ASE Technology Holding Co., Ltd. Q4 FY2020 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Fourth Quarter and Full Year 2020 Earnings Release. Thank you for attending our conference call today. Please refer to our safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation of this event. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risks and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in New Taiwan Dollars unless otherwise indicated. As a Taiwan based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards including those presented by our subsidiary using Chinese GAAP. I am joined today by Dr. Tien Wu, our COO and Joseph Tung, our CFO. For today's call, I will be going over our financial results, Tien will be providing a business recap, and Joseph will provide financial highlights and our guidance. We will have a Q&A session following the prepared remarks. Please turn to Page 3, where you'll find our fourth quarter's consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the fourth quarter, we recorded fully diluted EPS of NT$2.30 and basic EPS of NT$2.35. Consolidated net revenue increased 21% quarter-over-quarter and a 28% year-over-year. We had a gross profit of NT$23.2 billion with a gross margin of 15.7%. Our gross margins declined by 0.3 percentage points sequentially and 1.4 percentage points year-over-year. Both margin declines are principally the result of higher EMS business mix. Our operating expenses increased by NT$1.5 billion during the fourth quarter to NT$12.1 billion, as the result of higher profit-sharing expenses issued during the strong quarter. Despite the absolute dollar increase, our operating expense percentage declined, 0.5 percentage point sequentially and 1.5 percentage points year-over-year to 8.1%. Operating profit was NT$2.1 billion sequentially and NT$2.5 billion year-over-year. Sequentially, operating margins increased 0.2 percentage points to 7.6% and increasing 0.1 percentage points, year-over-year. During the quarter, we had a net non-operating gain of NT$1.4 billion. This amount primarily consists of gains related to the sale of our Fujian plant at NT$0.8 billion, gain on sale of operating assets of NT$0.5 billion and net foreign exchange investment income of NT$0.2 billion. This amount was offset in part by net interest expense of NT$0.6 billion. Tax expense for the quarter was NT$1.8 billion. The effective tax rate for the fourth quarter was 15%. The decline in the effective tax rate this quarter was the result of research and development tax credits that are able to be recognized during the quarter. Net income for the quarter was NT$10 billion, representing an improvement of NT$3.3 billion sequentially, and an improvement of NT$3.6 billion year-over-year. At the Holding Company level, we estimate that the strengthening NT dollar and 0.9 percentage point negative impact to gross margin sequentially and at 2.3 percentage point negative impact year-over-year. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.4 percentage point impact to our Holding Company gross margin. On the bottom of the page, we provide key P&L line items, without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be NT$24.2 billion with a 16.2% gross margin. Operating profit would be NT$12.4 billion, with an operating margin of 8.3%. Net profit would be NT$11.2 billion with net margin of 7.5%. Basic EPS excluding PPA expenses would be NT$2.63. Please refer to Page 4, here you'll find the 2020 consolidated full-year result. Fully diluted EPS for the year was NT$6.31 while basic EPS was NT$6.47. For 2020, consolidated net revenues grew by 15% as compared with 2019. ATM revenues grew 10% while EMS revenues grew 23% annually. In 2020, our gross margin improved by 0.7 percentage points to 16.3%, principally as a result of stronger loading. This margin improvement was achieved despite higher EMS product mix and the negative impact from the strong NT dollar. Operating expenses increased NT$2.3 billion for the year and came in at NT$43.1 billion. We were able to lower our operating expense percentage by 0.9 percentage points to 9%. Operating profit for the year was NT$34.9 billion, improving by 48% to NT$11.4 billion. Operating margin improved by 1.6 percentage points as a result of increased gross profit margins with a lower operating expense percentage. Total tax expense was NT$6.5 billion. The effective tax rate for the year was 18.1%. During the year, we confirmed the deductibility of certain Holding Company level expenses for tax purposes. This resulted in a catch up of tax assets during the year, leading to a lower effective tax rate. For ongoing purposes, we believe our current effective tax rate to be about 22%. Net income increased by NT$10.7 billion to NT$27.6 billion. On a full-year basis, we estimate that the strengthening NT dollar had a 1.8 percentage point impact to gross margin. Removing the effect of PPA depreciation, our gross margin would be 17.1%. Our operating margin would be 8.3%, and our EPS would be NT$7.60. On Page 5 is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the Holding Company level related to intercompany transactions between our ATM and EMS businesses. During the quarter, we did see three major challenges. First, the most important challenge was the strengthening NT dollar, appreciating 2.3% from Q3 to Q4. The strengthening NT dollar environment is generally negative for us. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.5 percentage point impact in our ATM gross margin. Second, the strength in the current market has created tightness across large parts of the semiconductor manufacturing chain. They're seeing longer delivery times for many products including lead frames, substrates, components, capital equipment, as well as upstream wafer supply from our partner foundries. As a result, we have seen some higher manufacturing costs. But for the most part, with the positive ASP environment, we have been better able to pass along these cost increases. Finally, the current COVID environment continues to make operations and logistics difficult. However, being mostly Asia based, we have been less impacted than many operations elsewhere in the world. And to a certain extent, because of our ability to provide supply chain stability during COVID, our businesses have been performing relatively well. From the business perspective, throughout the entirety of the fourth quarter, most business lines within our ATM business ran pretty much at full capacity. Strength was across the board in all product categories, wirebond and advanced packaging, consumer communications and computing. Even our test business recovered more rapidly than expected. Heading into the first quarter, things are loaded and running fairly smoothly. We continue to see a strong loading pattern with a positive ASP environment.

