Ken Hsiang - Head of Investor Relations Tien Wu - Chief Operating Officer Joseph Tung - Chief Financial Officer

Randy Abrams - Credit Suisse Rick Hsu - Daiwa Securities Roland Shu - Citigroup Gokul Hariharan - JPMorgan Eric Chen - Morgan Stanley Sebastian Hou - CLSA Securities

Hello. My Ken Hsiang, Head of Investor Relations for ASE Technology Holdings. Welcome to our second quarter 2018 earnings release. All participants consent to having the voice and questions broadcast via participation of this event. Please refer to page 2 of our presentation which contains our Safe Harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk and our actual results may differ materially from these forward-looking statements. For the purposes of this presentation, dollar figures are generally stated in new Taiwan dollars unless otherwise indicated. For today's event, I will be going over a few key accounting treatments and then the financial results, afterwards we will have a Q&A session with Dr. Tien Wu, our COO and Joseph Tung, our CFO. Following the event, Justin Yang will be stepping in this time for Eddie Chang. He will be available to address the media in Mandarin Chinese. This is of course the first earnings release for the new holding company. It took a monumental effort by our collective teams within ASE and SPIL entities to help make this happen. A special thanks goes out to all of the people involved. With the formation of the combined entity between ASE Group and SPIL, there are a few less common accounting treatments which probably require a more in depth explanation. We believe it is important for our shareholders to have the opportunity to understand the impact of these accounting treatments and as much we have a prepared a couple of slides to help with this. Page 3, purchase price allocation, first of which is a more advanced accounting topic purchase price allocation, otherwise known as PPA. PPA is the allocation of our purchase price of SPIL into the various assets and liabilities acquired from SPIL. The purchase price allocation process increases the book value of assets acquired to an apprised fair market value level. It is this write up of assets that generates increases to ongoing deprecation, amortization and rental expenses. For example, if SPIL had a piece of fully functional equipment that was fully depreciated zero book value such equipment would be written up to appreciate -- on apprised fair market value. Once the equipment has book value again, it reinitiates the accounting deprecation process. This appraisal process is performed on all identifiable assets from SPIL. After all available assets of SPIL are re-apprised up to their corresponding fair market values. The remaining amount of the purchase price is then recorded as goodwill. The end result is that purchase price allocation provides a more properly classified and valued balance sheet. So for us, the total purchase price of NT$163 billion (sic) [NT$168 billion] is allocated into three parts. First, NT$78 billion of the original book value of SPIL, next, NT$51 billion of additionally identifiable assets that are marked up to fair market value and finally, NT$39 billion of goodwill. From the NT$51 billion of additionally identifiable assets, we generate additional PPA depreciation, amortization and rental expenses. We have included here the quarterly deprecation, amortization schedule of PPA from the next few years. The amount of PPA depreciation and amortization included in this table will be recorded and operating expenses NT$253 million per quarter. You should also note there is a significant drop-off in 2020. I promise you, it gets easier from here. Page 4, revaluation gain. Prior to the close of the transaction, ASE Group owned approximately 1/3rd of SPIL. The average adjusted cost of the shares was NT$43.9 per share for a total adjusted cost of NT$45.5 billion. On April 30, 2018, our shares are treated somewhat similarly to other shareholders of SPIL. They are revalued to NT$51.2 per share or a total value of NT$53.1 billion to the extent of the revaluation, we have to record a gain for the difference. The revaluation gain on SPIL shares in total was NT$7.6 billion, the gain is a one-time non-cash gain and recorded in non-operating income. Finally, we would like to note that because ASE Holdings was jointly formed on April 30, during the middle of a quarter, ASE Holdings second quarter results include a full period of ASE and a stop period of SPIL, specifically for April, 33% of SPIL's net income is recorded in net operating investment income, but, however for May and June, the consolidated results of SPIL are fully included. We have included this set of results and labeled them as legal entity basis. We have also provided a set of results which combines SPIL and ASE on a retro active basis simulating the inclusion of PPA and interest expenses while excluding the aforementioned revaluation gain and transaction fees and expenses. We have labeled this set of results as pro forma basis. For the second quarter, we are very busy getting ready to be ASE Holding, we encountered a lot of macro political noise with potential trade tariffs between this country and that. We saw the potential failure of a major Chinese handset maker come and go. We also saw a virtual currencies drop to near term lows, slowing potential mining activity and despite that all, we saw a smooth second quarter ramp-up of business. We believe the industry and demand for electronics remain healthy despite the macro uncertainties. With that, let's start the financial review for those of you familiar with ASE Group's previous earnings release, you may notice that we have attempted to simplify our presentation. Our results will contain the results of two business units ATM and EMS. Combining our businesses of assembly test to materials into a unified entity aligns with how our customers increasingly demand a unified turnkey solution. Removal of the IC from IC ATM signifies