ASE Technology Holding Co., Ltd. American Depositary Shares (each representing Two Common Shares)

Hello, I am Ken Sheng, the Head of Investor Relations for ASA Technology Holdings. Welcome to our fourth quarter and full year 2023 earnings release. Thank you for attending today. Please refer to our safe harbor notice on page to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in New Taiwan Dollars unless otherwise indicated. As a Taiwan-based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I am joined today by Joseph Tong, our CFO, and Dr. Tian Wu, our COO. For today's presentation, I will first be going over the financial results. Dr. Wu will then give a market update and the 2024 key points. Joseph will then give the official company guidance. Both Joseph and Tien will then be available to take your questions during the Q&A session that follows. During the Q&A session, each caller will be limited to two questions at a time, but may return to the queue for further questions. As per our expectations, the overall demand environment for our services remained sluggish during the fourth quarter. However, there were pockets of stronger performers within the devices we serve. But, by and large, our customers remained conservative in their ordering patterns. In general, higher-end, leading-edge services seemed to be faring better than legacy services, but stronger, wide-breath volumes remained elusive. For our ATM business, revenues were on the higher end of our expectations. During the quarter, key equipment utilization rates were still relatively low, averaging out between the low and mid-60s. For our EMS business, in the fourth quarter, revenues increased sequentially in line with our expectations. This was driven by customers' new devices and growth in computing and automotive segments. For the year as a whole, the seasonal peak was a bit later in the year. With that, please turn to page 3 where you will find our fourth quarter consolidated results. For the fourth quarter, we recorded fully diluted EPS of $2.13 and basic EPS of $2.18. Consolidated net revenues increased 4% sequentially and declined 10% year-over-year. We had a gross profit of $25.8 billion with a gross margin of 16%. Our gross margin declined by 0.2 percentage points sequentially and declined by 3.2 percentage points year over year. The sequential decline in margin is principally due to higher EMS business mix and slightly lower ATM business loading during the quarter. The annual decline in gross margin is principally the result of lower loading during the current downturn. Our operating expenses increased by 0.4 billion sequentially and declined by 0.4 billion annually. The sequential increase in operating expenses are primarily due to higher compensation expenses, specifically higher bonuses due to stronger goal achievement and ESOP expenses. The year-over-year decline was primarily attributable to lower bonus and profit sharing expenses across the company. Our operating expense percentage declined 0.1 percentage points sequentially and increased 0.6 percentage points year-over-year to 8.7%. The operating expense percentage changes were primarily related to lower operating leverage in a downturn environment. Operating profit was $11.8 billion up $0.4 billion sequentially and down $8 billion year-over-year. Operating margins stayed flat at 7.4% sequentially and declined 3.7 percentage points year-over-year. During the quarter, we had a net non-operating gain of $0.6 billion. Our non-operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates, and other non-operating income offset in part by net interest expense of $1.3 billion. Tax expense for the quarter was $2.5 billion. Our effective tax rate for the quarter was 19.9%. Net income for the quarter was $9.4 billion representing an increase of $0.6 billion sequentially and a decline of $6.3 billion year-over-year. The NT dollar depreciated 1.5% against the US dollar sequentially during the fourth quarter and 1.8% annually. From both a sequential and year-over-year perspective, we estimate the NT dollar depreciation had a 0.5 percentage point positive impact to the company's gross and operating margins. 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 $26.7 billion with a 16.6% gross margin. Operating profit would be $13 billion with an operating margin of 8.1%. Net profit would be $10.5 billion with a net margin of 6.6%. Basic EPS excluding PPA expenses would be $2.45. Please refer to page 4. Here you will find the 2023 consolidated full year result versus 2022 full year results. Fully diluted EPS for the year was $7.18, while basic EPS was $7.39. For 2023, consolidated net revenues declined 13% as compared with 2022. ATM declined 15% while EMS revenue declined 11% annually. Gross profit for the year was $91.8 billion, declining $43.2 billion year-over-year or by 32%. In 2023, our consolidated gross margin declined 4.3 percentage points to 15.8%, principally as a result of the electronics industry downturn for both our ATM and EMS businesses. Operating expenses declined 3.3 billion for the year and came in at 51.4 billion. Given the lower operating leverage during the downturn, our operating expense percentage increased by 0.6% to 8.8% for the year. Operating profit for the year was $40.3 billion, for the year declining $39.8 billion. Operating margin for the year was 6.9%, representing a decline of 5.1 percentage points from 2022. We recorded a net non-operating gain of $2.3 billion for the year, including a net interest expense of $4.7 billion. Most of the non-operating gains were associated with our foreign currency hedging activities. Total tax expense was $9 billion. The effective tax rate for the year was 21.2%. We believe our ongoing effective tax rate for the coming year to be about 20.5%. Net income declined by 49% to 31.7 billion. On a full year basis, we estimate that the depreciating NT dollar had a positive 1.3 percentage point impact to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 16.4%. Our operating margin would be 7.7%. Our basic EPS would be $8.46. It's worth noting that despite the prolonged correction lasting throughout the entirety of 2023, our $7.18 EPS for 2023 represents the third highest EPS the company has historically delivered. Only 2021 and 2022 COVID-driven demand years had higher EPS. On page 5 is a graphical presentation of our consolidated financial performance. On page 6 is our ATM P&L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the fourth quarter 2023, revenues for our ATM business were $82 