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

ASE Technology Holding Co., Ltd. (NYSE:ASX) Q4 2024 Earnings Call Transcript February 13, 2025

ASE Technology Holding Co., Ltd. misses on earnings expectations. Reported EPS is $0.1261 EPS, expectations were $0.16.

Kenneth Hsiang: Hello, I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2024 earnings release. Thank you for attending our earnings release 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, 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 Dr. Tien Wu, our COO, and Joseph Tung, our CFO. For today’s presentation, Dr. Wu will be giving the company’s key message. I will be going over the financial results, and then Joseph will then go through our company’s guidance. Both Tien and Joseph will then be available to take your questions during the Q&A session that follows. During the Q&A session, I will be moderating, receiving and as needed, clarifying and condensing each interaction down to a single question.

With that, let me hand the presentation over to Dr. Tien Wu. Tien? Thank you.

Tien Wu: First of all, a bit late Happy Chinese New Year to all of you. Let me give you the recap for 2024. Our consolidated revenues grew 2% year-on-year in 2024, with ATM revenues up 3% year-on-year. We have seen a very strong demand for leading-edge packaging and testing while the mainstream segment was a mixed bag. We saw a soft recovery in some segments and some other segments due to inventory correction as well as end market demand were lagging behind the general market. Leading-edge advanced packaging and testing revenues were over USD 600 million, accounting for around 6% of ATM revenues, up from USD 250 million in 2023. Our testing business grew 9% year-on-year in 2024 and in particular, grew 18% year-on-year in Q4 of ’24.

We do expect the testing revenue will have accelerated momentum into 2025. Our increased turnkey as well as our expanding leading-edge test. Our machinery CapEx was USD 1.9 billion, up by USD 1 billion versus 2023, mainly driven by advanced packaging and testing. Next, let me give you 2025 outlook. Our ATM business to outgrow the logic semiconductor market, driven by strong momentum of our leading-edge advanced packaging and testing business. Leading-edge advanced packaging and testing revenues to increase by USD 1 billion versus 2024. That will account for about 10% of our growth in 2025. While the general segment will be better than 2024, we expect them to grow mid- to high single digit year-on-year. On the investment in R&D, human capital, advanced packaging and testing capacity and also factory automation and all of the smart factory buildings, we will continue to accelerate in preparation for the AI-led super cycle which we believe have started in 2024, and we will see the momentum in 2025, 2026 and beyond.

Q&A Session

Lastly, let me give you a market landscape and ASE’s positioning. We believe the total semiconductor revenues are likely to reach $1 trillion in the next decade, driven by AI, robotics, electrification of all systems, also the energy and the IoT-related products. ASE is well positioned to benefit from the strong demand of leading-edge advanced technology as well as the growing volume of peripheral chips on accelerating edge AI adoption. A comprehensive technology toolbox, 3D, 2.5D fan-out, large panel SiP, copackage optics, power, automation, scale advantages as well as the geographic diversification of ASE make ASE the preferred partner for customers. ASE’s strong financial performance and flexibility and agility in handling business model evolutions, further widen the moat against competitors.

Let me pass the floor back to Ken.

Kenneth Hsiang: Dr. Wu. I will now go over the financial results. The fourth quarter ATM and EMS businesses came in slightly better than originally anticipated. Our ATM business’ fourth quarter outperformance was driven primarily by some communications-related business. Strength was driven by our test business with a growing 11% quarterly. For the full year, our ATM business grew by 3%. Our leading-edge advanced packaging business accounted for most of this growth. And though testing finished strong, we believe our test growth will be even stronger during 2025. Our overall equipment utilization was in the mid- to high 60s. For our EMS business, despite a muted fourth quarter outlook due to earlier seasonality, our SiP product flow came in slightly ahead of our expectations during the fourth quarter.

For the full year, our EMS business was flattish. We believe that this is somewhat in line with the electronics industry as a whole. It should be noted that an earlier seasonality somewhat distorts our annual comparisons for our EMS business and to a lesser extent, also at holding company level. Please turn to Page 6 where you will find our fourth quarter consolidated results. For the fourth quarter, we recorded fully diluted EPS of $2.07 and basic EPS of $2.15. Consolidated net revenues increased 1% sequentially and year-over-year. We had a gross profit of $26.6 billion with a gross margin of 16.4%. Our gross margin declined by 0.1 percentage points sequentially and improved by 0.4 percentage points year-over-year. The sequential decline in margin is principally due to lower profitability from our EMS business.

Our operating expenses increased by $0.4 billion sequentially and by $1.5 billion annually to $15.4 billion. The sequential increase in our operating expenses are primarily due to leading-edge advanced packaging and testing services ramp-up and timing of equity compensation-related expenses from our ATM business. The year-over-year increase in operating expenses is primarily attributable to continued R&D staff up and other labor-related costs. Our operating expense percentage increased sequentially by 0.2 percentage points and annually by 0.8 percentage points year-over-year to 9.5%. Our operating expense probably requires a bit of explanation here. Extensive preparation and groundwork for our leading-edge advanced packaging-related businesses started in late 2023 and ramped during 2024.

We have been aggressively hiring and training new employees throughout 2024. We also needed to ramp our new product introduction efforts, including perfecting tooling and process flows that eventually needed to be in place. Finally, semiconductor manufacturing has become very visible throughout the world. The skill sets necessary to prepare, manage and run manufacturing also are in high demand. Retention of our employees has become increasingly important, and all of this has been done in an inflationary environment. As such, these expenditures have created a ramp in our operating expenses that started in 2024. We see our operating expenses continuing to rise on an absolute basis but will level off in the middle part of 2025. Further, as revenues related to these efforts grow, our operating expense percentage should start to decline during the back half of 2025.

