Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. The line is being recorded and I'll be standing by. Thank you.
Good morning, ladies and gentlemen. Welcome to the ASM Pacific Technology 2017 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 uncertainties and risks which could cause actual results, performance, and events to differ materially from those expressed or implied during this conference call. 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 2017 annual results, followed by a Q and A session. Without further ado, let me hand this over to Mr. W.K. Lee. Mr. Lee, please.
Thank you, Leonard. Good morning, good afternoon, and good evening, ladies and gentlemen. We appreciate you joining us for this 2017 annual results conference call. I'm very happy to report that 2017 has been a record year for ASMPT, with revenue for the group and all three business segments achieving new records. Group revenue went up by 23% year-on-year to $2.25 billion . Group bookings grew 34.7% to $2.34 billion . Group net profits surged 94.4% year-on-year to HKD 2.8 billion. Group gross margin improved by 264 basis points to 40.2%, a new high for the past seven years. This strong performance was partly due to the robust market demand and partly due to the successful strategic transformations that the group have carried out in the past few years.
Many people in the industry are of the opinion that the semiconductor industry is experiencing a super cycle driven by broad-based drivers. The semiconductor industry in the future might be different from the past. There might be no single killer application driving the industry, but a fragmented growth market. IoT, Industry Internet of Things, smart city, smart factory, Industry 4.0, artificial intelligence, big data analytics, augmented reality, virtual reality, 5G network, and automotive are expected to drive the global semiconductor industry to an unprecedented new height. The world is anticipated to enter the data center era with tremendous amount of data to be collected, transmitted, stored, processed, and displayed, which in turn will drive up the demand for semiconductor devices. We believe that ASMPT has made the necessary changes and investments to well position the group to ride on this wave.
Last year, strong demand for IC/Discrete and CIS equipment, lead frames, and SMT solutions drove the performance of all three business segments of the group to new heights. The group ended 2017 with a strong momentum. All three business segments delivered positive year-on-year revenue growth in Q4. Group bookings grew 5.5% year-on-year to $496.5 million . It is the highest Q4 booking for the group, and it exceeded the group's anticipation earlier. Judging on the market sentiment and momentum, the group is confident that group bookings in Q1 this year will display a strong rebound over Q4 2017, led by the back-end equipment segment. Group revenue for the second half last year amounted to $1.2 billion , setting a new half-yearly record with a percentage growth of 31% and 14.1% against the second half of 2016 and the preceding six months respectively.
Group bookings for the second half of 2017 amounted to $1.07 billion , representing year-on-year growth of 18.1%. Based on geographical distribution, our top five markets last year were China, Europe, Malaysia, Americas, and Taiwan. All regions experienced revenue growth over 2016. While China remains to be the largest market for the group, all other regions saw the highest growth rate than China market except Americas. Our back-end equipment segment did very well in 2017 with an achievement of new records in revenue and a six-year high gross margin of 47.9%. The back-end equipment segment continues to retain its number one position in the global market, one actually the group has been holding since 2002, with 2012 being the only exception. Revenue of the back-end equipment segment grew 19.5% last year to $1.11 billion , contributing to 49.3% of the group's total revenue.
IC/Discrete was the largest revenue contributor to our back-end equipment segment last year and delivered the highest year-on-year growth rate. It reflected a healthy market driven by smartphones, automotive, IoT, and power management applications. Last year, CIS has become the group's second-largest pillar of our back-end business. The group continues to enjoy a strong position in the CIS market for both the assembly equipment and the active alignment machines. New camera and 3D sensing are the key growth drivers for our CIS business. The group has become the partner of choice for our customers in CIS and customers who are developing new applications for 3D sensing, augmented reality, and virtual reality. After strong growth in 2016, our LED business experienced a contraction last year as customers need time to digest the new capacity installed. However, we expect our LED business to rebound strongly in 2018.
Driven by the strong demands generated from electric cars, wireless charging, and other mobile-related management applications, the group continues to enjoy a dominant position in the power management market. Our efforts in the development of advanced packaging business are well on track. Shipment of the PCB bonder picked up strongly since the second half of 2017 and will continue into 2018. The building of our first chip bonder reached an all-time high last year, with year-on-year growth rate of more than 140%. New order booking for our laser deposition equipment business attained a new record, setting a strong momentum for this year. Our new pick-and-place machine, panel-level fan-out and wafer-level fan-out packages have penetrated into multiple customer accounts. We expect the strong order intake for our die bonders, the test and sort instrument, will drive revenue of our tooling and encapsulation business to a new high in 2018.
The System-in-Package market with equipment served by the SMT Solutions segment have also achieved a very strong growth rate last year. We are confident that both the advanced packaging and the power management markets will become the next additional pillars of our back-end equipment business in time to come. Last year, our SMT Solutions segment achieved new records in revenue, booking, and segment profit. Revenue grew 30.9% to $865.9 million and contributed to 38.5% of the group's revenue. New order booking improved to 33.4% year-on-year. Strong demand from the automotive and the industrial electronics market drove the revenue of our SMT Solutions segment to a high level. This segment has further benefited from the latest smartphone upgrade cycle last year due to its superior technology and innovation. Over the past few years, we made very good progress in advanced packaging market. With product offerings from the SMT Solutions segment.
