Asmpt Ltd

Good morning and good evening, ladies and gentlemen. My name is Romil, the Group's Head of Investor Relations, and I will be the moderator for today's call. On behalf of ASMPT Limited, let me welcome all of you to the Group's second quarter and first half 2023 investor conference call. I would like to thank you all for your continued support and interest in the company. Please note that all participants will be only on the listen-only mode when the management is presenting. We will start the Q&A only after the management has gone through the entire presentation. During the Q&A session, priority will be given to the covering analysts. Let me quickly go through the disclaimer. Please do note that during this conference call, there may be forward-looking statements with respect to the company's business and financial conditions. Such forward-looking statements could involve known and unknown uncertainties and risks that could cause actual results, performance, and events to differ materially from those expressed or implied during this conference call. For your reference, the investor relations presentation related to our recent results can be downloaded from our website. On today's call, we have Mr. Robin Hung, the Group Chief Executive Officer, and Ms. Katie Su, the Group Chief Financial Officer. Robin will begin with a brief discussion and Group's key highlights, and then Katie will provide details on the financials and segmental performance. This will be followed by an update on the guidance and outlook, and then we will open the floor for Q&A. Without further ado, let me hand the time over to Robin now.

Thank you, Rohan. Good morning and good evening, everyone. It is a pleasure to have you all on an earnings conference call for the second quarter and the first half of 2023. First, let me give some highlights on recent developments in the semiconductor industry and the overall macro environment before we provide an update about our second quarter and first half performance. For the first half of 2023, the group was impacted but the continued weak conditions prevailing in the semiconductor industry. This was due to conservative consumer spending and capex investment and ongoing industry supply chain inventory digestion. Looking at the performance of our two segments, they offer a sense of how we are positioned as a business and for the future. For our Semi business, recovery is taking longer than is anticipated, as factory utilization of the Semi customer base has been gradually improving, but has not yet reached optimum levels. In contrast, our SMT business continued to perform resiliently, and its second quarter revenue exceeded that of Semi for a fourth consecutive quarter. Taken as a whole, This demonstrates how our unique and broad-based portfolio is helping to partially mitigate adverse impact from the current semiconductor down cycle. The combination of this unique and broad-based portfolio and our deep partnership with major customers on the technology roadmap position us well to capitalize on growth opportunities. In particular, our advanced pathogen solution stands to benefit significantly from the strong growth that has been seen in generative AI and high performance computing, which I will share more about next. Basically, for advanced packaging of AP, we are confident that our solutions are well positioned to meet the growing needs of generative AI and HPC applications. We are engaged in deep collaborations with key customers to enable the strong growth in generative AI to meet high-precision bonding requirements and stringent total cost of ownership criteria. In terms of performance, our AP solutions generated about $195 million in revenue, representing 19% of group revenue for the first half of 2023. with thermal compression bonding or TCB making up the highest proportion of our AP revenue. Let me elaborate a little bit more on the TCB solutions which are in a commanding position to address crucial logic and memory packaging bottlenecks in generative AI. For Logic, our TCB solutions are enabling chip-to-wafer and chip-to-substrate processes for major customers that are critical for heterogeneous integration and assembly of increasingly sophisticated AI computing packages. We see promising TCB order flow for Logic from our Foundry and OSEC customers. In particular, demand from our Foundry customer base is growing due to the urgent need for expansion of the AP capacity. A popular question we have been getting from analysts and investors is our presence in high bandwidth memory or HPM. Simply put, our TCB solutions are able to fulfill the demanding packaging requirements of next generation HPM. We strongly believe that as generative AI proliferates, customers will increasingly migrate to this advanced HBM packages to meet ever increasing storage and processing needs. And we are well positioned to capitalize on the trend. We have warned repeat orders for HBM and we continue a deep engagement with multiple memory players. Based on these opportunities, we are confident on more TCB order flow for both logic and memory in the second half of 2023. Besides TCB, our mass reflow high-precision die-bonding solutions are also benefiting from generative AI with continuous flow from top-tier global customers. For hybrid bonding, after securing a maiden order as we mentioned in the last earnings hall, we continue our engagement with key customers for qualification in various end-market applications, including memory. Generative AI's increasing demand is not just relevant for a high-precision bonding solution, but also benefits other tools in the group's portfolio. Let me quickly highlight this. In silicon photonics, we have market-leading solutions with high placement accuracy that are relevant for devices such as optical transceivers and photonic engines. We received repeat orders for Silicon Photonics 2 to support a key customer's transceiver expansion plans to meet high-bandwidth transfer requirements, and we expect more such orders in the second half of 2023. As generative AI and HPC evolve, they will require increasingly complex chip architectures, which benefits our laser simulation solutions and panel electrochemical deposition tools. In particular, our laser simulation solutions have seen preliminary engagement with global IDMs to help build the next generations of tools. On the SMT side, of our business, we are seeing traction in the server business that is being driven by AI applications. Here, our SMT placement tools provide flexibility for customers in terms of handling larger board, larger server board weights and sizes. This slide helps zero in on how our TCP technology as a whole, and ASMPTs in particular, stand to benefit from the growth of generative AI and HPC applications. In terms of drivers, generative AI packages will require an increasing number of logic chiplets and new generation high bandwidth memory. This leads to a significant increase in the number of interconnects required to be bonded, especially for memory. This will also come with more stringent technology and cost criteria. If you recall, during the last quarter's earnings call, I highlighted an example of high-end HPC device that showed number of interconnects handled by TCB versus hybrid bonding. We estimate that around 90% of interconnects in complex generative AI and HPC packages will require TCB. And our TCB solutions are capable of handling a variety of interconnect types. Based on high precision requirements balanced with the total cost of ownership, we strongly believe that TCB is a key enabler for generative AI and HPC. And there will be an accelerated adoption of TCB. The graph in the middle depicts how we see the TCB equipment market developing, with an inflection point coming in the next year or so. We are in a commanding position benefit from this accelerated TCB adoption, based on our unique capabilities, as you can see on the right-hand side of the slide. Our TCB solutions have the best in-class die placement accuracy of below 1 micron. They are also capable of handling thin-dye, ultra-fine-pitched bonding requirements of below 50 microns, and multi-dye format of sizes up to 100 by 100 mm. With this anticipated market potential and our TCP capabilities, we are excited about the growth prospects in this particular area. Our automotive Air market applications continued the robust contribution to the group. The automotive air market contributed the highest proportion of group air revenue at approximately $230 million, or 23% of revenue for the first half of 2023. This contribution spanned across the group's mainstream solutions, particularly SMT placement tools, molding tools, and die bonders. Our automotive solutions have contributed strongly to our overall performance in the last two years, and this sector has begun to normalize. Notwithstanding, demand from EV players and for silicon cupboard related applications remains robust. Moreover, our automotive solutions continue to back design wins that will eventually translate into high volume manufacturing demand. We believe we have a strong foundation for future growth in the automotive market due to our role as a key partner in the technology roadmaps of major customers. With those highlights, let me now hand over the time to Katie our group CFO, who will talk about the group and segment performance.

