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

Hello, I am Ken Shung, the Head of Investor Relations of ASE Technology Holdings. Welcome to our second quarter 2024 earnings release. Thank you for attending today. please refer to our safe harbor notice on page two. 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, 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 Dr. Tian Wu, our COO, and Joseph Tang, our CFO. For today's presentation, I will be going over the financial results and Joseph will give the company's outlook. Dr. Wu and Joseph 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. With that, let's get started. The second quarter can be summed up as the tale of two businesses. One business representing the leading edge products and the other, the more traditional products. For the traditional business, the second quarter had selective products with signs of reemergence. But, by and large, general product demand lacked the strength and durability necessary to be considered a sustained healthy pickup in the immediate term. while the leading edge business saw increasing demand with the development of increasing product pipelines. Equipment utilization for traditional products looked to be near 60%, while utilization for the leading edge products are effectively full. To support the bifurcated market, we will need to continue to increase our investment in the leading edge space, in particular, labor and equipment. From the labor perspective, we will need to hire more engineers as the level of product complexities are increasing with the leading edge. We will also need to invest in incremental capital equipment to provide for incremental demand. For our EMS business in the second quarter, demand for our services was slightly ahead of our initial expectations. We believe this was principally the result of a slightly faster start to the manufacturing season. Please turn to page three where you will find our second quarter consolidated results. For the second quarter, we recorded fully diluted EPS of $1.75. and basic EPS of $1.80. Consolidated net revenues increased 6% sequentially and 3% year-over-year. We had a gross profit of $23.1 billion with a gross margin of 16.4%. Our gross margin improved by 0.7 percentage points sequentially and 0.4 percentage points year over year. The sequential improvement in margin is principally due to NT dollar depreciation and product mix changes at both our ATM and EMS businesses. Our operating expenses increased by $0.7 billion sequentially and by $1.7 billion annually. The sequential increase in operating expenses are primarily due to higher R&D labor-related expenses. The year-over-year increase in operating expenses is primarily attributable to continued R&D staff up and other labor-related costs. Our operating expense percentage remained flat at 10% sequentially and increased by one percentage point year over year. The annual increase was also related to higher R&D staff up for both ATM and EMS, overseas expansion, and higher incentive stock option and bonus expenses. Operating profit was $9 billion, up $1.5 billion sequentially and down $0.4 billion year over year. The year-over-year decline in operating profit is primarily related to higher operating expenses related to the ramp-up of our leading edge advanced packaging and overseas expansion. Operating margin increased 0.7 percentage points sequentially and declined 0.5 percentage points year-over-year. During the quarter, we had a net non-operating gain of $1.1 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 $1.2 billion. Tax expense for the quarter was $2 billion. Our effective tax rate for the quarter was 19%. Net income for the quarter was $7.8 billion, representing an increase of $2.1 billion sequentially and flat year over year. The NT dollar depreciated 3% against the US dollar sequentially during the second quarter, while depreciating 4.2% annually. From a sequential perspective, we estimate the NT dollar depreciation had a 0.85 percentage point positive impact to the company's gross and operating margins. while from an annual perspective, we estimate the NT dollar depreciation had a 1.21 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 $24 billion with a 17.1% gross margin. Operating profit would be $10.2 billion with an operating margin of 7.3%. Net profit would be $9 billion with a net margin of 6.4%. Basic EPS excluding PPA expenses would be $2.08. On page 4 is a graphical representation. of our consolidated financial performance. You will see a troughish but gradually improving environment for both our ATM and EMS businesses. Gross margins are gradually improving also. On the operating margin front, as was stated earlier, operating expenses are increasing for expected ramps in leading edge advanced packaging products. We expect these leading edge advanced packaging products to be accretive to margins. On page five 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 second quarter of 2024, revenues for our ATM business were $77.8 billion, up $4 billion from the previous quarter and up $1.7 billion from the same period last year. This represents a 5% increase sequentially and a 2% increase annually. Gross profit for our ATM business was $17.2 billion, up $1.6 billion sequentially, and up $1 billion year-over-year. Gross profit margin for our ATM business was 22.1%, up 1.1 percentage points sequentially, and up 0.9 percentage points year-over-year. The sequential margin improvement was primarily related to foreign currency and higher loading efficiency offset by higher utility costs. The annual margin improvement is primarily the result of foreign exchange, product mix offset, in part by higher utility costs. During the second quarter, operating expenses were $9.9 billion, up $0.5 billion sequentially and $1.2 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher compensation expenses from ramp-up of leading-edge advanced packaging. The annual operating expense increase was driven primarily by the continued scale-up