ASE Technology Holding Co., Ltd. Q4 FY2023 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Fourth Quarter and Full Year 2023 Earnings Release. Thank you for joining us today. Please be aware of our Safe Harbor notice regarding the broadcast of voices and questions during this event. If you do not consent, please disconnect now. I want to remind everyone that the following presentation may include forward-looking statements which carry significant risks, and actual results may vary substantially. For this presentation, dollar amounts are generally expressed in New Taiwan Dollars, unless stated otherwise. As a company based in Taiwan, our financial data is presented according to Taiwan IFRS. Results under Taiwan IFRS might differ significantly from results using other accounting standards, such as those from our subsidiary using Chinese GAAP. I am accompanied today by Joseph Tung, our CFO, and Dr. Tien Wu, our COO. During today’s presentation, I will first discuss the financial results, followed by Dr. Wu who will provide a market update and key points for 2024. Joseph will then present the official company guidance. Both Joseph and Tien will be available for your questions in the subsequent Q&A session. Please note that during the Q&A, each caller is limited to two questions at a time but may return for additional questions. As per our expectations, the overall demand environment for our services remained sluggish during the fourth quarter. However, there were pockets of stronger performers within the devices we serve. By and large, our customers remain conservative in their ordering patterns. In general, higher-end leading-edge services seem to be faring better than legacy services; however, stronger wide breadth volumes remain elusive. For our ATM business, revenues were on the higher end of our expectations. During the quarter, key equipment utilization rates were still relatively low, averaging out between the low- and mid-60s. For our EMS business, in the fourth quarter, revenues increased sequentially, in line with our expectations. This was driven by customers' new devices and growth in the Computing and Automotive segments. For the year as a whole, the seasonal peak was a bit later in the year. With that, please turn to Page 3, where you will find our fourth quarter consolidated results. For the fourth quarter, we recorded fully diluted EPS of NTD 2.13 and basic EPS of NTD 2.18. Consolidated net revenues increased 4% sequentially and declined 10% year-over-year. We had a gross profit of NTD 25.8 billion with a gross margin of 16%. Our gross margin declined by 0.2 percentage points sequentially and declined by 3.2 percentage points year-over-year. The sequential decline in margin is principally due to higher EMS business mix and slightly lower ATM business loading during the quarter. The annual decline in gross margin is principally the result of lower loading during the current downturn. Our operating expenses increased by NTD 0.4 billion sequentially and declined by NTD 0.4 billion annually. The sequential increase in operating expenses is primarily due to higher compensation expenses, specifically higher bonuses due to stronger goal achievement and ESOP expenses. The year-over-year decline was primarily attributable to lower bonus and profit-sharing expenses across the company. Our operating expense percentage declined 0.1 percentage points sequentially and increased 0.6 percentage points year-over-year to 8.7%. The operating expense percentage changes were primarily related to lower operating leverage in a downturn environment. Operating profit was NTD 11.8 billion, up NTD 0.4 billion sequentially and down NTD 8 billion year-over-year. Operating margin stayed flat at 7.4% sequentially and declined 3.7 percentage points year-over-year. During the quarter, we had a net non-operating gain of NTD 0.6 billion. Our non-operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other non-operating income, offset in part by net interest expense of NTD 1.3 billion. Tax expense for the quarter was NTD 2.5 billion. Our effective tax rate for the quarter was 19.9%. Net income for the quarter was NTD 9.4 billion, representing an increase of NTD 0.6 billion sequentially and a decline of NTD 6.3 billion year-over-year. The NT dollar depreciated 1.5% against the U.S. dollar sequentially during the fourth quarter and 1.8% annually. From both a sequential and year-over-year perspective, we estimate the NT dollar depreciation had a 0.5 percentage point positive impact on the company's gross and operating margins. 