Operating profit was TWD 11.2 billion, down $0.3 billion sequentially and TWD 0.6 billion year-over-year. Operating margin declined 0.3 percentage points sequentially and declined 0.5 percentage points year-over-year. We believe this margin decline was primarily driven by higher compensation and ramp-up expenses related to leading-edge advanced packaging and geographical scale up across our ATM and EMS businesses. During the quarter, we had a net nonoperating gain of $0.2 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 $1.3 billion. Tax expense for the quarter was $1.9 billion. Our effective tax rate for the quarter was 16%.

The effective tax rate during the quarter was lower than expected, primarily as a result of higher tax investment credit recognition. Net income for the quarter was TWD 9.3 billion, representing a decrease of TWD 0.4 billion sequentially and TWD 0.1 billion year-over-year, the NT dollar appreciated 0.5% against the U.S. dollar sequentially while depreciating 0.75% annually. From a sequential perspective, we estimate the NT dollar appreciation had a 0.1 percentage point negative impact to the company’s gross and operating margins. While from an annual perspective, we estimate the NT dollar depreciation had a 0.2 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 TWD 27.3 billion with a 16.8% gross margin. Operating profit would be TWD 12.1 billion with an operating margin of 7.5%. Net profit would be TWD 10.2 billion with a net margin of 6.3%. Basic EPS, excluding PPA expenses, would be TWD 2.36. Please refer to Page 7 and here, you will find the 2024 consolidated full year results versus 2023 full year results. Fully diluted EPS for the year was TWD 7.23 while basic EPS was TWD 7.52. For 2024, consolidated net revenues improved 2% as compared with 2023. ATM improved by 3% while EMS business improved 2% annually. Gross profit for the year was TWD 96.9 billion, improving TWD 5.2 billion year-over-year or by 6%. In 2024, our consolidated gross margin improved 0.5 percentage points to 16.3%, principally as a result of foreign currency fluctuation and improved operating leverage from our ATM business, offset in part by higher utility costs.

Operating expenses increased TWD 6.4 billion for the year and came in at TWD 57.8 billion. Higher operating expenses, as discussed earlier, are the result of the ramp-up of leading-edge advanced packaging services and higher labor-related costs. Our overall operating expense percentage also increased to 9.7% as a result of these increases. Operating profit for the year was $39.2 billion for the year, declining $1.1 billion. Operating margin for the year was 6.6%, representing a decline of 0.3 percentage points from 2023. We recorded a net nonoperating gain of TWD 2.5 billion for the year, including a net interest expense of TWD 4.9 billion versus TWD 4.7 billion in 2023. And though interest rates may appear to be moderating, we believe that our interest expenses will most likely increase or stay near current levels heading into next year, given additional borrowing necessary to fund our expansion.

Most of the nonoperating gains were associated with our foreign currency hedging activities. Total tax expense was TWD 7.8 billion. The effective tax rate for the year was 18.6%. Current year income tax expense came in lower as a result of recognized deferred tax assets from increased government incentive programs on R&D. For the coming year, we believe our ongoing effective tax rate will be lowered by increased government incentive programs and offset in part by recent global minimum tax applications. We expect that the effective tax rate for the coming year will be slightly below 20%. Net income for the year increased by 2% to TWD 32.5 billion. On a full year basis, we estimate that the depreciating NT dollar had a positive 0.8 percentage point impact to gross and operating margins.

Removing the effect of PPA depreciation, our gross margin would be 16.9%. Our operating margin would be 7.3%. Our basic EPS would be $8.54. On Page 8 is a graphical presentation of our consolidated quarterly financial performance. On a year-over-year basis, gross margins have been gradually improving. On the operating margin front, as was stated earlier, operating expenses increased in preparation of leading-edge advanced packaging capacity labor staff up, offshore site expansion costs from our EMS businesses and equity compensation. On Page 9 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 of 2024, revenues for our ATM business were TWD 88.3 billion, up TWD 2.6 billion from the previous quarter and up TWD 6.4 billion from the same period last year.

This represents a 3% increase sequentially and a 8% increase annually. Gross profit for our ATM business was TWD 20.6 billion, up TWD 0.8 billion sequentially and up TWD 1.4 billion year-over-year. Gross profit margin for our ATM business was 23.3% up 0.2 percentage points sequentially and down 0.1 percentage points year-over-year. The sequential margin improvement was primarily related to higher test and leading-edge advanced packaging business offset in part by the impact of product mix shift. The annual margin decline is primarily the result of higher utility costs and product mix shifts offset in part by favorable foreign exchange. During the fourth quarter, operating expenses were TWD 11.2 billion, up TWD 0.6 billion sequentially and TWD 1.2 billion year-over-year.

The sequential increase in operating expenses was primarily driven by scale up of compensation costs, including headcount and timing of certain equity compensation. The annual operating expense increase was driven primarily by the continued scale up of R&D labor and timing of equity compensation. Our operating expense percentage for the quarter was 12.6%, increasing 0.3 percentage points sequentially and up 0.4 percentage points annually. The sequential and annual increases were primarily due to labor ramp-ups preparing for higher leading-edge advanced packaging revenues. During the fourth quarter, operating profit was TWD 9.4 billion, representing an increase of TWD 0.2 billion, both quarterly and annually. Operating margin was 10.7%, flat sequentially and down 0.5 percentage points year-over-year.

