ASE Technology Holding Co Ltd (NYSE:ASX)
Q2 2020 Earnings Call
Jul 31, 2020, 2:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kenneth Hsiang — Chief Executive Officer, ISE Labs and ISE Shanghai

Hello, I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Second Quarter 2020 Earnings Release. Thank you for attending our conference call today.

Please refer to our safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation of this event. 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. For the purposes of this presentation, our dollar figures are generally stated in New Taiwan dollars unless otherwise indicated. As a Taiwan-based Company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards.

For today’s call, I will be going over financial results. Afterwards, we will have a Q&A session with Joseph Tung, our Chief Financial Officer.

Entering the second quarter, we were concerned about supply chain durability and COVID-19’s impact on overall electronics demand. After, we do believe that supply chains generally held up, while COVID-19 appears to have bolstered consumers’ demand for electronics.

On Page 3 is a high level first half recap. Holding company revenues grew 18% year-over-year on U.S. dollar terms. ATM revenues grew 23% year-over-year on U.S. dollar terms with gross margins improving 3.8 percentage points or 5.3 percentage points, excluding foreign exchange impact. EMS revenues grew 12% year-over-year in U.S. dollar terms. We continue to see strong demand from our various business lines. In particular, our SIP business is driving our ATM and EMS business growth. SIP, for the first half of this year, grew 20% year-over-year in U.S. dollar terms. We actually expect SIP growth to accelerate in the back half of 2020 for both our ATM and EMS businesses. Our fan-out business grew 68% year-over-year in U.S. dollar terms and our test business also continues to outpace assembly growth, growing 30% year-over-year in U.S. dollar terms.

For the second quarter, our ATM business somewhat outperformed our initial expectations. We believe that our geographical diversification and Taiwan’s lower manufacturing risk continued to benefit us. For our factories, during 2020, business has been much more linear. Given strong demand during the first quarter, we started the quarter from a seasonally high base, and as such, it didn’t take particularly long for key capacities to start running tight. Our ATM business also encountered a strengthening NT dollar environment. Our first half year-over-year sales growth was 19% on NT dollar terms, while it was 23% by U.S. dollar terms. For the second quarter, on a year-over-year basis, NT dollar appreciation negatively impacted our sales by 3.6% and gross margin by 1.8 percentage points. We continue to see a strong NT dollar environment though, at least through the third quarter.

For our EMS business, the second quarter usually represents the trough quarter in terms of seasonality. However, our EMS business started at seasonal manufacturing ramp somewhat earlier than usual as well as seeing SiP upside in demand. As a result, our EMS business significantly outperformed our initial expectations.

What you’ll find going through our second quarter results is that both quarter-over-quarter and year-over-year comparisons are overwhelmingly positive. We also have a bit of a tax surprise benefit to discuss, and we will discuss the geopolitical situation toward the end within the outlook part of our discussion.

Please turn to Page 4, where you will find our second quarter consolidated results at the holding company level. In this section, we will generally defer business explanations to our ATM and EMS P&L discussion. Intercompany transaction between our ATM and EMS businesses have been eliminated during consolidation. For the second quarter, we recorded fully diluted EPS of TWD1.60 and basic EPS of TWD1.63. Consolidated net revenue was TWD107.5 billion, representing a 10.5% increase quarter-over-quarter and a 18.5% increase year-over-year. We had a gross profit of TWD18.8 billion, with a gross margin of 17.5%. Our gross margin improved by 0.9 percentage points quarter-over-quarter and 2.1 percentage points year-over-year. The sequential improvement is primarily the result of typical seasonal loading patterns. The year-over-year increase in gross margin is primarily the result of stronger overall loading, offset by higher EMS revenue mix and a stronger Taiwan dollar. Our operating expenses increased by TWD0.3 billion during the second quarter to TWD10.4 billion. This was primarily the result of slightly higher operating expenses in both our ATM and EMS business units. However, when viewed relative to sales, we were able to keep our operating expenses in check with our second quarter operating expense percentage declining 0.7 percentage points sequentially and 1.1 percentage points year-over-year to 9.7%. Operating profit was TWD8.4 billion, representing a 39% improvement sequentially and a 103% improvement year-over-year. Sequentially, operating margin improved 1.6 percentage points to 7.8%, while being up 3.2 percentage points year-over-year.

Tax expense for the quarter was TWD1.7 billion. The effective tax rate for the second quarter was 19%. We do have some important news here. On May 8, we received clarification from Taiwan’s Taxation-Ministry of Finance that ASE, SPIL, spill USI’s Taiwan capital spending may generate tax credits, which can be used to offset undistributed earnings tax at the holding company level. As such, during the quarter, we booked a net undistributed earnings tax reversal of TWD0.2 billion, representing tax credit claimable related to 2019 capital spending. With the inclusion of this, the expected effective tax rate for 2020 year should be slightly above 20%. More importantly, on an ongoing basis, we will continue to be able to generate tax credits in this manner. We estimate that we can now lower ongoing tax rate by about 2 percentage points to be in the range of 21% to 22%.

