Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Line attendees please remain on call, and I will be turning the floor over to Mr. Lee.
Thank you. Good morning, ladies and gentlemen. Welcome to the ASM Pacific Technology 2017 Q3 results investor conference call. 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 information and visions. 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. Danny Lam, CFO of ASM Pacific Technology. We will start with a brief discussion about our 2017 Q3 results, followed by a Q&A session. Without further ado, let me hand this over to Mr. W.K. Lee. Mr. Lee?
Thank you. Ladies and gentlemen, thank you for joining us for our third quarter results briefing. The electronic industry continued to do well during the third quarter of this year. This momentum has led ASMPT to achieve new quarterly records for both group billings and net profits in Q3, as well as for the first nine months this year, after excluding the one-time non-cash gain recognized from the acquisition of SMT placement equipment business in 2011. In fact, the group and its three business segments set many new records in Q3 and the first nine months of this year. We achieved record group revenue of $654 million in Q3, up 21.8% from a year ago and 15.5% from the preceding quarter, respectively.
With higher revenue coupled with success in strategic transformations implemented over the past few years and aggressive cost reduction measures made, we achieved new records in group net profits for both Q3 and the first nine months of this year. Group net profits for Q3 rose to HKD 862.8 million, up 49.3% from a year ago and 14.9% as compared to the previous quarter. Group gross margin for Q3 and the first nine months of 2017 were 14.6%, representing year-on-year growth of 123 basis points and 295 basis points, respectively. While the Back-end Equipment segment contributed strongly to the group's performance during the first half of 2017, the SMT Solutions Segment delivered outstanding performance in this quarter, setting new records in both billings and segment profits.
Bookings in Q3 was $574.4 million, representing growth of 31.8% year-on-year, but reduction of 13.1% quarter-on-quarter. The slight quarter-on-quarter reduction was in line with market seasonality. Based on geographical distribution, our top five markets in Q3 were China, inclusive of Hong Kong; Europe; Malaysia; Americas; and Taiwan. I will continue to give an overview of our performance in Q3 and the first nine months this year by business segment. First, I would like to cover the Back-end Equipment segment. During Q3, momentum of the CMOS image sensor, CIS, and IC/Discrete semiconductor markets remained strong .
Revenue for the optoelectronics market achieved a quarter-on-quarter improvement. Billings and bookings of the Back-end Equipment segment rose 1.1% and 20.3%, respectively, as compared to a year ago. Billings for the first nine months of this year set a new record. Gross profit in Q3 improved by 299 basis points year-on-year to 48.3%. Segment profit margin was 26.4%, representing improvement of 194 basis points year-on-year. During Q3, the Materials segment continued to set new billing records. Business momentum was healthy as billings grew 17.3% and 3.9% against the same period a year ago and Q2 this year.
Bookings for Q3 and the first nine months this year grew 6.5% and 23.2%, respectively, over the same period last year. In fact, for the trailing 12 months period end of September 2017, bookings of the Material segment surpassed the $ 300 million mark, setting a new record in ASMPT's history. Gross margin in Q3 improved by 171 basis points quarter-on-quarter and 37 basis points year-on-year. Q3 this year was a robust quarter for our SMT Solutions segment. It achieved new records in both billings and segment profits. Comparing to the same period last year, billings and new order bookings showed 54.5% and 56.2%, respectively.
For the first nine months this year, new order bookings grew 37.2% year-on-year, and billings were a new record of $640.3 billion, representing growth of 30% over the same period last year. Segment profits for both Q3 and the first nine months this year set new records. Segment profit margin for Q3 was 22.2%, representing growth of 631 basis points and 680 basis points as compared to Q2 this year and the same period last year, respectively. As for the outlook, we expect to end the year with a high note. We hit new full-year billing records for the group and all three business segments. Despite a higher-than-anticipated billing in Q3, we anticipate good billing in Q4 to achieve a low to high teen percentage growth, with all business segments showing positive year-on-year growth.
On the other hand, gross margin is expected to come down from Q3 level in line with lower volume. Since our customers are still positive on their factory loadings in Q4, we expect good bookings for Q4 to show a single-digit percentage growth year-on-year. 2017 is going to be a record year for ASMPT. The global semiconductor market is also expected to reach a new high. It seems that this time, the industry growth was propelled by broad-based drivers. It has now become a consensus in the industry that the pattern of the current industry cycle is different from that of the past few years.
Many people in the industry attribute it to the increases in semiconductor contents in automotive and other electronic modules. It is generally believed that in the years to come, Internet of Things, artificial intelligence, and data analytics will become the most important growth drivers of the industry. ASMPT is looking forward to set many more new records beyond 2017. With this, thank you for your attention in our results announcement. We are ready to take all your questions.
Thank you. We will now poll for questions. 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. Our first question comes from Mr. Bill Lu from UBS. Thank you.