For foreign exchange, we estimate that the NT to U.S. dollar exchange rate had a negative 0.2 percentage point impact on our ATM sequential margins and a positive 0.4 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% and operating profit margin would be 11.6%. On Page 10, we have our ATM full year P&L. 2024 revenues for our ATM business improved by 3%, with our packaging and test businesses up 2% and 9%, respectively. Gross profit for the year improved 6% to TWD 73.2 billion. Gross margin was 22.5%, up 0.7 percentage points. Margin improvement was the result of higher factory efficiency and a favorable foreign exchange environment offset in part by higher utility costs and factory supply consumption due to shifting product mix.

Our operating expense percentage increased 0.9 percentage points to 12.6%. Operating profit nudged up TWD 0.2 billion to TWD 32 billion while operating margin declined 0.3 percentage points to 9.8%. For foreign exchange, on a full year basis, we estimate that the depreciating NT dollar had a 1.4 percentage point impact on margins. Without the impact of PPA expenses, gross profit margin would be 23.5% and operating margin would be 11.1%. On Page 11, you’ll find a graphical representation of our ATM P&L. On Page 12 is our ATM revenue by 3C market segments, you can see here the relative strength of our Communications segment during the fourth quarter. As previously mentioned, our leading-edge advanced services are currently spread across our computing and communications segments.

On Page 13, you will find our ATM revenue by service type. The most prominent thing here is that our wire bond services saw gradual declines over the last 8 quarters. Traditional wire bond products are in everyday electronics like WiFi, televisions and household appliances. Frequently, they are not the main chip, but mainly serve supporting roles as peripherals like a screen or power controller. This chart shows a somewhat simple concept, more basic products like many of those upgraded during COVID, having a longer replacement cycle. We would expect to see a pickup in wire bond when a general recovery starts to happen. A corollary, you can see from this chart, is that there’s strength in our advanced packaging and test businesses. We believe our efforts involved with growing our test business are continuing to pay off.

Our test services have also managed to outgrow the corporate average going from 16% to 18% of ATM. Our test business grew by 11% quarterly and 18% annually. As Dr. Wu mentioned earlier, we see our test business accelerating during 2025. On Page 14, you can see the fourth quarter results of our EMS business. During the quarter, EMS revenues were TWD 74.9 billion, declining TWD 0.5 billion or 1% sequentially and TWD 4.3 billion or 5% year-over-year. The sequential and annual revenue declines are primarily the result of accelerated seasonality for the year. Sequentially, our EMS business’ gross margin declined 0.7 percentage points to 8.3%. This change was principally the result of product mix and lowering operating leverage. Operating expenses within our EMS business declined TWD 0.1 billion sequentially and while increasing TWD 0.3 billion annually.

The sequential expense decrease was primarily attributable to lower compensation expenses while the annual increase is related to geographical expansion and acquisitions. Operating margin for the fourth quarter was 2.7%, declining 0.6 percentage points sequentially and declining 0.8 percentage points year-over-year. The sequential and annual declines were primarily due to product seasonality. Our EMS fourth quarter operating profit was $2 billion down $0.5 billion sequentially while down $0.8 billion annually. For the full year, our EMS business experienced a somewhat muted electronics demand environment. For the full year, EMS revenues grew by 2%. Gross margin improved by 0.3 percentage points, primarily due to product mix. Operating margin for the year was 2.9%.

The decline in our EMS operating margin was primarily due to geographical expansion and acquisitions with differing cost structures. Operating profit declined by $1 billion. On Page 15, you will find a graphical representation of our EMS revenue by application. There was a slight shift from consumer devices to communications devices. The shift here are generally due to underlying product seasonality. On Page 16, you will find key line items from our balance sheet. At the end of the year, we had cash, cash equivalents and financial assets of $85.9 billion. Our total interest-bearing debt increased by TWD 0.7 billion to TWD 213.9 billion. Total unused credit lines amounted to TWD 375.7 billion. Our EBITDA for the quarter was TWD 28.8 billion.

Our net debt-to-equity this quarter was TWD 0.37. On Page 17, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the fourth quarter and U.S. dollars totaled $640 million, of which $321 million were used in packaging operations, $290 million in testing operations, $23 million in EMS operations and $5 million in interconnect material operations and others. Machinery and equipment capital expenditures for 2024 and U.S. dollars totaled $1.876 billion, of which $957 million were used in packaging operations, $815 million in testing operations, $89 million in EMS operations and $15 million in interconnect material operations and others. In addition to spending on machinery and equipment, we also spent $655 million on land and building or for simplicity’s sake facilities during the fourth quarter while spending $1.1 billion for the full year.

During the year 2024, we invested significantly in our facilities as part of our generational advancement in packaging technology. Given that our facilities spending is sporadic in nature, we have historically discussed our capital expenditures, mainly as it pertains to our machinery and equipment spending for the sake of comparability. Our facilities were also previously more generic and not specialized as our machinery and equipment. But as factory automation, advancing technologies and tighter building specifications are now driving new facility investments, the scale of investment steps up and now also represents significant technology advancements and competitive advantages for our businesses. At this point, I would like to hand the presentation over to Joseph for further discussion on our overall company outlook.

Joseph?

Joseph Tung: Thank you, Ken. Let me give you a first quarter 2025 outlook. Based on our current business outlook and exchange rate assumptions, we project overall performance for the first quarter of 2025 to be as follows. For ATM, in NT dollar terms, our ATM first quarter 2025 revenue should decline by mid-single-digit quarter-over-quarter. And gross profit margin should decline by slightly more than 1 percentage point quarter-over-quarter. For EMS, in NT dollar terms, our EMS first quarter 2025 revenue should decline slightly year-over-year. Our EMS first quarter 2025 operating margin should decline by 30 basis points year-over-year. Now on top of our first quarter guidance, I would also like to give you some more color of our ATM business in 2025.

