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

Thomson Reuters StreetEvents

Q1 2017 Advanced Semiconductor Engineering Inc Earnings Call

Taipei May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Advanced Semiconductor Engineering Inc earnings conference call or presentation Friday, April 28, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hong Shi Tung

Advanced Semiconductor Engineering, Inc. - CFO and Director

* Kenneth Hsiang

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

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Conference Call Participants

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* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* 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 and Head of Taiwan Research

* Sebastian Hou

CLSA Limited, Research Division - Research Analyst

* Steven C. Pelayo

HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific

* William Lu

UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst

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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'm Ken Hsiang, the Head of Investor Relations for ASE. Welcome to ASE Group's First 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, I will be going over the financial results; Joseph Tung, our CFO, will be answering questions during our Q&A session. Following the event, our VP in Charge of Public Relations, Eddie Chang, will be addressing the media in Mandarin Chinese.

The SPIL update. ASE and SPIL submitted the required materials to the Taiwan Fair Trade Commission on July 29, 2016, and the TFTC issued a no-objection letter in respect of the transaction. ASE and SPIL submitted the required materials to the Ministry of Commerce of the People's Republic of China on August 25, 2016. MOFCOM formally accepted the parties' notification materials on December 14, 2016. On April 12, 2017, ASE received MOFCOM's notice extending its review to phase 3 review. The parties are continuing to cooperate with the U.S. Federal Trade Commission's investigation and are working toward a goal of successfully completing the investigation as soon as possible.

The first quarter of each year is typically our seasonally down quarter. The first quarter 2017 was not an exception. As we believe our results would indicate most of the business lined up well with our expectations. However, there was a notable unforeseen factor that impacted our numbers. I'm sure you're all aware of the recent strength in the New Taiwan dollar relative to the U.S. dollar.

Let me give you a quick summary of how foreign exchange is part of our business. Our customers generally place orders with us denominated in U.S. dollars. Meanwhile, many of our costs such as labor and utilities are denominated in local currency. Even our machinery purchases, though denominated in U.S. dollars, are translated into local currency upon delivery and generate local currency depreciation. What this means is that NT dollar appreciation will lower the value of U.S. dollar denominated sales while maintaining the costs to produce such. Further, from a hedging perspective, we target to be foreign exchange neutral at the balance sheet level. As such, we generally do not apply currency hedging concepts for the P&L level. Foreign exchange movements, especially sudden ones like this one, have and will continue to have material impacts to our financial results.

During the first quarter, the NT dollar was unusually strong, averaging TWD 31.2 per USD versus our expectation as of the fourth quarter earnings release of TWD 32. This implies a fluctuation of greater than 2.5% from the time we issued our guidance. Please bear that in mind when reviewing our financial results.

For the first quarter, the foreign exchange rate negatively impacted our group level and IC ATM sales, each by 1.2%. The foreign exchange rate fluctuation also negatively impacted our group level and IC ATM level gross margins by 0.4 and 0.6 percentage points, respectively. Looking forward, we are continuing to assume a stable but strong NT dollar environment.

With that said, let's start the financial review. Page 3. Group quarter-over-quarter consolidated P&L. This quarter-over-quarter slide shows a fairly typical decline during our seasonally soft quarter. It is also worth noting that our fourth quarter 2016 -- the fourth quarter in 2016 was also somewhat overly strong. As such, we don't believe comparisons between the quarters are particularly useful. On a fully consolidated basis, for the first quarter, the company delivered fully diluted EPS of TWD 0.30 versus basic EPS of TWD 0.33. Our packaging, testing and EMS businesses were down 11%, 13% and 15%, respectively, while our direct materials business was up 11%. Other revenues shown are related to real estate sales and were down to below 1% of group sales. Total revenues for the consolidated group declined 14% to TWD 66.6 billion. Gross profit decreased from TWD 15.4 billion to TWD 12 billion, with consolidated gross profit margins declining to 18%. And again, there was an approximate 0.4 percentage point decline in gross margin that was attributable to foreign exchange fluctuation.

Operating expenses edged down to TWD 0.5 billion -- down by TWD 0.5 billion to TWD 6.8 billion. Despite the absolute dollar value decline, our operating expenses as a percentage of sales increased from 9.4% to 10.1%. Operating profit for the first quarter was TWD 5.2 billion, down TWD 2.9 billion from TWD 8.1 billion in the fourth quarter. Our operating margin decreased 2.6 percentage points from 10.5% to 7.9%.

