Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Leonard, please bring a call in. I will be standing by. Thank you.
Good morning, ladies and gentlemen. Welcome to this industry conference call. On April 3rd, ASM Pacific Technology has issued announcements regarding the acquisitions for TEL NEXX, a subsidiary of Tokyo Electron Limited, and AMICRA Microtechnologies GmbH. In the next hour or so, we would like to provide you with more information about these two acquisitions. Before we commence our 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 and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks, which would cause actual results, performance, and events to differ materially from those expressed or implied during this conference call. Joining 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 by taking a few minutes to share our strategic rationales on these two acquisitions, after which you will be invited to participate in the Q&A session. Without further ado, let me hand this over to Mr. W.K. Lee. Mr. Lee, please.
Thank you, Leonard. Good morning, ladies and gentlemen. We appreciate you joining us for this conference call. Before I take your questions, I want to spend a few minutes to go over with you our strategic rationales for these two acquisitions. These two acquisitions are strategic long-term investment for ASMPT. We identify both the advanced packaging and the silicon photonics markets are of high growth potential and are important for the group's long-term growth. The acquisition of the NEXX expands ASMPT's product offerings in the advanced packaging market and also establishes ASMPT as the only equipment supplier covering all semiconductor interconnect technologies. Whereas the acquisition of AMICRA immediately puts ASMPT in the forefront in the silicon photonics market, which we believe is of high growth potential. The combination of ASMPT and AMICRA creates the competitive strength that our peers find it difficult to replicate.
The acquisition of AMICRA has been completed on 4th April this year. It will be integrated into the optoelectronics BU of our back-end equipment segment. AMICRA is a strategic fit with the group. Its strength lies in its well-established technology in the silicon photonics and high-precision die bonding market, as AMICRA is known to be the equipment supplier capable of submicron placement accuracy. AMICRA's submicron ultra-high -precision die attach equipment is complementary to ASMPT's existing product portfolio. AMICRA has a leading position in the silicon photonics market. As we are entering the data center era, we believe that silicon photonics will be a key technology to facilitate ultra-high-speed data transmission between data centers. Almost three-quarters of all data center traffic originate from within the data center. Optics have traditionally been deployed to transmit data over long distances because light can carry considerably more information at faster speed.
As the need for higher data transfer speed and lower power consumption intensify, the trend is for optics to move closer to die. In addition, as 5G ramps, high-speed interconnect between data center and small cells will also come into play. This will max the field multi-fiber waveguide chip interconnection solutions, laser development, and application of advanced multi-chip packaging. Photonics is the answer to future data center needs. We have reached the tipping point for silicon photonics. Data centers are the main market attraction now, but other markets are interesting, too, although they are more long-term. Some industry analysts forecast that the 100G silicon photonics transceivers will grow at a compound annual growth rate of 37% from 2016 to 2025. While the higher data rate 200G to 400G silicon photonics transceiver is expected to grow at a much faster compound annual growth rate of 96%.
In absolute terms, Yole Développement forecasts that the silicon photonics transceivers market is expected to reach $1 billion in about two years' time and will grow to be a multi-billion dollars market by 2025. The AMICRA acquisition immediately puts the group in the leading position in the silicon photonics market and at the same time provides support for ASM AMICRA to accelerate its goal. NEXX, the target of the other acquisition, is an industry leader in the advanced packaging market. It has strong technological capabilities in highly specialized electrochemical deposition, ECD, and physical vapor deposition, PVD technologies. ECD and PVD are key technologies used in wafer bump fabrication for flip chip interconnect in TSV formation for 3D packages, and building up for redistribution layers, RDL, for wafer level fan-in, fan-out, as well as for panel level fan-out.
