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 second quarter 2025 earnings release. Thank you for attending our earnings release today. Please refer to our safe harbor notice on page two. Two. Thank you. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please do not ask questions or you may leave the session 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 Dr. Tian Wu, our COO, and Joseph Tung, our CFO. For today's presentation, Dr. Wu will go over our mid-year update, I then will go over the financial results, and Joseph will deliver the company's guidance and closing remarks. Afterwards, both Tian and Joseph will be available to take your questions during the Q&A session. I will be moderating the Q&A sessions that follow. We will start with some questions from the floor and then start alternating in some questions from virtual attendees. With that, I'll hand the presentation over to Dr. Wu.

Good afternoon. We have not had a lifeline for quite a few years. Welcome back, and thank you for coming. To begin with, I would like to give you a recap for the first half of 2025. Everything will be U.S. dollar terms. The unconsolidated revenue grew 9% year on year in first half of 2025, with ATM revenues up 18% year on year. Leading edge of advanced packaging and overall testing outpaced growth while the general segment saw some recovery. The leading edge of advanced packaging and testing revenue were over 10% of ATM revenues in the first half of 2025, comparing to 6% for the full year of 2024. Our testing business grew 31% year-on-year in the first half. The momentum will continue into the second half. Our increased turnkey and expanding leading-edge test. Machinery CapEx was U.S. dollar 1.9 billion. Building, factory, facility, automation was 0.9 billion in the first half of 2025, driven by advanced packaging and testing. So that is the first half recap. It has been quite busy for AAC team. The second half will be busier. Let me give you a little look. For the ATM business, we expect momentum to carry into Q3. As of now, we also believe Q4 will have a quarter-to-quarter growth comparing to Q3. The leading edge advanced packaging and testing revenue, we target to increase by US $1 billion. We made this statement at the early beginning of this year. Contributing 10% of the whole year growth, while the general segment is to grow by mid to high single digit year on year in 2025. We maintain this view as of now. Even with all of the uncertainties that we have gone through, this view has not changed. We expect revenue uptrend continuing into 2026 and beyond, driven by leading-edge solutions and broad-based semiconductor demand related to AI proliferation, also general recovery that we believe will happen in 2026. Investment in R&D, human capital, advanced capacity, and small factory infrastructures are key to support a multi-year growth. This is putting a lot of pressure on ASE team. However, with detailed conversation and discussion with our key partners and all of our key customers, We believe this is the best thing that we can do for ASE, for the Taiwan ecosystem, as well as for the industry. With that, let me go over to the third page. The third page, I only have bullet form. I would like to talk about three items, market dynamics, operations, and also the challenges. I might not go over things in the right order, but these are the bullet points I would like to cover. To begin with, I want to talk about how do we see the market heading and what is the current dynamics and also the future opportunities for ASC as well as for many players in our industry. I want to touch on the technology focus because that is related to the market trend, also related to the ASC position. Then I'll cover the operation where the leading edge capacity and all capacity in general in Taiwan is very full now. That's why we have to continue to expand into the second half. The overseas will still have some idle capacity. Therefore, how do we manage the expansion? in Taiwan as well as outside of Taiwan, and the resource optimization becomes key. And lastly, all of the challenges I will touch base on that. Okay, with that, let me just go over the mega trend. Everybody talks about AI, hyperscaler, data center. We're well into, I would say, the second or the third year of this trend. The recent announcement outside of the U.S., you're seeing the announcement of mega data center worldwide. We believe the two things are happening. The first is expansion of hyperscaler data centers worldwide. The second thing is in the middle of that expansion, the upgrade cycle are ongoing right now. with the technology provider as well as the infrastructure provider. We have not touched base on the AI Edge applications yet, but we believe there will be multiple waves in the next 10 years, starting with the hyperscaler data centers and then go through the inference and then go through the AI Edge applications. What are important is in this AI paradigm shift, what has become clear to us by talking to our foundry partner and also talking to our key customers, some of the foundational technology requirements are identical. I'm going to give you four. The first one is integration. I think the 3D IC packaging, the density, that is an example of the heterogeneous integration that we've been working on this for a long time. The focus offered by ASC, the co-ops offered by TSMC are examples of that integration. That trend will continue with the expansion as well with the upgrade cycle. The second thing is the power management. We have not touched base on the power management. We believe power management is going to be a key hurdle that industry needs to address. The third one is the silicon photonics. I think we have been talking about, very vocal, the importance of silicon photonics. We have not seen the revenue uptick yet, but this is a foundational technology that will provide the bandwidth, the speed, latency, and the efficiency. It needs to happen in order to trigger even more applications such as humanoid. And lastly will be the cost. In the cost, not only we need to think about capacity, we need to think about the material configuration. More importantly, we have to think about throughput and also the flexibility in designing the footprint. And that's where the large panel coming in. If we have gone through all of the foundational requirements, then we're going back to the AAC position. And there are three things I want to share with you on how I view the AAC positions, how I articulate AAC's position to our key partner and clients. The first one is the scale. I think from the news report, you can look at the AAC scale. margin model, as was our cash flow, and also the amount of capex investment we are making on behalf of the industry. The second item is speed. Because AAC is well positioned within the Taiwan ecosystems, that we will execute expansion. It is second to none. In other words, it's very difficult to imagine in 2025 alone, how much capital we have put in, how much more revenue we are going to introduce. The third one will be the synergy. So between scale, speed, and synergy, that pretty much outlined the AAC position in this new paradigm, AI shift. We're at the beginning of the data center of the scaler. In the future, there will be multiple cycles of expansion, upgrade, inference. as well as the AI edge. That's where the real volume and the real application is going to emerge. Because all of these future opportunities, we're seeing the leading edge capacities in Taiwan is very, very full right now. We do see the disparity between AI as well as the other general sectors. And that pretty much outlined the 2025 first half scenario. In the second half, the disparity will improve. In 2026 and beyond, we believe that cycle will start showing less of a disparity. That is why it is putting a lot of pressure on ASE to accelerate on the capacity growth in Taiwan, especially in the leading edge packaging and testing. At the same time, it prompts us to look at resource optimization between Taiwan overseas We have planned to looking at expansions in other countries of the world with all of the recent updates and changes. It prompted us to start looking at the business opportunities versus how do we deploy our capital and resources based on the new paradigm as well as all the new variables. And lastly, Foreign exchange. Foreign exchange, I think Kenshong and Joseph will give you much, much more details on the impact of foreign exchange on ASE's performance for last quarter and maybe for Q3. However, I want all of you to keep in mind, we are here for the long term. In the long term, we will have execution issues. We'll have regulatory control issues. We will have product mix issues. We have customers changing order issues. Of course, we will also have machine delivery issues and our own execution issues. When the management team is busy worrying about all of the detailed operational issues, let's not forget the future opportunities here and the speed execution. We would like to take all of the ASC partner and our customer to a much higher ground for this uptick, 10 years of AI cycles. With that, thank you.

