ASX

Hello, I am Kenneth Hsiang, the Head of Investor Relations for ASE Technology Holding. Welcome to our Q1 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 two. 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-IFRSs.

Results presented using Taiwan-IFRSs 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 Q1 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 Q1, our ATM revenues grew sequentially. We experienced continued strength in our LEAP services in 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 Q4. 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 manufacturing certainty. 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, Q1 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 three where you will find our Q1 consolidated results. For the Q1, we recorded fully diluted EPS of TWD 3.08 and basic EPS of TWD 3.24.

Consolidated net revenues were TWD 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 TWD 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 TWD 0.3 billion sequentially and TWD 2.1 billion annually to TWD 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 extents, 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 TWD 17.5 billion, down TWD 0.2 billion sequentially, and up TWD 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 non-operating gain of TWD 0.7 billion. Our non-operating gain for the quarter primarily consists of net foreign exchange hedging activities, offset in part by net interest expense of TWD 1.6 billion. Tax expense for the quarter was TWD 3.6 billion. Our effective tax rate for the quarter was 20.0%. Net income for the quarter was TWD 14.1 billion, representing a 4% decline sequentially of TWD 0.6 billion, and an 87% increase annually of TWD 6.6 billion. On page four 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 Q1 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 Q1 last year. On page five 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 Q1 of 2026, we had record revenues for our ATM business of TWD 112.4 billion, up TWD 2.7 billion from the previous quarter and up TWD 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 Q1, up siding 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 TWD 29.2 billion, up TWD 0.4 billion sequentially and up TWD 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 in 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 Q4. 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 Q1, operating expenses were TWD 13.3 billion, up TWD 0.6 billion sequentially and TWD 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 Q1, operating profit was TWD 15.9 billion, representing a sequential 1% decline of TWD 0.2 billion and a 90% annual increase of TWD 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 six, 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 Q2 and Q3 2025 margins were heavily impacted by NT dollar strengthening. On page seven 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 eight, you will find our ATM revenue by service type. We did not see any meaningful changes here during the quarter. On page nine, you can see the Q1 results of our EMS business.

During the quarter, EMS revenues were down 10% sequentially and 1% annually to TWD 61.9 billion. Sequentially, our EMS business' 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 TWD 0.3 billion sequentially and increased by TWD 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 Q1 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 Q1 operating profit was TWD 1.9 billion, down TWD 0.1 billion sequentially and up TWD 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 equivalents and current financial assets of TWD 114 billion.

Our total interest-bearing debt decreased by TWD 7.6 billion to TWD 265.3 billion. Total unused credit lines amounted to TWD 419.4 billion. Our EBITDA for the quarter was TWD 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 Q1 in U.S. dollars 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 TWD 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 Q2, I would like to give you a bit of a color for the full year. First of all, we are upping our CapEx for the year, which includes additional TWD 0.9 billion for buildings and infrastructure, as reflected in our recent announcements, and an incremental $0.6 billion in machinery, driven by a 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 expected to be deployed in the Q4 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 $3.5 billion, while the mainstream segment remains on track to grow at a similar rate with last year. For 2027, we continue to see strong LEAP business momentum and expect even stronger incremental revenue growth than this year. On ATM profitability, our strong market position continues to support a favorable pricing environment throughout the year. We reported Q1 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.

Q2 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 Q2 outlook. Based on our current business outlook and exchange rate assumption of U.S. dollar to 31.8 NT dollar, management projects overall performance for the Q2 of 2026 to be as follows. At the consolidated level, in NT dollar terms, our consolidated Q2 revenues should grow by 7%-9% quarter-over-quarter. Our consolidated Q2 gross margin should increase by 20-100 basis points quarter-over-quarter. Our consolidated Q2 operating margin should increase by 50-120 basis points quarter-over-quarter.

For ATM, in NT dollar terms, our ATM Q2 revenue should grow by 9%-11% quarter-over-quarter, and our Q2 gross margin should be between 26% to 27%. For EMS, in NT dollar terms, our EMS Q2 revenue should grow at least 10% year-over-year. Our EMS operating margin should be similar with Q2 of 2025 levels. With that, I'll open the floor for questions. Thank you.