Thank you, Robin. Good morning and good evening, everyone. This slide covers the group's key financial metrics for the first half of 2023. As highlighted earlier, we continue to be impacted by weak industry conditions. As our semi-business experienced a brunt of the impact from the ongoing semiconductor down cycle, Our SMT business stayed relatively resilient and was able to partially offset impact for the group. Looking at half on half comparisons, group revenue decreased by 12.1% while bookings came down slightly by 2.7% for the first half of 2023. Our backlog decreased by 13.4% in the last six months due to about 993 million US dollars. This backlog helps to support group's performance during this ongoing industry down cycle. Gross margin was 40.3%, a decline of 86 basis points half on half. Group net profit for the first half was 623 million Hong Kong dollars, down 29.5% half on half, and was adversely impacted by lower sales volume. Earnings per share for the first half came in at 1.52 Hong Kong dollars, a decrease of 29.3% half-on-half. Let me take you through more detailed financials and the segment performance in the next few slides. For first half of 2023, group revenue was close to a billion US dollars. This was a decline of 25.3% year-on-year and 12.1% half-on-half, mostly due to a decrease in semi-revenue, while SMT revenue remained stable. Group bookings were at $838 million, declining 43.9% year-on-year due to a high base effect. Bookings decreased slightly by 2.7% half-and-half due to a drop in SMT bookings, while semi-bookings grew from a low base. Contributions from advanced packaging, automotive, and industrial end markets combined accounted for approximately 57% of group bookings in the first half. Group gross margin of 40.3% declined slightly by 89 basis points year on year and by 86 basis points half on half. This was partly due to a segment mix as SMT contributed about 59% to group revenue in the first half. Group operating margin of 10.9% declined by 804 basis points year on year and by 318 basis points half on half. It was adversely impacted by lower sales volume. For the second quarter of 2023, group revenue of 497 million US dollars was higher than the midpoint of guidance. This was a decline of 25.0% year on year due to high base effect and roughly flat quarter on quarter. Group bookings were at about 384 million US dollars, a decline of 35.1% year on year due to a high base effect. and a decline of 14.9% quarter-on-quarter due to the ongoing industry down cycle. Group gross margin of 40.1% was a decrease of 158 basis points year-on-year and 33 basis points quarter-on-quarter. Margin decline is mainly due to semi partially offset by S&T. Group operating margin was 9.9%, a decrease of 892 basis points year-on-year and 197 basis points quarter-on-quarter. year-on-year decline was due to lower sales volume. For the second quarter of 2023, the semi-segment revenue grew 7.4% quarter-on-quarter to about $211 million from a low base. The IC discrete business unit had stable revenue quarter-on-quarter with the highest revenue contribution from TCB. The business unit also had some increase in contribution from its mainstream tools. The optoelectronics business unit recorded higher revenue quarter on quarter. Revenue growth was mainly driven by Y-bounders for conventional displays and high-end silicon photonics applications also grew. The CIS business unit revenue continued to remain relatively low due to ongoing weakness in global smartphone market. With the ongoing semiconductor down cycle, second quarter booking for semi declined to approximately $162 million. This was a decline of 40.5% year-on-year and 15.5% quarter-on-quarter. Semi-gross margin was 42.7%, a decline of 201 basis points year-on-year due to volume effect. Gross margin declined 243 basis points quarter on quarter, partially due to a higher mix of white bonders. The SMT segment continued to deliver relatively stable revenue for the second quarter of 2023, contributing about 286 million US dollars, or about 58% of group revenue. This was an increase of 5.3% year on year, but a decline of 5.5% quarter on quarter. SMT's revenues mainly from industrial and automotive applications. These two combined made up almost half of SMT's revenue with demand mostly from Europe. Our SMT business has enjoyed a high level of bookings for more than two years and has entered a normalization phase. SMT bookings declined to about $223 million for the second quarter, a drop of 30.6% year-on-year and 14.5% quarter-on-quarter. Similar to revenue, SMT bookings were also driven mostly by industrial and automotive end markets. SMT gross margin increased to 38.2% in the second quarter. Gross margin increased 85 basis points year on year and 81 basis points quarter on quarter, mainly due to a favorable product mix. This slide highlights the management's best estimates of revenue breakdown by end market applications for first half of 2023, highlighting the extent of our broad-based portfolio. The automotive market continued to have the highest contribution to group revenue at about 23%. mostly from mainstream solutions across both SMT and Semi. The industrial market continues robust contribution to group revenue at about 18%, mostly coming from SMT. Consumer, communication, and computers are the CCC market's remaining weak due to market sentiment. We serve a diverse global customer base, which includes IDMs, OSETs, fabulous, boundaries, high density substrate manufacturers, EMS players, and more. Having this wide range of customers has helped us maintain a low level of customer concentration risk. For first half of 2023, our top five customers accounted for approximately 20% of revenue. This slide shows the half yearly revenue contribution by different geographies over three consecutive periods. Looking at the graph, contribution from China declined year on year for first half of 2023, dropping from 44% to 30%. Revenue from Europe grew from 15% to 30% year on year, and America's grew from 9% to 19% year on year. The group remains committed to enhancing shareholder value and returning to shareholders. The existing given policy is to maintain payouts of about 50% of group's profits on an annual basis. For first half of 2023, the Board of ASMPT has declared an interim dividend of 61 Hong Kong cents per share, down 53.1% year-on-year, and that is in line with 64.1% year-on-year decline in net profit. This now concludes the financial section. Let me pass the time back to Robin for Q3 revenue guidance.

