ASE Technology Holding Co., Ltd. ($3711)

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our first quarter 2026 earnings release. I am joined today by Joseph Tung, our CFO. 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 do not ask questions or you may leave the session 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 subsidiaries. For today's presentation, I will be going over the financial results, and Joseph will then provide the company's guidance. We will then be available to take your questions during the Q&A session that follows. Our business throughout the first quarter remained resilient. Typically, we would expect to see manufacturing seasonality, as many consumer and corporate products wind down at the end of the calendar year. This year, we saw such seasonality in our EMS business, while demand for our ATM services did not slow at all. Even with less working days during the first quarter, our ATM revenues grew sequentially. We experienced continued strength in our LEAP services and traditional advanced packaging, while our wire bond also saw some pickup. As our product mix shifts, typical seasonality may become more muted as AI-related products do not appear to follow the same seasonal patterns as typical consumer-driven devices. Our blended factory utilization rate was around 80% for the quarter. This percentage can be slightly misleading. Loading was actually a little better. However, we have been installing additional [ LEAP ] manufacturing capacities that are expected to start generating revenues weighted towards the fourth quarter. We are also consolidating traditional capacities. These transitional activities would naturally bring down the blended utilization rates. As production resources get tighter, it needs to be emphasized that customers prefer [indiscernible]. They like to know precisely the timing and pricing of wafers, substrates, packaging and testing services. As uncertainties arise at key manufacturing points, customers perceive supply chain risk for their products. Our capacities along with those of our upstream foundry partners are finite with limited ability to be pulled forward at this point. With that said, we are seeing strength not only in our LEAP-related capacities. We are also seeing strong demand in wire bond and traditional advanced packaging. From a financial perspective, first quarter ATM revenues came in slightly ahead of our expectations. We saw slight pickups throughout our customer base, especially as it relates to computing-related products. We also saw incremental improvement in our profitability due to this pickup with gross margin outpacing our original expectations. Our EMS business slowed slightly due to underlying product seasonality as per our original expectations. Please turn to Page 3, where you will find our first quarter consolidated results. For the first quarter, we recorded fully diluted EPS of $3.08 and basic EPS of $3.24. Consolidated net revenues were $173.7 billion, representing a decrease of 2% sequentially and an increase of 17% year-over-year. On a U.S. dollar basis, our sales decreased by 4% sequentially and increased by 22% year-over-year. Our gross profit was $34.8 billion with a gross margin of 20.1%. Our gross margin improved by 0.6 percentage points sequentially and by 3.3 percentage points year-over-year. The sequential improvement in margin is primarily due to [ NT ] dollar depreciation. The annual improvement is primarily due to a higher mix of ATM revenue in addition to higher ATM factory utilization offset in part by the annual appreciation of the NT dollar. We estimate that foreign exchange had a positive 0.6 percentage point impact to our gross margin sequentially and a negative 1.2 percentage point impact annually. Our operating expenses increased by $0.3 billion sequentially and $2.1 billion annually to $17.3 billion. The sequential increase in operating expenses is primarily due to higher R&D labor-related costs. Meanwhile, the annual increase is primarily due to higher R&D labor-related costs and to lesser extent, R&D supplies and other non-R&D labor-related expenses. Our operating expense percentage eased 0.4 percentage points sequentially to 10% and declined 0.3 percentage points annually. Operating profit was $17.5 billion, down $0.2 billion sequentially and up $7.9 billion year-over-year. Operating margin was 10.1%, up 0.2 percentage points sequentially and up 3.6 percentage points year-over-year. During the quarter, we had a net nonoperating gain of $0.7 billion. Our nonoperating gain for the quarter primarily consists of net foreign exchange hedging activities offset in part by net interest expense of $1.6 billion. Tax expense for the quarter was $3.6 billion. Our effective tax rate for the quarter was 20.0%. Net income for the quarter was $14.1 billion, representing a 4% decline sequentially of $0.6 billion and an 87% increase annually of $6.6 billion. On Page 4 is a graphical presentation of our consolidated quarterly financial performance. The chart effectively shows the impact of ATM business growth and its impact to our consolidated holding company level results. For the first quarter this year, our ATM business represented 65% of our consolidated holding company revenue while representing 91% of our operating profit. This is compared to 58% of consolidated holding company revenue while representing 86% operating profit in the first quarter last year. 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 first quarter of 2026, we had record revenues for our ATM business of $112.4 billion, up $2.7 billion from the previous quarter and up $25.8 billion from the same period last year. This represents an increase of 2% sequentially and 30% annually. Our ATM business was able to avoid a seasonal decline in revenue during the first quarter upsiding our original expectations. We also delivered higher-than-expected margin performance via improved profitability from higher utilization of equipment. However, we were unable to avoid the higher running costs during the Lunar New Year holidays. Gross profit for our ATM business was $29.2 billion, up $0.4 billion sequentially and up $9.6 billion year-over-year. Gross profit margin for our ATM business was 26%, down 0.3 percentage points sequentially and up 3.4 percentage points year-over-year. The sequential gross margin decline was primarily due to a higher rate of labor during the Lunar New Year holiday and also a higher percentage of depreciation from preparing equipment for further expansion. These negative impacts were mostly offset by a positive foreign exchange environment and efficiencies from higher loading. Meanwhile, the annual gross margin improvement was primarily due to higher factory utilization and a higher LEAP product mix, offset in part by negative foreign currency impact. As a note, during this year, we see our depreciation rising faster than revenues as a result of our ongoing investments in LEAP. The granularity of our OS and full process LEAP equipment differs from our more traditional advanced packaging lines. Our LEAP lines must be installed at scale and together as a full set of differing machinery instead of small incremental units like wire bonders and testers. This results in our LEAP lines taking a greater amount of time to bring up and tune when compared with more traditional packaging capacities. Currently, our full process LEAP lines are in the midst of tuning and qualification. As a result, we will continue to see gradually increasing depreciation without significant amounts of associated revenue during the tuning and qualification period. Meanwhile, revenues associated with these full process lines will ramp mostly during the fourth quarter. With that said, we continue to believe our margins will increase sequentially quarter-over-quarter and reach the higher end of our structural margins by the end of the year. During the first quarter, operating expenses were $13.3 billion, up $0.6 billion sequentially and $2 billion year-over-year. The sequential and annual increases in operating expenses are primarily related to higher overall R&D costs and labor expenses. Our operating expense percentage for the quarter was 11.8%, increasing 0.2 percentage points sequentially and down 1.2 percentage points annually. The sequential increase was primarily due to relatively higher R&D labor costs. The annual decline was primarily due to higher revenues generating a higher operating leverage during the quarter. During the first quarter, operating profit was $15.9 billion representing a sequential 1% decline of $0.2 billion and a 90% annual increase of $7.5 billion. Operating margin was 14.1% down, 0.6 percentage points sequentially, while up 4.5 percentage points year-over-year. On Page 6, you'll find a graphical representation of our ATM P&L. The chart highlights the improvement in our gross profit margin. It should be noted here that our second and third quarter 2025 margins were heavily impacted by NT dollar strengthening. On Page 7 is our ATM revenue by the 3C market segments. LEAP services are primarily used within our computing applications with a lesser amount being used in the communications applications for infrastructure hardware. As can be seen here, the computing application percentage has been growing steadily with our Communications segment declining. Our automotive, consumer and others application appears to be consistently growing in line with our overall ATM growth. On Page 8, you will find our ATM revenue by service type. We did not see any meaningful changes here during the quarter. On Page 9, you can see the first quarter results of our EMS business. During the quarter, EMS revenues were down 10% sequentially and 1% annually to $61.9 billion. Sequentially, our EMS business's gross margin increased by 0.5 percentage points to 9.5%. This change was principally the result of product mix. Operating expenses within our EMS business decreased by $0.3 billion sequentially and increased by $0.1 billion annually. The sequential decline is primarily the result of lower profit sharing during the quarter. The slight increase annually is primarily attributable to higher R&D headcount. Our first quarter EMS operating expense percentage of 6.4% was up 0.2 percentage points sequentially and 0.1 percentage point annually. The sequential and annual operating expense percentage increases are due to underlying product revenue seasonality relative to more stable operating expenses. Operating margin for the quarter was 3.1%, up 0.3 percentage points sequentially and 0.5 percentage points year-over-year. The higher operating margins are primarily the result of product mix. Our EMS first quarter operating profit was $1.9 billion, down $0.1 billion sequentially and up $0.3 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. The communications applications decline is primarily due to underlying product seasonality. The computing applications increase is primarily due to a pickup in new AI Accelerator products. On Page 10, you will find key line items from our balance sheet. At the end of the year, we had cash, cash equivalents and current financial assets of $114 billion. Our total interest-bearing debt decreased by $7.6 billion to $265.3 billion. Total unused credit lines amounted to $419.4 billion. Our EBITDA for the quarter was $38.2 billion. Our net debt to equity this quarter was 40%. On Page 11, you will find our equipment capital expenditures relative to our EBITDA, Machinery and equipment capital expenditures for the first quarter in USD totaled $1 billion, of which $636 million was used in packaging operations, $327 million in testing operations, $40 million in EMS operations and $1 million in interconnect materials operations and others. In addition to spending on machinery and equipment, during the quarter, we also spent $771 million on facilities. With that, I'll hand the presentation over to Joseph to present the company's outlook.

