Earnings Call: Q3 2019

Oct 30, 2019

Summary

Q3 revenue hit a record TWD 117.6B as ATM and EMS rebounded, though higher EMS mix weighed on margins. Management expected stronger-than-normal ATM seasonality and materially stronger margins in Q1 2020, amid tariff and demand uncertainty.

Hello, I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holding. Welcome to our third quarter 2019 earnings release. Thank you for attending. Those of you physically here, we apologize for the temporary venue change, but it appears that our regular location had been booked over a year in advance. All participants consent to having their voices and questions broadcast via participation of 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 generally stated 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's event, I will be going over the financial results. Then we will have a Q&A session with Joseph Tung, our CFO. Eddie Chang, our VP in charge of financial aspects of public relations, will be available for questions in Mandarin Chinese following. Page three. First, let's have a quick update on our annual business goals. Both our advanced packaging and test businesses are performing well. On a pro forma year-to-date basis, advanced packaging has grown 9%, while our test business has also grown 6%. These amounts may appear somewhat modest, but this growth has primarily been accomplished in the midst of a downturn. SiP also grew by more than 32% during the first nine months out of the year. We are also well on our way to achieving our $100 million of incremental new SiP business for the year. Finally, we are continuing to make the appropriate investments in critical development areas across both ATM and EMS, such as the various types of fan-out, the next generation of bumping, and SiP. During the first nine months of this year, we have increased our R&D costs by 13% for ATM and 6% for EMS. We believe these expenses are strategically necessary to maintaining our lead in the industry. A quick update on 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. Thus far during this restricted period, an assigned third-party regulatory auditor has performed semi-annual audits to monitor our compliance. I am pleased to report that the final such regulatory compliance audit shall occur immediately following the expiration of the restricted period, November 24th. We, of course, are eager to complete this process. Our Chinese legal and compliance advisors have recently provided further clarification of this process to us. The regulatory auditors are targeting to submit their audit results to the Chinese Anti-Monopoly Bureau within a month of the restriction period end date. After such submission, we 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 expect to receive such an indication by the middle of the first quarter of 2020. It looks like we'll have a very busy 2020. Prior to going through the financial information, I would like to congratulate our team on being awarded inclusion in the Dow Jones Sustainability Indices for the fourth consecutive year. We believe this to be a significant accomplishment and a demonstration of our dedication towards ESG, environmental, social, and corporate governance. Next, I would like to give some context to the current business environment. From a macro perspective, the electronics industry is trying to adapt to shifting trade norms. Supply chains that were optimized after years and years of fine-tuning are now being re-evaluated in light of the new norm of volatility. It is no secret that much of the semiconductor industry has been directly impacted by the trade war. Some of our customers have been forced to disengage certain businesses. Meanwhile, some device makers are left trying to understand what features will go into their next generation of devices and what chips will provide those features. Others are looking at a step-up in their cost of production due to trade tariffs. Needless to say, locking down a bill of materials in this environment becomes incredibly challenging. As such, currently, there is a fairly broad range of estimates on how much the semiconductor industry will decline this year. However, what is expected is that the industry will decline. I would like everyone to keep this context in mind while going through our results. During the third quarter, our ATM business experienced a meaningful pickup. We saw strength across most sectors, but in particular within our communications-related businesses, including smartphone and 5G infrastructure spending. As good as our results are for the third quarter, we even missed some revenue because of product manufacturing constraints. Our EMS business experienced an even steeper ramp. The EMS quarter-over-quarter ramp-up is perhaps one of the largest mobilizations of capacity we have ever experienced, growing 60% quarterly. Especially with our EMS business, we believe that we ramped up to full production a bit sooner than in previous years, thus why we saw such a strong quarterly growth. When you put the ATM and EMS story together, there is some speculation that our customers may be accelerating products to get ahead of potential tariffs. You wouldn't be able to