Good morning. Good afternoon, ladies and gentlemen. Welcome to the conference call. Please be on the call. I will be standing by. Thank you.
Good morning, ladies and gentlemen. Welcome to the ASM Pacific Technology 2018 annual results announcement investor conference call. Before we proceed, I would like to note that during this 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 uncertainty and risks, which could cause actual results, performance, and events to differ materially from those expressed or implied during the conference call. For your reference, the IR presentation related to our 2018 annual results can be downloaded from our website, www.asmpt.com. With us this morning are Mr. W.K. Lee, CEO of ASM Pacific Technology, and Mr. Robin Ng, CFO of ASM Pacific Technology.
We will start with a brief discussion about our 2018 annual results, followed by a Q&A session. Without further ado, let me hand this over to Mr. W.K. Lee. Mr. Lee, please.
Thank you, Leonard. Good morning and good evening, ladies and gentlemen. We appreciate you joining us for our 2018 fourth quarters and full year investor conference call today. I will first provide you with a summary of the company's performance, followed by the Q&A section. We are very pleased to report that building on the momentum and achievement of the past two years, 2018 was yet another solid year for ASMPT. Both bookings and billing attained new records. Group revenue grew 11.6% year-on-year to $2.49 billion . Group revenue has in fact consecutively set new records over the past few years. Group bookings grew 10% year-on-year to $2.57 billion in 2018, setting a new record. Book-to-bill ratio was 1.03. Backlog as of the end of the year was $654.9 million , which was a growth of 21.6% year-on-year.
Booking of both the back-end equipment and the SMT Solutions segment achieved year-on-year double-digit growth rates, with booking of the SMT Solutions segment having attained a new record. The solid performance of the group was largely driven by the strong demand for ICs and discretes equipment, leadframes, and SMT Solutions. All the three business segments achieved new revenue records in both 2017 and 2018. We are pleased to see good progress from businesses that we have acquired over the past few years. As the SMT Solutions segment and ALSI continue to deliver outstanding results. The SMT Solutions segment's revenue exceeded $1 billion in 2018, with a record segment profit of HK 1.27 billion. ALSI, the laser business that was acquired in 2014, achieved a new record in revenue in 2018, that was around fivefold that of 2014.
Gross margin of the group was 38% for 2018, which was a 2.2% reduction compared with the previous year. Q4 group gross margin was negatively impacted by a few factors. Approximately 1.6% was due to the one-time impairment of inventory due to the discontinuation of the solar business. Other factors include higher revenue contribution of the SMT Solutions segment, lower margin for SMT equipment due to penetrations into the charter and spot market, product mixes, purchase price allocation expenses related to new acquisitions, higher inventory reduction leading to lower production capacity utilizations. Now, I will turn to giving you more detailed insights into the individual business segments. The back-end equipment segment attained consecutive new billing records in both 2017 and 2018. Last year, revenue of our back-end equipment business grew 7.3% to $1.18 billion, contributing 47.4% of the group's total revenue.
The segment continued retaining the number one position in the global market and further widened the revenue gap with its closest rival. The ICs and discretes market led the growth of the back-end equipment business last year. It was the largest market by revenue for the segment and delivered a year-on-year growth of over 24% in 2018. Automotive electronics, IoT, power management, RF filters, and advanced packaging were the drivers of growth in this market segment. Advanced packaging contributed to more than 10% of the revenue of the back-end equipment segment in 2018, even before counting in the one-quarter contribution from the newly acquired ASM NEXX business. We anticipate that contribution from advanced packaging will further increase in 2019. Advanced packaging has become a key growth driver for our back-end equipment segment.
The acquisition of the ASM NEXX business in the fourth quarter has further strengthened our position in the advanced packaging market, as evidenced in their significant contribution to the booking of our back-end equipment segment in the last quarter of 2018. The group is confident that our investment in advanced packaging over the past few years has put ASMPT well ahead of some of its peers, and anticipates that revenue from advanced packaging will further increase in 2019, helping the group to sail through the industry low cycles like the one that has been expected for 2019 by many industry analysts and participants. Revenue of our optoelectronics business in 2018 was comparable to 2017. It achieved a strong year-on-year growth during the first half of the year, but suffered from a weak market demand during the second half.
