Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our First Quarter 2024 Earnings Release. Thank you for attending today. Please refer to our safe harbor notice on Page 2. [Operator Instructions] I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I’m joined today by Joseph Tung, our CFO. For today’s presentation, I will first go over the financial results and give the company guidance. Joseph will then be available to take your questions during the Q&A session that follows. During the Q&A session, each caller will be limited to two questions at a time, but may return to the queue for further questions. With that, let’s get started. As per our expectations, the overall demand environment for our services during the first quarter fell on a sequential quarterly basis, primarily due to seasonality of electronics products. And as was the case at the end of 2023, higher and leading-edge services generally fared better than legacy services. For our ATM business, revenues were on the higher end of our expectations. During the quarter, key equipment utilization rates were still relatively low, averaging out around 60%. Certain devices initiated a short but unsustained inventory refresh, easing off initially more optimistic outlooks. For our EMS business in the first quarter, demand for our services was slightly…

Now we will start the Q&A session. [Operator Instructions] We have a question from Mr. Gokul Hariharan of JPMorgan.

Hi, good afternoon. Thanks for taking my question. First of all, on the overall end demand outlook, Ken, you mentioned you’re not really changing your outlook, which I think was 6% to 10% growth for largely SanDisk. Could you talk within that, what are you seeing in different verticals. Last time I remember, Joseph talked about auto are potentially growing this year. Since then, we have seen some downward reductions in automotive demand. Is that still your view? And secondly, could you also comment about smartphone and communication demand given some of the concerns there. That’s my first question.

Yes. I think most of the sectors, we’re seeing bottoming out in the second quarter. But with automotive and maybe it’s industrial, still with some lingering softness. But I think overall, I think things might digest itself, and we’re not changing our view for the outlook for the whole year at this point.

So you still think Joseph that automotive will be growing this year for you?

Yes. We’re still gaining market share on the automotive. In fact, we are making quite a bit of progress in moving that part of the business up.

Understood. Okay. My second question is on your advanced packaging, the advanced packaging related to AI that Ken mentioned is tracking ahead of plans to double this year. Could you talk a little bit about some kind of longer-term view? Like how do you see this business evolve? Is it going to get to 15%, 20% of revenues in the next 3, 4 years? Your key partner TSMC also raised their expectations on AI-related growth. So, I just wanted to pick your brains on that. And also related to that, now that you’re doing some of the packaging for this lead GPU customer, do you stand the chance to start winning some test business also for them? I think previously, you didn’t have much testing, whether it is panel test or system-level test. Is there a chance that you could start winning some test business with them as well in the upcoming product migration?

Yes. I think we still see very, very good growth momentum in the AI-related or the leading-edge both to packaging and test. And we’re ahead of our schedule for this year, and we’re expecting continuous strong growth over next year as well. In terms of test, I think overall speaking, we are increasing our full year CapEx by another 10%. And the bulk of the increase is in test, and we are making further investments to win not only, to raise not only our turnkey ratio but also to penetrate more into the test only kind of business. And that, of course, includes the advanced testing.

The next to ask questions, Charlie Chan of Morgan Stanley.

Hi, Joseph, Ken. Good afternoon. So I have a few questions. First of all, it’s also related to your advanced packaging. May I know your progress in the AI GPU testing business opportunity, especially burning, there seems to be a very important process. Do you think the company will gain much market share this year?

We are investing in tests and that also includes burning. And we’re hopeful that we will be seeing some volume by the later part of the year.

Okay. Okay. Thanks, Joseph. And another one is more the end demand and the cycle recovery. So we continue to hear that China smartphone relative semiconductor seeing some forecast cut destocking. Does the company see a similar trend? And do you think these are kind of short lived or you think third quarter from a smartphone segment, you are also seeing very muted growth into the quarter?

No, I think overall, we are still looking at the whole market, and most of the sectors will be bottoming out, and we are seeing steady but kind of moderate growth in the cell phone area. And the strongest is still high-performance computing, but all the other areas, we’re seeing gradual recovery. And coming into second half, we will see a much more substantial growth momentum.

