Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our First Quarter 2019 Earnings Release. All participants consent to having their voices and questions broadcast via participation of this event, please refer to 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 a high degree of risk and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in New Taiwan dollars, unless otherwise indicated. Like most Taiwan based companies, our financials are presented in accordance with the Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from other accounting standards. For today’s event, I will be going over the financial results, then we will have a Q&A session with Joseph Tung, our CFO. Following the event, our VP in Charge of Public Relations, Eddie Chang will be available to address the media in Mandarin Chinese. As a reminder, because ASE Holdings was jointly formed on April 30, 2018, during the second quarter, as a legal entity, our SPIL subsidiaries results are consolidated only as of that date going forward. Results for the legal entity are labeled legal entity basis in this presentation. For the sake of comparability, we have also included results which are compared against a pro forma set of results as if SPIL was a subsidiary and consolidated as of the beginning of 2017. This set of results is labeled as pro forma basis. Given that the transaction was completed during the second quarter, the legal entity and pro forma basis will have the same sequential comparisons between the first and fourth quarters. However, the pro forma numbers are still relevant for…

Yes. Thank you. First question – it’s from Randy Abrams, Credit Suisse. I wanted to ask, in the prepared remarks, Ken, you talked about investing for new streams – like new revenue streams in second half. Could you talk a bit more about those streams if it’s more IC ATM or on the EMS side? And maybe, a bit more on magnitude, if this is just more industry recovery or what...

So during the year, we’re expecting to spend more R&D expenses on basically developing the fan-out process lines a little bit better. There are technologies that could basically help in terms of cup linearity of the fan-out, basically making things a little bit smoother and also rolling out the panel level fan-out. So, there is a lot of R&D that’s – so there is a lot of different projects and revenue streams that are coming to fruition, but we don’t – we generally don’t see that level of a rollout.

Okay. If I could ask on the EMS, the – I’ve been running the full math, but it looks like second quarter is roughly flat for the EMS division after growing quite nicely double digits. And I know there has been weakness in some of that consumer application or smartphone. How is the view? If you could give an updated view on full year or expectation for growth as we look towards the second half and pipeline for new projects.

For EMS, I think in the second quarter, I think, the softness will persist into second quarter as well. So, there was still a bit of a dip in terms of revenue, which is seasonal. So, there is nothing abnormal about it. And it really – it’s in line with the customer’s product cycle. Second half of the year, we will see a fairly strong pick-up. Again, in line with the product cycle as well. And also in the – as Ken mentioned, we have already started to scale up our operation, both in terms of ATM and EMS for the second half ramp up of the some of the new products or new technology that we’re going to bring in. So overall, I think, both for ATM and for EMS as a whole on a consolidated basis, without giving out a very specific guidance, I think the general trend is we will continue to see quarter-to-quarter growth in terms of our top line. And for both business, we are still expecting growth for the year.

I’d probably ask just a follow up on both sets of margin. On gross margin, just year-over-year, you’ve talked a bit about the factors. But the EMS, down about a point and the ATM is down about 1.5 point. Maybe, talk about the factors, year-on-year, what’s been impacting the margin? And you referred to – and I don’t know if you’ve referred as much in the past about fierce competitive landscape, but has it gotten more challenging competition in the either segment? Like it seems like more going after the SiP business, but are you seeing more – is, I guess, competition in pricing a factor in the margin or is it other issues?

Well, I think the second quarter is particularly tough for us. I think the – it’s a combination of many different factors that is affecting our margin. Of course, the softer than expected margin does have an impact on the loading and that translates directly to a lower margin for us. And also, during the quarter or starting from the beginning of the year, we were already trying to scale up our operation, preparing for the second half ramp up, including the scale itself and also putting a lot of resources into new products that are coming on stream in the second half. Also, we are in a phase of relocating some of our business to outside of China. We’re expanding some of the facilities that we have outside of China as well. Also in the first quarter, we do – we did experience some issue in the supply chain that had an impact on the overall revenue as well. So put all the things together, there is a bit of a larger impact on our margin than expected for the quarter. And we are – and also on the operating side, I think the more compensation expenses that are incurred, because of the employee option that we put on last year. Also on the R&D side, we did spend quite a bit of money into our resources into some of the new technology or new products that we are coming on stream, mainly for fan-out as well as for SiP. As we mentioned in last quarter, we are seeing more projects – SiP projects coming on stream. We are starting to entertain multiple customers. We are seeing the momentum starting to build and we are actually starting from the beginning of the year we’re preparing for that.

