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ASE Technology Holding Co Ltd
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Hello. I am Kenneth Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Second Quarter 2021 Earnings Release. Thank you for attending our earnings presentation today. Please refer to our safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time.
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, our dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financials are 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 Dr. Tien Wu, our COO; and Joseph Tung, our CFO. For today's call, Dr. Tien Wu will first give a midyear update. I will then be going over our financial results. Joseph and Tien will then be available to answer questions during the Q&A section.
I would like to now hand the floor over to Dr. Tien Wu.
Thank you, Ken. Hello, everyone. Thank you for joining our conference call.
2021 has been an exciting year for all of us. I wish everyone is safe and well. For today's conference call, I would like to give you a brief report on 2 items.
First, I would like to give you a business update, including the second quarter and first half achievement, then the third quarter and the second half outlook, which will touch on business sentiment towards 2022. Second, business outlook, short term and long term. In the past weeks, there has been reports from several key customers and key partners with some conflicting signals causing some speculation about the current state of business and the landscape. I would like to give you ASE's perspective so you have another angle in solving the puzzle.
To begin with, I would like to give you our business update. Our second quarter '21 and the first half '21 revenue and margin are both on track. Second quarter '21 ATM revenue grew 8% quarter-over-quarter in U.S. dollar terms. First half '21 ATM revenue grew 20% year-over-year. If you exclude the EAR-affected revenue, it will be 48% year-over-year.
First half '21 test revenue recovered ahead of schedule. First half '21 revenue grew 54% year-over-year if we exclude the EAR-affected business. So starting from third quarter, we will see assembly and test business both grow.
Second quarter '21 HoldCo revenue grew 7% quarter-over-quarter. First half '21 HoldCo revenue grew 28% year-over-year. First half '21 HoldCo operating margin improved 2.7 percentage points year-over-year.
Let me talk about the second half '21. We expect third quarter and fourth quarter quarter-to-quarter revenue and margin improvement, as we have previously indicated. We're seeing very strong ATM demand than our previous target. Our next -- our last guidance, we estimated semiconductor will grow 10%, and we will do better than twice of that. Right now, our sentiment is better than our previous guidance. The momentum will last into 2022.
First half '21 ATM gross margin at full year target of 25%. In other words, we have achieved our full year target in the first half. Therefore, we do expect further gross margin expansion in second half, Q3 and Q4. HoldCo 2021 operating margin target should exceed or at a high-end target of 2.5% to 3%, as we previously guided.
Let me turn to the business outlook. I will first talk about the short term. Demands indicating a strong 2022 with another better-than-seasonal first quarter. As you know, first quarter of 2021 has been stronger than all of our expectations. We're looking forward to another strong Q1 in 2022. Many of the customer are extending the long-term service agreement beyond 2022 into 2023.
Let me comment on the expansion which has been -- many people ask about it. The capacity expansion needs to consider holistic and balanced supply continuity across the complete material, equipment and process ecosystem. Our estimate, the earliest the balance of demand and supply will be sometime in 2023. In other words, in 2022, we still need to be very smart and be very efficient in managing the bottlenecks.
Next, people ask about a double booking and inventory control, which may exist. However, that effect should be localized and temporal with the overall demand profile with very little impact to the overall business momentum, at least from ASE's OSAT perspective.
Next page, I would like to comment on the business outlook longer term. What I'm trying to do here is to share with you our ASE's perspective and maybe ASE's OSAT perspective on longer-term outlook. On this page, I have a diagram of a pyramid. What I'm trying to do is to illustrate a conceptual concept about the current state of semiconductor business. As you know, semiconductor business is mainly driven by innovation. If you imagine innovation is driven by technology, which is at the tip of the pyramid, as the innovation becomes more pervasive, the pyramid becomes taller. In order to support a bigger and taller pyramid, the length, the width, the height all need to increase proportionately.
This is not the exact mathematical description of our ecosystem. However, conceptually, you can see that. What we're seeing today is we have 2 driving forces, so let me comment on each one of them.
The first one is what the industry already been preparing for the longest time, including 5G, AI, EV, IoT, smart manufacturing and all, et cetera. Now for this type of innovation to be pervasive in scale, you need to develop a new infrastructure, which will incur, instigate a new demand for system and, therefore, demand for all semiconductor devices. However, in the last 2 years, unexpectedly, we had the COVID-19 impact. What the COVID-19 did is actually similar to this. It's not the new innovation. However, it put a step function or a sudden increase of demand on the existing systems without asking for any new infrastructure.
The industry is very used to building a capacity at a slower pace. While we're developing infrastructure, we're also cranking up new systems. While the COVID-19 effect is leveraged on the existing infrastructure, they only demand for a large quantity of new systems. So the industry is caught off-guard, and this is what we're talking about now.
The COVID-19 impact can be 2 years, can be 5 years. We actually do not know how long that will last. What we do know is we are in short. Therefore, the industry reacts accordingly by building up wafer capacity. We're also building up the assembly and test capacity. The whole supply chains are building all of the capacity accordingly.
The comment I would like to make here is this is a great incentive for the industry to start developing a manufacturing infrastructure because even if the COVID-19 impact dissipates in the next 2 to 5 years, the new wave of innovation, which will be a much, much longer-lasting impact to the industry, signified by 5G, AI, EV, IoT, smart manufacturing, we are seeing a huge demand on the IoT devices, for example, on the electric vehicle, on the autonomous driving. All of this new paradigm will require new infrastructure and a brand-new system.
