ASE Technology Holding (TWSE:3711) Q2 2026 Earnings Call

0:00 Hello, I am Ken Sheng, the Head of Investor Relations at ASE Technology Holding. Welcome to our second quarter twenty twenty six earnings release. I'm joined today by Doctor. Ken Wu, our COO and Joseph Tong, our CFO. Thank you for joining us today. Please refer to our safe harbor notice on page two. All participants consent to having their voices and questions broadcast via participation in this event. If you do not consent, please refrain from asking questions or leave the session now. 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.

0:47 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.

1:03 Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those separately presented by our subsidiaries. For today's presentation, doctor Tian Wu will begin with a mid year business update. I will then walk through the q two results and and Joseph will close with our third quarter outlook. With that, let me hand the presentation over to Doctor. Tian Wu. Good afternoon. I would like to give you the first half twenty twenty six recap and also the full year outlook. For my presentation will be all in U. S. Dollar terms. Consolidated revenue grew 24% year on year in the first half of twenty twenty six with ATM revenues up 35% year on year for the first half.

1:59 Leading edge advanced packaging and overall testing outpaced growth. For ATM business, we expect to maintain the same growth momentum into the second half. For full year, LEAP services revenue is tracking ahead of prior guidance of US3.5 billion dollars While general segment is expected to grow by 30% year on year versus previous guidance of 13%. So for the full year, we expect the ATM business revenue to grow by 35%. Machinery CapEx was 2,700,000,000 US dollars.

2:47 Building, facility, automation was $1,400,000,000 in the first half. Joseph will give you more detail for the full year. Stepping up investment in R and D, human capital, advanced capacity and also automation and smart factory infrastructure to support the multi year growth. On the second page, I would like to give you some highlight on market dynamics and positioning. There are many moving parts in the market today. You're reading the same newspaper, watching the same news as I do. What I'm trying to present to you is the company view.

3:32 We will try to present you the logic. Why are we making particular decision in this particular junction of time? AI enabled new applications with bigger scale and potentials. I'm not going to articulate the detail. If you're interested, we can talk more in the Q and A. That's our current view. I think very few of you will disagree with this statement that AI is a paradigm shift and we do have potential bigger scale and multiple applications. And that's our current view. In terms of when, how we are monitoring the progress, I believe we are at the beginning of the AI paradigm shift.

4:24 There will be multiple stages of transition.

4:28 We can talk more in the Q and A. The second comment is how we feel. AI demands new hardware that does not exist previously in size, complexity, and integration. You can argue about a competitive intensity, the memory, the power, the linkage, the bandwidth.

4:57 All in all, what we're trying to develop right now is a brand new platform to support the potential AI applications. The data center, the agentic, and future in the physical AI, humanoid, all of the hardware will be different than what we have been producing so far. There is a growing need for industrial power connectivity and storage devices because of the AI transition evolution or paradigm shift. The company is seeing all three right now from all of our customers on the multi year basis.

5:54 Let me talk about ASE's strategic priorities. Again, this is the company view. We have to have a blueprint, a plan, a vision in order for the 100,000 employees to act on. And where I'm trying to present to you is the highlight for that blueprint. Hardware infrastructure is a bottleneck. With AII, the hardware requirement is new, insatiable, and more complicated and more complex. And today, there are very few manufacturers capable of producing hardware.

6:41 Therefore, it is the bottleneck today for our capacity, from automation, and more importantly from innovation perspective. We can talk a little bit more detail about the panel, about co op, about glass substrate, about VRM, about silicon photonics. I can go on and on. But all of these are tied to the infrastructure and your capability to ramp with the complexity integration and the design blueprint the customer are asking to do. All in all, I call all of this to be hardware infrastructure, and that is the new bottleneck. We have not experienced this for the last forty years.

7:30 Packaging is moving up in system architecture value chain. For me as a designer by training, the system architecture always is at the top of the value chain. Packaging is approaching the system architecture value providing the new complexity integration capability with the variable that I just talked about it. Now if you believe hardware is the new bottleneck and the packaging is moving up in the value chain of the system architecture, then ASE has a unique position to support the AI migration, evolution, or paradigm shift and align with all customers' long term objectives today.

8:37 ASE's competitive position, I talked about this for many times. The ecosystem position, cluster or Taiwan cluster, scale or the AI data center Taiwan scale and other digital scale. The efficiency, I want to single out the pure play. The pure play enable you to have a seamless cooperation with all supply chain players. In future, this could be one of the competitive advantage for ASE as a pure play OSAT. That we have no conflict with foundry, with no conflict with substrate provider, we have no conflict with anybody.

9:26 Therefore, we have a good way not only to collaborate with our customers long term, also collaborate with all the ecosystem players that will turn critical for the overall complex integrated nature for the AI transition evolution. The first mover's advantage. I'm very specific about the first mover's advantages, technology, speed, capacity, and most importantly, trust. So everything the company does circle around the long term business objective as well as the seamless integration with ecosystem player and give you the speed, the efficiency, and earn the customer trust.

10:20 So that's the highlight for me for the second half. Okay, thank you. Thank you, Tian. As Doctor. Wu highlighted, our businesses performed extremely well throughout the first half of the year. For the quarter, we saw strong growth within both our LEAP and our general businesses. Non LEAP capacities like wire bond and traditional advanced packaging were also tight. For test, our wafer sort and final test capacities were also running near full. Effectively, outside of equipment lines being placed into service, capacities were generally very close to being full.

