Earnings Call: Q4 2019

Feb 7, 2020

Summary

Q4 revenue rose 2% YoY and net income reached TWD 6.4B; FY2019 revenue grew 4% pro forma. The 2020 outlook anticipated growth and margin recovery, but coronavirus-related labor and supply-chain disruptions made forecasts unusually uncertain.

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter. Welcome to our fourth quarter. Earnings release. Thank you for attending our conference call today. We apologize for not having our earnings release in our typical physical format. As with most people in Taiwan, we are acting with an overabundance of caution in regards to minimizing the chance of exposure to the coronavirus. Please refer to our safe harbor notice on page 2. Our lawyers have worked very hard on this disclosure, so please give it your utmost attention. All participants consent to having their voices and questions broadcast via participation in this event. Please refer to our safe harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, our dollar figures are stated generally in New Taiwan dollars unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan-IFRS. Results presented using Taiwan-IFRS may differ materially from other accounting standards. For today, I will be going over our business update and financial results. Afterwards, we will have a Q&A session with Joseph Tung, our CFO. As a reminder, because ASE Holdings was jointly formed on April 30, 2018, as a legal entity, our SPIL subsidiaries' results are consolidated only as of that date going forward. For the sake of comparability, our full year 2019 results will be compared against a pro forma set of results for full year 2018, as if SPIL was a subsidiary and consolidated during the entire year of 2018. This set of results is labeled or will be labeled pro forma. Please refer to page 3. Let's go through an update of our 2019 goals. For our SPIL combination, as you know, we have been limited in our ability to tap the full potential of our combination with SPIL during the restricted period imposed by the Chinese Anti-Monopoly Bureau. It is our understanding that the assigned third-party regulatory auditor has completed and submitted its report pertaining to our compliance during the restricted period ended November 24, 2019. We continue to expect to receive an official acknowledgment accepting that a satisfactory audit has been conducted and reconfirmation that the restriction period has been completed without incident. We also continue to expect to receive such an indication during this quarter. As of today, we have not received any additional information regarding the status of this process. However, given the current situation in China, the timing of this notification may understandably be subject to some delay. During 2019, our EMS unit achieved record revenues on the strength of SiP products. We continue to believe that our EMS entity provides a crucial component of SiP, a system-level understanding. During December of 2019, we announced our intention to acquire Asteelflash, the second-largest EMS company in Europe. We are in the process of clearing all relevant regulatory hurdles, and we expect to complete the combination during the third quarter of 2020. Unfortunately, we will not be able to give an outlook in terms of how much such an acquisition will contribute to our results during 2020, but we can state that Asteelflash had revenues of around $1 billion. In addition, our organic EMS business should also continue to grow during 2020, driven by our portfolio of SiP products and across our computing, industrial, and automotive segments. Along with the acquisition, we also expect to have an expanded geographical footprint, which could make a difference for current and new customers. There is much to look forward to from our EMS business. Exiting the year, our test business outgrew the rest of our ATM business. Given the context that the semiconductor industry shrank during 2019, we are pleased that we were able to grow our test business by 7% and hold our assembly business relatively flat. Looking out into 2020, we continue to see strong momentum for our test business. We are looking for our test business to pick up speed and grow greater than twice the logic semiconductor growth rate. Group SiP grew at 13% during 2019, with 230 million of new SiP products scattered across multiple customers. For 2020, total SiP growth should continue to expand with SiP adoption accelerating. At this time, we see accelerating momentum for SiP business in 2020, driven in part by 5G-related products. Finally, in 2019, fan-out revenue was ahead of our target of $50 million for the year. As we see increasing input-output density for shrinking die, we see fan-out becoming a necessity and a path to become the mainstream packaging method on the next foundry node. Such packaging adoption should accelerate gradually during 2020 and pick up more aggressively during 2021. We currently estimate fan-out revenue to grow more than $50 million during 2020. During this year, we will continue to invest in this capacity along with panel-level fan-out. During 2019, we were selected to be included in the Dow Jones Sustainability World Index for the fifth consecutive year. More impressively, within this index, we have been the worldwide leader within all semiconductor and semiconductor equipment companies for four consecutive years, which is considered a record. The Dow Jones Sustainability Index is widely considered the global standard for measuring and advancing corporate ESG practices. During 2019, we also were selected for inclusion in the CDP A List for Climate Change for the third time. CDP recognized ASE as a pioneer for action on climate change. CDP scored over 6,800 companies with a rating of A to D minus. Only the top 2% made the A List. We were also the first Taiwanese company to be included in both the Dow Jones Sustainability World Index and the CDP A List. We are extremely proud of the company's ESG accomplishments. Next, a little bit on the coronavirus. As with all entities in Asia, we are in the midst of trying to run our business under the impact of the 2019 novel coronavirus. As of today, the impact to us from this virus generally relates to China's lack of available labor. Much of China's workforce