Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Mr. Leonard Lee will speak in-call, and I'll be standing by. Thank you.
Good morning, ladies and gentlemen. Welcome to the ASM Pacific Technology 2016 first quarter results investor conference call. Before we proceed, I would like to note that during the conference call, there may be certain forward-looking statements with respect to ASM Pacific Technology's business and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks which could cause actual results, performance, and events to differ materially from those expressed hereby 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 2016 first quarter results, followed by a Q&A session. Without further ado, let me hand this over to Mr. W.K. Lee. Mr. Lee?
Thank you. Thank you, Leonard. Good morning, ladies and gentlemen. Thank you for joining us. I will first provide you with the summary of results for our first quarter ended 31st March 2016, followed by Q&A sessions. As we have expected, group bookings in the first quarter of this year continued to improve over the preceding quarter. Group bookings were $409 million, or 7.5% better than the previous quarter. It contracted by 11.9% as compared to the same period last year due to slow global demand and China's manufacturing sector is still in contraction. Group billings were $368.3 million, fell by 2.3% and 6.3% against the preceding quarter and the same period of last year, respectively. Net profits of the group of HKD 128 million was 156.7% higher than the preceding quarter, but 55% lower than the same period last year.
Book-to-bill ratio of the group was 1.11x. Group book backlog continued to register healthy growth during the quarter. As of end 31st March 2016, group backlog increased by 11.5% from the end of last year to $433.7 million. By geographical distribution, China, including Hong Kong, Europe, the Americas, Malaysia, and Taiwan, were the top five markets for the group in the first quarter. I will now go into the three business segments, starting with the Materials business. Our Materials business performed well during the first quarter. Booking grew 13.8% quarter-on-quarter and 18.8% year-on-year. Billings were $55.1 million or 5.1% higher than the previous quarter. It declined slightly by 3% as compared to the same period last year. Materials business continued to improve its gross margin and profitability during the quarter.
It achieved a gross margin of 16.4%, representing improvement of 1% both quarter-on-quarter and year-on-year. Our Back-end Equipment business also did better for the first quarter. Bookings for the Back-end Equipment business rose 23.3% quarter-on-quarter, but declined by 6.6% year-on-year. All major products in our Back-end Equipment segment experienced quarterly bookings growth. Billings for the Back-end Equipment segment grew 7.8% to $164.8 million. It contracted by 6.3% against the same period last year. Growth drivers for the quarter include LED equipment, wire bonders, flip chip bonders, CIS equipment, and laser grooving and dicing equipment. Despite revenue remaining at a relatively low level, Back-end Equipment segment continued to achieve better profitability. Gross margin was at 39.9%, an increase of 2.6% and 0.4% over the preceding quarter and the same period last year, respectively.
Our efforts in realigning our manufacturing strategies and aggressive cost reductions continue to yield positive results for the profitability of this business segment. Bookings for SMT Solutions segment during the first quarter declined by 10.4% and 26.1% against the preceding quarter and the same period last year, respectively. These contractions were not unexpected, as the SMT equipment market typically lags behind the back-end equipment market by one to two quarters. Billings were $148.4 million. It contracted by 13.5% quarter-on-quarter and 7.6% year-on-year. Gross margin of SMT Solutions at 31.7% was significantly lower than the preceding quarter, mainly due to product mix and lower revenue. Due to changes in mix, gross margin of our SMT Solutions segment can fluctuate significantly quarter-on-quarter. Other than that, we do not observe any structural change that will affect our gross margin performance of this business.
As for the outlook, we expect group billings to achieve a double-digit percentage growth in the second quarter, given the sequential improvement in bookings, but we expect it to be lower than the second quarter of 2015. In terms of bookings, we expect that they will continue to be higher than the first quarter of this year. Overall, we believe that we will be able to continue to outperform the market due to our diversified end-user markets, our efforts to develop products to address the growth markets, our extensive product portfolio, and our large customer base. On this note, I thank you for your attention. We are now ready to take questions.
Thank you, sir. We will now poll for a question. If you would like to register for a question, please press star one. Thank you. Our first question comes from Steven Pelayo from HSBC. Thank you.