Hi everyone. To begin with, I would like to wish all of you a Happy Chinese New Year. Here I would like to provide two updates. The first one will be a business recap, mainly addressing some of the comments which I made at our Q3 earnings call back on October 30 of last year. First item, the EAR affected ATM business has been recovered by Q4 of last year versus our previous commentary and expectation to be fully recovered by the end of Q1 of this year. That is good news. Second item, capacity remains tight. Last time I made a comment that the wirebond shortage will be at least to Q2 of this year. Right now we're slightly adjusting our view. We believe the wirebond shortage will be throughout the whole year of 2021. The machine delivery schedule, last time we talked about between six to eight months. Right now we're slightly elongated. The machine delivery lead time now is more like six to nine months. CapEx, the total for 2020 on machinery CapEx was 1.7 billion U.S. dollars versus our previous estimate of NT$1.8 billion. The NT$0.1 billion was mainly due to the machine delivery schedule tied to the machine lead time. For this year, we believe our machinery CapEx will not be lower than NT$1.7 billion. The actual number depending on the business landscape and how we collaborate with our customers as well as the machine delivery schedule. In 2020, the Group SiP business grew nicely 50% year-on-year to NT$3.5 billion. We made a common target. Our incremental SiP revenue from new customers or new projects should exceed our target of NT$100 million. In the Q3 timeframe, we made a comment that it will be three times our NT$100 million target; the actual came in at NT$386 million. That is in year 2020, from new SiP customers and projects, we have accrued NT$386 million of revenue. I will later make a comment on SiP momentum. For 2021, this year, we do believe the momentum will continue. And we will have new SiP customers and new SiP projects in the north of NT$400 million. That will be a very nice momentum and ramp. With that note, I would like to turn to the next page. I would like to give you highlights for the 2021 business outlook. For this year, we expect quarter-to-quarter growth at a local level. In other words, after Q1, we expect sequential growth in Q2 followed by Q3 and Q4. The second message here is for this year, we expect at the Group level, our operating margin will further expand by 1.5 percentage points to 2 percentage points. Next, let me make some comments on the ATM and also the EMS separately. The semiologic market growth, we estimate between 5% to 10%. We're seeing a very strong ATM run rate. As a matter of fact, we just closed our January in our Q1, and our run rate actually is the same as Q4 of last year. Just for your information, we have never seen this kind of run rate in the last 30 years in the semiconductor industry. The ATM 2021 full-year growth, we were targeting at two times of semiologic market growth in U.S. dollar terms. This is our current expectation. The 2020 ATM operating margin that Ken just went through with you has improved 2.2 to 2.3 percentage points. For 2021, we expect this margin expansion will continue. As a matter of fact, our margin expansion in 2021 will be better than the 2.3 percentage points, mainly from profitable synergy, economies of scale, efficiency improvement as well as technology leadership. Despite the foreign exchange impact for NT dollar against U.S. dollar, the EMS business shall have a higher year-on-year growth rate than our ATM business with operating