Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the ASM Pacific Technology 2020 first quarter results announcement investor conference call. Before we proceed, I would like to note that during the conference call, there may be certain forward-looking statements with respect to ASM Pacific Technology's business and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks which could cause actual results, performance, and events to differ materially from those expressed or implied during this conference call. For your reference, the IR presentation related to our 2020 first quarter results can be downloaded from our website, www.asmpacific.com. With us this morning are Mr. W.K. Lee, CEO of ASM Pacific Technology, and Mr. Robin Ng, CFO of ASM Pacific Technology.
Our CFO, Robin, who is also our CEO designate, will start with a brief discussion about our 2020 first quarter results, followed by a Q&A session. Without further ado, let me hand this over to Robin, please.
Thank you, Leonard. Good morning, good afternoon, ladies and gentlemen. In spite of a challenging quarter with the COVID-19 outbreak, the group managed to register a very strong double-digit percentage year-on-year and quarter-on-quarter growth in bookings. In fact, the bookings for this quarter was the second highest first quarter bookings after the record booking performance in Q1 2018. All three business segments registered double-digit % booking growth Q-on-Q and year-on-year. The group started the year with very strong bookings in January. The momentum was disrupted in February due to the COVID-19 outbreak in China. Bookings in March returned to normal, with immaterial amount of order cancellation. The group achieved strong double-digit % year-on-year booking growth in Q1 this year, led by customers in China, Taiwan, and Korea.
Multiple factors drove the strong booking performance of the group, including the 5G infrastructure build-up, localization of the China semiconductor supply chain, recovery of the optoelectronic market, and the group's strong position in advanced packaging. The group achieved a revenue of $434.2 million, which was at the higher end of the guidance, and a net profit of HKD 25.4 million, which was better than our guidance of a loss for this quarter. Q1 2020 group gross margin at 33.5% was lower year on year and Q- on- Q, mainly attributed to the SMT Solutions Segment's geographical mix. In terms of end application market, the mobility, communications, and IoT segment remains the largest by revenue in Q1 2020, underpinned by the continued momentum in China and 5G infrastructure demand.
A surge in demand for general lighting tools drove the optoelectronic segment to register the largest growth both year-over-year and quarter-over-quarter in percentage terms to form the third largest revenue contributor after the automotive segment, which retained the second spot despite the slowdown of the automotive industry. Since the outbreak of COVID-19, we have taken every effort to protect the safety and health of employees, which is the utmost priority. The group has implemented various measures like work from home arrangement for certain employees and enhanced social distancing measures at our workplace. These prevention control procedures have worked well so far with minimal disruption to operations. Besides focusing on employee safety and business continuity, our focus is also to ensure compliance with local authorities' guidelines and restrictions and helping the community to fight the outbreak as a responsible corporate citizen.
As at the date of this announcement, close to 100% of employees in China manufacturing plants have returned back to work. We lost some production capacity during the extended Chinese New Year holiday period and subsequent travel disruptions. The group manufacturing team in China demonstrated great resilience when our plants were reopened after the prolonged shutdown due to the COVID-19 outbreak. The group is also grateful to our suppliers who have supported us. We are working towards recovering a big portion of the lost capacity over the next few months through productivity improvement and working overtime. The other two primary production facilities in Malaysia and Singapore are also affected. Malaysia government has imposed a Movement Control Order closing all factories from 18th of March 2020 until 28th April 2020. Our factory, as part of the essential supply chain, has been granted approval to run production with a reduced workforce.
On 3rd of April 2020, Singapore government has also announced a set of tighter measures effective from 7 April 2020 until 4th of May 2020. This, by the way, has been extended to 1st of June based on last night announcement by the Singapore government, including suspending all non-essential workplace. Our business is classified as a key economic sector and allowed to remain open, but with certain restrictions.
While it is inevitable that such restrictions will have an impact on our production capacities and efficiency, we are able to cushion some of this adverse impact because of our diversified manufacturing base. At the start of this year, we have renamed Back-end Equipment Segment to Semiconductor Solutions Segment, in short, Semi, to reflect the contribution by ASMPT NEXX for the mid-end deposition tools, as well as the group's transition to an integrated hardware and software solution provider in the semiconductor packaging market. Demand for traditional tools like wire and die bonders and tools for advanced packaging contributed to the strong booking performance for this quarter. China semiconductor supply chain localization effect, 5G infrastructure, and general lighting demand contributed to the increase in bookings for IC discrete and optoelectronic businesses.
On the other hand, we registered relatively weaker than expected orders for CIS tools due to anticipated softness in smartphone demand brought about by the COVID-19 outbreak. For Q1 2020, the Semi Segment contributed to 44.7% of the group's revenue. Revenue from advanced packaging tools continued to be strong, exceeding that of CIS in this quarter. Collectively, both AP, advanced packaging, and CIS contributed close to half of Semi Segment's billing. Gross margin increased by 202 basis points year-on-year and 45 basis points Q-on-Q to 41.3%, mainly due to product mix and positive results from a productivity drive in manufacturing activities. This quarter booking of $88.9 million was a record high, and this is also the fifth consecutive Q-on-Q growth that the Materials Segment has registered.
Traditionally serving as a leading indicator to the semiconductor market, this trend would have overwhelmingly suggested the recovery of the market, if not for the current uncertainty introduced by the COVID-19 outbreak. For Q1 2020, billings of the Materials Segment declined 22.3% Q-on-Q but expanded slightly 1.3% year-on-year, respectively to $51.6 million. The prolonged plant shutdown in China limited the delivery performance of the segment. This segment contributed to 11.9% of the group's revenue. Gross margin declined by 188 basis points year-on-year due to an increase in cost of precious metal, but improved seven basis points Q-on-Q to 8.5%. Profit for the segment improved by 61.3% year-on-year and 61.4% Q-on-Q in the absence of molded interconnect substrate business, which was discontinued in early 2020.