Thank you, Katie. Near-term visibility continues to be limited due to uncertainty in the macroeconomic environment marked by persistent inflation, rapid consumer sentiment, and ongoing inventory digestion. This makes it more difficult to estimate the timing and the pace of industry recovery. With this consideration, and due to SMT normalizing, the group expects revenue for the third quarter of 2023 to be between $410 million to $480 million. At midpoint of $445 million, this is a decline of 23.4% year-on-year, and 10.5% cost on quota. However, we remain bullish on the longer term outlook for the group. We have a key competitive advantage as a major supplier and technology partner across many applications and solutions area. While a continued investment in R&D across industry cycles enables us to remain at the forefront of technology development. Our optimism also stems from the enduring long-term structural trends of automotive electrification, smart factories, green infrastructure, 5G, IoT, and HPC fueled by AI generative growth. This slide summarizes our unique broad-based portfolio across advanced packaging tools to mainstream, and applicative tools that have certain tailwinds for longer-term growth. Before I conclude, I want to highlight a key point that we generally update addressable market details for advanced packaging and automotive markets only once a year and disclose this during a full year results announcement. For the advanced packaging addressable market announced during a full year 2022 results, We did not factor in the full potential of the group coming from the strong growth in generative AI and HPC. This concludes the presentation. Thank you, and we are now ready for Q&A.

Let me pass it to Robin to facilitate. Thanks, Robin and Katie, for the presentation. For the Q&A session, before asking questions, you can... Either use the raise hand function or you can type your questions in the chat to ASMPT Q&A. Please ask your questions one by one and limit them to two questions at each time. Thank you. With that, can I request Gokul to unmute yourself and ask your questions?

Yeah, hi. Morning and thanks, management team. My first question is on TCB. Could you give us a little bit more detail on ASMPT's position, market position in TCB? Our understanding is that ASMPT probably has the highest market share in TCB. Also, historically, SMPT has been very IDM focused in the TCB presence within the logic space. Could you talk a little bit about the progress that you're having in penetrating the Foundry Fabulous and OSAT ecosystem so far? Is the Foundry Fabulous ecosystem going to be bigger than the IDM within your TCB mix? And lastly, maybe also within the memory PCB market, where does ASMPT's positioning currently stand? Given historically, what we understand is a lot of the smaller other Asian players actually have meaningful presence in the memory, the HPM PCB market. Thank you. That's my first question.

Thanks, Gokul. So, okay, I will break it down into two segments. First, I will request Robin to talk more from TCB perspective in terms of our market positioning for both logic and high bandwidth memory or the memory side. And noted on your point that, you know, we have been, for the logic side especially, we have been quite focused on IDMs. And then how has the scenario evolved in terms of handling more of, say, foundries, OSAT, Fabless? So let Robin answer this. After that, we will come back to your second question.

