ASE Technology Holding Co Ltd

TWSE:3711

Earnings Call Analysis

Profit margins narrow amidst seasonal revenue fluctuations and R&D costs

During the first quarter, the company's revenues declined 17% sequentially due to seasonality, while gross profit margin slightly improved year-over-year. Operating expenses saw a significant annual increase driven by R&D expansions and higher stock option costs. Net income was $5.7 billion, down sequentially. Looking forward, ATM second quarter revenue is expected to rise by mid-single digits, with gross margins slightly improving. For the EMS segment, revenue is anticipated to stay flat with a slight drop in operating margin. Overall, growth in advanced packaging and AI-related sectors is promising.

Company Performance and Financial Highlights

In the first quarter, the company's performance showed a mixed bag of results. Consolidated net revenues declined by 17% sequentially but experienced a modest 1% increase year-over-year. This was primarily due to seasonality in both the ATM (Assembly, Test, and Material) and EMS (Electronic Manufacturing Services) businesses. The company recorded a fully diluted EPS of $1.28 and a basic EPS of $1.32. Gross profit stood at $20.9 billion with a gross margin of 15.7%, which was a slight decline of 0.3 percentage points sequentially but a 0.9 percentage point increase year-over-year【4:0†source】【4:1†source】.

Operational Expenses and Profit Margins

Operating expenses saw a sequential decline of $0.6 billion, mainly because of lower compensation expenses, but increased by $1.7 billion year-over-year due to R&D staff ramp-up, overseas expansion start-up costs, and higher incentive stock option expenses. Operating profit for the quarter was $7.5 billion, showing a substantial decrease of $4.3 billion sequentially, even as it faced a smaller decline of $0.2 billion annually. This led to an operating margin decline of 1.7 percentage points sequentially and 0.2 percentage points year-over-year【4:0†source】【4:1†source】.

Net Income and Currency Impact

The company reported a net income of $5.7 billion, which declined by $3.7 billion sequentially and by $0.1 billion year-over-year. The Taiwan dollar appreciated by 2% against the U.S. dollar sequentially during this period and depreciated by approximately 3% annually. This currency fluctuation negatively impacted the company's gross and operating margins by impacting cost structures【4:2†source】.

Segment Performance

The ATM segment saw revenues of $73.9 billion, down $8.1 billion sequentially but up $0.6 billion year-over-year, translating to a gross profit margin of 21%. The EMS business posted revenues of $59.4 billion, down $19.8 billion sequentially but up $1.6 billion year-over-year. The EMS gross margin improved to 9.3% due to favorable product mix【4:2†source】.

Guidance and Future Outlook

The company anticipates a mid-single-digit growth in ATM revenues for the second quarter of 2024, along with a slight improvement in its gross margin. On the EMS front, revenues are expected to remain stable while operating margin might slightly drop. The company is also expecting increased expenses due to a 15% rise in electricity rates, which is anticipated to create a 0.8 percentage point negative impact on the ATM gross margin for the second quarter【4:3†source】【4:4†source】【4:6†source】.

Strategic Initiatives

Significant investments are being made in advanced packaging and testing, driven by the strong momentum seen in AI-related opportunities. The company's CapEx for the year has been increased by 10%, focusing on expanding capabilities in both packaging and testing. Advanced packaging revenues are expected to continue doubling, driven by collaborations with multiple customers, including foundries and design houses【4:8†source】【4:10†source】.

Sectoral Demand and Challenges

The demand perspectives across different verticals are varied. While automotive and industrial sectors are expected to show some lingering softness, other sectors such as high-performance computing are witnessing steady growth. The company remains optimistic about gaining market share, particularly in automotive and AI packaging sectors【4:12†source】【4:14†source】.