Yeah. I guess if we could start on the SMT gross margins. I understand you are saying it is nothing structural and product mix causes fluctuations, but this level of gross margin down on the 31% range is even lower than I think before your acquisition of DEK, which brought in higher- margin business. I am trying to understand, how can the mix be that off to cause this significant a margin deterioration?
I think volume is a major part of it. If we have analyzed margin deterioration, I would say if I try to attribute it on a roughly basis, a larger portion of the deterioration was due to volume. This mix has changed the margin by a few percentage points. I think volume is still the higher contribution for this fluctuation.
Okay. Your guidance for revenue to grow double digits but decline still year-on-year, and you also gave some guidance relative to the first half versus 2015 first half and 2014 first half. It is still actually somewhat vague. I believe it would suggest anywhere from a 10%-30% quarter-on-quarter revenue growth would meet all your suggestions there. Can you be a little bit more specific on a tighter range, what you think revenues can improve in the second quarter?
Well, I think, typically, our group bookings for the previous quarter serve as, I would say, a good guidance or a good indicator for our billings for the subsequent quarter. Based on that, we expect our billings in the second quarter should achieve a double-digit percentage growth. However, comparing to the second quarter last year, in order to match the second quarter, we need to have a [30%] over percent growth. Based on the booking we have last quarter, we believe probably is a little bit stretched at this point in time.
Okay. Last question for me is just when you look at the second quarter and you are guiding some kind of revenue growth here, double- digit, quarter-on-quarter, the mix of that revenue growth, which areas will relatively outperform, and perhaps even more importantly, what happens to SMT gross margins in the second quarter?
We expect the growth driver for the second quarter will continue to be this Back-end Equipment as well as this different Materials business. Since we have reported a quarter-on-quarter and year-on-year booking growth for the Materials business, this should translate into a relatively stronger billings for this quarter. For the Back-end Equipment, with 23.3% booking growth sequentially, we also expect this to translate into a higher momentum in these billings. We believe our wire bonders, our CIS equipment continue to drive. The other products like the flip chip, laser grooving, and dicing, these are relatively smaller- base business for us. I think the major volume driver will still be wire bonders, CIS equipment. So far in the first quarter, we see very good momentum for the LED business.
In the second quarter, we expect to pick up in terms of billing for IC/ Discrete market as we see some good booking momentum for this market segment last quarter. We also expect a higher billing for SMT. With that, we expect gross margin to see a substantial improvement. It probably will still be a distance away from what we have achieved in Q4 last year. Q4 last year is a little bit, really, I would say, exceptionally good, but we do not think we will stay at this current low level of gross margin for the SMT. It will bounce back substantially.
Do you think it can bounce back to the high 30s%, or are we still going to be in the low to mid-30s% for the gross margin in SMT?
Well, I think if we assume it to be in the range of mid-30s%, probably more realistic at this point in time.
Okay. Thanks a lot, guys. I will get back in the queue.
Thank you, Steven. Next question comes from Randy from Credit Suisse. Thank you.
Okay. Yes. Thank you. Good morning. I wanted to ask a follow-up on the SMT. The orders were still down a little bit in first quarter and running a good bit below last year. If you could go through just some of the factors you are seeing impacting the business relative to last year so far. If we look forward in the year, in the past, you have talked a bit about a two-year cycle on smartphone projects, if you still see potential for some orders tied to the smartphone market this year, where it might be on a longer cycle. Then maybe expand if you see anything that could improve where, if that segment is on a one- to two-quarter lag, could improve into second half.
For the SMT market, we see overall the market still shows some weaknesses, in particular in the China market. Compared to a few months back, I think the market improved. However, in order to show a better, I would say, market momentum, the market really has to demonstrate stronger growth in China. Whereas in Europe now, we see the market's okay. Although after many quarters of very strong demand, it showed a little bit weakness, softness, but I would say this is healthy. The other markets for SMT, in our opinion, looks a bit healthy, but what it lacks of is really the significant pickup in the China market. I believe this has something to do with the overall economy in China and probably the overall business situation in the electronics sector. Whereas for the smartphone investment cycle, it's really too early to tell.
