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

Hello, I am Ken Shung, the head of investor relations for ASC Technology Holdings. Welcome to our third quarter 2024 earnings release. Thank you for attending our second consecutive typhoon holiday earnings release. 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'm joined today by Joseph Tong, our CFO. For today's presentation, I will be going over the financial results and company outlook. Joseph will then be available to take your questions during the Q&A session that follows. We are altering our Q&A format slightly. During the Q&A session, I will be moderating, receiving and clarifying each question and repeating your questions to Joseph. With that, let's get started. The third quarter ATM seasonality came in slightly better than originally anticipated. The pickups were mostly driven by strength and leading edge advanced packaging and the seasonal ramps of some communications devices. Our overall equipment utilization was between 65 to 70%. For our EMS business, in the third quarter, demand for our services was also slightly ahead of our initial expectations. However, the higher demand was most likely attributable to an earlier seasonality. Please turn to page three where you will find our third quarter consolidated results. For the third quarter, we recorded fully diluted EPS of $2.17 and basic EPS of $2.24. Consolidated net revenues increased 14% sequentially and 4% year over year. We had a gross profit of $26.4 billion with a gross margin of 16.5%. Our gross margin improved by 0.1 percentage points sequentially and 0.3 percentage points year over year. The sequential improvement in margin is principally due to improved operating leverage offset by higher EMS product mix. Our operating expenses increased by $0.9 billion sequentially and by $1.4 billion annually. The sequential increase in operating expenses are primarily due to higher labor, bonus-related expenses, and other administrative 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 came down by 0.7 percentage points to 9.3% sequentially and increased by 0.5 percentage points year over year. The sequential decline in operating expenses is attributable to higher operating leverage due to higher loading levels, The annual increase was also related to higher R&D staff up for both ATM and EMS. Overseas expansion and higher incentive stock options and bonus expenses. Operating profit was 11.5 billion up 2.5 billion sequentially and 0.1 billion year over year. Operating margin increased 0.8 percentage points sequentially and declined 0.2 percentage points year over year. During the quarter, we had a net non-operating gain of $0.8 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 $2.1 billion. Our effective tax rate for the quarter was 16%. The effective tax rate during the quarter was lower primarily because of tax impacts of foreign currency fluctuations. We continue to expect an ongoing annual effective tax rate of approximately 20.5%. That income for the quarter was 9.7 billion, representing an increase of 1.9 billion sequentially and 0.9 billion year over year. The NT dollar was relatively steady during the third quarter. depreciating 0.3% against the U.S. dollar sequentially, while depreciating 2.7% annually. From a sequential perspective, we estimate the NT dollar depreciation had less than a 0.1 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 0.7 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 27.4 billion with 17.1% gross margin. Operating profit would be $12.7 billion with an operating margin of 7.9%. Net profit would be $10.8 billion with a net margin of 6.8%. Basic EPS excluding PPA expenses would be $2.51. On page four is a graphical presentation of our consolidated financial performance. Since the start of 2023, you will see here a troughish but gradually improving environment for both our ATM and EMS businesses. On a year-over-year basis, gross margins have been gradually improving. On the operating margin front, As was stated earlier, operating expenses are increasing for expected ramps and leading edge advanced packaging products, and to a lesser extent, offshore site expansion costs from our EMS businesses. 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 third quarter of 2024 revenues for ATM business were 85.8 billion up 8 billion from the previous quarter and up 2.1 billion from the same period last year. This represents a 10% increase sequentially and a 3% increase annually gross profit. for our ATM business was $19.8 billion, up $2.6 billion sequentially and up $1.2 billion year-over-year. Gross profit margin for our ATM business was 23.1% up 1 percentage point sequentially and up 0.9 percentage points year-over-year. The sequential margin improvement was primarily related to higher equipment utilization, offset in part by higher raw material product mix and higher utility costs. We expect the higher raw material product mix environment to extend into the fourth quarter. The annual margin improvement is primarily the result of favorable foreign exchange and product mix. During the third quarter, operating expenses were $10.6 billion, up $0.6 billion sequentially, and $0.8 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher labor-related expenses, much of which is related to the staffing for leading edge advanced packaging services. 