Thank you, Ken. Before we get into the guidance for second quarter, I would like to give you a bit of a color for the full year. Now first of all, we are upping our CapEx for the year, which includes additional $0.9 billion for buildings and infrastructure, as reflected in our recent announcements and an incremental USD 0.6 billion in machinery, driven by stronger demand for LEAP services this year and next. The majority of this additional machinery CapEx will be allocated to LEAP, particularly wafer sort, and expect it to be deployed in the fourth quarter to support capacity ramp-up in 2027. For ATM 2026 revenue, we now expect LEAP services revenue to be around 10% above our prior guidance, reaching over USD 3.5 billion. While the mainstream segment remains on track to grow at a similar rate with last year. And for 2027, we continue to see strong LEAP business momentum and expect even stronger incremental revenue growth than this year. Lastly, on ATM profitability, our strong market position continues to support a favorable pricing environment throughout the year. We reported first quarter ATM gross margin of 26%, which is ahead of our original expectation of 24.5%. As we continue to expect sequential improvement for ATM margins with second half gross margin to reach the upper end of our structural gross margin range. Second quarter gross margin improvement, however, will be partly offset by higher costs associated with early resource deployment for product transitions. Now with that, let me give you the second quarter outlook. Based on our current business outlook and exchange rate assumption of USD 1 to TWD 31.8, management projects overall performance for the second quarter of 2026 to be as follows. At the consolidated level, in NT dollar terms, our consolidated second quarter revenue should grow by 7% to 9% quarter-over-quarter. Our consolidated second quarter gross margin should increase by 20 to 100 basis points quarter-over-quarter. Our consolidated second quarter operating margin should increase by 50 to 120 basis points quarter-over-quarter. For ATM, in NT dollar terms, our ATM second quarter revenue should grow by 9% to 11% quarter-over-quarter. And our second quarter gross margin should be between 26% to 27%. For EMS, in NT dollar terms, our EMS second quarter revenue should grow at least 10% year-over-year. Our EMS operating margin should be similar with second quarter 2025 levels. With that, I'll open the floor for questions. Thank you.