The next to ask question is Brad Lin of BofA.

Thank you for taking my question. So I have two questions. One is on the advanced packaging. So, as we learn that, well, the outset including probably ASE prefers non-silicon-based interposer solution for this leading-edge advanced packaging. So, when or what time does the management see faster adoption in this type of solution and contribute to ASE? Thank you.

Well, we are in mass production at this point, and we are having a lot of engagement with some other customers as well. And I can’t predict the pace of it, but we certainly see a very good growth potential in this area as well.

Got it. So for the strong growth that we just mentioned into 2025, currently, this is still based on the well silicon-based solution. Can I assume that?

Well, it can be both. I think with our own solution, we’ll see some pickup in next year as well as we go with the existing packaging.

Got it. Thank you. And then my second question would be about the on-device AI. So, what will be the increasing well value addition from ASE in the on-device AI. And when do we think well, the growth to be meaningfully pick up in the future?

Yes. I think this year, we are ahead of the schedule in doubling that part of the business. Although next year, we still see very strong momentum going on. And we are – not just from the business from the foundry, but also, we’re having engagement with multiple customers, including design houses, system houses. So, I think there is a momentum building at this point, and we do have fairly good confidence in growing that part of the business quite substantially in next year as well.

The next to ask questions, Randy Abrams of UBS.

Hi, thank you. I wanted to ask a follow-up on your CapEx, the 10% higher CapEx. So could you go through – is some of that also tied to advanced packaging. I think you mentioned the test. And could you remind us you’re now – because equipment CapEx was still fairly low in the first quarter, would the CapEx guidance full year now for the equipment or for overall? And a follow-up you is with the optimism into next year, are we starting another CapEx cycle like we’re at a low base, but do you think directionally, there could be a good increase with you owning more AI opportunities to go after?

Yes. I think for this year, we are upping our CapEx by another 10%. We mentioned last time that this year will be 40% to 50% growth in our CapEx, and we’re upping that. I think in terms of overall CapEx, roughly 61% for packaging and 24% for tests. And for test portion of it, the percentage has increased from last quarter as well, we were budgeting about 18% now to 24%. So, we are making quite a bit of investment or expanding quite a bit of our investment in test CapEx, aiming to leverage on our turnkey services as well as trying to get more of the test only business as well. So, I think in terms of the overall CapEx roughly, I would say 50% of it will be for advanced and the other half of it will be for the maintenance and also some of the upgrades.

Okay. Great and thanks for the color, Joseph. I’ll ask a quick follow-up on that and then the second question. For the test, could you clarify, is that application more HPC, like high-performance compute driven? And then the second question I wanted to ask on – it looks like a few things happening on margins. So, on the gross margin, could you talk about the mix change, which you’re getting some product mix change, both ATM and sounds like EMS as well. And on the OpEx side, with some more of this investment in R&D, the view for OpEx, I guess I should say OpEx growth, how much do you think the OpEx has to grow?

Well, I think testing CapEx is both for the HPC as well as other applications. And as I mentioned, we do have a lot of opportunities in reaching our overall turnkey ratio, and that includes all products. And of course, in terms of the more advanced or AI-related tests, we are also investing into that area, and we expect to have some – making some inroads in that area as well. What’s the other part of the – okay – our gross profit margin, I think the improvement is, of course, coming from revenue increase as well as our more favorable product mix as we go into – as we grow our more leading-edge packaging and test. In terms of operating expenses, I think the increase mostly coming from our beefed-up R&D investments. And we’re staffing up in R&D, putting more resources into more advanced packaging and test. And of course, we are in the process of expanding our overseas sites as well. So there will be some more additional investment put into it. And also, in terms of compensation, we’ve granted our new round of employee stock options. So, we will be including that part of the expense increase as well for this year. All in all, I think for the whole year, operating expense percentage will have about 1% increase from last year or less than 1%.

The next to ask questions Rick Hsu of Daiwa Securities.

