Earnings Call Transcript - ASX Q1 2025

Ken Hsiang, Moderator

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 disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, 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 Joseph Tung, our CFO. For today's presentation, I will be going over the financial results and company guidance. Joseph will then be available to take your questions during the Q&A session that follows. During the Q&A session, I will be moderating, receiving and, as needed, clarifying and condensing each interaction down to a single question. With that, let's get started with the financial results. Our first quarter revenues came in ahead of our original outlooks for both our ATM and EMS businesses. There appeared to be a slight accelerated seasonality from certain customers that emerged during the first quarter, especially as it pertains to our EMS business. We believe there are some customers looking to minimize supply chain volatility by building secure inventory ahead of potential trade tariffs. With that said, we are unable to quantify such impact as we do not have a method to ascertain inventory build levels from regular order flow. On the flip side, we also saw some delay in upstream component availability due to the January earthquake in Southern Taiwan. Within our ATM business, our leading-edge advanced packaging, or LEAP, services continued its strong growth and were generally full during the quarter. For the first quarter, LEAP services accounted for 10% of our overall ATM revenues as compared to 6% for the full year 2024. Our test business also continued its strong momentum, growing 2% in the usually seasonally down quarter. Our overall utilization rate came in slightly above our original expectation of 65% for the quarter, with the latter part of the quarter faring better than the beginning of the quarter. Test utilization was full for advanced platforms, while being in the 60s for trailing edge capacities. Our EMS business also came in a bit ahead of expectations. At this point, we believe our EMS business customers may be adjusting order flow patterns for the year. And as a result, our EMS business may be experiencing a potentially shallower seasonal dip for the year. The overall macro environment has been rather unsettled over the early part of this year. Given that our strategic decisions and investments are evaluated on a long-term basis, these decisions become significantly more difficult with rapidly changing business fundamentals. For us, volatility is the enemy of sound, long-term planning and strategy. But even with such volatility, we can continue to focus on core trends of our industry and the strengths of the company. Technological trends, such as the increasing importance of package-based connective technologies, will continue to persevere regardless of the macro environment. The continuous improvement of our process technologies remains paramount to continuing to extend our competitive advantages. From a business perspective, we also continue to believe the assuredness of profitability and the market sustainability of our product offerings remain the key evaluation points when looking at business opportunities, both small and large. In a nutshell, we need to minimize the short-term noise in order to reach the long-term signal. For today, we will attempt to avoid the noisy play-by-play while continuing to offer insights into the strategy and positioning of the company on a longer-term basis. With that, let's go through the numbers in more detail. Please turn to Page 3, where you will find our first quarter consolidated results. The first quarter, we recorded fully diluted EPS of $1.64 and basic EPS of $1.75. Consolidated net revenues declined by 9% sequentially and increased 12% year-over-year. We had a gross profit of $24.9 billion with a gross margin of 16.8%. Our gross margin improved by 0.4 percentage points sequentially and improved by 1.1 percentage points year-over-year. The sequential improvement in margin is primarily due to foreign exchange fluctuations and the higher ATM product mix. The annual improvement is primarily due to foreign exchange, higher utilization and beneficial product mix. Our operating expenses decreased by $0.2 billion sequentially and increased by $1.9 billion annually to $15.2 billion. The sequential decrease in operating expenses is primarily due to lower factory supply and other expenses related to lower consumption during the holiday period, offset by higher labor due to incremental hiring. The year-over-year increase in operating expenses is primarily attributable to continued R&D staff up and other labor-related costs and geographical site expansion. Our operating expense percentage increased sequentially by 0.8 percentage points and annually by 0.3 percentage points year-over-year to 10.3%. Operating profit was $9.7 billion, down $1.5 billion sequentially and up $2.2 billion year-over-year. Operating margin declined 0.4 percentage points sequentially and improved 0.9 percentage points year-over-year. During the quarter, we had a net non-operating gain of $0.1 billion. Our non-operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other non-operating