ASE Technology Holding Co., Ltd. (ASX) Q4 2012 Earnings Report, Transcript and Summary

We are pleased to have our Chief Operations Officer, Dr. Tien Wu, to speak to you about the latest business update. And afterwards, our Chief Financial Officer, Joseph Tung, will talk about the latest financial results in the article for Q1 2013. And afterwards -- and then we will have Q&A session in the end. So now, please welcome our Chief Operations Officer, Dr. Tien Wu.

Good morning, everyone. I'm pleased to give you an update in terms of our overall 2012 performance, so if you can turn to Page 3. I would like to give you a summary of our Q4 results, as well as the full year summary. As you can see, in Q4, we achieved USD 1.1 billion in sales. In terms of U.S. dollars, we're up 4%. In terms of NT dollar, we're up 1.5%. This is slightly below our original guidance. U.S. is right in the middle. NT dollar, however, was slightly below the 3% to 5% range that we guided in Q4, mainly due to the currency. For the overall 2012, 2012 has been a challenging year. Overall, ASE has managed 1% year-on-year growth by U.S. dollar, or 2% year-on-year growth by NT dollars. So it was an okay year. The highlight here is we have achieved both Q4 a record revenue, as well as for the whole year, a record-high revenue, with the improved profitability. Our Chief Financial Officer later on will give you a more detailed number on our financial performance. For the CapEx, we spent USD 182 million in Q4. That was also slightly ahead of the guidance. We were guiding for about USD 100 million. I will give you some justification for why we need to spend the additional dollar in Q4. Our overall Q4 CapEx -- our overall 2012 CapEx was over USD 1 billion, USD 1.007 billion. Once again, ASE's -- our growth strategy in the advanced packaging, copper wirebond and low pin count discrete continue. We continue to observe the demand capacity in all 3 areas, as well as deliver the sequential revenue growth. Now if you can turn to Page 4. Page 4, I would like to give you a highlight of…

Thank you very much, Tien. Okay, let me get on with the presentation to give you an update on our financial results for quarter 4 of last year. So quarter 4, as anticipated, we saw strong pick up in the communications sector as industry capacity constrained being lifted. However, such ramp up quickly led to somewhat of an inventory adjustment starting December and should continue into Q1 of 2013. Other sectors remained flattish during the quarter. For the year, we have seen both accelerated copper conversion for cost reduction and expanding demand for advanced packaging for product mineralization and function integration. Consequently, we have made the R&D effort and CapEx investment necessary to meet such changing demand and poised to continue as the industry leader going forward. Please turn to Page 5, where we look at our consolidated income statement. On a fully consolidated basis, the company delivered EPS for the quarter of TWD 0.58. Consolidated revenues reached TWD 56 billion, an increase of 14% from the previous quarter. In the quarter, we recognized real estate revenue of close to TWD 1.5 billion, which accounted for 2.7% of the revenue growth in the quarter. Profits from the real estate project had a positive impact on both gross margins and operating margins. We stayed flat at 19.6%, and operating margin grew from 9.8% to 10.6% in the quarter. If netting out such impact, respective margins should be at 18.4% and 9.4%, respectively. Although non-operating expenses decreased TWD 207 million to TWD 133 million due to increased FX gain and investment income, such increase partially offset by increased interest expense. Pretax profit was TWD 5.8 billion, up 30% from the TWD 4.5 billion reported in Q3. Income tax increased TWD 404 million due to additional tax paid for the RE project. Net…

[Operator Instructions] The first question comes from the line of David Duley.

Could you just talk a little bit about, when you look at your guidance for Q1, how the segments break out, the end market segments? And then how the assembly and test and advanced packaging revenue should act here in Q1?

We're seeing the -- all sectors will decline. Computing will drop less than the communications. The advanced packaging right now, we look at it, we will have about 5% drop, whereas the wirebond and the traditional packages will have about the low-double digit drop. And this is what we're seeing from the assembly side. I believe, from the test revenue side, the test revenue will go down about the 10 percentile.

