ASE Technology Holding Co., Ltd. Q2 FY2025 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our second quarter 2025 earnings release. Thank you for attending our earnings release today. Please refer to our safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please do not ask questions or you may leave the session at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financial information is 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'm joined today by Dr. Tien Wu, our COO; and Joseph Tung, our CFO. For today's presentation, Dr. Wu will go over our midyear update. I then will go over the financial results, and Joseph will deliver the company's guidance and closing remarks. Afterwards, both Tien and Joseph will be available to take your questions during the Q&A session. I will be moderating the Q&A sessions that follow. We will start with some questions from the floor and then start alternating in some questions from virtual attendees. With that, I'll hand the presentation over to Dr. Wu.

Good afternoon. We have not had a live one for quite a few years. Welcome back, and thank you for coming. To begin with, I would like to give you a recap for the first half of 2025. Everything will be in U.S. dollar terms. The unconsolidated revenue grew 9% year-on-year in first half of 2025, with ATM revenues up 18% year-on-year. Leading-edge advanced packaging and overall testing outpaced growth, while the general segment saw some recovery. The leading-edge advanced packaging and testing revenue were over 10% of ATM revenues in the first half of 2025 compared to 6% for the full year of 2024. Our testing business grew 31% year-on-year in the first half. The momentum will continue into the second half on increased turnkey and expanding leading-edge test. Machinery CapEx was USD 1.9 billion, building factory facility automation was $0.9 billion in the first half of 2025, driven by advanced packaging and testing. So that is the first half recap. It has been quite busy for the ASE team. The second half will be busier. Let me give you the outlook. For the ATM business, we expect momentum to carry into Q3. As of now, we also believe Q4 will have a quarter-to-quarter growth compared to Q3. The leading-edge advanced packaging and testing revenue, we target to increase by USD 1 billion. We made a statement at the early beginning of this year, contributing 10% of the whole year growth, while the general segment is expected to grow by mid- to high single digit year-on-year in 2025. We maintain this view as of now. Even with all of the uncertainties that we have gone through, this view has not changed. We expect the revenue uptrend to continue into 2026 and beyond, driven by leading-edge solutions and broad-based semiconductor demand related to AI proliferation, also general recovery that we believe will happen in 2026. Investment in R&D, human capital, advanced capacity, and smart factory infrastructures are key to support the multi-year growth. This is putting a lot of pressure on the ASE team. However, with detailed conversations with our key partners and all of our key customers, we believe this is the best thing that we can do for ASE, for the Taiwan ecosystem as well as for the industry. With that, let me go over to the third page. The third page, I only have bullet form. I would like to talk about 3 items: Market dynamics, operations, and also the challenges. I might not go over things in the right order, but these are the bullet points I would like to cover. To begin with, I want to talk about how we see the market heading and what is the current dynamics and also the future opportunities for ASE as well as for many players in our industry. I want to touch on the technology focus because that's related to the market trend, also related to ASE's position. Then I'll cover the operation where the leading-edge capacity and all capacity in general in Taiwan is very full now. That's why we have to continue to expand into the second half. The overseas, we still have some idle capacity. Therefore, how we manage the expansion in Taiwan as well as outside of Taiwan and the resource optimization becomes key. And lastly, all of the challenges, I will touch base on that. Okay. With that, let me just go over the mega trend. Everybody talks about AI, hyperscaler, data center. We're well into, I would say, the second of the three years of this trend. The recent announcement outside of the U.S., you're seeing the announcement of mega data centers worldwide. We believe there are 2 things that are happening. The first is the expansion of hyperscaler data centers worldwide. The second thing is in the middle of that expansion, the upgrade cycle is ongoing right now with the technology provider as well as the infrastructure provider. We have not touched base on the AI edge applications yet, but we believe there will be multiple waves in the next 10 years, starting with the hyperscaler data centers and then going through the inference and then going through the AI edge applications. What is important is in this AI paradigm shift, what has become clear to us by talking to our foundry partners and also talking to our key customers, some of the foundational technology requirements are identical. I'm going to give you 4. The first one is integration. I think the 3D IC packaging, the density that is an example of the heterogeneous integration that we've been working on this for a long time. The focus offered by ASE, the CoWoS offered by TSMC are examples of that integration. That trend will continue with the expansion as well with the upgrade cycle. The second thing is the power management. We have not touched base on the power management. We believe power management is going to be a key hurdle that the industry needs to address. The third one is the silicon photonics. I think we've been very vocal on the importance of silicon photonics. We have not seen the revenue uptick yet. But this is a foundational technology that will provide the bandwidth, the speed, latency, and efficiency. It needs to happen in order to trigger even more applications such as humanoid. And lastly, will be the cost. In the cost, not only what you think about capacity, but what do you think about material configuration; more importantly, we have to think about throughput and also the flexibility in designing the footprint and that's where the large panel comes in. If we have gone through all the foundational requirements, then we're going back to ASE's position. And there are 3 things I want to share with you how I view ASE's position, how I articulate ASE's position to our key partners and clients. The first one is scale. I think from the news reports, you can look at ASE's scale, margin model as well as our cash flow and also the amount of CapEx investment we are making on behalf of the industry. The second item is speed. Because ASE is well-positioned within the Taiwan ecosystems, we will execute expansion in a manner that is second to none. In other words, it's very difficult to imagine in 2025 alone how much CapEx we have put in, and how much more revenue we are going to introduce. The third one will be the synergy. So between scale, speed, and synergy that pretty much outlines the ASE position in this new paradigm AI shift. We're at the beginning of the data center hyperscaler. In the future, there will be multiple cycles of expansion, upgrade, inference, as well as the AI edge, that's where the real volume and the real application are going to emerge. Because all of these future opportunities, we are seeing that the leading-edge capacities in Taiwan are very, very full right now. We do see the disparity between AI as well as the other general sectors, and that pretty much outlines the 2025 first half scenario. In the second half, the disparity will improve. In 2026 and beyond, we believe the cycle will start showing less of a disparity. That is why it is putting a lot of pressure on ASE to accelerate our capacity growth in Taiwan, especially in the leading-edge packaging and testing. At the same time, it prompts us to look at resource optimization between Taiwan and overseas. We have planned to look at expansions in other countries of the world. With all the recent updates and changes, it prompts us to start looking at the business opportunities versus how we deploy our capital and resources based on the new paradigm as well as all the new variables. And lastly, foreign exchange. Foreign exchange, I think Ken Hsiang and Joseph will give you much more details on the impact of foreign exchange on ASE's performance for the last quarter and maybe for Q3. And however, I want all of you to keep in mind, we are here for the long term. In the long term, we will have execution issues. We'll have regulatory control issues. We will have product mix issues. We have customers changing order issues. Of course, we will also have machine delivery issues, and our own execution issues. When the management team is busy worrying about all the detailed operational issues, let's not forget the future opportunities here and the speed of execution. We would like to take all of ASE's partners and our customers to a much higher ground for this uptick, 10 years of AI cycles. With that, thank you.