of R&D labor and other labor-related expenses. Our operating expense percentage for the quarter was 12.8%, flat sequentially and up 1.3 percentage points annually. Sequentially, operating expenses kept pace with revenue expansion. The annual increase was due to higher compensation expenses primarily at the R&D level. During the second quarter, operating profit was $7.3 billion, representing an increase of $1.2 billion quarter over quarter, and a decline of $0.2 billion year over year. Operating margin was 9.3%, increasing 1.1 percentage points sequentially and declining 0.4 percentage points year-over-year. For foreign exchange, we estimate the NT to US dollar exchange rate had a positive 1.47 percentage point impact on our ATM sequential margins and a positive 2.1 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.3%, and operating profit margin would be 10.8%. On page 6, you'll find a graphical representation of our ATM P&L. As you can see here, the first half of 2024 is shaping up very similarly with the first half of 2023. On page seven is our ATM revenue by 3C market segments. Our communications application dropped three percentage points while our computing and consumer segments increased. During the quarter, we experienced some spotty pickups in our consumer space. However, end demand was insufficient to sustain a more robust growth rate. As a note here, Our leading edge advanced packaging services are recorded within computing and communications accordingly in line with their underlying usage. On page eight, you will find our ATM revenue by service type. There are only some small movements here with other services declining two percentage points and wire bonding and advanced services increasing one percentage point each. On page nine, you can see the second quarter results of our EMS business. Our EMS revenues came in a bit ahead of where we expected, mainly as a result of slightly earlier than expected start to the manufacturing season. During the quarter, EMS revenues were $62.9 billion, improving $3.5 billion, or 6% sequentially, and improving $2.5 billion, or 4%, year-over-year. These sequential and annual revenue improvements are primarily attributable to our customers' timing of this year's product manufacturing start. Sequentially, our EMS business's gross margin improved 0.3 percentage points to 9.6%. This change was principally the result of better loading. Operating expenses within our EMS business was $4.1 billion, increasing $0.2 billion sequentially, and $0.5 billion annually. Our second quarter operating expense percentage was 6.5% flat sequentially and up 0.6 percentage points annually. The higher annual operating expense percentage was primarily related to higher expenses related to NPI development. Operating margin for the second quarter was 3.1%, improving 0.3 percentage points sequentially and declining 0.4 percentage points year over year, primarily due to increase in compensation expenses on higher headcount, mainly due to the consolidation of an acquired entity. Our EMS second quarter operating profit was $2 billion, up $0.3 billion sequentially, while down $0.1 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. As is typical in the second quarter, there isn't much movement here on a sequential basis. However, on an annual basis, we are experiencing decent growth within our automotive products. On page 10, you will find key line items from our balance sheet. At the end of the second quarter, we had cash, cash equivalents, and current financial assets of $75.3 billion. Our total interest-bearing debt declined by $11.4 billion to $183.9 billion. Total unused credit lines amounted to $417 billion. Our EBITDA for the quarter was $26.1 billion. Our net debt to equity this quarter was 0.34. On page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the second quarter in US dollars totaled $406 million, of which $215 million were used in packaging operations, $154 million in testing operations, $31 million in EMS operations, and $6 million in interconnect material operations and others we continue to be excited by the expanding portfolio of products that our leading edge advanced packaging addresses As we look further out, we continue to see signs that business is shaping up for the next super cycle. However, if we look into the more immediate future, we believe we will continue to have a tale of two businesses, the leading edge and the more traditional business. When we look at the leading edge business, including AI and high-end networking, business is continuing to boom. We cannot seem to get the capacity installed fast enough. For us, this is also not a single customer phenomenon either. And the interesting part is that it appears to be accelerating. On the more traditional business side, there is some excitement regarding potentially shortened refresh cycles on a number of products due to new AI features. But by and large, our customers are still proceeding cautiously. For us, that means our customers generally are in a trial and error mode. They start with a conservative forecast. If their products hit, they will quickly adjust their outlooks. There is an increasing optimistic sentiment in the market and we are looking forward to when such optimism manifests into increasing forecasts. If we look at our overall cost environment heading into the third quarter, we will need to continue to manage our costs of production with higher utility costs and ramping labor needs. On the operating expense front, we also see continued spending on R&D labor, tools, and equipment related to leading edge advanced packaging and testing. And as I stated earlier, we will continue to bear higher operating expenses before the majority of revenues come into place towards the latter part of this year and next year. we are looking to hold our full year operating expense percentage increase to within 75 basis points of that of 2023. With that, I would like to hand the floor over to Joseph Tung to speak to our corporate outlook. Joseph?