margin targeting at 4%, another slight improvement. Future growth engines to drive the riding trend into the next five years, I put five years here with some optimism. From where we stand right now, I think the 2021 loading is very strong and we're quite confident of that. Right now, our optimism has expanded into 2022. I would like to make a comment about the next five years with our growth strength and growth strategy. I think in 2020 as well as in 2021, we will demonstrate efficiency in ramping up and the overall supply chain management to all of our key customers and to our shareholders and our investors. In 2020, we faced a pandemic as well as supply chain constraints at all levels. The ramping up at such a dramatic rate was not a simple challenge. Also, we had to replace one of our higher runners due to the EI effect. The retooling, recalibration, and readjustment of our manufacturing portfolio as well as requalification for many of the products asked by our customers were not an easy task. So in 2020, we have clearly demonstrated our capability to ramp up as well as procure necessary materials in a very adverse and challenging environment. We're confident we will repeat the same thing in 2021. And that will give a boost of confidence to our key customers, securing the future business based on that performance. Following that comment, we do see very strong loading agreements, mostly two years, as well as very strong MPI pipeline, which covers a wide variety of applications, namely 5G, SiP, sensors, and a strong ramp in automotive, as well as for our devices and edge devices. We made a comment previously talked about our factory, or the fully automated line. At the end of 2020, we had a total of 18 LiDAR factories. In this year, we expect more than 25. The comment I would like to make here is that those LiDAR factories are proving to be very efficient, and very usable in ramping up new volumes, particularly with customers who have to do this remotely. All of the LiDAR factory, or the automated lines are in very, very high demand from two types of customers, either high reliability seeking or data seeking, for a variety of reasons. Our LiDAR factory can provide real-time information in a very detailed manner to our customers, either in medical, automotive, or high reliability applications. We're seeing more volumes, demanding multiple dies and sensors. And we believe this will fall into ASE's sweet spot. In other words, since 2013, we have been building a portfolio covering multiple dies, as well as different packaging algorithms, methods, processes, and tool sets for all kinds of sensors, that we're seeing huge demand due to the IoT edge device and smart device enabled by the 5G. In net, what ASE is trying to do is to build a pervasive foundation and be the preferred choice for all high-volume applications. We do see that the pandemic, learn-from-home, play-from-home, work-from-home, had created a slight uptick on the overall semiconductor demand. With the high-performance computing, the cloud, e-commerce as well as the 5G low latency and high data rate, we're seeing more applications released into the smart device electrical vehicle, and all of the IoT applications. With that, traditional packages will be expanding to multiple die and sensors. We believe in the OSAT market, we are taking clear leadership. Also because of our performance in coping scales, we have better traction with all of our key customers, and this describes why we're experiencing such a demand curve in 2020 as well as in 2021.