Earnings Call Transcript 2024-Q1

[Kenneth Hsiang, executive]

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our first quarter 2024 earnings release. Thank you for attending today. Please refer to our safe harbor notice on Page 2. [Operator Instructions] I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I'm joined today by Joseph Tung, our CFO. For today's presentation, I will first go over the financial results and give the company guidance. Joseph will then be available to take your questions during the Q&A session that follows. During the Q&A session, each caller will be limited to 2 questions at a time, but may return to the queue for further questions. With that, let's get started. As per our expectations, the overall demand environment for our services during the first quarter fell on a sequential quarterly basis, primarily due to seasonality of electronics products. And as was the case at the end of 2023, higher and leading-edge services generally fared better than legacy services. For our ATM business, revenues were on the higher end of our expectations. During the quarter, key equipment utilization rates were still relatively low, averaging out around 60%. Certain devices initiated a short but unsustained inventory refresh, easing off initially more optimistic outlooks. For our EMS business in the first quarter, demand for our services was slightly ahead of our initial expectations as a result of improving customer inventory levels. Please turn to Page 3, where you will find our first quarter consolidated results. For the first quarter, we recorded fully diluted EPS of $1.28 and basic EPS of $1.32. Consolidated net revenues declined 17% sequentially but increased 1% year-over-year. We had a gross profit of $20.9 billion with a gross margin of 15.7%. Our gross margin declined by 0.3 percentage points sequentially but increased by 0.9 percentage points year-over-year. The sequential decline in margin is principally due to lower revenues due to seasonality of both our ATM and EMS businesses. The annual improvement in gross margin is principally the result of foreign exchange. Our operating expenses declined by $0.6 billion sequentially, but increased by $1.7 billion annually. The sequential decrease in operating expenses are primarily due to lower compensation expenses. The year-over-year increase in operating expenses is primarily attributable to R&D staff up, overseas expansion start-up costs and higher incentive stock option expenses. Our operating expense percentage increased 1.3 percentage points sequentially and 1.1 percentage points year-over-year to 10%. The sequential operating expense percentage increase was primarily related to lower operating leverage during our seasonally down quarter. The annual increase was related to higher R&D staff up, overseas expansion and higher incentive stock option and bonus expenses. Operating profit was $7.5 billion, down $4.3 billion sequentially and down $0.2 billion year-over-year. Operating margin declined 1.7 percentage points sequentially and declined 0.2 percentage points year-over-year. During the quarter, we had a net nonoperating gain of $0.4 billion. Our nonoperating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates and other nonoperating income, offset in part by net interest expense of $1.1 billion. Tax expense for the quarter was $1.9 billion. Our effective tax rate for the quarter was 24%. Income tax expense was higher than anticipated, mainly from a tax basis gain realized due to the U.S. dollar appreciation against the Korean won. Such tax expense may reverse itself when the U.S. dollar depreciates against the Korean won. Net income for the quarter was $5.7 billion, representing a decline of $3.7 billion sequentially and a decline of $0.1 billion year-over-year. The NT dollar appreciated 2% against the U.S. dollar sequentially during the first quarter, while depreciating 2.96% annually. From a sequential perspective, we estimate the NT dollar appreciation had a 0.55 percentage point negative impact to the company's gross and operating margins. While from an annual perspective, we estimate the NT dollar depreciation had a 0.86 percentage point positive impact to the company's gross and operating margins. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $21.8 billion with a 16.4% gross margin. Operating profit would be $8.7 billion with an operating margin of 6.5%. Net profit would be $6.8 billion with a net margin of 5.1%. Basic EPS, excluding PPA expenses, would be $1.58. On Page 4 is a graphical representation of our consolidated financial performance. On Page 5 is our ATM P&L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the first quarter of 2024, revenues for our ATM businesses were $73.9 billion, down $8.1 billion from the previous quarter and up $0.6 billion from the same period last year. This represents a 10% decline sequentially and a 1% increase annually. Gross profit for our ATM business was $15.6 billion, down $3.7 billion sequentially and up $0.8 billion year-over-year. Gross profit margin for our ATM business was 21%, down 2.4 percentage points sequentially and up 0.9 percentage points year-over-year. The sequential margin decline was primarily the result of lower revenues due to typical seasonality. The annual margin improvement is primarily the result of foreign exchange offset in part by higher utility costs. During the first quarter, operating expenses were $9.5 billion, down $0.5 billion sequentially, while up $1.2 billion year-over-year. The sequential decline in operating expenses was primarily driven by lower compensation expenses. The annual operating expense increase was driven primarily by scale-up of R&D labor related to leading-edge advanced packaging. And, to a lesser extent, the impact of our incentive stock option and bonus programs. Our operating expense percentage for the quarter was 12.8%, up 0.6 percentage points sequentially and up 1.4 percentage points annually. The sequential operating expense percentage increased as a result of lower operating leverage during the seasonal soft quarter. And noted earlier, the annual increase was due to higher compensation expenses, primarily at the R&D level. From an ongoing basis, we believe that as leading-edge advanced packaging becomes more part of our overall business. A higher concentration of R&D workforce will be required. This will lead to higher compensation expenses within our operating expenses on an absolute