Hong Shi Tung - Chief Financial Officer and Director.

David Duley Szeho Ng - BNP Paribas, Research Division Gokul Hariharan - JP Morgan Chase & Co, Research Division.

Welcome to the ASE Q2 2014 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this point. Now I'll hand the call over to Mr. Joseph Tung, CFO of ASE, Inc. Sir, you may begin..

An overall stable ASP environment, even considering product mix. Our IC ATM production capacity should increase by roughly 4% quarter-over-quarter. Our blended IC ATM utilization rate should increase between 2 to 4 percentage points from roughly 80% in the second quarter.

The pace of our EMS business' first half year-over-year growth should carry into Q3. Let me repeat that. The pace of our EMS business' first half year-over-year growth should carry into Q3. Gross margins for the company as a whole should edge down, and operating margins for the company should edge up. And Jason, we are ready to take questions..

[Operator Instructions] Right now, we do have 2 questions on queue, and our first question comes from Mr. David Duley..

I noticed you're now giving guidance as far as utilization rate goes instead of forward growth guidance.

Could you just talk about why you're changing your methodology?.

This is due to some [indiscernible] regulation changes that we'll not be able to give specific numbers..

Okay. Then as I think about the segments in the third quarter in your IC ATM business, I think you mentioned that you might have been seeing a little bit of a, perhaps, inventory correction going on in the mobility business.

Does that carry forward to the third quarter? And then could you give us an update on the plant closure -- your plant closure and when that would expected to be opened?.

Okay. I'll answer the latter question first. I think the K7 factory has gone through the, what we call the final inspection of the trial run, and we have been notified as we have seen in the press today in the afternoon that we have been given conditional approval for full resumption of works.

There are a few conditions that we need to meet, and a lot of it is really documentation, and we need to bring these responses over to the Environmental Protection Bureau and waiting for their official approval to be granted, and we expect to receive that within the next few weeks.

And the first question was?.

Could you talk about the segments of revenue in your IC ATM business in the third quarter and just talk about the, perhaps, inventory correction you're seeing in the mobility business or what -- however you'd like to talk about it?.

Yes, I think the -- in terms of application, I think the -- in the third quarter, the communication will have the strongest growth and therefore, the percentage will increase, more or less at the expense of computing. Although in terms of absolute numbers, all 3 segments will continue to grow in the second quarter -- in the third quarter..

And then are you seeing -- could you just talk about the mobility businesses? There's some sort of inventory correction going on there. Your prepared comments were talking about how customers were cautious in some customers' forecasts..

I think, as mentioned in the presentation, there are customers revising down their forecasts, and there are some steady -- having steady forecasts, while some customers are preparing for their product launches actually have increased the forecast. So it's a mix at this point, and we are not seeing really a major inventory pileup at this time..

Okay. And final question for me, I'll get back in the queue, is there's been lots of chatter about a big customer of TSMC moving -- big customers moving from foundry to foundry, and I wouldn't think that would really impact the back end.

But could you just talk about what your views are there if big customers of TSMC move to Korea?.

I think, they'll -- what's been talked about is really a fraction of our business, and I think our capacity is really prepared for to serve the whole industry and multiple customers. So I think the -- if there is any impact, it will be very minimal..

Our next question comes from Szeho Ng of BNP..

With regard to your fan-out technology, are you seeing more customers showing interest in this?.

Can you repeat the question again?.

Yes.

For the fan-out technology, are you seeing many customer activities going on now?.

Not really..

Okay.

So any chance you see revenue contribution, let's say, in 2015?.

I think it's too early to tell. We don't really have a sense of it..

Okay, no worry.

And for the -- based upon the capacity, can you give us an update for the installed capacity for Q2? And what will be the plan for year-end capacity plan?.

Right now, we have about 95k 12-inch capacity, 95k for 8-inch bumping and 60k for 12-inch. And I think by the end of third quarter or early fourth quarter, we will have -- we will increase our 12-inch bumping to 70k..

70k..

70 to 75..

Okay. All right.

Is it a more linear expansion? That means that we should assume something like 60k in Q3?.

Right now, it's 60k, and I think by end of third quarter, early fourth quarter, we will have 70k to 75k already..

