ASE Technology Holding Co., Ltd. (NYSE:ASX) Q4 2024 Results Conference Call February 13, 2025 2:00 AM ET

Company Participants

Ken Hsiang - Head, Investor Relations
Tien Wu - COO
Joseph Tung - Chief Financial Officer

Conference Call Participants

Laura Chen - Citigroup
Charlie Chan - Morgan Stanley
Gokul Hariharan - JPMorgan
Brad Lin - BofA
Jason Tsang - CL Securities

Ken Hsiang

Hello, I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2024 earnings release. Thank you for attending our earnings release 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, dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financial information is 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.

Kenneth Hsiang

Hello, I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2024 earnings release. Thank you for attending our earnings release 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, dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated.

As a Taiwan-based company, our financial information is 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. I am joined today by Dr.

. Tien Wu, our COO, and Joseph Tung, our CFO. For today's presentation, Dr. . Wu will be giving the company's key message. I will be going over the financial results, and then Joseph will then go through our company's guidance. Both Tien and Joseph will then be available to take your questions during the Q&A session that follows.

During the Q&A session, I will be moderating, receiving and as needed, clarifying and condensing each interaction down to a single question. With that, let me hand the presentation over to Dr. . Tien Wu. Tien.

Thank you.

Tien Wu

First of all, a bit late Happy Chinese New Year to all of you. Let me give you the recap for 2024. Our consolidated revenues grew 2% year-on-year in 2024, with ATM revenues up 3% year-on-year.

We have seen a very strong demand for leading-edge packaging and testing while the mainstream segment was a mixed bag. We saw a soft recovery in some segments and some other segments due to inventory correction as well as end market demand were lagging behind the general market. Leading-edge advanced packaging and testing revenues were over USD 600 million, accounting for around 6% of ATM revenues, up from USD 250 million in 2023.

Our testing business grew 9% year-on-year in 2024 and in particular, grew 18% year-on-year in Q4 of '24. We do expect the testing revenue will have accelerated momentum into 2025. Our increased turnkey as well as our expanding leading-edge test.

Our machinery CapEx was USD 1.9% billion, up by USD 1 billion versus 2023, mainly driven by advanced packaging and testing. Next, let me give you 2025 outlook. Our ATM business to outgrow the logic semiconductor market, driven by strong momentum of our leading-edge advanced packaging and testing business. Leading-edge advanced packaging and testing revenues to increase by USD 1 billion versus 2024.

That will account for about 10% of our growth in 2025. While the general segment will be better than 2024, we expect them to grow mid- to high single digit year-on-year. On the investment in R&D, human capital, advanced packaging and testing capacity and also factory automation and all of the smart factory buildings, we will continue to accelerate in preparation for the AI-led super cycle which we believe have started in 2024, and we will see the momentum in 2025, 2026 and beyond.

Lastly, let me give you a market landscape and ASE's positioning. We believe the total semiconductor revenues are likely to reach $1 trillion in the next decade, driven by AI, robotics, electrification of all systems, also the energy and the IoT-related products. ASE is well positioned to benefit from the strong demand of leading-edge advanced technology as well as the growing volume of peripheral chips on accelerating edge AI adoption.

A comprehensive technology toolbox, 3D, 2.5%D fan-out, large panel SiP, copackage optics, power, automation, scale advantages as well as the geographic diversification of ASE make ASE the preferred partner for customers. ASE's strong financial performance and flexibility and agility in handling business model evolutions, further widen the moat against competitors. Let me pass the floor back to Ken.

Kenneth Hsiang

Dr. . Wu. I will now go over the financial results.

The fourth quarter ATM and EMS businesses came in slightly better than originally anticipated. Our ATM business' fourth quarter outperformance was driven primarily by some communications-related business. Strength was driven by our test business with a growing 11% quarterly.

For the full year, our ATM business grew by 3%. Our leading-edge advanced packaging business accounted for most of this growth. And though testing finished strong, we believe our test growth will be even stronger during 2025.

