ASE Technology Holding Co., Ltd. Q3 FY2025 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our third quarter 2025 earnings release. I am joined today by Joseph Tung, our CFO. Thank you for attending our earnings release today. Please refer to the 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. For today's presentation, I will go over the financial results, and Joseph will give the company's guidance. Afterwards, we will be available to take your questions during the Q&A session. With that, let's get started. During the third quarter, both our ATM and EMS businesses outperformed our original sales and profitability expectations. Packaging and testing utilization percentages were in the high 70s. Loading on LEAP and traditional advanced packaging lines were generally full. Our wire bond utilization also showed some improvement. Our test business continues to grow faster than our assembly business, with our chip probe testing leading the way. From a profitability perspective, with our factory loading being better than anticipated, we were able to extract higher operating leverage. However, the company's performance was still impacted significantly by foreign exchange. Despite the NT dollar's near-term decline in value against the U.S. dollar, for much of the third quarter, the NT dollar traded at a relatively appreciated level when compared with the second quarter. During the quarter, the NT dollar moved from an average exchange rate of TWD 31.2 to TWD 29.7 per U.S. dollar, strengthening by 4.6%. Simplistically, 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 margins at the holding company level and a 0.45 percentage point negative impact to margins at the ATM level. Using this simplified approach, foreign exchange had negative sequential impacts to our holding company and ATM margins of 1.4 and 2.1 percentage points, respectively. And annually, negative impacts to our holding company and ATM margins of 2.4 and 3.6 percentage points, respectively. Heading into the fourth quarter, we expect a more stable NT dollar environment with an average exchange rate of TWD 30.4 per U.S. dollar. Please turn to Page 3, where you will find our third quarter consolidated results. For the third quarter, we recorded fully diluted EPS of TWD 2.41 and basic EPS of TWD 2.50. Consolidated net revenues were TWD 168.6 billion, representing an increase of 12% sequentially and 5% year-over-year. On a U.S. dollar basis, our sales increased by 17% sequentially and 14% year-over-year. We had a gross profit of TWD 28.9 billion, with a gross margin of 17.1%. Our gross margin improved by 0.1 percentage points sequentially and 0.6 percentage points year-over-year. The sequential improvement in margin is primarily due to higher loading and 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 had a negative 1.4 and 2.4 percentage point impact to our gross margins on a sequential and annual basis, respectively. Our operating expenses increased by TWD 0.2 billion sequentially and TWD 0.7 billion annually to TWD 15.7 billion. The sequential and annual increases in operating expenses are primarily due to higher R&D costs. Our operating expense percentage declined 1 percentage point sequentially to 9.3% and was flat annually. Operating profit was TWD 13.2 billion, up TWD 3 billion sequentially and TWD 1.7 billion year-over-year. Operating margin was 7.8%, up 1 percentage point sequentially and up 0.6 percentage points year-over-year. During the quarter, we had a net nonoperating gain of TWD 0.8 billion. Our nonoperating gain for the quarter primarily consists of net foreign exchange hedging activities, offset in part by net interest expense of TWD 1.4 billion. Tax expense for the quarter was TWD 2.6 billion. Our effective tax rate for the quarter was 19%. Net income for the quarter was TWD 10.9 billion, representing an increase of TWD 3.4 billion sequentially and TWD 1.2 billion annually. 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 TWD 29.4 billion, with a 17.4% gross margin. Operating profit would be TWD 14 billion, with an operating margin of 8.3%. Net profit would be TWD 11.6 billion, with a net margin of 6.9%. Basic EPS, excluding PPA expenses, would be TWD 2.68. On Page 4 is a graphical presentation of our consolidated quarterly financial performance. On Page 5 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 third quarter of 2025, we had record revenues for our ATM business of TWD 100.3 billion, up TWD 7.7 billion from the previous quarter and up TWD 14.5 billion from the same period last year. This represents an increase of 8% sequentially and a 17% increase annually. On a U.S. dollar basis, our ATM revenues were up 13% sequentially and 27% annually. Our test businesses growth as a whole continues to outpace our assembly business as a whole, growing 11% sequentially and 30% annually. Gross profit for our ATM business was TWD 22.7 billion, up TWD 2.5 billion sequentially and up TWD 2.9 billion year-over-year. Gross profit margin for our ATM business was 22.6%, up 0.7 percentage points sequentially and down 0.5 percentage points year-over-year. The sequential gross margin increase was due to equipment utilization rate improvement, offset in large part by NT dollar appreciation. The annual gross margin decline was primarily due to NT dollar appreciation, and to a much lesser extent, higher electricity rates, offset in large part by higher loading. On a constant currency basis, relative to our first quarter, we estimate our gross margin would be roughly 4.2 percentage points higher during the quarter. This difference would have put our adjusted third quarter gross margin of 26.8% in the middle of our previously stated structural ATM gross margin range. During the third quarter, operating expenses were TWD 11.8 billion, up TWD 0.4 billion sequentially and TWD 1.2 billion year-over-year. The sequential increase in operating expenses was primarily related to higher overall R&D costs, including labor, equipment and factory supplies. The annual increase is primarily the result of R&D ramp-up and labor-related expenses. Our operating expense percentage for the quarter was 11.8%, decreasing 0.5 percentage