11:08 Our blended utilization rate for the quarter was between 80% to 85%. Our capability for near term incremental growth is being gated by our abilities to install capital equipment and build out our buildings and facilities. From a financial perspective, second quarter ATM revenues came in ahead of our original expectations driven by higher loading from both our LEAP and general services. From the profitability perspective, we also saw our gross margin outpacing our original expectations driven by higher loading, resulting in more operating leverage. Revenues for our EMS business were generally in line with our expectations. EMS profitability was slightly below our expectations due to product mix and higher component prices.

12:00 Please turn to Page five, where you will find our second quarter consolidated results. For Q2, fully diluted EPS was $4.61 and basic EPS came in at $4.80 We believe our earnings reflect strong core profitability and a few non operating items we'll outline shortly. Consolidated net revenues reached $191,100,000,000 up 10% sequentially and 27% year over year. Gross profit was 40,200,000,000 with a gross margin of 21.0%, up one percentage point sequentially and four percentage points year over year. The sequential improvement stems from higher operating leverage in our ATM business.

12:51 The annual improvement reflects both structural efficiency gains and a more favorable NT dollar environment. Operating expenses totaled $19,000,000,000 up $3,500,000,000 year over year, primarily driven by higher labor costs and further R and D spend to support LEAP initiatives. As a percentage of revenue, operating expenses remained flat at 10% and declined 0.3 percentage points annually. This delivered an operating profit of $21,100,000,000

13:23 up 21% quarter over quarter and 107% year over year with an operating margin of 11.1%, expanding one percentage point sequentially and 4.3 percentage points annually. Non operating income totaled $4,600,000,000 compared to $700,000,000 in the prior quarter. While this amount appears relatively elevated versus prior quarters, the increase primarily reflects some potentially non recurring gains. Our net non operating income includes mark to market equity gains related to our corporate investments of $4,200,000,000 foreign currency hedging gains of $1,500,000,000 and other items including equity method investment income, government grants, rent income, and dividends totaling zero point

14:22 offset by $1,900,000,000 in net interest expenses. Tax expense was $4,200,000,000 Our effective tax rate came in at 16.4%. We saw a lower effective tax rate due to higher R and D credits generated during the quarter. We continue to expect an effective tax rate of 18% for the year. Net income for the quarter was $21,100,000,000 up 49% sequentially and 180% year over year. On Page six is a graphical view of our consolidated quarterly performance. For the second quarter twenty twenty six, our ATM business represented 66% of our consolidated holding company revenue, while representing 94% of our operating profit.

15:12 This is compared to 61% of consolidated holding company revenue, while representing 87% of operating profit in the second quarter last year. We see this being primarily

15:24 driven by the growth of our ATM LEAP services over the last few years. On page seven is our ATM P and 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 second quarter of twenty twenty six, we recorded record revenues for our ATM business of $126,100,000,000

15:55 up $13,700,000,000 sequentially and $33,600,000,000 annually, representing an increase of 12% sequential and 36% annual growth. Gross profit for our ATM business was $34,500,000,000 up $5,300,000,000 sequentially and up $14,200,000,000 year over year. ATM gross profit margin was 27.3%, up 1.3 percentage points sequentially and 5.4 percentage points annually, driven by higher operating leverage and a more favorable revenue mix, particularly a higher mix of LEAP.

16:42 During the second quarter, operating expenses were $14,700,000,000 up $1,400,000,000 sequentially and $3,300,000,000 year over year. The sequential and annual increases in operating expenses are primarily related to higher overall labor costs and general R and D expenses.

17:08 Our operating expense ratio was 11.7%, down by 0.1 percentage points sequentially and 0.6 percentage points annually. We expect our ATM operating expense ratio should continue to improve during the back half of twenty twenty six. During the second quarter, operating profit was $19,800,000,000 representing a sequential 25% increase of $3,900,000,000 and a 124% annual increase of 11,000,000,000 Operating margin was 15.7%, up 1.6 percentage points sequentially and up 6.2 percentage points year over year.

17:53 The NT dollar had a positive 0.1% sequential

17:57 and a 0.6% annual percentage point impact to our gross and operating margins. On page eight, you'll find a graphical representation of our ATM, P and L. The chart highlights the improvement in our gross profit margin. It should be noted here that our second and third quarter twenty twenty five margins were heavily impacted by NT dollar strengthening. Over this time frame, our margin improvement has been largely driven by the recovery of our utilization rate related to our general manufacturing capacities and increasing LEAP product mix. On page nine is our ATM revenue by the three C market segments.

18:44 LEAP services are primarily included within our computing applications, with a lesser amount being included in the communications applications. As can be seen here, the computing application percentage continues to grow steadily. At this time, we see this trend continuing into 2027 and 2028. On page 10, you will find our ATM revenue by service type. Despite the overall growth in our business, we did not see substantial shifts in service types during the quarter. All business lines appear to be keeping pace outside of small adjustments between materials and others. At the beginning of the year, we believed that our test business, led by rapid expansion of our wafer sort business, would outpace growth in our assembly business.