During the Q&A session that follows, we would appreciate it if your questions could be as clear and concise as possible and asked singularly. We will start by taking questions from participants online. As moderator, I will be receiving each question and repeating and directing each question individually. After a participant's initial question, he or she may ask a follow-up question, clarifications of the earlier question or another question entirely. We will move on to the next caller. With that, let's see if we have the first caller.

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

Hi, good afternoon. Great results. Congratulations on that. Thanks for the opportunity, Joseph and Ken. Our first question is on LEAP. 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? Also, just to clarify, 2027, you said LEAP could grow at similar kind of stronger incremental revenue growth than this year. This year is around TWD 2 billion incremental revenue based on the new guidance. Are we implying that next year LEAP can grow at TWD 2 billion-plus kind of incremental revenue? Is that how we should read that statement? Any early read on what is the composition of LEAP next year?

Gokul is looking for clarification on our LEAP guidance for CapEx. Oh, actually, just primarily for on revenue side, right?

Yeah. Revenue. Yes This year and the 10% upside, where it's coming from, and 2027, like the TWD 2 billion or more than TWD 2 billion incremental revenue. 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. As such, we need to increase our CapEx to support that expansion. 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 in terms of LEAP services, both in terms of assembly and tests, we are growing at pretty much the same pace. 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 tests.

Understood. I think on 2027, could we talk a little bit about. I think, Joseph, you mentioned incremental growth can be higher than this year. Does that mean that we can grow from the TWD 3.5 billion this year to at least TWD 5.5 billion next year? Is that what you implied?

I'm only implying that we are continuously very, very strong momentum going forward into 2027. You know, the TWD 2 billion or TWD 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. Just within that, 2027 LEAP, any context on the full process cost, like a full process full cost kind of composition and do you think that you will have some accelerator related AI accelerator related full process revenue in 2027? Is it going to be mostly like the CPU and some of the other AI adjacent kind of full process revenue?

I think right now the full process is going on track, and we still believe that we can reach this TWD 300 million dollar revenue mark this 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. As also not just on the revenue growth field, we are also expanding our customer base in this particular area. We believe that be it any other application that would be moving into CoWoS 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 you'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?

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

Yes.

Thank you.

Well, I think things are moving very fast at this point, and it's very dynamic. I think we will You know, of course, we already said that, you know, even in Q1 and Q2, we are ahead of our original expectation in terms of margin improvement. We are even more confident now that in second half we'll be reaching the upper end of the structural margin. I think at this point, because things are moving very fast, I think we will rather wait till things are more settled. Maybe next year we will review 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 was mentioning, right now the investment or the CapEx that we put in are in pretty good, pretty large chunks, before we can incrementally add capacity. Before if the capacity is fully ramped up, it's kind of. That normally creates some pressure on the margin during that ramp-up stage. It's. We need to wait until a more steady-state kind of situation before we can find a suitable range for our margin.

Got it. We can leave some more good use for later. Thank you. I'll go back to the queue.

All right.

Our next question is from Miss Sunny Lin of UBS.

Good evening. Could you hear me okay?

Yes.

Thank you very much for taking my questions. Congrats on the very strong results. Well, my first question is actually to get your thoughts on CPO. Would you be able to share a bit more color on what will be the role that ASE can play for CPO's packaging and test? How should we think about the revenue opportunity, ASE from CPO? When would you expect the sales to start to contribute to ASE from CPO?

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

Yes. Thank you.

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. What I can say is once it gets into a volume scale, that we would definitely be a very critical partner within the overall effort.

Well, so.

I think things are moving.

Yeah.

Things are moving on track and, you know, we are continuing to make progress on this CPO development.

Got it. May I follow up? One, what will be the timeline that you start to expect revenue contribution? 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, you know, we will start with the packaging part of it and eventually, of course the test is more complicated than the regular chips that we are testing now. I think things we'll have to sync up our technology roadmap with our partners and also our customers to find the most suitable work combination between the three of us. You know, whatever happens, it will be a natural division of works for each of us to do what we do best.