Thank you, Dr. Wu. Thank you. Now I will go over our prepared remarks in regards to our financial results for the second quarter. We are trying to be more environmentally friendly. We are no longer providing printed copies of our slides. If you have not done so, we have a QR code. The QR code, please. Here for the attendees to scan. After scanning, you'll be forwarded to our investor relations landing page where you can download materials related to the presentation today. The slide deck currently does not include our guidance section. After the presentation has concluded, the slide deck will be updated to include our guidance section. During the quarter, we saw a material move in the NT dollar to U.S. dollar exchange rate. The NT dollar moved from an average exchange rate of 32.8 to 31.2 NT dollar per U.S. dollar, strengthening by 4.9%. With our revenues generally based in U.S. dollars and a large percentage of our ATM expenses being NT dollar based, The foreign exchange fluctuation was detrimental to our financial performance. The impact of currency fluctuation will differ each quarter. However, on a simplified basis, we estimate that for every percentage point appreciation of the NT dollar relative to the U.S. dollar, we see a corresponding 0.3 percentage point negative impact to our gross and operating margins at the holding company level and a 0.45 percentage point negative impact to margins at the ATM level. Using this simplified approach, we can estimate that on a sequential basis, foreign exchange had impacts to our holding company and ATM margins of 1.5 and 2.2 percentage points, respectively. On an annual basis, we estimate impacts to our holding company and ATM margins of 1.0 and 1.5 percentage points, respectively. As Dr. Wu stressed, our businesses are healthy and are generally on track to hitting most of our targets stated at the beginning of the year. However, foreign exchange movements have created a temporary misalignment between our costs and revenues, and as a result, we believe that our current financial results may not fully portray our underlying accomplishments. From a strategic perspective, we believe the current negative currency impact to be a near to midterm phenomenon financially. we fundamentally believe our businesses support a certain level of financial return. Such return expectations are intrinsic within our business evaluation and capital investment processes. The exchange rates we encounter are variables used within these calculations. As such, in time, we believe our margin structure can and will return to previously stated structural levels. With that said, we are examining and considering the timing of a number of strategic initiatives. We are also reconsidering whether future business opportunities still align with our return goals. There is much to accomplish, but it does present an opportunity to reexamine our businesses in more detail. With that, let's go through the financial results. Please turn to page 7 where you will find our second quarter consolidated results. For the second quarter, we recorded fully diluted EPS of $1.70 and basic EPS of $1.74. consolidated net revenues were $150.8 billion, representing an increase of 2% sequentially and 7% year-over-year. On a U.S. dollar basis, our sales increased by 7% sequentially and 11% year-over-year. We had a gross profit of $25.7 billion with a gross margin of 17%. Our gross margin improved by 0.2 percentage points sequentially and improved by 0.6 percentage points year over year. The sequential improvement in margin is primarily due to higher loading efficiency in our ATM business, offset in large part by foreign exchange. The annual improvement is primarily due to higher utilization and beneficial product mix offset by foreign exchange. We estimate that foreign exchange fluctuation had a negative 1.5 and 1.0 percentage point impact on gross margins on a sequential and annual basis, respectively. Our operating expenses increased by $0.3 billion sequentially and $1.5 billion annually to $15.5 billion. The sequential increase in operating expenses is primarily due to higher consumption of factory supplies as our R&D activities ramp. The year-over-year increase in operating expenses is primarily attributable to increases in R&D staffing, factory supply consumption, and other labor-related costs. Our operating expense percentage stayed flat sequentially at 10.3% and increased annually by 0.3 percentage points. Operating profit was $10.2 billion, up $0.5 billion sequentially, and $1.2 billion year-over-year. Operating margin was 6.8%, up 0.3 percentage points sequentially, and improved 0.4 percentage points year-over-year. During the quarter, we had a net non-operating loss of $0.9 billion, Our non-operating loss for the quarter primarily consists of net interest expense and net foreign exchange hedging activities offset in part by profits from associates and other non-operating income. Net interest expense for the quarter was $1.2 billion. Tax expense for the quarter was $1.6 billion. Our effective tax rate for the quarter was 17%. Net income for the quarter was $7.5 billion, representing a decrease of $0.1 billion sequentially and a decrease of $0.3 billion year-over-year. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $26.2 billion with a 17.4% gross margin. Operating profit would be $11 billion with an operating margin of 7.3%. Net profit would be $8.3 billion with a net margin of 5.5%. Basic EPS excluding PPA expenses would be $1.91. On page 8 is a graphical presentation of our consolidated quarterly financial performance. On page 9 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 2025, revenues for our ATM business were $92.6 billion, up $5.9 billion from the previous quarter, and up $14.8 billion from the same period last year. This represents a 7% increase sequentially and a 19% increase annually. On a US dollar basis, our ATM revenues were up 13% sequentially and 23% annually. Gross profit for our ATM business was $20.2 billion, up $0.6 billion sequentially, and up $3 billion year over year. Gross profit margin for our ATM business was 21.9%, down 0.7 percentage points sequentially and down 0.2 percentage points year over year. The sequential and annual margin declines were primarily due to NT dollar to U.S. dollar appreciation and, to a lesser extent, higher utility rates offset in part by efficiency from higher loading. On a constant currency assumption, we estimate our gross margin would be roughly 2.2 percentage points higher during the quarter, within our original margin expectations for the second quarter. During the second quarter, operating expenses were $11.4 billion up, $0.1 billion sequentially, and $1.5 billion year-over-year. The sequential increase in operating expenses was related to slightly higher labor costs from workdays. The annual increase is primarily the result of R&D ramp-up and labor-related expenses. Our operating expense percentage for the quarter was 12.3%, decreasing 0.7 percentage points sequentially and down 0.5 percentage points annually. The sequential decrease was primarily related to higher revenues on relatively stable operating expenses. We continue to target to lower our operating expense percentage. However, given the foreign exchange environment, the level of anticipated decline in percentage may be somewhat impacted. During the second quarter, operating profit was $8.8 billion, representing a sequential increase of $0.5 billion and an annual increase of $1.6 billion. Operating margin was 9.5% down 0.1 percentage points sequentially, while up 0.2 percentage points year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 22.4%, and operating profit margin would be 10.3%. On page 10, you'll find a graphical representation of our ATM P&L. On page 11 is our ATM revenue by 3C market segments. You can see here that the computing segment continues to become a relatively larger component of our business. This was largely driven by a higher percentage of LEAP-based revenues. From a wider perspective, it is representative of AI's growing share of the electronics market. On page 12, you will find our ATM revenue by service type. Here you can see the two service types containing LEAP services, Bump and Flipchip, and Testing. Both are becoming a larger component of our overall business. We continue to expect growth in these areas. it should be noted that we are starting to see a more visible pickup in our wire bond business. There are signs that this is related to a more general market recovery. On an absolute dollar basis, our wire bond business grew on a U.S. dollar basis, but was outpaced by leap and testing. On page 13, you can see the second quarter results of our EMS business. The annual seasonality of our EMS business has been inconsistent over the last couple of years due to differing device ramp schedules. As such, we believe the annual comparability of our second quarter results may be impacted. During the quarter, EMS revenues were $58.8 billion, declining 6% sequentially and 7% year over year. The sequential decline was primarily the result of underlying device seasonality. Sequentially, our EMS business's gross margin improved 0.5 percentage points to 9.4%. This change was principally the result of product mix. Operating expenses within our EMS business increased slightly by $0.1 billion sequentially and declined $0.1 billion annually. Our second quarter operating expense percentage of 6.9% was up 0.6 percentage points. Annually, our EMS operating expense percentage was up 0.4 percentage points on lower revenues. Operating margin for the second quarter was 2.6% flat sequentially and down 0.5 percentage points year over year. The annual decline was primarily due to lower revenues. Our EMS second quarter operating profit was $1.5 billion, down $0.1 billion sequentially and $0.4 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. As you can see, the second quarter mix of application revenue was relatively steady sequentially. On page 14, you will find key line items from our balance sheet. At the end of the year, we had cash, cash equivalents, and current financial assets of $76.9 billion. Our total interest-bearing debt increased by $8.5 billion to $240.1 billion. We continue to anticipate increasing our debt outstanding throughout the year. Total unused credit lines amounted to $355.3 billion. Our EBITDA for the quarter was $27.4 billion. Our net debt to equity this quarter was 52%. As a reminder, we anticipate that our net debt to equity will be peaking this year during the third quarter. On page 15, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the second quarter in U.S. dollars totaled $992 million, of which $690 million were used in packaging operations, $251 million in testing operations, $49 million in EMS operations, and $2 million in interconnect material operations and others. In addition to spending on machinery and equipment, during the quarter we also spent $531 million on facilities, which includes land and buildings. We continue to see the complexities of semiconductor design requiring step-ups in our LEAP offerings. Progressing device memory, thermal, and power requirements in addition to traditional bandwidth expansion, continue to necessitate advancements in our capabilities, equipment, and facilities. Our packaging products are now more than ever on the critical path of chip design. As we get closer to 2026, we are seeing a number of initiatives starting to activate. Aligning with customer requests, we are trying to be more aggressive with timelines, and as a result, we are potentially seeing some of the capital expenditures slated for 2026 being accelerated into the fourth quarter of 2025. At this point, the delivery and installation schedules are still fairly dynamic. But we are potentially looking at a bump up in 2025 capital equipment expenditures by a few hundred million dollars. With that, I'll hand the presentation over to Joseph to give the outlook for the coming quarter.