billion, down $1.7 billion from the previous quarter, and down $12.3 billion from the same period last year. This represents a 2% decline sequentially and a 13% decline annually. Gross profit for our ATM business was $19.2 billion, up $0.6 billion sequentially, and down $7 billion year over year. Gross profit margin for our ATM business was 23.4%, up 1.2 percentage points sequentially, and down 4.4 percentage points year over year. Gross margin was higher than our original expectations. The sequential margin improvement was the result of product mix and the end of summer utility rates. The annual margin decline is primarily the result of lower loading during the current downturn. During the fourth quarter, operating expenses were $10 billion, up $0.2 billion sequentially and down $0.4 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher labor-based expenses. The annual operating expense decline was driven primarily by lower profit sharing and bonus expenses. Our operating expense percentage for the quarter was 12.2%, up 0.5 percentage points sequentially, and up 1.2 percentage points annually. Sequential operating expense percentage increased as a result of higher compensation related expenses. The annual increase was due to lower operating leverage. During the fourth quarter, operating profit was $9.2 billion, representing an increase of $0.4 billion quarter-over-quarter and a decline of $6.6 billion year-over-year. Operating margin was 11.2%, improving 0.7 percentage points sequentially and declining 5.5 percentage points year-over-year. For foreign exchange, we estimate the NT to US dollar exchange rate had a positive 0.7 percentage point impact on our ATM sequential margins and a positive 0.9 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.5%, and operating profit margin would be 12.6%. On page seven, we have our ATM full year P&L. 2023 revenues for our ATM business declined by 15%, with our packaging and test businesses down 16% and 11% respectively. Gross profit for the year declined 35% to $68.7 billion. Gross margin was 21.8%, down 6.7 percentage points, primarily as a result of the prolonged correction. Our operating expense percentage increased 1.1 percentage points to 11.7%. The increase was primarily the result of lower economies of scale. Operating profit declined 52% to $31.8 billion, with operating margin declining 7.8 percentage points to 10.1%. For foreign exchange, on a full year basis, we estimate that the depreciating NT dollar had a 2.4 percentage point impact on margins. Without the impact of PPA expenses, gross profit margin would be 22.9% and operating margin would be 11.5%. Certainly, on its surface, the full year comparative results appear to be somewhat unappetizing. But given the breadth and severity of the industry downturn during 2023 and the history of even more unappetizing results during previously even lesser downturns, we believe this annual performance on its whole shows a reset in our ongoing ATM profitability structure. On page eight, you'll find a graphical representation of our ATM P&L. This shows the long protracted downturn that we are slowly coming out of. On page nine is our ATM revenue by three C market segments. Our communications application took its seasonally larger position in the fourth quarter. Our computing segment dropped from the previous quarter, but still remains a point above historical levels. On page 10, you will find our ATM revenue by service type. We have seen a higher revenue mix of advanced packaging and testing business in the back half of 2023 versus the first half of the year. During the coming years, we expect a higher growth rate from these two segments given the increased complexity and content in newer generations of devices. On page 11, you can see the fourth quarter and full year results of our EMS business. During the quarter, EMS revenues were $79.2 billion, improving $8.2 billion or 12% sequentially, and declining $4.8 billion or 6% year-over-year. The sequential revenue increase is primarily attributable to a slightly later than seasonal peak to our EMS business, while the year-over-year revenue decline is primarily due to the broad-based soft electronics demand environment. Sequentially, our EMS business's gross margin declined 0.7 percentage points to 8.4%, while our operating margin declined 0.4 percentage points to 3.5%. The operating margin decline was driven primarily by product mix. Our EMS fourth quarter operating profit was $2.8 billion, flat sequentially and down $1.2 billion annually. From a full year perspective, our EMS business declined $33.7 billion or 11%. Full year gross and operating profit declined by $5.7 billion and $5 billion respectively. full-year gross and operating profit margins decline 0.9 and 1.3 percentage points, respectively. Generally, the full-year declines in our EMS business are the result of the soft electronics market leading to lower operating leverage. On page 12, you will find a graphical representation of our EMS revenue by application. The shifts here overall were generally due to product timing. Relative to previous years, some products were earlier while others were later in accordance with customer requests. Further, our computing revenues were also higher driven by stronger networking, server, and general restocking revenues. On page 13, you will find key line items from our balance sheet. At the end of the fourth quarter, we had cash, cash equivalents, and current financial assets of $72 billion. Our total interest bearing debt was down $27.5 billion to $191.7 billion. Total unused credit lines amounted to $373.8 billion. Our EBITDA for the quarter was $28.6 billion, while our EBITDA for the year was $106 billion. Our net debt to equity this quarter was down to $0.38. On page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the fourth quarter and U.S. dollars totaled $234 million, of which $130 million were used in packaging operations, $76 million in testing operations, $21 million in EMS operations, and $7 million in interconnect material operations and others. Machinery and equipment capital expenditures for the full year of 2023 in U.S. dollars totaled $914 million, of which $460 million were used in packaging operations, $314 million in testing operations, $114 million in EMS operations, and $26 million in interconnect material operations and others. Current quarter EBITDA of $0.9 billion continues to outpace our equipment capital expenditures of $0.2 billion. At this point, I would like to hand the presentation off to Dr. Tianwu. Dr. Wu?

