ASE Expertise Holding Co., Ltd. (ASX) Q2 2022 Outcomes – Earnings Name Transcript

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ASE Technology Holding Co., Ltd. (NYSE:ASX) Q2 2022 Earnings Conference Call July 28, 2022 3:00 AM ET

Company Participants

Ken Hsiang – Head of Investor Relations

Tien Wu – Chief Operating Officer

Joseph Tung – Chief Financial Officer

Conference Call Participants

Randy Abrams – Crédit Suisse

Gokul Hariharan – JPMorgan

Szeho Ng – China Renaissance

Bruce Lu – Goldman Sachs

Rick Hsu – Daiwa Securities

Frank Lee – HSBC

Ken Hsiang

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Second Quarter 2022 Earnings Release. Thank you for attending our conference call today. Please refer to our Safe Harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time.

I would like to remind everyone 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 results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation.

For today’s call, I am joined by Dr. Tien Wu, our COO; and Joseph Tung, our CFO. During the call, Dr. Wu will first provide a midyear update and overall industry outlook. I will quickly go over our financial results, and Joseph will provide the third quarter outlook. Tien and Joseph will both be available to answer questions during the Q&A session that follows.

Also, as a reminder, we disposed off ASE Inc.’s China sites at the end of 2021. For our financial results presented here, in addition to our legal entity results, we have included information on a pro forma basis, or as if the disposition of ASE Inc.’s China sites had already occurred. We believe that pro forma results give additional meaningful information, which would assist in providing comparability of our financial results.

For the purposes of this presentation, including that of Dr. Wu’s, we will generally discuss our full company and ATM second quarter results sequentially compared with first quarter legal entity results, and year-over-year compared with pro forma second quarter 2021. Dr. Tien Wu will now present our midyear update. Dr. Wu?

Tien Wu

Good afternoon. I would like to give you some highlights. First, I would like to talk about the – our first half ‘22 and second quarter performance. Our second quarter ASE Holdco revenue grew 27% year-over-year in U.S. dollar terms. First half ‘22 revenues grew 28% year-over-year, as Ken already pointed out, on the pro forma basis. Second quarter ‘22 ASE ATM revenues grew 25% year-over-year, while the first half ‘22 revenue grew 25% year-over-year.

First half ‘22, we saw advanced packaging revenue up 48% year-over-year. First half ‘22 ASE HoldCo Automotive revenue grew 64% year-over-year. While the ATM automotive revenue in the first half grew 54% year-over-year. We do expect the momentum to continue into the second half as well as ‘23 and ‘24. First half ‘22 HoldCo operating margin improved 2.3 percentage points, out of which 0.5% were from the favorable currency. First half ‘22 ATM operating margin increased 3.4 percentage points, out of which 0.6 percentage points were from the currency.

Let me turn to the next page. I’d like to give you a highlight of the 2022 full year. First of all, our full year outlook is on track. The overall market is undergoing inventory correction, with some sectors more aggressive than the others. However, we are still seeing some sectors remain constrained. With our diversified customer portfolio and manufacture flexibility, we’re seeing a solid second half ‘22 with quarter-over-quarter growth of our HoldCo revenue. 2022 full year ATM revenue year-over-year growth will be 2x of the logic semiconductor industry, with EMS also seeing solid top line growth. We do expect further margin expansion, for both ATM and EMS business comparing to 2021.

The next page, I would like to give you some highlights for the accomplishment for the past few years. Namely, I would like to give you a structural improvement of our efficiency and margins. For the past 2 years, we have made great strides in the ASE-SPIL synergy in R&D, operation, capacity planning, business consolidation and also the customer portfolio calibration and procurement. With that, the synergy is offering us some percentage of margin improvement. We also made a lot of effort in the automation. The automation has improved significantly, our ability to entertain high volume high reliability business has also improved our manufacturing efficiency, cost structure and flexibility. We do see increasing demand in multi-die, co-packaging, and that trend is adding the complexity of ATM know-how. And therefore, we believe ASE’s value in the total supply chain at a system level. With the above three, the synergy, automation and also the value – we do believe that we have a structural improvement of our margin structure in mid-single digit. That is, going forward, we will see higher peaks and shallower troughs in future cycles, comparing to our past performance.

Now the last page, I would like to give you some business outlook. For next year, I know many of you are concerned about the business state. It is too early to comment on the macro-environment and potential end market demand shift. However, the general perception is, seasonality will resume in Q1 2023. We believe back-end capacity is in a healthy position, because if you look at the overall investment for the past few years, in back end, the incremental back-end capacity added, is relatively low when compared with the front end, and especially considering back-end investment are needed for technology migration, as well as volume expansion.