During the first quarter, we had a net nonoperating loss of TWD 1.4 billion as versus a net nonoperating gain of TWD 1.5 billion the previous quarter. The current quarter's nonoperating loss includes the following: ECB related loss from our stock movement of TWD 1.3 billion; net gain related to foreign exchange and hedging activities of TWD 0.2 billion; and net interest expense of TWD 0.4 billion. Pretax profit for the first quarter was TWD 3.9 billion, down from TWD 9.7 billion in the fourth quarter. Income tax was TWD 0.9 billion in the first quarter. The relatively high implied tax rate is the result of the ECB loss being inapplicable for the calculation of taxable income purposes. It is important to note that in the second quarter, we will book our undistributed earnings tax expense of TWD 0.8 billion. Net income for the first quarter was TWD 2.6 billion.

Page 3 -- Page 4, I'm sorry. Group quarterly results on a year-over-year basis. Comparing the current quarter's results versus the same quarter last year, our packaging, test and EMS businesses grew by 6%, 6% and 19%, while our direct materials business was flat. Other net revenues relating to real estate sales declined TWD 0.6 billion. Our real estate revenue is irregular in timing and is not particularly seasonal. On a year-over-year basis, our consolidated net revenues increased by 7%. Our gross profit was up 5% to TWD 12 billion. Our gross profit margin declined 0.4 percentage points to 18% from the previous year, principally as a result of the decline in real estate revenue mix and NT dollar appreciation, offset by higher loading across the majority of our business units. Without real estate included, gross margin for the group would have been 16.4% in the year ago quarter. This would indicate a gross margin improvement of 1.6 percentage points year-over-year. Operating profit was flat, with our operating margin declining 0.4 percentage points. This decline was caused primarily by revenue mix shift and NT dollar appreciation that flowed through from gross profit.

Page 4 -- Page 5. Please note the intercompany revenues, including the SiP technology business performed by our IC packaging business unit on behalf of our EMS business unit, are eliminated during consolidations. We believe the quarter-over-quarter comparison primarily shows that the business is in its seasonally soft period. Our IC ATM group performed generally as expected this quarter. The quarterly decline is in line with typical first quarters and relatively good given the strong fourth quarter in 2016. With that said, our IC ATM net revenue declined by 12% during the first quarter to TWD 38.4 billion. Revenues for our IC packaging and testing businesses declined 12% and 13% while our direct materials business increased 4%. Again, NT dollar appreciation had a 1.2% unfavorable impact on revenues during the quarter. Gross profit was down 8.8 -- down to TWD 8.8 billion with gross profit margin coming down to 23%. The gross profit margin decline was primarily the result of lower overall loading during the seasonally down quarter with semi-fixed labor and depreciation costs. In addition, foreign exchange fluctuation had a 0.6 percentage point impact on gross margins. Operating expenses decreased from TWD 5.3 billion to TWD 4.8 billion. Despite the absolute dollar value decline, operating expense percentage increased 0.5 percentage points to 12.6% from 12.1%. Operating profit was down to TWD 4 billion. Operating margin for the first quarter was down 4.3 percentage points to 10.4%.

Page 6, IC ATM year-over-year. Here, you can see our year-over-year comparison for our IC ATM business. We believe that the year-over-year comparison places the seasonal decline in proper context. During the quarter, on a year-over-year basis, our packaging and testing businesses were up 9% and 6%, respectively, while our direct materials business was roughly flat. Our total IC ATM revenues improved 8% versus the same period last year. Gross profit was up 13% with our gross margin improving 1 percentage point from 22% to 23%, despite a negative impact from NT dollar appreciation of 2.4 percentage points. Operating income was up TWD 0.8 billion or 24% from TWD 3.2 billion to TWD 4 billion. Operating margin was up 1.3 percentage points from 9.1% to 10.4%.

Page 7, packaging operations. In seasonally down Q1, our packaging revenue declined 12% sequentially and increased 9% year-over-year to TWD 31.1 billion. Our packaging gross margin of 20.7% declined 3.4 percentage points sequentially and increased 1.6 percentage points year-over-year. As compared with the previous quarter, the sequential margin decline was primarily caused by lower seasonal loading compared with stable semi-fixed costs such as labor and depreciation. Secondarily, the margin decline was driven by NT dollar appreciation. On a sequential basis, NT dollar appreciation impacted our packaging operation by 0.5 percentage points. The improvements in year-over-year margins are a result of relatively higher loading paired with lower depreciation and raw material consumption. During the quarter, capital expenditures were TWD 120 million, composed of wafer bump, fan-out and copper pillar equipment at USD 78 million; and common SiP and wirebond equipment at USD 42 million. We exited the quarter with a total of 15,963 wirebonders in operation. 8-inch bumping capacity remain unchanged at 95,000 wafers per month and 12-inch bumping capacity, including fan-out and copper pillar, remain unchanged at 116,000 wafers per month.

