ASE Technology Holding Co., Ltd. Q1 FY2021 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our First Quarter 2021 Earnings Release. Thank you for attending our earnings presentation today. Please refer to our Safe Harbor notice on Page 2. All participants consent to having their voices and questions broadcast during 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, 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. The results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I'm joined today by Dr. Tien Wu, our COO; and Joseph Tung, our CFO. For today's call, I will first be going over our financial results. Joseph and Tien will then be available to answer questions during the Q&A. During our last earnings release, we talked about seeing an increasingly tight semiconductor supply chain. At the time, we indicated that we saw tight supplies of wafers, components, substrates and capital equipment. The tight supply environment continues to be true today. During the quarter, headlines citing semiconductor shortages have spread into daily newspapers. Semiconductor companies, our customers, have started to plan further out with orders being placed now for products to be delivered in 2022. Longer-term loading agreements, which seemed like an unusual request in the back half of 2020, are now being regarded as a requisite by not only us, but by our customers as well. Last quarter, we expressed that we expected the logic semiconductor industry to grow between 5% to 10% during 2021. We also stated that our ATM business generally targets to grow two times that number. Since that time, we have certainly seen an overall step-up in our business. However, we also see some constraints becoming more of an obstacle for further growth. Nevertheless, even with these constraints considered, we still see an improved growth environment with our growth outlook to be on the very high end of the original range. All signs continue to point towards 2021 being a banner year for our ATM business. Meanwhile, our EMS business went through its seasonally soft quarter. The first quarter is usually when companies gauge their inventories and zero in on when to ramp down manufacturing while getting ready for the next product cycle. As a result, for us, volatility tends to be the norm during the first quarter. This year is no different, with business coming in a little behind our expectations during such order fine-tuning. This year's target manufacturing was made even more complex by bill of material constraints. Looking forward, we do see various product ramps coming, including new SIP and traditional EMS projects in the next few quarters. Please turn to Page 3, where you will find our first quarter consolidated results. Intercompany transactions between our ATM and EMS business have been eliminated during consolidation. For the first quarter, we recorded fully diluted EPS of $1.94 and basic EPS of $1.99. Consolidated net revenue decreased 20% quarter-over-quarter, but increased 23% year-over-year. This sequential decline was primarily driven by the seasonality of our EMS business. We had a gross profit of $22 billion with a gross margin of 18.4%. Our gross margin improved by 2.7 percentage points sequentially and 1.8 percentage points year-over-year. Both margin improvements are principally the result of a higher ATM business mix. Our operating expenses decreased by $1.1 billion to $11 billion, mainly as a result of lower bonus expenses during the quarter. Our operating expense percentage increased 1.1 percentage points sequentially and declined 1.2 percentage points year-over-year to 9.2%. The operating expense percentage increase is mainly the result of seasonality. On a full-year perspective, we should see improvement from last year's 9% level. Operating profit was $11.1 billion, down $0.1 billion sequentially and up $5 billion year-over-year. Sequentially, operating margin increased 1.7 percentage points to 9.3% and increased 3.1 percentage points year-over-year. From a total year perspective, we previously expected to be able to achieve a 1.5 percentage point to 2 percentage point improvement. We now expect to be able to improve our full-year consolidated operating margin by 2.5 percentage points to 3 percentage points, driven by increased scale, a favorable ATM pricing environment and SPIL synergies. During the quarter, we had a net non-operating gain of $0.3 billion. This amount primarily consists of gains related to our foreign exchange hedging activities, investments and asset sales, offset in part by net interest expense of $0.6 billion. Tax expense for the quarter was $2.5 billion. The effective tax rate for the first quarter was 22%. We expect to have an effective tax rate for the year of between 20% to 21% during the full year. Net income for the quarter was $8.6 billion, representing a decline of $1.5 billion sequentially and an improvement of $4.7 billion year-over-year. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $22.9 billion, with a 19.2% gross margin. Operating profit would be $12.2 billion, with an operating margin of 10.2%. Net profit would be $9.7 billion with a net margin of 8.2%. Basic EPS, excluding PPA expenses, would be $2.26. On Page four 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 first quarter, our ATM factories not only held fourth quarter production run rates as per our original expectations, but our factories were also able to surpass them. As you will see, we were also able to achieve higher-than-expected profitability as a result of these stronger revenues and a higher test revenue mix. For the most part, the majority of our ATM product lines were running at full or near full capacity. Our wirebond business continues to be capacity constrained, driven not just by increased unit demand, but also by unit bonding complexity. During this time, our ATM factories have remained diligent to our customers, trying to supply as much capacity as possible. To cope with the current environment, our preference has been, in no particular order, to pass-through raw material price increases, correct for underperforming engagements, enter into long-term loading contracts, and secure key customer relationships. We continue to work with our customers who are trying to work through an extremely challenging production environment. For the first quarter of 2021, revenues for our ATM business were $73.8 billion, up $1 billion from the previous quarter and up $7.6 billion from the same period last year. This represents a 1% increase sequentially and an 11% increase year-over-year. Our ATM revenues came in slightly ahead of our expectations. On a U.S. dollar basis, our ATM revenues grew by 3% sequentially. This marks the first time in recent history where ASE's first quarter had sequential revenue growth. Gross profit for our ATM business was NT$18 billion, up NT$1.5 billion sequentially and NT$4.7 billion year-over-year. Gross profits improved both sequentially and annually primarily due to higher manufacturing efficiency and significantly higher off-season loading. Gross profit margin for our ATM business was 24.4%, up 1.8 percentage points sequentially and 4.3 percentage points year-over-year. Our gross margin improvement was due to improved loading and a high percentage of low raw material products. ATM gross margin improvement was achieved despite NT dollar appreciation having a negative 0.8 percentage point impact quarter-over-quarter and a 2.7 percentage point impact year-over-year. Looking forward, we do expect this beneficial product mix to reverse itself in the second quarter and even switch to a high raw material product mix in the third and fourth quarters. However, even with this product mix shift looming, we expect to be able to deliver gradually improving gross margins throughout 2021. We are well on our way to achieving full year gross margin in the mid-20s. During the first quarter, operating expenses were NT$8.1 billion, down NT$0.4 billion sequentially and up $0.3 billion year-over-year. The sequential operating expense decline was primarily driven by a decline in employee bonuses. Meanwhile, the year-over-year operating expense increase was the result of higher employee salaries due to increased headcount and higher bonus accrual. Our operating expense percentage was 11%, down 0.6 percentage points sequentially and down 0.7 percentage points year-over-year. During the first quarter, operating profit was NT$9.9 billion, representing an improvement of NT$1.9 billion quarter-over-quarter and an improvement of NT$4.3 billion year-over-year. Operating margin was 13.4%, improving 2.4 percentage points sequentially and five percentage points year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 25.6% and operating profit margin would be 15%. On page five, you'll find a graphical representation of our ATM P&L. On Page six, you will see our ATM revenue by market segment. You can see here the typical seasonal decline in the communications market segment. However, our automotive, consumer, and other products picked up to fill the typical seasonal decline gap. On page seven, you will find our ATM revenue by service type. The quarterly movements tend to be small, but the chart taken as a whole tells a more complete story. You can see here the gradual improvement and underlying strength of our wirebond-related business. Meanwhile, our advanced and testing service types have seen a decline, much of which is due to the impact of the US EAR. On page eight, you can see the results of our EMS business and a graphical representation of our EMS revenue by application. The information we provide regarding our EMS business may differ materially from the information directly provided by our subsidiary, as they report independently using Chinese GAAP. During the quarter, our China-based factories were subject to a special government policy for lowering the risk of COVID-19 by means of reducing travel across China during the Lunar New Year holiday. China highly encouraged factories such as ours to maintain staffing levels throughout the Lunar New Year holiday. This resulted in extra unexpected labor expense. This, along with softer-than-expected business, contributed to the lower-than-expected profitability. During the first quarter, EMS revenues declined 40% sequentially, primarily due to product seasonality. EMS revenues increased 46% year-over-year as a result of having an expanded revenue base of products. Our EMS gross profit was NTNT$4.2 billion, declining NT$2.8 billion sequentially and increasing