basis. However, from a current operating expense percentage perspective, these R&D expenses are ramping ahead of the leading-edge advanced packaging revenues they are to generate in future quarters. During the first quarter, operating profit was $6.1 billion, representing a decline of $3.1 billion quarter-over-quarter and a decline of $0.3 billion year-over-year. Operating margin was 8.2%, declining 3 percentage points sequentially and declining 0.5 percentage points year-over-year. For foreign exchange, we estimate that the NT to U.S. dollar exchange rate had a negative 0.97 percentage point impact on our ATM sequential margins and a positive 1.49 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 22.2% and operating profit margin would be 9.7%. On Page 6, you'll find a graphical representation of our ATM P&L. On Page 7 is our ATM revenue by the 3C market segments. Our communications application shifted 1 percentage point to our computing segment. This shows that applications generally declined together during the seasonally down quarter. On Page 8, you will find our ATM revenue by service type. On a quarter-over-quarter perspective, our revenues didn't change significantly with a slight shift in percentage share between others and traditional advanced packaging. However, from a year-over-year perspective, there has been a more pronounced shift towards higher-end packaging for both traditional and leading edge. It is worth noting that our stated goal of doubling leading-edge advanced packaging revenues in the current year is tracking somewhat ahead of target. On Page 9, you can see the first quarter results of our EMS business. Our EMS revenues came in a bit ahead of where we expected, mainly as a result of higher-than-expected customer restocking and an improving customer inventory environment. During the quarter, EMS revenues were $59.4 billion, declining $19.8 billion or 25% sequentially and improving $1.6 billion or 3% year-over-year. The sequential revenue decline is primarily attributable to typical seasonality for our EMS business, while the year-over-year revenue improvement is due to higher customer restocking. Sequentially, our EMS business's gross margin improved 0.9 percentage points to 9.3%. This change was principally the result of product mix. Operating expenses within our EMS business stayed roughly flat with the first quarter at $3.8 billion, declining $0.1 billion sequentially. Our first quarter operating expense percentage increased 1.6 percentage points sequentially and 0.9 percentage points to 6.5%. The higher operating expense percentage was primarily driven by lower operating leverage while incurring higher global expansion costs. Operating margin for the first quarter declined 0.7 percentage points to 2.8%, which is ahead of our initial expectations due again to product mix. Our EMS first quarter operating profit was $1.7 billion, down $1.1 billion sequentially, while up $0.3 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. The moves here are generally in line with the seasonality of underlying customer products. Automotive was a larger portion of segment share driven in part by inorganic growth. On Page 10, you will find key line items from our balance sheet. At the end of the first quarter, we had cash, cash equivalents and current financial assets of $83.5 billion, increasing $11.5 billion. Our total interest-bearing debt increased slightly by $3.6 billion to $195.3 billion. This increase was primarily related to the impact of the Taiwan dollar depreciating against the U.S. dollar on our U.S. dollar-denominated debt. Total unused credit lines amounted to $393.9 billion. Our EBITDA for the quarter was $24 billion. Our net debt to equity this quarter was down to $0.36 million. On Page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the first quarter in U.S. dollars totaled $228 million, of which $109 million were used in packaging operations, $97 million in testing operations, $21 million in EMS operations and $1 million in interconnect material operations and others. We continue to be excited by the prospects of AI and the incremental volumes and package requirements from these increasingly robust devices. We are continuing to see increasing adoptions across our leading-edge advanced packaging services. However, we currently are only at the beginning. We see that the foundations that are being built now will lead to new generations of low-, mid- and high-end devices alike. And while AI will bring massive semiconductor volumes, step-ups and package level requirements and corresponding increases in ATM revenues, the vast majority of these devices are just starting to be developed. Going forward, we believe many products may take a fresh AI angle and may create a shorter-than-normal refresh cycle and thus, kick-start overall demand. As such, although the market recovery appears to be playing out a bit slower than previous customer forecasts. We are not looking to adjust our full year outlook. For the quarter upcoming, we still see a slightly improved demand environment for our services. On the expense side of things, we are seeing some impact to our electricity rate, Tai Power, the provider of electricity to Taiwan has increased electricity rates by 15% for us. The increase goes into effect at the beginning of the second quarter. Further, [some rates] are starting in the middle of May. The combined effect, we believe, will have a negative 0.8 percentage point impact to our ATM gross margin in the second quarter. Despite this, we are looking to improve our gross margin in the second quarter given improving favorable product mix. From an operating expense perspective, we still continue to staff up for R&D and incur site expansion costs. However, with revenue improvement, we will look to keep our OpEx percentage flattish or close to the current range. We would like to summarize our outlook for the second quarter 2024 as follows: for our ATM business in NT dollar terms, our ATM second quarter 2024 revenue should grow by mid-single digits quarter-over-quarter. Our ATM second quarter gross margin should be slightly above first quarter 2024 levels. For our EMS business in NT dollar terms, our EMS second quarter 2024 revenues should be similar with the first quarter 2024. Our EMS second quarter 2024 operating margin should be slightly below first quarter 2024 levels. That is the conclusion of our prepared remarks. I would like to open the floor to questions.

