Earnings Call Transcript - ASX Q2 2024

Ken Hsiang, Head of Investor Relations

Hello. I am Ken Hsiang, the Head of Investor Relations of ASE Technology Holdings. Welcome to our Second Quarter 2024 Earnings Release. Thank you for attending 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 am joined today by Dr. Tien Wu, our COO; and Joseph Tung, our CFO. For today's presentation, I will be going over the financial results, and Joseph will give the company's outlook. Dr. Wu and Joseph will then be available to take your questions during the Q&A session that follows. During the Q&A session, each caller will be limited to two questions at a time, but may return to the queue for further questions. With that, let's get started. The second quarter can be summed up as the tale of two businesses, one business representing the leading-edge products and the other the more traditional products. For the traditional business, the second quarter had selective products with signs of reemergence. But by and large, general product demand lacked the strength and durability necessary to be considered a sustained healthy pickup in the immediate term. While the leading-edge business saw increasing demand with the development of increasing product pipelines. Equipment utilization for traditional products looks to be near 60%, while utilization for the leading-edge products is effectively full. To support the bifurcated market, we will need to continue to increase our investment in the leading edge space, in particular, labor and equipment. From the labor perspective, we will need to hire more engineers as the level of product complexities are increasing with the leading edge. We will also need to invest in incremental capital equipment to provide for incremental demand. For our EMS business, in the second quarter, demand for our services was slightly ahead of our initial expectations. We believe this was principally the result of a slightly faster start to the manufacturing season. Please turn to Page 3, where you will find our second quarter consolidated results. For the second quarter, we recorded fully diluted EPS of NTD 1.75 and basic EPS of NTD 1.80. Consolidated net revenues increased 6% sequentially and 3% year-over-year. We had a gross profit of NTD 23.1 billion with a gross margin of 16.4%. Our gross margin improved by 0.7 percentage points sequentially and 0.4 percentage points year-over-year. The sequential improvement in margin is principally due to NT Dollar depreciation and product mix changes at both our ATM and EMS businesses. Our operating expenses increased by NTD 0.7 billion sequentially and by NTD 1.7 billion annually. The sequential increase in operating expenses is primarily due to higher R&D labor-related expenses. The year-over-year increase in operating expenses is primarily attributable to continued R&D staff-up and other labor-related costs. Our operating expense percentage remained flat at 10% sequentially and increased by 1 percentage point year-over-year. The annual increase was also related to higher R&D staff-up for both ATM and EMS, overseas expansion, and higher incentive stock option and bonus expenses.

Joseph Tung, CFO

Yes. Thank you, Ken. Let me give you our guidance for the third quarter. In terms of ATM, in NT Dollar terms, our ATM third quarter 2024 revenue should grow by high single digits quarter-over-quarter. And our ATM third quarter gross margin should be between 23% to 23.5%. In terms of EMS, in NT Dollar terms, our EMS third quarter 2024 revenue should grow mid- to high teens quarter-on-quarter. Our EMS third quarter 2024 operating margin should be slightly above fourth quarter 2023 level of 3.5%. In addition to the revenue and margin guidance, I would like to also provide an update on our CapEx. In anticipation of the booming demand for leading-edge ATM capacity and further technology advancement, we believe we will need to step up our CapEx investment, starting from raising full year 2024 consolidated machinery CapEx to double from last year's USD 914 million levels. And as these investments carry higher value contribution and are becoming more critical to the overall semiconductor manufacturing, we believe such investment will be both return and margin accretive. On geographical expansion. We started our Malaysia expansion 2 years ago, and our Phase 1 has been completed, and we will start volume production in quarter 1 '25. Also, we're soon to close the acquisition of 2 Infineon operations, one in the Philippines and one in Korea, and expect revenue contributions of these 2 sites starting from the third quarter this year. We have also acquired land in Mexico and we've identified potential locations in Japan. The land will be developed, and buildings constructed in anticipation of future customers' demand, and all these efforts are made to shorten the lead time for capacity ramp-up. With that, we will open the floor for questions.

