricing. And, you know, what we meant by friendly pricing is really a pricing environment that can help us better protect and improve our returns.

Understood. Thank you. So if we look at CapEx, now I think we're expecting 2 billion or more CapEx in 2022, higher than maybe middle of last year, given the increased confidence in the market. We're seeing that some of your Chinese peers are starting to invest even further, especially for their outside China capacity by like 40 to 50% increase in CapEx. And how do we think about competitive competition with some of these China companies, especially their competition in advanced packaging? Are we starting to see more kind of competition for future bids? Obviously, currently things are clearly tied. Around a year back, Dr. Vu, you had mentioned that some of the China capacity or China market related demand is starting to become a little bit more segregated and you're kind of not really competing in the same markets. Is that still the case or are we starting to see that there is still some linkage between what we are seeing in China OSATs because some of those companies are also seeing some utilization?

I think it is natural for our China competitor under the support of the industrial market, as well as the government, to build up capacity. Because the midterm or even the short-term objective is to recreate a self-sufficient ecosystem in China, per se. So many of the equipment as well as the capacity build up in China, they're mainly target at the internal consumption in China. I commented on the parallel universe. I think we're seeing the beginning of that. For example, our long range forecast from customers primarily comes from the non-China based. The technology requirement is different. The end market, the system is different. Of course, there are overlaps into the China, the consumer market, but there are a lot of market that we have no access to. And therefore, we're not privileged to understand some of the long range capacity requirement. We're monitoring the situation closely. For example, we do understand some of our OSAT competitor continue to order some equipment because we do have a total, the bird's eye view on where the equipments are going. However, at this point in time, We don't believe the China competitor based on technology as was access to the design of our key customer. We don't believe that the competition is anywhere near. But we are mindful of that. So far, we think we do have a clear leadership and also a clear firewall. not just the ASE, but ASE customer base versus the China base.

All right. One last question from my side. When you talk about under supply or supply-demand not coming into balance into probably 2023 and beyond, what is your underlying industry growth expectation through this period? Given, I think, in 2022 itself, we are expecting to see the logic semi-growth normalizing back to the 5% to 10% kind of growth rate compared to like the 20 plus percent growth or 15, 20% growth that we saw last year.

I mean, we're the last person to be able to tell you what the overall stomach and doctor can do. I mean, we don't know any better. We always use 5% to 10% like everybody else. And I think there is a demand. The COVID is still very much in place. And we are seeing the continuation of 5G migration. And the PC number, you know, they went up and it did not have the kind of phenomenal growth. However, it's not coming down. And if you want to order any auto today, your waiting time is six to nine months. So we clearly know at the channel inventory system manufacturers, we do not have enough components to ship what the consumer wants. And that's a fact. It doesn't matter how we project the macro economy and all of the potential, but in the market, we know we're not shipping enough components. We're managing the squareness of the line balance. But today, the fact is we are short of wafer, we're short of substrate, we're short of leaf frame. For different customer, we're short of different things. Under a very complex logistics and the line balance maneuver, I think all of us are being trained on how do we grow our business and satisfy the end customer demand to the best of our capability. Along the way, you will have the expedite fee, you will have a commoditized surcharge, you have all kinds of things. And that's why it's adding to the pricing increase. So overall, we think 2022, we need to struggle for another year. And the things are getting better. However, we're not seeing a line balance by far. I know we don't believe in 2023, you will see that line balance. Of course, the end market, if there's any black swan or any kind of major impact that we won't be able to see. But based on all of our customers, the short-term and long-range forecast, the design pipeline, and we look at the end market, the electrical vehicle, IoT, and smart manufacturing demand, we're quite optimistic, which is why Joseph and myself, we're giving all of you a solid, confident 2022 outlook, And we're trying to extend that a little bit beyond 2023. And we're building additional footprint in small factory just in case 2023 and 2024, 29 new fabs, waivers are coming out. And if they need a back-end partner, at least we are, you know, we have been inspired in the last few years to make investment just to get ready for the next wave.