Thank you, Dr. Wu. Now I will go over our prepared remarks regarding our financial results for the second quarter. We are trying to be more environmentally friendly. We are no longer providing printed copies of our slides. If you have not done so, we have a QR code. Please scan the QR code here for the attendees to scan. After scanning, you'll be forwarded to our Investor Relations landing page where you can download materials related to the presentation today. The slide deck currently does not include our guidance section. After the presentation has concluded, the slide deck will be updated to include our guidance section. During the quarter, we saw a material move in the NT dollar to U.S. dollar exchange rate. The NT dollar moved from an average exchange rate of NTD 32.8 to NTD 31.2 per U.S. dollar, strengthening by 4.9%. With our revenues generally based in U.S. dollars, and a large percentage of our ATM expenses being NT dollar based, the foreign exchange fluctuation was detrimental to our financial performance. The impact of currency fluctuations will differ each quarter. However, on a simplified basis, we estimate that for every percentage point appreciation of the NT dollar relative to the U.S. dollar, we see a corresponding 0.3 percentage point negative impact to our gross and operating margins at the holding company level and a 0.45 percentage point negative impact to margins at the ATM level. Using this simplified approach, we can estimate that on a sequential basis, foreign exchange had impacts to our holding company and ATM margins of 1.5 and 2.2 percentage points, respectively. On an annual basis, we estimate impacts to our holding company and ATM margins of 1.0 and 1.5 percentage points, respectively. As Dr. Wu stressed, our businesses are healthy and are generally on track to hitting most of our targets stated at the beginning of the year. However, foreign exchange movements have created a temporary misalignment between our costs and revenues. And as a result, we believe that our current financial results may not fully portray our underlying accomplishments. From a strategic perspective, we believe the current negative currency impact to be a near- to mid-term phenomenon financially. We fundamentally believe our businesses support a certain level of financial return. Such return expectations are intrinsic within our business evaluation and capital investment processes. The exchange rates we encounter are variables used within these calculations. As such, in time, we believe our margin structure can and will return to previously stated structural levels. With that said, we are examining and considering the timing of a number of strategic initiatives. We are also reconsidering whether future business opportunities still align with our return goals. There is much to accomplish, but it does present an opportunity to reexamine our businesses in more detail. With that, let's go through the financial results. Please turn to Page 7, where you will find our second quarter consolidated results. For the second quarter, we recorded fully diluted EPS of $1.70 and basic EPS of $1.74. Consolidated net revenues were $150.8 billion, representing an increase of 2% sequentially and 7% year-over-year. On a U.S. dollar basis, our sales increased by 7% sequentially and 11% year-over-year. We had a gross profit of $25.7 billion with a gross margin of 17%. Our gross margin improved by 0.2 percentage points sequentially and improved by 0.6 percentage points year-over-year. The sequential improvement in margin is primarily due to higher loading efficiency in our ATM business, offset in large part by foreign exchange. The annual improvement is primarily due to higher utilization and beneficial product mix offset by foreign exchange. We estimate that foreign exchange fluctuations had a negative 1.5 and 1.0 percentage point impact on gross margins on a sequential and annual basis, respectively. Our operating expenses increased by $0.3 billion sequentially and $1.5 billion annually to $15.5 billion. The sequential increase in operating expenses is primarily due to higher consumption of factory supplies as our R&D activities ramp up. The year-over-year increase in operating expenses is primarily attributable to increases in R&D staffing, factory supply consumption, and other labor-related costs. Our operating expense percentage stayed flat sequentially at 10.3% and increased annually by 0.3 percentage points. Operating profit was $10.2 billion, up $0.5 billion sequentially and $1.2 billion year-over-year. Operating margin was 6.8%, up 0.3 percentage points sequentially and improved 0.4 percentage points year-over-year. During the quarter, we had a net non-operating loss of $0.9 billion. Our non-operating loss for the quarter primarily consists of net interest expense and net foreign exchange hedging activities, offset in part by profits from associates and other non-operating income. Net interest expense for the quarter was $1.2 billion. Tax expense for the quarter was $1.6 billion. Our effective tax rate for the quarter was 17%. Net income for the quarter was $7.5 billion, representing a decrease of $0.1 billion sequentially and a decrease of $0.3 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 $26.2 billion with a 17.4% gross margin. Operating profit would be $11 billion with an operating margin of 7.3%. Net profit would be $8.3 billion with a net margin of 5.5%. Basic EPS, excluding PPA expenses, would be $1.91. On Page 8 is a graphical presentation of our consolidated quarterly financial performance. On Page 9 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 second quarter 2025, revenues for our ATM business were $92.6 billion, up $5.9 billion from the previous quarter and up $14.8 billion from the same period last year. This represents a 7% increase sequentially and a 19% increase annually. On a U.S. dollar basis, our ATM revenues were up 13% sequentially and 23% annually. Gross profit for our ATM business was $20.2 