Thank you, Ken. Let me give you a... guidance for third quarter. In terms of ATM and in NT dollar terms, our ATM third quarter 2024 revenue should grow by a high single digit quarter over quarter. And our ATM third quarter growth margin should be between 23 to 23.5%. In terms of EMS, in NT dollar terms, our EMS third quarter 2024 revenue should grow mid to high clean quarter on quarter. Our EMS third quarter 2024 operating margin should be slightly above fourth quarter 2023 level of 3.5%. And in addition to the revenue and margin guidance, I would like to also provide an update on our CapEx. In anticipation of the booming demand for leading-edge ATM capacity and further technology advancement, we believe we will need to step up our CapEx investment, starting from raising full-year 2024 consolidated machinery CapEx to double from last year's US $914 million level. And as these investments carry a higher value contribution and are becoming more critical to the overall semiconductor manufacturing, we believe such investment will be both return and margin accretive. On geographical expansion, we started a Malaysia expansion two years ago and now phase one has been completed and we will start volume production in quarter one 25. Also, we're soon to close the acquisition of two Infineon operations, one in the Philippines and one in Korea, and expect revenue contributions of these two sites starting from third quarter this year. We have also acquired land in Mexico and we've identified potential locations in Japan. The land will be developed and buildings be constructed in anticipation of future customers' demand. And all these efforts are made to shorten the lead time for capacity ramp up. With that, we will open the floor for questions.

If you have any questions, please raise your hand. When you ask questions, please hold two questions at a time. Thank you. Our first question is from Mr. Goku Hariharan of JP Morgan.

Yeah, hi. Good afternoon, Joseph and Ken. Thanks for your comments. My first question is about the guidance. So when you talk about ATM high single digit, could you also help us to understand the full year growth prospects for ATM? Because I think back in February or January, I think Tian had talked about six to 10% for industry and similar growth for ATM. Any updates there given year to date, it looks like you'll be tracking at about flattish year on year on USD terms. And also gross margin, I think previously we were expecting 25 to 30% range in second half of the year. Any reason, Joseph, why it's a little bit lower? Are there any startup costs or any other additional costs that have come in? Or is it just that utilization is tracking lower? And lastly, on CapEx, this doubled from FI23, obviously a bigger number than previous. Any breakdown in terms of test versus advanced packaging versus traditional packaging in terms of where you are putting in incremental CapEx? That's my first question. Thank you.

I guess the full year, in terms of a full year perspective, I think in the general market, the recovery seems to be a bit slower than we were expecting. So although in the second half, we will start to see the general market start to bottom out, and we'll start to have some recovery, more recovery there. But the... The pace of it seems to be slower than originally expected. But on the leading edge, it still is booming. But we are aggressively trying to catch up with the capacity to meet the growing demand. But all in all, put everything into consideration. I think for the full year, we're now looking at a more moderate kind of growth in terms of our top line. And in terms of margin, I think, again, because of the more muted recovery of the general market, I think in third quarter, we will come in a little bit short on reaching the structural margin of 24%. But on the full year basis, we still remain hopeful that going into second half, we will have a better pickup. And we're still, I think the coming back to the structural margin is still in play at this point. What's the third question?

CapEx, Victor.

The CapEx breakdown, with the new CapEx that I just mentioned, I think the breakdown will be roughly 53% for assembly and 38% for test. We have another 1% for material and about 8% for EMS.

Okay. That's very clear. Thank you. My second question, Joseph, is on the the 2.5D advanced packaging barrier, obviously spending a lot of capex and the prospects are good. I think last time, I think Tian had mentioned 250 million additional revenues from this segment. And I think recently, I think in your AGM, you had indicated there's probably some upside to that number. Could you talk a little bit about, A, what is the scale of this kind of business? Do you think that this could be 10% of your ATM revenues next year? And secondly, could you talk a little bit about your partnership with the leading foundry, given they also called out increased usage of OSAP partners to fulfill customer demand? How widespread is your kind of customer base? Is it mostly coming from this leading AI accelerator? customer or is it kind of more broad based? You're having multiple projects from many different customers for 2.5D packaging.

Well, I think in terms of leading edge, I think mostly you're still coming from AI or high performance computing. And I think it's a broader base. It's not just one customer phenomenon as Ken mentioned earlier on. And we are having a very active engagements with both of our partner as well as customers directly. And I think the raising of our is toward building the needed capacity for this type of including packaging as well as tests.

Next question is from Ms. Sunny Lin of UBS.