points sequentially and down 0.5 percentage points annually. The decline was primarily the result of higher revenues during the quarter. As we previously mentioned, we believe our spending in R&D, on an absolute dollar level, will continue to increase. But as the associated LEAP revenue syncs up with the R&D spending, our operating expense percentage should continue to moderate. During the third quarter, operating profit was TWD 10.9 billion, representing a sequential increase of TWD 2.1 billion and an annual increase of TWD 1.7 billion. Operating margin was 10.8%, up 1.3 percentage points sequentially and up 0.1 percentage points year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.1% and an operating profit margin would be 11.6%. On Page 6, you'll find a graphical representation of our ATM P&L. Please note the generally upsloping revenue bars. Using the first quarter's foreign exchange rate, we estimate the gross margin percentages for the second and third quarters would be 24.1% and 26.8%. On Page 7 is our ATM revenue by the 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. On Page 8, 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 expect continued momentum in these areas heading into 2026. On Page 9, you can see the third quarter results of our EMS business. The annual seasonality of our EMS business has been inconsistent over the last few years due to differing device ramp-up schedules. As such, we believe the annual comparability of our quarterly results may be impacted. During the quarter, EMS revenues were TWD 69 billion, increasing 17% sequentially, while down 8% year-over-year. The sequential increase in annual decline were both primarily the result of differing underlying device seasonality. Sequentially, our EMS business's gross margin declined 0.2 percentage points to 9.2%. This slight change was principally the result of product mix. Operating expenses within our EMS business decreased by TWD 0.2 billion sequentially and declined TWD 0.5 billion annually. The sequential decline is primarily the result of lower compensation and professional fees. While on an annual basis, the decline is primarily related to lower compensation expenses. Our third quarter EMS operating expense percentage of 5.6% was down 1.3 percentage points sequentially, while annually, our EMS operating expense percentage declined slightly by 0.1 percentage points on lower spending and revenues. Operating margin for the third quarter was 3.7%, up 1.1 percentage points sequentially and up 0.4 percentage points year-over-year. The improvements are primarily the results of higher loading rate and some one-time inventory-related adjustments. Our EMS third quarter operating profit was TWD 2.5 billion, up TWD 1 billion sequentially and TWD 0.1 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. The third quarter application mix shows the seasonal ramp-up of our customers' consumer products, with our consumer segment growing while all other segments declining in application share. We believe, at a strategic level, our EMS business faces similar technological manufacturing trends as our ATM business does. Trends such as power delivery and thermal control are core themes at the forefront in both our ATM and EMS businesses. Having the ability to address customer challenges at both the ATM and EMS level allows us to provide a broader set of technical solutions to our customers. On Page 10, 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 TWD 83.4 billion. Our total interest-bearing debt increased by TWD 55.6 billion to TWD 295.7 billion. This increase was primarily due to the completion of a TWD 50 billion syndicated loan to fund our CapEx. Total unused credit lines amounted to TWD 344.7 billion. Our EBITDA for the quarter was TWD 32.6 billion. Our net debt to equity this quarter was 63%. On Page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the third quarter in U.S. dollars totaled $779 million, of which $534 million was used in packaging operations, $199 million in testing operations, $40 million in EMS operations and $6 million in interconnect material operations and others. In addition to spending on machinery and equipment, during the quarter, we also spent $716 million on facilities, which includes land and buildings. The overall environment appears to be strengthening. For us, the upward seasonality during the third quarter has been the strongest since the COVID timeframe. From a customer sentiment perspective, the pendulum appears to be swinging from booking capacity on an as-needed basis to prebooking capacities and making sure raw materials are available. As a whole, our customers are now looking for more assurance and security in their supply chains. For the quarter, LEAP and test services continue to lead growth for the company. LEAP continues to be driven by AI. Although we are seeing more customers target their products for use within the AI super cycle, many new products are inferring AI capability or AI readiness. Products are expanding new and smart AI capabilities and features. Newer generations of products are becoming more robust electronically, while allowing streamlined access to certain aspects of GenAI capability, such as video and document creation. The key is whether the end consumers are enticed to integrate new generations of products into their lives. And to that end, AI does appear to be raising the basic standards of quality in various contexts, not just limited to the school, office, and social media. And there does appear to be the not so subtle ominous angle of you need AI to be competitive. This is bringing an intelligence and capabilities arms race to everyone's front door. In such a context, understanding the seemingly insatiable need for more capable chips and hardware seems fairly straightforward. From the packaging and testing perspective, the higher the AI computational capability, the stronger the chips packaging and testing needs are. Critical improvement paths in power delivery, processing bandwidth, and thermal performance will continue to drive our LEAP services. With that, I'll hand the presentation over to Joseph to present the company's outlook.

