ASE Technology Holding Co Ltd

TWSE:3711

Earnings Call Analysis

Earnings Call Transcript 2017-Q4

[Kenneth Hsiang, executive]

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE. Welcome to ASE Group's Fourth Quarter 2017 Earnings Release. All participants consent to having their voices and questions broadcast via participation of this event.

Please refer to Page 1 of our presentation, which contains our safe harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially from these forward-looking statements. For the purposes of this presentation, dollar figures are generally stated in New Taiwan dollars, unless otherwise indicated.

For today's event, Dr. Tien Wu, our COO, will be making a brief presentation. I will then be going over the financial results. Afterwards, we will have a Q&A session with Dr. Wu and Joseph Tung, our CFO. Following the event, our VP in charge of Public Relations, Eddie Chang, will be available to address the media in Mandarin and Chinese.

And now, Dr. Wu, our Chief Operating Officer.

[Tien Wu, executive]

Good afternoon, everyone. 2017 has been a very challenging and rewarding year for ASE. I would like to take this opportunity to thank all of you for all of your support to the company over the -- a very challenging but rewarding year.

I would like to give you a brief presentation. What I'll do is I'll start with the ASE and SPIL transaction update. Here is a list of all the approvals we have received from government, namely: Taiwan, November 16, 2016; United States, May 16, 2017; and finally, China, on November 24, 2017. We have received the MOFCOM conditional approval with a 2-year restricted behavior. For more details, please visit the MOFCOM website.

The key dates which we will follow will be: January 27 to February 9, we will go through the electronic voting period; 2018 February 12, both ASE and SPIL will have the EGMs; April 17, tentative schedule, it will be the last trading day of ASE and SPIL; April 30, that will be the effective day of the newco, which will be named ASE Industrial Holding Co., Ltd.; in 2019 November 24, if we comply with all of the regulations, the MOFCOM conditional approval restriction will be expired, 2 years.

I would like to give you a brief recap of 2017. We have achieved record-high revenue at the group level as well as the business level. In 2017, the group revenue came in as $9.6 billion, up 12% year-on-year. In Q4 of 2017, the group revenue was $2.8 billion, up 14% quarter-on-quarter. The EMS revenue came in as $1.4 billion, up 31% quarter-on-quarter.

We have seen clear momentums in growing markets. 2017 ASE Group SiP business grew 42% year-on-year. We do expect to see the SiP growth continue in 2018, which we will elaborate in the Q&A session. The bumping, flip chip, wafer-level packaging grew 11%. We will also see the same momentum going into 2018. We have seen good signs of the new applications. We have seen strength in the broader-spaced general semiconductor device, such as analog, MCU, PMIC, sensors, MEMS, in all kinds of new applications, which are a very encouraging sign.

The profitability has improved. In 2017, the IC ATM gross margin would have improved under the constant currency, which Joseph will talk a little bit more later. In 2017, USI gross margin expanded to 10.2% from 9.8%. 2017 USI net profit reached a record high at USD 189 million, which is 65% year-on-year.

Just to give a recap. 2017 was a good year for ASE Group. What we have seen in a macro trend is the following. We have seen more system companies designing sub-module SiPs. We have also seen more IC company as well as OEM/ODM companies designing the SiP in the modules. That led us to believe the theme of ASE growth for the future, System-in-Package is in the right sector, in the right area.

As a result of the last 5 years of endeavor with all the customers, we understand that the industry needs an open design flow and design tools. Today, at 2:45, we have made a press release with Cadence, announcing the next generation of SiP intelligent design. I believe the press release can be found on our website as well as the press.

In the next generation of SiP design tool, ASE closely collaborated with Cadence over the last 4 years, together with many of our customers, coming up to a very efficient, effective design tool, which is sponsored and backed by the ASE manufacturing database that we have collected over the last few years.

With this tool, we believe that not only we will be able to integrate the advance packaging, we can also use the same design tool leading to a more complicated SiP format; as well as with sensors, MEMS, we will understand the performance as well as the potential yield during the manufacturing. This can also greatly reduce design cycle time and time to market.

With that, I would like to offer you a brief 2018 outlook. In 2018, we're optimistic we will continue to drive top line growth and margin improvement across EMS as well as IC ATM. We do expect a strong pickup starting second quarter of this year. We will continue to drive the SiP business growth. We have also seen strong design-in pipeline across communication, automotive, memory and high-performance computing.

In 2018, we will also continue our investment in strategic technology for growth as well as strengthen the SiP-id collaboration with Cadence as well as all of our customers. We will continue to [ enrich ] technology portfolio with embedded substrate, fan-out, 2.5D as well as the other relevant SiP building blocks

And finally, we would like to thank SPIL team. Over the past year, they have closely collaborated with us to go through all the government regulatory approval. And we would like to -- on behalf of ASE, we'd like to welcome all SPIL team that we can join hands and start a new era for ASE and SPIL.

Thank you.

[Kenneth Hsiang, executive]

So thank you, Dr. Wu. With that, let's start the financial overview. I think we will take a slightly different approach for the numbers, at least for this presentation. Outside the group results, we will try to focus less on reciting the displayed results, which you can all read, instead focus on whether we can add any color to the information presented.

So second page. So I have here the foreign exchange implication. Before we get further into the results, I want to spend just a bit of time to highlight the impact of the NT dollar / U.S. dollar foreign exchange rate on our 2017 results. Here, you can see our group and IC ATM revenues for the year on a U.S. dollar versus NT dollar basis. Given our purchase orders are predominantly received on a U.S. dollar basis, we believe the 12% group and the 6% IC ATM revenue figures more accurately reflect our true business performance.

