ASE Technology - Q2 2024

Transcript

Kenneth Hsiang (Head of Investor Relations)

Hello. I am Ken Hsiang, the Head of Investor Relations of ASE Technology Holdings. Welcome to our second quarter 2024 earnings release. Thank you for attending 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, I will be going over the financial results, and Joseph will give the company's outlook. Dr. Wu and 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. The second quarter can be summed up as the tale of two businesses: one business representing the leading-edge products and the other the more traditional products. For the traditional business, the second quarter had selective products with signs of reemergence.

But by and large, general product demand lacked the strength and durability necessary to be considered a sustained healthy pickup in the immediate term, while the leading-edge business saw increasing demand with the development of increasing product pipelines. Equipment utilization for traditional products looked to be near 60%, while utilization for the leading-edge products is effectively full.

To support the bifurcated market, we will need to continue to increase our investment in the leading-edge space, in particular, labor and equipment. From the labor perspective, we will need to hire more engineers as the level of product complexities are increasing with the leading edge. We will also need to invest in incremental capital equipment to provide for incremental demand. For our EMS business, in the second quarter, demand for our services was slightly ahead of our initial expectations.

We believe this was principally the result of a slightly faster start to the manufacturing season. Please turn to Page 3, where you will find our second quarter consolidated results. For the second quarter, we recorded fully diluted EPS of $1.75 and basic EPS of $1.80. Consolidated net revenues increased 6% sequentially and 3% year-over-year. We had a gross profit of $23.1 billion, with a gross margin of 16.4%. Our gross margin improved by 0.7 percentage points sequentially and 0.4 percentage points year-over-year.

The sequential improvement in margin is principally due to NT dollar depreciation and product mix changes at both our ATM and EMS businesses. Our operating expenses increased by $0.7 billion sequentially and by $1.7 billion annually. The sequential increase in operating expenses is primarily due to higher R&D labor-related expenses.

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 remained flat at 10% sequentially and increased by one percentage point year-over-year. The annual increase was also related to higher R&D staff-up for both ATM and EMS, overseas expansion, and higher incentive stock option and bonus expenses. Operating profit was $9 billion, up $1.5 billion sequentially and down $0.4 billion year-over-year. The year-over-year decline in operating profit is primarily related to higher operating expenses related to the ramp-up of our leading-edge advanced packaging and overseas expansion. Operating margin increased 0.7 percentage points sequentially and declined 0.5 percentage points year-over-year. During the quarter, we had a net non-operating gain of $1.1 billion.

Our non-operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates, and other non-operating income offset in part by net interest expense of TWD 1.2 billion. Tax expense for the quarter was TWD 2 billion. Our effective tax rate for the quarter was 19%. Net income for the quarter was TWD 7.8 billion, representing an increase of TWD 2.1 billion sequentially and flat year-over-year.

The NT dollar depreciated 3% against the US dollar sequentially during the second quarter, while depreciating 4.2% annually. From a sequential perspective, we estimate the NT dollar depreciation had a 0.85 percentage point positive impact to the company's gross and operating margins, while from an annual perspective, we estimate the NT dollar depreciation had a 1.21 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 $24 billion, with a 17.1% gross margin. Operating profit would be $10.2 billion, with an operating margin of 7.3%. Net profit would be $9 billion, with a net margin of 6.4%. Basic EPS, excluding PPA expenses, would be $2.08. On Page 4 is a graphical representation of our consolidated financial performance. You will see a troughish but gradually improving environment for both our ATM and EMS businesses. Gross margins are gradually improving also. On the operating margin front, as was stated earlier, operating expenses are increasing for expected ramps in leading-edge advanced packaging products. We expect these leading-edge advanced packaging products to be accretive to margins. On Page 5 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 second quarter of 2024, revenues for our ATM business were TWD 77.8 billion, up TWD 4 billion from the previous quarter and up TWD 1.7 billion from the same period last year. This represents a 5% increase sequentially and a 2% increase annually. Gross profit for our ATM business was TWD 17.2 billion, up TWD 1.6 billion sequentially and up TWD 1 billion year-over-year. Gross profit margin for our ATM business was 22.1%, up 1.1 percentage points sequentially and up 0.9 percentage points year-over-year. The sequential margin improvement was primarily related to foreign currency and higher loading efficiency, offset by higher utility costs. The annual margin improvement is primarily the result of foreign exchange product mix offset in part by higher utility costs.

During the second quarter, operating expenses were $9.9 billion, up $0.5 billion sequentially and $1.2 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher compensation expenses from ramp-up of leading-edge advanced packaging. The annual operating expense increase was driven primarily by the continued scale-up of R&D labor and other labor-related expenses. Our operating expense percentage for the quarter was 12.8%, flat sequentially and up 1.3 percentage points annually. Sequentially, operating expenses kept pace with revenue expansion. The annual increase was due to higher compensation expenses primarily at the R&D level. During the second quarter, operating profit was $7.3 billion, representing an increase of $1.2 billion quarter-over-quarter and a decline of $0.2 billion year-over-year. Operating margin was 9.3%, increasing 1.1 percentage points sequentially and declining 0.4 percentage points year-over-year.