further the broadening of our assembly test to material services beyond just integrated circuits. So Page 5 here, for the legal entity with three full months of ASE Group in May and June of SPIL, the legal entity recorded fully diluted EPS of NT$2.67 and basic EPS of NT$2.70. Sales was NT$84.5 billion with a gross profit of NT$13.7 billion and a gross margin of 16.2%. Operating profit was NT$5.4 billion and after the non-operating revaluation gain of NT$7.6 billion and tax of NT$1.3 billion, net profit was NT$11.5 billion. For lack of comparability reasons, there is not a lot of productive commentary we can add to the legal entity results. Please feel free to go through them at your leisure, if you should have any specific questions regarding the legal entity results, you may address them to us during the Q&A or you can contact us after the earnings release. Skip to Page 7, so the EMS P&L here, during the quarter we saw a number of minor revenue revisions from a number of customers. This resulted in slightly lower than expected revenues here. EMS revenues of NT$30.5 billion were up 6% quarter-over-quarter and 8% year-over-year. Our gross profit improved NT$0.2 billion, we came into the quarter believing that we could exceed our first quarter gross margin, but given the slight revenue short-off -- shortfall, our EMS business units gross margin remained at 9.4%. EMS gross profit was also up 6% quarter-over-quarter but was down 8% year-over-year, the change here is primarily the difference in product mix. EMS operating profit was down 14% quarter-over-quarter and 29% year-over-year in addition to product mix, our EMS factories are in the process of ramp-up expansion. The decline in operating income is in large part related to extra cost incurred to ramp EMS capacity. Page 8, here we have the pro forma P&L for the consolidated holding company. We have tried to prepare a fair simplistic transparent pro forma P&L. To generate historic periods, we have added the historical P&Ls of each of the two entities on a retro active basis. Then we add a PPA and interest expenses related to the transaction as of those expenses existed in such periods. We also removed relevant transaction fees and expenses and further for the second quarter we excluded the revaluation gain of NT$7.6 billion. Aside from these, we made no further adjustments. On a pro forma basis for the second quarter, we had net revenues of NT$91.8 billion, this represents a 9% increase quarter-over-quarter and a 6% increase year-over-year. Gross profits were up 21% quarter-over-quarter, the quarter-over-quarter gross profit improvement was driven almost entirely by the ATM business unit. While on a year-over-year basis consolidated gross profit remained relatively unchanged with an increase from the ATM business offset by a similar decrease from the EMS business. Gross margin improved 1.6 percentage points on a quarter-over-quarter basis to 16.1%. This was driven by improved seasonal loading from our ATM business offset in part by lower margins from our EMS business. Gross margin declined year-over-year by 0.9 percentage points as a result of lower EMS gross margins and currency impact from our ATM business unit. Operating expenses were NT$9 billion up NT$0.9 billion sequentially. OpEx percentage was 9.9%. We expect our OpEx percentage to start declining during the next few quarters. Operating profit improved NT$1.6 billion quarter-over-quarter and stated relatively flattish year-over-year at NT$5.7 billion. Operating margin improved 1.4 percentage points quarter-over-quarter and declined 0.4 percentage points year-over-year. Non-operating expense on a pro forma basis was 0.5 billion. Interest expense within non-op was NT$1.1 billion offset by net FX income and financial instruments. Tax expense for the quarter was NT$1.5 billion on a pro forma basis. The pro forma basis effective tax rate was unusually high because of ECB conversion impact. On a pro forma basis for the second half of 2018, we expect our ongoing effective tax rate to be approximately 20%. Net income for the second quarter was NT$3.5 billion. This represents a 392% sequential improvement or NT$2.8 billion. On a year-over-year basis, net income declined NT$4.3 billion from 2017 levels because during the second quarter of 2017 we recorded a NT$4.2 billion real estate disposal gain in non-operating income. With such disposal gain excluded, year-over-year net income was roughly flat. We believe that the recording of PPA may give a fair assessment for the revaluation of assets post acquisition from a balance sheet perspective. However, we believe that PPA generated depreciation and amortization expenses create long lived non-cash distortions to the income statement on an ongoing basis. We believe that our results should also be evaluated without such non-cash PPA expenses. As such we have provided here key P&L line items without the inclusion of PPA. Without PPA expenses, consolidated profit was NT$15.9 billion with 17.4% gross margin. Our operating profit was NT$7.2 billion with an operating margin of 7.8%. Net profit was NT$5 billion with net margin of 5.4%. EPS excluding PPA expenses was N$1.17. Page 9, here is our ATM pro forma income statement. You can see here that as the second quarter ramped up, we started picking up operating leverage. It is exciting to see the scale of the combined entity and the potential drop through it can generate. For the second quarter, revenues for ATM business were NT$61.8 billion up NT$5.8 billion from the previous quarter and NT$2.3 billion from the same period last year. This represents a 10% increase from a quarter-over-quarter perspective and a 4% increase from a year-over-year perspective. Gross profits within ATM were up 25% or NT$2.4 billion quarter-over-quarter and 3% or NT$0.3 billion year-over-year to NT$11.9 billion. Gross margin for ATM was up 2.2 percentage points quarterly due to higher seasonal loading. Gross margin for ATM was down 0.3 