Advanced Semiconductor Engineering's (ASX) Q4 2015 Results - Earnings Call Transcript

| About: Advanced Semiconductor (ASX)

Advanced Semiconductor Engineering, Inc. (NYSE:ASX)

Q4 2015 Earnings Conference Call

January 29, 2016 2:00 AM ET

Executives

Kenneth Hsiang - Head of Investor Relations

Tien Wu - Chief Operating Officer

Joseph Tung - Chief Financial Officer

Analysts

Randy Abrams - Credit Suisse

Roland Shu - Citigroup

Rick Hsu - Daiwa Securities

Jean-Louis - Haitong

Patrick Liao - Macquarie

Sebastian Hou - CLSA

Kenneth Hsiang

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE. Welcome to the ASE Group 2015 Fourth Quarter Earnings Release. All participants consent to having their voice-in questions broadcast via participation of this event. If you do not consent, please hang up at this time.

Please refer to page 1 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 high degree of risks and our actual results may differ materially from these forward-looking statements. For the purpose of this presentation, dollar figures are generally stated in New Taiwan Dollars unless otherwise indicated.

For this earnings release, our COO, Tien Wu, will have some opening remarks. I will be going over the financial results, and then Joseph Tung, our CFO, and Tien Wu will have a Q&A session. Following the event, our VP In-Charge of Public Relations, Eddie Chang, will be addressing the media in Chinese.

Our Operating Officer, Tien Wu.

Tien Wu

Good afternoon. Happy New Year. Thank you for joining the earnings announcement for 2015 Q4 and for the whole year. We have gone through a very challenging 2015. There has been market fluctuations, as well as very aggressive inventory control. Here, I would like to give you some market highlights for 2016 and also some of the focus the ASE will engage in 2016. I will leave the earnings details to Ken Hsiang and later on, Joseph and myself will answer you via Q&A.

To begin with, I would like to give you some highlight for our outlook this 2016. We believe the inventory control is over. Right now, because there is two economic uncertainties in the marketplace, we're not exactly sure about the end market sell-through.

However, even with our conservative estimate, ASE Group this year will go through mild growth. We believe we'll go through the seasonality in Q1, resumed by quarter-on-quarter growth for the remainder of the year.

Second, our growth engine remains to be SiP. In the past three years, we have gone through very rapid expansions. Right now, at a group level, the SiP revenue is close to $2 billion. In the last three years, we have acquired and learned valuable lessons by working with multiple customers in multiple market segments.

Some of the findings are very useful for us in terms of resize, and we balance our portfolio going forward. For example, the first thing we learn is SiP is very good. We are very convinced that in the next 5 to 10 years, SiP will remain to be one of our focus for our growth engine. The market demand is tremendous. The pipeline is tremendous.

Number two, not all SiP will be profitable. We learn this by the hard way. Some of the SiP, the value is not right. Some of the SiP the market turns. The business framework is not correct. So, going forward, we will rebalance our SiP portfolio. We will try be more selective, find more critical resources in the SiP products and market segments that will warrant optimization on our profit and efficiency.

Certainly, we do have [indiscernible] of critical gaps. By working with multiple customers and the multiple pipelines, we understand that in the sensor, in the optics, in the heterogeneous integration in the fan-out arena we do have some gap that we need to fill out. Especially the 50 design engineers as work in firmware and software engineers.

In 2016, for the SiP, we will rebalance our product portfolio. We'll focus on the profit and optimization. We'll also focus on the technology gap and the resource gap, such that going forward, we can manage our pipeline, our customers. We believe this rebalance, we'll see a great effect in 2017.

Lastly, SPIL acquisition. SPIL acquisition is our answer to the OSAT industry of combining resources such that we can have a better differentiation, better product, better service to the market players. This is also in line with the global semiconductor consolidation which is ongoing today. The only update we have right now is all regulatory approval matters are ongoing. We are optimistic of the outcome. Whenever we have update, we will give you the - we'll give you the update as soon as possible. Thank you.

Joseph Tung

So, we have here an update on the SPIL transaction. I can read them to you. Key facts relating to the still current tender offer, ASE plans to acquire up to 770 million commons shares of SPIL including common shares represented by ADSs, representing approximately 24.71% of the issued and outstanding share capital of SPIL. Closing conditions to the tender offer; one, a 5% minimum thresholds, at least, you can view that number; two, Taiwan FTC's approval.

The tender offer commenced on December 29, 2015 and will expire on February 16, 2016. If the FTC requires additional time to review this case, the tender offer period may be extended to March 17, 2016. ASE is working on all regulatory approvals for the tender offer. ASE plans to use its cash on hand and loans to fund the tender offer. ASE currently holds 24.99% of SPIL. If the current tender offer is fully subscribed, ASE will become the owner of approximately 49.71% SPIL.