Thank you, Ken. Let me give you the guidance for the third quarter. Based on our current business outlook and the exchange rate assumption of $1 to 29.2 NT, the management projects overall performance for the third quarter of 2025 to be as follows. This time the guidance will be given in both U.S. dollar terms as well as in NT. So it's a little bit more complicated, so please bear with me. At the whole-core consolidated level, in U.S. dollar terms, consolidated third-quarter revenue should grow by 12% to 14% quarter-over-quarter. Whereas in NT dollar terms, our consolidated third quarter revenue should grow by 6% to 8% quarter over quarter. Our consolidated third quarter 2025 growth margin should decrease by 1% to 1.2% quarter over quarter. and consolidate the third quarter 2025 operating margin should decrease by 0.1 to 0.3 percentage points quarter over quarter. Now coming down to ATM, in US dollar terms, Our ATM third quarter 2025 revenue should grow by 9 to 11% quarter over quarter, while in NT dollar terms, our ATM third quarter revenue should grow by 3 to 5% quarter over quarter. Our ATM third quarter growth margin should decrease by 0.9 to 1.1 percentage points quarter over quarter. EMS, in U.S. dollar terms, our EMS third quarter 2025 revenue should grow by 18 to 20% quarter over quarter. In NT dollar terms, our EMS third quarter revenue should grow by 12 to 14% quarter over quarter. Our EMS third quarter 2025 operating margin should increase by 0.3 to 0.5 percentage point quarter over quarter. That is the overall guidance for third quarter. And with that, I would like to also make a very short comments on our margin. Well, on top of the overall higher cost environment that we're working in today, the NT dollar appreciation since early May put further pressure on our margin and will have a 5 percentage point negative impact on ATM third quarter 25 gross margin. If excluding such currency impact, our ATM gross margin should be around 26%. were near the midpoint of our structural margin, gross margin, as originally targeted during our last earnings call. Now looking forward, as we continue to improve our costs through efficiency improvement, leveraging our scale and capabilities to align our pricing and investment strategies with our value proposition, and to aggressively expand our leading-edge packaging and testing business and start easing up on our early-stage ramp-up costs. We are very confident that we will get back to our structural margin range in 2026. With that, thank you very much.

