Earnings Call: Q1 2019

Apr 30, 2019

Summary

Q1 pro forma revenue was TWD 88.9bn, down 22% QoQ, as EMS softness and lower loading pressured profit and margins. Management expected seasonal recovery in H2, while maintaining cautious outlook and investing in advanced packaging and test.

Hello, I am Ken Hsiang, the head of investor relations for ASE Technology Holding. Welcome to our first quarter 2019 earnings release. 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. Like most Taiwan-based companies, 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. Following the event, our VP in charge of public relations, Eddie Chang, will be available to address the media in Mandarin Chinese. As a reminder, because ASE Holdings was jointly formed on April 30, 2018, during the second quarter, as a legal entity, our SPIL subsidiary's results are consolidated only as of that date going forward. Results for the legal entity are labeled legal entity basis in this presentation. For the sake of comparability, we have also included results which are compared against a pro forma set of results, as if SPIL was a subsidiary and consolidated as of the beginning of 2017. This set of results is labeled as pro forma basis. Given that the transaction was completed during the second quarter, the legal entity and pro forma basis will have the same sequential comparisons between the first and fourth quarters. However, the pro forma numbers are SPIL relevant for the quarterly year-over-year comparison. From our point of view, the business is going through a period of lackluster demand for some products and ramping unprecedented demand for others. Some of our customers are cautiously managing inventories, while some of our other customers don't appear to have inventory concerns at all. We even have customers who are continuing to ramp their capacity requirements well into the second half of the year. I mention this because even though our seasonal revenue drop was somewhat stronger than normal, there are SPIL some highlights that were not part of a broad-based slump. Recently, we have been frequently asked to comment on how much semiconductor inventory digestion has already occurred, and I would like to remind everyone that we do not have meaningful visibility of our customers' inventory levels. From our perspective, once the wafer comes out from fab, it proceeds to get packaged as quickly as possible to minimize wafer oxidization. As such, we cannot make any thorough determination as to whether anything we build is for inventory accumulation or for immediate sell-through. Thus, through the small peephole we have visibility over, for just a fairly short moment of our customers' manufacturing cycle. From that short moment, we can say nothing appears particularly abnormal at this time. However, from a wider macro perspective, we do see signs that global politics are impacting regional consumer preferences. These preference shifts do appear to benefit some of our customers while being detrimental to some others. For our ATM business, the first quarter results were somewhat sluggish. Orders for this quarter came in on the lower side of where we expected them to be. Our ATM revenues were down 15%, which probably represent a slightly stronger than seasonal decline for the first quarter. Some orders were pushed into the second quarter because of customer supply chain issues. However, when taken together with the last half of 2018, our first quarter results are probably best characterized as business being softer than expected because of end demand. For our EMS business, the first quarter came in behind our expectation. Our EMS revenues were down 31% sequentially. Softness within our consumer and communications segments were primarily responsible. We expect soft order volumes should persist, following their seasonal trend, with orders being sluggish through the second quarter and eventually picking back up during the third quarter. Let's start the financial overview. On pages 3 and 4, you will find our legal entity quarterly results for the holding company and our ATM business unit. On a legal entity basis, the first quarter year-over-year results are not particularly comparable between 2019 and 2018 because of the inclusion of SPIL in 2019 or the lack of SPIL in 2018. I will generally discuss the sequential and year-over-year comparisons as part of the pro forma basis slide. With that, let's briefly go over page 3. For the legal entity, recorded fully diluted EPS of $0.46 and basic EPS of $0.48. Sales were TWD 88.9 billion with a gross profit of TWD 11.4 billion and gross margin of 12.8%. Operating profit was TWD 2.3 billion, and net income was TWD 2 billion. On page 4, you will find our legal entity results for our ATM business. Again, we will discuss this in the pro forma section a bit later. Let's move to page 5. Here we have our pro forma P&L for the consolidated holding company. To generate the historical pro forma period, we added the historical P&Ls