It really depends on our customer's customers' investment decisions. At this point of time, I would say, everybody's still looking forward to this to happen again. But I think until it happens, nobody can be for sure.
Okay. If I could add one follow-up, and it's a bit to Steve's question, but on the mix in SMT. What was the mix factor? Because China normally, or emerging market, lower margin, but the SMT was impacted by mix. What was the mix factor that affected from fourth quarter to first quarter on the margins?
Well, I think we expect actually, typically a strong business during the first quarter from Europe. I think this time, relatively, I would say, the good margin orders are not as high in this quarter compared to what we expected. I think mainly a product mix as well as customer mix showed some weaknesses. But as I commented earlier, I think still because of this significantly lower revenue, that really caused the problem, yeah.
Okay. You made a comment somewhere in the prepared statements about the second half could be better this year than last year. Is that more just because the basic last year first half was running a bit stronger, or are there projects or certain visibility, more inquiries or, I guess, feedback you are getting to make you more optimistic this year on the second half?
Partly. Certainly, second half last year was a relatively lower base for comparison. I think it is also, so far we are looking at the momentum of our business. The pickup of this Materials business really served as an encouraging sign for us. As we have shared before, based on our past experience, when the materials market starts to show a positive development, it typically serves as a leading indicator. We are looking at that. Hopefully, the history continues to repeat itself. Then with that, we should see a stronger momentum for order intake for this back-end equipment market. Then, if that is the case, the SMT equipment market should follow by another one to two quarters.
Okay. My final question is on two future growth drivers you have talked about. Could you talk more about this MIS opportunity in the leadframe equipment market, where maybe the sales or even the margin for that type of business, and then the integrated solutions sales in SMT, adding in the DEK line, if you have started to see incremental solutions sales from that?
The MIS is an interesting technology. It serves as, I would say, fill the gap between traditional leadframes and these substrates. As you are probably aware, leadframe is a very cost-effective medium for interconnections of semiconductor devices. However, due to its construction, it can only provide a very simple interconnection. Whereas substrates can offer a multilayer connection, so we can connect a high number of IOs. However, the cost of it is pretty expensive. So MIS serves as an in-between, and also in some cases, offer this superior electrical performance. Today, also in the market, a lot of people are looking for this wafer-level fan-out. Traditional wafer-level fan-out technology are pretty expensive. So people today are developing technologies, we call the RDL-first approach. Actually, the concept is very much like using some high-precision substrates to provide RDL-like capability.
MIS actually, in that sense, also serve this market. Of course, the MIS technology is in its early stage of development. Since we invest in this business, a lot of customers show strong interest in this, especially they feel comfortable with ASMPT as a technology partner for them in this development. However, I must caution everybody, it will take a little more time for us to really develop this business into a sizable and also interesting business. Comparing to leadframe, the advantage of this MIS besides technology is also in potential higher- margin business. First, it is because it is representing new technology. Second, it is less material- dependent. For traditional leadframe business, raw material account for a substantial part of the cost of the leadframe, and that cannot be easily changed. Whereas the materials content for MIS is significantly lower.
We see this as good potential for our Materials business. In terms of the SMT, you ask about the line solutions. I think it is in the stage of testing in the field. We have sent our lines to the field. I think customers' response is very positive. I think today the ball is in our court. We have to prove to the customer our solution really able to deliver the value we have committed to them. I think this year will be an interesting year for us to demonstrate this capability in the field.
Okay, great. Thanks a lot for the color.
Okay.
Thank you. Our next question comes from Szeho Ng from BNP. Thank you.
Hi, good morning, W.K. The OpEx- to- revenue ratio still stands on the high side, around, I think, 27% last quarter. How are you going to achieve the 20% target?
Thanks, Szeho . I think, yes, it is still on the relatively higher side. You also would notice that actually it came down significantly quarter-on-quarter and also moderately year-on-year. We have exercised a lot of effort controlling our OpEx growth. Certainly, 20% is still our goal, but the 20% also to a great extent, also count on the revenue. We will be working on both ends. On one hand, continue to control our OpEx, on the other hand, continue to expand our revenue base.
