ASE Technology Holding Co., Ltd. (ASX) Earnings

Management highlights

- **Market & Strategic Positioning** - Management believes the industry is at the beginning of an AI paradigm shift, which requires entirely new hardware with greater size, complexity, and integration that did not exist for prior applications. - New hardware for AI data centers, agentic AI, and future physical AI/humanoid applications is creating growing multi-year demand for industrial power, connectivity, and storage devices, which ASC is already seeing across its customer base. - Hardware infrastructure is currently the main industry bottleneck, with very few manufacturers capable of producing the required complex AI hardware; ASC is positioned to capitalize on this shift as packaging moves up the system architecture value chain. - ASC’s key competitive advantage is its pure-play OSAT (Outsourced Semiconductor Assembly and Testing) model, which avoids conflicts of interest with foundries, substrate providers, and other supply chain players, enabling seamless ecosystem collaboration that is critical for complex integrated AI hardware. - The company holds first-mover advantages in technology, speed, capacity, and customer trust that underpin its long-term growth. - **Operational Status** - Overall capacity utilization in Q2 was 80-85% blended, with most non-LeAP capacities (wire bond, traditional advanced packaging) and test capacities (wafer sort, final test) running near full utilization. Incremental near-term growth is constrained by the speed of installing new capital equipment and building new facilities. - The company is currently executing 13 simultaneous greenfield factory projects and 8 brownfield renovation projects to expand capacity, which creates execution and scheduling pressure on the business and its construction partners. - Total operating expenses for Q2 were $19 billion, up $3.5 billion YoY driven by higher labor costs and increased R&D for LeAP initiatives; as a percentage of revenue, operating expenses stayed flat QoQ at 10% and declined 0.3pp YoY. - Net income for Q2 was $21.1 billion, up 49% QoQ and 180% YoY, with an effective tax rate of 16.4% (lower than full-year expectation due to Q2 R&D tax credits). - The balance sheet remains healthy: at end-Q2, cash and current financial assets totaled $107.4 billion, net debt to equity was 47%, and unused credit lines totaled $396.2 billion. Q2 EBITDA was $45.8 billion.

Guidance

- **Q3 2026 Guidance**: Consolidated revenue is projected to grow 21-22% QoQ, with consolidated gross margin of 20.5-21.5% and consolidated operating margin of 11.5-12.5%. ATM revenue is expected to grow 11-13% QoQ, with ATM gross margin of 28-29%. EMS revenue is projected to grow ~40% QoQ (largely driven by pass-through memory component price increases, with core seasonality in line with historical levels), with EMS operating margin of 3.2-3.4%. EMS full-year 2026 revenue growth is expected to be sub-20%. - **Full-Year 2026 Guidance**: Full-year general/non-LeAP ATM segment growth was revised upward to 30% YoY from prior guidance of 13% YoY. Full-year ATM segment revenue growth is now guided to 35% YoY. Leap Services revenue is tracking ahead of prior full-year guidance of $3.5 billion, with an expected upside of a couple hundred million dollars for 2026. Capital expenditure guidance for 2026 was increased by $2 billion (to a total of $10.5 billion), with $4 billion allocated to new factory facilities and $6.5 billion allocated to equipment; 70% of 2026 equipment CapEx is allocated to leading-edge/LeAP capacity. The full-year effective tax rate is maintained at 18%. Management expects sequential ATM margin expansion through the end of 2026, with Q4 2026 ATM gross margin likely to exceed the company’s prior structural margin ceiling of 30%, after which management will review upward adjustments to the structural margin range. - **2027 Guidance**: Management is targeting to double 2026 Leap Services revenue in 2027. Current capacity expansion projects are expected to support ASC’s growth through 2028 and into part of 2029. Full process development is on track, with $300 million in full process revenue expected for 2026, and substantial full process growth projected for 2027.

