ASM Pacific Technology Ltd

HKEX:522

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the ASM Conference Call. Mr. Leonard Lee, please begin your call, and I'll be standing by. Thank you.

[Leonard Lee, executive]

Thank you. Good morning, and good evening, everyone. Welcome to the ASM Pacific Technology's 2020 Third Quarter Earnings Conference call. This is Leonard Lee, ASMPT's Senior Manager, Investor Relations, and your moderator for today.

Before we begin, we would like to encourage you to download the 2020 third quarter earnings release materials, including the Q3 investor presentation, from our company's website at www.asmpacific.com. If [Operator Instructions]

The format for today's event will be as follows. First, ASMPT's CEO, Mr. Robin Ng, will provide a preamble and an update about our company's business performance. Our CFO, Ms. Patricia Chou, will then summarize the financial performance of ASMPT.

Mr. Robin Ng will then share about the outlook and long-term prospects for the company. From time to time during this presentation, you may be prompted to refer to the investor presentation deck. Thereafter, we will open the lines for Q&A.

As usual, I would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which can cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our investor earnings call presentation.

Without further ado, let me now turn the time over to ASMPT's CEO, Mr. Robin Ng. Robin, please.

[Cher Ng, executive]

Good morning, everyone, and thank you for joining us today. Before we proceed with the quarterly results, I hope you and your loved ones are keeping safe and healthy during this time.

We are living in the world which has been characterized quite suddenly this year by a pandemic, economic upheavals and geopolitical tensions. These have profoundly affected everyone. I'm very appreciative of our more than 14,000 employees worldwide, who have demonstrated great resilience and character to ensure that we continue serving our customers and steering our business through these uncertain times. I'm privileged to lead this team.

Before we dive into our quarterly results in detail, let me briefly give an overview of ASMPT and what we do. ASMPT is a leading global supplier of hardware and software solutions in the manufacturing of semiconductors and electronics. We operate in 3 business segments: Semiconductor Solutions, where we are #1 in the global assembly and packaging equipment market; Materials or the leadframe business, where we are strong #3 in a very fragmented market; SMT or surface mount technology solutions, where we are a strong global #2. And our geographical presence spans 11 R&D centers and 12 manufacturing facilities worldwide in Asia, Europe and America with more than 2,000 R&D staff and more than 1,400 patents on leading-edge technologies in the fields of endeavor.

ASMPT has a broad array of core capabilities serving its many customers. For example, if you refer to Slide 6 of our IR deck, we have developed a highly comprehensive suite of semiconductor packaging and assembly and surface mount technology solutions, from wafer deposition handling to delicate silicon that forms the foundation of every computer chip with the various solutions that organize, assemble, package and prepare these chips into a wide range of end-user devices. Globally, our solutions suite for the CIS and LED markets is also the most comprehensive for these solutions.

ASMPT technologies enable many iconic and ubiquitous devices. On Slide 8, we demonstrate the exceptional breadth of one of our core capabilities, which is our Advanced Packaging solutions. ASMPT's advanced packaging technology helped with the creation of the vital components that power end applications ranging from data centers, cloud computing, AI, the many electronic system in modern cars, traffic, processing units for virtual reality and augmented reality devices and the complex components making up a host of smart wearable devices.

The ubiquity of our core capabilities can also be demonstrated by Slide 9. This graphic shows that a typical smartphone can contain components enabled by no less than 6 of our product lines, from the mainstream die and wire bonders that electrically connect silicon chips, the CMOS image sensors and LED components that form the cameras and displays, to the various packaging solutions that we have intricately created, combine and connect the many modules and systems that serve various device functions. These include our SMT, System-in-Package and Advanced Packaging solution, each of which is one of -- each of which is one of the leading players in its respective market.

To put it simply, ASMPT's solutions help to enable the digital world in areas ranging from mobility and IT, optoelectronics that provide displays from tiny to massive sizes, security and data centers, automotive technology, power management and energy, industrial applications and consumer devices.

So let me now go ahead and give you a review of our third quarter of year 2020. Despite this recessionary phase of the global economy, we delivered third quarter revenue of HKD 4.27 billion or USD 551 million, close to the top end of the revenue guidance provided previously of between USD 480 million to USD 560 million issued in our second quarter results announcement.

The group's consolidated profit after taxation for the quarter was HKD 233.9 million, 5.2% higher than that of the third quarter of last year. Our revenue also increased 4.7% year-on-year to HKD 11.97 billion for the first 9 months of 2020.

Let me provide some color to these promising numbers. I'll start with bookings. The group ended the first 9 months of 2020 with a strong backlog of HKD 6.55 billion and a book-to-bill ratio of 1.12. Third quarter group bookings increased 12.4% year-on-year and 23.5% quarter-on-quarter to hit HKD 4.52 billion. This went against the common pattern of third quarter bookings normally coming in below second quarter bookings. This growth was primarily driven by strong booking growth in both the Semiconductor Solutions and SMT Solutions segments.

There were several factors driving this strong bookings growth. For one, we saw increasing 5G infrastructure deployment and device upgrades. This drove an increase in silicon content, leading to strong capacity and technology buys that benefited not only the mainstream die and wire bonder businesses but also our Advanced Packaging and System-in-Package solutions.

We also benefited quite significantly from the rising adoption of digitalization and the radical shift to work-from-home arrangements that have happened this year. This drove demand for personal computing and connectivity devices and strong demand for high-performance computing. In fact, the strength in HPC growth contributed to our Advanced Packaging solutions revenue for the first 9 months of 2020 hitting a record high and equaling our Advanced Packaging solution revenue for the whole of 2019.

Last but not least, going on -- ongoing global trade tension facilitated increased localized production efforts for domestic channel-based companies, which contribute to our China business recording a year-on-year revenue increase for the first 9 months of 2020.