[Operator]

Now we will start the Q&A session. [Operator Instructions] We have a question from Mr. Gokul Hariharan of JPMorgan.

[Gokul Hariharan, analyst]

First of all, on the overall end demand outlook, Ken, you mentioned you're not really changing your outlook, which I think was 6% to 10% growth for [indiscernible]. Could you talk within that, what are you seeing in different verticals. Last time I remember, Joseph talked about auto are potentially growing this year. Since then, we have seen some downward reductions in automotive demand. Is that still your view? And secondly, could you also comment about smartphone and communication demand given some of the concerns there. That's my first question.

[Joseph Tung, executive]

Yes. I think most of the sectors, we're seeing bottoming out in the second quarter. But with automotive and maybe it's industrial, still with some lingering softness. But I think overall, I think things might digest itself, and we're not changing our view for the outlook for the whole year at this point.

[Gokul Hariharan, analyst]

So you still think Joseph that automotive will be growing this year for you?

[Joseph Tung, executive]

Yes. We're still gaining market share on the automotive. In fact, we are making quite a bit of progress in moving that part of the business up.

[Gokul Hariharan, analyst]

My second question is on your advanced packaging, the advanced packaging related to AI that Ken mentioned is tracking ahead of plans to double this year. Could you talk a little bit about some kind of longer-term view? Like how do you see this business evolve? Is it going to get to 15%, 20% of revenues in the next three, four years? Your key partner TSMC also raised their expectations on AI-related growth. So, I just wanted to pick your brains on that. And also related to that, now that you're doing some of the packaging for this lead GPU customer, do you stand the chance to start winning some test business also for them? I think previously, you didn't have much testing, whether it is panel test or system-level test. Is there a chance that you could start winning some test business with them as well in the upcoming product migration?

[Joseph Tung, executive]

Yes. I think we still see very, very good growth momentum in the AI-related or the leading-edge both to packaging and test. And we're ahead of our schedule for this year, and we're expecting continuous strong growth over next year as well. In terms of test, I think overall speaking, we are increasing our full year CapEx by another 10%. And the bulk of the increase is in test, and we are making further investments to win not only, to raise not only our turnkey ratio but also to penetrate more into the test only kind of business. And that, of course, includes the advanced testing.

[Operator]

The next to ask questions, Charlie Chan of Morgan Stanley.

[Charlie Chan, analyst]

So I have a few questions. First of all, it's also related to your advanced packaging. May I know your progress in the AI GPU testing business opportunity, especially burning, there seems to be a very important process. Do you think the company will gain much market share this year?

[Joseph Tung, executive]

We are investing in tests and that also includes burning. And we're hopeful that we will be seeing some volume by the later part of the year.

[Charlie Chan, analyst]

And another one is more the end demand and the cycle recovery. So we continue to hear that China smartphone relative semiconductor seeing some [old case cut] destocking. Does the company see a similar trend? And do you think these are kind of short lived or you think third quarter from a smartphone segment, you are also seeing very muted growth into the quarter?