We offer high-performance screen printers and placement equipment to the SIP wafer-level fan-out and panel-level fan-out application markets. We expect the demand from advanced packaging, smartphones, automotive, industrial electronics market, and international electronic market will continue to drive our SMT business going forward. Booking of our SMT Solutions segment in Q4 last year grew 39.5% year-on-year, exceeded the group's expectation. SMT Solutions segment achieved a record segment profit of HKD 1.08 million last year, with segment profit margin improved by 485 basis points to 16.1%. Our acquisition of the SMT equipment business turns out to be a big success. It has expanded the group's total serviceable market by more than $3 billion . The SMT Solutions segment has now solidly established itself as one of the group's growth engines and contributed significantly to both the group's top and bottom line.
Like other tool business segments, our materials business segment attained many new records in 2017, in particular, its revenue for last year and the second half of 2017. Last year, revenue of the materials business segment amounted to $275.2 million , representing a growth of 14.5% over 2016. New order bookings of the materials business segment in 2017 set a new record, representing growth of 13.5% as compared with the preceding year. New order bookings of the materials business segment in Q4 last year contracted 11% and 2.9% compared to the same period in 2016 and the preceding quarter respectively. Last year, the group faced challenges of rising price pressure in copper, which had affected gross margin of this business segment. The group has taken necessary actions to control its costs, optimizing its manufacturing process and efficiency.
Most importantly, the group managed to seek support from customers to share the burden of increased copper price. We expect profitability for our materials business segment to improve this year. As for the outlook of our business, we anticipate that group booking in Q1 2018 will rebound strongly over Q4 2017. Booking of the back-end equipment segment is expected to lead. Group revenue in Q1 2018 is expected to achieve a year-on-year growth rate in the range of a high single digit to a low double digit percentage. All three business segments are likely to deliver positive year-on-year growth rate. Generally, our customers are optimistic about the business environment in the first half of this year. With this, we thank you for your attention, and we are ready to take your questions.
Thank you. We will now open for question. If you would like to register for a question, please press star one on your telephone. Ladies and gentlemen, if you have any question, please press star one. Thank you. Our first question comes from Alpha Lai from Citigroup. Thank you.
Hi, W.K. Lee, Robin, and Leonard. Good morning. Congrats for the record high year. I have one very simple question on the application side. In your presentation, page 14, you break down the revenue by application, and we very appreciate you doing that. Compared to last year, actually, it looks like mobility and communication is gaining share. But on the auto electronics looks smaller. Is it fair to say, the mobility is gaining share? This is first question. The second question is, many reports saying that internet giant will do a lot of data center and also server demand in the coming years. How we categorize the server demand into the page 14? What is ASMPT's equipment offering to serve the demands? Is the CPU demand or the silicon photonics demand, our equipment can meet that demand? Thank you for your sharing. Thank you.
Thank you, Alpha. Last year, the mobility communication IT application market really has increased their contribution to the group's revenue. In 2016, its contribution is in the low 20% range. Whereas last year, this has increased significantly to the high 20% range. Contributed both by the CIS, our success CIS business is one of the fast-growth area of work, and also contributed also by the success of our SMT business in gaining market share in the high-end smartphone upgrade cycles. Whereas, as I mentioned earlier, unfortunately, our auto electronics business experienced a contraction last year, after aggressive capacity expansion by our customers in 2016. Because of this relative development, that is why you see on one hand, the mobility communication IT market grow significantly, on the other hand, the contribution of the auto electronics market came down, but comes up.
However, we expect the auto electronics contribution will improve this year as we see customers after one year of this capacity digestion start to install their new capacity in 2018. Whereas your question for the data center, we really expect the data center business going forward will be quite strong. However, as far as we are able to track these applications of the customer, then we will group it under the mobility communication or IT. But sometimes, we will not be able to track the exact application. Then it could be classified in the other semiconductor or other SMT applications. Whereas for your question for CPU, silicon photonics application, where the ASMPT equipment ready for that. For the CPU, I think ASMPT equipment has advantage for the high-end CPUs because of the very high IO applications.
Our TCB bond become the very big solution for the market, especially for people developing high-end CPU and also CPUs for these artificial intelligence applications. Whereas for the silicon photonics, it's a new area for the group. The group started to offer solutions to address this market. The group is still in the process of optimizing its product portfolio to capture this future opportunity in the silicon photonics market. Thank you.
Thank you. Can I have a quick follow-up on the CPU side? If there is a really strong demand, what regions you expect to generate revenue? Is it from the U.S. or from the China? Thank you.
Well, it may not directly reflected in the American market because customers probably will be assembling those chips outside of U.S.A. China will not be the main area for CPU chip assembly yet. I will say Taiwan probably is one of the highly likely region, then followed by other area, like Vietnam, Korea these kind of areas.
Thank you, sir. Our next question comes from Steven Pelayo from HSBC. Thank you.