So our perspective is semiconductor is very healthy. Short term, we have a great incentive to build our capacity to accommodate the system requirement by the COVID-19, while we are building up the needed capacity to accommodate the future increase of demand driven by the new paradigm shift.
So going to the next page. Let me talk about the other 3 tailwinds from our perspective. The first is consolidation. What the supply chain constraint has done to the industry is it's forcing everyone, our customer, our customer's customer, to accept more standard, flexible and secure supply alternatives. This is great for open-platform service provider like foundry and OSAT. In other words, what used to be proprietary now are being forced to accept the open-platform alternative. Long term, this is a thesis why OSAT and foundry will be gaining more share and consolidation over proprietary suppliers.
Let me talk about the third tailwind, Taiwan cluster. Taiwan cluster efficiency, economies of scale and supply chain flexibility, that has none. What we're seeing for the last few years is Taiwan cluster has been investing CapEx in a very, very heavy way, including ASE. As a matter of fact, ASE SPIL merger and synergy is another example of the Taiwan cluster efficiency. So with the efficiency in hand, with additional CapEx invested, with more customers choosing Taiwan sector as their preferred choices, this is forming a positive or a virtuous cycle.
Let me talk about the last tailwind, which is ASE HoldCo. ASE holding company today has demonstrated a clear leadership in scale, market share, margin, efficiency. We have a very clear view about how the new wave 5G, autonomous driving, smart manufacturing will demand heterogenous integration, including silicon on silicon and silicon with nonsilicon in sensors. We have a very clear view about the future AI, Big Data-driven, high-quality and tracking manufacturing, which is done by the automation. We are today a de facto choice and indispensable manufacturing partner for the semicap ecosystem.
With that, I thank you for listening. I will turn the floor back to Ken. Thank you.
Thank you, Dr. Wu. I will now go more in depth into our financial results. First off, I would like to clean up an order of business that needs a bit of explanation for the sake of reporting transparency.
As you all know, our subsidiary, USI, completed its acquisition of Asteelflash in 2020. Given the complexities of the purchase price allocation process, or PPA, IFRS generally allows companies up to a year to complete this valuation process. After the valuation is completed, a retroactive adjustment is usually made.
Asteelflash's purchase price allocation was completed during the second quarter. Accordingly, we have retroactively adjusted our balance sheet by TWD 0.4 billion, representing 0.1% of our total assets as of the first quarter. On our P&L, the purchase price allocation results in incremental expenses booked into the first quarter, totaling TWD 88.5 million or $0.02 per share. First quarter consolidated holding company reported gross margin has been reduced by 0.1 percentage points, while operating margin has been reduced by 0.2 percentage points.
For the second and future quarters, PPA impact to net income will be approximately TWD 37 million per quarter. Impacts to future gross and operating margin will, of course, depend on future revenues, but in the current period, such impact is considered negligible at less than 0.1%. This amount will be added to our quarterly PPA adjustment.
Please turn to Page 7, where you will find our second quarter consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the second quarter, we recorded fully diluted EPS of $2.30 and basic EPS of $2.40. Consolidated net revenue increased by 6% quarter-over-quarter and by 18% year-over-year. This sequential increase was primarily driven by our ATM business. We had a gross profit of $24.8 billion with a gross margin of 19.5%. Our gross margin improved by 1.2 percentage points sequentially and 2 percentage points year-over-year. Both margin improvements are principally the result of higher ATM business mix, offset in part by NT dollar appreciation. NT dollar appreciation had a negative 0.3 percentage point impact to sequential gross margin and a negative 2.1 percentage point impact to year-over-year gross margin.
Our operating expenses increased by $0.6 billion to $11.6 billion sequentially. Our operating expense percentage sequentially stayed flat at 9.2% and declined 0.5 percentage points year-over-year. For the year, we are now expecting to see an improvement from rather than targeting to maintain at last year's 9% level. Operating margin increased 1.3 percentage points sequentially and 2.6 percentage points year-over-year to 10.4%.
During the quarter, we had a net nonoperating gain of $0.2 billion. This amount primarily consists of gains related to our foreign exchange hedging activities, investments and asset sales, offset in part by net interest expense of $0.6 billion.
Tax expense for the quarter was $2.6 billion. The effective tax rate for the second quarter was 20%. For the third quarter, we expect to record our annual undistributed earnings tax. For modeling purposes, please use an effective tax rate of 21% for the third quarter to account for such tax impact. Net income for the quarter was $10.3 billion, representing an increase of $1.9 billion sequentially and an improvement of $3.4 billion year-over-year.
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 $25.7 billion with a 20.3% gross margin. Operating profit would be $14.4 billion with an operating margin of 11.3%. Net profit would be $11.5 billion with a net margin of 9.1%. Basic EPS, excluding PPA expenses, would be $2.67.
On Page 8 is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. As Dr. Wu indicated, our ATM business looks very healthy for this year and heading into 2022.
For the second quarter of 2021, revenues for our ATM business were $79 billion, up $5.2 billion from the previous quarter and up $9.5 billion from the same period last year. This represents a 7% increase sequentially and a 14% increase year-over-year. Our ATM revenues came in ahead of our expectations. On a U.S. dollar basis, our ATM revenues grew by 8% sequentially.
Gross profit margin for our ATM business was 25.6%, up 1.2 percentage points sequentially and 3.9 percentage points year-over-year. Our sequential gross margin improvement was primarily due to higher loading. The year-over-year gross margin improvement was primarily the result of higher loading, improved efficiency, product mix and a friendlier ASP environment.
