ASE Technology Holding Co., Ltd. (ASX) Q2 2015 Earnings Report, Transcript and Summary

Welcome to ASE Group’s Second Quarter Earnings Release. [Operator Instructions] Please refer to Page 1 of our presentation which contains our Safe Harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to high degree of risks, and our actual results may differ materially from those forward-looking statements. Our COO, Dr. Tianyu Wu will be going over a mid-year update and our CFO, Mr. Joseph Tung will be going over the financial results followed by a Q&A session. Following the event, our VP in-charge of Public Relations, Eddie Chang, will be addressing the media in Chinese after the release.

Good afternoon. Welcome to ASE’s Q2 2015 earnings release. There seems to be a lot of concerns question regarding the state of the industry as well as for ASE in terms our performance but first half as well as our second half outlook. I will be going through three key elements of this brief presentation. First, I will give you a first half business recap. Then I will talk about the SiP update, then the last portion will be the second half outlook. Let me try to cover the first half business recap. I think all of you already aware of the environment that were in, is certainly challenging low visibility and mixed message. There is a lot of discussion about the IOS versus Android, short exchange, PC slowdown we have seen very visible sign. However if you look at the auto and industry we have seen some growth in second quarter and by and large the volume has been steady. So the market environment a best is mixed. There seems to be a very aggressive inventory control, which started in Q1 of this year. Typically the inventory control should not last more than two quarters. The way we would like to quantify this is we believe that inventory control is slightly ahead of the market sell-through and pricing stability by saying that what we mandate the market sell-through actually is in range. The pricing by and large has been stable. So I think the inventory control has been aggressive. Of course is very difficult to predict when will the inventory control be ending also how it will end. However we are monitoring the situation very closely and hopefully by the end this quarter we will see some good sign. There's always a lot of discussion about consolidation and how does a consolidation on the customer end as well as our competitors end how would that affect our business short-term, long-term. Our view is all consolidations are positive specifically for all set our customers consolidation or our competitors consolidation will inevitably eliminating old asset. And because of consolidation, because of search for new efficiency there will be higher and more demand for new capacity typically more the advanced that requires investment. Let me talk about the ASE's first have achievement, our total consolidated revenue of grew base is up 15% year-on-year, consolidated SiP revenue triple year-on-year. As a percentage of total revenue it has moved from 7% of last year first-half to 19% of this year. We do believe this trend we will continue into the second half of this year. Flip chip and bumping, wafer level packaging revenue the so-called advanced packaging revenue is up 11% year-on-year. We do have share gain against our competitor as well as we are seeing the package migration into Advanced Technology as well as SIP. All of you know that ASE has been driving the SiP conversion for the last few years. I think it's good as we are learning this new platform through customs collaboration as well as feedback. We become more evolved and more sophisticated in articulating what is the SiP characteristic as well as value. Here I would like to give you our current view about SiP paradigm, SiP is to integrate heterogeneous components and functionalities into the most efficient form factor and cost of ownership. To do this we must collaborate with system house, IC, sensor, MEMS, optical, memory, substrate materials and suppliers front design to manufacturing. As we are repeating this process one product, second product, third product our knowledgebase will expand accordingly, create a standard platform with established capacity process flow and more importantly the business ownership in other words. How do we divide the total SiP business liability, the revenue stream into different participant that are joining the SiP platform. Would do believe this will help us for the grand SiP migration, which we have just begun. This is truly global, this is truly collaborative, this is truly vertical, embedded in three statement is a competitive advantage of ASE Group. We would like to claim that not only were the first one to repeat the SiP IP as well as partnership it does take a lot of years of effort. We do believe ASE has a leading competitive advantage versus our competitor. You have seen this chart, for many times, I would like to give you periodic update on this chart, what I'm showing here is the SiP what I call toolbox. In this toolbox we’re adding two new elements. For example on the top end of the chart is a 2.5D interposer. We have announced the collaboration with Inotera April last year. On the bottom this is the embedded organic substrate, which would have also announced a joint venture with TDK. I'm happy to report the first part on the 2.5D which I'll show you on the next page has been starting volume production and shipment that is the AMD Fiji program. On the bottom the embedded substrate we have many products in the design pipeline. We will give you update as time matures. This is an example of what we call the alternative to Moore's law. This the first high-volume 2.5D production that we have shipped in July and it has 20 times more I/O count comparing to the most advanced flip-chip BGA packs today. If you look at some of the detail the battery size is 50 mm by 50 million, the interposer chip size is 24 by 36, you have one large chip in the center that’s a graphic chip for AMD which 22.2 by 22.2 million. You also have four highly condensed stack memory as well as many other passive components. The whole concept about the SiP is we would like to open the freedom for the designer such that they can design more functionality into a better form factor as was cost of ownership, this is only an example of that. So lastly well I’d like to give you an outlook for the second half of 2015. Even though the visibility is very poor we remain to be cautiously optimistic for the second half, we do expect on the ASE end we will see sequential growth in second half for both IC ATM as well as EMS. Our CFO will give you more specific number during his presentation. We continue to build SiP momentum based on existing project as well as new project. CapEx stays at the current pace in the first half a reference we spent US$353 million. Thank you very much.