Operator, Operator

Our first question is from Mr. Gokul Hariharan of JPMorgan.

Gokul Hariharan, Analyst

My first question is about the guidance. So when you talk about ATM high single digit, could you also help us to understand the full year growth prospects for ATM? Because I think back in February or January, I think Tien had talked about 6% to 10% for industry and similar growth for ATM. Any updates there given year-to-date, it looks like you'll be tracking at about flat year-on-year on USD terms. And also gross margin. Previously, we were expecting 25% to 30% range in the second half of the year. Any reason, Joseph, why it's a little bit lower? Are there any start-up costs or any other additional costs that have come in? Or is it just that utilization is tracking lower? And lastly, on CapEx, this double from FY '23, obviously, a bigger number than before. Any breakdown in terms of test versus advanced packaging versus traditional packaging in terms of where you are putting in incremental CapEx?

Joseph Tung, CFO

I believe that for the full year, the recovery in the general market seems to be a bit slower than we anticipated. While we expect the general market to begin to bottom out in the second half and improve, the pace of recovery is not as fast as we hoped. On the leading edge, we are still thriving, but we are actively working to increase our capacity to meet the rising demand. Considering everything, we are now projecting a more moderate growth for the full year in terms of our revenue. Regarding margins, due to the slower recovery in the general market, we may not reach our structural margin target of 24%. However, we remain optimistic that we will see better improvement in the second half. The CapEx breakdown. With the new CapEx that I just mentioned, I think the breakdown will be roughly 53% for assembly and 38% for test. We have another 1% for material and about 8% for EMS.

Gokul Hariharan, Analyst

That's clear. My second question, Joseph, is about the 2.5D advanced packaging where you're obviously investing significant capital, and the prospects look promising. Last time, Tien mentioned that this segment could generate an additional NTD 50 million in revenue. Recently, during your AGM, you indicated there might be some upside to that figure. Could you discuss the scale of this business? Do you believe it could account for 10% of your ATM revenues next year? Additionally, could you elaborate on your partnership with the leading foundry, especially since they mentioned increased engagement with OSAT partners to meet customer demand? How extensive is your customer base? Is the demand primarily coming from this leading AI accelerator client, or are you working on multiple projects from various customers in 2.5D packaging?

Joseph Tung, CFO

I believe the leading edge primarily stems from AI and high-performance computing. It involves a wider range of customers, not just a single one, as Ken pointed out earlier. We are engaging reactively with both our foundry partners and customers directly. Our increased capital expenditure is aimed at expanding the necessary capacity for this type of work, which includes packaging and testing.

Sunny Lin, Analyst

Could you hear me?

Operator, Operator

Yes.

Sunny Lin, Analyst

So my first question is to follow up on the testing opportunities that you just mentioned regarding the advanced packaging business. Could you share a bit more details regarding the customer engagement, and for some of the key projects, how you compete with the existing suppliers?

Joseph Tung, CFO

I think there's plenty to go around as we see the demand for leading edge, both for packaging and tests are booming. And we are currently still a little bit capacity constrained, and we are beefing up our CapEx in this area to build the capacity as well as to further our technology investment. I think the ambition, demand is coming from different customers and also a part of it from the foundry as well. So we will entertain whatever business that is needed from our customers. And in terms of meeting competition, there's always competition, we will do whatever we can to further penetrate whatever business that's in front of us.

Sunny Lin, Analyst

Maybe let me try to ask from a different angle. And so for some of the AI-accelerated products, there are some pretty solid existing suppliers that have very close relationships with the customers. They are willing to customize the burn-in tools and also the boards. And therefore, I just wonder what's your competitive strategies. And if you manage to get some of these products, when should we expect the revenue to materialize?

Joseph Tung, CFO

We are gearing up on our leading-edge testing capacity and capability, including burn-in. We are basically leveraging our turnkey services, and we expect to have good progress starting from next year.

