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 third quarter 2026 earnings release. I am joined today by 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, 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 separately presented by our subsidiaries. For today's presentation, I'll give a brief business update and then go through the Q3 results. Joseph will close with our Q4 outlook. During the third quarter, our ATM capacities ran at or near full utilization rates. Demand for our services continues to outpace our ability to supply such services within our LEAP and much of our non-LEAP capacities. Our revenues grew faster than we had initially expected, driven primarily by faster-than-expected installations of high-demand LEAP capacities. Non-LEAP also performed slightly better than initial expectations. And even though historically speaking, third quarters tend to be driven by seasonal strength, given the increasing mix of LEAP services, seasonality related to underlying consumer buying patterns are becoming less of a factor in our overall loading patterns. Overall, ATM profitability also improved more than anticipated, primarily as a result of higher-than-expected LEAP floating. Our EMS business's third quarter grew slightly ahead of our expectations. The third quarter continues to exhibit strong underlying seasonal demand for our SIP-related products. Our EMS business's profitability was in line with our expectations. Please turn to Page 3, where you will find our third quarter consolidated results. For Q3, fully diluted EPS was NTD 5.84 and basic EPS came in at NTD 6.13. Year-to-date through Q3, and our fully diluted EPS was NTD 13.40 and basic EPS was NTD 14.17. Consolidated net revenues reached a record NTD 244.2 billion, up 28% sequentially and 45% year-over-year. Gross profit was NTD 54 billion with a gross margin of 22.1%, up 1.1 percentage points sequentially and 5 percentage points year-over-year. The sequential improvement stems from higher LEAP content in our ATM business. The annual improvement reflects higher ATM revenue and a more favorable NT dollar environment. Operating expenses totaled NTD 20.8 billion, up NTD 1.8 billion sequentially and NTD 5.1 billion year-over-year, primarily driven by higher headcount, profit-sharing expenses and further R&D spend to support LEAP initiatives. As a percentage of revenue, operating expenses declined sequentially by 1.5 percentage points and annually by 0.8 percentage points to 8.5%. Our OpEx percentage decline principally from LEAP revenue growth after previous periods of R&D investment. We currently see operating expenses continuing to rise on an absolute level, but on a percentage basis should remain near the range demonstrated in the current year. This delivered an operating profit of NTD 33.1 billion, up 57% quarter-over-quarter and 151% year-over-year. We had an operating margin of 13.6%, expanding 2.5 percentage points sequentially and 5.8 percentage points annually. Rising company profitability was primarily driven by higher loading and expanding LEAP product mix. Nonoperating loss totaled NTD 0.4 billion. This amount includes net interest expenses of NTD 2.6 billion, up NTD 0.8 billion sequentially due to higher debt levels, tax expense was NTD 4.8 billion. Our effective tax rate for the quarter was 14.8%. During the quarter, we saw beneficial changes to tax regulations and foreign currency movements, which positively affected our net deferred tax position. Given these changes, we now expect our full year effective tax rate to be between 16% to 17%. Net income for the quarter was NTD 27 billion, up 28% sequentially and 148% year-over-year. On Page 4 is a graphical view of our consolidated quarterly performance. For the third quarter 2026, our ATM business represented 62% of our consolidated holding company revenues while -- representing 91% of our operating profits. This is compared to 59% of consolidated holding company revenues, while representing 82% of operating profit in the third quarter of last year. As our ATM lead business continues to outgrow our other service areas, we continue to believe that our ATM business will continue to increase as a percentage of our overall business and profitability. On Page 5 is [Audio Gap] our ATM P&L. For the third quarter of 2026, we recorded record revenues for our ATM business of NTD 151.5 billion, up NTD 25.3 billion sequentially and NTD 51.2 billion annually, representing an increase of 20% sequential and 51% annual growth. Gross profit for our ATM business was NTD 46.4 billion, up NTD 11.9 billion sequentially and up NTD 23.7 billion year-over-year. ATM gross profit margin was 30.6%, up 3.3 percentage points sequentially and 8 percentage points annually, driven by higher operating leverage and [Audio Gap] particularly higher mix of LEAP. Our gross margin has surpassed our historical structural margin ceiling. A theoretical structural margin for our ATM business would now substantially depend upon the amount of expected LEAP product mix. Given that our LEAP business continues to grow rapidly, our margin range now appears to be dynamic rather than fixed structurally. During the third quarter, operating expenses were NTD 16.2 billion, up NTD 1.5 billion sequentially and NTD 4.3 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 10.7%, down 1 percentage point sequentially and 1.1 percentage points annually. We are approaching our near-term ATM OpEx percentage target as we balance cost in a more technology-led growth