ATM gross margin improvement was accomplished despite NT dollar appreciation having a negative 0.5 percentage point impact quarter-over-quarter and a 3 percentage point impact year-over-year. We expect to be able to deliver quarter-on-quarter improvement in ATM gross margins in the last half of the year even with ATM gross margin for the first half of the year already reaching our 25% full year target.
During the second quarter, operating expenses were $8.4 billion, up $0.3 billion sequentially and up $0.5 billion year-over-year. The sequential and annual operating expense increase was primarily driven by increased employee bonus accruals, which are based on a profit-sharing model. Our operating expense percentage was 10.6%, down 0.4 percentage points sequentially and down 0.7 percentage points year-over-year. Operating margin was 15%, improving 1.6 percentage points sequentially and 4.6 percentage points year-over-year. The strengthening NT dollar had a negative 0.5 percentage point impact quarter-over-quarter and 3 percentage point impact year-over-year to our operating margins. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 26.7%, and operating profit margin would be 16.4%.
On Page 9, you'll find a graphical representation of our ATM P&L. When we see our ATM gross margins here almost linearizing and hitting historical highs, I think it's fair to mention that we do not believe that our business is immune to future cyclicality inherent to electronics, but we do believe that having the scale synergies and the benefits of the 4 tailwinds, as mentioned by Dr. Wu, we will be in position to achieve margins with gradually higher peaks and shallower troughs.
On Page 10 is our ATM revenue by market segment. You can see here a decline in our communications market segment with share picked up by our automotive, consumer and other products. Meanwhile, our Computing segment has held roughly steady since 2020. Again, from what we can see here, our near-term performance has not been driven by communications-related devices. And more importantly, with such a decline in our Communications segment, it would seem that speculated widespread overproduction of communications-related components to be somewhat less likely. Our near-term performance has been driven primarily by growing consumer and general semiconductor expansion. This supports Dr. Wu's earlier statement that new technology and products create an expansion of more basic supporting devices.
On Page 11, you will find our ATM revenue by service type. There's generally too much noise in trying to understand each quarter's individual movement here. However, when the chart is taken as a whole, it tells a more complete story. You can see here the gradual improvement and underlying strength of our wirebond-related business. Meanwhile, services for advanced products have seen a gradual decline, some of which has to do with the impact of the U.S. EAR. We do, however, believe that our advanced services will start to rebound in the back half of this year.
On Page 12, you can see the results of our EMS business and a graphical representation of our EMS revenue by application. The information we provide in regards to our EMS business may differ materially from the information directly provided by our subsidiary as they report independently using Chinese GAAP.
As mentioned earlier, the results of the first quarter have been retroactively adjusted for PPA costs. Our second quarter revenue usually represents the end of our seasonal trough. However, what is more unusual this year is that many of our customers are experiencing the impact of component shortages in the second quarter. This is the main reason why we saw our EMS revenues fall slightly short of our initial expectations. However, we do believe that the majority of this revenue shortfall gets pushed out into the third quarter.
The second quarter expenses for our EMS business tends to be characterized by training, investment and preparation, readying our factory lines for the third and fourth quarters when things get up to full mass production speed. As is oftentimes the case, it's the quarter that requires spending of a more spontaneous nature for upcoming product ramps. This is especially true this year when we have 2 new factory locations ramping up during COVID spread. As such, we have incurred extra operating costs related to R&D, logistics and factory start-up costs in the second quarter to set the stage for second half growth.
During the second quarter, EMS revenues increased by 3% sequentially and 24% year-over-year. Our EMS gross profit was $4.5 billion, increasing $0.5 billion sequentially and $0.8 billion year-over-year. The higher sequential and year-over-year EMS gross profit was the result of product mix.
Gross profit margin for our EMS business unit came in at 9.1%, which is an improvement of 0.7 percentage points sequentially and a decline of 0.3 percentage points year-over-year. The sequential improvement is primarily the result of cost differences from differing product mix. The annual decline in gross margin is primarily due to higher operating overhead.
Our EMS business unit's second quarter operating expenses were $3.2 billion, increasing $0.4 billion sequentially while increasing $0.7 billion year-over-year. Sequential operating expenses were primarily up as a result of increased R&D and factory start-up costs. Annual operating expenses are up primarily as a result of a larger operating base. Our operating expense percentage increased 0.6 percentage points sequentially to 6.5% while increasing 0.2 percentage points year-over-year. The sequential operating expense percentage increase is primarily driven by higher R&D and factory start-up costs. We expect our operating expense percentage to temper down during the back half of the year as our mass production revenues ramp up during our typically seasonal up cycle.
Our EMS business has had a more challenging start this year as a result of worsening COVID operating conditions and component shortages. Quite simply, the underlying conditions have changed, and it's now more difficult and expensive to run than expected. We do not see the component shortages or extra costs subsiding in the near term. Therefore, our target of a 4% operating margin for our EMS business has become more of a challenging one.
On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. The second quarter change here with consumer products declining 5% is seasonally driven, while the increase in the Industrial segment is more brought about by industrial products picking up after a year of COVID softness.
On Page 13, you will find key line items from our balance sheet. The only things we would like to add here are that our total unused credit lines amounted to $276.4 billion, and our net debt-to-equity ratio dropped to 60%.