19:40 While our test business has shown the strong growth we initially expected, our assembly business has been showing even stronger than expected growth, especially as it relates to legacy wirebond services. We now believe that both our assembly and test businesses will grow at similar rates during

20:01 the year. On page 11, you can see the second quarter results of our EMS business. EMS revenues grew 6% sequentially and 12% annually to $65,800,000,000 Sequentially, our EMS business' gross margin decreased by 0.6 percentage point to 8.9%. This change was principally the result of product mix differences. EMS operating expenses increased by $300,000,000 sequentially and annually. Our second quarter EMS operating expense ratio of 6.5% was flat sequentially and down 0.4 percentage points annually.

20:50 Operating margin came in at 2.4%, down 0.6 percentage points sequentially and 0.2 percentage points year over year. The sequential margin decline is the result of product mix and a higher component cost environment. Our EMS second quarter operating profit was $1,600,000,000 down $300,000,000 sequentially and up $100,000,000 annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. Generally, the moves in the consumer and communication categories are related to the seasonality of the underlying products we service.

21:37 The growth in the computing category is largely driven by business related to our AI accelerator products. From the holding company perspective, we continue to pursue synergies between our ATM and EMS businesses to co develop system level solutions, particularly

21:58 in key areas such as optical interconnects, power delivery, and thermal management. By integrating critical EMS competencies with ATM technologies, we have the potential to optimize entire systems end to end, applying the same co engineering disciplines that successfully scaled SIP architecture. On page 12, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents, and current financial assets of $107,400,000,000 Our total interest bearing debt increased by $40,900,000,000 to $306,200,000,000 Total unused credit lines amounted to $396,200,000,000 Our EBITDA for the quarter was $45,800,000,000 Our net debt to equity this quarter was 47%.

22:59 On page 13, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the second quarter in U. S. Dollars totaled $1,700,000,000 of which $840,000,000 was used in packaging operations, dollars $8.00 4,000,000 in testing operations, dollars 49,000,000 in EMS operations, and $2,000,000 in interconnect materials operations and others. In addition to spending on machinery and equipment, during the quarter, we also spent $658,000,000 on facilities. It is worth reiterating what Doctor. Wu spoke of earlier.

23:46 We are investing in capacities and facilities because what we do has immediate impacts on key bottlenecks in semiconductor

23:55 supply, performance and efficiency. The AI build out, regardless of open or closed model waiting, will require unprecedented hardware capacity and capability expansion. At this point, we are just trying to keep up. With that, I'll hand the presentation over to Joseph to walk through the company's outlook. Okay. Now for third quarter twenty twenty six outlook, based on our current business outlook and exchange rate assumption of $1 to NT31.9 versus last quarter's NT31.6 dollars Management projects overall performance for the third quarter of twenty twenty six to be as follows.

24:42 On consolidated basis, in NT dollar terms, our consolidated third quarter revenue should grow by 21% to 22% quarter over quarter. Our consolidated third quarter gross margin should be between 20.5% to 21.5%. Our consolidated third quarter operating margin should be between 11.5% to 12.5%. For ATM, in NT dollar terms, our ATM third quarter revenue should grow by 11% to 13% quarter over quarter. Our ATM third quarter gross margin should be between 28% to 29%.

25:34 On EMS, in NT dollar terms, our EMS third quarter revenue should grow by around 40% quarter over quarter. Our EMS third quarter operating margin should be between 3.2% to 3.4%.

25:53 With that is the twenty sixth third quarter outlook. Now adding a bit of color for the full year and next. First on CapEx, given the stronger demand for LEAP in 2026 and beyond, we will need to add another US1 billion dollars each this year for facilities and equipment. So the total is adding another US2 billion dollars for CapEx.

26:20 While the additional investment for facilities and most of the equipment are for LEAP, we also need to add capacity for mainstream advanced packaging and testing to support the general market demand. On LEAP, while this year's LEAP service revenue tracking ahead of our prior quarter guidance of US3.5 dollars

26:44 as business momentum continues to be very strong, we are aiming to double our LEAP revenue in 2027. Lastly, on ATM profitability, with expanding margin accretive LEAP and test businesses, Our second quarter ATM gross margin of 20.3% came in ahead of our guidance. We continue to expect sequential margin improvement with fourth quarter ATM gross margin likely to exceed our structural margin ceiling of 30%.

27:24 At such points, we will start to review if we would adjust our structural margin range. With that, thank you. During the Q and A session that follows, we would appreciate if your questions could be as clear and concise as possible and asked singularly.

27:48 We will start by taking questions from live participants and then alternate in questions from our online participants. I, as the moderator, will be receiving each question and repeating and directing each asked question. After an initial question, the participant may ask a follow-up question, clarifications of the earlier question, or another question entirely. Then we'll move to the next participant. Participants may return to the queue for any additional questions and or clarifications. Thank you. Doctor. Hu, so just to follow our conversation,

28:38 industry peers seems to be more aggressive in The US operation, not just the NCORE but also KY announced to do that, right? So I want to ask you about kind of your partnership with The U. S. Customers and also your operation in The U. S? I guess it's a little bit separate question, can you also comment a little bit about the Intel EMFT involvement by ASE? Thank you. Charlie, you're asking about the competitive landscape that we're facing and secondly, EMIP. Okay. Doctor. Wu?

29:27 Well, me answer The US operation first. What I'm going to talk about it, I have repeated several times for the last two years. We do have US operation, ISE, test development, also services in California. We have one factory in Fremont, California. We have one factory in San Jose. We're in the process of expanding to number three and number four factories. These are particularly required by our customers for

30:02 the last twenty years in Bay Area for upfront chip design, test development, also technology development. And that is ongoing right now. The agreement that we have with our leading customer is the following. We will develop and build fully automated efficient line in Taiwan.