income, offset in part by net interest expense of $1.3 billion. Tax expense for the quarter was $1.9 billion. Due to timing of certain tax expenses, our effective tax rate for the quarter was 20.6%, higher than our full-year projection of slightly below 20%. Net income for the quarter was $7.6 billion, representing a decrease of $1.8 billion sequentially and an increase of $1.9 billion year-over-year. The NT dollar depreciated 2% against the U.S. dollar sequentially while depreciating 4.8% annually. From a sequential perspective, we estimate the NT dollar depreciation had a 0.6 percentage point positive impact on the company's gross and operating margins. While from an annual perspective, we estimate the NT dollar depreciation had a 1.4 percentage point positive impact on the company's gross and operating margins. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $25.4 billion, with a 17.2% gross margin. Operating profit would be $10.5 billion with an operating margin of 7.1%. Net profit would be $8.4 billion with a net margin of 5.6%. Basic EPS, excluding PPA expenses, would be $1.93. On Page 4 is a graphical presentation of our consolidated quarterly financial performance. Gross margins have been gradually improving, even heading into our seasonally slow first quarter. On the operating margin front, operating expenses are continuing to increase, primarily for LEAP business preparation, labor acquisition, retention, and offshore site expansion costs. 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 first quarter of 2025, revenues for our ATM business were $86.7 billion, down $1.7 billion from the previous quarter and up $12.8 billion from the same period last year. This represents a 2% decline sequentially and a 17% increase annually. Gross profit for our ATM business was $19.6 billion, down $1 billion sequentially and up $4.1 billion year-over-year. Gross profit margin for our ATM business was 22.6%, down 0.7 percentage points sequentially and up 1.6 percentage points year-over-year. The sequential margin decline was primarily due to softer loading during our seasonally soft first quarter, offset in part by foreign exchange impact. The annual margin improvement is primarily the result of higher loading, product mix, and foreign exchange differences, offset by higher utility costs. During the first quarter, operating expenses were $11.3 billion, up $0.1 billion sequentially and $1.8 billion year-over-year. The sequential increase in operating expenses was related to increased headcount. The annual increase is primarily the result of R&D ramp-up and labor-related expenses. Our operating expense percentage for the quarter was 13%, increasing 0.4 percentage points sequentially and up 0.2 percentage points annually. The sequential increase was primarily related to the seasonality of revenue, while the annual increase was primarily due to labor ramp-ups preparing for higher leading-edge advanced packaging revenues. During the first quarter, operating profit was $8.3 billion, representing a sequential decline of $1.1 billion and an annual increase of $2.3 billion. Operating margin was 9.6%, down 1.1 percentage points sequentially, while up 1.4 percentage points year-over-year. For foreign exchange, we estimate that the NT to U.S. dollar exchange rate potentially had a positive 0.97 percentage point impact on our ATM sequential margins and a positive 2.3 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.2% and operating profit margin would be 10.5%. On Page 6, you'll find a graphical representation of our ATM P&L. On Page 7 is our ATM revenue by three C market segments. You can see here that the Computing segment took a big step-up in terms of relative positioning of applications. This was made more apparent given the stable high-demand nature of AI products, while handsets and other communications-related devices were seasonally impacted. On Page 8, you will find our ATM revenue by service type. Moves here were generally product-mix driven. What is good to note is the testing percentage of our business has sustained at 18%. We continue to believe we can gain market share in testing throughout the year. We now believe we are slightly ahead of plan for increasing our test business. By the end of the year, our test business should reach between 19% to 20% of our overall ATM revenue. We continue to be the largest provider of outsourced test services in the world, and testing is becoming a more strategically critical component of our overall strategy. We believe that as future products become more integrated with multichip and RDL-based packaging, the insertion of incremental test steps during the assembly processes will become increasingly prevalent, potentially disrupting classic wafer probe and final test frameworks. For example, silicon and organic interposers, like those used on the newest generation of AI chips, are ideally tested pre- and post-die attach. The post-die attach test provides turnkey providers the opportunity to accelerate failure detection ahead of the final test process. Financially, we also believe that the test business is accretive to our overall ATM margins. And as such, almost all acquirable test business is good business. We