Okay. All right. In the prepared statement, you also mentioned the revenue shortfall due to supply issue from your supply side after Chinese New Year. Could you elaborate a little bit on that?
Actually, it was not a very big problem. As we have shared, we start to use a lot more subcontractors, external manufacturing. After Chinese New Year, their ramp-up took a little bit longer time than what we had expected. Actually, the problem basically has been resolved. I will say if we have the shortfall, actually, if you translate into output, it is only talking about we are behind the Q1 target by less than two days' output. Actually, it is a small impact to our overall performance.
Okay. All right. Last one, in the dual- camera area, could you talk about your market share right now and in what area you can benefit more from the market share gain?
We are not able to really very clearly quantify our market share for the dual- camera, I guess, because this is still a relatively new area. We can't rule out, we may still miss out on area we are not aware. But overall, if I generalize it in general in the CIS market, then I would say for our AA, probably we have very good market share. For the new installations, we easily believe we probably have more than 3/4 of the market share, we believe. We can't have a very accurate number. The reason why is that because there are some customers still using their in-house developed AA system that make this part much more difficult to track our exact market share. Of course, on the installer base, then the market share will be lower because on the early days, customers use a lot of in-house equipment.
But for the last two years installations, I think we are getting significant market share.
Okay. All right. Thank you very much. Have a good day.
Thank you. Our next question comes from Mr. Ken Hui from Jefferies. Thank you.
Thank you for taking my question. My first question is regarding your first quarter. I think when you guide first quarter, in February, you actually expect a double-digit improvement in the Back-end Equipment billings over the fourth quarter last year, but it turned out to be less than that. Is there any end demand or market weaknesses that you have seen towards the end of the quarter? That is my first question. Thank you.
No, as I just now explained, we actually turned in 7.8% quarter-on-quarter growth for the Back-end Equipment business. So, comparing to the double digit, I think we missed out, well, I would say 2 point something percent. As I just explained, this mainly due to the supply issues we face after Chinese New Year, and the effect is it has pushed back our output by around two days. So this is a relatively small effect. From our backlog, you can see, actually, if we show in our backlog increased by double-digit percentage, that's not something we like to see. So I would say as of this point in time, I don't attribute our small shortfall to any of the weakness in the end market.
Okay. Thank you. My second question is about the full-year outlook for this year. I think last time you gave some color that the overall market probably will be down a little bit compared to last year, but given the fact that ASM Pacific will continue to outperform, so overall speaking, the year probably will be more or less similar like last year. Have you changed your view regarding that direction?
I think so far, if based on these industry analysts' forecasts about the industry, they are still projecting a small single-digit contraction for this back-end equipment industry. Based on that, and also looking at, if you compare our full-year performance last year as well as the Q1 result this year, we continue to be encouraged by those growth areas like CIS, like the flip chip, like this laser grooving and dicing area, and we are particularly encouraged in the past quarter with the momentum of our wire bonder. I think this still gives us a reason to be optimistic that we should be able to outperform the market. As of this moment, as I shared earlier, judging from our booking for the Materials business, we continue to believe the second half of this year should be better than the first half of this year.
If this turns out really to be the case, I think there's reasonable chances for ASMPT to outperform the market, and that should translate into, I would say, overall full-year feeling, similar to last year or even slightly better. Okay. I think really depends on the market development, but as of this point in time, we are still, I would say, confident about the or comfortable with this development in the market.
Thank you.
Thank you. We have a following question come from Steven from HSBC. Thank you.
Let's see. First question, I guess if we can go back to cameras quickly. It's difficult to understand, quantify dual- camera, but I wonder if just regionally, I know a few years ago it was Korea that was driving your CIS strength, then I think more recently it's been Japan. Is that broadening out? Can you talk about it geographically? Maybe also talk about the Japan earthquake. Is that impacting you in any way? Any thoughts geographically on CIS?
Well, I think, Steven, you are right. I think a few years back, this Korean supply chain is one of the key areas. Although not all the equipment are delivered to Korea, they were also delivered to China and Southeast Asia. Today, Japan, China, are the two larger markets for us. Then to a smaller extent will be the other territories like Vietnam, like this relatively smaller will be Taiwan. China and Japan is the largest market. Our CIS solution, not only for the Tier 1 smartphone manufacturers. Actually, we have a very good market share. We are covering a very wide range of customer base in the CIS area. You asked about the impact on the earthquake in Japan. Honestly speaking, we don't know yet. As everybody knows, Sony is a major supplier of the CMOS imaging sensor wafer.