Good afternoon. Let me quickly go through the second quarter results and give you a little bit of color of how Q3 is shaping up. Let me start with the safe harbor notice of course. Okay, you have another three seconds to read this through. One, two, three we are done. Second quarter is a bit disappointing, we were expecting a bit of more growth in the second quarter, but however we ended the quarter with only about 9% growth on the consolidated revenue basis. And of which you packaging revenue has actually came down about 2%, while and direct material sales can down about 3%, while the testers actually went up by 1% and EMS it’s driving most of the growth in the quarter in terms of revenue and it went up 22% largely because of the ramp-up of our new EMS product. Now with the more sluggish IC ATM revenue and also the new EMS SiP product running at below breakeven loading. The gross profit margin came down as expected from 19% to 16.5%, 2.5% drop. Operating expenses was kept in check pretty much say flat from the previous quarter in terms of percentage it came down from 9.3% to 8.8% of sales. With that operating margin came down, the drop is less than the drop at the gross level came down from 9.7% to 7.7%. In the quarter, the non-operating losses was perfectly down to zero compared to last quarter we had over $750 million loss at non-operating level largely because of the ECB mark-to-market loss which didn't happen in this quarter. So the pretax income stayed pretty much flat from $5.4 billion, but this quarter we have much higher income tax largely because of the tax that we need to pay on the retained earnings which amounted to over $550 million. And also there is a write-off of DTA which is the deferred tax assets resulted into a much higher tax liability this quarter closing on $1.6 billion. Net income tax and also the non-controlling interest, our total net income this quarter actually came down a bit to $3.6 billion, closer to $3.7 billion down from $4.5 billion a quarter ago, and the EPS for the quarter, basic EPS is $0.48. In terms of first half our total EPS, basic EPS is NT$1.06 a share. EBITDA was very close to previous quarter's level at NT$13.4 billion or 19% EBITDA margin. Comparing to previous year, same period last year the overall revenue had a 20% growth again this all coming from EMS growth which grew about 68%, where packaging, and test and direct sales of materials came down by 7%, 6%, 4% respectively. Now with the smaller revenue particularly on the IC ATM side the margin can down gross level from $21.5 to $16.5 and operating from $11.32 to $7.7. Looking at IC ATM here I want to qualified by saying that they are here the packaging revenue here includes the chip revenue we do for EMS which was eliminated that the consolidated level. So here we are seeing the overall IC ATM revenue reached $37.7 billion which is slightly down from previous quarter about 2% drop. The drops largely came from assembly as a result of mostly the smaller advanced packaging revenue so the season no down of the chip revenue. With the smaller revenue the gross profit margin came down from $25.9 to $25.2 operating come down from $14.4 to $13.5. Okay taking a look at the packaging operation as assessment revenue came down sequentially from $31.5 to $30.6 came down about 3% where margin because of the smaller revenue margin consequently came down from $23.7 to $22.7. Largely the margin impact was mostly impacted by the higher percentage of depreciation as we continue to make CapEx throughout the year. In terms of packaging revenue breakdown you can see that the events packaging percentage came down 33% to 31% largely because of the high-end flip chip and bumping revenue came down and also on the chip revenue came down in this quarter, which is no more seasonal pattern. We are bounding - we also came down little bit from 58% to 57% whereas we see discrete and others as we came up from 9% to 12% because of the while giving shares in discrete and also we are the - sum of the RF sensor business as we gone up and we are also seeing some automotive chips volume increase. In the quarter overall utilization rates was cap that mid-70% and ASP was relatively stable. And the quarter we didn't buy any bonders we actually retired 110 bonders in the quarter so making our total bonder accounts at 15,662. So CapEx for the quarter of the packaging is about $86 million I'm sorry $140 million of which about $56 million is for flip chip and bumping and the rest for common usage as well as for a project. Test operation in the quarter as we came up 1%. As the results margin also improved on 30.3% to 35.2% in the quarter again the ASP was quite stable utilization as we came up a little bit from a mid-72 to high-70s. In the quarter we spent $43 million CapEx for test we had a 95 testers and retire 64 with the total tester came at 3370. Material operation actually came up a little bit. But in terms of direct sales as we said it was pretty flat. The internal supply rates actually came up from 28% to 33%. But because of the less favorable product mix shift, the gross profit margin, material operation came down from 17.1% to 16.2 %. In the quarter we spent about $5 million CapEx for material. Looking at the revenue breakdown by application in the quarter actually the communications stay pretty flat at 55% and but we’re seeing the PC sector to come down from 11% to 10%. And as I mentioned the auto and industrial and consumer actually came up a little bit. So we’re seeing that percentage coming up from 34% to 35% in a quarter. Going forward I think in the third quarter we’re seeing relatively flat composition from this quarter. EMS operation the revenue came up 22%. But margin came down because as I mentioned earlier the most of the revenue growth was driven by the new EMS SiP product unfortunately loading is still being run at the below breakeven level. therefore you had a negative impact on the gross profit margin for EMS business. In terms of revenue breakdown you can see that the consumer sector the percentage actually went up quite bit from 18% to 28% as a result of the new wearable product that we are shipping now. Okay on the balance sheet our cash and cash equivalent actually came up to about NT$59 billion, today where our interest-bearing debt came down from a close to $92 billion from $94 billion a quarter ago. And also in the quarter we’ve recognize our dividend from equity was shifting our dividend pay-out from equity to liability and as a result we’re seeing the smaller equity number in the quarter and also lower current ration. So with these adjustment we’re seeing that current ratio came down from 1:48 a quarter ago to 1:34, whereas net debt to equity as it came down to 0.22 in the quarter we continue to have a positive cash flow were our EBITDA was gone $434 million and CapEx is 215. Out of the 215 as I mentioned earlier on $140 million for packaging. $43 for test, $27 for EMS and $5 for material. With that I conclude the second quarter results and bring you a little bit of color on the third quarter. In terms of IC ATM we are projecting the production capacity should stay flat and balanced - blended IC ATM utilization should go up anywhere from 1% to 5% in the quarter, where IC ATM gross margin should resemble what happening in Q1. EMS business should approach, the revenue numbers should approach fourth quarter 2014 level. But because of the continuous ramp up of the new EMS SiP product, we will continue to have some pressure on the gross profit margin for EMS business. Now with that I conclude the presentation.