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 NTD 26.7 billion, with a 16.6% gross margin. Operating profit would be NTD 13 billion with an operating margin of 8.1%. Net profit would be NTD 10.5 billion with a net margin of 6.6%. Basic EPS, excluding PPA expenses, would be NTD 2.45. Please refer to Page 4. Here, you will find the 2023 consolidated full year results versus 2022 full year results. Fully diluted EPS for the year was NTD 7.18 while basic EPS was NTD 7.39. For 2023, consolidated net revenues declined 13% as compared with 2022. ATM declined 15%, while EMS revenue declined 11% annually. Gross profit for the year was NTD 91.8 billion, declining NTD 43.2 billion year-over-year or by 32%. In 2023, our consolidated gross margin declined 4.3 percentage points to 15.8%, principally as a result of the electronics industry downturn for both our ATM and EMS businesses. Operating expenses declined NTD 3.3 billion for the year and came in at NTD 51.4 billion. Given the lower operating leverage during the downturn, our operating expense percentage increased by 0.6 percentage points to 8.8% for the year. Operating profit for the year was NTD 40.3 billion, declining NTD 39.8 billion. Operating margin for the year was 6.9%, representing a decline of 5.1 percentage points from 2022. We recorded a net non-operating gain of NTD 2.3 billion for the year, including a net interest expense of NTD 4.7 billion. Most of the non-operating gains were associated with our foreign currency hedging activities. Total tax expense was NTD 9 billion. The effective tax rate for the year was 21.2%. We believe our ongoing effective tax rate for the coming year to be about 20.5%. Net income declined by 49% to NTD 31.7 billion. On a full year basis, we estimate that the depreciating NT dollar had a positive 1.3 percentage point impact on gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 16.4%. Our operating margin would be 7.7%. Our basic EPS would be NTD 8.46. It's worth noting that despite the prolonged correction lasting throughout the entirety of 2023, our NTD 7.18 EPS for 2023 represents the third highest EPS the company has historically delivered. Only 2021 and 2022, COVID-driven demand years had higher EPS. On Page 5 is a graphical presentation of our consolidated financial performance. On Page 6 is our ATM P&L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the fourth quarter 2023, revenues for our ATM business were at NTD 82 billion, down NTD 1.7 billion from the previous quarter and down NTD 12.3 billion from the same period last year. This represents a 2% decline sequentially and a 13% decline annually. Gross profit for our ATM business was NTD 19.2 billion, up NTD 0.6 billion sequentially and down NTD 7 billion year-over-year. Gross profit margin for our ATM business was 23.4%, up 1.2 percentage points sequentially and down 4.4 percentage points year-over-year. Gross margin was higher than our original expectations. The sequential margin improvement was the result of product mix and the end of summer utility rates. The annual margin decline is primarily the result of lower loading during the current downturn. During the fourth quarter, operating expenses were NTD 10 billion, up NTD 0.2 billion sequentially and down NTD 0.4 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher labor-based expenses. The annual operating expense decline was driven primarily by lower profit-sharing and bonus expenses. Our operating expense percentage for the quarter was 12.2%, up 0.5 percentage points sequentially and up 1.2 percentage points annually. Sequential operating expense percentage increased as a result of higher compensation-related expenses. The annual increase was due to lower operating leverage. During the fourth quarter, operating profit was NTD 9.2 billion, representing an increase of NTD 0.4 billion quarter-over-quarter and a decline of NTD 6.6 billion year-over-year. Operating margin was 11.2%, improving 0.7 percentage points sequentially and declining 5.5 percentage points year-over-year. For foreign exchange, we estimate the NT to U.S. dollar exchange rate had a positive 0.7 percentage point impact on our ATM sequential margins and a positive 0.9 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.5% and operating profit margin would be 12.6%. On Page 7, we have our ATM full year P&L. 2023 revenues for our ATM business declined by 15%, with our packaging and test businesses down 16% and 11%, respectively. Gross profit for the year declined 35% to NTD 68.7 billion. Gross margin was 