Yeah. Great. Let's see. Can we start a little bit with the discussion on operating expenses quarter-on-quarter? I remember you guys had guided to some growth there, but it was even stronger than what I had thought. So what happened in fourth quarter operating expenses, and what is your outlook going into the first half 2018?
Well, actually, we have been tightly controlling our OpEx. The higher OpEx increase was, some of it is also due to some year-end, I would say, accounting, housekeeping. But overall, the OpEx increase is mainly in line with the higher volume. Also, the higher profitability, then lead to this higher bonus provision for all the staff. Partly also due to the expenses related to the shared incentive due to the higher share price this year compared to last year. Other than that, there is nothing special our OpEx, for the whole year and as well as for Q4.
As you look out to 2018, do you think you can get it down to an OpEx ratio down to 20% of revenues? Or what are you thinking?
Well, I think it depends on the level of the revenue also. When the revenue continue to grow, this percentage will tend to be lower and approaching closer to the 20%. So, I think overall, we are around very close to the 20% level. So we are not exactly there yet, but overall, we have been keeping up in line with this, in a range we feel acceptable or comfortable at this point in time, yeah.
Okay. One more question, I will get back in the queue. Your guidance for first quarter bookings to grow strongly is led by the back end. I am curious, what segments are in there? Is Q1 being driven by CIS, by 3D sensors, by LED? Can you give us a little bit of a qualitative commentary on which areas are going to grow relatively fast within the back end in Q1?
Based on the current momentum, it seems to be the IC/Discrete market is still the strongest. That is in general a good sign for us. It is not only driven by the smartphones, but also board applications. So the IC/Discrete market continues to demonstrate the highest growth rate. There is a significant pickup in the LED business. The SMT Solutions also demonstrated better than expected booking in the beginning of the year. CIS momentum continues to be strong. We do not expect our booking for our MEMS business to match the first quarter of last year, because first quarter of last year was a very strong booking for the trend in the first quarter of that year.
Okay. If I could just follow up, one final question from me. On the SMT, you just mentioned that it had better bookings, so you have a stronger start to the year in 2018. A lot of people were nervous given that you had a lot of strength from a smartphone application, I guess, in 2017. Should that concern no longer, should we not be so worried about that, being a tough comparable from 2017, given that you are starting 2018 from a better than expected position?
Well, certainly, it is a pressure for us, because of the high base of comparison. We do not expect a similar strong booking for the high-end smartphone upgrade cycle in 2018. However, in 2017, actually, not only the smartphone drove our business. Yes, it is an important contribution to our growth in 2017. At the same time, the European market actually has been very strong for our SMT business last year. It was mainly for the automotive and industrial electronics market. That is why we believe the industrial and automotive market will continue to grow. While it will be challenging to, I would say, achieve a year-on-year growth for the SMT business, on the other hand, we do not really expect it to come down too drastically, just because of the smartphone upgrade cycle may not continue this year.
Thank you. Our next question comes from Tina Wong from Credit Suisse. Thank you.
Thank you for taking my questions. W.K. and management, congratulations for their very good result. I have a question regarding the data-centric market. I want to ask about besides CPU or potentially silicon photonics, what about the memory that ASMPT was going to in the data-centric business? Is that also one of the very key driver to drive this data-centric business in 2018?
Memory certainly is a very important element in this data-centric market. However, I think at this point in time, it probably represents a growth opportunity for ASMPT rather than an immediate growth driver for us yet. As we have shared before, ASMPT's presence in this market are not as high as what we would like to see. However, we are taking the necessary effort and actions to address this. We are really tackling this market by multiple fronts. In this particular market, for example, the High Bandwidth Memory is one of the key areas for server CPU, high performance computing. Our TSV bonder, that could be one of the solutions for customers in this area. We are working with customers on that. In this flash memory, the 3D NAND market, hybrid bonding is still the major interconnection technology for it.
ASMPT is taking action to work with customers to develop solutions for them for this very fragile 3D NAND memory. On the other hand, in the memory market, actually, customers are moving towards very thin wafers. With the very thin wafers, customers are actually switching or moving towards the direction of laser dicing instead of the traditional mechanical blade saw. ASMPT is addressing this application with our laser dicing equipment. We are developing some interesting solutions together with our customers. We also see certain customers are also developing the panel-level fan-out application for memory. These are the areas ASMPT is working on to capture this future growth opportunity for us.
Thank you. I want to ask the contribution of memory business in 2018, because you adjusted in last quarter earnings that memory will probably become a growth driver this year and could be a kind of reaching meaningful contributions. What do you see now?
Yeah. I think it's a bit too early for us to quantify it. As I mentioned, we are working on developing solutions in multiple fronts. However, we have not reached a stage able to provide a reliable guidance on this yet. Yeah.
Thank you. Our next question come from Charlie Chan from Morgan Stanley in Taiwan. Thank you.
Hi, Benjamin. Congratulations for very strong results. My first question is regarding your PB ratio. It seems like your first quarter PB ratio already exceeded 0.9% and do you expect that the PB ratio will continue to go up in 1Q and 2Q?
Sorry, Charlie, can you repeat exactly what do you mean by PE ratio or PB ratio?