of each ASE entity on a retroactive basis. We then added PPA and interest expenses related to the transaction as if the transaction was completed as of the beginning of 2017. Lastly, we removed relevant transaction fees and expenses. Given that the fluctuations from the holding company are comprised of the ATM and EMS businesses, I will try to keep explanations here short and provide detailed explanations during each of the business unit pages. For the first quarter, we had net revenues of TWD 88.9 billion, representing a 22% decline quarter-over-quarter and a 6% increase year-over-year. The quarter-over-quarter decline is somewhat stronger than what we normally see relative to seasonality. This was driven primarily by a stronger-than-expected decline in our EMS. The year-over-year increase is primarily the result of a higher revenue base within our EMS entity, despite stronger than seasonal weakness. Gross profits were down 39% quarter-over-quarter and 7% year-over-year. These quarterly declines in gross profit are the product of lower-than-seasonal loading as a result of inventory control amongst some of our customers across both ATM and EMS. Gross profit margin declined 3.6 percentage points on a quarter-over-quarter basis and 1.7 percentage points on a year-over-year basis. Both of these declines were primarily driven by higher EMS revenue mix. Our operating expense percentage was up 1.3 percentage points to 10.2% from 8.9% in the fourth quarter, and up 0.5 percentage points on a year-over-year basis. We believe this to be the peak of our OpEx percentage for this year. From a total year perspective, we are looking to contain the OpEx percentage increase to within a 30 basis point increase. Operating profit was TWD 2.3 billion. This represents a seasonal decline of TWD 6.3 billion quarter-over-quarter and TWD 1.8 billion year-over-year. Sequentially, operating margin declined 4.9 percentage points and was down 2.2 percentage points year-over-year. During the quarter, we had a net non-operating gain of TWD 0.3 billion. This includes net interest expense of TWD 1 billion. The gain was primarily from our financial instruments and foreign exchange hedging activities during the quarter, offset by net interest expenses. Tax expense for the quarter was TWD 0.4 billion with an imputed tax rate of 15%. The imputed tax rate was low during the quarter due to high utilization of tax assets. For the second quarter, we expect to book a tax charge of TWD 0.3 billion related to our annual undistributed earnings tax. We expect the imputed tax rate for the year to be 21%, inclusive of the annual undistributed earnings tax. Net income for the first quarter was TWD 2 billion, representing a decline of TWD 3.4 billion from the previous quarter. On a year-over-year basis, net income was up TWD 1.3 billion from the same period in 2018, principally from lower non-operating costs and tax expenses. On the bottom of the page, we have again provided here the P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be TWD 12.6 billion with a 14.2% gross margin. Operating profit would be TWD 3.8 billion with an operating margin of 4.2%. Net profit would be TWD 3.5 billion with net margin of 3.9%. Basic EPS excluding PPA expenses would be 82. On page six is our ATM pro forma P&L. For the first quarter, revenues for our ATM business were TWD 54.4 billion, down TWD 9.7 billion from the previous quarter and down TWD 1.6 billion from the same period last year. This represents a 15% decrease sequentially and a 3% decrease year-over-year. Loading levels for our ATM business fell somewhat short of our expectations, principally from softer loading and customer supply chain issues. Gross profits within ATM were down TWD 5.5 billion quarter-over-quarter and TWD 1.1 billion year-over-year to TWD 8.4 billion. Lower gross profits were driven by lower seasonal loading and costs associated with ramping new products. Gross margin for ATM was down 6.3 percentage points sequentially and down 1.5 percentage points year-over-year. The sequential decline is primarily due to the lower seasonal loading and a higher raw material pass-through product mix. The year-over-year drop in gross margin is primarily the result of softer-than-expected loading and new product mix. During the first quarter, operating expenses were TWD 6.9 billion, down TWD 0.8 billion from the fourth quarter and up TWD 0.6 billion from the same period last year. Year-over-year operating expenses were primarily up as a result of increased compensation expenses and ramping R&D expenses. Even though it may appear outwardly that we are just adding ongoing expenses, we believe the increased compensation expenses help us recruit and retain individuals necessary to move the company forward the next stage of evolution. Further, a portion of incremental R&D expenses spent are for projects meant to generate new streams of revenue by the latter part of this year, and a significant portion of R&D expense is specifically for