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Edited Transcript of 2311.TW earnings conference call or presentation 28-Jul-17 7:00am GMT

Thomson Reuters StreetEvents

Q2 2017 Advanced Semiconductor Engineering Inc Earnings Call

Kaoshiung Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Advanced Semiconductor Engineering Inc earnings conference call or presentation Friday, July 28, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eddie Chang

* Kenneth Hsiang

Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc

* Tien Yu Wu

Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs

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Conference Call Participants

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* Randy Abrams

Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department

* Rick Hsu

Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology & Head of Taiwan Research

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Presentation

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [1]

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Hello. I am Ken Hsiang, the Head of Investor Relations for ASE. Welcome to ASE Group's Second Quarter 2017 Earnings Release. All participants consent to having their voices and questions broadcast via participation of this event.

Please refer to Page 1 of our presentation, which contains our safe harbor notice. I would like to remind everyone on this call 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 from these forward-looking statements. For the purposes of this presentation, dollar figures are generally stated in New Taiwan dollars unless otherwise indicated.

For this earnings release, Dr. Tien Wu, our COO, will be providing a recap of the quarter, and I will be going over the financial results. Joseph Tung, our CFO, and Tien Wu will be answering questions during our Q&A session. Following the event, our VP in charge of Public Relations, Eddie Chang, will be available to address the media in Mandarin, Chinese.

Without further delay, our Chief Operating Officer, Dr. Tien Wu.

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [2]

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Good afternoon. What I would like to do is to give you a recap for the second quarter performance as well as the first half recap. Also, I would like to give you an indication for the second half outlook. As you can see on the chart, our Q2 revenue came in USD 2.189 billion, 3% quarter-on-quarter and 13% year-over-year.

As you all know, second quarter of 2017 has been a challenging quarter. We have seen some inventory adjustments, also mild. We have also seen some demand. Regardless, ASE Group has performed above our expectation. The Q2 net earning came in USD 260 million. Ken Hsiang will give you a more detailed breakdown for the composition of the USD 260 million net earning.

To recap the first half, revenue for the group came in USD 4.32 billion, year-over-year represent 13% growth. The first half industry environment, we all know that we've seen some mild inventory adjustments as well as some slowdown in particular segment. Our observation based on customer input is the inventory status right now for the second half will be in check. It's purely a demand driven. We do have some healthy product cycles. So right now, for the second half, from the ASE Group perspective, we maintain our view of quarter-to-quarter growth. We are optimistic about the demand. We have seen healthy demand in the industrial automotive, PCs also in check. We believe the wireless will have some new product cycles and should be healthy to the ASE growth.

Let me give you a recap for the ASE-SPIL transaction update. I'm sure many of you have questions. I would like to give you a summary. On this page, we have reported all major events through the announcement. Just to give you a recap, November 16 last year, Taiwan has offered approval. On May 16 of this year, United States has offered approval. We have filing showing the August 25, 2016, we filed with the Chinese MOFCOM. On June 6 of this year, we withdrew and refiled the same case. But right now, we have no new additional information to report. The only thing we can tell you is that all parties are aggressively going through the process, and hopefully, we can get this done as soon as we can. Thank you.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [3]

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Thank you, Dr. Wu. As Dr. Wu stated in his opening remarks, we expected a soft seasonal environment through the communication sector and we got it. We even properly foresaw the amount of NT dollar appreciation impact to our earnings -- to our results and margins. We also were able to unlock value within our balance sheet. We generated a sizable gain for our shareholders, and as a direct result of that gain, we are required to accrue bonuses within the company. That is the picture of our -- that our financial results will show.

So before we get into the detail of the financial presentation, we've prepared 2 slides here to go over the impact of NT dollar appreciation and the investment gain in our second quarter results. I apologize for not being able to make the cut off time to the printer for these slides. I would recommend that you take pictures of the slides as it isn't included in your packet. This slide will also be available from our website.

We've prepared an estimated summary of the impact of NT dollar appreciation on the group and our IC ATM and EMS business units. There are 3 tables here. The top table shows the various average U.S. dollar to NT dollar exchange rates used for this earnings release, quarter-over-quarter, year-over-year and first half comparisons. The table on the bottom left shows the impact NT dollar appreciation had to the Group, IC ATM and EMS gross margins for quarter-over-quarter and year-over-year. And, finally, the table on the bottom right shows our revenue growth rate in U.S. dollar and NT dollar format. Addendum two. During the quarter, we entered a transaction to introduce a local partner to help co-develop our Quince (inaudible) site living zone. The gain associated with this transaction was TWD 5.6 billion, with associated taxes of TWD 1.4 billion recorded in the tax provision.