Segment performance

1. **ATM (Advanced Semiconductor Manufacturing) Segment**: In Q2 2026, ATM recorded revenue of $126.1 billion, growing 12% quarter-over-quarter (QoQ) and 36% year-over-year (YoY). It contributed 66% of consolidated holding company revenue and 94% of consolidated operating profit (up from 61% of revenue and 87% of operating profit in Q2 2025). Gross profit reached $34.5 billion, up 18% QoQ and 70% YoY, with a gross margin of 27.3% (up 1.3pp QoQ, 5.4pp YoY). Operating profit hit $19.8 billion, up 25% QoQ and 124% YoY, with an operating margin of 15.7% (up 1.6pp QoQ, 6.2pp YoY). Within ATM, computing applications (which include most Leap Services) continue to steadily grow as a percentage of revenue, while both assembly and test businesses are growing at similar full-year rates (previously expected test to outpace assembly, but assembly, including legacy wire bond, has outperformed expectations). 2. **EMS (Electronics Manufacturing Services) Segment**: In Q2 2026, EMS revenue grew 6% QoQ and 12% YoY to $65.8 billion. Gross margin was 8.9%, down 0.6pp QoQ due to unfavorable product mix and higher component costs. Operating margin came in at 2.4%, down 0.6pp QoQ and 0.2pp YoY. Operating profit was $1.6 billion, down $0.3 billion QoQ and up $0.1 billion YoY. Growth in the EMS computing category is driven by AI accelerator product demand.

Risks & headwinds

- Current incremental growth is constrained by the speed of capacity expansion, as the business is building 21 total greenfield and brownfield projects simultaneously, which creates execution pressure and depends on on-time, on-spec delivery from construction partners. - Forward-looking statements and projected growth are subject to material risk, and actual results may differ materially from expectations, due to the uncertainty of AI technology adoption timelines and customer demand. - Inflationary pressure on materials and component costs could pressure margins if pricing adjustments cannot fully offset cost increases, though management has so far successfully passed through cost increases to customers. - Competing packaging technologies (such as Intel’s EMIB) could gain market share over ASC’s current focus on co-packaging (coWoS), though management notes multiple packaging technologies can coexist in the market and ASC is willing to support customer demand for any technology as a pure-play provider.

Analyst Q&A

• Q: What is the status of ASC’s U.S. operations, and how is ASE involved with Intel’s EMIP technology? /

  A: ASC already has two operational R&D, testing, and development factories in the California Bay Area, and is currently expanding to a third and fourth facility to support customer upfront design work. The company’s current strategy is to first develop and ramp full automated production lines in Taiwan to leverage existing efficiency and resources, then migrate production to other geographies (including the U.S.) when scale and customer requirements demand it. For EMIP/EMIB, ASC is open to collaborating on this and any other competing packaging technology. The company is currently focused on ramping up coWoS, but will add any requested alternative technologies to its roadmap; as a pure-play provider, there is no conflict of interest supporting any technology customers choose, and multiple technologies can coexist in the market.

• Q: What is driving the upward revision to 2027 LEAP doubling guidance and the upside to mainstream general segment growth? /

  A: The doubling guidance for 2027 LEAP revenue is based on clear line of sight to existing customer demand and visibility to the capacity that is currently under construction and will come online next year; demand still outpaces available supply, but ASC has enough visibility to commit to the doubling target. Upside to the general segment comes from stronger than expected demand for industrial, power, connectivity, and storage devices, which are all growing due to AI infrastructure buildout. ASC’s fully automated lines for general devices are preferred by customers building high-reliability products for EVs and AI data centers, giving the segment stronger traction than the overall semiconductor market.

• Q: When will ASC’s panel-level packaging start production, and how does it complement foundry panel solutions? /

  A: ASC’s 310x310 form factor fully automated panel packaging line will start production in Q1 2027. The solution is fully complementary to foundry panel-level packaging offerings, and serves the same set of customers.

• Q: Can you clarify the large projected 40% QoQ EMS revenue growth for Q3 2026? /

  A: The 40% QoQ growth is driven primarily by pass-through component price increases, particularly for memory chips; excluding this impact, Q3 EMS revenue growth follows normal historical seasonality. Management expects EMS revenue to be flat sequentially between Q3 and Q4 2026, with full-year 2026 EMS growth coming in below 20% YoY. Memory price increases are largely passed through to customers and have minimal impact on operating margins.