helping support the ramp-up of our new panel-level fan-out technologies and products. OpEx percentage was 12.7%, up 0.8 percentage points sequentially and up 1.4 percentage points year-over-year. Sequentially speaking, the OpEx percentage increase is primarily the result of lower revenue. Year-over-year basis, higher OpEx is due to higher R&D costs from new project ramp-up and higher compensation expenses. We expect the first quarter to represent the peak operating expense percentage for the year. We expect the quarterly operating expense percentages to start trending downward going forward. During the first quarter, operating income was TWD 1.6 billion, representing a decline of TWD 4.8 billion quarter-over-quarter and TWD 1.6 billion year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would have been 17.7%, and operating profit margin would have been 5.5%. Page 7, you will find the graphical presentation of our pro forma ATM P&L. Here you can see the impact of the overall softer-than-expected growth environment starting from the middle part of last year. On page 8 is our ATM revenue by market segment. As you can see here, there hasn't been any substantial change in mix, or you can also interpret that the softer environment has been fairly broad-based. On page 9, you can see here that during the first quarter, not much has changed from our fourth quarter. Test revenue fell off a bit as a result of it being on the tail end of a business cycle, so it will be the last to pick up. On page 10, you can see the results of our EMS business. During the first quarter, we had revenues of TWD 35 billion, representing a decline of TWD 15.7 billion, or 31% sequentially, and an increase of TWD 6.3 billion, or 22% year-over-year. Our original expectations for the first quarter were based on higher run rates within a few of our EMS consumer and communication business lines. However, demand for our EMS services was trimmed during the quarter, and revenues for the quarter came in short of our expectation. The year-over-year increase was driven by higher revenues from our consumer product segment. EMS gross profit dropped to TWD 2.9 billion, representing a decline of TWD 1.7 billion sequentially and an increase of TWD 0.3 billion year-over-year. Gross profit margin for the EMS business unit came in at 8.4%, representing a 0.7 percentage point decline from the previous quarter. This decline was driven by our product mix and lower-than-expected loading for the quarter. Compared with the previous year, EMS gross margin declined 1 percentage point. This difference is primarily the result of generational device differences in product mix. Operating profit for the quarter was TWD 0.7 billion, which is a TWD 1.4 billion decline sequentially and a TWD 0.2 billion decline year-over-year. Operating profits declined as a result of expanded scale, ramp-up costs, and higher bonus. Our operating margin came in at 2.1%, which is a 2.2 percentage point decline sequentially and a 1.2 percentage point decline year-over-year. The operating margin was somewhat behind our expectations and was primarily the result of lower-than-expected loading of expanded operational scale. Page 11, you will see our product segment mix within our EMS business. Our consumer product segment declined 6 percentage points of segment share, sequentially, while our communication segment also declined by 3 percentage points. Our automotive, industrial, and computing segments picked up that share. On page 12, 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 70.4 billion. Our interest-bearing debt increased from TWD 198.4 billion to TWD 201.4 billion. Total unused credit lines amounted to TWD 207.7 billion. Our EBITDA for the quarter was TWD 16.5 billion. On page 13, you will find our pro forma equipment capital expenditures. Machine and equipment capital expenditures for the first quarter totaled $239 million, of which $156 million were used in packaging operations, $72 million in testing operations, $8 million in EMS operations, and $3 million in interconnect material operations and others. We continue to expect our 2019 capital equipment spending related to capacity expansion of existing product lines to be low at 2018 levels. Going into the second quarter, ASE Technology Holding sees the overall environment as being somewhat unbalanced and a little bit volatile. There are certain pockets of strength as the industry gets its legs back underneath it. However, our customer mix seems to differ from the traditional customer mix at this time. If you wanted us to characterize the environment, we would say the overall competitive environment continues to be fierce. This fierce market, we believe we can continue to earn the vast majority of the OSAT sector's free cash flow. With that free cash flow, we are paying off our debts, cleaning up our balance sheet, and continuing to pay our dividend. The free cash flow generation also allows us to continue to develop operational advantages, such