Charlie Chan, Analyst

So maybe to begin with, I'm wondering, Joseph, your view about Kenneth and Tien talking about Foundry 2.0. Do you think going forward, would there be more competition from foundry? Or do you believe there should be more collaborations?

Joseph Tung, CFO

That is really a testament that the back-end packaging and test is becoming a more and more critical part of the overall value chain. We are excited about the opportunity in front of us. We will be closely working with our partners both upstream and downstream to make this happen. So I think the overall relationship with both our customers as well as upstream foundries. We are working very closely with both of them, and we'll try to come up with the capacity and the technology needed to suit their needs.

Charlie Chan, Analyst

So my follow-up question is also to clarify your potential expansion of the advanced packaging business. So first of all, my understanding is that you only do the Wafer-on-substrate (WoS), right? But the chart suggests that you want to expand to chip on wafers. That's the first part. And secondly, there's a rumor talking about you probably will do a new fab very close to Taichung or Changhua area, and there's a kind of offloading TSMC's burden. And number three is really the capacity number. As far as I know, probably in terms of WoS capacity, you have 60,000 wafers per month. But rumors talking about you're going to more than double the capacity for WoS. So those kind of rumors or speculation, can you clarify a little bit?

Tien Wu, COO

We're not going to clarify the speculation, by the way. But I will give you a qualitative description about the current engagement model. The technology takes years to develop. So whether the OS or the CoW or the equivalent of OS or the equivalent of CoW has been developed together with the foundry partners as well as key customers for years, in the current landscape because of the capacity constraints, there has been active engagement with our partner as well with our customer to see which route will give you the most efficient alternative to fulfill the customer demand in the shortest amount of time. So this is kind of the partnership that we have developed with the leading foundry suppliers. We have also gained confidence from multiple customers over years of product development trial-and-error process, materials or different equipment set and reliability. So in this round, as we can see, the OS ramp has been pretty successful. And we will continue to measure and monitor the progress of ramp-up to make sure the yield, the quality, and the cost model are all in check. We cannot give you specific comments based on the number that you have outlined. However, if you go back to the CapEx number we have provided, I think you can clearly understand that we're trying to ramp up rapidly on the OS. The CoW has been engaged with multiple customers as well as with our foundry partner. So we have active conversation together with partners and customers, again, just to seek the best alternative way to fulfill the customer demand.

Rick Hsu, Analyst

Hello. Can you guys hear me?

Tien Wu, COO

Yes, we can hear you.

Rick Hsu, Analyst

The first question is about your utilization rate for wire bonding and testing for Q2 and Q3. Additionally, when Ken mentioned that your advanced utilization rates were already full, what is your quantitative definition of full?

Joseph Tung, CFO

In terms of utilization in quarter 2, we have both our packaging and testing running at slightly above 60%. And that ratio will go above 65% for both in quarter 3. When we talk about full, we mean everything is being used up. All capacity is utilized. Adding to what Tien just mentioned, I think when we talk about expanding our capacity, we are talking about expanding capacity for all kinds of demand coming from our customer, whether for CoW or OS or testing. Also, not just on the machinery itself, we're also adding spaces, factory spaces, new factory buildings that are being built or being put online. We are also investing heavily, like we're beefing up our R&D as well, making significant investments in R&D and also in terms of hiring talents. It's an all-around effort for us to meet the customer demand.

Rick Hsu, Analyst

The second question is about your CapEx. We see a very strong commitment in building the advanced packaging and testing capacity, such as on substrate and also the core equivalent. Would you worry about any potential risk of overflow business model, i.e., that when the foundries resolve their bottleneck issue, will they cancel the outsourcing? I mean, what is about the overflow risk?