On Page 14, you will find our equipment capital expenditures. Amounts on this slide are denoted in U.S. dollars. Machinery and equipment capital expenditures for the second quarter totaled $611 million, of which $450 million were used in packaging, $116 million in testing, $39 million in EMS operations and $6 million in interconnect materials and others. As of the end of the second quarter, we are still running in a capacity-constrained environment, and at this time, we continue to see our capital expenditures up from 10% to 15% from last year, although more on the higher end of this range. However, this year's capital expenditure timing may be more volatile than previous years. The timing of equipment may defer or accelerate.
With that, we would like to provide our third quarter business outlook as follows. In U.S. dollar terms, ATM third quarter 2021 volume is to increase 12% with ASP holding stable versus second quarter 2021 levels. ATM third quarter 2021 gross margin sequential improvement should be similar with the sequential improvement in the second quarter of 2021.
For our EMS business, in U.S. dollar terms, EMS third quarter 2021 business level should be slightly higher than the average level of the third and fourth quarter in 2020. EMS third quarter 2021 operating margin should be around our targeted 2021 full year operating margin.
With that, I'd like to open the floor for questions. We're doing it slightly differently this fiscal round. We have people scattered throughout different rooms and such. We -- when we get the question, I will repeat the question, and then I would direct it over to Joseph and Tien. So question, please.
Our first question is from Mr. Gokul Hariharan of JPMorgan.
Yes. My first question is on what Dr. Wu mentioned in terms of demand-supply balance coming in 2023. Could you talk a little bit about what you expect pricing trends, margin trends to be next year? It looks like you're still going to be in a similar situation as 2021. So how should we think about this?
Secondly, could you also talk a little bit about how book-to-bill is looking as we head into early 2022? You talked about Q1 being better than seasonal, and you did allude to double booking, which is a very big topic for investor focus. How do you estimate double booking within your order book? And how does that affect your book-to-bill when you think about next year demand-supply? That's my first question.
Okay, Gokul. I have here that you were asking about pricing context for next year and also a outlook for 2022 and then somehow circle back over to concepts of double booking. Generally, we're trying to keep the number of questions for 2 questions per go-around. So let's go with the first 2, the pricing and the outlook for 2022.
All right. So our first priority is to make customer delivery fulfillment, and we have been very efficiently handling all of the customer requirement throughout 2020 and 2021. We will continue to do that.
Now occasionally, we'll get into a situation where we need to make pricing adjustment, either the higher material cost or the expedited fee. I believe for the second half of 2021 as well as the whole year of 2022, we will continue the current trend. It is very difficult to give you a quantitative estimate for what the pricing is because this is very dynamic. Our third priority is to make expedite delivery. However, the pricing environment remains to be very friendly.
The second question about the overbooking. We have seen some customers making adjustment. We have also seen some equipment delivery were making a timing adjustment. However, that may not be completed due to the business slowdown. I mentioned about the supply chain continuity. Sometimes, there's a BGA substrate shortage. Sometimes there's a different shortage. It makes no point to have overcapacity on one equipment or process while, at the same time, you do not have the materials.
So the comment that I made, in 2023, sometimes, we will see more of a holistic and balanced capacity supply-demand balance but definitely will not be in 2022. And hopefully, in 2023, we will have an easier time to execute the customer delivery. Thank you.
Got it. Just one clarification. So on the guidance for this year, I think it sounded like you are looking at 20-plus percent growth for IC ATM on a USD basis. Just wanted to clarify if I got that right.
That's correct. Well, I do want to mention that this is on top of the recovery of our affected business by the U.S. EAR. So as Dr. Wu mentioned in his presentation, if we exclude that part of the business from the equation, our actual first half overall ATM growth was 48%. And also, in terms of tests, not only that we are ahead of schedule and making a full recovery in the first half rather than the later part of the year, also, the -- again, excluding the EAR-affected business, the actual growth is about 54%.
So we're seeing a very, very strong growth momentum in terms of our ATM business at this point, and it seems that it's got -- also leading to 2022.
Next question is from Mr. Randy Abrams of Credit Suisse.
Okay. Yes. Okay. I came on the phone line. Hopefully, you can hear me. Yes, the first question, back to the comment about the tightness until 2023. How do you see -- I'm just curious on the supply side, we've seen pretty heavy industry bookings for equipment. And lead times are stretched out, but I assume those equipment would get delivered in the next year.
So I'm curious, one, on the supply side, how you're viewing it, if you think that bottleneck on the back-end equipment gets resolved moving through next year. And then from the demand side, are you -- how are you factoring parts of the environment? There's a fear about some of the COVID-related, consumer PC, home electronics coming off a high base. So I'm just curious what you're reflecting for next year if those factors ease the supplier or what gives the comfort of tightness continuing into 2023.
So Randy, you're looking for a question regarding the situation or the -- relating to back-end equipment tightness and also looking for an impact on next year's overall market demand and whether we see changes in overall market demand structure.
Okay.
That's right. Yes. Just to give the confidence for tightness all the way to '23.
Well, let me talk about the machine delivery. I think the machine delivery lead time right now is as bad as our last conference call. It has not improved. The lead time is stretching, and I believe the lead time will start to improve not this year. Sometime in 2022, we might see the lead time becomes better.
But once the lead time gets better, you still need to have a balanced capacity expansion, right? I talk about the material process and everything surrounding that. So I believe the reasonable capacity buildup will be some time throughout between 6 months ago, all the way this year as well as next year, and I believe in 2023, we will probably see more of a balanced profile, okay?