are migrant workers. These workers often travel thousands of miles between their hometown to their job. A large portion of these workers go home during the Lunar New Year holidays. During the 2020 Lunar New Year holidays, China has taken aggressive actions trying to curb the spread of the coronavirus, including extending the duration of the Lunar New Year holiday and restricting the movement in and out of a number of affected regions. Today, transportation in China is significantly more complicated than before the coronavirus measures were put in place. Many workers have difficulties rejoining the workforce due to transportation routing limitations or an inability to leave their hometowns. Even when these workers complete the logistical challenge of getting back to a factory, they must go through a health screening and a quarantine process. The competition for available basic workers is quite strong right now. Even with our factories running overtime to make up for these labor deficits, our China-based factories are all running at varying levels of suboptimal reduced staffing. The current situation is very dynamic, and much depends upon the ability of the world to control the spread of this virus. Overreaction is probably the most prudent course of action. With the information given to us now in terms of availability of labor, we can provide you the following information. Within ATM, roughly 15% of our revenues are from China-based factories. Within EMS, more than half our revenues are from China-based factories. From a seasonality perspective, the first quarter is typically our trough quarter, which provides some cushion to the overall impact to these factories. Nevertheless, during the Lunar New Year, our China factories still run at 60%-70% staffing. We expect to return to 80%-85% staffing by the end of February, and we still currently expect to be able to get near full staffing by the end of the first quarter. Page 4. On this page, we will find our fourth quarter consolidated results at the holding company level. We will generally defer business explanations of these results to our ATM and EMS P&L discussions. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the fourth quarter, we recorded fully diluted EPS of TWD 1.47 and basic EPS of TWD 1.50. Consolidated net revenues was TWD 116 billion. This represents a 1% decline quarter-over-quarter and a 2% improvement year-over-year. ATM revenues of TWD 66.8 billion were flat quarter-over-quarter and up 6% year-over-year. EMS revenues of TWD 48.7 billion declined 4%, both quarter-over-quarter and year-over-year. We had gross profit of TWD 19.8 billion with a gross margin of 17.1%. Our gross margin improved by 0.8 percentage points quarter-over-quarter while improving 0.7 percentage points year-over-year. The sequential increase in gross margin is primarily the result of stronger ATM loading and higher ATM product mix. Our operating expenses increased by TWD 0.4 billion during the fourth quarter to TWD 11.1 billion, primarily the result of increased operating expenses from our EMS business unit. Our operating expense percentage of 9.6% represents an increase of 0.4 percentage points. This increase was primarily the result of higher operating expenses within our EMS entity. Operating profit was TWD 8.7 billion versus TWD 8.4 billion in the third quarter. Sequentially, operating margin improved 0.4 percentage points to 7.5% while being flat year-over-year. During the quarter, we had a net non-operating loss of TWD 0.1 billion. This amount includes net interest expense of TWD 0.9 billion, offset in part by our foreign exchange and financial instrument activities. Tax expense for the quarter was TWD 1.8 billion. The effective tax rate for the fourth quarter was 20.7%. Net income for the quarter was TWD 6.4 billion, representing an improvement of TWD 0.6 billion from the previous quarter and TWD 0.9 billion from the same period in 2018. On the bottom of the page, we have again provided here key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be TWD 21 billion, with an 18.1% gross margin. Operating profit would be TWD 10.2 billion, with an operating margin of 8.7%. Net profit would be TWD 7.8 billion, with a net margin of 6.8%. Basic EPS, excluding PPA expenses, would be TWD 1.84. Page five, here is the 2019 consolidated full-year results with pro forma and legal entity comparisons. Again, we will defer to the business unit P&L to make business commentaries. For 2019, consolidated net revenues grew by 4% as compared with 2018. EMS revenues grew 9% annually, and ATM revenues stayed flat. Gross profit for the year increased by TWD 0.3 billion year-over-year, primarily as a result of higher EMS revenues. Gross profit margin for the consolidated entity declined 0.5 percentage points, primarily attributable to higher EMS product mix. Operating profit for the year declined by TWD 3.2 billion, primarily because of higher opex. Operating margin declined by 1 percentage point. Non-operating expense was TWD 0.2 billion for the year, including TWD 0.9 billion of interest expense. Non-operating expenses declined as a result of higher income from financial instruments and currency hedging activities. Net income increased by TWD 1 billion from TWD 15.9 billion to TWD 16.9 billion. Fully diluted EPS for the year was TWD 3.86, while basic EPS was TWD 3.96. Removing the effect of PPA depreciation and other transaction-related costs, our gross margin would be 15.7%, operating margin would be 7.1%, and our EPS would be TWD 5.35. On page six is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the fourth quarter, revenues for our ATM business were TWD 69.3 billion, up TWD 1.4 billion from the previous quarter, and up TWD 5.2 billion from the same period last year. This represents a 2% increase sequentially and an 8% increase year-over-year. Our ATM revenues came in slightly ahead of our expectations due to stronger-than-expected seasonal demand. For our industry, we believe the sequential increase during the fourth quarter to be somewhat unusual, as we typically see a slight seasonal decline as the holiday season build winds down. We believe this to be a positive sign and the result of a general business recovery. Gross profits within ATM were up TWD 1 billion quarter-over-quarter