Further, as required by our corporate policy, we accrue bonuses based upon the net income of the company. As such, this resulted in incremental bonus accrual at the Group and IC ATM levels of TWD 0.1 billion in cost of goods sold and TWD 0.3 billion in operating expense. Group and IC ATM had impacts of 0.2 and 0.3 percentage points to gross margin, and 0.6 and 1.0 percentage point impacts to operating margin. Payout of the bonuses accrued are still subject to their approval of our Board of Directors. Once you adjust for tax impact and the bonus -- and the bonuses tax impact, the gain has a TWD 3.9 billion impact to our earnings or TWD 0.48 per share.

With that, let’s start the financial overview. On a fully consolidated basis for the second quarter, the company delivered fully diluted EPS of TWD 0.89 and basic EPS of TWD 0.97. Our packaging and direct material's businesses were up 2% and 4%, respectively. Our test business was flat, and our EMS business was down 4%. Total revenues for the consolidated group declined by 1% to TWD 66 billion. However, on a U.S. dollar basis, revenues grew by 3%. Gross profit increased from TWD 12 billion to TWD 12.1 billion, with consolidated gross profit margin increasing 18.4%. As presented earlier, Taiwan dollar appreciation had a 1 percentage point impact to consolidated gross margin.

Operating expenses increased slightly by TWD 0.1 billion to TWD 6.9 billion. Our operating expenses as a percentage of sales increased from 10.1% to 10.4%. Bonus accrual related to investment gain accounted for TWD 0.3 billion of operating expense. Operating profit and margin for the second quarter were flat, with the first quarter at TWD 5.2 billion and 7.9%. Bonus accrual had a 0.6 percentage point impact to operating margin.

During the second quarter, we had a net nonoperating gain of TWD 6.2 billion as versus a net nonoperating loss of TWD 1.4 billion the previous quarter. The current quarter's nonoperating gain includes the following: net gain related to foreign exchange and hedging activities of TWD 0.6 billion, net interest expense of TWD 0.4 billion, gain from investments of TWD 5.6 billion, income from SPIL, net of purchase price accounting of TWD 0.4 million -- billion. Stock movement was neutral for this quarter, thus, our ECB had no material nonoperating impact during the quarter. Pretax profit for the second quarter was TWD 11.4 billion, up from TWD 3.8 million in the first quarter. Income tax expense was TWD 3.2 billion in the second quarter. This amount includes tax related to the investment gain of TWD 1.4 billion in addition to undistributed earnings tax expense of TWD 0.8 billion. Net income for the second quarter was TWD 7.8 billion, group quarterly results on a year-over-year basis.

Comparing the current quarter's results versus the same quarter last year, our packaging, direct material's and EMS businesses grew by 1%, 22% and 14%, while our test business was down 2%. On a year-over-year basis, our consolidated net revenues increased by 5% and in U.S. dollar terms, revenues increased by 13%. Our gross profit was down 1% to TWD 12.1 billion. Our gross profit margin declined 1.2 percentage points to 18.4% from the previous year principally as a result of NT dollar appreciation. Despite higher EMS product mix paired with seasonally soft IC ATM revenue, our gross profit margins would have actually improved significantly outside of NT dollar appreciation impact of 2.1 percentage points and investment gain bonus accrual of 0.2 percentage points.

Operating profit was down with our operating margin declining 1.5 percentage points. This decline was primarily caused by NT dollar appreciation that flowed through from gross profit. Revenue mix shift from a soft communication sector and bonus accrual related to investment gain.

Page 4. IC ATM P&L. During the second quarter, our IC ATM net revenues increased by 2% to TWD 39 billion. IC ATM revenues on a U.S. dollar basis grew by 5%. Revenues for our IC packaging and direct material's businesses increased 2% and 3%, respectively. While our test business stayed flat. Gross profit improved to TWD 9 billion from TWD 8.8 billion despite NT dollar having a negative 1.4% and investment gain bonus accrual having a negative 0.3 percentage point impact to gross profit margin. We were still able to improve gross profit margins slightly to 23.1%.