[Operator Instructions]. .

We have our first question from Mr. Gokul Hariharan of JPMorgan.

Great results. Congratulations on that. Thanks for the opportunity, Joseph and Ken. First question is on LEAP. So the 10% upside in LEAP in 2026, could you talk a little bit about what is the reason for that? Is it mainly coming from on substrate and wafer sort or any composition? And also just to clarify, '27, you said LEAP could grow at similar kind of stronger incremental revenue growth than this year. So this year is around $2 billion incremental revenue based on the new guidance. So are we implying that next year, LEAP can grow at a $2 billion plus kind of incremental revenue? Is that how we should read that statement? And any early read on what is the composition of LEAP next year?

Gokul is looking for clarification on our LEAP guidance for -- and actually, just primarily on revenue side, right?

Yes, revenue. Yes. This year and the 10% upside where it's coming from and '27, like the $2 billion or more than $2 billion incremental revenue. I just want to clarify that's what you meant.

For this year, I think we are seeing a stronger than anticipated demand, particularly in the LEAP's part of the business. And as such, we need to increase our CapEx to support that expansion. And also a lot of the increase of CapEx is really to prepare ourselves for next year's ramp up as well. In terms of momentum, I think both for assembly lead services, both in terms of assembly and tests. We are growing at pretty much the same pace. And in terms of combination, I think it's about 75% in assembly and 25% in tests with tests. We have about 75% in wafer sort and 25% in final test.

Understood. And on '27, could we talk a little bit about, I think, Joseph, you mentioned incremental growth can be higher than this year. So does that mean that we can grow from the $3.5 billion this year to at least $5.5 billion next year, is that what you implied?

I'm only implying that we are continuing to see very, very strong momentum going forward into 2027. And the $2 billion or $1.9 billion is really just to serve as a baseline. In fact, we are -- we can safely expect even stronger momentum than that, although I'm not giving out any particular number at this point.

Understood. And just within that 2027 LEAP, any context on the full process cohorts like or full process for cost kind of composition? And are you getting -- do you think that you will have some accelerator related -- AI accelerator related full process revenue in '27? Or is it going to be mostly like the CPU and some of the other adjacent kind of food process revenue?

I think right now, the full process is going on track, and we still believe that we can reach this $300 million revenue mark for this year. As we continue to expand that part of the capacity, I think, for next year, we can see quite substantial growth in that area as well. And also not just on the revenue growth, we are also expanding our customer base in this particular area. And we believe that any other application that will be moving into cohorts like kind of packages. I think we will be able to entertain those part of the request.

Understood. My second question is on gross margins, Joseph. You're already reaching probably the higher end of the structural range of gross margin, and we're already like at the midpoint in Q1 and Q2. Why not raise the structural range of gross margin given you have higher-margin products coming in next year as well with full process and more testing as well -- like is there anything that is holding you back from kind of raising the gross margin range, structural gross margin range?

So Gokul, you're looking for more clarification on the context of our structural margins?