On a two-year basis, revenue of our optoelectronics business increased slightly by 1.7%. Revenue of our CIS business experienced a contraction of 18% as compared with 2017, mainly due to customers delaying the delivery of some equipment to 2019. The business performed quite well during the first half of 2018. In fact, it attained a new billing record in the second quarter of last year. However, the business was affected by the notable slowdown of smartphone shipment during the second half of the year, when we started receiving customers' requests to push back delivery. New order bookings for back-end equipment in 2018 grew 11.9% as compared with 2017. New order bookings for the second half and the fourth quarter grew 5% and 4% year-on-year respectively. Booking for advanced packaging equipment contributed to the positive year-on-year growth achieved in Q4 last year.
However, booking for the rest of the back-end equipment was weak towards the year-end. The trade war between the two largest economic powers in the world had probably affected the investment confidence of our customer. Gross margin of this segment was 45.9% last year, a reduction of 2.1% as compared with the previous year. Reduction in gross margin was mainly related to order mix and the slowdown of the segment's production run rate during the second half of last year in anticipation of a possible market slowdown in 2019. ASP and costs of our products were relatively stable. The memory segment continued to set new billing records in 2018. Both revenue of the year and revenue for the first half of the year attained new records. Revenue of the segment amounted to $287.8 million, representing a growth of 5.2% from the previous year.
After consecutively breaking new records over the first three quarters of 2018, the revenue of the segment in the fourth quarter contracted 32.3% and 7.8% from the preceding quarter and the same period a year ago, respectively. This contraction reflected that the global semiconductor industry is entering into a period of correction after the long super cycle over the past few years. In 2018, the SMT Solutions segment did exceptionally well. The segment achieved new records in billing, booking, and segment profit consecutively for the past two years. In 2018, its revenue grew 19.1% to $1.03 billion, contributing 41.1% to the group's revenue. In the fourth quarter, the segment set another new revenue record with an amount of $315.5 million, representing growth of 40.3% and 12.9% against the same period of the previous year and the preceding quarter, respectively.
Booking of the SMT Solutions segment grew 16.7% in 2018 to $1.07 billion, attaining yet another new record. Demand for automotive electronics, industrial and IoT contribution to the strong growth of SMT Solutions business. We also expanded our market share in the supply chain for China brand smartphones and made a significant penetration into the Indian market. Gross margin of the SMT Solutions business in 2018 was 36.5%, which a reduction of 2.4% year-on-year. The segment achieved a segment result margin of 15.9%, reflecting a drop of 0.2% over 2017. While the first three quarters of 2018 had been strong, the group ended the year with some uncertainties ahead. Both indicators, booking of equipment and group bookings in the fourth quarter pointed to a possible slowdown of the semiconductor market in 2019. However, fundamental drivers for the long-term growth of the global semiconductor industry remain unchanged.
Many new technologies and applications such as AI, big data analytics, high performance computing, data centers, 5G communication, IoT, Industry 4.0, ADAS, virtual reality and augmented reality to name a few, are driving demand for semiconductor devices. Nevertheless, we expect 2019 to be a challenging year for the industry, not only for ASMPT. Group revenue is likely to register a year-on-year drop, although we forecast it to be small at this moment, as demand for advanced packaging equipment is expected to offset part of the weakness in demand for other capacity-related equipment. With the strong booking we received in the last quarter of 2018, we forecast group revenue for the first quarter of 2019 to be in the range of $460 million - $510 million, representing reductions both quarter-on-quarter and year-on-year.
We also anticipate first quarter revenue of 2019 for our back-end equipment segment to be flat or a small dip as compared to the previous quarter, and revenue for the SMT Solutions segment to come down from the split in the last quarter, but likely to register a year-on-year growth. Group booking in the first quarter is likely to be flat or rebound slightly from the fourth quarter of 2018. Group gross margin is expected to be at the mid 30% level due to lower revenue forecast. With this, we thank you for your attention, and we are ready to take your questions.
Ladies and gentlemen, if you would like to ask for a question, please press star one. Once again, it is star one to register for a question. Thank you. Our first question comes from Donnie Teng from Nomura Securities. Please go ahead.
Good morning, CEO and Leonard. My first question is a housekeeping question. CEO, could you repeat again your last few sentences? I heard you mention about gross margin, but I did not remember the numbers.
Oh, okay. Thank you. We expect gross margin for our first quarter to be at the mid 30% level due to lower revenue forecast.
Oh, got it. My first question is also regarding the gross margin. You mentioned about multiple reasons to track down the gross margin in fourth quarter last year. I am wondering, for example, if we excluding the solar business impairment loss, what would be ASMPT business gross margin in fourth quarter last year? Also, what is your expectation on ASMPT business gross margin in this year?