For foreign exchange, we estimate the NT to US dollar exchange rate had a positive 1.47 percentage point impact on our ATM sequential margins and a positive 2.1 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.3%, and operating profit margin would be 10.8%. On Page 6

, you'll find a graphical representation of our ATM P&L. As you can see here, the first half of 2024 is shaping up very similarly with the first half of 2023. On Page 7 is our ATM revenue by 3C market segments. Our communications application dropped three percentage points, while our computing and consumer segments increased. During the quarter, we experienced some spotty pickups in our consumer space. However, end demand was insufficient to sustain a more robust growth rate.

As a note here, our leading-edge advanced packaging services are recorded within computing and communications accordingly in line with their underlying usage. On Page 8, you will find our ATM revenue by service type. There are only some small movements here, with other services declining 2 percentage points and wire bonding and advanced services increasing 1 percentage point each. On Page 9, you can see the second quarter results of our EMS business. Our EMS revenues came in a bit ahead of where we expected, mainly as a result of a slightly earlier-than-expected start to the manufacturing season.

During the quarter, EMS revenues were TWD 62.9 billion, improving TWD 3.5 billion, or 6% sequentially, and improving TWD 2.5 billion, or 4% year-over-year. The sequential and annual revenue improvements are primarily attributable to our customers' timing of this year's product manufacturing start.

Sequentially, our EMS business's gross margin improved 0.3 percentage points to 9.6%. This change was principally the result of better loading. Operating expenses within our EMS business were $4.1 billion, increasing $0.2 billion sequentially and $0.5 billion annually. Our second quarter operating expense percentage was 6.5%, flat sequentially and up 0.6 percentage points annually. The higher annual operating expense percentage was primarily related to higher expenses related to NPI development.

Operating margin for the second quarter was 3.1%, improving 0.3 percentage points sequentially and declining 0.4 percentage points year-over-year, primarily due to an increase in compensation expenses on higher headcount, mainly due to the consolidation of an acquired entity. Our EMS second quarter operating profit was $2 billion, up $0.3 billion sequentially, while down $0.1 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application.

As is typical in the second quarter, there isn't much movement here on a sequential basis. However, on an annual basis, we are experiencing decent growth within our automotive products. On Page 10, you will find key line items from our balance sheet. At the end of the second quarter, we had cash, cash equivalents, and current financial assets of $75.3 billion. Our total interest-bearing debt declined by $11.4 billion to $183.9 billion. Total unused credit lines amounted to $417 billion. Our EBITDA for the quarter was $26.1 billion. Our net debt to equity this quarter was 0.34. On Page 11, you will find our equipment capital expenditures relative to our EBITDA.

Machinery and equipment capital expenditures for the second quarter in US dollars totaled $406 million, of which $215 million were used in packaging operations, $154 million in testing operations, $31 million in EMS operations, and $6 million in interconnect material operations and others. We continue to be excited by the expanding portfolio of products that our leading-edge advanced packaging addresses.

As we look further out, we continue to see signs that business is shaping up for the next supercycle. However, if we look into the more immediate future, we believe we will continue to have a tale of two businesses: the leading edge and the more traditional business. When we look at the leading-edge business, including AI and high-end networking, business is continuing to boom. We cannot seem to get the capacity installed fast enough. For us, this is also not a single customer phenomenon either.

The interesting part is that it appears to be accelerating. On the more traditional business side, there is some excitement regarding potentially shortened refresh cycles on a number of products due to new AI features. But by and large, our customers are still proceeding cautiously. For us, that means our customers generally are in a trial-and-error mode. They start with a conservative forecast. If their products hit, they will quickly adjust their outlooks. There is an increasing optimistic sentiment in the market, and we are looking forward to when such optimism manifests into increasing forecasts. If we look at our overall cost environment heading into the third quarter, we will need to continue to manage our costs of production with higher utility costs and ramping labor needs.

On the operating expense front, we also see continued spending on R&D labor, tools, and equipment related to leading-edge advanced packaging and testing. And as I stated earlier, we will continue to bear higher operating expenses before the majority of revenues come into place towards the latter part of this year and next year. We are looking to hold our full-year operating expense percentage increase to within 75 basis points of that of 2023. With that, I would like to hand the floor over to Joseph Tung to speak to our corporate outlook. Joseph?

Joseph Tung (CFO)

Thank you, Ken. Let me give you a guidance for the third quarter. In terms of ATM and in NT dollar terms, our ATM third quarter 2024 revenue should grow by a high single digit quarter-over-quarter. And our ATM third quarter gross margin should be between 23%-23.5%. In terms of EMS, in NT dollar terms, our EMS third quarter 2024 revenue should grow mid to high quarter on quarter. Our EMS third quarter 2024 operating margin should be slightly above fourth quarter 2023 level of 3.5%.

In addition to the revenue and margin guidance, I would like to also provide an update on our CapEx. In anticipation of the booming demand for leading-edge ATM capacity and further technology advancement, we believe we will need to step up our CapEx investment, starting from raising full-year 2024 consolidated machinery CapEx to double from last year's $914 million level. As these investments carry higher value contribution and are becoming more critical to the overall semiconductor manufacturing, we believe such investment will be both return and margin accretive.