With the acquisition of NEXX, the group further expands its product offerings in the advanced packaging market and establishes a full coverage of semiconductor interconnect technologies from wire bonding to flip chip, TSV packaging, fan-in, and fan-out. Moore's law has slowed down. More value added for semiconductor devices is shifting from wafer fabrication to advanced packaging. Furthermore, both hyperscale data centers and artificial intelligence are driving up demand for high-performance computing chips. Advanced packaging is a must for these applications. Therefore, we expect the advanced packaging market to grow much faster than the general semiconductor market. With ASMPT's strong presence across OSATs, IDMs, and even foundries, we believe ASMPT is a better fit for NEXX to grow its business in advanced packaging. The acquisition also reflects ASMPT's commitment to our customers in providing them a comprehensive and state-of-the-art product portfolio in advanced packaging.
It puts ASMPT in a unique position to be our customers' choice of technology partner in the development of new advanced packaging processes and technologies. Learning from our successful acquisition and integration of the ALSI laser fabrication business, we have developed the triple win M&A strategy for the group. We believe that by combining small but great technology companies with ASMPT's strong technical and financial resources, broad supply chain network, and market operations, it would be a win for the target company to accelerate its growth and to leave its competitors behind, a win for ASMPT to establish its foothold in high-growth markets timely and ahead of its peers. It is also a win for our customers, since they can have the best of both worlds, good technologies backed by a strong company, which they are very familiar with.
Just like our previous successful acquisition of the [Siemens SMT] business, which has been integrated seamlessly into the group and has grown to be one of the group's growth engines. We are confident that these two strategic acquisitions will enable ASMPT to capture future market growth opportunities and, at the same time, to realize cost synergies through insourcing and efficiencies in consolidation of common infrastructure. With this, we thank you for your attention, and we are ready to take your questions.
Sir, are you ready to take questions?
Yes, we are ready for questions.
Our first question comes from Mr. Steven Pelayo from HSBC.
W.K., could you start with discussing a little bit the sizes? How big are each of these? What kind of revenue contributions? What kind of margins do they generate? Just some details on each one of them.
Well, combining together, we expect this, in terms of revenue, it probably bring up around our back-end equipment revenue by around 10% in the last 12 months if the deal has been closed as of this 1st of April. On this hypothesis basis, it will roughly contribute around 10% to our back-end equipment. That means approximately bringing up our group revenue by around 5%. In terms of gross margin, the NEXX business typically has a gross margin at mid-40%, although for last year, for the last 12 months, it dropped to the low 40% due to revenue contractions. But we expect it to bounce back to the mid-40% level. AMICRA business typically has a gross margin of the mid-30% because it's a smaller organization and highly outsourced to suppliers in Europe.
We expect with this integration, it represents opportunity for ASMPT to bring up their gross margin by letting them tapping onto our supply chain network and also looking into insourcing capabilities opportunities from our internal manufacturing in Asia. Overall, the total size of their business is not too big at this point in time. As I mentioned, top line-wise, expect around 5% contribution to the growth. Gross margin will maybe slightly pull down our back-end equipment gross margin by up to 0.5%, but neutral at the overall group level.
Okay. Then maybe can you just talk briefly about the valuations? It looks like Tokyo Electron bought NEXX for, what, a couple of hundred million dollars a few years back, and now you are paying $90 million for it. So talk a little bit about the valuations for each one of the deals.
Well, I think the valuation is in line with typical transactions in the market. While I think we cannot comment on what our peer has paid in the past, but we judge from those business performance in the past few years and the projection for the next few years. So we come up with a valuation, and we also make reference to ongoing transactions in the market. So the valuation is finally based on a mutually agreed negotiation.
Okay, great. I will get back in the queue.
Thank you, Steven. Next question come from Mr. Arthur Lai from Citigroup. Thank you.
Hi, W.K. and management team. First, on the follow-up on the financial number, you say these two deals to pull down the margin by 0.5%. Can I know how you compare this 0.5%? Is it compared to last year or compared to the branded margin you forecast on this year?
Well, we basically kind of making reference to both. You can see, because on different entity, different company may have slightly different accounting practices. We kind of make reference to them. That makes some projection, when they is fully integrated into ASMPT, following the accounting standard of ASMPT and also making some projection about their revenue and financial performance in the next 12 months. Those numbers I quote is not 100% accurate in the sense, but it's the best estimations we can make. When we say pull down the gross margin by up to 0.5%, that is only referred to the back-end demand. At the group level, it's neutral.