Strong demand for 5G infrastructure and SiP packages contributed to the high booking, similar to the level recorded in the first quarter of 2018 for the SMT Solutions Segment. Billing of the SMT Solutions Segment amounted to US$188.3 million, representing a contraction of 15.1% year-on-year and 23.1% Q-on-Q. SMT Solutions Segment contributed to 43.4% of the group's revenue. Gross margin declined by 214 basis points year-on-year and 312 basis points Q-on-Q to 32.4%, largely due to volume as well as geographical mix, where there were a greater proportion of customers from China with lower margin tiers. Segment profit declined by 40.8% year-on-year and 54.6% Q-on-Q.
The pickup in demand from Chinese manufacturers to localize their supply chains and the accelerated deployment of 5G infrastructure and the progress of the group in making and capturing new market opportunities, such as advanced packaging, silicon photonics, industrial Internet of Things, mini LED and Micro LED solution, power semiconductors, and Industry 4.0 solution underpin the group's confidence to deliver long-term sustainable value to our shareholders. Second quarter booking tend to trend higher than the first quarter in the past. However, we are of the view that the booking for Q2 2020 will decline double-digit percentage Q-on-Q due to the adverse impact caused by the unprecedented COVID-19 pandemic. While we continue to experience strong booking momentum for Materials Segments in the month of April to date, demand momentum for traditional tools in the Semi Segment was not as strong.
In terms of billing, we expect the demand for information technology and data center-related application to continue due to increased telecommuting and home-based working activities as a result of COVID-19 containment measures worldwide. Customers are generally more cautious than before, as evidenced by some push-out of deliveries to Q3 this year. While the group ended Q1 2020 with a high backlog, some orders will take more than one quarter to be fulfilled due to production lead time and revenue recognition policy. In light of the above, we anticipate revenue in Q2 2020 to be in the range of $500 million-$580 million. We also expect the group's gross margin to be in the range of 34.5%-36.5% for Q2 2020. With that, we'd like to proceed with the Q&A session now.
Thank you, sir. We will now poll for question. If you'd like to register for a question, please press star one on your telephone touchpad. Thank you. Ladies and gentlemen, that is star one to register for a question. Thank you. Our first question comes from Mr. Donnie Teng from Nomura Taiwan. Thank you.
Good morning, management. Thank you for taking my question. My first question is regarding to your second quarter booking guidance. I am wondering if you can give us some more colors on what business segments may see a booking declining into the second quarter, and what are going to perform relatively well into the second quarter. Considering that, do you think that the second quarter booking will be lower than what happened in fourth quarter 2019? My second question is regarding to the inventory correction risk across the semiconductor supply chain into the second half. ASM Pacific provides both equipment for upstream and downstream tech companies in generally. I'm just wondering if you can give us some direction or some outlook on whether the upstream customers will see some more conservative outlook into the second half.
On the upper side, the downstream may be turning a little bit better into the second half due to downstream companies or downstream customers have earlier impact from the COVID-19. Thank you.
Okay. I answer your first question first. In terms of some color, in terms of our booking guidance for Q2, we are guiding a double-digit Q- on- Q decline. I think based on just pure, simple mathematics, you're going to take, it could be lower, than Q4. Now, some color. Customers, in general, indicate that the loading is okay in Q2, but they are uncertain as what can happen in Q3. Basically, we believe that they have yet to receive also forecast from their end customers. Generally, we feel customers start to show concern due to the pandemic. At this moment, and also partly to answer your question about Q3 is really, I think at this moment, nobody can really give a very clear picture yet, so far down the road.
Given this backdrop, we expect customers to start to slow down or even pull back their CapEx expansion program. We believe advanced packaging tool CapEx will continue because these are, in our opinion, more of a technology buy rather than a capacity buy. You're probably aware, I'm looking at the numbers. Q1 booking was a high base. Coming off from a high base, we expect, especially also if you look at our bookings in Q1 Materials, we recorded a record booking. That was a consecutive five quarters of increase. We expect, in terms of segment Materials, momentum may not be able to continue. SMT also high base in Q1. With Semi, there's a chance that it could be stable or slightly higher. In terms of Semi, a little bit more color.
We expect optoelectronics and the advanced packaging momentum to continue.
Thank you. Our next question come from Kyna Wong from Credit Suisse. Thank you.
Hello, management. I wanted to ask about the backlog and first quarter, because I think we can't find the numbers, this is a first time that we can't find it in your press release. How high is actually the backlog like in the first quarter? That's the first question. We also understand that there's certain push on the delivery that we're going into third quarter. Wanted to ask is, in terms of, back to the booking trend, if we should expect that second quarter is declining, but the fourth quarter, for further the seasonality this year will also change. What would you expect when the customer concern is stabilizing? I would say change when the COVID-19 situation is actually stabilizing later this year.
The second question is about we wanted to know about the outlook this year, because last time, I think given the certain visibility, but now we have already got two quarters booking. We also expect that you have connected with customer on the full year's CapEx expectation, et cetera. What would be the outlook for ASM Pacific this year by each segment?
Yeah. Kyna, I think let me answer your first question first. The backlog numbers, sorry, this time around, we realized that we did not put the group backlog in the slide. To give you the number, we ended up with a record backlog of $883 million for quarter one. In terms of your second question, let me get your question right first. You asked me about push out or delivery to Q3, and then what kind of booking trend we are looking at, maybe in Q3 and in Q4. Is that your question, Kyna? I suppose so.
Yes.