First on revenue. As Tien mentioned, our leading-edge packaging and testing business will continue to see very strong momentum, and we expect to add another $1 billion of revenue in this area or 10% of our revenue, ATM revenue growth. In terms of general market, we expect our revenue to grow in line with the industry, giving us above mid-single-digit ATM revenue growth. And to support such business prospects, we will need to further expand our CapEx in both capacity and matching facilities. For machineries and equipment, we expect our 2025 CapEx to be the annualized amount of fourth quarter ’24 number. And of which, 60% will be used for leading-edge to support the strong demand. Also, to support the aggressive expansion of both turnkey and pure testing businesses, over 30% of the total CapEx amount for the year will be allocated to testing.

Also, as mentioned by Ken, smart factory buildings have become an essential part of our overall leading-edge service offering. As such, we will need to double our CapEx and facilities to around USD 2 billion in multiple new sites, both in Taiwan and overseas. Secondly, I would like to talk about our profitability. We ended 2024 with an ATM gross profit margin of around 22.5%, which is a bit short of our structural gross margin target of 24% due to a softer-than-expected recovery of general market, which consequentially — and consequentially a sub-70% utilization rate. On top of that, our margin was also impacted by the inflationary environment with elevated costs, including electricity prices and logistics costs, et cetera. We’re also experiencing higher ramp-up costs of manpower and capacity as we’re in the investment and expansion mode at this point.

Entering 2025, once we progressively complete the full ramp of our leading-edge capacity, in the second half of this year, we expect ATM gross profit margin to reach the midpoint of our structural GM range with 2025 full year ATM gross margin recovering to structural GM target of 24% to 30%, and we expect to see further improvement in profitability in 2026 as we continue to expand our business. On operating expenses. The higher operating expenses is mainly due to active R&D investment, including setting up of R&D personnel, our Taiwan and overseas expansion and up-front costs of some new facilities. We do expect in 2025 ATM operating expense ratio should decline by a notch but remain higher than previous years as we continue the investment in leading-edge technology, human capital as well as varying up-front costs related to new facilities.

We believe the operating leverage of these investments will become more meaningful starting in the latter part of 2025 or into 2026. And therefore, OpEx percentage will start leveling off as we enter the full ramp-up of the newly invested capacity. And finally, I would like to say that there are many uncertainties ahead that could very well change the overall landscape of our business prospects. But with that in mind, we will stay focused on effectively executing our plan for the year, and hopefully, we will have a very decent 2025 ahead of us. Thank you very much.

Kenneth Hsiang: [Operator Instructions]

Operator: We have a question from Ms. Laura Chen of Citigroup.

Chia Yi Chen: Hello, my first question is that can I clarify what you mentioned about like $1 billion of revenue for the leading-edge contribution is additional new — another $1 billion contribution or the overall advanced packaging would contribute about $1 billion. Sorry, can you make it clear?

Joseph Tung: Tien mentioned that on top of the $600 million revenue we achieved in 2024, we will add another $1 billion of revenue in the leading edge for the year.

Chia Yi Chen: Yes, that’s very clear. And can you further also clarify that among that, can we kind of a breakdown of that advanced packaging or 2.5Ds between like a GPU or potentially AI ASIC or maybe edge AI as well?

Tien Wu: If is blended, we will not give you the breakdown.

Chia Yi Chen: My second question is, we know that recently, based on the new restrictions from the U.S. BIS, if clients — Chinese clients at TSMC, advanced nodes, they need to be packaging by so-called approved SAT wires, yes. So otherwise, TSMC may not really be able to ship to those Chinese customers. So from ASE perspective, since we are in the white list, I’m just wondering that do we see that surge requests or order, what would that impact our deterioration rate or like a potential the order visibility or outlook in the near term?

Kenneth Hsiang: Laura, you are asking about the BIS impact on our business, right, in general?

Chia Yi Chen: Right, right.

Kenneth Hsiang: Okay. Please?

Tien Wu: All right. This is a new regulation from BIS. And as we speak, we are working aggressively with our foundry partner as well as many customers. We’re trying to understand the detailed execution, the rules and also the capacity requirement. So all of these are in the process right now. The number that we have provided currently does not include this potential upside. We do understand there will be upside. However, we do not have a definitive plan in terms of when this upside will happen, the pricing as well as the type of package that are required. So at this point in time, we do understand this is an upside, and we are aggressively working with our partner and customer trying to fulfill that demand. But right now, we do not have any more detailed information to provide.

Operator: Charlie.

Charlie Chan: So my first question is really about your new business developments, especially at the beginning, the opening remark, you mentioned about the co-packaged optics. Can management talk about what ASE Group can do for this CPO advanced package and testing business? Can we start from this topic?

Kenneth Hsiang: Charlie, your question relates to copackage optics or are you asking in general about our R&D efforts?

Charlie Chan: The CPO, for example, what kind of service ASE Group can provide, timing, but it would be great if you talk about kind of the big picture, right, how you are working with that AI GPU customer supply chain and your foundry partner, this CPO development, right? Because I believe, it’s kind of new, and there could be a lot of bottleneck in the supply chain, right? So I’m not sure how ASE is going to contribute to that.

Kenneth Hsiang: Okay, Charlie wants to know about the overall CPO involvement that ASE has at this time, if you could first answer that.

Tien Wu: Well, I think you have already said it’s a new technology. And like any new technology, it take some time to incubate, ASE is playing a critical role in the supply chain as part of the overall puzzle. So we’re working with our foundry partner closely, the foundry technology is also evolving. We’re working with our ASIC suppliers, their architecture and system design as well as the request to the foundry partners are also evolving. And we’re working with the end system. In other words, their overall thermal, electrical, power delivery, under all of this constraint, we firmly believe the silicon photonics will be a vital incremental innovation to address many of these issues, together with other innovation. So as I said that the ASE will play a critical role in this new innovation, in terms of how do we work with our foundry ASICs and the system customers, I will not be able to reveal any development plan.