Okay. You expect the automation will still drive the group gross margin. You expect the group margin to not be impacted by this acquisition. Is that the right way to look at your guidance?
Well, you know, in the three segments of business we have, the back-end equipment deliver the highest gross margin. Although it has been pulled down by a very small, we expect probably up to 0.5% gross margin deterioration. But since this is still a higher gross margin, at group level, when we do the simulation, the impact is very minimal.
Okay. Thank you. My second question is about NEXX. You just mentioned that last year they have a lower margin because the revenue contraction. I recall this wafer level packaging market, actually, their clients increased their CapEx last year and also to increase next year. Can you remind us why NEXX experienced a low revenue contraction during the market actually growth?
Actually, when we try to look at the ECD and the PVD market, our conclusion is that there seems to be, for the last 12 - 18 months, this overall market has contracted. It probably relates to customers has installed more capacity in this area the years before. The contraction is not only for NEXX, but for the whole market. However, as we look, we see this ECD and PVD technology as a key technology, I just mentioned, for many areas in advanced packaging. We consider the market contractions only temporary, and we expect, as you also highlight, the customers increase their CapEx spending, CapEx budget for advanced packaging. We are very confident that the market should expand to a much higher level.
In the business planning also indicate the next few years, we expect this NEXX business unit should be able to achieve a compound annual growth rate for the next three years of more than 15%. That's what the expectation at this point in time.
Yes. Lastly is on the silicon photonics market. Who actually buy this AMICRA's machine? Is that those assembly makers you highlight in page 18, those assembly packaging company?
Well, they are either a packaging company or device manufacturers. They could be subcontracting out to some specialty OSATs. Typically, silicon photonics is a very special kind of devices. So the assembly is not carried out by the mainstream OSATs in the IC discrete market, but very similar to what has been happening for the CIS market. So there are another group of OSAT companies handling those assembly work. So those existing or targeting customers for AMICRA we listed in the presentation, they could be directly doing the assembly by themselves, or they could be engaging some other OSATs to do the assembly for them.
Understood. Is that the reason you acquired AMICRA? Because I think in the last earning call you highlight, actually, TCB Lite, you believe you can handle the microLED. I think the TCB Lite accuracy actually is higher than AMICRA's product. So you buying AMICRA's client base is the right way to think about?
Not exactly. Actually, even for our TCB, we are talking about placement accuracy in the range 1 um, 2 um. Okay? However, AMICRA actually deliver the machine, 1 um to 0.5 um high of accuracy. So AMICRA should have recognized as the highest precision placement machine in the market at this point in time. Now, we actually buying AMICRA for the technology and also for the quick access to the market. We recognize that actually, for customers in the silicon photonics market, they recognize AMICRA as their supplier. Of course, many other cases, these customers do have concern for their size.
That's why when we're looking at it, if we start to develop our own solution for this market, we probably take ASMPT two to three years to come out with a comparable product, and we have to spend another two to three years to establish our number one position in the market. So by acquiring AMICRA, I think we quickly enter the market and gain a time advantage of five to six years.
Yeah. Thank you. I will get back to the queue. No more question.
Thank you. Our next question comes from Kyna Wong from Credit Suisse. Thank you.
Thank you. My first question is about, because you addressed the triple win M&A strategy. In this case, for these two acquisitions, actually, do you see there is some customer request or a very strong demand for you to expand your portfolio in photonic market and also the advanced packaging up to mid to end process? That is the first question.
Wow, okay. Well, it is more of our initiative than driven by customers. To be honest, before the acquisition, we did come across AMICRA. There was customer approaching ASMPT for solution in silicon photonics. We learned that finally the order went to AMICRA. It is a reflection telling the globe, there are people, they are much more ready than ASMPT in this market after customer carefully evaluate. That triggers ASMPT to really look into the whole ecosystem in this particular area. Then we came to a conclusion, this is really something, a strategic fit for the organization, for ASMPT. Also actually, for AMICRA also, because they have been doing very well for the last three years. By combining with ASMPT, actually, they clearly established themselves as the leader in the market backed by a very strong company.