Hello, could you hear me? Yes. Thank you very much. So my first question is to follow up on the testing opportunities that you just mentioned regarding the advanced packaging business. And so could you share a bit more details regarding the customer engagement and for some of the key projects, how you compete with the existing suppliers?

Existing suppliers?

for testing for these HPC projects?

Oh, okay. I think there's plenty to go around as we see the demand for leading edge, both for packaging and tests are booming. And we are currently still a little bit capacity constrained and we are beefing up our in this area to build the capacity as well as to further our technology investment. I think the, as I mentioned, the demand is coming from different customers and also part of it from the foundry as well. So we will entertain whatever business that is needed from our customers. And, you know, in terms of meeting competition, there's always competition. and we will do whatever we can to further penetrate whatever business that's in front of us.

Got it. Thank you. Maybe let me try to... ask from a different angle. And so for some of the accelerator products, there are some pretty solid existing suppliers that have very close relationship with the customers. They are willing to customize the burning tools and also the boards. And therefore, just wonder what your competitive strategies. And if you manage to get some of these products, Should we expect the revenue to start to come through?

We are gearing up on our leading edge testing capacity and capability, including burn-in. We are basically leveraging on our turnkey services, and we do expect to have good progress starting from next year.

Our next question is from Mr. Charlie Chen.

Hello, good afternoon, Joseph, Ken, and Iris. Thanks for taking my question. So maybe to begin with, I'm wondering, Joseph, your view about KSNC talking about the Foundry 2.0, they include the backend Foundry also to their 10. Do you think going forward there would be more competition from Foundry or you believe there should be more collaborations? Thank you.

You know, that is really a testament that the back end, back end test, it is becoming a more and more critical part of the overall value chain. And we are excited about the opportunity in front of us. And we will be closely working with our partners, both on the upstream and also downstream, to make this thing happen. So I think the overall relationship with both our customer as well as Upstream Foundries, we are working very closely with both of them and try to come up with the capacity and the technology needed to suit their needs.

Gotcha. Thanks, Joseph. so my follow-up question is also to clarify your uh potential expansion of the uh advanced packaging uh business uh so it's a couple couple uh speculation maybe it's a good chance for you to clarify here so first of all uh my understanding is that you only do the waveform uh substrate like wos but the chatter such as you want to expand to chip-on wafers. That's the first part. And secondly, there's a rumor talking about you probably will do a new FAP very close to Taishan or Changhua area. And there's a kind of offloading TSNC's burden. And number three is really the capacity number. As far as I know, probably in terms of WOS, capacity, you have 60,000 welfare per month. But rumors talking about you're going to more than double the capacity for a WOS. So on those kind of rumors or speculation, can you clarify a little bit? Thank you.

We're not going to clarify the speculation, by the way, but I will give you a qualitative description about the current engagement model. The technology takes years to develop. So whether the OS or the COW or the equivalent of OS or the equivalent of COW has been developed together with the foundry partner as well as key customer for years. So in the current landscape, because of the capacity constraint, there has been active engagement with our partner as well with our customer to see which route will give you the most efficient alternative to fulfill the customer demand in the shortest amount of time. So this is kind of the partnership that we have developed with the leading foundry suppliers. We have also gained confidence from multiple customers over years of product development, trial and error, process, materials, or different equipment set and the reliability. So in this round, as we can see, the OS ramp has been pretty successful. And we will continue to measure and monitor the progress of ramp up to make sure the yield the quality and the cost model are all in check. We cannot give you the specific comment based on the number that you have outlined. However, if you go back to the CapEx number we have provided, I think you can clearly understand that we're trying to ramp up rapidly on the OS. The COW has been engaged with multiple customers as well as with our foundry partner. So we have active conversation together with partner and customers, again, just to seek the best alternative way to fulfill the customer demand. I think we're not in the position to comment detail of the engagement model as was the quantity, but over time, Just to give you a rough number, at the beginning of the year, we estimated we will have about $250 million incremental advanced technology revenue. I also commented we are slightly ahead of that curve. So right now, that status is we are ahead of the original number. The momentum most likely will accelerate into next year, also as indicated by Joseph and Ken's comment that we're doubling the CapEx. In 2025, we will continue to monitor the situation, and based on the business landscape, that we would decide what would be the right way to do it. Okay.

Next question is from Mr. Richu of Daiwa Securities.

Hello. Can you guys hear me? Yeah. Okay, sorry. Sorry for this technical issue. The first question is my usual housekeeping question about your utilization rates for wire bonding and the testing for Q2 and Q3. And also a little follow-up. When Ken says something about your advanced utilization rates was already four, what's your quantitative definition of the four? Thank you.