determine that by looking at our forecasts exiting this year and entering next. Please turn to page 4. On this page, you'll find our third quarter consolidated results at the holding company level. For the third quarter, we recorded fully diluted EPS of $1.33 and basic EPS of $1.35. Consolidated net revenue was a record TWD 117.6 billion. This represents a 30% increase quarter-over-quarter and a 9% improvement year-over-year. ATM revenues of TWD 67.9 billion increased 14% quarter-over-quarter and 2% year-over-year. Our ATM revenues came in slightly ahead of our own expectations as our customers' loading achievement rates were better than anticipated. EMS revenues of TWD 50.6 billion increased 60% quarter-over-quarter and 20% year-over-year. Our EMS revenues came in significantly ahead of our expectations. This was driven by what appears to be an earlier peak to our seasonal EMS build. We had gross profit of TWD 19.1 billion with a gross margin of 16.3%. Gross margin improved by 0.9 percentage points quarter-over-quarter, while declining 0.8 percentage points year-over-year. The sequential increase in gross margin is primarily the result of stronger loading, while the year-over-year decline is primarily due to higher EMS product mix. Our operating expenses increased by TWD 0.9 billion during the third quarter to TWD 10.7 billion, primarily the result of seasonally high NPI expenses during the quarter. Our operating expense percentage of 9.1% represents a decline of 1.7 percentage points. This decline was principally the result of higher revenues with stable operating expenses from our EMS business unit. Operating profit was TWD 8.4 billion. This amount is more than double the second quarter operating profit of TWD 4.1 billion. Sequentially, operating margin improved 2.5 percentage points to 7.1%, while being down 0.7 percentage points year-over-year. The year-over-year decline is again primarily because of higher EMS product mix. During the quarter, we had a net non-operating loss of TWD 0.7 billion. This amount includes net interest expense of TWD 0.9 billion, offset in part by other non-operating income, including unconsolidated investments. Tax expense for the quarter was TWD 1.5 billion. The effective tax rate for the third quarter was 19.4%. We expect an effective tax rate for the full year to be near 24%. Net income for the quarter was TWD 5.7 billion, representing an improvement of TWD 3 billion from the previous quarter and a decline of TWD 0.5 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 20.3 billion with a 17.3% gross margin. Operating profit would be TWD 9.8 billion with an operating margin of 8.4%. Net profit would be TWD 7.3 billion with net margin of 6.2%. Basic EPS excluding PPA expenses would be TWD 1.71. On page five is our ATM pro forma P&L. For the third quarter, revenues for our ATM business were up TWD 67.9 billion, up TWD 8.3 billion from the previous quarter and up TWD 1.6 billion from the same period last year. This represents a 14% increase sequentially and a 2% increase year-over-year. We believe the sequential increase is the result of seasonally strong loading. The small year-over-year improvement indicates that the downturn has ended and loading levels are finally showing positive year-over-year comparisons. Gross profits within ATM were up TWD 3.6 billion quarter-over-quarter, TWD 0.4 billion year-over-year to TWD 14.7 billion. Both of these gross profit differences are primarily from incrementally higher loading. Again, from a year-over-year perspective, this improvement in gross profit may indicate an inflection point for better performance ahead. Gross margin for our ATM business was 21.7%, up 3.1 percentage points sequentially and up 0.2 percentage points year-over-year. The sequential improvement is again due primarily to higher loading. The year-over-year improvement in gross margin is primarily due to NT dollar depreciation and a higher mix of more profitable test revenue. We believe that our margin recovery is just starting. We believe a small year-over-year increase of 0.2 percentage points during a downturn to be a significant achievement. During the third quarter, operating expenses were TWD 8.3 billion, up TWD 0.9 billion from the second quarter, and up TWD 0.7 billion from the same period last year. The sequential increase in operating expenses primarily relates to the seasonal ramp of NPI expenses during the third quarter. We expect that as our product complexity gets more technologically advanced, we will see longer and more extensive R&D and NPI requirements. We will continue to work towards further minimizing these costs during the coming year. We believe this to be a significant opportunity for further improvement in which we can work with our SPIL subsidiary. Our operating expense percentage was 12.2%, down 0.3 percentage points sequentially, and up 0.8 percentage points year-over-year. As we mentioned during the previous quarter, we were targeting to keep our operating expense percentage roughly flat. However, we were able to make an impact earlier than anticipated. We still expect an additional decline in our operating expense percentage during the fourth quarter. During the third quarter, operating income was TWD 6.4 billion, representing an improvement of TWD 2.7 billion quarter-over-quarter, and a decline of TWD 0.3 billion year-over-year. The sequential improvement is the result of higher gross profit, while the year-over-year decline is the result of relatively higher R&D expenses. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.4%, and operating profit margin would be 11.6%. Please turn to page six. As a legal entity, our SPIL subsidiary's results are only consolidated as of April 30, 2018, going forward. For the sake of comparability here, we have included a pro forma set of ATM results with SPIL retroactively combined during the first and second quarter of 2018. Here, you'll find a graphical presentation of our pro forma ATM P&L. On page seven is our pro forma ATM revenue by market segment. Also, as you can see here, the communication segment appears to be awakening. Page eight, you can see our pro forma ATM revenue by service type. During the third quarter, our revenue mix continues to shift away from wire bonding, with increasing amounts of test, bumping, flip chip, and SiP. We also continue to expect our test business to outgrow our assembly as we continue to expand our turnkey business model. On page nine, you can see the results of our EMS business and its associated revenue by application. During the third quarter, we had revenues of TWD 50.6 billion, representing an increase of TWD 19.1 billion, or 60% sequentially, and an increase of 8.6%, or 20% year-over-year. The sequential revenue ramp was originally expected to be softer during the third quarter. However, the ramp came sooner and steeper than originally anticipated. This was led by products within our communication and consumer segments. The year-over-year increase was driven primarily by higher loading sooner in the quarter. The EMS gross profit of TWD 4.5 billion grew by TWD 1.6 billion sequentially and TWD 0.3 billion year-over-year. Gross profit margin for the EMS business came in at 8.9%, representing a 0.2 percentage point decline from the previous quarter, and 1 percentage point decline year-over-year. These declines were primarily driven by product mix and bill of material changes through generational device differences. During the quarter, our EMS business unit's operating expenses stayed flat at TWD 2.4 billion, both sequentially and year-over-year. Operating profit for the quarter was TWD 2.1 billion, which is a TWD 1.6 billion increase sequentially, and a TWD 0.4 billion increase year-over-year. Our operating margin came in at 4.1%, which is a 2.5 percentage point improvement sequentially, and flat year-over-year. Operating margin was ahead of original expectations as a result of higher-than-expected revenue ramp. Page 10, you will find key line items from our balance sheet. At the end of the quarter, we had cash and cash equivalents and current financial assets of TWD 67.8 billion. Our interest-bearing debt increased to TWD 227.6 billion. Total unused credit lines amounted to TWD 197.0 billion. Our EBITDA for the quarter was TWD 21.2 billion. On page 11, you will find our pro forma equipment capital expenditures. Machinery and equipment capital expenditures for the third quarter totaled 436 million US dollars, of which 181 million were used in packaging operations, 229 million in testing operations, 23 million in EMS operations, and 3 million in interconnect material operations and others. As we stated in the previous earnings release, we expected our capital expenditures for the year to step up in order to ready capacity for the uptick. We now expect our capital expenditures to be close to our equipment depreciation and amortization amount. From our relative performance so far this year, we believe our customers continue to prefer our capability and predictability over that of our competition. We believe we outgrew the majority of our competition and gained share. We are unmatched in scale efficiency, geographical footprint, and technology portfolio. During this past downturn, we leveraged each of these key advantages to take market share. Looking out beyond this year, we are fairly optimistic about the health of the overall industry. We see more 5G-related products with increasing complexity. We see real reasons for consumers across multiple geographies to upgrade into new generations of various electronic devices. We also see the need for substantial infrastructure updates, and we see a newer generation of connected products that will build on top of these building blocks. AI, though more a software phenomenon now, is becoming more hardware demanding with its sensors and AI accelerators. With a proper set of applications, the ultimate needs of AI hardware can easily fill and drive the next generation of semiconductor manufacturing. Autonomous transportation are always talked about, but that could just be the tip of the iceberg. The semiconductor industry's penetration into everyday products and everyday life will continue its march forward. If we look out into the fourth quarter, the volume of business for the remainder of the year remains a bit tricky to evaluate. We do see the possibility of some order upsides, but the impact