framework. During the third quarter, operating profit was NTD 30.2 billion, representing a sequential 53% increase of NTD 10.5 billion and a 178% annual increase of NTD 19.4 billion. Operating margin was 20%, up 4.3 percentage points sequentially and up 9.2 percentage points year-over-year. The NT dollar had a positive 0.5% sequential and a 3.3% annual percentage point impact to our gross and operating margins. On Page 6, you'll find a graphical representation of our ATM P&L. The chart currently highlights our gross profit margin. Over the display time frame, our margin improvement has been largely driven by improving utilization rates within traditional product lines and increasingly product mix. In this time frame from peak to trough, our gross profit margin percentage has climbed 8.7 percentage points. On Page 7 is our ATM revenue by communications, computing and consumer applications. LEAP services are primarily included within our computing applications with a lesser amount being included in our in our communications applications. As can be seen here, our computing applications percentage continues to grow steadily. With a large amount of our LEAP services coming from computing, revenues for our computing application grew by 39%. Meanwhile, automotive, industrial and consumer all grew by about 14%. Our communications application had the least amount of growth during the quarter, growing 8%. At this time, we continue to believe that our computing application will lead growth into 2027 and 2028. On Page 8, you will find our ATM revenue by service type. At the beginning of the year, we believe that our [ test ] business, led by rapid expansion of our wafer [ soy ] business would outpace growth of our assembly business. However, during the year, our assembly business has been showing even stronger-than-expected growth, especially as it relates to our traditional businesses. The demand for our test services continues to be robust. However, as with much of our business expansion, test capacities are awaiting new facilities. As stated, during the previous quarter, we believe that both our assembly and test businesses will grow at similar rates during the year. On Page 9, you can see the third quarter results of our EMS business. Our EMS business has historically focused more on products closer to consumer-driven end markets. Many of these products are experiencing a higher component cost environment driven by shortages caused by the rapid AI build-out. These extra pass-through costs are increasing both our reported revenues and raw material costs. When netted, this ultimately negatively impacts our EMS business' margin performance. EMS revenues grew 42% sequentially and 35% annually to NTD 93.5 billion. Sequentially, our EMS business's gross margin decreased by 0.6 percentage points to 8.3%. This change was principally the result of higher pass-through component costs and product mix differences. EMS operating expenses increased by NTD 0.4 billion sequentially and and by NTD 0.8 billion annually. Our third quarter EMS operating expense ratio was 5%, declining 1.5 percentage points sequentially and and 0.6 percentage points annually. Operating margin came in at 3.3%, improving 0.9 percentage points sequentially and declining 0.4 percentage points annually. The sequential margin improvement is the result of product mix offset by a higher component cost environment. The annual decline is the result of higher component costs. Our EMS third quarter operating profit was NTD 3.1 billion, up NTD 1.5 billion sequentially and up NTD 0.6 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. And though the communications application percentage looks to have declined on an absolute dollar basis, our EMS communications application grew quarterly. Annually, the communications application percentage declined primarily due to underlying customer production timing changes. The growth in the computing application is largely driven by business related to AI Accelerator products. From a longer-term perspective, we continue to pursue potential synergies and between our ATM and EMS businesses to co-develop system-level solutions by integrating critical EMS competencies with ATM technologies. We have the potential to optimize entire systems and to end, applying the same co-engineering disciplines that successfully scaled SIP architecture. As complexities increase at the die and package level, the system level will need to follow suit. On Page 10, 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 NTD 107.9 billion. Our total interest-bearing debt increased by NTD 100.2 billion to NTD 406.5 billion. Total unused credit lines amounted to NTD 457.3 billion. Our EBITDA for the quarter was NTD 58 billion. Our net debt-to-equity ratio this quarter was 66%. As expressed in previous quarters, the third quarter represents the near-term peak of our net debt-to-equity ratio. We expect this ratio to come down somewhat in the fourth quarter. On Page 11, you will find our equipment capital expenditures relative to our EBITDA. Machine and equipment capital expenditures for the third quarter in U.S. dollars totaled $2.1 billion, of which $1 billion was used in packaging operations, $1.1 billion in testing operations, $41 million in EMS operations and $5 million in interconnect materials operations. [Audio Gap] Our investments today are laying the future groundwork for generations of products to come. I'll hand the presentation over to Joseph to walk through the company's Q4 outlook.