PB ratio.
Book-to-bill ratio. Well, the book-to-bill ratio for Q1, I will expect it to be higher than one. That is typically the seasonal pattern. Also partly due to Chinese New Year, our available production capacity is reduced, and our customer in China also will shut down for a period of time, not taking new equipment delivery. We will limit our billing to a certain extent. But on the other hand, customers will be aggressively putting in new orders to book their capacity, for the new year, with the new capital budget. So typically, a book-to-bill ratio for the first quarter of the year will be above one, or sometimes maybe even well above one.
Yeah. So do you expect this PB ratio can stay above one into second quarter?
Well, this one is really difficult to predict. If you know our industry, don't really have that kind of visibility. But I would say in a normal year, it most likely will continue to be, and in Q2, we're getting close to one. No matter it's above one, lower than one, it will be very close to one. That's the typical pattern for a normal year.
Thank you. Our next question come from Mr. Michael Chou from Deutsche in Taiwan.
Hi. Thanks for taking my question. My first question is regarding your CIS demand. You are guiding for demand for CIS to remain strong this year. Can you give some color regarding growth rate or any sales portion in terms of the outlook in 2018? For instance, what would be the AA machine ratio in CIS this year versus last year?
Well, it's difficult for us to predict the growth rate for the CIS business at this point in time. Last year is a very high year for the CIS business. Whether this year will continue to grow and exceed last year or slightly below is difficult to predict at this point in time. But no matter how, at this point in time, from the projects we have with the customer, we are not seeing a significant contraction in this particular business due to customers have already installed a lot of capacity, so we don't really see it yet. But still, a bit too early to really predict because we are only in the beginning of the year. Going forward, we expect the contribution from the AA machine or assembly equipment for the 3D sensing, assembly and alignment equipment for the 3D sensing will continue to grow.
They may overtake the assembly equipment. Last year, the contribution from the assembly equipment and the AA machine may be very close to the 50/50 tie level. They are not exact 50/50, but very close to that level. Compared in the past, assembly equipment for CIS is significantly much larger portion compared to AA. Going forward, I expect the AA, or as I mentioned, 3D active alignment assembly and alignment machine contribution may overtake the normal CIS assembly equipment.
Okay. Thank you. My second question is regarding the fan-out solution. You mentioned before, it seems like your wafer-level fan-out has some progress. Can we give some color regarding your fan-out revenue outlook this year?
We have not provided this, and also, in this particular area, because it is also an area, depending on how fast our customer ramps up their technology. It is difficult for us to provide a reliable forecast at this point in time, so we try to refrain from it. However, you have received our presentation materials. Over there, we also shared with you, actually, as of this point in time, we are working with more than 20 customers in the advanced packaging market, inclusive of the fan-out market. Some of them are still in the technical qualification period. Some of them are in preparation for high-volume manufacturing, and some of them already in high-volume manufacturing. It is a market, continue to gain attention. However, I think the market will still take a little more time to have, I would say, a wide adoption by many customers.
Thank you. Our next question comes from Mr. Bill Lu from UBS. Thank you.
Yeah, hi. Good morning. I want to circle back on Q1 bookings. You talked about that the back-end bookings is strong, driven by IC/Discrete. Can you give us a little bit more color on that? When you talk about the IC/Discrete, where are you seeing the strength in terms of the product segment or end market? Also, can you talk about whether the demand coming from Asia, Europe, or where is it geographically?
Well, the IC/Discrete demand actually come from a very broad-based application area. Certainly, you can trace some to smartphone-related, some to automotive-related, and also some to maybe this IoT or the power management, but not exactly the heavy power, but more of the controlling part of those applications. So we see a very wide area. IDMs tend to lead, certainly customers in Asia are the area, the customers are placing, are placing orders for the capacity, not so much in the other area like Europe or America.
That is very helpful. Thank you. Second question is on PCB thermo-compression bonder. It looks like that is going quite well. Can you talk a little bit about what that was as a percentage of sales in 2017, and what is your expectation for growth this year?
Well, we have not provided this figure out yet. As we mentioned, it only start to pick up strongly in the second half of last year, so the contributions still relatively, in our opinion, small. Typically, for any particular application, if its contribution start to be over 10%, we will start to share more color with the investors. So I think that probably will give you some idea. For the PCB application, it is really going well. We have delivered the machine to multiple customers. However, still, at this point in time, only one customer did high-volume production. All the others are still in the qualification or the preparation phase. But anyway, coming from in the past, basically only concentrated activities one customer only, to now we have multiple customers in the active engagement. So we feel very comfortable with all this development.
Thank you. Our next question come from Kevin Chen from JP Morgan. Thank you.
Hey, good morning management. Thanks for taking my question. My question is on LED. We have seen some intensifying competition in this sector, and one of your major competitors already announced their aggressive plan in gaining more market share. Would you please give us more colors on how ASMPT will deal with the competition, and why you expect LED business to rebound in 2018? Will the early adoption of Mini-LED become a key growth driver? Thank you.