The second comment is a little bit more difficult to answer, the demand. Now we have seen some adjustment. For example, some sector of the customers are making some of the pushout in delivery. However, because of the over demand on the overall situation, it is very easy for ASE on the assembly and test side to switch the necessary equipment into the other application, which is clearly very, very strong demand. Our wafer bank, whips, still very high.
So right now, we're not terribly concerned about some of the inventory correction due to whatever reasons, but I think each end customer will have their unique reasons why they are making some local adjustment. Right now, actually, the local adjustment is kind of welcome because our delivery situation has been in this tight spot, which is really not healthy mentally for everyone.
So I think the demand will continue to be strong second half. It will be strong for the 2022. I talk about the pyramid. I struggled for a long time how do we really conceptually articulate what is going on right now. COVID-19, without asking for any new infrastructure, they just have a sudden increase of new systems, and therefore, all devices are short. This is the problem we're addressing. When people are talking about the COVID-19 impact will dissipate, we don't see that. Of course, we do understand, sooner or later, this will disappear. However, you have the following multiple ways of AI, IoT, smart manufacturing that we're aggressively building up the infrastructure, which will, in turn, require a lot of new system, which demands semiconductor devices at all levels.
So I think industry will be in short, and this is a comment that the foundry guys are making. I mean the 2021, 2022, 29 new fabs have been deployed. Everybody sees this, but the industry has no incentive to build the manufacturing infrastructure ahead of the curve. This is standard practice. The COVID-19 give you a very good short-term incentive, even though we do not know this impact will be 3 years, 4 years or 2 years. However, we have enough belief and vision that all the capacity will be needed and will be good for the world, and this is what the -- our view is.
No. Great. And second question -- okay. Yes. And the second question, and one clarification to the first is the local adjustments, if you think those are all driven by the constraints up and down the chain. Or are you seeing any pockets of application weakness? That's kind of just a clarification.
And then my second question, just on the guidance. I know you mentioned the first quarter above seasonal. For fourth quarter, you're coming off above seasonal third quarter. Do you expect to grow in the IC ATM in the fourth quarter?
And then the other part on pricing being stable. I know you talked about the expedites and unfriendly environment. So I'm curious, given we're in the peak season, what's kind of keeping price stable or why you're not seeing a little bit of a sequential improvement on pricing?
Randy, so you're looking for a fourth quarter -- somewhat of a fourth quarter outlook and also a pricing environment commentary in -- for the rest of the year.
Okay. I think the first comment is we're seeing some local adjustment, and I -- we do not know the reason why there are local adjustment. It could be business related or it could be a component shortage related. However, those are very localized and temporal. We're seeing the adjustment down and adjustment up right away. So at this point in time, I think the best comment we can give to you is it does not affect the overall business momentum. At least this is what we can see now.
The comment on the Q3 to Q4. Yes, we are expecting Q3 growth. We're expecting Q4 growth just like last year. The comment about Q1 of 2022, of course, I'm hoping to see another record, like Q1 is better than Q4 of the previous year. However, I'm not going to say that right now, but this is what I'm hoping for, and I believe if we have a clear, a good, optimistic Q1 in 2022, that momentum will carry throughout the 2022, and this is our current view. And then we'll deal with 2023 at a later date.
I think on the -- also -- this is Joseph here. I'd say also on the margin side, we will see sequential growth on a quarterly basis for the second half of the year as well as we continue to see volume expansion as well as continuous effort in efficiency improvement, including our automation. That is being aggressively brought online.
And for next year, we're still seeing there's also room for improvement further in terms of margin, and we're seeing a very, very healthy development in our overall financial performance going forward.
I mean there's one comment. I will not talk about the overall pricing comparison. However, pricing is given by the market. I mean it's not defined by any individual supplier. Under a constant pricing profile, if you make that assumption, then you look at the margin improvement quarter-to-quarter. And we are doing a detailed analysis based on the last 8 quarters, how much efficiency improvement is from synergy, how much efficiency improvement is from the automation. All of this number will add up to the confidence when we set that in 2022 and maybe in the future. Ken Hsiang made a comment. Now we are looking for a more solid baseline going forward. Thank you.
Our next question is from Mr. Bruce Lu of Goldman Sachs.
Hello. Can you hear me?
Yes.
Yes.
Okay. my question is regarding to your long-term contract agreement. As I know that your wirebond business is actually very complicated. You have wirebond. You have different kind of wirebond there you have fleet chip. How does that work for your long-term contract? How much of your capacity is secured by this long-term contract?
So your first question relates to the character and the -- our long-term -- of our long-term contracts.
Yes. Help me to understand.
Well, I think the comment I can give it to you is the large majority of customers covered by the service contract. I don't think I can give you anything more specific. I mean a very, very large percentage.
I mean this contract is actually secured most of your capacity or the only for the incremental capacity?
For all of the capacity, not incremental. And also, I think the comment that I keep referring to is you have to look at when people secure assembly capacity, whatever that is, there is intrinsic, inherent assumption that assembly capacity will have the needed lead frame, molding compound, substrate and all of the processing materials to go with it. That today is a big assumption.
So the long-term service contract not only secures the assembly capacity. It also support the customer as well as ASE as well as our supplier partners to secure the needed overall balanced supply continuity beyond 2021 into 2022 and 2023. And this is a part of the overall efficiency and flexibility management I was referring to.
If you're really asking for the real or the effective competitiveness, you have to look beyond the assembly and test per se. You should look at the overall supply from wafer materials, the whole nine yard, and this is what we're seeing. We're seeing the campaign between the open platform service provider versus proprietary. We're seeing the regional competition, and we're seeing the ASE competition against our peer. But if you follow the same analogy, you will be able to understand the number and the meaning behind it. That's what I was referring to.