And the last question I wanted to ask, clarify the OpEx – I think you mentioned 30 basis point – and I just want to know, is that a year-over-year just had a OpEx percent of sales for consolidated? And then is there a way to think about a year-over-year growth in OpEx for the company?

Do you want me to confirm that or...

I just wanted to clarify what’s that 30 basis point, is that expectation versus last year OpEx percent of sales 30 basis points higher?

Yes. I think we – like I mentioned that we are beefing up our R&D and also because of the additional compensation expenses out of the ESOP, the – as we’d mentioned already last quarter that we are expecting our OpEx ratio to come up a bit this year. Although at this point, we are working very hard to see if we can still manage to keep the OpEx ratio at last year’s level. But if there is – there’s going to be some challenge in front of us in terms of managing – maintaining that. But nevertheless, we will keep it – if there is any increase we will keep it below 30 basis points.

Yes. Thank you. It seems like, I guess, with the low first half pace OpEx still not growing much – I mean, to only be up 30 basis points is still pretty flat OpEx.

We’re trying to keep it in place.

Okay. All right. Thank you.

Yes. Hi. Good afternoon. This is Rick Hsu from Daiwa Securities. My first question – again, it’s housekeeping question, so your utilization rates across the board – the wirebond testing and flip-chip for Q1 and second quarter.

I think for Q1, across the board, it’s about 70%. And in second quarter, ATM was – is – there will be some uptick in our revenues. So, the loading we’re expecting to be at around high-70s.

Okay. Thank you. Can you – second question, can you talk about – a little bit about your pricing environment, especially for your ATM sales, because it looked your first quarter job was kind of below seasonal. Is there any pricing pressure?

Pricing is never pleasant topic. Pricing is – there is always pressure. And in first quarter, I think the softness is an overall situation, its overall phenomena. There is a normal pricing adjustments on a quality basis or on annual basis. We don't see anything abnormal.

Last question just a little – just want to clarify, I think Randy asked about your full year revenue is going to be still grow – on year-on-year basis your full year revenue…

Yes, we're still expecting to have a top line growth on annual basis, yes.

So same as your guidance last time?

Yes.

Yes. All right. Okay. Thank you so much.

Do we have any more questions from the floor?

This is Sebastian from CLSA Securities. So first question just to follow up on the EMS operating profit guidance, is it similar to second quarter last year, which implies that the absolute level is better than Q1 this year, while the revenue is down Q-on-Q, is that right?

Right.

So which means the margin is improving.

There will be better control on the OpEx at the EMS business unit and therefore, the – we're expecting OpEx ratio to come down a bit in the operating. Also on the gross level, because of the different product mix, at the gross level the margin we just saw had some improvement.

Okay. And looking at your second quarter guidance of EMS and IC ATM, it seems like moving toward a different direction. So I just wonder what's driving your second quarter IC ATM business grow – sequential grow? Is it mainly from mobile or some 5G high performance computing?

Well, I think it's mostly because of the different revenue mix. I think EMS does have a higher consumer revenue and therefore the movement – it was really – it should be in line with the product cycle of our customers. So there is a little bit different direction in the second quarter. But all-in-all, going into second half, I think the ratio will be in sync.

How about the IC ATM – the strength, which application is driving the sequential growth in second quarter?

Well, I think the second quarter is quite – actually quite broad based, so except that communication seems to be – have a strong momentum.

Would you say communication is it just – is it include both like consumer type of the smartphone communication and also like infrastructure based communication, right?

Both.

So both are seeing strength?

Relative to other segments.

Okay. On the second half recovery, I think, Ken seems to be pretty optimistic about the – yes, about that. Yes, so I just wondered, how much of that is based on a typical seasonal product launch cycle? And how much of that is driven by a very clear visibility on the new products, new technology ramp?

