Earnings Call: Q4 2018

Jan 30, 2019

Summary

2018 pro forma revenue reached a record US$8.2B, while Q4 net income fell amid higher non-operating costs and EMS mix pressure. 2019 growth and investment plans center on SiP, fan-out, test, and diversified capacity, despite macro uncertainty.

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holding. Welcome to our fourth quarter 2018 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. For today's event, Dr. Tien Wu will make a presentation regarding ASE's 2018 accomplishments, competitive landscape, and 2019 outlook, after which I will be going over the financial results. Then we will have a Q&A session with Dr. Wu, our COO, and Joseph, our CFO. Following the event, our VP in charge of public relations, Eddie Chang, will be available to address the media in Mandarin Chinese. Now, Dr. Tien Wu. Good afternoon. Happy New Year. My presentation today will have three portions. The first one is the 2018 recap, competitive landscape, and then the 2019 outlook. Let me summarize the 2018 recap first. in 2018, we have established the ASE Technology Holding companies on April 30, 2018. As we have reported before, in 2019, November 24, we expect the expiration of China Ministry of Commerce conditions. Secondly, we have achieved record high revenues, which includes 2018 ASE record high revenue of US equivalent of $8.2 billion on a pro forma basis. On the EMS part, we have achieved a record revenue of $5.0 billion. It is good to report that our SiP business at a holding company level grew 14% year-on-year to $2.2 billion. Specifically, our ASE portion of SiP, based on new projects, have reached the target we have set of $100 million. We expect the momentum of the new SiP project at the ASE level continues into 2019 and beyond. We're growing the 2018 CapEx with more focus on test business. Specifically, the test business grew 4% year-on-year. For the second half of 2018, it grew 8%. Again, the test business momentum will continue to grow into 2019 and beyond. ASE being awarded DJSI leadership for three years in a row. We have also been awarded the CDP leadership three years in a row. Let me go over the competitive landscape, which we have not done in the previous earning report. In the following chart, we would like to show you the top 15 OSAT, the three years sum of their EBITDA minus the CapEx. As you can see, ASE Technology Holding on the ATM portion, our equivalent of the EBITDA minus CapEx for the last three years outperform top OSAT. To give you a reference, the top 10 OSATs combined spent 95% of the CapEx of the industry for the last few years. Therefore, we believe comparing to the top 15 OSAT is a very meaningful comparison. In the following chart, we are giving you a little bit more detail. We are looking at the last 10 years from 2007 all the way to 2018. We are giving you the percentage of ASE Holding of EBITDA minus CapEx versus the rest of the 14 players of the top 15. As you can see, the ASE long-term moving average, it is somewhere around 50%, which means ASE Holding will generate 50%, half of the EBITDA minus CapEx for all of the top 15 combined. Specifically, please note, in 2010, that percentage drops to 14%. In 2012, that percentage dropped to 6%. What that means was ASE Holding decided to outspend comparing to the normal pattern for those two years. We will talk about the implication of those CapEx expenditure in the following years. On this chart, I would like to show, if you look at the bar chart, the blue portion, you can see 953, 593, 839, 152. After the two years of outspend our normal pattern, you can clearly see the cash generating power has incrementally improved over the next few years. Please also note that in 2015, 2016, 2017, and 2018, our CapEx expenditure overall, we have underspent comparing to our historical pattern. Over here, we are accumulating cash for a different purpose of building up scale, which will be the SPIL acquisition. The 2010 outspending precisely corresponding to the copper wire bond initiative. In the 2012, it corresponded to the first SiP major project. What we have put here is starting 2018, 2019, and 2020, pending on the business condition and the new product launch, we might go through the third wave of investment in preparation for the new era. On this chart, what we meant to deliver to shareholder investor is our cash flow generating ability after disruptive investment. If you go to the next chart, you can look at the market share of ASE Holding, which is the blue curve, comparing to the orange curve, which is the OSAT growth for the whole OSAT industry. As you can see, in 2010, after the disruptive investment, ASE grew 52.9% year-on-year, where the rest of the industry grew 37%. You can also look at 2013. After the SiP launch, ASE grew 10% versus the industry at about 0%. What we are showing here is the ability after the major investment, how ASE can control the market share gain, as well as the cash generating capability in the following years. On the other hand, if you recall, we underspent comparing to our historic pattern between 2015, 2016, 2017, and 2018, because we are allocating the cash generated to buy SPIL to build up the scale in preparation for the next wave. Now, over the last three to four years, if you compare the ASE share versus the OSAT shares, our share loss is minimum. What this is indicating is when ASE outspend the historical pattern or the industry, there is a market share response, as well as cash generation response. When the other competitor outspend comparing to our historical pattern, that response has not been obvious. We will continue to track this. Again, we have indicated there is going to be a third wave. We do not know when. We believe the third wave will start in 2019. However, we have to look at the detail market evolvement. In this wave, we believe the heterogeneous integration becomes critical. The easy example to think about is the 5G. In the 5G world, to put in a simple way, almost every meaningful digital