21.8%, down 6.7 percentage points, primarily as a result of the prolonged correction. Our operating expense percentage increased 1.1 percentage points to 11.7%. The increase was primarily due to lower economies of scale. Operating profit declined 52% to NTD 31.8 billion, with operating margin declining 7.8 percentage points to 10.1%. Foreign exchange, on a full year basis, we estimate that the depreciating NT dollar had a 2.4 percentage point impact on margins. Without the impact of PPA expenses, gross profit margin would be 22.9% and operating margin would be 11.5%. Certainly, on its surface, the full year comparative results appear to be somewhat unappetizing. But given the breadth and severity of the industry downturn during 2023 and the history of even more unappetizing results during previously even lesser downturns, we believe this annual performance as a whole shows a reset in our ongoing ATM profitability structure. On Page 8, you'll find a graphical representation of our ATM P&L. This shows the long protracted downturn that we are slowly coming out of. On Page 9 is our ATM revenue by 3 C market segments. Our Communications Application took its seasonally larger position in the fourth quarter. Our Computing segment dropped from the previous quarter but still remains a point above historical levels. On Page 10, you will find our ATM revenue by service type. We have seen a higher revenue mix of advanced packaging and testing business in the back half of 2023 versus the first half of the year. During the coming years, we expect a higher growth rate from these two segments given the increased complexity and content in newer generations of devices. On Page 11, you can see the fourth quarter and full year results of our EMS business. During the quarter, EMS revenues were NTD 79.2 billion, improving NTD 8.2 billion or 12% sequentially and declining NTD 4.8 billion or 6% year-over-year. The sequential revenue increase is primarily attributable to a slightly later than seasonal peak to our EMS business, while the year-over-year revenue decline is primarily due to the broad-based soft electronics demand environment. Sequentially, our EMS business' gross margin declined 0.7 percentage points to 8.4% and while our operating margin declined 0.4 percentage points to 3.5%. The operating margin decline was driven primarily by product mix. Our EMS fourth quarter operating profit was NTD 2.8 billion, flat sequentially and down NTD 1.2 billion annually. From a full year perspective, our EMS business declined NTD 33.7 billion or 11%. Full year gross and operating profit declined by NTD 5.7 billion and NTD 5 billion, respectively. Full year gross and operating profit margins declined 0.9% and 1.3 percentage points, respectively. Generally, the full year declines in our EMS business are the result of the soft electronics market, leading to lower operating leverage. On Page 12, you will find a graphical representation of our EMS revenue by application. The shifts here overall were generally due to product timing. Relative to previous years, some products were earlier, while others were later in accordance with customer requests. Further, our computing revenues were also higher, driven by stronger networking, server, and general restocking revenues. On Page 13, you will find key line items from our balance sheet. At the end of the fourth quarter, we had cash, cash equivalents, and current financial assets of NTD 72 billion. Our total interest-bearing debt was down NTD 27.5 billion to NTD 191.7 billion. Total unused credit lines amounted to NTD 373.8 billion. Our EBITDA for the quarter was NTD 28.6 billion, while our EBITDA for the year was NTD 106 billion. Our net debt to equity this quarter was down to 0.38. On Page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the fourth quarter in U.S. dollars totaled USD 234 million, of which USD 130 million were used in packaging operations, USD 76 million in testing operations, USD 21 million in EMS operations, and USD 7 million in interconnect material operations and others. Machinery and equipment capital expenditures for the full year of 2023 in U.S. dollars totaled USD 914 million, of which USD 460 million were used in packaging operations, USD 314 million in testing operations, USD 114 million in EMS operations, and USD 26 million in interconnect material operations and others. Current quarter EBITDA of USD 0.9 billion continues to outpace our equipment capital expenditures of USD 0.2 billion. At this point, I would like to hand the presentation off to Dr. Tien Wu.

