ASE (ASX) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Oct. 29, 2026

CALL PARTICIPANTS

• Head of Investor Relations - Kenneth Hsiang
• CFO - Joseph Tung

TAKEAWAYS

• Consolidated Net Revenue -- TWD 244.2 billion, representing 28% sequential and 45% annual growth driven by higher-than-expected installations of leading-edge capacities.
• ATM Net Revenue -- TWD 151.5 billion, increasing 20% sequentially and 51% year over year as capacities ran at full utilization.
• ATM Gross Margin -- 30.6%, expanding 3.3 percentage points from the previous quarter and surpassing historical structural ceilings due to a higher mix of LEAP services.
• EMS Net Revenue -- TWD 93.5 billion, growing 42% sequentially due to seasonal demand for System-in-Package products and AI accelerator components.
• Full-Year CapEx Guidance -- USD 11.5 billion, revised upward from USD 10.5 billion to support additional facility construction and equipment procurement.
• LEAP Revenue 2026 Target -- Over USD 4 billion, an increase from the previous USD 3.7 billion projection based on accelerated installations.
• 2027 LEAP Outlook -- Management expects LEAP revenue to double in 2027 as demand continues to outpace the company’s ability to supply services.
• Full Process CoWoS Revenue -- USD 300 million for 2026, with management projecting a target of over USD 1 billion for 2027.
• CPO Revenue Target -- Over USD 0.5 billion in 2027, supported by mass production that commenced in the fourth quarter of 2026.
• ATM Operating Margin -- 20%, an expansion of 4.3 percentage points sequentially driven by higher operating leverage.
• Q4 Revenue Guidance -- 6% to 8% sequential growth on a consolidated basis, with ATM revenue specifically expected to grow 11% to 13%.
• Q4 Margin Guidance -- Consolidated gross margin between 23% to 24%, with ATM gross margin projected to increase 100 to 200 basis points.
• Equipment CapEx -- USD 2.1 billion for the quarter, with USD 1 billion allocated to packaging and USD 1.1 billion to testing operations.
• Facility and Land Spend -- USD 1.8 billion, supporting 22 ongoing building projects located in Taiwan.
• Operating Expenses -- TWD 20.8 billion, reflecting higher headcount and research and development spending for leading-edge initiatives.
• Interest Expense -- TWD 2.6 billion, rising TWD 0.8 billion sequentially due to higher debt levels required to fund expansion.
• Net Debt-to-Equity Ratio -- 66%, which management identified as the near-term peak for the company.
• Diluted EPS -- TWD 5.84, with basic EPS reaching TWD 6.13 for the third quarter.
• Effective Tax Rate -- 14.8% for the quarter, with a full-year expectation between 16% to 17% following regulatory changes.
• Computing Application Revenue -- 39% sequential growth, led by high-performance computing and AI-adjacent chip requirements.
• Automotive and Industrial Revenue -- Approximately 14% growth for both segments, reflecting a recovery in general market demand.

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RISKS

• Tung stated, "space continues to be a constraint -- one of the constraints that we have," noting that competition for suitable existing plants is keen.
• Hsiang noted that high component costs driven by shortages from the AI build-out "negatively impacts our EMS business' margin performance" through increased pass-through costs.

SUMMARY

ASE Technology Holding Co., Ltd. (NYSE:ASX) reported record consolidated revenue and margin expansion as demand for its leading-edge assembly and packaging services outpaced supply. Management reported that ATM gross margins have surpassed previous structural ceilings, leading the company to adopt a dynamic margin model based on the increasing mix of high-value services. The company increased its annual capital expenditure budget to USD 11.5 billion to address facility constraints and accelerate equipment installations for both assembly and testing. Strategic priorities focus on scaling full process CoWoS solutions and co-packaged optics to meet rising demand from the high-performance computing sector.

• CFO Tung stated that the "structural margin ceiling has now become the base for us" as the company expects sequential quarterly gross margin improvements from a 30% level.
• Management identified 22 ongoing building projects in Taiwan, with more than half expected to start supporting revenue generation between now and 2027.
• Tung noted that the company is "aggressively seeking for suitable existing plants" to buy because manufacturing space remains the primary bottleneck for fulfilling customer demand.
• CFO Tung indicated that the capacities being installed are intended as the manufacturing basis for future generations of miniaturized products, noting that AI products "just so happen to need" the performance benefits provided by these interconnections.
• Management reported that the assembly business is growing faster than testing services during the current year, leading the company to prioritize wafer sort capacity over final testing.
• Despite seasonal softness in consumer segments, management expects more than 20% growth in the general market business for the year due to recovery in the automotive and industrial sectors.

INDUSTRY GLOSSARY

• ATM: Assembly, Testing, and Materials.
• EMS: Electronic Manufacturing Services.
• LEAP: Leading-edge Assembly and Packaging.
• SiP: System-in-Package.
• CoWoS: Chip on Wafer on Substrate, an advanced packaging technology.
• CPO: Co-packaged Optics, an architecture that integrates optical components with processors.
• NPO: Near-packaged Optics.
• Wafer Sort: A process used to test integrated circuits while they are still on the semiconductor wafer.

