ASE Technology Holding Co., Ltd. (ASX) Q1 2023 Earnings Report, Transcript and Summary

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our First Quarter 2023 Earnings Release. Thank you for attending our conference call 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, our dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financials are 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 Joseph Tung, our CFO. For today's call, I will be going over our financial results and outlook. Joseph will then be available to take your questions during the Q&A session to follow. During our year-end 2022 earnings release, we reported that the company and the overall semiconductor industry was entering a period of inventory digestion. We touched upon the impending soft environment and noted prognosticating outlooks can be incredibly difficult, especially when trying to spot the end of an inventory correction. Our business during the first quarter ran expectedly soft, given that we expected many customers were going to be drawing down product inventories. For the large part, our customers generally met their near-term plans. However, towards the end of the first quarter, when many customers reviewed their channel inventory relative to their expectations. They realized their inventory depletion was happening slower than anticipated. Apparently, end markets had not performed as they expected, whether it be poor Lunar New Year sell-through or a missing corporate IT refresh, sluggishness and excess inventory persisted. For our ATM factories, during the quarter, key equipment utilization rates were hovering slightly above 60%. And given these levels are near-term record lows, our factories focused on how to lower ongoing expenses. Working hours and bonuses were trimmed, raw materials pricing was scrubbed with our vendors, projects were reviewed and reprioritized, all in the name of costing down. However, the soft loading environment did allow us to continue automating factory lines, scaling up new product introductions and completing R&D projects. Our EMS business entered into its seasonally soft period. The front half of the year generally acts as a preparation and buildup for the back half mass production builds. Our EMS business actually came in slightly better than our guidance last quarter. But as you will see, the overall macro environment did appear to have an impact, albeit somewhat smaller than the impact to our ATM business. With that, please turn to Page 3, where you will find our first quarter consolidated results. For the first quarter, we recorded fully diluted EPS of TWD1.30 and basic EPS of TWD1.36. Consolidated net revenues declined 26% sequentially and 9% year-over-year. We had a gross profit of TWD19.3 billion with a gross margin of 14.8%. Our gross margin declined 4.4 percentage points sequentially and 4.9 percentage points year-over-year. The margin declines are principally the result of inventory digestion and a weak macro environment. Our operating expenses declined TWD2.7 billion sequentially and TWD0.7 billion annually. The declines were primarily attributable to lower profit sharing expenses across the company. Our operating expense percentage increased 0.8 percentage points sequentially and 0.3 percentage points year-over-year to 8.9%. The operating expense percentage increases were primarily related to lower revenues during the quarter. Operating profit was TWD7.7 billion, down TWD12.1 billion sequentially and TWD8.4 billion year-over-year. Operating margin was 5.9%, declining 5.2 percentage points sequentially and 5.3 percentage points year-over-year. During the quarter, we had a net non-operating gain of TWD0.2 billion. This amount includes net interest expense of TWD1.1 billion. Tax expense for the quarter was TWD1.8 billion. The effective tax rate for the quarter was 22.6%. The rate variance during the quarter was largely due to incremental controlled foreign company tax expenses. We believe that our annual tax rate will be between 20.5% to 21%. Net income for the quarter was TWD5.8 billion, representing a decline of TWD9.9 billion sequentially and TWD7.1 billion year-over-year. The NT dollar appreciated 3.05% against the U.S. dollar during the first quarter. From a sequential perspective, we estimate the NT dollar appreciation had a 0.8 percentage point negative impact to the company's gross and operating margins. From a year-over-year perspective, we estimate that the depreciating NT dollar had a 2.63 percentage point positive impact to gross and operating margins. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.29 percentage point impact to our holding company gross margin. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be TWD20.3 billion with a 15.5% gross margin. Operating profit would be TWD8.9 billion with an operating margin of 6.8%. Net profit would be TWD7 billion with a net margin of 5.3%. Basic EPS, excluding PPA expenses, would be TWD1.63. On Page 4 is a graphical presentation of our consolidated financial performance. You can see the impact of the current weak environment here. Unusually soft loading even for a correction environment are leading to lower revenues and a low utilization rate environment impacting our ATM and EMS businesses. On Page 5 is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the first quarter 2023, revenues for our ATM business were TWD73.3 billion, down TWD21 billion from the previous quarter and TWD10.7 billion from the same period last year. This represents a 22% decline sequentially and a 13% decline year-over-year. This decline though steep, was in line with our outlook. Gross profit for our ATM business was TWD14.7 billion, down TWD11.5 billion sequentially and TWD8.4 billion year-over-year. Gross profit margin for our ATM business was 20.1%, down 7.7 percentage points sequentially and 7.4 percentage points year-over-year. The overall margin declines are the result of lower loading due to customer inventory digestion and the weak macro environment. During the first quarter, operating expenses were TWD8.3 billion, down TWD2.1 billion sequentially and TWD0.7 billion year-over-year. The declines in operating expenses were primarily driven by lower labor costs due to lower profit sharing and bonus accrual. Despite having significantly lower absolute operating expenses, their declines did not keep up with the pace that revenues declined. Our operating expense percentage for the quarter was 11.4%, up 0.4 percentage points sequentially and 0.6 percentage points year-over-year. During the first quarter, operating profit was TWD6.4 billion, representing a decline of TWD9.4 billion quarter-over-quarter and TWD7.6 billion year-over-year. Operating margin was 8.7%, declining 8 percentage points sequentially and year-over-year. For foreign exchange, we estimate that the NT to U.S. dollar exchange rate had a 1.52 percentage point impact on our ATM sequential margins and a 4.55 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 21.3% and operating profit margin would be 10.3%. On Page 6, you'll find a graphical representation of our ATM P&L. You'll note here the impact of a semi-fixed cost base with a low correction level loading. On Page 7 is our ATM revenue by market segment. Even though the current softer loading environment is fairly broad-based, we do see the communications market segment inventory digestion to be more pronounced than other market segments. On Page 8, you will find our ATM revenue by service type. There isn't a significant change here, but the advanced packaging side of the business is somewhat more impacted. On Page 9, you can see the first quarter results of our EMS business and a graphical representation of its market segment allocation. During the quarter, demand was impacted by an overall weaker SiP demand environment, along with our typical seasonality. During the first quarter, EMS revenues were TWD57.7 billion, declining TWD26.2 billion or 31% sequentially and TWD3.4 billion or 6% year-over-year. Our EMS business' gross margin declined 1.4 percentage points, while our operating margin sequentially declined 2.4 percentage points. These sequential declines were primarily driven by seasonally soft loading and, to a smaller extent, a soft electronics demand environment. Our EMS first quarter operating profit was TWD1.3 billion, down TWD2.7 billion sequentially and TWD0.9 billion annually. Given the overall quarter decline significantly as compared to last quarter, the percentage share information here may be somewhat biased. For our EMS market segment, our Consumer and Communication segments declined off of their seasonal peaks into their typical trough periods, while our Computing segment was also impacted by inventory corrections. Our Industrial and Automotive segments were more resilient and flattish on an absolute dollar perspective. But from a percentage of business perspective, the relative percentage share increased sharply. It is worth noting here that from a year-over-year perspective, our Automotive segment grew close to 30% year-over-year. On Page 10, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents and current financial assets of TWD68.4 billion. Our total interest-bearing debt was down TWD12 billion to TWD190.3 billion. Total unused credit lines amounted to TWD337.2 billion. Our EBITDA for the quarter was TWD23.8 billion. Net debt to equity was 42% at the end of the quarter. On Page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the first quarter in U.S. dollars totaled $231 million, of which $101 million were used in packaging operations, $90 million in testing operations, $32 million in EMS operations and $8 million in interconnect material operations and others. Given the overall slowdown within the industry, we are taking incremental action to push out more of our originally planned capital expenditures during the year. However, we will continue to spend on implementing incremental automation capabilities, including