As I have highlighted, possibly at the group level, it pulled down our gross margin by 1.6% in Q4. I would say if you translate this thing into only the SMT segment, it pulled down the SMT segment gross margin in Q4 by around 3%, or slightly more than 3% because of also the other restructuring costs. Around that level, around 3% level. Yeah.
Thank you. Next questions come from Leping Huang from CICC. Please go ahead.
Okay. Thank you for taking my question. This question is about your first quarter outlook. You are guiding for a flat or rebound slightly quarter-on-quarter on the booking. Can you share some color by the three segment or by the applications like the semi and the CIS and the LED. Are you seeing a similar flattish or some other segment that decline or rebound faster than others? Thank you.
We expect, typically, at the beginning of the year, we expect stronger booking for CIS, while traditionally, in the last quarter of the year or towards end of the year, booking for CIS traditionally is weak. We still expect this pattern to happen, although overall, 2019 will be a more challenging year. We expect in Q1 higher booking from CIS. Comparatively, the IC equipment booking and the LED booking may be slightly to be flat to slightly combined, that kind of situation. Overall for the back-end equipment, we expect actually there's a chance the booking will go up compared quarter-on-quarter, while you can expect the others may be, or SMT segment will be probably at a similar level of booking compared to Q4.
Thank you. Our next question comes from Kyna Wong from Credit Suisse Hong Kong. Please go ahead.
Thank you for taking my questions. David Tai, I would like to chat with you on your outlook on a full year basis, right? Because CIS, we probably will expect a slightly better demand on the first half. I mean, the booking is still higher than the other segments, but looking into the full year basis, do you expect that some demand from the multi-cam or some 3D sensing or AR feature to come in later this year, and what's your expectation in full basis? That's the first question. The second question is about the gross margin trend in 2019, because the beginning, the first quarter seems a bit weak in terms of gross margin due to lower revenue forecast.
But in a full year base, do you think that the advanced packaging could help offset the weaker sales in the other business segment and also the fixed issue, like from SMT contributions? The third question is about the dividend policy. Would you maintain the continuous incremental, increasing the dividend in 2019?
Okay, thank you. For the booking forecast for the full year, it is a little bit difficult to really have a good visibility at this point of time. In particular, I would say generally, the sentiment in the semiconductor industry is still quite cautious. I think people are really watching closely the development of the trade war between U.S.A. and China, and to adjust their own business policy individually. So as of this point of time, customer tend to give us a fairly conservative guidance of their business. However, as I mentioned, this industry used to work in such a mode that everybody lack of a long-term visibility, so we don't take that as a final at this point of time. I think overall, we start the year with CIS booking still comes back compared to Q4 last year. That's a good sign.
However, we do not expect CIS booking to be as strong as the first half of last year. First half last year, actually, sales booking was pretty strong. Okay? There's also a factor leading us to believe, overall, on a full year basis, a CIS business may not be as strong because of the 5G conversion. We noticed that people are expecting 5G phones to come out probably this year, later part of this year. I think that may have an effect of holding back some of the desire to change to a new generation of smartphone. People will still wait for the newer generation phones to come. So overall, we try to be a little bit more conservative on this. However, advanced packaging continued strong.
Of course, after a round of very strong booking from some of our customers in 2018, and in particular, towards the second half of 2018, how sustainable will be this booking momentum in 2019? We still have to watch. Advanced packaging still very competitive in the early stage of industry development for many of our customers. For the cost margin, we don't see anything structurally different. The second half cost margin for the growth, both for the back-end equipment and also the SMT, to a certain extent, besides those one-off effect, affected by our decision to slow down our capacity utilization. Okay? Other than those, actually, we don't really see significant differences. So I would expect cost margin comparatively stable on a full year basis. We are also putting in additional effort on cost reduction, as we anticipate a more challenging year in 2019.
Hopefully, this cost reduction effort will be able to offset some of those effects in the industry in 2019. On dividend policy, yes, this is our intention to continue to maintain this gradually increasing year-on-year. We will try our best to adhere to that unless we are really not able to do so. However, in 2019, I think we are pretty confident we should be able to continue this dividend policy.
Thank you, sir. Now next question comes from Kevin Zhang from JPMorgan. Please go ahead.
Good morning, management. Thanks for taking my question. I have two questions. First one is that actually one of your competitor mentioned in their conference call that they haven't seen any accelerated investments in fan-out, and the overall adoption of advanced packaging is slow. Would you please provide some more colors on what you have heard from your customers and actually the growth outlook for 2019? The second question is, given the current industry downturn, you just mentioned some cost reduction plan. Would you please also provide more colors, especially on the reduction of the fixed cost? Thank you.