Our overall equipment utilization was in the mid- to high 60s. For our EMS business, despite a muted fourth quarter outlook due to earlier seasonality, our SiP product flow came in slightly ahead of our expectations during the fourth quarter. For the full year, our EMS business was flattish.

We believe that this is somewhat in line with the electronics industry as a whole. It should be noted that an earlier seasonality somewhat distorts our annual comparisons for our EMS business and to a lesser extent, also at holding company level. Please turn to Page 6 where you will find our fourth quarter consolidated results.

For the fourth quarter, we recorded fully diluted EPS of $2.07% and basic EPS of $2.15%. Consolidated net revenues increased 1% sequentially and year-over-year. We had a gross profit of $26.6% billion with a gross margin of 16.4%.

Our gross margin declined by 0.1% percentage points sequentially and improved by 0.4% percentage points year-over-year. The sequential decline in margin is principally due to lower profitability from our EMS business. Our operating expenses increased by $0.4% billion sequentially and by $1.5% billion annually to $15.4% billion.

The sequential increase in our operating expenses are primarily due to leading-edge advanced packaging and testing services ramp-up and timing of equity compensation-related expenses from our ATM business. The year-over-year increase in operating expenses is primarily attributable to continued R&D staff up and other labor-related costs. Our operating expense percentage increased sequentially by 0.2% percentage points and annually by 0.8% percentage points year-over-year to 9.5%.

Our operating expense probably requires a bit of explanation here. Extensive preparation and groundwork for our leading-edge advanced packaging-related businesses started in late 2023 and ramped during 2024. We have been aggressively hiring and training new employees throughout 2024.

We also needed to ramp our new product introduction efforts, including perfecting tooling and process flows that eventually needed to be in place. Finally, semiconductor manufacturing has become very visible throughout the world. The skill sets necessary to prepare, manage and run manufacturing also are in high demand.

Retention of our employees has become increasingly important, and all of this has been done in an inflationary environment. As such, these expenditures have created a ramp in our operating expenses that started in 2024. We see our operating expenses continuing to rise on an absolute basis but will level off in the middle part of 2025.

Further, as revenues related to these efforts grow, our operating expense percentage should start to decline during the back half of 2025. Operating profit was TWD 11.2% billion, down $0.3% billion sequentially and TWD 0.6% billion year-over-year. Operating margin declined 0.3% percentage points sequentially and declined 0.5% percentage points year-over-year.

We believe this margin decline was primarily driven by higher compensation and ramp-up expenses related to leading-edge advanced packaging and geographical scale up across our ATM and EMS businesses. During the quarter, we had a net nonoperating gain of $0.2% billion. Our nonoperating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other nonoperating income, offset in part by net interest expense of $1.3% billion.

Tax expense for the quarter was $1.9% billion. Our effective tax rate for the quarter was 16%. The effective tax rate during the quarter was lower than expected, primarily as a result of higher tax investment credit recognition.

Net income for the quarter was TWD 9.3% billion, representing a decrease of TWD 0.4% billion sequentially and TWD 0.1% billion year-over-year, the NT dollar appreciated 0.5% against the U.S. dollar sequentially while depreciating 0.75% annually. From a sequential perspective, we estimate the NT dollar appreciation had a 0.1% percentage point negative impact to the company's gross and operating margins. While from an annual perspective, we estimate the NT dollar depreciation had a 0.2% percentage point positive impact to the company's gross and operating margins.

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 TWD 27.3% billion with a 16.8% gross margin. Operating profit would be TWD 12.1% billion with an operating margin of 7.5%. Net profit would be TWD 10.2% billion with a net margin of 6.3%. Basic EPS, excluding PPA expenses, would be TWD 2.36%.

Please refer to Page 7 and here, you will find the 2024 consolidated full year results versus 2023 full year results. Fully diluted EPS for the year was TWD 7.23% while basic EPS was TWD 7.52%. For 2024, consolidated net revenues improved 2% as compared with 2023.