Tien Wu, COO

I think the business model, of course, anything is possible. But the collaboration has been in place for many years. We're also very used to the up and down cycle. So in this round, it really depends on the overall platform. We're looking at multiple customers' product development that we look at their utilization and the volume roadmap. Then we look at our investment. Of course, we will examine the flexibility of the investment we put in place. So the nature of the OSAT business is we will build flexible and fungible capacity, and that can be easily moved around to accommodate different product mix as volume changes. Right now, we're quite confident the capacity we put in place will be here and will be beneficial for our customers and our partners for quite a few years. So the short answer is no, we don't worry about it.

Brad Lin, Analyst

I have two questions. The first is about the overseas expansion. Does the firm have any new thoughts on the US expansion? While we've discussed international efforts, we haven't said much regarding the US. With the new subsidy program from the US government and the evolving political landscape, does ASE have any updated insights on this? Additionally, we've noticed the growth of the ISE labs in California. Would that qualify for the new subsidy programs?

Tien Wu, COO

To provide a response about the ISE facility, it serves a single purpose: to foster innovation at both the chip and system level in Silicon Valley, focusing on areas like AI, future edge devices, advanced technology, high-performance computing, silicon photonics, and power management. The lab is designed for system-level testing, development, and reliability. Located in California's Silicon Valley, its main goal is to bridge domestic technology in the US with the necessary global advancements. Recently, the CHIPS Act office announced funding for R&D and manufacturing, and we will explore how to apply. The situations for ISC and IC are similar to Phase 3 or Phase 4; we will also consider the CHIPS Act funding for R&D and manufacturing. We are still evaluating the establishment of a high-volume manufacturing operation in the US, and we currently do not have a concrete plan, mainly because we are still looking into customer requests regarding volume needs.

Brad Lin, Analyst

So can we say that, well, with recent developments, there is a higher possibility that we will do the so-called volume production side there?

Tien Wu, COO

We do have a Mexico facility, and that is also available for North America. Just to give you the clarification.

Chia Yi Chen, Analyst

Can you hear me?

Operator, Operator

Yes.

Chia Yi Chen, Analyst

I have questions about the gross margin trends. On one hand, we are seeing that we are accelerating our investment in the advanced packaging, but the broad-based recovery on the traditional application seems to remain muted. So my question is that how would we expect this advanced packaging investment to bear fruit? If it's reached the stated 5G array and also the loading, how would you see that will be the normalized gross margin? That's my first question.

Joseph Tung, CFO

As I mentioned earlier, the capital expenditures we are making for the advanced packaging and testing are yielding higher margins. These investments not only contribute positively to our margins but also provide a significant return. As we continue to grow this segment of the business, particularly in testing, I believe it will enhance the overall margin for our ATM business over time.

Chia Yi Chen, Analyst

So, can we expect that if the overall ATM business reaches around an 80% utilization rate, we would typically see a gross margin of about 25%. However, if the cohorts also achieve a satisfactory utilization rate along with the loading, that could result in a margin significantly higher than our previous expectations.

Joseph Tung, CFO

Such capacity is also higher than the corporate average margin. And also, my next question is on the EMS business. You mentioned that the better than expected near term is due to the earlier ramp for the new products. So do you expect the stability will continue into the peak seasons into Q4? Or can we expect that Q4 will be even stronger like the historical pattern? No, I think the first half versus second half pattern should be similar to a typical seasonality.

Bruce Lu, Analyst

I would like to ask again about advanced packaging. Joseph previously mentioned the CapEx to revenue ratio. Can you provide details on the CapEx to revenue ratio for advanced packaging? You've invested a significant amount this year. What revenue do you expect to generate next year? Additionally, TSMC indicated that the gross margin for advanced packaging is approaching the corporate average of over 50 percent. Can we anticipate that your profitability will be similar to TSMC's for advanced packaging?

Tien Wu, COO

I don't believe we should make that type of straightforward comparison. TSMC's packaging and their business model are somewhat different from ASE's. Joseph has already addressed this. The operating system we are currently implementing has a higher margin than the average for our corporate operations. That is our position. We will not comment on comparisons to TSMC's margin because their equipment and processes, as well as everything they utilize, differ slightly from those of ASE. Regarding how we relate the dollar amounts, typically we refer to the capital expenditure dollar, and I believe it's generally a dollar-for-dollar comparison.