Net income for the quarter was TWD6.9 billion, representing an improvement of TWD3 billion or 78% sequentially and an improvement of TWD4.2 billion or 158% year-over-year. On the bottom of the page, we have again provided key P&L line items, without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be TWD19.7 billion, with an 18.3% gross margin. Operating profit would be TWD9.6 billion, with an operating margin of 8.9%. Net profit would be TWD8.1 billion, with net margin of 7.5%. Basic EPS, excluding PPA expenses, would be TWD1.90.

On Page 5 is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the second quarter of 2020, revenues for our ATM business were TWD69.5 billion, up TWD3.3 billion from the previous quarter and up TWD9.9 billion from the same period last year. This represents a 5% increase sequentially and a 17% increase year-over-year. Our ATM revenues came in somewhat ahead of our expectations due to stronger-than-expected demand related to communications products. Gross profit for our ATM business was TWD15.1 billion, up TWD1.7 billion or 13% quarter-over-quarter and up TWD4 billion or 36% year-over-year. The sequential gross profit improvement is primarily due to higher loading. The year-over-year gross profit improvement is primarily driven by scale efficiencies resulting from higher loading. Gross profit margin for our ATM business was 21.7%, up 1.6 percentage points sequentially, while up 3.1 percentage points year-over-year. Margin improvement is generally the result of higher seasonal loading. Margin improvement year-over-year is primarily attributable to higher relative loading and a higher mix of test revenue. During the second quarter, operating expenses were TWD7.9 billion, up TWD0.1 billion sequentially and TWD0.4 billion year-over-year. The sequential and year-over-year increases were driven by higher R&D expenses. Our operating expense percentage was 11.3%, down 0.4 percentage points sequentially and down 1.2 percentage points year-over-year. During the second quarter, operating profit was TWD7.2 billion, representing an improvement of TWD1.7 billion quarter-over-quarter and an improvement of TWD3.6 billion year-over-year. Operating margin was 10.4%, improving 2 percentage points sequentially and 4.2 percentage points year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23% and operating profit margin would be 12%.

On Page 6, you’ll find a graphical presentation of our ATM P&L. On Page 7, is our ATM revenue by market segment. Overall, not much has changed in the mix of our revenue.

On Page 8, you will find our ATM revenue by service type. During the second quarter, our test business continue to outgrow other product service types. Test now stands to be 18% of our ATM revenue.

On Page 9, you can see the results from our EMS business, and its associated revenue by application. This was a somewhat unusual quarter for EMS business. As mentioned in our previous earnings release, we believed that there would be some supply chain impact of business from the first quarter. That would get pushed into the second quarter. Even with consideration of such, our EMS business outperformed the quarter expectation. This was primarily driven by upside demand for our SIP-related products.

During the second quarter, we had revenues of TWD39.7 billion, representing an increase of TWD7 billion or 21% sequentially, and TWD8.2 billion or 26% year-over-year. EMS revenues increased quarter-over-quarter, primarily because of upside demand. EMS revenues increased year-over-year, primarily as a result of improved product demand. Our EMS gross profit was TWD3.7 billion, improving TWD0.7 billion sequentially, and TWD0.9 billion year-over-year. The sequential and year-over-year gross profit improvements were driven primarily by stronger customer demand. Gross profit margin for the EMS business unit came in at 9.4%, an improvement of 0.1 percentage point sequentially, and 0.3 percentage points year-over-year. These improvements are primarily driven by higher loading.

Our EMS business units operating expenses closed the quarter at TWD2.5 billion, increasing TWD0.2 billion sequentially, and TWD0.1 billion year-over-year. Operating expenses increased primarily as a result of a larger scale of operation. Operating expense percentage was held in check at 6.3%, as compared with 7% last quarter, and 7.5% last year. Operating profit for the quarter was TWD1.2 billion, representing a TWD0.5 billion improvement sequentially and a TWD0.7 billion improvement year-over-year. These sequential operating profit improvement was primarily due to increased customer demand during the second quarter. Our operating margin came in at 3.1%, which is a 0.7 percentage point improvement sequentially, and a 1.5 percentage point improvement year-over-year.

On the chart on the bottom half of the page, you will find a graphical representation of our EMS revenue by application. Our communication segment here picked up after a seasonal decline. It has been a while since we mentioned this, but it is worth noting that our EMS business unit runs under the name Universal Scientific Industrial, and it is traded as an A share on the Shanghai Stock Exchange under the ticker number 601231. We currently own 75% of the Company, which translates to roughly $5 billion.

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 TWD63.7 billion. Our interest-bearing debt declined TWD20.7 billion to TWD214 billion. Total unused credit lines amounted to TWD253.8 billion. Our EBITDA for the quarter was TWD22.5 billion. We continue to target a net debt to equity ratio of 60% to 65% in the next 18 months.