On geographical expansion, we started our Malaysia expansion two years ago, and now phase I has been completed, and we will start volume production in quarter one 2025. Also, we're soon to close the acquisition of two Infineon operations, one in the Philippines and one in Korea, and expect revenue contributions of these two sites starting from third quarter this year. We have also acquired land in Mexico, and we've identified potential locations in Japan. The land will be developed, and buildings will be constructed in anticipation of future customers' demand, and all these efforts are made to shorten the lead time for capacity ramp-up. With that, we will open the floor for questions.

Operator (participant)

If you have any questions, please raise your hand. When you ask questions, please hold two questions at a time. Thank you. Our first question is from Mr. Gokul Hariharan of JPMorgan.

Gokul Hariharan (Managing Director)

Yeah. Hi. Good afternoon, Joseph and Ken. Thanks for your comments. My first question is about the guidance. So when you talk about ATM high single digit, could you also help us to understand the full-year growth prospects for ATM? Because I think back in February or January, I think Tien had talked about 6%-10% for industry and similar growth for ATM. Any updates there? Given year-to-date, it looks like it would be tracking at about flattish year-on-year on USD terms. And also gross margin, I think previously we were expecting 25%-30% range in the second half of the year.

Any reason, Joseph, why it's a little bit lower? Are there any startup costs or any other additional costs that have come in? Or is it just that utilization is tracking lower? And lastly, on CapEx, this double from FY 2023, obviously a bigger number than previous. Any breakdown in terms of test versus advanced packaging versus traditional packaging in terms of where you're putting in incremental CapEx? That's my first question. Thank you.

Joseph Tung (CFO)

I guess the full year, in terms of our full-year perspective, I think in the general market, the recovery seems to be a bit slower than we were expecting. So although in the second half, we will start to see the general market start to bottom out, and we'll start to have some recovery, more recovery there. But the pace of it seems to be slower than originally expected. But on the leading edge, it still is booming, but we are aggressively trying to catch up with the capacity to meet the growing demand.

But all in all, put everything into consideration, I think for the full year, we're now looking at a more moderate kind of growth in terms of our top line. And in terms of margin, I think, again, because of the more muted recovery of the general market, I think in third quarter, we will come in a little bit short on reaching the structural margin of 24%. But on the full-year basis, we still remain hopeful that going into the second half, we will have a better pickup. And we're still, I think coming back to the structural margin is still in play at this point. What's the third question?

Gokul Hariharan (Managing Director)

CapEx breakdown.

Joseph Tung (CFO)

The CapEx breakdown, with the new CapEx that I just mentioned, I think the breakdown will be roughly 53% for assembly and 38% for test. We have another 1% for material and about 8% for EMS.

Gokul Hariharan (Managing Director)

Okay, that's very clear. Thank you. My second question, Joseph, is on the 2.5D advanced packaging where you're obviously spending a lot of CapEx and the prospects are good. I think last time, I think Tien had mentioned $250 million additional revenues from this segment. And I think recently, I think in your AGM, you had indicated there's probably some upside to that number. Could you talk a little bit about, A, what is the scale of this kind of business?

Do you think that this could be 10% of your ATM revenues next year? And secondly, could you talk a little bit about your partnership with the leading foundry, given they also called out increased usage of OSAT partners to fulfill customer demand? How widespread is your kind of customer base? Is it mostly coming from this leading AI accelerator customer, or is it kind of more broad-based? You're having multiple projects from many different customers for 2.5D packaging.

Joseph Tung (CFO)

Well, I think in terms of leading edge, I think mostly it's still coming from AI or high-performance computing. And I think it's a broader base. It's not just one customer phenomena, as Ken mentioned earlier on. And we are having very active engagements with both of our foundry partners as well as customers directly. And I think the raising of our CapEx is toward building the needed capacity for this type of including packaging as well as tests.

Operator (participant)

Next question is from Ms. Sunny Lin of UBS.

Sunny Lin (Analyst)

Hello, could you hear me?

Operator (participant)

Yes.

Sunny Lin (Analyst)

Thank you very much. So my first question is to follow up on the testing opportunities that you just mentioned regarding the advanced packaging business. So could you share a bit more details regarding the customer engagement and, for some of the key projects, how you compete with the existing suppliers?

Joseph Tung (CFO)

Existing suppliers?

Sunny Lin (Analyst)

For testing for these HPC projects.

Joseph Tung (CFO)

Oh, okay. I think there's plenty to go around as we see the demand for leading edge, both for packaging and tests, are booming. We are currently still a little bit capacity constrained, and we are beefing up our CapEx in this area to build the capacity as well as to further our technology advancement. I think, as I mentioned, the demand is coming from different customers and also part of it from the foundry as well. We will entertain whatever business that is needed from our customers. And in terms of meeting competition, there's always competition, and we will do whatever we can to further penetrate whatever business that is in front of us.