percentage points on a year-over-year perspective was primarily due to currency impact. We believe currency impact had greater than a 0.8 percentage point impact annually. Operating income improved 55% or NT$1.8 billion from the prior quarter and 7% or NT$0.3 billion from the year ago quarter. Operating margin improved 2.3 percentage points quarterly and 0.2 percentage points year-over-year. Net income improved 374% or NT$2.8 billion to NT$3.5 billion on a quarter-over-quarter basis. On a year-over-year basis, net income declined NT$4.3 billion due to the investment disposal gain related to real estate recorded last year. Year-over-year net income remained flat at NT$3.5 billion without consideration of the real estate gain. Net margin finished the quarter at 5.7% that is up 4.4 percentage points quarter-over-quarter and down 0.2 percentage points without the consideration of real estate gain last year. Without currency impact, we would also have posted a significant improved on net margin. Without the P&L impact of PPA depreciation and amortization, ATM gross profit would have been 21.2% and operating profit would have hit 10.3%. Page 10 ATM operations, here is a quarterly graphical presentation of our ATM pro forma P&L. During the second quarter our ATM revenue improved 10% sequentially and was up 4% year-over-year up to NT$61.8 billion. On a U.S. dollar basis ATM revenue was up 6% year-over-year. Given that this is the first time, we have presented this pro forma chart, it's worth noting that Q1 2018 year-over-year declined was principally caused by currency. On a U.S. dollar basis, Q1 2018, year-over-year revenue grew 3%. From a capacity perspective for the quarter, we had a net addition of 470 wirebonders for a total of 25,216 wirebonders, and a net addition of 336 testers for a total of 4,726 testers. Eight inch wafer processing capacity stayed flat at 240,000 wafers per month; 12 inch wafer processing capacity including bump, fan-out and copper pillar remained at 320,000 wafers per month. Page 11, sequentially for the second quarter, our communication segment stayed at 53%. Our computing segment grew 2 percentage points driven by processing and memory devices. Our automotive, consumer and other segment decreased 2 percentage points to 31%, this segment remains healthy though. We believe the decline is cyclical in nature. Page 12, ATM revenue by revenue type. You can look at this, I think we are now including test and materials into this allocation as it is a part of ATM. Page 13, here you can see our EMS graphical presentation which we went over P&L earlier, we will skip on. Page 14, here you will note our product segment within our EMS business. Our computing and industrial product segments each grow 2 percentage points, computing was driven by server related products and industrial products where driven by smart handheld products. Our communication segment declined four percentage points, we expect that the decline to be seasonal in nature and expect somewhat of a recovery starting next quarter. Page 15, balance sheet. At the end of the quarter, we had cash and cash equivalents in current financial assets of NT$85 billion. Our interest bearing debt increased from NT$74.5 billion to NT$216.6 billion at the end of the quarter. The increase in debt is related to the completion of our SPIL transaction. Total unused credit lines amounted to NT$135.6 billion, our EBITDA for the quarter was NT$24.9 billion. Page 16, on a pro forma basis, machinery and equipment capital expenditures for the second quarter totaled US$356 million of which US$211 million were used in packaging operations, US$117 million in testing operations, US19 million in EMS operations and $9 million in interconnect materials operations, those were all U.S. dollars. We do expect our 2018 capital expenditures to be below total holding company level, depreciation and amortization. Depreciation and amortization excluding incremental D&A added by PPA is currently running slightly below NT$1.5 billion per year. In U.S. dollar terms EBITDA for the quarter was US$647 million. With the retirements of our convertible bonds, we initially believed we would be able to start giving our outlook in a more typical transparent manner. However, our non-operating revaluation gain booked during the current quarter was above the 10% of pre-tax income threshold as established by the Taiwan SEC. During such scenarios, Taiwan listed companies are not allowed to directly provide guidance or that quarter in the three quarters thereafter. We unfortunately have to start out being somewhat indirect in our outlook. Despite the jogging between the various severance entities, we believe that the consumer will be able to find a product to purchase. As it has always been the case, the consumer has the power to choose. They are free to choose a different product a more expensive one from a different vendor, even in a different color, the underlying demand remains unchanged. This is what our customers see and this is why our customer order flow remains strong. In today's environment supply chains are incredibly flexible. Logical inefficiencies and bottle necks are resolved mid-product cycle. We are part of that flexibility. We are part of that scale. We are part of that capability. However, within what we do, we are the most flexible. We have the most scale and we are most capable. In short, ASE will be part of every solution. So next slide, so our outlook for ATM on a pro forma basis in U.S. dollar terms, ATM third quarter capacity should increase 3% to 4% quarter-over-quarter, while our utilization rate should increase 2% to 3% quarter-over-quarter. On a pro forma basis, ATM third quarter gross margin should approach third quarter 2017 levels. For EMS and U.S. dollar terms, EMS third quarter business should be similar to fourth quarter 2017 levels. EMS third quarter operating margin should approach second quarter 2017 levels. With that, we can move towards the Q&A section.