I think if I may comment, I think from a higher level perspective, a more linear kind of a growth pattern actually helps us in terms of managing our overall business. It gives us better planning and also during the last year, I think the whole industry is scrambling and there's a lot of that needs to break through and it makes planning, overall planning, a very difficult task. I think this more linear type of growth does help the industry as a whole. And it certainly helps in outsourcing as well.

Understood.

Thank you very much. Thank you.

Our next question is from Mr. Bruce Liu. Bruce. Please go ahead.

Hello, can you hear me?

Yes.

Okay, great. Thank you for taking my question and congrats for the great result. I think one thing management mentioned that strong growth in 2022. I just want to double check, is it like an apple to apple comparison or even you exclude your divestment in China and you still can generate like 2x of the semi-growth? But the question I'm trying to ask here, another one is that you suggest that you're testing business growth and, you know, it's substantially higher than your wire bonding growth. Is that for a company specific issue or is that for the market share issue? Or do you really see a testing dollar content per devices is going up?

Well, let me comment on the testing business. The testing business have two components to it. The first one is we would like to do turnkey. And as the packaging becomes more complex, the testing naturally becomes proportionately more complex. And in that scenario, it makes more sense for AASE to handle the packaging and the testing from design qualification all the way to manufacturing and ramp up. Now under that understanding, strategically AASE is increasing our appetite and aspiration to improve our testing business percentage. So I think I pretty much covered your question. That's that. Now, in terms of the overall growth, Performa versus the China side, I will let Joseph answer that.

Yeah, I think the growth that we were mentioning is really an apple-to-apple comparison, which means that we are based on the – for last year's numbers, we were based on the Performa number that we were giving, which excludes the China side that we sold out.

So, Tian, to follow up that, we should expect stronger growth for the final test versus wafer test, and we should see the testing business growth will be faster than the overall ATM business growth, even for the coming years. Is that the right assumption?

All right, I'm not going to get into the final test of wafer SWAR. How do we do the breakdown? The overall testing business will grow at a faster than the corporate average, yes.

Even for the following years.

Correct.

That's right. That's great. The second thing is that I think there are several counter traditional wisdom thing at this moment. Maybe, you know, Tim can help us to understand it, right? We do see that, you know, end demand fluctuation, right? Some of the end demand is not as good as expected. And we do see some EMS, overall inventory is going up. We also see your competitor was siding for welfare bank increase. However, we do not see like meaningful orders cut in the foundry side. We do see, you know, AAC, at least your ATM business, is still doing very, very good. So where is the discrepancy? And, you know, is that more the company specific, like AAC is getting some market share? Or at the end of the day, the fundamental demand is still very strong and, you know, help us to understand the discrepancy.

Okay. Well, I think you're talking about a short-term disconnect because in the marketplace, for example, you might see one area specifically they're complaining about the inventory, also the order drop. And you have some supplier to talk about specifically they're seeing slowdown in particular area. But at the same time, you know, you have different company serving a different segment, and then they will use the idle capacity from some of the idle sector, and then they will support the higher growth. So I think that's the nature of the outsourcing industry. Now, one of the key thing that we have is we have 400 customers. Some customers are growing very, very fast. And some of the customer are growing in step function, like a 50%, 100% a year. So how do you support this kind of customer and you have to have fungible capacity? So in the foundry world, there's some fungibility. In the assembly world, the fungibility is quite good. And therefore, we're right in between the foundry and the materials. So our job is to make sure we will support the high growth rate in that particular timeframe to the best of what we can do. We do see some of our customer are having a slow down and they're going through inventory adjustment. But this is the kind of thing that we do for the last 30 years. A localized slow down and seasonality for different customer and different sector is on a rotational basis. It's very normal and very healthy. As a matter of fact, industry needs that break. You know, if you look at 2020, the second half in 2021, we've been running straight line, going nuts. So I think it's very healthy for the industry to go through some localized adjustment. And that's what we're seeing. And we're giving you a solid outlook because the overall forecast is very strong. I will not comment into which company or which sector, but overall, we have to manage the logistics, the line balance, and the fungibility between all requirements. And I think the ASE has clearly demonstrated over the last few years that we're very good at that. And this is particularly appealing to IDMs, automotive, as well as some of the very high growth, like high performance computing. They really would like to have that flexibility.