remain committed to being aggressive in the test space. We have a target of gaining incremental test market share throughout the year. In particular, we continue to believe that we will start to make significant progress during the back half of 2025 in regards to increasing our AI testing market share. On Page 9, you can see the first quarter results of our EMS business. During the quarter, EMS revenues were $62.3 billion, declining $12.6 billion or 17% sequentially, while increasing $2.9 billion or 5% year-over-year. The sequential revenue decline is generally related to the seasonality of products that we service, while the annual revenue improvement is likely due to the current quarter following a slightly different seasonal pattern. Sequentially, our EMS business' gross margin improved 0.6 percentage points to 8.9%. This change was principally the result of product mix. Operating expenses within our EMS business declined $0.3 billion sequentially and while increasing $0.1 billion annually. The sequential expense decline was primarily attributable to lower running costs during the seasonally soft timeframe. Despite an absolute dollar decline in operating expenses sequentially, our first quarter operating expense percentage of 6.3% was up 0.7 percentage points. Annually, our EMS operating expense percentage was down 0.2 percentage points on higher revenues. Operating margin for the first quarter was 2.6%, declining 0.1 percentage points sequentially and year-over-year. The sequential and annual improvements were primarily due to product mix. Our EMS first quarter operating profit was $1.6 billion, down $0.4 billion sequentially, while flat annually. You will find a graphical representation of our EMS revenue by application on the bottom of the page. The percentage shifts here are generally related to the seasonal nature of underlying Consumer and Communications products. 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 $93.5 billion. In preparation for upcoming capital expenditures, our total interest-bearing debt increased by $17.7 billion to $231.6 billion. We anticipate increasing our debt outstanding throughout the year. Total unused credit lines amounted to $358.4 billion. Our EBITDA for the quarter was $27.6 billion. Our net debt to equity this quarter was 41%. As a point of reference, we anticipate that our net debt to equity will be peaking in the third quarter of this year at or near 60%. On Page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the first quarter in U.S. dollars totaled $892 million, of which $395 million were used in packaging operations, $472 million in testing operations, $23 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 $410 million on facilities, which includes land and buildings. The machinery and equipment we are investing in this year not only represent capacities allocated for current product demand, but they also represent a broader target of servicing the generational evolution of packaging in electronic devices. Future generations of AI, networking, and communications have fundamental needs for specification improvements only LEAP can provide, whether it's the need to move power delivery closer to the package or the need to bring HBM closer to logic dies, or the need to address higher I/O densities and newer generations of future products. All these core trends will require the generational leap in equipment and facilities we are currently installing. And though we continue to possess the ability to adjust capital equipment delivery times, current investment timelines continue to align with capacity needs. Heading into the second quarter, product flow appears to be strong. Our leading-edge advanced packaging and testing businesses continue to lead the way. And as we've mentioned, we are seeing some potential for accelerated seasonality and inventory build during the second quarter. And as stated earlier, we are not necessarily able to fully discern between customer inventory build and customer product sell-through. Avoiding a potentially thornier tariff environment by accelerating production would appear to be rational. However, it comes with a large caveat that wafers must have been completed, substrates are ready to go, and we have the proper tooling and capacity to support the acceleration. So not all who may wish to accelerate are able to do so. As such, there is some impact to our ATM business, but such impact is relatively limited. Looking beyond the second quarter is probably impractical at this time. But we, at this moment, have not seen any out of the ordinary adjustments, which may or may not be meaningful. With that, we would like to summarize our outlook for the second quarter of 2025, as follows. For our ATM business, in NT dollar terms, our ATM second quarter 2025 revenues should grow by 9% to 11% quarter-over-quarter. Our ATM second quarter gross margin should increase by 140 to 180 basis points quarter-over-quarter. For our EMS business, in NT dollar terms, our EMS second quarter 2025 revenues should decline 10% year-over-year. Our EMS second quarter 2025 operating margin should decline by 100 basis points year-over-year. 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.