Hi, everyone. This is Tien Wu. Year 2024 will be a year of recovery. In the last few years, there have been many changes. So, I think it's appropriate for me to give you a market update, take a snapshot of what we see today and how ASE is competing in this new environment before I go to the year 2024 full year outlook. Let me talk about the semiconductor landscape. As you know, the semi organization and many analysts have been talking about an NTD 1 trillion industry target by the year 2030. We believe that the industry is likely to reach the NTD 1 trillion revenue target in the next decade. It can be in '30, '31, '32, or '33. But with high confidence, we think the revenue will reach the NTD 1 trillion mark in the next decade, driven by AI, robotics, EV, and all of the new applications. The industry has a clear understanding about our responsibility in net zero, ESG, circular economy, as well as recycling throughout the whole supply chain. As a matter of fact, ASE has been putting a lot of endeavor in this area. The industry is facing challenges such as geopolitical tensions, regionalization, and market bifurcation. With all of these new effects, it will come at a cost, along with reduced scale. Those are new variables that the industry needs to learn how to manage. Industry will have a few things we need to do. First, the industry has to propose more innovations with higher value. I think AI is a perfect example in that regard. Structural improvement of efficiency and cost is crucial. Everyone in the whole supply chain is putting a lot of effort into that. Additionally, talent must be aligned in the workforce with the new complexities of doing business. With that, I would like to turn to the next page to discuss how we see ASE competing in this new environment. So, let me list a few competitive advantages, and this is based on the feedback from all of our customers as well as internal discussions. The first competitive advantage is technology. Here, I'm splitting the technology content into four large sectors. Let me talk about the High-Performance Computing or AI arena. In that arena, I think the Taiwan ecosystem with foundries, design companies, and the whole supply chain becomes very critical. ASE, in this regard, is at the center of the Taiwan ecosystem. Specifically for AI and HPC, we have the assembly, packaging, and testing technology leadership. On the SiP, there's no doubt that in the last 10 years, ASE has demonstrated clear leadership in heterogeneous integration as well as embedded devices. In optics, we are slowly revealing our endeavors with all of our key customers in silicon photonics and co-packaged optics. We believe that this will be the next paradigm shift, marking a new growth spurt for the whole semiconductor industry if that becomes a reality. The last one is automation. ASE has been working on a fully automated LiDAR factory, including software development, data collection, and design ecosystems, including collaboration with designers and customers. We believe these four areas will mark a strong competitive advantage for ASE in this new environment where the higher value of innovation becomes a key competitive requirement. The next point will be about scale efficiencies. From the financial performance in both upcycle and down cycle, we can see how we compare to our peers in the industry concerning financial performance and cash flow. ASE will continue to adhere to strong financial discipline, and we will make all the necessary investments according to our customers' requirements and the technology trends in the industry. Up next, we have flexibility and agility to adapt to business model evolutions. We believe that in the next 10 years, we need to work with different geographies in different business models. For example, we might need to work with Tier 1, OEM, or system houses directly in varying business environments. ASE has shown a clear flexibility and agility to work with different companies across various geographies within different business models and their evolution across the last 20 years. Lastly, there is geographical diversity. ASE, along with ASE Holdco including USI, has the most diversified geographic presence throughout the world. With these advantages and resources, we should be able to handle all of the customer requirements in the next 10 years, depending on how the political environment varies. Please turn to the next page. I will talk about the 2024 outlook. First, I want to talk about revenue recovery. 2024 will be a year of recovery. We will be moving out of inventory adjustment in the first half, and we expect growth to accelerate in the second half. Full year ATM revenue should grow at a similar rate as the logic semiconductor market. We expect a higher revenue mix of advanced packaging due to our technology leadership, as well as an increase in testing revenue on the increased turnkey ratio, just like what Ken has shown you in 2022 and 2023. We will target higher investment in machinery and buildings and smart factories compared to 2023. We believe we are entering into a new industrial upcycle with increasing adoption of advanced technology based on our customers' feedback. Please turn to the next page. Let me talk about the advanced packaging and the AI boom. In 2024, we are on track to double our leading-edge advanced packaging revenue. From existing customers, we expect to have an additional USD 250 million revenue in 2024, and we believe the momentum will continue in the coming years. ASE has a comprehensive technology toolbox, which includes 3D, 2.5D, Fanout, SiP, co-packaged optics, automation, etc. Our scale advantages and technology leadership will make ASE the preferred partner for our customers. As it is apparent today, we have mainly new NPI as well as collaborative projects with many Tier 1 system customers, along with design houses. ASE will not only benefit from the adoption of leading-edge advanced packaging but also from the expansion of mainstream packaging, which will be utilized to address the growing semiconductor demand for all the surrounding chips of the booming AI. I'd like to turn the floor to our CFO, Joseph.