Sunny Lin (Analyst)

Got it. Thank you. Maybe let me try to ask from a different angle. And so for some of the accelerator products, there are some pretty solid existing suppliers that have a very close relationship with the customers. They are willing to customize the burn-in tools and also the boards. And therefore, just wonder what your competitive strategies are. And if you manage to get some of these products, when should we expect the revenue to start to come through?

Joseph Tung (CFO)

We are gearing up on our leading-edge testing capacity and capability, including burn-in. We are basically leveraging on our turnkey services. And we do expect to have good progress starting from next year.

Operator (participant)

Our next question is from Mr. Charlie Chan.

Charlie Chan (Technology Research Analyst)

Hello, good afternoon, Joseph, Ken, and Iris. Thanks for taking my question. So maybe to begin with, I'm wondering, Joseph, your view about TSMC talking about the Foundry 2.0. They include the back-end foundry also to their TAM. Do you think going forward there would be more competition from foundry, or you believe there should be more collaborations? Thank you.

Joseph Tung (CFO)

That is really a testament that the back-end packaging and test is becoming more and more a critical part of the overall value chain. And we are excited about the opportunity in front of us. And we will be closely working with our partners, both on the upstream and also downstream, to make this thing happen. So I think the overall relationship with both our customers as well as upstream foundries, we are working very closely with both of them. We'll try to come up with the capacity and the technology needed to suit their needs.

Charlie Chan (Technology Research Analyst)

Gotcha. Thanks, Joseph. So my follow-up question is also to clarify your potential expansion of the advanced packaging business. So a couple of speculations, maybe it's a good chance for you to clarify here. So first of all, my understanding is that you only do the wafer-on-substrate WoS. But the chatter suggests that you want to expand to Chip-on-Wafer. That's the first part. And secondly, there's a rumor talking about you probably will do a new fab very close to Taichung or Changhua area. And that is a kind of offloading TSMC's burden. And number three is really the capacity number. As far as I know, probably in terms of WoS capacity, you have 6,000 wafers per month. But rumors talking about you are going to more than double the capacity for WoS. So on those kind of rumors or speculation, can you clarify a little bit? Thank you.

Joseph Tung (CFO)

We're not going to clarify the speculation, by the way. But I will give you a qualitative description about the current engagement model. The technology takes years to develop. So whether the WoS or the CoW or the equivalent of WoS or the equivalent of CoW has been developed together with the foundry partners as well as key customers for years. So in the current landscape, because of the capacity constraint, there has been active engagement with our partner as well with our customer to see which route will give you the most efficient alternative to fulfill the customer demand in the shortest amount of time.

So this is kind of the partnership that we have developed with the leading foundry suppliers. We have also gained confidence from multiple customers over years of product development, trial and error process, materials, or different equipment set and the reliability. So in this round, as we can see, the oS ramp has been pretty successful. We will continue to measure and monitor the progress of ramp-up to make sure the yield, the quality, and the cost model are all in check. We cannot give you the specific comment based on the number that you have outlined. However, if you go back to the CapEx number we have provided, I think you can clearly understand that we're trying to ramp up rapidly on the oS. The CoW has been engaged with multiple customers as well as with our foundry partner.

So we have active conversation together with partners and customers, again, just to seek the best alternative way to fulfill the customer demand. I think we're not in the position to comment detail of the engagement model as well as the quantity. But over time, just to give you a rough number, at the beginning of the year, we estimated we will have about TWD 250 million incremental advanced technology revenue. I also commented we are slightly ahead of that curve. So right now, that status is we are ahead of the original number. The momentum most likely will accelerate into next year, also as indicated by Joseph and Ken's comment that we're adding, we're doubling the CapEx. In 2025, we will continue to monitor the situation. And based on the business landscape, that we will decide what would be the right way to do it.

Charlie Chan (Technology Research Analyst)

Okay.

Operator (participant)

Next question is from Mr. Rick Hsu of Daiwa Securities.

Rick Hsu (Director and Senior Equity Analyst)

Hello. Can you guys hear me?

Joseph Tung (CFO)

Yeah.

Rick Hsu (Director and Senior Equity Analyst)

Okay. Sorry. Sorry for this technical issue. The first question is my usual housekeeping question about your utilization rate for wire bonding and the testing for Q2 and Q3. And also a little follow-up. When Ken says something about your advanced utilization rate was already full, what's your quantitative definition of the full? Thank you.

Kenneth Hsiang (Head of Investor Relations)

In terms of utilization in quarter two, we have both our packaging and testing running at slightly above 60%. And that ratio will go above 65% for both in quarter three. When we talk about full, we mean everything is being used up or capacity up.

Rick Hsu (Director and Senior Equity Analyst)

Okay. All right. Thank you. That's clear.

Joseph Tung (CFO)

Adding to what Ken just mentioned, I think when we talk about expanding our capacity, we are talking about expanding capacity for all kinds of demand coming from our customer, whether it's CoW or WoS or testing. Also, not just on the machinery itself, we are also adding spaces, factory spaces, new factory buildings that are being built or being put on stream online. We are also investing heavily. We're beefing up our R&D as well, making a lot of investment in R&D. And also in terms of hiring talents, it's an all-around effort for us to meet the customer demand.