Operator, Operator

Now we have a question from Mr. Gokul Hariharan.

Gokul Hariharan, Analyst

Okay. Good afternoon, Ken and Joseph. Thanks for taking my question. My first question is on test. First of all, when you talk about increasing AI test market share, is it mainly for the dominant GPU platform that you're referring to in the second half of this year? And second, on test, I think I saw that the test CapEx even in Q1 is almost like $500 million, following on from the $900 million that we spent last year. So we are starting to spend very heavy CapEx on test. Joseph, can you outline how we should think about the economic return framework for these test investments? And how does that compare to your target ROE for the overall business, et cetera?

Ken Hsiang, Moderator

So you're looking for a summary in terms of what, in particular, is ramping up in the back half of the year and also how that necessarily impacts our overall CapEx spending for test, is that correct?

Gokul Hariharan, Analyst

Yes. Also, I think some economic framework given the test CapEx is now becoming pretty meaningful. I think even a single quarter CapEx seems to be pretty chunky now, yes.

Joseph Tung, CFO

Yes. I think we have been and we will continue to be very aggressive in terms of making our test investment and aiming at continuing to expand our market share in the test area. I think we have been making a lot of progress. As you can see, for the past two, three years, we have been growing our test portion of the business from 16% all the way to 18%, and we are looking at closing into 20% by the end of the year. In terms of the composition of the test business, I think aside from kind of the general market test, special emphasis is also put on the AI chips testing or more advanced testing as well. On that, I think in terms of wafer sort, we have been executing as planned and progress is being made. And I think the focus will also be turned on the final test of these chips. And we are in the process of lining up and also aligning our capacity. We expect to see progress in the second half of the year in terms of penetrating into this very important market for us. In terms of economics, I think test, of course, as Ken mentioned, it has a higher margin. So it's a margin-accretive business for us. In terms of return, I think it has a very similar return to the leading-edge packaging on a financial standpoint. CapEx-wise, we will make the necessary investment in our CapEx, not just on the equipment itself, but also on the facility that we need to put in to address this demand.

Ken Hsiang, Moderator

Gokul, does that answer your question?

Gokul Hariharan, Analyst

Yes. That's pretty clear. Maybe my second question is on your U.S. investments. Any plans there given your partner, the large foundry, has already announced two advanced packaging fabs in the U.S. Also, one of your competitors seems to have gone ahead and invested a fair bit of CapEx in their U.S. fab, and they seem to be positioning themselves as a U.S. partner for your kind of large foundry partner. So how do you think about U.S. investments from here on, given the environment seems to have changed a little bit? When does ASE need to start preparing for some U.S. capacity, especially for your LEAP, leading-edge advanced packaging, portfolio?

Ken Hsiang, Moderator

Okay. You're looking for a summary or in terms of an overall framework for our view on the U.S. investment, right?

Gokul Hariharan, Analyst

Yes.

Joseph Tung, CFO

I think we were invited by the customer to evaluate the possibility of having some operation to support their business in the United States. Currently, we are engaging in discussion and are evaluating the opportunities with interest. There are no further details so far in terms of the actual investment size or the timing of it. But any decision that we will eventually make will be made with economic viability.

Gokul Hariharan, Analyst

Is that going to be similar stuff to what you do in Taiwan right now? Or is it going to be different, maybe more advanced packaging technology compared to what you're investing in? Just wanted to understand, is it just geographic diversification? Or is it like completely different products that you think would be invested in, in the U.S.?

Joseph Tung, CFO

I think it will be an extension of what we are offering here. But in terms of eventually what exactly that we will be doing or what kind of investment we will be making, it really depends on the situation and also the economics of it. So I think at this point, we don't really have much detail to share with everybody, except the fact that we are being invited and we are evaluating the situation here.

Gokul Hariharan, Analyst

Thank you.

Joseph Tung, CFO

Thank you.

Operator, Operator

Thank you. Our next question is from Mr. Bruce Lu of Goldman Sachs.

Bruce Lu, Analyst

Can you hear me?

Ken Hsiang, Moderator

Yes.

Bruce Lu, Analyst

Okay. Just one quick clarification regarding Gokul's question. When you evaluate your economic value in the U.S., does geopolitical factors play a role as one of the economic values?

Joseph Tung, CFO

Not really. I'm sorry, Ken, do you want to repeat the question?

Ken Hsiang, Moderator

No, please go ahead.

Joseph Tung, CFO

Anyways, I think it's really for our customers' request. Whatever we eventually will do is really offering our support to our customer and try to meet our customers' demand in any way we can, provided that it's a feasible or economically feasible option for us.

Bruce Lu, Analyst

Thank you. My second question is regarding the AI testing. You mentioned that you are confident in achieving more than 50% market share in AI testing. Can you provide an update on your market share across different products, such as GPU versus ASIC, or final testing versus wafer testing or burn-in? Do you see any significant differences in market share? Where do you anticipate growth in the AI testing business?