Yes.

Well, I think things are moving very fast at this point and it's very dynamic. And I think we will -- of course, we already said that even in first quarter and second quarter, we are ahead of our original expectation in terms of margin improvement, and we are even more confident that in the second half, we'll be reaching the upper end of the structural margin. But I think at this point, because things are moving very fast, I think we will rather wait until things are more settled. Maybe next year, we will -- we view the situation and see if this is justifiable to revise up our structural margin.

Is there any risk factor that holds you back? Is it just the depreciation growth is very strong? Or is there anything else that is holding you back?

Well, I wouldn't call it holding us back. I would say that because as Kenneth is mentioning, right now, the investment or the CapEx that we put in are in pretty large chunks rather than for we can incrementally add capacity. So -- and before the capacity is fully ramped up, it's kind of -- that normally creates a some of -- some pressure on the margin during the ramp-up stage. So it's -- we need to wait until a more steady state kind of situation before we can find the suitable range for margin.

Our next question is from Ms. Sunny Lin of UBS.

Congrats on the very strong results. So my first question is actually to get your thoughts on CPO. And so would you be able to share a bit more color on what will be the role that ASE can play for CPOs packaging and test? And how should we think about the revenue part from CPO? And when would you expect the sales to start to contribute to ASE from CPO?

So Sunny's first question refers to the context of CPO and the various financial aspects of that, right?

Yes.

We are working very closely with the [ Foundry ] as well as our customer, the end customer in terms of the development of CPO. Right now, we don't have a number for it. But what I can say is once it gets into volume scale, we would definitely be a very, very critical partner within the overall effort. And I think things are moving on track, and we continue to make progress on this CPO development.

Got it. So may I follow up? And so one, what will be the time line that you start to [ expire ] revenue contribution? And then secondly, in terms of packaging and test, what may be the role that ASE may play if you could share a bit more details?

No, I don't have that much of a detail, except we will start with the packaging part of it and eventually because the test is more complicated than the regular chips that we are testing now. So I think things we'll have to sink up our technology road map with our partners and also our customers to find the most suitable work combination between the 3 of us. And whatever happens, it will be a natural division of works for each of us to do what we do best.

And my second question is on -- and so now with the higher CapEx for this year, capital intensity should be above 30%. And so how should we think about the capital intensity for the coming maybe 1 to 2 years? Should we expect given a very strong demand? You need to continue to accelerate capacity expansion. And therefore, capital intensity will remain high at about 30%? Or should we think about maybe in 2027, given the revenue generation, maybe CapEx will start to sell in terms of intensity? How should we think about the growth between the sales and CapEx?

Sunny, you're looking for clarification on our CapEx trend going forward and the capital intensity involved, right?

Yes.

Well, we're still in this megatrend, and we're certainly not going to be shy about making the necessary investments, not only just on the capacity sale but also on the R&D spending that we need to put in. And from the momentum that we're seeing now, I would expect a pretty heavy CapEx for this and maybe even going into next year. Although, as I said, things are moving very fast, and there's a lot of variables in front of us. I cannot give you a number at this point. But I will say that we will be making the necessary investments, and we do have multiple cost-effective funding sources that we can leverage on. to continue to support the CapEx requirement that we'll be facing for this year, also next year.

Thank you. So if I may have a follow-up. And so earlier, you mentioned lots of capacity expansions [indiscernible] this year for the output from Q4. So would it be fair to say, therefore, [ LEAP ], we should expect a pretty meaningful step up in terms of revenue going to Q4, and that should meaningfully improve your gross margin on a sequential basis. So while the direction is upward in the coming few quarters, but in terms of magnitude, should we expect a pretty meaningful expansion from Q3 into Q4, given a lot stronger LEAP growth?

Sunny, first of all, I don't see how that's a follow-up. But I guess I'll let you ask it. For -- you're looking for basically what type of trend we're looking at in terms of LEAP, given that we're upping the outlook currently? Is that probably the right summary of that?

Yes, sure. Thank you, Ken.

Yes. I think from the get go, I was saying that we're still expecting a very strong year going into 2027 as well, particularly in the LEAP services, we see -- we do see the need to offer CapEx to support that momentum. And I think I already answered Gokul's questions that -- we are -- right now, we're expecting even stronger incremental revenue growth for next year in terms of LEAP and whatever that we're seeing this year, the incremental revenue will serve as a baseline for us. And we do see further potential for further upside.

Next, we have Ms. Laura Chen of Citi on line.

My question is also regarding our LEAP advanced packaging progress. We know that NT also build up your own full process. So I'm just wondering that for our like $3.2 billion and even stronger growth into next year. How should we think about that, the full process of our LEAP business? And what would be the gross margin profile comparing to the substrate part?

So Laura, you're looking for more expansion on our full process business opportunities. Is that correct?