and TWD 1.7 billion year-over-year to TWD 15.7 billion. Both of these gross profit improvements are the result of incrementally higher loading. Gross margin for our ATM business was 22.7%, up 1 percentage point sequentially and up 0.9 percentage points year-over-year. Margin improvement sequentially and year-over-year are primarily the result of higher overall loading and a higher mix of test revenue, offset by negative foreign exchange impact. We believe that our margin recovery is just starting and believe a small year-over-year increase of 0.2 percentage points through a downturn to be a significant achievement. During the fourth quarter, operating expenses were TWD 8.3 billion, flat with the third quarter, but up TWD 0.6 billion from the same period last year. The year-over-year increase is primarily related to increased R&D expenses related to higher NPI costs. Our operating expense was 12%, down 0.2 percentage points sequentially and up 0.1 percentage points year over year. We would like to make some comments in regards to what is becoming a more significant portion of our operating expenses, new product introduction, or NPI costs. Our R&D NPI expenses sometimes significantly precede their associated revenues. As we've previously mentioned, leading-edge packaging methods such as fine-pitch bumping, copper pillar, and fan-out require longer and more significant NPI efforts. These NPI expenditures often precede their associated revenues by more than three to six months. As such, our operating expenses will reflect higher and somewhat imbalanced R&D-related expenses when there are significant amounts of advanced packaging products in the pipeline. In short, more NPI costs now lead to more products to run down the road. We believe our focus related to these expenses should be towards better monetizing them once the associated business comes into mass production. During the fourth quarter, operating profit was TWD 7.4 billion, representing improvements of TWD 1 billion quarter over quarter and TWD 1.1 billion year over year. Operating margin was 10.6%, increasing 1.2 percentage points from the third quarter and increasing 0.8 percentage points year over year. This improvement was primarily attributable to better gross profit performance from higher loading during the quarter. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.4% and operating profit margin would be 12.7%. On page 7, we have our ATM full-year P&L with a pro forma and legal entity comparison. For our ATM business, we, along with most of the industry, had a soft first half of 2019. The back half was marked by a significant recovery, and even though our performance was one of the most resilient within the semiconductor industry, the sluggish first half was a significant drag on our full-year results. On a full-year pro forma basis, our ATM business in total increased by 1%, composed of our packaging business being flattish, materials business being down 1%, and our test business being up 7%. During this downturn year, we were able to increase our gross profit by 1% while holding gross margins to a 0.1 percentage point decline. This was primarily driven by softer loading in our assembly business, partially offset by higher test product mix. Operating income declined 10%, primarily due to higher operating expenses. The higher operating expenses primarily consisted of higher R&D costs and employee compensation. The R&D costs are primarily associated with higher NPI and advanced project costs. The employee compensation costs relate to employee stock options issued after completing our combination with SPIL. Operating margin declined by 0.9 percentage points. Please turn to page 8. Here you'll find a graphical presentation of our pro forma ATM P&L. We're not going to talk much about that. On page 9 is our pro forma ATM revenue by market segment. We do see the communications segment continuing its recovery here. On page 10, you can see our pro forma ATM revenue by service type. During the fourth quarter, our revenue mix continues to transition towards bumping, flip chip, and SiP. As stated earlier, we continue to expect our test business to outgrow our assembly business as we continue to expand our turnkey business model. On page 11, you can see the results of our EMS business and its associated revenue by application. During the fourth quarter, we had revenues of TWD 48.8 billion, representing a decline of TWD 1.8 billion, or down 4% sequentially, and a decline of TWD 1.9 billion, or 4% year-over-year. EMS revenues came in slightly ahead of our expectations as a result of higher demand as the seasonal build was slowing down. As mentioned during our previous earnings release, the seasonality of our EMS business accelerated forward a month or so. This seasonality adjustment had some business pulled in from the fourth quarter into the third quarter. As such, we had a relatively stronger third quarter, which led to a relatively softer fourth quarter. The year-over-year decline was also driven by this seasonality adjustment. Our EMS gross profit was TWD 4.3 billion, declining TWD 0.2 billion sequentially and TWD 0.3 billion year-over-year. The gross profit decline was driven primarily by softer loading. Gross profit margin for the EMS business unit came in at 8.9%, flat with the previous quarter, and declining 0.2 percentage points year-over-year. The year-over-year decline in gross profit margin was driven by softer loading and product mix. Our EMS business unit's operating expenses closed the quarter at TWD 2.8 billion, increasing TWD 0.4 billion sequentially year-over-year. Operating expenses increased primarily as a result of planned expansions of business, resulting in higher employee-related expenses, transaction-related expenses, and NPI costs for future products. Operating profit for the quarter was TWD 1.6 billion, which is a TWD 0.5 billion decline sequentially and a TWD 0.6 billion decline year-over-year. Our operating margin came in at 3.2%, which is a 0.9 percentage point decline sequentially and a 1.1 percentage point decline year-over-year. For the full year, our EMS business continued to grow, driven by strength within our SiP business and communications customers. For 2019, we had EMS revenue of TWD 165.9 billion, representing