When I talk about technology migration, I was implying to density, package type, as well as multi-die. That is for the same equipment in the advanced technology, you might only be able to support fewer units due to the complexity and density. We are also seeing increasing resource allocation or resource demand needed for NPI after more than 2 years of COVID lockdown. The NPI trend is very healthy. We are monitoring the NPI trend from all customers, because that is a key indicator, which can set our direction for future capacity investment, planning, equipment-type upgrades, automation and technology roadmap. Lastly, we are optimistic that ASE’s capacity utilization will stay at a higher level, given our customer engagement, LTA, technology, automation leadership, manufacturing scale, and as I pointed out in the last few bullets, relevance to all NPIs.

Thank you. With that, I’ll pass to Ken.

Ken Hsiang

Thank you, Tien. Let’s quickly go over the second quarter financial results. Please turn to Page 7, where you will find our second quarter consolidated results with legal entity and pro forma basis comparisons. For the second quarter, we recorded fully diluted EPS of $3.61 and basic EPS of $3.69. Consolidated net revenue increased 11% sequentially and 33% year-over-year. We had a gross profit of $34.4 billion, with a gross margin of 21.4%. Our gross margin increased by 1.7 percentage points sequentially and 2 percentage points year-over-year. The sequential margin increase is primarily attributable to favorable currency conditions within our ATM and EMS businesses. From an annual perspective, the margin improvements are primarily the result of higher profitability, scale efficiency and a favorable currency environment within our ATM business and scale efficiencies within our EMS business.

Our operating expenses increased sequentially by $1.4 billion during the second quarter, to $13.8 billion, primarily as a result of higher bonus and profit-sharing expenses during the quarter. On a year-over-year basis, our operating expenses increased by $2.7 billion, mainly from the increase of scale, in both our ATM and EMS businesses. Our operating expense percentage stayed flat sequentially at 8.6%. On an annual basis, our operating expense percentage declined 0.6 percentage points from 9.2%. Improvements in operating expense percentage were achieved as a result of operating leverage created. Operating profit of $20.6 billion, up $4.5 billion sequentially and $8.2 billion year-over-year.

Operating margin was 12.8%, increasing 1.6 percentage points sequentially. Operating margin increased 2.5 percentage points on an annual basis, as a result of higher loading and increased profitability. During the quarter, we had a net non-operating gain of $0.5 billion. The non-operating gain was primarily from our net foreign exchange hedging activities, offset in part by net interest expense of $0.7 billion. Tax expense for the quarter was $4.5 billion. The effective tax rate for the second quarter was 21.2%.

During the quarter, we saw slightly higher tax expenses, primarily related to undistributed earnings and treasury activities. We expect a full year effective tax rate of between 20% to 21%. Net income for the quarter was $16 billion, representing an improvement of $3.1 billion sequentially and $5.7 billion year-over-year. The U.S. dollar strengthened against the NT dollar and the Chinese yuan during the second quarter. Sequentially, we estimate that currency fluctuation had a 1.6 percentage point beneficial impact to our holding company gross margin. From a year-over-year perspective, we estimate that currency fluctuation had a 1.4 percentage point positive impact to gross margin.

On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $35.3 billion with a 22% gross margin. Operating profit would be $21.8 billion with an operating margin of 13.6%. Net profit would be $17.2 billion with a net margin of 10.7%. Basic EPS, excluding PPA expenses, would be $3.97.

On Page 8 is a graphical presentation of our consolidated financial performance. On Page 9 is our ATM P&L, with historical results on a legal entity and pro forma basis. It is worth noting here, that the ATM revenue reported here contains revenue eliminated at the holding company level, related to intercompany transactions between our ATM and EMS businesses. During the second quarter, our ATM business ramped up significantly ahead of where we thought it would. The revenue level achieved in the second quarter is near our original estimation of our third quarter revenues. It almost goes without saying, that capacities were tight with overall demand for our services remaining strong during the quarter. From the cost perspective, and as we mentioned last quarter, we encountered some higher costs of operations during the quarter, namely logistics, labor scarcity, lower efficiencies from COVID and higher energy costs. These incremental costs offset the scale efficiencies that were created during the quarter going forward, while costs related to COVID and labor shortage issues appear to be more under control, energy costs appear to be more ongoing.

For the second quarter, revenues for our ATM business were a record $95 billion, up $11 billion from the previous quarter and up $22.3 billion from the same period last year. This represents a 13% increase sequentially and a 31% increase year-over-year. Our ATM revenues came in ahead of our expectations, due to broad-based higher-than-expected loading.