The chart next to the revenue chart shows the NT dollar fluctuation impact on group and IC ATM margins. Through internal analysis, we approximate that every 1 percentage point the NT dollar appreciates, there is a corresponding 0.4 percentage point impact to IC ATM gross profit margins. And similarly, we approximate for every 1 percentage point the NT dollar appreciates, there is a corresponding 0.3 percentage point impact to group gross profit margins.

So here, given the 5.6% NT dollar appreciation, IC ATM gross margins received a 2.3 percentage point impact, while group gross margins received a 1.5 percentage point impact. Thus, in a flat NT dollar environment, we approximate group and IC ATM gross margins would have been 19.7% and 26.6%, respectively. This represents increases of 0.8 and 1.7 percentage points increases to 2016 group and IC ATM gross margins.

As we mentioned, towards the beginning of 2017, we believed that we would be able to improve margins during the year. We continue to believe there is incremental room for margin expansion during 2018.

Page 3. On a fully consolidated basis, for the fourth quarter, the company delivered fully diluted EPS of TWD 0.71 and basic EPS of TWD 0.74. Total revenues for the consolidated group increased by 14% to a record TWD 84 billion.

Our packaging and EMS businesses were up 1% and 31%, while our testing and direct materials businesses were down 5% and 3%, respectively. Revenues for our EMS business unit was a historical record of TWD 43.3 billion.

Gross profit for the group increased from TWD 13.8 billion to TWD 14.8 billion, with consolidated gross profit margin declining 17.6%. The margin decline is mainly associated with higher EMS revenue mix during the quarter.

Operating expenses increased to TWD 7.1 billion, primarily as a result of increased SPIL transactional costs. Operating expenses, as a percentage of sales, decreased 0.8 percentage points from 9.2% to 8.4%.

Operating profit for the fourth quarter increased TWD 0.6 billion to TWD 7.7 billion, with operating margins declining to 9.2%. The operating margin decline was mainly driven by higher seasonal EMS revenue mix.

During the fourth quarter, we had a net nonoperating gain of TWD 0.2 billion as versus a net nonoperating gain of TWD 0.7 billion the previous quarter.

During the current quarter's -- the current quarter's nonoperating gain includes the following: net gain related to foreign exchange and hedging activities of TWD 0.6 billion; net interest expense of TWD 0.3 billion; income from SPIL, net of purchase price accounting, of TWD 0.1 billion; and other nonoperating expenses of TWD 0.1 billion, including a goodwill write-down.

Pretax profit for the fourth quarter was TWD 7.9 billion. Income tax expense was TWD 1.1 billion in the fourth quarter. This amount and its corresponding effective tax rate were flat with the third quarter.

During January 2018, Taiwan passed legislation which increased corporate tax rates by 3 percentage points. As a result, we will recognize a TWD 0.7 billion impact for the revaluation of our net deferred tax liability position in the first quarter of 2018. Further, we estimate our ongoing effective tax rate will increase by 2.2 percentage points because of this legislation.

Net income for the fourth quarter was TWD 6.2 billion.

Page 4, quarter results on a year-over-year basis. On an NT dollar basis, our fourth quarter group-wide consolidated net revenue increased by 9% compared with fourth quarter 2016. When taken on a U.S. dollar basis, these revenues grew by 14%. Our EMS business grew in excess of our IC ATM businesses during this period. EMS strength was across the board, driven by its SiP, seasonal and traditional EMS products.

Our packaging and testing businesses, with differing end-product concentrations, declined 2% and 10% relative to the fourth quarter of 2016. It should be noted that in addition to the NT dollar appreciating 5% during this time frame, the fourth quarter of 2016, in retrospect, is considered an overproduction inventory building period.

Consolidated group gross profit margin declined 2.3 percentage points to 17.6%, primarily as a result of higher EMS product mix. In a flat NT dollar environment, we estimate our fourth quarter group gross profit margin would have been 18.8%.

Page 5. On a full year perspective, total 2017 group revenues of TWD 290.4 billion was a record, improving by 6% over 2016. As mentioned earlier, in U.S. dollar terms, 2017 group revenues grew by 12% over 2016.

Gross profit margins declined 1.1 percentage points, which was primarily attributable to NT dollar appreciation and higher EMS product mix. And as mentioned earlier, we estimate that in a flat NT dollar environment, 2017 gross profit margin would have been 19.7%, improving 0.8 percentage points.

Page 6. Our fourth quarter IC ATM net revenues were as expected, flattish with the third quarter at TWD 41.8 billion. Revenues for our IC packaging business were up 1%, while revenues for our testing and direct materials businesses decreased 5% and 6%, respectively.

Gross profit improved 4% sequentially to TWD 10.9 billion from TWD 10.5 billion, with gross margins improving 0.9 percentage points from 25.1% to 26%. The gross margin improvement was fundamentally the result of improved efficiency and a product mix shift resulting in lower raw material cost products.

Operating expenses edged up TWD 0.1 billion to TWD 4.9 billion for the period, principally as a result of higher transaction-related expenses. Our operating margins ended up 0.7 percentage points to 14.4%.

Page 7. As with the previous fourth quarter year-over-year comparison, we're comparing the current period with the period of inventory build and one which the NT dollar was 5% weaker.

Our total IC ATM revenues declined 4%. On a U.S. dollar basis, IC ATM revenues grew by 1% year-over-year. Gross profit was down 7%, with our gross margin declining 0.8 percentage points to 26%. Without the effect of NT dollar appreciation, we approximate our IC ATM gross margin would have improved by 1.2 percentage points year-over-year.