Yeah. Hi, good morning, and thanks very much for taking my question. I was just hoping to get a little bit more details on the specific applications. If you look at the Back-end Equipment, obviously in Q3, you said the CIS was still quite good. Looking out into the fourth quarter, bookings is down sequentially. Is it fair to assume that maybe semi equipment is flattish and the decline is really more in CIS and AA, active alignment?
Morning, Bill. For this CIS, typically, there is a seasonal pattern for every year. Customers in general are very aggressive in terms of placing new orders to us during the beginning of the year. In general, for this particular business, Q1 and Q2 are the typical peak quarters in terms of booking, and the bookings start to come down due to seasonality in the second half. While for billing, typically, it will peak at Q2, Q3 timing. So, this is a typical seasonality for the CIS business.
Great. I know it's a little bit early, but can you talk about as you're engaging customers for 2018, what the outlook for the CIS business 2018 versus where you were about this time last year?
Well, I would say we see generally customers are still very optimistic about the coming year. We do not see or do not hear any people start to concern about a possible slowdown in 2018 kind of thing. I would say there are many drivers for the industry that make us continue to be optimistic about the future. I think dual camera penetration will continue, in our opinion. 3D sensing will start to see a wider adoption, including for Android phones. So we are continue to be optimistic about this CIS business.
Thank you, Bill. Our next question comes from Steven Pelayo from HSBC. Thank you.
Yeah. Just first to clarify a bit on Bill's question. When you look at the third quarter as well as the outlook for the fourth quarter, on a relative basis, if I broke up your back-end business into CIS, Opto, and then everything else, your traditional IC business, are they all kind of down the same sequential? Or are there relative strength one versus the other for both the third quarter and the fourth quarter?
In general, I would say typically towards this period of the year, in general, all three business will come down compared to the earlier quarters in the year, as I mentioned, the typical seasonality. Whereas on a specific year, there could be differences. It really depends on specific customers' ordering pattern during that particular timing. For example, if their customers, they want to build up or increase certain capacity in a specific area, for example, in CIS or in LED or in IC/Discrete, then they may behave differently. But overall, we expect IC/Discrete, CIS should come down on a seasonal pattern. Whereas LED, a little bit depend on customer specific.
Okay. Maybe just on SMT, obviously a very strong third quarter. Congratulations there. It looks like your bookings are relatively flattish, too, giving you some pretty good visibility into the fourth quarter. I guess my question is, as you looked at 2018 and maybe a broadening adoption of substrate like TTB, how are you feeling about, A, the potential digestion phase, I guess, maybe in the first half of next year, or, B, do you see enough breadth coming in with more customers to keep SMT sustaining such solid levels as you've seen in the second half of this year?
Well, for the SMT, certainly, Q3 was a very good quarter for us. In terms of billing wise, it's a little bit ahead of what we have anticipated a year. We expect actually, for some of those orders, although we received in Q3, the billing should recognize in Q4, but in reality, the booking was received in Q3, and the billing also able to be recognized in Q3. So that is the reason why our billing for Q3 a little bit ahead of what we have anticipated. Despite that, we still expect some more orders to come in in Q4. Probably, we'll continue to be recognize the billing in Q4. So, we still are optimistic about our SMT business in Q4, despite a very strong performance in Q3. Whereas for outlook in 2018 about substrate IPCP, we are not able to be very specific.
As you know, the adoption of the substrate IPCP is still limited to specific customers at this point in time. But we do expect a more similar kind of PCP will be adopted, in the future, especially, with the introduction of the 5G phone, as we have shared before, and many people in the industry has pointed out, for the IT phone, probably battery will become one of the limiting factor. One of the ways to solve the problem is to free up more spaces, to have a thicker and a larger battery. So we do expect this to happen. Other than smartphones, actually, we see in the SMT business, Europe is demonstrating very strong momentum in Q3.
We see this momentum continue. It was mainly driven by automotive and industrial electronics. So, we are very optimistic about our SMT business. At this point in time, we are not forecasting a major correction for us in 2018 for SMT because we don't expect to repeat the strong buy of semi, that is a smartphone in 2018. We believe other applications will actually cover some of these shortfall, relating to the smartphone manufacturing in 2018.
Thank you, sir. Our next question comes from Kyna Wong from Credit Suisse. Thank you.
Thank you for taking my questions. I have some questions since strong results. I would like to follow up more about the SMT outlook in 2018 from these questions. As management mentioned, other application cover some shortfall, and you don't expect major correction for 2018 SMT. What do you see about the automation that could drive the demand on the SMT in perhaps Asia manufacturing, along with the China focus on the so-called automation or industrial Industry 4.0, etc . The second question is about, we see you are adjusting the dual camera, so 3D sensing as growth driver for CIS market. What do you expect, the momentum that next year, the CIS business could bring in, like the surprise or orders? That's my question.