Hi, everyone. This is Tianwu. Year 2024 will be a year of recovery. In the last few years, there has been many changes. So I think it is appropriate for me to give you a market update, take a snapshot of what we see today and how ASE is competing in this new environment before I go to the year 2024 full year outlook. Let me talk about the semiconductor landscape. As you know, the semi-organization and many analysts has been talking about one trillion industry target by year 2030, we believe that the industry is likely to reach 1 trillion revenue target in the next decade. It can be 30, it can be 31, 32, 33, but with high confidence, we think the revenue will be 1 trillion mark in the next decade, driven by AI, robotics, EV, and all of the new applications. The industry has a clear understanding about our responsibility in net zero, ESG, circular economy, as was recycling throughout the whole supply chain. As a matter of fact, ASE has been putting a lot of endeavor in this area. Industry is facing challenges geopolitical tensions, regionalization, market bifurcation. And with all of this new effect, it will be at a cost. Also the reduced scale. Those are new variables that industry need to learn how to manage. Industry will have a few things we need to do. First, industry has to propose more innovations with higher value. I think AI is a perfect example in that regard. Structural improvement of efficiency and cost. Everyone, the whole supply chain, is putting a lot of effort in doing that. Also, talent. We need to align talent and workforce with the new complexities of doing business. With that, I would like to turn to the next page. How do we see ASE competing in this new environment? So let me list a few competitive advantages, and this is based on the feedback from all of our customers, as well as the internal discussion. The first competitive advantage is technology, and here, I'm splitting the technology content into four large sector. Let me talk about the high-performance computing or the AI arena. In that arena, I think the Taiwan ecosystem with foundry, with design companies, as well as the whole supply chain becomes very critical. And ASE in this regard, we're in the center of the Taiwan ecosystem. Also, specifically for AI and HPC, we do have the assembly and packaging and testing technology leadership. On the SIP, no doubt in the last 10 years, AES has demonstrated clear leadership in heterogeneous integration, as well as embedded devices. In the optical, we are slowly revealing our endeavor with all of our key customer in silicon photonics, as well as co-packaged optics. We believe that will be the next paradigm shift, which will mark a new growth spur for the whole semiconductor industry, if that becomes a reality. And the last one is automation. ASE has been working on fully automated light-out factory, including software development, data collection, as well as design ecosystem, including collaboration with designers as well as customers. So we believe this full area will mark a strong competitive advantage for ASE in this new environment where the higher value of innovation becomes a key competitive requirement. The next one will be scale efficiencies. From the financial performance in the up cycle, also in the down cycle, we can pretty much see how do we compare to our peers in the industry on the financial performance as well as cashflow. AAC will continue to abide for the strong financial discipline and we will make all of the necessary investment according to our customer's requirement as well as the technology trend in the industry. The next one will be flexibility and agility to handle business model evolutions. We believe that in the next 10 years, we have to work with different geography in a different business model. For example, we might choose, we might have to work with tier one, or OEM or system house directly in a different kind of business environment. I think AESE in the last 20 years has demonstrated we have a clear flexibility and agility to work with different companies in different geography throughout the whole different business model and evolution. Lastly, will be the geographical diversity. I think ASE, as was ASE HOKO, including USI, we do have the most diversified geographic presence throughout the world. With that advantages and also the resources, we should be able to handle all of the customer requirement in the next 10 years, depending on how the political environment varies. Please turn to the next page. I will talk about 2024 outlook. First, I want to talk about the revenue recovery. 2024 will be a year of recovery. We will be coming out of inventory adjustment in the first half. We do expect growth to accelerate in the second half. Full year ATM revenue should grow at a similar rate with the logic semiconductor market. We expect a higher revenue mix of advanced packaging on technology leadership, as well as testing revenue on the increasing turnkey ratio, just like what Kent has just shown you in the 2022 and 2023. We will target higher investment in machinery and building and smart factory compared to 2023. We believe we are entering into a new industrial upcycle and increasing adoption of advanced technology based on our customers' feedback. Please turn to the next page. Let me talk about the advanced packaging and also the AI boom. In 2024, we're on track to double our leading-edge advanced packaging revenue. From existing customers, we expect to have additional $250 million revenue in 2024, and we think the momentum will continue in the next few years. AESC does have a comprehensive technology toolbox, including 3D, 2.5D, fan-out, SIP, co-package optics, automation, et cetera. Our scale advantages and technology leadership will make ASE the preferred partner for customers. As it is apparent today, we have many new MPI as well as collaborative project with many tier one system customers, also the design house. ASE will not only benefit from the adoption of leading edge advanced packaging, but also the expansion of mainstream packaging, which will be utilized to address the growing semiconductor demands for all of the surrounding chips of the booming AI. I'd like to turn the floor to our CFO, Joseph.