Operating expenses inched up to TWD 4.9 billion from TWD 4.8 billion, with our operating expense percentage staying flat at 12.6%. The increase in operating expense is primarily attributable to incremental bonus related to our investment gain. Operating profit improved to TWD 4.1 billion. Operating margin for the second quarter was up slightly to 10.5%. Bonus accrual for investment gain had a 1.0 percentage point impact to IC ATM operating margins.

Page 5, IC ATM year-over-year. Our packaging business and direct material's businesses were up 2% and 20%, respectively, while our test business was down 2% on a year-over-year basis. Total IC ATM revenues inched up 1%, while on a U.S. dollar basis, IC ATM revenue grew by 9% year-over-year. Gross profit was down 6%, with our gross margin declining 1.7 percentage points. NT dollar appreciation negatively impacted year-over-year gross margins by 2.9 percentage points.

Operating income was down TWD 0.8 billion, with operating margin down 2.3 percentage points. Our operating margin decline was again attributable to NT dollar appreciation and bonus accrual related to investment gain.

Page 6, packaging operations. During the second quarter, our packaging revenue improved 2% sequentially and year-over-year to TWD 31.7 billion. On a U.S. dollar basis, packaging revenue improved 6% sequentially and 9% year-over-year. Our packaging gross margin declined 0.1 percentage points sequentially and 0.9 percentage points year-over-year. Both of these margin declines were driven by NT dollar appreciation of 1.4 percentage points sequentially and 2.9 percentage points year-over-year. NT dollar appreciation and bonus accrual were offset in part by better factory efficiency.

During the quarter, capital expenditures were USD 161 million, composed of wafer bump fan-out and copper pillar equipment at USD 78 million and common SiP and wirebond equipment at USD 83 million. We exited the quarter with a total of 16,118 wirebonders in operation. 8 inch, wafer processing capacity increased slightly to 98,000 wafers per month and 12-inch wafer processing capacity, including bumping, fan-out and copper pillar remain -- increased 12,000 units to 128,000 wafers per month.

Page 7, test. Test revenues were sequentially flat at TWD 6.4 billion. On a year-over-year basis, test revenues were down 2%. Gross profit margin of 34.2% was up 0.8 percentage points sequentially and down 2.6 percentage points year-over-year. Margins were up sequentially as a result of product mix, offset in part by NT dollar appreciation of 1.6 percentage points. Margins year-over-year declined primarily as a result of seasonally soft quarter and NT dollar appreciation. NT dollar appreciation had a 3.2 percentage point impact on year-over-year test gross margins.

Overall, cost of services for test stayed relatively flat at TWD 4.2 billion sequentially and increasing TWD 0.1 billion year-over-year. Our test utilization rate, on a percentage basis, remained in the low to mid-70s. CapEx for the test business was at USD 47 million in the first quarter -- in the second quarter.

Page 8, materials. Revenues of TWD 2.1 billion were sequentially up 3% and down 13% year-over-year. During the quarter, TWD 928 million was from sales to external customers. This amount is a 4% increase as compared to the first quarter. Our internal self-sufficiency rate remained at 27%. Gross margins were sequentially up by 2.4 percentage points to 14.4%.

Page 9. IC ATM revenue by application. Here's an interesting trend, which further illustrates the seasonally soft communication segment. The communication market segment declined by 2 percentage points to 48%, and our automotive consumer and other segment increased 2 percentage points. Other -- our computing segment stayed flat at 11%.

Page 10, EMS. Here you can see the results for our EMS business. During the second quarter, revenues for our EMS business unit was at TWD 28.2 billion, sequentially down 4%, but up 14% year-over-year. On a U.S. dollar basis, revenue were flat quarter-over-quarter and up 22% year-over-year. In the same time frame, despite the revenue decline, our gross profit was flat with the previous quarter at TWD 3.1 billion and up 22% year-over-year. Our EMS gross margin increased to 11.1% from 10.6% sequentially, up 0.5 percentage point based on higher margin product mix. Gross margin was up 0.8 percentage points year-over-year. Our EMS business's gross margin should begin to subside as lower margin, higher-volume products begin their seasonal climb during the last half of the year.