[Operator Instructions]

Do we have questions from the floor? Name and company sir.

Okay. Yes. Randy Abrams, Credit Suisse. For the ATM business, if I did the math right, it looks like your guiding a few point improvement for third quarter gross margin. Could you talk about the drivers of the improvement in margin and maybe bigger picture combined company, how you expect leverage, like leverage to improve margins from the scale of the business and kind of what you see as a target model for gross and operating margin for the ATM business?

For the overall ATM business in the third quarter, I think we will continue to see some margin improvement largely because of the higher loading. In terms of the leverage that or the synergy that's being created after that, you think aside from the restrictions from China [MasCom] [ph], also purposely we want to -- we do not want to rush into any integration. I think the first priority is really the -- stabilize the customers we action to the merger and also stabilizing a lot of the employees constraint, if there is any and we are seeing very good results on that. So overall, we haven't seen any customer move out of orders. We are seeing the two companies -- already starting some of the initiatives in terms of all the efforts. And we are expecting the working relationship continue to be a smooth one. I think the results of -- particularly in second quarter, I think the merger so far has been going very smoothly and we are seeing a very strong results in the second quarter. And we expect this is to continue into third quarter as well in the remaining of the year.

Okay. Thank you. Second question just on the guidance, three parts here, but the capacity 3% to 4% growth where you are adding capacity in the business. And then for, if you put the two together capacity and utilization, if you could give a flavor, utilization where you are at from combined company second and third quarter? And then, for that type of growth what are you seeing in terms of the markets, you mentioned the tariffs and it's not really impacting the demand. But, if you could give kind of a flavor, how you see demand from the different end markets.

We do not see too much of a impact from the tariff. Having said that, we actually do not know what will be happening for the next few quarters. So just have to play by year. So far, all of the customer demand has to come in pretty strong. Our loading will be a little more tighter comparing the Q2. We do have capacity increase in wirebond test, bumping and fan-out. We are going to see some new product ramp start in Q3 and we are pretty excited about that. In terms of the segments, we are seeing the general strength from all segments.

Last question, if I could ask on the SIP business, SIP on the EMS, if you could give a flavor where that is for contribution from EMS now. And outlook from if you expect from other moment in products that can stay stable this year. And then, how the kind of an update on how the outlook for that business looks over the next year?

I think in terms of the SIP business, I think we are making a quite a bit of progress this year in terms of expanding our customer base as well as taking on new projects. I think right now we are seeing multiple -- we are having multiple customers at multiple projects undergoing with the existing projects also in the steady state. I think in terms of the overall percentage, it was relatively flat from last year. Similar level of last year, about 15% overall.

And I guess just looking out next it wasn't a growth driver for a while and then we went through a period of rebalancing. And so now we are in a period of stability. I guess your expectation, you think stability few years, or you are starting to see waves of products and that can start to be growth driver again?

I think we are seeing both now. The existing product, now, we do have stability. The end market always have uncertainty, but we think our visibility we have quite of the stable production as well as the manufacturing. Well, we are expecting is by the end of this year, we will like to report some news and I think I made statement this year, this will be a year where we are sky ramping up the SIP in terms of the customer portfolio and also the some meaningful dollar gain. It is too early to talk about exactly what are the custom portfolio and also what is a dollar gain. I hopefully by the end of this year, we will give you a much more definite number. But this year, we will definitely have new customer ramp-up.

Thank you.