a 9% annual increase from 2018. This was primarily driven by growth within our SiP-related products. Gross profit increased TWD 0.3 billion, or 2%, primarily as a result of higher revenues. Gross profit margin declined 0.6 percentage points, primarily as a result of product mix changes and initial ramp-up of costs of sites outside China. Operating profit increased to TWD 4.9 billion, with operating margin declining 0.8 percentage points to 2.9%. The operating margin decline was driven by higher operating expenses related to higher expansion costs for sites outside of China, higher NPI costs related to future projects, and higher transaction-related expenses. On page 12, you will find a graphical representation of our EMS revenue by application. You will see that our communication segment picked up while our consumer applications declined. These moves are seasonally driven. On page 13, you will find key line items for our balance sheets. At the end of the quarter, we had cash and cash equivalents and current financial assets of TWD 65 billion. Our interest-bearing debt decreased TWD 6.9 billion to TWD 220.7 billion. Total unused credit lines amounted to TWD 225.4 billion. Our EBITDA for the quarter was TWD 22.5 billion. On page 14, you will find our pro forma equipment capital expenditures. Machine and equipment capital expenditures for the fourth quarter totaled $457 million, of which $227 million were used in packaging operations, $205 million in testing operations, $18 million in EMS operations, and $7 million in interconnect material operations and others. For our ATM business, we had a strong fourth quarter, one that outpaced the third quarter in every aspect. Everything picked up. All major product lines are running well. A quarter ago, we said that the recovery was well on its way and that the business looked healthy. We saw that demand even seemed to be persisting into the first quarter. This, we believe, would lead to a stronger-than-seasonal first quarter. For the whole year 2020, we saw 5G being the biggest story of 2020, driving all our business units towards banner years. This view has not changed. It remains backed up by our customer forecasts, a shallower trough than a typical first quarter, followed by strong quarter-over-quarter growth. For our EMS business, during the first quarter, we usually see a significant cliff as the holiday seasonal build concludes. This also continues to be the case. Customer forecasts have remained relatively consistent. If you look out into the rest of the first quarter, I do know what we will be selling extremely well: surgical face masks. All kidding aside, this is the business environment in which we are left trying to understand. Relatively few people have any control of the macro factors that will impact our business. The situation is pretty much in the hands of sovereign government officials. When will the coronavirus be controlled, and what measures will be necessary for that control to happen? It is the effectiveness of those measures that will ultimately determine the availability of labor for ASE's China-based factories, the health of the overall supply chain, and eventually, the health of consumer demand. Even for me, I fundamentally believe the science that indicates the current coronavirus is similar to the flu, and I believe the transmission method of this virus is via droplet format and not airborne. Rationally, we should just avoid crowded areas, wash our hands, and avoid touching our faces. Rationally, I shouldn't be using an N95 mask and hoarding hand sanitizers. When the stakes are ultimately high and include your very own life, probability becomes meaningless. Fear trumps rational thinking. This virus is a negative lottery, and everyone is doing whatever they can not to win. The fear that is gripping the world, the overabundances of caution at the personal, company, and sovereign government levels are completely understandable. The impacts to our business are totally unpredictable. Supply chain risk is also troublesome and extremely difficult for us to evaluate. It doesn't matter if we can manufacture our components if the company ahead of us cannot provide the raw materials or the company below us cannot assemble the end product. This environment will test supply chains. Remember, in times of uncertainty and fear, product manufacturing risks are amplified. Customers, in turn, choose to stick with the leaders because the leaders have the best capability and flexibility to get the job done. Unnecessary product risk could be the difference between a product that gets made and one that does not. For our first quarter, we have adjusted our expectations given our operational constraints, and we've even adjusted for higher labor costs. Please remember that our expectations are made in an environment which the macro factors, which are completely out of our visibility, easily outweigh the micro factors, which are immediately visible to us. We actually had a significant internal debate over whether we should provide an outlook at all, but we felt that not guiding would contribute to the atmosphere of fear. We decided that highlighting the strength of our business should not be outweighed by uncertainties exogenous to our entire industry. With that said, please regard our outlook with a higher potential for variance than normal, and we would appreciate it if you would all assign a broader range of potential performance. For ATM, in TWD terms, ATM first quarter 2020 business should be between second and third quarter 2019 levels. ATM first quarter 2020 gross margin should be slightly above second quarter 2019 levels. For EMS, in TWD terms, EMS first quarter 2020 business should be similar to first quarter 2019 levels. EMS first quarter 2020 operating margin should be slightly lower than first quarter 2019 levels. These are the end of the prepared remarks. We can go to the Q&A session at this point. Yes, thank you. Ladies and gentlemen, it's Q&A session now. Please press 01 on your keypad if you would like to ask questions. Thank you. The first to ask questions, Randy Abrams, Credit Suisse. Go ahead, please. Yes. Hi, thank you, and good afternoon, and Yin, appreciate you still giving out the guidance. I wanted to ask the first question just