Now with lots of parts coming out at 28 nanometers, do you see parts that were traditionally wirebonded moving to advanced packaging? Or, I guess, why is the wirebonded business down more than the advanced packaging business?

It's very difficult to have a precise number on the 28 nanometer migration. We did an internal estimate. Our number shows that, out of 100 wafers in 28 nanometers, 80 will go to advanced packaging, while 20 will go to a wirebond. Now, please bear in mind, this is the initial off-the-gate number. In other words, as 28 nanometer become more mature, we believe more wirebond design will come into play. But off the gate, right now, we're seeing is 80% goes to advanced and 20% goes to the wirebond. And this is for the 28 nanometer.

And as far as the end markets, I think what you said was the communications market will be down more than the other segments?

I think that's correct. I think the -- as we mentioned earlier on, in first quarter, we are seeing both seasonality factors coming, kicking in. And also on top of that, we're seeing some inventory adjustments, primarily in the communications sector. I think during the October, November timeframe, we're seeing substantial growth in this particular sector. So you can see that in the fourth quarter, the percentage of communication increased from 50% to 55% in the quarter. So with that potential buildup, we are seeing some inventory adjustments starting from December and on to Q1. So with that, I think the communications sector, when relatively compared to other sectors, showing you a softer momentum.

Okay. And then could you talk a little bit about -- a little bit more detail about your CapEx for the upcoming year and just specifically how it breaks out amongst advanced packaging and test dollars that you plan to spend in each? I know you gave that breakdown, but I couldn't write -- I didn't write it down, so I was just hoping you could clarify it for me.

Okay, I think the -- we're projecting about USD 600 million to USD 700 million CapEx for the whole year. With that, we're allocating roughly 2/3 of it to assembly. And if we take the USD 600 million number, it would be USD 400 million in packaging, and then roughly USD 100 million to USD 150 million to test and the remaining for material as well as EMS.

And as far as how the CapEx in assembly breaks out amongst advanced packaging and bonding, did you have a breakout there?

Well, it will be mostly in advanced packaging. I think there will be limited wirebonding capacity expansion.

Okay. And I noticed, it seems like the big wafer foundry in Taiwan has been pretty positive about their growth rates for the calendar year. How do you look at this year in total shaping for ASE? Should you grow in the same ballpark as the big foundry? Or should there be a divergence between your growth rates?

If you look at the ASE track record for the past 12 years, between 2000 and 2012, the semiconductor grew 6%, and ASE compound annual growth rate, for the past 12 years, was 12%. So it is safe to say that ASE consistently outperformed the semiconductor market by 2x. And in the recent years, the Taiwan foundry has been growing strong, stronger than OSAT. And I think in 2013, as you can see in our Q1, is weaker than what TSMC has reported. And I believe there has been a foundry wafer buildup. So we do believe that in March, April, that time frame, those wafer basically will come over to the OSAT, including ASE. For the whole year, we do believe that we will have a healthy year. And we do believe we'll outgrow the semiconductor market. I will not be able to comment specific foundry partner, but we do have a high confidence, by March, we will see a good rebound. In Q2, our revenue as well as the margin, we're confident will go back to a healthy level. For the whole year, we remain to be optimistic, based on the pipeline, based on the customer forecast.

I think first quarter is really a combination of seasonality as well as some inventory adjustment, particularly in the communications sector. And therefore, the -- and that there is a lagging effect between us and the upstream foundry. So we're seeing a weaker quarter if we compare ourselves with the foundries, particularly TSMC. However, I think, on a full year basis, we're seeing this softness quickly rebounded from March. And for the whole year, we're still seeing quite a healthy pattern. And we are very confident that we will continue to see substantial growth as -- sequential growth on a quarterly basis. And particularly in Q2, we are confident that we will have our margin improved to approaching Q4 level last year.

And speaking of that topic, with the revenue decline that you are expecting in the first quarter, what gross margin should we be targeting for the March quarter?

