ASE Technology Holding Co., Ltd. (3711) Earnings Call Transcript & Summary

Hello. I am Ken Hsiang, the Head of Investor Relations at ASE Technology Holdings. Welcome to our Second Quarter 2026 Earnings Release. I'm joined today by Dr. Tien Wu, our COO; and Joseph Tung, our CFO. Thank you for joining us 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 you do not consent, please refrain from asking questions or leave the session now. 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 where 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 separately presented by our subsidiaries. For today's presentation, Dr. Tien Wu will begin with a midyear business update. I will then walk through the Q2 results and Joseph will close with our third quarter outlook. With that, let me hand the presentation over to Dr. Tien Wu.

Good afternoon. I would like to give you the first half 2026 recap and also the full year outlook. For my presentation will be all in U.S. dollar terms. Consolidated revenue grew 24% year-on-year in the first half of 2026, with ATM revenues up 35% year-on-year for the first half. leading-edge advanced packaging and overall testing outpaced growth. For ATM business, we expect to maintain the same growth momentum into the second half. For full year, LEAP services revenue is tracking ahead of prior guidance of USD 3.5 billion. While general segment is expected to grow by 30% year-on-year versus previous guidance of 13%. So for the full year, we expect the ATM business revenue to grow by 35%. Machinery CapEx was USD 2.7 billion. Building facility automation was $1.4 billion in the first half. Joseph will give you more detail for the full year. Stepping up investment in R&D, human capital, advanced capacity and also automation and smart factory. Infrastructure to support a multiyear growth. On the second page, I would like to give you some highlight on market dynamics and positioning. There are many moving parts in the market today. You're reading the same newspaper, watching the same news as I do. What I'm trying to present to you is a company view, we try to present the logic, why are we making particular decision in this particular junction of time. AI in note -- new applications with bigger scale and potentials. I'm not going to articulate the detail. If you're interested, we can talk more in the Q&A. That's our current view. I think very few of you will disagree with this statement that AI is a paradigm shift, and we do have potential bigger scale and multiple applications, and that's our current view. In terms of when, how, we are monitoring the progress. I believe we are at the beginning of the AI paradigm shift. There will be multiple stages of transition. We can talk more in the Q&A. The second comment is how we feel. AI demands new hardware that does not exist previously in size, complexity and integration. You can argue about the competitive intensity, the memory, the power, the linkage, the bandwidth. All in all, what we're trying to develop right now is a brand-new platform to support the potential AI applications, the data center, the agentic and future in the physical AI, humanoid, all of the hardware will be different than what we have been producing so far. There is a growing need for industrial power, connectivity and storage devices because of the AI transition evolution or paradigm shifts. The company is seeing all 3 right now from all of our customers on the multiyear basis. Let me talk about ASE's strategic priorities. Again, this is the company view. We have to have a blueprint, a plan, a vision in order for the 100,000 employees to act on. And where I'm trying to present to you is the highlight for that blueprint. Hardware infrastructure is a bottleneck. With the AI, the hardware requirement is new, insatiable and more complicated and more complex. And today, there are very few manufacturers capable of producing hardware. Therefore, it is the bottleneck today for our capacity, for automation and more importantly, from an innovation perspective. We can talk a little bit more detail about the panel, about CoWoS, about glass substrate about VRM, about photonics, I can go all and long. But all of these are tied to the infrastructure and your capability to ramp with the complexity, integration and the design blueprint the customers are asking to do. All in all, I call all of this to be hardware infrastructure and that is the new bottleneck. We have not experienced this for the last 40 years. Packaging is moving up in system architecture value chain. For me, as a designer, by training, the system architecture always is at the top of the value chain. Packaging is approaching the system architecture value by providing the new complexity and integration capability with the variable that I just talked about it. Now if you believe hardware is the new bottleneck and the packaging is moving up in the value chain of the system architecture. Then ASE has a unique position to support the AI migration evolution or paradigm shift and align with all customers' long-term objectives today. ASE's competitive position. I talked about this for many times. The ecosystem position cluster or Taiwan cluster, scale or the AI data center, Taiwan scale and other digital scale, the efficiency I want to single out the pure play. The pure-play enable you to have a seamless cooperation with all supply chain players. In future, this could be one of the competitive advantage for ASE as a pure-play OSAT that we have no conflict with foundry, with no conflict with substrate provider, we have no conflict with anybody. Therefore, we have a good way not only to collaborate with our customers long term, also collaborate with all of the ecosystem players that will turn critical for the overall complex integrated nature for the AI transition or evolution. The first mover's advantage. I'm very specific about the first movers advantages, technology, speed, capacity and most importantly, trust. So everything the company does circle around the long-term business objective as well as the seamless integration with ecosystem player and give you the speed, the efficiency, and earn the customer trust. So that's the highlight for me for the second half. Okay? Thank you.