Okay, Happy New Year to everybody. And before I go into our financial highlights, let me give you a guidance for our first quarter. Like Ken just mentioned, fourth quarter last year was a very exceptionally strong quarter for us. And we were able to recuperate whatever excess loss that we had from the EAR impact. And this strong momentum will continue into first quarter. So we're going to have an unprecedented first quarter performance. And from the ATM perspective, in U.S. dollar terms, ATM first quarter 2021 business should be similar to the fourth quarter 2020 level. Consequently, the gross margin should also be kept at a similar level with the fourth quarter of 2020 as well. In terms of EMS, in U.S. dollar terms, EMS will follow the seasonality. First quarter 2021 business should be similar to third quarter 2020 levels whereas EMS first quarter operating margin should be slightly below the whole-year 2020 level. That is the guidance that we're providing. Now, let me move into some of the financial highlights we have, going through 2020. In the beginning of the year in 2020, we set out to say that we've set an operating expense ratio. We wanted to lower it to 2018 level, which is 9.4%, and we have actually achieved ahead of that target. In 2020, our whole year operating expense ratio was managed to be held at 9%. We will continue to put a very tight control over our OpEx ratio. We're expecting to maintain the same OpEx ratio for 2021 as well. Also in 2020, we also set a target to say we want our operating margin to improve by 2%. From the reported operating margin, we stood at 7.3%, which was 1.6% higher than the previous year. But still in all fairness, we have to look at the FX impact in 2020. If we narrow the currency impact, the operating margin would be 9.2%, which is 3.5 percentage point higher than the 2019 level. Therefore, we believe that we have actually achieved our goal to have the operating margin improvement. For 2021, with the strong business momentum, we're targeting another 1.5 percentage points to 2 percentage points operating margin improvement for the year and also to support the strong business momentum in 2021. In the last quarter, we were saying that we were expecting our CapEx for the year to be lower somewhat from 2020's level. With the strong business momentum, we are actually raising that expectation in our CapEx to be similar to 2020's level, which was at NT$1.7 billion. Having said that, I think we want to dive a little bit more deeper into the CapEx number. As we mentioned, in 2020, due to the EAR restriction, we actually disposed of some of our capacity, up to the amount of around NT$300 million. For this year, we need to recuperate that capacity. So part of the CapEx that we're going to spend in 2021 will be to recuperate that capacity that we sold, and we will reconfigure the capacity to fit the current demand. Also, and in 2020, we said we wanted to set a goal to have our net debt-to-equity ratio down to 60% to 65% level. We have reached that goal ahead of time. In fact, at the end of 2020, we have already achieved the 65%, which is high-end of the target. We will continue to monitor very closely, and hopefully we can drive it further down in 2021. In terms of dividend, we are raising, actually raising our dividend payout; we expect to raise that from no less than NT$3 a share, as I previously mentioned, to no less than NT$4 a share. This is to give our shareholders a share of more benefits that we have coming out of this strong performance that we had for 2020. With that, we are opening the floor for questions.