We understand a lot of our customers are actually getting wafers from Sony. Will it affect this industry later? We don't know yet. I think as of this point in time, the information we get is similar to everybody getting from the open source, from the announcement of Sony only.
Okay. Then maybe just one more follow-up on the full-year growth outlook. When you do look at some of the third-party researchers here, your own slide here, I'm looking at page 32, VLSI had the Back-end business growing 28% in 2014, then declining 14% in 2015. That's relatively close to what you guys did. Now they're forecasting the 2016 down 4%. Do you think Back-end can actually grow this year? Could you outperform much more significantly than in the past couple of years that have been relatively in line with the market?
Well, as I mentioned earlier, I think judging from our good momentum in some of the growth areas like CIS, LED, this flip chip bonder, all these areas, test handling for small devices, there is reason for us to continue to believe we can perform better than our peers, including our solutions we have developed to address the wafer-level packaging. We believe that we can continue to outperform. However, we believe we will be able to outperform the market even more when the market really shows stronger momentum. I think it depends on the market. Otherwise, I would say we probably will outperform the market on a smaller scale.
Okay. The same question then can be asked on the SMT business. When I look at your slide again on page 33 here, it looks like you have the SMT market falling from roughly HKD 3 billion to HKD 2.5 billion or so down, call it 15% year-on-year. Do you think that you can outperform significantly enough where SMT could grow for you in absolute dollars this year?
The challenge for the SMT market that we are basing on the assumption, it would continue to lag behind the very good market for one to two quarters. Today, our whole assumption will be the SMT market will only show a more obvious pickup, the soonest will be starting from Q3 this year. So it will be a little bit challenging to translate all this improvement into billing. That is the reason for the, I would say, a little bit more conservative estimation about the overall market. I would say, we believe overall, this year there should be some weaknesses, even for ourselves in the SMT business.
Okay. Last question from me, and then I will leave you alone. Your competitors continue to talk a lot about thermoc ompression bonding. I am curious about any updates there and efforts to diversify customer base or feed tools out there, I don't. Get more volume production orders from other customers. Any updates on TCB?
We continue to work with a number of customers in the TCB market. However, we noticed from a market acceptance point of view, it is still relatively slow. We believe this is still a costly technology, and we see customers trying to work around these solutions. We are actually working with a number of customers also, together to develop solutions, flip chip solutions, advanced flip chip solutions, that I would say give them a performance similar to TCB, maybe slightly behind, but cost-effective enough. I will say, although, we are yet to really expand our customer base in TCB, but we are making very good progress in advanced packaging.
Great. Thanks a lot, W.K.
Okay.
Thank you. Our next question comes from [Sean Lewis] of Haitong.
Yeah, good morning.
Morning.
Could you please tell us CapEx this year, what is it going to be and where are you going to spend it?
Okay. The CapEx. Let me check. I think I have it here. So this year, our budget is around [$84 million]. This is our budget. So slightly above last year. Since we are only at the start of the year, certainly we have not spent too much of this budget yet.
Could you go into a bit more detail in terms of where it is going to be spent, SMT, Back-end, anything new perhaps?
Well, part of the budget will be used for the building constructions in Singapore. The building was completed, so part of the payment should be due soon. So this will be part of it. Other than that, we are spending the money to upgrade our capability in terms of manufacturing, in China, and also expansion in Malaysia. So in China and Malaysia, we are investing in robotics manufacturing. So this year we will be setting up a few lines to really test out and debug the concept of robotic manufacturing. We are also, this year, in a stage of expanding our Malaysia factory. So we expect towards the end of the year, a significantly higher portion of our SMT production will be transferred to our plant in Malaysia and Singapore from Europe. So these are the areas we will be spending a lot more money, including also R&D. Yeah.