I think by and large the second quarter is really seasonal uptick. The new products or new technology ramp up would be mostly in the second half.

I was asking about second half?

You mean the growth...

How much is that is seasonal driven? And how much of that is – you're doing something else that you didn't do before – like new products, new socket, content gains, market share?

That would be a very tough question to answer. I need to go back and check.

Yes, I don't know if we can break that down, so...

I'm just curious, because you have a very strong confidence in the second half recovery. I think certainly you have some clear visibility and that confidence may probably come from like, hey, I win this socket and this is something I didn't do before, and that make me confident. Even if there's no strong seasonal recovery, you can still grow on top of that or even there is a seasonal recovery we can grow above that.

So our second quarter number are – I mean they are not particularly above – they are not above seasonality, like typical seasonality.

No, no, no, I'm asking about second half.

That's correct. So if we lead to a third quarter growth, than what we're – we're still kind of coming from a general semiconductor environment improving category. I don't – even if we throw our wonderful, spectacular numbers, it's just – it's still kind of a recovery, right? We're just kind of getting back to where we were.

Well, let me say this. I think the – if you look at our CapEx for the year, I think the – roughly 25% of the CapEx will be spent on some of the new product or new technology. If that's any indication, I think that would be the likely split between the seasonal and the new product that being introduced.

So the second half recovery is most driven – is driven equally strong by both business?

Both what?

EMS and ATM.

They both will experience recoveries, but in different – I think they have different customer bases too.

I think this is a very, very difficult question to answer, because there is going to be fluctuations, maybe on the organic part of the business or the new product sets coming out. It depends on the end market sell-through which cycles up more, which cycles down more. So I really can't tell you what is really the split between the two. What I can say is we are preparing ourselves by spending 25% of our CapEx for the year for new products. So if there is any synergy there, that could be the analogy for it.

The last question from me is on the – I think Ken mentioned that your ASE Holding is still gaining share – gaining free cash flow share in OSAT industry in this downturn and utilized their cash to payback debt and pay dividend. So on the debt payback schedule do you have any – what should we model – like you paid down, like, 15% to 20% per year.

The original guidance on terms of debt pay back was roughly two to three years from transaction initiation.

So in three year – like, should I say the – we can assume that in three years' time the – all the debt will be repaid? So, like, 30% per year pay down.

Well, if we are talking about the transaction specific debt that we incurred, that part has been possibly repaid by our own cash flow and partially by other – different funding source. But by and large the total amount of syndicated loan is about NT$90 billion and we had paid it down to roughly NT$20 billion now within a year's time. And we are – although, roughly 60% of it or 70% of it is being paid down by other funding sources that we've raised in the year, the rest is being paid down by our own cash flow.

Do we have more questions from the floor? At this time we do not have any questions from – no, we do have a question. We have multiple questions suddenly. Hello?

Yes. [indiscernible] questions from the audio.

Yes, let's take a question from the call or audio. The first…

[Operator Instructions]

So we have three online, so can we take the first one?

The first question is coming from [Bruce] of Goldman Sachs.

Thank you for taking my questions. I think the first question is regarding to the P&L level of packaging items, happy to hear that the company is developing a new technology. Can you give us some picture of this technology, what kind of addressable market, what can we expect on revenue, what kind of occasion, et cetera.

Hi, Bruce. We are not stating exactly the amount of revenue related to it, but we have actually put it in place during the first quarter. We do expect revenues starting in the second quarter. Hopefully, this revenue ramps during the year. This panel revenue right now is currently – we are obligated to put it for just one customer, but we will be able to release this capacity to other customers by next year.

I am sorry. The connection is pretty bad. Your voice is breaking down, so I just hear that the revenue for – is isolated in one customer and one else?

It's for one customer right now. We are only able to sell it to one – to one customer at this time. But the capacity will be available to be sold to other customers, hopefully before the beginning of next year.

So just for the [indiscernible] what when can we expect [indiscernible] contribution from panel level packaging like say 5% of revenue – 5% of ATM business?

We do not have – I do not have that right now.

I think as Tien mention last quarter, I think the – we are expecting to grow our fan-out revenue by $50 million and above on annual basis, and right now things are moving on track. I think we are in the phase of increasing our fan-out capacity by another 50% at this point.