The transaction is a two-step acquisition with an ultimate goal of 100%. ASE intends to ultimately proceed with a 100% all cash acquisition of SPIL pursuant to the Taiwan Business Mergers and Acquisitions Act at TWD 55 per common share and TWD 275 per ADS. But subject to the condition that either SPIL shareholders do not approve if third-party transaction announced by SPIL on December 11, 2015 at any shareholders meeting or SPIL terminates or cancels the third-party deal in accordance with its terms. If the above conditions are met and the tender offer is consummated successfully, ASE would seek to discharge the SPIL board and elect new nominees to the board to implement the 100% cash acquisition. ASE remains open to a friendly resolution with SPIL. ASE believes the SPIL transaction is EPS accretive and the combination of the two companies would be beneficial to Taiwan IC assembly and testing industry both sides, shareholders and customers.

The quarter's performance was more volatile relative to our expectations. Effectively, we saw manufacturing deceleration and then acceleration due to market share dynamics within our communication products. This resulted in below expectation performance from our SiP products, offset by stronger than expected performance within our IC ATM business unit. All in all, the end results for the fourth quarter was about our EMS business unit track below our expectations while our IC ATM business unit track on the higher end of our expectation.

With that all said, we're not reading too much into the trend as we are uncertain as to what such products will eventually sell through. On a fully consolidated basis for the fourth quarter, the company delivered fully diluted EPS of TWD 0.60 and basic EPS of TWD 0.62. Our direct materials and EMS businesses were up 5% and 9% respectively. Our packaging and testing businesses were down 2% and 1% respectively. Consolidated gross margins edged down 0.2 percentage points to 17.6%. Gross profit improved 2% from TWD 13 billion to TWD 13.3 billion.

Operating expenses decreased by TWD 0.2 billion. Operating expenses as a percentage of sales decreased by 0.6% to 8.5%. It's worth noting that we expect our operating expense percentage to increase temporarily during the first quarter due to professional fees related to our ongoing tender offer.

Operating profit was TWD 6.8 billion, up 7% or TWD 0.4 billion from TWD 6.4 billion. Operating margins improved 0.2 percentage points to 9%. During the fourth quarter, we had a net non-operating loss of TWD 0.5 billion versus a net non-operating gain of TWD 1.4 billion in the third quarter.

Foreign exchange went from a loss of TWD 2.5 billion in Q3 to a gain of TWD 0.4 billion in Q4. Valuation of financial instrument including the ECD went from a gain of TWD 4.5 billion to a loss of TWD 0.7 billion. These two items accounted for the majority of change in our non-operating income. Our estimation of sales contribution to the current quarter was limited to TWD 100 million.

Pre-tax profit for Q4 was TWD 6.3 billion, down TWD 1.5 billion. Income tax for Q4 was TWD 1.3 billion, up TWD 0.2 billion. Net income for Q4 was TWD 4.7 billion, down TWD 1.7 billion. Net margin was 6.2%, down from 8.7% in Q3.

Using SPIL's reported but unaudited results, you should recognize the loss of TWD 53 million instead of a gain of TWD 100 million displayed here. We believe the variants from SPIL results drops our EPS by TWD 0.02 for basic and dilutive purposes, not an estimate at this time.

Here, you can see the extent to which the access inventory conditions have impacted our IC ATM business unit's fourth quarter performance. There were declines across our IC ATM business with Packaging, Testing and Materials declining 9%, 5% and 7%, respectively. Our EMS business was a highlight growing 6% making additional inroads with SiP offerings.

On a year-over-year basis, our consolidated net revenues declined by 1%. As a result of the softness and this product mix shift, gross profits were down 19% with gross margins down 3.8 percentage points to 17.6%. Operating profits were down 31% with operating margins down 3.8 percentage points. Net profits were down 40% with net margins declining 4.1 percentage points.

Fully diluted EPS for the year was TWD 2.41, basic EPS of TWD 2.51. Again, we estimated there should be a TWD 0.02 differential between our estimate and the amount reported by SPIL. So, I think you have to do the math on all of our pages here.

On a year-over-year basis, our consolidated net revenues improved by 10% with the lackluster Android handset product cycle impacting our customer sell-through. We saw our revenues for our packaging, testing and direct material businesses declined by 4%, 3% and 8%, respectively.