Segment performance. Let me now give some color to our respective business segments, starting with Semiconductor Solutions. This segment experienced broad-based demand with good year-on-year growth in the third quarter bookings and revenue. Growth was strong for its mainstream die and wire bonders, in particular, highlighting capacity expansion amidst gradually improving market conditions. We see 3 key drivers fueling this performance.

First, the IC/Discrete business unit was perfectly positioned to capture demand from the accelerating work-from-home trends, the strong demand for mobile and personal computing devices, and HPC was also critical to the growth of this unit.

Second, our Optoelectronics business has not only seen continued demand from general lighting and conventional display applications but also tapped into the growing opportunities in mini LED and micro LED applications. As a matter of fact, the group was engaging with leading customers in the Asia since 2017, who have begun high-volume messaging using our tools for mini LED applications. They are also in the final stage of qualification for our micro LED solution. This places us in one of the most formidable markets for the future and opens up huge opportunities for our Optoelectronics business segment.

Thirdly, while our CIS business has remained relatively weak as part of a wider slowdown in the global smartphone shipments for 2020, according to IDC, this business also showcased an encouraging signal as we recorded a strong quarter-to-quarter booking growth in Q3 2020 relative to the low base of Q2 2020.

Moving on to our Materials segment. We achieved a revenue of HKD 602.6 million. This was a record in U.S. dollar terms of about USD 77.8 million to be specific. This revenue resulted -- this revenue result represented year-on-year growth of 22.4%.

If you recall, at our second quarter earnings announcement in July, we stated that we have reached an agreement to form a strategic joint venture involving our material business with key partners. We are on track to close the transaction expense by the end of this year. The Materials segment will then operate as a stand-alone business under the joint venture structure, tapping our partner's deep and complementary network and market experience to help improve the Materials segment's prominent image in the leadframe market.

The financial of this joint venture will then be equity accounted for by ASMPT once the transaction closes. We will continue holding a significant minority equity interest of 44.44% in the joint venture.

Lastly, looking at our SMT Solutions segment. We witness a promising 37.3% increase in this segment's quarter-on-quarter bookings, which, in part, this historical trend of third quarter bookings standing to come in below second quarter bookings.

Apart from 5G-related applications, smartphones and wearables acting as key market drivers, we also experienced an improvement in automotive and industrial market bookings, albeit still at a relatively low level compared to previous years. This is an encouraging sign for the future.

In conclusion, the third quarter of 2020 delivered revenue towards top end of our guidance amidst an economic downturn, highlighting our ongoing and efficient management of our business. It was also characterized by a good uptick in bookings quarter-on-quarter, especially for Semiconductor Solutions and SMT Solutions segment. Lastly, we also experienced some encouraging progress in our key markets, for example, CIS, automotive and industrial bookings.

Now I will pass the time to Patricia to run through the financials for the third quarter of 2020.

[Peifen Chou, executive]

Thank you, Robin. Good morning, everyone. It's great to have you all with us on the call today.

As Robin has already given a good business overview of the company, let me dive straightly into the financials for the third quarter.

Despite serious challenges posted by the pandemic and the global economic uncertainty, it is my pleasure to inform you that the group has been able to deliver a commendable performance with a resilient set of results.

Our revenue increased year-on-year for Q3 and also for the first 9 months of 2020. Robin already explained in detail the sales growth. Let me give you a little bit more color on the geographic breakdown.

During the first 9 months of 2020, China, inclusive of Hong Kong, Europe, Taiwan, the Americas and Malaysia, were the top 5 geographic markets of the group. Our top 5 customers accounted for only 15.5% of our revenue. This highlights the consistent and healthy diversity in our geographic and customer mix.

As mentioned by Robin, bookings growth was a noteworthy aspect of our performance this quarter. Our third quarter bookings performance was the second highest we have ever recorded for Q3 bookings.

With regard to our gross margin, we saw a marginal year-on-year decline of 87 bps to 33.9% for the first 9 months of 2020 and a year-on-year decline of 182 bps to 32.9% for this quarter. Weaker gross margins from our Semiconductor Solutions and SMT Solutions segments were partially offset by higher year-on-year margins from our Materials segment. The Q-on-Q gross margin decline was mainly due to the underutilization caused by our actions taken to reduce the inventory.

We have continued to focus on cost-reduction efforts to streamline operations and improve overall profitability. Despite the lower gross margin, the group's net profit increased 5.2% year-on-year to HKD 223.9 million (sic) [ HKD 233.9 million ] for Q3 2020 and a significant 56% year-on-year increase to HKD 624.7 million for the first 9 months of 2020. This performance was attributable to higher revenue numbers, coupled with tighter cost controls and the government grants received to mitigate the effect of the COVID-19 pandemic.

The effective tax rate for 9 months of 2020 was 24.6%, taking into account transfer pricing regulations in various jurisdictions. Overall, our EPS for the quarter was HKD 0.57, representing an increase of 3.6% compared with that of the third quarter of 2019, which was HKD 0.55.

Despite the recessionary environment, our consistent commitment to research and development continues to hold, and this has helped make us a preferred partner of choice. Our average R&D expense has been about 10% of the equipment sales for many years. For the first 9 months of 2020, our R&D spending was at USD 155 million or 11.6% of equipment sales.

Now let's take a look at the revenue contribution by business segment. Our Semiconductor Solutions segment revenue increased 5% year-on-year to HKD 1.91 billion this quarter. This was primarily driven by a strong growth in the IC/Discrete business unit, which benefited from continued demand from general lighting and conventional display applications for the optoelectronics unit and the increased personal computing and data connectivity environment because of the increase in work-from-home arrangements. However, the segment experienced a third quarter year-on-year decline in gross margin of 348 bps to 40% due to the relative weakness of the CIS product market, which has, nevertheless, shown some promising signs on the back of an uptick in bookings growth.

