Hong Shi Tung - Chief Financial Officer and Director

Jack Lu - CIMB Research Szeho Ng - BNP Paribas, Research Division Gokul Hariharan - JP Morgan Chase & Co, Research Division

Welcome, and thank you for standing by. [Operator Instructions] This conference call is being recorded. If you have any objections, you may disconnect at this time. And I'll turn the call over to your host, Mr. Joseph Tung, CFO of ASE Inc. Sir, your line is open. You may begin.

Hi. Good morning. Good evening, everyone. Thank you for attending ASE's Q4 2013 Earnings Release Conference Call. Before we start the presentation, please turn to Page 1. Here, on Page 1, is the 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 risks, and our actual results may differ materially from these forward-looking statements. So during 2013, ASE has started to see synergies between our EMS and IC ATM businesses. These synergies in the form of SiP technology were well expressed during the fourth quarter. Even in a fairly neutral semiconductor business environment, we were able to continue growth and momentum within our SiP technology-related products. We believe that 2013 will be remembered as a critical juncture for differentiating ourselves from our competition and towards positioning ourselves for continued growth in the future. Given that our SiP technology-related products serve a new market for services appearing between classic EMS and IC ATM markets, we should expect to see higher volatility related to such businesses because the technology currently has high customer and product concentrations. Also, as we increase our SiP technology exposure, our financial statements may lack comparability to other business models. However, we believe that the incremental business that our SiP technology brings to us is very accretive to our EPS. We have a lot to go over today. We have a few extra slides related to the year end. So Page 2, quarter-over-quarter consolidated P&L. On a fully consolidated basis, the company delivered EPS for the quarter of TWD 0.73, TWD 0.16 greater than the third quarter and an increase of 28%. During Q4, on a consolidated basis, we saw our IC packaging, test and materials business decline 4%, 1% and 3%, respectively. Meanwhile, our EMS business, including our SiP business, grew 45% compared to the previous quarter. Even given a much higher EMS product mix, our consolidated gross margins declined by less than a percentage point to 19.5%. Gross profit grew 8% to TWD 12.5 billion. We were able to keep our operating margins flat at 10.7%. Operating profit was TWD 6.9 billion, up from TWD 6.1 billion in Q3. Pretax profit was TWD 6.5 billion, up 20% from TWD 5.4 billion in the previous quarter. Net income for the fourth quarter was TWD 5.8 billion, up 31% from TWD 4.4 billion the previous quarter. Net margin edged up 9 -- to 9.1% from 7.8%. Page 3. You can see the quarterly results on a year-over-year basis here. You can go through most of the numbers yourselves. However, it is worth highlighting that even with much of the sales growth tied to the EMS business, we saw comparable gross operating pretax margins and higher net margins overall. Page 4, full year 2013 compared with 2012. I believe that the numbers pretty much speak for themselves here. For the year, ASE delivered record revenues of TWD 220 billion on record gross profits of TWD 43 billion. EPS for the year was TWD 2.11 versus TWD 1.71, up 23%. Page 5, IC ATM P&L. Let's take a closer look at the results of our IC ATM business. You may notice that the IC packaging revenues reported on this page are different than the numbers reported on the consolidated group level. At the consolidated level, the SiP technology revenue performed by our IC packaging business unit on behalf of our EMS unit is eliminated during consolidations. So they're -- that's why they're different. Our IC ATM revenue was slightly better than flat during the fourth quarter, increasing just TWD 90 million to TWD 37.9 billion. Revenues from the IC packaging business grew 1%. Revenues from our test and direct materials business declined 1% and 3%, respectively. NT dollar appreciation had a 0.9% unfavorable impact on revenue and a 0.5% unfavorable impact to gross margins. For Q4, our gross profit increased to TWD 10.4 billion from TWD 9.6 billion while our gross margin increased 2 percentage points. Gross margin improvement was primarily the result of lower raw material costs. Raw material costs declined by TWD 0.8 billion from TWD 10.0 billion to TWD 9.2 billion. As a percentage of revenues, raw material costs dropped by 24.3% -- dropped to 24.3% from 26.5% 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 stayed roughly flat at TWD 4.3 billion. As a percentage of sales, operating expenses increased to 11.5% from 11.3% a quarter ago. Operating profit in Q4 rose to TWD 6.1 billion from TWD 5.4 billion in the previous quarter. Operating margins increased to 16.1% from 14.2%. Net margins increased to 15.3% from 11.7%. Page 6, Q4 on a year-over-year basis. Our IC ATM business improved significantly from a year-ago quarter. Our IC ATM business had 10% revenue growth. Gross profit increased from TWD 8 billion to TWD 10.4 billion, representing a 31% increase from a year ago. Gross margins improved 4.3 percentage points to 27.5% from 23.2%. This was principally as a result of lower raw material costs from lower gold wire expenses and favorable product mix. Operating profit increased from TWD 4.2 billion to TWD 6.1 billion, a 45% improvement. Operating margins climbed 3.9 percentage points from 12.2% to 16.1%. Page 7. From a full year perspective, we had quite the year. Fiscal year 2013 saw significant improvements at all relevant levels when compared with 2012. As compared to the previous year, 2013 revenues grew by 10%. Gross profits grew by 23%, and net income grew by 25%. Page 8, packaging operations. Packaging revenue increased 1% quarter-over-quarter in Q4 to a record TWD 30.9 billion. Our packaging gross margin increased 2.8 percentage points to 25.1%. As a percentage of revenue, improvements in raw materials, offset by an increase in depreciation and amortization, accounted for the gross margin improvement. Raw material costs decreased by TWD 0.9 billion to TWD 10.0 billion. As a percentage of packaging revenue, raw materials declined by 3.2 percentage points from 35.4% to 32.2%, primarily as a result of favorable product mix and lower gold prices. Depreciation and amortization costs edged up TWD 0.2 billion to TWD 3.9 billion. As a percentage of revenue, D&A increased 0.6 percentage point to 12.6% from 12.0% last quarter. During the quarter, capital expenditures for our packaging operations amounted to USD 46 million during the quarter, of which USD 16 million was used for wafer bumping and flip chip packaging equipment; USD 29 million for common equipment, including SiP; and less than USD 1 million for wirebond-specific purposes. For our capacity overview, during the quarter, we added 6 wirebonders and retired 79. We exited the quarter with a total of 15,692 wirebonders in operation. 