Joseph Tung - Chief Financial Officer and Director Qian Sheng Zhang - Chairman, Chief Executive Officer, Chairman of ASE Test and Chairman-ASE Test Taiwan

Tse-Yong Yao - HSBC, Research Division David Duley Gokul Hariharan - JP Morgan Chase & Co, Research Division Szeho Ng - BNP Paribas, Research Division

Welcome to the ASE Q3 2013 Earnings Conference Call. [Operator Instructions] This conference call is being recorded. If you have any objections, you may disconnect at this time. Now, I'll turn the call over to your speaker, Joseph Tung, CFO of ASE Incorporated. Sir, your line is open. You may begin.

Thank you. Good morning and good evening, everyone. Thank you for attending ASE Q3 2013 Earnings Release Conference Call. And before we start the presentation, please turn to Page 2 where here you see 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 high degree of risk, and our actual results may differ materially from these forward-looking statements. At this point, I would like to pass this presentation to Mr. Qian Zhang to deliver this presentation. And at the end of it, I will be more than happy to answer any questions you may have.

Thank you, Joseph. Good morning and good evening. In the third quarter, we saw a fairly neutral overall electronics market with some highlights related to products within certain smart devices. Within our businesses, Q3 was characterized by a stronger-than-expected rebound within our EMS business, with our Q3 IC ATM results marginally stronger than Q2. And significantly, we successfully launched our SIP-related product services. Let's get into the detail. Page 3. On a fully consolidated basis, the company delivered EPS for the quarter of TWD 0.57, TWD 0.07 greater than the second quarter. During Q3, we saw our IC packaging and direct materials business edge up 3% and 1%, respectively. Our test business saw a decline of 3% during the quarter. Our IC ATM business increased 4% quarter-over-quarter. Our EMS business rebounded back strongly, up 38% from Q2. Consolidated net revenue was a record TWD 56.7 billion, an increase of 12% from the previous quarter. Even given a higher EMS product mix, our consolidated gross margins stayed relatively flat, declining by 0.2 percentage points. Operating margins improved slightly, increasing 0.1 percentage points to 10.7%. Nonoperating expenses were up TWD 0.3 billion to TWD 0.7 billion, up from TWD 0.4 billion. Pretax profit was TWD 5.4 billion, up 7% from TWD 5 billion in the previous quarter. Net income for the third quarter was TWD 4.4 billion, up 16% from TWD 3.8 billion the previous quarter. Net margin edged up to 7.8% from 7.5%. EBITDA increased to TWD 12.6 billion from TWD 12.2 billion. Page 4. You can see our results from a consolidated third quarter year-over-year basis here. Total net revenues increased 16%. Gross profit grew 21%, with gross profit margins increasing 0.8 percentage points. And operating profit grew 27%, with operating margins increasing 0.9 percentage points. Net income grew 28%, with net margins increasing 0.8 percentage points. When compared with Q3 of 2012, the increases in gross and operating margins were primarily driven by increased volumes and lower raw material costs. Page 5. Let's take a look at the results of our IC ATM business. Q3 for our IC ATM business took a small step forward in a tepid environment. Our IC ATM revenue increased 4% quarter-over-quarter, within the range of our expectations to TWD 37.8 billion. Revenues from the IC packaging and direct materials businesses grew 6% and 1%, respectively. Revenues from our test business declined 3%. NT dollar depreciation had a 0.25% favorable impact on revenue and a 0.13% favorable impact to gross margins. For Q3, our gross profit increased to TWD 9.6 billion from TWD 8.7 billion, while our gross margin increased 1.5 percentage points from 24% to 25.5%. Within cost of goods sold, margin improvement was primarily the result of lower depreciation and raw material costs. On an absolute basis, depreciation and amortization expenses stayed flat at TWD 5.5 billion in Q3. However, as a percentage of revenue, D&A decreased to 14.5% from 15.2%. This decrease was primarily attributable to higher utilization rates on our equipment, with lower ongoing capital equipment investment. For Q3, raw material cost declined by TWD 0.1 billion from TWD 10.1 billion to TWD 10 billion. As a percentage of revenues, raw material costs dropped to 26.5% from 27.8% in the previous quarter. The raw material cost decline came principally as a result of lower gold wire costs and favorable product mix. Operating expenses increased TWD 350 million to TWD 4.3 billion due to largely higher R&D and in administrative expenses. As a percentage of sales, operating expenses increased to 11.3% from 10.8% 1 quarter ago. Operating profit in Q3 rose to TWD 5.4 billion from TWD 4.8 billion in the previous quarter. Operating margins increased to 14.2% from 13.3%. EBITDA in Q3 for the IC