Gross profit for our ATM business was $27.8 billion, up $4.7 billion sequentially and up $8.9 billion year-over-year. Gross profit margin for our ATM business was 29.2%, up 1.7 percentage points sequentially and up 3.3 percentage points year-over-year. The sequential gross margin improvement was primarily due to NT dollar depreciation. The year-over-year gross profit margin improvement was primarily attributable to NT dollar depreciation and scale efficiencies. During the second quarter, operating expenses were $9.8 billion, up $0.7 billion sequentially and $2 billion year-over-year.

Our operating expense percentage was 10.3%, down 0.5 percentage points sequentially and year-over-year. During the second quarter, operating profit was $18 billion, representing an increase of $4 billion quarter-over-quarter and an improvement of $7 billion year-over-year. Operating margin was 18.9%, improving 2.2 percentage points sequentially and 3.7 percentage points year-over-year.

The NT dollar depreciating against the U.S. dollar had a positive 2.3 percentage point impact on our ATM sequential margins. On a year-over-year basis, we estimate that the strengthening U.S. dollar had a 2 percentage point positive impact to margins. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 30.2% and operating profit margin would be 20.1%.

On Page 10, you’ll find a graphical representation of our pro forma ATM P&L. On Page 11 is our pro forma ATM revenue by market segment. The market segments were unchanged as compared with the previous quarter. And though the automotive segment is not separately displayed here, it continues to outpace the other market segments performances.

On Page 12, you will find our pro forma ATM revenue by service type. There was a small move, in which our wire bond products grew slightly faster than our other product lines. This was primarily the result of seasonality of underlying products.

On Page 13, you can see the second quarter results of our EMS business. During the quarter, demand was stronger than anticipated, driven by stronger-than-expected demand for both our traditional EMS and SiP services. Overall, operating conditions started improving halfway through the quarter. However, China’s COVID mitigation strategy continues to have spotty impacts throughout our EMS business. And though the situation is still somewhat dynamic, our EMS factories are poised and ready for the third quarter seasonal uptick.

During the second quarter, EMS revenues increased $5 billion or 8% sequentially and increased $17 billion or 35% year-over-year. Revenues were somewhat ahead of where we expected, primarily as a result of higher-than-expected SiP and traditional EMS business. Overall, profitability for our EMS business improved, with gross margin increasing 1.2 percentage points to 10% and reaching our 4% operating margin target. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. The reduction in the communications related segment is primarily due to seasonality.

On Page 14, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents and current financial assets of $79 billion. Our total interest-bearing debt was $218.3 billion. Total unused credit lines amounted to $312.4 billion. Our EBITDA for the quarter was $35.2 billion. Net debt to equity was 50%.

On Page 15, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the second quarter in U.S. dollars totaled $515 million, of which $290 million were used in packaging operations, $161 million in test operations, $53 million in EMS operations and $11 million in interconnect material operations and others. We continue to provide our EBITDA in U.S. dollars here as a reference. We believe that the company’s EBITDA relative to our equipment CapEx, serves as a key financial performance metric for the company. For the quarter, EBITDA was $1.2 billion.

Joseph Tung will now present our outlook. Joseph?

Joseph Tung

Thank you, Ken. Before I give the specifics, let me reiterate that despite the macro challenges, including the pandemic and related lockdowns, Ukraine war, supply chain disruptions, worldwide inflation, escalating energy costs and segment inventory corrections, we were still able to significantly outgrow our second quarter estimates and reach close to our anticipated peak revenue for the year.

As a result, we will see a more linearized revenue outlook and continue to see a higher operating cost structure for the remainder of the year. Having said that, our guidance for the third quarter is as follows: for our ATM business in U.S. dollar terms, our ATM third quarter 2022 business levels should be slightly above second quarter 2022 levels. On a pro forma basis, our ATM third quarter 2022 gross margin, should be similar with our fourth quarter 2021 gross margin. And as a reference, our fourth quarter 2021 gross margin was 28.5%.

Now for our EMS business, in U.S. dollar terms, our EMS third quarter 2022 business sequential growth, should be similar with the same period last year. And again, as a reference, the third quarter last year’s growth rate was up 25%. Our EMS third quarter 2022 operating margin should be similar to second quarter 2022 levels. In our second quarter 2022, operating margin was 4.0%.

Now with that we will open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Mr. Randy Abrams. Randy?

Randy Abrams

Okay. Yes, thank you. Good results. I wanted to ask the first question, just a little more on the guidance. For the third quarter, it’s IC ATM high base. Second quarter did well. But the factor for the small sequential growth, is that – how much is capacity limited that you’re tight on capacity, and how much is it – you’re seeing any moderation or slowdown in certain applications?