Hi. This is Rick from Daiwa Securities. So just a number I want to ask or the [indiscernible] on the pro forma or you holding level -- your holding company level, what's you’re the total number of wirebonders and tester and the bumping capacity for the second quarter or a pro forma level.

At the end of second quarter we have total wirebonder of 25,216 units. In terms of tester we have 4,726. In terms of bumping capacity eight inch, we have close to -- little over 240,000 wafers a month. For 12 inch about 323,000 wafers a month.

Okay. So across the board you are increasing the capacity by about 2% to 3%, am I correct?

Correct.

Okay. Thank you. Then, the second question is about your cohorts development, can you update this, what's your progress of your cohort and are you going to see more design wins in the next couple of quarters?

I'm not sure we can make a direct comparison to the cohorts. If you are talking about the high density fan-out, you are talking about the package configuration similar to info of cohort then the answer is yes. And there has been designing coming through it. We have been shipping production in a steady state and we are seeing some of the customer adoption rate in those two type of configuration without giving this exact one to one the comparison. But, in the similar configuration, similar format, in a similar resolute requirement, yes.

Apart from the graphic application you mentioned in last quarter result, any more new application in this regard?

Photonics.

Thank you.

Good afternoon, Roland Shu from Citigroup. The first question, TSMV seen better highest demand in second half of the three months and UMC however is seeing on the high inventory label for the slowing smartphone? What's your view for this smartphone demand in second half? Thank you.

We don't really have the visibility of the smartphone demand for second half nor are we in the position to comment about the smartphone.

But you said for own segment in second half what have been your core in general chain but I didn't for which sector communication customer or for competitor. Which segment is performing?

A comment we can make is based on our customer portfolio. We are seeing steady demand for the second half and that is across all sector including the smartphone. But, strictly speaking from the ASE customer base.

For less communication sector, how do we compare the customer demand now and compare with three months ago, is this improving or is this deterioration?

It's improving. But there is a shift. I think in the first half, we have a stronger up tick from one of the camp. And I think there will be a shift in the second half.

Okay. Thank you. I think because we will recheck right now, in the past two years and so, I look at the 2015 to 2017, both ASE and SPIL's revenue growth were [indiscernible] in a big way. So now since SPIL transaction have been done, so what's your plan or strategy to resume the growth after this acquisition, and what kind of product or technology will drive the growth going forward? Thank you.

We have two focus. There needs to be a balance in terms of revenue growth versus margin expansion. For the margin expansion, you really have to tie that to the technology advancement. Over the last few years now we have some rebalancing of our product portfolio mainly from the revenue balance to the margin expansion perspective. You have also seen a steady improvement as was investment in the more advanced technology such as 2.5D. And this year in the -- we have a very high expectation about our Deca fan-out start ramping up in Q3. We also have the embedded [subscreen] [ph] we will see the ramp up as well as new product portfolio for customer say greener. This new customer, new design, new advanced technology represent a more steady growth as well as margin expansion. In terms of the legacy product, we will be facing some pressure for our competitor and we do understand that. So it's a balance between how do you protect the legacy product of the existing product portfolio margin as well as accelerating on the best technology and a new customer in a new configuration to expand your margin. And that would be the focus for the next few years.

Sp do you have any view for this -- best technology like 2.5D by the subject other contribution this year or next year?

We will have a better view by the end of this year.

Okay. Thank you. So, may we have OpEx operating expense guidance outlook for -- going forward. How we are going to model this operating expense?

We were expecting, I think earlier the comments was 9% for the rest of this year. And at the holding level, and then, next year let's get a little bit more experience first.

Thank you.

The next question comes from the line. Gokul, are you there?

Hi. Thanks for taking the questions.

Name the company please.

Sorry. Gokul Hariharan, JPMorgan. First question on the CapEx side, could you talk a little bit about what is your plan for CapEx. When I look at the first half of the year, it looks like CapEx is running slightly higher than the levels that you had in the first half last year. Could you give some idea about what you are thinking about CapEx in second half of the year as well as I think before the acquisition SPIL did have some low utilization quarters. So should we think about lower level of CapEx as we go into the next several quarters? That's my first question.

I think, well, this year's CapEx, it will be higher than last year's and but it will still be below our depreciation although depreciation I mean excluding PPA. The additional depreciation that were put in. I think from the numbers that we are running for the whole year, I think the depreciation that will be kept at around NT$45 billion. So the total CapEx would be below that number. Also, in terms of the CapEx break down, I think roughly 65% or 2/3rds of it will be for assembly and 25% plus will be for test. I think this year we are putting a bit more investment into our test kit capacity. For material it will be around 2% and then the rest for EMS, I think it's a pretty well balanced CapEx plan for the year.