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 12.3%, declining 0.5 percentage points sequentially, but up 0.6 percentage points annually. Sequentially, our lower operating expense percentage was driven by higher loading and thus higher operating leverage, while the annual increase was primarily due to labor ramp-ups preparing for higher leading edge advanced packaging revenues. During the third quarter, operating profit was $9.2 billion, representing an increase of $2 billion quarter over quarter and $0.4 billion year over year. Operating margin was 10.8%, increasing 1.5 percentage points sequentially and 0.3 percentage points year over year. For foreign exchange, we estimate the NT to US dollar exchange rate had a positive 0.1 percentage point impact. on our ATM sequential margins and a positive 1.3 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.1%, and operating profit margin would be 12.1%. On page six, you'll find a graphical representation of our ATM P&L. As you can see here, we've generally seen a very gradual recovery when looking at revenues and margins from a year over year basis. On page seven is our ATM revenue by the three C market segments. You can see here a slight blip in regards to communications product seasonality. Otherwise, not much has changed during the current quarter. Our leading edge advanced packaging services are in both our computing and communications segments. On page eight, you'll find our ATM revenue by service type. Here you can see that our business, at least during the softer environment, is shifting towards more advanced services. The gray color represents both our advanced and leading edge advanced services. We believe our strategies involved with growing our test business are paying off. As a percentage of ATM business, our test business is just under 16.5% total. And though it may not be immediately visible here, our test business is actually significantly outgrowing our assembly business this year. Current year-to-date growth is 6% relative to 1% for our assembly business. we see growth momentum for our test business. Further, given that test follows assembly from a process flow perspective, we expect a more pronounced pickup for our test business during the fourth quarter. On page nine, you can see the third quarter results for our EMS business. During the quarter, EMS revenues were 75.4 billion, improving 12.5 billion, or 20% sequentially, and improving 4.4 billion, or 6% year over year. The sequential and annual revenue improvements are primarily attributable to our customer's timing of this year's product manufacturing start. It is important to note here that this year's seasonality has moved earlier as compared to last year. Sequentially, our EMS business's gross margin declined 0.6 percentage points to 9%. This change was principally the result of product mix, Operating expenses within our EMS business was $4.3 billion, increasing $0.2 billion sequentially and $0.6 billion annually. The inclusion of our newly acquired subsidiary accounted for the majority of the annual increase. Our third quarter operating expense percentage was 5.7%, down 0.8 percentage points sequentially and up 0.5 percentage points annually. The higher annual operating expense percentage was primarily related to overseas expansion expenses and integration expenses related to a newly consolidated subsidiary. Operating margin for the third quarter was 3.3%, improving 0.2 percentage points sequentially and declining 0.6 percentage points year over year, primarily due to higher operating leverage from the current quarter seasonality. On an annual basis, operating margin decline was due to higher overseas expansion costs, including the addition of a newly acquired subsidiary. Our EMS third quarter operating profit was 2.5 billion, up 0.5 billion sequentially, while down 0.3 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. The third quarter segment shares of 2024 looks very similar to the third quarter last year, showing similar seasonality. The only more substantial difference has been an increase in the automotive segment as a result of increased overall automotive business. On page 10, you will find key line items from our balance sheet. At the end of the third quarter, we had cash, cash equivalents, and current financial assets of 78.4 billion. Our total interest-bearing debt increased by 29.3 billion to 213.2 billion. Total unused credit lines amounted to 361.3 billion. Our EBITDA for the quarter was $28.6 billion. Our net debt to equity this quarter was $0.41. On page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the third quarter and U.S. dollars totaled $603 million, of which $312 million were used in packaging operations, $274 million in testing operations, $14 million in EMS operations, and $3 million in interconnect