Rick Hsu (Director and Senior Equity Analyst)

All right. Thank you. The second question is about your CapEx. We see your very strong commitment in building the advanced packaging testing capacity, such as on-substrate and also the CoWoS equivalent. Would you worry about any potential risk of overflow business model, i.e., that when the foundries resolve their capacity bottleneck issue, would they cancel the outsourcing? I mean, that's just what I said about the overflow risk.

Joseph Tung (CFO)

Well, I think the business model, of course, anything is possible. But the collaboration has been in place for many, many years. We're also very used to the up and down cycle. So in this round, it really depends on across the whole platform. We're looking at the multiple customer product development. Then we look at their utilization and their volume roadmap. Then we look at our investment. Of course, we will examine the flexibility of the investment we put in place. So the nature of the OSAT business is we will build a flexible and fungible capacity.

And that can be easily moved around to accommodate the different product mix as well as volume. So right now, we're quite confident the capacity we put in place will be here and will be very useful for our customers and our partners for quite a few years at least. So the short answer is no, we don't worry about it.

Operator (participant)

Next question is from Mr. Brad Lin of Bank of America.

Brad Lin (Director)

Hi. Good afternoon. Thank you for taking my questions. I have two questions. The first one is on the overseas expansion. So does the firm have any new thought on the US expansion? I know that we comment about overseas, but that seems to, well, we did not mention much about the US side. So I am on the new subsidy program by the US government and also the, well, increasing political dynamics there. So does ASE have any new thoughts on the U.S. expansion? And we also see the expansion of the ISE Labs there in California. Does that qualify for apply to the new subsidy programs? Thank you.

Joseph Tung (CFO)

Just to give you an answer, well, let me comment on the ISE facility. The ISE facility only has one purpose. That is to support the innovation at a chip level or at a system level in Silicon Valley for either AI or the future edge device or any advanced technology, high-performance computing, or silicon photonics or power management. So the lab is put in place to provide system-level testing, system-level development, as well as system-level reliability. The lab is in California, Silicon Valley. The main mission is to bridge whatever technology is available domestically in the U.S. and whatever technology that is needed that is available globally. Right?

So the CHIPS office just announced the R&D funding as well as the manufacturing funding. We will consider how to apply. And for ISE and IS is similar or the phase three or phase four, we will consider the CHIPS Act R&D as well as the manufacturing. The U.S. high-volume manufacturing establishment is to be considered. We do not have a tangible plant yet, mainly because the customer request on the volume are still being investigated.

Brad Lin (Director)

Got it. So can we say that, well, with the recent developments, there is a higher possibility that we will do the so-called high-volume production site there?

Joseph Tung (CFO)

We do have a Mexico facility. And that is also available for North America. Just to give you a clarification.

Operator (participant)

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

Laura Chen (Executive Director and Head of Taiwan Equity Research, Greater China Technology)

Hello. Hi. Good afternoon. Can you hear me?

Operator (participant)

Yes.

Laura Chen (Executive Director and Head of Taiwan Equity Research, Greater China Technology)

Thank you. I have questions about the gross margin trends. On one hand, we are seeing that we are accelerating our investment in the advanced packaging. But the broad-based recovery on the traditional application seems to remain muted. So my question is that how would we expect this advanced packaging investment to bear fruit? If it reached the satisfied DRA and also the loadings, how would you see that will be the normalized gross margin? That's my first question. Thank you.

Kenneth Hsiang (Head of Investor Relations)

As I mentioned earlier on, the CapEx that we're making for the leading-edge packaging and tests, those investments are of higher margin. These investments are of previous margin as well as return. So as we continue to grow that part of the business, also on test, I think it will help the overall margin for our ATM business as time goes on.

Laura Chen (Executive Director and Head of Taiwan Equity Research, Greater China Technology)

So, can we expect that there will be overall corporate average, say, if the overall ATM business reached, say, 80% utilization rate, usually we can expect 25% gross margin. But with the costs, if that reached the satisfactory utilization rate and also the loadings, that would be much higher than what we expected before.

Kenneth Hsiang (Head of Investor Relations)

At such point, such capacity is of higher than the corporate average margin.

Laura Chen (Executive Director and Head of Taiwan Equity Research, Greater China Technology)

Okay. Got it. Thank you. And also, my next question is on the EMS business. You mentioned that the better than expected near-term is due to the earlier ramp for the new products. So would you expect the sustainability will continue into the peak seasons into Q4? Or can we expect that the Q4 will be even stronger like the historical pattern?

Kenneth Hsiang (Head of Investor Relations)

No, I think the first half versus second half pattern should be similar to a typical seasonality.

Operator (participant)

Next question is from Mr. Bruce Lu of Goldman Sachs.

Bruce Lu (VP and and Equity Analyst)

Hi. Thank you for taking my question. I think I want to ask again for the advanced packaging, right? So Joseph used to comment that the CapEx to revenue ratio. Can you comment about what is the CapEx revenue ratio for the advanced packaging? You spent a lot of money this year. How much revenue you can generate next year? In addition, TSMC commented that the advanced packaging gross margin is somehow approaching to the corporate average, which is 50%+, right? So can we expect is there any reason that we can assume that your profitability was somehow similar with TSMC for your advanced packaging?