Okay. Thank you, Tien, and hello, everybody. To give you the guidance for the first quarter of 2024, based on our current business outlook and exchange rate assumptions, our guidance for the first quarter of 2024 is as follows. In NT dollar terms, our ATM first quarter 2024 revenue and gross margin should be similar to the first quarter of 2023. Again, in NT dollar terms, our EMS first quarter 2024 revenues should also be similar to the first quarter of 2023, and EMS first quarter 2024 operating margin should approach the first quarter 2023's operating margin.

I would like to invite questions. We have a question from Mr. Gokul Hariharan of JPMorgan.

Happy New Year. Could we talk a little bit more about how we think about growth this year? I think Dr. Wu, you mentioned close to the logic industry growth. What does that number look like for you? Is it more like a 10% number or more than that? And maybe give us a little bit more color on how you think about growth by vertical. Communication is still a very important part, making up more than 50% revenue for your ATM business. So, how do you think about communication versus computing versus the consumer auto segment? That's my first question.

As Tien mentioned, this 2024 will be a year of recovery. We are expecting to see ATM to see sequential growth on a quarterly basis throughout the year, with the second half having stronger momentum. As for the overall full year growth, also, as Tien mentioned, we will be growing at a similar rate as the logic semiconductor market growth, which is projected by different sources for anything from 6% to 10% in the industry now.

Also, any guidance for margins? Are we expecting margins to get back to high-20s to 30%? And could you also talk a little bit about your approach to the AI-related packaging? Some of your competitors are setting up capacity to compete with the leading foundry. Is that ASE's approach as well in terms of seeking out these high-end AI accelerator packaging? Or are you kind of partnering with the leading foundry in terms of potential opportunities in this advanced packaging business?

I believe we will definitely increase our total capital expenditures for equipment this year. Based on our current pipeline, we anticipate budgeting 40% to 50% more for equipment capital expenditures, pending Board approval. Over 65% of this capital expenditure will be allocated to assembly, primarily for advanced packaging. In terms of the distribution of our planned capital expenditures, approximately 67% will go towards assembly, 80% towards tests, and 30% for EMS. Most of this investment is aimed at new products we are launching this year. Regarding margins, we are very confident that in the second half of the year, we will return to our structural margin, which is projected to be in the mid-20s to 30%. We also expect to achieve our margin back within this structural margin range for the entire year.

I think there’s a question about the collaboration with the leading foundry supplier for advanced packaging as well as investment maybe in other parts of the world. Our position has been clear. We’re working with all of the leading foundries, and we have made public announcements that, for example, the ASE and TSMC collaboration has been ongoing for years, and we’ll continue to work very closely on all of the advanced packaging requirements. The investment and the R&D readiness has always been in place, which is another reason why we can ramp up, for example, the OS in the later part of last year as well as in the early part of this year, and you will see the good results coming out. So the collaboration and readiness has always been there. Now in terms of going to different parts of the world and making a big investment, we need to have a better understanding of the product and technology requirements. Right now, we do not have any plans to go to the U.S., for example, to make leading-edge capacity investments. However, we will be very cautious and work closely with our customers to examine the situation. Today, we’re going to focus in Taiwan first to ensure we can fulfill all of the ramp-up technology variation requirements based on the leading-edge foundry suppliers and our customers. I think that will be our first order of business. As we move to ‘25, ‘26, and ‘27, depending on the environment, including political and business factors, we will make different decisions accordingly.

Next question is from Ms. Laura Chen of Citi.

Can you hear me?

Yes.

I also have a question about the advanced packaging. I think you mentioned about like an additional NTD 250 million revenue contribution for this year. That's the new engagement with the advanced packaging. Can you elaborate more on what kind of application? Is that including some of the bump in business or more focus on substrates, that kind of advanced packaging?

The NTD 250 million revenue includes all of the what we call the advanced packaging. For example, if you're referring to our substrate business, that includes CoWoS, the TSMC version of CoWoS, and the un-substrate portion, and that is inclusive. Also, ASE has the 6 Pack and the VIPack that includes all kinds of advanced packaging. So this year, we're seeing OS customers. We are also seeing VIPack customers. Hopefully, by the second half of this year, we can start announcing key customer ramp-ups for other advanced technologies in volume.

