ASE Technology Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 10 speakers on the call.

Operator

Hello. I am Ken Shiong, the Head of Investor Relations for ASC Technology Holdings. Welcome to our Q3 2023 earnings release. Thank you for attending our conference call today. Please refer to our Safe Harbor notice on Page 2.

Operator

All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward looking statements. These forward looking statements are subject to a high degree of risk and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in the Taiwan dollars unless otherwise indicated.

Operator

As a Taiwan based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Kaiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I am joined today by Joseph Tong, our CFO. For today's session, I will be giving the prepared remarks. Joseph will then be available to take your questions during the Q and A session that follows.

Operator

The overall environment for our businesses during the Q3 was relatively soft from a historical perspective. Devices related to new communications products introduced during the quarter generated a small pickup in demand. But by and large, the post COVID inventory digestion and suboptimal demand environment continued. For the Q3, both our ATM and EMS businesses saw mild seasonal upticks. Our ATM businesses results were on the higher side of our expectations.

Operator

We believe this is primarily attributable to higher than expected unplanned orders. In the soft loading environment, our customers have become more cautious when booking regular production forecasts on the expectation that there would be more capacity available when needed. We do, to a certain extent, Trying to apply an unplanned order rate to our outlooks, but for the Q3, unplanned orders were a bit higher than expected. These unplanned orders were sporadic and disparate and not isolated to any particular product type or market segment. For our ATM factories, during the quarter, key equipment utilization rates were still relatively low, averaging out in the mid-60s.

Operator

Our EMS business' pickup was slightly below our initial expectation. We believe this was due to some loading being pushed out into the Q4. With that, please turn to Page 3, where you will find our Q3 consolidated results. For the Q3, we recorded fully diluted EPS of $2 and basic EPS of $2.04 Consolidated net revenues increased 13% sequentially and declined 18% year over year. We had a gross profit of $24,900,000,000 with a gross margin of 16.2%.

Operator

Our gross margin improved by 0.2 percentage points sequentially and declined by 3.9 percentage points year over year. The sequential improvement in margin is principally due to higher ATM business loading in the current quarter, offset in part by higher EMS revenue mix. The annual decline in gross margin is principally the result of lower loading during the current downturn. Our operating expenses increased by $1,200,000,000 Sequentially, it declined by $800,000,000 annually. The sequential increase in operating expenses are primarily due to higher profit sharing expenses and miscellaneous increases such as D and A, factory supplies and others.

Operator

The year over year decline was primarily attributable to lower bonus and profit sharing expenses across the company. Our operating expense percentage declined 0.2 percentage by sequentially and increased 1.2 percentage points year over year to 8.8%. The sequential operating expense percentage decrease was primarily related to lower salary and bonus costs Relative to revenues generated, the annual operating expense increase is primarily due to higher mix of ATM business during the quarter. Operating profit was $11,400,000,000 up $2,000,000,000 sequentially and down $12,300,000,000 year over year. Operating margin was 7.4%, improving 0.5 percentage points sequentially and declining 5.2 percentage points year over year.

Operator

During the quarter, we had a net non Operating gain of $800,000,000 Our non operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other non operating income offset by net interest expense of $1,200,000,000 Tax expense for the quarter was $2,900,000,000 Net of a one time capital gain tax of $700,000,000 our effective tax rate was 18.1%. We believe our full year effective tax rate to still be about 21%. Net income for the quarter was $8,700,000,000 representing an increase of $1,100,000,000 sequentially and a decline of $8,800,000,000 year over year. The N2 dollar depreciated 2.9% against the U. S.

Operator

Dollar sequentially during the Q3 and 4.5 percent annually. From a sequential perspective, we estimate that NT dollar depreciation had a 0.8 percentage point positive impact to the company's gross and operating margins. From a year over year perspective, we estimate that the depreciating NT dollar had a 1.2 percentage point positive impact to gross and operating margins. As a rule of thumb, for every percent the on a 0.27 percentage point impact to our holding company gross margin. On the bottom of the page, we provide key P and L line items without the inclusion of PPA related expenses.

Operator

Consolidated gross profit excluding PPA expenses would be $25,800,000,000 with a 16.8% gross margin. Operating profit would be $12,600,000,000 with an operating margin of 8.2%. Net profit would be $9,900,000,000 with a net margin of 6.4%. Basic EPS excluding PPA expenses would be $2.31 On Page 4 is a graphical presentation of our consolidated financial performance. As you can see here, the current correction appears to have had a stronger impact on our ATM business, then our EMS business.