Looking to the Materials segment. As Robin mentioned, this business achieved a record high quarterly revenue in U.S. dollars term of USD 77.8 million. Gross margin also improved year-on-year by 907 bps to 19.4%, anchored impacted by higher volume effects and discontinuation of our loss-making MIS business in early 2020. Gross profit and segment profits were also at record high.

Lastly, our SMT Solutions segment's quarter-on-quarter revenue increased 10.6% to HKD 1.75 billion and it recorded a decline in year-on-year gross margin of 277 bps to 29.9% due to the reduction in revenue contribution from the automotive and the industrial application markets and the weaker revenue from Europe and the Americas.

In these times of uncertainty, a healthy balance sheet can act as a great pillar of support. As at the end of Q3 2020, the group held HKD 3.52 billion in cash and bank deposits, providing a good foundation to withstand the current period of economic uncertainty.

On that note, I would like to pass back the time to Robin to talk about our future prospects, outlook and the fourth quarter guidance.

[Cher Ng, executive]

Thank you, Patricia. In the longer term, we are confident of our position and our ability to continue innovating and developing advanced solutions in response to some critical, long-term mega trends.

In terms of data, our fundamental market growth driver will be the accelerating and widespread growth of 5G infrastructure. This is a sustainable market growth driver, bringing massive possibilities into play for data creation, transmission, storage and use.

5G base stations, for example, require between 8 to 16x the number of power amplifiers from 4G base stations, driving future capacity buying.

The upgrade cycle for 5G devices is just one example of how the device side demand for higher performance for power group with the greatly increased number of required components for 5G devices driving capacity buyers. More and more devices beyond phones will come online as 5G capable over time, ready to be plugged into the ecosystem.

Vastly improved 5G power data speed and throughput will also lead to an ever-increasing demand for HPC capabilities across many industries, along with a steady proliferation of AI and machine learning capabilities into every aspect of life.

Across the 5G ecosystem, each component will also require more sophisticated package solutions that directly play into ASMPT's capabilities in Advanced Packaging and System-in-Package offerings.

ASMPT has significant growth enablers that position us well to capture growth. For this, I have already talked a little bit about leading growth in Advanced Packaging but we have identified 3 more areas: mini and micro LED solutions; CMOS image sensor, or CRS solutions; and silicon photonics.

Let me briefly speak about this.

First, Advanced Packaging. This market is expected to more than double its revenue from USD 39 billion in 2019 to USD 42 billion in 2025, as quoted by Yole Développement this year. Advanced Packaging is a key growth enabler for ASMPT, and we are well positioned to flourish here. Advanced Packaging basically enables cost reduction and time to market while enhancing system performance.

With reference to Slide 24, you can see that a wide range of current and potential advanced packaging markets are enabled by ASMPT Advanced Packaging solutions, from the wearables, vehicles, data centers and 5G equipment of today to exciting emerging areas in AI, factory robotics, telemedicine, connected homes and autonomous vehicles and evolving high-speed computing capabilities, just to name a few.

With the broader suite of Advanced Packaging solution in the industry, ASMPT is either one of the leading players or is a strong contender in most of the advanced packaging subcategories. Putting it together, ASMPT is well positioned to capture the shift to 5G and other key trends and to grow across the entire spectrum of technology and capacity buy. This will in turn essentially translate into strong demand for a comprehensive range of advanced packaging solutions.

Let me next touch on the next growth enabler, mini and micro LED. These are expected to generate healthy technology buying for us. The world is increasingly demanding better and sharper picture quality, especially with the expert -- ever-expanding innovation in smart wearables and display on devices. For example, car display, the rise of AR and VR and the expanding possibility for television and mid- to large-format LED display.

To look at it in tangible terms and to quantify the huge market potential, look at Slide 25. Research from LEDinside in the 2019 report stated that the mini LED market has a 35% compounded annual growth rate from medium to large display in the next 5 years, while micro LED market has a staggering CAGR for small gadget and transparent space.

Micro LED has many advantages, enabling 30x greater brightness than OLED in consumer devices such as smart watches and 10x higher resolution in virtual reality devices. We already experience encouraging adoption of mini LED in the industry among some key players who are entering into mass incorporation on mini LED into their TVs. Other players are also experimenting with micro LED solutions. We are confident that this rapid adoption of mini and micro LED in consumer devices, larger displays and video walls will help drive a massive technology buy cycle.

We have already captured -- secured key customers in Asia. And being a major player in the mini and micro LED packaging, we are well aligned to capture this significant market opportunity when it presents itself.

Let me now speak briefly about our Silicon Photonics business. Data transmission speed and throughput requirements will continue to place increasing demands on packaging solutions. Our AMICRA unique high-precision die bonder solution to top-tier players has positioned us strongly in terms of silicon photonics capabilities. This technology requires sub-micron precision equipment and is poised to grow when 5G capabilities and cloud computing massively proliferate.

We are engaged with major OEMs in these areas, and I'm confident about capturing future opportunities in data center applications and industrial messaging to meet ever-increasing data transmission requirements. According to research from Yole Développement, the silicon photonics market will have a healthy CAGR of 46% from 2019 to 2025, which will benefit us.

The past few years have been -- have seen a rapid transformation of technology and constant innovation, but we are just at the cusp of an era of massive connectivity, speed and possibility. Our equipment is being increasingly used for new market applications, expanding the range of possibilities for semiconductors. With our growth enablers and strong capability in key technologies in place, the prospect of our business remain positive and solidly supported by the key mega trends I have described today.

Over time, the global economy will gradually recover on the back of an improving sentiment for the equipment market. Our business shows clear sign of emerging from a very uncertain period in the first half of the year. ASMPT anticipates revenues in the fourth quarter of 2020 to be between USD 530 million and USD 590 million.