additional investments in our lights out factories. Current EBITDA was USD0.9 billion relative to our capital expenditures of $0.2 billion. For our outlook, we will first address our EMS business. Our EMS business will continue its typically soft season during the first half of the year. However, based on continued relative strength within its Automotive business, paired with some order improvement in our Consumer and Computing segments, we are looking for a slight pickup in business during the second quarter relative to the first. Similarly, margins should move off our expected trough and improve roughly 50 basis points. From a longer perspective, we continue to expect a strong ramp during the third quarter with the peak during the fourth quarter, primarily driven by new product launches. Continuing our earlier comments about our ATM business. At the end of the first quarter, what became more apparent was that the expected improvement in the macroeconomic environment did not materialize. Instead, world government's continued aggressive policy trying to curb hyperinflation. Unintendedly, this even led to separate banking crisis in the U.S. and surprisingly, in Switzerland. Meanwhile, more and more consumers and businesses around the world are grappling with spreading higher energy prices that initially stemmed from supply shocks related to the Russia-Ukraine war. And rather than seeing an overall post-COVID recovery and a return of electronic spending during and post the Lunar New Year, we, along with our customers, saw consumers instead catching up on spending on other items like services, travel and leisure. It should be noted that our customer sell-through of their devices are generally not visible to us. And usually, inventory draw and replenishment are in sync. With this current inventory digestion period, customers are selling inventory without the action of replenishing inventory, which gives us even less visibility. With wafer banks fully loaded, we basically can only wait for our customers' signal to restart production. And given the lack of recovery, a broad set of customers have communicated to us that their restocking will most likely happen later than anticipated. What was originally scheduled to ramp during the May, June time frame now has been pushed back into the third quarter. On a somewhat more positive note, we do see some level of rush orders sporadically happening across our ATM factories. We remain optimistic and expect that rush orders should continue to rise during the second quarter as various product restocking and new product launches start to happen. However, with a large amount of orders being pushed out for the second quarter as a whole, we expect continued sluggishness and a suboptimal loading environment. As a result, we effectively see revenues much the same as the first quarter. From our cost perspective, we are actively pursuing various avenues to trim costs, including expanding our automation efforts. However, given the higher utility rates instituted by the Taiwan government effective April 1, increasing electricity rates by 17% and the higher summer rates in the back half of the second quarter, our utility costs will rise sequentially. We currently see the rate increase and the start of the summer rate season is expected to have a 0.5 percentage point negative impact to our gross margin when compared to the first quarter. However, we are hopeful that a number of cost savings efforts will bear fruit during the quarter, and we will be able to offset most, if not all, of the impact of the utility rate increases. Such offset is not guaranteed, but we are targeting to keep our gross margin at a similar level with the first quarter. And if we step back and look at the bigger picture at this point. Despite all the distracting noise related to this correction, we believe we are in the process of proving that we have a fundamentally improved business. We've already seen higher margins through the cycle peak. Now, we are seeing structurally higher trough margins going through the cycle bottom. We are seeing pricing resiliency and the minimization of irrational competition. We also see our scale of manufacturing continue to give us competitive advantages in the form of lower manufacturing costs, thereby maintaining customer resilience. We basically see an industry possessing a wider moat with ASE outpacing its competition. We would like to summarize our outlook for the second quarter as follows: for our ATM business in NT dollar terms, our ATM second quarter 2023 revenues and gross margin should be similar with the revenues and gross margin of the first quarter 2023. For our EMS business in NT dollar terms, our EMS second quarter 2023 revenues should increase mid-single-digit percentage-wise quarter-over-quarter. Our EMS second quarter 2023 operating margin should improve by 0.5 percentage points versus the first quarter 2023. This concludes our prepared remarks. I'd like to open the floor for Q&A.