Joseph Tung, CFO

That's the current supplement. We will actually need to assess it better once it reaches volume. That seems to still be the case, yes. The second thing is that I want to ask about seasonality for your EMS business. I think the third quarter guidance seems to be a little bit lighter than historical seasonality. So what was the reason for lower seasonality? We didn't hear any delay for the flagship model smartphone. Is it because of the smartphone or because of other applications? I believe people are anticipating the new form factors and are noticing an increase in shipments. As a result, this quarter, due to the earlier launch of the product, we are experiencing a stronger second quarter than expected. We expect this momentum to carry into the third quarter. However, overall, the recovery in other general markets remains somewhat slow. Therefore, from a full-year perspective, I believe EMS will also experience a subdued year in terms of our revenue.

Jason Tsang, Analyst

Can you hear me?

Tien Wu, COO

Yes.

Jason Tsang, Analyst

My first question is regarding the proportion of your advanced packaging. Can you give us how many percentage is that advanced packaging account for your total revenue? And you mentioned about NTD 250 million. Is that your target in coming years? Or is that expectations on the contribution from advanced packaging in this year?

Joseph Tung, CFO

As we guided before, this year we're expecting to double our revenue in terms of leading-edge packaging tests. And the incremental revenue should be over NTD 250 million. As Tien mentioned, we are currently slightly ahead of our schedule. I think the momentum continues to be strong. And going into next year, we're expecting another doubling of revenue in this segment. And the percentage of our leading-edge revenue is about 5% this year, going from 2.5% to over 5% this year.

Jason Tsang, Analyst

My second question is in terms of the industrial and auto business. Because practically, we merged the new fab from ID employers. And we know that currently, those segments remain weak. So have we found any synergy or upside coming from those kinds of new business? Or can we comment that whether we see any improvements or recovery in those segments?

Joseph Tung, CFO

Well, I think in terms of auto, overall sentiment is still very soft. But we have been continuing our growth in the automotive business, largely because of market share gain, which we are leveraging on our automation to continue to expand our market share. For this year, I think in terms of ATM, the automotive part of the business will represent roughly 11% of the overall sales. And we'll see the momentum continue to grow.

Charlie Chan, Analyst

So actually, two follow-up questions from me. So first of all, I think Tien seems to suggest that the new CapEx for advanced packaging margin should be above the corporate margin. But Joseph may clarify, is that both corporate average margin or above ATM margin?

Joseph Tung, CFO

Above corporate ATM margin.

Charlie Chan, Analyst

That's clear. Yes. And also doubling this revenue next year. So it's doubling the 5% or doubling that USD 250 million incremental revenue?

Joseph Tung, CFO

Doubling means next year's leading-edge revenue will be doubling this year's leading-edge revenue.

Bruce Lu, Analyst

I want to know again for the advanced packaging in terms of investment direction. Because in advanced packaging, for me, there are like 10 different technology from TSMC, ASA, ORR, SOI, CPX or whatever. I mean, it seems to me it's very complicated. And how do you decide which one is the direction to go for ASE to invest? That's one thing. The second thing was TSMC is talking about ramping up the panel level packaging in 2 years, so which means it could be the case that they don't want to invest in the current cohorts, because in 3 years, they can migrate to panel and they've got to leave that to the current OSAT partner. So that could be a short-term business potentially. So how can we prevent this kind of read or what is the direction to go to?