I think the overall industry is going to continue to grow because of the increasing IC contents as well as IC applications. So I think the overall market will continue to grow. And in particular, I think we are very confident that we are gaining market share and we are taking the lion's share of the increasing IDM outsourcing. And, you know, with all the volume growth and all the industry trends that work into our favor, I think that our growth is we're gonna see a very healthy growth pattern in the foreseeable future for us.

And just one additional comment I feel obligated to explain is the new product design cycle takes two to three years. So for example, if we're not pre-positioning for capacity and technology ahead of the curve, the design-in will not occur. But once you have the technology and the infrastructure, the early stage, then the designs start coming in. Then you start developing the volume. I think we're all very used to it. So we are sitting in 2022. If we believe 2023 and 2024, there's going to be a recession. Let's just say if we believe that, and you publicly announce that we're not investing in CAPAC, we're not building infrastructure, then your customer will have concern. What is your aspiration? And what is your view and appetite for much longer term? So what helped us greatly is ask yourself the question, in the next five to 10 years, how do you see semiconductor? Going up in total content or going down in total content? Everyone that I talked to believes in the next decade, semiconductor will provide more efficiency to the world. So it is going up. Now, if you see that, then you ask yourself, well, how about the next five years? And people move beyond the impending wave of semiconductor, of the wafer in 2023, they believe the next five years is still good. If you believe in that, then the infrastructure investment, the capacity investment to us makes perfect business sense. Then you start asking, what is your service, agreement, pricing, margin? How do you do granularity with each one of your customer? And then that's what the management do. You do long-term, mid-term, as well as quarter to quarter report. So I think there's a lot of disconnect between the mid to very, very short term. But that's why when we talk about our view, our customer's view, sometimes are distinct, different from the analyst's view. So I'm just trying to offer you my perspective on the disconnect. I don't think there's a disconnect, but I think the timing difference between how, when we talk about things, we don't talk about quarter. We talk about three years, design cycle, sector growth, content growth, electrical vehicle, autonomous driving, What kind of infrastructure do you need to have in place? So in five to 10 years time, we can start port, park all of the design with you, expect the efficiency and the ASP for the kind of volume that the world needs. So I think the Taiwan and the ASC as a member of the cluster, we understand that obligation. That's why we're building technology and economic scale And all of the smart factory, the light out factory, we're developing all of this just to receive the next five, 10 years of different waves of semiconductor.

Oh, thank you. I think the disconnect is actually pretty big between the investors and what industry we're seeing. So I think thanks again for the explanation. And then one last quick question from me is that We do see increasing new customers, new revenue contribution from the SIP business. Do we expect a better, much better profitability moving forward, given that the newer customer or newer projects?

I'll give you the direction. The direction is yes. You know, with a diversified portfolio and then the sharing of IP technology and equipment set. I mean, that was the whole idea of building a strong base of SIP and then offer that library and the expertise to other customer. I mean, that's the whole idea of foundry and outsourcing. And so the answer is yes.

Thank you.

I'll go back to the two. Thanks.

Thank you. Next question is from Roland Xu of Citigroup.

Hi, good afternoon.

Hi, Tian. I know you don't want to talk about for this quarterly view, but I still have a problem, a question on this first quarter ICAT and guidance. So look at your ICAT and revenue guidance. You guided the first quarter to decline by 4% quote-on-quote. However, if you look at, you know, of the foundries that have been reported, they all guide first quarter revenue to up sequentially. And also, some of your key customers also reported sequential up first quarter. So, for your ICATN revenue to decline by 4% in first quarter, again, is there any disconnection between your ICATN revenue with, you know, foundry or your key customers, first quarter guidance. Thanks.