NT$1.1 billion year-over-year. The lower sequential EMS gross profit was the result of lower loading due to seasonality, while the higher year-over-year gross profit was the result of higher sales from a wider product base. Gross profit margin for the EMS business came in at 8.7%, which is a decline of 0.1 percentage points sequentially and 0.6 percentage points year-over-year. In addition to the aforementioned level staffing role, the gross margin sequential decline was primarily the result of lower scale during the seasonally down quarter. Year-over-year this decline is principally the result of the level staffing role and product mix. Our EMS business unit's first quarter operating expenses were NT$2.8 billion, declining NT$0.7 billion sequentially, while increasing NT$0.5 billion year-over-year. The operating expense sequential decline is the result of lower bonus expenses, while the annual increase is the result of China's level staffing role. Our operating expense percentage increased 1.4 percentage points sequentially to 5.9%, while declining 1.1 percentage points year-over-year. The operating expense percentage movements are driven by lower bonuses in the first quarter and sales seasonality. Our EMS operating profit declined NT$2.2 billion sequentially, while improving NT$0.6 billion year-over-year. Our EMS operating margin was 2.8%, declining 1.6 percentage points sequentially and up 0.4 percentage points year-over-year. From a full year perspective, we continue to target a 4% operating margin for our EMS business. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. You can see here that seasonally driven products in consumer and communication segments each declined by six percentage points. Other segments were generally seasonally soft, but were not as significantly affected. On Page 9, you will find key line items from our balance sheet. The only things that we would like to add here are that total unused credit lines amounted to NT$255.2 billion and our net debt-to-equity ratio dropped to 61%, the lower end of our targeted range. Page 10 will show our equipment capital expenditures. Amounts on this are denoted in US dollars. Machinery and equipment capital expenditures for the first quarter totaled $471 million, of which $337 million were used in packaging, $118 million in testing, $11 million in EMS operations, and $5 million in interconnect materials and others. From the full year perspective, we currently expect to increase our wirebond capacity by about 10% to 15% during the year. We ended 2020 with slightly more than 26,000 wirebonders. We also currently expect our 2021 equipment capital expenditures to increase by 10% to 15% compared to last year. We expect to invest roughly 65% of our CapEx on packaging equipment and 20% on testing equipment. The current environment is a challenging one. It is incredibly difficult to manage capacity allocations. We continue to see tight wafer, substrate component and capital equipment deliveries throughout the remainder of this year. It's even coming full circle for us. Some of our capital equipment vendors are telling us that their equipment delivery schedules are slipping due to a lack of semiconductors. We are well aware that perceived capacity scarcity potentially perpetuates a snowball effect with customers scrambling for even more incremental supply chain security. There are rumblings that capacity has been systemically underbuilt for years, but we have only been capacity constrained outside of typical seasonality for just this quarter. At the very most, underordering in the early days of COVID created an artificial lull in demand and capacity build. We don't believe the current situation can be simply explained away by saying the semiconductor industry had underinvested, specifically in back-end capacity. The worldwide capacity was in balance two quarters ago. For us and others, there is a resurgence of trailing edge technologies underway. We see longer-term shifts in product complexity, the expanded use of trailing edge technologies, and geopolitical disruptions having an impact on this supply and demand imbalance. Regardless of the cause, we believe we stand to extend our competitive advantage during the coming year. Not only do you look at who has the largest capacity at this time, what you have to ask is who gets the allocation of capital equipment in these times? Who has the advantage in getting allocation of components and substrates at this time? Who invested during the last three years while everyone else held back? Who can supply chain managers trust with their jobs to deliver on long-term loading agreements? Industry leaders like us stretch their lead in times like these. With that, we would like to provide our second quarter business outlook as follows. For our ATM business, our ATM second-quarter sequential business growth rate should be similar to our second quarter 2020 sequential business growth rate. Our ATM second quarter 2021 gross margin should slightly improve from the first quarter. For our EMS business in US dollar terms, EMS second-quarter business should be similar to third quarter 2020 business levels. Our EMS operating profit margin should be slightly below full year 2020 levels. Now, we open the floor for Q&A.