Thank you, Tien. As Dr. Wu highlighted, our businesses performed extremely well throughout the first half of the year. For the quarter, we saw strong growth within both our LEAP and our general businesses. Non-LEAP capacities like wire bond and traditional advanced packaging were also tight. For test, our wafer sort and final test capacities were also running near full. Effectively, outside of equipment lines being placed into service, capacities were generally very close to being full. Our blended utilization rate for the quarter was between 80% to 85%. Our capability for near-term incremental growth is being gated by our abilities to install capital equipment and build out our buildings and facilities. From a financial perspective, second quarter ATM revenues came in ahead of our original expectations, driven by higher loading from both our LEAP and general services. From the profitability perspective, we also saw our gross margin outpacing our original expectations, driven by higher loading, resulting in more operating leverage. Revenues for our EMS business were generally in line with our expectations. EMS profitability was slightly below our expectations due to product mix and higher component prices. Please turn to Page 5, where you will find our second quarter consolidated results. For Q2, fully diluted EPS was $4.61, and basic EPS came in at $4.80. We believe our earnings reflect strong core profitability and a few nonoperating items we'll outline shortly. Consolidated net revenues reached $191.1 billion, up 10% sequentially and 27% year-over-year. Gross profit was $40.2 billion with a gross margin of 21.0%, up 1 percentage point sequentially and 4 percentage points year-over-year. The sequential improvement stems from higher operating leverage in our ATM business. The annual improvement reflects both structural efficiency gains and a more favorable NT dollar environment. Operating expenses totaled $19 billion, up $3.5 billion year-over-year, primarily driven by higher labor costs and further R&D spend to support LEAP. As a percentage of revenue, operating expenses remained flat at 10% and declined 0.3 percentage points annually. This delivered an operating profit of $21.1 billion, up 21% quarter-over-quarter and 107% year-over-year with an operating margin of 11.1%, expanding 1 percentage point sequentially and 4.3 percentage points annually. Nonoperating income totaled $4.6 billion, compared to $0.7 billion in the prior quarter. While this amount appears relatively elevated versus prior quarters the increase primarily reflects some potentially nonrecurring gains. Net nonoperating income includes mark-to-market equity gains related to corporate investments of $4.2 billion, foreign currency hedging gains of $1.5 billion and other items, including equity method investment income, government grants, rent income and dividends totaling $0.8 billion. These gains were partially offset by $1.9 billion in net interest expenses. Tax expense was $4.2 billion. Our effective tax rate came in at 16.4%. We saw a lower effective tax rate due to higher R&D credits generated during the quarter. We continue to expect an effective tax rate of 18% for the year. Net income for the quarter was $21.1 billion, up 49% sequentially and 180% year-over-year. On Page 6 is a graphical view of our consolidated quarterly performance. For the second quarter 2026, our ATM business represented 66% of our consolidated holding company revenue while representing 94% of our operating profit. This is compared to 61% of consolidated holding company revenue, while representing 87% of operating profit in the second quarter last year. We see this being primarily driven by the growth of our ATM LEAP services over the last few years. On Page 7 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 2026, we recorded record revenues for our ATM business of $126.1 billion, up $13.7 billion sequentially and $33.6 billion annually, representing an increase of 12% sequential and 36% annual growth. Gross profit for our ATM business was $34.5 billion, up $5.3 billion sequentially and up $14.2 billion year-over-year. ATM gross profit margin was 27.3%, up 1.3 percentage points sequentially and 5.4 percentage points annually, driven by higher operating leverage and a more favorable revenue mix, particularly a higher mix of LEAP. During the second quarter, operating expenses were $14.7 million, up $1.4 billion sequentially, and $3.3 billion year-over-year. The sequential and annual increases in operating expenses are primarily related to higher overall labor costs and general R&D expenses. Our operating expense ratio was 11.7%, down by 0.1 percentage points