Thank you, Ken. Let me give you the fourth quarter guidance. Based on our current business outlook and the exchange rate assumption of USD 1 to TWD 30.4 versus in third quarter, we have TWD 29.7 exchange rate. Management projects overall performance for the fourth quarter of 2025 to be as follows. On a consolidated level, in NT dollar terms, our consolidated fourth quarter revenue should grow by 1% to 2% quarter-over-quarter. Our consolidated fourth quarter gross margin should increase by 70 to 100 basis points quarter-over-quarter. Our consolidated fourth quarter operating margin should increase by 70 to 100 basis points quarter-over-quarter. For ATM, in NT dollar terms, our ATM fourth quarter revenue should grow by 3% to 5% quarter-over-quarter. Our ATM fourth quarter gross margin should increase by 100 to 150 basis points quarter-over-quarter. For EMS, in NT dollar terms, our EMS fourth quarter revenue should stay flat or decline slightly quarter-over-quarter. Our EMS fourth quarter operating margin should be similar to fourth quarter 2024 level. With that, let me also give you some color for the full year. For ATM, we're seeing better-than-expected momentum of mainstream business, given the continuing recovery of the general market. While our leading-edge revenue, we are on track to reach the USD 1.6 billion mark as planned. Altogether, we expect ATM 2025 full year revenue to exceed our target and grow over 20% year-over-year in U.S. dollar terms. As for machinery CapEx, we expect to further increase our full year CapEx by another few hundred million U.S. dollars to meet customers' requests and to support continuing business momentum into 2026. The increase is largely for wafer probing for both AI and non-AI chips as well as for general capacity ramp and some new initiatives for year 2026. With that, let's give it back to Ken to open the floor for questions.