Yeah. Let me address some of the pushout. As I mentioned earlier, similarly, we see fulfilling. We begin to see the customers are a little bit more cautious already. They're starting to push out some of the shipment to Q3. I think that's expected in view of the current climate. Now, in terms of Q3 and Q4, honestly, I mentioned earlier, it's really too far for us to predict how this will develop, because it all depends on how the COVID-19 situation will pan out. Now, looking at the situation right now, in certain countries, like even in Singapore where I am, the situation is actually getting more serious. It all depends how this COVID-19 situation will pan out. Now, if I may refer you to, I think you guys may have all the data by now. Look at the forecast recently done by IMF.
They are projecting that the world economy will actually contract this year, even provided that if the COVID-19 situation can be contained by the end of the first half. They're projecting a worldwide economic contraction of minus 3%. Looking at such a forecast, I think we have to be a little bit more conservative and prudent in terms of how we look at the future, in the immediate future, in the next Q3 and Q4. Your third question is kind of related, I think. To be honest, we only have three weeks of visibility into April. As we have stated in the announcement, we see Materials booking are still very strong. Very, very strong. Whereas, the traditional tools in the Semi Segment are not as strong. That's what we're seeing at this point in time, after three weeks into the month of April.
Okay.
Thank you. Our next question come from Leping Huang from CICC. Thank you.
Thank you to take my question. The first question is about your full year or the second half visibility. If you look at your customers by geographical distribution by the different regions, what do you see any difference on the visibility since you have a very strong first quarter, and then second quarter you have double-digit decline. If you're looking forward, do you have any difference in the order visibility or the purpose on the order on this by region? This is the first question. The second question, I just want to understand more. Why first quarter is so strong which is driving the first quarter strong order? Is it because of the economic upgrade or it's because we were already in the COVID-19 situation, why the first quarter is so strong? Thank you.
The first question is whether we see any differences.
Yes.
in terms of customer by region.
By region or by [audio distortion] , yeah.
Yeah. Now, in terms of booking, right?
Yes.
You look at the booking, I think the China main drivers are still very much intact in terms of booking. China localization of supply chain, 5G infrastructure, advanced packaging, especially for high performance computing. Those advanced packaging like the FHP as well, and also optoelectronics, general lighting in particular. A little bit less in terms of photonics, but all these are still driving, we believe, the near term booking trend. The only thing that we see that buck this trend is really the CIS. The booking in CIS, in Q1 this year, decline on a year-on-year basis. In terms of region, I think so far, we don't see any significant deviation so far into three weeks of the booking compared to Q1 this year. Your second question is why so strong in Q1? What's really driving the orders?
I think I mentioned earlier just now, I think those factors, China, supply chain, the 5G, AP, optoelectronics, are the underlying drivers boosting up the performance of the booking in Q1. Despite the fact that we told you that during the February call, January booking was very strong. However, February came down because of the China situation, primarily. China lockdown and the world is starting to see that the crisis may get a bit more serious in February. However, after February, March booking came back and returned back to kind of normal level. Customers, this is what we see, in terms of booking one.
Thank you. Our next question comes from Arthur Lai from Citigroup in Taiwan. Thank you.
Good morning, management. This is Arthur Lai from Citi. First of all, I want to congratulate you. You have a strong first quarter result, and also demonstrate your management quality across this virus outbreak crisis. I have one question and one feedback. In your presentation, page 31, you highlight that there is a strong Q1 booking, but deliver over several quarters due to production lead time as well as some deliver push out. Can you elaborate more, like, this is from the advanced packaging or this is from the other application? What drive this longer lead time? It's driven by the supply constraint, some component shortage, or it's driven by the demand push out? This is my first question. I have one feedback that I compared to the previous quarter, I noticed that you changed the category of your revenue.
You changed the name from the Back-end to the Semi Solutions. I think this is maybe a change. Can you elaborate, in the future, will we see more new Semi Solutions products or service coming to this category? Thank you.
Arthur, to answer your first question first. What are the factors driving the long lead time? Not so much supply chain kind of constraint. More so of the type of equipment. Certain type equipment, like for example, our NEXX tools, the silicon photonics tools, for example, they take a longer time for production to manufacture them and deliver to customer. This is the usual. Nothing to do with any of the supply chain constraints that we talk about. In terms of revenue recognition policy, we have talked about this before. Under the new accounting standard, if we deliver a new tool, typically, the accounting standard require us to make sure or to ensure that the customer actually accept our tool before we can book the entire revenue. We are constantly shipping new tools to customers.
As a result, some of these tools, although we have already delivered to the customers, we have to wait for customer acceptance before we can recognize the revenue. This is just accounting kind of treatment. Your second question is changing from Back-end, Semi. I suppose you probably ask why the change. We have indicated the reasons in earlier quarter. I think with the addition of NEXX into our business, as you're aware. NEXX is primarily focusing on the mid-end segment. Once we have NEXX starting to make material or meaningful contribution, I would say, to the revenue base, we felt that it's more appropriate to rename this to Semi to reflect the nature of NEXX business, which is really not the Back-end business.
Also the fact that, I think that going forward, the Semi Segment, we also indicate that we are tying up with a leading software company to collaborate together and to offer IoT software solutions to our customers. I think with these two factors in the background, we felt it's appropriate to change or to rename the Back-end Equipment to Semi. I think that's the reason.
Thank you. Our next question comes from Mr. Bill Lu from UBS. Thank you.
Yeah. Hi, good morning. Thank you very much for taking my questions. I have three quick ones. One is, I totally appreciate that visibility right now isn't so good. A lot of things are sort of out of your control. If I look at maybe what you can control in terms of some of the growing areas, can you talk a little bit about, one, the advanced packaging business and maybe how much you expect that to grow this year? Second, if you could talk about also the opto business, maybe specifically mini LED and what that looks like this year. My second question is on Q2 gross margin. I'm wondering if there are any remaining impact from the supply disruptions in China. My last question is on Q2 SMT bookings. It looks like that is down in Q2.