chips needs to be combined with a radio RF chips. You can either implement this by the SOC or you can implement this by SiP or fan-out. This is really what is in store for the OSAT industry. If you go to the next chart, you can look at our expectation on the overall market. The foundry today is about $60 billion with cash generating capability and margin structure. The OSAT is about $30 billion with its respective margin structure. You have contract manufacturer, which is about $500 billion US dollars revenue with a margin structure, with the following market trend. You have a Moore's Law versus the economic value. We have the future design focusing on flexibility, power consumption, and all levels of cost efficiency at the system level. For ASE and USI, combining our design, customer profile, software, integration, and all of the new innovation, we believe the synergy is very well positioned for this potential expansion of our TAM as well as the serviceable market. In other words, we believe the future is bright. Let me comment on the 2019 outlook based on everything that I have recapped so far. Simply, 2019, the group machinery CapEx should be stable year-on-year. However, we will adjust the mix of how we spend the machine CapEx. We will put more percentage and focus on new technology development, fan-out, SiP, and expansion of new manufacturing sites just to prepare for any kind of geographic dynamics or shift of focus, and factory automation. For the EMS portion, we are putting higher CapEx on global footprint expansion, Mexico, Taiwan, and China, and also the corresponding SiP development per all of the conversation we just had. The 2019 group R&D expense, we expect this to move slightly up. As a matter of fact, it is our belief that between scale and innovation, you need to have these two pillar in order to propel the growth in a healthy way of the company well into the future. Let me comment on some of the new opportunities. In 2019, we believe the ATM SiP projects will grow at $100 million and above increments, and we expect this growth to carry into the next few years. We have talked about a fan-out. We have traditional fan-out. We also have a new fan-out which we were launching last year. We believe the fan-out, specifically the new fan-out, will grow at anywhere between US $50 million to $100 million in the next few years. 2019, we do have some macroeconomic uncertainty. However, we believe we have some new product launch. We have a few hundred million dollars in the pipeline that we are quite confident. Last, the 5G new product. The 5G launch, I am pretty sure some of you will ask me the question, is anybody's guess. But what we do know is 5G will be launched. We just do not know when. Now, when the 5G is launched, the digital and the radio, what we are looking for is an integration scheme such as SiP, such as fan-out, with a low power, such as embedded power solution. This is what ASE is preparing for the future. That is my presentation. Thank you. Thank you, Dr. Wu. While the handouts are being handed out, I would like to remind you, ASE Holding was jointly formed on April 30th during the second quarter of 2018. As a legal entity, our SPIL subsidiaries' results are consolidated only as of that date going forward. Results for the legal entity are labeled legal entity basis. 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 for the fourth and third quarters. However, the pro forma numbers are still relevant for the quarterly year-over-year and full-year results. Let us start the financial overview. This is our fourth quarter and year-end presentation. So in addition to having typical sequential and quarterly year-over-year slides, we have included full-year results. On page 3 through 6, you will find our legal entity results for the holding company and our ASE business unit quarterly and for the full year. I will generally discuss the quarterly and year-over-year comparisons as part of the pro forma basis slides. Nevertheless, it is worth mentioning that as a legal entity, even though the fourth quarter is not particularly comparable between 2018 and 2017, because one period consolidates SPIL and the other does not, our SPIL transaction was made in cash. There was no share swap, and even though the growth in revenue is not organic, the net revenue increase of 36% is real, substantial, and deliberate. We identified the problem of potential slowing smartphone growth, and we chose to accumulate cash during multiple lackluster growth periods. We then utilized that cash to put us in position to consolidate the industry. We made an active choice between cash accumulation, R&D, and capital expenditures. With the transaction, we picked up significant scale and the capability to yield synergies post-November 2019. We believe this to be one of the most important, if not the most important, strategic accomplishment in ASE's history. While we are not saying that pro forma comparisons are unimportant, the pro forma comparisons do not really tell the full story. Further, while the cash for the transaction has been dispersed and while the loans are being paid off, we continue to recognize non-cash expenses in the form of purchase price accounting depreciation and amortization. While purchase price accounting tries to create potentially a more accurate view of a company's balance sheet post-combination, we believe that incremental depreciation amortization PPA generates fundamentally distorts our P&L results. We believe our performance should be evaluated without the impact of such non-cash PPA depreciation amortization. With that, let's go over page three. For the legal entity, we recorded fully diluted EPS of TWD 1.24 and basic EPS of TWD 1.28. Sales were TWD 114 billion, with a gross profit of TWD 18.7 billion and gross margin of 16.4%. Operating profit was TWD 8.6 billion, and net income was TWD 5.4 billion. On page four, on a legal entity basis, fully diluted EPS was TWD 5.84 versus TWD 5.23 last year. This represents a 12% year-over-year growth