8-inch bumping capacity remained unchanged at 95,000 wafers per month, and 12-inch bumping capacity increased 2,000 wafers per month to 52,000 wafers per month. Page 9, packaging product mix. Within our packaging business, our advanced packaging businesses are taking share from our traditional IC wirebonding and discrete and other businesses. For the sake of this slide, our SiP technology-related businesses are contained within advanced packaging. Page 10, test operations. Our test operations revenues decreased by 1% sequentially down to TWD 6.2 billion in Q4. Gross margins for our test business moderated 0.6 percentage points from 37.1% to 36.5%. And in absolute dollars, cost of sales remained flat at TWD 3.95 billion. However, given the revenue decline, gross margins reflected a decline. Depreciation and amortization as a percentage of revenues stayed flat at 24% of sales. Our testing utilization rate remained around 80%. CapEx for the test business was USD 17 million in Q4. We added 98 testers and retired 128 testers during the quarter. At the end of Q4, our total tester count stood at 3,117. Page 11, our materials business. In Q4, revenue from our materials business declined to TWD 2.1 billion from TWD 2.5 billion in Q3. TWD 746 million was from sales to external customers, representing a 3% decrease. Our internal self-sufficiency rate decreased from 33% to 29%. Gross margins declined 0.8 percentage points to 17.9% during the fourth quarter, down from 18.7%. Gross margins within our interconnects business decreased primarily as a result of lower loading during the quarter. Page 12, our EMS business here. Our EMS business is the enabler of ASE's SiP technology-related capabilities and businesses. As we have indicated before, for the current SiP technology-related business -- related products, the value add contribution of our EMS business is relatively small as compared to the contribution from our IC ATM business. As such, margins for the EMS business unit related to those SiP technology products will be lower than most other EMS products they performed. With that said, our EMS business delivered significantly higher sales than anticipated. Revenues from our EMS business neared TWD 28.4 billion, up 45.4% from TWD 19.6 billion. As a result of significantly higher SiP product mix, our overall EMS gross profit margins decreased to 7.7%, down from 9.7% a quarter ago. Despite the lower gross margins, gross profit levels increased to TWD 2.2 billion, up from TWD 1.9 billion a quarter ago. Finally, despite lower gross margins, operating margins have held fairly steady, declining just 0.1%. Operating profit improved to TWD 958 million from TWD 678 million. Page 13. You can see the impact of our WiFi module and SiP technology-related businesses, with growth of our EMS communications-related products, increasing to 61% of overall EMS operations here. Page 14. For our balance sheet this quarter, our cash and cash equivalents and current financial assets grew to TWD 50.2 billion from TWD 43.5 billion the previous quarter. In Q4, our interest-bearing debt inched up marginally to TWD 100.8 billion from TWD 100.2 billion in the previous quarter. We still have TWD 111.2 billion in unused credit line. Page 15, CapEx. In Q4, our CapEx was USD 83 million, down significantly from the third quarter. Of the capital expenditures total of USD 83 million, USD 46 million was used for packaging, USD 17 million for testing, USD 12 million for EMS and USD 8 million for interconnect materials. For the full year, our capital expenditures totaled USD 668 million, down significantly from the USD 1.1 billion in 2012. EBITDA for the fourth quarter amounted to USD 463 million. For the year, EBITDA increased 15% from USD 1.4 billion to USD 1.6 billion. For 2014, we continue to see fairly minimal wirebond-specific capital expenditures. Our spending should be more focused on advanced packaging and SiP-related equipment, with total targeting -- target spending at around USD 700 million, similar to 2013. Page 16 shows our IC ATM market share here. I really don't have much to comment about this. First quarter guidance, with current product concentrations from our SiP technology-related business, we will see more extensive revenue and gross margin seasonality tied to product, customer product launches and their corresponding inventory builds. As opposed to years passed when we would swing from profit loss, seasonality should bring us to periods of lower and higher profits going forward. Outside of SiP, the environment is somewhat tepid as new electronic products increasingly appear to resemble the ones they are replacing. Looking forward, the industry is looking for the next killer product. There are some products and trends that generate some excitement. However, without a new killer product, we, along with the industry, should continue to be driven by the various flavors and sizes of smart devices available. We see the first quarter to be seasonally soft for IC ATM business. We see a revenue decline of about 12% to 15%. Within this estimate, we have included a 4% to 5% impact related to the K7 wafer bumping partial shutdown. Our EMS business should see a similar seasonal drop off, with revenues declining about 30% or returning close to Q3 levels. We fully believe that such declines are normal and typically seasonal for the type of products involved. We estimate that gross margins for the group will be between 17% to 18%. With this, I conclude my presentation and would like to open the floor for questions.