Kenneth Hsiang (Head of Investor Relations)

I don't think we should make that kind of a simple comparison because TSMC, the packaging they do as well as the business model are slightly different from ASE. Joseph has already talked about it. The OS that we're doing right now, the margins are higher than the ATM, the corporate average. And that's where we're going to stay. We're not going to comment comparing to the TSMC margin because the equipment, the process, all of the everything they use are slightly different than the ASE. Now, in terms of how do we bridge the dollar, I think normally we're talking about the CapEx dollar. I think it's a dollar for a dollar.

Bruce Lu (VP and and Equity Analyst)

So for the advanced packaging, it's also a dollar for a dollar?

Joseph Tung (CFO)

That's the current thought. We will actually need to once it gets to volume, then we'll have a better assessment of that.

Bruce Lu (VP and and Equity Analyst)

I see.

Joseph Tung (CFO)

In general, that seems to be still the case. Yes.

Bruce Lu (VP and and Equity Analyst)

Thank you. The second thing is that I want to ask about the seasonality for your EMS business. I think the third-quarter guidance seems to be a little bit lighter than historical seasonality. So what was the reason for lower seasonality? Because we didn't hear any delay for the flagship model smartphone. Is it because of the smartphone or because of other applications?

Kenneth Hsiang (Head of Investor Relations)

I think people are expecting the new phone volume. People are signing up an uptick on the shipment. So this quarter, and because of the earlier launch of the product, we're seeing a better than expected second quarter. And that same kind of momentum should go into quarter three. But as a whole, the other general markets, the recovery is still a bit slow. So I think from a full-year perspective, I think EMS will also have a muted year in terms of top line.

Operator (participant)

If you have any questions, please raise your hand. Next question is from Jason Zhang of CLSA. Hello.

Jason Zhang (Associate Director of Equity Vol, Desk Quant, EQD)

Can you hear me?

Kenneth Hsiang (Head of Investor Relations)

Yeah.

Jason Zhang (Associate Director of Equity Vol, Desk Quant, EQD)

Okay. Thank you for taking my questions. My first question is regarding the proportion of your advanced packaging. Can you give us how many percentage is that advanced packaging accounts for your total revenue? And you mentioned about $250 million. Is that your target in coming years, or is the expectations on the contribution from advanced packaging in this year? Thank you.

Kenneth Hsiang (Head of Investor Relations)

As we guided before, this year, we're expecting to double our revenue in terms of leading-edge packaging and tests. And the incremental revenue should be over $250 million. And as Tien mentioned, we are currently slightly ahead of our schedule. And I think the momentum continues to be strong. And going into next year, we're expecting another doubling of revenue in this segment.

Jason Zhang (Associate Director of Equity Vol, Desk Quant, EQD)

Okay. Thank you. My second question is...

Kenneth Hsiang (Head of Investor Relations)

The percentage of our leading-edge revenue is about 5% this year, growing from 2.5% to over 5% this year.

Jason Zhang (Associate Director of Equity Vol, Desk Quant, EQD)

Thank you. 5% of ATM business, right?

Kenneth Hsiang (Head of Investor Relations)

Correct.

Jason Zhang (Associate Director of Equity Vol, Desk Quant, EQD)

Okay. Thank you. My second question is in terms of the industrial and auto business because purposefully, we merged the new fab from IDM players. And we know that currently, those segments remain weak. So have we found any synergy or upsides coming from those kinds of new business? Or can we comment that whether we see any improvements or recovery on those segments? Thank you.

Kenneth Hsiang (Head of Investor Relations)

Well, I think in terms of automotive, overall sentiment is still very soft. But we have been continuing our growth in the automotive business largely because of the market share gain, which we are leveraging on our automation to continue to expand our market share.

For this year, I think in terms of ATM, the automotive part of the business will represent roughly 11% of the overall sales. We'll see that momentum continue to go.

Operator (participant)

We have a question from Mr. Charlie Chan of Morgan Stanley.

Charlie Chan (Technology Research Analyst)

Thanks for taking my follow-up question. Actually, two follow-up questions from me. First of all, I think ATM seems to suggest that the new CapEx or advanced packaging margin should be above the corporate margin. But Joseph may clarify is that above corporate average margin or above ATM margin. Thank you.

Joseph Tung (CFO)

Above corporate ATM margin.

Charlie Chan (Technology Research Analyst)

Corporate ATM margin. Okay. Okay. That's clear. Thanks. Yeah. Also doubling this revenue next year. So it's a doubling of 5% or doubling that $250 million incremental revenue.

Joseph Tung (CFO)

By doubling, I mean next year's leading-edge revenue will be doubling this year's leading-edge revenue.

Charlie Chan (Technology Research Analyst)

Okay. So if this year is around 5%, next year should be close to 10% or more than 10%.

Joseph Tung (CFO)

Well, we are expecting other parts of the business to grow as well. So that remains to be seen, yeah, whether it will be exactly 10% or a little over or a little under 10%.

Next question is from Mr. Bruce Lu of Goldman Sachs.