I see because -- do you believe that your competitor also have secured a reasonable long-term contract or is ASE pretty much the supplier who can ensure this kind of long-term contract?
I don't know the answer, but as a good competitor, I have to assume they do.
Or on the other hand, how much of your customers, their demand is fully secured by this long-term contract?
I think the customers, the motivation can be best illustrated by the long-term service agreement as well as all of the future technology development. If you are the de facto choice by the customer, not only you will have the short-term, long-term loading, you will also have all of the future pipelines.
So when we make statements about de facto versus our key customer or whether IC system or automotive, I'm actually referring to the existing loading as well as the future pipeline and everything that I just talk about, all inclusive.
I see. Okay. So my next question is for Joseph. I mean for the gross margin for ATM, again, thanks -- congrats for the great result. But I'm a little bit greedy that a lot of the semiconductor companies already posted that historical high gross margin. And the -- when do you expect you exceed your historical high gross margin as a consolidated basis.
Well, if we count the CapEx situation, we already surpass our historical peak.
Well, no. If you use a pro forma basis, if you add SPIL's gross margin in aggregate, not yet.
No. No, that's what I'm saying. Even including SPIL's, on a combined basis, we have already passed the -- if we add the FX fluctuation as well as the PPA that we have to bear, we already passed our historical peaks.
So how do we -- if you already surpassed that, how do we know that what is the new norm for the gross margin? How do we -- because -- how do we see the value proposition increase and to fully reflect to your gross margin?
In fact, if I'm -- really, I'm even more greedier than you are. I mean on a nominal basis, if I don't count the FX, if I don't count the PPA, I'm still heading to -- reaching the historical peak on an annual basis we have reached back in 2014. Our highest gross margin was about 27%.
And on a quarterly basis, I think this -- in the second half, we'll be surpassing that. And I'm pretty confident that next year, on an annualized basis that historical record will be broken.
Next question is from Mr. Rick Hsu of Daiwa Securities.
Can you guys hear me?
Yes, we can hear you. Go ahead.
Yes.
Okay. Great. Yes. Just 2 little questions. The first one is the housekeeping question for Joseph. So what's your utilization rate across the board for wirebond, flip chip, testing in Q2 and what's the outlook in Q3?
In Q2, in terms of assembly, we're about 85%, and for test, it's close to 80%. In the third quarter, I think assembly was -- will be over 85% for assembly and over 80% for tests. As we mentioned, we're running relatively on full capacity now.
Okay. Great. The second question is about your pricing. When you -- about your friendly pricing. So for Q3, and I presume it's going to be the same trend for Q4 and maybe into next year. And it's pretty much across the board or just more specifically for your wirebonding?
Rick, you're asking about whether we've raised prices or plan on raising prices across the board or on just wirebonders? Is that...
Yes, that's right. Yes.
Our utilization will be full for Q3. The -- we're already full in Q2. In Q3 and Q4, we'll start ramping up the SIP product. So the factory will be very busy.
The pricing adjustment is not a concept. We have to follow the business dynamics based on need and requirement. I am not -- I don't have the privilege, and I will not answer. However, we want to raise price across our product line. However, there is a possibility that we might do so. Sorry.
Our next question is from Mr. Szeho Ng of China Renaissance.
I have 2 questions. The first one is that before the merger, the company would give out the substrate self-sufficiency ratio. I'm not sure if you have the number ready for the latest quarter.
Can you repeat that question one more time?
Yes. The substrate self-sufficiency. In the past, you gave out before the merger with SIP. I'm not sure if you have the same percentage on hand, that share of it.
You're looking for our substrate sufficiency percentage?
Right. Exactly. Yes.
Well, it was hovering around 22% to 25%, and it's still around that. I think the current tightness of the materials or substrates in a sense actually give us additional edge over our competitors because of our stronger buying power and also our in-house capability or capacity.
That's my second question. Yes, you already answered. Okay. And also the other question, could you provide an update on the wirebonder delivery schedule? Last time, you mentioned that the company is planning to add roughly 3,000, 4,000 wirebonds this year. So just wondered if there would be upside to that number.
Well, in the second quarter, we added close to 1,500 bonders, 1,482 to be exact. And on test slides, we added 135 testers. I think the delivery is still ongoing, and we're seeing -- we are still maintaining our target for the year, and hopefully, in the second half, we will have a full delivery.
Okay. Great. Delivery, I remember last time you mentioned roughly October time frame, right? If we deliver, I mean.
Yes. But, as Ken mentioned, these are very dynamic at this point. So that's the target, but we'll see how it goes.
[Operator Instructions] We have a question from Mr. Gokul Hariharan of JPMorgan.
Could you talk a little bit about how you think about capital spending? It looks like this year is going to be at the high end of the 10% to 15% range or closer to the $2 billion mark or even higher. Do you feel next year also CapEx is going to remain in this high range, given supply is still going to be quite tight and customers are willing to sign up for longer-term agreements? That's my first question.
So you're looking for an outlook on our capital expenditure plans into 2022.
Yes. I just wanted to -- yes.
Okay. Well, for this year, we are still maintaining our previous plan of maybe -- but you're right. I think the actual -- will be at the high end of the range or 15%. And by the way, it's going -- I don't preclude the possibility of raising our CapEx for this year. Again, I think it's a little bit too premature to talk about 2022 CapEx. It really depends on the market -- overall market situation, although we remain confident that next year, there will be additional demand.