[Joseph Tung, executive]

No, I think overall, we are still looking at the whole market, and most of the sectors will be bottoming out, and we are seeing steady but kind of moderate growth in the cell phone area. And the strongest is still high-performance computing, but all the other areas, we're seeing gradual recovery. And coming into second half, we will see a much more substantial growth momentum.

[Operator]

The next to question is Brad Lin of BofA.

[Brad Lin, analyst]

So I have two questions. One is on the advanced packaging. So, as we learn that, well, the [outset] including probably ASE prefers non-silicon-based interposer solution for this leading-edge advanced packaging. So, when or what time does the management see faster adoption in this type of solution and contribute to ASE?

[Joseph Tung, executive]

Well, we are in mass production at this point, and we are having a lot of engagement with some other customers as well. And I can't predict the pace of it, but we certainly see a very good growth potential in this area as well.

[Brad Lin, analyst]

So for the strong growth that we just mentioned into 2025, currently, this is still based on the well silicon-based solution. Can I assume that?

[Joseph Tung, executive]

Well, it can be both. I think with our own solution, we'll see some pickup in next year as well as we go with the existing packaging.

[Brad Lin, analyst]

And then my second question would be about the on-device AI. So, what will be the increasing well value addition from ASE in the on-device AI. And when do we think well, the growth to be meaningfully pick up in the future?

[Joseph Tung, executive]

Yes. I think this year, we are ahead of the schedule in doubling that part of the business. Although next year, we still see very strong momentum going on. And we are -- not just from the business from the foundry, but also, we're having engagement with multiple customers, including design houses, system houses. So, I think there is a momentum building at this point, and we do have fairly good confidence in growing that part of the business quite substantially in next year as well.

[Operator]

The next to ask questions, Randy Abrams of UBS.

[Randy Abrams, analyst]

I wanted to ask a follow-up on your CapEx, the 10% higher CapEx. So could you go through -- is some of that also tied to advanced packaging. I think you mentioned the test. And could you remind us you're now -- because equipment CapEx was still fairly low in the first quarter, would the CapEx guidance full year now for the equipment or for overall? And a follow-up you is with the optimism into next year, are we starting another CapEx cycle like we're at a low base, but do you think directionally, there could be a good increase with you owning more AI opportunities to go after?

[Joseph Tung, executive]

Yes. I think for this year, we are upping our CapEx by another 10%. We mentioned last time that this year will be 40% to 50% growth in our CapEx, and we're upping that. I think in terms of overall CapEx, roughly 61% for packaging and 24% for tests. And for test portion of it, the percentage has increased from last quarter as well, we were budgeting about 18% now to 24%. So, we are making quite a bit of investment or expanding quite a bit of our investment in test CapEx, aiming to leverage on our turnkey services as well as trying to get more of the test only business as well. So, I think in terms of the overall CapEx roughly, I would say 50% of it will be for advanced and the other half of it will be for the maintenance and also some of the upgrades.

[Randy Abrams, analyst]

I'll ask a quick follow-up on that and then the second question. For the test, could you clarify, is that application more HPC, like high-performance compute driven? And then the second question I wanted to ask on -- it looks like a few things happening on margins. So, on the gross margin, could you talk about the mix change, which you're getting some product mix change, both ATM and sounds like EMS as well. And on the OpEx side, with some more of this investment in R&D, the view for OpEx, I guess I should say OpEx growth, how much do you think the OpEx has to grow?

[Joseph Tung, executive]

Well, I think testing CapEx is both for the HPC as well as other applications. And as I mentioned, we do have a lot of opportunities in reaching our overall turnkey ratio, and that includes all products. And of course, in terms of the more advanced or AI-related tests, we are also investing into that area, and we expect to have some -- making some inroads in that area as well. What's the other part of the Okay -- Our gross profit margin, I think the improvement is, of course, coming from revenue increase as well as our more favorable product mix as we go into -- as we grow our more leading-edge packaging and test. In terms of operating expenses, I think the increase mostly coming from our beefed-up R&D investments. And we're staffing up in R&D, putting more resources into more advanced packaging and test. And of course, we are in the process of expanding our overseas sites as well. So there will be some more additional investment put into it. And also, in terms of compensation, we've granted our new round of employee stock options. So, we will be including that part of the expense increase as well for this year. All in all, I think for the whole year, operating expense percentage will have about 1% increase from last year or less than 1%.