as rolling out multiple lighthouse factories and leveraging new technologies. Of particular importance to us this quarter is that we have just put in place one of the most advanced packaging lines ever, with the ability to achieve unparalleled fan-out yield while improving structural integrity and electrical performance of the design, and hopefully will become a principal building block of heterogeneous integration. On the test front, we will continue to invest in our own capacity. During this year, we will be executing an aggressive test business strategy by leveraging our unparalleled assembly capacity to reach its corresponding downstream test business. We believe test business sprinkled across Taiwan and other parts of the world can be precisely targeted with our turnkey solution. We believe such a campaign will allow us to gain market share against our competition. Looking into the second quarter, we believe the worst is most likely behind us, and a moderate recovery is starting to happen. Our customers continue to give us consistently upbeat outlooks for the second half of 2019. Even though downward revisions are still common, the size of those revisions are becoming significantly smaller. Given that trend is somewhat unusual this year, we don't have much of a position to say whether such outlooks are accurate, overstated, or understated. We can rationalize them to the best extent we can and internally digest these expectations to generate our own outlook. With that said, ASE Technology Holding sees a strong seasonal uptick beginning in the latter part of the second quarter and sustaining through the latter half of the year. Things are SPIL rather dynamic, and we will remain prudently cautious in our approach. For our guidance, on a pro forma basis and in NT dollar terms, ATM second quarter 2019 business should be similar to. On a pro forma basis and NT dollar terms, ATM second quarter 2019 business should be similar to the quarterly average of the first half of 2018. Pro forma basis, ATM business for the second quarter of 2019 gross margin should be similar to the first half of 2018. USD terms, EMS second quarter 2019 business should be similar to second quarter 2018 levels. USD terms, EMS second quarter 2019 operating profit should be similar to second quarter 2018 levels. Start the Q&A. I was asking the prepared remarks when you talked about investing for new streams, like new revenue streams. Can you talk a bit more about those streams, if it is more IC ATM or on the EMS side, maybe a bit more on magnets. Is this more industry recovery or- During the year, we are expecting to spend more R&D expenses on basically developing and talk to clients a little bit about- of planarity and also rolling out. There is a lot of R&D that. There is a lot of different projects and revenue streams that, but generally do not see that level of rollout. I did not run the full math, but it looks like second quarter is roughly flat for the EMS division after growing quite nicely in double digits. I know there has been weakness. If you could give an updated view on or expectation for growth actually the first half and half. For EMS, I think in 2Q, I think the softness will persist 2Q as well. There is SPIL a bit of a dip in terms of revenue, which is seasonal, so there is nothing abnormal about it, and it really is in line with the customer's product cycle. Second half of the year, we will see a fairly strong pickup, again, in line with the product cycle as well. Also, as Ken mentioned, we have already started to scale up our operation, both in terms of ATM and EMS for the second half ramp up of some of the new products or new technology that we are going to bring in. Overall, I think both for ATM and for EMS as a whole and a consolidated basis, without giving out a very specific guidance, I think the general trend is we will continue to see quarter-to-quarter growth in terms of our top line. For both businesses, we are SPIL expecting growth for the year. Just a follow-up on both sets of margins. On gross margin, just year-over-year, you talked a bit about the factors, but the EMS down about 1 point, 1.5 points. Talk about the factors year-on-year, what has been impacting the margins. You referred to, and I do not know if you have referred as much in the past also, more challenging competition in either segment. Well, I think the 2Q is particularly tough for us. I think the combination of many different factors has affected our margins. Of course, the softer than expected does have an impact on the loading and directly to a lower margin for us. Also, during the quarter or starting from the beginning of the year, we began to scale up our operation, preparing for second half ramp up, including the scale itself and then also putting a lot of resources into a new product that are coming on stream in the second half. Also, we are in the phase of relocating some of our business to outside of China. We are extending some of the facilities that we