ASE Technology Holding Co., Ltd. (NYSE:ASX) Q4 2023 Earnings Call Transcript

ASE Technology Holding Co., Ltd. (NYSE:ASX) Q4 2023 Earnings Call Transcript February 1, 2024

ASE Technology Holding Co., Ltd. beats earnings expectations. Reported EPS is $0.13, expectations were $0.12. ASE Technology Holding Co., Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Ken Hsiang: Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Fourth Quarter and Full Year 2023 Earnings Release. Thank you for attending today. Please refer to our Safe Harbor notice on Page [Technical Difficulty] to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in New Taiwan Dollars, unless otherwise indicated.

As a Taiwan-based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I am joined today by Joseph Tung, our CFO; and Dr. Tien Wu, our COO. For today’s presentation, I will first be going over the financial results. Dr. Wu will then give a market update and the 2024 key points. Joseph will then give the official company guidance. Both Joseph and Tien 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 2 questions at a time, but may return to the queue for further questions.

As per our expectations, the overall demand environment for our services remained sluggish during the fourth quarter. However, there were pockets of stronger performers within the devices we serve. But by and large, our customers remain conservative in their ordering patterns. In general, higher-end leading-edge services seem to be faring better than legacy services, but stronger wide breadth volumes remained elusive. 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 between the low- and mid-60s. For our EMS business, in the fourth quarter, revenues increased sequentially, in line with our expectations. This was driven by customers’ new devices and growth in Computing and Automotive segments.

For the year as a whole, the seasonal peak was a bit later in the year. With that, please turn to Page 3, where you will find our fourth quarter consolidated results. For the fourth quarter, we recorded fully diluted EPS of NTD 2.13 and basic EPS of NTD 2.18. Consolidated net revenues increased 4% sequentially and declined 10% year-over-year. We had a gross profit of NTD 25.8 billion with a gross margin of 16%. Our gross margin declined by 0.2 percentage points sequentially and declined by 3.2 percentage points year-over-year. The sequential decline in margin is principally due to higher EMS business mix and slightly lower ATM business loading during the quarter. The annual decline in gross margin is principally the result of lower loading during the current downturn.

Our operating expenses increased by NTD 0.4 billion sequentially and declined by NTD 0.4 billion annually. The sequential increase in operating expenses are primarily due to higher compensation expenses, specifically higher bonuses due to stronger goal achievement and ESOP expenses. The year-over-year decline was primarily attributable to lower bonus and profit-sharing expenses across the company. Our operating expense percentage declined 0.1 percentage points sequentially and increased 0.6 percentage points year-over-year to 8.7%. The operating expense percentage changes were primarily related to lower operating leverage in a downturn environment. Operating profit was NTD 11.8 billion, up NTD 0.4 billion sequentially and down NTD 8 billion year-over-year.

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Q&A Session

Operating margin stayed flat at 7.4% sequentially and declined 3.7 percentage points year-over-year. During the quarter, we had a net nonoperating gain of NTD 0.6 billion. Our nonoperating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other nonoperating income, offset in part by net interest expense of NTD 1.3 billion. Tax expense for the quarter was NTD 2.5 billion. Our effective tax rate for the quarter was 19.9%. Net income for the quarter was NTD 9.4 billion, representing an increase of NTD 0.6 billion sequentially and a decline of NTD 6.3 billion year-over-year. The NT dollar depreciated 1.5% against the U.S. dollar sequentially during the fourth quarter and 1.8% annually.

From both a sequential and year-over-year perspective, we estimate the NT dollar depreciation had a 0.5 percentage point positive impact to the company’s gross and operating margins. 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 NTD 26.7 billion, with a 16.6% gross margin. Operating profit would be NTD 13 billion with an operating margin of 8.1%. Net profit would be NTD 10.5 billion with a net margin of 6.6%. Basic EPS, excluding PPA expenses, would be NTD 2.45. Please refer to Page 4. Here, you will find the 2023 consolidated full year results versus 2022 full year results. Fully diluted EPS for the year was NTD 7.18 while basic EPS was NTD 7.39.

For 2023, consolidated net revenues declined 13% as compared with 2022. ATM declined 15%, while EMS revenue declined 11% annually. Gross profit for the year was NTD 91.8 billion, declining NTD 43.2 billion year-over-year or by 32%. In 2023, our consolidated gross margin declined 4.3 percentage points to 15.8%, principally as a result of the electronics industry downturn for both our ATM and EMS businesses. Operating expenses declined NTD 3.3 billion for the year and came in at NTD 51.4 billion. Given the lower operating leverage during the downturn, our operating expense percentage increased by 0.6 percentage points to 8.8% for the year. Operating profit for the year was NTD 40.3 billion for the year, declining NTD 39.8 billion. Operating margin for the year was 6.9%, representing a decline of 5.1 percentage points from 2022.