Our next question comes from Mr. David Duley..

Could you talk a little bit more about what you expect your SiP business to do in the second half of the year? And then also, could you clarify a little bit more about how you account for this business and what the impact is on the gross margins of the IC ATM business?.

I think the -- our SiP business will be back-end loaded, and I think by end of fourth quarter, on a consolidated basis, it will represent close -- around 20% of our overall revenue..

From what today, I'm sorry?.

To about 20 -- from about 6% in the second quarter..

Okay. So very rapid growth in the second half of the year.

And what's the key reason that you're going to see all of this growth?.

Well, it's just the scheduled product ramp-up..

And could you talk about -- the second question was how you account for this business and how it impacts the gross margins of the IC ATM business.

Really, what I'm looking for is how -- what sort of positive impact does it have on that business?.

I think the business model-wise, it's really -- we're looking the SiP business as part of the EMS business. So we're using EMS units to take on the order for -- and also to this particular project to handle all the logistic support. Whereas the manufacturing process is really being subbed [ph] over to the IC ATM operating units.

In terms of the margin, I think at this point, it has some positive impact on the overall IC ATM margin..

Is there -- could you help me with -- as a number of percentage points, is it 2 percentage points of positive impact for IC ATM? Or is it 1 or a rough cut about what the impact is?.

Sorry, I cannot provide that..

And then I think one of your competitors raised their CapEx and talked about capital intensity of advanced packaging. I was just wondering if you might be able to give us your views of, number one, how much of your CapEx budget will be spent on advanced packaging and talk about the capital intensity of it versus your other businesses..

Well, I think the -- we have already explained that in second quarter, we have [indiscernible].

In second quarter, we have -- out of $257 million CapEx for packaging, we have about $46 million invested in flip chip and bumping, and I think going into quarter 3, the -- that amount will significantly increase for the bumping capacity that I just mentioned -- for the bumping capacity expansion.

And I think at this point, the overall capacity, industry capacity for bumping is -- we're still in the -- trying to catch up with the demand and although eventually, there will be fluctuation in terms of demand/supply balances.

Well, I think the overall, right now, we're still looking at a healthy pace, and the investment discipline is still being maintained in our segment. And we don't believe in short term that there will be major oversupply situation..

Okay. That's good to know that you don't think there's oversupply in advanced packaging.

Could you just give us an idea about the capital intensity levels? Does it require $1 of spending to generate $1 of revenue? Or what's the ratio there?.

I think, as a whole, that's correct. I think the -- for the IC ATM business, including packaging and test, $1 of investment pretty much gives you $1 of additional annual revenue..

And you think that's true for the cap [ph], the flip chip and bumping part of the business..

So that's just the overall, and we're not seeing that trend changing that much..

Our next question comes from Gokul Hariharan..

I had a question on SiP.

Could you talk about when some of these new products that you talked about in your analyst meeting in Taipei today afternoon, when some of these new products start to come in, how quickly can your customer concentration within SiP diminish? Is that something that we should expect in the next couple of years? Or it's going to be a bit more longer term? And I had one more question on SiP..

In terms of customer expansion, I don't think we have a fixed time line for it. I think this is a -- the whole business model is a bit different. We -- in terms of the traditional IC ATM, we're serving the whole industry with multiple customer in each and every different segments.

But for SiP, it's more likely to be single customer, single product and therefore -- and also the products tend to be more consumer driven and therefore, the life cycle of each generation of such product is shorter. So -- and the -- so I think we need -- we want to be selective in terms of dealing with our customers.

We want to take one step at a time. The worse thing for us is really to prepare -- to pull all the resources to put up with a large team and making a lot of capital investment turnout. If the customer comes in and asking for 30 million units capacity, ended up selling 3 million, that will be the worst-case scenario.

So in that case, we really need to be selective. [indiscernible] our business model first. So I'm not -- don't have a really fixed time frame for when we'll have multiple customers..

Okay.

And the second question is, do you see other competitors also trying to come into this SiP segment? Do you think you'll still retain significant share in your key customer in the next 12 to 18 months still? Or is there any changes happening there?.