Joseph Tung

Our utilization – our loading remains to be high. And we do see this year, the revenue on a quarter-to-quarter basis seems to be more linearized; because in the second quarter, we have better-than-expected revenue stream coming in. And although there are some inventory corrections in different sectors, but there are also other sectors that remain very, very strong. So overall, I think it’s not a capacity constraint kind of situation, but overall, the market movement that is causing the year to be a more linearized revenue stream.

Randy Abrams

Okay. In the prepared remarks, you talked early about – we will get back to return to the first quarter, where we traditionally have that seasonality, I think like high single, low teens decline. If you could give an initial view between that fourth quarter, some years, I think in the middle of the year, you’ve had enough confidence to say, IC ATM would grow in fourth quarter, I guess, for this type of year, do you still see linear – like from the high base, a little bit of growth, or would we start some inventory correction in the fourth quarter?

Joseph Tung

I think for the second half of the year – again, the revenue seems to be more linearized, and in the fourth quarter, we’re expecting, at this point, a similar quarter to third quarter, although there is still some opportunity for further growth on a sequential basis.

Randy Abrams

Okay. And one further – two follow-ups on growth, for the applications, I mean we’ve had a lot of commentary about almost two cycles, but the consumer cycle smartphone TV, PC, that that’s the softness. I’m curious where you’re talking about inventory correction, is it those areas that you’re seeing it? And then the other commentary on demand outlook, it looks like EMS after a strong second quarter is also quite strong. Is that a function of any shift like earlier builds or additional projects this year, or other factors driving the good strength in EMS?

Tien Wu

Well, let me comment on the sector inventory controls. And I think there is enough conversation out there to talk about the consumer sector inventory control, I will not further elaborate. So we’re seeing some sectors still very constrained. And then the – in the data centers, in the networking, high-performance computing and, of course, automotive. So we will continue to see this kind of a sector fluctuation rotation. In terms of the EMS strengths, the – in addition to our normal SiP projects, I think this year, we do have a good amount of automotive and the other different type of EMS projects. So the answer is yes. We do have some new wins.

Operator

Our next question is from Mr. Gokul Hariharan.

Gokul Hariharan

Hi, can you hear me?

Operator

Yes.

Gokul Hariharan

Thank you. So my first question, could we talk a little bit about what are you seeing for our utilizations by the three big capacity categories, testing, wirebonding and for advanced packaging? Are we starting to see any slack in any of these areas right now?

Tien Wu

I think the overall packaging utilization remains the same as first quarter, at about 80% to 85%. And the same pattern will be going into third quarter as well. And also for testing, the overall utilization still remains to be above 80%, and that will also go into third quarter as well. In terms of packaging, I think the overall loading is higher in the more advanced packaging, whereas the wire bonding, it’s still growing and it’s still quite full, but comparing to the advanced packaging, I think advanced packaging seems to have a stronger momentum.

Gokul Hariharan

Got it. Thank you very much. So for wirebonding, I think the industry overall and ASE also saw some increase in prices, given the tight capacity last year?

Tien Wu

Are you talking about the…

Gokul Hariharan

Given some slack, customers going – yes, exactly.

Tien Wu

Well, we’re seeing a stable pricing environment. In other words, between the – if you’re asking if there are any structural negotiation on the price down, the answer is no. We do see a stable pricing environment across all of the service category. I think we expect that between the Q3 as well as Q4. And I think this scenario might well last into 2023.

Gokul Hariharan

Thanks. Thanks very much, again. Maybe one more question on that. And I think you have long-term loading agreements with a lot of customers signed last year, as well as early this year. Are any customers starting to discuss any changes to these, I mean, similar to what we are heading in the foundry side, where there are some LTAs being renegotiated?

Tien Wu

I think every company is signing LTA in all different forms. When we sign the LTA, typically is with the NPI loading agreement, as well as the pricing stability for specific lines. We don’t sign the LTA for some lines, but we do sign LTA for – like 100% LTA for some lines. And right now, it’s mixed. To answer your question, the short answer is no, we don’t have any customer coming back to renegotiate the LTA.

Operator

Next question is from Mr. Szeho Ng of China Renaissance. Szeho?

Szeho Ng

Hi. Sorry, yes. I unmute myself. Actually, two questions from my side. First one regarding the dividend policy, yes, because the company paid a pretty high dividend this year. So I just want to know the company’s dividend policy or the philosophy going forward?

Joseph Tung

I think we will – I think the – in terms of the dividend, amount is higher than previous years, it’s because – but in terms of the payout ratio, it’s pretty much the same. And I anticipate that we will continue this payout percentage going forward. Although part of the profit that we generated through the sale of the sites, some of that earnings, we will maybe have a few – maybe some percentage of that profit will be given out in the following years.

Szeho Ng

Okay. Alright. Yes. And roughly speaking, what percentage of our capacity right now is under LTA agreement?

Tien Wu

About 70%.