sequentially and 0.6 percentage points annually. We expect our ATM operating expense ratio should continue to improve during the back half of 2026. During the second quarter, operating profit was $19.8 billion, representing a sequential 25% increase of $3.9 billion and a 124% annual increase of $11 billion. Operating margin was 15.7%, up 1.6 percentage points sequentially and up 6.2 percentage points year-over-year. The NT dollar had a positive 0.1 sequential and a 0.6 annual percentage point impact to our gross and operating margins. On Page 8, 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. Over this time frame, our margin improvement has been largely driven by the recovery of our utilization rate related to our general manufacturing capacities and increasing LEAP product mix. On Page 9 is our ATM revenue by the 3C market segments. LEAP services are primarily included within our computing applications with a lesser amount being included in the communications applications. As can be seen here, the computing application percentage continues to grossly -- at this time, we see this trend continuing into 2027 and 2028. On Page 10, you will find our ATM revenue by service type. Despite the overall growth in our business, we did not see substantial shifts in service types during the quarter. All business lines appear to be keeping pace outside of small adjustments between materials and others. At the beginning of the year, we believed that our test business, led by rapid expansion of our WiFi sort business would outpace growth in our assembly business. While our test business has shown the strong growth we initially expected, our assembly business has been showing even stronger-than-expected growth, especially as it relates to legacy wire bond services. We now believe that both our assembly and test businesses will grow at similar rates during the year. On Page 11, you can see the second quarter results of our EMS business. EMS revenues grew 6% sequentially and 12% annually to $65.8 billion. Sequentially, our EMS business's gross margin decreased by 0.6 percentage points to 8.9%. This change was principally the result of product mix differences. EMS operating expenses increased by $0.3 billion sequentially and annually. Our second quarter EMS operating expense ratio of 6.5% was flat sequentially and down 0.4 percentage points annually. Operating margin came in at 2.4%, down 0.6 percentage points sequentially and 0.2 percentage points year-over-year. The sequential margin decline is the result of product mix and a higher component cost environment. Our EMS second quarter operating profit was $1.6 billion, down $0.3 billion sequentially and up $0.1 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. Generally, the moves in the consumer and communication categories are related to the seasonality of the underlying products we service. The growth in the computing category is largely driven by business related to our AI accelerator products. From the holding company perspective, we continue to pursue synergies between our ATM and EMS businesses to codevelop system-level solutions, particularly in key areas such as optical interconnects, power delivery and thermal management. By integrating critical EMS competencies with ATM technologies, we have the potential to optimize entire systems end to end, applying the same co-engineering disciplines that successfully scaled SIP architecture. On Page 12, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents and current financial assets of $107.4 billion. Our total interest-bearing debt increased by $40.9 billion to $306.2 billion. Total unused credit lines amounted to $396.2 billion. Our EBITDA for the quarter was $45.8 billion. Our net debt to equity this quarter was 47%. On Page 13, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the second quarter in U.S. dollars totaled $1.7 billion, of which $840 million was used in packaging operations, $804 million in testing operations, $49 million in EMS operations and $2 million in interconnect materials operations and others. In addition to spending on machinery and equipment, during the quarter, we also spent $658 million on facilities. It is worth reiterating what Dr. Wu spoke of earlier. We are investing in capacities and facilities because what we do has immediate impacts on key bottlenecks and semiconductor supply performance and efficiency, the AI build-out regardless of open or closed model waiting will require unprecedented hardware capacity and capability expansion. At this point, we are just trying to keep up. With that, I'll hand the presentation over to Joseph to walk through the company's outlook.