Let me give everybody a fourth quarter guidance. Based on our current business outlook and exchange rate assumption of USD 1 to NTD 31.9 which remains the same as the third quarter, management projects overall performance for the fourth quarter of 2026 to be as follows: On a consolidated basis, in NT dollar terms, our consolidated fourth quarter revenue should grow by 6% to 8% quarter-over-quarter. Our consolidated fourth quarter gross margin should be between 23% to 24%. Our consolidated fourth quarter operating margin should be between 14.5% to 15.5%. For ATM business, in NT dollar terms, our ATM and fourth quarter revenue should grow by 11% to 13% quarter-over-quarter. Our ATM fourth quarter gross margin should increase by 100 to 200 basis points quarter-over-quarter. For EMS In NT dollar terms, our EMS fourth quarter revenue should be flattish quarter-over-quarter. Our EMS fourth quarter operating margin should be around 2%. Now with that, we will open the floor for questions.

[Operator Instructions]

Our first question is from Sunny Lin of UBS. Could you hear me okay?

Congrats on the very strong results. My first question is on your overall LEAP sales. Given the importance and you're accelerating expansion, any update on your LEAP sales for 2027? And how should we think about the split by [indiscernible] process software outsourcing and test?

For 2027, we're expecting to remain, as we last projected, to double our LEAP revenue for the year.

Well then -- sorry, maybe just to follow up, and that will be my second question, so any update on your lip sales for 2026? .

Yes. As I said, we are upping our 2026 LEAP revenue from originally NTD 3.7 billion that we mentioned last quarter to over NTD 4 billion for this year. .

Sure. Sorry. I'm not sure if it's our connection issue, but I lost a part of the response, but it's okay, we will check the transcript. So my second question will be on the full process [ cos ], how's the overall ramp and yield for the key product second half of this year? And now looking to 2027, with your expansion, should we assume a more diversified customer base and product base? And -- yes. .

So Sunny, what you're asking about our full process business and then looking for any update in terms of the full process yield and such, right? Is that correct? .

Yield. And then the product base going to 2027. .

I think for 2026, our full process revenue is on track, and we're keeping a NTD 300 million revenue for the year. And I think the -- everything else is going on as planned. And for next year, we are expecting over NTD 1 billion revenue coming from a full process. And of course, the yield is at the -- at the level that we can get into mass production and major shipments. .

[Operator Instructions] Our next question is from Gokul Hariharan of JPMorgan.

Hello, [Audio Gap].

Next question is from [indiscernible] of BoA. Can you hear me? Okay. And now we go back to [ Harano], JPMorgan

Okay. All right. So thank you very much for the question, Joseph, and again, -- my first question is on gross margins. Could you talk a little bit about where we are seeing this upside in gross margins compared to our guidance range for Q3? Looks like a very clean kind of 150, 200 basis points beat and further upside in Q4 as well. Is it pricing? Or is it your full process is ramping up better in terms of margins? And secondly, on the same topic, I think now that we have already exceeded our previous structural range. And obviously, the product mix is also different. You're still expecting LEAP to grow faster than the overall product mix. What is the kind of gross margin range we should think about as we think about the next couple of years?