billion, up $0.6 billion sequentially and up $3 billion year-over-year. Gross profit margin for our ATM business was 21.9%, down 0.7 percentage points sequentially and down 0.2 percentage points year-over-year. The sequential and annual margin declines were primarily due to NT dollar to U.S. dollar appreciation and, to a lesser extent, higher utility rates offset in part by efficiency from higher loading. On a constant currency assumption, we estimate our gross margin would be roughly 2.2 percentage points higher during the quarter, within our original margin expectations for the second quarter. During the second quarter, operating expenses were $11.4 billion, up $0.1 billion sequentially and $1.5 billion year-over-year. The sequential increase in operating expenses was related to slightly higher labor costs from workdays. The annual increase is primarily the result of R&D ramp-up and labor-related expenses. Our operating expense percentage for the quarter was 12.3%, decreasing 0.7 percentage points sequentially and down 0.5 percentage points annually. The sequential decrease was primarily related to higher revenues on relatively stable operating expenses. We continue to target to lower our operating expense percentage. However, given the foreign exchange environment, the level of anticipated decline in percentage may be somewhat impacted. During the second quarter, operating profit was $8.8 billion, representing a sequential increase of $0.5 billion and an annual increase of $1.6 billion. Operating margin was 9.5%, down 0.1 percentage points sequentially, while up 0.2 percentage points year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 22.4% and operating profit margin would be 10.3%. On Page 10, you'll find a graphical representation of our ATM P&L. On Page 11 is our ATM revenue by 3C market segments. You can see here that the Computing segment continues to become a relatively larger component of our business. This was largely driven by a higher percentage of LEAP-based revenues. From a wider perspective, it is representative of AI's growing share of the electronics market. On Page 12, you will find our ATM revenue by service type. Here, you can see the 2 service types containing LEAP services, bump and flip chip, and testing. Both are becoming a larger component of our overall business. We continue to expect growth in these areas. It should be noted that we are starting to see a more visible pickup in our wirebond business. There are signs that this is related to a more general market recovery. On an absolute dollar basis, our wirebond business grew on a U.S. dollar basis but was outpaced by LEAP and testing. On Page 13, you can see the second quarter results of our EMS business. The annual seasonality of our EMS business has been inconsistent over the last couple of years due to differing device ramp schedules. As such, we believe the annual comparability of our second quarter results may be impacted. During the quarter, EMS revenues were $58.8 billion, declining 6% sequentially and 7% year-over-year. The sequential decline was primarily the result of underlying device seasonality. Sequentially, our EMS business's gross margin improved 0.5 percentage points to 9.4%. This change was principally the result of product mix. Operating expenses within our EMS business increased slightly by $0.1 billion sequentially and declined $0.1 billion annually. Our second quarter operating expense percentage of 6.9% was up 0.6 percentage points. Annually, our EMS operating expense percentage was up 0.4 percentage points on lower revenues. Operating margin for the second quarter was 2.6% flat sequentially and down 0.5 percentage points year-over-year. The annual decline was primarily due to lower revenues. Our EMS second quarter operating profit was $1.5 billion, down $0.1 billion sequentially and $0.4 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. As you can see, the second quarter mix of application revenue was relatively steady sequentially. On Page 14, you will find key line items from our balance sheet. At the end of the year, we had cash, cash equivalents, and current financial assets of $76.9 billion. Our total interest-bearing debt increased by $8.5 billion to $240.1 billion. We continue to anticipate increasing our debt outstanding throughout the year. Total unused credit lines amounted to $355.3 billion. Our EBITDA for the quarter was $27.4 billion. Our net debt to equity this quarter was 52%. As a reminder, we anticipate that our net debt to equity will peak this year during the third quarter. On Page 15, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the second quarter in U.S. dollars totaled $992 million, of which $690 million were used in packaging operations, $251 million in testing operations, $49 million in EMS operations, and $2 million in interconnect material operations and others. In addition to spending on machinery and equipment, during the quarter, we also spent $531 million on facilities, which includes land and buildings. We continue to see the complexities of semiconductor design requiring step-ups in our LEAP offerings. Progressing device memory, thermal and power requirements in addition to traditional bandwidth expansion continue to necessitate advancements in our capabilities, equipment, and facilities. Our packaging products are now more than ever on the critical path of chip design. As we get closer to 2026, we are seeing a number of initiatives starting to activate. Aligning with customer requests, we are trying to be more aggressive with timelines and as a result, we are potentially seeing some of the capital expenditures slated for 2026 being accelerated into the fourth quarter of 2025. At this point, the delivery and installation schedules are still fairly dynamic. But we are potentially looking at a bump up in 2025 capital equipment expenditures by a few hundred million dollars. With that, I'll hand the presentation over to Joseph to give the outlook for the coming quarter.