Full Conference Call Transcript

Kenneth Hsiang: Hello. I am Ken Hsiang, the Head of Investor Relations at ASE Technology Holdings. Welcome to our third quarter 2026 earnings release. I am joined today by Joseph Tung, our CFO. Thank you for joining us 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 you do not consent, please refrain from asking questions or leave the session now. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially.

For the purposes of this presentation, dollar figures are generally stated in New Taiwan Dollars, unless otherwise indicated. As a Taiwan-based company, our financial information is presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those separately presented by our subsidiaries. For today's presentation, I'll give a brief business update and then go through the Q3 results. Joseph will close with our Q4 outlook. During the third quarter, our ATM capacities ran at or near full utilization rates. Demand for our services continues to outpace our ability to supply such services within our LEAP and much of our non-LEAP capacities.

Our revenues grew faster than we had initially expected, driven primarily by faster-than-expected installations of high-demand LEAP capacities. Non-LEAP also performed slightly better than initial expectations. And even though historically speaking, third quarters tend to be driven by seasonal strength, given the increasing mix of LEAP services, seasonality related to underlying consumer buying patterns are becoming less of a factor in our overall loading patterns. Overall, ATM profitability also improved more than anticipated, primarily as a result of higher-than-expected LEAP loading. Our EMS business' third quarter grew slightly ahead of our expectations. The third quarter continues to exhibit strong underlying seasonal demand for our SiP-related products. Our EMS business' profitability was in line with our expectations.

Please turn to Page 3, where you will find our third quarter consolidated results. For Q3, fully diluted EPS was TWD 5.84 and basic EPS came in at TWD 6.13. Year-to-date through Q3, our fully diluted EPS was TWD 13.40 and basic EPS was TWD 14.17. Consolidated net revenues reached a record TWD 244.2 billion, up 28% sequentially and 45% year-over-year. Gross profit was TWD 54 billion with a gross margin of 22.1%, up 1.1 percentage points sequentially and 5 percentage points year-over-year. The sequential improvement stems from higher LEAP content in our ATM business. The annual improvement reflects higher ATM revenue and a more favorable NT dollar environment.

Operating expenses totaled TWD 20.8 billion, up TWD 1.8 billion sequentially and TWD 5.1 billion year-over-year, primarily driven by higher headcount, profit sharing expenses and further R&D spend to support LEAP initiatives. As a percentage of revenue, operating expenses declined sequentially by 1.5 percentage points and annually by 0.8 percentage points to 8.5%. Our OpEx percentage declined principally from LEAP revenue growth after previous periods of R&D investment. We currently see operating expenses continuing to rise on an absolute level, but on a percentage basis, should remain near the range demonstrated in the current year. This delivered an operating profit of TWD 33.1 billion, up 57% quarter-over-quarter and 151% year-over-year.

We had an operating margin of 13.6%, expanding 2.5 percentage points sequentially and 5.8 percentage points annually. Rising company profitability was primarily driven by higher loading and expanding LEAP product mix. Nonoperating loss totaled TWD 0.4 billion. This amount includes net interest expenses of TWD 2.6 billion, up TWD 0.8 billion sequentially due to higher debt levels. Tax expense was TWD 4.8 billion. Our effective tax rate for the quarter was 14.8%. During the quarter, we saw beneficial changes to tax regulations and foreign currency movements, which positively affected our net deferred tax position. Given these changes, we now expect our full year effective tax rate to be between 16% to 17%.

Net income for the quarter was TWD 27 billion, up 28% sequentially and 148% year-over-year. On Page 4 is a graphical view of our consolidated quarterly performance. For the third quarter 2026, our ATM business represented 62% of our consolidated holding company revenues, while representing 91% of our operating profits. This is compared to 59% of consolidated holding company revenues, while representing 82% of operating profit in the third quarter of last year. As our ATM LEAP business continues to outgrow our other service areas, we continue to believe that our ATM business will continue to increase as a percentage of our overall business and profitability. On Page 5 is our ATM P&L.

For the third quarter of 2026, we recorded record revenues for our ATM business of TWD 151.5 billion, up TWD 25.3 billion sequentially and TWD 51.2 billion annually, representing an increase of 20% sequential and 51% annual growth. Gross profit for our ATM business was TWD 46.4 billion, up TWD 11.9 billion sequentially and up TWD 23.7 billion year-over-year. ATM gross profit margin was 30.6%, up 3.3 percentage points sequentially and 8 percentage points annually, driven by higher operating leverage and a more favorable revenue mix, particularly a higher mix of LEAP. Our gross margin has surpassed our historical structural margin ceiling.