Thank you, Kuku. Indeed, I think for ASMPT, we have... been in the TCB business for more than 10 years now. And I think over the last 10 years or so, the concentration of the TCB business has always been on the IDM. So you also asked about our market share. I think last year we made the remark that we have been so close to 300 sets of TCB. So we believe we have the largest stock base of TCP in the market. I think the second question is about whether on the founding... How have you evolved from serving IDMs towards more OSADs, Foundry, Fabulous?

That's right.

Now, I think certainly with the advent of the generative AI and HPC, uh we see a lot of potential coming from you know the uh the foundry side of our customer base uh the um on the the other question about memory right yeah yeah now i think besides engaging uh you know, the founding customer base in terms of chip to substrate, chip to wafer kind of applications. We are also involved with a leading HBM memory device maker for packaging, you know, the advanced 24 gigabyte memory. So TCB is also involved in the memory space from that perspective as well. What else is your question? Anything else for Gokul? Gokul, did I answer all your questions already?

Yeah, maybe if you could give us a little bit more detail on the Foundry OSAT side. Are you now kind of becoming a major player there as well? Or you are kind of still kind of like a number two player or number three player in that market for TCB given? And I think maybe also historically foundry OSAT were not very keen to adopt TCB because of cost considerations. Could you talk a little bit about, I think you showed this chart of inflection of demand. Could you talk a little bit more in detail about what are you seeing for TCP adoption? Is it mainly only for the Gen AI applications or are you also seeing a more wider TCP adoption for some of the other HPC applications in the Foundry OSAT space as well?

Thanks, Goku. I think we're seeing both. Actually, HPC, we had one slide in the last quarter already, even before this generative AI frenzy started after our conference call last quarter. So we already had one slide saying that TCP is well positioned for a lot of bonding requirements for HPC packages, chip-to-wafer and subsequently chip-to-substrate. And with the advent of this generative AI, we see potentially more demand for TCP technology use in generative AI packages for sure.

Got it. Thank you.

Romil, can I move to the next question?

Please, go ahead. Go, go, go.

Yeah, so next question more on the 3Q outlook. I think clearly the industry seems to be still in the downturn. Could you talk a little bit more on what is the bookings outlook into Q3 and how do you see that trending for advanced packaging, the conventional biobonding and maybe for SMT for each of these segments? How do you see the bookings outlook?

Sure. I think for Q3 outlook, we don't really give a solid guidance as usual. We only give guidance for revenue. But I can certainly give you some perspective. We expect Q3 booking will probably decline about 10% Q on Q compared to Q2 this year. Most of the decline we expect are coming from SMT because as I said in our opening remarks, we see SMT starting to go into a normalization phase after more than two years of strong growth in terms of bookings. So I think it's healthy. I would say it's mainly driven by automotive. Automotive has also starting to stabilize and go into the normalization phase. I believe this is a healthy development because automotive has been on a high for SMT for about two years. So it's a healthy development that we start to sort of normalize, you know, going forward. Now, so taking into consideration the overall climate in terms of semiconductor downturn and SMG normalizing, we are expecting our booking to be around about 10% equal to a cube. Now, we believe although it started to normalize, it will still remain normal. probably the highest contribution segment overall in terms of end market application for our group into Q3. For AP, we expect it to be kind of steady. As we mentioned many times before, AP bookings and billing tend to be lumpy because of the concentration of a few customer base compared to mainstream, which has a much larger customer base. So AP for Q3 booking, we expect it to be kind of stable compared to Q2.

Got it. That's very clear. Thank you.

Thanks, Google. Next, can I request one to unmute yourself and ask your questions?

Thanks, Ramil. Good morning, management team, and thank you for taking my question. This is Wendra from HSBC. My first question is on TCV as well. Just regarding your chip to wafer to your foundry customers, it seems like you're getting a bit more traction there. My question is, are you selling these chip-to-wafer tools as a package in combination with tools for larger bump pitches within the same application? Thank you.

John, I do not really understand what you mean by larger bump feature, but let me answer your first question first. Yes, certainly, I think with crystal retainers integration, one of the key A step for heterogeneous integration is really chip-to-wafer application. And we believe that with the current configuration in the marketplace, 90% of those interconnects, you know, for chip-to-wafer and chip-to-substrate will require a TCB. So that's why we are excited about our TCB being in a good position to benefit from this trend. Maybe you would like to repeat your second part of the question.

Maybe you want to rephrase your question about packaging in the larger bump pitches?

Sure. Are you selling your chip to substrate tools in combination with your chip to wafer to the foundry customer?

No, certainly, certainly, yes. Actually, our initial demand for many years has been for chip-to-substrate, but with the advent of more complicated packaging requirements like heterogeneous integration, so TCP tools are also being used for chip-to-wafer application.