ATM business was TWD 11.4 billion, up from TWD 11.1 billion in Q2. Page 6. On a year-over-year basis, our IC ATM business saw improvement when compared with the year-ago quarter. Our IC ATM businesses grew -- revenue grew by 12%. Gross profit increased from TWD 7.7 billion to TWD 9.6 billion, representing a 25% increase from 1 year ago. Gross margins improved 2.8 percentage points, from 25.5% -- to 25.5% from 22.7%, principally as a result of lower raw material costs from lower gold wire costs and favorable product mix in the current quarter. Operating profit increased from TWD 4 billion to TWD 5.4 billion, a 35% improvement. Operating margins climbed 2.4 percentage points, from 11.8% to 14.2%. This was the result of gross margin improvement dropping through to operating margin. Page 7. A more detailed view of our packaging operations here. For the sake of this presentation, we have included certain revenues for our SIP business within our packaging operations. From the business perspective, it is the technologies and capabilities within our packaging group which enable our SIP service revenue. So with that said, our packaging revenue increased 6% quarter-over-quarter in Q3 to a record TWD 30.8 billion. Our packaging gross margin increased 2 percentage points to 22.3%. As a percentage of revenue, improvements in raw materials and depreciation and amortization expenses, offset by an increase in factory supplies, accounted, for the gross margin improvement. Raw material costs increased by TWD 0.1 billion to TWD 10.9 billion. As a percentage of packaging revenue, raw materials declined by 1.7 percentage points, from 37.1% to 35.4%, primarily as a result of favorable product mix change and lower gold prices. Factory supplies increased from TWD 2.2 billion to TWD 2.4 billion. This increase is primarily the result of supplies used for our SIP business. Depreciation and amortization costs stayed flat, remaining at TWD 3.7 billion. As a percentage of revenue, D&A dropped 0.9 percentage points to 12%, from 12.9% last quarter, primarily a result of improved factory utilization rates and lower capital investment requirements. During the quarter, capital expenditures for our packaging business amounted to USD 157 million. USD 25 million was used for wirebond-specific business purposes. USD 23 million was used for advanced packaging purposes and the remainder was for common equipment, including SIP. During the quarter, we added 463 wirebonders and retired 263. We exited the quarter with a total of 15,765 wirebonders in operation. 8-inch bumping capacity remained unchanged at 95,000 wafers per month; and 12-inch bumping capacity remain unchanged at 50,000 wafers per month. Page 8. Within our packaging business, our advanced packaging and discrete and other segment lines, are taking share from our traditional IC wirebonding business. Our SIP is contained within our advanced packaging number here. Page 9. Our test operations revenues decreased by 3.5%, sequentially down to TWD 6.3 billion in Q3. We believe that the decline of our test business was somewhat attributable to product timing, as some product had finished packaging and it had not completed tests. Gross margins for our test business moderated 1.5 percentage points, from 38.6% to 37.1%. Gross margins decreased primarily as a result of depreciation and amortization expenses, maintenance and utility costs. Depreciation and amortization, as a percentage of revenues, was up 0.6 percentage points to 24%, from 23.4% the previous quarter. On a dollar basis, depreciation and amortization costs stayed flat at TWD 1.5 billion. Maintenance and utility costs increased to TWD 503 million from TWD 477 million. Maintenance and utility costs represented 8% of revenues, up from 7.3% the previous quarter. During the third quarter, our testing utilization rate moderated to around 80%. Capital expenditures for the test business was USD 50 million in Q3. We added 145 and retired 55 testers during the quarter. At the end of Q3, our total tester count stood at 3,147. Page 10, our materials business. In Q3, revenue from our material business rose to TWD 2.5 billion, from TWD 2.4 billion in Q2. TWD 767 million was from sales to external customers, representing a 1% increase. Our internal self-sufficiency rate increase from 31% to 33%. Gross margins grew 4.5 percentage points to 18.7% during the third quarter, up from 14.2%. Gross margins within our interconnect business increased primarily as a result of lower raw material costs and improved product mix, with increasing low-cost flip chip substrate production. Gross profits increased 36% to TWD 458 million. Page 11. We would like to note that our EMS business also helps enable services performed at our SIP business. We expect the relative involvement between the EMS and packaging areas to differ within each product going forward. So with that said, during the third quarter, the pace of the recovery within our EMS business was