Please start the Q&A.

Okay, thank you. I’ll start with the first question on the third quarter outlook, could you talk a little more it's a bit above some of your peers in the industry were utilization up 1 to 5 and you get currency you should be seeing some decent growth in ATM. Could you talk about how much is being driven by the SiP business which flows into the ATM division and how the rest of the kind of what you are seeing trends at the other parts of the business?

For third quarter we will have SiP growth. I won’t be able to give you specific percentage, but right now you're seeing the - we do expect utilization to go anywhere between 1% to 5%. I think it has a lot to do with the product mix. I think each competitor of ours were serving different clientele and they will go through different part of cycle. I think in the second half is well-known that the IOS product will probably ramp up a bit more than android product. We are seeing the overall stability in the consumer slightly up, we also seeing the automotive slightly up. The wireless for ASE will also see slightly up and PC is flattish. Okay, and that should answer your question.

That’s fair. I guess for the SiP, if you could give an update on contribution how much is in percent of ATM, percent of consolidated and then how you see SiP growing for this year?

In terms of IC ATM in the second quarter we have about - the percentage SiP revenue represents about 5% of overall IC ATM came down from about 6% quarter ago because of the seasonality pattern. Of course that ratio will go up in the fourth quarter as we continue to ramp up the next generation product. In terms of overall, the SiP revenue accounted for about 22% in the second quarter up from 15% a quarter ago because of the EMS SiP product ramp up. And for the whole year I think we were expecting by the fourth quarter the SiP revenue on the group basis to be closing in for 30%. I think that percentage will be a judge down by the way the industry in going. So I think the percentage at fourth quarter will be over 25, but it will be below our original expectation.

Okay. The following question I’ll ask on the SiP, sorry the EMS gross margin is coming down a little bit more in third quarter, could you talk is it that the volumes like maybe how far you are from breakeven because it sounds like it’s just loading is it more the projects low expectation on volume or is it a yield issue or is it also from new project starting up at lower margin. And the second part if you think medium-term, where do you think the margin for EMS business should be say looking out 6 to 12 months?

That will be a million-dollar question. I think right now the situation is that we - for the new product we are still running at below breakeven in terms of loading. And this is a new product in the new business for not only us, but also for our customer. So both of us need to go through the learning curve and I think as we gather more experience and gather more data points we will be making the necessary adjustments including brining down our costs, including making some adjustments on the - how we do business actually on this particular type. But one thing I do want to stress is that this is really a new business and is it really a strategic investment there's going to be a learning curve that we need to go through. So it really depends on how the whole product shipment will shape up and also what kind of impact will have after all the adjustments that we make running this business. I can tell you that exactly when and how much what kind of a margin will eventually achieve nothing as time goes on as we could mature and is nothing eventually we will be reaching a probability and also making the necessary return on this.

Okay. Thanks and final question just on visibility into additional projects and were you have been ramping up several this past couple of years how do you feel it kind of initial snapshot if you look into next year. If you see additional projects layering on your first major customer and then also diversifying traditional customers?