Okay, and that chip-to-substrate tools, these are based on past programs, say about one to one and a half years back, right? Just to clarify. uh yes yes yes last year we won a big uh order for foundry uh for foundry sorry for foundry yeah yeah yeah so i think that we started off with cheap to substrate and last year when we won that the big order is really more for a cheap to cheap waiver got it um and then my following question my second question is regarding just um i just wanted to hear your thoughts given that uh 2020 and 2021 you obviously had a lot of orders from the chinese market It seems to me that even if there's a pickup in recovery from that market, just in terms of the sheer amount of orders that has to be digested, I was wondering, it seems there will be a lag. So I just wanted to hear your thoughts, even if the Chinese market recovers, how long will it take for that huge orders in 2020 and 2021 to be digested? Thank you.

So I think one, you're talking more from a perspective of inventory digestion, mostly from the China side. So even if the China side shows a certain level of recovery, what is Robin's view in terms of potential order flow to come towards our side?

Yes, you're right. I think 2021, 2022 was a, both years were very high year for you know, mainstream product. When I talk about mainstream product, I mean the dive owners and the wide owners. Now, because of the very high demand during that point in time, I think the industry will take time, you know, to digest that capacity. However, having said that, we see in Q2, you know, we see some sporadic, you know, interest in our wire bonds, wire bonders, basically. And we also highlighted in the MDAA that in the announcement that, you know, we actually had some demand coming from the conventional display side for LED, for example, they're using wire bonders for that purpose. So, yes, I think it's encouraging that there's some sporadic interest from this customer base, despite the prolonged downturn situation. It shows that this customer base has some confidence to start investing in CapEx. But having said that, don't take this as a signal that is going to be a broad-based recovery, especially from China. Because most of these LED tools are coming from China, but don't take this as a signal. Basically, they are basically sporadic interest driven by specific situation by our customer base. We believe that some of them have, you know, a subsidy backing for some of these investments. That's why they went ahead with these purchases for the wire wonders. Got it. Thank you.

Thanks, Juan. Next, can I request Dylan to unmute yourself and ask your questions?

Yes, sure. Thank you. Thank you for taking my question. I also would like to follow up on our TCP kind of strength. So, as mentioned, we have now penetrating our boundary customer and we are also expanding our customer base and the OSAT. I'm wondering what would be our strength for TCP for us to penetrate new customers? Maybe it would be nice if we can compare the throughput, precision, and price with our peers. And also, speaking of price, I'm wondering what will be the margin profile for our TCP solutions, because I also noticed that our gross margin is contracting. I'm wondering if our TCP solution is a margin accretive or dilutive to our semi-solution kind of gross margin profile.

Okay. Dylan, maybe I repeat the first part of the question. So you want to talk about our TCV strengths, especially, you know, how we have penetrated into more say customer base, including Foundry, OSAT, and you would want to know more like a competitive analysis for price and then throughput and some of these other measures. I will request here that, you know, we don't really want to comment on competitors or what's there in the market, but we can definitely give an overview and talk more from our own strengths or our uniqueness in the TCB solutions. So for that part, I will request Robin to give an update. For the second part on the GM or some color on the TCB numbers, for that I will request KT. Thank you, Ramya.

Now, Dylan, just to correct you, so our TCP penetration is not just into the foundry customer base or set, but also very importantly, you know, memory as well. All right, high bandwidth memory. So that's why indeed in the announcement, we said that we are also expecting order flow for TCP coming in the second half of 2023 for both logic as well as memory. Now you talk about our strength. I think I mentioned earlier when Goku asked, we have been in TCB for more than a decade now, right? We have accumulated a lot of learning experience in terms of processes and how to improve the performance of the TCB tools. having the largest in stock base, you know, would provide a very useful and very valuable platform, you know, for continued growth in this area. You know, when customers need to ramp up to the next level or when they need to upgrade to the next generation of tools, I think they will go for a supplier like ASM, which has been, you know, providing a TCP solution for a long, long time. Now, in In one of the slide, we also give some, an idea of, you know, our capabilities in terms of TCP technology, right? Our TCP solution can achieve probably the best in class accuracy of below one micron. We are capable of handing thin dye, very fine pitch, we call ultra fine pitch bonding of less than 15 micron. and also ability to handle multi-time format of sizes up to 100 by 100 mm. Now, that's important for a chip-to-subject application. As you can imagine, as we put more logic, chipless, and memory die. Let me give you an example. I think increasingly the market is moving to, you know, because of AI requirement, you know, they could be up to logic chipless. And this can be surrounded by, you know, six to eight, you know, high bandwidth memory. So you can imagine at that level, at the first level of packaging, you know, the die, the compound die are pretty large in size, right? So our chip and substrate are able to bond the compound die, you know, onto a substrate. So I think these are some of the capabilities which can distinguish us from our competition.

So, Katie, the next part of the question is whether the TCB side is margin accretive or dilutive towards the semi side. Maybe you can take that question.

Yeah. So, Dylan, thanks for the question. I think your question has two layers. One is the contracting of margin in the quarter, and then the second is the TCB margin. So, I just want to clarify the contraction of a margin is due to low volume, which has been impacting utilization absorption. And also due to product mix, as Robin mentioned, that we had taken in some wide boundaries with consumer and markets. So it is not due to TCB in the second quarter. Now, I will not comment on pricing or specific margin for a very specific transaction with our customers on TCB. But what I can say is overall, TCB as an AP solution is accretive to our margin.