Operator

Our traditionally strong third quarter ATM revenues of just now near our Q1 2022 levels. On Page 5 is our ATM P and L. It is worth noting here that the ATM revenue reported contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the Q3 2023, revenues for our ATM business were $83,700,000,000 up $7,600,000,000 from the previous quarter and down $15,100,000,000 from the same period last year. This represents a 10% improvement sequentially and a 15.3% decline annually.

Operator

Gross profit for our ATM business was $18,600,000,000 up $2,400,000,000 sequentially and down $10,200,000,000 year over year. Gross profit margin for our ATM business was 22.2%, up 1 percentage point sequentially and down 7 percentage points year over year. Gross margin was on the higher side of our expectations. The sequential margin improvement is the result of improved scales of efficiencies from higher loading offset in part by slightly higher summer utility consumption and out forced services. While the annual margin decline is primarily the result of lower loading due to the current downturn.

Operator

During the Q3, operating expenses were $9,800,000,000 up $1,000,000,000 sequentially and down $400,000,000 year over year. The sequential increase in operating expenses was primarily driven by higher compensation based expenses and higher R and D related factory supplies. The annual operating expense decline was driven primarily by lower profit sharing and bonus, offset in part by higher R and D related costs. Our operating expense percentage for the quarter was 11.7%, up 0.2 percentage points sequentially and up 1.4 percentage points Annually, sequential operating expense percentage increased as a result of higher R and D and compensation related costs. The annual increase was due to lower loading and thus lower operating leverage.

Operator

During the 3rd quarter operating profit was $8,800,000,000 representing an increase of $1,400,000,000 quarter over quarter and a decline of $9,900,000,000 year over year. Operating margin was 10.5%, increasing 0.8 percentage points sequentially and declining 8.4 percentage points year over year. For foreign exchange, We estimate that the MTU. S. Dollar exchange rate had a positive 1.4 percentage point impact on our ATM sequential margins and a positive 2.2 percentage point impact on a year over year basis.

Operator

Without the impact of PPA related depreciation and amortization, ATM gross profit margin would be 23.3% And operating profit margin would be 11.9%.

Speaker 1

On Page 6, you'll find

Operator

a graphical representation of our ATM P and L. Revenues and their corresponding scaled efficiency are still a ways off from previous 2022 peaks. On Page 7 is our ATM revenue by market segment. You can see here the seasonal pickup of some communications products during the quarter. We also saw a smaller pickup in our Computing segment.

Operator

Our Automotive, Consumer and Other Market segment declined on a relative and absolute basis. We believe this decline to be out of character for the seasonally strong Q3. However, it is indicative of the current softness in demand. On Page 8, you will find our ATM revenue by service type. You can see here that we are experiencing a stronger pickup in our advanced packaging services, which includes bumping and flip chip.

Operator

Our wirebonding and test business saw their relative shares decline during the quarter. It is worth noting that on an absolute dollar basis, Both wirebond and test service types increased revenues. On Page 9, You can see the 3rd quarter results of our EMS business and a graphical representation of its market segment allocation. During the quarter, EMS revenues were $71,000,000,000 improving $10,600,000,000 or 18% sequentially and declining $19,700,000,000 or 22% year over year. Sequential revenue increase It is primarily attributable to the seasonal nature of our EMS business, while the year over year revenue decline is primarily due to the broad based soft electronics demand environment.

Operator

Sequentially, our EMS businesses gross margin declined 0.2 percentage points to 9.1%, while our operating margin improved 0.4 percentage points to 3.9 percent. The operating margin improvements driven primarily by loading and favorable foreign exchange impacts to raw materials. Our EMS 3rd quarter operating profit was $2,800,000,000 up $700,000,000 sequentially and down $2,300,000,000 annually. For our EMS market segment, our consumer segment picked up seasonally as industrial and automotive segments declined on a relative basis. And while the automotive segment lost relative Share, it grew during the quarter by 7% on an absolute dollar basis.