material operations and others. We are in the midst of a substantial pickup in our leading edge advanced packaging revenues. As was stated in our second quarter earnings release, we continue to expect at least a doubling of such revenues for the next fiscal year of 2025. We continue to see substantial growth opportunities related to packaging and testing for leading edge products. These revenue opportunities are not only related to AI and high-performance computing, but also touch upon high-end networking and communications. As these high-end processes become more complex, this impacts our capital investment methodology in two major ways. First, the time it takes to put in place our equipment extends. Advanced products have significantly more process steps and each step has become more complicated. As a result, our capital expenditures will need to be made further ahead of anticipated revenues when compared to traditional ATM capital expenditures. Second, because of the increasing precision necessary for leading edge services, the cost of equipment has become more expensive. Relative to our traditional businesses, this increases our capital intensity per unit along with our unit ASP. This is starting to play out in the current quarter. We are seeing an increased level of capital equipment investment to satisfy 2025 business. As a result, we now project our annual machinery and equipment capital expenditures to end the year above our annual depreciation and amortization levels of 1.9 billion US dollars. From a historical perspective, 2021 was the last year we spent more on machinery and equipment than our depreciation and amortization. This inflection point not only represents ASE's belief in the revenue opportunities ahead, it also signifies a major step into the next evolution of packaging. For us, the leading edge component is becoming more mainstream and significant in terms of size and scale. We expect this elevated rate of investment to stretch into next year as we prepare for services to be delivered during 2025 and beyond. Looking into the fourth quarter from a business outlook perspective, we can separate our business into three separate service categories. Leading edge products, typically seasonal products, and everything else. Leading edge is going gangbusters. Whether it's AI, networking, or other products in the pipeline, the need for our advanced interconnect technologies in all its forms looks extremely promising. Seasonal products such as communications and handset-related products are going through its paces. Not really great, not really bad, and some devices doing better than others. It's kind of really neither here nor there. For everything else, there just isn't a lot of demand or optimism. Recoveries related to general demand for this year have not really happened. The fourth quarter pickup is not as strong as we would like it to be, but at least we still see a pickup, albeit slight. From the expense perspective, there are three items impacting our expenses for the fourth quarter. One, typhoon costs. Even though our factories are still running, such as today, typhoon holiday labor counts as overtime hours for much of our direct labor. Two, utility costs. Base utility rates were increased by Thai power. The higher base rate went into effect mid-October, coinciding with the end of summer rates. And three, a stronger NT dollar environment. With these impacts in place, we will attempt to keep our ATM fourth quarter margins flattish. The environment for our EMS business appears to be a bit more challenging. As was mentioned in our second quarter results, our EMS business appears to have an earlier manufacturing cycle or shifted seasonality. This combined with lackluster general demand is creating a declining fourth quarter outlook. Given this unusual seasonality and the ongoing costs related to geographical rebalancing, we are expecting lower operating margins for the fourth quarter for our EMS business. We would like to summarize our outlook for the fourth quarter 2024 as follows. For our ATM business in NT dollar terms, our ATM fourth quarter 2024 revenues, should grow slightly quarter over quarter. Our ATM fourth quarter gross margin should be flattish quarter over quarter. For our EMS business, in NT dollar terms, our EMS fourth quarter 2024 revenues should decline mid single digit quarter over quarter. Our EMS fourth quarter 2024 operating margin should decline one percentage point quarter over quarter. In order to make all our hardworking analysts have fair opportunities to ask questions during our earnings call, we are adjusting our Q&A format slightly. During the Q&A session that follows, we would appreciate if questions can be kept concise and asked one at a time. Callers will be allowed to ask two questions per turn, but questions are asked one at a time. I will be receiving each question and repeating the asked question to Joseph. Again, we will be limiting the number of questions asked to two questions per turn, but ask one at a time. Callers may return to the queue for additional questions. Thank you.