We believe customers will welcome this acquisition by ASMPT. For this NEXX, the situation a little bit different. NEXX has a very strong TEL. However, TEL is more in the front-end business. I think TEL, the NEXX business, what we understand is probably the only business for TEL in the, I would say, this middle-end area. Whereas, over the past few years, ASMPT has been aggressively developing solution for advanced packaging. In our opinion, by combining with ASMPT, it will offer both sides a better synergy, in particular in marketing, in customer relationship, and also in understanding the market. Putting ASMPT in the position that customers feel much more comfortable to work together, to develop new solutions for advanced packaging. We believe advanced packaging is still in an area continue evolve. New technology, new process will continue to be developed.
By showing our commitment to customer, we are committed in this area, and we are making significant investment in this area. Also by really processing a broad product portfolio and a deep knowledge in this area, I believe we will put ourself in a very unique position to continue to work with these lead customers in the solution development for advanced packaging.
Thank you. My next one is about when would you see the synergy to roll out, like next 12 months, next 18 months, and probably your strength in the supply chain and also the in-house sourcing would help these two company to cost down and also to roll out better leverage. Yeah.
For the AMICRA acquisition, officially is closed already. We actually are starting to work with the team to integrate. Immediately there are a few area we want to work on. Actually, the supply situations were tight in this silicon photonics market. Supplies in the silicon photonics market are quoting a very long lead time to their customers. Partly because of the size of those players in that particular market are small. We believe that by tapping onto ASMPT's resources, the supply chain network. We can help AMICRA to immediately reduce the lead time for production. Also by tapping on to our supply chain, and also looking into some insourcing opportunity, we will be able to bring down or improve their cost efficiency. All this work will be started almost immediately.
We expect we probably will see a more clear contribution from AMICRA in this area at a much earlier. However, having said that, the business at this point in time is still small. The overall impact to the financial performance of the group for the next one, two year from AMICRA will not be significant. I think that I still have to emphasize. As for NEXX, because the deal is not officially closed yet, we still have to wait for authority approvals, which we expect should be clear by late this year. Until then, we will not see any impact. For NEXX, after we officially take over the business, we still have to work on a few area. One is continued investment in R&D, developing the earn, and also maturing the new generation of equipment that they are developing at this point in time.
Also join and promote it to the market. Probably, the significant financial contribution from NEXX will not happen, I would say, in the next 24 months from now, because it will take us a few months for the official closing and also probably another 10 - 20 months for us to realize significant obvious synergies to the financial results.
Thank you. The last question is about how would you fund the deals? Because, I would say, how much you would pay by internal resources and how much you will get the bank loan to support it?
We actually do not see a big burden for us for these two deals. At this point in time, we don't have a fixed formula, how much we will be fund by the bank loan, how much we will be fund by the cash. We feel very comfortable at this point in time, so we will be dynamically adjusting this one. I would say today is only a combination of it working.
Yes.
Yeah.
As the location, we have sufficient internal resources, both cash and banking facilities to fund these two deals.
Yeah.
Okay. Thank you. I'll get back to the queue.
Thank you. Our next question comes from Le ping Huang from CICC. Thank you.
Thank you. Take my question. Can you help us to understand, you are making a series of acquisition on the advanced packaging. What other product portfolio you need to build a quite unique or good position in advanced packaging? It seems to me that you are entering the space which are traditionally done by TEL or AM or the front-end companies. In advanced packaging, what are the boundary between the traditional back-end equipment and the front-end equipment vendors in this space? Thank you.
Well, people typically refer to that as the middle-end. It's neither the front-end nor the back-end. You look at, for example, NEXX. NEXX was acquired by TEL, if I am not mistaken, back in 2012. Almost around the same time, or minus a year, Applied Materials acquired Semitool. Actually, you can see the front-end equipment company make the move a little bit ahead of the back-end equipment companies. Both of them are acquiring a relatively small size company in this area. It's a reflection, this middle-end market does not exactly belong to the front-end equipment company. If you look at another key player in this market, as we have highlighted in this PVD is SPTS. It's a company based in U.K., and also acquired by an Israel company, Orbotech. Orbotech only recently acquired by KLA.