Thanks, Katie. Dylan, do you have a follow-up question?

Yes, yes. My follow-up question will also be on the margin trend because when we discussed the third quarter bookings kind of outlook, I know that's not a guidance, that's more of a color that the company provides. But based on what we can see right now, most of the weakness of next quarter's bookings coming from SMT. So I wonder in the very near term, if the third quarter gross margin will expand because of the product mix as well. And also I noticed our OPEX has been quite stable despite the top line has been declining. So I would love to get a sense on how we think about the OPEX trend either into the second half or longer term or R&D kind of a longer term kind of a plan for OPEX.

Yeah, Dylan, so let me take this. So I think there are a few questions in one question here. Let me talk about margins first. You're correct. We don't quantitatively guide margin, but I do have some commentaries. The group has been very consistent in saying that our margin depends on volume, product mix, and segment mix. For Q3, As we guide it, volume will be down, so that pressure continues. For product mix, as we look into Q3, if we continue to experience more demand from mainstream products, gross margin may be negatively impacted due to product mix. On to segment mix, you mentioned about booking for SMT, but there is a time delay between booking and billing. So as we go into Q3, SMT most likely will continue to be a higher contributor to the group revenue, which means the segment mix will be under pressure as well. Now, coming on to the next part of the question, which is OPEX. You're correct that OPEX has been stable. There are two layers of OPEX I want to address. One is overall, the group is very committed to long-term growth and profitability, which means we'll continue to invest in the right technology for future, especially on the right R&D projects. like in technologies like advanced packaging. Second, the group has been investing in process improvement tools. For example, our ERP system and our global people system. So that investment will continue. Having said that, just like previous quarters, we have been... we have been consistently assessing and rolling out a range of cost measures. Very similar to previous quarters, we have been reducing the flex workers as an example, very sensible hiring, tightening our T&E travel, et cetera, right? So all these cost measures will continue on.

Thanks, Katie. Thank you. I don't have further questions. Thanks for answering my question.

Thanks, Dylan. Next, can I request Sunny to ask your questions?

Sure. Good morning. Thank you for taking my questions. So my first question is also to follow up on the TCB ramp. And so you mentioned that you expect TCB to reach about 90% of market share at some point. So I wonder if there is a timeline that you expect TCB to account for 90% of the new tools for HBM and 2.5D package. And the second part of my first question is, if you look into the rep by HBM and by Logic, when would you expect, I mean, which kind of customers would you expect to rep, but more meaningfully into 2024 and 2025?

Okay, Sunny, I think I have to correct you at one stage. We did not say that TCB will reach 90% of market share. We were just given an example of a HPC device where it's showing different interconnects and how TCB and hybrid bonding are playing into that. And based on that particular example, we have highlighted that we estimate that when you look at the number of interconnects in all these generative AI or HPC packages, we estimate that roughly 90% of those interconnects are handled by TCB compared to hybrid bonding. But that is not reflective of the market demand or the market share. So maybe for the first part of your question, I will request Robin to just talk about the ramp we are expecting in the overall market equipment, market of TCB. And, you know, the second part of the question is that looking at HBM and Logic, What kind of customers are we seeing which are ramping up and will require more of this TCB? Thanks.

Now, Sunny, the customer base, as we always say for AP, is kind of small compared to the mainstream product. So the usual suspect is, you know, leading foundry offsets, right? We see offsets are also moving into using more TCB solutions also for, we believe also for generative AR or HPC requirements. And of course, IDMs, right? And increasingly, because of the storage and the processing needs for memory, you know, memory makers are also, you know, very much part of the supply chain, also for generative AI. I mentioned earlier, right, for a typical HPC or generative AI packaging, you have chiplets, you have logic chiplets surrounded by HPM. So memory increasingly is also an important enabler for generative AI. I hope I answered your question, Sunny.

Well, so thank you for the color. I just wonder if directionally management will be able to guide us through the pace of the ramp by logic and by memory. Both markets could be substantial, but I think investors will be interested in knowing whether logic will ramp up faster or HBM will ramp up faster for next two to three years.

No. I think both are required for HPC and generative AI. But if you are looking from the interconnect, basically the number of interconnect required for memory and logic, I think if you look at the advanced memory space, the interconnect may be higher. you know, than the logic space. So from that perspective, the requirement for a TCB for memory could be coming at a faster rate compared to the logic side.

Got it, thank you for the color. My second question is also on TCB. And so number one, how should we think about the combined TCB orders for 2024 and 2025? Understand memory and foundry are showing upside. but your traditional large customer has placed a big order last year. So will there be some slowdown by your traditional large customer? And so combined, how should we think about the TCB revenue into 2024 and 2025? And I also wonder, how should we think about the mix for TCB? For foundry and memory, will they be using mostly the next generation TCB tools or the current generation? Thank you.