Aside from market enablers growth driver, let me add that one of the key growth markets for the semiconductor industry is China, which consumed USD 212.2 billion worth of semiconductor products in 2019. According to research firm Yole Développement, this is expected to increase to USD 624 billion by 2030, highlighting the massive market opportunity in China.

With the localization of supply chain in China firmly in place, our China business is well positioned to gain a substantial pie -- a share of this growing pie.

As a leading company that develops and supplies solution across the entire spectrum of data creation and use, ASMPT is even more strongly positioned to further innovate and develop advanced products and solutions for customers. Our position in core markets and commitment to innovation and strong customer relationship bodes well for the development and growth of a longer-term business prospect. We are confident that the key growth market drivers and enablers that I have shared with you today will continue to drive strong demand for ASMPT business for years to come.

Thank you, and I'll now hand over the time to Leonard, our moderator.

[Leonard Lee, executive]

Thank you, Robin. And operator, we're now ready to proceed with the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Donnie Teng from Nomura.

[Donnie Teng, analyst]

I have 2 questions. So first one is regarding to your fourth quarter guidance. Could you give us more color on your bookings by different business segment as well as the gross margin outlook into fourth quarter?

And second question is regarding to geopolitical issue as well as the COVID-19 impact. So I'm looking at your presentation on Page 5. So could you elaborate more on, besides the NEXX business, which business may leverage U.S. technology or U.S. patent at the [indiscernible] point? And also due to Europe COVID-19 situation is getting a little bit more severe right now, is there any impact to our SMT business or any other business related to the COVID-19 in Europe or in U.S. in the future?

[Cher Ng, executive]

Yes. Leonard, do you want to summarize the questions [indiscernible] so that we can answer?

[Leonard Lee, executive]

Yes. Sure, sure. Yes, I think the first question, Donnie, as I understand, just to be sure that we understand your questions correctly, the fourth quarter guidance, so some color booking by different segment and then the gross margin outlook into Q4, right?

And the second question is about the [indiscernible]

[Cher Ng, executive]

Leonard, let me answer the first question first.

[Leonard Lee, executive]

Sure. Sure.

[Cher Ng, executive]

Donnie, now in terms of guidance, since Q2 this year, we stopped giving guidance on bookings and gross margins. So we only give guidance in terms of billings for the next quarter.

Now, of course, I mean I can give you some color, although there is no hard numbers in terms of booking guidance. Now typically, Q4, based on historical trend, Q4 bookings tend to come down Q-on-Q compared to Q3. So this is based on past trends.

Second question, please, Leonard.

[Leonard Lee, executive]

Yes. Basically, the geopolitical implication, I think, and also COVID-19 impact. And also the fact that, yes, any leverage on U.S. technologies that we are having.

[Cher Ng, executive]

Okay. Yes. We just also saw the news that France and Germany, because of increasing infections, will go down into a lockdown situation.

Now as far as our operation is concerned, since the very beginning of the COVID-19 outbreak, we have already put in a very strong BCP process and control in place. So far, from then to now, things are well under control. So we don't expect any disruptions to our operations in Germany. We only have a sales office in France.

So as far as that is concerned, I think we are pretty okay to cope with the increasing infection if it arises.

[Leonard Lee, executive]

Yes. Basically, I think we've covered -- Donnie, have we covered all your questions?

[Operator]

Yes. Can we move to the next question?

[Leonard Lee, executive]

Yes, please.

[Operator]

Our next question comes from Leping Huang from CICC.

[Leping Huang, analyst]

Okay. So the first question is about your gross margin outflow. So it seems to be your SMT already dropped below 30%. And also, your -- the semi equipment side also declined. Are there any structural issues? Do you think -- how we should model this margin trend looking forward?

And the second thing, you mentioned a lot about this mini LED trend. So can you help us to understand how big it will be for your business? I remember, I think if -- more than roughly 10 years ago that when the LED comes, the LED lighting comes, the LED business is one of the largest driver for you for a few quarters many years ago. But how big the mini LED business will be?

[Leonard Lee, executive]

Okay, Leping. So your questions would be on the gross margin outlook and also the SMT gross margin coming under 30%, whether or not this is a structural issue. And so this is the first question.

[Leping Huang, analyst]

Yes. Yes.

[Peifen Chou, executive]

This is Patricia, and let me try to address your questions on gross margin. As you can tell, in Q3, our gross margin overall was not very exciting. And of course, some short-term factors, for example, the product mix. We had best demand from CIS, automotive and industrial markets. And also, the geographic mix, we have enjoyed them, more sales from the China-based customers who usually prefer the generic tools with less customization, less options.

And then in Q3, we tried very hard to improve our working capital and the cash flow. So we used the more existing inventories to support our higher shipments in Q3 instead of producing more new inventory. In this way, we tried to expedite our inventory turnover and expedite our -- the -- sorry, optimized our procurement spending to reserve more cash. So overall, these are some relatively short-term factors.

And for the long run, of course, this will not be a structure issue. As you can tell, if -- based on most of the analysis in the market, the CIS, automotive or industrial markets recover in, say, 2021, then the factors from product mix and the geographic mix would not continue. So for the long run, we are very confident that our gross margin will improve.

[Leonard Lee, executive]

Okay. And Leping, think your second question is regarding mini LED trend. How big is the contribution going to be?

[Cher Ng, executive]

Leping, I will take the second question. You have very, very good memory. That was 10 years ago, there was really a boom in terms of compression and lighting. So BLU, rather, sorry. BLU, backlight unit, for TV. So we benefited from that tremendous upcycle in terms of LED.