Operating income was down 6% or TWD 0.4 billion, with operating margin down 0.3 percentage points. Our operating margin decline was again principally attributable to NT dollar appreciation.

Page 8, IC ATM on a full year. From a total year perspective, our IC ATM revenues were relatively flattish, with our packaging and direct materials businesses growing 1% and 11%, while our test business declined 3%. On a U.S. dollar basis, total IC ATM revenues grew 6%. The gross profit and margin movements are again primarily attributable to NT dollar appreciation. And as mentioned earlier, in a flat NT dollar environment, we estimate IC ATM gross margin to be 26.6%, representing a 1.7 percentage point improvement as compared to 2016.

Page 9, packaging. During the fourth quarter, our packaging revenue improved 1% sequentially and was down 3% year-over-year to TWD 34.3 billion. On a U.S. dollar basis, packaging revenue was up 2% year-over-year. Our packaging gross margin improved 1.6 percentage points sequentially and was down just 0.2 percentage points year-over-year. We believe that this is a significant accomplishment, especially given the NT dollar decline during the year. Sequential margin improvement was mostly attributable to improved factory efficiency and a lower raw material product mix. Year-over-year improvement is primarily attributable to improved factory scale efficiencies.

During the quarter, capital expenditures were USD 103 million, composed of wafer bump, fan-out and copper pillar equipment at USD 46 million -- USD 46 million, and common SiP and wirebond equipment at USD 57 million.

We exited the quarter with a total of 16,076 wirebonders in operation. 8-inch wafer processing capacity remained at 104,000 wafers per month. 12-inch wafer processing capacity, including bumping, fan-out and copper pillar, remained at 128,000 wafers per month.

Page 10, test. During the fourth quarter, test revenues were sequentially down 5% to TWD 6.6 billion. On a year-over-year basis, test revenues were down 10%. On a U.S. dollar basis, year-over-year test revenues were down 5%. The U.S. dollar revenue decline was principally the result of a major customer switching to a consigned tester business model. Under a consigned tester business model, our customer bears substantially more business risk. However, this results in lower revenues for our test business.

Test gross profit declined TWD 0.2 billion sequentially, with test gross margin down 1.2 percentage points sequentially and down 1.8 percentage points year-over-year.

Gross margins were down sequentially, principally as a result of decreased loading during this quarter and a semi-fixed cost structure. Test gross margin declined year-over-year, principally as a result of NT dollar appreciation. Outside of NT dollar appreciation, our test gross margins would have instead improved 0.4 percentage points.

Overall, cost of services for test declined TWD 0.1 billion sequentially and TWD 0.3 billion year-over-year to TWD 4.2 billion. Our blended test utilization rate on a percentage basis decreased to the low 70s.

Capital expenditures for the test business were USD 28 million in the fourth quarter. During the quarter, we added 61 and disposed of 40 testers, ending with 3,760 testers.

Page 11. During the fourth quarter, our materials business unit had revenues of TWD 2.1 billion sequentially, and year-over-year down 2%. On a U.S. dollar basis, our materials year-over-year revenue would have improved 3%. TWD 922 million of revenue was from sales to external customers. This amount is a 3% decline as compared to the third quarter. Our internal self-sufficiency rate, measured by value, remained at 25%.

Gross margins were down by 0.9 percentage points sequentially and 1.6 percentage points year-over-year to 12.2%. The margin decline is in part the result of NT dollar appreciation and a higher manufacturing cost-oriented product mix.

Page 12. Sequentially, for the fourth quarter, our market segment movements were not particularly dramatic, with communications decreasing 1 percentage point and computing increasing 1 percentage point. Looking over the last 2 years, it does appear that the communication segment is becoming a smaller part of our revenues. This segment shift is not so much about the communications business shrinking, in as it is about new generations of products beginning to ramp.

Smartphones are the common platform in everyone's pocket. From an IoT perspective, the smartphone is becoming the ever more robust remote control to people's houses, offices and commerce. In particular, we see sensors and AI-type products, like autonomous driving, which extend the limits of human capabilities and senses. As mobile phones allowed people to communicate with people in new ways, we are seeing products which implement AR and VR, allowing people to interface and communicate with the world of machines in new ways.

Even passive forms of entertainment are increasingly being antiquated. Ask yourself this question: who sits in front of the television at a set time for their weekly sitcom anymore? Streaming, live feeds and social media are examples of things increasingly driving servers and data centers to upgrade to offer more active and dynamic information. We believe we are on the cusp of the next wave of electronics. More units, more IOs, more connections, more product complexity, more business for ASE.

Page 13. Here, you can see the results from our EMS business. During the fourth quarter, we had record revenues for our EMS business unit at TWD 43.3 billion. This is sequentially up 31% and up 25% year-over-year. The revenue growth was driven by various segments, including consumer, communication, industrial, storage and automotive electronic products.

Our gross profit climbed 17% sequentially and 11% year-over-year to TWD 4 billion. As we expected, EMS gross margin declined to 9.2% from 10.3% sequentially, as higher-volume, lower-margin product ramped during the fourth quarter. Relative to the previous fourth quarter, we had lower margin -- we had more lower-margin, high-volume products. We remain positive on our EMS business' prospects and expect positive growth momentum to carry into 2018.

Page 14. Here, you will note that our consumer segment continued its third quarter strength into the fourth quarter. During the fourth quarter, our consumer segment accounted for 32% of our revenues, climbing 6 percentage points, and even though computing, automotive and industrial segment shares were either flat or declining. From a dollar perspective, each segment's revenue increased. The EMS business pickup in the fourth quarter was seasonal, but definitely broad-based.