Can you guys hear me?

Yes.

Okay. Hi, thank you for taking my question. So the first question is a housekeeping one, can you share with us your utilization rates across ATM for the coming second quarter?

We have about slightly below 60% in quarter one and quarter two with the revenue growth, we’re seeing the overall utilization rate could be slightly above 60%.

Alright. The second question also about your second half. I remember last quarter, Joseph, you said your ATM gross margin will go back to your structural target, which is a mid-20% to 30%. Is that still viable for your second half this year?

Yes. I think from the forecast we have, we’re still pretty confident that we will be reaching structural margin in the second half of the year. And I think we have a fairly good chance that for the whole year, we’ll be – we can also reach that level.

[Operator Instructions] The next to ask questions, Bruce of Goldman Sachs.

Thank you for taking my question. I want to ask about your U.S. expansion plan. The advanced packaging business, a major chunk of it is coming from the foundry outsourcing part. On the other hand, you probably the most important also in partner for TSMC. But as TSMC mentioned during the call, that they are very happy to see Amcor is going to have another advanced packaging facility in U.S., which ASE doesn’t really have a sizable facility there. Do you have any plan to do that? Do you see any change in terms of landscape? How you do the business with TSMC in the future?

We’re not precluding any possibility, but then any investment that we make needs to make economic sense. And right now, we’re not sure that a greenfield operation setup in the U.S. fits into that category. So, we are monitoring the situation at this point. And I think bulk of the advanced packaging or tests can still be serviced out of Taiwan and our other locations as well.

So even with government subsidy, you still don’t think that’s a profitable business or a good returns business?

No, I don’t think it’s wise to make any commercial decision based on subsidy.

I would tell Amcor that.

I think they know that, too.

Okay. The next question is for the SiP business. I mean what do we see that SiP business growth in this year and the coming years? I mean it has been built for quite some time already. When can we see another course momentum for the SiP business?

I think the SiP business for this year, we could see a flattish or a little bit down for the whole year, given the fact that there are less products being introduced and there is the seasonality and we are seeing market conditions are a little bit different from previous years. But we are still quite actively engaging with customers and some of the products are going to be mass produced and some are in earlier stage, but we do feel that come next year, the growth in our SiP business will resume.

So next to ask questions Laura Chen of Citigroup.

Hi, good afternoon. Thank you for taking my question. Just a quick follow-up on the gross margin. Just so you mentioned that for the structural gross margin target of 25% to 30% is achievable or not just for the second half but also for the full year, is that correct?

Yes. I think for the second half, we will sort of reach that level. And we are trying very hard and working very hard to – for the whole year. We’re working hard to reach that level as well. Bear in mind that that’s with the increase of our utility costs. The recent rate increase for us, it’s about 15% in electricity in Taiwan. And that will have roughly about 0.8% impact on us. So, that needs to be offset as well. So, it’s – even with that kind of increase in cost, we are still confident that in the second half, we will reach that. And we have – we are feeling, at this point, quite comfortable that for the whole year, we should be able to reach that as well.

Thank you. May I understand that aside from the utilization rate improvement, do we also assuming that more mix change towards the advanced packaging or AI-related or increasing like testing revenue, which would lead to higher gross margin?

Yes, that’s correct. We believe the higher advanced packaging as well as our test business will definitely help our margin.

Okay. Thank you. That’s very helpful.

Thank you.

The next to ask questions Jason Chen from CLSA.

You preferably mentioned that it makes sense for ASE to enter the new AP business when it is mainstream enough to reach maybe mass production stage for ASE. So, is that the case that for leading-edge service that you talk about, how should we expect the volumes or contribution for this kind of advanced packagings or your new business? Thank you.

Are you talking about percentage of revenue?

Yes, or can you give us more colors on maybe the contributions or your outlook in the future?