of trade war tariffs are especially difficult to quantify with any level of real accuracy. That taken with an earlier manufacturing cycle, which may have been driven by the desire to avoid these tariffs, leads to an even less conclusive outcome. Of course, this begs the question of whether we are building product that would otherwise be built in the first quarter of 2020. We do have some information that gives us a bit of comfort on this point, and please understand that it's definitely an early statement, but we can tell you that we currently see a shallower trough period during Q1 of next year. As our investments and cost control are beginning to take shape, we also see our first quarter 2020 margins to be materially stronger than seasonality. We're unprepared to give much more detail on this at this point, so we'll leave it there until Dr. Wu can comment on the full year of 2020. Now, back to the quarter immediately in front of us. In NT dollar terms, ATM fourth quarter business should be similar to third quarter 2019 levels. ATM fourth quarter 2019 gross margin should see slight sequential improvement. In NT dollar terms, EMS fourth quarter 2019 business should be slightly above the average of the second half of 2018. We do admit this outlook does appear to be a bit out of line with our traditional fourth quarter EMS outlook. However, I should remind you that our EMS business picked up a bit sooner than previous years, and our second half revenue still implies year-over-year revenue growth. EMS fourth quarter 2019 operating margin should be similar to first quarter 2018 levels. I have to move to the Q&A podium. I'm not allowed to take Q&A here. Questions, please. Yes. Thank you. Good details. I just wanted to follow up on one thing you mentioned about manufacturing constraints maybe limiting a bit of business, and maybe two follow-ups on that. Since you were constrained in third quarter, maybe the why fourth quarter you're guiding stable and not some improvement if you can ship some of that. And if you could talk about the areas of constraint, where you're seeing it, and the implication for CapEx into next year if you expect to stay at the higher level. We're trying to be pretty politically correct in that statement. We probably don't want to expand on that. On the constraints? Yeah. I think from our own end, I think some of the constraints came from some of the reallocating of our manufacturing services to other areas outside of China. We were ramping up as fast as we can, but it does create some disturbances to start with, then the ramp-up period does put a bit of a constraint on us. Aside from that, there is some external factors that also create some problems in that nature. Was that ATM? Was that in the ATM segment, the move outside of China? I think from ATM standpoint, I don't think we have that much of a constraint at this point. But the EMS, I guess you were constrained from where it looks like the guidance is a little bit down sequentially, but you're clearing up the constraints. So even with that, was the view it actually would be even a bigger decline on the EMS? On the EMS? Yeah. I think, as Ken was mentioning, I think there seems to be some earlier shipment coming out of the third quarter. We suspect that that's part of the reason is because of the people's efforts in avoidance of coming tariffs. Having said that, we have no intention to say or this does not indicate that the coming quarters will see a significant softness from the order standpoint. Okay. I think it's encouraging, at least what you're saying on first quarter, I mean, being potentially shallower. Could you talk a bit more about areas, like if it's certain application or it's start of some of the 5G, or inventory starting to restock, or maybe a bit more color on- Well, generally speaking, I think communication seems to be still going fairly strong. Just looking at our forecast, I think across the board, we're seeing a stronger than normal seasonality first quarter next year. Okay. If I could follow up on the gross margin, where you mentioned kind of start of an improvement in margin. Maybe the confidence on the margin, what's improving the confidence? As you start to look, like maybe how that could result in a P&L, because it's down a few points maybe from the peak four or five years ago, but how you kind of see the recovery in margin or potential? I think, to start with, we were saying that this year is really a year of investment, both in terms of capacity and technology. So the R&D expenses and also a lot of the ramp-up costs as incurring during the first three quarters of this year. I think those investment will start to gradually start to pay off, in terms of additional revenue generation as well as improving overall operating efficiency. Going into next year, on top of the better loading that we're expecting, some of the additional revenue that we'll be generating from our earlier investment this year. Also, I think the lifting of the restrictive condition on us between our works with SPIL will certainly help the margin as well to help the overall operational efficiency. Great. Thank you. Name and company, sir. Bruce Lu, Goldman Sachs. Can you talk, or