Thank you very much. My second question is on CapEx. Now with the higher CapEx for this year, capital intensity should be above 30%. How should you think about the capital intensity for the coming maybe one to two 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 3%? Should we think about maybe in 2027, given the revenue generation, maybe CapEx will start to slow in terms of intensity? How do you 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?

Yeah.

Well, we're still in this mega trend, and we're certainly not gonna be shy about making the necessary investment. Not only just on the capacity itself, but also on the R&D spending that we need to put in. From the momentum that we're seeing now, I would expect 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.

I would say that, you know, 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. Also, if I may have a follow-up. Earlier you mentioned lots of capacity expansions through rest of this year for the output from Q4. Will it be fair to say that for LEAP, we should expect a pretty meaningful step up in terms of revenue going to Q4? That should meaningfully improve your gross margin on a sequential basis. 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 large chunk of LEAP growth?

Sunny, first of all, I don't see how that's a follow-up. I guess I'll let you ask it. 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?

Yeah, sure. Thank you, Ken.

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

Very clear. Thank you very much.

Thank you.

Next we have Miss Laura Chen of Citi online.

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

Yes.

Yeah. Thank you for taking my questions. My question is also regarding our LEAP advanced packaging progress. We know that NC also built up your own full process. I'm just wondering that for our like a TWD 3.2 billion and even stronger growth into next year, how should we think about that the full process of our LEAP business? What would be the gross margin profile comparing to the substrate part?

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

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

Yeah. Thank you.

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 further potential going forward as we have multiple customers requesting for this for this kind of capacity. You know, this is a very complex process that we need to go through, and we are in the midst of trying to tune up our capacity as well as the yield that we can generate. We're gonna take one step at a time at this point in time.

We do see very good potential, but we want to be cautious in making this part of the business with a very good execution. At this point, I think it's not very easy for us to say to give you a number for the business, for this business for next year. All I can say is we do see very good potential, and that it's just a matter of how we can quickly execute the expansion plan.

Sure. That's fair and very clear. My following question is, just wondering that as we see that many of your clients who are the AI chip makers, they are looking for various different backend support, including the panel-based or large, like, radical support from the OSAT and not just at the foundry side. I am just wondering that how is the progress at ASE on the panel-based, 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 radical size, manufacturing.

Yeah, and-

-using panel, right?

Yes. Yes, the panel-based. The, like, a radical, that kind of, packaging design. Thanks.

Well, on panel, I think we're also on track. Right now we have already installed a fully automated pilot line for customer qualification. We do expect to have starting with small mass production volume starting from next year. We'll see how it goes from there at that point on. I think in terms of the panel, right now it's still at its early stage. It is something that's gonna happen, but we're still at the early stage of the overall development and how the industry's infrastructure will be built. 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.

Sure. We'll wait for more details. Thank you.

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

Thanks, Iris. Hi, Joseph. Hi, Ken. How are you? Also congratulations for very strong results and guidance. My first question is actually on the non-AI or so-called broader semi. Over the past three months, do you see smartphone consumer semi demand bottoming out or it continue to deteriorates? Because we are getting a little bit confused at why some of the churn of foundry are hiking wafer price. Texas Instruments also suggested they want to hike their price, but overall end market demand are so weak. Just want to get some thoughts from management. Thank you.

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

Yeah. Yeah. Exactly. Also the tendency, whether it is getting better or getting worse, and how ASE kind of benefit or suffer from those incremental trends. Thank you.

I mentioned earlier on that we are maintaining, I think the general market revenue growth is well, maintaining the same guidance as we made last quarter.

Mm-hmm

Which is, repeat of last year's growth rate, about 13%.

Mm-hmm.

Yes, we do see that the PC and cell phone market softness continues and it seems to be softening a bit more. On the other hand, I think a lot of the softness is being picked up by the more IT contents in the devices, different devices. We're seeing the AI peripheral chips emerging.

Mm-hmm

Emerging.

Mm-hmm.

We are seeing good recoveries in terms of automotive and industrial segment.