In terms of utilization in quarter two, we have both our packaging and testing running at slightly above 60%, and that ratio will go above 65 for both in quarter three. When we talk about full, we mean everything is being used up or capacity. Right. Thank you. That's clear. Adding to what Tian just mentioned, I think when we talk about expanding our capacity, we are talking about expanding capacity for all kinds of demand coming from our customer, whether it's COW or OS or testing. Also, not just on the machinery itself, we're also adding spaces, factory spaces, new factory buildings that are being built or being put on stream online. We are also investing heavily, like we're beefing up our R&D as well, making a lot of investment in R&D.

and also in terms of hiring uh talents uh it's it's a it's an all-around effort for us to meet the customer demand all right thank you um the second question is about your uh uh capex um we see very strong your very strong commitment in building the advanced packaging testing capacity, such as on substrate and also the course equivalent. Would you worry about any potential risk of overflow business model, i.e. that when the founders resolve their course bottleneck issue, would they cancel the outsourcing? I mean, this is what I said about the overflow risk.

Well, I think the business model, of course, anything is possible, but the collaboration has been in place for many, many years. We're also very used to the up and down cycle. So in this round, really depends across the whole platform. We're looking at the multiple customer product development. Then we look at their utilization and their volume roadmap. Then we look at our investment. Of course, we will examine the flexibility of the investment we put in place. So the nature of the OSAP business is we will build a flexible and fungible capacity, and that can be easily move around to accommodate the different product mix as well as volume. So right now we're quite confident that the capacity we'll put in place will be here and will be very useful for our customers and our partners for quite a few years at least. So the short answer is no, we don't worry about it.

Next question is from Mr. Brett Lin of BOA.

Hi, good afternoon. Thank you for taking my questions. I have two questions. The first one is on the, well, overseas expansion. So does the firm have any new thought on the U.S. expansion? I know that we come about overseas, but that seems to, well, We did not mention much about the U.S. side. So on the new subsidy program by the U.S. government and also the, well, increasing political dynamics there. So does ISE have any new thoughts on the U.S. expansion? And also we also see the expansion of the ISE labs there in California. Does that qualify for apply to the new subsidy programs? Thank you.

Just to give you an answer, well, let me comment on the ISE facility. The ISE facility only has one purpose. That is to support the innovation at a chip level or at a system level in Silicon Valley. for either ai or the future edge device or any advanced technology a high performance computing or silicon photonics or power management so the lab is put in place to provide system level testing system level development as with system level reliability the lab is in california silicon valley The main mission is to bridge whatever technology are available domestically in U.S. and whatever technology that are needed that are available globally. So the CHIP Act office just announced the R&D funding as well as the manufacturing funding. we will consider how to apply. And for IASC and IASC similar or the phase three or phase four, we will consider the CHIP Act R&D as well as the manufacturing. The U.S. high volume manufacturing establishment are still being considered. We do not have a tangible plan yet, mainly because the customer request on the volume are still being investigated.

Got it. So can we say that, well, with the recent developments, there is a higher possibility that we will do the so-called high volume production site there?

We do have Mexico facility. And that is also available for North America. Just just clarification.

We have a question from Miss Laura Chen of Citigroup.

Hello, hi, can you hear me? Yes. Thank you.

I have a question about the gross margin trends. On one hand, we are seeing that we are accelerating our investment in the advanced packaging, but the broad-based recovery on the traditional application seems to be remain muted. So my question is that how would we expect this advanced packaging investment to bear fruit? If it's reached a satisfied year rate and also the loading, how would you see that will be the normalized gross margin? That's my first question. Thank you.

As I mentioned earlier on, the capex that we're making, uh, for the leading edge, uh, and test, uh, those investments are off, uh, you know, higher margin or, uh, or these investments are of, you know, creative margin as well as return. So as we continue to grow that part of the business, also on test, I think it will help the overall margin for our ATM business as time goes on.

so can we expect that uh that will be over corporate average say like if the overall atm business reached the say like 80 percent utilization rate uh usually we can expect like 25 percent gross margin but with the co-ops if that's reached the satisfied situation rate and also the loadings that will be much higher than that what we we expect before

At such point, such capacity is of higher than the corporate average margin.

Okay, got it. Thank you. And also, my next question is on the EMS business. You mentioned that the better than expected near-term is due to the earlier ramp for the new products. So would you expect the sustainability will continue into the peak seasons into Q4? Or can we expect that the Q4 will be even stronger like the historical pattern?