Szeho Ng

Alright. Okay. Last one, yes, on the CapEx front, I think we are sticking to the $2 billion figure for this year, right? But how does the percentage breakdown amongst different divisions?

Tien Wu

CapEx percentage breakdown.

Joseph Tung

Okay. I think overall, for this year, we’re looking at the allocation between assembly test material and EMS. I think in terms of packaging, the overall percentage will be about 54%, down from 65% last year, and we’re increasing our test CapEx from last year’s 25% to this year’s 30%. Material, we’re also increasing our CapEx and the percentage will rise from 2% to 4% this year. And also for EMS, raising that from 9% to 12% this year.

Operator

We have a question from Mr. Bruce Lu of Goldman Sachs.

Bruce Lu

Hello, can you hear me?

Operator

Yes.

Bruce Lu

Okay. Thank you for taking my question. Congrats on a great result. I’m very impressed in terms of your gross margin for both EMS and ATM. I know part of that is due to the currency, but still the gross margin improved a lot. However, you are guiding for a slightly decline in the third quarter for the ATM gross margin, with the currency is still very weak and the capacity retention rate remain at the same level, can you give us a little bit more color on that?

Tien Wu

That’s more, there are two factors involved. One is for some of the product mix, with some of the higher material contents – shipments would be higher. And the other main reason is, really the rising utility costs, which will give us a over 50 basis points increase in terms of our costs.

Bruce Lu

I see. But can I assume that, if the retention rate remained at the current level, the 28% and above will be a new norm for ATM profitability moving forward?

Joseph Tung

I think, Tien mentioned – discussed about our structural improvement in terms of our margin. I think if you go back to past 10 years, I think the margin range is from – a gross profit margin range from 20% to mid-20%. I think with the scale enlargement with the technology improvement, also the – a lot of the efficiency improvement. I think structurally, we are – we can anticipate a move up of that range from mid-20s to 30%.

Bruce Lu

So we can expect somehow 30% gross margin next year?

Joseph Tung

That’s the current growth. And I’d also bear in mind that, with the raised range, the new range is including the PPA, which has about a 1% impact on our overall margin.

Bruce Lu

Obviously.

Joseph Tung

Yes. So apple-to-apples, there is another 1% increase in our structural margin there.

Bruce Lu

Okay, okay. My next question is regarding to the advanced packaging business. I mean, [indiscernible] if TSMC is willing to outsource some of the advanced packaging business to ASE. Do we have any threshold in terms of profitability or ROE, whether ASE would take that kind of business or not? Is that even in company’s growth strategy?

Ken Hsiang

I mean the – it certainly is in part of the growth strategy, but we will not comment any detail on this one.

Bruce Lu

Just a little bit color, Ken.

Ken Hsiang

No comment.

Bruce Lu

Okay. Understand. I will go back in the queue. Thank you.

Operator

Our next question is from Mr. Rick Hsu of Daiwa Securities. Rick?

Rick Hsu

This is Rick here. I guess…

Operator

Hello, Rick.

Rick Hsu

Yes.

Operator

Please restate your question again.

Rick Hsu

Can you hear me?

Operator

Yes.

Rick Hsu

Okay. Right. So I got only one question, for your outlook for the year 2023. I think the tax cycle, how much the cycle would drop, nobody knows, but some of the industry leaders at TSMC and UMC, they still expect a growth year for 2023, regardless of the cyclical correction. So I would like to have your view on your revenue growth for next year. Can you give us a little bit color?

Tien Wu

As I pointed out, it’s really too early to talk about 2023, but if you really want to ask and I can offer you a most likely scenario, right? I believe next year, is going to be a challenging year with a lot of uncertainty, a headwind. So the overall industry, it won’t perform as well as the previous few years. However, in that scenario, you will have some companies, some sectors doing better than the others. And certainly, I believe the company you have just mentioned, as well as ASE, we’re striving to perform in the upper threshold of the average. In other words, it is possible even though the industry is flattish, slightly up or slightly down. But some company will continue to outperform the others. And I think next year will be a perfect scenario to see the differential of technology, customer traction, as well as the economy of scale. And I believe that’s what some of the companies we’re referring to. In terms of specifically, its upturn downturn, where the recession is going to hit us, and that really is very, very difficult. I don’t think anyone knows. However, I do believe if there is a downturn, it would be a good opportunity for us to demonstrate that differential. Thank you.

Rick Hsu

Alright. Thanks so much Dr. Wu. That’s very clear.

Joseph Tung

If I may add, I think our goal – our target is continue to do 2x of the large semi growth.

Rick Hsu

Okay. That sounds pretty good. Just one quick follow-up about your guidance, I think when you say EMS Q3, I presume that EMS Q3 quarter-on-quarter growth will be around 25%, right?