And was that also the expansion? What kind of margin impact are we looking for?

We don’t normally comment on specific product margins. However, as a whole, I think the overall corporate margin will continue to improve as we see volume come up, and also by bringing in the new technology that we are in our overall offering.

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

Happy New Year. So, I also have a question regarding advanced packaging. That CPO seems to be a very, very future technology, but can the company comment on the potential timing, penetration, and TAM, especially how are you going to work with the key foundry events at TSMC? Because I heard that TSMC may want to produce their silicon photonics. So, how are you going to collaborate with the foundry partners or other vendors?

The silicon photonics is a big subject. The whole idea is that it will represent another paradigm shift. As we enter into silicon photonics, we'll be opened up to more dimensions, more performance, and more flexibility for all of the designers. So, it is good for the whole industry, right? The timing of silicon photonics has been the big question. We have been working on this for many, many years. Many people have been working on this. So, this is really a future technology as well as an incremental growth driver for the whole industry. In terms of the rolling responsibilities, that is less of a concern. The foundry will have its role in terms of making the photonic chips either in a stack format or isolated format. For ASE, we will focus on co-packaged optics. For example, if we take the IDM photonic chips or the foundry photonic chips, we need to find ways to bundle those with everything else. Each sector of the player will have a good responsibility and role to play in that new arena. Now ASE has been discussing CPO or silicon photonics primarily because this is really an important innovation. The whole industry is focusing on this. ASE today is working with all of the major drivers in the industry in this arena.

Very, very fair and indeed covered lots of my questions. My second part of the question may be on near term. Since I guess late third quarter, we've seen a circular foundry rush orders that indicate demand is coming back and also people are looking for visibility. Fast-forwarding to 4 months later, I'm not sure Tien or Joseph want to answer this question, but do you think this kind of rush order patterns will continue, or have we already seen the negative side where rush orders have disappeared?

Rush orders can be viewed from two different angles. For example, if you look at the industry going through a very prolonged inventory correction after COVID, many companies examined their inventory days, looking at order patterns and trying to adjust based on the inventory days and the foundry order as well as the supply chain cycle time pipeline. What we observed a few months ago in China was that high-end cell phones started selling well. Some of our customers began placing rush orders for different wafers and devices. I believe this is a positive sign. The next question is whether this trend can be prolonged. Our belief is that this marks the beginning of the hub to the boom cycle or we are nearing the tail end of the inventory control. For instance, the first customers began adjusting their inventory back in January of 2023, while others started later in the year. Therefore, every company and every sector will go through their own inventory adjustments. However, I believe by the third quarter of this year, most customers will have finalized their adjustments and will move back into the sell-through cycle. There are, of course, uncertainties about the sell-through cycle given high inflation, the state of the Chinese economy, and ongoing geopolitical tensions. These complications make it difficult to provide a definitive answer. However, the general belief is that semiconductors will grow this year, and logic is projected to grow around high single-digit rates, like 10%. All of the order patterns observed today across various sectors with different paces are pointing in that direction. The best method we have to determine trends is to assess the data in January and February, which will give us a clearer picture. We will update every quarter based on evolving insights.

Next question is from Bruce Lu of Goldman Sachs.

Again, I still want to ask about advanced packaging. I think in the past, the difficulty for us in terms of advanced packaging is that there are so many different solutions, each requiring different capacities and CapEx. And obviously, we see a clear direction for the market driven by AI at this moment. Can you tell us if the direction for moving into specific advanced packaging is more confirmed? Are we focusing our CapEx on that, and do we foresee reasonable ROIC or ROE for this business moving forward? Is this an accretive business for us?