Okay. Thanks for that. The other question I had was on -- the view on EMS profitability as well as maybe some more specifics in terms of how you think about profitability in the SIP projects that you are starting to ramp some of the newer SIP projects.

I think in terms of this year, we are going through some for the rebalancing of our business. And also in terms of some specific product lines, we are going through some economic business model or profile changes. Therefore, those have some impact on the margin. And also, we are ramping up some of our newer facilities. There will be some initial cost being incurred this year. So the overall margin, we are going through some pressure this year. Although, I think the overall target is still try to move the gross profit margin back to double digit or 10% level. And hoping the operating margin can also see some -- came back to the last year's level.

Okay. Just narrowing down on the SIP projects, I think you guys talked about expansion in the new cuts to model. Can you talk a little bit about what level of diversification you can achieve in terms of reliance on one big customer in the SIP project? And secondly, when you have some of these new projects coming in, what does it do to the overall SIP profitability, are they more ATM like projects, which should improve the margins or they are going to be more like EMS like, maybe you could give some qualitative color on that?

Right now, majority will be ATM.

So all the new ones that are coming in should be more ATM related?

That's correct.

Okay. That's great. And could you also address in terms of the diversification, when you have some of these new customers, how long should we expect it to take for you to have a bit more balance in terms of the customer mix compared to where we had in SIP over the last couple of years?

We are hoping to report more definite number by the end of this year because we are in the process of ramping up. But, without giving the just specific number, I think the dollar amount will be a 100 million range.

Okay. That's very good. Thank you very much.

Thanks for taking my question. I'm Eric Chen from Morgan Stanley. So first of all, I would like to ask a question on crypto currency. So I think from last earnings call, you guys mentioned for ASE itself, crypto currency extortion is going to be a missing of digit, is there a change to that after pricing dropping to 5000 at one point? Do you have a revision on that guidance?

The percentage has not changed. It's still in single digit.

All right. Thank you. So, my second part of my question is that, on U.S. [iPhone] [ph] with the new management on Board, do you see any changing overall ASE industrial strategy and overall through action on the EMS and SIP business?

No.

No. Okay. Thank you. Well, last question, real quick, so like the Chinese player has been really aggressive on expanding all their capacities, can you like help me understand, where do you pinpoint your biggest entry barrier in terms of like more events packaging, technology system as like bumping, flip trip, like what kind of entry barrier do you have covering to Chinese players and how many years do you think they are behind ASE? Thank you.

It's very subjective statement in terms of how many years or leading competitor even though we believe that we are leading. The bumping, there are different kind of bumping. Fan-out there is different fan-out. In terms of the technical depth design capability also you are supporting partners as well as your ecosystem customers. If you really want to evaluate the overall leadership, you have to look at the overall picture in totality. There is a revenue leadership. There is a margin leadership. But, more importantly, how much money does one company invest in the R&D and the vast technology on a consistent basis going for 20 years. On top of that how many sophisticated experienced engineers do you have? They understand how the core design, co-work, co-caliber with your global supply chain as well as your partner. I think if you really want to make a statement about leadership. You should never look at capacity as well as funding per se because for semiconductor, the capacity and funding are a very, very small part of the competitiveness.

All right. Thank you. That was very clear.

Hold on we have an operator. Operator has a message.

[Operator Instructions]

We have a question on the floor.

Sebastian from CLSA Securities. I have quite some questions. So the first one is on the PPA revenue -- just to clarify, so that OpEx portion will be like 253 million, so which means the -- on the COGS side, use 1.4 billion to minus that then we get the COGS numbers, right?

Yes.

Okay. Thanks. Second question is, second quarter margin, it seems like SPIL, the portion of the gross margin probably improved a little bit compared to their first quarter 16% level along with yours like 2 percentage point improvement. But, if you look at SPIL itself, the past three years, their margin almost declined by close to 10 percentage point? So, I wondered how was your plan fixing that because originally SPIL probably have a higher margin than your IC ATM, but now they have below your -- they are below your margins. How do you see can fix that problem or it is not a problem that can be fixed?

Well, first of all, we are supposed to run independently. So I'm sure the SPIL management is very, very conscious about the margin situation. And actually, I'm pretty happy to report that in the second quarter. I think they pretty much hit the close to the lowest point in terms of gross margin in the first quarter this year because of the -- some of the older ships that they experienced in the first quarter. I think they -- the same quarter for SPIL as -- I think they rebounded pretty nicely. And I think the margin wise it's very, very close to the corporate average in terms of ATM.