Okay. There are a couple of parts of the question, Sunny. Maybe on the first part, I will request Robin, but do take note of that, you know, we don't really give that kind of longer term guidance. And for our overall AP, we don't really break it down in terms of numbers when it comes to individual solutions like data. tcb but maybe i will request robin to give more color what he look how is he looking at the demand for tcb and from the market side for 24 25 especially looking at the mix of you know the customer base now sunny before you know we came up with the the chart that we believe we forecast right the

I mean, the market will go for TCB in an accelerated fashion in the years to come. We also base our internal modern assumption is also based on you know, indication of the growth prospect of generative AI. I think lately there have been a lot of market data on how strong this generative AI will grow in the years to come. So our modeling is also based on that and also based on the fact that we have engagement, you know, with leading customers in this space. So these are all assumptions based on this kind of indicators. Of course, we also have to make some assumption, you know, the number of interconnects that will be required by TCB going forward. Now, that's why we came up with the TAM chart for TCB. We are excited about it, that, you know, the TAM for TCB will grow in an accelerated fashion. Maybe the infection point could be 2024, 2025. The exact timing is hard to predict, but the growth prospect for TCB is there because of this generative AI growth. Now, based on our own experience alone, as I said, we have been in TCB for more than a decade, Right. It took us 10 years to reach a certain level of TCP demand. But just for, you know, since starting 2022, we believe that starting from 2022 to about 2024, we will reach the same level of demand for TCP. You know, that it took us 10, in the initial 10 years to reach from 2012 to 2011. 2012 to 2021. So you can imagine, even from a home perspective, we are seeing accelerated adoption of GCP in the last couple of years.

Thanks, Robin. I think the next part of the question is more from the demand mix between foundry and same memory. This is more from a perspective of the current generation of tools and the requirement for the next generation of tools. So your views on that, Robin?

Now, we believe the, you know, customer base will continue to push the boundary of TCB towards more and more ultra fine-pitch bonding. Now, I mentioned earlier that the, you know, the TCB, our TCB is capable of less than 15 micron bondage, fine-pitch bonding. That is... that is very tight in terms of requirement already, right? So it's really moving towards the hybrid bonding space. Hybrid bonding, we're talking about pitch of 10 micron below, but PCB, you know, we are working with customer space that pushing the boundary of PCB to go down to less than 50 micron pitch. So I think in short, there's a lot of relate room for PCB to grow.

Got it. Thank you very much.

Thanks, Sunny. Next, can I request Nicholas to unmute yourself and ask your questions?

Yes, hello. Looking at your revenues, so semi-solution revenue have been declining at, let's say, you know, 40%, 45% year-on-year for four quarters. Probably given your 3Q guidance, one more quarter of... minus 40%, right? And at the opposite, the SMT was, let's call it stable, right? Do you think it's the opposite for the next coming quarters that, you know, SMT decline will be, will improve while, sorry, semi-solution revenue decline will improve, will be less negative while SMT will start shrinking more? Is that correct? a reasonable conclusion of what you're saying?

From our perspective, for semi-bookings, we have been experiencing a low level of semi-booking for a number of quarters already. So historically, that has been a low number. Primarily also because China, the Chinese market has to recover in terms of demand. And also because HMPT is a business, traditionally our semi-business is weighted towards more of the Chinese market. So if Chinese markets are not recovering, our semi-business will also be impacted. But as I say, having said that, you know, we have been floating around this low level of semi-booking for a number of quarters already. So, and your question is about SMT as well.

Robin, I think Nicholas wants a view more from a revenue perspective as well. But how are we looking at Q3? Yeah, I think for revenue... Or second half.

Or second half, yeah. For revenue, typically, it follows from the bookings, right? So... So typically it takes about a quarter kind of timeframe before we deliver the booking demand. Now for a second half, I think similar picture, right? So, when we look at the second half, as I said, SMT will start to normalize. I think that's healthy. And for semi, it's difficult to really predict the bottom. So the negative is that the SMT is normalizing. However, the positive is that we see business, the booking coming from generative AI, HPC, you know, flow in the second half of 2023.

By normalize, Robin, so whether you're talking about SMT or automobile, when you're saying after two years of strong growth, you're expecting revenue to normalize, I suppose that means decline, right? So, you know, you think automobile SMT spending was very high for the past two years as, you know, the result of, for example, European customers' investment in EV or another reason? And why would that decline?

Now, automotive has been high for... eight quarters, maybe, or two years already. It's a market dynamic, so you don't expect any particular segment will continue to grow and grow without taking a pause. So as the automotive will have to normalize someday, I think we see that for SMT.

Understood. Given your percentage of revenue from advanced packaging, if I'm calculating right, which is not guaranteed, but if I get it right, it looks like in the first half of 23, your AP revenue actually declined year on year and half on half.

yes indeed as i said uh quite a lot i i think overall the market has turned down the semiconductor market has turned down so uh so ap is part of the uh last week coming from the semiconductor market so we don't i think it's kind of uh normal to expect you know uh ap also

I don't know. You know, if you're listening to the largest foundry out there, everything is declining except precisely HPC demand and especially GPU and AI, right? So which component of AP is declining in that case?

Nicholas, I think you're talking about first half. Yeah. Within AP, other than the TCP that we talked about today on the call, there's also other AP applications. For example, on the panel side, in terms of revenue and the booking, we do experience some weakness due to the substrate inventory digestion.