[Operator]

The next to ask questions Rick Hsu of Daiwa Securities.

[Rick Hsu, analyst]

So the first question is a housekeeping one, can you share with us your utilization rates across ATM for the coming second quarter?

[Joseph Tung, executive]

We have about slightly below 60% in quarter 1 and quarter 2 with the revenue growth, we're seeing the overall utilization rate could be slightly above 60%.

[Rick Hsu, analyst]

All right. The second question also about your second half. I remember last quarter, Joseph, you said your ATM gross margin will go back to your structural target, which is a mid-20% to 30%. Is that still viable for your second half this year?

[Joseph Tung, executive]

Yes. I think from the forecast we have, we're still pretty confident that we will be reaching structural margin in the second half of the year. And I think we have a fairly good chance that for the whole year, we'll be -- we can also reach that level.

[Operator]

The next to ask questions, Bruce of Goldman Sachs.

[Zheng Lu, analyst]

I want to ask about your U.S. expansion plan. The advanced packaging business, a major chunk of it is coming from the foundry outsourcing part. On the other hand, you probably the most important also in partner for TSMC. But as TSMC mentioned during the call, that they are very happy to see [Amcor] is going to have another advanced packaging facility in U.S., which ASE doesn't really have a sizable facility there. Do you have any plan to do that? Do you see any change in terms of landscape? How you do the business with TSMC in the future?

[Joseph Tung, executive]

We're not precluding any possibility, but then any investment that we make needs to make economic sense. And right now, we're not sure that a greenfield operation setup in the U.S. fits into that category. So, we are monitoring the situation at this point. And I think bulk of the advanced packaging or tests can still be serviced out of Taiwan and our other locations as well.

[Zheng Lu, analyst]

So even with government subsidy, you still don't think that's a profitable business or a good returns business?

[Joseph Tung, executive]

No, I don't think it's wise to make any commercial decision based on subsidy.

[Zheng Lu, analyst]

I would tell Amcor that.

[Joseph Tung, executive]

I think they know that, too.

[Zheng Lu, analyst]

The next question is for the SiP business. I mean what do we see that SiP business growth in this year and the coming years? I mean it has been built for quite some time already. When can we see another course momentum for the SiP business?

[Joseph Tung, executive]

I think the SiP business for this year, we could see a flattish or a little bit down for the whole year, given the fact that there are less products being introduced and there is the seasonality and we are seeing market conditions are a little bit different from previous years. But we are still quite actively engaging with customers and some of the products are going to be mass produced and some are in earlier stage, but we do feel that come next year, the growth in our SiP business will resume.

[Operator]

So next to ask questions Laura Chen of Citi Group.

[Chia Yi Chen, analyst]

Just a quick follow-up on the gross margin. Just so you mentioned that for the structural gross margin target of 25% to 30% is achievable or not just for the second half but also for the full year, is that correct?

[Joseph Tung, executive]

Yes. I think for the second half, we will sort of reach that level. And we are trying very hard and working very hard to -- for the whole year. We're working hard to reach that level as well. Bear in mind that that's with the increase of our utility costs. The recent rate increase for us, it's about 15% in electricity in Taiwan. And that will have roughly about 0.8% impact on us. So that needs to be offset as well. So, it's -- even with that kind of increase in cost, we are still confident that in the second half, we will reach that. And we have -- we're feeling, at this point, quite comfortable that for the whole year, we should be able to reach that as well.

[Chia Yi Chen, analyst]

May I understand that aside from the utilization rate improvement, do we also assuming that more mix change towards the advanced packaging or AI-related or increasing like testing revenue, which would lead to higher gross margin?

[Joseph Tung, executive]

Yes, that's correct. We believe the higher advanced packaging as well as our test business will definitely help our margin.

[Operator]

The next to ask questions Jason Chang from CLSA.

[Unknown Analyst]

You preferably mentioned that it makes sense for ASE to enter the new AP business when it is mainstream enough to reach maybe mass production stage for ASE. So, is that the case that for leading-edge service that you talk about, how should we expect the volumes or contribution for this kind of advanced packaging or your new business?

[Joseph Tung, executive]

Are you talking about percentage of revenue?

[Unknown Analyst]

Yes. Or can you give us more color on maybe the contributions or your outlook in the future?