Right now, we're not -- we haven't seen any major changes in terms of the competition landscape. I think one very important thing to notice is that to be able to do SiP in effective manner, you really need to have all 4, including front-end, system-level technology and design capability.

Whereas for -- to actually build these -- the products, you need to use semiconductor-level assembly and test technology. And if you're shrinking everything to a chip-size type of a board, then the board really is the -- what we use in the semiconductor world, the substrate. So I think to be effective, you really need to have all 4 of them.

Right now, we haven't seen any real competitors that have all the ingredients involved..

Okay, okay.

One more question, on the wafer bump capacity increase, is it by any chance you're increasing the capacity because you have some uncertainty regarding K7 resumption? Or the -- when we talk about going from 60 to 75 for 12-inch bump, is that including the K7 capacity or is that excluding K7?.

Including. I think it's worth mentioning that K7 has already gone into what we call a full-scale trial run. At this point, about 80% to 85% of the capacity has already been utilized..

At this time, we have no further questions. [Operator Instructions] At this time, there are no further questions. We do have another question on queue, and it comes from Gokul Hariharan..

I have one follow-up on the wafer bump part and wafer-level packaging, in particular. Could you talk a little bit about where the demand is coming from for wafer-level packaging? It seems to be that market is starting to see a lot more demand coming through.

Your competitors also -- you're probably actually a bit slower in terms of the pace of expansion compared to some of your competitors who are going very quickly.

So could you talk a little bit about what you're seeing? What kind of products are going to wafer-level packaging? And how -- what does it really replace? Is it replacing traditional wirebond? Is it actually replacing some flip chip with wafer-level CSP kind of stuff?.

Actually, most of the -- we're seeing a lot of connectivity devices, WiFi, Bluetooth and so on and so forth. Those devices are using wafer-level packaging today, although some of them are still using wirebonds. Also there are some demand from our analog customers, MCU customers.

But like I said, the majority of wafer-level packaging capacity is being used by connectivity devices. Also that -- there are also gaming [ph], for example. [indiscernible].

That is primarily the 8-inch wafer bump capacity, right?.

Well, actually, it's -- some of them are utilizing 8-inch bumping, and they are in flip-chip package. But they are also -- many of them are in wafer-level packaging. And also, like I mentioned, a lot of connectivity devices like WiFi combo chips, they are in wafer-level packaging..

Our next question comes from Mr. Dave Duley..

Yes. I just have a clarification question on your forward guidance. When you talk about overall utilization rates of the IC ATM business, I guess, increasing about 4% from about 80%, I think that indicates low -- less than 10% sequential growth or less-than-typical growth seasonality. Maybe just talk about it that way.

It appears that this is less than seasonal growth.

What are the key reasons for that?.

I wouldn't actually say the coming Q3's growth is really out of character. I think the -- we can only base -- we can only look at our own customers' forecast and come out with the estimates. But case in point that in third quarter last year, the sequential growth was only about 4%..

Yes. I think the typical seasonal growth is 8% to 12% or 8% to 10%, so just kind of wondering why you're seeing it lower than, let's say, the 5-year average..

Yes, I think the first and -- particularly in the second quarter, I think the sector's momentum was actually quite strong. And if you look at our own business, we have about 14% growth and also, Amkor has about 10% in the second quarter, whereas SPIL has about 20-some percent.

So I think the overall Q2 has a -- pretty strong, I think, and this is going into Q3. I think the -- we should be looking at such strong pace of growth repeating..

At this time, there are no further questions. [Operator Instructions] At this time, there are no further questions. [Operator Instructions].

I think there's no further questions. Let me wrap up. I think we had a very good second quarter both in terms of top line growth, as well as margin improvement.

And for the year, although we apologize we will not be able to give specific numbers for guidance, I think what we are providing is sufficient to help to bring some color to the coming quarters. I think one thing is -- we can be sure is that for the year, for IC ATM, we will have -- we'll continue to see sequential growth on a quarterly basis.

Whereas the -- from EMS point of view, the growth will be second-half heavy, and we should be having a very healthy coming 2 quarters. Thank you very much, and that will conclude the call today..

Thank you. That concludes today's conference call, and thank you all for participating. You may now disconnect..