Ken Hsiang, Moderator

So Bruce, you're looking for a summary in terms of our market position relative to GPUs or in total?

Bruce Lu, Analyst

Well, I want to know the market share in different products.

Joseph Tung, CFO

I don't think we have a market share breakdown between different products. I think the overall emphasis is really we want to expand our test business in whichever area. I think legacy or more advanced or leading edge, it's across the board. We're making efforts to penetrate this market further. And we have been making a lot of progress, not just on the AI chips, but as an overall test business, which is being shown in the percentage of our revenue. As I said, this has grown to 18% and we're going to reach 20% pretty soon. And this effort will continue. But in terms of AI chips, I think we're really the dominant player in terms of wafer sort, and we're moving in very aggressively into final test as well. And we will see some results coming in, in the later part of the year, and we expect to grow this part of the business very aggressively next year as well.

Ken Hsiang, Moderator

Does that answer your question, Bruce?

Bruce Lu, Analyst

Thank you. My second question is about the long-term demand for CoWoS. There's a lot of talk regarding this demand, and we are noticing some changes or fluctuations in capacity planning at TSMC. How does this impact your CoWoS or related capacity expansion plans for the latter part of this year or into 2026?

Ken Hsiang, Moderator

Bruce, you're looking for a view on our leading-edge advanced packaging road maps, in particular, our focus-based products. Is that correct?

Bruce Lu, Analyst

I want to make it clear that we do see the fluctuation in terms of the advanced packaging demand in one of your major partner in TSMC. And does that have a secondary impact on your business? Or do you change any of your plan because of that?

Joseph Tung, CFO

So far, we haven't seen anything that's out of the ordinary. I think the things are going as planned. And in terms of leading edge, I think we're still in a catch-up mode in terms of building our capacity to meet the demand. And as our foundry partner has mentioned, it has a long-term or 5-year CAGR of 45%. And we are also true believers of the long-term prospect of this AI-related growth. And more importantly is that it's not just AI itself, but the AI-generated demand for other products as well as the AI adoption expands. So we're going to change our course in terms of making the necessary investment in time to meet this growing demand, not just on AI itself, but on the overall. So right now, we're not seeing any major behavioral changes among our customers. And therefore, for this year, we are not making any changes. I don't think any structural changes is warranted at this point. So we will just go ahead with whatever we set out to do. And we believe that there's going to be short-term uncertainties or fluctuations, but the longer-term direction remains the same. And we're making all our investments according to that.

Ken Hsiang, Moderator

Does that answer your question, Bruce?

Bruce Lu, Analyst

Yes.

Ken Hsiang, Moderator

All right. Thank you.

Operator, Operator

Next question is from Charlie Chan of Morgan Stanley.

Charlie Chan, Analyst

Good afternoon Joseph and Ken, thanks for taking my question. So first of all, I wanted to know your 3D IC technology development. I think the similar at your foundry partner is SoIC. So I'm not sure when the chip migrates to 2-nanometer or whether you're receiving more business opportunity for the 3D IC packaging. And can we get a sense about your investments and potential revenue contribution next year?

Ken Hsiang, Moderator

Charlie, you're looking for an update in terms of our overall positioning within the 3D IC framework, right?

Charlie Chan, Analyst

Yes, because one of the very big U.S. recently, high profile, talked about its 2-nanometer chip at your foundry partner. So we heard that the packaging could leverage some 3D IC technology, right? So wondering whether you can seize this opportunity, and also how big the revenue contribution could be?

Joseph Tung, CFO

We really don't have much clarity in terms of when or how these new packages will come on stream and what kind of volume we can expect maybe next year and onwards. What we can do is not just on the 3D IC, I think a lot of the advanced technology that's now in play, including 3D IC, including CPO, including panel, I think we are all putting a lot of resources in this. As you can see, our R&D investment has been increasing year-over-year. Not just on CoWoS itself, but also on this upcoming technology. We need to prepare ourselves and we are forming very strong alliances with different parties, also engaging in very active engagement with our foundry partner as well as our customers to ready ourselves for this technology when they come on stream. So our strategy is really to prepare ourselves. And when the volume comes, be ready.