This is a loaded question. The AI market is expected to last for a long time. Initially, we might see one or two representative customers, but over time, we think other players will enter the market. I believe we're witnessing the beginning or the tip of the iceberg. If we follow this trend, leading edge foundries will commit to providing the necessary capacity, and other OSAT players will have to step in to assist. As a company, we've decided that we possess the technology and initial capacity to engage in this business comprehensively, not only from leading-edge foundry customers but from all end and potential system customers who have requested this service from us. Currently, we are implementing OS and VIPack products, but as AI evolves, additional requirements will emerge that will require similar capacities for building those comprehensive systems over time. We think our applications and systems will expand, and we will have enough portfolio and financial strength to sustain this business model and its responsibilities.

As I mentioned earlier, we don't typically comment on the profit margins of different packages. At a holistic level, I think we can anticipate our margins to reflect the continued technological advancements. If we observe this year, we will see our margins starting to improve as we progress with technological developments.

Next question is from Randy Abrams of UBS.

Yes. I wanted to ask the first question if you can elaborate on the growth profile for this year. The first quarter looks like it will be seasonal or slightly lower than seasonal. For the outlook, it sounds like you are more confident about the second half, but I'm curious for the second quarter, do you expect to see a return at least to a seasonal level from the low base? So, are we starting to get back to high-single, low-teens type of recovery? And for applications, what I'm curious about is how the automotive segment is faring through this downturn and correction. Are you seeing any content growth? I'm curious how auto is weathering all this.

Typically, Q1 is down around 10% to 15% based on my 20 years with ASE, and we usually consider 12% as the average. This year, if we can match last year's Q1, I believe we've done better than average. Of course, we must assess our Q4 relative performance as well. Regarding Q2, we anticipate a rebound to our usual growth pattern. Thus, we are predicting a standard performance where Q1 is low, Q2 shows growth, and the second half is more robust. As for the automotive segment, some IoT and analog mixed-signal customers are expressing concerns about high inventory levels. As a result, we are seeing a sluggish order environment in the first half of the year for these arenas. However, ASE's automotive business is growing, mainly due to our strong automotive line. Joseph can provide more insights on automotive growth.

We have experienced significant growth in the automotive sector since 2022, with strong expectations for growth continuing into 2024. Presently, the automotive-related business has already reached approximately 10% of our overall business, and we foresee continued growth into 2024. Although we are encountering some softness in the market during the first half of the year due to selective inventory adjustments, we still believe the overall growth momentum will persist in 2024 for our automotive business.

There's a quick follow-up on that, and then I'll ask the second question. With the IoT analog mixed signal, since the consumer downturn extended much longer, do you think we have moved through that based on customer feedback that we should see improvement in the second half, or do we face further risks given the length of the previous strong trends? The second question relates to the EMS business, which has been underperforming, and there hasn't been substantial customer innovation on new SiP projects. How do you foresee the EMS business recovering? Are there specific applications driving this recovery, or should we expect general growth, and are there any activities related to SiP that can jumpstart this portion?

We’ve already stated our expectation for a recovery starting in the second half of the year. As for the EMS segment, if you listen to the EMS earnings announcement, they will likely report similar growth alongside ASE this year. I’m not sure how to answer regarding SiP since we do not typically comment on specific projects or customer products.

I think for 2024, the EMS SiP business will remain relatively flat compared to last year due to the different dynamics in this space. Nevertheless, we remain very engaged with diverse products and customers in the SiP sector and anticipate a meaningful momentum starting in 2025. I think 2024 will be the year when we see numerous NPIs and new engagements across various areas, including automotive, consumer, and communication.

Our next question is from Szeho Ng of China Renaissance.

First question regarding Q1 guidance, right? We are looking for revenue ATM business to be down double-digit roughly. Can you clarify how much of that is volume or loading driven, and how much is ASP related?

ASP is quite stable right now. To clarify, when we talk about the first quarter, we expect it to be flattish compared to the same quarter last year. My comments regarding the second half inventory adjustments primarily concern most of our customers. Some have begun ordering, while others are still awaiting decisions. We can’t say for sure when inventory adjustments will conclude. However, we believe that by the third quarter, most of our customers will initiate recovery paths. Both volume and ASP are stable.

And second question relating to the advanced packaging portfolio. Is it fair to assume that right now, the overall portfolio for advanced packaging is margin dilutive to the ATM business? Under what circumstances should we expect the advanced packaging to command margins similar to the division margin?