Page 8, test. Test revenues of TWD 6.4 billion were down 13% sequentially and up 6% year-over-year. Test gross profit margin of 33.4% was down 5 percentage points sequentially and up 0.5 percentage points year-over-year. The decline in gross margin was primarily due to lower seasonal revenues paired with a semi-fixed cost environment, and secondarily, NT dollar appreciation. Overall, cost of services for test was TWD 4.2 billion, declining TWD 0.3 billion sequentially but up TWD 0.2 billion year-over-year. Our test utilization rate on a percentage basis declined to the low 70s. Capital expenditures for the test business was USD 31 million in the first quarter.

Page 9, materials operation. Revenues were sequentially down 4% and down 8% year-over-year. During the quarter, TWD 892 million was from sales to external customers. This amount is an 11% increase as compared to the fourth quarter. Our internal self-sufficiency rate increased slightly to 27% from 26%. Gross margins were sequentially down by 1.8 percentage points to 12%.

Page 10, IC ATM revenue by application or market segment. Here, you can see the application shift during the seasonally down first quarter. During the first quarter, our communications segment declined in accordance with the seasonal trends and the other applications made up for them.

Page 11, EMS operations. Here, you can see the results from our EMS business. During the first quarter, revenues for our EMS business unit was TWD 29.4 billion sequentially, down 15% but up 19% year-over-year. In the same time frame, our gross profit was TWD 3.1 billion, down 13% sequentially but up 55% year-over-year. Despite the seasonal revenue decline, our EMS gross margin increased slightly to 10.6% from 10.4% sequentially and up 2.5 percentage points year-over-year. The sequential EMS gross margin increase was principally the result of a seasonal product mix shift away from lower-margin products and streamlined costs within our EMS operations. We do believe that from a total business perspective, the financial results of our EMS business appear to be encouraging. Our rebalancing efforts appear to have a material impact as the business unit's contribution to the overall group has been steadily improving.

Page 12, EMS business segment mix. During the first quarter, our communications product segment decreased their segment share by 4 percentage points while our computing, consumer and automotive segments in combination increased their individual segment shares. These segment share moves are mostly in line with the seasonality of the underlying business products.

Page 13, ASE Group balance sheet items. At the end of the quarter, we had cash, cash equivalents and current financial assets of TWD 46.2 billion, increasing from TWD 42.3 billion the previous quarter. Our interest-bearing debt decreased from TWD 111.7 billion at the end of 2016 to TWD 97.9 billion at the end of the first quarter 2017. Total unused credit lines amounted to TWD 183 billion.

Page 14, capital expenditures. Machinery and equipment capital expenditures for the first quarter totaled USD 155 million, of which USD 120 million were used in our packaging operations, USD 31 million in our testing operations and USD 3 million in our EMS operations and USD 1 million in our interconnect materials operations. EBITDA for the quarter was USD 377 million. For the full year of 2017, we expect to spend capital expenditures in excess of 2016 levels but below our depreciation and amortization levels. These expectations are subject to significant changes as business conditions are always dynamic.

Looking forward, there are a number of factors related to overall communications market that are impacting our businesses. We believe that some of our customers are actively controlling component inventory related to smartphones in China. This seems to indicate that the China smartphone market is taking some time to digest inventory after showing surprising resilience during 2016. Further, we also have noted that some end products have adjusted their launch timing, not matching their previous generations -- launch times. Some of these times are off by weeks, some by potentially months. We believe these product launch shifts have created timing shifts in various smartphone manufacturing cycles, making cyclical comparisons particularly troublesome. We also don't see the brisk upswing at the beginning of the second quarter to which we are accustomed. The business environment appears to be stable with an upswing somewhat delayed. This, paired with other impending major product launches further out this year, makes our second and third quarter outlooks stand in remarkable contrast. It is unclear to us at this time when the upswing will exactly start.

With that said, we believe that the business in the second quarter will run at a slightly more rapid pace than we did in the first quarter, but such pace increases may be offset at least in part by foreign exchange rate increases in the New Taiwan dollar. And at this time, we are conservatively assuming a New Taiwan dollar to U.S. dollar exchange rate of 30.3 off of an average exchange rate of 31.2 in the first quarter. This foreign exchange fluctuation in itself implies almost a 3% impact to sales. So with that said, our guidance -- our second quarter 2017 IC ATM business in gross margin should be similar with the previous quarter. Our second quarter 2017 EMS business should be similar to the average of the second and third quarter levels, and our second quarter 2017 EMS gross margin should be similar with the previous quarter.

Do we have a Q&A questions?