we saw some good progress for your SiP projects. Can you give us more outlook about the SiP outlook in 2020 onwards? Management has been guiding for additional $100 million SiP revenue moving forward. Do we have more color on that? Since we are close to a year, we should have more clear picture for the SiP outlook. Well, I think the biggest progress we've made this year is that we're now having multiple projects and multiple customers, and we still have a very healthy engagement or their engagement with a lot of projects and customers. We are expecting to continue this momentum going into 2020. There will be new projects coming on stream, and we feel very, very confident that we will continue to reach our goal in incremental revenue, SiP revenue of $100 million a year, or if not exceeding it. Yeah. Do we have any revision for the target? The what? The target, the 100 million, additional 100 million target. We will keep it for the time being yet. If the momentum continues to get stronger and stronger, then we will see if any adjustment is needed. Okay. Another question just to try to be clear that first quarter 2020, the revenue will be stronger than seasonality. I want to clarify that A, is only for ATM business or for the overall business? B, is that right now with ASE plus SPIL, what is the typical seasonality now? I think 1st quarter, you wouldn't be surprised to see a 10%-15% drop in the revenue and the top line. That's the normal seasonality. We're saying, as far as ATM, ASE and SPIL combined, we're seeing a stronger 1st quarter next year, stronger than the normal seasonality. For EMS, I think it's going to be a typical quarter. For previous guidance for the 1st quarter, the suggestion for the 1st quarter is mainly for ATM only? No, I think Ken mentioned both. I think for ATM, we're seeing a stronger quarter. For EMS, it's a typical seasonality quarter. I see. How about for the margin improvement? It is mainly for ATM or for EMS or for both? I think in terms of margin as a whole, you are referring to fourth quarter or? First quarter. Huh? First quarter 2020. First quarter? Yes. You mean quarter-on-quarter improvement or? Because the management just mentioned that for the first quarter 2020, our gross margin is going to see materially better than seasonality, right? Right. That is mainly for ATM or EMS or? For ATM, yes. How about the EMS? EMS is steady. I see. Thank you. Yeah. Hi. Thanks. Rick Hsu from Daiwa Securities. The first question, again, is housekeeping. What is your utilization rate across the board, wire bond, flip chip and testing for Q3 and Q4? I think across the board it is 80%-85%, and that should remain the same for fourth quarter as well. All right. Thank you. Can you update your depreciation and amortization cost for this year? If I had my numbers right, I think it is TWD 50 billion altogether, right? Cost of goods sold plus operation. Okay. Now, another question is, just want to follow up with the EMS. I think you were talking about multiple customers, multiple projects. Can you give us more about the percentage of the revenue contribution this year and next year from these new customers other than the key customer? Well, it fluctuates quarter to quarter because it's really a product. I don't think it's kind of difficult to make a prediction on that. But as far as third quarter is concerned, in terms of ATM, it's close to 5%. For EMS, it's close to 50%. On a group basis, it's around 20%. Okay. Thank you. The last question is, I think Ken, during the presentation, was talking about your revenue year-on-year, positive year-on-year growth signal that downturn has ended. Also you're talking about inflection point, and your margin is going to be better and better toward 2020. Can you give us a little preliminary guidance about your 2020 outlook? I would actually really prefer to leave that to Dr. Tien Wu. He likes to make the larger pronouncements at this point. Okay. Just simple question. Can you fairly assume 2020 will be a year of upturn, because the downturn has ended? We are fairly confident about 2020. Nice. We normally only speak for ourselves, and whatever we said is based on our own forecast coming from our own specific sets of customers. We try to refrain from commenting on the industry as a whole. Hi. Thanks very much. Bill Lu from UBS. Over the last several quarters, we've heard you talk about getting to more complex products, and associated with that, we've seen higher R&D, slightly higher CapEx as well, right? My question is, first of all, if you look at this new higher level of investment, is that short term or should we expect that to step up again next year? Well, until we have our budgets made for next year, I think this is actually a difficult question to answer. As a whole, I think we remain optimistic about next year's, and I think the investment that we're going to make, particularly in CapEx, this year, we're saying that our overall CapEx is going to be very close to the total depreciation that we have. Obviously, it's higher than last year. With the momentum that we're seeing, I think CapEx-wise, although we're not allowed to make any announcement on the CapEx for next year, I think it will be a similar