30:27 We are comfortable with our resources and efficiency. In due time, we will migrate and move the operation to the other places in the world. It could be United States, could be somewhere else. That has always been the case. So it's not like we're not supporting, we are supporting development, R and D, also architectural design. In terms of manufacturing process development, for now we are focusing on Taiwan. Until we build the appropriate scale, having the appropriate resources and know how and efficiency, upon that time we will work with our customers to move to the other part of the world for better logistics.

31:17 The second comment is E NIP. E nip, I'm going to repeat what TSMC has responded. Right now, it's really capacity constrained. If there's any other alternative technology that can offer the same yield to resolve the bottleneck that we have for the AI infrastructure, we're welcome to see that. For ASE, we're also collaborating with the other customers also along the same line, including EMIP. The following question is if EMIP posting potential threat or competitive advantages over a COAS, that's always a possibility.

32:10 I have been working in the packaging industry for forty years. I've gone through about a thousand different packaging designs. At the end of the day, probably 20 will leave, will be here. So there's always a competing technology, alternative materials. That's always been the focus of R and D. For eNiB, we're happy to see if eNiB can ramp up. In terms of efficiency performance, that's up to the system as well as the market to decide. We're not going to make a judgment call who has the superiority. But our focus is to support the COOS. We're trying to ramp up the COBOS scale efficiency as fast as we can. If customer asks for other alternative technology, ASE will also include that in our roadmap.

32:57 I don't think there's a potential threat. Again, we are pure play. If the substrate becomes the right alternative, we just buy substrate and we do the assembly. There is no conflict. So anything is welcome. It is not like a zero sum game. Like you can only choose one. It's never been the case. The world is a big place. More question from the floor. Hi, Doctor. Wu and Joseph, Ken. Thank you for taking my question. My first question is, can you give us little bit more detail guideline for your Q3 ATM demand driver for LEAP and also for general packaging and testing? That's more detailed demand driver across the key applications of product.

34:01 Rick, you're asking for maybe segmented drivers of what's helping the industry or our results pick up at this point. Is that correct? Right. Demand driver. The question is the Q3 driver. Again, have a very awkward and peculiar position because we're capacity constrained. So we talk about 12 to 13% growth. That means we have to add 12 to 13% capacity. The demand overall is strong. I'm not gonna comment about the memory pricing or any consumer devices, but overall, all of our customers are asking for more devices for Q3 and Q4.

34:57 Greg, follow-up? No, not follow-up. The second question, can you elaborate your development of the full cohorts like and this year, roughly about how much is still coming from outsourcing and what's your development and progress into next year of your internal full cohort development? Rick, you're looking for the composition of our LEAP services between what is potentially OS type services and full process and test. I think basically we are on track with our full process business development.

35:44 For this year, we said that we're going to have about $300,000,000 worth of revenue coming from that space and things are on track. We are aggressively expanding that capacity and by next year I think we will have pretty substantial growth in that area as well. And again, this is something that under development. We have not fully I think margin wise as not fully reflected at this point but going forward I think full process will also be another margin accretive business for us and with pretty good substantial growth coming into next year. We have our next question coming from online.

36:39 Next question is from Sunny Lin of UBS. Sunny? Hello, could you hear me okay? Yes, we can hear you. Thank you very much. Good afternoon. Congrats on the very strong outlook. Sorry for not being able to attend in person. So my first question is maybe to follow-up on 2027 outlook. And so maybe take a step back, you are guiding for special lip to exceed $3,500,000,000 So should we be looking at maybe $4,000,000,000 or maybe between 3,500,000,000 to 4,000,000,000 And then for 2027 for it to double, have we already had an idea in terms of breakdown by full process outsourcing for substrate and also test?

37:33 Sunny, you're looking for an update on our LEAP guidance for this year and then looking forward into 2027 whether we have any nuggets of information for you. Is that correct? Right. Thank you, Ken. Currently Well, I think Ken mentioned that we are ahead of our lead revenue this year. And by ahead, think we will be adding another couple of $100,000,000 worth of revenue coming out of this year. And on top of that, for next year, we still see very strong momentum and we believe at this point that we should be able to doubling that to double the revenue or lead revenue next year.

38:29 In terms of we are going full speed ahead with both our assembly as well as test. And as Ken mentioned at this point assembly is also catching up in terms of its growth momentum with tests. So by next year, I think the combination will be pretty much similar to what we're having seen this year. Well, but sorry, let me clarify if I may. So just want to get a bit more color in terms of late breakdown going to 2027. I do assume that full process you account for a much larger portion for 2027. So any color will be very helpful. Probably two quarters from now we'll give you a better color. Thank you.

39:18 Sure. So maybe if I may, second question, Doctor. Wu want to double click on your earlier comment regarding AI driving lots of new applications with different complexities and scope. And so if I may, maybe based on your current engagement with the clients, what type of devices you are seeing better visibility that and then if we could see more meaningful ramp in the coming few years? Sunny, you're looking for a little bit more color in terms of what potential applications and devices that we may see coming in the future. Yeah, due to AI. I would like to separate the technology statement versus business statement.