have outside of China as well. Also, in the 1Q, we did experience some issue in the supply chain that has an impact on the overall revenue as well. So put all things together, there's definitely a larger impact on our margins than expected for the quarter. Also on the operating side, I think the more compensation expenses that are being incurred because of the employee option that we put out last year. On the R&D side, we did spend quite a bit of money into our resources, into some of the new technology or new products that we are coming on stream, mainly for fan-out as well as for SiP. As we mentioned in last quarter, we are seeing more projects, SiP projects coming on stream. We are starting to entertain multiple customers. We're seeing the momentum starting to build, and we are actually starting from the beginning of the year, we're preparing for that. Just by the offset, I think you mentioned 30 basis points. Other way to think about it year-over-year? Want me to confirm that or? I just wanted to clarify what that 30 basis point impact. Yeah, I think we, like I mentioned, that we are beefing up our R&D, also because of the additional compensation expenses out of the top. As we mentioned already last quarter, we are expecting our tax ratio to come up a bit this year. Although at this point, we are working very hard to see if we can SPIL manage to keep the OpEx ratio at last year's level. But there's going to be some challenge in front of us with managing, maintaining that. Nevertheless, we will keep it. If there is any increase, we will keep it below 30 basis points. It seems, I guess, with the low first half days. Hi, Gaston. This is Rick Hsu from Daiwa Securities. My first question, again, housekeeping question, is this for the flatbound, has been in purchase of Q1 and second quarter? I think the Q1 across the board is about 70%, and in second quarter, ATM-wise, there will be some uptick in our revenue, so the loading, we're expecting to be at around high 70s. Second question. Can you talk a little bit about your pricing environment, especially for your ATM sales? Because if you look at your first quarter growth, it was kind of a little decent. Is there any pricing pressure? Pricing is never a pleasant topic. Pricing is always pressured. In first quarter, I think the softness is an overall situation, is overall phenomena. There's a normal pricing adjustment on a quarterly basis or on an annual basis. We don't see anything abnormal. Last question, just a little, I want to clarify. Wendy asked about your full-year revenue. Is SPIL going to grow on a yearly basis, your full-year basis? Yeah, we're SPIL expecting to have a top-line growth on an annual basis, yes. Same as your guidance last time? Yes. Thank you so much. Do we have any more questions from the floor? This is Sebastian from Singapore Securities. My first question, just to follow on the EMS operating profit guidance, it is similar to the second quarter last year, which implies that the level is better than Q1 this year, while the revenue is down 2%. So which means the margin is improving? There will be better control on the OpEx at the EMS business unit, therefore, the expecting OpEx ratio to come down a bit. Also, on the gross level, because of the different product mix, gross level, the margin will just start. Okay. Looking at your second quarter guidance of EMS and moving for the different direction. I just wonder what is driving your second quarter growth? Is it mainly from mobile or some? I think it is mostly because of the different revenue mix. I think EMS does have a higher consumer revenue. But the movement, it really should be in line with the product cycle of our customers. So there is a little bit different direction in the second quarter. But all in all, going into the second half, I think the direction will be the same. Okay. How about the ATM, the strength? Which application is driving the sequential growth in second quarter? Well, I think the second quarter is actually quite flat based, except that communication seems to be helping. When you say the communications, does it include both consumer type of smartphone communication and also the infrastructure-based communication? Both. Both are seeing strength. Let's just do other bets. On the second half recovery, seems to be pretty optimistic about that. Yeah. I just wonder how much of that is based on a typical seasonal product launch cycle, and how much of that is driven by a very clear visibility on the new products, new technology? I think, by and large, the second quarter is really seasonal update. New products or new technologies. Anyway, I was asking about second half. In the growth- How much is that your seasonal trend, and how much of that is you're doing something else that you didn't do before? New product, new socket, content gains. That would be a very tough question to answer. Hope I can check. I don't know if we can break that. I'm just curious because you have a very strong confidence in