During the year, we also saw our EMS business unit penetrate a core wearable product. As a result, our EMS business grew 31%. We had some start-up capacity alignment issues. However, we believe in the criticalness of wearables as a unit driver going forward. Primarily because of this product mix shift, gross profits were down 6% with gross margins down 3.2 percentage points to 17.7%.

Operating profits were down 16% with operating margins down 2.8 percentage points. Non-operating income for the year was TWD 0.1 billion composed of foreign exchange loss of TWD 0.7 billion; gain on valuation of financial instruments, including ECB, of TWD 2.5 billion; net interest expense of TWD 2 billion; investment income and other non-operating income of TWD 0.3 billion.

Net profits were down 19% with net margins declining 2.4 percentage points. However, even with the fairly negative operating environment, we were able to keep EBITDA down just by 1% to TWD 57 billion versus TWD 57.6 billion the previous year.

Please note the intercompany revenues, including the SiP technology business performed by our IC packaging business unit on behalf of our EMS business unit, are eliminated during consolidation. Our IC ATM net revenues declined TWD 1.5 billion or by 4% during the fourth quarter to TWD 38.4 billion. Revenues for our IC packaging, testing and direct materials businesses decreased 4%, 1% and 2%, respectively.

NT dollar depreciation had a 1.62% favorable impact on revenue and 0.92 favorable impact to gross margins.

First, profit was up TWD 0.7 billion to TWD 10 billion. Gross margin declined 0.7 percentage points. The gross margin decline was principally the result of softer loading. The composition of the margin decline principally was the result of lower revenues and the pace of semi-fixed cost.

In particular, relatively higher factory supply consumption as a result of product mix accounted for 0.5% of the margin decline. Operating expenses were down TWD 0.4 billion to TWD 4.7 billion. Operating expense percentage was down 0.5 percentage points to 12.1% from 12.6%. Again, we expect our OpEx percentage to increase during the first quarter with regard to professional fees related to the ongoing tender offer. Operating margin was down 13.9% from 14.2%. Operating profit down TWD 0.3 billion to TWD 5.3 billion.

Pages 8 and 9 are for your reference. On a more detailed view of our packaging operations, in Q4, our packaging revenue declined 4.2% sequentially to TWD 31.1 billion. Our packaging gross margin decreased 1.2 percentage points to 23.6% sequentially. The margin decline was principally caused by lower loading and relatively fixed labor and factory supply cost offset by lower off-peak utility cost.

During the quarter, capital expenditures were $64 million composed of fan-out wafer and flip-chip investment, $29 million and common and IC ATM and SiP at $35 million.

Capacity overview. During the quarter, we added 1 and retired 50 wire bonders. We exited the quarter with a total of 15,568 wire bonders in operation. 8-inch and 12-inch capacity remained unchanged at 95,082 and 0.5 thousand wafers per month respectively.

Within our packaging product breakdown, our advanced packaging within - including SiP decreased to 33%. Our IC wire bonding business increased slightly to 58% and our discrete and other segments decreased to 9%. This quarter's performance is predominantly the result of moderating SiP related services within IC ATM.

Past revenues of TWD 6.4 billion were down 1.1% sequentially. Gross margin was sequentially up, 1.5 percentage points to 37.6%. The changes in gross margins was principally the result of higher labor and machinery efficiency. Overall, cost of services per test decreased TWD 0.1 billion to TWD 4 billion. Our testing utilization rates stayed in the high - mid to high 70%. CapEx for the test business was $18 million.

In Q4, we added 55 and retired 37 testers during the quarter. At the end of Q4, our total tester count stood at 3,435.

Material business. Revenues for material business was sequentially up 1.4% at TWD 2 billion. TWD 798 million was from sales to external customers. Our internal self-sufficiency rate increased to 25% from 23% by value. Gross margins were sequentially up by 1.9 percentage points to 13%. The gross margin increase was principally the result of a more favorable product mix as compared to Q3.

During the fourth quarter, our market segment share percentages did not appear to change significantly. However, it is worth noting that our computer segment did see a small but significant 1% increase in segment share for two consecutive quarters.

Revenues for EMS business unit were sequentially up 8.8% to TWD 39.3 billion from TWD 36.2 billion. Revenues year-over-year are up 5.7% as compared to TWD 37.2 billion in Q4 of 2014. Revenues within our EMS business unit increased primarily as a result of increased seasonal SiP-related business offset and part by declined in our wearable SiP business.

Those margins declined 1 percentage point to 7.3%. The margin decline was principally the result of product mix. Gross margins for our wearable SiP device continue to be adversely impacted. However, recent actions have made incremental improvements. We expect the current environment to persist through the first half of 2016.