Yes. Yes. And what's the percentage? And also what's the gross margin profile?

I think we -- like I said, we are on track at whatever capacity that we're putting in and the customer engagement that we are having at this point. We do see very good potential going forward as we have multiple customers requesting for this kind of capacity. But this is a very complex process that we need to go through, and we are in the midst of trying to tune up capacity as well as the yield that we can generate. So we're going to take one step at a time at this point in time, although we do see a very good potential, but we want to be cautious in making the making this part of the business with a very good execution. And so at this point, I think it's not very easy for us to say, to give you a number for the business for next year. But all I can say is we do see very good potential and it's just a matter of how we can quickly execute the expansion plan.

Sure. That's fair. Very clear. And also my following question is just wondering that as we see that many of your clients or the AI makers, they are looking for various different back support, including the panel base or a large -- like radical support for -- from the [indiscernible] not just at the foundry side. So I'm just wondering that how is the progress at ASE on the panel base? And how would you think about these business opportunities in your LEAP revenue?

Laura, you're looking for our opportunities in terms of supporting large [ reticle ] size in panel? Right?

Yes, the panel based like the reticle that kind of packaging design.

Yes. On panel, I think we're also on track. And right now, we have already installed a fully automated pilot line for customer qualification. We do expect to have -- starting with small mass production mass production volume starting from next year. And we'll see how it goes from there and that point on. And I think in terms of the panel right now is still at its early stage. It is something that's going to happen. But it's -- we're still at the early stage of the overall development and the -- how the industry infrastructure will be built remains to be -- there's still some work to be done going forward. Yes, there is potential for that. And if anything else, we'll be the first to start the capacity ramp-up.

Charlie Chan of Morgan Stanley will be the next to ask questions.

Also congratulations for very strong results and guidance. My first question is actually the AI or [indiscernible]. So over the past 3 months, do you see smartphone consumer semi demand bottoming out or continue to deteriorate because we are getting a bit confused why some mature foundry or hiking with price and [indiscernible] instrument also suggests that they want to hike the price, but overall end market demand are so weak. So I just want to get some thoughts from management.

Charlie, you're looking for some characterization of our non-LEAP related revenues and how we view that going forward, right?

Yes, yes, exactly. And also, the tendency, whether it's getting better or getting worse and how ASC kind of benefit or suffer from those incremental trends?

I mentioned earlier on that we are maintaining -- I think the general market revenue growth, it will maintain the same guidance as we made last quarter, which is a repeat of last year's growth rate of about 13%. And yes, we do see that the PC and cell phone market softness continues and -- it seems to be softening a bit more. But on the other hand, I think a lot of the softness is being picked up by the more [ IC ] content in the devices -- different devices. We are seeing the AI peripheral chips emerging, and we are seeing good recoveries in terms of automotive and industrial segment. So putting everything together, I think we're still very, very confident that we will repeat our last year's growth in terms of general market.

I see. So can I clarify it with Joseph, what did you mean by the AI peripheral chips? We do have some [ stands ], but I just want to get some clarification from Joseph?

They are power-related connectivity, sensors, all different kinds of edge devices that we'll be using or the -- which we don't -- we were dividing this general market with LEAP. So it's not in industry segment per se, kind of a differentiation of segmentation. We're just only looking at the process itself to decide what's the general market for us.

I see. Thanks for the clarification. And my second question is actually about your pricing strategy. I mean, you're investing heavily -- but there is also some cost increase from the recent geopolitical events, right? So I just wanted to get a sense, what's your prediction for your fab utilization in the coming quarters? And would you -- that circle [ tightenings ] into further pricing power to your customers?

So I believe, Charlie, you're asking what the impact of recent political volatility would be on our pricing and then also different components that go into what we do, what our pricing strategy is relative to our services that we provide. Is that correct?

Yes. So yes, thanks, Ken. Yes, so -- maybe it's more like from a strategic perspective. One is that you can just passively pass through those additional costs, like you said, right, there's increase in energy costs or chemical costs. I'm not sure how much of a chemical cost you have an exposure to -- or I think it differently, right? Your [ fab ] in the coming quarters if the utilization continue to be getting higher and you feel like is sustainable? So why don't you further kind of hike the price and it's more like proactive price hike?

Well, I can never give you a direct answer on whether we're going to raise our prices for now. What I can say is we will continue to seek for the suitable pricing strategy given the situation and also considering the customer relationships that we need to maintain. Also, we will set the pricing to reflect the margin requirement that we will have for ourselves.

I see.

Whatever the cost increase there is because of the market uncertainties the dose can be fully passed through. And also, at the same time, we will continue to set the pricing to reach our margin requirement.

Next, we have Haas Liu of BofA.