On Page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the second quarter in US dollars, totaled $495 million, of which $287 million were used in packaging operations, $133 million in testing operations, $70 million in EMS operations, and $5 million in interconnect materials operations and others. Given the current business climate, we continue to be cautious with our capital expenditures. However, even in this time of change, we are seeing a number of opportunities appearing for our businesses. These include opportunities as a result of manufacturing capacities relocating away from geopolitical risk and other supply chain shifts.

As you may be aware, on May 15, the United States Bureau of Industry and Security announced plans to protect US national security by restricting the use of US technology and software to design and manufacture its semiconductors abroad. After September 14, 2020, semiconductor manufacturers will be under order by the US to restrict product shipments. The US BIS has not finalized this pronouncement. But whatever format it takes on, we would comply. With the restriction left in its current format, we expect this ruling may start impacting our revenues beginning in late August. But with that said, we do not believe that geopolitical disruptions fundamentally alter long-term demand of communication products, and infrastructure.

For instance, if a consumer drops their smartphone and one particular brand is not available, there are many substitutes smartphones. As such, we believe that the majority of the impact will be more of a near-term nature. But as demand resettles over the following quarters, product flow and competition will reestablish a new equilibrium. And given our capability and market share of advanced packaging, we believe much of the potentially impacted business will go back into the market and get redistributed back to us. We expect this process will take some time to fully play out.

We do not opine on the validity of this proposed restriction one way or the other. We also definitely believe that this is an ongoing situation. We have evaluated many possible scenarios. And even in a worst-case scenario, we believe that we would be able to contain the impact of such a restriction to a mid-to-high single-digit decline to our ongoing ATM business over the coming year. This would represent direct business restricted in full and that market share is reshuffle back from other customers. In the end, we believe in our own capabilities and the strength of Asian semiconductor manufacturing.

And for the third quarter, outside the impact of geopolitical disruption, we see the communications market picking up, driven by strength in 5G. And to the contrary of what many market research firms are concluding for the logic semiconductor market, we are seeing strong business growth. It is necessary to point out that we do not just service traditional semiconductors. In fact, one of our fastest-growing segments is our SiP business, which creates systems and subsystems, not captured within the semiconductor market. Our products enable our customers to add new features to their products, such as with current generation products enabling millimeter wave 5G technology. We believe that our SiP business will continue to pick up momentum in the back half of the year.

Entering the third quarter, our factories are generally already running at or near full capacity. We actually see a mid-single digit growth for our ATM business. However, we also estimate that we will also see a 5% business impact from the US restriction. If we do not see relief from the US restriction, given product cycle times, we will start seeing impact in late August. Growth, net of this restriction, will result in what appears to be a flattish outlook for the third quarter. Also of concern to our ATM business during this time frame, is the strength of the Taiwan dollar. For our third quarter gross margins, we estimate we will see a 0.6 basis point impact from NT dollar appreciation from a sequential perspective. Further, as geopolitical disruption takes shape in mid-August, we also see some margin impact during the back half of the third quarter.

The outlook, ATM, in NT dollar terms, ATM third quarter 2020 business should be similar to second quarter 2020 levels. ATM third quarter 2020 gross margins should be similar with first quarter 2020 levels. For EMS in NT dollar terms, EMS third quarter 2020 business should be similar with third quarter 2019 levels and EMS third quarter 2020 operating margin should be similar with third quarter 2019 levels.

That concludes the prepared remarks. Please open the floor for Q&A.

Questions and Answers:

Operator

Yes. [Operator Instructions] The first to ask questions, Randy Abrams Credit Suisse. Go ahead, please.

Randy Abrams — Credit Suisse — Analyst

Okay. Yes, thank you and good afternoon. The first question I wanted to just ask on the third quarter outlook. I guess, maybe, big picture, the mid-single digit growth maybe factors comparing to foundry or TSMC, which is quite optimistic, but I’m curious if you’re seeing any timing difference from the — I think now even the flagship customers noted a little bit later build, if there is a different seasonal profile for your second half from just different timing this year for both segments, ATM and EMS. That’s kind of the first part.

The second part, if you could clarify the impact from the restriction. Just want to make sure I get it right that it’s mid-single digit third quarter. And then, if I could understand after that like a full quarter in fourth quarter, once that customer is out, what the impact is. And then I think I heard medium term, it’s still a mid- to high-single digit impact even with new customers. So, I guess if you could just clarify how that impact will play out after or going into second half and then beyond.

Joseph Tung — Director and Chief Financial Officer

Well, I think in terms of TSMC situation and our comparison, I think we’re not a full reflection of whatever TSMC is projecting at this point, because of the different customer portfolio and also different level of capacity or technology in the two different segments. So I think what we are projecting on our end is really to forecast that we’re getting and the situation that we are in today.