Charlie Chan, Analyst

Okay. And if I may ask a second one would be the common tariff question, right? So beforehand, do you see any kind of pull-in given the tariff? And also, do you see the second half could be very, very moderate given kind of that pull-in in first half already, resulting in very flattish second half growth?

Ken Hsiang, Moderator

Charlie, you're looking for a view on the tariff impact on us and then how that reflects various timelines in our business, right? Is that correct?

Charlie Chan, Analyst

Indeed. Yes, your foundry partners indicated there hasn't been any change in behavior. However, two of them forecasted a very strong second quarter while suggesting a much slower second half. I'm curious about this, particularly since the back end is closer to customers. We would like to hear your perspective on it.

Joseph Tung, CFO

Yes, we had a strong second quarter, and I remain confident about that. However, when it comes to the second half, I wish I had a clearer outlook, but I don’t have any better insights than anyone else. To address the risks, the first step is to identify what those risks are. Until things stabilize, it's challenging to make any predictions, and any forecast I provide now would likely be inaccurate. Therefore, I’ll hold off on making any definitive statements about the second half.

Charlie Chan, Analyst

Yes. But just want to ask is that, do you see kind of pull-in? Or is this just some market speculation, and customers they just operate as usual?

Joseph Tung, CFO

I believe it’s quite normal to see some pull-in during the first half of the year. However, as Ken mentioned, we still face limitations regarding our capacity and readiness to meet this anticipated pull-in demand. This makes it challenging to accurately determine how much of our growth in the first half is truly due to pull-ins. Additionally, various factors are influencing the quarter’s performance, such as being placed on the whitelist, which may result in some business shifting to us. Therefore, it’s a mix of many elements. At this stage, aside from the occasional pull-ins, we’re not observing any significant changes in behavior or forecasts from our customers. The best approach for us is to stay on track with our plans for the year while remaining flexible and responsive to any upcoming changes.

Charlie Chan, Analyst

Thank you. Thanks, Joseph. This is super helpful.

Joseph Tung, CFO

Thank you.

Operator, Operator

Next question is from Sunny Lin of UBS.

Sunny Lin, Analyst

Could you hear me?

Operator, Operator

Yes.

Sunny Lin, Analyst

Thank you very much. So my first question is on EMS. So if I calculate correctly, your guidance basically implies your Q2 EMS sales could drop sequentially. I know earlier you mentioned there is some earlier seasonality for build in Q1 given the pull-in for tariffs. But could you share a bit more color on why there's a pull-in in Q1? But for Q2, now there's a 90-day delay, but we have started to see orders maybe dropping off in Q2 already?

Ken Hsiang, Moderator

So Sunny, your question relates to our view on what is causing the movement in terms of our Q2 revenues. Is that correct?

Sunny Lin, Analyst

That's right.

Joseph Tung, CFO

I think the pattern is a typical seasonality pattern. Second quarter is always the slowest quarter for us in terms of EMS. What Ken mentioned earlier on is that, for the first half, we were entering these down quarters. This time around, the dip is a bit shallower than before or than previous years because of some of the pull-ins that have been happening in not just the first quarter, but also the second quarter. But still, second quarter is down quarter, is the lowest quarter for us.

Sunny Lin, Analyst

Got it. And a quick follow-up for EMS. Last year, your largest customer had earlier build for their new products. So now based on your Q2 guidance, there is no earlier build for this year, right?

Ken Hsiang, Moderator

I can summarize your question, but I can pretty much answer it for you at this point. I don't think we can really comment on that customer per se. Do you have a different question to ask?

Sunny Lin, Analyst

Yes, no problem. So maybe switching gears to your profitability and CapEx. I recall maybe two quarters ago, you mentioned that for 2025, as you start to ramp more sales from advanced packaging, the second half gross margin should be higher than the first half. Although now I understand there's some macro uncertainty for the second half, but does that gross margin guidance still hold? And then for your CapEx, you spent quite a bit in Q1. And so for 2025 full year, are you still guiding $2.5 billion to $2.6 billion CapEx for the full year? Or should we expect a bit higher CapEx?