Page 15, balance sheet items. At the end of the quarter, we had cash and cash equivalents and current financial assets of TWD 51.9 billion. Our interest-bearing debt decreased from TWD 82.5 billion to TWD 76.9 billion at the end of the quarter. Total unused credit lines amounted to TWD 174.2 billion. Our EBITDA for the quarter was TWD 16.1 billion.

16. Machinery and equipment capital expenditures for the fourth quarter totaled USD 142 million, of which USD 103 million were used for packaging, USD 28 million for testing, USD 7 million for EMS and USD 4 million for interconnect and others.

For the full year of 2017, we spent a total of USD 639 million for our CapEx, of which USD 468 million was for packaging, USD 134 million for testing, USD 26 million for EMS and USD 10 million -- or USD 11 million for interconnect and others.

Total year CapEx came in slightly below where we expected. Much of this has to do with a sizable chunk of CapEx originally scheduled for 2017 being deferred into 2018. With that said, from a stand-alone entity perspective, we do expect our 2018 capital expenditures to continue our pattern of being above previous year's CapEx but being below depreciation and amortization. In U.S. dollar terms, EBITDA for the quarter was USD 537 million.

Looking out into the first quarter, we are, of course, going to be busy with all our logistical activities involved with preparing for a combined entity. If we hit all of the dates of our tentative schedule, our first quarter earnings release should be close to the relisting date of the new ASE Industrial Holding Co. We are looking forward to and are excited by the opportunities of ASE and SPIL functioning under the same umbrella.

From the business perspective, we see a positive overall business environment for 2018. We see an above-seasonal pattern developing during the first quarter. And at this time, we see a strong seasonal broad-based upswing starting in the latter part of the first quarter, carrying into the second quarter. Cryptocurrency mining does play a part in this. But even without such impact, we still see a healthy seasonal pickup in front of us.

Of course, the end markets will always dictate whether what gets made ultimately gets ordered and then reordered. There is one note of caution, though. The geopolitical environment appears to be creating extra volatility in foreign currencies around the world. As we've seen, the NT dollar is continuing to be impacted. We don't believe we can properly forecast the impact of such movements. And as such, we have provided our business guidance outside of such potential impacts.

With that, our guidance. In U.S. dollar terms, IC ATM first quarter 2018 business should be slightly ahead of first quarter 2017 levels. Excluding foreign exchange impacts, IC ATM first quarter 2018 margin should be slightly improved versus the first quarter 2017 levels.

EMS. The first quarter EMS business should be slightly below third quarter 2017 levels. And EMS gross margins for the first quarter should be slightly above fourth quarter 2017 levels.

Let's start our Q&A session.

[Kenneth Hsiang, executive]

Question? This gentleman in the front? Name and company, please.

[William Lu, analyst]

Bill Lu, UBS. So it's been a year, and TSM and UMC have both said that this year, they expect the semi industry to grow mid-single digits, foundries slightly outgrowing that. Can you give us your outlook for the assembly and test industry?

[Joseph Tung, executive]

I think we're pretty optimistic about the year. And from the forecast that we're getting from our customers, it seems to be that we will start off with the above-seasonal first quarter. And going into second and third, we will see a pretty strong uptick on the top line. I think the momentum that we're seeing is, aside from communication, I think all the other sectors seems to be going pretty strong. And if -- we typically offset growth 2x the industry average growth, and we are pretty confident that we will be staying ahead on that front.

[William Lu, analyst]

So you're saying better than 5% then, right, for the industry?

[Joseph Tung, executive]

I'm not saying, I'm implying.

[William Lu, analyst]

Okay. Well, I guess, what is a little bit confusing to me is TSMC is saying that smartphone is flat, but HPC, bitcoin, these other drivers are taking off. I'm not really sure how that impacts the assembly and test industry because these businesses are smaller volume, but very high ASP, right? So you would think that that's not so good for the packaging sector. That's more unit-driven. At the same time, these businesses are not as price-sensitive as, for example, smartphones. So how do you think about that change for your business?

[Tien Wu, executive]

I think in 2000 -- Q4 of '16 and also Q1 of '17, we have seen some clear buildup at the inventory for the cellphone. I think in 2017, we are actually working out of the inventory level. So entering into 2018, relatively speaking, we're much more comfortable about inventory level comparing to last year. So that comment was specifically for the cell phone. So let me address on the others. You cannot just think about packaging as a stand-alone component business. What we're implying here over and over again -- and that we've been saying this to all investors, and I believe this is one of the reason why we really like to invite SPIL to join hands with ASE. If you only focus on the legacy, which is within the current framework, then you can debate about a mobile phone application, you can debate about the chipset, you can debate about the number, the reduction principle, 3 becomes 2 becomes 1. And then you have a different picture about semiconductor. But if you really look back to semiconductor over the last 50 years, it's always about innovation. The application that will be dominating in the next 10 years, we simply cannot see. What we're seeing today is we have more OEM/ODM, we have IDMs and the system house. They're designing numerous new-type applications, and those applications are real, robots, AI, automation, electrical vehicle. We're seeing uptick on the standard MCU on power management chips that we already understand, and we pretty much know what's their volume, but we're seeing uptick, even the most traditional volume, and memory, MEMS, sensors. Not only we're seeing the new devices, we're seeing a new combination of different kind of devices for new applications, and that really gets us very excited. So mobile phone, we understand. And we're not going to comment about the mobile phone, the smartphone, the 5G. I think too many people understand that already. But what we're seeing is from the packaging universe, if you only focus your attention on the legacy, you have one set of resolution. But the world, the government regulation and us, we have absolutely 0 restriction on creativity and innovation, and that should be the area we should all embark and engage. In 2018, I think you will see a strong uptick of the ASE -- well, I have to use the packaging, but the packaging with a [ slash ], new houses of new business application, new model, and so we're very excited.