In terms of third quarter, I think the — what Ken just mentioned is that presently, just looking at the forecast, we should be having a 5% or mid-single digit growth in the quarter, but we are looking at the U.S. export restriction impact on us. And we are taking — although the procurement is — the pronouncement is not finalized yet and exactly how much and what kind of an impact on us is still remain to be seen, but just for the conservative perspective, we are saying that — we are thinking that the 5% or mid-single digit growth in our ATM business should be offset by this U.S. export restriction. And therefore, in our guidance, we are saying that we’re going to have a similar quarter in third quarter comparing to the last quarter.

And for the fourth quarter, I think, again, nothing is finalized yet, and there will be further revisions or modifications in the restriction. And so, the net impact of that is still remains to be seen. So, at this point, we’re not giving out any fourth quarter projection yet.

Randy Abrams — Credit Suisse — Analyst

Okay. And could you clarify the comment that mid- to high-single digit impact? Is that the one even including some other customers making up the difference? So that’s what you still see as net impact even factoring some benefits? Or do you expect, I don’t know, in a medium term, you’d get back to run rates? I’m just curious that second part of the guidance what you’re implying?

Joseph Tung — Director and Chief Financial Officer

I think the– what we’re saying is really the — again to be conservative, although nothing is confirmed yet, but just for conservative per se, we are saying that we — if we look at full year next year, there could be a mid- to high-single digit impact on our revenue, but still it depends on what kind of a year in 2021 in front of us. And there are a lot of things that are some moving parts and we’re just trying to be conservative about it. And there are lot of things to be considered, including new products coming out, including the COVID- 19 situation, including the overall demand situation in the 5G deployment status. And also, there is going to be if one customer is impacted, there could be other customers having some reshuffling of business in terms of the competitive landscape. So, all things put together, it’s still a very vague or very unclear situation in front of us. But just to be conservative, we want to say, there could be mid- to high-single digit impact on our revenue for next year.

Randy Abrams — Credit Suisse — Analyst

Okay, and thanks for the clarification. And then if you could give an update — I think right after the merger, you had mentioned about the synergy that you could have, I think 2 points at the operating margin level. And it looks like, first half, I think you’re on track with that, but the sales are also recovered in first half. But I guess now that you had a bit more time to assess, if you could give a view how to think about the margin, if it’s in measure of synergy. And then, how we can think about the OpEx growth and also the CapEx outlook now?

Joseph Tung — Director and Chief Financial Officer

I think the after the lift out the restriction — lifting out the restriction, I think we have been initiating quite a bit of efforts in terms of having a better alignment with the — with SPIL. And that includes some of the capacity sharing, procurement, also CapEx alignment and so on and so forth. And we are seeing very good progress in the first half although the COVID-19 situation, also the U.S. restriction may have some of the offsetting impact on us. But nonetheless, I think in terms of operating expense, I think we are definitely on track in terms of getting back to the 2018 level, which was 11.4% [Phonetic]. In fact, by the way it is going, even with the lot of the alternatives front of us, our expectation is that we’re not only going to be hitting that target, but also maybe ahead of the target a bit. So, we are seeing some of the synergies being created with the better cooperation or better alignment with two entities.

Randy Abrams — Credit Suisse — Analyst

Okay, great. And for CapEx, if you have a view of now? I think you mentioned a little bit of conservatism, but then some new opportunities. So, how that may net out for overall CapEx spending?

Joseph Tung — Director and Chief Financial Officer

I think for this year, we are still maintaining our original budget. We’re saying — we have been telling the Street that we are expecting similar level of CapEx for this year and that hasn’t been changed yet.

Randy Abrams — Credit Suisse — Analyst

Okay. And if I could ask one final one, on the, I guess, the latest news from Intel where they’re starting to consider at the foundry, one is the chiplet strategy and then the second is potentially contingency plan to do some outsourcing. I’m curious if you see opportunity on the CPU market or from some of this potential contingency or strategy shift maybe taking place?

Joseph Tung — Director and Chief Financial Officer

Well, I think it is still early to comment on that. I think the overall impact still remains to be seen. But generally, we are seeing Intel’s competitors that are ramping up, and that’ll certainly benefit our overall business. And going forward, it’s kind of a natural tendency that if TSMC does better, then we do better.

Randy Abrams — Credit Suisse — Analyst

Okay, great. Thanks so much.

Joseph Tung — Director and Chief Financial Officer

Thank you.

Operator

Next one, we are having Gokul Hariharan, JPMorgan. Please ask your question.

Gokul Hariharan — JPMorgan — Analyst

Thanks for taking my question. So first question I had is, just to understand the impact of this US restrictions. I think if you think about your market share in various competitors of this Company, which has been restricted, how quickly do you think you start to get back some of this market share, even if these restrictions were to remain in place. And secondly, since we don’t have clarity in terms of how the final restrictions are going to shape up, if we think about — I think you talked about, about 5%, 6% mid-single digit growth in Q3 without these restrictions coming into place. Would you think that if it’s a normal kind of year without these restrictions coming in place? Would you have expected the Q4 also would be a kind of a growth quarter for IC ATM? And I had a follow-up question on 10% [Phonetic].