Mm-hmm

Put 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. Ken, may I clarify with Joseph what did he mean by the AI peripheral chips? We do have some sense, right? Just want to get some clarification from Joseph.

They are, power related, connectivities, sensors, all different kinds of edge devices that we'll be using for the. Which we were dividing this general market with the LEAP, so it's not in the, in a industry segment per se, kind of a differentiation or segmentation.

Mm.

We're just only looking at the process itself to decide.

Right.

What's general market for us?

I see. Thanks for the clarification. My second question is actually about your pricing strategy. I mean, your investment, investing heavily, there is also some cost increase from the recent geopolitical events. Right. Just want to get a sense what was your prediction for your fab utilization in the coming quarters, and would you transfer that sort of pricing into further pricing power to your customers?

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?

Thanks, Ken. Maybe it's more like from a strategic perspective, right? One is that you can just effectively pass through those additional costs, like you said, right? There's an increase in energy costs or chemical costs. I'm not sure how much of a chemical cost you are exposed to. Or think differently, right? Your fab in coming quarters, if the utilization continues to be getting higher and you feel like it's sustainable, why don't you further kind of hike your price and it's more like a proactive price hike?

I can never give you a direct answer on whether we're gonna raise our prices or not. What I can say is we will continue to seek for the suitable pricing strategy given the situation and also considering the customer relationship that we need to maintain. 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 all the market uncertainties, those can be fully passed through.

Mm-hmm.

At the same time, we will continue to set the pricing to reach our margin requirement.

I mean, thank you. It's very clear. Thanks, Joseph.

We have Haas Liu of BofA. Hey, [audio distortion].

Hey. Thank you. Thanks, Joseph, Ken, and Iris for taking my questions. Congrats on those solid results and guidance. I guess my first question is also a follow-up on the near-term guidance. Just want to get more clarity regarding your view on what is going to be the key driver for Q2 sequential growth for your IC ATM business. Would you be able to quantify it between LEAP versus traditional business on the growth momentum? I think a quick follow-up also on the full year outlook for your overall IC ATM business. Now, you did provide more detail on the non-LEAP business and the reason why you are still holding that kind of a growth guidance similar to last year.

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 three months, if there's 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. Just want to get more clarity on the Q2 and also full year, IC ATM growth momentum between LEAP versus non-LEAP business.

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

Yes. On the quarterly basis as well as on the full year outlook basis. Thanks.

I think Q2 revenue growth is really up base. I think both LEAP as well as the general market, we're seeing similar kind of a growth to support the quarterly growth of revenue for us. I think as I said, we are more than doubling our LEAP revenue this year, which is up our LEAP revenue by another 10% and showing the strong momentum that we're seeing at this point. General market, we continue to see the same kind of growth rate from last year.

As I tried to explain, I think although we're seeing some softness in some certain segments, we do see that the so-called AI peripheral, AI adjacent type of chips, that'll be grown on stream and then that we're seeing the demand 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, you are actually not changing your pricing strategy in the past three months or in the next few quarters, to reflect the potentially higher cost on the materials or the labors. You pretty much on an everyday basis, you are not seeing much of the customers, demand dynamic change in the past three months. Should I just make that kind of assumption for your full year outlook?

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

Yeah.

-repeat?

I was just trying to get more clarity that you simply are not seeing any of the order cuts 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. 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. Net-net, you are not seeing much of the unit demand weakness versus three months ago for your full year outlook. Is that correct?

Yes. Yes.

My second question is on CapEx and also gross margins. Joseph, you just mentioned that on the CapEx for this year, you raised it by like 10% versus your original guidance. I understand there is a lead time between your pulling equipment and build clean room versus it starts to contribute to revenue. Would you be able to help us to triangulate that growth rate or the incremental 10% hike versus the 10% hike in your lead business for this year? What is the main reason why that you raise your CapEx by 10%, but in the meantime, your lead business in general only being raised by like 10%?

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 installed throughout the next few years? Thank you. I will have a follow-up [audio distortion].

Haas Liu, 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. Thanks.