EMS gross profit decreased to TWD 2.9 billion. CapEx for EMS business unit was $5 million during the fourth quarter.

During the fourth quarter, our communications products segment increased its segment share in line with SiP's seasonal patterns. We also saw our consumer segment continue to decline. Our computer segment also shows significant growth relative to new traditional EMS projects ramping.

Looking out into Q1, we believe that we will see a stronger-than-seasonal decline in our communications segment mix, driven by weaker-than-normal SiP demand.

At the end of quarter, we had cash and cash equivalents in current financial assets of TWD 59.1 billion, increasing from TWD 45.6 billion the previous quarter. We also had our interest-bearing debt decrease to TWD 120.4 billion from TWD 124.5 billion in the prior quarter. As a reminder, our investment in SPIL is recorded in investments equity method.

We still have TWD 159.3 billion in unused credit lines. EBITDA declined TWD 14.2 billion from TWD 15.9 billion, principally as a result of lower non-operating income in Q4.

Capital expenditures for the fourth quarter totaled $90 million, of which $64 million was used for packaging, $18 million for testing, $5 million for EMS, and $3 million for interconnect materials. EBITDA for the fourth quarter amounted to $437 million. We believe the disparity between the CapEx and EBITDA bars on this chart generally demonstrates the cash-flow-generating capability of the company.

From a total year perspective, we do not see a particularly capital-intensive year but should be a notch up from 2015. In addition, we look forward to record EPS achievement, with the inclusion of incremental SPIL investment income.

Looking out into the first quarter, we see that there is a lot of market competition in the handset space amongst our customers. Recent trends and developments would seem to indicate that our current portfolio of SiP-related products for both IC ATM and EMS face some additional headwinds during the remainder of their individual product cycles.

However, we do believe that the inventory situation that plagued us during 2015 has dissipated, and we do see some positive signs from our material business unit which generally is a lead indicator. But at this time, we take these signs as inventory replenishing and we prefer not to get overly exuberant in our outlook.

So, our guidance as it is, IC ATM capacity should stay flat and blended utilization rate should be down high-single digit sequentially. IC ATM gross margin should be approaching first quarter 2014 levels. EMS business should decline moderately on a year-over-year basis. EMS gross margin should decline slightly quarter-over-quarter.

Now for Q&A.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]

Kenneth Hsiang

Randy? Name and company, please.

Randy Abrams

Okay. It's Randy Abrams from Credit Suisse. First question, I'm sure you'd figured you'd be asked, the guidance where you talked about moderate declines, if you could kind of characterize what the range of that as moderate, it kind of implies like a double-digit year-over-year decline. And for that business, is that more from just the seasonality we already saw with that product versus going through below seasonal, or does it imply any shift in terms of market share or project change, like it was all just from demand of the product or market share? And then how - what is moderate?

Tien Wu

There is no - I'm not exactly sure which one you were referring to. Are you referring to the SiP products or...

Randy Abrams

The guidance for EMS is down moderately. Does that imply the SiP products, anything on market share, just the seasonality...

Tien Wu

Seasonality in product, yes. Seasonality, product cycles.

Randy Abrams

Okay.

Joseph Tung

I think it's a combination of seasonality as well as product transition. There also as a result of some the rebalancing that we're trying to do, in terms of our overall business mix, I think this year's focus is really to realign our - the business, both on the IC ATM perspective as we well as EMS perspective. There will be some they can choose. There will be selective business that we want to extend or to actually reduce. So, it will be a combination of things.

Randy Abrams

To follow-up to that, your remarks Tien, at the beginning, you mentioned some investments in firmware capabilities to rebalance the business and then some interest how much OpEx you're thinking about, like if we're going to start to see faster increase in expense to kind of reinvest or transform the business, and then the revenue implication if you start picking and choosing, if you have any projection for SiP for 2016, like the type of growth would come up to a very strong year?

Tien Wu

All right. Our current outlook right now will be conservative due to the power cycle and also the market uncertainty. So, we're looking forward to a flattish effect to revenue or to a mild growth. At this point in time, it's very, very difficult to project to the year-end.

In terms of the other SiP in the pipeline, we have been engaging with multiple customers in multiple market segments for quite a few years, and we are slowly bring all of these revenue and the product into the market.

The characteristic of the SiP is the - we don't get huge revenue, huge volumes in any given time, unless it's very, very specific, tied to a particular customer segment. And we believe that, in 2016 and 2017, we will start seeing the revenue become more meaningful.