Joseph Tung — Director and Chief Financial Officer

Are we clear on the question? Okay. I think it is fair to say that the impact, if without the US export restriction impact, we should have a stronger than what we are projecting now, the second half. And there was a fair chance that we would continue to see quarter-on-quarter growth in terms of the overall business. But still, I want to [Phonetic] qualify it by saying that nothing is finalized yet, and how big the impact there will be still remains to be seen. And we’re just taking one step at a time without any changes so far, which is projecting that in third quarter there may be some impact on us, which could be in the mid-single digit kind of impact on the — on our revenue.

Gokul Hariharan — JPMorgan — Analyst

Okay. Quickly on the margin, I think just following up on Randy’s comment, I think previously, we talked about 200 basis point gross margin expansion in IC ATM as a result of the combination, synergies, etc. When should we expect that to come through? Is that something that you now expect maybe some time next year? Or would that be affected by this US restriction as well for the medium term?

Joseph Tung — Director and Chief Financial Officer

Well, I think the — well, certainly, the first half we have reached our target, but in — going into the second half, I think there is a lot of uncertainties in front of us, including the COVID-19 situation that has an impact on our overall situation. And the US restriction, and by and large, I think the NT dollar appreciation also had a very large impact on us. So I think it will become a bit difficult for us to reach our 2% saving — the margin improvement target for the year. We will work on it. And situation changes, and then we need to perhaps putting more efforts in terms of controlling our costs. And hopefully we can maintain that — we can reach that target sometime in next year.

Gokul Hariharan — JPMorgan — Analyst

Okay, got it. Just one small question on SiP. I think you talked about some of the new millimeter wave-related projects coming through. How should we think about the new wave of SiP project that are — that is entering. Should we expect that that will be more margin accretive to the business? Or would they be similar to the margins they’ve have been making in the current business?

Joseph Tung — Director and Chief Financial Officer

One second, please.

Gokul Hariharan — JPMorgan — Analyst

So, are you still with us?

Joseph Tung — Director and Chief Financial Officer

Yes. I’m with you. I think the new products that we are going in, particularly in the SiP products, I think right now we are in the stage of ramping up and we are expecting fairly good progress or momentum going into the second half, particularly on some of the new projects that we’re going in. I think in terms of margin, I think the — these new projects should be a margin accretive, and that will help our overall momentum for the year and following to us next year. We have been making a lot of progress in our SiP business buildup. I think in the — in terms of our EMS business, right now I think about 40% — in second quarter is about 40% of the overall business and the — that percentage will continue to rise. In terms of ATM, is on the mid-single digit level. And we are seeing this SiP business momentum start to accelerate in the second half. We set out to say that we have a goal of new SiP business revenue to be TWD100 million a year. And it looks like we’re going to triple that, more than triple that in 2020. So we’re making a lot of headways or progress in terms of building the SiP business, which has not only helped the revenue, but also on the margin.

Gokul Hariharan — JPMorgan — Analyst

Thank you.

Operator

Right now, we are having Roland Shu from Citigroup. Go ahead, please.

Roland Shu — Citigroup — Analyst

Hi, good afternoon. For US restriction, I would like to know what extent of the US technology equipment or software you are using for doing your business. Is it possible for you to build production line totally, we now use US technology or equipment going forward?

Joseph Tung — Director and Chief Financial Officer

There is a portion of our equipment or capacity that are US made or with the US content. There are other alternative solutions to that. Although, I don’t think that is really the main issue, I think the — the result is reflected in the whole value chain, whole manufacturing chain. It’s not just on the assembly and test for say. So if we — it comes all the way from a chip design to foundry to wafer fabrication to assembly and test. So we cannot isolate this just by looking at whether we can replace our capacity or equivalents with non-US equipments to solve — to try to solve that problem.

Roland Shu — Citigroup — Analyst

Understood. But for the assembly and testing point of view, I think in the extent of this US technology or equipment I think there is a — it will be much lower than the foundry or others, right?

Joseph Tung — Director and Chief Financial Officer

That’s correct.

Roland Shu — Citigroup — Analyst

Okay, understood. Okay, second question. Ken just said you started EMS seasonal production earlier than the previous year. And also I think this morning, I think the key [Indecipherable] company talked about the smartphone launch schedule will be above the week later than expected. So for that one, I think this actually is a little bit different from what the customer is talking about. So I’m wondering what kind of the product you started the — have the capacity in second quarter for EMS business? And with this early start, will that result in the 4Q the EMS revenue will be [Indecipherable] previous years? Thank you.