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. Again, we'll be limiting the number of questions to 2 questions per turn, but asked one at a time.

The first question is from Gokul Hariharan of JPMorgan. Gokul?

First question, obviously, on LEAP, could you give us a little bit more color about how the progress has been on LEAP revenues this year? I think you had the TWD 1.6 billion guidance or additional TWD 1 billion guidance. What are we tracking to compare to that guidance now? And any indications for what it could do next year? I think based on our own math, it looks like it could easily double next year. And you're also raising capacity and CapEx pretty much every quarter. And also, on LEAP, what is the margin contribution from LEAP-related business? Is it already accretive or it will turn accretive once you reach a certain kind of revenue run rate, and any indications on that? That's my first question.

Gokul, you are looking for revenue progress and generally kind of what you're thinking for this year.

Yes.

We are on track to achieve our TWD 1.6 billion target this year, and everything is progressing well. We've demonstrated strong momentum in the AI and HPC segments of the business. Due to geopolitical uncertainties, we're slightly short of our original target for packaging, but this has been offset by unexpected growth in our test business. We are very confident that we will meet the TWD 1.6 billion mark this year. Looking towards 2026, we anticipate continued strong momentum and are optimistic about generating an additional revenue increase of over TWD 1 billion in this sector. We plan to invest heavily in our leading-edge technology to support the current strong momentum. We believe that the growth in AI and HPC will continue, and we are committed to making the necessary investments to not only maintain our leading position but also to expand our competitiveness and fully meet our customers' needs. Regarding margin and return, the LEAP initiative will be accretive to both, and we are approaching that point swiftly.

Okay. That's very clear. Maybe one other question. Can you talk a little bit about pricing? I think, Ken mentioned in the opening remarks that you're pretty much running full on flip chip and bumping. You're pretty much running full on LEAP. I think last time around, I think Dr. Wu had discussed potential price negotiations. Anything that you can report on what are we seeing on pricing for your overall offering? Should we expect that pricing should go up? I think OSAT pricing doesn't usually go up that much, but just wanted to understand how we should think about pricing going into next year.

Gokul, you're looking for commentary on overall just pricing environment for us for this year and next year.

Yes. And maybe also specifically on LEAP as well as your flip chip and bumping kind of advanced packaging business as well because the customer set is slightly different. LEAP, you're kind of largely partnering with the large foundry.

In general, our pricing remains resilient. It's sensitive to discuss, but we will continue to establish the most appropriate pricing structure based on the current situation. There are many moving parts and uncertainties ahead of us, but overall, we will maintain our pricing at a very resilient level.

Maybe if I tweak it a bit, Joseph, what is customer feedback? I'm sure everyone is discussing this. We hear it from your fabless customers as well. I want to understand what customer feedback means regarding pricing, especially when considering mainstream areas like flip-chip CSP or flip-chip BGA, where there isn't a super cycle of growth. Even in these areas, are you able to have some value-added programs coming through?

Are you asking for expansion on the original pricing question there?

Yes, sir. Maybe talk a little bit more on the mainstream advanced packaging as well, yes.

For mainstream, I think we are seeing the continuing recovery of the general market. And therefore, I think pricing-wise, I think it's right now at a very stable level.

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

Yes, I just unmuted myself. First of all, congratulations on the excellent results and outlook. My first question pertains to the supply chain. Can you provide an update on your plans for the U.S. operation? Your major customers and foundry partners are quite active in the U.S., and it seems that your competitor, Amkor, is also present there. What is your updated plan for the U.S. operation to capitalize on that ASME-type growth? Additionally, we are quite concerned about the T-Glass shortage. Many customers are reaching out to your fab to see if they can secure more substrates. Could this shortage be a limiting factor for your growth next year? This is my first question.

That's two questions. So let's start with the first one about the U.S. building out perspective.

Okay. Thank you for your question, and thanks for coming to my concert.

Yes, it was a great one.

In the U.S., we don't have any new updates except to reiterate that our customers have invited us to explore investment opportunities in the region. We are still in discussions with our customers and assessing various options, but no decisions have been made at this stage. Any decision we make will need to be financially viable for us. Regarding competition, Amkor operates independently, so I won't speak for them. Overall, we will remain vigilant about the competitive landscape and look for ways to enhance our position in response to this competition.

So Charlie, do you want your second question to be about your previous question on T-Glass and such?