In terms of the OpEx, they'll be lifting the normal range. They're not looking at any type of extreme expenditure in terms of building up that. But right now, we have a few selected segments such as the embedded [indiscernible], such as the fan-out, such as the sensors, such as the optic area. We have a clear gap that we need to backfill in order to entertain the broader market to a much, much more meaningful stage. That was the comment that I made.

Randy Abrams

Have you thought - CapEx was down a lot this past year - it looks like about TWD 600 million, but if you could give a view of 2016, it sounds like it's another lower investment year, so you'll generate free cash flow again. Could you give a feel for CapEx?

Tien Wu

Yeah. I think from the - although the visibility is not that great right now, but I think from the overall perspective, I think we'll be a notch higher than where we spent last year given some of the new projects that we're going to put in and some of the new technologies that we need to acquire.

Randy Abrams

And the last question on gross margin. The EMS actually held up. It looks a little better. I think, based on the guidance, it was implied to come back to 6% - 6% or 6.5% and held above 7%. As you pick and choose projects, what do you think the outlook for the EMS gross margins, perhaps, that holds better where middle of the year can be done at 6.5%. How do you see that margin?

Tien Wu

I think, for this year, I think it would be - I think we already see - we saw some results as we continue to streamline some of our business particularly the SiP area. I think, you all know that there's one particular product that we are actually now making money but some losing some money.

On that, I think we've done a lot of - we've put a lot of efforts in terms of streamlining the operation itself, bringing up the yield, improving our process and also better alignment capacity. And also, I think, one of the major [indiscernible], I think, over the past few years, we've gathered a lot more data points to come out with a more accurate cost estimation.

So with all that, we can have a better base in terms of renegotiating the business terms that we should have. So with all that, I think we already see some improvement in the EMS margin in the fourth quarter. And I expect that we will continue to see more improvement in that area going into 2016.

Randy Abrams

Thank you.

Roland Shu

Yeah. Okay. Citigroup, Roland Shu. Good afternoon. For your guidance for IC ATM, you guided that the utilization rate will be flat and also gross margin should be approaching our [indiscernible] how fast the ASP for IC ATM business.

Tien Wu

I think we've gone through quite a bit of price negotiation already at the latter part of the year. So, right now, we're looking at 2016, a pretty stable ASP environment.

Roland Shu

Okay. This is for the whole year or for the first quarter?

Tien Wu

It's for the first quarter for now. And I think remaining year, I think Ken is in a better position, but I think, overall, we should see a pretty stable year.

Roland Shu

Okay. Yeah. For IC ATM, last year, the overall revenue declined last year. How about the revenue for this year? Are you going to see [indiscernible] as last year or you think it will be better this year?

Tien Wu

Well, I think Ken has already mentioned that we're going through all the seasonality in first quarter and maybe the first half as we go through the product transition in terms of SiP, which is normally down two quarters. So, we will start to see some rebound in the traditional IC ATM business. And for the whole year, we are constantly...

Roland Shu

Optimistic.

Tien Wu

We should see some growth for the year.

Roland Shu

Yeah. It's more closures, more optimistic, both.

Tien Wu

It's a very balanced statement.

Roland Shu

Okay. Thank you. Yeah. And also, Ken, you said about the first quarter OpEx that will be higher. So, what's your guidelines? How much would you [indiscernible] the OpEx in the first quarter?

Kenneth Hsiang

We have percentage on that.

Tien Wu

I think we will be back to close to 10%.

Roland Shu

10%? Close to 10%.

Tien Wu

On a group basis.

Roland Shu

Okay. Thanks. And last question, Ken, you mentioned about a gap to fill of a certain segment. I think that you mentioned about the second half and also the info. So, is the difference that’s going to [indiscernible] this year. So, how are you going to fill the gap with this info and what's the impact to ASE for this gap of the info? Thank you.

Kenneth Hsiang

Okay. I think the fan-out is a technology that - I believe what TSMC has made a strong statement is the - that's one of the technology in terms of the - between wafer, between chip and packaging that will become or is becoming one of the important standard or benchmark for the industry.

So, ASE also has fan-out. What we need to do is in line with what TSMC is working on, we have to identify the market segments, the cost model, and the technology statement. And I believe in the coming years, you will see more aggressive investments of ASE also in fan-out arena.

Now, there are many customers and there are many different type of technology requirements. I believe the market is large enough to accommodate multiple type of cost model, multiple type of technology resolutions in the fan-out space.

Rick Hsu

Yeah. Good afternoon, guys. Yeah. My name is Rick Hsu from Daiwa Securities. I got a few questions. The first one is the - more a housekeeping question. Can you run through your utilizing rate for Q4 across the packaging, testing and bumping?