If you have any questions, please raise your hand. We have a question from Ms. Sunny Lin of UBS.

Hi, could you hear me okay? Yes. Thank you very much for taking my questions. So my first question is on your opportunity in leading-edge events packaging. As you said, you continue to raise K-Pack t-shirts to support businesses into 2025. So any updates that you could share with us on your revenue target for 2025, whether it's going to be higher than the $1 billion target that you provided back in July? Yeah, that would be my first question.

Funny.

So your question is related to our leading-edge advanced packaging targets for next year.

Is that correct?

That's right. Yeah. Okay.

Okay, I think we are seeing, we're maintaining our view for this year. We continue to be ahead of our target of doubling our revenue from leading edge, both for packaging as well as test revenue. And going forward, I think we continue to see very, very strong demand coming in. And as we are scrambling to increase our capacity, we do see a very... healthy pickup next year in terms of a leading edge, I think it's safe to say that we will be having over 10% of our revenue is not more likely to be at low teens of overall ATM revenue coming from leading edge.

Got it. Yeah. Well, so maybe, sorry, just to be more specific, I think people maybe care more about if you have any breakthrough in the full process co-op. TSMC is still very determined in expanding the chip-on-wafer capacity going to next year. And I think MCOR earlier this week also talked about for the full process co-op, we are seeing some client-based expansions to the second and also the third client. Our sense this year, you have pretty good pickup overall for leading edge, but that's probably mostly coming from the outsourcing business from TSMC. And so wonder going to next year, whether we should also expect some pickup into your own full process co-op. Thank you very much.

So Sunny, your question relates to the composition of our leading edge advanced packaging revenues going into next year. Is that correct?

Right. Thank you. Yeah.

Well, I think TSMC's aggressive extension of their backend or leaving a backend capacity is really a testament of a very, very strong demand coming in the next few years. And being the, you know, the chosen partner of our customer as well as a fund-raising partner, I think that we will definitely share that huge potential in front of us. And we are making the necessary investments across the board, including 2.5B, including tests. But the investment will be made or capacity increase will be made in line with our customers' requests and also all the economic parameters that we need to put in place for consideration of what are the suitable capacity that we will be adding and where and when and how we'll be adding those capacity. Basically, it should be aligned with the customers' requests.

Does that answer your question?

Yeah, thank you. Thank you, Ken. Thank you, Joseph. Could I ask my second question?

That was your second question. Please return to the queue. Thank you.

No problem. Thank you.

Next question is from Mr. Goku Hariharan. Goku.

Hi, good afternoon. Thanks for taking the question. My first question is again on the leading edge advanced packaging. How do you characterize the relationship with the SMC on a, let's say, two to three year basis? I think next year you're getting a lot of the outsourcing business. but they're also working with Amcor. I think they just announced the MOU signed with Amcor for the US capacity, I believe from 2027. So if you think about next year and as well as maybe three to five years out, what portion of this leading advanced packaging business will come from DSMC's outsourcing and what portion of it would be coming from ASC's own efforts kind of seeking out your own customers directly?

Hi, Goku. So your question relates to our relationship with our foundry partners. Is that correct?

Yeah. And also in relation to how the AMCOR arrangement that they have also will work, like how you're posting that.

Okay.

In that context.

Yeah, I think, you know, we are partnering together with our foundry partner to... continue to expand our capacity to meet the growing demand. And it really depends on the water. There will be a natural division of works where each partner will be focusing on what they do best and what makes the most economical sense for each. So, as I pointed out, the capacity expansion that we were going to be making will be across the board, including all aspects of the whole process. But again, there will be priority allocation between different processes, depending on the customer's request. In terms of M-Corp, I think right now we are really focusing on meeting the current demand and we're scrambling to increase the capacity so as to meet the current strong demand. We're not particularly worrying at this point, worrying about what's what kind of a competition may or may not have, you know, three years down the road. What we are busy on today is really focusing on meeting the current demand at this point. Does that answer your question, Goku?

Yeah, that's good. So second question is basically on the chip-on-wafer portion. Could you talk a little bit about whether you will have significant chip-on-wafer related assembly next year? If it is happening, how big is it going to be of this low teams percentage of ATM revenue? Is it going to be quite significant or is it going to be quite small next year?

So, Goku, you're asking about the composition of our leading edge advanced revenues as it relates to the wafer attached portion, right?

Japan wafer portion, yes.

We don't use that term. But we do understand what you mean.

As I mentioned, we will be investing in all aspects of the process, I think, including chip-on-wafer as well as on-stop rate and testing as well. Again, it really depends on the economic benefits that we'll be looking at or considering to make the necessary or the appropriate investment in terms of building these capacities. So I think the, you know, of course the, in terms of managing to, there will be a, I think more will be on substrate as we're seeing the situation now. But the situation can be very dynamic. It depends on ourselves, our customers, and also our founding partners, the progress in terms of developing these products or capacity. So we'll make the necessary adjustment as we go along. Does that answer your question, Goku?