Ladies and gentlemen, we are now in the Q&A session. Thank you. The first to ask a question is Randy Abrams from Crédit Suisse.

Okay, yes. Thank you and congratulations on the results and outlook. I wanted to ask the first question on the wirebond tightness, the change in view from mid-year to full year. Just how much, you mentioned the equipment lead time push out but just how much the factor of demand and maybe what demand changes you saw to push that out to end of year? And if you could talk about how much wirebonder capacity you'll be adding to keep up to that demand.

So the first question is the demand has not slowed down at all. And the machine lead time is getting longer. That's why we're confident that wirebond capacity will remain tight to the end of this year, at least, if not longer. In terms of the number of wirebonder we're adding, I think last year we added 1800. This year, we believe we will add a similar number of units. Right now we have confirmed delivery of 1200, and we're working on the other. But in terms of the wirebond tightness, it's a combination of demand has not slowed down as well as the machine lead time. It's not just wirebonders; it's the whole line balance.

Okay, and if I could follow up on the demand for wirebond, just the application, is it more PC consumer related, but also the other side automotive. I think since your last report, it got even more tight. If you could remind us just how big the automotive sector is and how you see that coming in and whether you need to even prioritize some capacity with that market; it seems like it picked up quite a bit in the year-end?

Right now, we have very high demand in automotive, mainly from the automated line as well as some high-quality, wirebonding process. The demand is actually getting to be very strong in terms of the percentage; it's actually very difficult to estimate because we do have specific customers who are 100% engaged in automotive business. But what we're seeing today is because of the expansion of electrical vehicles, we have more customers getting into the design-in with the automotive players, and therefore it will take us a while to really comprehend exactly where the application is.

Okay, fair enough. If I can ask on the pricing, well you talked last quarter about raising price? How should we see the pricing in terms of magnitude? Like how much, and then how it's taking effect? Like because it looks like your expectations will be tight through the year, so would it be like sequentially you see the ability to pick up pricing so we would see it come in throughout the year? And I think you talked a bit about even two-year contracts, if you could talk a little more about what that involves, like how much of your business or what that's doing, what you're contracting in for pricing on those?

But the comment that I made last quarter caused a lot of confusion and complaints. So I'm not going to comment on that anymore. The only thing I can tell you is we do have a very friendly pricing environment. The price adjustment, it's not a science but an art. You have to really look at the business dynamics and how do you really collaborate with your customers. And how do you really support them in their total business portfolio? I think we have struggled in the second half of last year and all the way to now, trying to accomplish the balance. So the two comments that I made last time caused a lot of confusion. First, I gave a very quantitative number on the wirebond shortage, I'm not going to do that again. And then I talked about the pricing environment, and I won't do that again.

Yeah, sure. The last question I want to ask for now. On OpEx, I just want to clarify, I think Joseph, you made a comment about managed the OpEx to keep at 9%. But I think the sales you are guiding up, double digit. So is it the expectation that the OpEx would be growing in line with the revenue run rate?

I would say that there's still room for further improvement. But with the growing profitability, I think the bonuses in this area assessments will start to kick in a little bit more. So at this point, I want to stay a bit conservative, although I'm not precluding any possibility of further improvement in OpEx ratio.

Okay, is the bonus expense tied to a percent of net income or is there a way to think about how we should model that structure?

The OpEx?

No, like the bonus expense, like back when bonus expensing first started, it was a percent of... is it a percent of like pretax income or is there a way to think of that? Or does that go up with more profit sharing if you get more profitable?

Yeah, it goes up with the profit that we're making in terms of the profit margin.

Okay, all right. Great, and thanks a lot, Joseph.

Yeah.

Next one to ask a question is Gokul Hariharan, JPMorgan.

Yeah, hi. Congrats on the good results. Thanks for taking the question. First of all, could we talk a little bit about advanced packaging and testing? How was the kind of backfill and recovery from the impact? I think we did have some impact in Q4 for both these areas; I think it was lower than Q3. How should we think about those areas? If you think about double-digit growth for IC ATM this year, if we were to rank wirebond versus advanced packaging versus testing, how should we think about the growth ranking for these three components of IC ATM?

Okay, 2020 especially Q4 was a kind of painful process for us, mainly because EAR affected customers which happen to be very high run rate on our fan-out and some of the advanced packaging facility, as well as the advanced testing facility. We have fully recovered that. We have disposed some of the assets, as Joseph already talked about. The remaining assets, we have to retool, recalibrate, and reconfigure to accommodate the other customers who might not have the same configuration requirements compared to our EAR affected customers. That has been largely done. In terms of now after that recalibration in 2021, we do expect the advanced packaging, as was testing to resume the growth curve.

Do you feel that it'll grow faster than the overall average or is it probably still going to be in line with the overall average or slightly lower?

It will be in line with our overall growth.

Understood. My second question, Dr. Wu, you mentioned work-from-home, stay-at-home and some of these new demand drivers that have emerged as a result of the pandemic. When you think about your increased confidence in demand, not just for this year, but also for next year, and that is kind of reflected in your CapEx increase as well. Do you feel or are you kind of baking in some kind of mean reversion here in terms of demand going back once we get into some kind of a recovery, or you think that this is a new normal, and new customers are basically expecting the demand to stay at these levels or even go from here rather than I mean revert back?