[Joseph Tung, executive]

Well, look, last year, we have about low single-digit percentage of revenue coming from what we call the leading edge. And we are -- as we pointed out last time, we expect to double that to mid-single digit. And as I pointed out that next year, we still continue to see strong momentum. And but in terms of exact percentage, we don't have -- I don't have that number yet because we're expecting not only the advance packaging will grow. The other so-called traditional advanced packaging or tests and all the other areas will grow as AI development continues to expand.

[Unknown Analyst]

So my second question in terms of your outlook in second half this year. So, can we expect seasonality or how season for [indiscernible] to sustain our growth momentum for maybe traditional packaging or flagship or even mature testing or any kind of service or products in Q3 or Q4?

[Joseph Tung, executive]

I think Q3, Q4 or second half, we will see all kinds of all products to start to grow. But I think leading edge would may be above the corporate average.

[Operator]

The next to ask questions Gokul Hariharan of JPMorgan.

[Gokul Hariharan, analyst]

First one, I wanted to explore a little bit is the partnership with the leading foundry for the advanced packaging. Could you help us understand a little bit the nature of this agreement, the arrangement? Is that something that you have visibility into the long term? And is it kind of like a strategic partnership that ASE has entered into? Or is it something that doesn't have that kind of visibility given they're also expanding their own in-house capacity as well? So, I just want to understand how this partnership works over the next, let's say, three, four years?

[Joseph Tung, executive]

Well, obviously, we work very closely with the foundries, and we do have continuous dialogue with them and to set up an expansion plan for our capacity. But this is something that between us and the foundry, I don't think it's proper for us to discuss what exactly the arrangement will be.

[Gokul Hariharan, analyst]

Okay. But do you think it's something that will continue to drive the growth for the next three, four years?

[Joseph Tung, executive]

We do have good visibility, but I don't want to get into the detail for it.

[Gokul Hariharan, analyst]

No worries. Thanks. A couple of quick follow-ups. One is on pricing. Any changes you're seeing on pricing? And for the electricity tariff increase, is there any chance you're able to pass through some of these cost increases to customers? And also secondly, on the traditional packaging side, utilization in the early '60s definitely seems quite low. Based on your current customer forecast, any view on when we get back to like 70%, 75%? Will it happen this year? Or will have to wait for next year to kind of get back to 70%, 75% utilization?

[Joseph Tung, executive]

Well, I think going into the second half, we will start to see our utilization to grow. And I think it's safe to say that we will be above 70% for the second half. In terms of pricing, I think the overall pricing for us is still resilient and there are a bit of a price pressure on the legacy products. But overall, I think on average, I think our pricing still remains to be resilient. And I think overall pricing structure will be much better than the past cycles.

[Gokul Hariharan, analyst]

Any chance you can pass on some of this electricity tariffs? Because it seems like it's not a 1-year thing. It's actually happening every year now.

[Joseph Tung, executive]

Yes. I think all costs are being considered. And when we further set up the proper pricing that we have. So, whether it's 100% passed out or is shared with our customers, I think that we will just come up with the sort of pricing, considering all the costs that we need to bear.

[Operator]

There is a follow-up question from Jason Chang of CLSA.

[Unknown Analyst]

I have a follow-up question. I wonder if you can provide more details on your comments regarding the leading-edge service. I mean, can you provide some of the type for cutting-edge packaging, like 2.5D or 3D or chip and wafer substrates? What kind of the type of advanced packaging or testing can you currently enter into the mass production stage? Or have the contribution right now?

[Joseph Tung, executive]

We have Fan-out. We have 2.5D. We have OS. I think those are the focus. Those are the ones, the type of packages we call leading edge.

[Unknown Analyst]

Okay. And all of them account for right now low single digit of the ATM business, right?

[Joseph Tung, executive]

Like I said, this year, we're expecting mixed single digit.To sum up, I think we had a better-than-expected first quarter. And going into second, we are on track of things for the whole year. We're also expecting same kind of outlook that we presented last time. I think overall, this is all sectors are bottoming out, maybe with some different test sectors with different time pace or time schedule. But all in all, we are comfortable with the current situation, and we will continue to make the necessary investments to service the whatever customer needs, including the leading edge and also on the test side, we are increasing our CapEx as well to try to win more test business. Thank you very much. We'll see you next quarter.