on, as you're factoring in the first quarter guidance, it sounds like you're implying more the production side impact. I'm curious from the demand side if you've seen any customer revisions at this stage from the demand side. Within that guidance you gave, is that more apropos how orders look now, or have you taken a discount to factor in any demand side weakness? I think whatever we are providing now is really based on the situation at our factory level. So it's more on the supply side kind of constraint that we have, and we made those kind of the best guess adjustments into our first quarter outlook. But in terms of demand, I do not think we are in a position to comment on the overall demand situation because there's still a lot of uncertainties in front of us. But indirectly, I think this demand situation should be reflected into the forecast that we're getting from our customers. So, whatever we're providing at this point is really looking at our own situation and looking at the forecast that we're still getting from our customers, and made the overall estimation of what kind of impact it will have on the first quarter and remaining of the year. Okay. If I could ask on the investment side, you were running at a high level through second half, I think, ahead of some of the good drivers you were expecting for this year. How are you thinking about maybe the CapEx relative to what you were doing the last few quarters, holding, or if you have a full year CapEx, knowing it could change based on what's happening? At this point, we're still fairly optimistic about 2020, and we will continue our CapEx as required. But at the same time, there is some of the CapEx being made earlier in 2020, what we call the upfront investments that we are already making. So for 2020, we're expecting our CapEx not to exceed whatever we had spent in 2019. Okay. It will not exceed 2019. Okay. If I could then ask on the, and maybe if I missed it, the SiP business, you had the 13% growth last year. Do you have any potential, what you're kind of seeing at this stage in terms of SiP, how much, or what the outlook could be for this year? Then maybe on the broader business, factoring in like the virus gets contained, do you have kind of a view on maybe full year for the overall company versus industry, maybe a rough view what type of growth could come through. I am sorry, the later part of the question? Okay. The first was more micro, just more looking at the SiP, what you expect for this year. Second was if you have a broader baseline view, maybe going into the year, if the virus contained within a quarter or so, how your business and also how the industry looks on a full year growth. Well, I think in terms of SiP, we had a very good run-up in 2019, and I think that momentum will continue. I think more worth mentioning is that the new projects revenue exceeded our target of $100 million incremental revenue in 2019, and we are expecting that momentum to further strengthen in 2020 as well. So there will be a fairly healthy growth in our SiP business in 2020 as well. As for the full year, if taking the virus situation aside, I think we still remain very optimistic about the whole year situation, and we are expecting a very healthy growth in terms of overall revenue, particularly on the ATM side of it. First quarter, we are still expecting an above seasonal quarter, and for remaining of the year, we are still expecting sequential growth on a quarterly basis overall. Okay. Last question, if I can ask the margins. In IC ATM, maybe the factors you mentioned just the start of the margin improvement, and it looks like tests may be one factor. If you could go through the areas giving confidence that margins and maybe how much you might be seeing in that front. If you could give an update then on the EMS, where first quarter looks like a lot of impact on the production side, but maybe how second half could look for margin versus second half last year, at least if we are through the virus impact. From a consolidated point of view, we do expect a healthy margin improvement in the year because of the, first of all, higher loading, and also a lot of the investments that we are making in 2019 will start to pay off in 2020. We are expecting a better control over our opex ratio. We are expecting, although I cannot quantify at this point, but we do see room for more efficiency improvement after the restriction period is lifted. Overall, I think the margin situation in 2020 will see some healthy, quite a bit of healthy improvement. That is both on the ATM side and also on the EMS part of the business as well. Okay, great. Thanks a lot, Joseph. Thank you. Next, we will have Bill Lu from UBS. Please go ahead. Yeah. Hi, Joseph. Hi, Ken. Thanks for taking the question. A lot of information given, so I am just hoping for some clarifications first. I think Ken said that test would grow faster than 2x logic, I think. Did I hear that right? And if so, what is your expectation with the logic growth this year? People are expecting somewhere around 7% to 8%. Okay. Can you just talk a little bit about the key drivers for test this year? And also, I do not know if I heard it, besides that, was there also a guidance given for total ATM growth this year over last year? No. We did not give a total ATM for 2020. Okay. Can you try to help me a little bit around that? As I mentioned, we are expecting a healthy growth, particularly in the ATM part of it, because a lot of the new initiatives that we're taking will start to pay off in 2020. We're seeing strong momentum in our SiP business. We're seeing strong momentum in our test business as well. Overall, I think we're going to have a pretty If taking all the uncertainties aside, particularly in this virus situation, whatever we're getting at this point, whatever information we're gathering at this point, leads to quite a healthy year for us in 2020. Okay. Maybe I'll ask that slightly differently, because you had said that if you look at the growth this year, 5G is one of the bigger drivers. If I look at 5G, a lot of it is China. I guess my question is there a way to quantify how exposed you are to China and to 5G within that optimistic outlook for ATM, IC ATM? What percentage of our revenue will be 5G related? Is that the