Operator: Our next question is from Szeho Ng of China Renaissance.
Szeho Ng : First question regarding Q1 guidance, right? We are looking for revenue ATM business to be down double-digit roughly. Can I know how much is that volume or loading driven, how much is ASP related?
Tien Wu: ASP is quite stable right now. So, I think the — when we talk about the — well, first of all, let me just clarify a little bit. I think 2024 is the year of recovery. Our Q1 is flattish comparing to last year. Our Q2 will grow. When I talk about the second half inventory adjustment, I’m mainly referring to most of the customers that we have. Some of the customer has already started ordering. Some of the customers, it is still waiting, although we do not know for sure, starting July, all of the inventory adjustment will be over. But macroscopically, we think that in the third quarter of this year, most of the customers will start the recovery path, all right? So, I think that was a clarification. Now in terms of the ASP or volume, I think I am referring to volume driven, assuming the ASP is stable from now on, if that answers your questions.
Szeho Ng: And second question relating to advanced packaging portfolio. Is it fair to assume that right now, the overall portfolio for advanced packaging is margin dilutive to the ATM business? Or under what circumstances we should expect the advanced packaging to command margins similar to the division margin?
Tien Wu: I think the first answer is yes. When I talk about NTD 250 million, that’s all ATM. In terms of margin, I think Joseph has repeated over and over again. We don’t comment specifically, but the overall margin contribution to the business will be accretive.
Joseph Tung: Yes.
Tien Wu: I think that you just forced us to say that.
Joseph Tung: Okay. I was going to say not dilutive.
Tien Wu: Not dilutive. Sorry, does that answer your question?
Operator: Next question is from Mr. Gokul Hariharan of JPMorgan.
Gokul Hariharan : I had a question on the test side of the business. How are we seeing the progress in trying to improve the bundling ratio for turnkey test? And could we also talk a little bit about your market presence in some of these advanced AI chips, how much testing business are we able to secure? And Dr. Wu, if you could give us any milestones in terms of how we should be looking at your test business given I think the bundling ratio is still quite low compared to what you want to be in the medium term.
Joseph Tung: Well, in terms of our test business, we have been growing that part of the business percentage-wise in terms of our overall revenue composition. I think from ’21 to ’23, I think we have been growing that from below 15% to now over — close to 16% now. And we believe that ratio will continue to grow in 2024 to approach 17%. And we will continue to make efforts in growing our test business through the increasing our turnkey ratio with our customers. That includes advanced packaging today, which is, at this stage, is a low percentage of testing that we have been doing for our customers. We believe that percentage will continue to rise. And we will strive to reach our peak test revenue percentage of around 18% in the next couple of years.
Gokul Hariharan: My second question is on mobile since that is still the primary revenue driver. We’ve been hearing that there are some changes happening in the mobile side with more customers looking for 2.5D or Fanout package on package kind of solutions. There’s also some discussion about the biggest flagship mobile customers starting to potentially see or at least the foundry part of the mobile packaging stepping out of foundry towards OSAT. Are these opportunities that are likely to benefit ASE? How is ASE positioned to benefit from these? And could you talk a little bit about this potential change from flip chip to Fanout package on package on mobile? How beneficial is that to the OSAT profits and revenues?
Tien Wu: Well, I’m not sure I can answer all of your questions, but let me try this. Not just the mobile, right? If you look at the High Performance Computing and the router, the server, I think they all go through the similar trend. So initially, they want to go with a foundry supplier to make sure the turnkey service will guarantee yield and also the just-in-time delivery. As time goes on, a portion of the – it can be packaging, it can be testing, and can be un-substrate and they will decide to go to the outside of the foundry service. And then the first question is, is ASE-ready. I think ASE has been – this is really our business. And we are working with almost all of the customers in terms of the development just to make sure apple-to-apple we’re at least at par the efficiency cost reliability-wise at par with the foundry suppliers, depending on the business model and also the volume, supply-demand requirement, and I think we’re seeing the first wave of the outsourcing activity.
Once the door opens, I think this trend will continue. As more people coming in, as more technology becomes available, as the data points start going up, the confidence level of the supply chain diversity and the resilience, I think it will be a natural force to drive that. So in this regard, I think ASE will benefit because this is the business which is incremental and also in the core portfolio of our business objectives, right? Now, in terms of how fast, how much and the margin contribution, we believe the margin contribution will be accretive. We also believe that as this is coming in, the testing, turnkey becomes a natural extension and the testing will be of higher margin to begin with because of the investment and also the IP. So, as we approach more of the turnkey as we approach more of the high end, also the – there’s a natural margin requirement based on the technology content.
So, in the higher margin requirement in the higher turnkey ratio. So I think all of this will be very beneficial for ASE future. I hope that answers your question.
Operator: [Operator Instructions] Charlie Chan or Dylan Liu of Morgan Stanley has more questions.
Dylan Liu : Yes, I’m asking — this is Dylan. So, I’m asking on behalf of Charlie. So the first question is, do we see any competition coming from Chinese OSATs because we heard some of our customers are surveying the possibility of shifting some of the capacity to Chinese OSAT? And if so, how do we tackle that? Will we lower our price just because of the market share? Or we tend to focus more on the ASP and shift more of our focus to advanced packaging as such?
Tien Wu: I think for competitor, it’s ongoing for 30, 40 years. And we’re very used to this, right? I think customers will always survey the worldwide suppliers. The decision point is going to be under the new geographic regulatory control. If you’re comfortable going to a different part of the region, that will be the first screen, the first filter. I think for now, we have less concern for some of our key customers going to China because of that reason. But over time, this might change. Then we’re going back to the cost, the efficiency as well as the reliability and also the data traceability. So at least what — I cannot comment on a competitor, but what ASE has been doing is we’re trying to have full traceability on everything we do.
We’re having to have 100% fully automated. Therefore, everything is logging in the data with full transparency to our customers. We’re trying to improve our scale by working with leading foundry partner, we’re trying to work with all of the key Tier 1 system IDM suppliers, customers trying to increase the data point and our knowledge. And not only we’re trying to do manufacturing know-how, we’re trying to do the design simplification know-how because we’ll enter — we’re trying to make the more simple design, more complex, that’s where the value is. And immediately will make a more complex expensive design to a cheaper, simpler design. So, only with all of these positive cycles, can we secure the key customer. And this is why ASE has been having very high traction with all of the leading edge customer.
So, in terms of competition to Japan, Korea, China, including, it’s always the same. You can use the same analogy on all of the legacy. Over time, people are concerned about the legacy supply and demand. ASE is increasing our fully automated fab as well as our design simplification capability precisely to anticipate that. On top of it, we’re trying to improve the silicon carbide. We’re trying to improve the silicon photonics, as well as, or the High Performance Computing like the VIPack. So, all of the innovation are meant to offer additional toolbox to our customers in their future design, complexity as was simplification. I don’t think any of our Chinese competitors are having this kind of ecosystem and the data and the AI know-how for now, which is why I presented the ASE competitive advantage.
I think we have a few years of a clean leadership, we can leverage this window of opportunity to make sure our scale and efficiency and know-how can extend quickly ahead of our competitors.
Dylan Liu : And the second question is also circling back to the advanced packaging. So, we were curious about the business model because first thing is that how will we frame our competitive advantage versus the incumbent, for example, those IDMs and foundries? And because in our mind, we tend to think that more of a targeted market will be top dies coming from different foundries and we can work as a collaborator. And if so, how do we guarantee the yield? Because sometimes it could be packaging, sometimes it could be top die. But if ended up, the production yield is suboptimal, who will be responsible with it.