Yes, maybe we can save it for maybe second round. But my major second question is really the final test completion. So I know this one is a little bit controversial, but I wanted to get your updates or confidence level about your final test market share at major customers' next-generation GPU. Yes, and by the way, congratulations for a very strong share price. So I think your efforts were recognized by foreign shareholders. Yes, so second question is really about your final test business updates.

So you're looking for a more comprehensive explanation or update on our final test market share gains.

We have been proactive and successful in expanding our test business. This year, we anticipate that our test business growth will outpace our packaging revenue growth by twofold. We will continue to invest significantly in our test capacity, but we also have limited resources and cannot cover every aspect of the market. Currently, our primary focus in test investment is on wafer probing, and we plan to maintain this focus moving forward. Regarding final test, we are making the required investments to enhance our capacity, and we expect to generate substantial revenue in the latter part of next year as we begin serving the next-generation AI chips.

Next question is from Bruce Lu of Goldman Sachs.

Can you hear me?

Yes.

Okay. My question is regarding your revenue split for your incremental TWD 1 billion revenue in 2026 for your AI-related revenue. We understand that the revenue contribution is more geared to testing for this year. Are we able to see incremental more revenue contribution from packaging? And to be more specific, can we get more like packaging-related business from both outsourcing as well as your own packaging or AI packaging business?

Bruce, you're asking for the incremental revenue for this year, right?

And next year, because Joseph just mentioned that we will see an additional TWD 1 billion in revenue, correct?

He may have said that. So yes, okay.

For the TWD 1 billion increase in our leading-edge revenue, I believe the breakdown is TWD 650 million from packaging and about TWD 350 million from testing for this year. As for next year, we will evaluate how things develop. I can provide a rough estimate suggesting that we could see at least TWD 1 billion in revenue growth. However, the exact breakdown is still uncertain, and we will determine how to allocate our resources based on the current situation to grow both areas of the business. At this moment, we don’t have a definite plan for the composition, but I can say that testing appears to maintain stronger momentum at this time.

I see. So the testing will grow faster than packaging next year within this TWD 1 billion?

It has been growing faster than the packaging. However, next year, when the new generation product launches, the competition may change. What I can say is that we are currently seeing strong momentum in testing.

I understand. The second question is focused on the U.S. plan. TSMC has used an asset plan to develop some CoW processes, and Amkor has committed to establishing some substrate processes. It appears that your customer and competitor have at least one supply chain in the U.S. What is ASE's current strategy in this context? Clearly, you may not need two supply chains in the United States. Therefore, the possibility of losing some market share in TSMC's Automotive business poses a significant threat to our future operations. Can you provide more detail on ASE's strategy?

Bruce, you're looking for a reiteration on the U.S. plan on our behalf.

We do not seek market share simply for the sake of it. Our focus is on market share that is logical and profitable for us. If we do not see a return or at least an acceptable margin, we do not consider that segment of the business worth pursuing. Regardless of whether it's in the U.S. or anywhere else, any investment we make must be economically viable. If Amkor believes they can generate a profit from a particular investment, that's fine. However, we currently have uncertainty about that.

So there's no way to pass on the incremental cost to the customer in order to make the investment like profitable?

Well, it's not just about pricing; it's about the overall infrastructure that can support that kind of business at a reasonable cost structure. Even with some premium pricing, whether that can cover the associated costs remains to be seen. Right now, I think that's a very tall task.

Next question is from Laura Chen of Citigroup.

Can you hear me?

Yes.

I would like to get your perspective on the outlook for gross margins, and congratulations on the great results. Do you anticipate achieving the high utilization rate that Ken mentioned? There's also a stronger testing business to consider. If I recall correctly, you indicated earlier that if the utilization rate returns to over 80%, gross margins could rise back into the high 20s. I'm curious about the current dynamics. Additionally, you're increasing CapEx to meet future demand. How should we approach the gross margin outlook for next year and beyond?

Laura, are you looking for commentary on the relationship between utilization and our margin structure?

Yes, we are also increasing CapEx, and I believe there is an increase in depreciation costs as well. I'm curious about the current dynamics and how we should view the gross margin outlook.