the second half recovery. I think certainly you have more clear visibility. That confidence probably comes from, "Hey, I win this socket. I do something I didn't do before," and that made me confident. Even if there's no strong seasonal recovery, you can SPIL grow on top of that. Or even if there is a seasonal recovery, you can grow above that. Our second quarter numbers are, I mean, they are not particularly above. They are not above seasonality. No, no, I am asking about second half. That is correct. If we lead to a third quarter growth, then we are SPIL kind of coming from a general semiconductor environment improving category. Even if we throw out wonderful, spectacular numbers, it is SPIL kind of a recovery, just kind of getting back to where we were before. Well, let me say this. I think if you look at our CapEx for the year, I think roughly 25% of the CapEx will be spent on some of the products or the technology. If that is any indication, I think that will be the likely bet. The second half recovery is both driven equally by both businesses, the bets and APS. They both will experience recovery. Okay. I think, this is a very, very difficult question to answer because there's going to be fluctuations on the organic part of the business or the new products that's coming out. It really depends on the end market sales, which side goes up more, which side goes down more. I really can't tell you what is really the split between the two. All I can say is we are preparing ourselves by spending 25% of the CapEx for the year to new products. If there's any theory there, that could be the last question from me is on the I mentioned that your ASE Technology Holding SPIL gaining share, including free cash flow shares. On the debt payback schedule, do you have any What's your remodel? Like, pay down 15%, 20%? The original guidance on terms of debt payback. In three years, like, let's say, so it's a years time, the debt will be like 30% per year. If we're talking about this transaction-specific debt, that part has been partially repaid by our own cash flow and partially by other different funding sources. But by and large, the total amount of the syndicated loan is about NT$90 billion. That's paid down to roughly NT$20 billion now. Although roughly 60% of it or 70% of it is being paid down by other funding sources that we've raised since then. The rest is being paid down by the, our own cash flow. Have more questions from the floor? We do not have any questions from We do have a question. Yes. Are you able to take the questions from the audio? Yes. Let's take a question from the call or the audience. Thank you. Ladies and gentlemen, from the audio line, if you have a question, please press star one on your telephone keypad. We have three on line. Can we take the first one? The first question comes from Bruce of Goldman Sachs. The line is now open. Please go ahead, Bruce. Hi, Bruce. Thank you for taking my question. I think the first question is regarding the panel level packaging. I am happy to hear that the company is developing a new technology. Can you somehow give us some picture about this technology? What kind of the addressable market? When can we expect some revenue? What kind of applications, et cetera? Hi, Bruce. We are not stating exactly the amount of revenue related to it, but we have actually put it in place during the first quarter. We do expect revenue starting in the second quarter. Hopefully, this revenue will ramp during the year. This panel revenue right now is currently we are obligated to put it for just one customer. Hello? I am sorry, the connection is pretty bad. Your voice is breaking down. I just hear that the revenue is isolated in one customer, and what else? It is for one customer right now. We are only able to sell it to one customer at this time. But the capacity will be available to be sold to other customers, hopefully before the beginning of next year. So let's put it this way. When can we expect to see meaningful revenue contribution from panel level packagings, like, say, 5% of our revenue, 5% of ATM business? We do not have. I don't have that. Okay. I think that as Ken mentioned last quarter, I think they are expecting to grow our panel revenue by $50 million and above on the end. Right now, things are moving on track. I think we're in the phase of increasing our. What kind of profitability would you expect from this new business? Well, I think we are SPIL at the early stage, so it is kind of difficult to anticipate a corporate average. So it gets to an economic scale. But the overall return, we are SPIL making investment based on the What is the scale of economics, though? I think it will go over $100 million. Let us put it this way. If we get more than $100 million, can we expect the profitability is better, is margin accretive? It should, yes. I see. Great. The second question is regarding your strategy in testing business. Testing business, you have a very strong competitor in TSMC, about having