in our earnings. Net revenues grew 28%. Packaging grew 41%. Test grew by 37%. EMS grew by 13%. Gross profit grew by 16%. Operating profit grew by 6%. Granted, most of the growth was due to the acquisition of SPIL, but I would like to remind everyone to evaluate such a result with Dr. Wu's presentation in mind, and in particular, ASE's relative cash generation within the OSAT space. Repeatable planned inorganic growth from internally generated cash should be rewarded instead of being ignored. Let's move forward to page seven. Here we have our pro forma P&L for the consolidated holding company. To generate the historical pro forma periods, we added the historical P&Ls of each of the two entities 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. On a pro forma basis for the fourth quarter, we had net revenues of TWD 114 billion. This represents a 6% increase quarter over quarter and an 8% increase year over year. The increases are primarily attributable to seasonal upticks in our EMS business, offset by a slight decline in our ATM business. Even though our EMS business grew at a fairly rapid clip sequentially, it was still somewhat below our expectations. The gap was mostly driven by softness within our communication products. Gross profits were up 2% quarter over quarter and 3% year over year. The sequential gross profit improvement was driven by stronger margin performance in both ATM and EMS business units. Gross profit margin declined 0.7 percentage points, both on a quarter-over-quarter and year-over-year basis, to 16.4%. Both of these declines were driven by higher EMS revenue mix. Operating expenses were TWD 10.1 billion, or TWD 0.1 billion sequentially, and up TWD 0.7 billion on a year-over-year basis. Our operating expense percentage was down 0.4 percentage points to 8.9% from 9.3% in the third quarter, and flat on a year-over-year basis. Operating profit improved TWD 0.2 billion quarter over quarter and was down slightly year over year at TWD 8.6 billion. Sequentially, operating margin declined 0.3%, driven by increased EMS product mix. On a year-over-year basis, operating margin declined 0.7 percentage points, driven by lower gross profit margins from higher EMS product mix. Non-operating expenses were TWD 1.3 billion for the fourth quarter. This includes net interest expense of TWD 1 billion. Non-operating expenses increased from the third quarter primarily as a result of a write-down of goodwill from a minority equity investment, and to a lesser extent, lower contribution from gain or loss from financial instruments. Tax expense for the quarter was TWD 1.3 billion, with an imputed tax rate of 18.5%. Net income for the fourth quarter was TWD 5.4 billion, representing a decline of TWD 0.8 billion from the previous quarter, driven primarily by higher non-operating expenses. On a year-over-year basis, net income was down TWD 0.3 billion from 2017 levels. On the bottom of the page, we have again provided here key P&L line items without the inclusion of PPA. Consolidated gross profit, excluding PPA expenses, would be TWD 19.9 billion, with a 17.4% gross margin. Operating profit would be TWD 10 billion with an operating margin of 8.8%. Net profit would be TWD 6.9 billion, with a net margin of 6.1%. Basic EPS, excluding PPA expenses, would be $0.35 higher at $1.63. For 2018, this is on page eight, consolidated net revenues grew by 6% as compared with 2017. EMS revenues grew 13% annually, and ATM revenues grew 2%. Gross profit for the year declined by TWD 0.7 billion year-over-year, primarily as a result of lower ATM gross profits from currency, higher material pass-through, and decline in cryptocurrency business. Gross profit margin declined 1.2 percentage points, primarily attributable to higher EMS product mix. Operating profit for the year also declined by TWD 1.8 billion. This amount is from lower gross profits and higher operating expenses, primarily due to higher R&D investment for new technology development and ramp-up. As a result, operating margin declined 0.9 percentage points. Non-operating income and expense declined mainly due to high real estate investment disposal in 2017. Net income declined by TWD 5.9 billion to TWD 15.9 billion. This decline is largely attributable to real estate investment disposal during 2017 of TWD 4.2 billion and lower operating profit. Basic EPS for the year was $3.75. Removing the effects of PPA depreciation and other transaction-related costs, our EPS would be $5.13. On page nine is our ATM pro forma P&L. For the fourth quarter, revenues for our ATM business were TWD 64.1 billion, down TWD 2.2 billion from the previous quarter, and up TWD 0.7 billion from the same period last year. This represents a 3% decrease from a sequential perspective and a 1% increase from a year-over-year perspective. Gross profits within ATM were down TWD 0.3 billion, or 2% quarter-over-quarter, and down TWD 0.2 billion, 1% year-over-year, to TWD 14 billion. Lower gross profits were driven by lower loading during the fourth quarter. Gross margin for ATM was up 0.3 percentage points sequentially, but down 0.5 percentage points year-over-year. The sequential increase in gross margin is due to product mix, including higher test revenue. The year-over-year drop in gross margin is primarily the result of charges related to cryptocurrency inventory obsolescence. During the fourth quarter, operating expenses were TWD 7.7 billion, up TWD 0.1 billion from the third quarter, and up TWD 0.5 billion from the same period last year. Operating expenses were primarily up as a result of R&D expenses for new technology ramp. OpEx percentage was 12%, up 0.5 percentage points sequentially, and up 0.6 percentage points year-over-year. Sequentially speaking, the OpEx percentage increase was primarily the result of lower revenues. On a year-over-year basis, higher OpEx is due to higher R&D costs from new project ramp-ups. From a forward-looking perspective, as the company ramps the next generation of packaging, we expect R&D to stay at an elevated