Congrats on the solid results and guidance. I guess my first question is also a follow-up on the near-term guidance. I just want to get more clarity regarding your view on what is going to be the key driver for the second quarter sequential growth for your IC ATM business. We should be able to quantify it between LEAP versus traditional business on the growth momentum. And then I think a quick follow-up also on the full year outlook for your overall IC ATM business that you did provide more detail on the nonlead business and the reason why you are still holding that kind of growth guidance similar to last year. But would you be able to provide the breakdown on the unit and also pricing assumptions for that kind of growth outlook. I was just wondering if in the past 3 months, if there is any like meaningful change on the mix of assumptions, on the pricing that you may be able to improve your pricing further? Or you simply have not yet seen your customers have been cutting their orders at this stage? So just want to get more clarity on the second quarter and also full year IC ATM growth momentum between LEAP versus the lead business?

Haas, believe you're looking for clarity between -- on our guidance relative to LEAP and non-LEAP context. Is that correct?

Yes, on a quarterly basis as well as on the full year outlook basis.

I think second quarter revenue growth is really a base. I think both LEAP as well as the general market -- we're seeing similar kind of growth to support the quarterly growth of revenue for us. I think the -- as I said, the -- we are more than doubling our lead revenue this year. We just upped our LEAP revenue by another 10% showing the strong momentum that we -- that we're seeing at this point. General market, we continue to see the same kind of growth rate from last year. And as I tried to explain, I think, although we are seeing some softness in some certain segments. But we do see that the so-called AI peripheral or AI adjacent type of chips that will be brought on stream and then we are seeing the demand from -- for those chips are more than offset what we're seeing the softness in these particular segments.

Okay. I think just a quick follow-up here is that to my first question is that -- so you are actually not changing your pricing strategy in the past 3 months or in the next few quarters to reflect the potentially higher cost on the materials or the labors. And you pretty much on an aggregate basis, you are not seeing much of the customers' demand dynamic change in the past 3 months. Should I just make the kind of assumption for your full year outlook?

I'm not sure I quite get your question. Can you --

Yes, I was just trying to get more clarity that you simply are not seeing any of the order costs from your customers even though that the end market demand, including like smartphone, PC at this stage and also the overall end market demand is just tracking slower, but you are seeing incrementally automotive, industrial related demand and also some AI peripheral chipsets are making up some of the weakness in the other parts of the market. And so net-net, you are not seeing much of the unit demand weakness versus 3 months ago for your full year outlook. Is that correct?

Yes.

Okay. Okay. Yes. And then my second question is on CapEx and also gross margins. Joseph, so you just mentioned that on the CapEx for this year, you raised it by like 20% versus your original guidance. And I understand there is a lead time between your [indiscernible] implement and build clean room versus it starts to contribute to revenue. But would you be able to help us to triangulate that growth rate or the incremental 20% hike versus the 10% hike in your lead business for this year? What is the main reason why that you raised your CapEx by 20%. But in the meantime, your lead business in general only being raised by 10%. And on top of that, I was just wondering with the current supply tightness in the back-end equipment supply chain, do you think there is any further potential for you to raise CapEx throughout this year? If you would like to have more capacity being sold throughout the next few years? And I will have a follow-up on --

Haas, you're looking for commentary in terms of how our capital equipment expenditures are correlated to our leading-edge advanced packaging revenue outlook. Is that correct?

That's right.

First of all, 2/3 of the increase of our CapEx is for building and facilities. As we've been saying that the suitable new factory facility is one of the gating factors for us to expand. And in that area, we are making progresses as shown in our past announcements that we've managed to start some of the building construction and also to acquire some of the existing facilities that are suitable for our operations or for our LEAP business operation. So -- and for the machinery, it's largely for next year's ramp-up and the bulk of it or $600 million worth of the CapEx is really for wafer sort, that would be -- the capacity will be ramped up in next year. As for this year, the -- whatever the capacity that we're building or the CapEx that we're spending for machinery should be sufficient to support another temporal in our lead service.

Got it. And then I think just a quick follow-up on this part of the business the --

I think you got your follow-up earlier. So sorry about that.

Next, we have Mr. Bruce Lu of Goldman Sachs.

Yes. Okay. Let me ask a simple question to save job for Ken. Can you give us an update for the global capacity investment, global capacity expansion?

Global capacity expansion, you mean outside of Taiwan?

Yes, U.S., Southeast Asia, anywhere, any places.

So you're looking for a geographical differentiation between our capital expenditures. Is that where you're looking?

No, no, no. I'm looking for, like, is there any incremental update for your instance outside of Taiwan? The current investment is mostly highly contented in Taiwan. You have limited capacity, you have limited clean room, why not go outside? And I asked a few quarters ago and I'm going to ask again.