Thank you, Ken. Let me give you the guidance for the third quarter. Based on our current business outlook and the exchange rate assumption of USD 1 to TWD 29.2, management projects overall performance for the third quarter of 2025 to be as follows. This time, the guidance will be given in both U.S. dollar terms as well as in NT. So it's a little bit more complicated, so please bear with me. At the holdco consolidated level in U.S. dollar terms, consolidated third quarter revenue should grow by 12% to 14% quarter-over-quarter. Whereas in NT dollar terms, our consolidated third quarter revenue should grow by 6% to 8% quarter-over-quarter. Our consolidated third quarter 2025 gross margin should decrease by 1 to 1.2 percentage points quarter-over-quarter. Our consolidated third quarter 2025 operating margin should decrease by 0.1 to 0.3 percentage points quarter-over-quarter. Now coming down to ATM. In U.S. dollar terms, our ATM third quarter 2025 revenue should grow by 9% to 11% quarter-over-quarter. While in NT dollar terms, our ATM third quarter revenue should grow by 3% to 5% quarter-over-quarter. Our ATM third quarter gross margin should decrease by 0.9 to 1.1 percentage points quarter-over-quarter. EMS. In U.S. dollar terms, our EMS third quarter 2025 revenue should grow by 18% to 20% quarter-over-quarter. In NT dollar terms, our EMS third quarter revenue should grow by 12% to 14% quarter-over-quarter. EMS third quarter 2025 operating margin should increase by 0.3 to 0.5 percentage points quarter-over-quarter. That is the overall guidance for the third quarter. With that, I would like to also make very short comments on our margin. Well, on top of the overall higher cost environment that we're working in today, the NT dollar appreciation since early May put further pressure on our margin and will have a 5 percentage point negative impact on ATM third quarter '25 gross margin. If excluding such currency impact, our ATM gross margin should be around 26%. We're near the midpoint of our structural gross margin as originally targeted during our last earnings call. Now looking forward, as we continue to improve our costs through efficiency improvement, leveraging our scale and capabilities to align our pricing and investment strategies with our value proposition and to aggressively expand our leading-edge packaging and testing business and start easing up on our early-stage ramp-up costs. We are very confident that we will get back to our structural margin range in 2026. With that, thank you very much.