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Questions and Answers

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [1]

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Bill Lu, UBS. Just a clarification on the guidance on what Ken said. It sounds like 2Q visibility maybe is a little bit weaker than it's been historically. I wasn't sure what Ken said about the third quarter, is it also cloudy or it's different from 2Q?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [2]

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The third quarter stands in remarkable contrast to the second quarter. There should be a very brisk uptick. We're just not exactly sure which month that uptick happens. But we're pretty optimistic on the third quarter. There's no exact number at this point.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [3]

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Okay. But the timing versus your previous third quarters is a little bit uncertain right now? Is that the point?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [4]

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I think the third quarter should be -- the third quarter number should be pretty reasonable. It's the second quarter that we're not exactly sure about. It could -- things could, in all potential likelihood, pick up in June but we don't know.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [5]

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I see. Okay. Question on gross margin. In the first quarter, I mean, I realize there's a currency impact but it seems like margin is a little bit weaker. What are the factors here? Obviously, loading is one factor, anything else?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [6]

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I think in terms of IC ATM gross profit margin, of course, the softer demand and also the loading, of course, will have an impact, a negative impact on the margin itself. But on top of that, we are also experiencing NT dollar appreciation, which has a [0.6%] impact on margin. Also in the quarter, we do have some one-off expenses that we need to book, including the composition expenses that we need to incur for the rights offering with the portion of the employees subscription. And also we have a -- we went through an early retirement plan in Korea site and that incurred some additional costs as well. There's also a one-off expense is the -- because of the -- I don't know what this translation is, (foreign language), a lot of the unpaid annual leave that we need to incur in expenses. So all those add up the additional expenses for the quarter such as the one-off items. It's about 0.5% of total and the additional overtime expenses that we need to pay for the (foreign language) as well, that's another 0.3%. So these are the items that had some negative impact on the margin as well on top of the lower loading.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [7]

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Continuing on gross margins, we've seen the improvements in EMS gross margins last year that rebalance the portfolio, but last couple of quarters have been in the low season. So as we go into the second half of the year, into the strength of the EMS business, can you talk about how we should think about margins in terms of maybe an absolute level that you want to achieve or incremental margins going forward?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [8]

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Well, I think there is no set target on the, let's say, 11%, 12%, I'm not saying that. We're saying that the main focus for this year is we need to continue our rebalancing specifically on the [EMS] business, and the main focus is we need to continue to improve our margin on EMS side. And as we -- as the business progresses, I think there's still further room for improvement although the NT -- the currency movement does not have that much of an impact on the EMS business because most of the business is really made in China. But we still have a small portion of the business in Taiwan as well. So that may have some impact. Overall, I think there's still room for improvement, and we're optimistic that we'll continue to make some improvement on the gross margin for our EMS business.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [9]

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I was thinking, one last one. The clarification on the MOFCOM process. So we moved to a phase 3 April 12. Is my understanding correct that phase 3 is 1 month and...

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [10]

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No, phase 1 is 30 days and then phase 2, 90, and then phase 3, 60 days.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [11]

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60 days? At the end of the 60 days, it's either yes or no? Or are there other options?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [12]

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Yes, we're actually quite comfortable with the progress that we're making now, and hopefully, we can get everything occurred away before the expiry, which is June 11.

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [13]

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But the government -- the MOFCOM has to make a ruling by June 11, is that correct?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [14]

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They can do -- they can give a ruling or they can ask you to withdraw the application and then refile it. There are different ways that they can handle this.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [15]

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Name and company?

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Rick Hsu, Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology and Head of Taiwan Research [16]

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Rick Hsu from Daiwa Securities. I guess 2 questions from me here. The first one, as you just said, some housekeeping numbers, including your -- I know Ken talked about the utilization. I just -- that was copied into copy everything. So can you run-through a YouTube for your...

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [17]

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For [assembly], it's around mid-70s for both wirebonding and then wirebond. For test, it's low 70s. For material, it's low to mid-70s. And for the second quarter, it should remain very similar.

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Rick Hsu, Daiwa Securities Co. Ltd., Research Division - Head of Regional Technology and Head of Taiwan Research [18]

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Second quarter should be similar across the board?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [19]

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Right.

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

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Al right. And can you talk a little bit about your capacity build for the second quarter. Is it going to be similar again? Quarter-on-quarter always on the increasing -- on preparation for Q3?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [21]

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You mean CapEx?

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

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Your capacity across the board for the second quarter.

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [23]

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Well, in terms of CapEx, I think, the first quarter, we have TWD 155 million. I think, in second quarter, it will be higher. There will be a higher number for that and that's, as you said, is in preparation for the third quarter's onwards ramp up.