[Operator Instructions] Our first question is from Mr. Randy Abrams of Credit Suisse.

Okay. Yes. Thank you. I wanted to ask the first question. If you could talk a little more about the outlook. First, for rush orders, if you could talk about the areas you're seeing rush orders? And then for the area of resilience, if you could go through the view, Automotive, if you see auto, and I think you mentioned Industrial, if you see those areas holding up? And the second part of that first question is for the spillover. How much do you see the weakness spilling into third quarter? Do you think we're back to normal seasonal third quarter? And what do you view as a reasonable normal for third quarter? So just curious that as well. Thank you.

I think in terms of rush orders, I think we've been seeing sporadic rush orders in different areas, although more seems to be in the Consumer sector. We continue -- I think we believe that we will continue to see some rush orders coming in the second quarter as well. But in terms of its volume and magnitude, I think it's difficult to predict at this point. Overall, I think the overall market softness seems to be persisting into second quarter. And going into third, I think we'll definitely see a rebound because of the new products being launched and some of the customers, as Ken pointed out, the restocking for new product launches will be starting in the third quarter. So we'll be seeing an uptick in third quarter. Although for the whole year, I think the overall situation is softer than what we have been expecting. I think in the beginning of the first quarter, we were projecting that we're kind of estimating that for the whole year, we could be seeing a flat year to high-single-digit decline in terms of our overall ATM revenue. But now we are of the view that the full year prospect should look like high-single to low-teen kind of a decline in the -- for the whole year. And in terms of the Automotive, I think we have made very good progress in terms of expanding that part of the business, both from ATM, as well as an EMS perspective. I think that momentum is still going on. I think comparing to the other sectors, Automotive continues to be more resilient than the others. We are still -- we're expecting double-digit growth for this year, and we will continue to try to penetrate this market further through our automation of our factory and also expanding our product line or service offerings.

Okay. And second question, just on the cost structure, actually, good progress to bring it down the OpEx, especially ATM. It sounds like most of it was the bonus accrual. From this level, though, because you mentioned that ongoing cost reductions, how should we see the OpEx trending? Is there anything you've taken out beyond the bonus expense that brings it to a...

I think we're actually facing quite a challenging environment from the cost factor -- cost aspect. We're looking at higher material costs that we've -- that's continued to roll forward. And we're seeing higher utility costs. We're seeing higher net interest expenses because of the rate hike. So it's quite challenging, but we have been implementing quite a bit of our cost reduction programs throughout the factories. And we are kind of confident that we can maintain our OpEx ratio for ATM, as well as EMS businesses at the -- our target is to maintain the OpEx ratio at the same level as last year.

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

Right. Thanks for taking my questions. First of all, could you talk a little bit more on where are the areas you're seeing, I think previously, we were looking for double-digit growth in Q2. Is it mainly in Communication that you're seeing the slower-than-expected momentum? Or is it a little bit more broad-based? And given that the pricing -- sorry, the weakness has been more persistent. Could you also give us some view on how you think about pricing? And what should we be expecting for CapEx this year? It looks like CapEx already come down a fair bunch in Q1, but maybe some outlook for CapEx this year?

I think it's fair to say that we were banking on a better situation with the Communication sector, particularly when we're seeing most of the Taiwanese customers started the inventory digestion earlier. And -- but I think the overall macroeconomic situation did not improve and the end demand seems to be -- still remain to be soft. So we're seeing the softness persisting into second quarter. And hopefully, this will start to turn around in the third quarter. I think the -- right now, we're still seeing low price elasticity, meaning that even we lower our prices, it doesn't really bring us more volume. So I think at this point, we still think the pricing is resilient, particularly for -- in our case, being the preferred vendor of our customers, I think the -- we are more resilient in protecting our pricing. We will continue to pursue or seek for sort of a pricing structure to meet both our customers and ourselves meeting our goals and try to protect our margin and return better.

Got it. And could you also talk a little bit about the CapEx outlook for the year? And also, there were certain customers and funding capacity that you had some loading guarantees and loading arrangement agreements. How have those progressed given that the overall utilization, like Ken mentioned, is closer to the 60% mark? Are customers still kind of retaining those? Or you already renegotiated most of those? And if they are renegotiated, how do the terms look like today that maybe a year back?

I think the LTAs has served its purposes, has being run down per its expiring period. As I mentioned, we will continue to seek for sort of a pricing structure for -- to serve both our customers, as well as our own needs. In terms of CapEx, I think in the first quarter, we already mentioned that whole year CapEx for the year will be a few TWD100 million lower than previous year. But at this point, given the softness persisting, we are lowering that CapEx budget by another couple of hundred million for the year. And also the combination of the CapEx will be a bit different from we previously anticipated. I think right now, in terms of assembly, it will be about 53% of the overall and test. Last year, we have about 34% of our CapEx being spent on tests. The ratio will be reduced to about 25% for this year. In terms of material, we're maintaining at 3% to 4%. And for EMS, actually, we are expanding the CapEx because of the new projects that we are taking on, particularly in the automotive sector. So, the EMS CapEx will represent roughly 15% to 16% of our overall.