Joseph Tung

Correct.

Rick Hsu

Okay. Great, thank you so much, guys.

Joseph Tung

Thank you.

Operator

And we have a question from Mr. Frank Lee of HSBC.

Frank Lee

Great. Thank you, guys. Just wanted to ask, I guess, looking at the bigger picture and you’ve talked about, I think, a consistent message, some pockets of weakness, some other areas still holding up. But I guess if we look at this as a whole, the areas of weakness such as smartphones and PCs, looks like they keep getting worse and worse over the last couple of quarters. And yet your overall outlook has been good. The overall business hasn’t been too negatively impacted. As you go into next year, I know there is a lot of uncertainties, are there any specific end market applications that would be a concern? Because it seems like no matter how bad consumer gets – so far, it’s not impacting you guys in the overall industry, especially some of the other foundries. But are any particular areas of concern that would be a bigger problem from a demand point of view that you can share?

Tien Wu

It’s very sensitive to talk about which sector, because the – we will be automatically linked to the company and the customer that we are supporting. But if I want to talk about bigger picture in general terms and then the – from ASE’s perspective, we are preparing for the following scenario. I call this one of the worst-case scenario is, people continue to order, assuming that they are either gaining share or nothing is going to change. And the consumer most likely will go back to the traditional purchase pattern. Now, that will not affect the Q3 and Q4 loadings because we have to prepare for Thanksgiving, Christmas and maybe the Chinese New Year. Once we step up, if the end market demand really shows strong signs of weakness, then there will be a major correction. Chances are in very late December, most likely will be in the January, February timeframe. This is why the general assumption right now of all the supply chain guys that I talk to, are assuming we will go back to the normal seasonality in Q1 of 2023, okay. So, this is really what we paint out as the worst-case scenario. But I really would like to give all of you some operational highlights. Now, if you recall, all of the supply chain guys, including ASE, we have not had a break for almost 2.5 years. And you also understand that we are short of equipment, we sort of manpower. Everybody is calling everybody throughout the whole supply chain, everybody, just the same parts. So, for any operation under such an intensive stretch, it’s like running a marathon 3x. They will be fatigue. So, when I talk to all the supply chain, including my guys, everybody is kind of desperate for a break for seasonality. The seasonality, people can take the necessary attrition, equipment upgrade, software upgrade, maintenance and many customers are pushing us to establish additional automation line. But you understand that, to do automation line, it takes a lot of resource, a lot of qualification and then the [indiscernible] after 2 years, the customers start traveling, the NPI becomes very fascinating. So, we have a lot of very interesting multi-die co-package, all kinds of applications. All of the NPI will occupy critical resources for qualification, and redesign of material process, equipment, software, everything. We have not had the time to do the necessary thing to prepare for the next 5 years of growth. This is the general scenario I am painting to you. I don’t think anyone is of exception. So, everybody is concerned about seasonality. Seasonality is – this is like a four seasons, it’s like night and day. This is something we grew up with, and this is something health-wise, biological wise, it makes sense business-wise. So, we really welcome seasonality. We should not really look at after 2 years of COVID, we should assume the abnormal to be normal. So, I really would like to start laying out, yes, we will go back to seasonality. We will try to well utilize the precious seasonality to do the right thing, like what we have always been trained to do. By doing this, we are looking at structural improvement in our baseline, our capability, our efficiency, better NPI, better engagement. And then industry is really poised for the long horizon. If you talk to anybody today, people will tell you, well next 5 years, 10 years is fantastic. But 2023, we don’t know. So, just take it, 2023, we don’t know. But future 5 years is fantastic. Now if that is the scenario, what would you do, as an operator, so I believe if we put things really in the big picture in perspective, you will see that this is actually a necessary transition, back to the normalcy. Whatever it is, for the long haul, it will be better for the industry. That’s my honest opinion.

Frank Lee

I really appreciate that Dr. Wu, that’s a great answer. Can I just ask a follow-up then, just on what you have painted as a worst case where – or I guess maybe the base case is to what you said, if things start to normalize by beginning of next year or at least it’s a two-quarter or three-quarter slowdown, because that’s been the past correction cycles we have seen in the industry. But we have also seen kind of an unprecedented 2-year upturn, and inventory levels, if you collectively look at semiconductors, is probably at a multiyear high, which we have never seen so high before. Do you think it’s normal to assume that it will be just a normal two, three – I know it’s a very difficult question, but given where we are coming off of such a high base, could it be a longer period, or is it – or are we too optimist to think that it’s a normal two quarters, three quarters, in light of the fact that everything is extremely elevated levels?