Well, as we continue to ramp up our LEAP business, I think the -- there will be further margin improvement in fourth quarter as well as going into next year. I think that at this point, I think the so-called structural margin no longer applies because of the significant and rapidly changing business structures that we are having today. . So if we are to comment on our margin, I think the first thing we will say is that the so-called structural margin ceiling has now become the base for us. And looking into next year, I think as we continue to ramp up our overall capacity and also in a very friendly type of pricing environment, we believe that we will continue to see gross margin improvement on a quarterly basis from the base of 30% and we will continue to see sequential improvement in our margin on a quarterly basis for next year as well.

Got it. Just a follow up there. If you look at the overall portfolio, maybe we leave testing aside within packaging, what would be the highest gross margin that you're able to earn in any of the LEAP process? Is it already like close to 40% for some of the processors or that is too ambitious?

Gokul, you're looking for the potential the highest-performing margin for LEAP at this point? Is that your question? .

Yes. Within the 3 or 4 components that are there, which one is the highest performing and what are those levels? Just to understand, like what is the room for travel in terms of your overall gross margins, given your mix is clearly improving quite rapidly?

I don't think we need -- we want to comment on the different margins in different products or different packages. But I think the overall LEAP business, both on assembly and test, are margin accretive, and we'll continue to see improvement in our margin expansion. .

Okay. Okay. Got it. My second question is on -- just a follow-up on your LEAP full process revenues for next year, Joseph, I think you mentioned more than NTD 1 billion, but that sounds quite conservative given you're already doing NTD 300 million in the first quarter of ramp this year. . Could you talk a little bit more about your engagements on the full process? And also, if you ramp up all these 22 projects that you are currently ramping up in terms of facilities, both greenfield and brownfield, what does it mean in terms of, let's say, you ramp it up in 2028? Any indication in terms of what is the investment required from a CapEx perspective? And what does that mean for continued growth? Does it mean that you continue to grow at similar rates even into 2028, not just for 2027?

You're asking about the characterization of our full process business and in certain regards, kind of a total return outlook. Is that correct? .

Total growth outlook given the very sharp ramp in the facilities.

We do have multiple customers engagement at this point, although we are pretty much constrained by our capacity and we're aggressively building that up. So from the business outlook that we have so far, I think our resources are quite limited. So we are -- although the demand is there, but we're still trying very hard to catch up in terms of supply. And for the next year, we are expecting that the demand can be way higher than now. what we'll be able to deliver. So right now, we're still projecting over NTD 1 billion revenue coming from our full process deal. So I guess that's -- I think the biggest bottleneck today is really still the space, although many different areas. We do have final sales being constrained, but space is really one of the biggest the constraint that we're facing today.

Our next question is from Laura Chen of Citi Group.

Just wanted to follow that USD 1 billion like the full process. Can you give us more color about that? What type of the full process will see, the contributions next year? And also, for our LEAP overall revenue, so [ VSC ] still more driven by the substrate part. But we do see that our companies at various different type of technology. So just wondering, can you give us more color about the growth breakdown in particularly in the full process in the next 2 years?

Laura, this is Ken. I don't think we have a lot of characterization in terms of what types of full process. I think when we talk about full process, it's generally much more customer specific to -- I think we probably can't really comment that much on that at this point. .

Okay. Sure. Understood. So that also seems like the growth into next year is more coming from the substrate part?

Yes. But we are seeing very, very strong demand in test as well [indiscernible] we are posing a very strong momentum. Again, we are actually constrained with our capacity buildup. So we're still trying to -- very hard to try to catch up with it. . In terms of full process, I think, as I mentioned, we are moving ahead and on track. And we hope that we can supply more for next year. But at this point, we are conservatively looking at about over $1 billion revenue coming from that. And there are some other new projects that we're entering, for example, CPO, and we're expecting over $0.5 billion of revenue coming from CPO as well for next year. That will be included in our LEAP revenue.

That's actually my second question about about the CPO because we see that Jensen earlier last week, he mentioned about that 30x capacity will pick up for next year. So I assume that also, yes, in the LEAP revenues. But will we like going forward to kind of split that revenues breakdown for bidder like investors' understanding on that part growth?