No, I think the first half versus second half pattern should be similar to typical seasonality.

Next question is from Mr. Bruce Lu of Goldman Sachs.

Hi, thank you for taking my question. I think I want to ask you again for the advanced packaging, right? So Joseph used to comment that the capex to revenue ratio, can you comment about like, you know, what is the capex to revenue ratio for the advanced packaging? You know, you spend a lot of money this year, how much revenue you can generate next year? In addition, TSMC commented that the advanced packaging gross margin is somehow approaching the to the corporate average which is 50 plus percent right so can we expect you know is there any reason that we can assume that your goals your profitability was somehow similar with tsmc for your advanced package i i don't think we should make that kind of uh

the simple comparison because TSMC, the packaging they do, as was the business model, are slightly different from AAC. Joseph has already talked about it. The OS that we're doing right now, the margins are higher than the ATM, the corporate average. That's where we're going to stay. We're not going to comment comparing to the TSMC margin because the equipment, the process, all of the – everything they use are slightly different than the ASE. Now, in terms of the – how do we bridge the dollar? I think normally we're talking about the CapEx dollar. I think it's a dollar for a dollar.

So for the rent packing, it's also a dollar for a dollar.

That's the current thought on it. We will actually need to, once it gets to volume, then we'll have better assessment of that.

I see.

In general, that seems to be still the case, yes.

Thank you. The second thing is that I want to ask about the sustainability for your EMS business. I think the third quarter guidance seems to be a little bit lighter than historical sustainability. So what was the reason for lower sustainability because of, we didn't hear any delay for the flagship model smartphone. Is this because of the smartphone or because of other applications?

uh i think the uh people are are expecting the new phone uh volume since uh you know people are sending up an uptick on the uh on the shipment. So this quarter, and because of the earlier launch of the product, we're seeing a better than expected second quarter, and that same kind of momentum should go into quarter three. But as a whole, you know, the other general markets, the recovery is still a bit slow. So I think from a full year perspective, I think EMS will also have a muted year for the, you know, in terms of our top line.

If you have any questions, please raise your hand. Next question is from Jason Zhang of CLSA.

Hello, can you hear me?

Yeah.

Oh, okay. Thank you for taking my questions. My first question is regarding on the proportions of your advanced packaging. Can you give us how many percentages that advanced packaging account for your total revenue? And you mentioned about 250 millions. Is that your targets in coming years or is expectations on the contribution from advanced packaging in this year? Thank you.

Uh, as we, uh, as we got it before, you know, this year we're expecting to double the, uh, our revenue in terms of leading edge, uh, packaging and tests. And, uh, we, uh, And the incremental revenue should be over $250 million. And as Tim mentioned, we are currently slightly ahead of our schedule. And I think the momentum continues to be strong. And going into next year, we're expecting another doubling of revenue in this segment. Okay, thank you. My second question is... The percentage of our leading edge revenue is about 5% this year, going from 2.5% to over 5% this year.

Thank you. 5% of ATM business, right? Correct. Okay, thank you. My second question is in terms of the industrial and auto business, because previously we merged the new fab from IDM players, and we know that currently those segments remain weak. So have we found any synergy or upsides coming from those kind of new business? Or can we comment that whether we see any improvements or recovery on those segments? Thank you.

Well, I think in terms of automotive, overall sentiment is still very soft. But we have been continuing our growth in the automotive business, largely because of the market share gain and which we were we are leveraging on our automation to continue to expand our market share. For this year, I think in terms of ATM, the automotive part of the business will represent roughly 11% of the overall sales. And we'll see that momentum continue to go.

We have a question from Mr. Charlie Chen of Morgan Stanley.

Thanks for taking my follow-up question. So actually, two follow-up questions from me. So first of all, I think it seems to suggest that the new capacity for advanced taxing margin should be above the uh corporate margin uh but but uh joseph may clarify is that above corporate average margin or above atm margin thank you above corporate atm margin corporate atm margin okay okay that's clear thanks um yeah and also uh Doubling this revenue next year. So it's a doubling of 5% or doubling that 250 million US hours incremental revenue.

Doubling, I mean, next year's leading edge revenue will be doubling this year's leading edge revenue.

Okay, so if this year is around 5%, next year should be close to 10% or more than 10%.

Well, we are expecting other parts of the business to grow as well. So that remains to be seen, yeah, whether it will be exactly 10% or a little over or a little under 10%.

Next question is from Mr. Bruce Lu of Goldman Sachs.