Well, let me cover the SMT. As I mentioned earlier, we see there are four application drivers for the SMT business. Certainly, smartphone is one of it this year. But as I mentioned, we also see very strong momentum in industrial electronics as well as automotive. We see this will continue. For the area of automation, Industry 4.0 as you mentioned, certainly, they will drive the industry growth also, but probably it's more, I would say, a gradual kind of growth. With the higher electronic content, definitely more semiconductor chips need to be placed onto some kind of PCB or a substrate for this SiP, so System in Package. From that perspective, we expect the demand for SMT equipment capacity will continue to be strong and continue to be increasing. That's how we look at it.
For the CIS, as I mentioned earlier, we see two drivers for the CIS. One is the dual camera penetration rate, we believe it will continue. The other one is the 3D sensing. In the dual camera, we see more and more people start to adopt this active alignment. As we have shared before, not everybody in the market has adopted active alignment approach yet. Some phone makers still stick to the passive alignment approach. As we have pointed out in the past, there were so many advantages for active alignment assembly process.
So we see this become a widely adopted approach, we do expect this momentum will continue. Whereas, on the other hand, we believe 3D sensing will be a success. 2018, we expect to see Android phones come with this 3D sensing. Nevertheless, for the current 2017- 2018, 3D sensing, people talk about front-side camera. So we believe when we reach the WSI 3D sensing, it will really, the time this technology will take off in a big way in the consumer applications. So we believe this 3D sensing, and these two camera, will continue to drive our CIS business for a number of years.
Thank you. Can I follow up a question about the competitive landscape, because I would like to ask, in the SMT design, we see ASMPT is gaining share continuously from maybe Japanese competitors in this area. That's why the CIS, we see the competition will intensify in the active alignment. I already see ASMPT is positioning to be more high-end and with more new innovation in terms of the equipment efficiency and also to handle a more difficult complicated module. So now what we see about the competitive landscape in this area.
Well, I think for the competitive landscape in the SMT design, I think so far, our machines demonstrate high precision, and also running at very high speed. People can typically either achieve very high speed or very high precision. But ASM has consistently demonstrated we can achieve both, and that actually offer ASM an edge over the others. But we don't take our competitors for granted. We expect they will catch up, okay? So we will continue to, I would say, innovate and continue to drive ourselves to higher performance. But if the market have a faster adoption of high precision or fine pitch substrates, that in the short term, I think, we will be able to benefit more.
For the CIS, active alignment is definitely one of the technology we are leading in the market. But in the 3D sensing, actually, it's more than just the active alignment. It is also actually precisely placing the multiple components together. It is also very important. So ASM also serving this particular area so strongly at this point in time. We believe we are having a good market share at this point in time. I think more important in the CIS area is that the customers select ASM as their technology partner.
That is why ASM has been able to have an early start compared to any of our competitors in this particular area. That is why we are able, consistently in the past, to tell you what new technology are expected. Because we know the pulse of the market, as the reason is because we are being selected to work together. So I think this being selected to work together is the most important advantage of ASM over our peers.
Thank you. Our next question comes from Arthur Lai from Citigroup. Thank you.
Hi, W.K., and the whole management team. This is Arthur Lai. My first question is to W.K. I think you are more confident and also positive on the semiconductor demand, driven by the automotive and also IoT, and you mentioned your clients are getting a stronger signal in the demand side. Is it fair to say that versus last quarter, you are getting more upbeat about the demand outlook?
Well, I will put it in this way. Last quarter or few months back, we are in the middle of the year. So if you look back in the past few years, we almost always come across a pattern, in the second half of the year, things start to go down into a cycle correction. You know, in this industry, actually, the visibility is not too far off. So it has been very difficult for us to really see a few quarters down the road. So after three months, I will say, what really make us feel comfortable is that, we do not hear any of our customers talk about a possible slowdown after many quarters of strong performance. So far, we never hear of that.
Customers are still talking to us on new projects, talking about their either capacity expansion, few of their new factories next year, or they start to talk to us working on some new developments. We are seeing this kind of momentum, and further support by, I just mentioned about, we are seeing very good momentum in Q3. Do not forget, actually, Q3 in general should be a quiet quarter for Europe. But actually, we see very good momentum in Europe. Probably, we believe this has a lot to do with the improvement of the global economy as a whole.
Because of automotive, besides of the high electronic content, I think it is also driven by the general macroeconomic. We see the automotive sector strong, the industrial sector strong, and when we check back on the customer who are buying our assembly equipment in Europe, we see a very broad base. Those are positive elements to make us feel comfortable about the foreseeable future.
Yeah. Two follow-ups from your guide. I think, number one, can we say the investor may be too concerned last quarter on the 2018, the semiconductor demand slowdown? The second thing I also want to echo what you say, if you look at Europe, you post 12% year-over-year growth, and in Korea, you post 113% year-over-year growth. Can you share with us a little bit what that revenue come from? Thank you.