Can you talk about the trends maybe in consumer versus opto? Thank you.
Hi, Bill. Your first question is, you're saying that visibility isn't so good and what are the areas that we can control? Your focus is really on advanced packaging expected growth, this year, as well as opto and mini LED, right?
[audio distortion] Thank you.
That's correct. In terms of advanced packaging, we see advanced packaging momentum continue to be strong since a couple of quarters ago and moving into Q1. We also see this trend will continue because as I said earlier, advanced packaging tools are more for technology buy. I think customers are preparing also such tools for the future. This momentum we see will continue and also the fact that some of these tools actually go into a high-performance computing kind of a market. I think in that particular segment, you probably realize that segment is still relatively healthy compared to, say, the consumer segment, compared to the automotive segment or even the smartphone segment. That's the reason why the AP, we are confident that the AP demand will continue to be okay compared to the rest of the segment.
In terms of opto, this time around, we are seeing the opto demand coming mainly from the general lighting, not so much of the RGB display market. Possibly there could be a reason, I know with the COVID-19 outbreak, the postponement of the Tokyo Olympics, for example. All these RGB outdoor displays, probably customers are a little bit more cautious in placing a new CapEx. Whereas for general lighting it's something that is a replacement. I think that makes the difference why the general lighting market we see is relatively healthy compared to the RGB for the optoelectronics. In terms of mini LED and Micro LED, as we mentioned before, these are still very much at a prototyping space right now. We'll consider this also as more of a technology buy.
Technology buy typically are not so much affected by a situation like this because customers are preparing for the future. They'll continue to purchase advanced packaging tools like those I mentioned before. Now, coming back to your second question. You said, do we see any impact from China on our gross margin? I mentioned earlier, our workforce in China are close to 100% back at work. In fact, we are also pleased to note that since they came back to work after the long shutdown, we also been driving a lot of productivity improvement. That's also the reason why you see our Semi Segment margin perform quite well this quarter vis-à-vis the other quarters. In short, we don't see any more impact coming from China. However, in the other location, we have manufacturing location in Malaysia.
The lockdown in Malaysia is still continuing up to the end of this month, 28th April. That will have some impact on our operation capacity. However, with the diversified manufacturing base that we have, we are able to manage the situation quite well. Our China plant are able to take some load from our Malaysian plant. For equipment, we also have the luxury of outsourcing more during this period to make up for the lost capacity in Malaysia. I think on the Semi side, we should be able to manage the capacity effect pretty all right for this particular quarter. Now, of course, when it comes to [lithography] materials, a slightly different story because for materials we can't really outsource. The impact on material will be relatively a little bit more impactful compared to the Semi side.
As you're aware, Malaysia is still in a lockdown. We only, at this moment, probably close to 50% of our workforce are able to work in our plant. Our Materials Segment in terms of the [audio distortion] will be slightly impacted because of this lockdown in Malaysia. Now, the third question is on SMT, the GM down. Now, you're absolutely right. We see a consumer market, automotive market. Based on those independent research houses as well, the smartphone demand for this year will also come down. That will impact the SMT. However, we see 5G infrastructure demand, as I mentioned earlier, still very strong. We also see customers also requiring very advanced packaging tools from SMT in terms of SiP packages. That's the situation in SMT.
Our next question comes from Angus Lee from HSBC. Thank you.
Hi, management. This is Angus Lee from HSBC. I have a couple of questions. The first one is, you have a very good Q1 and you're getting Q2 to trend up in revenue as well. You also mentioned that you're going to see some shipment delivery pushed out maybe later into Q3. Does that mean that your Q3 is going to add up pretty well as well with a possible with that in maybe end of this year? Do you see any difference compared to my comments here? The second question is regarding your OpEx. You have your OpEx pretty well in control in Q1. I'm wondering if going into Q2 or further into the year, do you see your OpEx to spike up further or to stay at a relatively stable level as we started seeing Q1?
Yeah, these are the two questions I have right now. Thanks.
Okay. Let me answer your first question first. In terms of a Q3 kind of outlook. To be sure, to be very clear, when we talk about push out from Q2 to Q3, we are not talking about a significant number at this point in time. Of course, relatively speaking, compared to Q1, we see more customers pushing out because they're getting a little bit more cautious. Q3 performance in terms of billing will very much also depend on Q2 booking. If you have been following us closely, we have been always saying, typically we will fulfill our booking in one quarter, typically. Very much depend on how the booking will pan out in Q2 for Q3 performance. However, having said that, this year is really something exceptional. It depends on how the COVID-19 outbreak pan out.
That is really an uncertainty event that we also cannot control. If that can be contained very quickly, as I mentioned earlier, then perhaps second half may not be too bad. It all depends how this will pan out in the near future. In terms of OpEx, you're right. I think we have controlled our OpEx pretty well. On a year-on-year basis, we see, I think OpEx kind of flat. Excluding some of the acquisition, in fact, the organic or the original Semi business, actually OpEx actually came down slightly. Well controlled in terms of OpEx. Did I answer all your questions? Yeah.
Yeah. Thanks a lot.
Thank you.
Yeah.
Our next question comes from Sebastian Hou from CLSA Taiwan. Thank you.
Yes. Hi. Thanks for taking my questions. Some of my questions have been answered by the previous, by you. Just a few follow-up. Where do you see the most interest and the highest momentum of the Semiconductor segment in the second quarter? Because I remember you say that relatively speaking, Semi seems to be better than Materials and SMT. That in particular in terms of the, I think you mentioned about advanced packaging, and can you elaborate more about in which application, in which region of the advanced packaging you see the most strength? Thanks.