For IC ATM, it will come down roughly our original, this about 4% to 5%. But I think it could be smaller given the fact that the NT dollar has been depreciating quite a bit. When we looked at our budget, we were budgeting the exchange rate at 28.9%. And right now, it's standing at 29.60%? 29.57%. So that will help us on the margin side as well.

So that seems like an awful big decline in gross margins in the first quarter. Is there some other reason behind that besides the revenue decline?

I think the drop is really just purely volume-driven. We are not seeing any major price erosion in the quarter. In fact, I think it's not very meaningful if we drop prices to gain business because it's a seasonal downturn, and also, with some inventory adjustments, [indiscernible] lowering your prices, we're not keeping more business.

The next question comes from the line of Szeho Ng, BNP Paribas.

Just want to ask about what percentage of revenue do you expect to achieve from flip chip actually by end of this year?

Well, as I have indicated, we have -- today, we have 300 million extra capacity planned for 2013. So if I recall, we closed 834 million in 2012. What I'm saying is that we do have 300 million extra capacity installed.

But you expect all these capacity will be fully loaded?

No. That is something we are not capable of projecting right now. The capacity was requested, was demanded by customer with the pipeline and part number. However, how much of that will be fully utilized really depends on the market.

And the other thing, your competitors talk about silver wirebonding. I just want to tap your brain, how you see that market going forward?

Can you repeat that question? Our competitor is talking about the silver?

Silver wirebonding. Silver alloy.

Okay. I can only give you the feedback as well as the conversation we had. The silver alloy is not well accepted by the automotive industry. And there has been silver issues associated with the moisture and the biased [ph] and humidity environment. The ASE, until today, we stay focused on copper, as well as some copper wirebond, the improvements. So we will not be able to comment on the silver. The silver, I believe, is a niche market. It's not widely accepted by the industry, particularly by some of the IDM, particularly by IDM in the security, in the network, as well as the automotive market.

And last question. Regarding the tax rate, what should we use for this year? Because most of the companies in Taiwan talk about an increase in effective tax rate? And it's going into...

Well, for model building purposes, I would suggest the 15% to 17% effective tax rate.

Okay. That one is still intact all the way into 2014?

I will let the government change the tax policy again.

The next question comes from the line of Steven Pelayo.

Just a couple of quick questions here. The first one is, Siliconware was just suggesting that they're going to retire more wirebonders than they'll effectively add this year. So when we're having this call 1 year from today, you have 15,500 or so bonders, do you think that number is actually down as well 1 year from today?

Right now, we have about 15,000 wirebonders in total. We have about 11,500 or so of copper wirebonder. Yes, some of the older generation wirebonders will turn out to be obsolete when they have to deal with the 40-nanometer and the 28-nanometer. So we do have plan to retire some of the wirebonders. As a matter of fact, I think in Q4, we have retired some wirebonders, 200-something -- 304. Was that a question? I'm sorry.

Yes, I guess I'm just thinking about the net number. I was quite surprised to hear Siliconware suggest they're rolling out 250 bonders this entire year and retire some -- even more, so their total net capacity would actually be down. I was asking, I guess, the same question to you, if your total wirebonder capacity would decline this year as you retire more than you add?

Well, let me give you the bonder counts. At the end of 2011, we had a total of 13,000 -- close to 14,000 bonders. And now we're at 15,500. So we are actually adding bonders. We're adding more than what we retired.

I'm talking about for 2013.

Yes, well, Joseph, the question is the -- well, I think what Joseph's number indicates is we have been adding about 3,000 wirebonders in 2011 and 2012. In the meantime, we have retired about 2,000 older generation wirebonders. That's why we have net increase of about 1,000 to 1,500. Now your question about 2013, I believe the plan is we will buy some new wirebonders. At the same time, we'll also retire some of the older generation. In terms of the net number, we do not have that right now. It really depends on the business.