The only thing I can say is we’ve been working on this for quite some time. And then everybody’s moving very hard as well as they are competing technology. But as we know, all of the competing technology will have a plateau and with have a ceiling, we’re firmly believe that the optics will be a critical innovation for the whole supply chain, the ecosystem. That’s pretty much I can tell you so far. In terms of revenue ramp up, we are ramping up revenue. However, nothing major at this point in time, if that’s what you’re interested.

Charlie Chan: I have a second question, but somehow, can I have a clarification on Laura’s question on the, your $1 billion revenue as well. Is that okay?

Kenneth Hsiang: Charlie would like to — so you’re asking that this not count as your second question, right, Charlie?

Charlie Chan: Yes, yes. Just a quick clarification. Is that okay?

Kenneth Hsiang: Yes, sure, sure. If we could clarify for Charlie and for Laura, the $1 billion extra revenue and the components of that?

Charlie Chan: Yes, yes. And then I have a second more important question. Why don’t we go for the second one? I think that is also important to your investors because you can see those geographical dynamic, right? So your foundry partner may need to accelerate their U.S. production plan. So there has been some discussion about whether TSMC should also do CoWoS capacity in the U.S. And we kind of think that ASE becomes a more important partner with TSMC in CoWoS. So the reasonable question you said that whether ASE is considering your kind of advanced packaging opportunity or operation in the U.S.

Kenneth Hsiang: Okay. Charlie would like first clarification on the $1 billion number. And then if we could follow up with the current U.S. geopolitical climate impact on our overall business at this time.

Charlie Chan: Yes, because the last time you talked about advanced packaging total revenues of $1 billion, but now you’re talking about USD 1 billion additional. And your answer to Laura, you kind of talked about, is a combining the leading-edge and advanced packaging. So I kind of get very, very confused.

Kenneth Hsiang: We’ve got to let them answer first.

Joseph Tung: All right. In terms of the $1 billion extra revenue from leading edge, I think 3/4 of it — 3/4 of the $1 billion will be from packaging and another 25% will be coming from advanced testing. Does that answer your question on the first part?

Charlie Chan: Okay. So 25% is from advanced packaging and 75% from leading-edge packaging, is it…

Kenneth Hsiang: 75% related to advanced packaging, 25% related to testing, of leading-edge type products.

Charlie Chan: Oh, I see. I see. There’s a huge upside, right? Because last year, you did USD 600 million. And your original guidance you said above 1 billion. So the original guidance you said that you’re going to grow USD 400 million revenue, but now you are growing USD 1 billion revenue. Is that the right comparison, compared to your…

Joseph Tung: Let me clarify the numbers again. I think in 2023, we have leading-edge revenue of around $250 million and we grew that business in 2024 to over $600 million. And this year, we will add another $1 billion extra revenue from this new technology. So altogether, it will be over $1.6 billion from leading edge.

Charlie Chan: Okay. And your previous guidance is above $1 billion, but you didn’t say how much above the $1 billion.

Joseph Tung: Correct. Correct.

Charlie Chan: Okay, then it’s super clear. And can you go back to that major question? Your U.S. fab plan.

Tien Wu: It’s — I’m trying to figure out the best way to answer that question. We have been working very closely with our end customers as with our partner to explore what is the most efficient as well as visible way to ramp up all sorts of packaging, including the leading-edge anywhere in the world. The current plan is, ASE would like to figure out the methodology, the process, the automation and all the yield and all of the design database in Taiwan. And this is where our resource are mostly concentrated before we have a full confidence we can fully execute the ramp with reasonable results, we will not go outside of Taiwan. But once we have achieved that, we will consider how to move the personnel that we have trained by then, the equipment, the building material that we have already mastered by then into other parts of the world.

The reason being, as we transfer some of the leading edge — by the way, the leading-edge are constantly evolving, every year is different. We are in this time chase against resource and technology know-how. The yield, the investment and the qualification requires so much R&D resources. It simply cannot be executed for ASE in any kind of a satellite situation. It has to be a headquarter where all of our resources are concentrated. So we can constantly maneuver and change the configuration and the resource requirement and do all of the relevant experiments to know the right things to do until we really master that going to overseas will not do our customer and the country that we’re moving to the correct service. And that has been the agreement that I have — that we have with our foundry partner as well as with our end customers.

So the short answer is, yes, we have all of this in the plan. However, we are in good communication to all the relevant parties about the status we’re in, the volume we have created and also the learning that we have acquired. And I believe the end customer like the kind of rationale because I don’t think this is just a money thing. At the end of the day it’s the utilization, the cost, and for leading-edge packaging is really about the yield. So we really have to master this. Today, we just simply do not have the knowledge. We do not have the resource to create a satellite situation.

Operator: Question from Mr. Gokul Hariharan of JPMorgan.

Gokul Hariharan: My first question is on test. I think you mentioned, Dr. Wu, that a test will accelerate in terms of growth this year. Is that an acceleration from the 18% year-on-year growth that we saw in Q4? Is it like further acceleration? Any color you can give us on the test growth this year? Also, previously, I think you talked about reaching 25% of revenues as like a mid-term target. Could you talk a little bit about when do you have that insight for test to reach 25% of revenues? And lastly, I think I just wanted to understand what are the margins for testing like, are they still in the low to mid-30% levels? Or is there some upside given that you’re doing a lot more advanced testing?

Kenneth Hsiang: So Gokul, you’re asking about our general test business in relation to how it’s going to grow and then eventually the target in terms of where we want to get it to and then overall margin structure, basically the test business as a whole?