Okay. Yes. Thank you. Yeah. Actually, if I could ask the first question. I tried to get down the guidance real quick, but I want to just make sure I have the right understanding. For IC ATM, so we should imply 5% sequential – about 5%, if I look back to last year in US dollar terms with slightly up gross margin. And then for EMS, I think I saw compared to the third quarter 2020 growth rate. Is that a sequential or a year-on-year for that growth? And then for operating margin I assume it's slightly below. So it's a good sequential improvement. But if you could just recap it just so we have the right assumption on those guidance metrics?

Okay. I can’t hear you.

I didn't write it down.

The guidance that we provided for ATM, you're correct. In terms of ATM on the top line, we're expecting the same level of growth that we saw in the previous second quarter. In terms of the gross profit margin, we're looking at a slight improvement in the quarter. For EMS, we are looking at EMS second quarter. The top line will be similar to the third quarter 2020 level. And the operating margin should be slightly below the full-year 2020 level.

Okay. If I could follow up on the two things on the constraints. Is there a way to think about how much it is limiting you or how much behind you are on IC ATM? And is it strictly a wirebond that's still the bottleneck, or do you now have constraints on your, like more advanced packaging, the flip chip and wafer level packaging as well?

The constraints we were referring to apply to capital equipment including wirebonders and also related to substrates, lead frames, and other components that are required to do the final assembly. So every product is different. I mean I cannot tell you definitely it's not just a wirebonder thing. In terms of how do we manage the line balance, I think that's the operations job. Whenever we're missing some components or materials or try to do the line conversion, we switch back to the other assembly where we have materials in reserve. In terms of how much that limits our potential growth, it's very difficult to quantify that because the process right now is very dynamic. I won't be able to give you a quantitative number.

Okay. All right. And the second part of the guidance outlook. The EMS actually picking up in the second quarter. Last year did, but some years it's still down. If you could talk about the drivers for the pickup if there's some SiP projects or just existing EMS business recovering a bit earlier? And if you could give an update on the overall SiP outlook how that's now looking whether on a year-over-year or if any change versus the incremental growth you're expecting?

From the second quarter and for the entire year, we expect continued growth in EMS. This year, the revenue distribution will likely follow a typical pattern similar to roughly 44-56 or 43-47. The overall growth will come from both traditional EMS and SiP. Last year, we experienced significant growth in SiP revenue, with many new projects and customers. We generated nearly $400 million from new projects, and we're seeing similar momentum this year. While some mature products are gradually declining due to feature transitions, we're also seeing second sourcing in the pipeline. Additionally, new projects we began last year are starting to grow this year. Overall, we anticipate solid growth in SiP, especially from new projects, and we expect to maintain strong momentum moving forward.

Okay. And I could try to do the math. I think on the 47-53, is it the implication IC ATM you had mentioned high end of the 2x, which seems to imply U.S. dollar up mid to high teens. Is EMS a similar type of growth profile factor you consolidate?

I think the overall annual growth in the EMS business will be slightly better than the ATM overall growth for the year.

Sure. I have two follow-up questions regarding CapEx. First, I understand that the upgrade, which was initially maintained at last year's high investment level, is now increasing. Is that correct? Is this the area where you're seeing an increase compared to the previous year? Secondly, regarding the wirebond projected increase of 10% to 15% year-over-year, is that based on actual demand, or is it a limitation number indicating that you would expand further if capacity allows? If I may ask a third question, I've heard that it typically takes a couple of years to bring up a fab, which suggests we might face a shortage for two years. What's your perspective on the sustainability of this tightness? Historically, lead times have been extended, but not as long as it takes to build a fab. Do you think this situation might continue into next year?