Tien Wu, COO

It's a good question. For example, ASE has been working on the panel solution for over 5 years. Just to give you a status report. We started with a form factor of 300-millimeter by 300-millimeter square. We've been doing that with quite a few key customers for a number of years, qualifying a few products. Then we decided the 300-millimeter by 300-millimeter will be naturally expanded to 600 by 600. We are doing a lot of study with customers, partners, equipment suppliers, and materials. Right now, we have firmed up the business plan. Out of the CapEx that we talk about, the 600 by 600 panel is also part of the overall CapEx that we make the investment. We believe that by the second quarter of '25 next year, we will have all the equipment ready. In the meantime, we are collaborating with our partners as well as customers in terms of the detail volume ramp. I think technology development typically will take 10 years. In terms of the volume readiness, that's always the tricky part. How do we do the overall CapEx, whether OS, CoW, panel or different kind of equivalent of technology? That's really the IP of OSAT. We have to work with partners as well as multiple customers, not a single customer or a single partner. Now there will be fungibility between all of the technology: the common usage, the sheer usage, and the flexibility to convert if needed. I don't think it's easy to say when technology can easily replace another technology. Each technology will cater for a different set of target customers. So when you talk about the cohorts, there will be different level cohorts already said that. Even with the panel, the panel we're targeting at different line width, different lines of space. Each one is different. It's very complicated. But our job is to prepare the whole portfolio of products, whatever the customer has a specific product mix they need to ramp. We are readily available to do that ramp for them. And that's why we need to work very closely with our foundry partner as well customers because it's a very dynamic time. You can't really know a priori what the volume mix is going to be. But our job is to make sure we have all of the technology development, we have all the buildings ready. And then when we need to, then our team will be very busy to convert one line to another or the other back to another just to make sure we have the operational efficiency.

Bruce Lu, Analyst

Your panel size seems to be different from what TSMC is trying to do. Is that going to be different? Is there going to be an issue?

Tien Wu, COO

I'm not going to comment on TSMC's panel size. I think you have to ask TSMC. But ASE is pretty determined. We will do 600 x 600. Our customer seems to be comfortable with that dimension. The equipment will be different. The process will be different. But again, as I said, we cannot say one panel, there is no a universal definition of any process. Well, ASE is working on the 600 x 600 as a certain feature size, as a certain cost model. And then we are working with our partners and customers to make sure they're comfortable.

Bruce Lu, Analyst

Can you disclose the prediction for the panel’s customer? Is this for power management or for AI or ...?

Tien Wu, COO

Actually, it's for all of the above.

Bruce Lu, Analyst

I see. Okay. My next question is for gross margin in the second half. I think, Joseph, you mentioned that in the second half, ATM gross margin...

Operator, Operator

Our next question is from Mr. Gokul Hariharan.

Gokul Hariharan, Analyst

I had one quick question. On your smartphone segment, which is the largest segment, I think, Joseph, you talked about some improvement in demand from a particular set of customers. Could you talk a little bit about what is the status of the smartphone segment, both for high-end SoC as well as for other auxiliary products? How is the inventory level? And are you seeing a more broad-based enthusiasm from customers to actually order more? Or things are still quite sluggish? Second part of that is for Tien. Tien, I think you talked about the toolbox of portfolio of packaging technologies that you have. Smartphone has been an area where the packaging technology has largely been stagnant for quite some time, I guess. Could you talk a little bit about are we seeing anything on the horizon where packaging technology could evolve towards something similar to the 2D to 2.5D fan-out for the smartphone segment in the next couple of years?