A theoretical structural margin for our ATM business would now substantially depend upon the amount of expected LEAP product mix. Given that our LEAP business continues to grow rapidly, our margin range now appears to be dynamic rather than fixed structurally. During the third quarter, operating expenses were TWD 16.2 billion, up TWD 1.5 billion sequentially and TWD 4.3 billion year-over-year. The sequential and annual increases in operating expenses are primarily related to higher overall labor costs and general R&D expenses. Our operating expense ratio was 10.7%, down 1 percentage point sequentially and 1.1 percentage points annually. We are approaching our near-term ATM OpEx percentage target as we balance cost and a more technology-led growth framework.

During the third quarter, operating profit was TWD 30.2 billion, representing a sequential 53% increase of TWD 10.5 billion and a 178% annual increase of TWD 19.4 billion. Operating margin was 20%, up 4.3 percentage points sequentially and up 9.2 percentage points year-over-year. The NT dollar had a positive 0.5% sequential and a 3.3 annual percentage point impact to our gross and operating margins. On Page 6, you'll find a graphical representation of our ATM P&L. The chart currently highlights our gross profit margin. Over the displayed time frame, our margin improvement has been largely driven by improving utilization rates within traditional product lines and increasing LEAP product mix.

In this time frame, from peak to trough, our gross profit margin percentage has climbed 8.7 percentage points. On Page 7 is our ATM revenue by communications, computing and consumer applications. LEAP services are primarily included within our computing applications with a lesser amount being included in our communications applications. As can be seen here, our computing applications percentage continues to grow steadily. With a large amount of our LEAP services coming from computing, revenues for our computing application grew by 39%. Meanwhile, automotive, industrial and consumer all grew by about 14%. Our communications application had the least amount of growth during the quarter, growing 8%.

At this time, we continue to believe that our computing application will lead growth into 2027 and 2028. On Page 8, you will find our ATM revenue by service type. At the beginning of the year, we believe that our test business, led by rapid expansion of our wafer sort business would outpace growth of our assembly business. However, during the year, our assembly business has been showing even stronger-than-expected growth, especially as it relates to our traditional businesses. The demand for our test services continues to be robust. However, as with much of our business expansion, test capacities are awaiting new facilities.

As stated during the previous quarter, we believe that both our assembly and test businesses will grow at similar rates during the year. On Page 9, you can see the third quarter results of our EMS business. Our EMS business has historically focused more on products closer to consumer-driven end markets. Many of these products are experiencing a higher component cost environment driven by shortages caused by the rapid AI build-out. These extra pass-through costs are increasing both our reported revenues and raw material costs. When netted, this ultimately negatively impacts our EMS business' margin performance. EMS revenues grew 42% sequentially and 35% annually to TWD 93.5 billion.

Sequentially, our EMS business' gross margin decreased by 0.6 percentage points to 8.3%. This change was principally the result of higher pass-through component costs and product mix differences. EMS operating expenses increased by TWD 0.4 billion sequentially and by TWD 0.8 billion annually. Our third quarter EMS operating expense ratio was 5%, declining 1.5 percentage points sequentially and 0.6 percentage points annually. Operating margin came in at 3.3%, improving 0.9 percentage points sequentially and declining 0.4 percentage points annually. The sequential margin improvement is the result of product mix offset by a higher component cost environment. The annual decline is the result of higher component costs.

Our EMS third quarter operating profit was TWD 3.1 billion, up TWD 1.5 billion sequentially and up TWD 0.6 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. Generally, the moves in the consumer and communication categories are related to the seasonality of the underlying products we service. And though the communications application percentage looks to have declined on an absolute dollar basis, our EMS communications application grew quarterly. Annually, the communications application percentage declined primarily due to underlying customer production timing changes. The growth in the computing application is largely driven by business related to AI accelerator products.

From a longer-term perspective, we continue to pursue potential synergies between our ATM and EMS businesses to co-develop system-level solutions. By integrating critical EMS competencies with ATM technologies, we have the potential to optimize entire systems end to end, applying the same co-engineering disciplines that successfully scaled SiP architecture. As complexities increase at the die and package level, the system level will need to follow suit. On Page 10, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents and current financial assets of TWD 107.9 billion. Our total interest-bearing debt increased by TWD 100.2 billion to TWD 406.5 billion. Total unused credit lines amounted to TWD 457.3 billion.

Our EBITDA for the quarter was TWD 58 billion. Our net debt-to-equity ratio this quarter was 66%. As expressed in previous quarters, the third quarter represents the near-term peak of our net debt-to-equity ratio. We expect this ratio to come down somewhat in the fourth quarter. On Page 11, you will find our equipment capital expenditures relative to our EBITDA. Machine and equipment capital expenditures for the third quarter in U.S. dollars totaled USD 2.1 billion, of which USD 1 billion was used in packaging operations, USD 1.1 billion in testing operations, USD 41 million in EMS operations and USD 5 million in interconnect materials operations and others.

In addition to spending on machinery and equipment, during the quarter, we also spent USD 1.8 billion on facilities and land. We continue to believe that the growth of the company is highly dependent upon the execution of our various facility teams to deliver new manufacturing space and install equipment in those buildings for scaled-up mass production. We believe the ability to accelerate CapEx at this point to be beneficial to the company as it allows us to bring in new manufacturing capacity at a time when we are running full. Year-to-date, we have spent USD 8 billion of CapEx, USD 4.8 billion in equipment and USD 3.2 billion in facilities. We currently have 22 ongoing building projects in Taiwan.