[William Lu, analyst]

Just thinking of one last question. So margin, if you look at it in terms of U.S. dollar basis, was quite good. Can you talk about the drivers behind that maybe in terms of cost cuts, in terms of the pricing environment, in terms of volume? What are some of the major factors?

[Tien Wu, executive]

The pricing environment has always been as competitive as ever. The cost of goods sold, we all understand some raw materials price has gone up. So the market environment has always been friendly or unfriendly. As always, this [ stay put ], it's always like that. What we're seeing today is because of the scale, because of the automation, because of the factory processing efficiency improvement, you will see a continuing drive for output, mainly the efficiencies. All right? And we're pretty confident that we have seen good results, starting from the rebalancing effort in 2016. I think that rebalanced effort moved into 2017 even with the very, very adverse NT dollar environment. I think in 2018, if there's no major shift and changes, we should see another incremental improvement on our efficiency.

[Rick Hsu, analyst]

This is Rick from Daiwa Securities. My first question, just to follow Bill's question about your optimistic outlook for this year. I think apart from the application you mentioned earlier, do you foresee any market share gain or market share recovery for this year to drive your momentum?

[Tien Wu, executive]

The market share gain is a very dangerous word. All right? The -- what we are confident is the business demand from our end customer and also our confidence in the pipeline because of technology content and the cost model that we have provided. Now right now, if you really look at the assembly and test world, you have the new emergency of -- you have new emergence of subsystem or SiPs. And how do we really group that under the traditional component business? Or is that an EMS type of business? It's neither. So in terms of market share gain, we really have to further quantify that as new application, new devices that did not exist before. And those opportunities are in very, very large scale, if you can find the end customer that can drive the market and have consumer willing to buy it. So market share gain from that aspect, yes. But in terms of traditional business, it becomes very, very convoluted. All right?

[Rick Hsu, analyst]

Okay. Second question is, I think we also had talked about the new business, especially like HPC, this type of leading-edge product. But as far as I know, right now, most of these products are leading-edge when it comes to the back-end. It's still quite captive, captive at the foundry space, including like, for example, like [ info ] or even cores. So I'm just wondering how you guys get a piece of business from this?

[Tien Wu, executive]

I will not comment on a specific technology because it's too sensitive. But if you look at a segment, there is always a reason why end customer would like to do turnkey at the beginning, because the yield, the cycle time, the time to market, we understand that, right? However, what I would like to advise is, if you look at the real business, you have to look at the business at saturation and maturity. If you always look at the leading edge, I do understand we're making a certain comment, and maybe the business rationale are completely correct for the new business. But what I would like to advise you is to look at a broader-based foundry, a broader-based business requirement from a much broader-based customer. Then you ask the question, what will be the technology that can serve the mature market when it scales? I think those are the -- in terms of role and responsibility, there's always overlap between IC, between OEM, ODM, between foundry and packaging house. That overlap on the NPI on the initial yield improvement and technology development, that is rightly so. We have to have that. Otherwise, there's no handshake from the whole ecosystem. But my comment has always been, you have to look at a business at a scale and maturity, what will be the right business model and who should bear what responsibility. Right? By that aspect, even the high-performance computing, the fan-out, the 2.5D, I believe there's a broader-based demand by different customers, different price points and different requirements and different ownership about the sourcing and also about all of the business decision. Right? So I think there is a place for all the factors.

[Rick Hsu, analyst]

Okay. One last question, just housekeeping. I think Ken had mentioned some answer, but still on the whole picture. So your utilization rates for Q4, among the 3, packaging, testing and bumping, so how many wirebonders you added in Q4, and how many you disposed in Q4? And also, the guidance, utilization guidance for Q1.

[Kenneth Hsiang, executive]

Oh, I actually misspoke on the testing utilization. It's actually in the mid to high 70s. Wirebonding was in the low 80s, non-wirebond was in the mid-80s and then substrate was mid-70s.

[Rick Hsu, analyst]

Sorry, substrate is how much?

[Kenneth Hsiang, executive]

Mid-70s.

[Rick Hsu, analyst]

Mid-70s. And the wirebond in low 80s, right?

[Kenneth Hsiang, executive]

Low 80s, yes.

[Joseph Tung, executive]

We didn't add any bonders.

[Kenneth Hsiang, executive]

Well, Q4, we did not? Q4, how many bonders do we add? I think...

[Joseph Tung, executive]

I think we added 3 bonders in Q4, if that counts.

[Kenneth Hsiang, executive]

That's a lot.

[Sebastian Hou, analyst]

Sebastian from CLSA. My first question is, TSMC talked about semiconductor industry grew 9% in 2017. If I calculate ASE, the IC ATM business in U.S. dollar terms, it's probably around 6% to 7%; SPIL, even lower than that. Does that mean that -- so what was your numbers estimated for the OSAT industry growth in 2017? And why ASE and both ASE -- or probably you cannot comment on SPIL now, but just ASE, lower -- why is that the case, lower than that?