If we disregard the impact of foreign exchange, we have essentially returned to our structural margin. As Ken mentioned in the third quarter, if we had the same foreign exchange level as in the first quarter, our margin would be approximately 26.8%. Looking ahead to the fourth quarter, we anticipate further margin improvement. At the same currency level, we expect to exceed 27%. As previously stated, once our utilization reaches 70% or higher, we should return to our structural margin range. However, foreign exchange continues to significantly affect our overall margin. That said, the foreign exchange situation appears to be stabilizing. We intend to initiate our margin efforts from this point. We are confident that as our leading-edge business continues to expand and capacity increases, we will see margin improvements. Currently, we are optimistic that in 2026, for the entire year, our gross profit margin for ATM will fall within the structural margin range.

We are seeking information on this. My second question is regarding the leading-edge advanced packaging. ASE has also developed its own focus technologies, and I am curious about the current progress in customer engagement. It's not only about the opportunities pertaining to substrates. Additionally, what is the progress on ASE's own focus?

Laura, you're looking for an update on our internal advanced packaging solutions, just as a focus.

Yes. Right.

In terms of overall capacity for CoWoS or similar 2.5D technologies, both our foundry partner and we are working hard to invest in capacity to keep up with demand. Given the current tight supply, there are other customers seeking alternative solutions to meet their needs, which presents a strong business opportunity for us to offer our own solutions. We are making the necessary investments and engaging with multiple customers; however, these developments take time. We expect that by the end of next year, we will begin to see significant revenue from the full processing of multiple customers.

Okay. So does this also include in your at least TWD 1 billion revenue increase into next year?

Yes.

Next question is from Sunny of UBS.

Sunny, are you there?

Yes. Could you hear me okay?

Yes.

So congrats on the very good results and guidance. Glad to see LEAP business ramping up and gaining momentum going to 2026. So maybe a question on mainstream. Could you help us understand the recovery ahead? And so when you guide IC ATM sales to grow 3% to 5% sequentially, how is the growth by mainstream and LEAP? And how should we think about the cycle for mainstream going to 2026? Do you see the current utilization rate being a good base for critical recovery going to 2026?

Sunny, you're looking for basically our more trailing edge capacity or trailing edge plus traditional advanced packaging capacity.

So mostly on the mainstream, so wire bonding, die bonding?

Okay. You're looking for commentary on more traditional packaging this year and into next year?

Yes. How should we think about the cycle from here?

We are experiencing better-than-expected performance in our mainstream business, which I attribute to the overall market recovery. In various sectors, we are gaining market share, particularly in communications and computing, which are recovering faster than automotive and industrial. However, the signs of recovery are clear, even though automotive is progressing at a slower rate than the other three sectors. Despite this, our automotive business has seen significant growth, and we anticipate over 20% growth in this area this year, largely due to our market share gains through factory automation. Earlier this year, we projected that our leading-edge technology would contribute to a 10% growth, with the mainstream business contributing mid- to high-single-digit growth. As I mentioned at the start of the session, we expect to surpass our revenue growth target and achieve over 20% growth. This indicates that the mainstream performance has exceeded our initial expectations, and we currently see no negative trends in this area. While I won't provide specific guidance for next year, we believe we are in a healthy position overall, with strong momentum in the leading edge as well.

Maybe a very quick follow-up. So for Q4, is the utilization rate for mainstream continuing to recover a bit?

Yes. I think, like what Ken just mentioned, our bumping and flip chip capacities are quite full. Wire bonding is improving, although it's not completely full, but it is steadily getting better.

Got it. My second question is on gross margin. So from here, one, with the improving measuring business, and then secondly, accelerating ramp probably for LEAP going to 2026 and a stabilizing FX, should we assume for IC ATM, the gross margin recovery should accelerate in the coming few quarters?

Sunny, you're looking for an update in terms of forward-looking commentary regarding our gross margin structure.

Yes, especially on the pace of the improvement.

We're not in an ideal situation. There are still many variables and uncertainties ahead, including fluctuations in foreign exchange. While the overall trend appears positive due to our rapid expansion in our leading-edge area, which enhances margins, it's difficult to predict the precise pace of our margin improvement at this stage.