Okay. Now for third quarter 2026 outlook. Based on our current business outlook and exchange rate assumption of USD 1 to TWD 31.9 versus last quarter TWD 31.6, management projects overall performance for the third quarter of 2026 to be as follows. On a consolidated basis, in NT dollar terms, consolidated third quarter revenue should grow by 21% to 22% quarter-over-quarter. Our consolidated third quarter gross margin should be between 20.5% to 21.5%. Our consolidated third quarter operating margin should be between 11.5% to 12.5%. For ATM, in NT dollar terms, our ATM third quarter revenue should grow by 11% to 13% quarter-over-quarter. Our ATM third quarter gross margin should be between 28% to 29%. Our EMS, in NT dollar terms, our EMS third quarter revenue should grow by around 40% quarter-over-quarter. Our EMS third quarter operating margin should be between 3.2 to 3.4%. With that is the '26 third quarter outlook. Now adding a bit of color for the full year and next. First, on CapEx. Given the stronger demand for LEAP in 2026 and beyond, we will need to add another USD 1 billion each this year for facilities and equipment. So the total is adding another $2 billion for CapEx. While the additional investment for facilities and most of the equipment for LEAP, we also need to add capacity for mainstream advanced packaging and testing to support the general market demand. On LEAP, while this year's LEAP service revenue tracking ahead of our prior quarter guidance of USD 3.5 billion as business momentum continues to be very strong, we are aiming to double our LEAP revenue in 2027. Lastly, on ATM profitability, with expanding margin accretive LEAP and test businesses, our second quarter ATM gross margin of 20.3% came in ahead of our guidance. We continue to expect sequential margin improvement with fourth quarter ATM gross margin likely to exceed our structural margin ceiling of 30%. At such point, we will start to review if we would adjust our structural margin range. With that, thank you.