Thank you, Joseph. During the Q&A session that follows, we would appreciate if questions can be kept concise and asked one at a time. I will be receiving each question and repeating the asked question to Joseph and Tian. Again, we will be limiting the number of questions asked to two per turn, but asked one at a time. We will start off by taking questions from the attendees on the floor. After some of those, we will look to the virtual queue to see if we have some questions online. Thank you. I want to go with one to Charlie.

Hi, Dr. Tian and Joseph. Great to see you and thanks for hosting the physical meeting. I believe it's going to be much more interactive. So my first question is about, Dr. Tian, your comments about your family is going to be very busy in the second half. And actually your ATM guidance is pretty good, right? How do we kind of reconcile with the sort of comments about PC, smartphone, automotive? It seems to be very slow. Is that because of AAC is a share again or any other factors that we don't consider? Thanks.

Charlie, you're asking about the general dynamics of variable markets?

Yeah, so end market seems to be pretty slow. I mean, excluding the AI, right? But your guidance and also the comments about your FAB utilization, you know, seems to be very busy. I just want to get a sense how do you reconcile your performance and also the end market weakness?

You want some consolidate or some reconciliation between what people believe and what we're experiencing.

We're in a much better position to look at our forecast with our customers. We're providing the guidance based on the customer's input. Those orders are firm. It covers the AI. It also covers other area, for example, the wireless, also the industrial and automotive. So I'm not going to go to the second half forecast on the segments and i don't think we're in the position to do that but the uh but right now based on the uh the forecast committed order and uh we do see a very strong i wouldn't use the word very strong with the seal or strong or as strong as q2 oh look all right charlie your second question

Actually, if I may add, I think we are seeing a very strong demand for HPC and AI, of course. But on the general market, we're also seeing healthy recovery in second quarter. Actually, in all ad sectors, we're seeing actually double-digit kind of growth, quarter-on-quarter, each different segment. So we are seeing a... recovery in the general market as well, along with the hyper growth in terms of the leading edge.

Thank you. Thanks, Dr. Kim and Joseph. And my second question is more focused on your advanced patient testing business because Foundry, TSNC, revised that a full year. And they kind of attribute that overall revision to the strengths in AI and HPC. So why company doesn't revise your kind of additional one billion revenue guidance?

Charlie, you're asking for – I actually don't understand what you're asking for. Can you rephrase this question?

Yeah, so TSNC revives at a full year, right? Yeah. And attribute to AI strength. But you maintain your kind of revenue increase from the advanced packages remains to be at 1 billion US hours. So is that because of any concertism or why TSNC revives and you don't?

Charlie is asking about whether we can comment on a leading-edge advanced packaging outlook for the year.

We're in a very interesting position because our capacities are full. The incremental capacities are new capacity that we put it in. I hope to answer your questions. They're capacity-constrained right now.

So why don't you revise up the CAPEX thing?

There's a little thing called execution, operation, human talent, land, space, facility, and machine delivery. We're doing the best we can.

I see.

I think I already made a comment that the Q4, well, into 2026, many of the customer pipeline require similar foundational technology capacity. So it's not a matter of we are reluctant to put in more CapEx. But we also be mindful, like any machines, you don't want to overstress it. on top of the, you know, we do have to put in some buffer for Typhoon for all of this. All right, so hopefully we can do a better job, but we're very, very busy. Next question, Bruce.

Bruce, raise your hand. Name and company, please.

Bruce Liu, Goldman Sachs. I think the first question I want to clarify something that, you know, Ken, when you do the prepared remark, you were talking about certain, like, you know, prioritize initiative, you know, talk with the customer. You know, last time when I remember when AAC was talking about this, about the SIP project, Biden, you know, tried to prioritize those projects. Given the current currency environment, given, you know, do we expect a new pricing strategy or do we expect to, you know, get a different, set a different bar for the future project? But the future business discussion is does that only goes to like, you know, SIP, new SIP business or the existing business with the foundry partner or the existing new business when, you know, we need a better pricing. Otherwise, you know, you might not want to do the business. So can we expect a margin upside or moving forward?

So, Bruce, you're asking for us to elaborate on our strategic initiatives. Yes.