Well, 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 or facility is one of the gating factors for us to expand. In that area we are making progresses as shown in our past announcements that we've managed to start some of the building constructions and also to acquire some of the existing facilities that are suitable for our operation or for our LEAP services business operation.

For the machinery is largely for next year's ramp up, and the bulk of it, or TWD 0.6 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, whatever the capacity that we're building or the CapEx that we're spending for machinery should be sufficient to support another 10% growth in our lead service.

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

I think you got your follow-up earlier.

Okay. Yeah, sure.

Sorry about that.

Next we have, Mr. Bruce Lu of Goldman Sachs. [audio distortion].

Hello, can you hear me?

Yes.

Okay. Let me ask a simple question to save time for everyone. 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.

You're looking for a geographical differentiation between our capital expenditures? Is that what you're looking for?

No, no. I'm looking for like is there any incremental update for your investment outside of Taiwan? Your current investment is mostly, you know, highly concentrated in Taiwan.

Right.

You have limited capacity, you have limited cleanroom. Why not go outside? I asked like two quarters ago and, yeah, I'm gonna 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 a factory from ADI and that will be used as our buffer capacity to serve the demand coming from outside of Taiwan. In other areas, I think we are making mostly maintenance kind of CapEx to support the operation there. However, aside from Malaysia, 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. Thank you. I want to ask the next question is that I, can you give us some update for the profitability for the, I think you answered before, but I want to ask a bit different. For the full process of your LEAP, right? Because it's, you know, the CapEx requirement is high. The utilization might be low. Yield might be unknown, right? At the current stage. But assuming the blue sky scenario, once you eventually will deliver that good yield with reasonable prof, utilization rate, can the full process profitability be higher than LEAP services or gross margin or 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.

Yes.

That everything goes perfectly. Is that correct?

Yes. Which eventually you will deliver.

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

Accretive to the LEAPs.

In theory, yes, given the complexity of it.

I see. Understand. Thank you. I don't have follow-up.

Thank you very much.

Thank you very much.

Next, we have Mr. Rick Hsu of Daiwa.

Hello.

Hello, Rick.

Can you guys hear me?

Yes.

Okay. Hi, Joseph and Ken. I just got one question here. I think for your very strong demand for your IC ATM, the driver behind that, apart from AI and HPC, automotive, industrial, do you guys see any order pull in from your customers across the board because of a concern on the supply chain uncertainties? If so, are you concerned about any demand rebalancing or order rebalancing in the second half? Apparently, like Charlie said earlier, right, there is a disconnect between the end demand, non-AI end demand and the wafer and chip loading. Just my only question.

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.

Yeah, as I said, you know, in certain segments we're seeing softness, those are more than offset, being offset by the AI peripheral chips demand that we are getting. Yes, I think in the Q1, we are seeing stronger than normal seasonality demand maybe coming from pull-in. Having said that, we don't really have the capacity because our capacity is really limited, so we don't have the capacity to entertain those pulling demands, so to speak. I think our revenue is very solid.

It's not because of, particularly in the Q1 growth, I don't think it's because of the customers early pull-in that really bumped up our revenue for the quarter.

Okay. Fair enough. Thank you so much. That's the only question I have. Thank you.

Thank you.

Thank you.

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

Yeah. Hi. Thanks for the second chance. One question on CapEx. Joseph, looking upon what you're hearing from your customers and your foundry partner, could you talk a little bit about, 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 seems like you're going to be a little bit free cash flow negative this year. Just wanted to understand how you're thinking about CapEx into next year as well. If CapEx is growing next year, any thoughts on how we are looking to kind of, you know, fund that CapEx for the next year?

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

Okay. We should assume that CapEx keeps growing next year then? Yeah.

Well, let me see. It's more likely, yes.

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

Yeah. Whatever the funding gap that we're gonna have for this and next year, I'm not sure about next year though. For this year, I think the funding gap will mostly be funded by additional borrowing.

Okay. Okay. Understood.

Which, 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?

Yeah, I think the primarily, I think we will be focusing our resources in wafer sort at this point. I think we are tight in both facility as well as in capacity. For the time being, I think the main focus will still be on wafer sort.