somewhat stronger than anticipated, with our EMS Wi-Fi module business recovering during the quarter, revenues for our EMS business approached near-term highs at TWD 9.6 billion, up 37.8% -- TWD 19.6 billion, sorry. As a result of higher Wi-Fi module product mix, our overall EMS gross profit margins decreased to 9.7%, down from 11.4% a quarter ago. Gross profit levels increased 17.1% to TWD 1.9 billion, up from TWD 1.6 billion a quarter ago. Page 12. Within our EMS business, you can see the pace of our recovery here. The Wi-Fi module business, which had represented 24% of overall EMS revenue in Q2, almost doubled to 47% of overall EMS revenue in Q3. Last quarter's EMS segment leader computing dropped back to second-largest, representing 20% of total EMS revenue. By and large, the percentage declines in noncommunication segments stem primarily from the increase of communication-related product performed. Page 13. For our balance sheet this quarter, our cash and cash equivalents and current financial assets grew to TWD 43.5 billion, from TWD 30.3 billion the previous quarter. In Q3, our interest-bearing debt increased to TWD 100.2 billion from TWD 83.6 billion in the prior quarter. Most of the additional debt is related to the launch of our ECB. We still have TWD 107.8 billion in unused credit lines. Page 14, CapEx. In Q3, our capital expenditures were USD 223 million; relatively flat with the previous quarter. For 2013, as anticipated, capital expenditures will be significantly down from 2012. We should finish roughly around USD 700 million for the year. Capital expenditures in the third quarter of 2013 totaled USD 233 million, of which: USD 157 million was used for packaging; USD 50 million for testing; USD 16 million for EMS; and USD 10 million for interconnect material. EBITDA for the third quarter amounted to USD 421 million. Page 15. Our IC ATM market segment exposure did not change between Q2 and Q3 with communications, consumer and automotive, and computing representing 55%, 34% and 11% of our IC ATM business, respectively. Page 16. We would like to take a little bit of time to discuss an important emerging product category for the ASE Group. We have termed this area S-I-P or, of course, SIP. We believe that the technical expertise within our EMS and IC ATM businesses, we are uniquely poised for certain lines of business which culminate in SIP. Historically, electronics has had 3 traditional industries separated by certain areas of smallness, so to speak: EMS, OSAT and foundry. In a very simplistic explanation: EMS generally speaks in terms of millimeters, as in trace width; OSATs generally talk about things in terms of microns, such as a wirebond pad pitch size; and foundries generally speak about things in nanometers, like transistor sizes. These 3 industries have acted together to create the different scales of modern electronics, from miniscule to the centimeter-level of human interaction. The evolution of electronics is pushing many of the system and subsystems traditionally assembled by EMS players into scales of smallness more familiar to OSAT, at this point. Here's where we believe our SIP business lies: implicit in the natural evolution of electronics. Our SIP business involves our EMS group at the onset, buying material and acting principally as logistics coordinator. Almost all the actual activity is performed within our packaging factories. The business, in its present form, generates accreting margins at IC ATM combined with dilutive margins for EMS. Additional future SIP products that we are targeting from any number of various customers, may not be of the same structure. The structure is dependent upon the various values added from within our EMS and IC ATM business units. During the third quarter, the SIP business was significant but not large enough for individualized reporting. We understand the nature of the business and our approach to SIP is unique and has generated a lot of interest. However, we fundamentally believe in the confidentiality of our customers and their devices. Page 17, to Guidance. Fourth quarter -- we saw the third quarter as a slow growth environment. Certain key products showed spots of highlights. We expect for this type of spot highlight environment to continue into the fourth quarter, with the general environment set to slow seasonally. As such, for our IC ATM business, we believe revenues should be flattish to slightly down, around minus 3%. For EMS, seasonality works slightly differently. As our SIP business continues to ramp, and with Wi-Fi modules growing during this Christmas build season, our EMS business should continue to see rapid growth. As such, we believe that EMS revenue should see increases in excess of 25% quarter-over-quarter. During the quarter, given the balance of EMS and IC ATM business, we expect our consolidated gross margins to be between 18% and 19%. With this, I conclude my presentation. We'd like to open the floor for questions.