There are many aspects on the strategic initiative. Some of the items I cannot go over in detail because once I said it, you understand exactly what I'm talking about. I think the SIP project, As well as many, it becomes a resource recalibration. We're looking at the floor space. We're looking at the cash flow capacity investment. And most important, we're looking for the resource deployment. now in the resource recalibration obviously will come in the optimization and the optimization by default will improve the the end results which will be a margin improvement So that's one aspect. The second thing, the pricing strategy, that has always been on the table. That really depends on the customers, also the future product, as well as the timing. For example, for the RFQ, new product, old product, investment requirement, each one will be different. The third large item will be the overseas expansion. We were thinking about expanding in many strategic areas. But given the dynamics of the tariff as well as the exchange rate, we have to rethink priority and also the dollar amount. So our approach is going to be instead of going to multiple places, we will focus on one or two overseas areas and make a much, much bigger investment. just to make sure whatever we do counts. So those are the recalibration that we're going through right now, while we're very, very busy investing in Taiwan and trying to build up with speed, scale, as well as synergy with the Taiwan ecosystems. But the important thing is whatever we put in, we understand the fluctuation of the market. But we tend to look at the basic characteristics. What are the foundational requirements we would like to put in capacity that we believe will run for seven to ten years? And that's what we're building on now.

Okay, my second question. Yeah, the second question is for your AI-related business, which is highly skilled to testing business for this year. Do we expect packaging will account for a larger portion of the business in 2026 and onwards? And if that would be the case, can the module maintain a similar level with both packaging and testing for the AI business?

Bruce, you're asking about our lead services heading into 2026.

The concept is to grow our turnkey business that covers the AI-related leading edge. If you only look at the growth rate, it tends to be very misleading because the testing business has a larger base. We talk about the 31% first half, and it will probably be a better number in the second half. That will be the overall testing growth rate. If you just look at the leading edge packaging, then the growth rate is much higher. But the concept is to grow this in tandem. However, you cannot look at it because the basis is different. But just to answer you briefly, we do intend to make investment on packaging as well as testing because the requirements tend to go in tandem. For example, once you go to chiplet, silicon photonics, or any kind of HPC or AI related, then the thermal fluctuation that you have to deal with a whole lot more variables for the testing arena and the lead time tend to be multiple cycles much longer you also have to deal with the interim testing to guarantee yield with all of this practical concern I think AAC has a very good position to run the leading-edge assembly, packaging, as well as testing, just the nature of logistics and also the technology and the cash flow.

Can I have a very quick follow-up? Because we were guiding for $1 billion additional business for this year. Given the huge cap as we invest this year, the incremental revenue will be a lot bigger than $1 billion for next year. Is that right?

You're jumping way ahead of me.

Yeah, I don't think we're, I don't think we have any comments out on 26 yet.

But, you know, Joseph used to comment about, like, you know, capital to, you know, cash per revenue, right? You know, if you use the similar terminology or similar methodology, you can provide some color. Yeah, nothing ahead means yes.

I'm not sure I understand what you're asking there. I'm nodding my head just to show my appreciation to your question. Anyways, I think, you know, we do have – we have been pretty aggressive in terms of investing into TAS. And the growth rate that TAS is showing is – actually shows the – or demonstrates the progress that we're making. For this year, we're still expecting growth of tests to be twice the pace of packaging. And in terms of tests overall to ATM, we will be approaching 20% of ATM revenue being tested by fourth quarter this year. And going forward, I think aside from the – right now the leading edge part of the test is about over 20% of the overall leading edge revenue. And I think that ratio will continue to grow because right now we are expanding our test mostly for leading edge at the wafer sort level. And in the later part of the year, we will be starting getting into final tests, burning included. So I think there's still a lot of potential for us to grab going forward, particularly in the test, which overall will bring up our margin as well. So it's a very creative business for us to further penetrate.

Does that answer your question, Bruce? Yes. Oh, I got to say yes, right? Thank you. If we could switch it up and maybe take a question from virtual.

Yes, we have a question from Mr. Goku Hariharan.

Yeah, hi. Thanks, Dr. Abu, Yusuf, and Ken. Sorry, I couldn't be there in person. First question is on gross margins. So you mentioned that gross margin can get back to the structural gross margin levels with to high 20s. next year, is that assuming that currency stays at this level? So if so, what are the variables that are contributing to that? Do you assume that there is a big increase in non-leading edge utilization or is it just a function of better mix of leap, better testing and potentially better pricing?

Gokul, you're asking what levers are available to get back to our structural margin levels. Is that correct?

Yeah, especially for next year. I think Joseph mentioned I think it's for next year we hope to get back there, right? Okay.

Yeah, I was talking about our margin for next year and we're very confident about Coming back to our structural margin range in 2026, I think through several different directions. One is, of course, we will continue our effort in improving our efficiency. That includes further automation of our overall operation to bring down our costs. And I think a lot of the early stage ramp-up costs, we'll start to see that easing up. And we're actually saying last time that our operating expense ratio will start to level off because initially we're putting a lot of R&D dollars into our investment. So as we continue to grow or expand our leading edge, I think, and we're going out of the ramp-up stage, I think that part of the experience can be more controlled. And, of course, all the leading edge businesses, including TAS, are margin-equitative. So all these put together, I think, give us a high confidence level that going into next year, we will be able to get back to our structural margin range. And, of course, that's based on the assumption that the currency doesn't further appreciate from the 29.2 or 29 level at this point.

And just follow up, how much of a lever can be pricing given for Leap, you are pretty much the only vendor out there spending so much money. Your competitor doesn't really seem to be spending much capex. Your foundry partner seems to be a lot more aggressive about selling their value as well. So just wanted to understand how you were thinking about this, given your market position today seems to be a lot better than maybe five years back.

Gokul, you're asking about what we perceive as our market position within LEAP. Is that correct?

And leverage and pricing as a result of that market position. Thank you.

The pricing power is what every company wants to have. The pricing power includes your design, attachment rate, long-term loyalty, trust, as well as your technology and overall solutions. I think I talked about the current scale and speed and synergy. of ASE being in Taiwan as well as being supported by many ecosystem players and founder partners. I think we need to clearly demonstrate our trust and also the overall solution support to our key customers. Pricing is always an option. However, we prefer to use technical strength, offer long-term growth prospect, which I think is much, much longer lasting. However, everything is being considered. And by recalibration and resource the optimization, that by itself is one pricing strategy.