I think to answer that both questions are yes. We do have additional project with particular customers were also lending the new projects on even though the revenue are still small. However we have great numbers of them hopefully they will start contributing. One more clarification on the answer - on the question just ask about the particular wearable project. We are going through a very dramatic learning process. One of the things like everything there's a good side and there’s a bad side, there’s a bad side and there’s a good side. While we have found is not as were going through this learning we have [indiscernible] achievement on the yield. So the yield has met all of the interim objective so the yield is non-issue right now. In terms of the volume because the initial volume projection versus the capacity preparation versus the breakeven point that put a tremendous amount of pressure our EMS side of business. On the flip side of it, it does open up the flexibility to look at it under the current capacity in the resources that we have allocated. Over the last two years out of the knowledge we have collected are we in a better position to look at how do we divided up on the existing product as well as the next generation in other words yes there is a matter of the volume of not meeting the breakeven point in the current generation. But there's another questions are we better competitive position because we already have installed resources as for capacity with some modification. How do we trim optimize the cost structure such that were much better equipped for the next generation, but those questions are what we going through in the new product category.

I would just ask one quick is it a way to judge how far from breakeven how much your following below to get a sense or how much of a drag on profitability by being blow breakeven on this?

I'm afraid I cannot give you specific details on that one. Right.

Okay. Thank you.

Of course from the operational perspective what would try to manage that's closest we can.

Thank you.

The question was from Randy Abrams, Credit Suisse.

Okay.

Oh, please introduce yourself.

[Indiscernible] Okay. I just tried I would either follow Randy question. You just mention about the new business and the loading is below the breakeven label and I would like to get idea how brother breakeven utilization rate. What kind of utilization rate for the breakeven?

Well there is a lot of adjustments so this is really a moving target. I can give you any specifics now.

Okay. Well how about complexity for the current new business for the wearable device and the well either well send the similar equipment for the next generation.

I think this is the collaboration that were going through I would not be able to give you specific number. However were trying to manage the total installed capacity, we’re trying to go through the out of the options all right as we speak

Can I say this probably too early to judge that really depends how the kind to define the new generation in the spec, right?

You said better than I did. Thank you.

I try my best.

Okay.

And on the other hand, once we do get a new dilution rate in the first half and probably not so good at all our expectation. And that given the [indiscernible] in the market still not good. So can we image all the gross margin for the EMA's probably in the second half will be the similar label as the first half, generally speaking?

It will be similar, yes.

Well okay, so I mean when I get a 7% to 8% over the gross margin right.

No, actually in season quarter we’re about 6.4%

Right. In the Q1?

Q1, let me, actually in the last meeting, I already mentioned that Q1 it was 8%, but it was not a normalized margin. The normalized should around 6.9%. Because in the quarter, first quarter we had a reversal of inventory write-off, that boosted the first quarters gross margin.

Okay, so more like cost to the 7%.

Yes, so it will be a normalized margin repeating in the second half.

Okay, in like case is [indiscernible] on the operating margin for the whole year, will it be lower than the last year and it was probably 100 basis point to 200 basis point from the last year level?

I am sure you have your model, but then I can only tell you at the gross level it will be similar on the first half.

Okay, I finished my question. I appreciate it.

You, go…

Thank you. And Joseph I think still on the SiP question. So in second quarter, of the SiP project utilization on the breakeven level or this is just - for the new project?

Thank god it is. It’s only this particular projects that are running at little breakeven. Other things are moving very nicely.

So how many was that, I mean how many projects utilization was under breakeven level?

How many projects?

Yes.

Just one.

Just one, okay. And also by the end of this year, we said for SIP, probably around the 25% to 30% of total revenue. So [indiscernible], can we assume all of this projects are there, utilization were above breakeven label?

Everything else is above breakeven, yes.

Okay, so we can assume the gross margin probably were up significantly in 4Q?

Are you referring to this particular project or you referring to SiP as a whole?

I think overall for this 25% to 30% of total revenue from SiP by end of this year?

Okay, as we stated the we do expect to see sequential volume growth or revenue growth. Applies to the IC ATM as well as the EMS. In the fixed capacity were already put in place. As the volume goes up I think it's natural to expect that it gross margin level or the operating margin level will see quarter-to-quarter improvement. I am not sure to answer your question by email and I try not to answer the specific project, but seems to be everybody's is very interested on that. Even for that I think already hinted there's a lot of optimization that we will go through between now to the foreseeable future. So I’m pretty sure on the cost side. But also manage that of course this is a very strategic project, because it's very, very difficult and very, very challenging. So far even though we have not reached to the financial expectation. But on every single other front we have surpassed our initial target especially on the resource on IP portfolio, on the design collaboration, on the logistics. Let’s not forget SiP is a new campaign it’s a brand new platform. We are doing the pacesetting, we're doing the path finding. Initially we do expect on the investment side there will be some uncertainty and we’re going through that right now. We feel very, very optimistic as we go through this challenging project. The trust between the partnership, the collaborative spirit I believe that we will yield to mid to long-term benefit for the group.

Okay, thanks Tianyu. I think the next question is also for you. It seems that you said ASE is building moment on the existing and the new SiP project. So can you give a small color on the new SiP project you are doing in the near-term or longer term. What kind of application and what kind of customers you are working with for the new SiP project? Thank you.