Okay. As I mentioned, I think overall the advanced packaging is still in the early phase of the industry development. I think individual peers' performance really depends on how good is their customer coverage. For ASMPT, I think we have a pretty good customer coverage at this point in time. As we have been reporting, most of the customers engaged in the advanced packaging development actually engage ASMPT in some way or the other. Because of that, we are able to enjoy a better business at this point in time. However, I think, I'm not suggesting 2019, we have already reached a year there will be a high level adoption of advanced packaging. I think it will still depend on individual end customer for us. Some of them are a bit faster, some of them are slower.
However, we are pretty confident for ASMPT revenue for our advanced packaging equipment in 2019 should register a year-on-year growth compared to 2018. That one we ourselves are pretty sure because we have the orders on hand. On the long-term part, how are we going to deal with all those fixed cost reduction? Actually, since Q4 last year, we have been having a tight control on our headcount in production. Actually, our production headcount has decreased already compared to the beginning of Q4. So we will continue to tighten our control of this headcount in our manufacturing operation. At the same time, we will only allow a very moderate headcount increase in R&D. Investing for the future is important for us, so this will be the effort we are heading at this point in time.
Okay. Thank you.
Our next question comes from Chris Yim from BOCOM International. Please go ahead.
Oh, hi. Thank you. Thanks for taking my question. My question is still on the gross margin. I am just curious to know the reason behind ending the solar business, and also, how long do you expect the inventory reduction to continue, and whether because the revenue may be slightly down this year, whether the utilization rate will remain similar to the current utilization rate. My second question is, if you can give us a breakdown, 2019, since revenue may be slightly down, how do you see the back-end and SMT Solutions business to perform this year? My last question is on the You gave us the gross margin outlook. I was wondering, during the down cycle, what would be the R&D and OpEx ratio for this year? Thank you.
For the gross margin you mentioned about the solar business. Solar business charges are one core. It will not carry forward anymore, in the future. Actually, after this write-down, it will have a positive impact to the gross margin of SMT group, although its contribution value is small, so it will not change it significantly. For the inventory reduction we continue to carry out. However, the inventory reduction actually is really the effect on the gross margin is more of because we want to reduce the inventory. That is why we make a conscious decision to cut down our production one way. I would say it is more the production one way, the lower production one way, will lead to this gross margin reduction.
In terms of in the first half of 2019, as I mentioned earlier, we already have exercised the effort to cut down our production headcount in China. We expect this lower capacity utilization will have a less impact on the gross margin, in the first half of this year compared to Q4, because the fixed cost has already been brought down to a certain extent. Whereas for how we see the 2019, the end equipment and the SMT equipment affect the business. Overall, while we expect on a full year basis, group revenue will likely to register a year-on-year drop. At this point in time, we believe, the reduction for SMT equipment will be higher compared to the back-end equipment, partly because of we have a very good year for SMT, in 2018.
Looking at the current industry environment and also taking into the consideration of traditionally the SMT equipment will be lagging behind the back-end equipment by one quarter, one to two quarters. Even if there is any recovery in the market for the back-end equipment in the latter part of the year, the SMT business unfortunately will not be able to benefit much. That is why on a full year basis, we expect there will be a bigger drop in SMT equipment revenue, whereas a much smaller drop for the back-end equipment business. Also partly because of the contribution of this advanced packaging. Overall, because of this segment revenue mix, it will have a positive impact on the group gross margin. Okay, thank you.
Thank you. Our next questions come from Avali Somsevi. Please go ahead.
Thank you, Beverly, and the management team taking our question. I want to focus on two things. One is 2019 business mix. I think, W.K., you mentioned a very interesting point that you envision the biggest drop in the SMT lane again. I was wondering, do you believe actually SMT machine will have more new order from the manufacturing in ASEAN country and also even from India? The reason I ask this question is because from the interview with a lot of assembly in the east of China, right now, they try to better diversify from these geopolitical concerns. This is the first question. I try to understand your assumption of the SMT chart bigger than again. The second one, I think in the second part, actually, you also mentioned that CIS has a good booking in the first quarter.
Can you also give us more color? Is it because from the sensor packaging, or is it because the module active alignment machine? This is my two questions. Thank you.