Okay, thank you, Tan. Hello, everybody. And to give you the guidance for first quarter 2024, based on our current business outlook and exchange rate assumptions, our guidance for the first quarter of 2024 to be as follows. In NT dollar terms, our ATM first quarter 2024 revenue and gross margin should be similar to the first quarter of 2023. Again, in NT dollar terms, our EMS first quarter 2024 revenues should be similar to the first quarter of 2023. And EMS first quarter 2024 operating margin should approach first quarter 2023 operating margin. Thank you.

I'd like to open the floor for questions. If you have any question, please raise your hand. When you ask questions, please hold two questions at a time. Thank you. We have a question from Mr. Goku Hariharan of JP Morgan.

All right. Happy New Year, and thanks for taking my questions. Could we talk a little bit more about how we think about growth this year? I think, Doctor, you mentioned close to the logic industry growth. What does that number look like for you? Is it more like a 10% number or more than that? And maybe give us a little bit more color on how you think about growth by vertical. Communication is still a very important, more than 50% revenue for your ATM business. So how do you think about communication versus computing versus the consumer auto segment? That's my first question.

As Tim mentioned, this 2024 will be a year of recovery and we are expecting to see on ATM to see sequential growth on a quarterly basis throughout the year, but with the second having a stronger momentum, And as the overall full year growth, also as Tim mentioned, we will be growing at a similar rate with the logic semi-market growth, which is projected by different sources of anything from six to 10% in the industry now.

Okay, understood. Also, any guidance for margins? Are we expecting margins to get back to high 20s to 30%? And could you also talk a little bit about your approach to the AI-related packaging? Some of your competitors are setting up capacity to compete with the leading foundry. Is that ASC's approach as well in terms of seeking out these high-end AI accelerator packaging? Or are you kind of partnering with the leading foundry in terms of potential opportunities in this advanced packaging business?

Well, I think we will certainly increase our overall capacity for equipment for this year. And given the pipeline that we're seeing today, I think we were likely to have a 40 to 50% more equipment CapEx budget for the year. Although that's still subject to board approval. And the bulk of the, more than 65% of the CapEx will be put in assembly. And the bulk part of it is really for the advanced packaging. And if we're looking at the breakdown of the campus that we are looking at today, roughly 67% will be for assembly, 18% for tests and 30% for EMS. And a lot of it, most of it is really for the new packages of new products that we are bringing up this year. In terms of margin, I think we are very, very confident that the second half of the year we will be going back to our structural margin, within our structural margin, which is set at mid 20s to 30%. And we believe that for the whole year, we could also have our margin coming back to the structural margin range.

I think there's a question about the collaboration with leading foundry supplier for advanced packaging as well as investment, maybe in the other part of the world. So our position has been clear. We're working with all of the leading foundry, and we have made public announcement that, for example, the ASE and TSMC collaboration has been ongoing for years. And we'll continue to work very closely, working on all of the required advanced packaging. The investment and the R&D readiness has always been in place, which is another reason why we can ramp up, for example, the OS in later part of last year, as well as the early part of this year. And you will see the good results are coming out. So the collaboration, the readiness, has always been here. Now, in terms of going to different part of the world and making a big investment, that we need to have a better understanding about the product and also the technology requirement. Right now, we do not have any plan to go to US, for example, to make a leading edge capacity investment. However, we will be very careful, closely working with our customer and try to examine the situation. But today, we're gonna focus in Taiwan first, to make sure we can fulfill all of the ramp up technology variation requirement based on the leading edge foundry suppliers as well as our customer. I think that will be the first order of business. As we move to 25, 26, and 27, depending on the environment, including political as well as business environment, and we will make the different decision accordingly. Thank you.