Ken Hsiang, Moderator

Sunny, you're asking for our seasonal outlook in terms of how we would normally expect a peak seasonal gross margin level, right, especially pertaining to our leading-edge advanced packaging ramps. Is that correct?

Sunny Lin, Analyst

Yes. So basically, directionally, will gross margin trend up in the second half with higher advanced packaging contribution, and also CapEx guidance for 2025?

Joseph Tung, CFO

As I mentioned, we are not making any changes to our projections for the year regarding both revenue and CapEx at this time. I believe we are slightly ahead of our original expectations. For the second quarter, overall utilization is expected to be around 70%, and we will reach that threshold earlier than anticipated. Consequently, we had indicated that our margins for the second half would return to the structural range, but it appears this will occur sooner. We expect to see improvements starting in the second quarter. For the entire year, we anticipate meeting our goals in restoring our margins to the structural range. Absent any significant surprises in the second half, our margin should return to the midpoint of our structural margin level. This outlook remains unchanged.

Sunny Lin, Analyst

Got it. Thank you very much.

Operator, Operator

Next question is from Laura Chen of Citigroup.

Laura Chen, Analyst

Hi. Good afternoon. Can you hear me?

Operator, Operator

Yes.

Laura Chen, Analyst

Thank you for taking my questions. I recall that last time we talked about like $1.6 billion leading-edge advanced packaging revenue for this year. Just wondering that based on Q1 achievement and also the Q2 outlook, what kind of achievement we already have right now? As we know that from our foundry partner, they have technology migration, say, like from the CoWoS-S to CoWoS-R or L. So will that have any implication to our advanced packaging revenue ramping up? That's my first question.

Ken Hsiang, Moderator

Laura, you're asking for an update in terms of our leading-edge advanced packaging, in terms of the revenue and then the shape of the ramp at this point, right? Is that correct?

Laura Chen, Analyst

Yes.

Joseph Tung, CFO

There's really no change at this point. I think we are moving ahead with our original plan, both on the overall as well as on the leading-edge. We are making the necessary investments. We are not cutting our CapEx at this point. And we are set out to reach our revenue target on leading edge as well for the year. And in terms of different types of CoWoS, I think we have our capacity ready for whatever the package type that's needed. We will have our capacity aligned for that.

Laura Chen, Analyst

Okay. Very clear. And also my second question, again, is related to the testing. We know that we have set the objective, the target, to ramp up the internal testing revenue contribution. But just wondering that for furthermore upside, can we assume that is mostly coming from the GPU or AI accelerator? Or is it also including some of the other applications, like a smartphone?

Ken Hsiang, Moderator

Laura, you're asking about who we're targeting in terms of expanding our overall test, is that correct?

Laura Chen, Analyst

Right. Yes. I'm also curious whether this could be included in our advanced packaging revenue or if it should be considered separately. Sometimes, it operates more like a comprehensive service for the entire OSAT process.

Joseph Tung, CFO

We are making a concerted effort to capture as much market share as we can in the testing sector. Naturally, there will be heightened focus on AI and cutting-edge testing, and we are committed to making the necessary investments. We are confident that we will achieve significant progress moving forward. We anticipate that developments will begin to materialize, particularly with our final testing, although we foresee potential challenges in the latter half of the year. We are working on enhancing our capacity and navigating through the qualification processes. We expect business to start flowing in during the second half of the year. This is a comprehensive initiative, and I believe we are not only maximizing our turnkey capabilities to enhance our test operations but also dedicating considerable resources to grow our pure testing business as well.

Laura Chen, Analyst

Okay, thank you, that's very clear.

Operator, Operator

We have a question from Brad Lin of BofA.

Brad Lin, Analyst

Thank you for taking my question. Hello, good afternoon, Joseph and Ken. I have two questions. My first question would be mainly related to tariff. So if the new tariffs are really to be implemented, particularly on the semiconductors, does ASE expect to absorb part of the additional cost? And also, given that a significant portion of your EMS manufacturing is currently in China, what strategies are in place to reduce the potential tariff exposure?

Ken Hsiang, Moderator

Brad, your first question relates to the tariff and the cost, whether we're going to be absorbing any costs and then also how our EMS business would react in such situations, correct?

Brad Lin, Analyst

Exactly. Thank you.