Thank you, Avali. Yes, you are right. We also believe, comparing the semiconductor business and the SMT business, it is more likely the customer relating to the SMT business, they plan for a diversification outside China because the SMT business is more related to the end product, while the semiconductor business, the finished good is only a component. So, probably if there is a tariff effect in U.S.A., it is more applied on the end product. I think yes, you are right. We are also aware, customer talking about this. If they want to ship, they more likely shipping the SMT business than the semiconductor business. However, at this point of time, we thought we have not seen a massive action on this yet. Okay? So we really don't know.
If the shift happen, yes, it will benefit the SMT business as a whole because more capacity has to be installed outside China. A lot of the people are shifting their current capacity of those equipment already installed in China to overseas. However, I am yet to see that. As for the CIS business, we see a booking come back in January. However, I will be cautious to describe it as strong because compared to last year, I think as of this point of time, I will say they will not be as strong as last year, but at least it showed when they start a new CapEx cycle, these customer continue to invest. Regarding your question, those are relating to modules, AA equipment and the assembly of this camera modules.
Hi, Kevin Chen. Can I follow up? This year if more and more brand using the triple-camera or even the higher spec of camera, do you envision the sensor packaging business come back in the second half?
The triple-camera is still the camera. I mean, the triple-camera. When you talk about the sensor business, I am not sure which one you are referring. Are you referring to the 3D sensing?
No, imaging sensor.
Yes, I think the CMOS image sensor is our CIS business. The AA are all these for the alignment of those CMOS image sensor and also the assembly equipment also for the CMOS image sensor.
Yeah. Sorry, I probably used a lot of time, but this is my two cents. Because you mentioned first quarter is active alignment, right? Since there's enough on the sensor packaging, my question is, if we expect the sensor packaging business to come back later this year, do we have an upside risk in our revenue guidance?
As I mentioned, actually, the active alignment and the assembly are for the CMOS image sensor. I probably am not able to catch your question because they are relating to CMOS image sensor. While when customer go to multiple camera, definitely they need more capacity, they need more alignment machine. However, when we talk to customer generally, we are of the view that because people are anticipating a 5G phone to come, so the desire, the consumer's desire to change phone in 2019 may be affected. With this anticipation of a newer generation handheld devices will be on board soon, so people will probably wait for that, take a look at what they can offer before they decide to switch. So overall, for us and for our customer, we are a little bit conservative about the smartphone business in 2019.
Thank you, sir. Our next question comes from Simon Woo of Bank of America Merrill Lynch. Thank you.
Yeah. Good morning, everyone. Thank you very much. First question is, yes, everybody talking about smartphone industry saturation. Meanwhile, lots of new phones showing higher, more and more camera numbers. For example, as you pointed out on page eight, somewhere you already mentioned that sometimes a new phone already embedded six cameras. So that should be the great business opportunity for ASMPT. But the question is, your customers are already using lots of the alignment machine, module assembly machines well provided, well installed. The question is, if your customers want to upgrade the existing machine for triple-camera module or even with the 3D sensing function within the module, do you think your customers buy the new machine, or your customers can upgrade the existing machines that you have already supplied in the past several quarters? That's the first question. Thank you.
Okay. As you point out, yes, multiple cameras definitely the trend. We expect more and more camera per phone. When customer need to deploy more cameras per phone, they need more capacity, both assembly of the sensors and the alignment of the sensors. Okay. I think they simply need more capacity. It is not a question for them to upgrade the old equipment, but they need more capacity. The industry actually also expecting a foldable camera to come in, okay? When the foldable camera come in, actually, there will be more active alignment process, okay? Besides of aligning the lens and these are typically the camera, the lens module to the sensor. We have another additional prism to align. You are absolutely right. We are actually having a very positive view on the long-term of the CIS business.
However, as I mentioned earlier, on a short-term basis, we try to be a little bit more cautious because if people are expecting many new things to come, they may not select to have upgrade, in 2019. That may affect the short-term. However, on a long-term basis, I think the business potential for our CIS business is really strong. In the announcement, we also highlight, actually, we are also working with customers beyond the smartphone segment. We believe other business segment, other application segment like automotive, security monitoring will be an interesting additional market to come.
Yeah. Thank you very much. Last question is regarding the advanced packaging business. Seems to be quite impressive. Already more than 10% of your back-end revenue 2018, and you said year on year increase for 2019 despite the tough semiconductor business environment. The question is, which machines actually will be more demanded? At NEXX, any NEXX company product or more memory related for 3D or more logic chip related? Because we are a little bit curious which area can be better than the other. Meanwhile, yes, we worry about the semiconductor industry downturn, particularly the older chip makers, more conservative guidance for the CapEx cut for 2019. Thank you.