We have a question from Mr. Rick Hsu of Daiwa Securities.

Hi. Joseph, can you hear me?

Yes, you're kind of breaking off. So -- yes, I can hear you now.

Okay. Sorry for that. Technical issue here. Just want to double check on the housekeeping questions about your utilization rate of 60% roughly, that's for the Q1 across the board of your packaging and testing, right?

Pretty much it's across the board. I think the same level of utilization will persist into second quarter. And going into second half of the year, I think it was -- third quarter, it should substantially improve, and we're expecting at some point, the utilization rate should reach around 80% in the back half of the year.

Okay. Great. Thank you so much. That's pretty helpful. And the second question is about your profitability, especially your gross margin. Would that still be above the pre-COVID 19 level? When you guys move into second half, when all the operations improve and the utilization rates go to the optimal level, is that still effective?

I think our target is still try to maintain our gross profit margin to the new structural margin range of mid-20% to 30%. I think we still have a shot in maintaining that. But if the overall decline -- revenue decline exceeds around 10%, I think we could look at another 1% to 2% drop on this from our original target.

Okay, fair enough. All right. That's all I have. Thank you so much again.

No problem.

We have a question from Laura Chen of Citigroup. Next question is from Brad Lin of BOA.

Hi. Thank you for taking my questions. I have two questions. One is on the testing part. So the mix of our CapEx on the testing lowered to around 25%. I remember last time we talked about that, we would like this testing business to be one of our key drivers going forward. So, well, would you please discuss what were the barriers there? And what changed the mind for our testing business target? And then -- that's my first question. Thank you.

Yes. I think our drive into test business is continuing, although there will be periodic modifications or revisions in our CapEx plan based on the current capacity, as well as the incoming demand for our services. So, there will be periodic or adjustments in terms of CapEx. But the overall goal remains the same. We'll continue to build that part of the business. And we still believe that the potential of test business is greater than assembly. And our target remains that we want to bring our test business to its historical peak of about 18% of our overall ATM business.

Got it. Thank you very much for the clarification. And my second question will be on the ABF substrate. So last time we mentioned that the ABF supply improved, but not completely loosened. And would you please tell us that what will it be like for the second half of the year with the potential demand rebound? Thank you.

I think most of the items returned to a normal lead time, and we are not seeing further ABF constrain at this point. And if we look at the second half, I think ABF should not be -- should not continue to be a constraint for us now.

Our next question is from Laura Chen of Citigroup.

Can you hear me?

Yes.

My line just dropped previously. I got a question on the automotive revenue. I'm just wondering, do you have any breakdown between the ATM and also the EMS business of your automotive sales? And also, do you see any potential softness would happen in second half, since some of the foundry makers they cited earlier, like automotive orders seems to be slowing down into second half and also the IDMs, their inventory level and also lead time since also kind of slower, right? I'm just wondering your view on the automotive business so far seems to be resilient at the moment. But do you see any potential softness into second half?

For last year, I think the overall automotive revenue for us is over TWD1.6 billion, with the split from ATM -- between ATM and EMS, ATM is close to TWD1 billion. EMS is over -- close to -- somewhere close to TWD700 million. And we're expecting this part of the business to have a relatively resilient growth for the year, and we're still looking at double-digit growth for both EMS and ATM. And as -- in terms of the overall automotive business prospect, I think there is a lot of noises so far from our own forecast or from the business outlook that we are seeing from our end. I think it still looks very resilient. And I think part of the reason is that we are -- aside from the organic growth, we are also gaining shares in this part of the business. So, there may or may not be some softness going into the second half of the year. But as far as our own business, I think the combination of organic as well as share gaining, I think that's really the layout of the prospect for us in terms of our automotive business.

Okay. Thank you. And my second question is also about the ATM business. We know that, given the weakness, we probably will slow down the CapEx expansion in this space. But on the other hand, we are seeing like a high-computing PC or AI, the trend seems to be more structured. So from ASE Group perspective, just wondering that what's your position now? And any chance you may also break into these, like AI chip or a high-computing PC, maybe find some way to cooperate with the foundry makers or to pursue your own solution? So can you elaborate more on your strategy and your business plan on this space?