I don't think I comment specifically, but I'm pretty sure you will buy some new products pretty soon.

So even though I buy new product other than smartphone.

I’m sorry.

Even I buy the tablet or notebook or other product other than smartphone they also have the SiP project from ASE?

We promise each other we never announced specific customers idea so I will give you a non-qualifying nonspecific answers. We are expending the SiP coverage to the cell phone, to the tablet in that particular arena and hopefully we can report more revenue, more penetration and the same time we’re also expending the wearable as well as the IOT product and I believe in the foreseeable future hopefully beginning of next year I would be able to showcase some of the IOT product that are being market i.e. United States basis in volume. Again as promised before SiP is not a single customer specific or single application or segment. SiP is a new platform and we would like to demonstrate over the next few years how pervasive the SiP can be applied in volume and how this new product can change your lifestyle. So I'm pretty optimistic about this.

Thank you. I think the last question from is for your 2.5D project so for this 2.5D project are you competing with the foundry or are you collaborates with foundry and the how do you differentiate your 2.5D from foundry makers? Thank you.

All right. I think the answer is we are 1% competition, 99% collaboration. On the specific Fiji project and we have full authorization probably to release the information. In the first launch of volume we are collaborating with UNC on the interposer. So UNC provides the interposer with over 200,000's of macro and this is 20 times greater than any of the technology on the packaging end of it. In the next generation we will continue to evolve either the foundry model or our joint venture partner. So I think this is only one lack of it. Now specifically is 2.5D in competition with 3D or TSV or any other foundry. The answer is no. I believe the mark is big enough and by the way the whole concept of SiP is the higher the value on the chip residing on all kinds of substrate. The higher the value the better it is for ASE to put on the SiP. In other words whether it’s from foundry number one, foundry number two whichever IC supplier, which ever memory supplier, which ever supplier our concept is to have a higher value mix of functionality. We can integrate then in a better form factor, better efficiency onto the SiP. So in this way, the better the IC the foundry guys can defense the better it is for everybody including ASC. I hope that answer your question.

Thank you.

Next question will be coming from Dan Heyler. Dan, are you online.

Hi, yes I am thanks for that. I'll move over to the core business semiconductor ATM. I wanted to ask you guys I mean Tianyu you have been through many cycles here. I am wondering what you’re feeling and how things have been kind of playing out here relative to say other cycle. Some tend to be demand driven some are kind of inventory driven. And there have been kind of dramatic types of you know revision the customer forecast for a last couple of months. So it give us a sense of how things are playing out - previous correction.

It’s a very question because the one can never play the we don’t have a very - on this one. If you are asking my personal opinion the I will give you few fact. 2010 the industry has gone through 26% of growth 2011, 2012, 2013, 2014 we have gone through anywhere between zero to five. Last year was 7.9, 8 percentage, and this year all we tend to pay the penalty for the Q4 inventory that we have over billed. If you look at demand inside, the demand side actually is pretty much in check. There's a lot of pessimism because of the financial world because the political arena. Therefore everybody is taking a very, very cautious staff everybody hit the break that's why I believe we have such an aggressive human to control because of the sentiment. Now let's look around the pricing is very stable that means the industry does not have over billing capacity from wafer, OSAT all the way down. Now if you believe this are the truth that means that I think in Q3 and Q4 we should see some slight improvement. Now every comment is pending on the financial because if you have another 2008, 2009 repeat then the everything is out of the door. But today when we are look at the overall customer forecast the sentiment descendent is very low. On the other hand no one is adding capacity into the supply chain. So this is all we have. When the demand is steadily going through the shopping season, the yearend so we'll see how that plays out. I hope that answers your question.

Excellent thank you. And then one of that advanced packaging TCB bonders so far been adopted in the very high end IDMs really. I am wondering whether not you think that technology that would be applied more to the OSAT and I think the issue there has been throughput fairly specific question just wondering about high end packaging, high end bonders what point you think that’s going to be mature?

I am sorry you asking 2.5d or you asking…

Thermal compression bonding it’s kind of the TCBs that are being used and memory and server chip [indiscernible] move into application processor is a difference rate and also potential competitors with him?

Sorry I do understand the question deal we do have a different opinion in industry about the thermal compression bonding. So I won’t be able to give you specific comment because different vendor, different customer they do have different preference. As you said that the you know that is a very, very niche application are only applicable to specific product, which tends to be very, very small in volume in the revenue impact.

Okay great and one more if I may and then get back in the queue. Sorry to jump back to the third question. So you are SiP very advanced chips capabilities for wearable really high end. I am wondering to what extend you can think there is opportunity to drive down this type of platform into more affordable kind of segment and I guess and whether or not you would?

I am not serious online but a pretty much got the question. The question is the first SiP wearable project that is engaged tends to be very high-end is a very, very convoluted complicated self-contained system. So the question now is no when do we see more of a pervasive lower cost volume product that can penetrate into the other market like the generic the IOT. Okay I am going to way for him to get on the line.