For the advanced packaging, actually, we have a fairly diversified product portfolio. I believe by 2019, the end application driving the demand for advanced packaging equipment will still mainly in the advanced logic. We are working with customer on the memory. As we highlighted in our announcement, we are developing the process together with the customer for the HBM, the assembly of the HBM. This has not been included in our revenue forecast in 2019 yet. While this will be when we successfully develop together with the customer, when they selected us and ramp up, this could lead to further potential in 2020 and beyond. I think advanced packaging, advanced logic is the application driving it in 2019. It involves equipment from NEXX, certainly, the TCB equipment.
It involves laser dicing and gluing equipment from our ALSI side, and also the pick and place equipment for this die placement. As we highlighted in our announcement, there's also another interesting application, is the RF filter. This is just a very little packaging. Customer need equipment need to do the pick, test, and pack operation. This also has been selling pretty well for us in 2018, as 5G phone to come, so more filter will be needed per phone. This could be also an interesting business development for us.
Thank you. Our next question comes from Mr. Donnie Teng from Nomura Securities. Please go ahead.
Thank you, Manjun, for taking my question again. I have three follow-up questions. First is regarding your two new acquisitions, NEXX and AMICRA. Could you give us an update on what kind of sales contribution we should expect this year? Whether gross margin of NEXX is higher than the back-end equipment average or lower. Also I see there is a PPA expense. I'm wondering if this is a recurring expense or a one-time expense. My second question is regarding to you mentioned about the outlook on gross margin this year. You mentioned about gross margin will be stabilized in the coming quarters, but I'm wondering what the base you are mentioning about, is this compared to the base in fourth quarter last year, or is compared with the base of the full year last year? Lastly, about the booking momentum trend.
Looks like first quarter booking will be flat or slightly rebound. Do you expect more meaningful rebound to second half or you are expecting a relatively flat booking momentum in the coming quarters? Thank you.
Okay. For the revenue contribution from NEXX and AMICRA. For the NEXX, second is more in 2018 because of new quarter. Okay. For AMICRA is also a relatively smaller business compared to the back equipment. I would say their contribution to our back-end equipment business in 2018 are very small. It is a single digit to the segment. In terms of gross margin from these two business, overall, I will say, they are better than our group gross margin, however, slightly below the back equipment segment. So in between. For the PPA, it is the accounting treatment. It is not a one time, it will be recurring for a number of years. Okay? For the gross margin outlook, I was comparing Q4, when I comment about we see stabilize. But overall, on a full year basis, then I will be comparing to the full year.
I will do on a full year basis. I do not see any structural reason. There will be a significant deterioration of gross margin in 2019 compared to 2018. The structural factor that affect us will be the lower revenue. However, we are working very hard to mitigate this particular factor by aggressive cost control. Hopefully, we can offset most of those effect over there. On the booking trend, as I mentioned, in our industry, it is really difficult to have a high visibility. But, we also believe actually the fundamental industry are solid. Today more customers are more concerned about the economic and political situation at this point in time. That is why they are giving out a very conservative guidance in CapEx. I think some of you probably already pick up from some of these semiconductor companies.
If we stick to the CapEx guidance, then 2019 could be a very good year. However, in our opinion, I think things may change. We are still cautiously optimistic that second half may turn. Furthermore, today there is so much rumors about the talk between U.S. and China, talking about China is going to buy $200 billion of semiconductor devices from American companies. If that is the case, probably there could be a rush among these companies to get a good share of this business from China. I think things can change very dynamically. At this point in time, we are not too pessimistic. That is why, overall, we forecast our 2019 revenue drop to be small. While I already guide the SMT Solutions revenue drop will be bigger, that means I am guiding an even smaller revenue drop for this back-end equipment.
However, there is still a lot of uncertainty, a lot of, I would say, assumption for this forecast. We have to really watch it quarter by quarter. Okay.
Thank you, sir. Our next question comes from Leping Huang, CICC. Please go ahead.
Thanks. Thank you to take my question. We're glad to see that you show that there's one slide showing that the back-end revenue in 2018 reached 10%, or the advanced packaging already reached 10% of back-end equipment revenue. Can you elaborate? What the stage of your investment on the advanced packaging? You pretty much have the required product line to attack this market, and what we should expect the growth outlook on this item. Thank you. Yeah.