Next question is from Miss Laura Chen of Citi.

Hi, hello. Hi, can you hear me? Yes. Thank you. Thank you for taking my question. I also have a question about the advanced packaging. I think you mentioned about like an additional 200, and 50 million revenue contribution for this year. That's the new engagement with the advanced packaging. Can you elaborate more for what kind of the application? Is that including some of the bumping business or is more focused on substrate, that kind of advanced packaging? Thank you.

The 250 million revenue, we include all of the, what we call the advanced packaging. For example, the unsubstrate, if you're referring to a substrate business, and that includes like a co-op, the TSMC version of the co-op and the unsubstrate portion, and that is inclusive. Also, the ASE has the six pack, the VI pack, That includes all kinds of advanced packaging. So this year, we're seeing the OS customers. We are also seeing the VI pack customers. And then hopefully by the second half of this year, we can start announcing key customer ramping up the other advanced technology in volume. Thank you.

Thank you. And with that, also the expansion, what kind of the margin impact are we looking for?

We don't normally comment on specific product margin. But as a whole, I think the overall corporate margin will continue to improve as we see volume to come up and also bring in the new technology that we are in our overall offering.

Okay, thank you very much.

Next question is from Charlie Chan of Morgan Stanley. Charlie.

Hello.

Yes.

Hi. Yeah. Happy New Year. So I also have a question regarding to advanced packaging that CPO. It seems to be a very, very future technology, but Can the company comment about the potential timing, penetration, temp, especially how are we going to work out with the key foundry vendor, TSMC? Because I heard that TSMC may want to produce their silicon photonics. So how are we going to collaborate with the foundry partners or other vendors? Thanks.

Okay, the silicon photonics is a big subject. The whole idea is that will represent another paradigm shift. And as we enter into silicon photonics, we'll be open up to more dimensions, more performance, more flexibility for all of the designers. So it is good for the whole industry, right? The timing of silicon photonics, and that has been the big question. We have been working on this for many, many years. There are many, many people working on this. So this is really a future technology as well as an incremental growth driver for the whole industry. In terms of how do we partition the role and responsibility, that is less of a concern. For example, the foundry will have foundry's role in terms of making the photonics chips, either in a stack format or isolated format. And for ASE, we will focus on co-packaged optics. For example, if we take the IDM photonics chips or the Foundry photonics chips, how do we bundle that with everything else? So each sector of the player will have a good responsibility and role to play in that new arena. Now, ASC has been talking about the CPO or Silicon Photonics, mainly because this is really an important innovation. The whole industry is focusing on this. And ASC today is working with all of the major driver in the industry in this arena. I'm not sure that answers your question, but that's what I have. Thank you.

Thanks, Dan. Yeah, it's super helpful, very, very fair, and indeed clarified lots of my questions. My second part of the question maybe is on your term. So since, I guess, the late third quarter, we see so-called foundry rush orders. That means that demand is coming back and also people lack of visibility. So fast forward into four months later. So I'm not sure if Tian or Joseph want to answer this question. Do you think this kind of rush order patterns will continue, or actually on the negative side, rush orders now already disappear?

Okay, Rushwater, you can view it from two different angles. For example, if you look at the, well, let me offer you my perspective first.

Sure.

Industry is going through a very prolonged inventory correction, right, after COVID. And so then we have a lot of wafer banks. And then the people looking at their inventory days, they look at the order pattern. They're trying to make two adjustments on the inventory days, as well as the foundry order and the supply chain cycle time pipeline. Now, what we have seen a few months ago is, for example, in China, the high-end cell phone was selling really well. And therefore, some of our customers start having the rush order on different wafer, different devices. I think that's what you were referring to. And this is really good. So the next question is, can this be prolonged? You know, our belief is this is the beginning of the boom cycle, or this is nearly, we're at a tail end of the inventory control. For example, the first customer that started the inventory control was back to like January of 2023. And there's some customers, you know, they start doing inventory control at a much later of the year. So every company, every sector will go through a different inventory adjustment. But I believe by the third quarter of this year, they're pretty much done. And then we're really going back to the sell-through cycle. There's a lot of uncertainty on what exactly the sell-through cycle, because high inflation, the China economy, the war that's going on. And I think it's so complicated comment, but the general belief is this year, the semiconductor will grow. The logic will grow around high single digit, like 10%. So everybody's working towards that goal. All of the order of pattern that we're seeing today with every sector in a different pace, different tempo, they all pointed to that direction. The best way we can judge is in January, February, we'll give you this position based on the snapshot. And every quarter, we'll give you a different snapshot. I think that's probably the best we can do because there's really no right or wrong. And both sides of the perspectives can be correct, but we believe that we are seeing towards the tail end of the inventory adjustment. So the order pattern will start coming in and become more persistent and consistent. Thank you.