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

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Okay. The second question is, if I screw any exchange fluctuation for your second quarter, and I assume your IC ATM will likely grow by, maybe as Ken say, up 3% quarter-on-quarter, but if I look at one of your competitors, Amkor, they also released number today. I think they are looking at about 5% to 13% quarter-on-quarter growth, if I remember correct. So can you explain why the difference is? Are you losing any amount here or it's a different story?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [25]

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Well, I can't exactly speak for Amkor but I think the bulk of it is really because of different customer mix. I think they have a larger exposure in the galaxy phones.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [26]

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Do we have more questions locally? Yes, Randy Abrams, are you on the line?

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [27]

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Yes, I'm on the line. I wanted to ask a follow-up clarification on the, you mentioned uncertainty or potential product push outs. Were you referring more just to the Android over second quarter? It sounded like you're confident on third quarter ramping, but is there still uncertainty on time line, or is it more locked in for the second half? I guess, we have -- the Apple's normally ramp but for those component nodes, is that still moving around and uncertain, or is that more locked in to drive the confidence from the third quarter?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [28]

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I don't think we can be very specific about customers per se, but I think all in all, what we're looking at is we are going through a bit softer typical second quarter because of the -- there's some inventory that needs to be worked off and also because of some delays in some of the product launch. Of all these, we expected to be worked out by third quarter and that's the reason why we're having a much more optimistic third quarter, thinking that the things will start to rebound from the third quarter. Although the product launch still have some uncertainties involved, so we are not exactly sure when exactly in third quarter, which month exactly, things will start to look up. I think that's what we're trying to say here.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [29]

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Okay. That's helpful. And the second question, I wanted to ask about the fan-out packaging, more for the mobile market if you're seeing some of those developments carry forward for next year. We're still two years away, but if you could talk about your opportunities for that market?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [30]

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We continue to see fan-out, let's say, growth driver for us going forward. I think the application of it will be expanding. So we'll continue to make our investment into fan-out, and also, we're expecting quite substantial growth in our revenue, from our fan-out revenue this year.

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [31]

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Okay. And then the rest on SiP. It's been, I think, a little obvious since you disclosed but I'm curious, the level, like if you did percent of the EMS business now and percent of IC ATM maybe for how it is now and if you still with the rebalancing and also moving out the loadings, if we should still expect that normal sharp second half for the SiP business?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [32]

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Well, I think the overall rebalancing involves a lot of things in our SiP business, including we're trying very hard to linearize whatever business flow that we're getting from the customers and that seems to be working out better for us now. So are you -- is your question about the percentage of business from SiP?

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [33]

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Yes, if you can, the percent of, like on the EMS, ATM and consolidated levels, like rough area, where it is now?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [34]

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I think in first quarter, in terms of IC ATM, it's about 4%.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [35]

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Okay. Are you looking for EMS?

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Randy Abrams, Crédit Suisse AG, Research Division - MD and Head of Taiwan Research in the Equity Research Department [36]

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Yes, if you have EMS and consolidated, like how that performs?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [37]

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Yes, IC ATM's actually 3%. From the EMS perspective, it's about 40, 40-some odd percent. Next caller, Charlie Chan, Morgan Stanley?

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [38]

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So I just wanted to follow-up the question regarding P&L with the label package. So can you elaborate what kind of income (inaudible) were moved to fan-out this year since you're seeing strong demand? Specially, I'm curious about what was the cost crossover versus subscription-based packaging?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [39]

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So in general, fan-out is more expensive than traditional packaging. You choose fan-out when your I/O densities are denser than what can be provided by traditional forms of packaging. So most products at this point in time are able to be serviced by bumping or copper pillar. There is an extra potential factor in fan-out. It provides a slightly thinner profile. I think it's about maybe 10% thinner or 15% thinner but that's it. But going forward, we believe that we can probably drive fan-out costs down, and when fan-out costs can actually be lower than their corresponding substrate costs, we can -- fan-out should actually grow significantly at that point in time.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [40]

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Okay. And my follow-up would be, you know, because the competition involves some foundry player, so can you explain your key depreciation or advantage against the foundry competitor?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [41]

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We're a back-end player, right. Fan-out is a back-end service. So we're basically running sewer pipes to and from the chip. So you don't need to spend a lot of money on packaging. You go for the lowest cost. So we believe we can deliver the lowest cost. We believe we have the path to deliver the lowest cost fan-out going forward.