ATM improved by 3% while EMS business improved 2% annually. Gross profit for the year was TWD 96.9% billion, improving TWD 5.2% billion year-over-year or by 6%. In 2024, our consolidated gross margin improved 0.5% percentage points to 16.3%, principally as a result of foreign currency fluctuation and improved operating leverage from our ATM business, offset in part by higher utility costs.

Operating expenses increased TWD 6.4% billion for the year and came in at TWD 57.8% billion. Higher operating expenses, as discussed earlier, are the result of the ramp-up of leading-edge advanced packaging services and higher labor-related costs. Our overall operating expense percentage also increased to 9.7% as a result of these increases.

Operating profit for the year was $39.2% billion for the year, declining $1.1% billion. Operating margin for the year was 6.6%, representing a decline of 0.3% percentage points from 2023. We recorded a net nonoperating gain of TWD 2.5% billion for the year, including a net interest expense of TWD 4.9% billion versus TWD 4.7% billion in 2023.

And though interest rates may appear to be moderating, we believe that our interest expenses will most likely increase or stay near current levels heading into next year, given additional borrowing necessary to fund our expansion. Most of the nonoperating gains were associated with our foreign currency hedging activities. Total tax expense was TWD 7.8% billion.

The effective tax rate for the year was 18.6%. Current year income tax expense came in lower as a result of recognized deferred tax assets from increased government incentive programs on R&D. For the coming year, we believe our ongoing effective tax rate will be lowered by increased government incentive programs and offset in part by recent global minimum tax applications. We expect that the effective tax rate for the coming year will be slightly below 20%.

Net income for the year increased by 2% to TWD 32.5% billion. On a full year basis, we estimate that the depreciating NT dollar had a positive 0.8% percentage point impact to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 16.9%. Our operating margin would be 7.3%. Our basic EPS would be $8.54%.

On Page 8 is a graphical presentation of our consolidated quarterly financial performance. On a year-over-year basis, gross margins have been gradually improving. On the operating margin front, as was stated earlier, operating expenses increased in preparation of leading-edge advanced packaging capacity labor staff up, offshore site expansion costs from our EMS businesses and equity compensation.

On Page 9 is our ATM P&L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the fourth quarter of 2024, revenues for our ATM business were TWD 88.3% billion, up TWD 2.6% billion from the previous quarter and up TWD 6.4% billion from the same period last year.

This represents a 3% increase sequentially and a 8% increase annually. Gross profit for our ATM business was TWD 20.6% billion, up TWD 0.8% billion sequentially and up TWD 1.4% billion year-over-year. Gross profit margin for our ATM business was 23.3% up 0.2% percentage points sequentially and down 0.1% percentage points year-over-year.

The sequential margin improvement was primarily related to higher test and leading-edge advanced packaging business offset in part by the impact of product mix shift. The annual margin decline is primarily the result of higher utility costs and product mix shifts offset in part by favorable foreign exchange. During the fourth quarter, operating expenses were TWD 11.2% billion, up TWD 0.6% billion sequentially and TWD 1.2% billion year-over-year.

The sequential increase in operating expenses was primarily driven by scale up of compensation costs, including headcount and timing of certain equity compensation. The annual operating expense increase was driven primarily by the continued scale up of R&D labor and timing of equity compensation. Our operating expense percentage for the quarter was 12.6%, increasing 0.3% percentage points sequentially and up 0.4% percentage points annually.

The sequential and annual increases were primarily due to labor ramp-ups preparing for higher leading-edge advanced packaging revenues. During the fourth quarter, operating profit was TWD 9.4% billion, representing an increase of TWD 0.2% billion, both quarterly and annually. Operating margin was 10.7%, flat sequentially and down 0.5% percentage points year-over-year.

For foreign exchange, we estimate that the NT to U.S. dollar exchange rate had a negative 0.2% percentage point impact on our ATM sequential margins and a positive 0.4% percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24% and operating profit margin would be 11.6%. On Page 10, we have our ATM full year P&L.

2024 revenues for our ATM business improved by 3%, with our packaging and test businesses up 2% and 9%, respectively. Gross profit for the year improved 6% to TWD 73.2% billion. Gross margin was 22.5%, up 0.7% percentage points.