[Operator Instructions] Our first question is from Tse-Yong Yao from HSBC. Tse-Yong Yao - HSBC, Research Division: I just wanted to clarify again regarding the report, how the SIP revenue is being reported. Correct me if I'm wrong, but so all of -- at the consolidated level, all of this revenue flows to the EMS part and then any packaging revenue gets kind of netted out through intercompany transfers. Is that correct?

That's correct. I think we are recording all the SIP revenue in other EMS. And for the value-add of the assembly and test, it's like a subcontracted model to be handled by the assembly and test. Tse-Yong Yao - HSBC, Research Division: So basically, I can just take the difference between -- and you report for example, in Q3, at consolidated level, you reported packaging revenue of TWD 30.7 billion. And then at the -- Sorry, for the IC ATM business, but at a consolidated level, you only reported about the TWD 29-point-something billion. So this delta, about TWD 787, is it safe to assume that this delta is all related to SIP?

That's by and large correct and there are -- of course, there are a little something else in that number. By and large, that's how the numbers are being presented. Tse-Yong Yao - HSBC, Research Division: Okay. And then getting to your guidance for Q4, for IC ATM, flat to down 3%, is that for the consolidated level of IC ATM? Or is it for the, kind of, the whole business?

That's for the whole business.

IC ATM.

The ATM business. Tse-Yong Yao - HSBC, Research Division: All right. So the number that shows up at the consolidated level might be different from that flat to down 3%?

It will be 0% to 3% down from the number that is being shown on the IC ATM. Tse-Yong Yao - HSBC, Research Division: Okay. Okay, great. And then, I did want to clarify -- get a little bit more clarity on your gross margin for the EMS business. So Q3 was 9.7%. If I compare this with the low point for 2012, which was Q4, 10.8%, just trying to understand what the difference -- the 100 basis points difference. Is it lower because of product mix? Or organically lower, structurally lower margins in -- within the same particular type of product?

It's because of the change of product mix.

Our next question is from David Duley of Steelhead.

A couple of questions from me. Could you -- I guess, couple of clarifications. I didn't -- I can't find the presentation, so could you give us the copper revenue and all the details about copper during the quarter, as far as the wirebonding?

Okay. In terms of bonder counts, we have 78% of our bonders being copper-capable. And the total number, it's 12,332. And in terms of revenue in third quarter, we have TWD 631 million.

That was TWD 631 million. And what was that, up or down sequentially?

It is 4% up, to TWD 403 million, which is 64% of total wirebond revenue, up from 63% a quarter ago.

Okay, and the actual dollar number was? I'm sorry, I didn't hear you.

TWD 403 million.

TWD 403 million. Okay. In your SIP revenue, you mentioned, I think, like basically 1/2 of it was Wi-Fi module revenue. What is the -- where does the other 1/2 come from?

I'm sorry, can you repeat the question?

Yes. I think in your prepared remarks, you mentioned that your Wi-Fi, your SIP Wi-Fi module revenue was about 47% of the overall SIP revenue. I'm trying to figure out where does the other 50% come from? Are there any other major product types that you can categorize for us?

What we've shown here is the 47% of the EMS revenue are being communication-related, which includes Wi-Fi modules, and also a bit of the SIP revenue. In third quarter, the SIP revenue is still not so significant.

Okay. So but the other areas that it comes from are -- if 47% of the SIP revenue is Wi-Fi-related, where is the other 53% -- what is the other 53% made of?

I think the numbers that we've shown here, the 47% is communication revenue.

It's a segment breakdown, Dave.

Yes, I realize that and I don't have the charts so I can't see whatever picture that you're trying to ask me to look at. I'm trying to figure out where does the other revenue come from, are there any other major product categories?

Did the file not make it online?

No.