Joseph Tung — Director and Chief Financial Officer

I think we’re talking about two different things. I think in the second quarter, the better-than-expected revenue growth was twofold. One is, some of the quarter one demand because of the operation disruption was being pushed out to third quarter. And second is that we did have a better-than-expected ramp of some of the SiP products, which are now related to the smartphone that is coming on stream in third quarter, although there is a bit of a delay, but what happened in the second quarter is not related to that.

Roland Shu — Citigroup — Analyst

So, what kind of the product? It is — so, is that for computer or for [Speech Overlap]?

Joseph Tung — Director and Chief Financial Officer

It’s for communication and for consumer as well.

Roland Shu — Citigroup — Analyst

Understood. Yeah. So then, you think seasonality for your EMS business in 3Q and 4Q will be well maintained. So definitely [Phonetic] we are not going to see 4Q seasonality will be impacted?

Joseph Tung — Director and Chief Financial Officer

Judging from the whatever forecast we’re getting, we’re seeing a very strong momentum in the second half and we will see quarter-to-quarter growth as well.

Roland Shu — Citigroup — Analyst

Understood. Okay. Thanks. These are my questions. Thank you.

Joseph Tung — Director and Chief Financial Officer

Thank you.

Operator

Right now, we are having Bruce from Goldman Sachs. Please go ahead and ask your question.

Bruce Lu — Goldman Sachs — Analyst

Hi. Joe, I want to talk [Phonetic] more about the gross margin for the ATM business. I think that we do see the currency impact in the second quarter already, but management mentioned that there will be another like close to 1 percentage gross margin impact. Can you be more quantified that what is the impact from [Indecipherable] in the second part of the quarter and also the forex for the second quarter — sorry, for the third quarter?

Joseph Tung — Director and Chief Financial Officer

I think the — in terms of the utilization in the second quarter, we’re looking at around 85% across the board, including assembly and test. And going into third quarter, I think in the first two-third of the quarter, I think we will remain to be full, fairly high — very high utilization. But just to be conservative, we’re seeing — we could see some impact starting from late August. And therefore, the utilization may drop a bit to still above 80%. So overall, I think the margin impact of — because of the utilization rate differences is very marginal. I think most of the margin pressure will come from — really coming from the NT appreciation.

Bruce Lu — Goldman Sachs — Analyst

I see. So, compared to like earlier this year, if you use like the similar foreign exchange rate, what kind of gross margin we are looking in the third quarter? So the question I’m trying to ask is that with all the forex impact, are you on track to deliver the gross margin improvement? Because forex is nothing we can’t control, but the product mix, the cost saving is something that management can do.

Joseph Tung — Director and Chief Financial Officer

Yes, I think, as I mentioned earlier on, we are on track in terms of controlling our opex, and on the — like I said on the cost of goods sold side of it, there is still — aside from the currency issue, there is a little bit of the impact not on the utilization, but really on the utility costs, because we are in the summer period. Therefore, there could be some impact on the margin.

Bruce Lu — Goldman Sachs — Analyst

I see. Lastly, again, I want to follow-up with Roland’s question about the seasonality for the EMS business. I think third quarter you’re guiding for flattish year-on-year decline — I’m sorry, flattish year-on-year revenue. So — but your key customer is having some delay for their production and you had a very, very strong second quarter as well. So, can you all go through this scenario again for your EMS business?

Joseph Tung — Director and Chief Financial Officer

You’re referring to third quarter?

Bruce Lu — Goldman Sachs — Analyst

Yes, because you are guiding third quarter revenue to be year-on-year flattish, right? Right. But your key customer is actually having some delay in terms of their production. So, how can you deliver flattish year-on-year [Indecipherable]?

Joseph Tung — Director and Chief Financial Officer

Well, I think the — what we are saying here is we are using NT dollar to — for the third quarter, but if you look at in U.S. dollar terms, actually — there is still actually some growth.

Bruce Lu — Goldman Sachs — Analyst

I see. So, even though your customer might be delayed in production, you are still generating revenue growth for the third quarter for the EMS business?

Joseph Tung — Director and Chief Financial Officer

Yeah. I don’t think — our third quarter is still growing in terms of our EMS. One week delay, I’m not sure how much it will impact.

Bruce Lu — Goldman Sachs — Analyst

All right. I should ask this way, do you see any scheduled delay for your customer — for your production in the third quarter as a year-on-year basis?

Joseph Tung — Director and Chief Financial Officer

No comments.

Bruce Lu — Goldman Sachs — Analyst

No or no comments [Speech Overlap]. Okay, I’m back to the queue.

Operator

We are now taking questions from Sebastian Hou, CLSA.

Sebastian Hou — CLSA — Analyst

Yes, thanks for taking my questions. So, my first question — sorry, in fact, I probably joined later. So just wanted to clarify one thing that the mid- to high-single digit impact from this [Indecipherable] on one of your customers, is that for next year or for third quarter or for second half this year? Thank you.

Joseph Tung — Director and Chief Financial Officer

Both.