level during 2019. During the fourth quarter, operating income was TWD 6.3 billion, representing a decline of TWD 0.4 billion, or 6% quarter-over-quarter. Operating income declined TWD 0.6 billion, or 9% year-over-year. On a sequential basis, operating margin declined 0.3 percentage points from 10.1% to 9.8%, driven by higher gross margin offset by higher R&D expenses. On a year-over-year basis, operating margin declined 1.2 percentage points, principally as a result of lower gross margin and higher reorganizational and R&D expenses. Without the P&L impact of PPA depreciation and amortization, ATM gross profit would have been 23.7%, and operating profit would have hit 12.1%. On page 10, we have our pro forma ATM full-year P&L. On a full-year pro forma basis, our ATM business increased 1%. As Dr. Wu pointed out earlier, our test business outgrew our assembly business this year, growing at 4% for the year and at 8% during the last half of the year. We do believe that our test business is gaining share and will continue to gain share during 2019. Gross profit declined 3%, with gross margins declining 0.9 percentage points. The margin decline was driven by currency impact, higher pass-through costs from a new business line, and the decline of cryptocurrency business. Operating margin also declined by 0.9 percentage points. On page 11, you'll find a graphical presentation of our pro forma ATM P&L. I'll let you review that on your own. On page 12 is our ATM revenue by market segment. Sequentially for the fourth quarter, our communications segment climbed 2 percentage points to 56%. Our computing segment declined 1 percentage point. Our automotive, consumer, and other segment declined 1 percentage point to 31%. This is usually the tail end of the communication segment's seasonally high period. On page 13, you can see here that during the fourth quarter, wire bonding revenue declined 4 percentage points while testing, bump, flip chip, wafer level packaging, and SiP increased. We do expect our test business to continue to perform well as we make attempts to gain more market share. On page 14, you can see the results from our EMS business. During the fourth quarter, we had revenues of TWD 50.7 billion, representing an increase of TWD 8.7 billion, or 21% sequentially, and an increase of TWD 7.5 billion, or 17% year-over-year. This was driven by continued growth from our consumer product segment. We're expecting a slightly stronger pickup in our EMS business during the fourth quarter, but we encountered a slower-than-expected sell-through environment. This sluggishness was spread across a few of our customers' product lines, but strongest within our communications segment. Even with such sluggishness, our EMS operation was able to deliver a record quarter and year. Sequentially, our gross profit improved 11%, or TWD 0.4 billion to TWD 4.6 billion. Compared with the same period last year, gross profit improved TWD 0.6 billion, or 15%. Gross profit margin for the EMS business unit came in at 9.1%, representing a 0.8 percentage point decline from the previous quarter. This decline was driven by our seasonal product mix. Compared with the previous year, EMS gross margin declined 0.1 percentage points. The difference was primarily the result of generational device differences. Operating profit for the quarter was TWD 2.2 billion, which is a TWD 0.5 billion improvement sequentially and a TWD 0.3 billion improvement year over year. Our operating margin came in at 4.3%, which is a 0.2 percentage point improvement sequentially and flat year over year. The operating margin was slightly ahead of our expectations and was primarily the result of product mix. On page 15, you will see our full year P&L for our EMS entity. For 2018, our EMS revenue of TWD 151.9 billion represents a 13% annual increase. Gross profit increased TWD 0.7 billion, or 5%, primarily as a result of higher revenues. Gross profit margin declined 0.8 percentage points, primarily as a result of generational product changes. Operating profit stayed flat at TWD 5.7 billion, with operating margin declining 0.5 percentage points to 3.7%. Operating margin decline was driven by lower gross margin. On page 16, you will see our product segment mix within our EMS business. Our consumer product segment continues to grow, improving 8 percentage points sequentially. Our consumer segment strength is a bit unusual in this market environment. Some of our other segments are either reaching the end of their seasonal builds or experiencing impact from softer end market demand. We believe pockets of weaknesses are not unusual in this market environment and at this time. On page 17, you will find key line items from our balance sheets. At the end of the quarter, we had cash equivalents, and current financial assets of TWD 65.3 billion. Our interest-bearing debt decreased from TWD 208.2 billion to TWD 198.4 billion. Total unused credit lines amounted to TWD 219.9 billion. Our EBITDA for the quarter was TWD 21.1 billion. On page 18, you'll find our pro forma equipment capital expenditures. Machinery and equipment capital expenditures for the fourth quarter totaled $248 million, of which $134 million were used for packaging, $95 million in testing, $11 million in EMS, and $8 million in interconnect materials and others. Total equipment capital expenditures for the year were $1.2 billion. $0.7 billion was for packaging, $0.4 billion was for testing, $0.1 billion was for EMS and others. We expect our 2019 capital equipment spending related to capacity expansion of existing product lines to be below current year levels. However, we will be beginning to ramp new equipment for our next generation of packaging, which will bring our equipment CapEx to be near or slightly above 2018 levels. I believe it would be useful to frame our results in a business context. Last year, although we did not know it at the time, we were right in the tail of cryptocurrency mining demand. This year, there's no such tail to ride. Furthermore, this year, a