Okay. I suppose you're referring to booking.
Yeah.
Packaging, I mentioned earlier, we see high performance computing devices going into data center. If you try to triangulate all this, I suppose it's relating to what is happening to the world right now as well, right? We are telecommuting more, we are working from home more, school children are also having lessons from home. All this will place a lot of demand in terms of all these devices. We believe that probably, is part of the reason we see that sector still relatively resilient compared to the other sector. In terms of advanced packaging tool, we actually provide a wide range of advanced packaging tools. First and foremost, I think on NEXX, deposition tools are still very strong, still doing very well. We have a good platform in terms of the NEXX business. This momentum will continue for a period of time.
Also SiP, I suggest we talk a lot also this quarter about SiP packages. We see that also demand going to our SMT. SiP packages typically devices like RF, [mems] modules, going into smartphones, going into wearables, smart watches, AirPods. We see the demand in the last few quarters for these are pretty strong. As a result, we see our SMT also see shipping advanced packaging tools to customers related to those areas. We also mentioned a little bit more color, that in this quarter, we see AP and the advanced packaging and the CIS, too, making up close to 40% of our Semi revenue, 50% of our Semi revenue. In this quarter, AP is actually stronger than our CIS, because CIS has actually declined on a year-on-year basis. What else, [audio distortion] ? Did that answer all your questions already?
Yeah. That's very helpful. Thank you.
Thank you. Our next question comes from [audio distortion] Chao from Hong Kong. Thank you.
Hi. Good morning. Thank you for taking my question. Regarding the relocation of the lead frame operations in Singapore to Malaysia you announced last quarter, can you give me some detail on how these savings are to be achieved, like savings from headcount, rent, et cetera? Also an update on how these plans have been affected, if at all, by the virus and the government's response, I guess, both in Malaysia and in Singapore. Thank you.
Okay. We mentioned in the last quarter that we have decided to shift our lead frame operation in Singapore to Malaysia after we have successfully completed the extension to our Malaysian plant. Obviously, it's quite intuitive, right? If you look at the living standard of Singapore compared to Malaysia, obviously, the savings really coming from the headcount. It's quite obvious. In terms of exchange rate, Singapore exchange rate is one to three in Malaysian ringgit. Obviously there's a great impetus for us to shift from Singapore to Malaysia. We expect these savings to kick in once this plant is fully operational. However, because of this outbreak, of course, as I said earlier, Malaysia went into a lockdown situation. To a certain extent, that will push back our plan by a couple of months.
Once the situation resumes, we will start to tool up the Malaysian plant. We are still targeting, by maybe third quarter of next year, the plant in Malaysia will be fully tooled up and operational.
Thank you very much.
Thank you. Our next question come from [Yu Xu] Hong from China Merchant in U.S. Thank you. Can we move on to the next question? Our next question come from Chris Yao from BOCOM. Thank you. Chris Yao, please go ahead with your questions.
Oh, hi. Sorry. Yeah. Thanks for taking my questions. My first question is on, again, the Malaysia-Singapore situation. Is it just lead frame being impacted, or are there other products being impacted, and how much do they contribute to your overall manufacturing capacity? Number two is on your second quarter gross margin. I see your revenue in the second quarter expected to rise about maybe 25%-30%, but your gross margin is only going up by about maybe 2 percentage points. I was wondering, historically, your gross margin trend pretty well with your revenue. I was wondering if there's any product mix impacted or are there any more COVID-19 expenses going to be booked in second quarter, that's why you're being a little bit more conservative in your gross margin? The third question is on advanced packaging.
I was wondering if you can disclose how much ASM makes is accounting for your overall revenue, and how much exposure do you have in the data center space? Thank you.
Let me answer your first question. Concerning the Malaysian situation, is it just impacting lead frame or the other segment? The Malaysian plant is, in fact, the manufacturing center for all three segments. We have the Materials Segment there, we have the Semi, as well as the SMT. All three segments are impacted by the lockdown. However, as I mentioned earlier, for the equipment side, the Semi and the SMT, we have pretty much a diversified manufacturing base. I think that helps. We could, for example, China could take some load off Malaysia as well as Munich and Weymouth for the SMT. They can also take some load off the Malaysian plant during this period. We are managing quite well. On the equipment side, also, we can outsource.
If there's this avenue to outsource some of these constraints capacity that we are facing in Malaysia to external manufacturing. Equipment side, I think we are able to contain the situation very well. The only impact we see is a lead frame, because lead frame is something that we, or material, is something that we cannot easily outsource. That's why I mentioned earlier, that the lead frame may see some impact in terms of delivery performance this year. We still expect the lead frame billing to be better than Q1, because the Q1 situation was a complete lockdown in China for about three weeks. That's back to normal already. China, in terms of lead frame, are contributing more to the top line compared to the Malaysian side. Now, in terms of Q2 GM improvement, given revenue increase in Q2, yes.
Typically, when volume increases, we typically see an increase in gross margin. That's why we are guiding 1%-3% better than Q1 2020 as a blended margin. I think of all the three segments, we still see there's a little bit of a weakness in the SMT margin going to Q2. As we mentioned before, we like the fact that we have been doing very well in China, penetrating into China's smartphone areas. However, the trade-off is always on the margin side. That's probably the reason why we are guiding that kind of margin performance in Q2. In terms of AP, how much NEXX is contributing to the overall revenue now? I'm sorry we have not been so granular in this particular area. Let's put it that way, I know if it is meaningful.
If not, we will not care mentioning that NEXX has been playing a part in terms of contributing to our AP revenue.