Got it. Also, on LEAP, is there a margin difference between outsourcing and full-process CoWoS, meaning if you start to ramp more full process from the second half of next year, will that further boost your gross margin for IC ATM?

I think, in terms of full process, we're still at the early stage, so it's kind of difficult to make any meaningful comparison at this point. I think both need to be at really a more stable level for us to make the comparison. I think theoretically, regardless of whether it's our own full process or outsourced, leading edge does give us margin accretion.

Our next question is from Felix Pan of KGI.

Can you, guys, hear me okay?

Yes.

Yes. My first question is about the incremental demand for CP test outsourcing from your foundry partner. If I'm wrong, please let me know, but I've found it challenging to determine the size of the total addressable market. It may be difficult for you to comment on this, but could you provide any insight into how we can quantify the CP test demand, or perhaps the percentage of the bill of materials? Any information would be appreciated. That's my first question.

Felix, I think I'll take this one. In terms of the overall TAM, for something like that, I would say that that's not quantifiable, at least from our perspective. This is something that is probably known by our foundry partners. And you may want to address the amount of work that they want to outsource directly to them. We don't quantify that at this point.

My second question relates to TSMC's recent earnings call, where C.C. highlighted the importance of customer-to-customer engagement. We've noticed increased engagement. From your viewpoint, are you observing a similar trend in customer interactions? Additionally, with many developments occurring this month, could you share any insights regarding potential business model changes or any noticeable increase in customer engagement at TSMC?

Felix, you're asking for how we look at our overall market and whether we actually look into our customers' customers? Similar to...

Actually, my question is whether there is any engagement from your customers' customers that encourages them to secure critical capacity with you.

I don't know if we can talk about that. Joseph, if you want to take a step?

Yes. I think we have a very, very close communication with both our direct customers as well as our foundry partners. Those dialogues are being conducted on a routine basis so that we can better prepare ourselves in terms of our capacity and also our technology roadmap. So in this regard, we do talk to them. And I think our information source is not just coming from our customer, but our customers will definitely keep us informed of what they're expecting from their own customers and how the overall market will shape up. So it's a constant dialogue among the industry players to make sure that the demand is sufficiently being supported by the supply. That's an ongoing process that has been going on for them maybe forever.

Next question is from Gokul Hariharan of JPMorgan.

First one, could you help us understand what is the progress on the full stack focus or CoWoS like kind of processes going into next year? When do we expect this to start becoming more meaningful contributor to revenues, to the LEAP total revenues? And are the applications still similar in terms of like AI accelerator? Or are the applications becoming more diverse in terms of networking or server CPU and other kind of stuff as well?

Gokul, you're looking for an update on our full process type services, is that correct?

I mentioned this earlier. We are continuing to invest in full process capabilities, and we are currently working with several customers to prepare for capacity. We anticipate that towards the end of next year, we will begin to see significant revenue from full process, beyond just the outsourced part of our business. Regarding applications, there will be AI accelerators along with other demands in various chips that require such capabilities. However, it is a bit premature to specify the exact scale or composition of this revenue. We need to maintain close collaboration with our multiple customers to better understand their needs and prepare ourselves for the necessary capacity.

Got it. Maybe a slightly related question is on the CapEx. I think we are probably finishing this year above TWD 3 billion, well above TWD 3 billion in terms of machinery CapEx. How do we think about this investment cycle? Are we still going to be in this, like increased CapEx, likely to continue to increase CapEx over the next couple of years given the demand outlook that you're seeing from your customers and your customers' customers?

Gokul, you're looking for an update on our overall CapEx view. And also in the frame of the leading-edge advanced packaging, how it works?

We maintain a close relationship with our foundry partner, who is a major player in the industry. They serve all customers with demand, establishing strong connections with both their direct clients and the end customers. Our ongoing communication with them allows us to share valuable insights, which helps us prepare for capacity expansion. We are committed to investing in leading-edge technologies to secure and enhance our position in the market. Therefore, we expect to see significant investments in our capacity and technology in the leading-edge area next year.