Margin improvement was the result of higher factory efficiency and a favorable foreign exchange environment offset in part by higher utility costs and factory supply consumption due to shifting product mix. Our operating expense percentage increased 0.9% percentage points to 12.6%. Operating profit nudged up TWD 0.2% billion to TWD 32 billion while operating margin declined 0.3% percentage points to 9.8%.

For foreign exchange, on a full year basis, we estimate that the depreciating NT dollar had a 1.4% percentage point impact on margins. Without the impact of PPA expenses, gross profit margin would be 23.5% and operating margin would be 11.1%. On Page 11, you'll find a graphical representation of our ATM P&L.

On Page 12 is our ATM revenue by 3C market segments, you can see here the relative strength of our Communications segment during the fourth quarter. As previously mentioned, our leading-edge advanced services are currently spread across our computing and communications segments. On Page 13, you will find our ATM revenue by service type.

The most prominent thing here is that our wire bond services saw gradual declines over the last 8 quarters. Traditional wire bond products are in everyday electronics like WiFi, televisions and household appliances. Frequently, they are not the main chip, but mainly serve supporting roles as peripherals like a screen or power controller.

This chart shows a somewhat simple concept, more basic products like many of those upgraded during COVID, having a longer replacement cycle. We would expect to see a pickup in wire bond when a general recovery starts to happen. A corollary, you can see from this chart, is that there's strength in our advanced packaging and test businesses.

We believe our efforts involved with growing our test business are continuing to pay off. Our test services have also managed to outgrow the corporate average going from 16% to 18% of ATM. Our test business grew by 11% quarterly and 18% annually.

As Dr. . Wu mentioned earlier, we see our test business accelerating during 2025. On Page 14, you can see the fourth quarter results of our EMS business.

During the quarter, EMS revenues were TWD 74.9% billion, declining TWD 0.5% billion or 1% sequentially and TWD 4.3% billion or 5% year-over-year. The sequential and annual revenue declines are primarily the result of accelerated seasonality for the year. Sequentially, our EMS business' gross margin declined 0.7% percentage points to 8.3%.

This change was principally the result of product mix and lowering operating leverage. Operating expenses within our EMS business declined TWD 0.1% billion sequentially and while increasing TWD 0.3% billion annually. The sequential expense decrease was primarily attributable to lower compensation expenses while the annual increase is related to geographical expansion and acquisitions.

Operating margin for the fourth quarter was 2.7%, declining 0.6% percentage points sequentially and declining 0.8% percentage points year-over-year. The sequential and annual declines were primarily due to product seasonality. Our EMS fourth quarter operating profit was $2 billion down $0.5% billion sequentially while down $0.8% billion annually.

For the full year, our EMS business experienced a somewhat muted electronics demand environment. For the full year, EMS revenues grew by 2%. Gross margin improved by 0.3% percentage points, primarily due to product mix.

Operating margin for the year was 2.9%. The decline in our EMS operating margin was primarily due to geographical expansion and acquisitions with differing cost structures. Operating profit declined by $1 billion.

On Page 15, you will find a graphical representation of our EMS revenue by application. There was a slight shift from consumer devices to communications devices. The shift here are generally due to underlying product seasonality.

On Page 16, you will find key line items from our balance sheet. At the end of the year, we had cash, cash equivalents and financial assets of $85.9% billion. Our total interest-bearing debt increased by TWD 0.7% billion to TWD 213.9% billion. Total unused credit lines amounted to TWD 375.7% billion.

Our EBITDA for the quarter was TWD 28.8% billion. Our net debt-to-equity this quarter was TWD 0.37%. On Page 17, you will find our equipment capital expenditures relative to our EBITDA.

Machinery and equipment capital expenditures for the fourth quarter and U.S. dollars totaled $640 million, of which $321 million were used in packaging operations, $290 million in testing operations, $23 million in EMS operations and $5 million in interconnect material operations and others. Machinery and equipment capital expenditures for 2024 and U.S. dollars totaled $1.876% billion, of which $957 million were used in packaging operations, $815 million in testing operations, $89 million in EMS operations and $15 million in interconnect material operations and others. In addition to spending on machinery and equipment, we also spent $655 million on land and building or for simplicity's sake facilities during the fourth quarter while spending $1.1% billion for the full year.