We expect more than half of these projects will start supporting some level of revenue from now through 2027. One final point before handing the presentation off. Our overall business outlook continues to be increasingly defined by our leading-edge capacities. And though our LEAP services are frequently tied to AI-related products, we see our LEAP capacities as the manufacturing basis for future generations of products, not just AI related. Multichip interconnectivity on leading-edge devices has become the norm. We are in the midst of an evolution of electronics production where systemization is increasingly happening at the chip level. Simply put, what we are seeing is the next evolution of miniaturization.

It bears repeating the capacities we are putting in place are not specifically made for AI. AI products just so happen to need the performance benefits LEAP interconnections provide. Our investments today are laying the future groundwork for generations of products to come. I'll hand the presentation over to Joseph to walk through the company's Q4 outlook.

Joseph Tung: Thank you, Ken. Let me give everybody a fourth quarter guidance. Based on our current business outlook and exchange rate assumption of USD 1 to TWD 31.9, which remains the same as in third quarter, management projects overall performance for the fourth quarter of 2026 to be as follows: On a consolidated basis, in NT dollar terms, our consolidated fourth quarter revenue should grow by 6% to 8% quarter-over-quarter. Our consolidated fourth quarter gross margin should be between 23% to 24%. Our consolidated fourth quarter operating margin should be between 14.5% to 15.5%. For our ATM business, in NT dollar terms, our ATM fourth quarter revenue should grow by 11% to 13% quarter-over-quarter.

Our ATM fourth quarter gross margin should increase by 100 to 200 basis points quarter-over-quarter. For EMS, in NT dollar terms, our EMS fourth quarter revenue should be flattish quarter-over-quarter. Our EMS fourth quarter operating margin should be around 2%. Now with that, we will open the floor for questions.

Kenneth Hsiang: [Operator Instructions]

Operator: [Operator Instructions] Our first question is from Sunny Lin of UBS. Sunny?

Sunny Lin: Hello. Could you hear me okay?

Operator: Yes.

Sunny Lin: My first question is on your overall LEAP sales. Given the importance and your accelerating expansion, any update on your LEAP sales for 2027? And how should we think about the split by full process, software outsourcing and test?

Joseph Tung: For 2027, we're expecting to remain as we last projected to double our LEAP revenue for the year.

Sunny Lin: Well, then -- sorry, maybe just to follow up, and that will be my second question. So any update on your LEAP sales for 2026?

Joseph Tung: Yes. As I said, we are upping our 2026 LEAP revenue from originally USD 3.7 billion that we mentioned last quarter to over USD 4 billion for this year.

Sunny Lin: Got it. And...

Joseph Tung: Go ahead, please.

Sunny Lin: Sure. Sorry. Not sure if it's our connection issue, but I lost a part of the response, but it's okay, we will check the transcript. So my second question will be on the full process CoWoS. How's the overall ramp and yield for the key product second half of this year? And now looking into 2027 with your expansion, should we assume a more diversified customer base and product base? And how -- yes.

Kenneth Hsiang: So Sunny, you're asking about our full process business and then looking for any update in terms of the full process yield and such, right? Is that correct?

Sunny Lin: Yield and then the product base going into 2027.

Joseph Tung: I think for 2026, our full process revenue is on track, and we're keeping a USD 300 million revenue for the year. And I think the -- everything else is going on as planned. And for next year, we are expecting over USD 1 billion revenue coming from full process. And of course, the yield is at the level that we can get into mass production and major shipments.

Kenneth Hsiang: Does that answer your question, Sunny? Thank you.

Sunny Lin: Yes.

Operator: [Operator Instructions] Okay. Our next question is from Gokul Hariharan of JPMorgan.

Gokul Hariharan: Joseph and Ken...

Operator: Hello, Gokul? Gokul, I cannot hear you. Okay. Next question is from Haas Liu of BoA. Haas? Can you hear me? Okay. Now we go back to Gokul Hariharan of JPMorgan.

Gokul Hariharan: Hello? Can hear me?

Operator: Yes.

Gokul Hariharan: Okay. All right. My first question is on gross margins. Could you talk a little bit about where we are seeing this upside in gross margins compared to our guidance range for Q3? It looks like a very clean kind of 150, 200 basis points beat and further upside in Q4 as well. Is it pricing? Or is it your full process is ramping up better in terms of margins? And secondly, on the same topic, I think now that we have already exceeded our previous structural range and obviously, the product mix is also different. You're still expecting LEAP to grow faster than the overall product mix.

What is the kind of gross margin range we should think about as we think about the next couple of years?

Joseph Tung: Well, as we continue to ramp up our LEAP business, I think there will be further margin improvement in fourth quarter as well as going into next year. I think the -- at this point, I think the so-called structural margin no longer applies because of the significant and rapidly changing business structures that we are having today. So if we are to comment on our margin, I think the first thing we will say is that the so-called structural margin ceiling has now become the base for us.