Tien Wu, COO

The first question is regarding the cellphone. This year, we're seeing an uptick on cellphone. If we look at the Q3 and Q4 forecast, the cellphone is ramping up in the overall. Overall, this year, the cellphone over shipment, I mean, we're not in the position to comment on that. But based on the forecast we're looking at, it seems to be moderately positive compared to, for example, automotive and industrial. Okay. That's the first comment. In terms of the toolbox, also the how could cellphone specifically, that segment utilize some of the new technology we put in place. We believe on the technology roadmap, with all of the AI initiatives, over time, you have two types of devices. First, when do we expect the high-performance computing type of architecture to permeate into the cellphone? That will be the first question. And we believe with all of the AI features coming in, if the market response is very good, I'm pretty sure the leading cellphone technology suppliers will start adding either more higher level of memory or higher-level, bigger chips into it. If that is the case, then the current technology that's only be applicable to high-performance computing will naturally take some shape into the cellphone market. Now the second type of thing will be the edge device. I think one of the earlier comments that we did not get a chance to answer is with all of the fabs, I think statistically, we have like 84 fabs coming up right now. They're pretty much in the traditional, not the leading edge. So in the next few years, with all of this traditional fab, capacity coming online, how do we balance the semiconductor over demand versus supplier? I think the general industry view is with AI at the top, over the next few years, there will be more edge devices such as autonomous driving, such as robots, such as drones, start coming out. Now in any kind of edge devices or edge device system, you will utilize a lot of actuators, MEMS, sensors, microcontrollers in an integrated and heterogeneous integration fashion. So if you think about the potential robots, the potential autonomous driving, the potential drones, they will use a lot of conventional semiconductor devices as well as the AI engine or the AI brain. Now the semi talked about it. In 2030, '31, '32, the industry will hit about $1 trillion. If we want to hit $1 trillion, naturally, we will use up all of the fab in the leading edge as well as the traditional package level. The OSAT or ASE, all of the automation that we put in place, all of the building blocks we put in place are targeted to capture not only the high-performance computing as well as the next generation AI brain and to the edge devices as well as to robotic fingers for all of the heterogeneous integration or any kind of existing package that our customers or system designers would like to do. It's a very long answer to your question, but I hope that's comprehensive.

Gokul Hariharan, Analyst

Yes, that's very clear. So one follow-up on that, Tien, is if you had to hazard a guess, when do you think smartphone or cellphone SoC starts using chiplet? Is it in the next 2 years, next 3 years? Or is it much further than that in terms of technology readiness and market acceptance?

Tien Wu, COO

I believe the chiplet concept is already underway. Essentially, when you start integrating chips, they essentially become chiplets. Currently, we see chiplet architecture being utilized in supercomputing and high-performance computing. Additionally, you could argue that the current generation of electric vehicles and smartphones marks the beginning of chiplets. The market is validating the chiplet concept and platform, and over time, I expect chiplets to become more widespread. Consequently, the technology we are developing today, such as heterogeneous integration, power management, and embedded systems, will become increasingly valuable. Regarding power management, for instance, integrated devices and packages are in consideration. The panel must be low-cost and flexible to support the power management integrated package while also being capable of handling high-performance computing requirements. Different packages will cater to various customer needs. With 3D and 2.5D technologies, the feature size will continue to shrink in accordance with lithography and density demands. Our role is to ensure we have a broad range of technologies available so that when customers require specific proportions of high-end, mid-end, and low-end solutions, we can provide them with a comprehensive and automated selection of tools.

Operator, Operator

We have a question from Bruce Lu. Bruce, I apologize for interrupting your question earlier.

Bruce Lu, Analyst

Just one quick question. Joseph, you did mention earlier, the second half gross margin for ATM will go back to 25%, 30% due to better product mix, better testing, more events. It seems to be slightly lower than guidance. Can we expect that to go back to 25%, 30% in the fourth quarter? What slows us down for the gross margin recovery?

Joseph Tung, CFO

I believe the overall recovery was slower than we anticipated. Due to the volume shortage, the margin outlook for the second half appears to be somewhat lower than our initial expectations. However, we do believe that heading into the fourth quarter, we should be able to return to our structural margin range when overall utilization exceeds 70%. As I mentioned, it is more challenging at the moment. Nonetheless, for the entire year, we are still making an effort to determine if we can achieve at least the lower limit of our structural margin, which is around 24%. But the product mix improvement and more testing revenue is still intact in the third quarter, is that right? That's correct. In terms of testing, we are progressing as planned. But the overall general market recovery seems to be slower. That's dragging our margin a bit, yes.

Operator, Operator

There is no question from the floor.

Joseph Tung, CFO

If there's no more questions, we will end the conference call today. Thank you very much for attending, and we will see you next quarter. Thank you.

Tien Wu, COO

Thank you.