I want to know, again, for the advanced packaging in terms of investment direction because, you know, advanced packaging for me, there are like 10 different technology from TSMC called SAOR, you know, SOICPX or whatever. i mean it seems to me it's very complicated and how do you decided which one is the direction to go for aac to invest that's one thing the second thing was like tsmc is talking about ramping up the panel level packaging in three years so which means that it could be the case that they don't want to invest in the current cohorts because in three years they're gonna migrate to you know panel and they gotta leave that to uh the current offset partner so that could be a short-term business you know potentially, so how can we prevent this kind of risk or, you know, what is the direction to go?

It's a good question. For example, ASE has been working on the panel solution for over five years. Just to give you a status report, we started with a form factor of 300 millimeter by 300 millimeter square. been doing that with quite a few key customers for a number of years qualified few product the um then we decided uh the uh 300 millimeter by 300 millimeter will be naturally expanded to 600 by 600 and then we're doing a lot of the study with customers partners equipment suppliers and materials right now we have firm up the business plan. So out of the Cap Hacks that we talk about it, the 600 by 600 panel also is part of the overall Cap Hacks that we make the investment. We believe that by second quarter of 25 next year, we will have all of the equipment ready. In the meantime, we are collaborating with our partner as well as customers in terms of the detail, volume, ramp. I think technology development typically would take 10 years. In terms of the volume readiness, that's always the tricky part. How do we do the overall CapEx, whether OS, COW, panel, or different kind of equivalent of technology, that's really the IP of OSAT. We have to work with partner as well as multiple customer, not a single customer or a single partner. Now, there will be fungibility between all of the technology, the common usage, the shared usage, and the flexibility to convert if needed. I don't think we're easy to say one technology can easily replace another technology. Each technology will cater for a different set of target customers. So when you talk about the co-ops, there'll be a different level of co-ops. You already said that. Even with the panel, the panel will be targeting at customers. different line width, different line space. Each one is different. It's very complicated, but our job is to prepare the whole portfolio of toolbox. Wherever the customer have a specific product mix they need to ramp, we are readily available to do that ramp for them. And that's why we need to work very closely with our foundry partner as well as customers, because it's a very, very dynamic time. You can't really know a priori what the volume mix is going to be. But our job is to make sure we have all of the technology development, we have all of the building ready. And then when we need to, then our team will be very busy to convert one line to another or the other back to another, just to make sure we have the operational efficiency.

Your panel size seems to be different with TSMC was trying to do. Is that gonna be a different, is that gonna be an issue?

I'm not gonna comment on TSMC's panel size. I think you have to ask TSMC. But ASC is pretty determined. We will do 600 by 600. Our customer seems to be comfortable with that dimension. The equipment will be different. The process will be different. But again, as I said, we cannot say one panel, there is no universal solution. definition of any process well as is working on the 600 600 has a certain feature size as a certain cost model and then the we're working with our partner as well as our customer to make sure they're comfortable can you can you discuss the application for the panel's uh customer this is for power management or for ai for you know uh Actually, it's for all of the above.

I see. Okay. Thank you. My next question is for gross margin in second half. I think Joseph used to mention that in second half, ATM gross margin.

Our next question is from Mr. Goku Hariharan.

Hey, I had one quick question on your smartphone segment, which is the largest segment. I think, Joseph, you talked about some improvement in demand from a particular set of customers. Could you talk a little bit about what is the status of the smartphone segment, both for high-end SOC as well as for other auxiliary products? How is the inventory level and are you seeing a more broad-based enthusiasm from customers to actually order more or things are still quite sluggish? Second part of that is for Tian, you talked about the toolbox of portfolio of packaging technology that you have. Smartphone has been an area where the packaging technology has largely been stagnant for quite some time, I guess. Could you talk a little bit about, are we seeing anything in the horizon where packaging technology could evolve towards something similar to 2D, 2.5D fan out for the smartphone segment in the next couple of years?