Okay. Well, actually, I still clearly remember a few months back, I clearly told everybody, I do not see we have reached the peak. I do not see that. Well, I think certainly some investors do not agree with me, but I think very obviously for the last one two months, probably people do not talk about this anymore. I think, yes, I still hold to my view, there will be at least some more good quarters to go. I think that as the What was the second question? You talked about the I am sorry, can you repeat your second part of the question? Yeah.
Korea.
Korea. Korea. Comparing Korea and Europe. For Korea, at this point in time or for this year, our strong performance, I will attribute a larger part to CIS related. Although we do expect, in the future, the advanced packaging part will start to increase, but for 2017, a larger part of the strong performance in Korea is CIS related. Europe, as I mentioned, typically in Q3, this should be slow. However, what we are particularly excited is not the feeling of year-on-year growth, it is the booking momentum. The orders we received in Q3 this year from Europe is encouraging. I think the booking momentum is a better market indicator over there. As I mentioned earlier, when we carefully analyze it is not related to specific customer ordering, but a broad base of customers placing orders to us.
Thank you. Our next question comes from Charlie Chan from Morgan Stanley in Taiwan. Thank you.
Hi, good morning. Congrats for a great third quarter results. My first question is on the AA front line. Just a very simple question to compare 3D sensing versus ToF cam, which do you see more technological complexity? Thanks.
I would say they are different. At this point in time, the AA for ToF camera, from a precision point of view, is more demanding. However, as I mentioned earlier, the 3D sensing involves more components, so the relative accuracy of the components are important. Also, this is still a technology evolving at this point in time. Some customers may still want to adopt more advanced technology in assembling those. From a current development point of view, AA is more demanding in terms of technology. But, in the years to come, we expect far more innovation will come from the 3D sensing area.
Okay. So in that case, do you think the outsourcing of the AA equipment will accelerate? I know some of your key customers in Korea and China, they have some very big captive capacity, right? Captive equipment. Do you think that also— Yeah.
Well, as we have shared in the past, we believe the industry cycle will continue to move, the pattern will continue to move into outsourcing. Based on our own market intelligence, we believe customers in China last year, if they had installed new AA capacity from captive in-house supply, we believe this is very minimal. Okay? Very minimal. Actually, when we talk to all those customers in China, actually they assure us their new direction is to buy from ASMPT for the mainstream application.
Their own in-house will develop for certain very specific application, very small quantity. We are expecting to, I would say, to change the picture in Korea also. As you point out, Korea's customer also have a strong in-house supply, but we are seeing obviously our equipment offering a better advantage. We do expect we may be able to also change the picture in Korea in 2018.
Okay, thanks. Let me switch gear to another segment, that fan-out wafer-level packaging. What is the industry progression now for that fan-out adoption, and more fundamental question is that can ASMPT benefit from this trend and why?
I think for panel-level fan-out, still in the early stage. Certainly, more customers are interested in it. As we have reported in the past, we are aware one customer in the early stage of preparing for volume production. They are on track. There are many other customers want to get into this area. I think, as of this point of time, our equipment probably is the only equipment has proven in the field. We are able to demonstrate such a large panel size with such a high accuracy and productivity. So we try of becoming the industry de facto standard. Whoever new customer want to jump into this particular area, the first one they talk to has been ASMPT at this point of time. So we believe, when the panel-level fan-out take off, ASMPT definitely will be the largest beneficiary for this particular application.
Thank you. We have our next question come from Laura Chen from BNP. Thank you.
Hi, good morning. Thank you for taking my question. Just very quickly, given the promising outlook for overall different segments around the world, I just wondering that do we have more aggressive CapEx expansion plan into next year, or do we see any capacity constraint at this moment?
We are still in the process of working out our own planning for 2018, so we have not finalized our CapEx for 2018 yet. For the past few years, we have successfully convert our manufacturing model to adopt a certain portion of outsourcing. It turns out to be very successful for us. So it allow us to deliver a significantly better financial performance, in particular in our Back-end Equipment business. Last year, we set up our Malaysia factory for SMT. So this year it start to contribute.
Actually, without the Malaysia factory, we had get ready in the beginning of this year, we won't be able to deliver this kind of good result.
So we are still expanding. We are putting up a new factory in Malaysia, but that won't be ready for production until early 2019. We expect in 2018, if there is a need for higher capacity, it should be fulfilled by increased level of outsourcing. Whereas in CapEx, is there a possibility we are going to increase our CapEx? I would say the chances is there, because we for the past two to three years, we have test out the robotic automation concept. It really demonstrate we can significantly improve our cost structure.
This year we have installed a few more robotic lines. We expect in 2018, 2019, and 2020, we will continue to accelerate this program. If we decide to increase our CapEx, it should be the area. Other than that, we do not see any other structurally different area we want to put in more CapEx in 2018, although, as I mentioned earlier, we are yet to finalize the CapEx budget.
Okay, thank you. Also just a follow-up question. You talked about the panel-level fan-out packaging. Can you also talk about the progress of the wafer-level base fan-out?