All right. I remember that the guidance you have for second quarter, I mean in the last conference and also compared to the pro forma gross margin and the increasing major about 2 percentage point last quarter, it seems like SPIL's portion also improved by about 2 percentage point. So which means that probably improved 16 to 18, I think that's still quite low isn't it?

No. It's not -- like I said, it is very, very close to the overall average margin for ATM.

Okay. The third question is regarding your third quarter margin guidance for ATM, so the guidance almost implied close to 3 percentage point improved while revenue is about 5% to 7% increase. In either pass, when your revenue grew about this similar range like high single digit, your gross margin probably improved about 2 percentage point. So it seems like this time around margin improvement is larger than before. Can you explain why?

I think the -- as we continue to increase the loading, I think they dropped to increase better. Therefore, the margin improvement is bigger.

Also the product mix specifically testing.

Okay. So, if you look at the third quarter, in general like apart from the product mix and the loading, you and SPIL, I mean which one of like as you stand along the SPIL have a higher margin upside improvement in 3Q?

I don't think we are going to comment on that.

Okay. Got it. And fourth question is on the EMS, so is, will be 3Q this year would be similar to 4Q last year, but usually your 4Q was your -- has been the peak of the seasonality. So it seems like the third quarter will have a very strong EMS quarter. So, question is that, it seems like this -- the increasing manage is more significant than typical seasonality and can you specify reason and also after this very high level in 3Q, do you further expect the typical seasonality to occur in 4Q?

I think the overall third quarter changes, I got mentioned earlier on, one of the factors that first suppose the margin as well as the top-line is really the changing or the changed product economic or business profile. What I mean by that is -- it will -- such products the overall pricing cost, volumes and business terms are all going through some changes. And therefore have some impact on the margin itself, and those are on the top-line. And I think the -- in terms of the overall seasonality I think EMS will continue to see quarter-to-quarter growth even into fourth quarter.

Okay. And Joseph, you early mentioned about the operating margin pro forma base, operating margin target is 10%, is that excluding PPA?

We didn't have an operating margin. Yes, we didn't have an operating margin.

I thought that Joseph just mentioned by [OPM] [ph] target you go back to double digit?

No, no. I was referring to EMS in a gross profit margin, our target or the -- we are going to strive very, very hard to bring the gross profit margin back to double-digit or 10%.

Okay. Got it. But based on your third quarter guidance for EMS [OPM] [ph], it seems that you should be able to already above 10% gross margin, all right?

I think the reason why we actually changed the -- I shouldn't say guidance, I think the outlook that we give to audience is because in the EMS business, I think the operating leverage is less. So their movement in the gross margin translates less impact on the -- of the operating margin. So the operating margin is kind of a more stable measurement to look at EMS business.

Okay. And to follow on the crypto power, I remember last conference you mentioned the first half will be like low single digits, second half will be high single digit and full year about mid single digit. You already mentioned about it, you still maintain the guidance in mid single digit. So, is this for full year or second half?

A bit of a correction, I think the crypto currency we were expecting the business to grow from the low single to mid single. I think with the current development in the crypto currency, I think the -- that ratio actually still remain to be at the low single level for this year.

Okay. So which means the first half and the second half will be similar in terms of revenue contribution?

Right.

Then because your second half you have a larger base -- revenue base which has been absolute revenue is higher? That's quite -- actually quite different from what you actually said. So is it different customers?

I think we are coming from the lower base. I think the first and the second half will be similar level.

It's actually very difficult to tell too, right. The crypto currency market is extremely volatile. So, I don't think we want to place any bets.

All right. Last question for me is that the earlier SPIL [indiscernible] have a release of 30% stake to King Yuan Unit Group. Can you tell us that -- now is -- belong as the holding company. So can you elaborate more like any subscript plan, what type of the collaboration was a roadmap there?

I think the overall our China operation some degree of localization is for the overall business and to achieve that some engagement or some local partners involvement to help, improve the overall working situation in China market to be beneficial to us. And so far I think the investment has been working very well. I think the partnership is a smooth one. Hopefully, going -- well, longer term that overall relationship can bring us new some more new business opportunity in China market. And also, for King Yuan Unit Group when their product actually comes out, there will be some backend demand that we will be looking forward to a support.

So that mean the -- I think they already have some product on the larger side, so what -- you just mentioned the new product coming out, you mean memory?

Yes.

Okay. Thank you.

Hi. Thank you. A few follow-up questions. The first one, how are you treating FX in the outlook for third quarter, is that factored in -- are you factoring flat constant currency for both revenue and margin?

Very, very minimum FX impact on the margin the next quarter.

To clarify minimum impact, are you factoring I guess because exchange rate is much as it moved should have some impact, so are you assuming flat currency, FX exchange rate holds you might get some benefit?