question? Yeah, that would be very helpful if you could answer that. Well, that is one question I cannot answer. I think, of course, 5G will be a major driver for growth for us, including 2020 and beyond. But in terms of what percentage of revenue will be 5G related, I think that is a very difficult number to come by because everything is intertwined. Some can be 5G, direct 5G, or some can be 5G related. Some can be rising out of 5G implementation. But I think the key for us is really to maintain our first mover advantage in terms of the 5G development or deployment. This is driven by our overall, our deepest or widest coverage over all the 5G players. Whatever players, whoever that comes up with 5G more in applications or more products, I think we want to maintain our first mover advantage, and I think we will stay as a dominant player in the 5G field. Great. Sorry, can I sneak in one more. You talked about production out of your China-based factories and how that is going to be back to normal by end of the quarter. But assuming issues do not get resolved, what is your ability to shift manufacturing away from the Chinese factories? I think right now, the overall capacity in our China factory, in terms of ATM, is about 15%. I think most of the products can be taken over by our Taiwanese side or sites in other areas as well. I think this is the point Ken was trying to make earlier. When there is a crisis, I think the leader with the highest scale and flexibility tend to be the safer bet for our customers. I think that is the silver lining here. There is a crisis in front of us. There is some additional challenges, but in terms of overall strategic positioning for ASE, we could look at it as a plus for us. Okay, great. Thank you. Next to ask questions, Gokul Hariharan, J.P. Morgan. Please ask your questions. Yeah, hi. Thanks for taking my question. First of all, could you talk a little bit about CapEx, looking at 2020? It felt like 2019, eventually CapEx ended up being higher than the expected range. What do we expect for 2019? Secondly, I think you talked about some of the NPI investments which drove opex higher in Q4. What are the timeframe roughly in terms of when we see these investments come through in terms of revenues? How should we think about opex in 2020? Are we expecting opex as a percentage of sales to start coming down, given that we are expecting meaningful revenue growth? I had a follow-up question on the guidance as well. Well, as mentioned, we are expecting this is not a budgeted number, but by the forecast we're getting from our customers, we're expecting a relatively steady CapEx compared to 2019. The combination of that CapEx would be somewhat different because in 2019, up to 44% of the CapEx was spent on test. Going into 2020, that ratio will come down to below 30%. More resources will be put in assembly, advanced packaging. Also, a larger CapEx will be spent on EMS for some of the new SiP project that we put the NPI in already in second half or fourth quarter of 2019. Okay. Could you talk a little bit about the opex as well and the NPI? In terms of opex, I think this year, the overall opex ratio grew from 9.4% in 2018 to 9.9%. This is because we have additional ESOP-related expense. We spend more on R&D, and also we are expanding some of our sites, some of our non-China sites, given the trade war situation. We are looking at 2019 as a year of investment. I think a lot of this front-end investment will start to pay off in 2020, so that give us a better margin outlook for 2020 as well. In terms of the overall control of the opex, our target for this year is really to come back to 2018 level of 9.4% or 9.5% level. Okay. Just a quick question on the guidance. Could you talk a little bit about how you handicap the guidance for any demand shortfall? I know that it is very early for customers to feedback to you in terms of any potential demand risk on 5G products, et cetera, in China. Could you talk a little bit more in detail about, are you already handicapping some of those potential near-term demand disappointments in your Q1 guidance? Or the caution in Q1 guidance is primarily related to supply disruption and not really counting on any potential demand related to China 5G? As I mentioned, whatever outlook numbers that we, our guidance we provided is based on the forecast that we are getting from our customers. Without directly commenting on the overall demand situation, we would like to say that that is somewhat reflected in the forecast that we are getting from our customers. With that forecast, we look at our own capacity situation and make the necessary adjustment particularly in the first quarter outlook. That is how we come up with the overall outlook that we provided. Okay. Thank you very much. Right now, we are having Charlie Chan, Morgan Stanley. Go ahead, please. Hi. Thanks for taking my question. First of all, can I ask how you are going to split the millimeter wave AiP revenue between ASE and subsidiary USI, both revenue and profits? Thanks. The what? The The millimeter wave AiP, how are you going to split the revenue and the profits between you and USI? Oh, we're not talking about the specific product at this point. Okay. Joseph, you mentioned about this year you're expecting higher margin, better control of opex ratio. Does that discount the merger synergy already, or that's a kind of separate factor? Right now, I don't think we are not putting a lot of weight on the synergies that can be created, particularly on the operation after the merger, because at this point, we're not in a position to comment on that because the restriction hasn't been lifted yet. No, we are not budgeting this into the overall. Okay. Okay. On that front, any timeline or any reason that restriction is still there? When that is going to be removed? Well, I think we have already filed. I think the appointed reviewer has already filed their last report to the Anti-Monopoly Bureau in China. We are waiting for them to review such report and give us a clear bill of health. Because of the virus situation, I think it is kind of put. I think if there is some delay, that is well understandable. At this point, we are still hoping that by end of the quarter, we should be able to get the full clearance. Okay. Lastly, maybe