Sebastian Hou — CLSA — Analyst

Okay, got it. But you see that — OK, so, OK. So but for third quarter, the impact should be less, is that right?

Joseph Tung — Director and Chief Financial Officer

The third quarter impact will be what?

Sebastian Hou — CLSA — Analyst

Will be less in that magnitude, because you are probably still doing — shifting something to their customers in the first half of the third quarter.

Joseph Tung — Director and Chief Financial Officer

We’re not commenting on any particular customer.

Sebastian Hou — CLSA — Analyst

Okay, got it. But if I — if I look at the compared — the guidance you have, I understand there is a time difference between you and foundry, but I think clearly, I think TSMC will also have the similar exposure to you, to the customer — that customer in question, but probably the company seems to have been able to backfill or find other customers to fill that hole pretty soon. So, even raised the full-year guidance. So, my question to ASC is that it is just a temporary issue that you have given the time difference — time lag between foundry and OSAT, so we — probably some of that strength will be seen in fourth quarter? Or is a more — a bigger issue where I think TSMC can find someone to backfill, while we are — difficult for us to find — to do that?

Joseph Tung — Director and Chief Financial Officer

Well, I responded to this question earlier on. I think first of all, we have done a full reflection of TSMC’s business model. We do have different customers and we do have different technology. We’re not exactly in the same arena. So there’s going to be some major differences between us. Second is, like I said, nothing is finalized yet. So, whatever impact on us may or may not be the same as everybody else. And we’re not even sure that, how much of an impact or how long the impact would be, because nothing is finalized yet. What we’re trying to say is, if you have to be on the — more on the conservative side, we want to — we’re trying to say that this thing could be contained. And also it doesn’t really change the overall — the ongoing growth drivers for our industry remains the same. 5G, HPC is also — all kinds of different new applications and new products that’s coming on stream. So, there are lot of uncertainties involved. And also different players. There’s going to be a lot of reshuffling in the industry. So there’s so many different factors that could have an impact on the overall situation. So whatever we are saying now is really just the guesstimation that what could be the impact on us.

Sebastian Hou — CLSA — Analyst

Got it. Got it. Fair. Can I revise my previous question. So you probably mentioned before, I just wanted to clarify that the mid-to-high single-digit revenue impact is for the consolidated revenue or for the IC ATM only?

Joseph Tung — Director and Chief Financial Officer

IC ATM only.

Sebastian Hou — CLSA — Analyst

IC ATM. Okay, got it. The last question from me is on the SiP business. I think that certainly we have been pretty positive, and have a leading technology here. The — how do you evaluate this opportunity when we go through 2021? And how do you see the competition? Do you see the competition that is intensifying or the gap between us and the second or third tier players are getting widening or narrowing based on your judgment? Thank you.

Joseph Tung — Director and Chief Financial Officer

Well, there is going to be really — any industry or any market, there’ going to be in and out of different competitors. And we’re totally open to that. I think the key strategy for us is to continue to maintain our leadership in technology and also our product offerings and solution offerings. So the overall impact remains to be seen. But I think the overall growth momentum in the SiP business is still very strong. We are definitely the dominant player in this. And there’ll be others coming in as a second or third — even third source. We actually welcome that because it adds to the [Indecipherable] of the whole business. Hello?

Sebastian Hou — CLSA — Analyst

Yeah. Thank you. Thank you very much. That’s good.

Joseph Tung — Director and Chief Financial Officer

Thank you.

Operator

Next one, we are having Gokul Hariharan from JPMorgan. Go ahead, please.

Gokul Hariharan — JPMorgan — Analyst

Yeah, hi, just quick one follow-up question from me. I think we had talked about very strong growth in our turnkey business and increasing the exposure for test. With this US restriction coming in, do you see that growth in test is likely to slow down as well? I think some of your equipment vendors have talked about orders drying up pretty quickly as a part of this restriction earlier today or actually yesterday. So could you just talk about what is the outlook for the test, especially the turnkey part? Are other customers picking up some of the capacity over the next two quarters to three quarters? Thank you.

Joseph Tung — Director and Chief Financial Officer

Yeah, I think there could be some short-term impact. But overall, I think the general trend remains to be the same. And we do plan to continue to leverage our turnkey capabilities and continue to drive the test business of ours. I think there is still plenty of room for us to grow in this particular area. And this is a business that has ample growth opportunity, and also it’s our margin accretive business for us to continue to focus on.

Gokul Hariharan — JPMorgan — Analyst

Okay. And could you talk a little bit about what is the status of Asteelflash? How quickly should we see that consolidation coming into the P&L for ASE? And what are the things that you’re looking for to kind of drive some synergies up given that the revenue mix for that company seems to be a little bit different?