And looking into next year, I think as we continue to ramp up our overall capacity and also in a very friendly type of pricing environment, we believe that we will continue to see gross margin improvement on a quarterly basis from the base of 30% and we will continue to see sequential improvement in our margin on a quarterly basis for next year as well.

Gokul Hariharan: Got it. Just a follow-up there. If you look at the overall portfolio, maybe we leave testing aside within packaging, what would be the highest gross margin that you're able to earn in any of the lead process? Is it already like close to 40% for some of the processes or that is too ambitious?

Joseph Tung: Can you repeat the question?

Kenneth Hsiang: Gokul, you're looking for the potential highest-performing margin for LEAP at this point. Is that your question?

Gokul Hariharan: Yes. Within the 3 or 4 components that are there, which one is the highest performing? And what are those levels? Just to understand like what is the room for travel in terms of your overall gross margins given your mix is clearly improving quite rapidly?

Joseph Tung: I don't think we need -- we want to comment on the different margins in different products or different packages. But I think the -- overall, I think the overall LEAP business, both on assembly and test are margin accretive, and we'll continue to see improvement in our margin expansion.

Gokul Hariharan: Okay. Okay. Got it. My second question is on -- just a follow-up on your LEAP full process revenues for next year. Joseph, I think you mentioned more than TWD 1 billion, but that sounds quite conservative given you're already doing TWD 300 million in the first quarter of ramp this year. Could you talk a little bit more about your engagements on the full process? And also, if you ramp up all these like 22 projects that you are currently ramping up in terms of facilities, both greenfield and brownfield, what does it mean in terms of, let's say, you ramp it up in 2028? Any indication in terms of what is the investment required from a CapEx perspective?

And what does it mean for a continued growth? Does it mean that you continue to grow at similar rates even into 2028, not just for 2027?

Kenneth Hsiang: Gokul, you're asking about the characterization of our full process business and in certain regards, kind of a total return outlook. Is that correct?

Gokul Hariharan: Yes. Total growth outlook given the very sharp ramp in the facilities.

Joseph Tung: We do have multiple customer engagements at this point, although we are pretty much constrained by our capacity, and we're aggressively building that up. So from the business outlook that we have so far, I think our resource is quite limited. So we are -- although the demand is there, but we're still trying very hard to catch up in terms of supply. And for next year, we are expecting that the demand can be way higher than what we'll be able to deliver. So right now, we're still projecting over USD 1 billion revenue coming from full process.

So I guess that's -- I think the biggest bottleneck today is really still the space, although many different areas, we do have -- find ourselves being constrained. But space is really one of the biggest constraint that we're facing today.

Operator: Our next question is from Laura Chen of Citigroup.

Chia Yi Chen: Can you hear me?

Operator: Yes.

Chia Yi Chen: Just want to follow that USD 1 billion like the full process. Can you give us more color about that? What type of the full process will see the contributions next year? And also for our LEAP overall revenue, so obviously, still more driven by the substrate part. But we do see that our companies have various different types of technology. So just wondering, can you give us more color about the growth breakdowns, particularly in the full process in the next 2 years?

Kenneth Hsiang: Laura, this is Ken. I don't think we have a lot of characterization in terms of what types of full process. I think when we talk about full process, it's generally much more customer specific, too. I think we probably can't really comment that much on that at this point.

Chia Yi Chen: Okay. Sure. Understood. So that also seems like the growth into next year is more coming from the substrate part?

Joseph Tung: Yes. But we are seeing very, very strong demand in test as well. And on assembly and test, we are both seeing a very strong momentum. Again, we are actually being constrained with the capacity buildup. So we're still trying to -- very hard to try to catch up with it. In terms of full process, I think, as I mentioned, we are moving ahead on track. And we hope that we can supply more for next year. And -- but at this point, we are conservatively looking at about over USD 1 billion revenue coming from that.

And there are some other new projects that we're entering, for example, CPO, and we're expecting over USD 0.5 billion of revenue coming from CPO as well for next year. That will be included in our LEAP revenue.

Chia Yi Chen: That's actually my second question about to ask about the CPO because we see that Jensen earlier last week, he mentioned about that 30x capacity will pick up for next year. So I assume that also, yes, in the LEAP revenues. But will we like going forward to kind of split that revenues breakdown for better like investors' understanding on that part growth?

Joseph Tung: I think we will -- we are kind of breaking it down already in terms of OS, in terms of full process, in terms of wafer sort and as I mentioned, CPO.

Chia Yi Chen: Okay. So if I may also check on that, do we have any expectation on the CPO revenue contributions in 2 years?

Joseph Tung: In 2 to 3 years?

Chia Yi Chen: Yes.

Joseph Tung: No, we have a projection for next year, but we'll see -- we'll have better clarity after we finish what we're setting up to do for now.

Operator: Our next question is from Haas Liu of BoA.

Haas Liu: Yes. Can you hear me now? Sorry, I was disconnected.