Now for mini LED. At this point, the way we see it is it's just beginning. So it probably will take some time for it to reach a very substantial cycle. But as I mentioned earlier in a conference call opening remarks, we are well positioned. We are engaging key customers in this particular area. So when this cycle -- when this digital business takes off, I think we will be in a very good position to capture the growth. It's really hard to predict when the substantial growth factor will come.

So we just have to watch this space carefully and -- but looking at the mini LED, I think what is really driving this business at this point in time, basically, we look at it, there are 2 areas.

One is what we call local dimming for gaming consoles and TVs. These are quite different from the LED TV that we talk about because for LED TV, you're talking about only the peripherals have been populated reality. But for local dimming, it's actually the entire screen at the back populated by LEDs. And this means that there will be more LEDs required compared to the backlight TVs that we were used to for many years.

What is also driving the mini LED is also RGB video display at this point in time. So these are the 2 applications we see will take off for mini LED in the years to come.

[Operator]

Our next question comes from Kyna Wong from Crédit Suisse.

[Kyna Wong, analyst]

I have 2 questions. The first one actually is another follow-up question on the line margin trend. Because looking into the booking in the third quarter, you see that the SEMI and SMT is actually recovering. But in the SEMI side, we also see some recoveries, actually uptick booking from the CIS. Could we expect that somehow the fourth quarter margin could also benefit on the CIS uptick? And generally, because of the revenue that trying to be increased and potentially the margin, there will be some improvement into the fourth quarter. If this is the right progression, would you expect that? This is the first one, the first question.

[Leonard Lee, executive]

Okay. So the first question -- yes, go ahead. Yes.

[Kyna Wong, analyst]

Should I ask then the second question first, sir?

[Cher Ng, executive]

No, one question at a time.

[Leonard Lee, executive]

One question at a time, yes.

[Peifen Chou, executive]

Kyna, this is Patricia. Let me answer your question regarding the gross margin. Yes, you're right. We do see some early signs of improving -- improved demand in CIS. So this will definitely be reflected to our fourth quarter's gross margin.

But the early signs of the improvement in CIS demand is mainly based on the low base in Q2 and Q3. So comparing with our strong demand in the conventional die bonder and wire bonder, I would say, the overall volume from the CIS tools is still limited. Of course, it will help anyways.

And the other thing is, we will -- in Q4, we will continue to streamline our inventory. So we will keep some measures for better use of our existing inventory, similar in Q3.

[Kyna Wong, analyst]

Okay. Got you. Then the second question is about Advanced Packaging because this year, I think the Advanced Packaging has been driving the growth. And what should we look at this opportunity into the 2021? Because like Robin addressed a lot of like AI, 5G and smartphone. And so into the 2021 -- because this year, we already achieved a high base and a lot of like growth also driven by the mix.

Like what kind of new, I mean, area we can also get into? Like, for example, in the process of AP? Or we see some market share gain into 2021 in certain customer, et cetera? Or like -- on top of like the overall demand in AP is actually growing?

[Cher Ng, executive]

Yes, Kyna. I think you probably know, for industry, we really can't see too far ahead. So -- but I can give you a little bit of color as much as I can, yes?

So I think AP will be a key driver, not just for us, but I think for the whole industry for reasons I think you guys should understand because it's really a good alternative to scaling at the front end.

So -- and we've been the most -- providing the most comprehensive suite of solutions, as you can see, slightly seminal. So you can see in our slide, our deck, [ this panel ], we try to give you more color as to how we are addressing the AP market. So we have really a good suite of solution to address the AP market.

Now having said that, I think one must remember, the AP market is still a small base market, and it's reserved for a few customers in this industry. And also, not everyone can afford to go into AP kind of business. So the customer base -- if the customer base is small, the -- it's quite natural, the volatility in terms of a business will be higher compared to the mainstream die and wire bonders because of the small customer base and is also a very niche area.

So it's really difficult to give you how high this growth will be in 2021. But I mean, looking forward to a longer term, we are quite confident that this AP business will continue to grow, not just for us, but also for the whole industry.

Now besides NEXX, of course, this year and this year and last, we had the benefit of additional business into our portfolio. We -- I think NEXX is stuck into a very nice business, especially for the panel plating. We are probably one of the leading player in terms of panel plating or made contact position into high-density substrate area. So if AP continue to grow, especially for heterogeneous integration, we believe this area will also follow suit.

So for our AP business, NEXX, don't forget about TCB. TCB is also enabler for many of the AP application, especially for HI, heterogeneous integration.

[Operator]

Next question comes from Mr. Arthur Lai from Citigroup.

[Yu Jang Lai, analyst]

We know that your presentation material style changed. To me, it's more educational. So I really appreciate.

I have 2 questions. One is on the Advanced Packaging. So Robin just mentioned that there is more heterogenous packaging. So in this product line, how you think of your client base distribute among the regions such as if you break down to Japan, Taiwan or China, how much percent each -- they generate by each regions?

[Leonard Lee, executive]

Okay. So Arthur, your first question is about the geographical distribution of AP among Japan, China, et cetera.

[Cher Ng, executive]

Okay. Thanks, Arthur. Looking at the AP customer base, if you look at our 9-month geographical mix, you will see Taiwan, you will see Korea increasing year-on-year quite strongly. So these 2 areas, I would say, the main kicker over last year will be AP application market. So these are the areas, plus, of course, the area in U.S. U.S. will be also a key area for Advanced Packaging. China as well. So these are the geographical mix in terms of AP.

Now I forgot to answer one part of Kyna's question. Maybe I take this opportunity to answer her. It is what else is coming in our AP solution. So if you can see the slide on our AP portfolio, we are also developing the next generation of interconnect technology called the hybrid bonding. So it's progressing well. We are engaging key customers in this particular area. So we believe we are able to develop a system for very low volume kind of manufacturing by the year 2021.