During the year 2024, we invested significantly in our facilities as part of our generational advancement in packaging technology. Given that our facilities spending is sporadic in nature, we have historically discussed our capital expenditures, mainly as it pertains to our machinery and equipment spending for the sake of comparability. Our facilities were also previously more generic and not specialized as our machinery and equipment.

But as factory automation, advancing technologies and tighter building specifications are now driving new facility investments, the scale of investment steps up and now also represents significant technology advancements and competitive advantages for our businesses. At this point, I would like to hand the presentation over to Joseph for further discussion on our overall company outlook. Joseph.

Joseph Tung

Thank you, Ken. Let me give you a first quarter 2025 outlook. Based on our current business outlook and exchange rate assumptions, we project overall performance for the first quarter of 2025 to be as follows.

For ATM, in NT dollar terms, our ATM first quarter 2025 revenue should decline by mid-single-digit quarter-over-quarter. And gross profit margin should decline by slightly more than 1 percentage point quarter-over-quarter. For EMS, in NT dollar terms, our EMS first quarter 2025 revenue should decline slightly year-over-year. Our EMS first quarter 2025 operating margin should decline by 30 basis points year-over-year.

Now on top of our first quarter guidance, I would also like to give you some more color of our ATM business in 2025. First on revenue. As Tien mentioned, our leading-edge packaging and testing business will continue to see very strong momentum, and we expect to add another $1 billion of revenue in this area or 10% of our revenue, ATM revenue growth.

In terms of general market, we expect our revenue to grow in line with the industry, giving us above mid-single-digit ATM revenue growth. And to support such business prospects, we will need to further expand our CapEx in both capacity and matching facilities. For machineries and equipment, we expect our 2025 CapEx to be the annualized amount of fourth quarter '24 number. And of which, 60% will be used for leading-edge to support the strong demand. Also, to support the aggressive expansion of both turnkey and pure testing businesses, over 30% of the total CapEx amount for the year will be allocated to testing.

Also, as mentioned by Ken, smart factory buildings have become an essential part of our overall leading-edge service offering. As such, we will need to double our CapEx and facilities to around USD 2 billion in multiple new sites, both in Taiwan and overseas. Secondly, I would like to talk about our profitability.

We ended 2024 with an ATM gross profit margin of around 22.5%, which is a bit short of our structural gross margin target of 24% due to a softer-than-expected recovery of general market, which consequentially -- and consequentially a sub-70% utilization rate. On top of that, our margin was also impacted by the inflationary environment with elevated costs, including electricity prices and logistics costs, et cetera. We're also experiencing higher ramp-up costs of manpower and capacity as we're in the investment and expansion mode at this point.

Entering 2025, once we progressively complete the full ramp of our leading-edge capacity, in the second half of this year, we expect ATM gross profit margin to reach the midpoint of our structural GM range with 2025 full year ATM gross margin recovering to structural GM target of 24% to 30%, and we expect to see further improvement in profitability in 2026 as we continue to expand our business. On operating expenses. The higher operating expenses is mainly due to active R&D investment, including setting up of R&D personnel, our Taiwan and overseas expansion and up-front costs of some new facilities.

We do expect in 2025 ATM operating expense ratio should decline by a notch but remain higher than previous years as we continue the investment in leading-edge technology, human capital as well as varying up-front costs related to new facilities. We believe the operating leverage of these investments will become more meaningful starting in the latter part of 2025 or into 2026. And therefore, OpEx percentage will start leveling off as we enter the full ramp-up of the newly invested capacity.

And finally, I would like to say that there are many uncertainties ahead that could very well change the overall landscape of our business prospects. But with that in mind, we will stay focused on effectively executing our plan for the year, and hopefully, we will have a very decent 2025 ahead of us. Thank you very much.

Kenneth Hsiang

[Operator Instructions].