Operator

From a full year perspective, we continue to expect our automotive market segment to outperform other segments. On Page 10, you will find key line items From our balance sheet, at the end of the Q3, we had cash and cash equivalents and current financial assets of $71,900,000,000 Our total interest bearing debt was down 32,100,000,000 to $219,200,000,000 Total unused credit lines amounted to $347,000,000,000 Our EBITDA for the quarter was $27,800,000,000 As mentioned in the previous quarter, our net debt to equity this quarter was up as a result of cash usage for our annual dividend payment. On Page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the Q3 and U. S.

Operator

Dollars totaled 239,000,000 of which $121,000,000 were used in packaging operations, dollars 89,000,000 in test operations, dollars 28,000,000 in EMS Operations and $1,000,000 in Interconnect Material Operations and Others. Current quarter EBITDA of US0.9 billion dollars continues significantly to outpace Our equipment capital expenditures are $200,000,000 It is worth noting that with more excitement surrounding AI, Our leading edge advanced packages in our vertically integrated or VIPAC offerings are getting a lot more attention from our shareholders as well as our customers. At this point,

Speaker 1

We are

Operator

expecting incremental customer adoption of our fan out and interposer based solutions, along with increasing collaboration with upstream foundry partners on leading edge advanced packaging. As a result, we will be making incremental investments to support these businesses subject to financially justifiable returns. And while revenues related to these products are relatively small, representing a low single digit percentage of APM revenues, We believe we see significant growth opportunities in the coming year. We are in October now And the year is almost done. Much of the original wafer banks for our ATM business still remain to be addressed.

Operator

As with many situations during the downturn, our wafer bank situation has become a bit complicated. During the Q3, while some wafer banks were gradually being worked down, the composition of some of those wafer banks appeared to be replenishing instead of just declining. In effect, we saw newer wafers started to come in and replace older ones. Devices on these older wafers may continue to be sold, perhaps by being rescued or by being marked down. And if that is the case, we will provide packaging and testing services for those products.

Operator

5, For us, the focus going forward should be placed on the newer generation of products. And while we are not in a position Predict how long those new products will stay in the channel before they sell through in the end markets. We do believe that the overall environment heading into 2024 appears to be improving. Our customers have been more cautious in their approach towards restocking. Overall demand looks marginally better as consumers finish the post COVID catch up spending.

Operator

Businesses are looking to implement AI to optimize their business operations. Consumers are discovering how new AI technology may help improve their lives. It is an opportunity to target a new generation of products at a new generation of consumer demand. Looking out into the Q4, we see many products continuing their seasonal builds. And while we did see a welcomed mild seasonal ramp.

Operator

We have not necessarily seen a rapid recovery for the industry. As an extension to this concept, We believe that seasonal forces of product cycles are still stronger than the recovery we are encountering. As such, We see our 4th quarter revenues to be more indicative of waning seasonal bills than the rising momentum of a full recovery. For our EMS business, the 3rd quarter shallower than normal product ramps turn into a longer building season with a peak in the Q4. Product mix and the cessation of foreign exchange benefits will result in a lower quarterly operating margin similar with year to date levels.

Operator

We would like to summarize our outlook for the Q4 as follows. For our ATM business, in NT dollar terms, Our ATM 4th quarter 2023 revenues should decline lowtomidsingledigits quarter over quarter. Our ATM 4th quarter 2023 gross margin should be flattish as compared to Q3 2023. For our EMS business, in an NT dollar terms, Our EMS 4th quarter 2023 revenues should increase percentage wise in the low teens quarter over quarter. Our EMS Q4 2023 operating margin should be similar or slightly higher than our EMS year to date 2023 operating of 3.3%.

Operator

That is the conclusion of our prepared remarks. I would like to open the floor to questions.

Speaker 2

Now we would like to open the floor for questions. We have a question from Mr. Gokul Hariharan of JPMorgan.

Speaker 3

Hello. Thanks for the opportunity. So my first question is on the Refill Bank comment. Quite interesting. Could you talk a little bit more, Ken, on the Composition of the wafer bank, are you seeing new wafers coming in for one kind of application, While the older risk costs that are not yet getting fully depleted is for some other kind of application, is there any difference by application that you're seeing in terms of The Bifor Bank inventory buildup and reduction.

Speaker 3

And to the extent that you have the 2nd before, Can you talk a little bit about how quickly this digital bank could potentially get depleted over the next maybe couple of quarters or so? That's my first question.