kind of pace, I think. Having said that, our CapEx is made on a very dynamic or fluid type of pattern. It's not like we're building a fab, putting $6 billion for it. A lot of the CapEx is spent as required, and it's also spent on an incremental basis. I think we will just continue to make the right investment at the right time. Just to be clear, you said similar, meaning similar pace of increase, right? No, I'm just similar pattern. As I said, we'll see the business and then we will make the necessary investment as required. Okay. Maybe I'll ask that slightly differently, right? Because we know your traditional business is pretty well in terms of how it's structured. But if you look at some of the new business, for example, AiP, what is the level of investment required that versus the old businesses? Well, I don't think we can talk about specific products or customers. But I think in general, the investments, I think most of the R&D dollars is put in fan-out and some of the advanced technology, fan-out SiP. This year, and I'm suspecting same for next year as well, there will be more NPIs given the more new products coming out and due to the increased complexity of these whatever products that we'll be building. I think the NPI investment will continue as well. So with the higher complexity products with hopefully higher loading, is there a roadmap to get back to the previous gross margin level? Go back to when? The previous peak. Well, that's always something that we will be hoping for. I think there's certainly room for us to continue to improve our margins. As the overall business situation continue to improve with better loading, with some of the newer technology start to be applied. As we move along, hopefully we can get back to where we achieved before. Thank you. Any more questions on the floor? Thank you. Robin Cheng from Bank of America. Just want to refresh last time, I think you guys mentioned that the OpEx for the fourth quarter will be materially lower. Is that still the case? Yeah. We mentioned previously that we would take a step down on the OpEx percentage. Yeah. We still believe that there will be room for drop on OpEx, although we got some of that this quarter, so. Okay. The level of decline would not be as big because some of the savings has taken place already. Yeah, during the third quarter. Originally, we thought second and third were going to be the same. Okay. Still the same outlook for 2020 in terms of some of the upfront R&D expenses have been already spent in. We're definitely targeting to lower OpEx percentage next year. I think we came out to say this year, because of the additional investment that we're making, OpEx ratio will be 30 basis points higher than previous year. Yeah. Next year, we're looking to bring it down to the 2018 level. Okay. I think that's the target. All right. Thanks. We actually have a caller online. We have Mr. Gokul. Gokul, are you there? No. It didn't work. He left? Yeah. He lost his connection. That was our only caller online. Are there any more questions on the floor? Oh, wait. Any more questions on the floor? No? Oh, we do have one. Sebastian from CLSA. First question is, I can't remember the last time the company talked about two quarters beyond the outlook. I mean, the next following quarter. What drives the better visibility this time? It seems like not just ASE, but I think even some of the other company, like your peers, like Powertech, they also talk about this. It seems to me like something different happening this time, that the industry seems to have a better and longer visibility in more than one quarter, and you guys are also willing to talk about that ahead. That's a question we never anticipated. I think this year we've gone through a lot. There's a lot of changes, a lot of uncertainties, and we think it's maybe we should give some more color what's ahead of us, after going through that many changes or challenges this year. I think the point we want to make is really that despite a very challenging year, I think ASE as a whole came out fairly strong if we compare it to our competitors. We believe that given our scale, given the technology leadership that we have, with the changing environment, we have more resources or flexibilities to adapt ourselves to face these challenges, and that gives us a better view on the next, in the near future. We'd like to share this with everybody here. Great. I'm just curious about what's driving this trend for Q1. Certainly, you see customers giving you firmer forecasts. In terms of application or geography perspective, where do you see the strengths come from? I think, like I said, we are looking at the forecast, and we are seeing stronger momentum in the communication sector. 