I think the first answer is yes. When I talk about NTD 250 million, that's all ATM. In terms of margin, I think Joseph has repeated that we don't typically comment specifically, but overall margin contributions to the business will be accretive.

Yes, we're talking about not being dilutive.

I had a question on the test side of the business. How are we seeing progress in trying to improve the bundling ratio for turnkey test? And could we also talk a little bit about your market presence in some of these advanced AI chips, how much testing business are we able to secure? Dr. Wu, could you give us any milestones regarding how we should be viewing your test business, given I think the bundling ratio still seems quite low compared to what you want to target in the medium term?

In terms of our test business, we have been growing that part of the business percentage-wise in our overall revenue composition. From '21 to '23, we’ve increased that from below 15% to now close to 16%. We believe that ratio will continue to grow in 2024, aiming close to 17%. We will continue to endeavor to grow our test business by increasing our turnkey ratio with our customers, which includes advanced packaging today — a sector where we've seen low testing percentages for our customers. We anticipate this percentage to rise and project to reach a peak test revenue percentage of around 18% in the coming years.

My second question is on mobile since that is still the primary revenue driver. We've been hearing that there are some changes happening in the mobile side with more customers looking for 2.5D or Fanout package on package solutions. There's also some discussion about major flagship mobile customers potentially seeing, or at least the foundry part of mobile packaging stepping out of foundry towards OSAT. Are these opportunities likely to benefit ASE? How is ASE positioned to benefit, and could you provide any insights into the possible change from flip chip to Fanout package on mobile? How beneficial could this be to OSAT profits and revenues?

I’m not sure I can answer all of your questions, but let me try this. Not just mobile, right? If you look at High Performance Computing, routers, and servers — they all go through similar trends. Initially, customers want to work with a foundry supplier to ensure that the turnkey service will guarantee yield and just-in-time delivery. Over time, however, a portion of it may shift to packaging, testing, and un-substrates, and they will decide to seek out external foundry services. Our capability sets us apart; we've demonstrated our ability to work closely with an array of customers in various geographies, and we can adapt to changes effectively. As more customers come in, enhanced technology will become available. We are seeing preliminary waves of outsourcing activity. Once the door opens, this trend tends to persist as technology improves and more data points establish confidence in supply chain diversity and resilience. I believe ASE is well-positioned to exploit this emerging trend because these areas align directly with our core business objectives. It's essential to recognize that the margin contribution will be more pronounced as we develop high-end solutions and work towards increasing our turnkey ratio.

Yes, I'm asking on behalf of Charlie. The first question is, do we see competition coming from Chinese OSATs? We have heard some of our customers are surveying the possibility of shifting some capacity to Chinese OSATs. If so, how do we tackle that? Will we lower our prices for market share, or do we focus more on maintaining ASP while shifting our focus to advanced packaging?

I think we have seen competition persisting for the last 30 to 40 years, and we have adapted over time. Customers will always explore options from global suppliers. The decision point ultimately lies with new geographic regulatory controls. If a customer feels comfortable moving to different regions, that becomes a primary filter. Currently, we see reduced concerns regarding key customers opting for Chinese suppliers due to these considerations. Over time, this might change. Our strategy remains to improve our efficiency, reliability, and ensure data traceability. ASE focuses on complete traceability and automation, ensuring substantial data visibility with our customers. We’re aiming to enhance our scale by collaborating with leading foundry partners and all key Tier 1 system customers to increase our knowledge base and capability. Not only do we concentrate on manufacturing know-how, but we are also enhancing design efficiency to make even complex designs simpler and cheaper. Without these advantages, securing key customer business would be challenging. ASE has a wealth of experience that serves us well, particularly with leading-edge customers. In light of this evolving landscape, we remain cautiously optimistic about ASE's competitive stance in the industry. Thank you for the insightful questions.

Thank you, all. Happy New Year. We'll see you next time.

With that, I would like to wish all of you a Happy New Year wherever you are. After an exciting 2021 and 2022, 2023 offered a bit of a breather. I believe in 2024, we'll embark on a new era, and I look forward to working with all of you. Thank you.