During the Q&A session that follows, we would appreciate if your questions could be as clear and concise as possible and ask singularly. We will start by taking questions from live participants and then alternate in questions from our online participants. I as the moderator, we'll be receiving each question and repeating and directing each asked question. After an initial question, the participant may ask a follow-up question, clarifications of the earlier question or another question entirely. Then we'll move to the next participant. Participants may return to the queue for any additional questions and/or clarifications. Thank you.

Dr., so just to follow our conversation, your industry peers seems to be more aggressive in the U.S. operation, not just Amkor, but also KYC announced too that, right? So I want to ask you about kind of your partnership with the U.S. customers and also your operation in the U.S. I guess it's a little bit separate question, but can you also comment a little bit about the Intel community involvements by ASE.

Charlie, you're asking about the competitive landscape that we're facing and secondly, EMIB. Dr. Wu.

Well, let me answer the U.S. operation first. What I'm going to talk about it, I have repeated several times for the last 2 years. We do have U.S. operation, ISE, test development, also services in California. While one factory in Fremont, California, we are one factory in San Jose. We're in the process of expanding to number 3 and number 4 factories. These are particularly required by our customers during the -- well, for the last 20 years in Bay Area for upfront chip design, test development, also technology development. And that is ongoing right now. . The agreement that we have with our leading customer is the following. We will develop and build fully automated, efficient line in Taiwan. We are comfortable with our resources and efficiency. In due time, we will migrate and move the operation to the other places in the world. That could be United States, could be somewhere else. That has always been the case. So it's not like we're not supporting. We are supporting development, R&D also architectural design. In terms of manufacturing process development, for now, we are focusing on Taiwan. Until we build the appropriate scale, having the appropriate resources and know-how and efficiency, upon that time, we will work with our customers to move to the other part of the world for better logistics. Okay. The second comment is EMIB. EMIB, I'm going to repeat what TSMC has responded. Right now it's really capacity constrained. If there's any other alternative technology that can offer the same yield to resolve the bottleneck that we have for the AI infrastructure, we're welcome to see that. For ASE, we're also covering the other customers also along the same line, including -- the following question is the -- if EMIB posting potential threats are competitive advantages over its cohorts? That's always a possibility. I have been working in the packaging industry for 40 years. I've gone through about 1,000 different packaging designs. At the end of the day, probably 20 will leave -- will be here. So there's always a competing technology, alternative materials has always been the focus of R&D, right? For EMIB, we're happy to see if EMIB can ramp up. In terms of efficiency performance that's up to the system as was the market to decide. We're not going to make a judgment call who has a superiority. But our focus is to support the colos. We're trying to ramp up the CoWoS scale efficiency as fast as we can. If customer asks for other alternative technology, ASE will also include that in our road map, right, I don't think as a potential threat. Again, we are a pure play. If the EMIB substrate becomes the right alternative, which is EMIB substrate, and we do the assembly, there is no conflict. So anything is welcome. It's not like a zero-sum game. Like you can only choose one, I mean it's never been the case, right? The world is a big place. A question from the floor.

My first question is, can you give us -- there will be more detail guideline for your Q3 ATM demand driver for LEAP and also for general packaging and testing, the more detailed demand driver across the key applications of products.

Rick asking for maybe segmented drivers of what's helping the industry or our results pick up at this point. Is that correct? .

Yes, right. demand driver.

The question is the Q3 driver. Again, the -- we have a very awkward and peculiar position because we're capacity constrained. So we talk about 12% to 13% growth. That means we have to add 12% to 13% capacity. The demand overall is on -- I'm not going to comment about the memory pricing or any consumer devices. But overall, all of our customers are asking for more devices for Q3 and Q4. .

Great. Follow-up.

Not follow up. The second question. Can you elaborate your development of the 4 cohorts like -- and this year, roughly about how much is still coming from outsourcing. And what's your development and progress into next year of your internal 4 course development.

Rick, you're looking for the composition of our LEAP services, being what is potentially OS type services and full process and test.

I think basically, we are on track with our full process business development. But this year, we're going to have about $300 million worth of revenue coming from that space, and things are on track. We are aggressively expanding that capacity. And by next year, we'll have pretty substantial growth in that area as well. And again, this is something that is under development. We have now fully I think margin-wise, fully reflected at this point. But going forward, I think the full process will also be another margin accretive business for us and with pretty good substantial growth coming into next year. .

We have our next question coming from online.

Next question is from Sunny Lin of UBS.

Congrats on the very strong outlook. Sorry for not being able to attend in person. So my first question is maybe to follow up on 2027 outlook. And so maybe take a step back, you are guiding for Desoto exceed $3.5 billion. So should we be looking at maybe $4 billion or maybe between $3.5 billion to $4 billion. And therefore, 2027, for you to double, have we already had an idea in terms of breakdown by full process, outsourcing, for substrate and also test.

Sunny, you're looking for an update on our LEAP guidance for this year and then looking forward into 2027 whether we have any nuggets of information for you. Is that correct? .

Right.

Currently -- well, I think that we are ahead of our LEAP revenue this year. And by ahead, I think we will be adding another couple of hundred million dollars worth of revenue coming out of this year. And on top of that, for next year, we still see very strong momentum, and we believe at this point that we should be able to doubling that -- to double the revenue -- or the revenue next year. In terms of -- we are going full speed ahead with both our assembly as well as test. And as Ken mentioned, at this point, assembly is also catching up in terms of this momentum with test. So next year, I think the combination will be pretty much similar to what we're having seen this year.

Well, but sorry, let me clarify, if I may. So I just want to get a bit more color in terms of LEAP breakdown going to 2027. So I do assume that full process you account for a much larger portion for 2027. So any color will be very helpful.