Goku claims that that's a follow-up question. Do you want to let him on for his second question?

Thanks for being generous, Ken. Thank you. The second question is on the LEAP platform. Dr. Wu, can you talk a little bit about uh application of 2.5 d 3d uh packaging whether it is covox like focus focus bridge etc for um applications beyond ai accelerator uh it definitely looks like 26 27 you start to see a lot more of these applications coming to you for CPU or other HPC applications. Could you talk a little bit about what you are seeing and how important these are going to be in terms of the growth going in 26 and 27, given this year mostly it seems for AI accelerators only.

Gokul, you're asking for Dr. Wu to expand upon our LEAP offerings.

Yeah, beyond AI accelerator, yes.

Well, I talk about the first wave is the accelerator. I think the second wave, you will see more infrastructure people. You'll always see the ASIC people start coming in. However, they all share the same characteristics. They would like to have a very, very tight configuration and very, very large design footprint. And also very efficient power delivery systems. And also the transmission, high bandwidth, low latency. I do see this round of AI accelerator that will cascade it to the CPU, yes. And will go to the ASIC, yes. And in the future, for the AI Edge applications, I believe most of the devices will share the similar multifunctional heterogeneous integration that will demand much of the characteristic I just talked about. So I believe the volume, we obviously are optimistic that the volume will be increasing over time.

All right, question from the floor, Sunny.

Sunny Lin from UBS. Thank you for taking my questions. So my first question is on advanced packaging, especially on the leading edge. Just want to learn your strategy on how to scale the business into 2026 and 2027. I believe for 2025, most of your sales apply for packaging, maybe through the outsourcing from foundry. And so going to 2026, what's, Where are you in terms of the progress to run full process co-ops or full costs? And how should we think about the further upside from the foundry outsourcing?

Sunny wants us to describe in a little bit more detail what we're going to do with our leap.

The foundry outsourcing will continue pending on the foundry partner as well as our end customers requirement overall. So that is ongoing. The second layer is going to be the ASIC players. The ASIC players will make their choice and they can either go through different routes and also there will be a peripheral packaging and testing requirements on the other devices that will also go into the same infrastructure. And then there will be the CPU guys. I don't think I can go even more details, but if you really believe that the AI is a new paradigm shift, that you look at how many players are really embracing the AI, and how many other people are jumping on it you can pretty much figure out we are still seeing the first wave even the cpu the asics whatever we can name today it will be the first wave the real definition of paradigm shift is there will be others that we cannot see that's the definition of paradigm shift so i think the uh for that building an efficient Viable and flexible infrastructure today at a speed is extremely critical, which is why it is the management in choose through heart root that we want to accelerate investment. and then just take the heat. Even with the risk, you know, we might miscute, also put a lot of stress on the supply chain. But we believe in this round, gaining customers' confidence will dramatically improve the long-term royalty, as well as explaining to our customers, not just the first wave, in the second wave and the third wave, You will need to have a footprint flexibility. That's where the large panel, the 300 by 300 fully automated line will be put in by the end of this year. The 600 by 600 fully automated line will be also delivered by Q4. And then silicon photonics, we have been extremely vocal. And also on the new power management, the VRM solutions, we're working with many of our key customers trying to define at the IP level, at the technology level, also at the capacity level to the next generation. So I think this campaign is not just co-op or a focus. It's really an overall focus. the solution. And I think once in a lifetime you will encounter something like this. So I'm personally very excited.

For sure. So maybe let me try to ask the question maybe in a different way as a follow-up, if I may. And so for us to think about 2026 for your advanced packaging sales, is it fair to assume that your full process advanced packaging could account for a meaningful portion of the opportunity given your current customer engagements? Yes.

That would be the aspiration. But, of course, you have to understand that customer loyalty means trusting partners. Whatever people ask us to do, we will try to fulfill it. But the different customers will have different choices. And the market will take us to the rightful place. And we should not look at just 2026. We should really look at the multiple years. I think that statement is very true.

I think just to give you a short answer, I think we are in full production in terms of full process. We do have a couple of customers that are using capacity, and we are investing, making further investment into full process. And we do expect to have some meaningful business coming in next year, mostly from ASIC customers.

Thank you very much. My very quick second question is on testing for AI. I just want to learn more on how you think about the competitions. Obviously, the key competitor continue to be very aggressive in the in-house solution, whereas you may lean more toward the third-party platform with event test. And so how should you think about the progress of you with the clients, I'm sure at some point, AAC will be a very important supplier for final test for AI. But how should we think about the timing for you to again, meaningful market share?

So you're asking about our test position related to final test on AI.

I think we have been talking about this for a long time, and we are expecting to have some final test revenue coming in by maybe the fourth quarter. And we'll continue to expand that part of the business going forward into next year. And I'm sure we will gain a meaningful market share in this aspect as well. I think everybody saw some short report saying whatever about our competitor. So I'm not going to comment on competitor. I'm just saying that what we're doing ourselves, we do have a goal, we do have a plan, and we are making progress. We believe that whatever we invested is going to be fruitful for us.

We have another question on the floor.

Brad? Hi. Thank you for taking my question. I'm Bradley from Bank of America. So I got two questions. One is that, well, Tim, you just mentioned heterogeneous integration. So basically I think AAC has a very unique position. It has AAC, SPO, and also USI. So how would that help you maintain a competitive position? advantage in the, well, across multiple potential application in the future in AI, including humanoid robots, AGI, and then if available, may you share any initial view on the timeline for those to happen.

Thank you. Brad is asking about the positioning of our brands, including our EMS side of the business, in terms of whether this allows us to tackle incremental AI opportunities.