Thanks. That leads on quite nicely to my second question. I was going to ask you anyway. Just for an update in terms of SMT since you bought the company, what is the structural OpEx looking like with regards to Europe versus Asia, and how much more effort needs to be made to transfer over to Asia, and thus what can we perhaps expect from a structural perspective in terms of cost savings from that sort of longer term?
Well, in terms of OpEx, we do not see there will be significantly structural change in geographical mix as your question has asked. For the SMT, Europe will continue to be the center of excellence in terms of R&D people, in terms of product development people. I think Europe will still be the key center for us. In terms of sales and services, actually, a substantial part has been in Asia already because Asia represents a major market. Of course, I think Europe will continue to be a key market for SMT business. We also have a sizable sales and services staff in Europe to serve that area. I think this will be very much depends on the market mix. We do not expect to change during G&A on relatively a much smaller base.
We are expecting between this unit in Germany as well as Singapore and a smaller amount of it will be in this U.K. I think from a mix point of view, we do not see there will be a significant change from this pattern. As I mentioned, from the manufacturing point of view, we see this year, by end of this year, we see a substantial increase from manufacturing in Asia.
Thank you. Can I just ask one last little question? You mentioned right at the beginning of this call, LED is one of the sort of drivers of Q1, which kind of, I guess, surprised me a little bit. Is there perhaps a bit of a renewed interest in LED? Are we beginning to see a turn in the cycle yet?
Well, actually, LED has been quite a major part of our business for many years. Last year, towards the middle of last year, there was some weakness in the LED business. It was mainly due to a very severe price war for the LED general lighting market. We were told by our customer, the price of the LED light bulbs has come down so much. We noticed that at that point of time, our customer hold back their investment. They want to understand, they want to know where should be the direction of the investment. This situation has been, I would say, more or less digested towards end of the year. That is why a few months back when we report our last quarter result, we also shared, we start to see a picking up of LED business.
This pickup continued into extend into this first half of this year. We believe the LED business will continue to be in a healthy state for some time. Yeah.
Thank you. Thank you very much.
Yeah, welcome.
Thank you. Our next question comes from Michael Chou from Deutsche.
Hi, good morning. Just one question. Could you give some color for your SMT Solutions business for new solution, including closed-loop and the mid to low-end solution?
For the SMT Solutions equipment, it's a new product we have developed. For the lower-end machine, actually, we are making some interesting development in markets like Europe as well as America. Although the traditional has been very strong in those market, actually, until we have this product, then we start to realize that, actually over there's still another segment of the market of people looking for some, I would say, less advanced, more simple, more cost-effective machine. So we are making some good progress over there. Whereas in Asia, in this particular market segment, price is still a very sensitive area. We are yet to really gain a lot of market share in Asia for this particular segment, partly due to the Japanese yen has been so low, and we also don't want to easily let go our price, let go our profitability.
However, we are taking continue to make adjustment to our business strategy for this lower-end machine in Asia. We do expect to continue to gain further market share going forward. For the line solutions, as I mentioned earlier, we have delivered the system. As we have promised the customer, with a closed-loop system, with the inspection system, we should be able to immediately monitor the quality of printing, and then feedback to both the printer and also provide information to the placement machine. With this one, based on our estimation, we should be able to help our customers to achieve more than 0.5% , from 0.5% to 1% kind of yield improvement. So if our calculation is correct, if our system really able to deliver that will translate to very significant saving for our customer.
At this point of time, I think we are in the stage of really collecting more information in the field. With the actual installation there to really show the customer we are able to deliver the value. We don't expect this line, which I say, I looked into a lot of revenue this year, but hopefully this year is the year of really getting improvement in the field and turning into, I would say, our selling starting from next year.
Thank you.
Thank you. Our next question comes from Steven Pelayo of HSBC. Thank you.
Yeah, just one more question. I know you talked about operating expenses, seeing improvements from manufacturing move to Malaysia. But I guess, we're in an anemic growth period right now, and semiconductors are only supposed to be growing at low single-digit kind of CAGRs. So I guess, if top line was growing at kind of low single digits as well, could you even get to a 20% OpEx- to- sales? What kind of target model are we talking about? What kind of revenues do you think you need to do a 20% OpEx- to- sales?