a lot of advanced testing business. You also have a lot of testing service providers whose average ROE is less than 10% as the industry. ASE is turning more aggressive in testing business. Can you tell us a bit more about what is the rationale behind and what is your strategy? Well, I think at this point, I think we mentioned last time, I think in the past few years, we have been quite active in terms of making investments for tests. Now with our We are seeing the turnkey services department has been Still have a much larger scale after the combination with SPIL. We believe that at this point, test business is something that we want to be pretty more focused on. We do have the scale and also the toolboxes to demonstrate this more. We believe the return of this test business is SPIL just valuable at this point. So basically, I SPIL do not understand because the second tier testing, well, I should not say second tier, a lot of independent testing companies, their ROE is below 10%. How do you make sure or how confident it is that ASE can do it at least better than the industry, though, in terms of return? Right now, we're not quite as aggressive on test. Yes. Test is also more margin accretive. We believe that we do have room, and post November 23rd, 24th, we should have better capability to generate a turnkey test solution. I think our customers are interested in being able to shorten up their cycle time, with their test product, quick order, instead of having to wait in multiple lines and multiple queues. I see. Can I explain it that, because SPIL traditionally has much less testing of capacity compared to ASE, and once you integrate it in terms of packaging and testing, it's not as balanced in terms of capacity and location. Can I expand somehow from this angle as well? Yes, we do expect some level of low-hanging fruit to be able to go after, approach business that was not approached before. I see. Understood. Thank you. I will go back to the queue. Thank you. The next question comes from Citi's Roland. Roland, please go ahead. Your line is open. Thank you for taking my question. First, there are SPIL follow-up questions for the testing business. For the testing business, are you referring to the final testing or are you also doing the testing for the wafer probe as well? Both. Both. Both. Yeah. Now, for the percentage-wise, what is the allocation for this wafer probe and final testing? Didn't get the question. One more time? No, I said, for the wafer probe and the final testing, what's the percentage of each for your total testing business now? Actually, we don't know. I don't think you can necessarily make any rational decision out of that, because you could balance your test more towards wafer probe or more towards final test. It doesn't really state anything. Yeah. But okay. For the going forward, if you are going to invest more on testing, what kind of business you are going to invest? Is it more probe to the probe business or more into the wafer final testing business? Both. Your tester, it is a matter of peripherals that you attach to the tester. We would attach both. We would buy further peripherals for probe if we get more probe business. Or handlers if it were for final test. Okay, thank you. Last quarter, you said going forward for your SiP and the fan-out business, every year you are going to see incremental revenue around $100 million for SiP and $50 million-$100 million for fan-out business. Our question is, how much CapEx you need to invest in both technology in order to maintain such incremental revenue every year? As I mentioned earlier on, I think, first of all, this year's CapEx will be similar to last year. I mentioned that 25% of the CapEx will be, right now it is SPIL budgeted for the new technology that we are bringing in. Yeah. How about going forward? Well, it depends on how the market shapes up. Mm-hmm. Okay. In the past, you also said, for every dollar you invest in assembly, it generates about 1 dollar return for the first year after you invest, and the testing actually will be generating more. How about the investment on this advanced technology? I think we need to put everything into one basket to see. We want to maintain for assembly and test combined, a dollar of investment generates a dollar of revenue for us. Yeah. Sorry, I did not hear you. Could you kindly say again? Sorry. As a whole, for assembly and test, I think the fan-out or other technology in terms of assembly and test is SPIL in the same basket, and we want to maintain that ratio to a dollar of investment generating a dollar of revenue for us on an annual basis. Okay. Thank you. Yeah, these are all my questions. Thank you. Thank you. The next question comes from Gokul of J.P. Morgan. Please go ahead. Your line is open now. Yeah. Hi. First of all, I just wanted to follow up on the testing question. So right now, for ATM, we are running at about 15%-16% of total revenues coming from testing. Given your comments that you are underinvested