Well, for the wafer-level fan-out, we are also doing something. We actually are working together with different customers in this particular area. We are actually developing a new process and also new solutions for customers, either improve their placement accuracy or their placement speed. We are working with two different customers at this point of time in this particular area.
Thank you, sir. Our next question come from Simon Woo from Bank of America Merrill Lynch in Korea. Thank you.
Yeah, thank you very much. My name is Simon Woo from Bank of America Merrill Lynch. Very quickly, number one question. Would you recap overall your shareholder return policy, including the share buyback program and also the major shareholder, the ASM International stake sales, no further this kind of transaction will happen? I will ask more fundamental questions for the future. Thanks.
Okay. For the total shareholder return policies, in terms of the dividend, starting from this year, we adopt a gradually increasing dividend policy. The idea is that we will try to keep our dividend at least a sustainable level on an absolute basis, if not increasing. Okay? That is our policy. Also, we start to have a share buyback program this year.
Although we have only bought back a small quantity, partly because of the lockout period for the past one month. This will be our, I would say, underlying policy at this point in time. Whereas on the major shareholder, as you are aware, probably, ASMPT is currently holding 34% of our shares. We do not have any information they intend to reduce further. Of course, I think, we are not able to really answer on behalf of ASMI on this particular question, but that is what we understand at this point in time.
Okay. Thank you, sir. Second question should be your newly growing area business, say, laser grooving and the dicing area. Your PT is still saying number two position, which seems to be DISCO, Japan, seems to be number one. What should be the overall progress for this area, the laser dicing area business, and also whether it can be meaningful for your sales for next year, or still we have to wait another year?
Well, we are making good progress in this particular area. But on the other hand, as you mentioned, that particular competitor is really a respectable competitor. They have a very strong position in the market. So we are challenging a giant in that particular market segment. However, despite that is the fact, our superior technology really gaining a lot of attention from our customers. In particular, now, we are already moving from laser grooving to laser dicing. Customers actually, when they try, when their wafer become thinner and thinner, laser dicing seems to be the best solution for that. So many customers are working together with us to directly using laser technology to replace either mechanical blade saw or laser stealth dicing.
The wafer are getting too thin, the traditional laser technology offered by our Japanese competitor. They offer the laser stealth dicing technology. Actually, it will not be so applicable or so suitable for thin wafer. So we are seeing a lot of momentum. We are actually evaluating this technology together with many of our customers in this particular area, and we also continuously coming out with new innovation in this particular area. So I believe we are getting good momentum. Whereas this is, in terms of business contribution, we believe in 2018, it will still be a small area for us yet. It will take a little bit more time to really take off that customer to really qualify this technology to run their production. I think it will take a bit more time.
Thank you. Our next question comes from Kevin Jang from J.P. Morgan. Thank you.
Good morning, management. Thanks for taking my questions. My first question is on SMT. The booking in Q3 was down 1% quarter-on-quarter, which seems like below your previous guidance of up to low double-digit sequential growth. I want to ask, is it a kind of delay in demand, or the demand is actually weaker than your previous expectation?
Well, yes, you are right to point out that the Q3 booking for SMT actually down 1% QoQ. As we report out in our guidance a few months back, it will be subject to the timing of the order. Part of the order will be coming in. Originally, we expect all the orders will come in in Q3 and then really recognized in Q4. In reality is that part of the order comes in earlier in Q3. However, not all those orders we anticipate have come in Q3. As I mentioned earlier, we do still expect some orders to come in in Q4. Nothing special, I would say. Should those orders have come in in Q3, I would say we already met the previous guidance we have pointed out, so I think nothing special here.
Okay, thanks. My second question is on memory. I think earlier this year, you mentioned that ASM will do more exposure in memory sector. Would you please give us more colors on this, in terms of what kind of equipment you have commenced shipment and the current revenue contribution? Also, what is your outlook for 2018? Thanks.
Yes. Memory is an important area. Everybody realizes, actually, a part of the high semiconductor industry this year was related to this memory. We expect to have a major big boom in wire bonding for memory application in 2018. We expect to start to see wire bonding for memory. We will make a meaningful contribution next year. As I mentioned earlier, for the laser dicing, actually the thin wafers, mainly memory wafer-related. Okay. However, we expect the meaningful revenue contribution should be at least another year later, okay, because due to customer qualification, so they take time to qualify. Then, for the wafer thermal frame out, we understand, on the agenda for our customers, they want to use this technology to package memory also.
So, if this really takes off, that will be another major application for ASMPT. Now, then in the memory, there is another application, is the high-bandwidth memory modules. For the data centers, servers. This is the area now people need to use TCB bonders. This is still under qualification evaluation with customers. ASMPT are having multiple solutions to address the memory market. So, when some or all of this take off, it will contribute to our business in a sizable way, in the years to come.
Thank you. Our next question come from Tony Tang from Nomura. Thank you.