Any chip-on wafer is in your guidance for the low teens of ATM revenue?

I guess we'll allow this. But yeah, we would prefer you keep to the two-question limit at this point. But go ahead.

Yeah, just as a clarification, in your guidance of low teens, is any chip-on wafer already included? Any meaningful revenue from chip-on wafer already included or the on-wafer processing part already included?

Yes, we will be having both focus and focus bridge and kind of solutions under our mass production. And we are adding new capacity aligned with the customer demand.

Okay.

That will be part of the overall leading edge revenue that we are going to have next year.

Does that answer your question, Koku? Okay, thanks. Thank you.

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

Okay, can you hear me?

Yes.

Okay, so for the 500 million revenue we generate from advanced packaging this year, how much is this from the testing? You know, testing will account for 15%, 16% of your total age in the business. But for the advanced powers, well, you know, the advanced one, you know, how much is it from testing? And this ratio is going to change meaningfully for, you know, 2025 with a billion dollars revenue.

Bruce, your question relates to the amount of testing within our total outlook of leading-edge advanced packaging services for next year. Is that right?

I mean, what's the ratio for... For this year or next year, please? Both, both.

First of all, we are ahead of our schedule in terms of ahead of our plan in terms of doubling our leading edge revenue. So it will be over $500 million. But at this point in time, particularly for this year, we're basically focusing on building up the assembly facility. capacity. And so the test portion of the overall leading edge revenue for this year, uh, will be relatively smaller. Uh, next year, I think advanced testing, uh, Well, as Ken pointed out earlier on, we are seeing our investment in tests are starting to pay off. And we believe that the percentage will continue to rise into next year. And we are targeting at anywhere from 15 to 20% of our leading edge revenue coming from tests.

Does that answer your question? Yes. My second question is for your customer's concentration for the leading-age advanced packaging portion. What's the customer concentration right now, and is the concentration going to change for 2025?

You're asking the customer composition of our leading-age? Concentration. Concentration. Yes. Okay.

I don't think we have a concentration issue here. I think the... We are having engagement with all the direct customers, with the system houses, with the fabulous houses. We are dealing with foundries. So the demand is coming from all different directions. And basically all the who's and who's that are involved in the leading edge will be, we're having engagement with. And at this point, concentration is not a real issue. The real issue is how fast or how efficiently or how effectively we can catch up our capacity with the demand.

I'm sorry, just to be clear, it's not the case that the top two, top three customer accounts for the majority of your advanced packaging business?

I'm sorry.

Okay. I thought that, you know, top two or top three customers in your advanced packaging accounts for like, you know, 80 or 60% of your, you know, $500 million revenue.

At this point, yes.

Yes. So that's the customer concentration, which is supposed to be high for this year, right? Do you see the customer concentration remain this high for next year? That was the question.

It will not be the same percentage as we're seeing today. I think it's going to be much more appropriate next year.

I see. I understand. Thank you. Thank you.

Next question is from Mr. Rick Hsu of Daiwa Securities.

Hi, can you guys hear me?

Yes, we can.

Okay, yeah, thank you so much for taking my question, especially during this typhoon season. Yeah, I guess maybe just end it loud and you guys are still on the duty. Okay, just one quick question from me. Housekeeping, so your utilization rates across your assembled and testing for Q3 and Q4, please.

I think the utilization will be very similar between the two quarters. Right now for both packaging and testing, we're running at 65 to 70%.

So 65% to 70%, is that correct? Correct. Okay. And second question is regarding the global semiconductor revenue forecast or the semiconductor market as memory. What's your take? What's your update right now for this year and next year? Do you think next year the growth will be better than this year?

Rick, are you asking that for our view on the general market, general semiconductor market?

Yes, and if you can share also your own revenue growth this year, next year, especially for next year, that would be great.