Thank you. Our next question comes from Simon, from Bank of America Merrill Lynch. Thank you.
Yes, thank you very much. Congratulations on the great Q1 results. A few things, very quick check, please. Number one, the Q1 bookings, showing 50% quarter on quarter increase for the group. Could you recap the Q1 utilization ratio and then whether your order second quarter production will be good enough, to meet the 50% potential revenue increase? In other words, the Q1 bookings means almost a second quarter sales this time? I have a follow-up question. Yeah.
Okay. You're right. Q1 booking was very high. The booking and the utilization ratio actually are not that correlated. The billing and the utilization ratio is actually more correlated. Utilization ratio in Q1, as you could expect, February was low because of the shutdown. As I mentioned earlier, we recovered fairly quickly in March. March was a very good quarter for us. Looking at the continuous trend in terms of booking, our factory were really at full speed, in terms of turning out deliveries to meet the demand from our customer. Overall, I think in Q1, the utilization rate for factory are pretty healthy. Maybe in the 80%-85% range. That kind of range we're talking about in Q1. Whether Q2 production will be, I suppose, the question is sufficient to meet the Q1 strong booking. Yes.
That's why we are guiding, that kind of range, $500 million-$580 million, which is still an increase, in terms of billing compared to Q1.
Yes, very clear. Yeah, very clear, sir. A little bit details regarding the traditional die wire bonders. Could you recap what kind of the semiconductor chips are for the die and the wire bonders? This sounds very traditional over the semiconductor chips. Why this area, the demand is growing? The new chip, the demand is more and more advanced packaging related. Whether this kind of a trend is sustainable or not. Also regarding the SMT, what do you mean the 5G infrastructure and the SiP? It sounds that some base station related, because all the smartphone demand is quite weak. Could you provide a bit details what kind of the chips or components, based on your traditional die wire bonding and the 5G infrastructure and SiP? Thank you.
Traditional die and wire bonding are still very cost-effective tools. Typically, a lot of our revenue is still coming from the traditional tools because they're very cost-effective compared to advanced packaging. If the requirement in terms of precision, in terms of performance of the device is not very high, customers still prefer to employ and use traditional tools because they are, as I said, very cost-effective compared to advanced packaging tools. Advanced packaging tools are only used for very high-end packages. I can give you an example. Going into high-performance computing, that kind of requirement, customers will be looking at using advanced packaging tools for the packaging process. Is this trend sustainable? Typically, for traditional tools, we like to view it this way. They are more for what we call capacity buy.
Whereas for advanced packaging, we view it as more of a technology buy. We try to differentiate these two. It all depends. For capacity buy, it all depends on the loading of customers. If their loading reaches a certain high level, typically they will start to buy new tools to meet the increased capacity needs. Well, however, as I said, in light of this current situation, we can't really see beyond Q2 at this point in time. Can't really answer you whether, is this trend sustainable going into Q3 and Q4. Now, 5G infrastructure, you're asking exactly what kind of end devices are we packaging. I can give you some ideas. These are typically more high-end chips or modules that require more precise tools, more advanced tools. These tools can be supplied both from our SMT as well as from our semi-type.
We believe, when we talk about 5G infrastructure, so these devices actually go into those base stations. You're probably aware that, for 5G compared to 4G, we need much more base stations. That's why the demand for more chips, more modules, more components, semiconductor components are there when it comes to 5G infrastructure. SiP, I think you also talked about SiP. System in package are basically devices whereby customers pack a lot of components into a small package that go ultimately into your AirPods, into your smartphones, into mobile devices like watches. I suppose because of the small real estate, they need pretty precise tools in order to package those small components into a small estate, a platform. That's why SiP require more advanced packaging tools.
Very clear, sir. Thank you so much.
Yes.
[Tim Gao] from Hong Kong.
Thank you.
Hello?
Please go ahead, sir.
Hi. Just a quick question. Can you give us some guidance about tax?
Sure. If you've been following us closely, our tax or ETR, we call it estimated tax rate, whereby we just simply take the tax expense over the PBT, typically tend to trend higher on a few factors. One is the business segment mix. When we have a higher SMT mix compared to, say, the Semi mix and the Materials mix, we tend to have a higher ETR. That's because our base for SMT is in a high tax jurisdiction area in Germany, in the U.K. As a result, when they contribute more to the top line and the bottom line, we tend to see our ETR tend to trend higher compared to normal quarter. The other factor that we have to take into consideration is, the tax is a very complicated subject.
Typically on a quarter-basis, when the profitability is low, the tax for the group tends to be higher. In certain jurisdictions, we still have to pay a tax when they make money, and if those jurisdictions happen to be a high tax area, we still have to account for the tax. If you look at last year 2019, the first three quarters' tax rate was also on the high side. Towards the end of quarter four, we tend to true up our tax, and then overall, our ETR on a normalized basis for 2019, if I recall correctly, should be around 28%-29%. I think in terms of how you guys plan for tax, as I always mention, don't plan tax on a quarter-to-quarter basis. Look at tax on a more annual basis.
If our top line, if you look at last year top line, around $ 2 billion, our tax is around 38%. That's the guide that you guys should be taking as a reference.
Thank you. Our next question comes from Kyna Wong from Credit Suisse. Thank you.
Hi. Robin, just have a follow-up question on two things. One is about the gross margin in the second quarter, because actually, you reclassify some of the COVID-19 expenses. Does it include extra labor hiring or something? What else if we go back to the normal standard, like in the COGS or in the OpEx, then how much gross margin will it really impact in the first quarter? The second is about, there's other income, which is much higher than historical in the first quarter. Where does it come from? Is this interest income or something? The third question is about the CIS, because we see the first quarter actually comes down a bit in terms of booking and what kind of expectation you will have this year, because [audio distortion] is actually a multi-year driver for ASM Pacific. Would you see this trend intact this year?