Tien Wu

Joseph and Ken are signaling, asking me not to say it. But I think I want to say it, because if you look at the – I mean how bad the downturn is going to be, please consider the following fact. I think the – if you look at the PC number, whether commercial or the personal – the consumer or the commercial, the baseline is moving up, and that’s a fact. And if you look at the wireless, I really do not want to talk about any customer. What we have seen is the wireless inventory control started in January of this year. I have never seen people jump in so early, because the – yes, we have our agility, we should. But our customers are more shrewd. You don’t know, like we used to be like 30%, 40% overbooked, sometimes 50% overbooked. In the last few quarters, things have changed dramatically starting January. So, the inventory control has been going on for two quarters already. So, the question now is the – I mean Q3 additional inventory control by some sectors, Q4 another control, and you believe this will last all the way to the second half of next year. Again, nobody knows. I only want to offer perspective. I believe the baseline, because of the COVID, people travel differently. People use Zoom differently. People use PC differently. The baseline has absolutely moved up, I am convinced. The question now is, with all of the baseline moving up, as was inventory control, as was everything that’s going on, right now, we just don’t know what it is. But if you really ask my honest opinion, I think next year will be a mild adjustment, and if you look at even the U.S. fab, I mean yesterday, the market moved up and then they raised 3 basis point and then we hear everything. But again, I don’t have a crystal ball and I just want to share with you what our internal conversation has been. People are sharing extreme thoughts, that next year is going to be a holocaust, terrible. But on the other hand, look at the signs, look at all the NPIs and look at all of the bookings, look at all of the substrate, look at all of the automotive guys, what a long waiting list. I mean I talk to a lot of customers, the way to aggressively booking capacity. It really makes you think why. But again, by next January, we will see better. And we can compare it to my notes six months ahead of time. So, we will see. Okay. Joseph asked me absolutely not to say anymore. I will stop.

Operator

Now we have a question from Mr. Bruce Lu of Goldman Sachs.

Bruce Lu

Hey. I wanted to ask one more question about the multiyear growth, which is 2x of semiconductor growth. Can you break it down in terms of like, what is the dollar content growth? What is the shipment growth and what is the share gain in a way that we can better understand it, or can you provide something like TSMC has been saying that their dollar content will increase by mid to high-single digit in the next few years. Can we have that kind of quantitative guidance for your growth for the next few years?

Tien Wu

My apologies, we don’t have this kind of detailed dollar breakdown in terms of the end product customers. Because our customers are too diversified, and it’s hard for us to track. But in terms of the – I mean the organic growth is easy, and we also have the technology, which means that for the same unit, we have to start adding more value because of the complexity. On top of that, the share gain actually is not difficult to comprehend. If you look at the supply chain for the last 2 years, and you really ask the question, we are – where were the bottlenecks. You will understand that OSAT is hardly the bottlenecks, and we have other bottlenecks. Therefore, to have a more secure supply chain, a lot of the end customer, including automotives are demanding to have second source. And the second source being, moving to the foundry and OSAT. So, in terms of market share gain, we know we have market share gain. And that is giving us more confidence in terms of how do we have the stability moving forward, even though you have a sector rotation up and down.

Bruce Lu

But can you say that the market share gain is more important than your additional value add to your product, i.e., the dollar growth, which one is the more important factors?

Joseph Tung

So, I think the safe answer is all important, because I am really…

Bruce Lu

I am sorry.

Tien Wu

Yes. I don’t want to misuse the information. I don’t want to mislead you and – but…

Joseph Tung

No, I think it’s very, very critical that, we have a very, very unique scalability. When the time is uncertain, I think all the customers will see for it, security and also fly for quality. I think that’s what we have. I mean the whole industry, we will continue to see unit growth. We will continue to see IC content growth. We will see – continue to see increasing outsourcing, even like automotive in the past, very little percentage of the auto parts are being outsourced. And now because of the customers’ request, the more outsourcing in the automotive is happening as well. So, we are seeing a lot of growth in the IoT. We are seeing HPC. We are seeing a lot of different categories that are still growing strong. I think the overall unit continues to make – lay a very strong support for our business, and given our leading position in the industry, market share gain is a very natural thing for us.

Tien Wu

And just to give some additional color to the last 2 years, because as the Head of Operation, you have to understand that in the last 2 years, there is a lot of like commodity type of number looking for volume, which is very critical. But in the last 2 years, there are very difficult parts like in automotive, that not everyone can do it. And then ASE was constrained by equipment delivery, and we are also constrained by manpower, because of COVID. But if you look at the number of parts that we shipped, and also if you really look into the content, there has been – we made a lot of friends, let’s put it this way. In an extreme difficult condition, we were able to just put it together and then really start shipping in record time, of a highly complex volume parts, using some – using the fully automated line. And that gained us a lot of friendships. And then the – which is rewarded by additional NPIs. So, when we look at the whole scenario, yes, we do understand the install capacity. We do understand our competitor. But with everything considered, and I think the – especially in 2023, I think it will be interesting, just to see all of the friendship, how much that is worth.