Okay, the first question is regarding the cell phone. And Q1 of this year, we're seeing an uptick on cell phone. And if we look at the Q3 and Q4 forecast, that the cell phone is ramping up in just the overall. So I think overall this year, the cell phone over shipment, I mean, we're not in the position to comment on that, but based on the forecast we're looking at, it seems to be a moderately positive comparing to, for example, automotive industry. Okay, that's the first comment. In terms of the toolbox and also how could cell phones specifically, that segment, can utilize some of the new technology we put in place, we believe on the technology roadmap, with all of the AI initiatives, Over time, you have two types of devices. First, when do we expect the high-performance computing type of architecture to permeate into the cell phone? That would be the first question. I would believe with all of the AI features coming in, if the market response is very good, I'm pretty sure the leading cell phone technology suppliers will start adding either more higher level of memory or higher level, bigger chips into it. If that is the case, then the current technology that only be applicable to high performance computing naturally will take some shape into the cell phone market. Now, the second type of thing will be the edge device. I think one of the earlier comment that we did not get a chance to answer is with all of the fabs, I think statistically we have like 84 fabs coming up right now. They're pretty much in the traditional, not the leading edge. So in the next few years, with all of this traditional fab, capacity coming online. How do we balance the semiconductor over our demand versus supplier? I think the general industry view is with AI at the top, over the next few years, there'll be more edge devices such as autonomous driving, such as robots, such as drones start coming out. Now, in any kind of edge device or edge device system, you will utilize a lot of actuator, MEMS, sensors, microcontrollers in an integrated and heterogeneous integration fashion. So if you think about the potential robots, the potential autonomous driving, the potential drones, they will use a lot of conventional semiconductor devices as well as the AI engine or the AI brain. Now, the SEMI talk about it in 2030, 31 to 32, the industry will hit $1 trillion. If we want to hit 1 trillion, naturally we will use up all of the FAB in the leading edge as well as the traditional package level. And the OSAT or ASE, all of the automation that we put in place, all of the building blocks we put in place are target to capture not only the high performance computing, as well as the next generation AI brain to the edge device, as well as to robotic fingers for all of the heterogeneous integration or any kind of system package that our customers or system designer would like to do. It's a very long answer to your question, but I hope that's comprehensive.

Yeah, that's very clear. So one follow-up on that, Tian, is if you had to hazard a guess, when do you think smartphone or cell phone SOC starts using chiplet? Is it in the next two years, next three years, or it's much further than that in terms of technology readiness and market acceptance?

I think the chiplets already started. The chiplets really is a concept. In other words, when you start integrating chip, it becomes a chiplet. So today we're seeing the chiplet architectures in a supercomputing, high-performance computing. But even when you carefully go to the electrical vehicle or ask the current generation of cell phone, you can pretty much argue this is the beginning of the chiplet. So I think the chiplet concept, the platform, are being validated by the market. Over time, I think the chip will become more pervasive. Therefore, the hydrogen integration, the power management, the embedded, all of this technology that we're developing today will become very useful. And that's where the panel, for example, that the panel, I did not get a chance to comment. We think about at a power management level, there'll be a lot of integrated devices, integrated package, they're thinking about it. So the panel needs to be lower cost, flexible enough to accommodate the power management integrated package, but also needs to go high enough to accommodate the current form of high performance computing. But any kind of package will have a different set of target customer. If you're talking about 3D, you're talking about 2.5D or interposer, That feature size can continue to move up, become smaller and smaller together, proportional to the lithography and also the density requirement. So our job is to make sure we have a whole spectrum of technology in our pocket. Whenever the customer come in, they need 10% of high end. 40% of mid-end and 50% of low-end, we can easily provide them a comprehensive selection of tools in an automated manner. Okay.

If you have any questions, please raise your hand. Oh, we have a question from Bruce Lu. Bruce, sorry about interrupting your question earlier. Please keep two questions at a time. Thank you.

Okay, just one quick question. Joseph, you did mention that earlier, the second half growth margin for ATM will go back to 25, 30% due to better product mix, better testing, more events. It seems to be slightly lower than, you know, can we expect that to go back to 25, 30% in growth margin fourth quarter? You know, what slows us down for the growth margin recovery?

I think the overall recovery was slower than we were expecting. And because of the volume shortage or the gap, we are now the margin prospect for the second half seems to be a little bit lower than what we were originally expecting. We do expect that going into fourth quarter, we should be able to go back into our structural margin range. And when the overall utilization goes beyond 70%. And as I mentioned, it's more challenging now, but I think for the whole year, we'll still try to struggle to see if we can still reach the lower edge of the structural margin, which is about 24%.

but the product makes improvement and more testing revenue is still intact in third quarter, is that right?

I'm sorry?

The what? The more testing revenue or the more advanced packaging contribution in third quarter is still intact. Just the traditional packaging, the efficiency is lower. That was the main reason for lower gross margin in third quarter. Is that right on this thing?

That's correct. Okay, thank you. In terms of testing, we are progressing as planned, but the overall general market recovery seems to be slower. That's dragging the margin a bit, yes.

Okay, thank you.

There is no question from the floor.

Okay, if there's no more questions, we will end the conference call today. Thank you very much for attending, and we will see you next quarter. Thank you.

Thank you.