Well, actually, maybe first let me clarify, I think when we talk about having more manufacturing to Malaysia, it wouldn't really change OpEx, but it would change the cost margin. It would really help cost margin. For the OpEx, well, actually, looking back at 2014, I would say we have been quite close to the 20% level. I think we do not need a very, very high appealing, but I would say appealing level similar to what we have achieved in Q3 of 2014. That will be very helpful already.
Okay. That's it for me. I don't know if you're still waiting for me.
Thank you. Our next question comes from Mr. Ken Hui from Jefferies. Thank you.
Thank you. I have a follow-up question regarding the SMT gross margin. I think you talked a lot about the changes in product mix, which caused the margin decline in the first quarter. I want to ask a bit more, is it also related to changes in the application? For example, is it due to weaknesses in, for example, high-end smartphone and relatively strong demand on the industrial segment, et cetera? If that is the case, do you think it is going to be lasting for quite a while, for this year regarding this application mix? Thank you.
No. If relate to something like you have described, then we will consider it structural. No. Actually, I think it more depends on really during that last quarter, the set of customer, they are really taking delivery of the machines, depending on their application. But we do not see their application representing a change in the market. That is why we do not really see this as a structural problem. And we also are very confident the gross margin will bounce back in Q2. I think it is attributable to the specific orders, specific customers, specific products we deliver. But [audio distorti on] everybody, as I mentioned, yes, that caused some deterioration of the cost margin, but it is only a few percentage points. The very significant margin contraction still to a larger extent relate to volume rather than this mix. Yeah.
Okay. Thank you.
Thank you. We have a following question come from Michael Chou from Deutsche.
Hi, W.K. One follow-up question for gross margin. You mentioned SMT gross margin Q2, but can you give some color for the SMT margin trend in the second half or from long-term perspective? Thank you.
Well, in general, we should expect this business continue to improve in terms of higher volume in Q2, Q3, and Q4. That typically the case for SMT business, so that we do expect when this comes, the margin will improve. Then it will also depends on some, I would say, quarter-to-quarter fluctuation, because there's regional mix still play a role. When more orders delivered to Europe, then we should expect a higher margin when a larger number of orders to be delivered into Asia. In general, we will have a lower margin, partly because of the type of machines that this customer order, and partly also because of the scale of the order. Typically, Asian customer will order in big quantity and enjoy a better discount. It will depend on all these compiling together.
Thank you. That's it from me.
Thank you. Once again, ladies and gentlemen, should you have any questions, please press star one on your telephone. We have another following question. Come from Steven from HSBC. Thank you.
Yeah, guys. It was a couple of years ago, in the second half of the year, where you had the big SMT pickup. I'm curious, smartphone market's growing a lot slower now, but I assume technology's marching on, board densities are getting higher, chip sizes are getting smaller. So help me understand the technology needs of the customers versus maybe the market environment, which would, they'd probably want to sweat those assets longer and not update them. I'm curious, as you look at the designs and the chips and the boards that are being built in the second half of this year, can the tools that were used a couple of years ago in that big wave of CapEx investment be utilized still for those applications?
Well, strictly speaking, we do not know exactly yet because of the latest phone, everyone knows it is top secret in the market. However, based on our experience, customers are definitely will drive for a more smaller and smaller devices, smaller components, that we believe this trend will continue. Well, it really depends on the type of machines the customer install. We actually believe the machine they have installed from us are pretty capable. However, we also understand that typically, our customer strategy will be taking the opportunity to renew their installed capacity, installed capability. So, as of this point of time, the indication to us from our customer will be they will continue to invest in new equipment and retiring or transferring some of the old equipment for other applications. So this is still the, I would say, the direction, the fault of the customer.
Of course, everything, all this CapEx investment decision will be very much tie in with their business environment. So, I would say, until these people get a better input from the end customer, then they will finalize their actual CapEx planning this year.
What is the timing on that? It seems like they would have to finalize very soon and place a booking with you. As you look at your bookings, in the first quarter for SMT were down, do you expect bookings to be up significantly in the second quarter for SMT?