Thank you, Joseph. During the Q&A session that follows, we would appreciate if questions can be kept concise and asked one at a time. I will be receiving each question and repeating the asked question to Joseph and Tien. Again, we will be limiting the number of questions asked to 2 per turn, but ask one at a time. We will start off by taking questions from the attendees on the floor. After some of those, we will look to the virtual queue to see if we have some questions online.

So my first question is about Dr. Tien your comments about your fab is going to be very busy in the second half. And actually, your ATM guidance is pretty good, right? How do we kind of reconcile with the sort of comments about PC, smartphone, automotive seems to be very slow. Is that because of ASE's share gain or any other factors that we don't consider.

Charlie, you're asking about the general dynamics of variable markets or...

Yes. So end market seems to be pretty slow. I mean, excluding the AI, right? But your guidance and also the comments about your fab utilization seems to be very busy. I just wanted to get a sense how do we reconcile your performance and also the end market weakness?

We are in a much better position to assess our forecast with our customers. We are providing guidance based on their input, and those orders are firm. This includes AI as well as other areas like wireless, industrial, and automotive. I won't discuss the second half forecast for the segments, as I don't believe we're ready to do that. However, based on the forecasted committed orders, we observe a strong outlook, similar to Q2.

Charlie, your second question?

Actually, if I can add, I think we are seeing a very strong demand for HPC and AI, of course. But on the general market, we're also seeing a healthy recovery in the second quarter. Actually, in all sectors, we're seeing double-digit growth quarter-on-quarter on each different segment. So we are seeing a recovery in the general market as well along with the hyper growth in terms of the leading edge.

And my second question is more focused on your advanced packaging and testing business because foundry, TSMC revised the full year, and they kind of attribute that upward revision to the strength in AI and HPC. So why company doesn't revise up your kind of additional $1 billion revenue guidance?

Charlie, I'm not quite sure what you're asking. Could you please rephrase your question?

Yes. So TSMC revised their full year, right, attributing to AI strength. But you maintained your kind of revenue increase from the advanced packaging remains to be at USD 1 billion. So is that because of any conservatism or why TSMC revised up and you don't?

Charlie is asking about whether we can comment on a leading-edge advanced packaging outlook for the year?

We're in a very interesting position because our capacities are full. The incremental capacities are new capacity that we put in. I hope it answers your questions. We're capacity constrained right now.

So why don't you revise up the CapEx in?

Execution, operations, human talent, land, space, facilities, and equipment delivery are all critical factors. We’re doing everything we can. I've previously mentioned that for Q4 and into 2026, many customer demands will need similar foundational technology capacity. It's not that we are hesitant to invest more in capital expenditures, but we must also be cautious. Like all machinery, we want to avoid overextending ourselves, and we need to account for potential typhoons. We aim to improve our performance, but we are extremely busy.

Next question, Bruce? Name and company, please.

Bruce Lu from Goldman Sachs. I would like to start with a clarification regarding something Ken mentioned in his prepared remarks about prioritized initiatives related to customer engagement. Last time I recall, ASE discussed the SiP project and the importance of prioritizing these projects. Given the current currency situation, should we anticipate a new pricing strategy? Will there be a new standard for future projects? In terms of our future business discussions, do these pertain only to new SiP business, or do they also involve existing business with our foundry partner or new ventures where better pricing is essential? If not, we may reconsider pursuing that business. Can we expect margin improvements going forward?

So Bruce, you're asking for us to elaborate on our strategic initiatives.

There are many aspects on the strategic initiative. Some of the items, I cannot go over in detail because once I said it, you understand exactly what I'm talking about. I think the SiP project as well as many that becomes a resource recalibration, we're looking at the floor space, we're looking at the cash flow, capacity, investment and most importantly, we're looking for the resource deployment. Now in the resource recalibration, obviously will come in the optimization. And the optimization by default will improve the end results, which will be a margin improvement. So that's one aspect. The second thing, the pricing strategy that has always been on the table. It really depends on the customers, also the future product as well as the timing, for example, for the RFQ, new product, old product, investment requirement, each one will be different. The third large item will be the overseas expansion. We were thinking about expanding in many strategic areas. But given the dynamics of the tariff as well as the exchange rate we have to rethink priority and also the dollar amount. So our approach is going to be instead of going to multiple places, we will focus on 1 or 2 overseas areas and make a much, much bigger investment just to make sure whatever we do counts, right? So those are the recalibration that we're going through right now. While we're very, very busy investing in Taiwan and trying to build up with speed, scale as well as synergy with the Taiwan ecosystems. But the important thing is whatever we put in, we understand the fluctuation of the market, but we tend to look at the basic characteristics. What are the foundational requirements we would like to put in capacity that we believe will run for 7 to 10 years, and that's what we're building on now.

The second question is for your AI-related business, which is highly skewed to testing business for this year. Do we expect packaging will account for a larger portion of the business in 2026 and onwards? And if that would be the case, can the margin be maintained at a similar level with both packaging and testing for the AI business?

Bruce, you're asking about our LEAP services headed into 2026.