You probably know that Spill and ASE ATM business, we're running independently. And one of the advantages of that is we're free to choose our own customers. And what so happened is right now the AI initial set of customers are extremely happy because we each want to have our different focus group with a very independent firewall in between. If we may call that advantage. The second one is on the USI I think with the SIP, we clearly demonstrate a synergy and also the vertical capability for our designing as well as manufacturing, also logistics perspective. For the AI, I think we're waiting for that opportunity. For example, power management. It's a key area because the power management, you go through 2,000 volts all the way to 0.1. And then the assembly people, you know, have their sweet spot. And then the EMS team will also have their sweet spot. If you take this kind of a hierarchical approach into the PCB, into a different kind of architecture, you can derive a similar thesis. So over time, it is the value between ASC spill and USI and pending on the market demand. I think we've demonstrated this a few times. And I do believe in the AI. you will see more optical, you will see more power management that will bring the synergy back again. On top of that, you have the China, you also have the other part of the world. You have the U.S., you have the China alliance. I think that presents another competitive advantage if we decided to go that route. Just one comment on the testing portion. There's one thing I want to articulate is testing is not about wafer sword and final test. If we only fixate on the wafer sword and the final test, I think we're missing the point. The point is in the future architecture, The testing needs to be an integral part of the processes. And the question is, how do you do this on a discrete format or an integrated in situ format? I am giving you a 10 years outlook on the overall manufacturing strategy for very, very highly evolved, automated, complicated assembly and testing process.

Thank you for the explanation. So with that comment, we assume that actually advanced testing will greatly outpace the so-called advanced packaging in that view because that will be integrated into a lot of the new processes.

Don't take my 10 years comment back to one year. I'm always struggling with people, right? The technology direction is correct. The testing has a larger revenue base. If you really want to compare initial, of course, you can make that statement. However, you have to look at the overall testing business percentage. as well as that the nature and how do you define the segments and it's very difficult to to make that comment but the overall trend yes I mean the hydrogen integration a very very long cycle time on the focus and the co-op process and also the value of the components and also the yield impact and the module level. And these are the issues that defines and segregates the people who can play in this market versus people who cannot afford it. But this all becomes competitive advantages in any kind of business. So my point is, when we evaluate the overall ecosystem at a worldwide level, at a geographical level, you have to put all of this into consideration. The AI has initiated a paradigm shift in terms of algorithm and application. Accordingly, each country, each geography, each company needs to evaluate their own paradigm shift in accordance to this macro paradigm shift. Maybe I'm overstretching, but I think this is the kind of thing I'm very excited to see in the next 10 years what will play out.

Thank you. So my second question will be a little bit on the financials. So basically we know we are putting a lot of the CapEx in the, well, LEAP business, and I believe, well, that will not be a problem for gross margin because it's margin equative. But, well, if available, can you kind of share some of the initial thought about how the growth rate of the depreciation that we are looking at in this year and maybe next year?

Brad, you're looking for some guidance on what depreciation looks like.

I think that for this year, given the heavy investment in our CapEx, I think the appreciation percentage is going to grow about 14% from last year. At the ATM level, it will reach about 69 billion NT for the year. That's holding level, right? At the ATM level as well, $59 billion. I think financially, I think we will see this heavy investment for some time. And we are currently funding our investment through additional debt. As you can see, in the second quarter already, we are seeing our net debt-to-equity ratio has come up quite a bit. And we expect this to peak, actually, in the third quarter as we put in additional debt to our balance sheet. And in the third quarter, we should see a ratio roughly below 70%. And then it will start to come down. Our target level remains to be 60% to 65%, which is the level that we feel comfortable with. And we're seeing that peak at third quarter and start coming down on a quarterly basis back to our more comfortable level, around 60% to 65%. Thank you very much.

The next question we are taking from the virtual queue.

We have an online question from Laura Chen of Citigroup.

Hi. Hi, yes. Hi, good afternoon. Thank you for taking my questions. I have a question on the broad-based recovery on the wire bonding. What would be the key driver behind? Just curious. Especially we see some of the pulling happening in the first half already. So just wondering that you mentioned there are some power management IC demand. Is that also related to AI, or do we see any market share again, or each AI device, or just simply the demand gradually recovery? That's my first question.

Laura is looking for a rationale as to why we're seeing or potentially seeing a wire bond recovery within our businesses.

The wire bond capacity is tight in Taiwan, mainly due to two markets. The first one, it could be related to AI. As AI are building AI systems, it does require some of the chips that are using wire bond to support those AI systems. But we believe the larger percentage of the demand actually comes from the automotive, based on customers that we are serving. And maybe they are using the AAC capacity because the AAC wire bond are highly automated. And we have the 100% fully automated line. Therefore, it gives you a better throughput and quality. That could be. Overseas wire bonder remains to be somehow idle. So we do see a disparity between the Taiwan wire bond. as well as the overseas wire bond.

Thank you. Is this also... Yeah, thank you. Just wondering, is that also kind of because of China or non-China, that kind of a decoupling trend? Or the reason that customers prefer to place more orders in our Taiwan fab, along with their probably manship for AI or something like that?

You're looking at the – due to the BIS regulatory control, some of the loading are migrating from China to Taiwan. We see some of that, but that is not a major variable in our report.

Sure. Thank you.

And also – I think most of the – if it's BIS, I think most of the packages are more advanced rather than water-bound.

Okay, sure. Also, I think, Tian and Joseph, you probably already talked a little bit about that, but we see a lot of leading-edge advanced packagings happening for different types of design, like COAS or panel-based or CPO. what would be the key consideration on your capacity preparation and particularly everything seems to be quite tight and the AI chips development is very fast so just wondering how you would plan your capacity and TAPEX priority and also for the final testing starting from Q4 this year I'm just wondering is that also including the burning and also the system level testing

So, Laura, you're asking about our LEAP services and how we prioritize funding those LEAP services, including, to some extent, the final test services provided for Leading Edge.