So is it fair to say next year machinery CapEx is likely to be still higher than this year?

We will give you better guidance once we complete our budget cycle, which is starting now. And we will reserve this question until next quarter.

Next question is from Charlie Chan of Morgan Stanley.

Yes, that question is about T-Glass resulting in the shortage of substrates. I'm not sure if you've heard, there would be kind of a risk factor for ASE Group to grow your revenue next year because we start to hear some customers' hard time to get the substrate sourced. And how would the ASE to help our customers to get a more sufficient supply?

Your question about the overall T-Glass supply and its potential impact on our supply chain going forward is noted.

Yes, yes. And how would the ASE manage or help your customers on this period of shortage?

There are many uncertainties ahead of us, and like running any other business, we will experience ups and downs along with changes. Currently, we might see some materials having a longer lead time, but so far, we haven't encountered any significant disruptions in our service to customers. Being the dominant player means that if any issues arise, customers turn to us, and we have a strong position to secure the necessary materials or components needed to serve them effectively.

Got you. So I would assume, for those materials or substrate, if there will be any cost or price increase, ASE would fully pass-through to customers? Is it right or you would charge some markup because those materials are getting harder to get?

We will find the most suitable pricing for the current situation.

Next question is from Bruce Lu of Goldman Sachs.

I think I asked this question last quarter, but I want to ask it again. What is the CapEx to revenue nowadays? Or is there any changes in terms of like how long does it take to see the revenue after you invest your CapEx? The reason I ask this is that you invest for TWD 1.8 billion CapEx last year and 3-point something billion this year, right? But you generate additional TWD 1 billion of revenue this year, but you also can only generate additional TWD 1 billion next year. Theoretically, should be able to generate a bit more than TWD 1 billion next year, right? Is there any changes in terms of CapEx to revenue or trying to generate revenue?

Bruce, you're looking for the magic solution in terms of CapEx to revenue, right?

Which Joseph used to give us.

First of all, the TWD 3 million plus capital expenditure is not entirely for leading-edge. For this year, I estimate that 55% of that is allocated to leading-edge technology. However, it's important to remember that capacity expansion doesn't happen overnight. Equipment needs to be delivered progressively, not all at once. So, if we're talking about TWD 1.8 billion in capital expenditure, that suggests an average of TWD 900 million in new capacity being added this year. If we see a TWD 1 billion increase, that ratio appears to be on track. The other half of the investment will eventually generate revenue, but there is always a delay between when the capital is spent and when the revenue starts coming in. I'm not suggesting that we can only expect TWD 1 billion in new revenue; I'm simply indicating that we are very confident we can achieve at least TWD 1 billion in new leading-edge revenue next year. Currently, we are still early in the process with leading-edge technology, and we are gathering data to determine the intensity of investment required for this area. Based on the limited data we've collected so far, it appears that the traditional notion of TWD 1 of investment generating TWD 1 of annual revenue still holds true for the core businesses we are currently pursuing, which include OS and testing.

So one to one. That's the major number. It still works.

Still applies. However, as I mentioned, we are in the process of collecting more data. It's important to note that our capacity is not fully ramped up at this time, so it will require a bit more time.

My plan is straightforward. 45% of your approximately TWD 3 billion in capital expenditure is around USD 2 billion. You mentioned that about TWD 3.8 billion, with 55% allocated for established technology. Assuming that 45% or even 50% of your roughly TWD 3 billion capital expenditure this year translates to nearly TWD 2 billion in incremental new revenue from AI, that's how the calculations work.

No, that's not how the math works. We don't live on math. We live in the real world.

Well, I only know math.

Well, if you're calling me conservative, well, call me conservative.

There's no question on the floor.

Okay. I guess, time has pretty much run out. I would like to thank everyone for participating in the call. I look forward to seeing you all, either during the quarter or at the next earnings release.

Okay. We are having a good run, and we'll continue to have a good run going into next year. And we're confident that we will continue to deliver good performances and good numbers for you. We'll see you next quarter. Thank you very much.