I think yes, we noticed that our competitors are talking about it. However, I think when they do a comparison, they are comparing with a very small base in the past. That's why those comparisons are not really meaningful in the overall market research. Actually, there are high concentration of consolidation in this LED market. Comparing a few years back, we have over 1,000 customers in the LED market. But today, the majority of the purchasers are concentrated in a few significantly large customers only. ASMPT are actually maintaining this customer base very well. In some of these major accounts, we have 100% market share, and we have not lost it yet. We don't really feel the competition is weakening our position in this particular area. Our contraction last year in this LED business are mainly due to these customers.
They reduced their purchase because in 2016, they have expanded very aggressively. That actually is normal. Going into 2018, we already received orders and indication from these customers for about their expansion plan in 2018. We are not too concerned about this competition. On the other hand, actually, we are deploying our IC technology into the LED market. I think we will continue again. On the other hand, in the LED business, actually, ASMPT continue to migrate ourselves from a purely capacity provider to a technology provider also. Working with customers, for example, for some of those very high precision LED, for example, in the flashlight for these handphones, those LED die bonders are very expensive die bonders. ASMPT enjoy a very good market share in those areas, and ASMPT are working with customers in the development of Mini-LED applications for the big panel displays.
ASMPT are working with customers, not only in providing additional capacity to them, but also providing ultimately together with them new technologies to address the market. These are the indeed advantages that our competitors are not able to offer at this point in time. We want to move our LED business from also from the mass market to a more differentiated market position.
Okay. Thank you very much.
Thank you. Our next question comes from Lepi ng Huang from CICC. Thank you.
Thank you for taking my questions. I have two questions. One is, we see the Bitcoin and the cryptocurrencies quite hot for the semiconductor industry. How this benefits you also? Which segment or which application you classify it? The second question is about the China demand. We see a lot of talking fab plan has been announced. I think it is a very hot, maybe hotter than LED or the solar boom in Q4. Do you see any back-end equipment demand already from your auto customer in China? Thank you.
Okay. Well, the first question relating to Bitcoin, certainly, I think everyone know the Bitcoin have a very high demand for Bitcoin at this point in time. We certainly benefit from it. Customers are buying substrates and MI substrates for assembly of Bitcoin chips. Customers are buying assembly equipment to expand their capacity. However, we take a cautiously approach in this particular business area. At this point in time, we do not really assume this is something sustainable. We took it as more opportunistic. So when customer need to expand the capacity, we grab the opportunity quickly.
But overall, its contribution is not very high. It is small at this point in time. Whereas for the China, I think continuously we see a strong demand in the China market. We certainly are aware of some of our customers, the big China OEMs, continue to expand, adding new factories in the future. They also moving up in the value chain. They are very aggressive in developing solutions for the offers in this advanced packaging market. ASMPT are actively engaging with them in all this development.
Okay. How big is the Bitcoin on the cryptocurrency? It is in order is 5%-10% of in revenue if you look the last quarter?
Well, I do not really have this kind of number, but it cannot be too big. It cannot be too big.
Thank you. Our next question comes from Mr. Simon Woo from BofA Merrill Lynch in Korea. Thank you.
Okay, good morning, everyone. First question is regarding your CIS-related business. Do you really believe the double-digit growth in the CIS area for 2018? Our concern, number one, the smartphone industry situation. At the MWC, most of the OEMs did not introduce the new smartphone. Secondly, we think that most of the module makers, they have already installed lots of the chip mounters for the dual-camera module, even partially 3D. Lastly, the industry itself, smartphone industry itself, is not really growing rapidly. Because of this business environment, how management still believes the strategic growth? I would ask various implication regarding the back-end. Thank you.
As I mentioned earlier, it is difficult for us to really provide guidance whether there will be a double-digit growth or whether this CIS business in 2018 will continue to grow over 2017. Nevertheless, we continue to believe demand will stay at a high level. It is not, after one, two years with a strong growth, we see the demand falling off the cliff. We do not see that. In the smartphone area, you are right, we also noticed that the shipment volume for smartphone has stabilized, even come down slightly in 2017. This is something that many body has been expecting it already, so it is no surprise to the market. On the other hand, if you notice that, last week, actually, the Galaxy S9 from Samsung was announced in this trade show in spring.
Once again, you see customers or smartphone manufacturers are differentiating themselves with the camera. A lot of focus, really on the camera of the new Galaxy S9. That is exactly the area ASMPT are providing our technology to help our customers to achieve what they want. While we do not expect smartphone shipment volume will continue to grow, we expect our customers will continue to invest in the CIS area to really differentiate themselves in front of each other. We expect this is only the start of the new era for the smartphone. 3D sensing, on the front, has been introduced in 2017. We expect 3D sensing to be introduced in the VSI, probably in 2019, 2020.
Phone camera will come in with the 3D sensing once it reached the back, we locate it to the back, and actually, instead of relocate, we expect it will be both in the front and the VSI. We also expect the VSI 3D sensing to be equipped with a longer-range sensor, laser sensor. All these unique new capability, new equipment to enable it. We are very optimistic about the CIS business growth going forward.