Actually, I would say, the middle-end equipment company, originally it was a virgin land, and actually it was played by smaller companies. Now these smaller companies are merging with a bigger company, one by one. So far, some of them merge with front-end company and some of them merge with back-end company. Looking at the ECD, PVD, actually, we believe that besides of this market synergy I just mentioned, we also believe in those applications, automation is also very important. When it comes to automation, I think equipment company like ASMPT have more expertise and knowledge in automation than their front-end counterparts.
Okay. How do you categorize it? Because you classify your revenue by application. How we should think your advanced packaging business revenue now, or if you look three years or five years down the road, how big this business opportunity, overall, if you look at advanced packaging as a—
Well, the advanced packaging market, the business is developing for us. We set a first milestone. We hope to see the advanced packaging revenue to exceed 10% of the group revenue. Not only the back-end equipment, the group revenue. We are not there yet, but we are setting this as a clear target for ourselves. You see, last year, the group revenue was $2.25 billion. So 10%, $225 million. It's a sizable business. We see this only as our first target. By combining the advanced packaging product offering from our back-end equipment business, our SMT business has the new acquisition. We are very confident this first target is achievable. It may take a bit more time, but it's achievable. We also believe as the market develop, actually, it will go beyond this 10% level I just mentioned.
But of course, how fast it will develop, it will really depend on also the market situation and also our own execution.
Thank you. Thank you very much.
Thank you. Next we have our following question come from Steven Pelayo. Thank you.
I want to just talk a little bit more about NEXX. I guess, does ASMPT have any existing products that are kind of the wafer level deposition step? I mean, it's not really a core strength, I guess. And then I'm trying to understand, you can't really sell a total solutions process unless maybe you had like a litho angle as well. And then you're competing against companies like Applied Materials, KLA, and Lam Research, who dominate some of these spaces in PVD and ECD, especially on the front end. So I guess I'm really trying to understand where is ASMPT's advantage here with these acquisitions?
Well, as I mentioned, I think it is the market synergy. We are really serving the same customer base, our understanding about the market development, what the customer needs. I think, actually, that will put ASMPT in a much better position. Well, if you are looking at similar to what we have acquired, the SMT business from Siemens, though Siemens is a much bigger company than ASMPT. However, when the SMT business was no longer a core business for Siemens. This particular SMT business unit performed very well under ASMPT. In a few years time, grew to a sizable business. You are looking at our revenue for that business last year is not too far away from the $1 billion mark. You can see this kind of synergy understanding about the market, the trend, the technology, I think is important.
We see there is something similar with this. Although a lot of people feel we are going to compete with this front-end company. Actually, when we carefully look at the ecosystem, as I mentioned earlier, when we say Applied Materials, actually it is only Semitool. Similarly, when we talk about TEL, actually it is NEXX only, and when we deep dive into the due diligence process, analyzing it, we actually came to a conclusion that strictly speaking, there was not much technology synergy between TEL and NEXX. Also we looking at the other company, mid-size company, SPTS, is very successful in the PVD market, and also it is only a mid-size company. Actually, our conclusion is that this mid-end equipment business market is significantly smaller than the front-end equipment market. It would never be the main attention of the big front-end company.
Probably back-end equipment has a better knowledge about this market. Finally, this is also a very cost or price-sensitive market. Unlike the front-end business, front-end business will emphasize a lot more of selling new generation of new technology. But for the back-end equipment company, besides technology, we also have to emphasize a lot more on delivering a cost-efficient solution for the customer. I think probably the back-end equipment company has a better knowledge how to make things more cost-effective than the front-end equipment counterparts.
W.K., can you just remind me what is an average range for an ASP for an ECD and a PVD tool that is applied to a back-end advanced packaging opportunity? What do these things sell for?
Well, it's typically talking about $2 million-$4 million, that high range. Of course, it depends on configuration.