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Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [42]

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Okay. So to put that into a perspective, you believe in time, which quarter, or what do you think fan-out can now contribute to your revenue significantly? And if you can give us some capacity in the schedule that will be great.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [43]

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That's not really up to us. The demand in fan-out is exactly correlated to the devices that need it. So maybe potentially, 10, 7, even sub-7 nanometers on the foundry front. When the I/O densities get beyond what traditional packaging needs, that's the foreshore point at which fan-out is needed as packaging. But at this point in time, there really isn't a lot of direct obvious need for fan-out. I mean, traditionally speaking, fan-out is used for keeping a footprint of a particular dye when dyes shrink. So I mean, those are different types of purposes but we don't have a long-term time price in terms of exact fan-out expansion. We will expand as the market needs it.

Next caller, Steven Pelayo, HSBC.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [44]

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Great. I'm wondering if you can talk a little bit about the second quarter. I understand you're guiding up a little bit but flattish with the currency affected. Amkor did talk about half the growth coming from the communications side and the other half coming from automotive, industrial consumer. So I guess, as you look into the segments in the second half, is comp kind of down and other things offsetting at all?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [45]

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Can you repeat that question?

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [46]

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I'm just looking at what is your outlook for the second quarter revenues by segment. Does it equal across communications, consumer, computing? Because Amkor had actually said it was fairly -- half the growth for them was going to come from communications, the other half was going to come from all the other things. I'm curious if you see a similar flattish environment for all end markets?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [47]

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Well, as I mentioned earlier on the call, I think Amkor has a different customer exposure than ours, where they have more exposure in the Samsung Galaxy. So there's a bit of a difference in there. In terms of our own coverage, I think the -- in the second quarter, aside from computer -- computing, other segments are kind of stable. Computer -- computing for us is going to be a bit soft than the other segments, so the distribution will be slightly changed in the second quarter.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [48]

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Okay. And then when you look, last year, for example, you had kind of a flattish quarter-on-quarter second quarter, which is somewhat similar, and then you ultimately had a 16% quarter-on-quarter third quarter. So if things are pushing out and other things are lining up, I mean, as you look to the third quarter, do you think it'll be even better than what you saw a year ago on your sequential growth?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [49]

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Joseph wants me to answer. So yes, I'm actually really bullish on the third quarter, but we don't really have a number at this point, right? It's tied to products. You have a number of products that are delaying at this point, that could actually also impact or flow into the third quarter as well as traditional products that normally launched near that time frame.

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [50]

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I think having said that, I think there's a little bit difference between this year and last is that in the last second quarter, or I should say last first quarter and second quarter, the -- our SiP business really decreased very, very significantly, both in terms of unit volume as well as pricing for those services. As I mentioned earlier on, this year on, we're making progress in terms of linearizing that part of the business. So I think the changes between the quarters, second and third quarter, this year and last year, in terms of magnitude would be a little bit different because of that factor.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [51]

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Okay, linearity moves a little bit of it. I understand. But do you think it could mean very well that fourth quarter is unreasonably stronger as well? I mean, I guess, I'm just trying to ask, maybe more of a full year type outlook from you?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [52]

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Well, as I said, we don't have any numbers right now but we're trying to explain that the way we look at it is because in the second quarter, most of the inventory, particularly in China, market should be worked out. And there will be multiple product launches coming into the third quarter that give us a bit more confidence on third quarter's performance.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [53]

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Okay. Just one more question. I was reading the 20F today for last year, I'm surprised to see your largest customer, I think, decreased by about 24% year-on-year? Your expectations for that this year, do you see that, that can relatively outperform the total company?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [54]

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We generally can't comment on customers. They sue us. So, thank you.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [55]

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I'm not giving a name here, I just saying your largest customer.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [56]

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Any other questions? Name and company, please.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [57]

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I'm Sebastian for CLSA. So my first question is to follow-on the product delay launch from your customers, which you just mentioned. Does that impact more of your IC ATM business or EMS business in second quarter?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [58]

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Product launches? The product launches are impacting our IC ATM business at this point.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [59]

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Okay. And the product launch delay is from several customers who are from your top 5 customers?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [60]

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The product launches that are delaying are more end-product launches, not necessarily our customer product launches. So their particular manufacturing cycles are pushing out, right? I mean, some of those numbers come in, some go out, right, so that's what makes the quarter particularly difficult to analyze at this point.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [61]

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Okay, got it. And on your system packaging business. In last quarter, you talked about that the business pipeline is pretty strong with many customers approaching ASE, but it's hard to forecast in terms of the time line when these projects will take off [involvement]. And how about now, three months right now. I mean, is there -- do you get any clear visibility or still the same?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [62]

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I think the situation remains the same. At this point, we still have, for multiple customers, engaging us in their different phases and different devices, and exactly when and how these product will get into the market really depends on the customers, their own game play.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [63]

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Okay. Remember that your SiP products, you used another way to describe them, it used to be like a security, wearable, probably just interface and subsystem related. I remember there are 4. And how many -- are you still having this for this year or how many do you have?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [64]