Next question is from Bruce Lu of Goldman Sachs.

Yeah, thank you for taking my question. Again, I still want to ask about advanced packaging. I think in the past, the difficulty for us in terms of advanced packaging is that there are so many different solutions. And each one requires different capacity and different CapEx. And obviously we do see a clear direction for the driven by AI at this moment. So can you tell us that, you know, is that, the direction for moving into the specific advanced packaging is more confirmed. Do we see a clear cap, our cap is somehow focused on that? Do we get a reasonable ROIC or ROE for this business moving forward? Is that a critical business for us moving forward? Basically, that's the question I'm trying to ask.

Okay, this is a loaded question. Now, how long will the AI last? we believe it will be a long time. So initially, it could be one or two representative customers, but over time, the other players will come in. So I think we're seeing the beginning or the tip of the iceberg. Now, if we believe that is the case, then the leading edge foundry will say, okay, this is a capacity they're willing to put in. And the other capacity, the other OSAP players, if we can do it, you will come in to help us. I think that was the situation pretty much described last year. The company has decided, we think we have the technology, we have the initial capacity, we understand the investment, we understand the return profile. So we want to do this business, not just from the leading edge foundry customer, but also from all of the end customer and the potential system customer. They asked us to do this. Now we're doing the OS or we're doing the VI pack as of now, but as AI become more evolved, in other words, now once you evolve beyond the brain, the logic, or the memory, you will start adding the other requirements. And all of this will require a similar capacity to build that required system over time. So we think company will be more, the application will be more, the system requirement will be more. But all going back to automation, going back to the understanding of the basic technology, and also the company has enough portfolio and financial strengths to shoulder the business model and the liability. So this is one area which is quite definitive for ASE. So we're not doing this just for three to six months, if that answers your question.

I want to add a point. I think the AI is really at its early stage and we believe that as they continue to proliferate, it will go to some other applications and create another round of replacement market for us. So it's not just the, to us, it's not just the advanced packaging that will start to have a very strong growth. but also as they expand into other applications, all the other chips will be coming out and the overall volume for the, also high-end, but the mainstream packages will also benefit from the overall AI. So that will create another round of volume growth for us going forward, but not just on the FS package.

But the question is more like in the early stage of an event packaging, which requires a bit of R&D and CapEx. Are we seeing that the event packaging margin or how you are creative in 2024, in the early stage of the AI?

As I mentioned, we don't particularly comment on different packages of profit margin. But as a whole, I think as long as technology continues to advance, I think the margin will reflect that. And as I said, If we look at this year, we'll continue to see our margins starting to improve as we go along with the technology advancement.

Next question is from Randy Abrams of UBS.

Okay, yes, thank you. I wanted to ask the first question, if you can elaborate on the growth profile for this year. First quarter looks like seasonal or slightly lower than seasonal. For the outlook, it sounds like more confident in the second half, but I'm curious for second quarter, do you see we get back to the point it at least looks seasonal from the low base? So we start getting back to like high single, low teens type of recovery. And then For applications, what I'm curious, the auto is very strong through the upturn. How is that application weathering the downturn in correction? And do you see the content growth where, I'm curious how auto is faring through all this?

The Q1, The Q1 typically, if you go back to my 20 years with ASE, the Q1 typically is 10% to 15% down. And the typical number that we work with is 12%. So I think this year, if we can be flattish to Q1 of last year, I think we're better than the typical Q1. Of course, our Q4, you have to look at the relative. So that would be the first comment. And then Q2, we believe that we'll go back to our typical growth path. So I think this year we're looking at a typical year where Q1 low, Q2 growth, the second half stronger. I think we're looking at that patterns now. In terms of the automotive, Some of the IoT and the analog and mixed signal customer, I think they're having a lot of inventory concerns. So we are seeing a sluggish order in the first half in those arena. And some of the customer do supply to the automotive. However, the ASC automotive business per se is growing mainly because of the I think the auto line has a lot to do with it. And Joseph will comment more on the auto growth.

We did see a very good growth in auto motor part of the business since 2022, 2023, and we're expecting higher growth also in 2024. Right now, I think the automotive related business has already it's had a quite decent growth. And in 2023, it already represents close to 10% of our overall business. And we're seeing that continue to grow into 2024. And in terms of the overall growth rate, I think it will outpace the other sectors for 2024 as well. Although we are seeing some softer market conditions for the first half of the year because selectively there are a few areas that we're seeing some inventory adjustments. But overall, I think the overall growth momentum will continue into 2024 in terms of our automotive business.