40:08 Technology would take fifteen to twenty years to develop. And the business team typically you're interested in, four quarters, probably the longest lead time. So let me comment on the CoAs for example or EMIP and other alternative technology. The AI data center is driving computation intensity therefore the rectal size becomes bigger and bigger. That we know already. Everybody demands more bandwidth from logic, ASEC, as well as memory. Therefore the immediate up ground will be the panel. Or more complicated colas to accommodate a bigger chiplet or rectal size.

41:01 That's one dimension that we're dealing with. We also comment that somewhere along the line, towards the end of the year, the CPO will start launching. Initially, it could be in small volume. However, we will have a critical benchmark information in terms of bandwidth and the system performance and also the thermal dissipation that can resolve. Depending on the cost performance ratio and also the yield, we will learn critical information. When the replica becomes bigger and the optics becoming in the different hierarchy, then the power delivery becomes the next immediate questions.

41:48 This will be deployed in the next two to three years. On a much longer term, there are other things people are working on. For example, today we're primarily dealing with digital on digital. There's a lot of activity going on to start accommodating sensor, analog, mixed signal with digital. If you think about the humanoid applications, other than the brain, the eyes, ears, fingers, they're all analog. So what are the technology that can provide the low power, the bandwidth as well as the fully automated, high volume integrated capability to the digital analog mixed signal.

42:40 These are the infrastructure of pure play OSAT supplier to work with the customer trying to develop. The technology takes fifteen to twenty years to develop. All of the business we're deploying now are the result for the past fifteen years of effort. So I would like to make that separation. But if you're interested, I think the AI has a very long leg. You can listen to all the smart people about the infrastructure, AI data center, agentic, and also the physical interface. I also would like to give you some color on how I see the AI. I'm not the best person to talk about it. I have a very simple view to look at AI. AI is for a new pattern recognition in the domain knowledge you're familiar with.

43:34 When people start crossing domain, IT versus pharmaceutical, IT versus medical, the new pattern get recognized. When you recognize the pattern, that's the potential application. We're at the beginning of the knowledge collection and the early stage of a pattern recognition. That's what AI does. But today we'll only talk about single field. Eventually in the world, I do not know how many, it's got to be 100 domain. How do you bridge all of the domain knowledge and start creating something hybrid? The medicine, the surgical, humanoid, all of this are the potential application.

44:22 All of the technology will use exactly the building block that we're developing today. So what we're doing not just for AI data center. If all we're thinking about is AI data center for a specific customer, then we really missed the point of what engineering does. Engineering is to build elegant solution for the future demand regardless how difficult it is. It takes fifteen to twenty years. This is not a stock trade. But what you're seeing is we are the first mover. We already have the cluster efficiency in the early stage of this AI transition. I think that means a lot if you really understand what I'm trying to tell you. No problem. Sounds good. Thank you very much for sharing Doctor. Tian. Thank you, Sunny.

45:15 Next online question is from Gokul Hariharan. Okay, good afternoon. Thanks, Doctor. Hu, Joseph, and. First question just to Doctor. Hu, You have been working in very close partnership with the lead foundry customer lead foundry partner for the last few years, which has been helping the LEAP revenue growth quite nicely. They seem to be transitioning a little bit towards three d panel level kind of future technologies, at least pretty aggressively, it looks like in the next two, three years, compared to last three, four years have been largely been about CoWoS and various forms of cohorts.

46:09 So as they are embarking on that partnership, on that kind of transition, Doctor. Wu, help us understand what is ASE's role? Is it getting elevated further in that partnership? And obviously, of the full process cohorts is also a result of them leaving some of the older areas to you as well. So just could you outline your what you talked about on the technology side in relationship to how this partnership with Elite Foundry is going to work out in the next maybe two, three years first? Gokul, you're asking about as our foundry partner progresses into their further down their technology roadmaps, how our plan what our plans are to intermix and or interlink with them in this process. Is that correct? Yeah, and do you get more value add out of it as they migrate out to more complicated packaging?

47:16 The collaboration is long term. Once again I want to focus on the pure play. The foundry ideally is a pure play for wafer. Testing, bumping, packaging are enabler to support the delivery of the wafer to the correct customer in the correct timing, also with the correct efficiency. Packaging pure play is to develop a packaging architecture, all the LEGO pieces, to facilitate that. When the pure play foundry with the pure play packaging collaborate, that boundary is very clear.

48:05 So today there are packaging that needs to be taken by the foundry people because access to the leading edge wafer is simply not available to the others. Or some architectural requirement that has strict IP that would like to honor and respect the customer as well as the foundry. That is a domain that the pure play wafer people needs to decide. But preclude from that, the collaboration will cover all aspects in the packaging arena. In terms of where do we stop the line, when do we start the line, that depends on the wisdom of the management team of the ecosystem collaborator.

48:54 I'm not sure how to give you a better answer. But as you can see, the OS, the full process, all of the collaboration are the full spectrum. In terms of future, we do not know. But it really depends on the pure play IP as well as the customer's requirement. But we will try to navigate through all of the complexity. But the important thing is we all understand we would like to provide speedy, the most elegant solution in the quickest amount of time to our customers collectively. That understanding is very clear and it's very obvious for the next few years as well as the ramp up in the next few years.

49:45 Got it. That's very clear. Thank you, Doctor. Wu. My next question is just on a couple of the guidance increases that you have. One is on LEAP for 2027. I think previously, we were expecting, I think, 1,900,000,000 or so additional. Now we are expecting doubling of the revenue. Is that primarily coming from having more line of sight into capacity availability? Because I think demand is probably still much higher than what you can really support even next year. And secondly, mainstream us expecting the growth to be close to 20% this year from the, I think 13% previously.