Yeah, thank you, sir. Very quickly, memory seems to be the new business opportunity for your back-end area. I remember, among your back-end equipment machines, there is memory still small portion. Any color how the memory chip back-end equipment area can offer top-line growth and when it will be the meaningful portion of your back-end equipment? Thank you.
Yes, you are right. The memory is really a growth opportunity for ASMPT. Everybody would talk about picking a glass, whether you look at a glass is half or empty. I would say, for this particular case, this glass for memory is really, I would say, quite empty for ASMPT. That means there is pretty good growth opportunity for us, and in particular, looking forward with the data-centric era, I think demand for memory will be strong. I shared earlier, we are addressing this area with a multiple front. For the High Bandwidth Memory, we are working with customer on the using TCB, our TCB solution, to build this High Bandwidth Memory. In the 3D NAND area, we are working with customers to introduce our die bonding solutions.
When the memory wafer getting thinner and thinner, we are also offering our customers our laser dicing solution for thin wafers and also supporting some customers to develop a panel-level fan-out solution for memories. These are the few area. I cannot really be able to give you a very reliable guideline, guidance of how much will be the contribution of exactly when ASMPT will be able to make a significant breakthrough in the memory market. I think, while I cannot be precise in terms of timing, I am pretty optimistic about we should be able to make some breakthrough in the near future.
Thank you, sir.
Thank you. Our next question come from Laura Chen from BNP. Thank you.
Hi, good morning. Thank you for taking my question and congratulations for the good result last year. I have a follow-up question for the TCB progress. I recall that a few years ago, you announced that the cooperation with Intel, the management also mentioned that they have now multiple customers in this phase. Can you share with us how the progress with Intel right now, and also for those new customers, what is the applications? That is my first question.
Well, I must first clarify, we have never named any of the customer because we are not allowed to do so. The customer we developed those TCB initially for them, the relationship is very well. Still, we are the sole TCB supplier for them at this point of time. We continue to use the TCB bond that we developed to address new applications. Today, besides the CPU applications, it is also being used in the LTE modems.
As for the other customers, when customers are working on high-performance logic, or recently we see people working on processor related to AI, they start to utilize the advantage of TCB for that. So for the other customers under consideration, are mainly relating to this kind of area. As I mentioned earlier, the High Bandwidth Memory, this HBM, is another area. We find TCB will be of this good potential, good value to customers.
Okay, thank you.
One other area I forgot to mention. Interestingly, we also deliver a TCB-like technology for MicroLED applications.
Okay, thanks. My second question is, we know that China has been our largest market in the past few years, and I was just wondering that in the different regions, which market you see the strongest growth, like in Korea or America and the other region? What will be the key driver or applications in that market? Thanks.
In the China market will be broader, more general. If I am looking at LED, majority of LED will go to China, while the high-end LED, high price LED equipment will be outside China. For this IC/Discrete, China is still a very important market for the IC/Discrete application. For Taiwan, Korea, I would say advanced packaging is the most important area for these two areas. For the CIS, China is a big market for us, whereas Korea, Japan, these are also important market for CIS.
Thank you. Our next question comes from Donnie Teng from Nomura. Thank you.
Thank you, management, for taking my question. My first question is regarding the guidance. You mentioned about the booking will rebound strongly quarter-over-quarter, but wondering if you can quantify the year-over-year magnitude.
Well, Q1 last year was a really high-level booking for us. The group booking last year for Q1 exceeded $600 million. I cannot predict with 100% confidence at this point of time whether we will surpass this $600 million booking in Q1 this year. Nevertheless, we are expecting a very strong Q1 growth. Bookings really sometimes are difficult to predict with a high accuracy. We are also not expecting a booking level significantly below the same period last year.
Okay, thank you. The following question is on the billing. Could you kindly give us more details on the billing quarter-over-quarter growth rate for different product segments like back-end, SMT, and material in the first quarter?
Well, I think with this guidance of a high single digit to a low double digit, actually, I think people would be able to really calculate what kind of quarter-over-quarter growth rate already. In terms of different areas, as we mentioned in our last one, we expect very likely all three business segments to deliver positive year-over-year growth rate for Q1 this year. This one, it will translate probably also positive quarter-over-quarter growth rate for revenue, human and materials. It is purely a mathematical calculation. You can get this. Whereas, more likely, the SMT solutions will experience a quarter-over-quarter, small to moderate revenue contraction.
My second question is regarding to the full year outlook for different business segments like IC & Discrete, LED, CIS, SMT, et cetera. You have mentioned about there will be a strong rebound for LED, and SMT looks like to be relatively stable. How about CMOS image sensor and IC & Discrete? Could you give some direction?
Well, for the first half of this year, we see overall the market momentum is strong. Customer sentiments are pretty good. A lot of activities in terms of new projects, new capacity requirement from the customers. That is why we are pretty confident with Q1, and we also optimistic about Q2, especially. Typically, we know with our order backlog situation, booking will typically lead the billing by one quarter.
The strong booking in Q1 will turn into strong billing in Q2. So typically, that is the case. That is why, overall, we are optimistic about first half. We see this IC & Discrete being very strong, LED rebound, CIS stay at the high level, good booking momentum for SMT. These are the sentiment we see. As for the second half of this year, as you know, our industry do not really have that kind of visibility. I am not able to really have a good prediction for the second half yet.