Okay. No, thanks for that color. And there's a quick follow-up on that. Then I'll ask the second question. There was some IOT analog mixed signal because the consumer downturn lasted a lot longer. Do you think we are through that based on the customer feedback that we should also improve? in second half or risk just given the inventory and how long it was strong stays. And then the second question, it's actually the EMS business where it's coming off a slow year and there hasn't been that much. It feels like end customer innovation on new SIP projects. How do you see EMS if it's also just general environment recovering or applications they're pushing and if there's you're seeing new activity for SIP that could jumpstart that part?

Okay, we already said that. Second half, we believe that will be the beginning of the recovery. All right, for the first question. The second question is EMS. And I think if you hear the EMS earning announcement, I think they will also have a similar growth with ASE this year. I'm not sure how to answer the SIP part of the question because we don't typically comment on the specific SIP or product or customers.

I think for 24, I think in terms of EMS SIP business, it will stay relatively flat from this point. last year because of the different dynamics that's happening in this business. But all in all, I think we're still remain very, very active in engaging with the different products and different customers in the SAP arena. And we believe that we will see very strong momentum start to start to happen in 2025. I think 2024 is really the year that we're entering a lot of MPIs, a lot of the new engagements in different areas, including automotive, consumer and communication.

Our next question is from Si Ho Ng of China Renaissance.

Oh, hi. Good afternoon. First question regarding Q1 guidance, right? We are looking for revenue ATM business to be down, double-digit roughly. Can I know how much is volume or loading driven? How much is ASP related?

ASCP is quite stable right now. So I think when we talk about the, well, first of all, let me just clarify a little bit. I think 2024 is the year of recovery. Our Q1 is flattish compared to last year. Our Q2 will grow. When I talk about the second half inventory adjustment, I'm mainly referring to most of the customers that we have. Some of the customer has already started ordering. Some of the customer, it is still waiting. Although we do not know for sure, starting July, all of the inventory adjustment will be over. But macroscopically, we think that in the third quarter of this year, most of the customer will start the recovery path. All right. So I think that was a clarification. Now, in terms of the ASP or volume, I think I am referring to a volume driven, assuming the ASP, it is stable from now on. If that answers your questions.

Oh, yeah, yeah, yeah. And second question relating to advanced packaging portfolio. Is it fair to assume that right now the overall portfolio for advanced packaging is margin dilutive to the ATM business? Or under what circumstances we should expect the advanced packaging to command a margin similar to the division margin?

I think the first answer is yes. When I talk about $250 million, That's all ATM. In terms of margin, I think Joseph has repeated over and over again. We don't comment specifically, but the overall margin contribution to the business will be a credit. I think that would just force us to say that.

Yeah, okay. I was going to say not that little.

Sorry, does that answer your question?

Next question is from Mr. Goku Hariharan of JP Morgan.

Yeah, hi. I had a question on the test side of the business. How are we seeing the progress in trying to improve the bundling ratio for turnkey tests? And could we also talk a little bit about your market presence in some of these advanced AI Chips, how much testing business are we able to secure? And Dr. Wu, if you could give us any milestones in terms of how we should be looking at your test business, given I think the bundling ratio is still quite low compared to what you want to be in the medium term.

Well, in terms of our test business, we have been growing that part of the business percentage-wise in terms of our overall revenue composition. I think from 21 to 23, I think we have been growing that from below 15% to now close to 16% now. And we believe that ratio will continue to grow in 2024. to approach 17%. And we will continue to make efforts in growing our test basis through the increasing our turnkey ratio with our customers. That includes the advanced packaging today, which at this stage is a low percentage of testing that we have been doing for our customers. We believe that percentage will continue to rise and we will strive to reach our peak test revenue percentage of around 18% in the next couple of years.

All right. My second question is on mobile, since that is still the primary revenue driver. We've been hearing that there are some changes happening in the mobile side with more customers looking for 2.5D or fan out package and package kind of solutions. There's also some discussion about the biggest flagship mobile customers starting to potentially see at least the Foundry part of the mobile packaging stepping out of Foundry towards OSAT. Are these opportunities that are likely to benefit ASE? How is ASE positioned to benefit from these? And could you talk a little bit about this potential change from flip chip to find out package on package on mobile How beneficial is that to the OSAT profits and revenues? Thank you.