So this is an exciting technology. So it's one up in terms of placement accuracy and also cost performance for the future. But of course, this is still very nascent technology. It will still take some years for this hybrid bonding technology, in our opinion, to mature.

So meanwhile, the other more AP solutions like, for example, flip chip, TCB, this will still prevail for a period of time before hybrid bonding will start to show meaningful demand in the years to come.

[Yu Jang Lai, analyst]

Yes. And my second question is on the margin side. So Patricia just told us that because of the utilization, because of the mix, so there's a margin decline in quarter 3. And if you're looking forward, if we think of quarter 4, the utilization should go up. And also the CIS, you guide in the presentation, CIS has some positive signs. And then should we expect the better gross margin in a Q-o-Q or Y-o-Y basis?

[Peifen Chou, executive]

Thank you, Arthur. Very good questions. Okay. That's -- okay. Let me remind you that as Robin guided the top line for Q4, the fourth quarter's revenue would be around the same level as third quarter. And so the top line should -- will lead the margin. And you can tell, within a quarter, we should not expect a huge difference.

And then we do see a strong demand in the mainstream wire bonders and die bonders from the IC/Discrete and Opto business unit. Although we indeed did reserve the early signs of the improved CIS, automotive and industrial market demand, the contribution or the increase from this relatively soft segment comparing with the mainstream wire bonders and die bonders, I would say the volume or contribution is still limited.

So it's fair to say we will get a higher margin from the market demand of these 3 segments. However, overall, the volume still much less comparing with the mainstream products.

And in terms of the capacity utilization, as I mentioned earlier, we try to optimize our cash flow and expedite our current inventory. So we will try to consume the existing inventory rather than using a lot more capacity to prepare more inventory. So I don't know whether I answered your question.

[Yu Jang Lai, analyst]

Okay. Perfect. Can I ask...

[Operator]

Sorry, Arthur. We have to move to the next question coming from Laura Chen from KGI.

[Laura Chen, analyst]

Hello? Can you hear me?

[Leonard Lee, executive]

Yes, Laura.

[Laura Chen, analyst]

Yes. My first question is about SMT business. Do we expect another SMT upgrade cycle driven by 5G? Or is this actually happening right now or that would be more gradually? Because back in the year 2017 and 2018, we see the trend of the substrate-like PCB type of design for smartphone. So back then, we see the strong growth and revenue contribution from SMT business.

Since then, the SMT business had picked up. So do we see anytime that our SMT business came back to, say, like 2017 or '18 level anytime soon? That's my first question.

[Leonard Lee, executive]

Sure, Laura. So you're asking about the -- whether or not we expect another major upgrade cycle for the smartphone due to 5G, right?

[Laura Chen, analyst]

Yes.

[Leonard Lee, executive]

And how does this compare with 2017 when there was a big smartphone upgrade cycle.

[Laura Chen, analyst]

Right.

[Leonard Lee, executive]

Okay.

[Cher Ng, executive]

Let me answer the question. Thank you for the question. Now, in fact, the smartphone upgrade cycle has been going on already. So -- but however, if you look at the overall shipment for smartphone this year, according to IDC, they predict that the smartphone volume will come down by close to, say, 10%.

So I think with this now backdrop, we believe that the quantum of the investment this year should be smaller than the previous cycle. So don't expect this investment cycle to be as big as the previous cycle.

As we mentioned earlier, indeed, on SMT, one of the drivers for SMT in the first 9 months of this year, beside 5G infrastructure buildup, is also 5G-related devices, like smartphones, underpinning the performance of our SMT this year.

[Laura Chen, analyst]

Okay. And also, just want to follow up on the Advanced Packaging. Could you just remind us again how big is the Advanced Packaging revenue contribution for the overall company as a whole? And also, what kind of the application or product we will see the strongest growth for the next few quarter or next year?

[Cher Ng, executive]

Unfortunately, we don't disclose the hard number. I think this is really for competition reason. So -- but we did give some color. Our AP revenue for the semiconductor solution for the first 9 months are very close to the whole of 2019 already. So I think -- I hope this will give you a sense of the growth pattern of our Advanced Packaging solution for the Semiconductor Solutions.

Now where does it go to? Well, I would say, I think the 5G will be really the underlying driver, not just for AP, but also for the mainstream solutions. 5G will drive HPC, such HPC will be a main driver for Advanced Packaging the way we look at it.

Now SMT. Our SMT also see increased demand for our SIP solutions. Now SIP, to a certain extent, can also be considered as AP. Although SIP are more used -- the end -- SIP will go into more of the wearables. Like, for example, smart watches, AirPods and those devices. So if you look at Advanced Packaging, there are 2 -- probably 2 areas. One is HPC, and the other is SIP.

So both these areas are benefiting our semiconductor solution as well as our SMT Solutions segment this year. And we believe this trend will continue. As I said earlier, AP is, in our opinion, a multiyear growth driver.

[Operator]

We have another follow-on question come from Mr. Donnie Teng from Nomura.

[Donnie Teng, analyst]

I have 2 follow-ups. So first one is the question I just raised. I'm just wondering, besides our NEXX business, what else of our businesses or equipment leverage U.S. technology or patents heavily? This is my first follow-up.

[Leonard Lee, executive]

Okay. Yes. Let's deal with your first question first.

[Cher Ng, executive]

Yes. Okay. You're right. NEXX is based out of U.S., whereas the other businesses that we have are non-U.S. based. So to answer your question, we are fully compliant with all the export and the import regulations imposed by the various countries that we operate in. And I think going forward, I don't think there's any change in this particular area, yes? So we are fully compliant.