number of products within the electronics market are going through a period of dynamic adjustment. However, some products continue to perform relatively well. Such products entering the seasonally down quarter bear the need for cautious monitoring. Even though geopolitical trade tensions have only had a mild direct impact on our business, the environment has introduced a certain level of conservatism from our customers in their view of the world. Conservatism in a business context does not necessarily mean that they do not order, but it does impact a customer's view on how much inventory they should carry. The question that is on everyone's mind is, when does this get resolved? Of course, we don't exactly know the answer to that. So naturally, we should expect things to be probably a bit softer than normal, especially when much of the world is expecting the sky to start falling. However, from our view, the market looking into the first quarter doesn't look that much different than typical seasonality at this point. From an annual view, given the dynamic global environment, we, of course, do not hold a very strong view. However, we do still expect to be able to deliver sequential quarterly growth. In such an environment, we go back to our core, readying ourselves for the next rebound. Actions like putting new R&D to expand our serviceable market and readying leading-edge capacity for broader market, leading to generational packaging migration. We will also continue to carry our test business 2018 momentum into 2019. This, along with other initiatives designed around improving overall gross margin, will be our focus. Finally, during the latter part of this year, there will be a time for us to talk about synergies of our SPIL and ASE subsidiaries, those synergies that we can have together, but now is not the time to talk about them. With that, guidance for the first quarter. On a pro forma basis and in TWD terms, ATM first quarter 2019 business should be at or slightly below first quarter 2018 levels. ATM business first quarter 2019 gross margin should be around a percentage point below first quarter 2018 levels. For EMS and TWD terms, EMS first quarter 2019 business should be slightly ahead of the quarterly average of the second half of 2017. EMS first quarter 2019 operating margin should be similar to second quarter 2018 levels. Q&A. Questions? No questions? Thought I'd try. Name and company, sir. Okay. It's Randy Abrams, Credit Suisse. The first question, I just want you to clarify for the SiP and the fan-out, where you talked about 100 million and the 50-100 million. Is that every year that you expect that growth, or that's over several years you expect that opportunity? Every year. Okay. For the next few years. Okay, great. On the CapEx side, could you talk a little bit more about your allocation of the CapEx? Last year, it wasn't that much tied to these new projects. Looking ahead to 2019, how much do you see tied to the fan-out, the SiP, some of this new heterogeneous computing? I think we mentioned that last year, we put more focus on or more resources on test CapEx, which represents about 35% of the overall CapEx for last year. This year, I think last year, I think we were doing a bit of a catching up in terms of test investment. This year, we'll go back to the normal level. But we are putting more resources this year for some of the new projects or new technology that we're bringing on stream. Also, some of the CapEx is for the new sites that we are preparing for further diversification and also to meet the customer demand. In terms of the overall percentage allocation, I think this year, I think assembly, including the new projects or new technology, will represent about two-thirds of the CapEx that we are going to be spending this year, while test will be lower to about 22% from 35% last year. The rest will be for the EMS and also for material. Okay. Could you talk a bit more on both SiP, what type of projects or applications this incremental growth you expect to come from, and also for the fan-out? Will that start where you start to get additional revenue? Is it more the single die, or do you think it now will be fan-out more of the advanced chips, like application processor or high-performance computing? The SiP project has a variety, and I will not tell you any more detail rather than the $100 million incremental revenue for 2019 expected. In terms of the fan-out, I think what we would like to demonstrate for 2019 is a successful ramp on cost efficiency of the fan-out structure with reliability and revenue generating and the profit capability. By the end of 2019, we should have around $50 million-$100 million incremental revenue to demonstrate that. In terms of the detailed structure, it will have a combination of single chip primarily, but we'll have elements of multi-chips. Of course, this is a typical manufacturing ramp-up. You really have to learn how to walk before you run. What we do believe is, as we're really ramping into the 5G, whichever timeframe that is, a lot of people believe that that'll be in the 2020 to 2021 arena. We will believe that the multi-chip combination of low power requirement, digital memory, as well as radio, and we're really setting up against those requirement in the future. Design skills, as well as manufacturer know-how, as well as the capacity already installed. So this phase is what we're ramping up. Same thing applies to the SiP. Okay, great. The last question on gross margin. I think EMS was a little bit down year-over-year, like back to like 9.1%. It was running closer to 10% for a while. Could you maybe, I guess, talk about gross margin in that category, how some of the SiP projects look? I think you talked about generational change for the new product might have been a bit lower margin. So the outlook, what you might expect, if it's stable or could come back. Then, you talked about gross margin improvement programs kind of broadly, or I guess ATM. So maybe the view margin, if kind of outlook is more