By the way, there is no disconnect. I'll offer you two parameters to think about it. First of all, there is a time lapse, typically between the six weeks time. There is a time lapse between wafer to assembly. Therefore, okay, that will, explains some of it. Now, the second comment, which Joseph already made it, our assembly and tasks continue to run at a full run rate. You know, we have like two fewer days. So that's like a two percentage sum. And then you do have seasonality between one of our largest customer on the SIV shipment. So when you look at revenue, they're reporting the whatever they have they're selling for inventory or they're reporting the revenue of the last quarter. So our key customer revenue versus our shipment to them, you're off by, you know, one or one and a half quarter. Foundry to assembly, you're typically off by like a quarter. I'm not sure that explained it, but, you know, that's what we see.

Yeah. I agree, but then, you know, the foundry and your customer also have, you know, two fewer days, working days in first quarter. So is there any business, you know, from you have been gapped by or constrained by the component shortage in first quarter?

I will not comment on why the foundry is growing. And yes, we have component shortage that we already talked about it. We have a variety of line balance issue, which I will not comment more on that.

Okay, thanks. And my second question is, since Tian, you are on this call. Can you give us more colors on your progress for your 5G millimeter wave smart factory and also on the light-out factory? And how did they contribute to your profitability or efficiencies improvement last year? And what's the target for this year?

Thanks. Last year, we talked about our target was to build And we're happy to report that we actually built 25 and two of the factory was delayed because we couldn't get the equipment in time. Well, anyway, this year we will have a new target for 37. So we continue to add 10 light-out factories per year, maybe accelerating over time based on the customer volume. How do we aggregate the volume into smart factories? In terms of the overall efficiency, I think you can see that from overall operating margin improvement. And that to us, continue to serve two purposes. First is efficiency that goes to the margin. What is more important is I talk about the ramp of the SIP and also automotive. Our automotive customer per se, they are extremely delighted to have LIDAR factory where you document our data of every single process station, every single process. and then it demonstrate the unparalleled quality as well as traceability. I actually talked about this a few years ago. I'm not sure we all remember that. One of the key thing going forward is in the heterogeneous integration world, things will become more complicated. The liability will become bigger. You really have to have much better granularity as well as traceability. And without the light-out factory of every single process, you will not be able to demonstrate that. We have demonstrated a 100% automated factory versus a 90% automated factory. They are different in nature. A lot of people couldn't comprehend that, but we talked to the automotive guys, you will understand. So in the heterogeneous integration going forward as the microsystem become more smaller, more difficult, more complex, and then the material set become more intricately involved. And I think the LIDAR factory will play a great role in our engagement with our key customer in the complex design arena.

Okay, thanks. Just a follow-up for the operating margin. So last year, you have the target to grow operating margin by 2.5% to 3% last year, and you end up, you know, have a better 3.6% improvement last year. So how about this year? Do you have any operating margin improvement target for this year?

We don't have exactly a target per se, but what I can say is we'll continue to see margin improvement both on the sequential or quarterly basis as well as on an annual basis. We'll continue to see our margin both at the growth and the operating margin level to improve for the year.

Okay. Okay. Thanks.

Thank you. Our next question is from Rick Hsu of Daiwa Security.

Hi, can you guys hear me?

Yes.

Okay, yeah, just one quick housekeeping question from me, maybe to Joseph. What's your utilization rate across the board of your wire-bound testing and free chip for Q4 last year and this year, Q1 this year? Thank you.

Q4, our overall assembly utilization rate is about 85%, and test above 80%. I think it's going to be very similar in Q1 as well. Packaging will be 80 to 85, and tests will continue to be above 80.

Okay, just one quick follow-up. When you say about 4% impact to your ICATM sales in Q1 this year, that also has taken account of the capacity loss because of your China disposal, right? So it's not really an Apple-to-Apple comparison, right? I don't quite get your question. I'm sorry. Can you repeat that? Okay. Because your ATM revenue in Q4 last year, that was still including the China operation. But starting from Q1 this year.

When we say reduced by 4%, it's really apple to apple. That's quarter four, we excluded the China operation.

I see. All right. Thank you so much.

Thank you.

Next question from Zihao of China Renaissance.

Zihao. Oh, hello, hello. Yeah, thanks.