5G is certainly one of the driving forces behind it. There will be more new products coming out earlier than previous years. I think in a more dynamic environment, the positioning of the company, we are seeing it starting to pay off. I think that is the message we are starting to try to convey. Thank you. Just a follow-up. When you say communication, is it more on the infrastructure side or on the edge side? I think both. Okay. You see both trends into Q1 next year? Okay. The second question is on the fourth quarter guidance. I think the revenue for ATM, is it ATM you guide the revenue to be roughly similar from previous quarter? The margin you see is improvement. You talk about utilization rate was similar from 3Q to 4Q. What is driving the incremental margin improvement in Q4? Is it product mix or- Product mix and both. Basically product mix, and also the higher percentage of test revenue that were coming in. Actually, I think starting from last year, we started to talk about more investments in our test business, and we are seeing that producing fairly good results. On a quarterly basis, we are seeing from first quarter last year, the test revenue percentage has increased from about 15% to 17% now. We are seeing quite a bit of progress on that. Got it. Third question is regarding the OpEx saving into next year. So with, like, you can finally do the real merger thing or synergy after November this year with SPIL. Would you expect even more of a saving into next year, not just lower to 2018 level, or maybe even lower than that? Well, I think things don't happen overnight. I think whatever integration or cooperation, we will do it as we go. We will do the right thing at the right time. We are not in a haste to try to make something happen. Whatever we do may or may not have an impact on our customers as well. So, we need to be very cautious when we decide to do whatever that we are going to do. We are going to take one step at a time, and we will set our first goal at coming back to a more normal OpEx ratio, and then we will see from there. Yeah. Thank you. Our caller has returned. Goku, are you online? Hello? Can you hear me? Yeah, Goku, go ahead. Name and company, please. All right, thank you. Goku Hariharan, JPMorgan. Thanks for taking my question. First of all, given that you are planning to keep CapEx similar or higher, looks like for next year, could you talk a little bit about the CapEx priorities for next year? I think this year, testing was clearly one of the big priorities. As we look into 2020, could you talk a little about what are the key priorities? Do we see a lot more investment in fan-out and SiP? Can you give us some color on that? For this year, I think the overall percentage breakdown will be assembly around 50%, and test actually went up again from last year's 35% to 43%. EMS, we are also jacking up our CapEx, I think, for EMS. For the year, it should stand at around 6%, with material taking the rest. For next year, I think it is still a bit early, I think. But as far as assembly is concerned, I think a large chunk of the CapEx will still be in the bumping as well. Would you say that you already have enough testing capacity right now, or do you think there is further expansion that you need to do in testing, given the turnkey business coming through? You mean bumping or fan-out? Sorry, testing. Oh, testing. Testing is a moving target. I think we are looking at higher turnkey ratio. We are looking at lengthening test time. So the tester requirement, we will see how our business combination becomes going forward. Right now, I think we are having adequate capacity to meet the demand. Okay. Secondly, just wanted to elaborate on a previous question, gross margins. Looks like utilization has already gotten back to about 80%-85% levels. As we think about gross margins moving higher, where is the key area of upside that you are expecting? Is there more flex on utilization from current levels, or is it purely going to come in from product mix? And within product mix, could you also give us some details on what are the higher margin products that you are expecting to grow faster? I think the general is really the improving. Well, it is a combination of loading as well as product mix shifts. Especially if we are talking about at a holding level, especially on the EMS, the product mix does make a lot of difference on the gross margin level. Okay. Pardon, ATM, do you think it is more of a question of increase in loading, or is there any meaningful product mix shift that we should be anticipating? It's loading as well as overall efficiency. Hopefully, we can achieve better margin going forward. Yeah, we're definitely also looking to keep our gas pedal depressed on test turnkey business. We're definitely looking for a little bit more test product mix. All right. Thank you. Do we have any more questions? Follow-up. Many of you are optimistic about 2020, right? For your ATM business, can you give us the growth ranks in terms of different applications, like communication, computer, which one will be the stronger in 2020 in terms of their growth rate? Huh? In terms of their year-on-year growth, which one will be the strongest? I think we will have a better answer in next conference. Yeah. Okay. There is definitely a little bit to do with 5G too. So you suggest that the communication will still be stronger than the computer? We do not have a relative performance right now. I see. Yeah. Any other questions? No? Well, thank you very much for attending the earnings release. We will be headed back to our regular location next quarter, and hopefully Dr. Kang will be here to enlighten us all. Thank you.