Operator: Yes.

Haas Liu: Congrats on the great results. I think just a quick follow-up on the structural gross margins where you already reported the third quarter ICDM gross margins up to slightly higher than 30 percentage. So with your LEAP business set to be even higher in the next couple of quarters and also your mainstream packaging and testing business utilization, pricing are actually also improving. Can we use third quarter gross margin as a base case going forward for your LEAP -- for your overall ICDM gross margin assumptions as long as the cycle holds?

Joseph Tung: Yes. As I mentioned earlier that we're now using our structural margin ceiling as a base for next year.

Haas Liu: Okay. So we can use like this kind of roughly 30% of the gross margins as the base case for next year. Got it. And then...

Joseph Tung: We will see quarterly improvement for next year as well.

Haas Liu: Okay. Sequential improvement. And then second thing is just on CapEx. This year, you are already spending based on what you reported just now, you have already been spending 80% to 90% of your annual budget, which has been revised up twice year-to-date to USD 10.5 billion on CapEx. Would you be able to provide some update on that since there's still like a few months to end this year? And looking into 2027, how should we think about that trajectory as one of your foundry partner also just now announced to buy another panel fab.

Should we also expect similar acquisition of the fabs or the facilities by ASE as well and also more equipment procurement in the next couple of quarters to meet your customers' demand?

Joseph Tung: Yes. As I said, the space continues to be a constraint -- one of the constraints that we have, and we are aggressively seeking for suitable existing plants for us to buy. But there are -- when your competition is pretty keen and there are really not that many suitable factories for us to pursue at this point. So it's an ongoing effort that we're putting in. And also for this year's CapEx, we are increasing our CapEx for the year from USD 10.5 billion to USD 11.5 billion now. We're adding USD 1 billion, another USD 1 billion.

And of that USD 1 billion, half of it will be for facilities as we continue to fill up our new factories. And the other half will be for equipment and 60% of it will be for LEAP and 40% will be for the mainstream events.

Haas Liu: Got it. Got it. And just on the overall pricing environment across your LEAP versus the mainstream packaging and testing business, how should we think about -- since the supply/demand is still pretty tight and that...

Kenneth Hsiang: Sorry to stop you there. You're on question #3.

Operator: Our next question is from Gokul Hariharan of JPMorgan.

Gokul Hariharan: A couple of follow-ups from my side. So Joseph, I think you mentioned CapEx USD 11.5 billion, higher by USD 1 billion. Could you give an opinion on what you're thinking CapEx is going to look like next year? Are we still in an upward sloping curve for CapEx? And could you also talk a little bit about are you entering into any prepayment arrangements or anything like that with customers given a lot of this new CapEx seems to be targeted at some of the key customers itself? Yes, that's my first question.

Kenneth Hsiang: Gokul, you're looking for an update on our CapEx outlook going forward?

Gokul Hariharan: Yes. And the kind of any funding arrangements that you have, repay...

Joseph Tung: And the funding sources around it. Well, we'll continue to see very strong demand coming in, and we do have a very strong prospect for next year as well. So at this point, I believe the CapEx spending for next year will be even larger than this year. And as we continue to ramp up our capacity. Also in terms of R&D, we will continue to make the necessary investment to carry our missions. Funding-wise, we will continue to use whatever -- we do have multiple cost-effective sources for us to raise funds to support our growth.

I think at this point, we are not shy -- we will not be shy from making the necessary investment to support the expansion. So I think for next year, we will continue to see negative cash flow. But I think this thing will be balanced off in due course. In terms of -- as I mentioned, multiple funding sources that will also include some of the trade financing that we can arrange with the different customers.

Gokul Hariharan: Understood. And the second question is on the test business. Could you characterize the growth of the test business going into next year, final test versus chip probing? And I think how constrained are you on test versus packaging? Like if you think about on a relative scale, is the constraints on test bigger than packaging from a facility or equipment perspective?

Kenneth Hsiang: Gokul, you're looking for an update in terms of looking at the test business going into next year, and then in terms of the growth rates relative to what we're seeing in terms of the market. Is that correct?

Gokul Hariharan: Yes. Relative to packaging and relative to -- like constraints relative to packaging as well.

Joseph Tung: I think same pattern will -- like in the third and fourth quarter of this year, it will repeat into next year. I think in terms of assembly, it should -- the growth rate should outpace test, given the limited resource that we have. And also for test under the current resource constraint, we will need to prioritize our investment to more on wafer probe rather than final test.

Gokul Hariharan: Okay. Would you say test is more constrained in terms of your capacity versus demand compared to packaging or it is largely similar?

Joseph Tung: I think it's mostly space. I think the space that we use for assembly is more efficient than test at this point. So given the constraint, we will allocate -- we will put our priority on assembly and for test will be for wafer sort.

Operator: Our next question is from Haas Liu of BoA.