Speaker 4

Well, I don't think it's we can predict how fast or how what kind of pace that the Original labor bag will be rolled down. We are seeing these original labor bags are being progressively Looking down to the same level. But at the same time, the overall wafer value is still At a relatively high level because some of the wafer beds are being replaced by the new This is coming in. And I think at this point, it's really the new product that we launched, which is mostly in communication, consumer as well as in computing area. It's quite less spreaded in terms of new orders coming in.

Speaker 4

And I think the overall inventory digestion is still going on. It should continue for some time. I think the bright side of it is we are seeing that being worked down, and We're seeing signs of this inventory being consumed and the digestion We should be at the tail end of the industry digestion now.

Speaker 3

Thank you. Thanks, Joseph. So if you look at the Q4 guidance down low to mid single digit, You saw a pretty good improvement in communication by both auto and industrial kind of failed off In Q3, is that the same trend going into Q4 that communication is still relatively strong, Right. You see communications and consumer is relatively strong, but you see the drop off continuing in auto and industrial. And lastly, I think on the auto industrial side, Any thoughts on how this is likely to play out given it's been a sector which has been relatively strong Until very recently, it seems like feeling to go into inventory correction now.

Speaker 3

Based on prior history and your judgment, do you think there's going to be still a drag for most So next year, like first half of next year, at least?

Speaker 4

I think overall situations are stabilizing now. In auto, we need to be One of the brightest spots, and we are making quite a bit of progress in moving up the auto part of the business. I think last year, we have overall about 7% of our revenue coming from automotive, and that ratio has been up to We're up 10% for this year, and we believe it will continue to grow. Although we are seeing some level of The growth the momentum seems to be slowing down a little bit because the same area there will be some inventory that needs to be digested. So overall, I think the overall trend is still going fairly healthy.

Speaker 4

For quarter 4, I think it's from these new products that we launched.

Speaker 2

Our next question is from Ms. Laura Chen of Citigroup. Hi. Thank you. Can you hear me?

Speaker 2

Yes. Yes. Thank you for taking my question. My first question is about the COAS or substrate advanced packaging expansion. Can you provide us more detail about how big of the capacity you are preparing?

Speaker 2

And also in terms of the growth Outlook, even though so far it's at very low single digit of the IC ATM business, I was just wondering your view On the capacity expansion plan and also the growth outlook, that's my first question. Thank you.

Speaker 4

Well, instead of giving out the numbers For capacity, I think what we can say is we have the sufficient installed capacity generating the revenue that we're generating now. And we do see pretty good potential going forward, and we'll be making the necessary investments provided those are financially justifiable. And what Most of the CapEx that we're going to put in or the investments we're going to put in are for debottling the capacity. And at this point, we are confident that we should easily double that part of the revenue next year.

Speaker 2

Okay. Thank you. And also my second question is also just wondering that you see the ATM business will see slightly down, but at the same time, the gross margin seems to be resilient as they currently will. So just wondering like in terms of the technology mix or applications, what helped you held relatively well for the profitability Into Q4, even though we see some still some softness?

Speaker 4

Well, a lot of it comes with The dynamics that we are building as we are in quarter 3 And also in quarter 4, we are seeing that the higher margin products being Representing a higher percentage of our overall revenue. And also, I think the pricing continues to be resilient. And Given our scale in our technology offering and the efficiency of the level of automation that we have, We have continued to being able to maintain a reasonable pricing level And also to have pretty good control over our costs and making the margin added. We're not totally happy, but it's still quite that exactly level at this point. Even when we're anticipating A mild decline in revenue going into quarter 4, given the efforts that we put in, we believe that we can maintain Whatever margin we achieved in quarter 3, if not higher, a little bit higher.

Speaker 2

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

Speaker 1

Hello, can you hear me?

Speaker 2

Yes.

Speaker 1

Okay. Thank you for taking my question. Hi. I think the management sounds a lot more bullish or positive in terms of AI Revenue potential. Given that the technology for AI in terms of targeting is So complicated for me.

Speaker 1

Can you tell us what is the service you provided for AI? It's more limited

Speaker 5

to fan out

Speaker 1

or on software or anything. What kind of profitability? What kind of return on equity? What kind of capital intensity for this business?