Good morning, management. Thank you for taking my question. My first question is regarding to your season guidance, because, I saw your backlog in the end of third quarter is like $578 million. But according to your outlook, it looks like the billing number is lower than your backlog number. I am wondering what is the gap between the backlog and the guidance.
Oh, some of those billings, or some of the shipment we make in Q4 may not be able to recognize billing in Q4. Some of this will be a timing effect.
Okay, got it. It probably will be recognized in first quarter.
Yeah. Yes.
My second question is regarding your booking outlook, by different business segments. Wondering if you could kindly give us a color about the booking momentum in fourth quarter, by second SMT and different, if it is possible.
Well, actually, a little bit difficult to predict Q1. In general, if I talk about the historical pattern, entering into a new year, in the beginning of the year, it should be a low season for SMT. Typically, that is the case. SMT will be lagging behind by one quarter. In general, before Chinese New Year, it will be slow for Back-end Equipment also. Typically, customers start to pace all the aggressively after Chinese New Year. This year could be different, because Chinese New Year is relatively late, in the middle of February.
We are not sure about the impact yet. However, in general, I would say other than this timing, we as of this point of time, as I mentioned earlier, because when we talk to customers, seems to be everybody still quite optimistic about their business. We do expect the current good momentum will continue. How much it will be affected by this holiday period timing, we do not know. The Q1 booking is really difficult to predict at this point in time.
Sorry. How about the fourth quarter, by different business?
Fourth quarter, QoQ, we do expect all the three segments will come down, QoQ. However, we do expect some relative mild come down for Back-end Equipment as well as Materials. Maybe it will come down in a slightly bigger portion for SMT. But other than that, there is nothing really special, I would say, as of this point in time, yeah.
Thank you. Our next question come from Stefan Chang from Maybank. Thank you.
Hi. Thank you for taking my question and congratulations for the good Q3 results. Just one follow-up regarding the guidance part. I think in addition to the booking as well as the sales guidance, another thing is the SMT gross margin has been at above 39% for five consecutive quarters. I am just wondering if this level is a good reference for our assumption going forward or if there is any particular driver to make it higher or lower from here in your perspective.
Well, I would say we have done something to prepare for better gross margin going forward, is the setting up of the Malaysia factory this year. When we look at the gross margin of SMT business, we also have to take into consideration the strengthening of the euro in this year against U.S. dollar. Despite the strengthening of the euro against U.S. dollar this year, actually, we are able to sustain our gross margin. I would say, if not because some of the cost-reduction effort we have put in place, actually, we should see a deterioration of the gross margin due to the exchange rate effect. However, we expect actually the Malaysia factory continue to ramp up. In the long term, I think we have prepared this business for a gross margin above the 40% level.
Okay. Thank you for this. My following question is going back to the second equipment. You mentioned about some of those drivers for the advanced packaging, like fan out, like thermal compression. I am just wondering if it is possible for you to rank the contribution to the growth in the time frame you can foresee among all of these new drivers. Thank you.
You are talking about the new products, right? Relating to the-
Yes, that is correct.
Yeah. Well, I think, it's difficult to quantify at this point in time because, as I mentioned earlier, also partly due also related to the customer's business success, like the wafer level, panel level fan out. It's not only for ASMPT. Certain area, for example, we are penetrating into the memory. That's easier to predict, because it's more on our hand. We know we have a very good vibe on there this time. We should be able to penetrate. A little bit difficult. Also, for example, the laser dicing for fan wafers, it also depends on the timing. How much time the customer need to take to qualify this new process. A little bit difficult to really quantify the future contribution to our revenue at this point in time.
Okay. That's clear enough. Thank you very much.
Thank you. We have our following question come from Mr. Bill from [inaudible]. Thank you.
Yeah. Hi there. Thanks very much. On the SMT business, you previously talked about the auto being strong going into next year. Can you help me with, if you look at SMT this year, what is the revenue contribution from smartphone versus auto, and what do you think the split is going to be next year?
I do not have this exactly done here. But overall, automotive is still the largest target market for us for the SMT business. Certainly, this year, smartphone application mobility has increased, but the automotive is still the largest. I have to double-check the comparison between industrial electronics and this smartphone mobility. But automotive is still the largest application market for us for SMT.
Okay. Is the implication that the automotive will still grow as a percentage next year?
Yes, we do expect that because, with the higher semiconductor content going into automotive also. So automotive-related SMT demand should continue to be strong.
Okay. If I look at mobility within SMT, the last time we had a big upward cycle was in 2014, and revenues in SMT, Q3 of 2014 versus Q3 of 2017 is not very different. Now, I understand what you are saying, which is that it is more spread out this time. But I think, we also think that your market share is higher this time around versus before. Can you just talk a little bit more about that in terms of, is that the right way to look at it? Two is, how big is the opportunity this time versus last time? I am just trying to figure out what is left.