Right, of course, that is an educated guess. Assuming that the vaccination and also the pandemic situation is largely under control. The question now is, we will still see the current demand curve to continue. My belief is the answer is yes, mainly for the following reason. Now, once you are accustomed to using Wi-Fi, using the smart device, using multiple computers - there is no turning back. And also, I think for you, myself, as well as many of the other semiconductor veterans, we're used to travel, flying around. I think 18 to 24 months' time, is enough to change a lot of human behavior. For example, the automobile customers who have not been traveling since the last 12 months, in the future, there will be an increasing percentage of people working from home, having conferences at home to replace some of the travel, face-to-face meetings. In that regard, I think the IT equipment, the bandwidth, and the quality and also the number of units people are willing to stand by, as well as the age group which covers the older age group as well as the younger age group, I think that effect is there. Of course, we actually do not know how much that slope is going to change. But I believe the slope will be better than pre-pandemic days.

Understood. That's very helpful. Maybe if I could ask one more question to Joseph. Joseph, when you talk about margin expansion on the - it looks like a lot of the margin expansion is going to still come from gross margin even though you're expecting op ex to remain largely flattish, at least the starting point of your expectation. Is it, given that except for maybe one quarter, we were recently fully utilized all through last year, is it mainly a pricing translating into gross margin expansion because of capacity tightness and the different kinds of pricing or are there any other variables? Is it more of the build synergies starting to kind of come in when we think about the gross margin - into margin?

Well, I think it's a combination of many different factors. Of course, a friendly pricing environment certainly helps, but I think we will continue to improve our efficiency through further automation in our factories. Also, the synergy that we can be creating with the cooperation with SPIL will continue to benefit us in terms of margin improvement. And there are other measures that we're taking at this point to like Tien just mentioned. There are a lot of the ways that we do business which will be different and will be more efficient. So all these and plus the continuing technology investment that we're putting in our factory in terms of making new products and creating new projects, particularly in the SiP area. Those all put together will definitely have a positive impact on our margin.

Got it. Maybe one last question. Could you also talk a little about how much of our EMS revenues were SiP last year and could you talk a little bit about what are the new projects? Like what kinds of products, are they still 3C products that we are looking at in terms of this NT$400 million revenue stream coming in this year? Or are we also seeing some diversification of this into other verticals? Thank you.

We're seeing a whole wide variety of new SiP projects that cover the optical, the audio, and silicon photonics, as well as the smartphone, edge devices. So we are kind of pleased to see that finally the SiP project start to gain momentum. And one of the things I always like to tell people is when I talk about the heterogeneous integration, I'm really not addressing the silicon, all-silicon type of integration. I think the ASE sweet spot for the SiP will be the traditional silicon, all-silicon, multiple die, as well as optical sensor integrated in a very packaging manner. I think that, we are looking at a huge growth rate ahead of us. And I can't really give you a number. But over the last few years, we have been basically collaborating with a lot of our key customers and trying to come up with design applications that can improve the efficiency, leverage the success of the HPC bigger brain and also the success of very powerful networks in cloud with the 5G data rate and low latency. I think we're seeing more applications in all areas, but all of the little devices for the mass market, that is really the sweet spot that ASE has been designing for, and with our key customers, with our early success, I think ASE today almost becomes the first choice. For example, in the 5G, most of the unique SiP, ASE has always been the first one to engage with our key customers. And I think that trend, hopefully, will repeat in 2021 that we will have an even higher confidence. Maybe we'll be able to give you a projected market size based on the effort. But in the last few years, we couldn't give you that number because we're primarily working with a few customers. But now we're seeing a broader, more diversified portfolio. And we gradually understand the design rule, the value, the fiscal and electrical, and the cost performance. So we're just building the database to that. Our fully automated factory really was part of the overall architecture to accommodate that because if we don't understand how the sensor interacts physically and electrically with one another, it's very, very difficult to build high multiple die, high-level integration with overriding sensors using different materials and different configurations. And I think that is something that has become more obvious to us through the effort of the last few years. That's a long answer, but I think it's the key message I would like to deliver to all of our partner investors.