Speaker 4

Well, we are getting pretty good traction with our customers in terms of both our Fanal as well as interposer based kind of packaging products. And We will be aggressively engaging these customers and try to fit their needs. But at the same time, we are also increasing our collaboration with the upstream foundries in providing the sufficient capacity into this area. So we are optimistic about the revenue from these different package type products coming from both directions. 1 is our own solutions and the other is related to collaboration with Foundry.

Speaker 1

Which one It's stronger for the past 3 months, which one turns out to be more positive to give So management like stronger confidence. Well, I think the Collaboration with Banji or your staff?

Speaker 4

Collaboration is more stable there, and it's more Obviously, in terms of our own solution, I think the design or the process of it is still Subject to a lot of the customer discussion and also co working with our customers, We are making a lot of progress on that. We're actually in mass production, but in terms of real volume, I think we should be seeing that coming from next year.

Speaker 1

Okay. Sorry. So what was the

Speaker 3

profitability for that, Capital intensity for the

Speaker 1

AI related business and the capital intensity for that.

Speaker 4

Well, you're seeing our margin being gradually improving. So I guess at least the margin should be equivalent.

Speaker 2

Our next question is from Mr. Charlie Chen of Morgan Stanley.

Speaker 6

Hello. Thanks for taking my question. So first of all, congrats for the Thank you, Kyushan, especially for Q4 gross margin improvement. So first question yes, sure. So first question is about your view about the cycle and right now Customers placing rush orders, your WorldShare Bank gets depleted.

Speaker 6

But do you think right now it's the hard bottom in Cycle, meaning for the Q1, you wouldn't expect a

Speaker 7

further decline of the fab utilization.

Speaker 1

I think you

Speaker 6

can give us some color about the cycle recovery. Thanks.

Speaker 4

Well, I certainly don't have the crystal ball for it. I think the market is Still very volatile. I think one good sign of it is we Same as everybody else, we believe that we're at least at the Maybe at nearing the end of the inventory digestion. But still, I think that's really not at this point, I don't I personally don't believe that this is really the real issue here. I think the real issue is still whether the overall consumption We covered more in a stronger pace than what we're witnessing now.

Speaker 4

That really involves a lot of different various exo Genius factors, the recent war that's going on in the Middle East certainly doesn't help the situation. And we thought that the inflation is in check now, but with the war going on, that may have another Putting another variable into it. So it's very hard to predict how We'll know how fast the industry will recover. We're just going to play by years. I think Yes, they are good signs, they are bad signs.

Speaker 4

But overall, I think we were just Focusing on what we do best and serve our customers. And we are cautiously about next year, Consciously optimistic about next year. We believe that going into Q1 over Throughout the whole year of next year, we will continue to see year over year growth.

Speaker 6

Okay. Thanks, Joseph. So just to look back, right, when did you start to see or feel the so called rush orders?

Speaker 4

Can you give us a kind

Speaker 6

of timing when you start to see that?

Speaker 4

We've had been seeing rush orders throughout the years, particularly at the Last month of any particular quarter, We see some buzz orders coming in across the board. I think that's the reason for that is, we the customers Like Ken mentioned, he's at this point more cautious about restocking. And since there are Ample capacity as well as wafers and also materials. I think the customers will tend to wait till the last minute until they see They have a clearer view of their upcoming demand that will put they will put the orders in. So that's what we have been seeing for the past few quarters, and We are seeing that still going on at this point.

Speaker 2

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

Speaker 8

Yes. Hi, Great. Good afternoon. Can you guys hear me?

Speaker 2

Yes.

Speaker 8

Okay, great. First question is regarding your Capacity utilization across the board ATM, I think if I don't remember wrong, Ken said something about mid 60 for Q3, right? So I assume given your slightly decline in Q4 ATM revenue, So your loading should be below mid-60s in Q4. Is that right?

Speaker 4

It will be slightly lower than 65, yes.

Speaker 8

Okay, great. Second question, your foundry partners like Jason, J and UMC see some good early signs About demand stability from PC and smartphone to consumers, that's on the progress. Do you guys agree? And if so, do you see any kind of seasonal possibility for your Q1,

Speaker 4

Well, there are spotty signs of optimism, but End demand remains to be seen. There could be some volatility in 2023. We believe that things are starting to look up, and that's why we, Like I said earlier, we are cautiously optimistic about next year.

Speaker 8

All right. Thank you so much.