Page 11, don't have much commentary here, view it as you wish. Page 12. ASE Group balance sheet. At the end of the quarter, we had cash, cash equivalents and current financial assets of TWD 48 billion, increasing from TWD 46.2 billion the previous quarter. Our interest-bearing debt decreased from TWD 97.9 billion to TWD 91.6 billion at the end of the quarter. Total unused credit lines amounted to TWD 175.7 billion. Our EBITDA increased by 62% to TWD 19.1 billion. EBITDA per share was TWD 2.35. This was helped out significantly by our investment gain recognized.

It should be noted that on Wednesday, July 26, we delivered notice of our intent to redeem our 0 coupon convertible bond due 2018. These bonds will be redeemed on September 6, 2017, at 100% of the principal amount. The last day for bondholders to request conversion will be August 30, 2017. As of July 15, 24% of these bonds have been converted to common shares. 313 million shares remain to be converted.

Page 13, capital expenditures. Machinery and equipment capital expenditures for the second quarter totaled USD 213 million, of which USD 161 million were used for packaging operations, USD 47 million in testing operations, USD 4 million in EMS, and USD 1 million for interconnect materials.

In U.S. dollar terms, EBITDA for the quarter was USD 633 million. We continue to be committed to our capital expenditure discipline. We continue to see our capital expenditures for the year to be below our depreciation and amortization expenses. If you look at the whole picture, the company delivered improved quarter-over-quarter results in a slow moving, inventory-chewing environment. Nearly everything was marginally better; revenues, gross margins, operating margins. But as we expected, NT dollar appreciation clouded those results and making our second quarter performance even less obvious. Our investment gain triggered gross and operating margin charges related to bonus.

For what ASE does we can't afford to be neutral in our view of which end product does well or does poorly. As the worldwide leader in outsourced assembly and test, we know that products will become more complicated. We know that transistor densities within a defined set of space will increase. We know that the connections from the transistor level out into the real world will increasingly become more complicated. Complexity, density, technological advancement are ASE's friends. Whether it be the new, new smartphone, artificial intelligence, self-driving vehicles or the third, fourth or even fifth coming of IoT, there are commonalities in the types of packaging necessary to deliver these products. We choose to focus on the broad packaging and testing technologies that service these product trends of the future. SiP, copper pillar, fan-out, along with plain old wirebonding are part of the necessary array of solutions available for our customers to provide the next new thing.

Looking into the third quarter, there are exciting products on the horizon. Here is an interesting fact actually. From an analysis of sales numbers, there is no difference between a consumer eagerly waiting to buy something versus a consumer not interested in buying anything at all. Both of these individuals have not purchased anything, but one will and one will not. And yet, they look the same. And when we and the industry look at the composition of the potential consumers in places like the U.S. and China, it's difficult to figure out one from the other.

With that said, we believe there to be a pickup coming up. However, we believe our simulations show a wider range of potential results. This is where we generally say things lack a lot of clarity. We do expect for a soft communications environment to subside. We also don't expect NT dollar appreciation to make a major impact to our results. But, of course, that is not within our control. We are cautiously optimistic, our third quarter should be good. So with that said, our third quarter 2017 IC ATM business should be a notch or 2 below third quarter 2016 levels. Our third quarter 2017 IC ATM gross margin should be similar to second quarter 2016 levels. Our third quarter 2017 EMS business should be similar to the average of the third and fourth quarter of 2016. Our third quarter 2017 EMS gross margin should be similar with the average of the first and second quarter of 2016.

Before we start our Q&A, I would like everyone to note that we cannot provide any further details in regards to our discussion, if any, with regulatory entities as it relates to our ongoing transaction with the SPIL. The company appreciates if we do not have further questions related as such, all right? Thanks.

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Questions and Answers

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [1]

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It's Randy Abrams, Crédit Suisse. The first question I want to ask if you're seeing changes in seasonality for the second half. The guidance implies, kind of, mid- to high single-digit growth for IC ATM. And also I think EMS looks a bit more flattish than the prior couple of years, so if you're seeing a shift in seasonality. And maybe if you can elaborate on the wider range of outcomes, just some of the volatility you're seeing.

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [2]

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Well, we're not seeing difference in seasonality. If you're asking between this year versus the previous few years, so I think the third quarter, I think, we have provided some implied guidance as you can probably crunch out the numbers.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [3]

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I guess what I was asking here, you're seeing maybe than a bit softer than prior year. Like last year, I think it was up over 10%. I mean in the past couple of years, EMS, it looked like it had sharper ramp in the third quarter. So is it either softer? Or do you see potentially, say, a bit more shifting in the fourth quarter than normal?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [4]

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I think the industry has experienced the first half where we do have some slower demand. In other words, if the second half is mainly product driven then we need to be careful. We can only speculate it to a certain extent. Right now, based on the customer forecast, based on internal simulation and this is the set of the implied guidance that we can come up with. The -- in terms of the overall demand for any segment, I think it's fair to use the whole year number in the -- instead of using the first half number.