I think the general market this year is still not recovering very well. And I think going into next year, I think in terms of general market, it's still going to be a lukewarm year. I think the only bright spot at this point is really the leading edge and or AI HPC related type of business. And so, you know, this year, I think the overall, if you look at the whole non-memory, if you exclude the AI or HPC related, I think the whole market is actually came down. to some degree. Um, so there was, there was really negative growth for this year. Um, Going into next year, I think if you look at different analysis of different research reports, I think people's view on next year is really all over the map. I think there will be low single digit all the way up to close to 20% kind of growth. So it's really, at this point, I think the situation is really very unclear. uh so what we are uh what we are doing is really focusing on what we are seeing uh our own business and where those businesses are coming from and what are the mentality or momentum of each different categories at this point i think uh we we continue to see that leading edge will be uh the main driver for next year although the general market will have a you know, kind of a slow recovery. We are seeing that our investment in tests is paying off. We're seeing both very good progress in terms of increasing our turnkey ratio and our turnkey business as well as our direct business, you know, front end. Although, again, a large chunk of it is really coming from the leading edge. So without giving you a full, you know, in terms of what kind of growth we're going to have for next year, we will have a clear vision picture once we've done our budget cycle. And I'm sure we're going to have a more meaningful discussion come next quarter.

Great. Yeah, that's really helpful. Thank you so much. Thank you.

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

Hi, Joseph. Hi. Ken, and that's Iris. Yeah, I hope you stay safe and warm. So my first question is about your investment in testing business, right? Joseph said that they will pay off next year. So can I ask some more details? So first of all, For that testing revenue, do you expect more coming from the chip probing outsourcing or your sort of final test and kind of burning kind of business takeoff for next year?

Charlie, your questions regarding the composition of our test market share gains that we're expecting? Is that correct?

Yep, for next year. Yes, thanks, Ken.

I won't be able to give you a breakdown, but what I can say is that we will be making the necessary investments covering all kinds of different businesses. Some can be for wafer sort, it can be for final tests or burning related final tests. I think, um, you know, we are also, uh, aggressively, uh, expanding our turnkey businesses as well, uh, with our existing customer and future customers. So I think the, uh, our turnkey service really give us an edge in terms of, uh, uh, growing our test business, both in the, uh, uh, in all fronts, including some outsourced business, as well as direct business from direct customers.

Okay, that's perfect. Thanks, Joseph. And my second question is about the gross margin trend. I feel like it's a little bit... disappointing per se, because for your fourth quarter, ATMs and revenues are flat, but your margins are so flat, right? But I thought that your advanced packaging, especially the testing parts, continue to grow in fourth quarter. So can you give us some sense about how we're going to model growth margin training to next year? Do you really benefit from the

So your second question is regarding the characterization of our gross margin, one for this coming quarter and then from a longer-term future outlook perspective. Is that correct?

Yes. Yes, thanks, Kent.

Yes, we are a bit disappointed with this year's margin in performance. As we pointed out, once we can reach a loading of 70% and above, we can go back to our structural margin range. Unfortunately, I think at this point, because the general market is still relatively weak, while the leading edge still represents only a small percentage of our overall revenue, so we weren't able to make it this year. But going into next year, I think, of course, things are looking up, both from a general market perspective. Like I said, it's going to be, although not as strong, but it's still going to have a much a better recovery, uh, than this year. While we also, uh, aggressively expanding the, uh, uh, the leading edge capacity, uh, which should, uh, represent more than 10% or maybe at the low teens kind of percentage of overall revenue. So, and also, uh, the test portion of our, uh, of our business will continue to increase. All these put together will definitely help our margin, uh, for next year. And, uh, Although one thing I would like to mention is that all the investments that we'll be making for capacity expansion, it's more front end loaded. And because this leading edge is much more complex, You really have to have very high competencies in all process, including equipment, including process, technology, scale, logistics, everything. So I think a lot of the investment, hard and soft investment needs to be put in front end. And so it's going to be more front end loaded. and the revenue will come later. It will be more back-end loaded. So for next year, it will be a bit more I shouldn't say tough, it's very natural that because of the front end loaded investment, the margin performance in the first half of the year will be weaker than the second half. But as a whole year, we are very, very confident that we'll be able to bring the overall margin back to the structural margin range.

Does that answer your question? Oh, he's already off. Okay, the next question.

We have a question from Ms. Laura Chen of Citi.