Haas Liu: I think just a quick follow-up on the CapEx. A couple of your peers, including the one in Korea and also your foundry partner mentioned that they are preparing for a significant or a meaningful step-up on the CapEx for next year. Given this is the first -- the third time of CapEx upward revision for the year for ASE in 2026, do you still -- do you also expect a similar statement to hold for your CapEx for next year? You already mentioned that next year's CapEx will be higher than this year. But just wondering whether that kind of aggressiveness will be applied to ASE as well.

Kenneth Hsiang: Haas, you're looking for a characterization of how we view next year's investments...

Haas Liu: Yes. in a qualitative way as compared to your peers comment for a meaningful step-up or significantly higher than this year's CapEx. Does those -- do those statements also hold for your CapEx outlook?

Kenneth Hsiang: Haas, generally, we don't necessarily view our own CapEx relative to competitors or, I guess, peers in the market. In general, we do see that CapEx going into next year, we do see a lot of opportunity in terms of the business that will be available to us. And as Joseph previously mentioned, we will not be shy in terms of investing to get at that business. Does that answer your question?

Haas Liu: Okay. Yes. And just a related follow-up on the CapEx one is probably more specifically on the CPO that one of your key customers last week in its Germany event said it will hike CPO capacity by 15% next year at your facilities and then double again in 2028. Would you be able to share more detail on that? What is your role in CPO packaging and testing? What is the related CapEx you expect to spend? And how should we expect -- or try to -- or quantify the related revenue contribution from that part of the business in the next few years from CPO based on your customers' statements?

Kenneth Hsiang: Haas, you're looking for a clarification in terms of the potential joint press release that we had with our customer on the CPO?

Haas Liu: Yes.

Joseph Tung: Well, I don't think we will comment on specific product or specific customer. What we're saying is overall, we are the -- I think we are the most active participant in the whole CPO effort and joining with our foundry partner as well as our customer and just from the business that we are projecting to have from our customers, we're expecting to generate more than USD 0.5 billion worth of revenue coming from CPO for next year.

Haas Liu: For next year. Okay. Yes. And my second question would be just on the pricing environment across your LEAP business and also the mature -- or mainstream packaging and testing business. It seems that the supply tightness is actually happening across the board. Would you be able to share some detail on how that pricing improvement has been helping your gross margin improvement in the third quarter? And into 2027, how should we expect the pricing negotiation with your customers at this stage to help your gross margin expansion beyond the product mix improvement?

Joseph Tung: Well, I will not comment on pricing, except we will continue to look for the most suitable pricing strategy depending on the situation. And all I can say is, overall, I think both for LEAP as well as for general market, I think we are in a very pricing-friendly environment at this point.

Haas Liu: Okay. Okay. And could you also just try to quantify the...

Kenneth Hsiang: Haas, I think you're on question #4.

Operator: Our next question is from Charlie Chen of Morgan Stanley.

Charlie Chan: So just a quick follow-up, right? Thanks for disclosing your CPO revenue. So if we may, can we know roughly is the testing part, for example, insertion 3, insertion 4, a bigger revenue contribution or the substrate is a bigger contribution for that USD 0.5 billion revenue contribution?

Joseph Tung: I won't be able to comment on that, sorry.

Charlie Chan: Okay. No worries. Yes. And secondly, I think management mentioned you wouldn't hesitate to kind of invest in space capacity, whatever to gain share, right? But recently, there seems to be some industry dynamic that one of TSMC's subsidiary, they're also getting into the on-substrate business, right? Do you think there is like demand overflow or it's kind of a real competition to your on-substrate business?

Kenneth Hsiang: Charlie, you're asking for commentary in terms of competition within our LEAP business.

Charlie Chan: Yes. Because now it seems like demand is not an issue. But my question is that who seems to have the space can really gain share, right? Is that a fair comment? Because one of the TSMC's subsidiaries is kind of ordering lots of equipment. So we are a little bit worried whether that's kind of gaining share at expense of ASE.

Joseph Tung: It's kind of sensitive to talk about our foundry partners, subsidiary situation. And all I can say is given the scale, I think we are really the dominant player in this field. And whatever competition, I think, is out of necessity from our foundry partners as well as our customers. So I don't think -- at this point, I don't think it will move the needle that much in terms of overall market share kind of situation. As I said, we are still in a catch-up mode, trying to supply as much as we can to meet the demand. So I think that's all I can say at this point.

Charlie Chan: Got you. At least, there wouldn't be any so-called price competition, right? It's like demand is too big, whoever can squeeze more space or capacity can gain share, but don't worry about pricing and margin.

Joseph Tung: I think the sheer scale difference is I don't think a price war will be created.

Charlie Chan: Makes sense. Yes. And if I may, non-AI. So we start to pick up some data points on PC and smartphone order cuts at the wafer front end. So except for iOS ecosystem, right? So Joseph or Ken, can you share your observation about non-AI part of business and how that is going to impact your kind of midterm outlook?

Joseph Tung: Well, at least for this year, I think the general market growth is well ahead of our expectation in the earlier part of the year. I think we will have more than 20% growth in our general market business as well. That's largely -- we all understand that cell phone and PC is going through a very soft period given the high component prices that's kind of hurting the overall demand. But that is more than compensated by the recovery of automotive and industrial and more importantly, AI adjacent chips requirement. So we're seeing very strong growth in this year for general market, and we're expecting that to happen again in next year as well.