Okay. And with the market size that's under $400 million, so we really only sell 100- 150 of these things a year. Is that kind of the way to think about the market in units?
At this point of time, yes. So that's why you're looking at that plan, as I mentioned, is small for the equipment company.
Okay. Interesting. Thanks a lot.
Thank you, sir. Our next follow-up question comes from Mr. Arthur Lai. Thank you.
Hi, W.K. Thank you for your explanation of your acquisition philosophy. I have a follow-up question. When we look at your presentation in page three, you mentioned that there is additional $8 million paid dependent on their financial performance. It brings our question that how you motivate the NEXX team in the upcoming two years. Can you share with how you set up the financial goal for the team? Is this $8 million paid to the management of the NEXX or paid to TE L? This is my first question.
This $8 million earn-out is paid to TE L, the shareholder. Yes, certainly, we will offer the team motivation and incentive package to perform and to proceed to stay with ASMPT, but I am not able to disclose those specific details here.
Okay. Thank you. The second question is a follow-up question on the AMICRA. You just mentioned that AMICRA's competitor are all small. Can you share with us what is their competitor in this market?
Well, some small companies. For example, MRSI in U.S.A. There are also other, for example, company, the ficonTEC from Japan, all this. So smaller company. I would say AMICRA is already the bigger one among them.
Okay. The third one is a manufacturing strategy. So for those two company, do they have an assembly site in U.S., and do you plan to invest in U.S. and followed by the Donald Trump's strategy?
Well, a bit too early for us to say. We also need to understand all the, I would say, the detailed incentive from this U.S. administration. However, at this point in time, both target are having a highly outsourced model. So, you can imagine, especially for AMICRA, a small company in Germany, so a very large portion of their business are outsourced. So, we are looking into that, how to help them to increase the scale as well as tapping on our supply chain to achieve the cost efficiency. Whereas for NEXX, they are a little bit better because they have a big parent, TE L. So at the moment, besides using their supplier around them in U.S.A., we understand they are also tapping onto the supply chain of TE L in Japan, particularly.
This will be one of the area we will be working with them after the closing of the acquisition, to how to transfer those supply chain from Japan to the ASMPT network. I don't think at this point in time we plan to immediately expand those production in U.S.A. But, of course, we were looking into what the administration will offer there. Well, I think, with the new tax rate, the income tax in U.S.A. is attractive compared to many other areas, but this is only one of the consideration.
Thank you. No more question.
Thank you. Another following question come from Steven Pelayo.
Yeah, just a quick question. I do not know, maybe for Robin or W.K. You mentioned you can afford to pay with this with your internal cash or using some bank facilities. But I am curious, what does this mean for your guys' cash and net cash position when both these deals are done, and what is the optimal level that you would like to see that at? I do not know, Robin or W.K. Can you talk to us a little bit about use of cash and what you think the balance sheet will look like post these deals?
Steven, I think as W.K. mentioned, these two deals are not big deals, so we do not see there is any significant impact on our cash flow. However, when we look at the working capital requirement, we estimate that these two company will probably add up probably around $20 million - $25 million, roughly around there, in terms of working capital. So that is still a small number compared to our working capital size at this point in time.
Robin, where do you think your balance sheet is in terms of a net cash position, I don't know, at the end of this year or so? What is the optimal capital structure you would like to see for ASMPT?
As I said, we have not really disclosed this, how we look at what is optimal structure. But we believe that at the end of this year, we should still be net cash compared to our liabilities. Yeah.
Okay, fair enough. Thanks, guys.
Thank you, sir. Ladies and gentlemen, should you have any question, please press star one on your telephone. Ladies and gentlemen, should you have any question, please press star one on your telephone touch pad. Thank you. Mr. Lee, there seems to be no further question at this point in time. Would you like to wrap up?
Okay. If there are no further questions, I think we have had a good discussion this morning, very many good questions. I think we can conclude the conference call now. Thank you very much for joining our conference call, and we will talk to you again next time.
Thank you.
Thanks, guys.
Thank you.
Thank you for your participation. This concludes your conference. Thank you.