I think the AI chips definitely presents a good potential for us, although this is still at a very early stage. And so we cannot -- it's kind of difficult to quantify the impact. But as a whole, I think it does create a good business potential for us, both in terms of the so-called advanced packaging and test, but also for the peripheral chips that requires traditional packaging test. They all fall into our strength, and we believe that creates a good opportunity for us going forward. In terms of the ultra-advanced type of packaging, I think, for any type of new product technology, I think, because of the characteristics of it, because some -- most of these new packaging is more of a wafer process. So, we believe in the earlier stage, it should be the foundries that are taking the lead in developing this technology. Whereas when we come in, we need to wait until these applications becomes -- has a wider adoption. And with the volume becomes a real volume production type of business, then there will be a natural division of works between us and the foundries. So, I think it's a good opportunity, and we do have a natural migration of technology from foundry to OSAT players, including us. And in this environment, I think, being the largest and the most technologically advanced OSAT player in the field, I think we will gain the most potential from this business.

Our next question is from Sunny Lin of UBS.

Could you hear me?

Yes.

Thank you very much. Thank you for taking my questions. So, my first question is on second half. Just want to better understand the trajectory of your recovery. So, I think, Joseph, earlier you mentioned for your IC ATM utilization rate, they get back to 80% or higher in late this year. And so I understand it's still a bit early, but based on your current communication with the customers, would you expect a similar recovery pace for Q3 and Q4? Or do you think potentially it will be very back-end loaded, meaning Q4, the recovery will be a lot more significant?

I think the -- it should be third quarter being the highest sequential growth rate. And then going to fourth quarter, we're still expecting growth on a quarterly basis, but to a lesser magnitude. But all in all, I think I already mentioned that from a whole year perspective. I think the softness -- because of this softer-than-expected second quarter, I think for the whole year, we're now taking a more conservative view from originally expecting a flat to high single-digit decline ATM revenue to high single-digit to mid-teens kind of a decline for the whole year. Low teens.

Got it. Thank you. That's very helpful. So just to follow up. For second half, any particular areas that you're seeing better strength?

I'm sorry?

So for second half recovery, any particular applications that you're seeing better strength?

I think it should be a broad-based recovery. I think a lot of the new products in all segments should be brought out. And I think the customer will resume to a restocking type of mode to meet these new product launches.

Next question is from Szeho Ng of China Renaissance.

Hi Joseph, two questions from my side. The first one, within the ATM business, what are the major applications that are driving the automotive momentum?

Driving the automotive?

Yes. Business within the ATM portfolio.

The IDMs, MCUs, sensors, infotainment processors, telematics, there's a pretty wide application. And for EMS, I think it's a large chunk of it -- a better chunk of it is for power module and power management type of products and also telematics and infotainment.

I see. So basically, it's on the wire bond applications, right, for those products?

Yes. What?

Mostly on wire bond, right, for those products?

Right, right, at this point. And so it is migrating into flip chip as well.

I see. All right. Yes. Second question on the financial side, on the gearing ratio. Right now, the company has been driving down the gearing ratio to a quite healthy level. So is this something that we are comfortable? Or do we want to bring it down further?

We are comfortable with the current level, although the -- because of the rate hikes, I think the interest burden on us is increasing quite a bit. So if -- given the circumstances, I think we will try our best to continue to bring down our interest-bearing debt level so that we could have some savings on interest.

Our next question is from Bruce Lu of Goldman Sachs.

Hello. Thank you for taking my questions. Can you hear me?

Yes.

Okay. So, I want to follow-up a lot of questions, but I want to focus on the ARM-based CPU where you have higher market share. Do we see some kind of dollar content increase for you to do this kind of business, whether you get like better packaging ASP, a longer testing time or even have -- with level testing opportunities?

Like I said, it's in the early stage. We don't really have a number in our mind, except it's more complicated and it's more technologically advanced. So, I think the overall value should be -- or value content should be higher than the other chips involved. And also, I think, not just on these most advanced chips also to -- there will be also peripheral chips coming out using mature packaging. And that is also another good potential for us.

Right. Do you see emerging SLT business? Is that an ROE or accretive business for ASE?

SLT?

System level testing.

I need to get back to you on this. I'm not that familiar with it.