We are expecting 3% depreciation.

Three, okay. Second question on automation, and there has been some press stories about ASE taking some pretty big activity in automation. If you could give a flavor just to how much automation like where you are in that project and the type of benefits you could see from the automation initiative?

We have three factories right now fully automated. In the next three years, we will add another 11. We do see benefit in the fully automated factory not in terms of labor savings in terms of the higher reliability. And also the high product mix for a specific products such as the automotive. When the quality requirement and the traceability requirement goes way beyond the consumer product, the fully automated line becomes extremely useful especially for the customer during the audit. They understand where a data comes from traceability and everything they ask for. We intend to continue this trend on the high reliability requirement or difficult to manage product that we will try to incorporate with the fully automated line.

Okay, great. And a follow-up on fan-out, you mentioned Deca is doing pretty well and if you could give a flavor just contribution from fan-out and maybe the latest view, I guess when the volume would get big if mobile application processor or maybe just some of the big end markets were [indiscernible] out? What you see in terms of timing or…

We are very excited about Deca mainly for the adaptability. In other words the Deca process has a very well build in software capability to make sure to maintain a high yield for different type of product mix, different kind of resolution requirement. It's too early to give you the revenue impact what we can say is, we are ramping up the Deca, we are starting from July. We are in the process of ramping up. We will like to have the next six months to ramp various product to a various volume, when you look at a cost model the performance, the margin model are we fully in line with out of this simulation that we have. So by the end of this year, we have a much more clear picture about the future plan. Our plan is to continue to expand the Deca line and cover more products and also continue to expand the capacity. Right now the Deca line is focused on the 300 millimeter. So even though the configuration of software is different but it is to around and then the after we successfully ramp up the 300 millimeter, we start ramping up the 600 millimeter panel. And that would be the project for 2019 schedule to ramp by 2020.

And can those panels be used for application processor or some of the high-end or some of the low-end?

We would hope so.

Okay. The last question is a follow-up to Sebastian on the -- its kind of both the memory in the China, if you could give a flavor just contribution combined company from your China operations now and memory you had a few years ago with the power ASE, but just how you see about how if you want to be getting back into the memory market now?

The overall China operation in terms of revenue contribution to the group is 15% ATM. I believe the China memory contribution in that regard is at a minimal level right now. In terms of the overall group, we are increasing the memory exposure mainly in specialized memory product where ASEs assembly process, material process, test process has a special contribution. Well, as of today, the memory remains to be a small percentage of our overall product portfolio.

Thank you.

Just one follow-up question. So, last quarter you said 1% of appreciation, while negative impact of ATM gross margin by 40 bps, and group gross margin by 30 bps, so for EQ now you expect 3% of the anti-dollar depreciation, but you said probably very limited impact to the gross margin. So, means that you will say 50 number if no longer hold or?

I think we are recalibrating it because of the inclusion of large size operation to us. Right now, we are budgeting minimum impact from FX on a margin, so I think the linkage there is kind of not particularly close with them. So although we are expecting the currency to depreciate but maybe 3%, but then we are not actually budgeting any impact on the margin.

One more from the floor.

Hi. Thank you. It's me again. Just because this is the first time you hold conference after the merger, so previously you couldn't comment too much about the synergy. So I wonder if you can give us some color about the synergy. I mean we understand that before November 2019, you need to roll independently, but I remember in the [indiscernible] also say that there is some facility on the capacity transfer, location and also the R&D discussion at the Board level. So, for this two -- from this two perspective, can you give us some color about the -- how -- is there -- how much room -- how much room we can -- you can do it in the next 16, 17 months?

We cannot comment on the synergy.

Still cannot?

We cannot. We will comment synergy after November 24 midnight 2019. In terms of the R&D collaboration there has been ongoing discussion and the relationship is very, very cordial. The reception on both end in terms of the R&D collaboration about long-term. And that is ongoing right now.

Okay. Let me put in that way is that when you, so earlier thanks to Rick asked a question about the capacity and believe that you have already seen the what's the capacity, what kind of equipment, utilization level the SPIL has and along with yours and how much you see that like the or -- how much do you -- possibly do we have like to transfer or allocate capacity?

At this point in time very minimum. We understand where the equipments are, but there is no transfer of business. And there is no transfer of equipment because both companies are running independent.

Okay. Or is it because both of you are running at high UTR in the second half? So there is no need to transfer these two there?

No. Even if we are rounding in low utilization, we will not transfer the equipment. Both company are running independent.

Okay. Got it. Thank you.

Any more questions? No. Well, thank you for attending the second quarter earnings release. See you next time.