Yeah, thank you. So the investment on factory facility, that is very flexible. I mean, that's the nature of OSAT, and that's what we do. a large portion of the equipment, they do have some intrinsic fungibility. In other words, while we're going through different code names, and I think you know the code names better than I do, intrinsically, we are doing this every day, not just this year. So even for the advanced packaging, there's still intrinsic fungibility that any company needs to master although more complicated. So the investment that we put in, we want to make sure our capacity has the fungibility and flexibility which can guard band five to ten years of utilization. So that's one question. In terms of the testing, I'm pretty sure our testing revenue will include burn-in as well as system-level test. I won't be able to give you a percentage of that in detail. So as customers are requiring more ATC as well as thermal variation, I think that becomes one area included in the power management as well as the testing solution. I think that's part of the technology development that we're going through. In the right time, we will come out and announce the overall power management solution, including assembly and testing, as well as some of the IP innovation. Hopefully, we can schedule this sometime next year.

We have more questions from the floor. We have one additional question from Laura. No. We have one additional question. No. Someone put down their hand. Are there any more questions on the floor? Going once. Oh, no. Bruce has a question.

I just want to clarify a couple of things. Number one is that when we talk about the overseas investment, U.S. is not in the short list. Is that right?

I'm going to be very careful answering these questions. Please go read our announcement. We have made clear announcement that we are supporting one of the large customers going into United States. I'm not going to say anything other than that. Anything related to U.S. investment, please read our press release.

Okay. The second thing is, can I double-check that what is the latest CAPEX forecast for the full year in 2025 for equipment and total CAPEX?

First, you're looking for an update on the CAPEX.

for this year? Sure. As I said, I think Ken just mentioned that we are upping because the capacity right now is very tight and the demand is very high. So we are upping our CapEx, machinery CapEx for a few hundred million dollars. By a few hundred million, that means $300 million to $400 million. And out of this, in the bulk of the, I would think almost 90% of this increase is really for leading edge. As we see, demand continues to be very strong, particularly going into 2026. So I think the increase of CapEx is really trickling to the fourth quarter.

It's more geared to packaging or testing?

Both.

Joseph and I had a long debate on this. As a CFO, he tends to be very concerned about the operation guys are spending money like crazy. My advice to him is everybody wants to spend CapEx. The only people who has order can spend the capex. The question now is that put a lot of burden on execution. If the operation team cannot fulfill the things online, it becomes a problem. We understand that. So the CFO concern is legitimate and right on. The team collectively decided we're going to go through this CapEx ramp, mainly because our partner, as well as our key client for the next 10 years, they would like to have a trusted partner that can execute. The speed of that will define how are we going to invest further in Taiwan as was outside of Taiwan. So this goes to a long way. Therefore, we decided to bite the bullet and just go through that. Okay, thank you.

I think to give you a little bit of color, I think for this year's machinery CapEx, roughly 60% will be for assembly and 30% for test and 10% for others and material. That includes material and EMS. And also on this machinery CapEx, I think about 60% is for leading edge.

Don't look at the numbers too much because the machine delivery, it can change. The execution, including building new buildings, hiring new people, I mean, there's a lot of variable. But right now, we do have a high aspiration to do this.

Okay. Thank you. I believe we have one more question from Virtual. Virtual?

We have a question from Goku Hariharan of JP Morgan.

Hi. Thanks for taking my question. So, Jin, just wanted to zoom out and think about this. This is the first time I've seen ASE enter this, like, massive CapEx investment and hypergrowth kind of stage. If we, and I think as you discussed earlier, I think it's a very careful consideration that the management team has placed. Where do you want to be, let's say, in three to five years' time? I think ASC is a, I think if I just look at ATM, it's a 12 billion revenue company, 12 billion revenue operation, maybe mid-30s market share in OSATs. what constitutes success of this plan, let's say, if we roll out maybe three to five years, like what does a successful ASC look like at the kind of culmination of this hyperinvestment phase?

Okay, you're looking to see how we define our own successes within the company?

Yeah, I'm sure that you are spending billions of dollars. You do have some targets in mind. So just wanted to understand, what do you define success as at the culmination of this heavy investment phase?

I think this is the exercise we're going through. For example, if you look at a traditional OSAT, you can define the revenue, the margin, and the CAPEX. You have some ratio. If you look at the key foundry supplier, their CAPEX on their assembly and test will have a different ratio. So what we're going through is to take this from the traditional OSAT ratio to the foundry ratio. And we're climbing stairs. Then the question is, why are we doing this? Well, because the founder partner wants you to do this because their end customer wants both of us to do this. The question now is, who has the capability to execute this to the scale that becomes competitive advantages over time? This includes not only the key players, also includes the whole ecosystem supporters that we enable you to do this. In terms of the margin model, I think you can apply equally. How do we define success? Going through the execution without issue and earn success. the larger clientele base on the longer term basis, that will be the success. Thank you.

All right. Goku, do you have any more questions there?

Yeah, so since you referred your foundry partner, in that process, their own margins have gone up maybe 10% or more. Their growth rate has accelerated quite a bit. So how do we think about our margins? I think we've talked about structural margins heading to mid-20s to high-20s. Is that where we get to? And is there any expectations on growth, like, like there's 12 billion become 20 billion in five years. Is that our definition of success in terms of ATM revenue growth?

Well, I'm sure everybody knows that there's still a lot of moving parts and uncertainties in front of us. The world is changing very fast. Right now, we're not trying to reinvent the wheel, I think. From what we learn, from what we know, our own business, we are keeping our structural margin range as it is for now. And we'll just go. We'll see how the situation changes. And if we need to make a change, we'll make a change. But at this point, there's nothing structurally different from what we originally expected.

I think we've hit our hard cutoff time frame. It's 4.30 over here. Thank you very much for attending our earnings release. See you next time.