Joseph Tung

In terms of packaging, [indiscernible] wise, we're at mid-70s, advanced packaging at high-70s, testing at mid-70s. Substrate at low-70s. Going into quarter one, wirebond will be at the low-70s. Advanced packaging at mid-70s or to high-70s. Testing will be at low-70s and substrate will be mid-70s.

Rick Hsu

Thank you so much. That's very clear. What about your depreciation for this year.

Joseph Tung

This year, I think, the overall depreciation is close to a quarter about TWD 7 billion including the cost of goods sold and also at the operating levels. And I don't think - I think it's going to be a very little increase in 2016.

Rick Hsu

You said TWD 7 billion a quarter?

Joseph Tung

TWD 7 billion a quarter.

Rick Hsu

A quarter. Okay. Thanks.

Joseph Tung

TWD 6.8 billion to be exact.

Rick Hsu

Yes. All right. TWD 6.8 billion. Okay. Great. If you look at this, the pricing outlook for Q1, right? I think GSMP reported [indiscernible] reported as well, and [indiscernible] reported as well, I think. If you roughly look at the picture, the strong end looks to be enjoying a pretty good quarter in Q1, at least it's above seasonality. What's the gap between you and [indiscernible]? Any indication of market share loss?

Joseph Tung

Normally, there's a time lapse. In other words, when the wafer is small, two to three months later [indiscernible]. Is that the question you were asking? I'm not exactly sure about the market share loss. I certainly don't believe so.

What we have seen starting December last year to January of this year, we have many short orders. If you would just jump in, and they ask you to ship, it's a clear indicator that the inventory control has come to an end and people are basically - there's a shift to order. We believe that this is early indicator of people start coming back. And with the indication that TSMC, UMC, our founding partners, are getting full. And we do believe that in Q2, if the market condition continues to improve and we do believe that the wafer will be coming our way.

Now, let me make another statement. Even there are many economic uncertainties, which is really beyond the realm of our comprehension, we are taking more of a conservative approach in terms of estimating. I think all of the guidance that Joseph and I have been talking about it, mild growth in industry, mild growth for IC assembly intact. We balance our product portfolio. We are taking more of a conservative approach.

Tien Wu

Right. Well, I think another point I'd like to make is that the changes in our numbers has been exaggerated because of the larger movement in the volumes. If you take the fourth quarter, you will see that the local traditional [indiscernible] test, the decline was actually it's only 1.4%. If you look at testing, that's 1.1%. So pretty much big deal overall moment of the volatility is fairly exaggerated because of it.

Rick Hsu

Thank you so much.

Tien Wu

Thank you.

Kenneth Hsiang

We're done. We're going to take a call.

Joseph Tung

All right.

Kenneth Hsiang

Jean-Louis from Haitong.

Operator

The next question comes from Mr. Jean-Louis from Haitong. Mr. Louis, you may proceed.

Jean-Louis

Hi. Good afternoon.

Tien Wu

Hi.

Jean-Louis

Thanks for taking my question. The SPIL call, just about an hour ago, the company talked about the expected loss of customers due to the merger between or the prospective merger between or due to a prospective merger between ASE and SPIL. And on the call, they were suggesting that something like 12 out of the 15 biggest customers wouldn't want a concentration equating to approximately 50% of their allocation to one enlarged company, and, therefore, they thought they were commenting on the call that perhaps, this might drop from 50 to somewhere like 30 or 30 to 40. Just wondering if you have any comment on this? How do you think about potential losses, customer base due to this kind of activity? Thank you.

Tien Wu

Well, I think the best way to look at this is taking a rational approach. You look in the past 15 years, all of the merger acquisition deal around the world and quite often, there are large companies with very, very high concentration market share in all regional segments. After the merger acquisition, have they really lost market share?

More recently, specific example, we talked about the JCET acquiring the STATS ChipPAC. If you go back to 2015 and this is the actual reason that you can get, ASE was down, IC ATM, 8%. EMCORE is down 7%. SPIL was down 5%. JCET after acquisition was down 5%. In other words, the claim that after JCET lost STATS ChipPAC, there has been a market share loss. At least the number didn't show. I'm pretty sure that one customer, one product segment closed around which happens daily.

Now, in terms of the Taiwan regional, there has been high concentration of market share held by companies in different market segments. You go to the foundry, you go ESAT, you go to the EMS, it has occurred.

In the ICT design, we also have clear examples of high concentration market share optimize acquisition, and there's no apparent market loss. So, all I can say is I have not found one example to basically substantiate the claim which is why we issued a statement. I really do not know how to answer this claim. Thank you.