We recorded a net nonoperating gain of NTD 2.3 billion for the year, including a net interest expense of NTD 4.7 billion. Most of the nonoperating gains were associated with our foreign currency hedging activities. Total tax expense was NTD 9 billion. The effective tax rate for the year was 21.2%. We believe our ongoing effective tax rate for the coming year to be about 20.5%. Net income declined by 49% to NTD 31.7 billion. On a full year basis, we estimate that the depreciating NT dollar had a positive 1.3 percentage point impact to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 16.4%. Our operating margin would be 7.7%. Our basic EPS would be NTD 8.46. It’s worth noting that despite the prolonged correction lasting throughout the entirety of 2023, our NTD 7.18 EPS for 2023 represents the third highest EPS the company has historically delivered.

Only 2021 and 2022, COVID-driven demand years had higher EPS. On Page 5 is a graphical presentation of our consolidated financial performance. On Page 6 is our ATM P&L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the fourth quarter 2023, revenues for our ATM business were at NTD 82 billion, down NTD 1.7 billion from the previous quarter and down NTD 12.3 billion from the same period last year. This represents a 2% decline sequentially and a 13% decline annually. Gross profit for our ATM business was NTD 19.2 billion, up NTD 0.6 billion sequentially and down NTD 7 billion year-over-year. Gross profit margin for our ATM business was 23.4%, up 1.2 percentage points sequentially and down 4.4 percentage points year-over-year.

Gross margin was higher than our original expectations. The sequential margin improvement was the result of product mix and the end of summer utility rates. The annual margin decline is primarily the result of lower loading during the current downturn. During the fourth quarter, operating expenses were NTD 10 billion, up NTD 0.2 billion sequentially and down NTD 0.4 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher labor-based expenses. The annual operating expense decline was driven primarily by lower profit-sharing and bonus expenses. Our operating expense percentage for the quarter was 12.2%, up 0.5 percentage points sequentially and up 1.2 percentage points annually. Sequential operating expense percentage increased as a result of higher compensation-related expenses.

The annual increase was due to lower operating leverage. During the fourth quarter, operating profit was NTD 9.2 billion, representing an increase of NTD 0.4 billion quarter-over-quarter and a decline of NTD 6.6 billion year-over-year. Operating margin was 11.2%, improving 0.7 percentage points sequentially and declining 5.5 percentage points year-over-year. For foreign exchange, we estimate the NT to U.S. dollar exchange rate had a positive 0.7 percentage point impact on our ATM sequential margins and a positive 0.9 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.5% and operating profit margin would be 12.6%. On Page 7, we have our ATM full year P&L.

2023 revenues for our ATM business declined by 15%, with our packaging and test businesses down 16% and 11%, respectively. Gross profit for the year declined 35% to NTD 68.7 billion. Gross margin was 21.8%, down 6.7 percentage points, primarily as a result of the prolonged correction. Our operating expense percentage increased 1.1 percentage points to 11.7%. The increase was primarily the result of lower economies of scale. Operating profit declined 52% to NTD 31.8 billion, with operating margin declining 7.8 percentage points to 10.1%. Foreign exchange, on a full year basis, we estimate that the depreciating NT dollar had a 2.4 percentage point impact on margins. Without the impact of PPA expenses, gross profit margin would be 22.9% and operating margin would be 11.5%.

Certainly, on its surface, the full year comparative results appear to be somewhat unappetizing. But given the breadth and severity of the industry downturn during 2023 and the history of even more unappetizing results during previously even lesser downturns, we believe this annual performance on its whole shows a reset in our ongoing ATM profitability structure. On Page 8, you’ll find a graphical representation of our ATM P&L. This shows the long protracted downturn that we are slowly coming out of. On Page 9 is our ATM revenue by 3 C market segments. Our Communications Application took its seasonally larger position in the fourth quarter. Our Computing segment dropped from the previous quarter but still remains a point above historical levels.

On Page 10, you will find our ATM revenue by service type. We have seen a higher revenue mix of advanced packaging and testing business in the back half of 2023 versus the first half of the year. During the coming years, we expect a higher growth rate from these 2 segments given the increased complexity and content in newer generations of devices. On Page 11, you can see the fourth quarter and full year results of our EMS business. During the quarter, EMS revenues were NTD 79.2 billion, improving NTD 8.2 billion or 12% sequentially and declining NTD 4.8 billion or 6% year-over-year. The sequential revenue increase is primarily attributable to a slightly later than seasonal peak to our EMS business, while the year-over-year revenue decline is primarily due to the broad-based soft electronics demand environment.