[Donnie Teng, analyst]

Okay. My second follow-up is on the booking trend. So you mentioned that we don't give out specific guidance on bookings and gross margin into the coming quarters. However, this year, you also mentioned about that third quarter is like empty cycle, right? Originally, third quarter bookings should be lower than second quarter, but this year is totally different. So I'm just curious whether there is a chance that booking will continue to trend up into fourth quarter.

[Cher Ng, executive]

Yes. Now there is a chance, provided the momentum continues. So we are still early in the fourth quarter. So we have to wait for a while to see whether this booking momentum, which started for the IC -- for the IC subunit under the Semiconductor Solutions, we started to see a surge in bookings sometime in September. So we have to wait and see whether this momentum will continue into the rest of Q4. So it's still too early to answer the question.

[Donnie Teng, analyst]

I see. Then maybe I rephrase my question. If the momentum continue in November and December as October, then probably we can expect the fourth quarter overall booking momentum should be better than third quarter. Is that a fair comment?

[Cher Ng, executive]

As I said earlier, September was a very good momentum, so I can't really comment that. We really have to see, yes.

[Operator]

[Operator Instructions] We have another follow-on question come from Mr. Arthur Lai.

[Yu Jang Lai, analyst]

I only ask a very simple question. So in our presentation, we highlight that CIS, we see like a better booking off the low base. I wonder, is this booking technology by or capacity back? So which means is more [ as advanced ] CIS or it's a combination or is a -- for sensor or for the AA. Can you give us more color?

[Cher Ng, executive]

After you -- how do I answer you now? Let's put it that way. We are supplying a whole range of equipment, including AA equipment. So when customers buy equipment from us, they tend to buy a in-line solution. So I can't give you too much specific at this point in time. But so far, it's encouraging. We see a booking uptick, as we mentioned earlier, in Q3. Hopefully, this can continue and translate into billings in the quarter to come.

[Operator]

Our next question comes from Mr. Chris Yim from BOCOM.

[Seeching Yim, analyst]

Just a couple of quick questions from me. I guess the booking would be too early to say, but on the billings, 4Q, we talk about CIS, maybe some recovery; on industrial, some recovery. Can you give a little more color on Q4 billings in the other applications, maybe the Advanced Packaging, mini LED? How are they trending in terms of quarter 4 billings?

[Cher Ng, executive]

Okay. As said earlier, Q3 booking was strong for the semiconductor solution. This has to come -- this has to really back up by our mainstream business, the die and the wire bonders, because these are what we call -- at this point in time, it's really the capacity buy. So we need customers who are confident to look equipment for capacity in order to see the kind of volume.

So as my colleague, Patricia, has alluded earlier, so the mainstream die and wire bonders business will continue to do well for Q4. So CIS, CIS advanced packaging. CIS, of course, is still depend on the -- ultimately, the demand for the smartphone launches. So bookings should translate into billings in the next quarter.

For AP, I mentioned earlier, because of the small customer base, not just for us, but for the whole industry, it can be lumpy from quarter-to-quarter. That's why we do not want to give you color on our AP mix on a quarter-to-quarter basis because it's not reasonable to discern any kind of trend from that. So on a longer period than 9 months, it's a better way. 9 months, 1 year is a better way to discern the trend for AP.

And for mini LED, I think you also asked for mini LED. As I said earlier, we see encouraging signs. I think second half, mini LED demand starting to pick up. I think the first half probably is impacted by the COVID-19 situation. So COVID-19 situation, we still have to monitor. With the second or third quarter infection that's happening around the world, we cannot lose sight of this particular event or situation.

[Seeching Yim, analyst]

Can I ask a follow-up? Just a quick follow-up on the policy of using our booking guidance. Is it -- so for Q2, you to start giving booking guidance. Is it because of limited capability because of the whole global situation? Or is it the change -- more longer-term change in how you are providing outlook?

[Cher Ng, executive]

Yes. I would tend to say it's a longer-term change because we will only give billing guidance going forward. When we compare our industry peers, we also notice that most of our peers only give Q4 -- only give billing guidance. So most of them also do not give bookings or gross margin guidance.

[Operator]

Our next question comes from Mr. Frank Lee from HSBC.

[Frank Lee, analyst]

I just wanted to ask, I guess, 2 questions. And one is you -- sorry to keep talking about bookings, but you did talk about the bookings start to see a bit pickup in September. But if I look at the full quarter bookings, it still looks like SMT is stronger compared to Semi Solutions. But the pickup that you're talking about, is it more Semi specific starting in September?

[Cher Ng, executive]

Yes. Yes, it's more. Because the question was more on the Semi side, so I replied -- response was on the Semi side, yes.

[Frank Lee, analyst]

So on a relative basis, the incremental strength you're seeing in booking, would it be fair to say it's mostly on the Semi side? I mean SMT is expected to be up anyway. So the incremental strength in booking that bucked the trend, is it mainly because of the Semi side?

[Cher Ng, executive]

No. No. As we mentioned earlier, for Q3 bookings, both bucked the trend. So typically, Q3 for bookings for Semi and SMT tend to be lower in Q2. But this time round, it's different. So it's encouraging. So SMT has been kind of lagging behind the Semi. But now with the strong Q3 bookings, things seem to be looking up.

As we always mention, as a guide, the way we read the entire supply chain is that Semi, if anything, Semi recovers first and maybe a quarter or slightly above a quarter, and then SMT will start to recover. That's how the whole ecosystem works, actually.

[Frank Lee, analyst]

Okay. And this time around is similar? Or are we seeing basically a similar timing of recovery?

[Cher Ng, executive]

We think so. We think so. I think -- I don't think there's anything to disrupt that kind of trend at this point in time.

[Frank Lee, analyst]

Okay, sir. And then sorry, my last question is you talked earlier on the call about the strength of the base station and as a driver of this year's outlook. But in the last couple of months, there seems to be some signs that the base station momentum is slowing, especially out of China. Are we seeing -- is that a potential risk you could see in the horizon?