stable or you see some of those programs helping out this year on ATM. I think it's more meaningful to look at EMS margin from an operating standpoint. It's really the operating margin that reflects the true performance. Because at a gross level, it really depends on the product mix. But some of the products may have lower gross, but has a larger, it has a thinner operating expenses that needs to be accrued, associated with that particular business. So all in, I think in terms of EMS at the operating level, we continue to see improvement at the operating margin level. As a result, I think it's really, we have been improving the overall efficiency across the board, particularly in some of the specific projects that we're running. The profitability is really showing a lot of improvement. Then maybe the ATM, kind of outlook for ATM margin. I think for 2018, there were a few factors that affected our gross margin, including some of the provision that we need to take for our cryptocurrency business. Also, a part of our business, we have a higher material content because of the pass-through arrangement that we have with the customers. Also, I think the overall FX in the year, particularly the first half of the year, did have some impact on the gross margin as well. Also, as we mentioned, there were some organizational changes that require some of the more administrative expenses. Also, we're initiating some of the preparation works for allocating or expanding the operation in our overseas sites. So all these put together have put some pressure on the margin for ATM in 2018. Now, most of these factors will be gone for the year, except at the operating level, in terms of operating expenses ratio, it will be slightly higher than 2018 because of the higher R&D efforts that we're putting in. But all in, I think 2019, although there's quite a bit of uncertainties in front of us, but from the way the things are going, I think there's a because of a lot of the factors that affected our margin in 2018 has already been taken care of, I think there's really room for us to further improve our margin for the year. Yeah. Hi, this is Rick from Daiwa Securities. Quickly, can you put back the guidance slide? Because I missed the last part of the EMS gross margin. Okay, thank you so much. The second question is, well, I should say the first question, again, the housekeeping. Across your wire bonding, testing, bumping, can you share the number with us about your Q4 capacity and also utilization rates? And how do you see for first quarter this year? Okay. In terms of wire bonders, at end of first quarter, last quarter, we had total of 25,172 units of wire bonders. The net change is minus 47. We actually retired more than we bought. In terms of testers, we have altogether 4,822 testers. We added 20 testers in a quarter. In terms of utilization, in terms of Hold on a second. In terms of utilization in fourth quarter, the wire bond, we have a high 70% utilization. For the non-wire bond, we are above 80%. And testing, we're close to 80%. Okay, thank you. The second question is about your Can you comment on your customers' inventory level, and when do you see How severe do you see the ASE inventory level right now, and when do you foresee the ASE inventory to normalize? And also, do you, just like TSMC, do you expect a pretty strong backend loaded recovery in second half this year for your business? Well, I don't think we want to comment on the overall industry inventory situation, but purely based on our own customer forecast, I think in terms of first quarter, it does seem to be slightly weaker than the normal seasonality. We are seeing things turning up, starting from second quarter. Although, again, there's a lot of uncertainties in front of us, and purely based on our own forecast, it seems to be that for the whole year, we will continue to see sequential growth on a quarterly basis. For the whole year, we're still expecting some growth. Okay, thank you so much. I think we can take a call. Hello? Hello, Bill. You are on the line. Please go ahead and ask your question. Go ahead. Yeah, hi. Dr. Wu gave an outlook for 2019, which was very helpful. But I am wondering if you can also talk about what you think is the OSAT industry growth in 2019? Given the performance of the last few years, I think the overall OSAT will continue to grow. I do understand there are a lot of macro uncertainties surrounding the industry, but if you really look at the OSAT sector performance for the last few years, it has been quite steady, mainly driven by the efficiency that OSAT can provide to the semiconductor industry. I believe that trend will continue. I will not be able to comment on the overall OSAT growth, because each company will have a different focus and different strength. But if you want my guess, I believe the OSAT industry next year will continue to grow. Okay, that is helpful. As you ramp the fan-out business, can you talk about the gross margin trend for that specific business? Bill, can you Bill? Bill, can you repeat the question? Yeah, please. Yeah. I'm wondering if you could talk about gross margin for fan-out, maybe in the initial stage, because I know volume and CapEx are key initially, and how does it look longer term? Thank you. My apology. We won't be able to comment on the gross margin of the fan-out, as we are really ramping up. We're also doing the calibration, and there's a lot of design work, there's a lot of materials work, there's a lot of automation work. So right now, we're at the investment stage. Okay. My last question is, I think Ken made a comment on cryptocurrency inventory obsolescence. I didn't quite catch the details there. Can you talk a little bit more about that? Yes. I think most of the provision that we took is really on the inventory or specific materials that we prepare for the business. Since starting from actually second half of the year, we are seeing that part of the business actually start to disappear, so we had to take some provision on some of