Well, I'm not sure I can answer all of your questions, but let me try this. Not just the mobile, right? If you look at the high-performance computing, and the router, the server, I think they all go through the similar trend. So initially, they want to go with a foundry supplier to make sure the turnkey service will guarantee yield and also the just-in-time delivery. As time goes on, a portion of the, it can be packaging, it can be testing, it can be unsubstrate, and they will decide to go to the outside of the foundry service. And then the first question is, is ASE ready? I think ASE has been, this is really our business. And we are working with almost all of the customers in terms of the development, just to make sure Apple to Apple, we're at least at par, the efficiency, cost, reliability-wise, at par with the customers. the the the foundry suppliers and depending on the business model and also the volume supply demand requirement. And I think we're seeing the first wave of the outsourcing activity. Once the door opens, I think this trend will continue. As more people come in, as more technology becomes available, as the data points start going up, the confidence level of the supply chain, diversity and the resilience I think it would be a natural force to drive that. So in this regard, I think ASE will benefit because this is the business which is incremental and also in the core portfolio of our business objective. Now, in terms of how fast, how much, and the margin contribution. We believe the margin contribution will be accretive. We also believe that as this is coming in, the testing turnkey becomes a natural extension, and the testing will be of higher margin to begin with because of the investment and also the IP capability. So as we approach more of the turnkey, as we approach more of the high end, also there's a natural margin requirement based on the technology content. So in the higher margin requirement, in the higher turnkey ratio, so I think all of this will be very beneficial for ASE future. I hope that answers your question.

If you have any question, please raise your hand. Charlie Chen or Dylan Liu of Morgan Stanley has more question.

Yes, hello. Yeah, I'm asking, this is Dylan. So I'm asking on behalf of Charlie. So the first question is, do we see any competition coming from Chinese OSETs? Because we heard Some of our customers are surveying the possibility of shifting some of the capacity to Chinese OSET. And if so, how do we tackle that? Will we lower our price just because of the market share or we tend to focus more on the ASP and shift more of our focus to advanced packaging as such?

I think for competitor, it's ongoing for 30, 40 years. We're very used to this, right? I think customers will always survey the worldwide suppliers. The decision point is going to be under the new geographic regulatory control. If you're comfortable going to a different part of the region, that'll be the first screen, the first filter. I think for now, we have less concern for some of our key customer going to China because of that reason. But over time, this might change. Then we're going back to the cost, the efficiency, as well as the reliability and also the data traceability. So at least what I cannot comment on the competitor, but what ASC has been doing is we're trying to have full traceability on everything we do. we're having to have 100% fully automated. Therefore, everything's logging in the data with a full transparency to our customers. We're trying to improve our scale by working with leading foundry partner. We're trying to work with all of the key tier one system, IDM suppliers, customers, trying to increase the data point and our knowledge. And Not only we're trying to do manufacturing know-how, we're trying to do the design simplification know-how because we're trying to make the more simple design more complex. That's where the value is. And immediately, we'll make a more complex, expensive design to a cheaper, simpler design. So only with all of these positive cycles can we secure the key customer. And this is why ASE has been having very high traction with all of the leading edge customer. So in terms of competition to Japan, Korea, China, including China, It's always the same. You can use the same analogy on all of the legacy. Over time, people are concerned about the legacy supply and demand. AAC is increasing our fully automated FAB as well as our design simplification capability precisely to anticipate that. On top of it, we're trying to improve the silicon carbide. We're trying to improve the silicon photonics. as well as all of the high-performance computing like the VI pack. So all of the innovation are meant to offer additional toolbox to our customers in their future design complexity as well as simplification. I don't think any of our Chinese competitor are having this kind of ecosystem and the data and the AI know-how for now. which is why I presented the ASE competitive advantage. I think we have a few years of clean leadership. We can leverage this window of opportunity to make sure our scale and efficiency and know-how can expand quickly ahead of our competitors.

Got it. Thanks for sharing the insights. And the second question is also circling back to the advanced packaging. So we're curious about the business model because first thing is that how would we frame our competitive advantage versus the incumbent, for example, those IDMs and foundries? And because in our mind, we tend to think that more of a targeted market will be top dyes coming from different foundries and we can work as a collaborator. And if so, how do we guarantee the yield? Because sometimes it could be packaging, sometimes it could be top dye. But if it ended up the production yield is suboptimal, who will be responsible with it?

I'll try to give you the simplified version of it. It's a big challenge. We struggled with this for a long time. All right. The beauty of this is all of the customers, all of the suppliers has been working with one or two leading suppliers for a period of time. So the data log is there. They understand the memory yield. They understand the logic yield. They understand the so-called assembly yield overall. So the benchmark is very clear. So the simple answer is such. If ASE can produce the overall yield based on the overall benchmark, at par to the benchmark, then we got this business. If we're below that, either we'll lose the business or there'll be punitive damage, which is why you were referring to. So the best way to look at is, can we retain this business going forward and still making money? It is too early to tell, but I'm telling you, we do have a confidence we will manage this. In terms of the other question you asked a little bit too complicated and too detailed, I will not answer. My apology.

There's no questions.

If that, I would like to wish all of you a happy new year wherever you are. And we have gone through quite an exciting 2021, 2022. 2023 was a little bit of a break. I think 2024 will enter into a new era. And I look forward to working with all of you. Thank you. Joseph?

Thank you all. Happy new year. We'll see you next time.

Okay. Bye-bye.