Just -- this is Ken. I just want to give you another angle and the -- for example, yes, we are talking about high-tech tax for ASE and OSAT for 2020 and 2021. But at the same time, it will be very interesting to look at over the IDN CapEx for the back end. I believe you will see a very, very different scenario.
The reason I want to make that statement is now keep in mind, in 2022 and 2023, there will be incoming wafers from all of the new fab that has been started since 2020. So all the new wafer, 8-inch or 12-inch, who will be the back-end service provider for all the wafer if there is a system demand, infrastructure demand. If there's no demand, that's a different scenario. But in case there are demand, if the IDN are investing less for the back end, then the consolidation thesis we guided, the OSAT needs to double down in order to make up the delta.
Therefore, in 2022, even though it is a little bit earlier to say, but depending on the business dynamics for 2021 and the early part of 2022, by working with all of the IC and system customer, we will have a much better view about the overall system demand and the back-end demand as well as all of the other substrate difference supply, and that will be a dynamic process, will give you a much, much better number in terms of the CapEx scenario.
Understood. Maybe one follow-up on that front. Could you talk a little bit about how you think about returns on that CapEx now that your gross margin is clearly gone up? Like how are these LTAs being structured? And how are you thinking about CapEx in the future? You talked about bulk of a lot of capacity being spoken for in LTAs. So how should we think about returns?
And just to give some context, I think historically, OSAT has been seen as more cyclical in terms of margins and returns. Is there something that we can talk about that is through the cycle, like where your returns are likely to be higher or much higher given what we are seeing with the pricing dynamics and willingness of customers to commit much more longer-term contracts?
Gokul, you're asking about how we evaluate CapEx, especially in the context of this tight semiconductor supply environment, right?
Could give ROIC or ROE, kind of what are the threshold or hurdle rates that you use when you think about CapEx and investment in general?
Well, I think it's very apparent that the return is getting better as we continue to have margin expansion, although the FX does have some impact, a negative impact on the overall return situation. But as you mentioned, the ROE that we are looking at as the threshold is good by about 20% to 25%.
25% for new investment, right?
That's correct.
Next question is from Mr. Roland Shu of Citigroup.
Can you hear me?
We can hear you. Go ahead.
Okay. Sorry, I dialed in late, so excuse me if my questions were asked. First question from me is TSMC has several plans to build new fab overseas. So are you considering to increase your global presence as well to catch the business opportunity on the newly built wafer fab worldwide? And if we want to do so, how will it impact your CapEx spending plans in the mid- to long term?
So your question relates to our longer-term thought process in terms of our global footprint expansion.
Yes.
All right. To answer that question is if you look at the ASE footprint, I believe ASE is by far the most diversified manufacturing company in OSAT world. We have factories across the 3 continents and Japan, Korea, Singapore, Malaysia, as was U.S. and China, of course, Taiwan. So in terms of the global diversification, we are already there. Okay.
So the next question is, under the geopolitical sensitivity as well as the U.S. incentive as well as China initiative, how do we respond to like TSMC or Samsung or Intel initiative in building up the different capacity in different parts of the world. And I think the short answer of that is the -- it really goes by the business dynamics.
If I want to be a little bit more specific, you will look at the overall semiconductor demand, which is given by the pyramid picture that I gave to everyone, that you dissect the pyramid into 2 portion. You ask which part of the pyramid are cost sensitive, and you would develop your manufacturing in a massive scale to offer the most cost-effective, flexible delivery to that part of the pyramid that are cost sensitive.
After that, you will have a little piece or smaller piece, which is national security sensitive, technology sensitive or location sensitive. Then you will look at it, who are the end user, who are the service provider. For those service provider and end user, which portion of the assembly and test can we contribute to add efficiency to the alternative route?
So this process sounds very complicated, but actually, it's very, very simple. So if any of the foundry partner wants to build a fab anywhere in the world, we look at the output. We look at the assembly and test requirement. Then we ask the question, does it have to be ASE? If it does, what will be the volume that is required compared to any other alternative route.
When all fails, we will make the investment accordingly based on the business need. So right now, we already have a globally diversified footprint, but to make adjustment on the footprint by adding different service portfolio will really depend on the business. And by the way, that business requirement as of today is not clear for the assembly and test. It's a very, very long answer to a short question because we have been asked this question by everybody in the world. Thank you.
Understood. My second question is about your testing business. In the past 2 to 3 years, you have the goal, try to grow your testing business, but I think last year probably was not a good year for your testing because of Huawei's -- have been banned in the supply chain.
So how do you look out for your testing business now and going forward? Are you still planning to further grow your testing business in terms of the percentage of the total IC ATM revenue?
Yes. I think the first half of the year, we were kind of busy in terms of realigning our test capacity to serve the other customers, and we have done so fairly successfully, as I mentioned, where we have fully recovered our test business in the first half of the year ahead of our schedule.
And going forward, we will continue to make -- we'll start to bring the test business back to a growth mode. We will be making the necessary investment further to -- to further expand our test business going forward.
Do you have a specific target of the percentage of the revenue from testing?
I think right at the peak, we were around 20% and I think that's the first thing that we need to go back to.
Our next question is from Mr. Randy Abrams of Credit Suisse.
Okay. Yes. And my follow-up was on the SIP. If you could give an update, the contribution now for IC ATM and the USI, what percent it is. And then could you give an update just how the pipeline is looking for expansion next year, both at your primary customer and also diversification into additional customers.