Joseph Tung, CFO

I am unsure how much we need to absorb, but I believe that adjusting our prices will not solve the tariff issue, so that's not truly an option. From a group perspective, our direct exposure to the U.S. is quite minimal. Less than 10% of our EMS business shipments go directly to the U.S., and we can manage this by relocating some parts to other sites we have. Regarding ATM, our direct shipments to the U.S. are also very minimal. Therefore, estimating the overall impact of the tariffs is quite challenging at this time. However, if there is any impact, it is likely to affect our competitors significantly more than us.

Brad Lin, Analyst

Got it. My second question would be, well, switch gear to the general demand of the industry, such as consumer electronics, industrial, and automotive. And do you anticipate a recovery, particularly in the industrial and auto segments, in the second half of the year? And also compared to three months ago, are we more optimistic or less optimistic about consumer electronics?

Ken Hsiang, Moderator

Brad, your question relates to our view of the overall general demand of electronics, including automotive and consumer-related products. Is that correct?

Brad Lin, Analyst

Yes.

Joseph Tung, CFO

I think there's a general consensus that other than maybe automotive, the other sectors are gradually recovering. In terms of automotive, I think on the high-end, automotive actually is having a much better momentum at this point. But the legacy, the MCUs and the lower-end stuff, are still going through some level of inventory correction at this point. So from our own business portfolio perspective, I think automotive, we will see growth in this area for this year as well.

Brad Lin, Analyst

Got it. Thank you very much.

Operator, Operator

Our next question is from Jason Tsang of CL Securities.

Jason Tsang, Analyst

Can you hear me?

Operator, Operator

Yes.

Jason Tsang, Analyst

Thank you for taking my questions. I want to follow up the EMS questions in terms of your Q2 revenue. Can you give us more color in terms of each of different sectors, revenue outlook or guidance in Q2? Which sector do you expect probably can have sequential growth? Or all the sectors will drop in Q2?

Ken Hsiang, Moderator

Yes. And you're looking for characterization in terms of market segment related to our Q2 revenues, right? Is that correct?

Jason Tsang, Analyst

Yes.

Ken Hsiang, Moderator

Hang on just a sec.

Joseph Tung, CFO

I think this is a very difficult question to answer because I can't answer this without linking this to a particular customer. So I think I'm going to refrain from answering that.

Jason Tsang, Analyst

What sectors do you anticipate will see better demand, shipments, or revenue in Q2? Are there any sectors you expect to perform worse than others in that timeframe?

Ken Hsiang, Moderator

I think regarding our EMS business, since we are in the second quarter, which typically sees a seasonal decline, it's likely not the best time to assess which products are gaining traction and which are not. The current fluctuations in these products are more related to their position in the manufacturing cycle. Therefore, I don't believe it is particularly useful to discuss this at the moment.

Jason Tsang, Analyst

Got it. So my second question is in terms of your new technology plan in the future. I think yesterday, Powertech suggested that they are working with HPC or AI clients with two nanometers for their panel level packaging. So I wonder if you have any plans or timeline for mass production stage for panel-level packaging for more high-end or advanced applications? Or also, can you give us some of the timeline for silicon photonics, something like that?

Ken Hsiang, Moderator

Jason, you're looking to understand what our explosive growth plans are for our leading-edge technologies. Is that correct?

Jason Tsang, Analyst

Yes, yes, including panel-level packaging or silicon photonics.

Joseph Tung, CFO

I can't comment on our competitors. They recently made a bold statement. However, regarding our own panel, we are currently establishing and aligning our pilot line for customer qualifications, which are set for the latter part of 2025 and 2026. The actual timeline for adoption will depend on our customers. We've been investing in this area for a considerable time, and we are pleased that our foundry partner is also involved and setting the industry's standards for this technology. We are on track and are proceeding cautiously to ensure that our solutions meet market needs.

Ken Hsiang, Moderator

Does that answer your question, Jason?

Jason Tsang, Analyst

Yes, understood. Thank you very much. I have no more questions. Back to queue. Thank you.

Operator, Operator

There are no questions from the floor.

Ken Hsiang, Moderator

Okay. I think that's a wrap for the quarter. Thank you for attending our call. See you next time.