Bruce Lu

Alright. Can I put – can I ask you in a different way that, for the last 2 years, obviously, you are growing 2x then, semi growth. So, for the last 2 years, at least you have some consultative number, that how much is coming from the share gap, how much was coming from the higher value add you provide to your customers, at least for the last 2 years?

Tien Wu

Well I don’t know the number. I will just tell you 50-50.

Bruce Lu

Okay. Fair enough. Thank you.

Operator

We have a question from Mr. Randy Abrams of Credit Suisse. Randy?

Randy Abrams

Okay. Thanks for the follow-up. I wanted to ask on the capacity expansion. If you could clarify the announcements you have made in SPIL, in terms of like timing and how much you are bringing on? And second part to that, we have had all these chips at Europe, now U.S. may go ahead, India. Is anything shifting in thinking, because it looks like you rely on deck for expansion in Taiwan?

Tien Wu

I will answer the – I am not sure you are talking about the U.S., the upper house just passed the CHIPS Act, is what you are talking about fabs?

Randy Abrams

That’s not through all the way. But yes, the upper – the Senate passed, so there is quite a bit of money in there, including some packaging.

Joseph Tung

Right. I mean obviously, our customers and our governments [indiscernible], are all pushing us to do some investment. And our answer is the following. We will like to make that investment in different geography, just to satisfy the supply chain security and everything. But we need to understand precisely what are the requirements. So, until today, we have not been able to narrow down to the precise investment that we need to make in order to make the supply chain security better. Now, the support, the funding is always good to have. However, we will not make any investment because of the funding or the subsidies. But we will make investment if we understand precisely the requirement in detail, such that we can perform to that expectation. So, the short answer is, short-term, no. We are not engaging in any kind of capacity investment in any geography outside of our current jurisdiction. In terms of the – I am sorry, in terms of the SPIL investment, I think SPIL is building the additional buildings in anticipation for the next few years of our run-up. And then the – I think ASE is also acquiring land and building facility, because the facility and the building are on a different tempo. They are on a different time scale, comparing to the business up and down. So, we also want to make sure the infrastructure is ready, and then we will deal with the business, the equipment and the qualification accordingly.

Randy Abrams

Okay. Makes sense. And if you could talk to this, you have mentioned a few times the multi-die, the co-packaged. In the past, there was a lot of focus, which was a fair amount of EMS. Could you go a little more into the application of the products driving this, and how big it is for the overall – if it’s more IC ATM, how big it is?

Tien Wu

Okay. When we talk about the multi-die co-pack, my apology for all of these terms, because it is different, because we always talk about the multichip module MCM. The MCM tends to be multiple chip, using the similar method to be attached to one module. When I talk about the multi-die co-package that means it could be multiple package. The multiple die or multiple package, and let’s put it together. So, when you think about this, then your question is relevant. In this kind of multi-die co-package, should that be going to the ATM business, or should I go to the USI business. The question really is – the answer is yes, both. It really depends on the density, the complexity and also the feature size. And it also depends on the logistics. So, the ATM can do it, the very, very fine pitch, a complicated ATM will do it. And a little bit – whatever the EMS can handle, the EMS will handle. But in terms of application, I mean we see this in all applications, especially when you talk about automotive, the automotive used to be – I mean if you look at the Tesla, for example, right, their design always will be compared to the old automotive design. The old automotive design was like one microcontroller will control the radio, and then the CD and the windows. One chip will do one thing – one chip does one thing. But if you look at how Tesla design things, one chip does 20 things. So, in order to do this, if you really have to start thinking about the concept of multi-die co-package and managing by the firmware, software and everything around it. In the future, like not only all of the combustion cars are going this way, the electrical vehicles are absolutely going this way. So, that’s just one example. So, when you think about multi-die co-package, and I think you bundle the power management chip, with ASE [ph] controller memory, they are necessarily the same. I mean wireless chip, then you have linear analog, and digital. They are not just die, they can be die, they can be die on the package. And then they somehow bundle all of the pack together. So, things become a little bit more creative now. I think it covers the – all of the applications, and this is something that we believe will offer us more value and room for imagination in the future.

Randy Abrams

Okay. Great. Thanks a lot Tien.

Operator

There is no more questions.

Tien Wu

Thank you guys.

Ken Hsiang

Okay. If there is no more questions, we will end the – we will end the call today. Thank you very much.

Tien Wu

Thank you very much.

Ken Hsiang

See you next quarter.

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