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We generally don't discuss customer related information for the reason I mentioned to Steve.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [65]

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Okay. How about like from the very top-down perspective, how do you see your SiP business in terms of the revenue? Is it going to be similar to last year or up or down?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [66]

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There will be some growth in terms of revenue.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [67]

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Okay, okay. And can you talk about your strategy on the very advanced packaging, like 2.5D and 3D packaging, particularly for high-performance computing, these processors? How -- I think 2 years ago, you announced you have these projects with AMD and -- on GPU side. And any new progress and new designing pipeline projects you're working on right now?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [68]

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Our product service packaging portfolio is always expanding, the one that you mentioned with AMD. Unfortunately, it seems that there wasn't a lot of volume there, right? But I do understand that there will be more similar type products. It's a very interesting product. You have stacked memory with a CPU, with an interposer on it. Those are the next generation of packaging. So from our perspective, exciting, very interesting, not a lot of revenue yet.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [69]

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When you say exciting and interesting, are you saying from -- that you see this market is interesting, exciting but you haven't got it yet? Or you already have it, that's already in your designing pipeline?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [70]

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That was our product -- that was our coworked product with AMD.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [71]

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Okay. I mean on top of AMD? Besides AMD?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [72]

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We offer our packaging tech to all our customers or most our customers or most of our tech, unless it's exclusive.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [73]

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Okay. Can I then ask where do you get your interposer? You manufacture it yourself or you have partners? Remember, you have announced a partnership with Inotera when Inotera was still listed about 2 years ago or 4 -- 3 years ago.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [74]

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Yes. We have them as a potential provider of interposers. There are others that can provide interposers.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [75]

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So basically, you get your interposer from your partners but not doing that yourself?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [76]

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Correct.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [77]

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And last one, just to clarify on Randy's questions, I didn't hear it clearly because -- you talked about the SiP account for 3% revenue for IC ATM in the first quarter and how much percent for EMS?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [78]

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We have 40...

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [79]

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42%.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [80]

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Yes, around 40%. In the 40s.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [81]

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40s. Okay. And in terms of the total company, then that's...

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [82]

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26%.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [83]

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26%.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [84]

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I'm sorry, hold on.

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [85]

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18%.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [86]

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18%, I'm sorry. We have a lot of numbers, sorry. 18%. Any other questions? Bill? Another one?

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William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [87]

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Yes, just a quick one. I think a month ago, there was an announcement about some sort of JV between you guys, Qualcomm and the Bolivian government. Can you talk a little bit more about that in terms of is that more in the IC ATM realm or SiP EMS? And also, what is the financial arrangement?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [88]

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Well, we just signed an MOU. I think there's still a lot of details that needs to be worked out and there's still a lot of pre-conditions that needs to be met before the whole thing goes into play. I think the -- this will be a 2018 and beyond event. At this point, there's really no set parameters around it in terms of financial arrangements and so on. It really depends on how things progresses in the next 6 months to 12 months. And I think the purpose of that JV is really to develop a product for the region and it will be a combination of IC ATM as well as EMS, and we will make the decision on when which unit -- which business unit to take the lead on that.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [89]

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Any more questions on the floor? I have Steven Pelayo in the queue for a question. I'm not sure if it's -- Steven? You have another question?

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [90]

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Yes, can you hear me?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [91]

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Yes.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [92]

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Okay, great. In talking with some of your customers here, it seems like that they may be already viewing ASE and Siliconware kind of as one. So I'm curious if that's true or if it's as competitive between you 2 as ever? Are pricing more stable? Any thoughts on kind of now that we're into this, I don't even know what year now, what customer behavior and how it's changed?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [93]

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I don't think the customers are taking us as one. I think we're 2 -- still 2 separate companies running our own businesses. There's no any sort of collaborations until the whole thing is cleared and approved and we finally make the combination.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [94]

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So I guess there was some concerns that by combining you 2, that opened up second sourcing opportunities for other players out there. As far as you're aware, you don't think that, that's negatively impacted you at this point?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [95]

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So far, we don't sense any significant changes in our business.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [96]

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Okay. Just a couple of more quick ones here. Finger print sensors were very active of late. I'm wondering if you can just maybe give us some color in 2016. How big of a business was that for you? And maybe just some qualitative comments on your outlook for 2017?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [97]

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We can't comment on customer devices, sorry.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [98]

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Well, what about just directionally then? Is it a growth market for you this year?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [99]

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We don't -- we can't comment on that, sorry.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [100]