Okay. And then if you could just comment about your guidance for some of the sequential decline, even in advanced packaging? I guess a bit of a surprise for me. So I don't know where capacity is kind of moving there. So can you talk a little bit about utilization rates in Q1, for both the -- for primarily the advanced packaging, but also even on wirebonding and test utilization rates in Q1?

In terms of utilization, for wirebonding, we're expecting at mid-70s. And for advanced packaging, close to 80%. Testing will be high-70s.

I guess I'm still just surprised that there's no pricing pressures out there when we're talking about mid-70s utilization rates and a much more aggressive move to flip chip. It seems like maybe there's some leftover wirebonding out there. Is it really just because it's see-ho right now and nobody needs any demand and so there really is no negotiations going on? Or do you think that there may be more potential pricing pressures in wirebonding this year as you see [indiscernible]?

Well, if I can give you my comparison for 2012 versus 2013. If you recall, in the first quarter of 2012, the market environment was very, very bad. As a result, the pricing pressure was tremendous. Now we have also given some price concession in 2012 first quarter. As a matter of fact, the -- part of the margin erosion in 2012 for the whole year had a lot to do with the price concessions that we have concurred in the Q1. What I'm telling you is, in 2013, the pricing pressure is not nearly as bad as the 2012 level. And the reason, we believe, is now the -- everybody understands that this inventory control is a short-term in nature, and people will be coming back in March and April in high demand. As a matter of fact, we do have customers today talking to us about a March upside as well as April upside. So I do believe that in January, we will likely to report the monthly revenue in a few days' time. I think January number is okay. February, because of the working days, as well as the inventory control factor, is going to be the trough. In March, we do believe that we will have a bounce back. In Q2, right now, we're quite confident. So I really believe this downturn is really, really temporary in nature. We don't see any kind of a precipitous downturn in the marketplace, nor our particular customer losing market share to the others that we don't serve. And that is part of the reason why we believe the pricing deal has been stable. For the advanced technology, we've put in a lot of the bumping, the flip chip, and tested capacity based on demand. And those demands are basically have agreement with customers, so the pricing pressure in those arena are less in general. But even the -- in the copper wirebond, the pricing pressure is not nearly as bad as 2012.

Okay, just last quick question. You guys talked about wirebonders in Q1 being down low-double digit drop. I guess, is that equal? I would assume the gold portion probably drops significantly more. So could you talk a little bit about copper versus gold wirebonding in Q1 and the sequential decline?

Okay, the -- as a matter of fact, there are quite a few reasons. Let me just go down the -- without the -- the order of the priority, the importance. Now some of the wirebond packages are going through a migration to an advanced technology. You have seen some of the U.S. customer, as well as the Greater China customer, some of the volume package they have, they're actually migrating from copper wirebond to flip chip. That explains some additional downturn on the wirebond revenue migration to the advanced technology, which is why I stated advanced technology was down about 5%, low-double digits for the wirebond. So then the next question you ask is, now then what about all of the copper wirebond capacity you have installed? What we're saying is, when the fabless customers are migrating some device to the advanced packaging, we have to serve that. Our job is to enable the IDM customers to continue to migrate their gold wirebond, either from other sub con or from their internal factory, continue to migrate to ASE, which is why I've shown you these 2 curves, about fabless as well as IDM. And I believe, in 2013, you will see that the IDM part of the copper wirebond revenue continues to go up, but in terms of the Greater China or the fabless sector, the current conversion rate at about 80%, I believe that is quite close to the [indiscernible].

Okay, so once again, the question was, do you think the copper portion declines the same as the gold portion in wirebonding because of this migration to flip chip? Or help me understand the guidance in Q1. That's my last question.

Okay. Now the copper will continue to grow. I think the Q1 drop has the seasonality, the inventory control, as well as some of the volume device are migrating from wirebond to flip chip. For the whole year, we remain to be optimistic about the copper wirebond revenue growth.

At this time, we have no further questions.

Well, thank you, everyone, for dialing in. And we just wish you a happy Chinese Lunar New Year. Thank you very much.

Thank you. Operator?