Jean-Louis

No. That's very clear. That's kind of also the way I look at it. But thank you. Thank you very much for that. That's it from me. Thank you.

Tien Wu

Thank you.

Joseph Tung

And did you tell a 3.7% growth in the revenue, right?

Tien Wu

Yeah. It's very difficult to counter all of those claims. We have to go one by one. Every time, we have to really go back to all of the statistics. But I believe all of us has been in this industry for a long time. Just make your own call, make your own judgment.

Kenneth Hsiang

Our next caller Patrick Liao from Macquarie. Patrick.

Operator

Next question comes from Mr. Patrick Liao from Macquarie. Mr. Macquarie (sic) [Mr. Liao] (45:18), your line is now open.

Patrick Liao

Okay. Thanks for taking my question. My first question is about the incremental gain for your earnings once your companies merge SPIL. So, I'm wondering that is there any agenda if we can expect it, that could be likely this year or last year that could be factored in, in our model or expectation for all investors. Thank you.

Tien Wu

Well, I think the transaction will be done with cash. So, it will definitely be an EPS-accretive transaction for the year. But how much the accretion will be, it really depends on the respective performances of the two companies.

Patrick Liao

Right. Then, the follow-up things is about the - is there any intangible [indiscernible] amortization, which are impacted after the transactions?

Tien Wu

Well, we will go through the normal PPA announcements to decide what eventually the goodwill number will be. And we'll go through the normal accounting treatment and do a valuation of such goodwill on annual basis, decide whether there will be any amortization that's needed.

If you look at SPIL's track record, it has always been a very, very stable and also a very well-run operation, and that's actually one of the very reason that we've decided to become investor of the company. So, I think we are pretty confident that the so-called intangibles would not have too much of an effect on the overall.

Patrick Liao

Right. Thank you. So, to give a kind of likely modeling, can I ask, is there any - say how many years EBITDA amortization to happen five years, six years or whatever? Is there a sense of direction? It will be appreciated for that.

Tien Wu

You mean the goodwill?

Patrick Liao

Yes. Yes. How the modeling - I know it's difficult to tell right now, but if you could give us some kind of color on that on how many years likely or whatever, I think, I would appreciate for that.

Tien Wu

Well, as I mentioned, the goodwill will be evaluated on an annual basis and there is no fixed time period for us to amortize them. As long as the business or the operation remains stable, then there's no write-down or there's no scheduled amortization period.

Patrick Liao

Okay. Fair enough. Last question is about the 2016 or even longer terms. If you can give us a kind of feeling, but saying the longer term or 2016's growth perspective, saying that semiconductor worldwide, TSM saying 2% growth. How's ASE's [indiscernible] view? And in terms of that, how much growth we'll be looking at for your EMS and IC ATM this year or the following years?

Joseph Tung

If you look at the semiconductor from 2000 all the way to 2015, the long-term growth rate that came out a growth rate of 5%. We don't believe there's any reason why that 5% assumption should be altered. In other words, it might go through a negative growth in one year. But in the subsequent years, you will have more positive growth, go back to the long-term growth rate of 5%. If you believe in that thesis, then we have just gone through a minus 2% growth. Therefore, in 2016 or 2017, 2018, 2019, 2020, in the next five years, we ought to have 25% of earning come from growth rate.

How do you distribute that 25% down to the five years to become [indiscernible]? Right now, because there are mainly economic uncertainties, we do not understand, we try to take a conservative view. Therefore, we believe the 2% for this year. So, for the longer term, we still believe that the industry continues to march on a 5% annual growth rate curve.

Patrick Liao

Okay. Got it. Can I ask another way around that? If we look at phases of bucket shares growth all the way from 1998, I believe, [indiscernible] ASE increasing market share all the way. So, can we assume that ASE will continue to grow better than their peers? So, can we assume that will be more than 2% or 5% growth? Another number is [indiscernible] by the direction kind of confidence. Can we have some color on that? Thank you.

Joseph Tung

All right. If you are looking at 1998 long-term average of ASE, we are growing at more than two acts of the market. In other words, the long term is like between 5% to 5.3%, ASE is growing between 11% to 12%. That is the long term. Can we make that assumption? I believe, directionalized, yes, I believe ASE will outgrow the overall market due to a number of reasons. In terms of the absolute digitized number, I cannot give a comment.

Patrick Liao

Fair enough. Thank you, sir. That's all I have.

Kenneth Hsiang

Do we have any additional question?