The wirebonder delivery right now is anywhere between 40 weeks to 52 weeks. And that's the wirebonder delivery. In other words, whatever wirebonders that I've ordered now won't be delivered until next year. So the wirebonder lead time as well as the other equipment that go with the wirebonding line are also getting elongated. The wirebonder demand right now is clearly above the efficiency improvement as well as the new capital equipment that we can receive this year. So right now, the wirebonder is under allocation, highly constrained. Previously I made a comment that for the whole year of 2021, we will see wirebond constraint. My view remains the same, except that the wirebonder constraint might last a little bit longer. The back-end equipment has a shorter lead time compared to the fab, so I will not draw a comparison between one to the other. But right now, the supply/demand imbalance is obvious for the whole industry, which is why many of our customers who already signed long-term agreements and we are talking about how we can collectively, through design optimization and material standardization, improve efficiency to support them for 2021 as well as 2022.

Okay, great. That's helpful. And I guess just a follow-up. If you could clarify the increase in CapEx, it sounds like that might be an area where you could place orders to get additional tools. Was there a difference compared to the previous framework regarding where the new spending is directed?

The CapEx right now is literally across the board. We're seeing the test equipment, we're seeing the fan-out equipment, we're seeing the bumping equipment, we're seeing the wirebond equipment. We're issuing CapEx on almost all kinds of equipment. Right now we are working with our suppliers to prioritize delivery schedules. In terms of the total equipment that we plan to order, we will stay at the high level, if not exceeding last year. In terms of the actual delivery, that is what we need to do from an operational perspective. Now, why are we placing orders knowing that we have such a low lead time, because our customers' development and product cycle, as well as the long-term service agreement, dictates that. We're working closely with our customers to understand the demand profile long-term. And all of the capital equipment expansion will take that into consideration.

Okay. Great. No, appreciate the color. Thank you.

The next caller we have is Gokul from JPMorgan.

My first question is if you can hear me.

Yes. We can hear you.

Thank you. My first question is about the details of the longer-term commitment partners you are engaging with. Are these agreements for two to three-year fixed price contracts with a set volume? What implications does this have for ATM pricing and margins? Are these commitments mainly focused on wirebond, or are they also extending to other areas in advanced packaging? Could you provide more detail on the nature of these long-term orders you are receiving?

The long-term service agreements depend on customer. Each one is different. I will not comment in detail on that. The comment that I can make is, the service agreements right now cover more than just the wirebonder. It was wirebonder in the second half of 2020, and now we're spreading into flip chip and the other areas, because we do see a general constraint of the assembly capacity. In terms of the pricing environment, the pricing environment remains friendly. But as you know, we do not engage in tactical pricing. What we're doing right now is, we're working closely with our customers to reflect the raw material and other component pricing increases. We are also working closely with customers on long-term service agreements in terms of total demand, the capacity we need to build on behalf of their demand. The only area that I would like to comment on is, there are specific sectors where we have a super hot run, as well as the expedited product requirement. And normally we will have the expedite fee to apply for those particular cases. But in general, the price environment remains friendly. And I believe that condition will at least apply to the whole year of 2021, if not longer.

Thank you. Thank you, Tien Wu. If I may also ask about chiplets and the 2.5D, 3D packaging, clearly a lot of your compute customers, especially seem to be talking about this in a very aggressive fashion. Could we refresh what is ASE's view on this area? When we think about the CapEx increase, are we allocating some of that CapEx to your fan-out as well as 2.5D packaging efforts as well, or most of it is still going to come a little bit later?