in testing over the last few years, where does that look like settling in maybe in the next couple of years? Do you think that goes to 25%-30%, or is it just a minor increase from the 15%-20% kind of levels over the next couple of years once you complete your investments in the testing capacity? There is no preset target percentage for us in terms of our revenues between assembly and test. What we are saying is that we see pretty good potential in the test business once we get the scale now. We are putting more focus or putting more resource into test. We are confident, or we are expecting this effort will lead us to gaining shares in test business, which we believe SPIL makes economical sense for us. Having said that, it really depends on the execution, how successful we are in terms of getting more business and how fast the business will start to come in. It really depends on We will just go with the flow to see how much resource we need to put in further to continue to grow that part of the business. There is no preset goal, say, "Oh, we want to get to 25% or 30% at any given time. Okay, fair enough. Just a quick question on SiP. It looks like, based on your Q2 guidance, the EMS revenues are basically flattish year-on-year. How should we think about the acceleration potential for this business as we get into second half, given that you have some new projects in second half for SiP as well? Secondly, could you also comment about your efforts with Qualcomm in terms of the SiP1 or QSiP, the kind of business that Qualcomm has been incubating? It looks like they have started shipping some volume for some of their customers. Could you talk about the, what do you think is the potential for that business long term? We are actually expecting some growth in the growth on the top line for EMS as well on an annual basis for this year. Also, we are entering not just the Did you call it the QSiP project? Yes. Okay, that is just one of the projects, the SiP projects that the EMS is engaging in now. For that particular project, we are expecting sizable but not a whole lot of revenue for us this year. We do see potential that it will grow to maybe even to other customers or other applications as well. So, this is one area that the EMS will continue to put resources in. Okay, thank you. Thank you. Ladies and gentlemen, if you have other questions, please press star one on your telephone keypad. Hi, I have one follow-up. With regards to the EMS business growth for full year this year, if we look at the second half, is the second half year-over-year also positive? Yes. The first half is already positive, so based on your guidance for second quarter, and the second half will SPIL be positive? That's correct. Okay. And how much of this is driven by this? I do not know if they are talking about that. I mean, I do not want to get too specific on the numbers. I am just trying to see that the year-over-year growth of EMS this year, is it mainly driven by the SiP project? I would say both, for SiP as well as for the concept of it. Right now, I think the overall SiP represents about 42% of our EMS revenue account. And we are expecting this revenue to basically more or less at the same level by the year end. Okay, thank you. Ask if it's QSiP that we should call it. But for that particular project, you had announced the Qualcomm Brazil. I just want to understand, is it SPIL limited to one, is it SPIL more limited to Brazil where you're doing that production, or is it now more of a global opportunity? Do you also have potential, is there any exclusivity, or could you go to MediaTek, Huawei, and other platforms to do these types of SiP for 5G? Well, I think it's primarily targeted at the Brazilian market, as we do think there's a market that is the most suitable for this type of a SiP solution. But there's SPIL a lot of room for us to expand. To serve that particular market, there will be other supplier as well, which could be of potential customers as well. If it's for the current application, then yes, it's pretty much for the Brazilian market. We will extend this to other customers as well. But this also has the potential for other applications as it would be different options or different outside options. To clarify other customers' applications, because I would think just Brazil, but is there an opportunity in China or global for these types? I guess why only, I mean, I know this customer is for Brazil project, but is there a global opportunity for these types of projects? Well, we'll see how things evolve, but apparently at this point, we're SPIL in South America. You mentioned that compared to net pass-through, and I think it was in the IC ATM on margins, is there much module pass-through growth in the IC ATM? Like, is there a piece of the SiP that's flowing in? That was more in reference to higher substrate. Thank you. Any more questions from the floor? No more? Okay, thank you very much for attending our earnings release. See you next quarter.