I think we will -- we are kind of breaking it down already in terms of OS in terms of full process, in terms of wafer sort and as I mentioned, CPO. .

Okay. So if I may also check on that, do we have any expectation on the CPO revenue contributions in 2 years?

In 2 to 3 years?

Yes. .

No, we have a projection for next year, but we will see -- we'll have better clarity after we finish we're setting that to do for now. .

Our next question is from [ Heska ] of BOA. .

Congrats on the great results. I think just a quick follow-up on the structural gross margins where you already reported third quarter ATM gross margins up to slightly higher than 3 percentage. So with LEAP business, that will be even higher in the next couple of quarters and also your mainstream packaging and testing business, utilization, pricing are actually also improving. Can we use the third quarter gross margin as a base case going forward for your overall [ ICM ] gross margin assumptions as long as the cycle homes?

Yes. I mentioned earlier that we're now using our structural margin sealing as a base for next year. .

Okay. So we can use like this kind of roughly 30% of the gross margins as the base case for next year. Got it. And then...

With the quarterly improvement for next year as well.

Okay. sequential improvement. And then second thing is just on CapEx. This year, you are already spending based on what you reported just now, you have already been spending 90% of your annual budget, which has been revised off price year-to-date to USD 10.5 billion on CapEx. Would you be able to provide some update on that since there is still like a few months to end this year? And looking into 20.7, how should we think about that trajectory as one of your foundry partners also just now announced to buy another panel fab. Should we also expect similar acquisition of the fab or the facilities by AUC as well and also more equipment procurement in the next couple of quarters to meet our customers' demand?

Yes. As I said, the space continues to be a constraint -- one of the constraints that we have, and we are aggressively seeking for soluble existing plants for us to buy. But there are new -- competition is pretty keen and they're really not that many suitable factories for us to pursue at this point. So it's an ongoing effort that we're in. And also for this year's CapEx, we are increasing our CapEx for the year to $10.5 million to $11.5 billion now. We're adding $1 billion, another $1 billion. And of that $1 billion, half of it will be for facilities as we continue to fill up our new factories. And the other half will be for equipment and 60% of it will be for LEAP. And will be for the mainstream events.

Got it. Got it. And just on the overall pricing environment across your lead versus the mainstream packaging and testing business, how should we think about -- since the supply demand is still pretty tight. And that ...

Sorry to stop you there. Okay. You're on question #3.

Our next question is from Gokul Harihana of JPMorgan.

A couple of follow-ups from my side. Thanks for the opportunity. So Joseph, I think you mentioned CapEx, 11.5% higher by $1 billion. Could you give an opinion on what your thinking CapEx is going to look like next year? Are we still in an upward slow-paying curve for CapEx? And could you also talk a little bit about are you entering into any prepayment arrangements or anything like that with customers, given a lot of this new CapEx seems to be targeted at some of the key customers itself? Yes, that's my first question. .

You're looking for an update on our CapEx outlook going forward? .

Yes. And the kind of any funding arrangements that you have to repay the funding sources here around it. .

Well, we'll continue to see very strong demand coming in. And we do have a very strong prospect for next year as well. So at this point, I believe the CapEx spending for next year will be even larger than this year and as we continue to ramp up our capacity. Also in the -- in terms of R&D, we will continue to make the necessary investment to carry our missions. . Funding-wise, we'll continue to use whatever -- we do have multiple cost-effective sources for us to raise funds to support our growth. I think at this point, we are not shy -- we will not be shy from making the necessary investment to support the expansion. So I think for next year, we will continue to see negative cash flow. But I think this thing would be balance off in due course. In terms of -- as I mentioned, multiple funding sources that will also include some of the trade financing that we can arrange with our different customers.

Understood. And second question is on the test business. Could you just characterize the growth of the test business going into next year final test versus chip [ probing]? And I think how constrained are you on test versus packaging? Like if you think about late scale, is the constraints on test bigger than packaging from a facility or equipment perspective? .