The concept is to grow our turnkey business that covers the AI-related leading-edge. If you only look at the growth rate, it tends to be very misleading because the testing business has a larger base. We talk about the 31% first half and will probably be a better number in the second half. That will be the overall testing growth rate. If you just look at the leading-edge packaging, then the growth rate is much higher. But the concept is to grow this in tandem. However, you cannot look at it because the base is different. But just to answer you briefly, we do intend to make investment on packaging as well as testing because the requirement tends to go in tandem. For example, once you go to chiplet, silicon photonics, or any kind of HPC or AI related, then the thermal fluctuation that you have to deal with a whole lot more variables for the testing arena. And the lead time tends to be multiple cycles, much longer. You also have to deal with the interim testing to guarantee yield. With all of this practical concern, I think ASE has a very good position to run the leading edge, assembly packaging as well as testing just the nature of logistics and also the technology and the cash flow.

Can I have a very quick follow-up? Because we were guiding for $1 billion additional business for this year. Given the huge CapEx we invest this year, the incremental revenue will be a lot bigger than $1 billion for next year. Is that right?

You're jumping way ahead of me.

Yes, I don't think we have any comments out on '26 yet.

But Joseph used the comment about capital to CapEx per revenue, right? If you use that similar terminology or similar methodology, you can provide some color, again, nothing that had these things.

I'm not entirely clear on your question, but I appreciate your inquiry. We've been quite proactive in our investments in testing, and the growth rate of our tests reflects the progress we're making. For this year, we anticipate that test growth will outpace packaging growth by a factor of two. By the fourth quarter, we expect about 20% of ATM revenue to come from tests. Looking ahead, the leading-edge segment of our tests currently represents over 20% of our total leading-edge revenue, and we believe this proportion will continue to increase as we expand our test efforts, especially at the wafer sort level. Later this year, we will also begin to incorporate final test burning. There remains significant potential for us to capitalize on this, particularly in testing, which will enhance our margins. This is a highly profitable area for us to deepen our involvement.

Does that answer your question, Bruce?

I got to say yes, right?

If we could switch it up and maybe take a question from virtual?

We have a question from Mr. Gokul Hariharan.

First question is on gross margins. So you mentioned that gross margin can get back to the structural gross margin levels, mid- to high 20s next year. Is that assuming that currency stays at this level? So if so, what are the variables that are contributing to that? Do you assume that there is a big increase in non-leading-edge utilization? Or is it just a function of better mix of LEAP, better testing and potentially better pricing?

Gokul, you're asking what levers are available to get back to our structural margin levels. Is that correct?

Yes. I was talking about our margin for next year, and we are very confident about coming back to our structural margin range in 2026, I think, through several different directions. One is, of course, we will continue our effort in improving our efficiency. That includes further automation of our overall operation to bring down our costs. And I think a lot of the early stage ramp-up costs will start to see that easing up. And we're actually saying last time that our operating expense ratio will start to level off because initially, we're putting a lot of R&D dollars into our investment. So as we continue to grow or expand our leading edge, I think we're going out of the ramp-up stage, and that part of the expense can be more controlled. And of course, all the leading-edge businesses, including tests are margin accretive. So all these put together, I think it gives us a high confidence level that going into next year, we will be able to get back to our structural margin range. Of course, that's based on the assumption that the currency doesn't further appreciate from the TWD 29.2 or TWD 29 level at this point.

And just a follow-up, how much of a lever can be pricing given for LEAP, you are pretty much the only vendor out there spending so much money. Your competitor doesn't really seem to be spending much CapEx. Your foundry partner seems to be a lot more aggressive about selling their value as well. So I just wanted to understand how you were thinking about this, given your market position today seems to be a lot better than maybe 5 years back.

Gokul, you're asking about what we perceive as our market position within LEAP. Is that correct?

The pricing power is what every company wants to have. The pricing power includes your design, attachment rate, long-term loyalty, trust as well as your technology and overall solutions. I think I talk about the current scale and the speed and synergy of ASE being in Taiwan as well as being supported by many ecosystem players and their foundry partners. I think we need to clearly demonstrate our trust and also the overall solution support to our key customers. Pricing is always an option. However, we prefer to use technical strength, offer long-term growth prospects, which I think is much longer lasting. However, everything is being considered. And by recalibration and resource optimization that by itself is one pricing strategy.

Gokul claims that, that's a follow-up question. Do you want to let him on for his second question? Second question is on the LEAP platform. Dr. Wu, can you talk a little bit about application of 2.5D, 3D packaging, whether it is CoWos like, PoCoS, FOCoS-Bridge, etc. For applications beyond AI accelerator, it definitely looks like '26, '27, you start to see a lot more of these applications coming to you for CPU or other HPC applications. Could you talk a little bit about what you are seeing and how important these are going to be in terms of the growth going in '26 and '27, given this year mostly seems to be for AI accelerators only?

Gokul, you're asking for Dr. Wu to expand upon our LEAP offerings?