Got it. Thank you very much, that's very helpful. Thanks.

Now the line is open to Roland Shu from Citigroup.

Hi, good afternoon. I think the first question still for the gross margin. So looking at your IC ATM gross margin in the fourth quarter, it improved by 2.4 percentage points with the overall IC ATM revenue slightly better than Q3 of last year. However, I look at this testing revenue; actually, it's been declined a lot in Q4. So but SPIL, your gross margins improved a lot. So Joseph just said you have a lot of these efficiency improvements, and some also with a better pricing environment. Question is, is this improvement of gross margins way off, or are we expecting the gross margin improvement for this IC ATM to continue even though our testing business, the kind in 4Q?

With the higher loading that's continuing with very strong business momentum and the continuous effort that we're putting in terms of improving our overall efficiency, and also with the closer collaboration with SPIL to create further synergy, I do believe that in 2021, we'll continue to see margin improvement at the gross level.

Okay, yeah.

Although there are some headwinds in front of us including the strong NT dollar and also, as you mentioned, we're still trying to - we're in the process of recuperating some of the lost test business which tend to have a higher gross margin. But putting all of these together, I think that there are some plus and minuses. But we still, we're still fairly confident that we will continue to see margin improvement going forward.

Understood. Yeah, and for your testing business, actually in past couple years you had a big amount of testers and then you also would like to increase this testing business. However, I think in Q4, the revenue for the testing was the lowest quarter in last year. It was even lower, like 4Q last 2019. We think, the year probably was the reason for this lower testing revenue, except for this EAR, is there any other issue that caused this testing revenue to decline in 4Q last year?

No, I think that is really the main reason why we're down, because of this customer that is impacted by the EAR. It unfortunately has a very high turnkey ratio with us. And we are - now that this part of the business will take some time for us to bring back, but I think fortunately, I think the current market environment does allow us to have more capabilities in terms of raising our overall turnkey ratio with our customers. So I think by the second half of the year, we should be seeing a full recovery of our test momentum.

Second half this year, 2021?

Right. And it does take some time, not only to bring in new business but also to re-equip ourselves with suitable testers which does take some time for us to fully recover.

So what is the utilization for the testers, at this moment?

For fourth quarter, in terms of fourth quarter, I think the overall test utilization has come down a little bit to below 80%. It was around 80% this quarter.

Okay, yeah. How about for IC ATM for packaging?

Packaging was, we're running at full capacity. And typically, we'll say it's 80% plus.

Okay. So I - is that in first quarter, this utilization of packaging and testing in the first quarter probably will be similar to 4Q?

It will - like I mentioned the run rate of our business remains the same as in the fourth quarter. So the utilization should be very similar.

Okay, so previously you have that target for testing revenue to be - to reach one-fourth or one-third of the total IC ATM revenue. So now, do you still keep the same goal for this testing revenue? And when do you think you will reach this goal?

Yes, I think the test business is still a very, very lucrative business for us to build further. And we're setting a high goal for ourselves and we'll continue to work very hard on it.

Okay, so you don't have the timeframe for when to reach this one-fourth or one-third total IC ATM revenue?

Oh, well let's take one step at a time.

Yeah, okay. Okay. Lastly, for you said you have this two-year loading agreement with customers. I just would like to know, is this for all customers or applications or this is just for some specific customers' products? And is this, your loading agreement at fixed price, are this valid for two years?

We have 90% of the customers covered, two years term.

90%?

Yeah.

90% of all IC ATM customers, right?

Right, that covers NPI, audio, as well as pricing.

Okay, so this is a fixed pricing and the fee is valid for two years?

Yeah.

Okay, thank you, everyone for attending our call. We'll see you next quarter, hopefully at an earlier time slot. Talk to you then. Bye.

Thank you, Happy New Year.