Good afternoon, gentlemen. Two questions from me. The first one, you mentioned that you are seeing more IDM outsourcing this year. Is it fair to assume that IDMs nowadays are turning more receptive to turn key outsourcing to us? Because in the past, they tend to only outsource the assembly part.

When I talk about IDM outsourcing, I mainly comment based on the fact from the last two years As you know, automotive is the most difficult one to outsource simply because the automotive manufacturers and tier one, and they're not flexible at all. But we all know this. Now, in the last two years, because of the supply chain disconnect, people are more accepting alternative routes, different material set, different suppliers. and different qualification standard. So I think the COVID-19 has done great for the outsourcing industry is it broke that constraint. As a result of that, if the automotive end customers and the tier one are directly connecting to the outsourcing industry, the IDM becomes one of the acceptable alternatives as well as the outsourcing industry. So by that standard, it is good long-term that the assembly and test will increase the outsourcing ratio from the IDMs. When you talk about fabulous, it's meaningless because the fabulous has been outsourcing all of it. But IDM, we're seeing a clear trend, not only in the automotive, you actually have the same issue even with the computing. And so we are seeing the outsourcing acceleration. Of course, I'm not addressing the location of the manufacturer, which is a totally separate, the rationale, not purely based on economics.

The second question, I'll skip to that. Do you think OSET or ASE in specific will play a meaningful role in the chiplet market? And if that's the case, in what areas and when we should see the contribution to us?

Well, I do see in the future, ASE will continue to play an important role in the outsourcing market, whichever segment. I think you talk about the chiplet, The, I mean, the chiplet that without naming, there's only a handful of customers are dealing with the chiplet architecture. And I believe all of them have more willingness to do outsourcing. And then the question is for the back end of the chiplet, should I go to Foundry or should I go to the OSAT? But if you have that view, I would advise you to have a bigger, longer term view.

That's why I'm asking your opinion.

Outsourcing is one trend, that's binary. Once you outsourced, how do you partition the outsourced volume, that's a totally separate question. I think having the binary from zero to one is a whole lot more meaningful than how do you partition the one afterwards. And afterwards, you have to look at technology, you have to look at the overall presence, logistics, business model, whether round is more meaningful or square is more meaningful. And then you get into an argumental, the arena, which I'm not ready to discuss online. But I believe outsourcing per se is very meaningful. And once the customer outsourced, then becomes a competition. Who can ramp up faster? Who can manage the cost better? Who will have better service and the less constrained. I mean, the outsourcing, we've been doing this for 40 years. We understand how it works. Yeah.

That's true. Yeah. I have a question maybe to Joseph. Can you feel about the complex breakdown between assembly and test this year? Very rough number with you.

I think the number, Joseph, yeah, why don't you?

Yeah, this year, I think we will start to increase our investment in tests. So from a very rough sketch, I think the, this year we're looking at about, around 50% of the campus, the equivalent campus will be assembly, about 30 in tests. And, you know, at EMS, we're also, because of the new projects that we're taking up, I think the percentage will increase to about 15% and the rest of the material.

All right. Great. Thank you very much. Happy Chinese New Year.

We have one last question, online question from Mr. Charlie Chen of Morgan Stanley. I'm going to read it for the management. Any observation for the cheap inventory trend in the supply chain? Will companies ATM utilization stays high through the year? How about the pricing and gross margin trend? Thanks.

As we mentioned, I think we're still expecting a very strong year this year. I think the loading will be kept at a very high level. And in terms of pricing, it's still a very pricing-friendly year for us. And as I mentioned earlier on, in terms of our margin, we're expecting sequential margin improvement on a quality basis. And for the whole year, I think there will be further improvement in terms of both our growth and operating margins. comparing to last year?

Chip inventory.

In terms of the chip inventory, we have seen some reports from some customers, but not all of the reports. We think the chip inventory is low overall. Of course, the chip inventory can be high in the very highly localized application sectors.

All right, that's all we want to share. Thank you. There is no more questions. Thank you everyone for joining us this quarter.

See you next quarter. Thank you.