Operator: Next question is from Sunny Lin of UBS.

Sunny Lin: I have a question on very high level, what's your view on CPO versus NPO. Besides CPO, could ASE also capture the opportunity in NPO as well? And then based on your commentary, would it be fair to say that based on the current visibility, it's fair to say that 2027 CPO will be able to ramp up even with still some technical challenges or optimization that the industry need to go through?

Kenneth Hsiang: Sunny, you're looking for an update in terms of how we view the CPO versus NPO market and then our capability to ramp up to support CPO going forward. Is that correct?

Sunny Lin: Yes. Or maybe just CPO as a technology, is it mature enough to start mass production for your key clients in 2027?

Joseph Tung: Yes. As I mentioned earlier on CPO, we're expecting mass production. We already started mass production in quarter 4, and that will continue into 2027. And as we are projecting at this point, we're looking at over USD 0.5 billion worth of revenue coming from CPO. In terms of NPO and CPO, I think they will both coexist. And it's just a matter of difference in terms of overall performance between the 2 different types of packages.

Sunny Lin: And for MPO, will ASE be able to capture as well?

Joseph Tung: If there is real demand, yes, of course, we will be a major player in that.

Sunny Lin: Got it. And a quick question on EMS. So looking at the shared [indiscernible] is a bit different. And how should we think about the growth going to Q1? Typically, Q1 should be a down quarter as the build moderates. But this time around, the flagship smartphone clients are also launching for lower-end models going to early 2027. And so all things considered, how should we think about your EMS business maybe going to first half of 2027?

Kenneth Hsiang: Sunny, you're looking for the seasonal pattern of our EMS business as potential underlying customer products change their timing of release. Is that correct?

Sunny Lin: Right.

Joseph Tung: Well, we will continue to expect some growth going into 2027 as well for EMS business. I think the main focus will be on the high-performance computing. And at this point, it represents roughly mid-teens of our overall EMS revenue, and we're seeing that ramping up rapidly. And communication-wise or consumer-wise, it will be -- at this point, it's -- relative to computing, it's weaker. But all in all, I think the -- our EMS will continue to move into optical, silicon photonics and power-related type of devices. And also, of course, AI-related business that we'll be focusing on. So yes, we do expect further growth, particularly in the AI-related part of the business.

Operator: Next, we have Haas Liu of BoA coming back again.

Haas Liu: It's me again. I'm just wondering if you could provide more clarity on the gross margins improvement in third quarter. How much of that is coming from the product mix improvement versus the like-for-like price hike across your LEAP versus -- and the mainstream business and your utilization improvement? Because if we look at the trend in the past 8 quarters or 7 quarters that you already have experienced 2 step-ups on the gross margins back in the second half of last year. And now in the third quarter this year, there's another step-up.

So as you accelerate your LEAP business, I think -- going forward, in addition to the question I just had now on the third quarter gross margin breakdown on the -- from the relative benefits. I think just going forward, may I also check on your expectation, whether that kind of gross margin improvement will further accelerate through 2027.

Kenneth Hsiang: Haas, you're looking for further clarification in terms of what has caused our margin pick up during the third quarter and then whether those types of improvements are sustainable going forward? Is that correct?

Haas Liu: That's right.

Joseph Tung: Third quarter margin improvement is largely because of the LEAP ramp-up as well as overall improvement in utilization across the board, including the general market or mainstream packages and test. And going forward, as we continue to ramp up our LEAP business and having a healthy growth on the general market business as well. I think, yes, we will continue to see sequential improvement in our margin on a quarterly basis going into next year.

Haas Liu: Okay. And I think just a follow-up on the application mix. In third quarter, your computing business is seeing a nice ramp. Would you be able to share more detail on that? And what are the key applications are you targeting in that segment in the next 1 to 2 years between GPUs, CPUs, ASICs and networking switches?

Kenneth Hsiang: Haas, you're looking for an answer in terms of the composition of our compute business. Is that correct?

Haas Liu: Yes. And your targeted application in the next few years between GPUs, CPUs, ASICs and networking switches.

Kenneth Hsiang: I don't know if we can comment so specifically. Yes. I think from a targeting perspective, we should be targeting everything. We can't be particularly specific. But in terms of our technologies, we do hope to be able to address all applicable products within that high-performance computing section. Do you have another question, Haas?

Haas Liu: No, I am good for now.

Kenneth Hsiang: Okay. I think you're the last question then. Do we have any other questions online?

Operator: No, no more questions.

Kenneth Hsiang: Thank you, everyone, for attending the call. Joseph, do you want to...

Joseph Tung: We had a fabulous third quarter, and we'll continue to see strong momentum going into fourth and into next year. We will make the necessary investment to support the overall expansion, and we'll continue to expect good results for the fourth quarter as well as for next year. Thank you very much.

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