Speaker 4

Thank you.

Speaker 2

Next question is from Brad Lin

Operator

Hello. Hi. Thanks for taking my question.

Speaker 7

I have two questions, 1 on generative AI and second on the Stitcha Photonics. So basically, firstly, We are encouraged to learn the management's positive comments on the new generation of the consumer demand. I'm quite curious about What kind of the new applications should we expect for the consumer market and how are the applications that are inside for the ASE and also what time do we expect it to take off? Thank you.

Speaker 4

Takeout and what is it on photonics?

Speaker 7

No, no, for the new generation of the consumer demand, which may be brought by the generative AI.

Speaker 4

I think the AI is coming and we We're expecting the AI technology to proliferate into so many different kinds of edge devices. And it will be the main thing for the next few years. It will be a mega driving force for the industry to grow. Yes, we're certainly going to be well prepared for it. I think the real clean for us is Not just the AI chip itself, but the proliferating applications into all different kinds of devices That will create tremendous peripheral chips demand for us to satisfy.

Speaker 7

Got it. So that's a structural trend and then we should see a lot of the new applications to come in the upcoming years.

Speaker 4

And I think the momentum will start to really start to accelerate going into 2024.

Speaker 7

Got it. Got it. And then my second question is on the CPO. So we have learned as we started development of the CPO or For a couple of years during the semicon, so may we learn the opportunities and also the implication of the new technology And what are the key barriers or challenges for ASC here in this new technology? Thank you.

Speaker 4

Well, not being a technology guy, I think From what I've heard, that's still a few years away. Right now, we're still focusing on The silicon photonics chips, packaging test, going forward, I think the technology will just We'll push the development of CPO, and we're still at the investing stage. And when the demand will become, we'll be ready for it.

Speaker 2

Next question is from Ms. Sunny Lin of UBS.

Speaker 5

Hi. Could you hear me okay?

Speaker 2

Yes.

Speaker 5

Thank you very much for taking my questions. So my first question is on interposer based 2.5D package. I think currently the mainstream solution is based on silicon interposer, but there is increasing discussions With the key customers, when do you think that should start to happen? And for ASE, I assume That you should be getting more opportunities if the industry does start to make that shift?

Speaker 4

Yes. We're seeing that And we are aggressively engaging customers who are looking for a more cost effective kind of solution. At this point, I think If you call silicon based silicon interposer based, it's still a A bit more matured kind of technology, and I think the RDL base, There will still be some discussions in terms of the design Or the process of it that needs to be worked out individually with the customers that we are engaging now. We are in mass production at this point, but with limited amount. But we see this has a Pretty good potential, and we will continue to make investment into it and continue to work very closely with our customers to start expanding that part of the business for

Speaker 5

us. Got it. So a quick follow-up on this part of the business. And so in terms of competition, obviously, the leading foundry is also aggressive on the overall technology roadmap. Some of your competitors are also focusing on exploring the opportunities.

Speaker 5

And so for ESE, what are some of the competitive advantage that you think you have when competing with the key projects?

Speaker 4

Well, our loan partnering relationship with the foundry Or t foundry, certainly gave us an edge. And given our scale and the Technology that we have been doing over the years, I think we are certainly ahead of our Competitors and in whatever products that we are building today or whatever technology that we're developing. So we competition is given. There's always going to be competition. The key here is really to stay focused and continue to Bring out the satisfactory offering to our customers as well as our street phone partners.

Speaker 2

Next question is from Mr. Ziho Ng of China Renaissance.

Speaker 9

Hi. Thank you. My first question is regarding the pricing environment. So far, it seems to be quite stable, but would there be a risk that the pricing environment would be more aggressive when the inflection point really

Speaker 4

Well, pricing is pricing pressure is always there. And Given our scale and our leading position, I think our pricing is more resilient than our competitors. And we'll continue to find the most suitable pricing strategy for to satisfy ourselves as well as our customers.

Speaker 9

I see. All right. And same question regarding the CapEx this year and also any initial outlook for next year's CapEx?

Speaker 4

Nothing for next year, but for this year, we are sticking to our original CapEx roughly for equipment about $1,000,000,000 The split of it will be around 50% in assembly, 30% in tests, 17% in

Speaker 2

Next question is from Mr. Gokul Hanifang of JPMorgan.