50:31 Where is that upside coming from on the mainstream growth? Gokul, you're looking for incremental explanation related to what is driving our LEAP 2027 outlook and also what has helped us drive our mainstream expectations up this year. Is that correct? That's right, yeah. We have clear line of sight in terms of who needs what. We also have a clear line of sight on the building, the facility that we're building today. When we make a comment that this year by year end we're tracking ahead of the 3,500,000,000 That comment is made because we see our yield and execution that gave us the confidence to tell you that by year end we will achieve that target.

51:36 But at the same token, we also give you a comment that whatever the target has been achieved by year end, with the next twelve months building new facility and adding new machines, we will be able to double that. That line of sight is there. The uncertainty exists in terms of how can we execute. So the business demand is not a concern. It's our own capability to execute the two line of sight which is clear in front of us. In terms of the general devices, we see very strong demand in industrial, power, connectivity, and storage devices.

52:23 I do not know what the general market for semiconductor this year. I don't have that number. I believe we will outperform the general market simply because our association with a stronger AI infrastructure development, also our superior capability to have fully automated lines for most of the general devices. So people want to build devices to go into electrical vehicle, AI data center, or any high impact, high risk applications, chances are they will use our fully automated line. That's why we're having very good traction.

53:13 So in terms of capacity expansion, not only we need to expand the LEAP, we also need to expand the general market. That's putting immense amount of pressure on ASE, which is why I think during the shareholders meeting, I complained that ASE is building 13 new facility simultaneously this year. And we just bought another seven brownfield. So we're building, we're buying, and we're spending CapEx. We're not happy about it. But the question now is that is our obligation. This is why we're here. We want to make sure we are providing the critical capacity to the best of our capability to satisfy the long term objective for all of our customers.

54:05 Got it. Yeah, that's very clear. Yeah, thanks very much. You. Charlie, do you want to shot at another round of questions there? Yes. Go ahead. I do have two questions but can I make a clarification on the previous Q and A? Please go ahead. So about the LEAP revenue next year, So just you took about the mix would be very similar to this year, next year's LEAP revenue mix, right? But according to your analysis, it seems like you have full kind of a 2.5D the end customer is at 86 CPU, their part is growing 3x.

54:59 And I assume you're testing business is also growing more than double. So how come the rest of the substrate kind of outsourcing can also double next year? Because NVIDIA, I think the three consensus is like next year is growing 50% and case and recall the extension is like 70%. I think that was referring to in general assembly and test seems to have the same momentum but assembly includes not just OS, are full process, there are other steps or process steps that we are entering. So also some new packages that are coming on stream.

55:45 So I think that's a general description of what we are seeing next year in terms of between assembly and test. Anyway we were very happy to see that strong growth. I just want to make sure we get a breakdown right. And next question is a little bit joking, but I just see that your quarterly CapEx is feeding your EBITDA, right? So is that your free cash flow is also turning negative. Do you think share price will react negatively tomorrow? Yes, I think we will continue to have very heavy CapEx for this year, not only this year, but also going into next year. So I think the negative cash flow situation will remain for some time.

56:32 But at the same time, we're still maintaining a very healthy balance sheet and we do have multiple cost effective funding sources to fund the upcoming CapEx requirement. So at this point I think we're pretty confident that we we will be able to support our growth in a healthy manner. And we are still at the early stage of this mega trend. And so like I said last time we're not going to be shy in making the necessary investment to not just to support our customer but also to maintain our clear leadership position in this field. Okay. Thanks, Joseph. Yes, we really like to hear you have a more funding need.

57:22 So last one is pricing and margin. So we keep hearing from your customers that you hike the price aggressively in second half. Can we confirm if this is the case, whether it's more price hike in a traditional service or the advanced packaging? Think it's a power one. And secondly, how does that translate into your kind of long term gross margin outlook? I think you were having this like 26% to 29% margin range for several years. Right? Do you think you can break to the 30% anytime soon? Thank you. Yes, I think it's like I said in the outset, we will be we're very likely to exceed the margin ceiling in the fourth quarter.

58:18 And at that point of time, I think we will start to review whether we should adjust margin, structural margin range. Of course when I say adjust I mean upward adjustment. I think we are still in a very, very kind of a friendly pricing environment. I think of course we saw a lot of inflationary pressure in terms of materials and components so far. So far we can definitely pass on these cost increases to our customers through our pricing arrangements. And of course we'll continue to see for the most suitable pricing strategy considering the situation as well as our margin return requirement.

59:12 Are you okay? Okay. So the next question, we will go back online. Our next online question is from Has Liu of CoA. Hi, can you hear me? Thank you so much for your Yes. Time So, just a few questions from me. I think first one is that when you commented on the gross margins, it's likely to exceed the ceiling of your structural gross margin shrinking fourth quarter. Would you be able to share with us how much of that would actually be contributing from your particular part of the business and how much of that would potentially liquefied your growing mix in the lead contribution?

59:59 You. Hans, you were kind of breaking up, but I think you're asking what is contributing to our positive outlook in terms of maybe perhaps hitting our structural margins. Yes, fourth quarter. And specifically, I wanted to know which part of the sector is more important. Is it the LEAP business contributing more or is it because of the sure packaging on the whole business you are testing your pricing strategy to make that? ASE is looking for the prime contribution for structural margin. Well, I think margin improvement is a combination is a result of a combination of different factors, including the margin accretive business growth, including our improvement in efficiency, including the continuous expansion of our automated factories.