Hello, hi, good afternoon. Thank you for taking my question. My question actually is also similar to the gross margin trend. We assume that the leading age advanced packaging would be able to generate better SP and also gross margin. But like Joseph, you mentioned that that would be fun and loaded. So I'm assuming that initially that could be the margin dilution. But at the same time, because of the iteration rate should be high. So how should we think about the growth margin at this moment for the most leading age advanced packaging?

Laura, your question relates to Leading Edge Advanced Packaging's impact on gross margins. Right. Now and going forward, right?

Yes, yes, correct. Thank you.

Well, the Leading Edge, both packaging and test, I think it's really a margin accretive business for us. I think the key question here is for us to really do a good job and continue to ramp up the capacity and to raise this part of the revenue as fast as possible and as high as possible moving forward to continue to move up our margin. And, you know, at a more steady state kind of status, I think our margin should be closer to the higher end of the structural margin.

Okay, thank you. Yeah, and also, just a quick follow up, if I may, I mean, for the AI accelerator, we also see the trend of the CPU opportunity. I'm not sure that is also considered as advanced packaging from AAC perspective, or you will view that more like a module or SIP type of a business?

Is there a question there?

I think the answer is yes, we do look at it as part of the leading edge revenue that we're going to have. I personally, I don't really think that it's a simple module that does require a very high standard of precision and it requires a leading edge technology to make this thing happen.

Okay, thank you.

Thank you, Laurel.

Next, we have Mr. Goku Hariharan back.

Hey, thanks very much for taking another round of questions. So, first of all, on the leading-edge advanced packaging business, Joseph, now that you've done a fair round of investments here, Any math in terms of how is the return profile looking like for this business? Like previously, you've talked about a dollar investor gives you a dollar back, I think, in flip chip in a year or so. Any math on the ROI for this investments based on your current expectations?

Goku, your questions regarding the return profile of leading edge advanced packaging.

That's right.

I think this is a bit difficult to answer. I think this is new. And like I said, in terms of investment, because it is new, it's more complex. Aside from the hard costs that we need to put in, there's also a lot of soft costs that's involved. So it's difficult at this point to pinpoint what kind of return profile this kind of investment will have. But from what we're seeing today, I don't think we're too far off from what the what we have as a rule of thumb before, on a blended basis, each dollar investment could create close to a dollar of revenue. That kind of profile remains to be seen. But at this point, I haven't seen a major deviation from that.

Understood. My second question is on your communication business, which is still the largest part of the ATM revenue. There is obviously a lot of excitement about Edge AI, et cetera, larger chip sizes. Anything that is helping you on this regard from an outlook perspective when you talk to your customers, do you think this is a segment they are growing into next year or is it you think that is also going to be kind of very slow growth going into next year for the communication part given that's the biggest part of the revenue?

Okay, you're asking from an edge AI perspective, whether that is going to impact our overall communication segment going forward or our expectations related to that? Yes, for 2025. Yeah.

Oh, you mean AI devices?

Yeah, edge AI, yes. And any expectation on 2025 improvement in like flip chip packaging and flip chip CSP, BGA, et cetera, for your core communication portfolio?

Well, I think that's certainly the theory. And, you know, once the... Once the AI comes into play, I think there's going to be a lot of edge devices or more applications that's coming on board. It will definitely take some time. And we will continue to observe the magnitude of AI-related product proliferation. And with our technology and capacity, we'll certainly be the biggest beneficiary of the going trend. I can't answer whether that's gonna happen in a big way in 2025 or any specific timing, but we believe that is certainly the trend and it's gonna happen sooner or later.

That answers your question, right?

That should be fine, yeah, thank you.

All right, thank you. Please raise your hand. We have a follow-up question from Mr. Bruce Liu of Goldman Sachs.

Okay, I got a question for the ATM growth margin. I think we were talking about the margin recovery a couple of quarters ago. But the growth margin for ATM is still around low 20s, even for the fourth quarter. But if you look at the business, the testing business is supposed to be higher growth margin, grow faster than other businesses. your other vendors, you know, AI business, which is supposed to be a higher margin, and it's also exceeds $500 million revenue, suggesting that fourth quarter revenue can be even though it's supposed to be much higher. So, other than lower utilization rate from your, you know, mature technology capacity, Is there anything we missed or anything we see that as a margin headwind?