Speaker 3

Yes. Hi. Thanks for taking my question. So for some of these 2.5d packaging and advanced Yes, Genuity, Liquid Products. Could you talk a little bit about how much more capital intensity based investments are?

Speaker 3

I think long term math, we need to talk about $1.1 revenue for $1 CapEx For Flip Chat and much lower for Livebond, could you talk a little bit about how we are seeing this So capital needs to be growing up for some of these investments. 2nd, what is ASE's stance on taking Some customers supported capacity buildups. Some of your competitors or some of your peers have kind of done some of the About expansion in partnership with some of the AI customers, any thoughts on how ASC is approaching this kind of capacity build out? Lastly, I think we've been seeing CapEx declining since 2021. So do you feel like we are seeing an inflection where we start to have to add some capacity, Increased CapEx in next year or you think given utilization is still mid-60s, next year outlook is still

Speaker 4

Well, like I said, We are seeing a better overall market environment for next year. It wouldn't be a surprise that we next year's CapEx, although I don't have the number here, but I do believe that the CapEx That we need to put in for next year will be higher than this year. In terms of The advanced packaging, I think the like we said, right now, it's We're still at the early very early stage in developing this part of the business. And So I think we don't have any sufficient data points to come up with the real or more precise Investment intensity at this point, plus, like I mentioned earlier on, Whatever investment that we are on the table today for this type of products is mostly for Debodeling the current capacity that we have. So I don't have a real Number 4 in terms of capital intensity for this type of product until we collect more data points and until this This part of the business becomes a larger enough pool of business that we can come up with the More meaningful numbers for it.

Speaker 4

I think whatever we're going to do is we will look at the demand. We will look at The technology that's required or the concluent that's required and also the business terms that we can get. So when we put the investment in, it will be suitable for the demand and also That could create a justifiable financial return for us.

Speaker 3

Okay. Got it. My second question is on the adoption of chiplet. We've seen a lot of that happen In the HPC side, broadly, could you talk a little bit about how the chiplet adoption helped our changes AAC's role either adds to it or takes away something, but just how you think about it. And more specifically, do you see more chiplets related packaging potentially getting adopted even in the Communication, the mobile smartphone segment, which is largely monolithic right now, looking out maybe a couple of years in terms of what you see and This question is the priority of our customers.

Speaker 4

Well, I guess the chiblet is certainly the Technology that's required for especially for our vessels and there are physical boundaries that we need to break through the chipset Hi, Piyushy. So it is a going trend, and we will at this point, we think It's still predominantly in the HPC area of networking. When or How fast it will move into other areas, I think it will take some time for us to have a better grasp of this development.

Speaker 2

Next question is from Joseph Hsu of Goldman Sachs.

Speaker 1

Joseph, I want to ask about the dividend. Given your EBITDA is so much stronger than the CapEx. Can we expect a higher dividend payout ratio moving forward At least for this year, you're paying $8 $7 for the last 2 years given the weakness of this year that your cash flow is still very strong. So can we expect a higher payout ratio this year?

Speaker 4

I think we have been paying 60% to 65% over the years. And This is not up for me to answer. I think this has to go through the Board. And given the circumstance, I think we will have a good discussion on how we address this issue. Sorry, I didn't hear it now.

Speaker 4

Yes, you mentioned that.

Speaker 1

I understand that just that you should maintain the 60%, 70% Given that the earnings declined more than that, so we don't want to see the Another question for the testing. I mean, I think I do recall in early 2022, Management turns more greater than testing, which generated pretty stronger growth on earnings. However, if you look at some second 3rd quarter, your testing revenue disclosure was substantially lower than your packaging business. At the same time, your peers Testing does pretty good with very impressive share price. So what kind of testing strategy can we expect?

Speaker 1

Do we expect some change for the testing? Do we turn more aggressive into testing? Do we get involved in the wafer level testing moving forward? What kind of strategy we're going to can we expect?

Speaker 4

Well, we still have the same view on testing that we believe still has it does have good potential for us. We want to maintain remain aggressive in making tests. This is a larger part of our overall, and we're going to come back and revisit the overall situation See how we can move further toward our target and To bring this part of the business up, what are the right business that we should be pursuing, what kind of new technology that we should be investing in, That's an ongoing process. I think the recent Kind of a slower growth pace in test is because of the overall Products shifting in this market at this point. So I think that's one of the main reasons why we're seeing some of the differences In the test business, growth pattern between us and our competitor, we're

Speaker 8

We're going

Speaker 4

to look into this and we're going to put our focus back on tests. We'll continue to drive that business.