Probably 2 quarters from now, we'll give you a better color.

Sure. So maybe if I may, second question Dr. Wu, I want to double-click on your earlier comment regarding AI driving lots of new applications with different complexities and scope. And so if I may, maybe based on your current engagement with the clients, what type of devices you are seeing better visibility. And then if we could see a more meaningful rev in the coming few years.

Looking for a little bit more color in terms of what potential applications the end devices may see coming in the future?

Yes, due to AI.

I would like to separate the technology statement versus business statement. Technology would take 15 to 20-year development. And the business statement typically, you're interested in full quarters, probably longest lead time. So let me comment on the CoWoS, for example, for EMIB and other alternative technology the AI data center is driving computation intensity. Therefore, the rectal size becomes bigger and bigger, that we know already. Everybody demands more bandwidth, from logic, ASIC, as well as memory. Therefore, the immediate upground will be the panel or more complicated CoWoS. To accommodate a bigger chiplet or rectal size, okay? That's 1 dimension that we're dealing with. We also comment that somewhere along the line towards the end of the year, the CPO will start launching. Initially, could be in small volume. However, we will have a critical benchmark information in terms of bandwidth and the system performance and also the thermal dissipation that can resolve. Pending on the cost performance ratio and also the yield, we will learn critical information. When the rectal size becomes bigger and the optics to come in a different hierarchy, then the power delivery becomes the next immediate questions. This will be deployed in the next 2 to 3 years. On a much longer term, the other things people are working on. For example, today, we're primarily dealing with digital and digital. There's a lot of activity going on to start accommodating sensor, analog, mixed signal with digital. If you think about the humanoid applications, other than the brain, the eye, ears, fingers, they're all analog. So what are the technology that can provide the low power, the bandwidth as well as the fully automated high-volume integrated capability to the digital analog mixed signal. These are the infrastructure a pure-play OSAT supplier should work with the customer, trying to develop. The technology takes 15 to 20 years to develop. All of the business that we're taking are deploying now are the results for the past 15 years of effort. So I would like to make that separation. But if you're interested, I think the AI has a very long leg. You can listen to all the smart people about infrastructure, AI data center, about agentic and also the physical interface. I also would like to give you some color on how I see the AI. I'm not the best person to talk about it. I have a very simple view to AI. AI is for a new pattern recognition. In the domain knowledge you're familiar with, when people start crossing domain, IT versus pharmaceutical, IT versus medical, the new pattern get recognized. When you recognize the pattern that's the potential application. We're at the beginning of the knowledge collection and the early stage of a pattern recognition is what AI does. But today, we'll only talk about single field. Eventually, in the world, I do not know how many, it's got to be 100 domain, how do you bridge all the domain knowledge and start creating something hybrid. The medicine, the surgical, humanoid. All of this are the potential application. Older technology we use exactly the building block that we're developing today. So what we're doing not just for AI data center, if all we're thinking about is AI data center for a specific customer then we really missed the point of what engineering does, engineering is to build elegant solution for the future demand regardless how difficult it is. It takes 15 to 20 years. This is not a stock trade. But what you're seeing is we are the first mover. We already have the cluster efficiency in the early stage of this AI transition, I think that means a lot if you really understand what I'm trying to tell you.

Next, online questions from Gokul Hariharan. .

First question, just to Dr. Wu. You have been working in very close partnership with the LEAP foundry customer -- sorry, LEAP foundry partner for the last few years, which has been helping the LEAP revenue growth quite nicely. They seem to be transitioning a little bit towards 3D, panel level kind of future technologies at least pretty aggressively, it looks like in the next 2, 3 years compared to the last 3, 4 years have been largely been about CoWoS and various forms of CoWoS. . So as they are embarking on that kind of transition, Dr. Wu, can you help us understand what is ASE's role? Is it getting elevated further in that partnership. And obviously, some of the full process CoWoS is also a result of them leaving some of these older areas to you as well. So just could you outline your -- what you talked about on the technology side in relationship to how this partnership with the LEAP foundry is going to work out in the next maybe 2 to 3 years first?