Yes. Thank you. My last question is regarding gross margin. The SMT gross margin looks like to be a little bit lower in fourth quarter despite sales level was still quite high. I am just wondering, what kind of gross margin can we expect for SMT? Also, if the LED sales growth to be quite strong this year, will it have some negative impact to gross margin? Because I remember in the past few years, the LED section has very low gross margin.
Well, I think I will suggest all the analysts and the investors do not put too much emphasis on the gross margin of Q4 because it is the last quarter of the year. Sometimes we also have to really make sure we do some proper housekeeping from accounting point of view to end the year. There are also some, for example, warranty provision we have made in Q4, that have affected the gross margin of the SMT business.
There are certain non-operating or not direct related factors included over there. I would suggest looking at our gross margins for the whole year. That will be of much better reference. Or at least you look at the gross margin for the second half of the year, if you want to have a more current, a more up-to-date trend of our gross margin development. But do not really take the Q4 as your focus or put too much interpretation into the Q4 numbers. Okay.
Thank you. Our next question, we have a follow-on question come from Steven Pelayo from HSBC. Thank you.
Yeah, just a couple of follow-up questions here. I guess first, either W.K. or Robin here. The free cash flow in 2017 was down pretty significantly, yet your EBITDA was up by what, more than HKD 1 billion or so year-on-year. Something's going on, I think, especially in the working capital account. I know your CapEx was up a little bit, but still, your working capital management maybe hasn't been that good. Is there something we need to talk about on receivable collections? Are you preparing inventory at the end of the year? Can you talk to me a little bit about free cash flow in 2017 and going into 2018?
Yes, Steven, this is Robin . Yeah, you're right. I think when you have a kind of highest level, typically you expect working capital to be on the heightened level. But nothing to really worry about, because the inventory that we build up, we feel that with the high Q4 booking, I think it will be consumed in the subsequent quarter. As for the AR, I think we are confident so far our situation here has been excellent. There's really no concern about the dark days or bad debts. Yeah.
Yeah. Actually, we have been very aggressively preparing for this demand for 2017. That's why inventory level for 2017 was high. We also anticipate a strong first half of 2018. That's why we also start to prepare the material in advance. It was further complicated by a worldwide shortage of certain mechanical components. There are certain mechanical components we are getting a quote of lead time of nine months, 18 months. It also drive up our inventory to a certain level. But, other than that, nothing alarming at this point.
All right. If I could follow up a little bit on use of cash, especially from a buyback perspective. Looks like you guys bought back about 4 million shares or so, an average price of about HKD 108. What are you thinking in terms of in 2018 from a stock buyback or capital returns perspective?
Well, the share buyback actually is mainly related to the CB, the outstanding CB we have. We anticipate bondholders will ponder. The board has discussed how do we deal with this. Basically, our idea is for that amount, roughly close to around $300 million , we decide to return it to shareholders either in the form of share buyback or a special dividend. We expect to continue the share buyback program in 2018. If there will be any outstanding amount of this, roughly around $300 million , the total CB is $300 million. If there is any outstanding amount, at the end of the period, by March 2019, we will consider to distribute as a special dividend to our shareholders.
Okay. So if I understand you correctly, the strategy is to try to offset dilution from converting shares and purchase an equivalent amount. Do I understand that correctly?
Yes.
Okay. Just want to be clear.
Equivalent amount, or return those excessive cash to the shareholders.
Okay, great. One last question on just fundamentals here. Advanced packaging, I am pretty impressed with the breadth that you guys are talking about here. You made some interesting comments in your press release with things like flip chip growing 140% year-on-year. I am curious if you are seeing that. I know you have very strong activity in low pin count flip chip. Are you seeing that migrate to more of the advanced higher pin count applications as well?
More low pin count flip chip, and also partly one of the investor asked a question about Bitcoin applications.
Okay, fair enough. Thanks, Robin.
Thank you. Our next question comes from Mr. Alpha Lai from Citigroup. Thank you.
Hi. Can I have a follow-up question on the tax rate? We noticed that the tax rate actually was 16% in 2017. Can we use this as an assumption for 2018 or maybe in the upcoming years? The reason I ask is, we see in the past history when the Europe revenue going up, actually the tax rate also going up. But this time things are different because the Europe revenue actually is growing very strong in 2017. Can you give us a little guidance on it? Also, the Japan's revenue went up about over HKD 200 million and about 17 - 18 times year over year in the December quarter. What has drove the stronger billing? Thank you.
To address the tax rate first, I think you are right. I think we should look at tax rate on the yearly basis. Do not focus on the quarterly. Because on a quarterly basis, there are some adjustments here and there. On a yearly basis, this year tax rate, the headline tax rate is low, but you have to add back the CB, because the HKD 200 million CB gain in the first quarter is non-tax effect. So add it back, I think we bring our tax rate to about 15% -1 6% something. So that is about right for the kind of top line in geographical mix. On a high teens tax rate, I think that is about the level we are looking at on the whole year.