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All right. One more quick one here. Kingboard is out there talking a lot about rising copper clad laminate costs. I'm just curious, on the materials side, are you seeing any potential impact? We're seeing on the foundry side, for example, in raw wafers, are you seeing anywhere on the back-end side?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [101]

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That hasn't crossed my desk yet. But I would -- I guess I will look into that.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [102]

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Okay. Actually I'm going to sneak in a couple more. Companies like Teradyne and BE Semiconductor were guiding their revenues up 50% quarter-on-quarter. Is that kind of what we should expect in your capital spending as well? Is that the kind of growth that you're thinking? How lumpy, I guess, is the linearity of your annual CapEx plan?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [103]

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Our -- I mentioned that our capital spending, it should be above last year's capital spending but below our depreciation and amortization.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [104]

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In terms of quarterly linearity, you've mentioned that the second quarter should go up. I'm trying to understand the magnitude. Is it a very large lump of the annual budget that gets spent in 2Q or is it a fairly steady number?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [105]

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Well, second quarter will be the highest in the quarterly spending for the year.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [106]

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Okay. And then lastly, maybe you could talk a little bit about China customers, your China operations. I know Chinese smartphones are going through these excess inventories correction. But I'm just curious about your thoughts on your positioning, the competitive landscape, demand there, pricing, technology roadmaps. Even Amkor has a lot of advanced capacity in China. So can you talk just a little bit more about the market in China and your own operations and strategy?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [107]

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Well, I think the -- from a high-level point of view, that China is becoming a rapidly expanding market. I think going forward, I think it's almost necessary for us to maybe expand our operation in China so as to meet the demand there. There's also a lot of new fab investments into China that will eventually need more back-end support. And so we're seeing China market has a very good potential, and we will be putting more effort in the investment into China along with the overall market growth in that area.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [108]

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Can you remind me the percentage of revenues from China headquartered companies?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [109]

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It's about 6%.

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Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [110]

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6%, okay. And then last question, just more from a finance perspective. I'm curious what the -- exiting 2017, what's the balance going to look like? I'm a little unclear about kind of the capital structure eventually here.

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [111]

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Well, if the transaction goes through, then there'll be additional borrowing up to about $3.5 billion. And at that point, I think the overall net debt to equity ratio will be closing in on 90%, 95%, up from about 30-something at this point. So we -- there's going to be quite large funding these and also, our leverage will be significantly increased. That's part of the reason why at this time around, our dividend is -- our payout is a bit lower than previous year to reserve some more cash for our funding needs.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [112]

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We have one more from Sebastian. Just one, right?

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [113]

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Sorry, I need to come back to the product delay again. So Ken, are you're very positive on the -- on third quarter. You say you are very bullish. And you talked about the -- that and product delay impacts your IC ATM business mainly in the second quarter. So -- and you see -- so which means that this will translate into third quarter revenue. And also, you need -- you also have EMS, so which means that both IC ATM delay from 2Q to 3Q, plus EMS in third quarter, together, will give you a very strong third quarter revenue. And does that imply your expectation for that and product delay won't postpone your EMS growth from third quarter to fourth quarter?

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [114]

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The product delays are, in general, not referring to any particular customer, but if you just look at various products at this point in time, there were products that were launched now this time last year but aren't launched now this time this year. So I don't think -- I think you may be stretching that particular comment out a little bit too much there. But in terms of what we see, the timing of end products are definitely impacting overall manufacturing cycles.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [115]

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All right. Second follow-up is how do you see the pricing environment for this year? Remember, the first quarter last year, there's a pricing reset and I that impact your margin and also SPIL's margin. How about the pricing environment for this year? Do we also have that kind of pricing reset for this year or the magnitude compared to last year is milder, smaller or bigger?

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [116]

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I think we're -- this year, we're going through the normal price talks typically of on quarterly basis. So I think the -- in terms of overall pricing environment, I think this year is quite stable and normal.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [117]

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So better than last year, relatively. Okay. Last one, and, Joseph, you mentioned that the computing in second quarter will be slower than the others which means the other applications are actually still growing.

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [118]

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That's really based on our own portfolio, our forecast. Again, this -- it's sometimes customer specific because the customer give us a forecast and each customer -- selective customer's up and downs does have an impact on our overall portfolio performance. So what we're saying is, we're looking at our own forecast, we're looking at those customer's forecast, there's ups and downs. And it seems that in our customers in the computing area, the forecast seems to be weaker than the others.

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Kenneth Hsiang, Advanced Semiconductor Engineering, Inc. - General Manager of ISE Labs Inc [119]

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Any other questions? No?

Thank you for attending the first quarter 2017 earnings release.

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Hong Shi Tung, Advanced Semiconductor Engineering, Inc. - CFO and Director [120]

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Thank you very much.