I think outside of Taiwan, I think the main investment that we're making today is really in Malaysia, where we announced that we've acquired factory from [ ADI ] and that will be used as our buffer capacity to serve the demand coming from outside of Taiwan. And in other areas, I think the -- we are making mostly maintain this kind of CapEx to support the operation there. However, aside from Malaysia, we are also -- I think we are also ramping up quite a bit in Singapore for our test operations which is mostly to serve the AI-related test requirement.

I see Thanks. I want to ask the next question is that can you give us some update for the profitability for the -- I think you [indiscernible] different. For the full process of your LEAP, right, because the CapEx requirement is high, the utilization might be low, [indiscernible] may be unknown, right, at the current stage. But assuming the blue sky scenario once you eventually would deliver that good deal with reasonable [indiscernible] rate, can that -- can the full process profitability higher than LEAP services gross margin higher than the corporate average?

Bruce, you're looking for our profitability potential of our full process --

Yes.

Leading-edge advanced packaging lines going forward. In the case that everything goes perfectly. Is that correct?

Yes, which eventually will deliver.

Well, we haven't reached the blue sky yet. So it's kind of difficult to answer that question. But in theory, it should be accretive to LEAP.

In [indiscernible] to the LEAP?

In theory, given the complexity of it.

Next, we have Mr. Rick Hsu of Daiwa.

I just got one question here. I think for your very strong demand for your [ ITM ], the driver behind that, apart from AI and E&I automotive industrial, do you guys see any order pull-in from your customers across the board because of the concern on the supply chain uncertainties? And if so -- do you -- are you concerned about any demand rebalancing or order rebalance in the second half? Because apparently, like Charlie said earlier, right, there is a disconnect between the end demand, non-AI demand and the wafer and chip loading. That's my only question.

So Rick, you're looking to see whether we see order pull-ins and then how we may respond to such situations. Is that correct?

Exactly. Especially for second half.

Yes. As I said, in certain segments, we are seeing softness, but those are more than offset -- being offset by the AI peripheral chips demand that we are getting. Yes, I think in the first quarter, we are seeing stronger than normal seasonality demand may be coming from [indiscernible]. But having said that, we don't have -- really have the capacity because capacity is really limited. So we don't have the capacity to entertain those pulling demand, so to speak. So I think our revenue is very solid. It's not because of -- particularly in the first quarter growth. I don't think it's because of the customers already pull in that really bumped up our revenue for the quarter.

Next we have Mr. Gokul Hariharan of JPMorgan coming back for the second round Q&A.

One question on CapEx. Joseph, depending upon what you're hearing from your customers and your foundry partner, could you talk a little bit about -- and do you feel that this year is a peak of CapEx? Or you think that you will have to keep spending on CapEx even into next year given it feels like we're going to be a little bit free cash flow negative this year? So I just wanted to understand how you're thinking about CapEx into next year as well? And if CapEx is growing next year, any thoughts on how we are looking to kind of fund that CapEx in the next year?

Well, by the way it's going, I think next year could be another CapEx heavy year for us.

Okay. So we should assume that CapEx keeps growing next year then?

It's more likely, yes.

Got it. And any thoughts on the funding given the free cash flow is kind of probably kind of flattish or close to 0 or negative this year given the heavy CapEx. Like is there -- is there any like new fundraising or something like that, that you need to think about?

Yes. Whatever the funding gap that we're going to have for this and next year, I'm not sure about next year, though. But for this year, I think the funding gap will mostly be funded by additional borrowing which we have multiple sources for that.

Okay. Understood. Maybe one more question from my side is on the testing business. I think we did talk about final test as potentially something that we wanted to win with a large GPU customer. Is that still the objective right now? Or you are too busy with too many wafer sort kind of projects on hand to kind of really go and support that kind of demand with the heavy capacity on final test?

Yes. I think the primarily, I think we will be focusing on our resources in wafer [ store ] at this point. I think we are tight in both facility as well as in capacity. So for the time being, I think the main focus will still be on wafer sort.

Next, we have Haas Liu of BOFA to ask questions.

Yes. Yes. Thank you. I was not able to fully ask my questions in the first, but thank you so much for coming my additional questions. I think just on the back-end equipment, the supply right now is getting tighter and the lead time for delivery is also getting longer. Do you think there's like further potential or possibility that you need to raise your CapEx again, just to show your equipment supply chain or commitment or to ensure that you could expand the capacity as scheduled throughout this year, if needed, that you need to raise your CapEx again this year.

Haas, your looking for characterization on the likelihood of our ability to spend more on CapEx. Is that --

That's right. This is the straight way we ask.

Haas is looking to understand whether we have any potential to increase our capital expenditures during this year.

I wouldn't say no. I think the -- like I said, things are moving very fast, and there are a lot of our forecast is -- has been adjusted pretty rapidly at this point. And I wouldn't preclude that there will be further need for us to increase our CapEx for the year.