Well, I will say, a little bit difficult for us to really give you the specific details. But, yes, you are right. I think this time we have a larger market share. You can also understand actual business opportunity potential depends on so many factors, okay? So, I cannot say at this point in time, all the potential related to this particular upgrade cycle has been fully realized.
As I mentioned, we still expect some more orders to come in. I also cannot rule out, there could be future further orders to come in, maybe in the subsequent quarter. So I think this one is really difficult to tell at this point in time, b ut other than that, I will say we are making good progress as you see for the nine months, we have set up a new record in billing already, so even take away this order, it is still a substantial progress for our SMT business so far.
Great. Thank you very much.
Thank you, Bill. We have our next following question come from Steven Pelayo. Thank you.
Yeah, just a couple of quick follow-ups. Following up with Bill again, more specific on the SMT mix, just in the second half of this year. I am looking at what happened in 2014 as well, and you guys almost did that kind of $300 million quarter in the third quarter as well. Can you talk a little bit about, is the concentration either by customer, by segment in the second half of this year, and does that then give you some insight on potential digestion in the first half of next year?
Well, I think that particular big order we refer to certainly is the largest order for us. However, as I mentioned earlier, automotive is still the largest segment for the SMT. So actually, other customers in the automotive are not too far away from this kind of orders. Also, as I mentioned earlier, in Q3 this year, in terms of booking, we see very good momentum from Europe, and with orders coming from a very diversified customer base. So I think this will be continual. We also have a strong market position in Americas.
Although Americas is improving, but stable, not as strong as Europe. In China, we have shared with you, due to our high price performance, we are less successful with the local Chinese supply chain smartphones. But we are making effort to change our market position in this particular area. I would say that represents a growth opportunity for ASMPT going forward so that we are successfully address these less demanding application market segments.
Just to be clear, you talked about auto being the majority of SMT. I didn't understand if that was in the context of the full year or actually of just the large growth that you've had in the third quarter. If auto is still the majority of that, then I guess I don't have to worry about it being so lumpy in the smartphone side. I have one more question after this.
Well, I will say absolutely a larger part of the SMT, a significant part of the SMT billing in Q3 is from the smartphone order, that big order. However, we booked in $292 billion revenue in Q3 this year. If I take away the SMT, this smartphone order, still a very beautiful number. That's what I can tell you.
Thank you. Our next question comes from Mr. Arthur Lai from Citigroup. Thank you
Thank you. A quick follow-up on TCB. W.K., you said last time that the TCB opportunity is bigger than the fan-out from your view. Can you share the why, the high bandwidth memory use this very high-tech, but low output technology, and how your company to benefit from that? Thank you.
Okay. For the high bandwidth memory queue, they need to stack the memory chips on top one of each other. TCB kind of technology for direct chip-to-chip bonding technology is the must. They're using TSV to connect these memory chips. Because of that, they need to use very high-precision kind of placement technology and a very different kind of interconnection technology. Customers in general still face a lot of challenge in this area.
You see in the application market, the high bandwidth memory actually is taking off very slowly because as of this point in time, none of the customers has a very, I would say, satisfied solution. Either the throughput is too slow or the yield is not good enough. That's why customer continue to work with supplier like ASM, want to look for a newer method. We are still working on this. We can't be sure at this point in time to say we definitely have a better solution than anybody else, a solution that will satisfy customers' need, but that represents good opportunity for us to work together.
Thank you.
Thank you. Our next question come from Kyna Wong from Credit Suisse. Thank you.
Thank you. I only have just one follow-up question on the Fanout event packaging. Is this on trend or is this Fanout for AM?
You need to speak to the mic. We can't hear you clearly. Yeah. Sorry.
Okay. Sorry. Okay. I want to ask about the business opportunity in terms of wafer level fan-out technology and panel level fan-out technology for ASM Pacific, because I think different technology, but the content you could provide and also the advantage of your equipment may be different. I wanted to see how we could convert your customer standing versus the business opportunity for you all.
Maybe I can put it this way. First start with wafer level fan-out. I would say, in the market, there are two different wafer level fan-out technology. The older generation of wafer level fan-out technology that was originated from the Infineon technology. This technology do not require too high precision placement, but require a higher UPH. Okay? ASM do not have a big market share in the pick and place application in this particular area. ASM participate in this particular area with the laser grooving. Okay? There comes to customer start to, in the past two, three years, they start to have a new generation of wafer level fan-out technology. ASM has been pretty successful. In this particular application, this customer, they require far more accurate placement than the earlier technology.
ASMPT, and also this is a multi-chip application, so ASMPT participate in this area. We understand this wafer level fan-out will be put into the new phase, new version of technology. We expect ASMPT stand a very good chance in participating the new phase of development. Another area is the panel level. The panel level, the biggest challenge is the size of the panel to handle. ASMPT has offered our customer a solution that can handle substrate or panel of size as large as over 600 mm by 600 mm. As of today, we are the only equipment really capable to do this, and at the same time, placing the chips in a very high accuracy. We are talking about customized primary contact accuracy and also a relatively high UPH.