Gokul Hariharan: Yes, that’s right. Yes.

Kenneth Hsiang: Okay. Thank you.

Joseph Tung: I think the momentum of our test business is continued — continuously be growing, and we do have a fairly aggressive growth plan for our test business as well in terms of it further increasing our turnkey ratio as well as trying to grab more pure testing business as well. So this year, as I mentioned earlier on, our investment in test will continue to occupy a large chunk of overall CapEx, roughly over 30% of the CapEx will be spent on test this year. And, again, I think this year, our test business will outgrow our packaging business by twofold at this point.

Kenneth Hsiang: Okay, does that answer your question?

Gokul Hariharan: Yes. Could you also talk a little bit about the gross margins? So 2x of packaging that that’s quite clear. So that’s definitely an acceleration compared to Q4. Could we also talk a little bit about the margins for test. I think our previous understanding has been it’s like low to mid-30% gross margins. Is that consistent? Or is it even higher given that you have a lot more advanced testing business right now?

Joseph Tung: I think test business, we continue to have a relatively stable margin, have a 35%-ish kind of margin that year in, year out, and we’re seeing that continuing into 2025 as well.

Gokul Hariharan: My second question is on the leading-edge advanced packaging and testing revenues. I think our understanding and the market’s understanding is right now that most of this is in partnership with the leading foundry. How is the business momentum for full stack leading-edge advanced packaging and testing going, are we starting to get more full stack business also either on our own steam or in partnership with the leading foundry. And also, I think TSMC also talked about potentially CoWoS being applied to some non-AI applications also. Dr. Wu, could you talk a little bit about what are you seeing on this 2.5D and 3D packaging for non-AI applications given right now, most of it is AI?

Kenneth Hsiang: So Gokul, you’re asking about our leading-edge advanced packaging. And in terms of, our, the developments within our focus-type solutions. And then to a certain extent, whether there’s other R&D applications related to fan out at this point?

Gokul Hariharan: Yes. outside of AI because right now, it seems like mostly AI, but are you seeing this being adopted by other customers, whether that be in the HPC or even in the mobile space also?

Tien Wu: It’s like all new technology, you always start with a bulldozer and then the industry will find an anchor, application or anchor customer or a set of customers. I think that’s what we have seen. So you create a brand-new packaging technology, which has been around for a few years. But in the last 2 years, it has gone through a rapid ramp-up to now become more sophisticated and more mature with a better known yield as well as the yield for any kind of evolution. That’s what we have. After that, the other customers will start adopting the same type of methodology. So the answer to your first question, yes, we have other non-AI — well, I’m not sure exactly what is non-AI now. It seems like everything is AI related. But anyway, if you really need to differentiate.

There are other type of applications also adopting the same type of platform. We have seen that. Now what we have seen more is in the related field, AI or AI peripheral, we will have the ASIC customers as well as system customers start pushing for their own vintage or the own version of the architecture. And that incidentally will fall into the similar type of platform. So from ASE’s perspective, we abide for 2 things. We keep a very transparent communication with our partners, our end customers or our foundry customers. So we’re fully aware of what we are doing across the board. So there’s no confusion about who does what. After all, our joint objective is to make sure we deliver as much as we can to what the ecosystem required, okay, first thing.

The second thing is as we’re going through this ramp, we will make sure we have the good yield, it doesn’t matter which route that you’re taking through. So this is a process that we’re going through right now, 2023 is where we started. 2024 really is a year of transition. I think the — all companies, including ASE, we spend a majority of the time trying to figure out in which direction do we ramp and how do we ramp. So it has been quite painful for everybody. 2024 will be the — 2025 will be the first year we start seeing the effect of all the deployment and the investment, which should be followed through by 2026 and 2027. Now in order to ramp from ’23, ’24 and ’25 and become bigger impact in ’26 and ’27, you need to have all of this coming in, non-AI or other type of application to come in and also not just the chip design, the ASIC guys needs to come in, the system people need to come in and more importantly, as the AI algorithm become more efficient, it will enable or entice a different kind of algorithm and different kind of applications.

So I think the AI edge devices will also be — we will have a lot of incentive, which means that there will be more hardware or integrated system-level hardware that are required. And all of this will use a similar type of platform although different configurations, different building materials. It’s a very long answer, but it’s a good question. Thank you.

Gokul Hariharan: Maybe one clarification on outsourcing part from the — your partnership with the foundry versus your own full stack solutions, including FOCoS and FOCoS-Bridge, like what is the kind of mix that you’re expecting over the next, maybe, I think, this year and maybe next year in terms of your visibility?

Kenneth Hsiang: Gokul, can we take that on the — circle back a little bit later?

Gokul Hariharan: Sure. No worries.

Kenneth Hsiang: Yes, apologies.

Operator: Next question is from Mr. Brad Lin of BoA.

Brad Lin: I have 2 questions. So the first one, I would like to follow-up the component of the growth of leading-edge advanced packaging for this year, obviously, the at least $1.6 billion kind of the revenue from this segment is clearly pretty strong upside and 75% from packaging and 25% from testing. And then while we — I would like to know is there — was there anything changed in management’s mind in terms of this revenue target for 2025? Or that was simply in line with the expectation versus 3 months or 6 months ago? And then if there is upside, is that coming from the packaging side? Or is there any significant breakthrough in the — from the testing side?

Kenneth Hsiang: So Brad, you’re looking for what changed in the meantime that we — that you perceive that the number has ramped up, right? What are the factors that changed?

Brad Lin: Yes. And then for the components in 2025, if that there is upside, then well, upside to previous expectation, is that coming from packaging or testing?