Sebastian Hou

Thank you. This is Sebastian Hou from CLSA. So, my first question is on the SiP, just a follow-on on some details. So, earlier, Tien Wu and Joseph talked about the rebalancing for this year due to this product line. So, remember, earlier last year - earlier last year, you mentioned about the customer diversification in SiP this year. So, we wonder - we know that last year, you have like four projects, probably, and this year, how many projects you are looking at? And also in terms of the customers, are we going to see new customer coming in? And yeah.

Tien Wu

We do have new customers coming in. And we have quite a few number of projects, more than the four that you just referred to. The issues right now is the - some of the projects are taking very, very high revenue and percentage. We're not exactly sure how to clearly model, make a statement of what the number is going to be for this year.

However, in terms of number of customers on SiP, variety, we absolutely broadened the portfolio, which is a great news. And you will see in 2016 and particularly in 2017, we have more meaningful percentage of the SiP revenue being accounted for by those multiple projects

Sebastian Hou

Okay. Thank you. So, in terms of - can I get a little bit more details? In terms of the numbers of the customers, is it more than one finger, five or...

Tien Wu

You mean one hand.

Sebastian Hou

Yeah. One hand. That's right.

Tien Wu

Now, we do have more than 10 customers, if that's what you're referring to when you said projects, but it takes a long time and we realized that. There are critical gaps and they are value, their market segment readiness. We are going through all of these right now, but we do have many customers in the said projects.

Sebastian Hou

Okay. Thank you.

Tien Wu

And some of them, we will start reporting meaningful revenue, hopefully soon. This year or latest next year.

Sebastian Hou

Okay. Thank you. And considering your earlier comments on the rebalancing and be more selective on this SiP business, can we assume that the margin trend of this business is going to trend up for the second half of this year into next year?

Tien Wu

I want to think there'll be changes between different projects. But, I think, all in all, I think the overall direction that we're trying very hard to maintain or to improve our margin as well as return the SiP business. Like I said in the past, we do have some of the projects that are very profitable, some are losing money.

So, we want to make it a more - and also all these projects, there might be some consumes a lot of resources, which are becoming limited today. So, that's why we believe that we need to focus or better utilize such limited resources on some of the projects that can produce better return on profitability. So, I think it's the overall direction, yes. We will continue to improve the margin of the return of the business. And that's what this local rebalancing is all about.

Sebastian Hou

Okay. Thank you. My second and final question is fan-out. So, when do you see revenue contribution from here?

Tien Wu

Okay. As I already stated, right now, the fan-out revenue we'll start reporting this year in 2016. The fan-out has been invested by ASE for the last two-and-a-half years, and we will report either one or two customers' revenue in the fan-out or the so-called high-resolution fan-out.

What we're referring to the SiP includes the high and mid and low resolutions of the different cost models. And somewhere in the middle of this year, we'll start deploying the other type of fan-out and I will hold the announcements until later days, right? But the fan-out revenue we'll start reporting this year.

Sebastian Hou

You mean reporting so that you can recognize or are you going to report on the - when...

Tien Wu

We're going to report revenue. We're actually in production. No.

Sebastian Hou

Okay.

Tien Wu

Yeah. The meaningful ramp-up will be some time this year.

Sebastian Hou

Okay. And my third and final question is on the acquisition of SPIL. So, I wonder, do you have any - since the ultimate goal is 200% buyout SPIL, did you have any model in mind that the target model in mind that the combined revenue or combined profit by, say, 2018 or 2020?

Tien Wu

No, we haven't gone this far. We're going to take one step at a time.

Sebastian Hou

Okay. But in terms of the cost synergies, how much can we see from that?

Tien Wu

Well, I think we can only say that there will be synergies that can be created. I think one or the thing that's lacking in the Taiwan OSAT industry is really the integration of better utilization of resources. And we believe that for the overall OSAT industry, the next big wave of growth is really SiP. And as I said, the resources is very consuming. Therefore, I think the combined effort with a lot of the players [indiscernible] in Taiwan put in together will give us a better utilization of our resource for us to bring down cost and to better secure this upcoming business. So, that's the overall goal that we're aiming at.

Sebastian Hou

And the last question for me is, so after the tender offer, assuming this is going through and the rest of the 50%, if you're going to acquire SPIL's stake, how are you going to finance that? Are you going to use old debt and internal cash, or are you considering any new shares issuance?

Tien Wu

Well, it depends on the timing and also the fundings availability in the market. But I think in a nutshell, it will be very similar to this round of tender offers, maybe one-third of our internal cash flow, the other two-thirds from bank borrowings and some other debt borrowings.

Sebastian Hou

Thank you.

Kenneth Hsiang

That's all we have time for today. Thank you very much for coming. Hope to see you next time.

Tien Wu

Thank you.

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