Speaker 2

Next question is from Mr. Si Ho Ng of China and Renaissance.

Speaker 9

Yes. Thanks for taking the question. Yes. Regarding the Interposer business, do you have any plan to get into the fabrication part of the business?

Speaker 4

I'm sorry, I didn't get your question.

Speaker 9

Do you have any plan to build interposer internally?

Speaker 4

Still in the full earnings release, I wish we could, but No, I don't think we have any plans of doing that.

Speaker 9

I see. Because it doesn't fit our DNA, right, heading for Any closer?

Speaker 4

This is what?

Speaker 9

It doesn't fit our DNA, I mean, the business

Speaker 4

I'm not sure this is really what our strength is, and This is a labor process and we're a family house. So I don't see

Speaker 2

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

Speaker 6

Hi Charlie. Hey, Joseph. Thanks for taking my question again. So I'm not trying to be picky, but I'm very interested About your previous comments, you said that usually in the previous quarters, right, those orders only In the quarter end, but now we are at the beginning of the quarter, you still see rush orders coming. Am I getting anything wrong or Is that a sign of kind of demand is actually better than expected?

Speaker 6

How do we read this? Thanks.

Speaker 4

No, I'm saying the pattern seems to be remaining. That's to say, By end of the quarter, we could see some other rush orders coming in. I'm actually excited to say that the quarter end rush order seems to be the pattern up until now, yes.

Speaker 6

Okay, okay. Thanks. So another follow-up question or 2, if I may. 1 is The AI chip testing business, right, no matter GPU or basic It seems like your competitors in the casing business are gaining a lot of market share. I just want to know any fundamental reason behind that.

Speaker 6

And second part of the question is more about long term because As we can see better for mature nail foundry, that's a capacity expansion is happening in China. So just wondering if China in the long term will gain market share, whether that means ASE in the back end foundry service We'll lose market share because you probably I'm not sure, right, but you probably sold your China operation a couple of years ago.

Speaker 4

Well, I think the our China operation remained It's a bit different from it's quite different from the 4 factories that we sold 2 years ago. I think the SUGO factory today is a more advanced The going demand in China, particularly when things are The whole industry is kind of polarizing at this point, where China demand remains into China And the outside of China goes to outside. So I think the Suzhou being more advanced, More efficient, more cost effective kind of facility. I think it does It's doing quite well actually in China, particularly in terms of serving the Chinese customers with higher end technology requirement. So we are confident that in China, We could be losing some revenue in terms of dollars, but in terms of business, we're actually getting gaining

Speaker 6

Objecting effort for the GPU and ASIC, yes.

Speaker 4

Other than congratulating our Well, Verisk is doing a very good job in securing that business. Well, we have some catch up to do, and we will do so.

Speaker 6

Okay, okay. Good to know. Thank you.

Speaker 2

There is no more questions.

Speaker 4

Okay. Thank you all for coming. Sorry for my low voice because I caught a cold. But Thank you again for joining us, and we'll see you next quarter.

Speaker 5

Goodbye.

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Key Takeaways

  • ASC reported Q3 consolidated net revenues up 13% sequentially but down 18% year-over-year, with fully diluted EPS of TWD 2.00 and a gross margin of 16.2%, up 0.2 pp sequentially.
  • The ATM segment delivered TWD 83.7 bn in revenues (+10% q-q), a gross margin of 22.2% (+1 pp q-q), though factory loading remained low at mid-60% utilization.
  • EMS revenues rose 18% sequentially to TWD 71 bn, with a 9.1% gross margin and a 3.9% operating margin, reflecting a seasonal pickup amid broader demand softness.
  • For Q4, ASC expects ATM revenues to decline low- to mid-single digits with flattish margins, while EMS revenues should grow in the low teens q-q with operating margins similar to year-to-date levels (around 3.3%).
  • Management is ramping up in AI-driven advanced packaging (fan-out and interposer), planning incremental capex to debottleneck capacity as wafer inventory digestion nears its tail end.
A.I. generated. May contain errors.
Earnings Conference Call
ASE Technology Q3 2023
00:00 / 00:00