There is a noticeable trend towards the acceptance and demand for chiplet, 2.5D, and 3D architectures across all regions and application sectors. ASE has been collaborating with our key customers on these architectures for some time. The current circumstances of 2020 and 2021 have slightly changed the landscape, particularly because we have long-term service agreements with our key customers. As a result, chiplet, 2.5D, and fan-out technologies have become essential components of these agreements. As we enhance our delivery cycles with our customers, we are also expected to engage in further development to improve efficiency and performance from both architectural and process perspectives. I'm not entirely certain of the specific question you have, but I believe these insights address your inquiry for today. Thank you.

Got it. Thanks, Tien.

Are we all set there, Gokul?

Yes. Well, I’ll go back into the queue. Thanks.

The next question will be coming from Bruce Lu, Goldman Sachs. Bruce, are you on the line?

Yes. Yes. Thank you for taking my question. A very great result. Can you give us a little bit more color in terms of 2021 ATM overall? I look at like the first quarter revenue was very strong. Do you expect the same year-on-year performance for the whole year? And also, for the profitability, the gross margin seems to improve more than 2.5 percentage points already, but the company was guiding only that 2.5 percentage operating margin improvement. I would be greedy to ask for a little bit more because of the operating level. Thank you.

I believe the overall growth momentum in ATM remains strong. In our previous earnings call, we mentioned that our growth would be twice that of the logic market growth, and I think that principle still holds. While we're observing overall industry growth increasing, due to some capacity constraints, we're now stating that our growth should reach the high end of the previously mentioned estimate of 10% to 20%. We're likely to achieve the upper end of that range. Regarding profitability, we expect to see continued sequential growth in our gross margin as we expand our operations and enhance our efficiency. For the entire year, we're very confident we will reach the mid-20% level. The operating margin improvement I referred to is based on a consolidated holdco level, where we're projecting an improvement of 2.5% to 3%. This will translate to a higher improvement for ATM, as we're setting an EMS operating margin target of 4% for the year.

Okay. Thank you. Can I track down a little bit for the ATM gross margin improvement in the first quarter? The gross margin improved by 180 bps compared to the previous quarter, but the earlier guidance for the first quarter of GPM for ATM is flat. So, where are the positive surprises coming from? And can you also give us a rank in terms of the gross margin amount like different business in ATM, such as wirebonder testing, flip chip SIP, what was the rank for the gross margin now?

We don't give out separate gross margins in our different businesses. But as a whole, I think the improvement that we saw in the gross profit margin this quarter largely came from the higher-than-expected revenue that we generated in the quarter. The other is really we had a higher test revenue as well. In terms of the percentage of our overall revenue, the test percentage is higher than expected. So that leads to a better-than-expected gross margin performance in the quarter.

Just one additional comment. When we offered the guidance last year, we were planning for the seasonality. In other words, the communications sector will go through the typical Q1 and Q2 seasonality. At the time, we were planning on some of the equipment dealing with the communications sector might not be fully utilized as well as the test equipment, and some of the assembly or the SIP equipment. What transpired in the first quarter was because of the loading situation and strong demand, we were able to collectively cooperate with our customers trying to utilize some of the idle equipment that would have been underutilized otherwise. And that resulted in improved revenue streams as well as gross profit. That is just another comment. We believe similar improvements will permeate into Q2. In other words, what is unique about 2021 years is we somewhat removed from the typical communication sector seasonality in Q1 and Q2. Now, having said that, in Q3 and Q4, we will go through the reverse part of the seasonality. So right now from an operational execution standpoint, we have to work diligently to secure all the supply, all the equipment, and all the necessary resources to ensure that after clear Q1 execution, we exit Q2 well and can deal with the second half including ATM, SIP, and the traditional seasonality of the communication sector. Overall, I believe 2021 will be a very exciting year. Now, in terms of the supply situation, the cover substrates, lead frames, ABF substrate capital equipment that you're all quite familiar with, we will try to give you a quarter-to-quarter update. As of today, we have done a decent Q1 because of all the factors that Ken, Joseph, and I have just outlined, we are optimistic about Q2 and we're quite excited about the second half of 2021. I mean there are some headwinds, the NT dollar that we have not discussed much about, and the other types of constraints, and of course the general global political situation as well as the pandemic. But with all of this considered, we have given you the best guidance we believe is pertinent to the current uncertainty scenario. I hope that clarifies a lot of the questions about Q1 and also the outlook for Q2 and the second half.