So what kind of profitability we're looking to derive from the 15%?

Well, I think, we are still at the early stage, so it's kind of difficult to anticipate a corporate average return or margin at this point until it gets to economies of scale. But I think the overall return, we are still – we are making the investment based on the return requirement that we have, which is an ROIC of over 15%, so that is still the criteria that we are looking at.

What is scale of economies now?

I think it will go over $100 million when we start to see some scale and…

So basically, we get more than USD 100 million, can we expect the profitability – is margin accretive?

It should, yes.

The second question is regarding to your strategy in testing business. The testing business, you have [indiscernible] in TSMC now having lot of developments in testing business. And you also have a lot of like testing service providers who with every [indiscernible], so what – so ASE turning more aggressive in testing business. Can you tell us a little bit more about like what's the rationale behind and what's your strategy?

Well, I think at this point I think the – as we mentioned last time, I think we – in the past few years we have been quite passive in terms of making investment into test. And now with our – we are seeing the turnkey services requirement has been the increasing. And we do have a largest – much larger scale after the combination was SPIL. So, we believe that at this point this test business is something that we want to be putting more focus on and we do have the scale and also the tool boxes to penetrate this business more. And we believe the return of this test business is still justifiable at this point for us to expand.

So for the second – I still don't understand, because the second tier of testing – well, I shouldn't say second tier, a rather independent testing company's tier, ROE is [indiscernible]. And how do you make sure or how confident it is that, if you can do it like – at least better than the industry in terms of return?

So right now, we are not quite as aggressive on test, right? And test is also more margin accretive. So we believe that we do have room. And then post-November 23, 24, we should have better capability to generate a turnkey test solution. So I think our customers are interested in being able to shorten up their cycle time. They are able to move their test product – I mean, quick order right – instead of having to wait in multiple lines and multiple cues.

Can I expand that, because SPIL traditionally has much less testing – of capacity compared to ASE. Once integrated in terms of like packaging and testing, it's not as balanced in terms of capacity or location. Can I explain somehow from this angle as well?

Yes. We do expect some level of low hanging fruit to be able to go after – or approach business that was not approached before.

I see, understand. Thank you, I will get back into the queue.

Thank you. Our next question comes from Citi's, Roland. Roland, please go ahead your line is open.

Thank you for taking my question. First still a follow up question for the testing business, so for the testing business are you referring to the final testing or are you also doing the testing for the wafer probe as well.

Both. We will target both.

So now for the percentage wise, also some allocation for this wafers probe and final testing?

I didn't get the question. One more – one more time?

For the wafers probe and the final testing, what's the percentage of each for your total testing business now?

Actually we don't know. I don't think you can necessarily make any rational decision out of that, because you could balance your tests more towards wafer probe or more towards final test. It doesn't really state anything.

Okay. Going forward, if you are going to investing more on testing, so what kind of business you are going to invest? Is that are more flow to the probe business or more into the wafer final testing business.

Both. So your tester – it's a matter of peripherals that you attach to the tester. So we would attack both. We would buy further peripherals for probe if we get more probe business. We would buy more handlers if it were for final test.

Okay. Thank you. Last quarter you said going forward for your SiP and fan-out business, every year you are going to see incremental revenue around the $100 million both SiP and testing to $100 million for fan-out business. So question is how much CapEx you need to invest in both technologies in order to maintain such incremental revenue every year?

As I mentioned earlier on, I think first of all this year's CapEX will be similar to last year and I mentioned that 25% of your CapEx will be – right now it's still budgeted for the new technology that we're bringing in.

And how about the going forward?

Well, it depends on how the market shapes up.

Okay. So – and then in the past you also said, for every $1 you invest in assembly, it generate about the $1 return for the first year after invest and testing actually will be generating more. How about the investments on this advanced technology?

I think we need to put everything into one basket to see – we want to maintain for assembly and test combined $1 of investment generates $1 of revenue for us.

Sorry, I did not hear you clearly. Can you say again, sorry?

I said, as a whole for assembly and test, I think the fan-out or other technology in terms of assembly and test is still in the same basket and we want to maintain that ratio to a $1 of investment generating a $1 of revenue for us on an annual basis.