Do we have any local questions for now? State your name and company.

Hi, this is Andrew Chen from Yuanta. I have a pretty simple question. I think this year for 3Qs pretty obvious that that growth is definitely sub-seasonal. I think probably I understand that we can typically common beyond that the current quarter. [Indiscernible] [0:50:51] just a little bit on the view into 4Q or 1Q, our competitor basically is guessing that 4Q could potentially see inventory we stocking. Well on the wafer side they put of you that it could be more on 1Q. I am wondering for ASE based on your customer mix what are you more tap it 4Q or 1Q and if you - and we do see a inventory kind of restocking happening that time which product application category do you think it’s going pick up first. Great thanks a lot.

We can only give you the bios view based on ASEs own visibility.

That would be great.

We are pretty confident that our Q4 will be see growth quarter on quarter. Mainly because the our customer and some of the project that were ramping up. However ASE could be more exposure to a bios product side versus a generic market demand. Since communication is overwhelming percentage, our product portfolio like 55% to 58%. When this is good jump on that side was differentiated product. That will lead us to believe that we were optimistic. Right now in terms of the industry I will not be able to give you any better guessing then the many other distinguish people they already made a comment. However excluding a total collapse in the financial system or something very, very strange. The inventory control cycle normally does not last more than three quarters.

If I may just be a little bit more specific if to exclude EMS business just focus strictly on the back end. So would be imply that 4Q on the back end side should be better than 3Q.

Correct.

Great. Thanks a lot.

Thanks.

Think on you back end revenue guidance compare to assume that your expecting come flat share revenue for every month in Q3?

I am sorry can you repeat the question. Because there some echo here.

Sure. No problem. Yes, based on your back end revenue guidance if that assume that you are expecting kind of flat issue monthly revenue for every month in Q3?

Are we expecting the backend the IC ATM sluggish monthly revenue. Flattish.

Right. right.

Yes, I guess the answer is yes the overall we do believe the utilization we improve anywhere Q1 5% if you want to breakdown a monthly I have to assume yes it will be flattish.

So basically you are not assuming and you rush order enough quarter to coming.

Well, I wish we will have right now we are not planning on that.

Sure, and the second question on the CapEx you are basically your full year CapEx unchanged. So in what areas are you going to capacity in second half.

In the center there would be two areas the advance packaging and also specific the sub product.

Okay all right. Okay I see and the last for my side and can you talk about capacity expansion plan rest of the year and also utilization.

You referring aims and talking to bumpy.

Right, right.

Okay there will be expansion on the 12 inch bumping. There will be no expansion on the 8 inch bumping. And I will not be able to give you a specific detail in terms of number of wafers out or the type of metallurgy and the form factor. Sorry.

All right. Thank you very much.

Going back to Dan Heyler. Dan sorry about the disconnection.

Yes, thanks can you hear me okay.

Yes, you are coming and good.

Okay. I want to jump on to the IOT discussion I think there is view from investors and then some people that IOT is very, very low margin and low price to modified business. And you talk about initiate there. May be you could elaborate a bit on the value out here to your platform, as we look at, I guess [indiscernible] put multiple buyers on packages and sensors and controllers and one we would see this the immaterial contribution to your business.

I think this question is somehow related to your first question, before we got cut-off. The whole idea of the IOT is the - it’s a native standalone intelligence system, that has different functionality, such as sensor and memory, CPU, they can last for long time and very cheap. We are not seeing the IOT in any kind of meaningful way, because the industry has not progressed and learn, how to produce those complicated system at low cost. So the concept is if you look around, the industry the biggest player is the cell phone that is 2 billion units, followed by PC, tablet, Pad everything about 550 million to 600 million, followed by everything else which is much smaller. If we can [indiscernible] a major cell phone supplier to create the SiP platform with capacity, with understanding, then I believe there is a possibility we can work our way down to use the capacity that we have created, the knowledge we have gained and start planning, designing, so much, much lower cost, simpler function for the IOT world. You can also do the other way around that means you have to collect about 2000 customers each one go through about 10 million and start building IPO volume, or you can do the other around, all right. We chose to do the cell phone guys, create a platform, create IP, create a capacity, create a building block as well as the hurdle rate and the differentiation and work our way down. Now let me come around IOT I will give you one simple, look at the Wi-Fi. The Wi-Fi is growing crazy, it’s going pervasive. Everything that you are looking at in the future, will have a Wi-Fi, think about the Wi-Fi adding other things, you have the initial form of the IOT. So the IOT volume is real, what is not real is the industry supply chain has not figure out the way to do IOT with everybody. And we are in the campaign, how do we start and create the standardization eventually we can move to aggregated very high volume pervasive IOT at low cost. I hope that answer your question.

In terms of timing, I guess wearable next year, are we years away or we quarter away before you start to see some key high volume customers, coming in and start certain platforms, [indiscernible] lot of activity at the chip level? And you know at the platform level, companies such as Mediatek that are putting platform out for customers.