1:01:02 Operating leverage does a of course it plays a very important role as well as we continue to see volume growth. On the operating side, we are also seeing our passive investments start paying off. We are seeing on an annual basis, we're seeing OpEx ratio continue to drop. I think overall the efficiency is much improved and we have a much solid base in terms of our revenue coming on stream. So that's give us the confidence that we should be continue to see margin expansion on a sequential basis at least for this year and next. And like I said, once we pass the structural margin range, we will start reviewing that and see how far we can go.

1:01:53 Yes, that's great. Thank you so much. And then just a quick follow-up on your CapEx. Would you be able to provide a breakdown since you also mentioned that the general market demand is also very strong as well? Would you be able to provide a breakdown for your growth for your CapEx for this year? And for next year, know you probably will not be able to give qualitative guidance at this stage for CapEx. But would you be able to discuss that which part of the business is probably going to outgrow from the spending perspective? Is it going to be evidence or mature business is going to still be pretty solid from the spending? Thank you. ASE is looking you're looking to understand what the CapEx makeup is of what's driving the increase or what components are driving the increase this year. And then maybe if we have any type of nuggets of wisdom related to next year's CapEx?

1:02:47 Well, I think obviously we are seeing a stronger demand forecast coming from not just customers but also our foundry partner. And the requests that are coming in require a lot of the new investments, not just for this year but also for next year as well. As we continue to see very, very strong business momentum in both assembly and test Express again. Also there are new projects or new products, new process steps that we are entering to. We would not just put in the necessary equipment CapEx. We also have to have the new facilities to house those capacity and also spending quite a bit of money for the R and D to support those new products or new projects that are coming on stream. So our CapEx is really based on the what was necessary coming out of customers demand and we want to put the right resources onto those high potential revenue basis for us to continue to invest.

1:04:03 Okay and your expansion going forward will probably be just pretty similar to your foundry here. Probably, you are going to probably focus more on the areas that you can convert capacity from one to the other. For example, furniture and also bumping, you can both use in the mature business as well as in the advanced business. So that is probably the area that you're spending more money. You're looking to well, Hass, we've got to try to limit those questions to two in the future again. But I guess we can try to comment a little bit on where we're spending the CapEx as it relates to maybe this is an opportunity to talk about construction and our difficulties in terms of building buildings or getting enough buildings.

1:04:52 Okay. But this year, we're raising the CapEx by $2,000,000,000 That brings up the total to about $10,500,000,000 And out of this $10,500,000,000 $4,000,000,000 will be for new factory buildings and facilities and 6,500,000,000 for equipment. Like Ken just mentioned, in terms of these new capacity that we're going to put in, we need to have the more advanced factory buildings and facilities to house this capacity. So at the same time, at this very moment we are having 13 greenfield projects going on. We have another eight brownfield projects.

1:05:40 By brownfield we mean that we are buying existing factories and try to renovate them to suit our needs. I think the current projects will be sufficient for us to carry ourselves into '28 maybe some part of '29. And we'll continue to look at the situation and find a suitable new locations for further expansion going forward. And with these 20 projects going on at the same time it puts a lot of challenge on us, puts a lot of pressure on us in terms of we really need to have a very, very efficient and very responsive construction partner for us to make sure everything is delivered on time. All the specs are all the qualities according to spec and this is something that we are working on and hopefully I think Tim mentioned that execution is everything you manage there.

1:06:46 What we need to do is really to execute whatever we're set out to do. Got it. Thank you so much, Joseph. Do we have another question online there? Yes, we have online question from Gokul Hariharan of JPMorgan. Hi. Thanks for taking my follow-up questions. First of all, on CapEx, Joseph, I know that you're not guiding for next year, but looking at what Doctor. Wu mentioned, it definitely feels like CapEx is still likely to keep rising into 2027.

1:07:32 Is fair that statement to make, given the gap between supply and demand that you're currently facing, especially for LEAP? Goku, you're looking for some hint in terms of 2027? CapEx. Yes. Not CapEx. Well, I think it's better if we I know it's gonna be big, but how big? I think we want to pay it for another quarter or so to see to have a better clarity on how much we would need to spend next year. Okay. Understood. Could you also talk a little bit about anything that you're seeing on the COPA, also the panel level packaging development?

1:08:25 Based on your current assessment, when do you expect this to potentially start entering production, given that there are so many different views out there in the market? Gokul, you're looking for an update on our panel processes? Yeah, panel process, yes. The different panel process for ASE's panel process are fully automated line will start production by Q1 of next year. And that is in the form factor of three ten by three ten. In terms of the COPAs, I know there are many alternative materials that people are evaluating.

1:09:15 R and D people are working with substrates supplier, foundry as well as customer to evaluate the feasibility and also the economics of it. But right now we do not have the glass substrate in production, not for the next twelve months, if that's the question you're asking. Thank you. Got it. And how does the ASE's three ten by three ten solution differ? Is it for a completely different kind of market or customer compared to the foundry scope of kind of solution? Or is it like quite complementary compared to what they are trying to offer?