[Operator Instructions] Our first question is from Jack Lu from CIMB. Jack Lu - CIMB Research: My first question is regarding your gross margin guidance for Q1. I know that you guys guided the consolidated gross margins, but can you give us some color on the individual entities, for example, the ATMs business and the EMS business, how the margin trends?

Well, the overall gross profit margin will range -- will fall between 17% to 18%. And because of the different -- this nature, I think in terms of EMS, actually, the gross profit margin, because of the lower SiP and also WiFi modules revenue, gross margin at that level will be -- at that business will actually come up a bit to the level of around 1% improvement. And the -- but for the IC ATM, the margin will actually come down because of the lower loading. Jack Lu - CIMB Research: Okay. My second question, can you talk about your SiP as a percentage of your revenues, whether consolidated level or EMS or packaging?

Well, at the consolidated level, the SiP represents about over 10% in fourth quarter. And for IC ATM, it's roughly over 6%. Jack Lu - CIMB Research: 6%?

6%. Jack Lu - CIMB Research: Okay. And how do you think that will trend into, say, Q2 or Q3?

I think it will actually trend down a bit in Q1 and Q2. But I think the SiP business by its -- by the nature of this business, it can probably -- normally it starts to ramp up in the second half of the year. And we believe that if the ongoing projects continue to go as it is, at the end of the fourth quarter, in fourth quarter, we should be seeing our overall SiP revenue to account for more than 20% of the overall revenue. Jack Lu - CIMB Research: 20% of the consolidated?