So straight inventory digestion, I understand. I'm just trying to reconcile how TCB has become the largest revenue contributor within AP, right? While at the same time, there's something big enough in AP that is declining so much that the total AP revenue are going down.

So as Gary mentioned, last year we had pretty good demand for our panel ECV tools for high-density ABS substrate. So after two years of strong growth in the area, we see that particular segment is going through inventory taxation. So I think part of the decline in the AP demand is coming from the area.

Understood. Thank you very much. Do you have a capex number for this year and a tax number?

We don't have a capex number on hand, but for tax.

If you're talking about ETR, we've been looking at 20, about the high 20s, I think. That's probably similar to previous quotas because of the high contribution from SMT whose entities are in relatively higher tax jurisdictions.

Understood. If I may ask the last question, I promise it's the last one. You have very sharp increase in revenue from Europe and America in the first half of the year. or continuing, you know, since the first half of 22. Anything to highlight there, especially to explain that very large increase in revenue?

They are coming mainly from the automotive and industrial market for S&P business. As you are probably aware, you know, our S&P position in that space is very significant. Yeah.

Or is there advanced packaging in America is also going up?

Oh, yes, yes, certainly. I think for advanced packaging, it's coming more from the semi side. So America will be also advanced packaging. But for Europe, it's typically coming from the SMT for automotive industry.

Understood. Thank you so much.

Just on the TCB, just what you mentioned, right? You're kind of surprised why our TCB, you know, revenue was so high. Remember, we had a big order last year. So the shipment has taken place this year, and we are anticipating to ship out most of the requirement or the demand for that order by the end of this year.

So in the second half of the year, basically, right?

No, we have shipped already in the first half, but the shipment will continue into the second half of 2023.

So in that case, is it possible that within the semi-revenue, everything declines but AP increased in the second half?

We give it a bit more color in the next quarter.

Yes, I'll be waiting for that. Thank you, Robin. Bye-bye.

All right. With that, I think we'll just take one last round of questions. Can Randy please unmute yourself and ask your questions?

Okay. Yes. Thanks for putting me in. First question following up from Nicholas on the regional split. Curious as China, it's been quite depressed. As that comes back, do you or should we factor in some dilution? Historically, it was lower margin on the volume order. So just the margin impact is Where do you see the U.S. Europe sustaining at a higher level?

I guess, Randy, I'll take that on the margin. I touched on it a little bit earlier, actually. When China recovers, especially consumer and markets recover, it will have adverse impact to our gross margin due to the mainstream product mix.

Okay. Are you – actually, it's maybe a question as you look at initial view. A lot are writing off second half. As you take an initial view or talk to customers on the outlook into next year, I think in semis, do you see potential we go back to finally digesting a lot of the capacity and getting to capacity buys next? in semis. And then correspondingly, SMT with this high base, does this look like a short-term digestion or the same factor that's been strong the last couple of years may continue to weigh? So I guess just an initial view when you talk to customers on the two segments.

Yeah, Randy, I don't think we can really predict, you know, when the uphill will come. I think everybody is looking for some kind of answer in this space. So we also take reference from those market research, right? In particular for the semi-side, our equipment space, market research is predicting a fall in terms of market size this year compared to last year. However, they are predicting a growth in 2024 onwards. So we also have to take reference from the kind of market data.

Okay. SMT, do you see an overhang though? Or do you think it looks like a short-term digestion?

I think for SMT, we're still, because automotive, although I started in human eyes, but I don't think it will, you know, it will come down a lot because automotive is overall is still a growth segment for the semiconductor industry. And SMT, our SMT is really strong in that particular area.

Okay. Hey, great. The last question I wanted to ask for hybrid bonding, I think a lot of the focus, TCB, could you talk a little more of the feedback on hybrid bonding with the first order? And then the timeline, when you see the cut-in or potential to ramp that tools, whether to the 3D IC stacks or how far away for high bandwidth memory to actually use hybrid bonding?

Yeah. I think we said many times that the industry always favors a solution that is force-effective. So we strongly believe that at this point, at this juncture of the development in terms of HPC, TCP will probably have more... play, you know, in those packages. That's why in the, you know, in the diagram that we have shown last quarter, we believe 90% of those interconnect can be handed by TCV in a very cost-effective manner.

Yeah. Okay. And so for your tool, probably don't expect much ramp than next couple years. Like it's, I mean, primary focus TCV, but for the early... 3D engagements? Do you see much or it's still going to be a couple years to really think about the hybrid bonding ramp?

Well, yeah, for us, this is probably a couple of years down because, you know, our development roadmap has to factor in those really evolving dynamics in terms of, for example, in terms of accuracy, in terms of higher year, in terms of throughput, And we believe that, you know, our next generation of HP should be able to intercept, you know, with a key customer base roadmap for HBM.

Okay. Timing for that next generation? Sorry? What is the timing for the next generation? Probably a couple of years from now. Okay.

Great. Thanks a lot. I appreciate the call. Thank you. Thanks, Randy. And with that, we will end the earnings call. Let me thank all of you again for attending today's call, and we hope to see you during the next quarter's call. Thank you. Take care. Thank you.