1:10:02 They're quite complementary. It's actually the same customer set. Similar the rectal size. In terms of the pitch size, line width, they're all identical, cover the similar range. But in terms of which customer will adopt what, not only depends on the capacity and the performance and also the speed of execution. Okay, okay. That's clear. Thank you very much. Thanks. On CapEx, I want to give you guys a clarification. I think for this year, out of the total CapEx, like I said $4,000,000,000 is for factory and facilities, dollars 6,500,000,000 for equipment and for equipment I think it's about 56% is for assembly, 40% for test and the remaining for EMS and some for material.

1:10:59 In terms of assembly and test breakdown, in terms of the leading edge, think 70% of the equipment CapEx is for leading edge for this year. Okay, Another online question. Yes, we have Samilian of UBS. Thank you very much for taking my follow-up. So my first follow-up will be on CPO. And so maybe good time if you could share with us, given the complexity of the technologies, what type of services ASE as a group will be able to offer?

1:11:50 And then based on the current development, when do you think the revenue contribution for ASE could become more meaningful? And then given USI, they also acquired optical module company as well earlier. And so what are the synergies that you think you could drive? Do you have IC ATM and also EMS capabilities? Sunny, you're looking for an update on what particular we would be doing in regards to CPO and also potential linkages with our EMS business. Is that correct? Yeah, thank you. On the CPO, I would like to wait for two quarters before I give you more detail.

1:12:38 The CPO service as was the revenue also the 2027 outlook. I prefer to have a little bit more time to talk about that. In terms of the optical hierarchy, the hybrid between the electrical signal and also the optical signal, I think that direction is definitive. The question now is when and how could we execute that at the system architecture from near field to outer field. Some optical devices are premature. It has been used for many, many years. And some near field, at a chip level, at a substrate level, that needs to be created, which is very, very difficult which is why the industry has taken so much time trying to develop.

1:13:37 I think by the end of the year we'll have some database in terms of how that is behaving, how that is working, And whether how much benefit, how much ramp up, I think 0.5 time. By the way, we have been working on this for about twenty years. So two more quarters, I think we can wait. Sure, looking forward to that. Thank you. Yeah. Looking forward to that update. And my second question, I'll be very quick. So for your full process COAS given you have better visibility now for 2027. So want to understand your progress internal diversifying for your client, also product base.

1:14:23 Should we assume for 2027 CPU should be very major or should we assume good volume coming from the other applications like accelerators as well? Sunny, you're looking for probably something that can't be answered. In terms of you're looking for what our products that would be in terms of our full process services? Yeah. Basically, your progress in terms of product based identification for full process. I think for the full process, we should be able to give you a better visibility in a quarter or two.

1:15:09 Right now we do have line of sight in terms of full process. We're tracking nicely. And also for the next year we do have line of sight. We have full visibility in terms of capacity that we're developing. Now in terms of the customers, is the need a little bit more time to digest how much information can we share. I think in two quarters time we should be able to give you the following. Our leading edge, our lead services revenue for next year and also the OS, full process and others. The assembly and test, I think that we can share. In terms of GPU, CPU, ASEIC, we need a little bit more time to digest how much information we can share.

1:15:59 But right now, our clientele portfolio covers all of them, which is good. And we're just waiting for a clear execution such that we know our yield and also how well the system performs in the marketplace. That we're waiting anxiously. Thank you. Thank you very much. Our next online question is from Michael Rasnicus. Hi, how are you? Thank you for the call here. I just want to clarify, when you gave Q3 guidance, did you say that EMS will grow 40% quarter on quarter revenues?

1:16:52 Michael, you're looking for a little bit of explanation behind the EMS growth. Yes. So it's a pretty huge, huge quarter on quarter growth. So yes, just want to clarify what's going on there. I think the 40% growth is it is a little bit abnormal seasonality. I think this is largely because of the component price hikes, particularly in the memory sector. So if we take that part of the number out, I think the third quarter EMS should see a typical seasonality kind of movement. Makes sense. And how about Q4 in terms of quarter on quarter? Is it still growing over Q3? Or is there will it shrink, will revenues, EMS shrink or revenue shrink in Q4 versus Q3?

1:17:54 At this point, we're seeing a pretty similar level of revenue in the fourth quarter for EMS. Okay. That's very helpful. And do so overall for the year, did you I think did you say in your overall comments that you're looking for 25% plus full year growth, revenue growth? Michael, you're looking for full year guidance, or full year outlook for EMS and ATM? Yeah, overall revenue growth. I thought there was a comment about sort of 25% plus type of revenue growth. Is that right?

1:18:47 EMS at this point, think on the full year is just sub 20% kind of growth for the year. Sub 20? Correct. Okay. So, that's sub 20 and the ATM business will be 35% plus type of growth? Also correct. Okay, got it. And what is the impact on EMS margins from with the big memory component and larger revenues? Is it flat year over year or is there an increase or decrease? I can talk about the third quarter. Think if we take out the component price hikes, I think the operating margin will be very similar to typical seasonality of 3.7%, 3.8% level.

1:19:41 Okay. And so the memory is just sort of a pass through type of cost for you guys? That's correct. Got it. Okay. Thank you for that clarification. And congratulations on very strong performance. Thank you. Thank you. Do we have more questions online? More questions on the floor? No? Okay, very good. Thank you very much. I would like to thank everyone for attending our conference call today. Joseph, do you want to close-up? Well, I'm sure we're to have another good quarter in third quarter and we'll bring you some more new good news next quarter. We'll see you next quarter.