Got it. Very clear. Thank you.

Thank you.

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

Yeah. Yeah. Thank you. I was not able to fully ask all my questions in the first round, thank you so much for accommodating 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 shore up 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?

You're looking for characterization on the likelihood of our ability to spend more on CapEx?

Yeah, that's right.

Right?

Yeah. That's the straight way to ask. Yeah.

The capacity? I'm sorry.

Haas Liu 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, you know, like I said, the things are moving very fast and there are a lot of, you know, our forecast is being adjusted pretty rapidly at this point. I would, I wouldn't preclude that there will be further need for us to increase our CapEx for the year.

Okay. Yeah. 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 cost, impacting your Q1, Q2 or even like second half this year as you have more capacity gradually on the line but not yet entering to mass production at a stage contributing to your revenue. Would you be able to quantify the potential negative impact to your gross margins? We already see some of the mild, mildly negative impacts in Q1 and also your Q2 outlook.

Should we actually expect more of that negative dilution to happen through our second half of this year before your full process or even other parts of the lead business capacity ramp is going to contribute to your revenue growth in the following year? Is that kind of factored? If you have any way to quantify any of the potential negative dilution throughout the next few quarters, that would be pretty helpful.

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

Yes, please.

Yes. I think when we look at a margin trend, of course, we will consider all factors, including the CapEx that we're gonna make, including the timing of the revenues that will be generated. 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 at Q1, we already ahead of our original plan. Q2, we remains 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 the, our view on the, on the margin profile for the year.

Got it. Is there any way you could quantify probably like 50 basis points or 100 basis points impacts to your Q1 and Q2 margins? Into second half, if there is similar like 50 to 100 basis points negative impact from that margin dilution for the capacity ramp, is it a reasonable assumption?

Haas, I think we haven't been able to necessarily release that as of yet, but there is a there is expansion into the depreciation %. We have not been able to create a immediate dilution effect at this point. Maybe we can have that for you next quarter.

Okay, got it. Thank you so much, Joseph.

If you have any questions, please raise your hand. Next, we have Miss Laura Chen of Citigroup who has questions.

Thank you. Just a quick follow-up. Thanks for taking my 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. Can you share with us what would you see that the most difficult part or potential technology bottleneck and what ASE now is working and when would you see that will be kind of the indicators we can see better breakthroughs?

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

Yes. Yes. What would be like a key watching point to, we can judge, like, 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 our customer. I think at the end of the day, each will be doing what they do best, and there will be a natural division of work. I couldn't tell you know, what is hard, what is not. It really depends on what our respective expertise is. You know, suitable works will be allocated to different partners. That's how the thing is being managed at this point. You know, like I think everybody understand that CPO is still, it's a must-have going forward, but at this point, it's still at a very early stage.

I think it's a bit premature to say when and how much it's gonna be a major revenue or profit contributor to us.

Sure. Okay. Thank you.

Yeah.

Next we have a question from [Stefan Chang].

Hi, thank you very much. This is [Stefan Chang] from Aletheia Capital, thank you for taking my question. Congratulations for your good result and guidance. Two questions from me. The first is regarding the two fab acquisition for the past month you announced, one for steel and one for ASE. I'm just curious, like, in what time frame you expect these two new acquired facility can start to contribute to the company revenue?

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

Yes, that's correct. Thank you.

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

Okay. Yeah. Thank you for that. Just quick follow-up. If early for early next year, and I think especially for the second half, in the news release, you mentioned that is for the packaging. Does that mean the tool installation for these two facility, the CapEx will be in this year or that will be in the next year? Thank you.

You're looking for the timing of the facilitization and equipment of these two facilities.

Yes. Also the impact, CapEx, whether it's this year or next year.

I think the, at least for equipment, it will be for next year. 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. Before that becomes available, there are also some construction works or for facilities and some of the wiring construction that needs to be done. If we're breaking down the CapEx between for building of facilities or for equipment, I think the for the building part of it will start earlier. For equipment, it will be starting from next year.

the space becomes available and we progressively put the machineries in.