Steven, honestly, I do not know yet. From our experience, that kind of decision will be made on a quarterly basis. If I talk our experience in two years back, it is really at the end Q2, beginning of Q3 kind of decision-making timing.
All right, great. Appreciate that. Thank you.
Last question come from Mr. Ken Hui from Jefferies.
Thank you. I have some follow question regarding the CIS business. Given the fact that this segment is one of the growth driver for this year, I guess I would assume that this business is going to grow compared to last year in terms of the bookings. Please correct me if I am wrong. However, if we take out the Active Alignment portion out from it, do you still expect the other parts of the business to grow this year? That would be my first question related to this subject. Thank you.
Yes. As of this point of time, we still see this CIS should be able to achieve a year-on-year growth in this year compared to last year. Last year already a year-on-year growth. Well, I think, we have not made the calculation, taking out the Active Alignment, whether it will be a year-on-year growth, maybe not. However, Active Alignment does not equate to the total CIS business. People still need to buy the total line to assemble. Certainly, Active Alignment represent the new capability, a new technology that customer need to install. Combining the whole CIS equipment market, I would say, within that business, Active Alignment machine is really the growth driver for that business.
My follow-up question will be, I think the growth of that [segment] obviously is driven by the dual- camera penetration, for this year, which I think may be hard to tell. I think the other variable is going to be the actual production yield rate that your customer are achieving, on their side, with your Active Alignment machine. Are you able to give us a color, regarding their current production yield rate? I think if they are good, then probably the adoption will be higher. Otherwise, that may drag the overall market a little bit. If you can comment on that.
I can't share the actual yield data. To be honest, customer also don't share 100% with us. But so far, I would say customers in general are able to achieve good production quality with the machine we have delivered. In the dual-camera applications today, we still see there are mixed approaches. Some people use one high-resolution, one low-resolution camera. In this case, actually, it's not very critical. Only the high-resolution camera they need to do Active Alignment, the low-resolution camera, they don't. For this kind of configuration, typically they don't face too much problem in manufacturing. But of course, with this configuration, it may limit the application of the dual camera. There are other people, they are taking the approach of having two high-resolution dual cameras. But even that's the case, then we also notice different customers have different approaches of doing the alignment.
Some of them, they will align the two cameras independently and then put them together. Some, they will use one camera as a reference to align the others. Today, in the industry, there's still no standard approach yet. With this one, we expect the market will continue to develop for some time. Of course, I think finally, how big and how important will be this dual- camera market will be really the application. If the phone makers are able to develop interesting applications to induce more consumers to adopt this, or to switch to these smartphones with dual camera, then the business will be even stronger. Besides the dual camera for smartphone, we also see a dual camera for other applications. One of the areas is the 3D sensing. This is also another potential area that we notice developing in the market for a time.
Okay. My final question on this subject is, you talk about there are customers which are actually developing their own in-house AA equipment. Based on your knowledge, how would you compare your own equipment with the in-house development by some of your customers? Are you concerned that there will be more customers trying to do in-house development, or are you actually more optimistic that actually customers may do less in-house development?
Oh, I think definitely the latter. Actually, like many other industries, when the industry starts to develop, when the market lack of standardized equipment, a lot of customers will use their in-house capability as a competitive advantage to differentiate themselves out from the market. That's why a lot of manufacturers of CMOS imaging cameras modules developed their own AA capability a few years back. However, when the industry continued to develop, typically the industry will have these standard machines offered by independent equipment suppliers like ASMPT. I think, I would consider the industry has entered this phase. Our machines are significantly better than the in-house machines of many of our customers. We believe, moving forward, the industry will be moving to buying machines from independent suppliers like ASMPT, while they continue to develop their own.
For the last two years, what we observed is that we managed to convince some of these customers. Our machines are really better than their own in-house development. We believe for those customers, they will discontinue or slow down their own in-house development.
Very helpful. Thank you very much.
Mr. Lee, would you like to wrap up the call?
Yes. I think we had a very good discussion this morning with a lot of good questions, but I am afraid we have to conclude the conference call now in the interest of time. Thank you very much for joining our conference call today, and we will talk to you again next quarter. Thank you and goodbye.
Thank you for your participation in this conference. Thank you.