Thank you. Can I ask a question about the EMS? The guidance for the second quarter for EMS increased by about 10%, despite the usual low seasonality. How much of this increase is attributed to the Asteelflash acquisition? Additionally, the consumer segment in EMS saw a significant decline in the first quarter. Do you expect to see a rebound in that segment in the second quarter as well?

In the second quarter compared to the first quarter, we are observing that the primary driver is organic growth. The sequential growth can be attributed mainly to supply chain continuity. Many customers are increasing their inventory levels to raise their safety stock, as there are constraints in components and material supply throughout the value chain. Consequently, we are experiencing an uptick in the second quarter, which is not typical for this period, but it reflects the current situation for our EMS business.

So what is the outlook for revenue growth for the EMS for the entire year, considering that seasonality no longer appears to be a reliable indicator?

Like I said, in terms of the overall EMS business, we're expecting kind of a 44-56 kind of split between the first and second half. So I think going into the second half, we will see new products coming on screen and we're seeing more product launching; therefore, we'll go back to the typical seasonality seeing a much stronger uptick in the second half.

Okay. Let me ask one more question. We notice a somewhat different production iteration rate, especially with the wirebonder, between AC and many Chinese OSAT makers. Most OSAT companies are experiencing extremely high iteration rates. However, China's rates are high but seem to be a step down compared to most Taiwanese companies. Can you explain what has happened and why this is the case?

Well, I think the supply security applies somehow to that scenario. In other words, if a supplier has a longer working relationship who can cooperate not only in the assembly complexity for you the quality, who can also secure better component molding compound as well as the lead frame and substrate supply. I believe that plays into the fact why people tend to place more orders even though it's on the allocation mode just to prefer to work with ASE or our peers in Taiwan. I can't really comment on the China OSAT because I'm sure you know their scenario better than I do. But I think the product complexity, the product security and the geopolitical sentiment might play, might not play into their decision. That you have to talk to the customers.

Tien, don't get me wrong. I'm fully agreeing that ASE should have a much stronger customer demand. But your customers are actually buying, or like are in serious shortage. I mean they need to grab like the dying people they grab whatever they have, right? So the gap seems to be a bit larger than I expected. So that's why I tried to get some color.

That's precisely the point. I think when things are tight, I think most of the customers will look for the safest brands. And given our scale and the leverage that we have in terms of sourcing, capital equipment as well as materials, I think we are a much safer bet for our customers. That's one front. And I think the other one is that given the geopolitical situation, I think there is a growing concern on the longer-term or mid to longer-term sustainability of some of the Chinese players. I think it does play into the current situation a bit.

I see. Understand. Thank you. I’ll go back in the queue. Thank you.

Alright. Thank you. Next question is coming from Roland Shu of Citi. Roland?

Hi. Thanks a lot for taking my question. Just one quick question on the CapEx. So I think for today, I didn't hear you update your total CapEx spending plan this year. So how is the CapEx spend being planned this year?

This year, we expect to increase our equipment capital expenditures by approximately 10% to 15% compared to last year, which is really to accommodate the rising demand we're experiencing. While we've mentioned an overall increase in capital expenditures this year, the actual spending will largely depend on our delivery schedules. Currently, we are increasing our capital expenditures, and regarding the distribution, approximately 65% of the total spending will be allocated to assembly, 21% will go to testing, 12% to EMS, and the remainder will cover materials. This will outline our spending distribution for the year.

Understood. So it sounds like I think that the total number should be somewhere around $1.9 billion to $2 billion you are planning right?

Yes. Last year we spent close to $1.7 billion. And this year…

Yes and 10% to 15% higher.