Well, I talk about the first wave is the accelerator. I think the second wave, you will see more infrastructure people. You all see the ASIC people start coming in. But however, they all share the same characteristics. They would like to have very, very tight configuration and very, very large design footprint and also very efficient power delivery systems and also the transmission, high bandwidth, low latency. I do see this round of AI accelerator that were cascaded to the CPU, yes. And we'll go to the ASIC, yes. And in the future, for the AI edge applications, I believe most of the devices will share the similar multifunctional heterogeneous integration that will demand much of the characteristics I just talked about. So I believe the volume, we obviously are optimistic that the volume will be increasing over time.

Question from the floor. Sunny?

So my first question is on advanced packaging, especially on the leading-edge, just want to learn your strategy on how to scale the business into 2026 and 2027. I believe for 2025, most of your cell supply for packaging may be through the outsourcing from foundry. And so going into 2026, where are you in terms of the progress to ramp full process CoWoS or FOCoS? And how should we think about the further upside from the foundry outsourcing.

Sunny wants us to describe in a little bit more detail what we're going to do with our LEAP.

Well, the foundry outsourcing will continue pending on the foundry partner as well as our end customers' requirements overall. So that is ongoing. The second layer is going to be the ASIC players. The ASIC players will make their choice and they can either go through different routes. And also, there will be a peripheral packaging and testing requirements on the other devices that will also go into the same infrastructure. And then there will be the CPU guys. I don't think I can go into even more details, but if you really believe that the AI is a new paradigm shift, if you look at how many players are really embracing the AI and how many other people are jumping on it, you can pretty much figure out, we are still seeing the first wave. Even the CPUs, the ASICs, whatever we can name today, it will be the first wave. The real definition of the paradigm shift is, there will be others that we cannot see. That's the definition of paradigm shift. So I think for that, building an efficient, viable, and flexible infrastructure today at speed is extremely critical, which is why ASE management chose their hard route that we want to accelerate investment and then just take the heat. Even with the risk, we might miscue it. Also put a lot of stress on the supply chain. But we believe in this round, gaining customers' confidence will dramatically improve the long-term royalty as well as expanding to our customers, not just for the first wave, for the second wave and the third wave; you would need to have a footprint, flexibility. That's where the large panels, the 300 x 300 fully automated line will be put in by the end of this year. The 600 x 600 fully automated line will also be delivered by Q4. And then silicon photonics, we have been extremely vocal. And also on the new power management, the VRM solutions, we're working with many of our key customers trying to define at IP level, the technology level, also at a capacity level to the next generation. So I think this campaign is not just CoWoS or FOCoS. It's really the overall solution. And I think once in a lifetime, you will encounter something like this. So I'm personally very excited.

For sure. So maybe let me try to ask the question maybe in a different way as a follow-up, if I may. And so for us to think about 2026 for your advanced packaging cells, is it fair to assume that your full process, advanced packaging could account for a meaningful portion of the opportunity, given your current customer engagements?

That will be the aspiration. But of course, you have to understand the customer loyalty means it's a trusting partner, whatever people ask us to do, we will try to fulfill it. But different customers will have different choices. And the market will take us to the rightful place. And we should not look at just 2026. You should really look at the multiple years. I think that statement is very true sometimes.

I think just to give you a short answer, I think we are in full production in terms of full process. We do have a couple of customers that are using our capacity. We are investing for making further investment into full process. We do expect to have some meaningful business coming in next year, mostly from ASIC customers.

My very quick second question is on testing for AI. Just want to learn more on how you think about the competition. Obviously, the key competitors continue to be very aggressive in the in-house solution, whereas you may lean more toward a third-party platform with Advantest. And so how should we think about the progress of you with the clients? I'm sure at some point ASE will be a very important supplier for final test for AI. But how should we think about the timing for you to gain meaningful market share?

Sunny, you're asking about our test position related to final test on AI.

I think we have been talking about this for a long time, and we are expecting to have some final test revenue coming in by maybe the fourth quarter. We'll continue to expand that part of the business going forward into next year. And I'm sure we will gain a meaningful market share in this aspect as well. I think everybody saw some short report saying whatever about our competitor was. So I'm not going to comment on our competitor. I'm just saying that what we're doing ourselves, we do have a goal, we do have a plan. We are making progress. And we believe that whatever we invested is going to be fruitful for us.

We have another question on the floor. Brad?

I'm Brad Lin from Bank of America. So I got two questions. One is that, well, Ken, you just mentioned heterogeneous integration. So basically, I think ASE has a very unique position. It has ASE, SPIL, and also USI. So how will that help you maintain a competitive advantage across multiple potential applications in the future in AI, including humanoid robots, HAI? And then if available, may you share any initial view on the timeline for those to happen.

Brad is asking about the positioning of our brands, including our EMS side of the business in terms of whether this allows us to tackle incremental AI opportunities.