Yeah. Also with the big order we have won, for the SMT business, last year is delivering in China. So, that is why from a public contribution point of view, also a sizable portion contributed from the activity in China.
Okay. Thank you. What drove Japan's revenue up so much?
Typically, it has something to do with the revenue recognition in Japan. In most of the other countries, as far as we ship the equipment, in most of the case, we can recognize revenue. On some of them, we have to wait until we got the buyoff. In Japan, 100%, we can only recognize the revenue when the customer has accepted the machine. Typically, customer will cooperate with us. Towards the end of the year, they will try to expedite all these activities and help to clean up all the outstanding buyoff. There is no special meaning over there. It is only we affected in 2017, we shipped, I would say, a good number of equipment to Japan. Before the end of the year, customer had released the acceptance, and we can convert them into billing only.
Okay, understood. Thank you.
Thank you. Our next question comes from Tina Wong from Credit Suisse.
Thanks. I have a follow-up questions on CIS. Last time, W.K. mentioned about the trends of outsourcing in current customer, CIS customer. I would like to follow up your view now. Would you see the current CIS customer will take a big place this year?
Well, our customers, the major smartphone makers, have outsourced their camera module assembly to others. There are some Korean players, some Japanese players, some Chinese players, Taiwanese players over there. ASMPT has been working with all these people. As we have shared, take the active alignment machine as an example, our biggest competitor is not the independent supplier, but the internal supplier from some of these customers. We have to continue to improve ourselves. We expect we are penetrating into more and more accounts, including customers in Korea. Of course, we do not expect to replace the internal supplier totally. Probably, a customer will define certain applications they feel their own internal supplier will be good enough, and certain applications define the solution from ASMPT is more competitive. It really depends on situation by situation and case by case.
You need more time to watch the customer progress or your competitiveness in this account, right?
Well, you cannot expect to take 100% market share. For the active alignment machine, we obviously have more than 50% market share. We almost eliminate all the external independent suppliers. The other suppliers are very small compared to us. I would say, I only measure the other suppliers, other than the internal supplier, probably we are easily in the 9:1 kind of ratio. The internal supplier is still a major player over there. For certain camera applications, our customers' internal supply arm, they are able to provide machines good enough. This customer may not see a strong push to adopt the ASMPT solutions. I would consider that as a fact of life, for the business environment. Going forward, we expect that customers will be having more innovations on the camera.
Typically, internal suppliers will not be able to catch up with the innovation at such a fast speed, not because their technology is no good, just because they are not being exposed to so many different customer challenges. An independent supplier like ASMPT has this advantage. We have been confirmed that we are being challenged by multiple customers, so typically our way of innovation will be much faster. I think it is a matter of time. The internal supplier will continue to shrink, the external supplier will continue to grow.
Thank you.
Thank you. Our final question comes from Charlie Chan from Morgan Stanley in Taiwan. Thank you.
Thanks for taking my question again. At the end of the day, I think that the main question remains to be, how do you reconcile the weak smartphone demand to your first half outlook? Apparently, no matter Apple iPhone, China smartphone demand has been very weak in 1Q. Can you give us some color how you reconcile that weak demand to your first half very strong outlook?
Well, we also read a lot of reports, news, from the media, talking about certain phone makers having to cut down their production of their shipment. However, when it turned into the actual booking activity for us, we do not really feel our booking has been affected by all this kind of negative reports, news. Of course, we do not know whether it is a matter of time. We do not know. But as of this moment of time, what I can share with you is that we do not really feel customers are concerned about that, or customer has slowed down their capacity expansion or capability expansion. Maybe, actually, matter of fact, everybody believes the industry is moving from the past 10 years. The past 10 years are so heavily dominated by the smartphone growth.
But many of us in the industry believe the next 10 years will be quite different. The next 10 years will be driven by multiple, very broad-based drivers. Take the IoT, Internet of Things, for example. Everybody believes no single end application company can dominate the market. So it will be a very diversified market. There will be many different applications, many different end customers, many different players in the market. So it seems to be the industry dynamics are reflecting more and more of this direction at this point in time.
Okay. On the discrete business, is that the power discrete, like IGBT, MOSFET, or other components like passive components or simple logic? Can you clarify, what do you mean by the strength in discrete business in 1Q?
For this, just now you mentioned about IGBT, some MOSFET. Those are typically, yes, they are part of the IC/Discrete business as power management. These are the strong market. They are not growing at a crazy rate, but they will be more steady, high-growth rate for the past few years, very strong demand. We expect this will continue, partly related to this electric car, but mainly still related to the mobile applications or portable applications. So, this will continue to be an important area for us.
No passive component?
Passive component, we don't really benefit too much from the passive components. Because those passive components don't really need very complicated assembly or packaging equipment.
Okay, understood. Thank you.
Thank you. Leonard, would you like to wrap up the call?
Okay.
Yes, Leonard, would you like to wrap up the call?
Yes.
To the call like that.
Well, I think we've had a very good discussion this morning with very good questions, but I'm 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.
Okay, thank you.
Thank you for your participation. This concludes your conference. Thank you.