Bruce Lu (VP and and Equity Analyst)

I want to know again for the advanced packaging in terms of investment direction because advanced packaging, for me, there are like 10 different technologies from TSMC, CoWoS, S, L, R, SOIC, P, X, or whatever. I mean, it seems to me it's very complicated. And how do you decide which one is the direction to go for ASE to invest? That's one thing. The second thing was TSMC is talking about ramping up the panel-level packaging in three years, which means it could be the case that they don't want to invest in the current CoWoS because in three years, they're going to migrate to panel, and they're going to leave that to the current OSAT partner. So that could be a short-term business, potentially. So how can we prevent this kind of risk, or what is the direction to go?

Kenneth Hsiang (Head of Investor Relations)

It's a good question. For example, ASE has been working on the panel solution for over five years. Just to give you a status report, we started with a form factor of 300 mm by 300 mm². We've been doing that with quite a few key customers for a number of years, qualify a few products. Then we decided the 300 mm by 300 mm would be naturally expanded to 600 by 600. Then we're doing a lot of study with customers, partners, equipment suppliers, and materials.

Right now, we have firmed up the business plan. So out of the CapEx that we talked about, the 600 mm by 600 mm panel also is part of the overall CapEx that we make the investment. We believe that by second quarter of 2025 next year, we will have all of the equipment ready. In the meantime, we are collaborating with our partners as well as customers in terms of the detail volume ramp. I think technology development typically would take 10 years. In terms of the volume readiness, that's always the tricky part. How do we do the overall CapEx, whether OS, CoW, panel, or different kinds of equivalent of technology? That's really the IP of OSAT.

We have to work with partners as well as multiple customers, not a single customer or a single partner. Now, there will be fungibility between all of the technology: the common usage, the shared usage, and the flexibility to convert if needed. I don't think we're easy to say one technology can easily replace another technology. Each technology will cater for a different set of target customers. So when you talk about the CoWoS, there will be different levels of CoWoS. You already said that. Even with the panel, the panel will be targeting at different line widths, different line spaces. Each one is different. It's very complicated. But our job is to prepare the whole portfolio of toolbox. Wherever the customer has a specific product mix they need to ramp, we are readily available to do that ramp for them.

And that's why we need to work very closely with our foundry partners as well as customers because it's a very, very dynamic time. And you can't really know a priori what the volume mix is going to be. But our job is to make sure we have all of the technology development. We have all of the building ready. And then when we need to, then our team will be very busy to convert one line to another or the other back to another just to make sure we have the operational efficiency.

Bruce Lu (VP and and Equity Analyst)

Your panel size seems to be different with TSMC was trying to do. Is that going to be different? Is that going to be an issue?

Kenneth Hsiang (Head of Investor Relations)

I'm not going to comment on TSMC's panel size. I think you have to ask TSMC. But ASE is pretty determined. We will do 600 mm by 600 mm. Our customer seems to be comfortable with that dimension. The equipment will be different. The process will be different. But again, as I said, we cannot say one panel; there is no universal definition of any process. What ASE is working on, the 600 mm by 600 mm, has a certain feature size, has a certain cost model and then we are working with our partner as well as our customer to make sure they're comfortable.

Bruce Lu (VP and and Equity Analyst)

Can you disclose the application for the panel's customer? Is it for power management or for AI?

Kenneth Hsiang (Head of Investor Relations)

Actually, it's for all of the above.

Bruce Lu (VP and and Equity Analyst)

I see. Okay. Thank you. My next question is for gross margin in second half. I think Joseph mentioned that in second half, ATM gross margin.

Operator (participant)

Our next question is from Mr. Gokul Hariharan.

Gokul Hariharan (Managing Director)

Hey, I had one quick question. On your smartphone segment, which is the largest segment, I think, Joseph, you talked about some improvement in demand from a particular set of customers. Could you talk a little bit about what is the status of the smartphone segment, both for high-end SoC as well as for other auxiliary products? How is the inventory level? And are you seeing a more broad-based enthusiasm from customers to actually order more, or things are still quite sluggish? Second part of that is for Tien. I think you talked about the toolbox of portfolio of packaging technologies that you have. Smartphone has been an area where packaging technology has largely been stagnant for quite some time, I guess.

Could you talk a little bit about are we seeing anything in the horizon where packaging technology could evolve towards something similar to 2D, 2.5D fan-out for the smartphone segment in the next couple of years?

Kenneth Hsiang (Head of Investor Relations)

Okay. The first question is regarding the cell phone. Q1 of this year, we're seeing an uptick on cell phone. If we look at the Q3 and Q4 forecast, the cell phone is ramping up in just the overall. So I think overall, this year, the cell phone overall shipment, I mean, we're not in the position to comment on that. But based on the forecast we're looking at, it seems to be moderately positive compared to, for example, automotive and industrial.

Okay. That's the first comment. In terms of the toolbox and also how could cell phones specifically, that segment, can utilize some of the new technology we put in place. We believe on the technology roadmap, with all of the AI initiatives, over time, you have two types of devices. First, when do we expect the high-performance computing type of architecture to permeate into the cell phone? That would be the first question. And we believe with all of the AI features coming in, if the market response is very good, I'm pretty sure the leading cell phone technology suppliers will start adding either more higher level of memory or higher level, bigger chips into it. If that is the case, then the current technology that only be applicable to high-performance computing naturally will take some shape into the cell phone market.