the materials that we have. But the number is not substantial to cause to make any alarm for us. Got it. I visited some major competitors in China, and I feel like many of them built too much capacity for the crypto guys in 2018. Is that a concern at all that maybe we have a little bit excess capacity for China? In terms of cryptocurrency, I do not think we prepare any specific or specialized capacity for that part of the business. It is really just part of the future business that we have. In terms of our overall China capacity, I think it is roughly about 15% of the overall ATM capacity that we have. Yeah, sorry. I do not mean you, I mean your competitors in China, I think, build capacity for the cryptocurrency customers. I am wondering if that might have a negative impact in terms of maybe pricing going forward? If you look at the cryptocurrency demand, without being specific, a large part of 2018, we have already experienced that. Any kind of extra capacity, any kind of regional, we should have experienced that already for more than a few quarters. In terms of how will the excess capacity play into the margin erosion for future, I think each company will have a different strategy to encompass that. Okay, thank you very much. Just another additional comment, we do not want to downplay the cryptocurrency. The cryptocurrency might come back in a different form or different application. Just a rule of thumb, we will never write off any kind of new emerging technology or potential application for any region. Great. Thank you. Do we have any more questions on the floor? Sebastian from CLSA. Thank you. My first question is on the. I think you already mentioned that you still expect this year to grow. How about separately for ASE and EMS? Both will grow? Yes, the answer is yes. Okay. Which will outperform? Which one grow faster? It really depends on the market, and I won't be able to comment on that. But we're pretty confident that this year, depending on any kind of major disaster that we cannot foresee, we do expect positive growth for both segment. Okay. Is it regardless of the macro incidents? This is basically based on the pipeline, the visibility that we have so far? That's correct. Based on the best knowledge and estimate that we have, based on our customers' collective forecast. Okay. Thank you. Second question is on the CapEx for some new sites to diversify the geopolitical risk. This is more related to EMS, right? That is correct. Will we expect this will impact the overall efficiency and the overall return on investment of the EMS business this year and next year? There are two elements in this kind of global footprint deployment expansion. We do expect the overall efficiency to be improved, given any kind of geopolitical condition that we impose. It would not be an absolute comparison, but will be in relative comparison. For example, if, unfortunately, the tariff condition turns into a different direction, and you need to have some kind of a backup plan to encompass the new ruling, or in case you cannot ship anything into any country or the vice versa. This is really the risk mitigation plan that we are working on right now. Okay. When do you expect this site diversification to complete? I think this is ongoing. I think if we look at the EMS part of the business, because of the tariff situation, less, I would say less than 10% of the business is affected, and some of the customers may require us or have the preference of us moving some, allocating that part of the business over to some other sites, and we are already doing that. That is one category. The other is, there will be new products or new markets that we need to or do we wish to penetrate, and there will be new facility being set up or capacity being put in. The timing of that is really depending on the overall demand situation. So these are all ongoing. On the ATM side, I think the site that we are, I think it is also a housekeeping issue, is that the Xiamen new factory, as like we explained last time, it was never meant to be a captive factory for the memory house that they are building in Xiamen, but to serve the other numerous customers within the region, and that is continuing. But in terms of the investment or the cooperation with the memory house, or Tsinghua in Xiamen, that is permanently put on hold. Okay. Can I go back to Dr. Wu's, my first question regarding the efficiency question? So, I just want to get a sense that for the CapEx that you are putting to the site expansion this year, would it be more of just to diversify, or actually is it net incremental capacity? What I am trying to get is that, for example, you have a customers now maybe in China, it has to move to Mexico. So can you just simply relocate your capacity from China to Mexico, or you have to add new incremental capacity in Mexico while those capacity in China may become idle in the near term? That depends on whether you can backfill it. Okay. I am going to answer the question in 2 different category. If you look at the short term, most likely we are relocating capacity into a factory for the risk mitigation due to specific customer requirement or regional political requirement. However, I have emphasized this over the years, which I want to once again to emphasize this. Maintaining a global footprint of manufacturing base is an extremely costly thing. ASE over the years has been criticized for trying to maintain joint venture, manufacturing site, and design collaboration with all of the IDM customer in all geographies. I think it is timely to point out that with the recent geographic, geopolitical conflict, you do understand the sensitivity of manufacturing base, as was the IPR, as was the ownership by different regions. You also need to understand that when we are talking about 5G, autonomous driving, smart city, smart medical, Industry 4.0, the design, the protocol, the standard, as well as the manufacturing and distribution, because of the IPR and the security concern, it will become more distributed