Well, I think we have the widest product portfolio for advanced packaging, but we do not have everything. We also do not intend to have everything, but we intend to really cover the most important area that customer is looking at, the customer want to work with us. So, we are pretty happy about our product portfolio at this point in time. As we have guided on the revenue, we expect the revenue in 2019 for advanced packaging to go up, as I commented earlier, because for quite a significant part of it, we already have the orders on hand, so it's a matter of deliver and also achieve the revenue recognition in 2019. Of course, things can change. If customer pulls back with delivery in the later part of the year, that still can lead to uncertainty.
However, from our experience, typically, customer will be more reacting to capacity-related kind of delivery, but they are more aggressive with the capability-required installations. So, at this point in time, we do not foresee if they want to push back any of this delivery, it will be due to the economic situation. It happens more related to how ready they are, or it could be their new setup, their new facilities are not totally ready, or could be when they set their new process, some other equipment cannot match together in time. So this kind of situation. Overall, we are pretty optimistic. Going for a longer term, as I mentioned, this year still the advanced logic. When this advanced packaging also goes into the memory, that will be another brand new market. Now, the advanced logic, there is a potential big market for it.
As a lot of people are aware, the semiconductor technology has reached the 7-nanometer mark, and it is expensive to build set of it. While the market rumor talking about some customers will be starting their 5-nanometer node production very soon. Generally, in our industry, people really believe this time, the focus effort will shift from front-end to back-end. Going forward, more performance achievement have to be realized through this what they call the heterogeneous integration and advanced packaging. So these two have been identified as the key technology to realize all these equipment. The market has a lot of talk about artificial intelligence. Artificial intelligence is pretty computational intensive. Also, we are talking about the need for more data centers. So all these actually, I believe actually, will lead to a lot more requirement of these high-performance computing chips.
At this point in time, it looks like heterogeneous integration and advanced packaging are the key technology to deliver this. So that is why we are pretty optimistic about this particular application. We believe we are only starting in our advanced packaging technology. I must still admit to you, even in 2019, we are talking about limited number of customers ramping up their production. So when the industry goes into a more mature phase in time to come, I think the revenue contribution will be even higher.
Thank you. Our next question comes from Kyna Wong from Credit Suisse Hong Kong. Please go ahead.
Hi, W.K. wanted to chat with you on tax expenses in fourth quarter. Is this because of a high contribution from SMT and/or any other reasons actually cause higher than expected tax expenses?
Hi Kyna, this is Robin. You are right. I think the group tax rate is sensitive to a few factors. One is the profit mix between SMT and back-end. For Q4, yes, you are right. The SMT profit contribution is higher, so that elevated the tax rate. However, in Q4, there was also a one-off adjustment relating to the additional tax provision for prior years that we had to make. If you take that out, the SMT Q4 tax rate will come down from 40.7% to around 30 % . So that is for Q4. For the full year, it will come down from 25.6% to around 21%. So that is the kind of level based on profit mix that we are seeing.
Yes.
Thank you. Next question come from Abalay from CB Group. Thank you.
Thank you for taking my follow-up question. I think I followed the PowerPoint, and I think there is one slide very interesting in page 13. You highlight that the automotive and industrial advanced to number two and number four, respectively, in 2018. Can you share with us the percentage of the automotive and industrial make up and can you also give us the year-over-year growth view into 2019? Thank you.
Okay. The contribution from the automotive industry is more than 10% to the group revenue. In 2019, in our opinion, it will continue, although, there is also talks in the market, the automotive customer start tend to be a little more cautious at this, under the current economic situation. However, when looking back, there is a few factors continue to make us a little bit more optimistic is the automotive industry, unlike the smartphone business, is less cyclical. Once you design in, you continue to enjoy the business for a number of years until the life cycle of that particular generation of cars end. Looking back to the past few years, actually, a lot of new design has been designed into the new generation of cars. When this new generation of models being rolled out, the demand for all these semiconductor will continue.
In our opinion, this will be a segment that continues to grow. If you also refer to page 23 in our presentations, actually, many people have, page 22, many people have predicted that automotive will surpass smartphone as the number one consumption of semiconductor devices soon. As the content in the car has continuously continued to go up. We subscribe to the same view, and we see this is going to happen not too far from now. I think we won't be surprised one day, this automotive will overtake the smartphone business as our number one application market. They are not at this point in time. I think there's still a significant gap between the mobility, communication, IT application market and the automotive electronics market, for ASMPT.
Thank you, sir. Our next question comes from Donnie Teng from Nomura Securities. Thank you.