also related to your ATM business growth in 2020. If you can compare your ATM business versus the industry growth in 2019 and 2020, do you think you are outgrowing or undergrowing the industry? I think that associates to another question, whether you think local Chinese backend foundries are gaining share. Do you think Chinese semi customers, they have any preference between using ASE or those local vendors? Well, I think we will be able to outgrow the industry overall if you are talking about the logic part of it. I think we are pretty confident that we will be outgrowing not just the industry, but also all of our competitors. What is the latter part of the question? Yeah. Because China is pushing this semi-localization, right? I am not sure if that does change customers' preference. I mean, for those local China semi customers, do you see the shift from your China fab to those local vendors? I am not sure that if there is such kind of a preference, does those local vendors still need to discount your price versus yours? Well, I think preference is one thing, but the capabilities is the other. They can prefer their local vendor, but if their local vendor cannot provide the service or the quality or the products as a whole, I would think our customer really have a choice. Yes, we will review the overall situation or competition very seriously, and we will try our best to accommodate whatever our customer demand is or requirement is. That includes ramping up our China factory as well, if local manufacturing is preferred by our customer. Okay. Okay. I see. Thanks for the answers. Yeah. Right now, we are having Richy from Daiwa Securities. Go ahead, please. Yeah. Hi. Thank you so much for taking my question. The first question, as usual, is housekeeping for model and purpose. Can I know your utilization rate in Q4 across your packaging, testing, and bumping? Also, what is your view on the first quarter loadings? Fourth quarter, we are at a range of 80%-85% utilization, and going to across board. First quarter, we are looking at 75%-80%. 75%-80%. Yeah. Okay. Okay, thank you. Second question, this is a little bit hypothetical. Assuming there is some impacts from the virus in your first half business, would you be able to make up the shortfall in second half? What is the impact to the virus? Okay. Yeah, because I am just thinking, I am just trying to resemble the situation to the SARS back in the Well, I think, first of all, I think within reason, of course, we can make it up, and we do have the scale or the flexibility to handle that. Unless there is a total collapse of the whole situation, then I think right now what we are seeing is things are still within a manageable level. Okay. Thanks. That is fair enough. The final question is about the 5G. I think a couple days ago, Xilinx, when they put out their business outlook, they actually say something about a slowdown in the 5G build this year. Would you worry about that the demand given by your customers for the 5G build this year a bit too bullish? Do you see any risk on that? Oh, I think there is always risk on whatever forecast or whatever market assessment there is. But the forecast that we are getting still suggests that we are having a good year. We will try to analyze the situation better and make the proper adjustments on whatever we are seeing, i.e., if there is any overbooking or any over-optimistic kind of forecast that we are getting. We will try to make some more read into, because we do have a very diversified customer base. So there is some level of check and balances we can get among our different customers. I think we have been managing our business for over 30 years, so we should have the experience or knowledge how to view the overall situation. Okay, fair enough. I have no more questions. Thank you so much. Thank you. The next one to ask questions, Bruce, Goldman Sachs. Please go ahead. Hi. Thank you for taking my questions. My question is regarding your USI production. You just mentioned that you have 85% production in Taiwan for ATM. How about your production in China? Are you able to move those SiP production back to Taiwan? That will be a larger scale of work to do, yes. But I do not know how to answer this question, actually. Okay. So basically your assumption, your assumption is based on that your labor and everything is going back to your factory around 80% or 90% by the end of the first quarter. Is that your assumption for the USI business as well? Yes. I see. Okay. But I think to answer your question, your first question, if we can do it, then I do not think anybody else can do it either. So it will be a real problem for us. Well, because that is why we need to ask you, right? Okay, let us try to ask a different question. Regarding your profitability for the ATM, if you look at your profitability for ATM for 2020, you are looking at a much better year with high utilization rate, a better product mix. The profitability for ATM in fourth quarter is still lower than the historical level or before the ASE deal position. So what kind of profitability or what kind of the new norm of profitability we can expect in 2020 or 2021 onward? This one should be a lot easier. Yeah, it is a lot easier, but then I do not want to give you the answer, though. You did not give me the first one, you have to give me this one. No, I don't want to get into trouble with the SEC here. If I give any numbers, then I need to put out a full-blown, what do they call it? reconciliation. Yeah. We're not allowed to do that. The way TSMC uses that, they call it a structural profitability. What? They call it structural profitability. Structural profitability? Yes. That is what TSMC was using. Instead of getting into trouble. I do not understand. No, I mean, for me, it's that we are expecting some profitability improvement. Historically, ASE still are able to generate somewhere around 25% or 28%, even 30% gross margin at the peak quarter. Are we expecting those kind of number in the full year or future? Let me do this. Let me do this. I am, as a CFO, I am asking for at least 2% improvement. I see. In 2020? Yeah. I see. I believe everyone listen to you, right? Huh? I believe all the staff listen to you and will follow the instructions. Oh. You believe