than concentrated. For the concentrated economic model based on cost and efficiency, it applies to certain domain. But you move to a different sector, when you hit the sensitivity of IPR and national security, the manufacturing base needs to be more, relative speaking, distributed. What we are telling all of the shareholder over the years is ASE always understand the potential of this. That is why we are the only OSAT today have a large global footprint, which we maintain for years, just to have the local skill, the connectivity to the government, to the IDM, to the regulatory control. Everything that we have deployed is to get ready for both business model, concentrated, efficiency, cost model, as well as more sensitive, more distributed model. Comments? Thank you. Last question from me is that when I look at on the past four or five years, the OSAT, the top OSAT vendors, the aggregate profitability on the Op margin level, gross margin level, it seems like the overall industry profitability has been on the declining trend in the past few years. I just want to ask this question is whether, Dr. Wu, what do you think about the trend going forward? Is there any way that the industry or as a leader, ASE can do to stop this derating trend? What ASE can do is to do the contribution of ASE towards the industry. When you are making more contribution in terms of disruptive technology, innovation, or the next level of new efficiency, then the ASE value and the cash-generating capability will incrementally improve. I will not be able to speak for the rest of the OSAT industry. However, when the leader of the OSAT start moving in this direction, inevitably will put pressure on all of the other players. The chart that I demonstrated is really twofold. First is the cash-generating capability. The second one is the percentage of that versus the industry. We need to bundle is, who in the last 10 years have introduced disruptive technology from the OSAT? Now, after you introduce the disruptive technology, how does the market respond and reward you or penalize you, right? We do understand that there is extra capacity and there is cost pressure and there are excess, the build-up, in some region of the world. What ASE needs to accelerate is twofold. We build up our own scale. Organic scale development, sometimes too slow, therefore you have acquisition. Then combining all the resource, then you start investing in a bigger chunk to create a bigger disruptive introduction into the system. Hopefully, over the years, you can see the margin improvement at the company level, and hopefully this will propagate downstream and affect the other OSAT members. It's a long answer to a great question. We do understand the OSAT sector pressure. You look at it, how can OSAT expand our value to cross the boundary into the contract manufacturing portion, and how do we build up our own influence within the own OSAT? Because the boundary is getting very blurred. Of course, when people talk about the slowdown, the Moore's Law, there's got to be a new efficiency to come in to augment the slowdown portion of the Moore's Law. We believe that is the heterogeneous integration, which coincides with the 5G because radio comes in. It coincides with all of the IoT because sensor and MEMS comes in. With everything that we can encompass right now, we believe the future few years for OSAT industry, for all of the technology we have laid down the foundation in introducing over the fact that the last few years are extremely promising. We really think the opportunity is really there. We cannot speak for anybody else, but from the ASE perspective, it's very clear what do we need to do. Thank you. Just last follow-up. Besides all these organic measures, do you also continue or proactively consider consolidation as a strategy to both in terms of the scale and also the profitability? Of course, that will continue to be one option for growth if it makes strategic sense. I think we will continue to look at what's happening in the market and what's needed in our portfolio and see if there's a right fit for us to look at. I think this is an ongoing, should be an ongoing program running any business. Thank you. Do we have any additional questions? We have a follow-up here. I just had one follow-up because Tian, your comments about the investment, like 2010, 2013, was I think when you were going through it, I was expecting you to announce a big CapEx number, because in those periods, you spent a lot for copper and then had some of the SiP. Is it the expectation we are kind of in a slow year, but looking ahead the next couple years, are you preparing us for we should expect CapEx to start really growing to go after the opportunity? If everything goes well, yes. But right now, we do not know how things will develop. For example, the big question is now who is going to launch 5G, and how big 5G is going to be, and how big is the 5G derivative due to the low latency? What kind of new application do we expect? So I have a thousand questions. However, I mean, go back to the core. Do you think those applications will be pervasive in volume? If you do, who has got the capacity and technology to do the heterogeneous integration? And if that really showed up, now who is going to capture the first wave and the second wave? Those are the questions that I am posting to all of you. Okay. The second question, I know you mentioned synergy, we have to wait till the end of the year. It looks like since you acquired SPIL, even though it is operating separately, there has been a bit higher OpEx. I guess your take, when you consolidate the company, do you think there are still areas, both CapEx and OpEx, that you might be able to take some out? Or is it more now about revenue synergy and going after the next opportunity, so it is more to get scale and push revenue growth? This is not the right time to talk about it. Next year. That is it. Okay. Thank you. Any additional questions? Thank you very much for attending. See you next quarter.