Now, the second type of thing will be the edge device. I think one of the earlier comments that we did not get a chance to answer is with all of the fabs. I think statistically, we have like 84 fabs coming up right now. They're pretty much in the traditional, not the leading edge. So in the next few years, with all of this traditional fab capacity coming online, how do we balance the semiconductor overall demand versus supplier? I think the general industry view is with AI at the top. Over the next few years, there will be more edge devices such as autonomous driving, such as robots, such as drones start coming out. Now, in any kind of edge device or edge device system, you will utilize a lot of actuator, MEMS, sensors, microcontrollers in an integrated and heterogeneous integration fashion.

So if you think about the potential robots, the potential autonomous driving, the potential drones, they will use a lot of conventional semiconductor devices as well as the AI engine or the AI brain. Now, the SEMI talked about it in 2030, 2031, or 2032, the industry will hit $1 trillion. If we want to hit $1 trillion, naturally, we will use up all of the fab in the leading edge as well as the traditional package level.

And the OSAT or ASE, all of the automation that we put in place, all of the building blocks we put in place are targeted to capture not only the high-performance computing as well as the next generation AI brain to the edge device as well as to robotic fingers or all of the heterogeneous integration or any kind of system package that our customers or system designers would like to do. It's a very long answer to your question, but I hope that's comprehensive.

Gokul Hariharan (Managing Director)

Yeah, that's very clear. So one follow-up on that, Tien, is if you had to hazard a guess, when do you think smartphone or cell phone SoC starts using chiplet? Is it in the next two years, next three years, or is it much further than that in terms of technology readiness and market acceptance?

Kenneth Hsiang (Head of Investor Relations)

I think the chiplets already started. The chiplets really is a concept. In other words, when you start integrating chip, it becomes a chiplet. So today, we're seeing the chiplet architectures in supercomputing, high-performance computing. But even when you carefully go to the electric vehicle or at the current generation of cell phone, you can pretty much argue this is the beginning of the chiplet. So I think the chiplet concept, the platform, are being validated by the market.

Over time, I think the chiplet will become more pervasive. Therefore, the heterogeneous integration, the power management, the embedded, all of this technology that we're developing today will become very useful. And that's where the panel, for example, the panel, I did not get a chance to comment. We think about at a power management level, there will be a lot of integrated devices, integrated package they're thinking about it. So the panel needs to be lower cost, flexible enough to accommodate the power management integrated package, but also needs to go high enough to accommodate the current form of high-performance computing.

But any kind of package will have a different set of target customers. If you're talking about 3D, you're talking about 2.5D or interposer, that feature size can continue to move up, become smaller and smaller together proportional to the lithography and also the density requirement. So our job is to make sure we have a whole spectrum of technology in our pocket. Whenever the customer comes in, they need 10% of high-end, 40% of mid-end, and 50% of low-end. We can easily provide them a comprehensive selection of tools in an automated manner.

Gokul Hariharan (Managing Director)

Okay.

Operator (participant)

If you have any questions, please raise your hand. Oh, we have a question from Bruce Lu. Bruce, sorry about interrupting your question earlier. Please keep two questions at a time. Thank you.

Bruce Lu (VP and and Equity Analyst)

Okay. Just one quick question. Joseph, you did mention that earlier, the second half gross margin for ATM will go back to 25%-30% due to better product mix, better testing, more advanced. It seems to be slightly lower than guidance. Can we expect that to go back to 25%-30% in gross margin in fourth quarter? What slows us down for the gross margin recovery?

Joseph Tung (CFO)

I think the overall recovery was slower than we were expecting. And because of the volume shortage or the gap, we are now the margin prospect for the second half seems to be a little bit lower than what we were originally expecting. We do expect that going into fourth quarter, we should be able to go back into our structural margin range when the overall utilization goes beyond 70%. And as I mentioned, it's more challenging now. But I think for the whole year, we'll still try to struggle to see if we can still reach the lower edge of the structural margin, which is about 24%.

Bruce Lu (VP and and Equity Analyst)

But for the product mix improvement and more testing revenue is still intact in third quarter. Is that right?

Joseph Tung (CFO)

I'm sorry? The what?

Bruce Lu (VP and and Equity Analyst)

The more testing revenue or the more advanced packaging contribution in third quarter is still intact. Just the traditional packaging, the utilization is lower. That was the main reason for lower gross margin in third quarter. Is that right?

Joseph Tung (CFO)

That's correct. In terms of testing, we are progressing as planned. But the overall general market recovery seems to be slower. That's dragging our margin a bit. Yes.

Bruce Lu (VP and and Equity Analyst)

Okay. Thank you.

Operator (participant)

There is no question from the floor.

Kenneth Hsiang (Head of Investor Relations)

Okay. If there's no more questions, we will end the conference call today. Thank you very much for attending. We will see you next quarter. Thank you.

Joseph Tung (CFO)

Thank you.