Kenneth Hsiang: Okay. We can take that up. Brad wants to know about the components and then what changed in the meantime, within those components for us to come up with our $1.6 billion target.

Tien Wu: To answer that question, I think the best way is there was no surprise. The only thing that guard band, Joseph and myself, our previous estimate is our own ability to execute. The demand — I think I don’t have — I’ve not talked about the demand is there. Clearly, how do we ramp our resources, facility, equipment set, we don’t necessarily use all of the same materials, we don’t necessarily use all of the same equipment, and there has been a lot of collaboration on everybody’s side. I think as we walk through 2024, we start to gain confidence that we can execute to our plan. So I think the short answer is there was no upside or surprising news throughout the 2024, I think likewise, in 2025, while we’re executing the delivery of manufacturing side, we will continue to expand based on the road map that we have committed to our end customers and to our partner.

In terms of the assembly and the testing portion, there could be minor adjustment, but largely because it was a turnkey, so we pretty much know what the ratio is. I think Joseph and I, we talk about this. This is really the first time that both of us agreed to be explicit in giving you a very special number and also the mix because we do have sufficient confidence in delivering this at least to 2025 level. Around midyear, we’ll probably give you better color about the 2026. I do understand that there has been concern about the — whether there’s end market fluctuation, either up or down. But based on our visibility, for hardware demand, I think we’re still in the undersupply situation. So again, we’re just trying to ramp up to the best of our capability.

In terms of the long-term, the capacity and the other concern, if you’re putting all of this capacity, let’s just say, 5, 10 years down the road, can you use them? Our belief is the AI is at the early stage. We’re seeing the hyperscaler at a high level. And over time, the other application, which I’ve answered previously, as well as the real volume is going to be in the edge, I think, the kind of capacity we put in will be fungible and flexible in nature, we will be able to tailor for many of the applications and many of the customers long term. And most importantly, I think Ken talked about this, I think this is the right time, we need to widen the moat by making the appropriate affordable investment and trying to create the smart factory and also the large number of database, because the know-how on the AI and the platform at a brand level will help us tremendously in terms of credibility and also confidence to our system customer when they want to — when they’re ready to create the edge devices for their edge system which will involve many of the things that we’re doing at the HPC level.

Brad Lin: That’s very clear. And then, well, may I follow up also? What was the mix. Yes, so how was the mix of the, well, testing and packaging for 2024, if I may?

Kenneth Hsiang: Is this your second question.

Brad Lin: No.

Kenneth Hsiang: Well, why don’t we go on to a wider question.

Brad Lin: Okay. Yes, yes. So my second question would be on the, well, obviously, we are very happy to learn that this kind of advanced packaging, leading-edge advanced packaging will be applied to many applications across GPU, ASIC and even the edge devices. And so does the management seeing the strengthening momentum maybe in the non-GPU side? Or if there is any option that management can take, would the management prioritize either ASIC, GPU or edge device, and how will be the criteria, maybe profitability or margins?

Kenneth Hsiang: Brad wants to — Brad — your question relates to our preference or even what devices potentially outside of AI that we are being exposed to in terms of these leading-edge advanced packages, is that primarily right?

Brad Lin: Yes. And then, it would be good to know if whether ASIC or GPU or the edge device, with this kind of the advanced packaging architecture, which one will doing better or providing better margin for the firm?

Kenneth Hsiang: I can probably answer that, but I’m going to let — I want to pass that along.

Tien Wu: Well, the correct answer is we’re working with all of them, which is the truth. I mean in this space, there are limited end customers, so we’ll not be able to go down to the detail because whatever I said, you can immediately link that to the end customers. There aren’t that many of them. The truth is we’re working with all of them trying to develop the appropriate architecture based on their requirements. And the requirement will change, will evolve based on their — based on our yield and manufacturability and cost. And we will provide you a better clarity when we believe it is the time to disclose. But right now, we won’t be able to give you any kind of priority or who’s taking what status. I only lump all of the leading edge.

And there’s one confusion I would like to clarify a little bit. The ASE versions of leading-edge is a very leading-edge defined by our foundry customers, which is why $250 ramp up to $600 ramp up to $1.6 billion. The other advanced packaging, for example, a 7-nanometer is also advanced, but we do not count that as the leading edge. Such that we can give you better clarity, a little bit more specific, right? But there are other opportunity 7-nanometer, the 14-nanometer they also use pretty leading-edge, the pretty advanced packaging. It’s a little bit confusing there, but I just want to make sure you understand what we’re referring to for the $1.6 billion.

Operator: We have a question from Mr. Jason Tsang of CL Securities.

Jason Tsang: May I follow up the Laura’s question in terms of the white list because we hear some rumors suggest that ASE’s production line in China cannot support the client who are not in the white list. So I wonder if you can give us more details, is your whole group can all supports the clients or Chinese production cannot support. Wonder if you can give us more detail.

Kenneth Hsiang: So Jason, your question relates to the U.S. BIS specifications in terms of our ability to work with the white list or be on the white list. Is that correct?

Jason Tsang: I mean your production line in China can also support the clients who are not in the white list. Is that okay or only non-China production line?

Kenneth Hsiang: Okay. Jason would like to know more about our capabilities to support white list and non-white list customers within our China facilities.

Jason Tsang: Yes. Yes.

Tien Wu: Well, we want to be careful here because I don’t want to give you any information that is not pertinent if that does not stick to the BIS requirement. Right now, we’re in the process of clarifying, for example, our factory located inside of China, which set of customers can we serve? Until this is clarified, we will not give you any kind of official statement. We are in the process of working with our foundry partner as well as with the authority, on the precise requirement pertinent to that question. But what I can tell you is in case our China facility cannot support any customer per se, then we will explore the maximum probability of supporting that customer in Taiwan. And we’re confident we will be able to come up with enough capacity in due time to support that.