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Eddie Chang, [5]

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I think as Tien mentioned, we don't see any significant changes in terms of seasonality. We are seeing some ramp up in both IC ATM as well as EMS. In terms of magnitude, I think we're coming off with a slower first half, and we're seeing some softness in some segment in the market. And therefore, the overall momentum seems to be impacted a little bit, but more so on the EMS. But I think the EMS is really not the change of seasonality, but more toward our effort in rebalancing our SiP business, which you have -- we have been more selective in terms of what business we want to get into and that has an impact on the overall growth momentum.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [6]

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A follow-up on the EMS rebalancing. The first half, and actually gross margins have done very well to pick up, but you're guiding, it looks like sales are a bit mild, but more a gross margin impact. Is it just more of the mix profile, that second half you have more SiP and less of the traditional EMS that's higher margin?

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Eddie Chang, [7]

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That's correct. I think going into the second half, I think, particularly in the EMS business that the SiP business was starting to pick up and it has some impact on the margin.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [8]

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Okay. The other question I wanted to ask. Just your take, I guess, SPIL in the market, it looks like their sales have been a bit slower like sales are probably down slightly year-over-year and gross margins they reported are down about 4 or 5 points from where they were, say, a year or 2 ago. Are you seeing change just with this deal kind of going on for a while, changes just in how it's behaving in the market just from competitive position?

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Eddie Chang, [9]

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I don't think we can speak for SPIL. I think you really need to ask them those questions.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [10]

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Okay. And then the final question that I wanted to ask. When you mentioned softness in the market, I think there was some softness, Android, first half. If maybe you could point to any areas you're using softness continue as you go towards second half?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [11]

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We are not going to comment on the product, right?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [12]

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Name and company?

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Rick Hsu, Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology & Head of Taiwan Research [13]

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My name is Rick Hsu from Daiwa Securities. My first question, again, is a housekeeping question. So among your wirebonding, testing and pumping, what capacity was a new add and retire for each segment the second quarter?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [14]

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Let me dig out the numbers. I think for foundries we added 205, we retired 50 or so?

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Eddie Chang, [15]

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Yes, 50.

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [16]

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In testers?

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Eddie Chang, [17]

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Added 104, deleted 90. Ended the quarter at 3,796 with 1,184 consigned.

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [18]

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And your next question is utilization, right? Bumping, it 8 inch, we're 98?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [19]

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97.8. And then 12 inch add 128,000.

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Rick Hsu, Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology & Head of Taiwan Research [20]

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And utilizations?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [21]

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Okay. In terms of packaging, we're at above mid-70. And for test, we are at low 70s. Substrates, we are at mid-70, second quarter.

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Rick Hsu, Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology & Head of Taiwan Research [22]

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All right. So what about the utilizing rate for second -- for Q3?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [23]

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Q3, we're expecting packaging to be at low 80s; testing, at high 70s to low 80s; whereas substrates, it will be inched up low to mid-80s.

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Rick Hsu, Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology & Head of Taiwan Research [24]

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All right. The second question is if I look at the guidance from TSMC, it looks like the foundries we'll likely see in above seasonal demand for Q4. And although Q3 is kind of so-so, will you guys see the same trend for your Q4 business outlook above seasonality?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [25]

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We do believe we'll see a quarter-to-quarter growth in Q4 comparing to Q3. At this point in time, we do not see a strong deviation from the normal seasonality. But that could be due to the product timing.

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [26]

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I think we do have a different customer base and also product mix with foundry [upstream] in TSMC in particular. So I think the percentage doesn't really represents the true picture if you make the apple-to-apple comparison.

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [27]

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Any more questions? Name and company?

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Unidentified Analyst, [28]

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(inaudible) So my first question is on your fan-out business. Can you give us some guidance about your current capacity? What kind of semiconductor projects that you're doing for fan-out now? And for next year, what kind of growth you're expecting from this business?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [29]

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The current fan-out capacity on 12-inch, right now, is about 15,000. We will continue to grow the fan-out capacity throughout the year. At this point in time, I will not give you the precise number. It really depends on the utilization as well as the customer adoption rate. I would not be able to comment the specific customers, but we do have a good portfolio of customers. In other words, now we do have more than 5 customers signing up for those capacity. And right now if you're asking the utilization, the utilization rate is quite healthy.