[Tien Wu, executive]

If you look at our business model, the -- we rely largely upon our end customer. So if the 9% in 2017 logic semiconductor growth is correct, then obviously, we under-grow comparing to the industry, which means that some of our end customer, they basically under-grow comparing to the industry in 2017. And that will be the logical explanation. All right? And the -- we cannot comment on a specific customer. But the beginning of 2017, we have seen some slower demand pickup by some of our customer, mainly in the communication area. All right? However, if I follow the same logic, I would say that in 2018, we're cautiously optimistic that trend will be reversed. In this industry, we don't always go by year-on-year. But if you look at over 3 to 4, 5 years or 10 years period, I think that relative comparison is pretty accurate.

[Sebastian Hou, analyst]

Okay. So is that more because you expect your customers will have -- will gain more share this year, so indirectly, you benefit? Or is it because a lot of the IDM, they are so tight right now, so the excessive demand, they have to outsource, so you benefit? Which one?

[Tien Wu, executive]

I think both.

[Sebastian Hou, analyst]

And in terms -- the second question is that earlier, you mentioned about you have the high confidence for demand pickup in the second quarter and third quarter. I guess smartphones is still weak this year, presumably. So which application especially do you expect and also that give you this high visibility for the pickup in 3 to 6 months from now?

[Tien Wu, executive]

Okay. Just a clarification, we did not say smartphone is weak.

[Sebastian Hou, analyst]

Okay. So...

[Tien Wu, executive]

I did not say that. And I don't want to comment whether smartphone is weak or not. I can only comment on my end customer. The forecast and the solid forecast demand, they gave it to us and actually includes smartphone. So I actually cannot comment on that. I have seen strong in electrical vehicle, power devices and, of course, the high-performance computing or the crypto currency. We're seeing very broader base in also optical sensors and also memory. I will not comment -- I will not give you a comment, yes or no, up or down, on the smartphone. That question is just too sensitive, and I do not have enough information to make that comment.

[Sebastian Hou, analyst]

Okay. So you mentioned about memory. So is it the discrete memory packaging or the memory goes with other logic?

[Tien Wu, executive]

Both.

[Sebastian Hou, analyst]

Okay. So is it DRAM, NAND or smaller density?

[Tien Wu, executive]

It will be, in the generic memory terms, in the hybrid, in the more advanced packaging type of format. It will not be the component level as we knew before.

[Sebastian Hou, analyst]

Okay. Third question is on the capacity. And do you experience or do you see any tightness in the capacity for certain type of the packaging technology?

[Tien Wu, executive]

Yes, we do. That's why, I think Ken commented, in this year, we do expect the CapEx number to pick up. I'm not exactly sure how specific can we be. But this year, we do expect to spend more CapEx. And as a matter of fact, I'm not even sure we can talk about the CapEx number. The CapEx number will be the -- in Q1 and Q2, we will spend a good amount of CapEx to ramp up the capacity, so it's real.

[Sebastian Hou, analyst]

So can I ask in more details about -- the tight capacity is mainly in wirebonding or bumping or in which packaging technology?

[Tien Wu, executive]

I think you have to assume it's everything.

[Sebastian Hou, analyst]

Last question from me is that, I'm not sure if your earlier comment about the cryptocurrency mining impacts your demand. What are -- how does that impact your above-seasonal first quarter? How much is driven by that?

[Tien Wu, executive]

Well, it's part of the demand that we have. I'm not sure I have the freedom to give you a percentage of our revenue. And I'm not even have knowledge to explain what the cryptocurrency in terms of next 10 years outlook. But I only know the demand is very strong now. And the question is, do we have the supply chain, do we have the capacity and do we have the right margin structure to support that demand today? And how much confidence do we have about the requirement, the demand for the next 2 quarters or the next 4 quarters? And those are the judgment based on the capacity allocation, based on capacity utilization, the margin structure, then we make a decision who do we support.

[Sebastian Hou, analyst]

Okay. So do you -- so how about -- I think no one can predict that in 10 years, but how about just for this year?

[Kenneth Hsiang, executive]

I don't think you can predict that even for the year, right? Where do you think the bitcoin price is going to be tomorrow?

[Tien Wu, executive]

No, no, I think what Sebastian is asking is, maybe if I know, is do we think the demand, at least for the packaging, is real for 2018? The answer is yes, the demand is real.

[Sebastian Hou, analyst]

So if I tie this with your capacity expansion, are you adding capacity or spending money for this incremental demand or no?

[Tien Wu, executive]

We are expanding capacity for all customers, and they are part of it. I am not in the -- I don't think I can give you a comment, are we spending CapEx specifically only for a particular customer in a particular sector, about 2 quarters, I will not make that comment. But when we make a capacity expansion, we will look at the risk profile as well as the overall demand profile. Are we buying the general capacity that we are confident, 1 year, 2 years and 5 years out, throughout the depreciation period, do we have a good probability and confidence we can utilize, right, in the right investment, the return? And the answer is yes. Okay.

[Kenneth Hsiang, executive]

Do we have a -- okay, Bill. Bill?

[William Lu, analyst]

A couple of follow-ups. Can you talk a little bit more about this SiP-id platform as far as how many customers you have working with you on this platform right now?