[Cher Ng, executive]

Let's don't try to discern from quarter-to-quarter. We believe this 5G infrastructure rollout will be a multi-year growth driver. Not just -- China is strong. China is starting. They are ahead in this particular area. But, well, this infrastructure rollout will happen in all countries in time to come. So we believe this is a multi-year mega trend.

[Operator]

Our next question comes from Sebastian Hou from CLSA.

[Sebastian Hou, analyst]

I have 2 questions on the Advanced Packaging side. First is that, curious about your view, are you seeing any differences or rising technology challenges if your Advanced Packaging customer mix are changing more from typical OSAT to advanced foundries? And also, at the same time, when the bondage strength is accelerated?

[Cher Ng, executive]

Leonard, can you repeat the question? [indiscernible]

[Leonard Lee, executive]

Yes. Yes. So your question is about the -- whether or not we see any rising technology challenges as we see OSATs moving, as we see the demand coming from the -- switching from the OSATs to the foundries. Is that correct?

[Sebastian Hou, analyst]

Yes. Exactly.

[Cher Ng, executive]

So I can speak in general terms. I think AP is still a developing technology. So in our terminology, we tend to view AP as one that has no really standard across the whole industry. So different customers have different way of using AP to package their devices.

So I think what's more important, in our opinion, as an equipment supplier, is to be at the forefront of all this technology, that's one; and working very closely, in close collaboration with our customers. Because then we will develop technology, new technology together with our key customers going forward. And this is how we have been so successful in our TCB business. We have anchor customers. We develop these solutions together.

So we believe this is a winning formula, and we are doing exactly that for AP packaging solutions going forward.

[Sebastian Hou, analyst]

Okay. My second question is, I'm curious about how extendable and expandable of the NEXX technology you have. If I get it right, it seems to have quite dedicated or quite concentrating in one key U.S. customers. So I'm curious about how do you see the kind of -- leveraging that technology to penetrate into the other advanced packaging customers.

[Cher Ng, executive]

Sure. Now for NEXX, we basically have 2 solutions. What we -- one is what we call the PVD, physical vapor deposition solution. And the other one is what we call the electrochemical deposition, so ECD.

So yes, right now, for the panel plating, which is under the ECD, that's driving the growth of NEXX. But NEXX has been around for many years. They've been serving the customers in the PVD and the ECD for wafer-level kind of a solution. So we believe NEXX is also pretty well positioned to take advantage of the AP growth in years to come. It's just that for the last 2 years, panel plating has taken off in a big way because of the high-density substrate, RDL requirement and first-level interconnect requirement. That's why the mix for NEXX for the last 2 years has been more towards the panel plating solution.

[Operator]

Mr. Lee, there seems to be no further question at this point in time.

[Leonard Lee, executive]

Okay. So let's pool one more time. And then it's already 9:42, so...

[Operator]

[Operator Instructions] We have another follow-on question coming from Sebastian.

[Sebastian Hou, analyst]

Yes. Just one follow-up. The -- I think you probably already see that. I think TSMC is promoting its 3D fabric solutions. And so I'm curious about the opportunity for ASMPT. I think what kind of the tools we can offer and how we're going to address that rising business opportunity.

And in particular, I think, Robin, you mentioned about the NEXX technology of hybrid bonding that is under development right now. I think that's required for the future [indiscernible] wafer to wafer, with die to wafer, the kind of technologies. So it's good to see that the company also have that product offering down the road.

I'm curious about how do you evaluate the current development maturity of new technology compared to your competitors.

[Leonard Lee, executive]

Okay. So you -- yes, go ahead, Robin, yes.

[Cher Ng, executive]

Yes. Thanks, Leonard. It's clear. I can hear him clearly. So thanks for the question. I think first and foremost, you're aware that we really cannot comment on specific customer engagement. I can give you some color.

As we said earlier, we are the most comprehensive -- providing the most comprehensive suite of AP solutions. And we believe we are one of those leading in those areas. So certainly, as more customers -- as we see more customers entering into the Advanced Packaging space, I think that we'll benefit in the whole. I think being a premier interconnect company, so we will stand also to benefit.

So there are a few areas, typically, for heterogeneous integration. So if you are talking about heterogeneous integration tools like, for example, plating tools for RDL, for bumping, for copper pillar, so that space is played by NEXX. And then for die-to-die bonding, whether it's stacked die or whether it's -- we put die as close as possible onto a kind of substrate, a logic die and a memory die side by side or a stacked die, TCB, because of its superior performance compared to, say, flip chip, for example, so that is also an area that we can stand to benefit.

So as far as heterogeneous integration is concerned, we have a few key provisions. So NEXX is one, TCB. And if customers sometimes prefer mass reflow instead of TCB because of cost performance reason, we also have a nuclear solution, very high-precision, pigment-based tool also for heterogeneous integration. So these are the tools typically employed by clients or customers using HI or heterogeneous integration.

[Sebastian Hou, analyst]

Great. How about the hybrid bonding development versus your competitors?

[Cher Ng, executive]

Yes. As I said earlier, we are in the process of developing a hybrid bonder. We are engaging some key customers in this particular space. And we think that we should have a model ready by year 2021.

[Leonard Lee, executive]

Operator, any further questions from the floor?

[Operator]

[Operator Instructions] No question at the moment, sir.

[Leonard Lee, executive]

Okay. Yes. In that case, let us conclude the conference call then. And thank you very much all for joining us today, and we'll talk to you again next time. Thank you. Bye-bye.

[Cher Ng, executive]

Thank you. Thank you. Bye-bye.

[Peifen Chou, executive]

Thank you. Bye-bye.

[Operator]

Thank you for your participation. This conclude your conference. Thank you.