Okay. Let me repeat this page, then. Okay, within our EMS business, the Wi-Fi module business, which had represented 24% of overall EMS revenue in Q2 jumped to 47% of overall EMS business in the Q3. And within that, the communication modules business, which represented 47% of our overall EMS revenue in Q3. And this communication revenue or communication business includes both Wi-Fi modules and SIP.

Okay. Let me ask a different question. When you look at 2014, from a 30,000-foot level, what do you think the growth drivers for ASE are going to be? Is it going to be copper wirebonding? Is it going to be test? Is it going to be SIP? Maybe you could talk about the biggest areas of growth that you see for 2014?

Well, we are looking at -- we are putting our focus on different areas, including material, including packaging, also on SIP as well. I think, of course, in terms of the SIP business, we do have -- we are in the process of developing multi-customers and also expanding product mix and so on and so forth. So I think the growth driver for, not just 2014 but also for the following years will come from our technology development in both material area and also our packaging, as well as in SIP.

Okay. And when you think about your CapEx budget for next year, is it going to be roughly the same dollar amount you spent this year, up or down? Or maybe you could give us some early detail on what you're thinking there?

I think just -- we will have the final number until we do our actual budgeting for next year. But from this point on, I think we are comfortable in saying that it will -- it should be relatively the same as this year's level, short of any major projects that we'll be undertaking next year.

And, Dave, we verified the files online. I think you can take a link and get to it.

Our next question is from Gokul Hariharan of JPMorgan. Gokul Hariharan - JP Morgan Chase & Co, Research Division: First of all, I think you mentioned on the Mandarin call that SIP-based revenues could be close to like 10% of revenues in Q4. I just wanted to know how that breaks out. Is it going to be like 70%, 80% of that coming in the EMS business and just the pass-through of whatever services that you provide at the IC ATM level going to the IC ATM business? And also how should we think about modeling for gross margins, for both in IC ATM as well as the EMS side for this particular part of the business?

We're not breaking down the gross profit margin, but I can -- we are guiding that in terms of consolidated gross profit margin for the fourth quarter, it will be -- it will range from 18% to 19%. Gokul Hariharan - JP Morgan Chase & Co, Research Division: The first part of the question is...

As I mentioned earlier on, I think the SIP revenue is really booked under EMS. And then the value-add portion of assembly and test will be subcontracted to the packaging and test operation. Gokul Hariharan - JP Morgan Chase & Co, Research Division: Okay. My second question is...

When I say 10%, it's really the overall revenue coming from SIP, from an EMS standpoint. Gokul Hariharan - JP Morgan Chase & Co, Research Division: Okay, okay, got it. My second question is on CapEx. So when I look at your disclosure, I think over the last 2, 3 quarters, I think close to 50% are -- even more than 50% of the CapEx is still being spent on wirebonders; likely, to kind of refresh your installed base to copper-based wirebonders. Now that you're reaching like about 70% to 80% refresh rate in terms of your installed base, are we going to see that number come down drastically over the next, say, 2 or 3 quarters?

Actually, it has already come down a lot in quarter 3. Out of $157 million CapEx for packaging, only $25 million is for wirebonding. And in the quarter, we only added about 463 bonders while we retired 263 of them. Gokul Hariharan - JP Morgan Chase & Co, Research Division: Okay. So from next year on, most of the CapEx is likely to be for everyone's packaging and testing, basically.

Yes.

Our next question is from Szeho Ng from BNP. Szeho Ng - BNP Paribas, Research Division: Sure. For the top rate of bonded capacity has been staying flat last quarter, so I just want to know, has any additional capacity will be built in Q4?

Not at this moment, no. Szeho Ng - BNP Paribas, Research Division: No, okay. But the reclassification is quite high, right, for that part of the business?

Yes, over 80%. Szeho Ng - BNP Paribas, Research Division: Okay. All right. And the other question is housekeeping one. Can you talk about employee bonus accrual for last quarter? Both at the consolidated level and also at the OpEx level.

Yes. The bonuses accrual for employees, TWD 520 million for the quarter, and there is another TWD 36 million accrued for directors and supervisors.

As of the moment, sir, we have no questions on the queue.

Well, if there's no further questions, thank you very much for attending the conference call and we'll see you next quarter. Thank you.

Thank you. That concludes the presentation. You may now disconnect.