[Tien Wu, executive]

So I can tell you that the -- in the last 5 years, you understand the SiP -- the ASE thesis has been -- SiP is brand new. It's fantastic. We're in the right position, right, so I don't need to repeat that. Part of the issue we have dealt with is, now whenever we start working with customers, they love this technology and they love the projected performance, form factor, yield, integrated design and also time to market. The difficulty has been largely they do not have the right design tool. Now if you were an ODM/OEM system guys, you really do not do the IC chip design. If you're IC design guys, you really don't do the PCB design. Now both sector, even if you know both, adding the exposed window for optical sensor, adding the conformal shielding, adding the built-in antenna, adding the RF power, low power, high power, latency, MEMS, memory, most of the people got lost. They don't understand the boundary, the ground rule. What if I do these 10 components in A format, in B format, what is the yield projection? They start doing things in random. And we have to calibrate it, explain, and you cannot do this, you cannot do that. Eventually, you start building prototyping, you realize you have a problem, especially in the RF in a certain new form factor that no one has experienced before. So people start playing with all kinds of DoEs. So in the last 5 years, we have gone through hundreds of new product NPI with everybody. The demand is there, but the cycle time has been laborious. And also, in the chip layout file, you send it to PCBA, you send it to SiP, they're not compatible. You got to do manual check. So we finally get together with Cadence. We talked to Cadence about 2.5 years ago, and we're putting a lot of engineers. Working with the Cadence team, we together lay out all my customers' issue and start piecing together the ASE ground rule on PCB, on layout and all kinds of experience that we already have. We understand this is the way you should do it. This is the way you should not do it. And Cadence, being the #1, they understand. They start piecing all of this together. So right now, the SiP-id, in the simplest way to understand, it is something you can design from beginning to end using exactly the same platform. We don't need to change data file. They understand the beginning to the end. Whenever you want to make a software upgrade, design upgrade, the whole team get changes right away. So the simple fact that you have a common platform, you have the same template and format, you will save months of design time. Now with this, our customer, as was the industry, they will have the freedom to start designing something out of their current experience base. You have to understand that the definition of SiP, it is something -- there is a better, more efficient application that does not exist today. However, most of the component, the building block is already exist and much lower cost. So by doing this, we believe we create a common design platform that can open up the imagination of the designer. I think the key thing is we have to let the designer to use their imagination to help us. But this, I believe, is really a major milestone in this industry because this is the first one substantiated by the real manufacturing empirical database and ground rule, and then all of the designers at all levels will have something they can use.

[William Lu, analyst]

If I take that one step farther. If you look at the SiP growth this year, would it be fair to say that you've got some new customers that's layering in to the growth? Or is that going to be later, and this year is still going to be your traditional customers?

[Tien Wu, executive]

I think both answers are true. We will have multiple customers. The question really now is what application, what volume. And those are the areas that we have struggled for the last 5 years. We will try and get this and jump start it. We know this technology is good. It's good for the industry. It will be embraced by everybody. But the question now is, how do we really do this, right? You really have to understand that. For any kind of emerging market, somebody has to take leadership. Infrastructure design platform is part of the leadership. What ASE would like to do different this time is we want to just put a flag there, SiP is ASE. And this is the way we will work with everybody in the world to create the building block. Cadence on the design flow, TDK on the embedded system and work with the other key players which we announced over time in terms of different geography, different business model, and this is really the campaign that we will do for the next 10 years.

[William Lu, analyst]

Is this exclusive? Can Cadence use the same platform and give it to somebody else?

[Tien Wu, executive]

Okay. Now the way we do that is there will be a 12-month period where ASE exclusively will use this with all of our customers. However, with the agreement of ASE, Cadence can sell the same tool. We're not trying to be parochial so that only ASE can use it. That was not the intent. However, I do [ indeed ] have a 12-month lead time for all of my customers to start enjoying this. And after 12 months, with the agreement of ASE, anybody can use it. That was the whole concept.

[William Lu, analyst]

Sorry. I'm going to ask you a question on the ASE-SPIL merger. I know you're limited about what you can say. But the MOFCOM approval was with conditions. Can you just talk a little bit more about, within the next 2 years, what you can and cannot do just in terms of synergies or engineering costs and all the good stuff?

[Joseph Tung, executive]

Well, I think to put it simply, I think the restriction is really just put on us so that we remain as independent operations between the 2 of us for 2 years. And we don't particularly feel very, very strenuous about complying to that because even under ASE itself, we have different profit centers in the different sites, so we're very used to that kind of a model. And adding SPIL into the picture doesn't really change the fundamentals of how we work. However, with the internal competition, of course, still exist. There's certain collaborations as well. And mainly, it will be in the R&D area as well as, to some degree, in terms of capacity alignment, that sort of arrangement. So the restriction or the plan that the MOFCOM gave us does provide some flexibilities in these 2 areas. So I think given time, I don't -- I can't tell you exactly when and how much and how we can achieve whatever synergies that can be created during the restricted period. However, there is room for us to collaborate. And I think we are not in a hurry. I think we will let things progress naturally. And it will take some time for us to get used to each other and work together gradually. And eventually, we see good potential of synergies coming out, out of this combination. But saving $1 here or $0.01 there, it doesn't really make us rich. I don't think that is really the main purpose for us to have this combination. I think it's really for the longer term. I think, eventually, we need to have the scale to meet the challenges coming in the next 5 to 10 years. We're seeing consolidation happening in our customers. Our customers, they are getting much bigger, getting much more leverage over us. We're seeing the -- even in our own segment, we're seeing our competitors are consolidating with each other as well, like JCET, STATS ChipPAC, Amkor buying J-Device, Nantong bought AMD facilities and so on and so forth. So a lot of upcoming challenges in front of us, and scale is really the way for us to meet those challenges. I think that's the ultimate goal for us.

[William Lu, analyst]

Sorry, one last question. This is a follow-up on Sebastian's question. But if you look at HPC, I think you didn't want to define bitcoin, but if you look at HPC overall, what is that as a percentage of sales?

[Tien Wu, executive]

I don't think we have that.