You probably know that SPIL and ASE ATM business, we're running independent. And one of the advantages of that is that we're free to choose our own customers. And what so happened is, right now, the AI initial set of customers are extremely happy because each one has a different focus group with a very independent firewall in between, if we may call that advantage. The second one is on the USI. I think with the SiP, we clearly demonstrated a synergy and also the vertical capability for our designing as well as manufacturing also from a logistics perspective. For the AI, I think we're waiting for that opportunity. For example, power management is a key area because power management, you go through 2,000 volts all the way to 0.1. And then the assembly people have their sweet spot. And then the EMS team will also have their sweet spot. If you take this kind of a hierarchical approach into the PCB, into different kinds of architecture, you can derive a similar thesis. So over time, it is the value between ASE, SPIL, and USI and painting on the market demand. I think we've demonstrated this a few times, and I do believe in the AI, you will see more optical, you will see more power management that will bring the synergy back again. On top of that, you have China, you also have the other part of the world. You have the U.S., you have the China alliance. I think that presents another competitive advantage if we decided to go that route. Just one comment on the testing portion. There's one thing I want to articulate: testing is not about wafer sort and final test. If we only fixate on the wafer sort and the final test, I think we're missing the point. The point is, in the future architecture, the testing needs to be an integral part of the processes. And the question is, how do you do this, on a discrete format or an integrated in situ format? I am giving you a 10-year outlook on the overall manufacturing strategy for very, very highly evolved, automated, complicated assembly and testing processes.

Thank you for the explanation. So with that comment, may we assume that actually advanced testing will greatly outpace the so-called advanced packaging in that view because that will be integrated into, well, a lot of the new processes?

Don't take my 10 years comment back to 1 year. I'm always struggling with people, right? The technology direction is correct. The testing has a larger revenue base. If you really want to compare initial, of course, you can make that statement. However, you have to look at the overall testing business percentage as well as the nature and how do you define the segments, then it is very difficult to make that comment. But the overall trend, yes, I mean, the heterogeneous integration, a very, very long cycle time on the FOCoS and the CoWoS process, and also the value of the components and also the yield impact at the module level. And these are the issues that define and segregate the people who can play in this market versus people who cannot afford it. But this all becomes competitive advantages in any kind of business. So my point is, when you evaluate the overall ecosystem at a worldwide level, at a geographical level, you have to put all of this into consideration. The AI has initiated a paradigm shift in terms of algorithm and application. Accordingly, each country, each geography, each company needs to evaluate their own paradigm shift in accordance with this macro paradigm shift. Maybe I'm over stretching, but I think this is the kind of thing I'm very excited to see in the next 10 years what will play out.

So my second question would be a little bit on the financials. So basically, we know we are putting a lot of the CapEx in the LEAP business. And I believe, well, that would not be a problem for gross margin because it's margin accretive. But well, if available, can you kind of share some of the initial thoughts about how the growth rate of the depreciation that we are looking at in this year and maybe next year?

Right, you're looking for some guidance on what depreciation looks like, right?

For this year, with the significant investment in our capital expenditures, we expect depreciation to increase by about 14% compared to last year. At the holding level, it will amount to approximately TWD 69 billion, and at the ATM level, it will be around TWD 59 billion. Financially, we anticipate this high level of investment to continue for a while. Currently, we are financing our investments with additional debt. In the second quarter, our net debt-to-equity ratio has already risen significantly. We expect it to peak in the third quarter as we add more debt to our balance sheet, with a projected ratio of just below 70%. After that, it should begin to decline as we aim for a target level of 60% to 65%, which we find comfortable. We expect to see this peak in the third quarter and gradually return to our preferred level of around 60% to 65%.

I believe we have one more question from virtual.

We have a question from Laura Chen of Citi Group.

I have questions on the broad-based recovery on the wire bonding. What would be the key driver behind? Just curious especially, we see some of the pooling happening in the first half already. So just wondering that you mentioned there are some power management IC demands. Is that also related to AI or do we see any market share gain or HAI device or just simply the demand gradual recovery? That's my first question.

Laura is looking for a rationale as to why we're seeing or potentially seeing a wirebond recovery within our businesses.

The wirebond capacity is tight in Taiwan mainly due to 2 markets. The first one could be related to AI. As AI are building AI systems, it does require some of the chips. They are using wirebond to support those AI systems. But we believe the larger percentage of the demand actually comes from the automotive based on customers that we are serving and maybe they are using the ASE capacity because the ASE wirebond is highly automated, and we have the 100% fully automated line. Therefore, it gives you a better throughput and quality that could be. Our overseas wirebonder remains to be somehow idled. So we do see a disparity between the Taiwan wirebond as well as the overseas wirebond.

Just wondering, is that also kind of because of China or non-China, that kind of recovering trends or the reason that customers prefer to place more orders in our Taiwan fab, along with the probably main chip for AI or something like that?

Due to the BIS regulatory control, some of the loading is migrating from China to Taiwan. We see some of that, but it is not a major variable in our report.

I think most of the packages are more advanced rather than wire bond.

Thank you all for your questions. It looks like we've reached the end of this session. Thank you for joining us today. As always, feel free to reach out with any additional questions post-call. Have a great day.