I think this is the kind of answer I hate to give. Because any kind of new product category, new platform campaign takes years, so unfortunately we will not be able to give to the financial community, you see in the 12 month, 24 month time we will see this. No it might take 10, 20 years. The question now is which customer are you engaging with, which project are you collaborating. In terms of the design freedom, in terms of technology toolbox, how wide can you open up for the future generation and what kind of cost you bring down. And what kind of cost you bring down, the cost needs to be brought on the 10 times. But somebody has to get started from somewhere and this is really the campaign that we are going through. I believe it’s very, very meaningful campaign, however it’s not an easy thing to do. Dan anymore?

Thank you, very much. Yes, thank you.

Next we have Gokul from JPMorgan.

Hi, thanks for taking my questions. My first question is on the SiP side I think in one of the previous conferences Tianyu you had mentioned that topical products would be one of the focus areas for SiP going forward. Could we have some color in terms of whether that is materializing in the next 12 to 18 months or still in the development fees? And I have follow-up question on the outside business? Thanks.

I think you are referring to the optical.

Yes, optical, camera kind of products. Is that something already kind of tangible and visible for us in the next 12 to 18 months?

The answer is yes. In the optical we are dealing with three type of product category. The first one is camera module, obviously has a very, very high volume. I believe the ASE in the SiP arena will have a lot of competitive advantages going forward when the camera becomes more complicated. The second one is really the Silicon photonics, there has been a lot of engagement because the server market in terms of the partner assumption and the copper, the heat generated as well as the cost of ownership becomes the prohibitent. We are also having a lot of effort and hopefully in the next 12 to 18 months we will see some progress in this Silicon photonics. I think there is another breakthrough. The third one in the optical is really sensor, for example the sensor for the pulse, the sensor for the pressure for the blood sugar. There has been a lot of biomedical application that is focusing or accessing to the big data within the human body. I believe that is another area we would see a tremendous amount of progress. So I am happy to see that hopefully in the next 12 to 18 months we can report volume in all three arena. I’m not sure that’s your question, but that’s the answer.

Okay, that’s very helpful. Just another question on the IC ATM side, it looks like this industry downturn is forcing some of your competitors to be a lot more cautious on CapEx some of them are almost close to breakeven levels. Historically you’ve talked about consolidation or active consolidation in the space. Do you feel that we are getting close to level especially with the growth rates in mobile also starting to become that slower, are we getting to a level where we can see more industry consolidations happening in the space. Any thoughts you had on that front?

I have a very simplest theory on the consolidation, consolidation will never stop. The consolidation is driven by the finance, it’s not driven by the technology. So if you look closely I do not have the detail number, but I believe in the 2014 and 2013 I think ASE generated about 50% of the overall industry profit. If we keep go in this rate that means investing going forward ASE should be entitle to 50% of the incremental market share, it’s just a math it seems to work for the last 15 years from me. Now, if we continue to improve the margin structure and also the economy scales as the total control of the dollar by any entity going forward assuming all of the operating cash flow can be invested with the right partner in the right segment. I believe this is the ultimate driver for a healthy consolidation. Now there could be other consolidation where they are buying volume. When they are buying volume, if they are not buying IP there are not buying differentiation, they are not buying the dollar that can be invested into the industry building towards the future. So I think when you talk about consolidation there are different kind of consolidation. What we are looking for is consolidation where you have better differentiation that you can drive a better margin structure and you have better skills investing the dollar with the right partner on the global basis in the right segment. And going forward this would be a sustainable campaign. Buying revenue, building up scale we have seen many, many examples as matter of fact I’ve not seen any successful examples that eventually all failed. So everything go backs the most simple fundamental dollar sign.

Okay, got it. That’s very clear. Thank you.

Do we have any other questions? No, Rick. Rick with Daiwa.

Yes, thank you. Rick from Daiwa. So just some follow-up on this market share question. If I look at the [indiscernible] better than your peers, so can I fairly assume that even in Q3 you guys are gaining market shares and if that’s the case in which areas are you guys gaining market shares. I mean a path this non-organic new project.

I think the market share gain actually come from quite a few arena. For example there is a lot of IDM in consolidation going on in Japan and Europe as well as the United States. As IDMs going through the consolidation there would be elimination on the business unit when they are looking for new efficiency. And the new team together inactively we start looking for new efficiency and new design and that’s also share gain not for our competitors, but for our customer. Okay, there is something going on there and therefore you are better wired on the global basis to IDM you tend to have a better access through the customer consolidation. So let’s talk about the competitor size and everybody is concerned about our competitor are buying competitor all over the place. Some customers don’t like that and therefore, quite a few customer actually are running away from that. So we are also getting some short-term market share gain because people are just concerned about the safety, the execution whatever reason they have. Even through there is no guarantee the customers that are coming to us will stay with us forever, but at least short-term we are seeing that. And of course I do believe that because of the earning power and also because the ASE investment I believe we are gaining share against our competitors to. But again honestly we are talking about very, very small advantage. I mean the percentage you were talking about almost the same so I will not say that we are better. We are mathematically better, but I don’t think we are much better than our competitor to just to be fair. All right, there is a long gain.