I think for fourth quarter, we are facing a higher cost environment. Like I said, a lot of the, not just the park projects, cost that we need to put in for capacity. There's a lot of development costs that we need to put in. There's a lot of R&D effort that we need to put in. Also, if we look at the overall environment, we're facing weather difficulties. We are looking at, we are having a You know, the second round of electricity bill raised, you know, last time it was about 15%. And on top of it, starting from October, there's another 14% increase in our electricity bill. We are staffing up. for the new capacity that we're going to put in. So a lot of the front end investment that we need to put in or expenses that we need to put to throwing does have an impact for our fourth quarter margin. So we're kind of scrambling to... Although there are some upside for us, including the higher percentage of test revenue. But I think the progress in that is not enough to offset all the other expenses that we will be incurring for a fourth quarter. And that's why We're saying, although with a slight growth in our overall revenue, our margin doesn't seem to be... There won't be a... a real pickup in terms of our margin for fourth quarter. But like I said, you know, once we get into a more steady state, we are very, very confident that we will be reaching our structural margin and more so on the higher end of that range.

Does that answer your question, Bruce?

Sure. Can you reiterate that? Can you restate your structural gross margin? And Can you raise that if you achieve $1 billion revenue from next year?

I think the structural margin will continue to be 24% to 30%. Like I said, for next year, it will be back-end loaded, basically, in terms of our margin improvement. And because of a lot of the investment that we need to put in first half of the year and there's a lot of engineering early efforts that we need to put in.

Thank you.

Next question is from Mr. Charlie Chen of Morgan Stanley.

Thanks Iris and thanks for taking my Second question. So my question is about the end demand, especially recently several companies reported very disappointing smartphone related to guidance, right? No matter M-Core or last night Corvo. So I'm wondering whether ASC also sees similar trend of the smartphone weakness, especially for the major U.S.-brand smartphone, the so-called forecast cut or auto cuts. Thank you.

You're looking for our view on the communications segment, in particular, handsets.

Yes, indeed. Yeah, because there are lots of noise, I would say. And if you can also talk about automotive, that would be much appreciated because also lots of a different view there. Thanks.

Oh, okay. I think it's kind of hard to comment on noises that's playing around. But I think we are... from our own perspective, we're seeing typical seasonality for smartphone going into fourth quarter and also in the coming quarters. At least from our own forecast, we're not seeing a huge or a large scale movement in our forecast. I think as a general comment, I think I think both for communication and maybe for computing, things are kind of... I think the inventory issue is kind of behind us. But then I think the real question is how the end demand or the consumption is coming... How that is coming back at this point. And that remains to be seen. I think a lot of the... A lot of the noise may come from, you know, if it's a season... I think there's a lot of hype in terms of all the new devices coming out with AI features in it and whether those will be appealing and when these AI applications will be actually put in place for the consumers to enjoy. I think there could be some timing gaps between a real products coming out when the consumption starts to pick up. So there's different types of noises flying around. But what we need to do is really to focus on our own business and see how that fluctuates and how that affects our business. And for the time being, at this point, we're seeing a stable fourth quarter in terms of all segments. although we're still seeing some softness in terms of automotive and maybe to some degree in industrial. But other than that, I think things are in the kind of a normal pattern for us.

Thank you. Yeah, it's super helpful. And my second follow-up question is about your progress in burning. And so may I know, How do you think about your kind of cost structure? Meaning if you need to buy third parties a burning tool, would that sort of dilute your margin for your future testing business?

I think it's a little bit early to comment on that, you know, what kind of burning, what kind of specs for it, and whether those burning capacity will be consigned or purchased ourselves. It depends on what the future business looks like. At this point, I think it's very difficult for me to comment on that.

No problem. Thank you. Thanks again. Thank you.

There is no more question.

All right. Well, thank you very much for attending the call. I'll turn it over to Joseph to close it all out.

Okay. Thank you all for attending our conference call, even at this time. I think overall, we had a pretty good third quarter and stable fourth. And, you know, going into next year, I think we are, We are very aggressively expanding our capacity for the leading edge and also for tests. And we believe that the momentum will continue to build into 2025. And we are really looking up for next year. And we'll be producing a very good result for our shareholders and for ourselves. Thank you very much.

Thank you.