Gokul, you're asking about as our foundry progresses into their -- further down their technology road maps, how our plan, what our plans are to enter mix and/or interlink with them in this process. Is that correct?

Yes. And do you get more value add out of it as they kind of migrate out to more complicated packaging?

The collaboration is long term. Once again, I want to focus on the pure play. The foundry ideally is a pure play for wafer. Testing, bumping, packaging are enabler to support the delivery of the wafer to the correct customer in the correct timing also with the correct efficiency. Packaging pure play is to develop a packaging architecture or the Lego pieces to facilitate that. When the pure-play foundry with the pure-play packaging collaborate, that boundary is very clear. So today, they are packaging that needs to be taken by the foundry people because access to the leading edge wafer is just simply not available to the others or some architectural requirements that has strict IP that would like to honor and respect the customer as well as the foundry. That is a domain that the pure-play wafer people needs to decide. But preclude from that, the collaboration will cover all aspects in the packaging arena. In terms of where do we stop the line, when do we start the line, that depends on the wisdom of the management team of the ecosystem collaborator, right? I'm not sure how to give you a better answer. But as you can see, the OS, the full process all the collaboration are the full spectrum. In terms of future, we do not know, but it really depends on the pure-play IP as well as the customers' requirement but we would like to navigate through all of the complexity. But the important thing is we all understand we would like to provide speedy, the most elegant solution in the quickest amount of time to our customers collectively. That understanding is very clear and it's very obvious for the next 3 years as well as the ramp up in the next few years.

Got it. That's very clear. My next question is just on a couple of the guidance increases that you have. One is on LEAP for 2027. I think previously, we were expecting, I think, $1.9 billion or so additional. Now we're expecting a doubling of the revenue. Is that primarily coming from having more line of sight into capacity availability? Because I think demand is probably still much higher than what you can really support even next year. And secondly, mainstream as expecting the growth to be close to 20% this year from the, I think, 13% previously. Where is that upside coming from on the mainstream growth?

Gokul, you're looking for incremental explanation related to what is driving our LEAP 2027 outlook and also what has helped us drive our mainstream expectations up this year. Is that correct? .

That's right. Yes.

We have clear line of sight in terms of who needs what. We also have a clear line of sight on the building, the facility that we're building today. Well, we make a comment that this year by year-end, we're tracking ahead of the $3.5 billion. That comment is made because we see our yield and execution that gave us the confidence to tell you that by year-end, we will achieve that target. . But at the same token, we also give you a comment that whatever the target has been achieved by year-end. With the next 12 months, building new facility and adding new machines, we will be able to double that. That line of sight is there. The uncertainty exists in terms of how can we execute. So the business demand is not a concern. It's our own capability to execute the 2 line of sights, which is clear in front of us. In terms of the general devices, we see very strong demand in industrial, power, connectivity and storage devices. I do not know what the general market for semiconductor this year, I don't have that number, right? I believe we will outperform the general market, simply because our association was a stronger AI infrastructure development also our pure capability to have fully automated lines for all -- for most of the general devices. So people want to build devices to go into electrical vehicle, AI data center or any high impact, high-risk applications, chances are they will use our automated line. That's why we're having a very good traction. So in terms of capacity expansion, not only we need to expand the LEAP, we also need to expand the general market. That's putting a tremendous amount of pressure on ASE which is why I think during the shareholders' meeting, I complained that ASE is building 13 new facilities simultaneously this year, and we just bought another 7 brownfield. So we're building -- we're buying and we're spending CapEx. We're not happy about it. But the question now is that is our obligation. This is why we're here. We want to make sure we are providing the critical capacity to the best of our capability to satisfy the long-term objective from all of our customers.

Charlie, do you want to shout out another round of questions there. Yes. Go ahead.

