ASE Technology Holding Co., Ltd.

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.