Okay, thank you. My second questions regarding your SiP, let me think if I can get this right. I think you guys are - you guys start to ramp up this project starting from the second quarter and Q3 is still a margin diluted. And if I’m correct I think I suppose you guys it’s going to ramp up another IOS related SiP in this quarter. So would that new project also start with a low breakeven operations and if that’s a case I think will that prolong your margin diluted discount went back for several quarters?

Well, I do understand you question I certainly hope not. Right now I do not have information to confirm what you are concerned about, okay. So in other word I believe we should be okay, we should be able to do on the other multiple project.

Okay, thank you. Just one last question is more like a housekeeping question, can you talk about your depreciation cost for Q2 and Q3 and those are you pump-in rates for Q2 and Q3 as well?

Depreciation. For us the ATM the depreciation were $6.5 billion a quarter and it will be similar into Q3.

Your pump-in rates.

80%.

Thank you. Randy Abrams, Credit Suisse. Just have couple of follow-up question, the CapEx the run rate is 350 is actually a little bit lower I think before it was in line with deprecation which would have been 800. So could you confirm it how more…

Still in line with the deprecation.

Is it still going to be about 800 full-year?

I can say that is in line with deprecation.

Okay, all right. And the second I wanted to clarify because you mentioned earlier your scale will go up with SiP in second half so margin is improved. Could you than clarify for third quarter why that - why regarding the EMS gross margin down slightly for Q3 because you should have better scale growing sales again back to Q4 levels.

I think the drag from the new product is still going on third quarter and we will have some impact on the EMS businesses, specifically. All in all I think the volume coming up, the particularly on the IC ATM side. And the SiP product that we are running at IC ATM part of the business. The overall margin does have room for improvement in the quarter and hopefully we will see that continuous improvement go into fourth quarter. I think I want to put SiP a bit into perspective. I think the first voice is really new, the newer the words that we were using here is the platform, toolbars and so and so forth. All that tells you is that we are building a new business model and we will enter into a new market. When it comes to a broader sense of market share gain, that is another way of gaining market share. And also if you look at this business, is not at the component level anymore, this is a really system or product. And therefore there is another set of risk that we need to go through and in terms of business model, we also need to go through the learning curve along with our customer not just ourselves. So when we look at a SiP project, you got to give it a long time and horizon, is not going to be a particular package or particular customer component that you put on your generic machinery and start making money. If there is an investment period I need to go through and I think that we will - we’re doing, we will be handling multiple prices now. And as I mentioned earlier on, this particular one is really the only one that is still running at below break-even I think that’s a very good hit rate already, it’s a very successful accomplishment for us, in entering into a newer territory. So I think people need to realize that, this is a new business, it takes time to be able to what we’re building here is really a platform the capability to enable the market going into a new solution. I really appreciate Joseph brought us up, because the you have to look at growth is not only coming from the component side, okay, it’s from the new market as well as from the overall EMS industry as well as for out of the PCB suppliers. I give you an example, and this will know wearable product, if you go to the web, you will know that they have 43 active die, plus I cannot be specific, but go check on the web, hundreds of components. When you put the known die, which this kind of numbers on the package, how do you manage yield, this has been the killer for the industry. Nobody can manage a product with sufficient yield at low cost and business ownership, you have a 100 people sending new style and anything goes from, who takes the ownership. So in designing the platform you got to go through not only the assembly protocol, you got to go through the test protocol, how do you differentiate, which combination of die, how they have good or bad, this is really the biggest cost of ownership issue that place everybody, industry has no resolution on this. Now ASE can manage this kind of broader scope that would push to hundreds of combination die platform. We go figure out a way, how do we manage very, very high yield. Imagine you go down to number 10 times, what kind of optimization efficiency does ASE have, this is by far much more complicated in both the tester, the test protocol, slow layout, how do you control ins and out, combination active, passive, embedded power consumption and eventually the low voltage, high voltage the RF or the wireless combination. How do you stimulate test and guarantee as we ship out the SIP, they are 100% good. Think about the total dollar, the industry can save, think about how many people don’t strain that does not have to do any intelligence, just buy the SiP and plug-in and you have the setup, this is what IoT were seeing in the beginning of that. So you guys has a lot of question, I would like to say that we have been a SiP campaign for many years, one of the reason, many customers from Germany, from Switzerland, from Japan, from United States, and our customer who are willing to engage with ASE can fund us to build out this platform, because industry has got a big issue. And no one has been able to figure out a way to lead the way to address the tactics and we are doing that. And as time goes on, we will become more sophisticated we can explain to you more, but to do this, think about it, I already make that statement and go think about what that means, you got to be truly global, you got to be truly collaborative, you got to be truly vertical. In all three dimensions, when you go by out of the vendor, out of the competitor and you do your metrics. And you have your solution already.