Okay. Let me answer your first question first. Maybe I can give you a little bit of color how we classify the COVID-19 expenses. If you look at, say, in February, there was a government-mandated shutdown in China for three weeks. You see, we still have to incur the staff salary, when they cannot come back to work during that prolonged downturn. We thought that maybe to give the investors and shareholders a more accurate view of our finances, we should classify these costs. I would say these are all sunk costs. Whether they come to work or not, we still have to pay the salary. Because they cannot come to work due to government shutdown, we classify this as COVID-19 expenses under the other expense line.
Typically, you can see now in our announcement, we only classify a few key components, staff salary, some associated depreciation of the tools, the equipment in the factory, some space costs. Only these three components were actually reclassified, out from the cost of sales line to the COVID-19 line. The amount we classify out is not that material. It's only about HKD 47 million. For these expenses in Q1, majority were related to China because China was affected mostly in Q1. A little bit, a smaller proportion coming from Malaysia because Malaysia lockdown started in the second half of March. We also had to classify on a like-to-like basis some of the Malaysian similar sunk costs into the other expenses, but much smaller compared to China, because the base in Malaysia is also much smaller than China.
Your question is whether this will continue. Yes, for Malaysia, it will continue because Malaysia is still in a lockdown mode. As far as there's a lockdown affecting our plan, we will try to reclassify these expenses as accurately as possible so as to facilitate a more like-to-like comparison with the prior quarters. We also incur, in terms of COVID-19 expenses, these are now sunk costs, a smaller proportion are additional costs or incremental costs that we have to incur to protect the well-being of our employees. We have to, for example, buy more masks, sanitizers. We have to incur more expenses cleaning our facilities. We also have to arrange additional transportation for our workers in China, so that they don't take public transport and get themselves exposed.
All these costs, incremental costs, we also classify as COVID-19 expenses, but this is a smaller portion compared to the earlier one that I mentioned about. As to your second point, other income. Basically, other income comes from government grants. You probably are aware that because of the COVID-19 situation, governments in China, particularly in mainland China, are helping businesses like us to defray some of these fixed costs. They are granting us some savings in terms of, for example, insurance, retirement funds. All these are classified as other income mainly in the financial statement. When you see other income, they are mainly coming from government grants. The third question is CIS came down in booking. What is the expectation this year? Well, we started on a low base for CIS. CIS is a business segment that declined year-on-year.
It depends on how things pan out in quarter three and going forward. For sure, CIS, to answer your question, is really a multi-year driver. We see the multi-year trend intact. Could be tempered by this outbreak situation only.
Thank you.
Thank you. Following question comes from Arthur Lai. Thank you.
Hi. I have a quick question. I want to confirm one thing. Today we mentioned a lot of new growth drivers from the technology part. Does it imply we can have a better gross margin and pricing? As I understand, the technology migration, actually, we have less and less competitor because most development is usually the single source and co-developed with our key clients. My understanding is right? Thank you.
Arthur, I can only catch the first part of the question, but let me answer the first part, then you can repeat the second part. In terms of margin, as we have been saying, generally speaking, we can't be too granular. Generally speaking, advanced packaging tool, by nature of their complexity, they tend to command a better margin compared to traditional tools. That will help in terms of our gross margin. Now, Arthur, can you repeat your second question because you kind of muffled second part?
Yeah. In this advanced packaging project or revenue, are we the sole source or the single vendor working with clients?
Typically, client also may not tell you, to be honest. Typically, client would like to also do a source for advanced packaging tools. For certain tools whereby they are pretty new. For a period of time, we can certainly be the sole source. Typically, that's the situation.
Great. Thank you.
Another following question come from Sebastian Hou from CLSA. Thank you.
Thank you. Actually have three small follow-up, if I may. The first one, I just want to clarify that you already mentioned about in second quarter booking may potentially be below 4Q 2019 level. Is that right?
Sorry, Sebastian?
Yes. Can you hear me?
Yeah.
My question is that, just to clarify whether if I hear it incorrectly or correctly, that the second quarter this year booking could potentially be below 4Q 2019 booking level.
No. We don't think so at this point in time. Yeah.
It's a double-digit decline, but not seeing that going back to 4Q 2019 level.
We hope so. Yeah.
Okay.
We hope so. Yeah. At this point in time, it doesn't suggest. Yeah.
Okay, got it. Thank you. My second question follow-up is that, if you also could follow up on the tax rate. What you mentioned is that based on the similar revenue scale we see in 2019, then high 30% of the effective tax rate could be the reasonable assumption. Is that the right way to interpret?
Yes. It very much also depends on how the mix pan out at the end of the year. I would say that, if we base just on 2019, that kind of mix, that kind of revenue, and PBT, that will be the kind of [audio distortion] we are looking at.
The last follow-up from me is, what's your experience in the past downturn when there is a significant economic crisis about customers' order behavior? I wonder, usually, I think the company mentioned that you already notice some customers push out from delivery from second to third quarter. In your past experience, what's the possibility, what's the odds of these push out turns into a cancellation? What happen if that turns into a cancellation? Do you charge penalty from customers, or do you write off those already prepared inventory?
WK, maybe you want to step in and maybe answer this question, okay? Since it's talking about the past.
Oh, I think it's difficult to generalize. In most of the case in the past, cancellation is not serious. Some are probably will pay for sometimes one quarter because the market situation, the economic situation really deteriorate. Definitely, they may defer it to more than one quarter, but finally they will take delivery. In most of the cases it's like that. However, as many people has warned that this time, the pandemic actually also potentially bring in global recession. That has this unforeseen, I mean, there's [audio distortion] in the past half a century. How this economic situation will play out, we really don't know. However, as of this point of time, we talk to customers. Customers generally.