what? I believe all your staff will follow your instruction and deliver the results. Well, remember, they are not all my staff. Okay, thank you. It could be my wishful thinking, right? True. True. I'd like to thank you. Thank you. Right now, we're having Sebastian Hou from CLSA. Please go ahead. Hey. Yes. Thank you. My first question, just to want to clarify some of the numbers that I did not hear very clearly. I think you mentioned that the utilization rate in your EMS factory in China was like 50% in Lunar New Year, and expect that to go up to 4 percentage point by end of February, and then fully utilized by end of this quarter. For other numbers, could you repeat that again? Yeah. All right. We are looking at around 60% to 70% staffing during the Lunar New Year, and then we expect to return to 80% to 85% by the end of February. And then hopefully to get close to full by the end of the quarter. That is the more optimistic outlook at this point. These are the bull case scenario? Yes, that is the okay scenario. Okay. What is the usually staffing rate increase a month after or 2, 3 weeks after CNY holiday, let's say, the past 2 years? Normal year? Yeah. Normal year, it is back to full. Okay. You are saying that it is 80% to 85% by end of February, but the normal years, by end of February, should have already gone back to 100%, right? That is correct. So that is like almost 20% below. That is correct. But during this timeframe, we are also going through basically the trough seasonal quarter, right? So, that gives us a little bit more cushion to work with. We can also work with a little bit more overtime, planning worker schedules and such. But in a positive scenario, this is what we are seeing. Got it. I have a question, a follow-up on this, because typically, your EMS business is, as your definition, the trough quarter, where the low season in 1Q. So, even if you cannot get back to the very decent staffing rate, would that still be a bottleneck to your manufacturing capability or fulfilling your customer demand? After all, it is low season in Q1. It still has some impact. It has an impact. Or this year is somewhat different, like you see a better than typical Q1 seasonality, so that's why this will matter? We're basically trying to get to an optimal percentage, right? We're trying to get to 100%, but that 100% is 100% of the seasonal quarter. Okay, got it. My second question is about your EMS business. I look at your 2018 to 2019 change. You have 9% revenue growth, but the operating profit dropped 14%. OP margin contracted by 0.8%. Can you explain again what drives that OP margin or operating income decline? Also, what's your outlook for 2020? Our EMS entity is in the process of some different types of expansion. There is geographic expansion. There is also trying to expand a current site. Then they are also buying Asteelflash, right, and doing a number of other transactions that have been talked about. These things, these expansion plans are actually generating additional costs within opex this year. Hopefully, these are not. We do not see these necessarily as structural in nature for opex at this time. Okay, sure. But has most of the expense expand, we would like to, or do you expect these will normalize this year? To a much lesser degree, yes. There will continue to be some ramp-up, particularly in Poland, in Mexico, in Taiwan, in terms of EMS. In terms of NPI, it really depends on what new projects we will be getting. But I think most of the costs for expanding non-China sites from EMS perspective is done in 2019, and things are starting to get much more streamlined. So, there will be additional expenses put in, but in terms of overall percentage to the revenue, I think it is back to more of the normal level. Okay. So, to the conclusion for the EMS business outlook this year is that the top line will grow, and margin, OP margin will stabilize here or potentially improve? Yes. Okay. Got it. Thank you. The next question, Szeho Ng from China Renaissance. Go ahead, please. Oh, hi, and good afternoon, gentlemen. Just want to touch base on the EMS acquisition at Asteelflash. I'd like to get contribution to the company's top line. We're not giving out this year's number for Asteelflash because the transaction is not closed yet. Yeah. But as a reference, last year they had a revenue of $1.1 billion. And if you look at their first and second half split, it is about 45%, 55%. They had a net income of around $53 million for last year. So, you could probably take that as a reference, and we expect the schedule is to close the transaction by early third quarter. Okay. All right. So is it fair to assume that that business, the net margin at least, right, is better than our existing EMS business? Yes. Any reason for that? Is it one-off or because of the mix issue? I think it is the different nature of business. I think what they are focusing on is smaller volume, but larger variety, and a lot of it is not the traditional 3C type of business. I think the biggest benefit out of this transaction is three-fold. One is, it does expand our overall geographical coverage throughout Europe. The second is that the business model is different. They are serving a lot of the newer application, smaller volume. Once those business turn into mass production, then it is very natural for Asteelflash to move these to USI. Oh, okay. Got you. Yeah. I think third is really the customer portfolio is very, very complementary. I think there is very little overlap between your customers. Okay. Sounds great. My last question regarding the dividend part. Is it fair to assume at least for this year's dividend will be flat from last year's level, right? The what? Cash dividend will be at least flat compared to last year. Well, we've been paying off 60% to 65%. I think we're not changing it at this point. I mean from the dollar perspective, dollar amount perspective. Well, we almost made the same. We made similar. The EPS we made this year, very similar to last. So dollar-wise, I think the amount-wise. Okay. Great. Anything else you have? Do we have any more callers? Okay. Thank you for attending ASE's fourth quarter earnings release. One other thing. I did not give any guidance on margin. All right. Thank you very much. See you next quarter.