Okay. Yes. And my second question before I jump back to the queue is that I was wondering if you could quantify the impact of the new technology ramp transition-related costs impacting your first quarter, second quarter or even like second half this year. As you have more capacity gradually on the line, but now you're entering into mass production at this stage, contributing to your revenue? Would you be able to quantify the potential negative impact to your gross margins because we already see some of the mildly negative impacts in first quarter and also your second quarter outlook? And should we actually expect more of that negative dilution to happen throughout second half of this year before your fold process or even other parts of the LEAP business capacity ramp is going to contribute to your revenue growth in the following year. Is that kind of a factor if you have any way to quantify any of the -- if any of the potential negative dilution throughout the next few quarters would be pretty helpful.

Haas is looking to understand whether we have previously included the incremental depreciation into our original gross margin outlook for the year. Is that correct?

Yes.

Yes. I think when we look at the margin trend, of course, we will consider all factors including the CapEx that we're going to make, including the timing of the revenue that will be generated. I think the -- I think the margin profile that we presented in the beginning of the year remains the same, that first half of the year -- all quarters will be within our structural margin range, except the first quarter, we're already ahead of our original plan. And second quarter, we remain to be very confident that we will be reaching the upper end of the margin range. Yes, everything is included. And so far, we haven't changed our view on our margin profile for the year.

Got it. So is there any way you could quantify probably like 50 basis points or 100 basis point impact to your first quarter and second quarter margins? And then into second half, if this similar like 50 to 100 basis point negative impact from that margin dilution for the capacity ramp? Is it like a reasonable assumption?

Haas, I think we are able to necessarily lease that as of yet, but there is expansion into the depreciation percentage we have not been able to create an immediate dilution effect at this point. Maybe we can have that for you now.

[Operator Instructions]. Next, we have Ms. Laura Chen of Citi Group who ask questions.

Just a quick follow-up questions. I think just to briefly talk about the CPO opportunities on the packaging and also the testing front. Although it's still in relatively early stage. So can you share with ourselves what would you see that the most difficult part or a potential technology bottleneck and what ASE now is working? And when would you see that will be kind of an indicator we can see better breakthrough?

Laura, you're looking for an understanding as to where we see a technology bottleneck going forward?

Like key watching point to -- we can judge that when it will be becoming stronger revenue catalyst at ASE.

Well, as I said, this is a team effort between us and our foundry partner as well as customer -- at the end of the day, each will be doing what they do best. And there will be a natural division of work. I can tell you what is hard, what is not. It really depends on what our respective expertise is -- and then suitable works will be allocated to different partners. So that's how the [ thing ] is being managed at this point. I think everybody understands that CPO is still at -- it's a must-have going forward. But at this point, it's still at a very early stage. So I think it's a bit premature to say when and how much is going to be a major revenue or profit contributor to us.

Next, we have a question from Stefan Chang.

This is Stefan from Aletheia Capital, and thank you for taking my question and congratulations for your good result and guidance. So 2 questions from me. The first is regarding the 2 fab acquisition for the past month, you announced one of steel and one for ASE. I'm just curious in what time do you expect these 2 new acquired facility can start to contribute to the company revenue.

Stefan, welcome to the call. You're asking about our 2 recent acquisitions in regards to buildings and facilities. Is that correct?

Yes, that's correct. Thank you, Ken.

First of all, both buildings are going to be for LEAP services. And I think we will start ramping up progressively starting from early next year.

Okay. Thank you for that. So a quick follow-up. So it's early for early next year, and I think especially for the second fab in the news release, you mentioned that for the packaging. So does that mean the tool installation for these 2 facility, the CapEx will be in this year or that will be in the next year?

You're looking for the timing of the facilitization and equipment of these 2 facilities?

Yes. And also the impact of the CapEx, whether it's this year or next year?

I think the -- at least for equipment, it will be for next year. And this factory will be -- how should I put this -- because the current facility needs to be vacated before we can start moving in and start installation and before that becomes available, there are also some construction works for facilities and some of the wiring construction that needs to be done. So if we're breaking down the CapEx for building facilities or for equipment, I think the -- for the building part of it, it will start earlier. But for equipment, it will be started from next year. Once we -- the space becomes available and we progressively put the machineries in.

Thank you. Also one last quick follow-up. So we discussed about full service and even some new technology panel. But I'm curious if you can give us any color, how do you see [indiscernible] right now?

[indiscernible]?

Yes, [indiscernible] for [ PCB ].

That's -- I've seen this further away. So I'm not expert this. So I don't think I'm qualified to comment on that.

We don't see anyone raising their hands online now.

All right. Thank you very much. See you next quarter.

I think to sum up, we had a good quarter, and we'll continue to have a good year. And next year, we see a very, very strong momentum continuing and we will do our best to execute our expansion plan to meet the demand from our customers. And we will continue to see our profit return to expand and come next year when things are more settled, we will be reviewing our structural margin to make it a more suitable rate for us. Thank you.