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Unidentified Analyst, [30]

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Okay. So I know you're sort of a bit sensitive talking about customer. But in general, what kind of semiconductors, for example, the industry is talking about (inaudible) RFIC, even memory? So what kind of semiconductor products you are doing by this fan-out service now?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [31]

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It's a combination of a high-performance computing as well as the wireless. And in terms of the number of chips, as was the composition, has all variety. But I think the beauty of fan-out is now you can really mix the different notes as well as the functionality and you can really have a concentrated heterogenous integration in a low cost. So I think that was the whole premise of fan-out.

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Unidentified Analyst, [32]

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Okay. So on that fan-out technology, I know there are some discussions regarding taking core issues. For example, you've seen the fan-out level carrier, the euro is still quite low and there is some pattern issue, for example, the key IP is owned by Infineon and now it belongs to Intel, right? So how ASE solves all these problems? And what is the key element that you said ASE has?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [33]

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I think what we are ready to disclose at this point in time is fan-out is not a standalone process. In other words, when we talk about the capacity for the 12-inch fan-out, we are implicitly informing our customers that a fan-out will be a platform of solution. In other words, the current stage of the 12-inch of a particular process node and that will be scalable and that will be extended into a finer node where those IP issues, you just mentioned, will become a concern. Now while on ASE end, I think we already give a very clear indication. Fan-out is a major platform solution that ASE is driving, so we're making great strides. We're not ready to disclose any detail. But I'm pretty sure in the next coming year or 2, we will like to disclose the whole portfolio of the fan-out solution, including the 12-inch, including the panel, and some of the IP issues, some of the patterning issues, some of the design tool issues, all of this will be part of the overall solution that we'll be presenting to all of our customers. But it is a major platform that we're driving.

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Unidentified Analyst, [34]

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Okay. So it seems that the company is quite well prepared, well planned for this fan-out trend, right? So this is my main question to you, Dr. Wu, right. So in coming years, how ASE is going to outgrow semi industry or the packaging industry organically? So what kind of a service or [proline] you think they can make -- come into outgrow?

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Tien Yu Wu, Advanced Semiconductor Engineering, Inc. - COO, Director and CEO of ISE Labs [35]

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All right. If I look at the last 10 years average, the ASE growth has been 2x of semiconductor, and the number has been quite steady. I presented this a few times. And I think the recipe for our continued growth with reasonable margin and return will be based on innovation and technology. And I think Ken Hsiang already talked about it. We do believe that the transistors, the integration, the power consumption will be an issue. We also understand that from the process -- the wafer process perspective, the investment becomes more hefty overtime. So the scalability of the Moore's law as far as how can packaging augment the Moore's law, which is to go more and more. The ASE is coming up with portfolio of solution and fan-out being one of them. We also have the embedded solution, we also have the 2.5D, so all of this will become the building block for the innovation, for the readiness of the next wave of application. Mind you, we did not know exactly when the next wave will hit us, and which next wave will be ahead of the other next waves. But right now, IoT, the automotive, the VR and the new generation of high-performance computing, the new generation of happy memory, there is a combination of application that is in the marketplace. The good thing about ASE is if you really look at the whole industry and whole set, I believe we are in the best position from a technology perspective. We are also the best position from a customer portfolio perspective. We also have the more in-depth engineer at a system-level as well as the IC level. We also have the widest partnership in all geographies with all segments, including foundry, design house as well as the ADS company. Going forward, this is about global business. This is about technology innovation, it's about partnership. I think in all 3 metrics, ASE is very well-positioned. Then the only question is how fast we scale, and during the scalable process, how can we maintain the margin rebalance or a calibration. And I think this is the primary challenge of ASE Group as well as for the rest of the world. But so far, based on the last few years performance, we have been on track in terms of partnership, technology development, scalability growth, as well as rebalance our product portfolio to maintain a certain margin at a certain cost curve, and I hope that offers you some outlook.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [36]

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Do we have more questions? Thank you very much. I don't have any -- I don't know if it's a conference issue, but I don't have any questions online either. Thank you very much for attending the second quarter earnings release.