For other customers that would like to move to Taiwan, we are in the process of defining the required capacity, the investment while we’re ramping up all of the other leading edge. However, ramping up other advanced capacity will be an easier task because ASE factories in Taiwan are all highly automated. So we don’t believe that challenge is too daunting for us However, we cannot give you a definitive answer because we do not have a definitive clarity yet at this point. Maybe towards the second quarter, we’ll have a better clarity, and we’ll be able to give you the right answer without misleading you. Thank you.

Jason Tsang: That’s helpful. My second question is in terms of your outlook for your different kind of applications. So could you please give some colors in terms of your gross momentum in terms of communication, computing, consumer or industrial, et cetera. And which kind of gross momentum did you expect for this year? Probably spend migrations or new market shares or in demand improvement?

Kenneth Hsiang: So Jason, you’re looking for clarification or more color on the various growth opportunities available to us. Is that correct?

Jason Tsang: Yes, in different kind of applications for this year.

Kenneth Hsiang: If we could answer the — what the growth is via the various applications that we are seeing or what we’re expecting.

Joseph Tung: I think it’s logical to assume that in the coming quarters, I think HPC or computing will show the strongest momentum. In terms of the general market, we’re seeing communication is recovering better than other sectors. I think except everything else, but maybe automotive is in a recovery mode, and we are seeing business in these areas will start to come back in 2025. Automotive will take a little while before — and I think the most recent consensus is that, it will be maybe third quarter this year when we start to see automotive coming back to a more stable level. So I think in terms of the revenue components. I think it’s logical to assume that computing will continue to occupy more percentage of our revenue in the coming quarters.

Operator: Ken, do we have any other questions from analysts?

Kenneth Hsiang: Yes. We actually have a question that was sent over from us from Sunny Lin of UBS. I think she may be having some problems with her Internet. She asks, regarding our collaboration with foundry on advanced packaging. Would we be able to do more with them? And in particular, whether the on-substrate component is the main business that we’re seeking with them.

Tien Wu: I think the right way to answer that question is, I think our foundry partner is open to all suggestions and feasibility. And then the requirement is can we fulfill the capacity with an acceptable yield and ramp up quality. And then the, there is a step-by-step process with the strong support from our foundry partner to guide us together with our partner, end customer and trying to achieve that. And I think we’re trying to execute to that target, to that objective. In terms, can we expand the current portfolio into something else, I don’t think our foundry partner is objecting to it. I think everything is possible, but at this point in time, we would like to hold that comment until we have better clarity.

Kenneth Hsiang: And then her second question here relates to our investment in leading-edge advanced packaging, whether it’s highly concentrated in terms of ultimate device or whether we view that this type of investment is widely usable or fungible going forward.

Tien Wu: I thought I just answered that question.

Kenneth Hsiang: Yes, kind of.

Tien Wu: Yes, I just did.

Kenneth Hsiang: Okay. Do with have another question?

Operator: Yes. We do have Mr. Gokul Hariharan, returning to the call.

Gokul Hariharan: So just belaboring this point on the leading-edge advanced packaging and testing, your foundry partner has talked about AI revenues for them growing mid-40% over the next 5 years. And when I look at ASE’s leading-edge advanced packaging exposure, it also keeps track with these leading foundries, AI revenues with pretty much like a 1-year lag. So is that kind of like the growth rate that we could expect for your business also given your very tight partnership with this foundry partner? Like should we expect that you should also be able to grow those revenues at like 40%, 45% CAGR over the next 4, 5 years? Is that how you’re planning thinking about the CapEx spend?

Kenneth Hsiang: So Gokul, you’re asking regarding whether our leading-edge advanced packaging tracks with — or how that tracks with foundry HPC growth, right?

Gokul Hariharan: Foundry’s AI growth. AI growth exactly. But they have given a 40% to 45% target for the next 5 years, yes.

Tien Wu: We would like to take this 1 year at a time. I think there is a leading indicator. If you look at the, our announcement on CapEx machinery that normally will give you a very good indicator, are we on the right track right or not. If we’re not on the right track, we will try to reduce the spending because we know our trajectory is not heading in the right direction. So at this point in time, we would like to take a more conservative approach. Let’s just take 1 year at a time. I think 2024, we deliver, we executed. 2025 is the first year we’re trying to give a preposition. We give you a target for the full year, which we have never done that. I think we would like to be wait at least to the second quarter, the third quarter before we give you the ’26 and ’27 projection. Thank you.

Gokul Hariharan: Got it. And on this CapEx, could we talk a little bit about what is your kind of like payback? Or like how do you think about the CapEx and the ROI or ROCE attached to it? Maybe Joseph, how do you think about the CapEx and do we have a return number attached to it that we can share and in terms of what kind of time line that you’re looking at?

Kenneth Hsiang: So you’re looking for a general philosophy in terms of how we look at our CapEx?

Gokul Hariharan: Exactly. Because this year, I think the total CapEx seems like it’s going to be like north of $4 billion or so, right, including facility and machinery.

Joseph Tung: I think we’re not yet at the steady-state of these new investments. So I think it’s a little bit premature to pinpoint exactly what kind of return or what kind of capital intensity that’s required for the business. So we would like to reserve that until later. Maybe in the second half, we will have more accurate numbers to address this issue. But what I can say is, by the business that we’re running today, I think the leading-edge is margin accretive business for us.

Operator: There’s no other questions from the floor.

Kenneth Hsiang: If there are no other questions, I think we can end it right here, we’re getting close to about 1.5 hours. Thank you for attending our full year earnings release. We will see you next quarter.

Joseph Tung: Thank you.