Yeah. Thank you for taking my question again. Two follow-ups. One is a pretty housekeeping question. Just simply say, what kind of OpEx ratio and tax rate we should expect in 2019? Secondly, it's more like a business outlook. In the past few years, we have been through a very successful growth, mainly driven by certain equipment like CIS business. But looking into next one to two years, which product line you would expect to have more meaningful structural growth? I'm personally thinking about SMT. As you know, lots of activities in India, terminal module makers and EMS companies are building tons of new capacities in India. I'm also wondering that when 5G comes in onto the smartphone, what kind of SMT equipment would be used for the next generation of the PCBs inside the smartphone?
I'm asking this because I think in 5G, the RF content will be growing, and also the battery size will be bigger, so the main board inside the smartphone will be smaller. Will that help your SMT business going into 2020-ish? Also, as you know, the premium smartphone vendor, they mostly upgrade the SMT products every three years. Is that a good way to think about SMT to be a key growth driver in the coming one to two years? Thank you.
Thanks, Robin. I want to answer the tax question first. If the SMT revenue for the full year come down more to the back end, the profit mix of SMT will come down. If that's the case, then we will expect the tax rate to be lower than 2018. So maybe high teens to 20%, based on a full year basis for tax.
Okay. How about
Sorry?
How about the OpEx ratio?
Well, I think the OpEx ratio actually has a lot to do with revenue. We do not have any plan at this point in time to trim down our designs. We will continue to maintain our investment in R&D. I would say, under this current challenging market environment, we exercise effort to control our costs, but we do not see on an absolute basis, the OpEx spending will come down significantly. When the revenue comes down, the OpEx ratio will go up. But we will try to manage them as much as we can. Related to your question on SMT. Well, thanks for pointing out a number of key points. I think you are right, 5G could be a driver for our SMT business. Besides the smartphone, the handset itself, actually infrastructure, 5G infrastructure is one of the major area.
While as you are probably aware, the number of base stations for 5G significantly increased compared to 4G. Okay? So, if the results approximately cover the same area, the ratio, the number of base stations for 5G is roughly 10 x that of 4G. Okay? So it will translate when people start to build up their 5G infrastructure, in our opinion, we will translate into demand for more SMT capacities.
Now, when it comes to 5G handset, you are absolutely right that people have to free more space for the battery. That seems to be everybody's direction at this point in time. I think that is no surprise because the advances in battery technology is falling behind the advances of the others. So I think people are destined to free up more space to deploy a largest capacity battery in a 5G phone, as 5G phone is expected to consume more power.
You are talking about RF, components are more in the 5G phone. That is right. However, it may benefit more of the back-end equipment business than the SMT. The reason I immerse first in the wafer-level packaging, the RF filter, we already see a good demand for our back-end equipment. Furthermore, in people's terms of the customer's direction is integrating more of these kind of RF components, particular filters, band filters into the modules, into SiPs. Okay? As a result, the number of SMT components relating to RF may not increase so much. People put it into a package, a multiple filters into a package. So, that may, as I mentioned, be benefit a little bit more of the back-end equipment, SMT business.
Thank you, sir. Now next question comes from Simon Woo from Bank of America Merrill Lynch .
Okay, great. Very quickly the question to Robin, CFO. Number one, do you have any plan to announce the share buyback because of the convertible bonds? Could it be converted into the shares maybe in a few months? Second question is, once the $2.2 billion convertible bonds converted into common shares, so could we get the overall dilution impact? Thank you, Robin.
At this moment, we still have a buyback plan out to May this year, after the AGM. We have not decided what to do after that. As far as the CB is concerned, if it is fully converted, I recall it should be around 5%, 6% dilution in terms of the number of shares.
You mean the 5% or 6% number of shares ostensibly will be increased?
Yes. If it is fully converted, yes.
Okay. Thank you very much, Robin. Appreciate it. Probably, I supplement one more. The CB will be due by-
30th March.
30th March.
Yes.
This year. The expiration, you mean?
Yes. Majority.
Okay. Thank you, sir.
Thank you once again, ladies and gentlemen. To register for questions, please press star one. Once again, it is star one to register for question. Thank you. Len, there seems to be no further questions at this point in time, sir.
Yeah, sure. Okay. Well, I think we have had a good discussion this morning with very good questions, but I am afraid we have to conclude the conference call now in the interest of time. Thank you very much for joining our conference call today, and we will talk to you again next time. Thank you. Bye.
Bye-bye.
Thank you, everyone. This concludes your conference.