Well, look, last year, we have about low-single digit percentage of revenue coming from what we call the leading edge. And we are – as we pointed out last time, we expect to double that to mid-single digit. And as I pointed out that next year, we still continue to see strong momentum. And but in terms of exact percentage, we don’t have – I don’t have that number yet because we are expecting not only the advanced packaging will grow. The other so-called traditional advanced packaging or tests and all the other areas will grow as AI development continues to expand.

Okay. Got it. So, my second question in terms of your outlook in second half this year. So, can we expect seasonality or how season for end demand to sustain our growth momentum for maybe traditional packaging or flagship or even mature testing or any kind of service or products in Q3 or Q4?

I think Q3, Q4 or second half, we will see all kinds of all products to start to grow. But I think leading edge would may be above the corporate average.

The next to ask questions Gokul Hariharan of JPMorgan.

Yes. Hi. Thanks for the follow-up opportunity. First one, I wanted to explore a little bit is the partnership with the leading foundry for the advanced packaging. Could you help us understand a little bit the nature of this agreement, the arrangement? Is that something that you have visibility into the long-term? And is it kind of like a strategic partnership that ASE has entered into, or is it something that doesn’t have that kind of visibility given they are also expanding their own in-house capacity as well? So, I just want to understand how this partnership works over the next, let’s say, 3 years, 4 years?

Well, obviously, we work very closely with the foundries, and we do have continuous dialogue with them and to set up an expansion plan for our capacity. But this is something that between us and the foundry, I don’t think it’s proper for us to discuss what exactly the arrangement will be.

Okay. But do you think it’s something that will continue to drive the growth for the next 3 years, 4 years?

We do have good visibility, but I don’t want to get into the detail for it.

Okay. No worries. Thanks. Thanks Joseph. A couple of quick follow-ups, one is on pricing. Any changes you are seeing on pricing? And for the electricity tariff increase, is there any chance you are able to pass through some of these cost increases to customers? And also secondly, on the traditional packaging side, utilization in the early ‘60s definitely seems quite low. Based on your current customer forecast, any view on when we get back to like 70%, 75%? Will it happen this year, or will have to wait for next year to kind of get back to 70%, 75% utilization? Thank you.

Well, I think going into the second half, we will start to see our utilization to grow. And I think it’s safe to say that we will be above 70% for the second half. And in terms of pricing, I think we feel – I think the pricing – overall pricing for us is still resilient and there are a bit of a price pressure on the legacy products. But overall, I think on average, I think our pricing still remains to be resilient. And I think overall pricing structure will be much better than the past cycles.

Okay. Any chance you can pass on some of this electricity tariff, because it seems like it’s not a 1-year thing, it’s actually happening every year now.

Yes. I think all costs are being considered. And when we further set up the proper pricing that we have. So, whether it’s 100% passed out or is shared with our customers, I think that we will just come up with the sort of pricing, considering all the costs that we need to bear.

Got it. Thanks Joseph. Thank you.

Thank you.

There are no more questions. I am sorry, there is a follow-up question from Jason Chen of CLSA.

Yes. Sorry, I have follow-up questions. I wonder if you can provide more details on your comments regarding the leading-edge service. I mean, can you provide some of the type for cutting-edge packagings, like 2.5D or 3D or chip on wafer substrates? What kind of the type of advanced packaging or testing can you currently enter into the mass production stage, or have the contribution right now? Thank you.

We have Fan-Out. We have 2.5D. We have OS. I think those are our focus. Those are the ones, the type of packages we call leading edge.

Okay. And all of them account for right now low-single digit of the ATM business, right?

Like I said, this year, we are expecting mid-single digit.

Okay. Got it. Thank you.

There are no more questions.

Okay. To sum up, I think we had a better than expected first quarter. And going into second quarter, we are on track of things and for the whole year. We are also expecting same kind of outlook that we presented last time. I think overall, this is all sectors are bottoming out, maybe with some different test sectors with different time pace or time schedule. But all-in-all, we are comfortable with the current situation, and we will continue to make the necessary investments to service whatever customer needs, including the leading edge and also on the test side, we are increasing our CapEx as well to try to win more test business. Thank you very much. We will see you next quarter.