Yes. Correct.

Thank you. Our assembly and testing expenses are around 80% to 85%. We want to understand TSMC's capital expenditures for advanced back-end services, which are projected to be about $3 billion this year. This figure exceeds your total spending, which is approximately $2 billion this year. Does this indicate that you need to significantly increase your capital expenditure in the future as you pursue more advanced packaging business?

The comment regarding TSMC's CapEx for the back-end requires clarification. It's important to note that the CapEx they discuss for their back-end differs significantly from the CapEx we reference for assembly equipment. A review of the CapEx equipment list would highlight these differences, making direct comparisons inappropriate. Additionally, if our customers require us to engage in specific configurations or architectural designs in collaboration with foundry suppliers, we will work with them to develop our proposals. Our proposals may align with what the foundry uses, but they might not be identical, as design choices will ultimately depend on the customers' packaging architecture. This remains a hypothetical scenario. Currently, we are in discussions with several customers to explore our proposals. While some overlap is possible, most aspects will differ significantly. Therefore, I don't anticipate our CapEx to align with foundry levels due to these fundamental differences. Moreover, the variety involved is quite distinct, as we are not focused on high-volume capacity for just a few customers. The processes and architectural designs we must create need to accommodate a range of application segments for multiple customers interchangeably, which is a key distinction in our business model compared to CapEx.

Okay, so Tien, correct me if I'm wrong. So, you are pretty much meaning TSMC is building its technology and proprietary technology for their customers. And this technology probably is different from the platform technology you are doing for customers' products across the board. Am I reading you right on that?

Yes, I believe it’s not about what ASE wants; it’s about what ASE customers want.

Thank you. I have a follow-up question regarding your past statement that for every $1 you invest in assembly CapEx, it is likely to generate around NT$1 in new revenue in the first year, and more than NT$1 for testing in the first year. Given the current spending on CapEx and the capacity constraints, are you still expecting to achieve a similar return on the new capacity investment?

As a general guideline, for every NT$1 invested in packaging, we can expect to generate approximately NT$1.20 in revenue. For testing, an investment of NT$1 typically results in about NT$0.50 in revenue. Therefore, when considering a blended perspective, we anticipate that NT$1 invested in assembly and testing will yield about NT$1 in revenue, making it a financially sound investment. It's important to note that TSMC's investment in the back-end is a different situation entirely.

Yes. I understand it's very different. Generally, for the back-end, you mentioned that for every NT$1 investment, you could expect to see an NT$1 return. So, this guideline is still applicable, correct?

That's still the rule, yes.

Okay. Cool. Okay. Thank you. Thanks for taking my question.

The next caller we have is Szeho Ng. Szeho, you're working nine to six?

Hey, I'm in Hong Kong. Yes. I have two questions for you guys. Anyway, a good result. First one regarding the wirebond delivery. I recall that in Q1 you got roughly a thousand hundred wirebonders, right? So, I basically want to note the wirebonder delivery schedule for the rest of this year.

I think currently we're looking at 3,500 to 4,000 bonders for this year addition. And we're expecting full delivery by maybe October-November timeframe. It will be delivered progressively. And I think full delivery is expected by the October-November timeframe.

Okay. Got you. Okay. Alright. And then the other one is on the housekeeping. What is the utilization for your wirebonder business and testing back in Q1? Where rough number would be fine?

I think in terms of packaging, we're around 85% and for tests around 80%.

That's good at peak utilization right, I believe?

Yes, we're pretty much at maximum capacity.

Okay. Good. And last one on the dividend policy, any update compared with three months ago?

No, I think we've announced it already. It's going to be NT$4.2 this year, and the payout ratio is roughly 65%.

Okay. And that will be the guideline for the near future, right?

Yes. Yes.

Okay, great. Congratulations on a good result.

Thank you. We don't have any additional questions in the queue. Okay. Thank you for attending our first quarter earnings release. See you next time.

Thank you.

Thank you.