[Kenneth Hsiang, executive]

We don't have that number.

[Sebastian Hou, analyst]

One follow-up on the, if I can, on the issue with the merger -- the upcoming merger with SPIL. The -- just want to -- yes, okay. So I just want to clarify, so Joseph, you mentioned that MOFCOM allows some flexibility in R&D and capacity alignment.

[Joseph Tung, executive]

Yes.

[Sebastian Hou, analyst]

Okay. So if I read through -- I have read through the official documents from MOFCOM. Sorry, I want to read this in Chinese to make sure that I don't misinterpret what he said because it allows some rights between you and SPIL during this restriction period. One of it say that [Foreign Language] So my question is, on the first -- related to R&D, second related to your non-packaging business -- non-IC packaging business. So I think Joseph already talked about this, some flexibility on R&D integration. The second is that I want to wonder the non-IC packaging business cooperation, does that mean that SPIL can work with something with USI?

[Joseph Tung, executive]

I think both of us can work with USI. There is no restriction particularly on that. It's just if SPIL wants to work with USI, it has to work on its own without all 3 of us teaming up together. I think that's what the restriction is about. But that really is at the -- the reason why we have that clause in there is because at the holding level, we want both companies to kind of focus on its core businesses. So if one side wants to do something that's considered, first of all, non-core or not even strategic, the holding companies need to have a say on that. I think that's basically why we have that clause there.

[Sebastian Hou, analyst]

Okay. So how about the material? We know ASE have the internal material substrate, so does that mean that SPIL can also...

[Joseph Tung, executive]

It's under -- if this is under a normal business transaction, our substrate or material can sell to whoever, including SPIL.

[Sebastian Hou, analyst]

Okay. So I go back to the first flexibility that MOFCOM offers on the R&D integration. So does that mean that there -- before November 2019, we could also see some R&D efficiency improvements reflected on your numbers?

[Joseph Tung, executive]

We certainly hope so, yes.

[Rick Hsu, analyst]

This is Rick again. Just a little -- one little question. So when you say your -- the holding company will start effective on 30th April, and the new share will be also listed the same day, right?

[Joseph Tung, executive]

Yes. I think timing-wise, after the EGM on February 12, we will start the process of both delisting and listing. The listing of ASE, Inc. and SPIL, and the listing of the holding company eventually. And all will happen at the same day. On April 30, tentatively. On April 30, ASE, Inc. and SPIL will be delisted, while the holding company will be listed.

[Rick Hsu, analyst]

So let me clarify. So is it you're listed both in Taiwan and U.S., right?

[Joseph Tung, executive]

Yes.

[Kenneth Hsiang, executive]

Do we have any more questions? I have a caller online, Steven Pelayo. Steven?

[Operator]

Yes, Steve is on.

[Steven Pelayo, analyst]

I don't know if you're aware, but the audio was not working for the first 35 minutes of the call, so I apologize if this has been addressed. I'd also appreciate if there's any way management can maybe release transcripts or something like that. But I'm curious, on the CapEx, you're talking about increasing in 2018. Can you just provide some qualitative comments on that? ATM versus EMS, investing more in Taiwan versus China, particular package technologies? Can you give us a little bit of color on where you want to direct that increase in CapEx in 2018?

[Joseph Tung, executive]

I think CapEx-wise for the year, as we said, it will be ahead of last year, but not over the depreciation and amortization put together. I think this time around, because of there's some pushout of CapEx from last year, I think the total number will be much closer to our depreciation and amortization number. I think the bulk of it was still impacting Taiwan and as well as in packaging. Although the -- I think for tests, it will be similar to last year's level. And there will be some spending on some of the new projects that we'll be taking on.

[Steven Pelayo, analyst]

Given all the plans for increased [ front-end ] capacity in China over the next year or so, I think there's, I don't know, 5 to 10 different projects at various stages. Are you going to be directing more CapEx into the Mainland as well?

[Joseph Tung, executive]

Yes.

[Steven Pelayo, analyst]

Can you quantify maybe a little bit relative to this year versus next year?

[Joseph Tung, executive]

Well, I think right now, the output from our China factory is about 16% of our overall, and we'll just make the necessary CapEx as we see the business go in China.

[Steven Pelayo, analyst]

All right. Maybe if I can just sneak one more question in. I'm curious about the new customers. And you guys talked about ODM, OEM, system houses. How do we quantify that? Is there some way you can help us understand? I don't know if I heard an answer to Bill's question on what percentage was total HPC business. But if I'm looking at companies like Google and Microsoft making their own chips, how do I try to quantify that? Can you help us provide some maybe color on what these newer customers might represent for you guys?

[Tien Wu, executive]

We typically group customer in the -- we have system customers. The 2 examples that you just referred to, I think they will be quantified as the system customers. We also have the -- some ODM, OEM customer. They're typically like the EMS, or the ODM with their own brand, that will be the second category. Then we also have the IC design house, that could be the IDM and it could be the fabless. And they sometimes will also like to design their own module for whatever reasons. And by the way, we did not offer the percentage of the HPC.

[Steven Pelayo, analyst]

Oh, you did not. Can you offer how much revenue is from system houses and how much do you think that could grow this year?

[Tien Wu, executive]

That, we don't, no. Right, we do?

[Joseph Tung, executive]

From a group perspective, I think it's over 20%.

[Steven Pelayo, analyst]

Over 20%.

[Kenneth Hsiang, executive]

Any additional questions? I guess that's it. Thank you very much for attending the ASE Fourth Quarter 2017 Conference Call and Earnings Release. See you next quarter.