Far, we demonstrate very good technology in the market, and as I mentioned earlier, that triggers other customer start to lock on ASMPT board to want to collaborate with us, to deploy the similar platform into their other applications. In the market, people also back to a smaller panel or wafer. In the wafer level fan-out, people are using a 300 mm wafer diameter wafer as a substrate. There are customer talking about they want to use a 340 by 340 mm panel for this. Actually, you can say this is very fine, very poor distinction between a wafer level fan-out and panel level fan-out. Strictly speaking, you cannot call it a wafer because it's 340 by 340 square, but actually the size is such a size people can use the wafer level equipment to handle it.
With this one, customer are looking for a very high-speed placement. ASMPT is working with this customer to deliver to them very high precision, a very high output position. In the panel level fan-out, there's also another customer talking about embedded application. ASM working with them. Also another customer talking about they want to use a technology called adaptive patterning to lower the placement accuracy of the chips. With this one, we offer them SMT solution to do it. ASM actually have a multiple product, in covering a very diversified application. I think today ASM is the only supplier in the world have a full suite of solutions for this particular application.
Thank you. We have another following question come from Charlie Chan from Morgan Stanley. Thank you.
Yeah, thanks. On that AA equipment, I think some chairs are talking about the install base at customers are already high. Next year, the demand for the new AA equipment will decline year- on- year. Do you have any comments on this? Thank you.
We don't see that yet. Certainly, we don't expect a similar growth this year. The base of comparison will be much higher. as of this point of time, we do expect the demand is sustainable. We don't really see the demand will come down sharply in 2018.
Okay. on the fan-out, again, so I think you are well-positioned for that fan-out, right? longer term, do you think y our wire bonding or substrate-based related equipment business will also be about life by this fan-out business?
I think they are addressing different applications. Probably the fan-out will take away the high growth of wire bonding. That's our belief. However, it won't kill the wire bond. Wire bond is still the most cost-effective technology. We don't think fan-out, in the foreseeable future, can reach that kind of cost structure. in semiconductor industry, cost is still the very important consideration. For those applications, a fan-out does not offer a unique advantage. We continue to believe wire bonding will be the solution, will be the technology for interconnection, so the wire bonding will still be there. We expect the wire bonding will experience, I would say, a small growth, come back and grow for the years to come, or very small decline. we do expect that market sustained at least.
We don't expect that. We don't worry about that. As for the die bonding, because even you talk about fan-out, you still have to pick the die one by one and from the wafer and place to a substrate. This substrate could be a panel, could be a 300 mm wafer substrate. the demand for that kind of application will not go away. The other one, in the past, die bonder, don't need to talk about very high accuracy.
Typically, die bonder are talking about ± 25 micron accuracy. now, customer are talking about ± 10, ± 5, or even ± 3 micron. you can imagine, in order to achieve that kind of accuracy, the speed of the machine must be slowed down, and at the same time, the price of the machine go up significantly. Overall, the market size for this kind of pick-and-place machine will be significantly larger than traditional die bonder market due to slower machine and also much higher ASP. The number of dies should not be reduced.
Thank you. Our last question comes from Steven Pelayo from HSBC. Thank you, sir.
I'm surprised we haven't talked more about on the opto side. I know there's a lot of sensor and LED equipment being installed. Can you just comment a little about your current demand patterns? Is LED comparable to kind of CIS today, and what are you thinking about LED during the 2018?
LED still remain an important business for us. Competitively, it was outshined by the CIS business and the IC discrete business this year, partly because of the base of comparison was very high last year. Last year, it was a good year for the LED business. Going forward, we do expect the LED business continue. We are seeing a more MOCVD will be installed. We still expect this will be a driver for our business. Although, it will be difficult for me to predict whether the LED business will catch back next year to overtake the CIS business or not. Internally, all these three business units are competing with one each other. Everybody put up aggressive plan going forward.
General lighting and the big panel display continue to be the drivers for this particular application. In the market also, people start to talk about the mini LED applications. Probably people hear a lot about micro LED, but in our opinion, micro LED will be a more challenging technology, take a bit more time. In between, more and more customer are talking about mini LED applications. We believe this is another area. In the LED business, another potentially growth area we are exploring at this moment is the photonics market. With the explosion of this cloud computing, and also the forthcoming of the 5G network, we do expect the demand for super-fast interconnection within the data center will be strong. This is also another area where we are looking into, the photonics application area. We are still very optimistic about LED business.
Okay, last question. I know you don't like to speak specifically on quantifying individual product segments, but I'm wondering if I lump it all together, and if I define advanced packaging as kind of your thermal compression bonding, all your higher I-O flip- chip and fan-outs and laser dicing, is that at least 10% of your backend business today if I put all those together?
Not yet. Not yet for today. We are seeing the good momentum. I think it will not be too far away.
Okay. Fair enough. Thanks a lot