Okay. Thank you. These are all my questions. Thank you.

The next question comes from Gokul of JPMorgan.

Yes. Hi first of all I just wanted to follow up on the testing question. So right now for ATM, we're running in about 15%, 16% of total revenues coming from testing. Given your comments that you are underinvested in testing over the last few years, where does that look like settling in maybe in the next couple of years? Do you think that goes to 25%, 30% or is it just a minor increase from the – like, 15% to 20% kind of levels over the next couple of years once you complete your investments in testing capacity?

There is no preset target percentage for us in terms of our revenue split between assembly and test. What we're saying is that we see fairly good potential in the test business once we get the scale now. So we are putting more focus or putting more resource into test and we are confident or we are expecting this effort will lead us to gaining shares in test business, which we believe still makes economical sense for us. But having said that, it really depends on the execution how successful we are in terms of getting more business and how fast the business will start to come in. And it really depends on – we'll just go with the flow to see how much resource we need to put in further to continue to grow that part of the business. But there is no preset goal, say, "Oh, we want to get to 25% or 30% at any given time".

Okay, fair enough. Just a quick question on SiP, it looks like based on your Q2 guidance, the EMS revenues are basically flattish year-on-year. How should we think about the acceleration potential for this business as we get into second half given that you have some new projects in the second half for SiP as well. And secondly, could you also comment about your efforts with Qualcomm in terms of the SiP1 or QSiP kind of business that Qualcomm has been incubating, looks like they have started shipping some volume for some of their customers. Could you talk about the – what do you think is the potential for that business long term?

We are actually expecting some growth on the top line for EMS as well for – on annual basis for this year. And also we are entering not just the – did you call it the QSiP project?

Yes.

Okay. That's just one of the project – or SiP projects that the EMS is engaging in now. And – but for that particular project, we're expecting sizable, but not a whole lot of revenue for us this year. But we do see potential that it will grow to maybe even to other customers or other applications as well. So this is one area that the EMS will be continuing to put resources in.

[Operator Instructions]

I have one follow up. With regards to the EMS business growth for full year this year, if we look at the second half, is the second half year-over-year also positive?

Yes.

So, the first half is already positive. So based on your guidance for the second quarter and – so second half will still be positive.

That's correct.

And how much of this is driven by SiP?

Yes. I don't know for really – we're talking about that that numbers.

I mean, I don't want to be specific on the numbers, but just trying to see that the year-over-year growth of EMS this year is it mainly driven by the SiP project?

I would say both for SiP and as well as non-SiP type of business. Right now I think the overall SiP represents about 42% of our EMS revenue now. And we are expecting this revenue to basically more or less at the same level by the year-end.

Okay. Thank you.

Actually I wanted to ask if its QSiP that we should call it? But the – for that particular project you had announced that Qualcomm Brazil, so I just want to understand, like that – is it still a limited to – is it still more limited to Brazil where you're doing that production or is it now more of a global opportunity? And do you also have potential or is there any exclusivity or could you go to MediaTek, Huawei and other platforms to do these type of SiP for 5G?

Well, I think is primarily targeted at the Brazilian market and we still think there is a – it's a market that is more suitable for this type of the SiP solution for us to grow. There's still a lot of room for us to expand. And to serve that particular market there will be other supplier as well which could be our potential customers. That's why I'm saying – so if it's for the current application then, yes, it's pretty much for the Brazilian market and we will expand this to other customers as well. But QSiP also has the potential for the other application then it would be different market and different aspect of it.

And to clarify other customers' application, so – because I would think just Brazil, but is there an opportunity in China are global for these type – like I guess, why only – I mean, know these customers are Brazil project. But is there a global opportunity to do these type of modules?

Well, we will see how things evolve. But primarily at this point, we are still targeting at Brazil.

Then you mentioned in your prepared remarks pass-through and I think it was in the IC ATM on margin. Is there much like module pass-through growth in the IC ATM – like is there a piece of SiP that's flowing in?

That was more in reference to higher substrate content.

Okay. Thank you.

Any more questions from the floor? No more. Okay. Thank you very much for attending our earnings release. See you next quarter.