Similar set of other industry sectors, probably semiconductor sector, and it is still practical with the industry, really offer the least impact. I think we are cautiously optimistic in a sense, probably short term or near to short term may have some impact, but I think probably once the economy stabilize, once the other situation stabilize, probably we could probably be the first industry to rebound.
Got it. Okay. Certainly understand. I think the reason I'm asking this, maybe there's still more of a hypothetical questions, but I think it's more in [audio distortion] Instruments. If you go with the semiconductor industries with like 60, 70 years of experience, I think they are modeled. We're using assumption that this downturn could be similar to global financial crisis. I know a lot of the people are using that assumption as well. I'm just saying that if that were to be the case, if I look back on your revenue or performance back in 2008 and 2009, from 3Q 2008 to 4Q 2008 and 1Q 2009, the revenue basically declined significantly. I think that's also the case for all the industry, not just for ASM Pacific.
I'm just wondering if that were to be the case, and back then, can you remind us, your experience back then, did those push on maybe initially, has it turned into cancellation?
Even back then, actually most of the orders, finally the customer took delivery. I think the actual cancellation at that point in time, and we call for revenue still four. Some of them may take a few quarters for the customer to take delivery. Finally, most orders, customer has taken delivery.
Okay. All right. Well, that's really helpful. Thank you.
Thank you. Our next question comes from Angus Lee. Thank you.
Hi. Thanks for taking my follow-up question. I have just two. I think the first is on your 5G is actually doing good for both Semi and SMT. We all know that. Smartphone weakness is actually, we have already seen it, being happened for your CIS, especially CIS in your Semi Solutions. I'm wondering if this smartphone weakness is going to impact your SMT segment as well. Do you see assemblers to slow down their SMT procurement or replacement cycle, especially given that those assemblers, they should be able to use SMT tools for 4G phones, for their 5G ones as well? The second is, you mentioned a lot on China localization being one of the main drivers for you. Can you provide us with some color on maybe China OSAT CapEx trend this year? What does that mean for you guys? Thanks.
I think your first question on the smartphone weakness, whether that will impact SMT. It all depends on really this year, our end customers demand. If you base on the research, for those independent research, they say the smartphone volume will come down. That means that I don't think we are also immune. Okay. Of course, it all depends whether how fast the 5G smartphone will roll out, because typically 5G smartphone require a higher-end kind of components. Our SMT tools are actually very well suited for that kind of devices. It all depends really on the end customer, the ultimate customer's demand, their own business outlook, and that will impact the supply chain for the smartphone. Now, in terms of China localization, your question is, OSAT, right?
Yeah.
Any color on China CapEx for OSAT this year? I think Q4, the China OSAT was strong. WK, you can step in if you think you want to supplement. The bigger boys in China were placing more orders compared to the second tier or the third tier OSATs. We see the second tier, third tier OSATs has become a little bit more active in Q1 2020 compared to Q4 last year.
Thank you. Our next question comes from Simon. Please go ahead. Thank you.
Okay. Thank you very much. Very quickly for the financial related question. Could you explain why your net cash, I mean, the gross cash improved by $1 billion quarter-over-quarter, even with the lower profit level? Could you recap your CapEx and dividend target for 2020 versus, could you recap the 2019 CapEx and dividend again to compare the year-over-year trend? When we look at your IR material, we cannot find any balance sheet items and the cash flow items. Maybe next time it will be great if you can add some balance and cash flow items, if you don't mind. The cash, yes, you said $3 billion, but we don't know the amount of your total debt. It will help if we can recap the Q1-end total debt. Thank you.
I think to answer your last question first. Typically Q1, Q3, we don't provide balance sheet details. Only the half year and the full year results, we'll provide the balance sheet detail. Back to your question on cash. You're right. I think our cash has increased. I think two reason, I would say. Despite the upward situation in Q1 2020, we see the collections are still very healthy. We continue to be very aggressive in terms of collection from our customer. That's one. Secondly, looking at the situation, we want to be very prudent in the way we manage our cash. What we did is that we actually drew down some bank facilities. If I recall correctly, to the tune of close to $70 million-$ 80 million, just to bolster our liquidity and prepare just in case.
This is just a case scenario whereby the pandemic situation play out worse than we expected. At least, we want to be very sure that we have enough liquidity. In fact, we will not touch those. We will just lock them aside for contingency use. Correspondingly, you will see when we announce our half year result, you will see our bank loans also increase and our interest expense will also show a slight increase because we have drawn down this loan. Now, if you talk about dividend target for 2020, I think it's too early to really talk about dividend at this point in time. However, I can assure the shareholders and investors that we are still fully committed to meet our policy of a sustainable and gradually increasing policy.
Now, in terms of CapEx, I think we should have one page in the investor slide on CapEx. So far, I think in view of the situation in Q1, our spend on CapEx is very, very low. We are controlling our CapEx spending very tightly and very prudently in view of the situation. Yep.
Thank you, sir.
Thank you. Ladies and gentlemen, that is star o ne to register for question. Thank you. Ladies and gentlemen, that is star one to register for question. Thank you. Mr. Leonard Lee, there seems to be no further question at this point in time.
Okay. Thank you. I think we've had a very good discussion this morning. Many good questions, and also covered a lot of ground. I think at this point in time, we will conclude our conference call. Thank you again for joining us this time. Please stay safe and healthy in this COVID-19 environment, and we'll talk to you again next time. Thank you very much. Goodbye.
Goodbye.
Thank you for your participation. This conclude your conference. Thank you.