So you're looking for basically an overview on SIP, its contribution and from our EMS and our ATM entity and also potential view on the pipeline.
Yes. That's correct.
I think in terms of overall SIP business, last year, we had a 50% growth, and so this year, I think the growth rate will start to -- will come down a bit. But overall, I think the momentum is still there, and we'll continue to make the necessary investment to continue to grow our SIP business.
In second quarter, I think the overall SIP business represents about 17% of our overall business from the holding standpoint; for EMS, 40%; and for assembly and test, it's about 4%. And all these ratios will grow in the second half.
Okay. And for the EMS business where you're a little bit -- it sounds like a much better environment for semis relative to EMS right now with the tightness. So is that 4% -- I mean does it feel like that's difficult until we get back to a better balance or there's kind of a program in place to improve that or you have a bit of -- like you're doing in ATM a little bit of pricing to offset the higher costs to get back to that type of margin target?
I think the -- for the ATM, it will continue to grow in terms of percentage of overall business in third and fourth quarter, and for the whole year, it will be at a higher rate than what we're seeing in the second quarter. Were you asking about EMS margin?
Yes. EMS operating margin.
Okay. We're still...
Yes.
Yes.
Okay. So it's still 4%.
Yes. We're still looking at 4%. It's becoming a more challenging target because of the overall logistic cost is rising. All the operating uncertainties is higher at this point, but still we're maintaining that target run rate.
Okay. And the last question I have, just on the advanced packaging for things like SOIC and TSMC, SOIC. Intel has their Foveros. If we get some move to the 3D stack, is that a market you see OSAT or SOIC participating in? Or would that really -- if we go to full 3D, I see it's -- there's not as much for you to do. Or is there still like some final assembly to substrate? I'm just curious if you see an opportunity in that area.
Well, the short answer is we have always been in development with key customer along the line of 2.5D and the -- for example, we're the first one to launch the 2.5D with a key customer in Texas, and 3D IC that development, we never stop.
But one of the things I was trying to articulate is we really have to understand the service versus the business model. If we have any company providing a service that is proprietary, serving unique customer, that is not OSAT business. The definition of OSAT business, you should have at least 2 alternative service providers each, at least have 2 customers.
So we have multiple customers with the multiple open platform that becomes a viable OSAT business with a sustainable volume. Whatever comes into the OSAT world, and there are plenty of that, ASE will take a clear leadership in that.
Now when the 2.5D or the 3D IC or whichever chiplet architecture becomes OSAT, in other words, there are multiple foundry offering their service, and there are multiple people accepting alternative process achieving the same architecture and similar cost and performance. ASE absolutely will be a participant. And I believe this kind of open platform versus the proprietary and not only OSAT is driving it. Everybody in the world, including our end customers, eventually would like to see that.
So I think the macro trend is very clear. But in terms of how do we take one step to another, the reality is very complicated. You really have to have a foundry development. You have to have architectural development, material process, the mechanical, thermal, and all of these things will take a unique company to put a lot of R&D resource to make sure they can define the standard for that, and I think that's what we're seeing today.
The good thing is packaging is emerging as a more critical, integral part for the whole semiconductor ecosystem, and that's welcome. But in terms of which technology will be more industrial-wise pervasive, and I think the time will prove that. But ASE will not be missing this part.
Next question is from Mr. Bruce Lu of Goldman Sachs.
Okay. I want to have a quick follow-up for the CapEx. What's the CapEx allocation for testing, bonding, wirebonding for this year?
The CapEx location or...
Allocation. Allocation.
Okay. So you're asking about basically planned CapEx for test.
For everything. I mean what's the CapEx allocation, Yes.
I think for this year, the likely allocation will be around 65% for assembly, roughly 23% to 25% for test, a little bit for material and then roughly 9% to 10% for EMS.
Okay. So assuming that your equipment lead time, right now, it's more than a year. So your CapEx for next year should be foreseeable.
Huh?
Because you already mentioned that the CapEx equipment lead time right now is more than a year, right? So basically, you know how many equipment you're going to spend for the coming like 12, 15 months already, so which means that your CapEx for next year should have a very clear pictures.
Well, when we talk about CapEx, we're talking about required CapEx and not necessarily the test CapEx that we're talking about.
I see. Okay. The next question is a quick question. Can you give us the revenue contribution from automotive or from the IDM in your ATM business?
Bruce, you're looking for how much revenue the automotive sector represents?
Yes, in ATM.
Roughly, second quarter is around 6% -- 5% to 6%.
Do you see a clear uptrend?
Yes. Well, I think we're pretty aggressive in terms of ramping up our automotive business.
Do you expect it to be more than 10% in 2022?
Well, we'll look at it. But there's going to be quite a bit of growth this year, over 50% net growth.
Wow. Okay. So what is your IDM revenue exposure right now?
The IDM exposure?
Yes. IDM customers.
Yes. Around 1/3 of our business has come from IDM.
Do we have additional questions at this time?
There is no question.
Okay. I'll turn it over to Dr. Tien Wu to wrap up the call.
Well, thank you very much for your patience and support to ASE. 2021 has been a very challenging but extremely exciting year for us. Much of the EAR impact which plagued us last year has been resolved. And I would like to thank all of you for supporting us, and I look forward to a successful 2021, and we'll talk to you next quarter. And in the meantime, please stay safe and healthy. Thank you.
Thank you very much.