Okay. Then I want to switch gear to another question for the -- do you consider to do some kind of like capacity expansion in United States, given there it's like tear-and-stack approach from the government?

Well, we're not ruling out anything. I think we're evaluating different options, trying to find a suitable option for us, not just in the US, but also in the other part of the world. As you know, we do have worldwide footprints and we are expanding in Singapore and Malaysia and in Korea as well in terms of ATM. And we are expanding from EMS perspective, expanding in Vietnam, Poland, some other areas. So, we'll continue to monitor the situation and trying to find a suitable option for us to meet our customer's request and also to move to meet the overall kind of environment, geopolitical environment type of requirements.

[Operator Instructions] Our next question is from Charlie Chan, Morgan Stanley.

Hello, Joseph and Ken, and also [Iris] good afternoon. So first of all, just some follow-ups to the previous questions. In terms of the advanced packaging, would the company consider to do some kind of wafer purchase for [indiscernible] in the processor? Can I ask a follow-up question?

Yes. I think there will be some kind of alliances with the wafer producers, and we already have the wafer process here.

Okay. But this is still in early stage, as you just mentioned?

Yes.

Got it. And the next follow-up is to Sunny's question about utilization back to 80%. I think -- do you mean that by the end of this year, it will be 80% or at the beginning of second half, you can see? Yes, because just based on the utilization calculation, right, from 60% to 80%, it is like a 30% sequential growth. Can you clarify?

Yes. I think what we're seeing is, at some point, we will reach 80%. I think that's based on the forecast that we're looking at. But it's too early to say when exactly that will happen and how long it will last. So, I think we still need to monitor the situation a bit more.

Okay. Yes. Thanks. Thanks for the clarification. And lastly, kind of pricing and also your structural margin improvement. So this question could be a little bit more complex. So in terms of pricing, I understand that lower prices don't really drive the end demand, but your key customers are quite suffering, right, meaning they are cutting price with their competitors, their margin squeezed. And also our understanding is that some of your Chinese competitors, they are indeed cutting price for some mature wire bond business, right? So how do you address all those kind of pressures from your major customers and also your competitors?

I'm trying to look at the -- to find the right word, [b for b, bifur]. I think because of the supply chain....

Bifurcation.

- bifurcation, I think the price competition from the Chinese OSATs has lessened. So, we're actually not feeling that much of a pressure from the Chinese competitor at this point. But in terms of our customer, I think the value add in terms of the back-end services is much smaller than the front end. So, I think most of the pricing pressure should be more on the fab level within us. And given our scale and technology leadership and also the high degree of customer reliance on us, I think the -- we're still -- comparing to our competitors, we have a better pricing leverage. So, we're saying the pricing seems to be still resilient. In that case, we still need to find the suitable pricing strategy to serve our customers' needs and also to maintain the strategic relationship we have with our customers.

Sure. Yes. Thanks for that. And last one. Attached to your comments about your pricing strategy, I'm wondering when you talk about or Ken talk about higher trough margin versus previous cycle, do you refer to the ATM business only or ATM and EMS? And also, do you think if there is industry-wide, the trough margin will be higher? Or is it just more about ASE?

Competitors, I think from ATM's perspective, we are in a much stronger position than our customers -- than our competitors. And because of the -- because of our scale, because of the higher degree of customer reliance on us, I think the -- also the synergistic cost savings that we have after the SPIL combination, I think it does raise our overall margin prospect for us. That's why we're saying that our structural margin range has improved from historically around 20% to 25%. Now, we're moving that range from to mid-20s to 30%. And even with this trial cycle, we're still -- we still -- I think we still -- we're still maintaining that margin range for the whole year, although there's more uncertainties and the overall environment is not -- the overall environment is more challenging. As I mentioned, we are facing higher utility costs. We're facing higher financial costs and so on and so forth. And so the challenge is higher, but given the position, we still believe that we do have the buffer to try to maintain that structurally improve the margin.

[Operator Instructions] It seems like there is no more question.

Okay. So thank you very much for attending this conference call. And I think the whole year, it remains to be challenging. But we believe we will continue to be the leader of the industry and we will be the last to fall and first to rise. And we remain confident weathering through this out, this down cycle lastly. And we'll continue to make the necessary investments to meet the future demand going forward. Thank you very much.