Of the consolidated, yes. Jack Lu - CIMB Research: My last question, regarding your gross margins in Q4 that was better-than-expected. You talked about 3 reasons, right, copper wire, gold costs, product mix. So of these 3 factors, which one is -- has the biggest impact on your gross margin improvement?

It's product mix. I think the -- particularly in the SiP business does help the margin a bit -- quite a bit. Although, actually there are not just 3. I think gold wire is one, higher copper, as well as higher bumping and such as CSP revenue also helped the margins.

Our next question is Szeho Ng from BNP. Szeho Ng - BNP Paribas, Research Division: With regard to your advanced packaging portfolio, do you also provide a further breakdown into flip-chip CSP and flip-chip BGA if possible?

No, I don't have that with me. Szeho Ng - BNP Paribas, Research Division: Okay, all right. And for the flip-chip CSP business, are you seeing most of your customers on substrate consignment basis or basically you're doing the turnkey for your customers?

They're both. I think some of the lower costs, such as CSP turnkey business, we are buying [ph] some of the materials. But, by and large, a lot of it is really still being outsourced. Szeho Ng - BNP Paribas, Research Division: Okay, all right. But what sort of trend are you seeing? Is it going towards the substrate consignment mode or towards the turnkey mode for, let's say, for the next couple of quarters?

I don't have a good feel of it. It really depends on the business, the customers' requirement.

Our next question is from Gokul Hariharan from JPMorgan. Gokul Hariharan - JP Morgan Chase & Co, Research Division: I had a couple of questions on the SiP market. Do we expect the SiP revenues to be primarily still consumer-driven, smartphone-driven kind of revenues in second half of this year? That's my first question. And second is, whom should we think about as competition for your SiP products? From what we have heard, I think Sharp or some of the other Japanese guys are competing with you guys. But how should we think about the competitive landscape for you guys in SiP?

I think for this year, it will predominantly still be consumer-driven type of devices that we will be building for our customers. I think the process that we are engaging with our customer right now, both from EMS, as well as from IC ATM, are still consumer and, by and large, in the cellphone area, although it will expand into patent, other product -- mobile devices. In terms of competition, I think, yes, you're correct that the -- at this point, most of the primary competitor is the Japanese, although, they are playing -- they're really being the second source of the -- for the business. And primarily, I think our competitive edge is really not only from the technology that we have, but also from the scalability of our operation. And I think to be able to be efficient or effective in building SiP-type of products, you really need to have all technology in place, including at system level, design and logistics and also at IC level assembly tests, and by and large, in SATS [ph] as well. And at this point, we believe we're the only company that has all the ingredients. So from that perspective, I think the competition eventually will come either from the EMS people or from the OSAT players today. How soon they can integrate their operation or to expand their expertise into some -- a familiar areas for them, it really -- I think, the whole process will take some time. So I think we have -- we, in terms of competition landscape for SiP in particular, I think we are -- we do have quite sometime of -- ahead of our competitors at this point. Gokul Hariharan - JP Morgan Chase & Co, Research Division: Okay, great. One last question from me. I think you guys had talked about your low-cost flip chip substrate solutions in-house material. Is there any progress on that front that we should expect this year? Or is it still too early?

It's still at its early stage. I think, we are -- we have 1 or 2 customers that are in mass production.

[Operator Instructions] Currently, sir, we have no questions over the phone.

Okay. Very great. Okay. We had a -- I think we had a very, very good fourth quarter and also a very good performance for the whole year in 2013. For 2014, we remain confident or comfortable that we will continue the healthy growth over -- both on the -- and also improvement on our margins. I think in the year, we should see sequential growth on the quarterly basis. Whatever we lost in the first quarter due to seasonality, I think the -- things will start to rebound, particularly in IC ATM area, things with still start to rebound in second quarter and going forward. EMS, I think it was the more second-half heavy. I think the distribution among -- on revenue should be mostly -- most of the growth will come from second half of the year. All-in-all, we are -- I think, we will continue to see a growth year for us. All right, with that, I will conclude the session today. Thank you very much, and happy new year.

Thank you. That concludes the conference. Thank you for joining. You may now disconnect.

Thank you.