I do have 2 questions, but can I make a clarification on the previous Q&A. So about the LEAP revenue next year, right? So just you talk about it will be very similar to this year, next year's premium mix, right? But according to your analysis, it seems like you have 4 kind of 2.5, the end customer is 86 CPU. Their product is growing 3x. And I assume your testing business is also growing more than double. So how come the rest of the kind of such kind of outsourcing can also double next year? Because NVIDIA, I think The Street consensus is like next year is growing 50% and TSMC expansion is like 70%.

Well, we have -- I think I was referring to in general assembly and test, it seems they have the same momentum. But assembly includes not just OS, they are a full process. There are other steps or process steps that we are enduring. So also some new packages that are coming on stream. So I think that's a general description of what we are seeing next year in terms of -- between assembly and test.

We are very happy to see that strong growth. I just want to ensure we get a breakdown in price. And next question is a little bit joking, but I just see that your quarterly CapEx is exceeding your EBITDA, right? So is that your free cash flow is also turning negative. Do you think share price will react negatively tomorrow?

Yes. I think we will continue to have very heavy CapEx for this year, not only this year, but also going into next year. So I think the negative cash flow situation will remain for some time. But at the same time, we're still maintaining a very healthy balance sheet. And we do have multiple cost-effective funding sources to fund the upcoming CapEx requirement. So at this point, I think we're pretty confident that we can -- we will be able to support our growth in the healthy manner. And we are still at the early stage of this mega trend. And so like I said last time, we are not going to be shy in making the necessary investment to not just to support our customer, but also to maintain our clear leadership position in this field.

Okay. Thanks, Joseph. Yes, we really like to hear you have a more funding need. So last one is the pricing and the margins. So we keep hearing from your customers that you hike price aggressively in the second half. Can we confirm if this is the case, whether it's more price hike in the traditional service or the advanced packaging. I think it's power 1? And secondly, how does that transition into your kind of long-term gross margin outlook. I think you were having this like 26% to 29% margin range for several years, right? Do you think you can break to the 30% anytime soon?

Yes. I think it's -- like I said in the outset, we will be -- we're very likely to exceed the margin savings in fourth quarter. And at that point of time, I think we will start to review whether we should adjust our margin -- structural margin range. Of course, when I say adjust, I mean, upward adjustment. I think we are still in a very, very kind of a friendly pricing environment because we saw a lot of inflationary pressures in terms of materials and components so far. So far, we can definitely pass on these cost increases to our customers through our pricing arrangements. And of course, we'll continue to see for the most suitable pricing strategy considering the situation as well as our margin return requirement. .

Okay. So the next question, we will go back online. .

Our next question is from Haas Liu of BoA.

So just a few questions from me. I think first 1 is that when you commented the gross margins is likely to exceed the ceiling of your structural gross margin ranking fourth quarter. Would you be able to curate how much of that would actually be coming from your mature part of the business and how much will be potentially liquify your growing mix in the LEAP contribution.

Haas, you were kind of breaking up, but I think you're asking what is contributing to our positive outlook in terms of maybe perhaps hitting our structural margins. .

Yes, that's correct, in fourth quarter. And specifically, I wanted to know which part of the sector is more important. Is it the LEAP business contributing more? Or is it because the mature packaging in your pricing strategy...

Haas is looking for the prime contribution for structural margin.

Well, I think margin improvement is a combination -- is a result of many combination of different factors, including the margin-accretive business growth, including our improvement in efficiency, including the continuous expansion of our automated factories. Operating leverage does -- of course, it plays a very important role as well as we continue to see volume growth. On the operating side, we are also seeing our passive investments start paying off. We are seeing -- on an annual basis, we're seeing OpEx ratio continues to drop. I think overall, the efficiency is much, much improved, and we have a much solid base in terms of our revenue coming on stream. So that gives us the confidence that we should be -- continue to see margin expansion on a sequential basis, at least for this year and next. And like I said, once we pass the structural margin range, we will start reviewing that and see how far we can go.