Joseph Tung — Director and Chief Financial Officer

Well, I think the schedule remains the same that we are expecting to close this by end of third quarter. And I think the very rationale for having this acquisition is really the businesses are very complementary to each other. And the Asteelflash is first of all, has a very extensive footprint, particularly in the Europe area. And also its product and service offerings are very complementary to USI. And also the business model wise is also very complementary. Well, Asteelflash is mostly in the early stage, smaller quantity going into mass production type of business. Well, USI is still very strong in mass production. So I think the two entities have very, very strong synergy that can be created among the two.

Gokul Hariharan — JPMorgan — Analyst

Okay. Thank you.

Joseph Tung — Director and Chief Financial Officer

Thank you.

Operator

Next one to ask questions, Elena Leaw from Daiwa. Go ahead, please.

Rick Hsu — Daiwa — Analyst

Yeah, hi, Joseph and Ken, this is Rick. So I guess, just one question from me. Do you guys worry about the year-end inventory risk? Because the reason why I’m asking this, I think one of the reason why the demand strength in Q3 across the board, the ATM [Phonetic] companies is the continued restocking from customers because of the worry of the COVID-19 will continuously affect the supply chain operation. So, but on the other hand, the inventory at the end of the second quarter is over the kind of excessive. And the COVID-19 overhang will likely further weigh down the in-demand in second half. So, I’m just wondering whether you guys worry about any big mismatch between the sell-in and sell to when we move toward the end of this year?

Joseph Tung — Director and Chief Financial Officer

Well, I think like everybody else, we cannot exclude the possibility out. There is — it could be some inventory buildup because of the overall supply chain situation. But so far, we’re running based on the forecast that we’re getting, and we’re just — we’re not in the one particular area, and we have a diversified customer base and product offerings. So we are seeing a fairly strong overall momentum going forward. So we’re not overly concerned on that.

Rick Hsu — Daiwa — Analyst

Okay. Just one quick follow-up. I think some management indicate this high inventory build could become a new norm in this industry going forward. Do you guys agree? Hello?

Joseph Tung — Director and Chief Financial Officer

Can you repeat the question, again?

Rick Hsu — Daiwa — Analyst

Okay. What I’m saying is, some companies recently indicated that this high inventory buildup could become the new norm in the industry going forward. For example, in the past, I’d say, we wouldn’t have a seasonal norm, it could be seasonal — seasonal norm could be based at 70 days. But now it could be maybe 80 days or even 90 days to become the new norm for the seasonal inventory build. Would you guys agree?

Joseph Tung — Director and Chief Financial Officer

I don’t think we can comment on that. But this — inventory can come in many different shapes or forms. I think, if we look at the kind of the legacy products, there could be some inventory buildup. But in terms of more advanced products or new applications, I don’t think there’s really inventory buildup at this point.

Rick Hsu — Daiwa — Analyst

Okay. Well, fair enough. Thank you so much. Yeah.

Joseph Tung — Director and Chief Financial Officer

Okay.

Operator

[Operator Instructions]

Kenneth Hsiang — Chief Executive Officer, ISE Labs and ISE Shanghai

If there are no more questions, we can — oh, wait, we have one more question. I announced it too late.

Operator

All right. So, right now, we are having Randy Abrams from Credit Suisse. Go ahead, please.

Randy Abrams — Credit Suisse — Analyst

Okay. Thanks for fitting me in. No, I actually wanted to clarify on the fourth quarter because it gets noisy with a lot of moving parts, because I think from the impact from the restriction, it moved from mid-single to mid-to-high single. So, there was a few [Phonetic] point net impact. But I’m curious you’re also mentioning pretty good momentum. So, is there a way to think how you’re netting it out? Or like, I think in the past, sometimes when things have been good, you said, hey, business actually looks so good, fourth quarter looks like it’s growing. I guess, if you can give a snapshot knowing it will change in a few months but how the net of all this based on forecast looks.

Joseph Tung — Director and Chief Financial Officer

Well, I think the — I think fundamentally, you want to — I want to say that we are still seeing a very healthy and very strong demand momentum for us in the overall view of things, particularly in the 5G area, in the HPC and so on so forth. There are lot of the new things that are going on. A lot of the front-end investment that we made last year and also the early part of this year are starting to pay off, and that’s why we’re seeing a very strong first half. And even in the third quarter, if everything remains the same, we’ll still see quarter-to-quarter growth and the momentum continuing. The restriction will have — definitely have a — if it stays as it is, we — there could be — there should be a short-term impact on us. If it involves any particular customer, we are here to serve the whole industry, there are other customers as well, and the — whatever that’s being left out could be picked up by somebody else.

So, it really depends on how situation — how things move along. And at this point, since nothing is confirmed, we are not — we are really not saying that things are falling apart just because of this restriction. We’re just saying that to be conservative, we want to put this in the state of mind, I guess. And things can change, things can change very fast, and how soon and how fast the things could turnaround around is — we don’t really know. We don’t really have a good grasp of it, but we do know that the basics remains the same. The industry is still moving toward more technology advancement, toward new products introduction and so on and so forth. And we continue to maintain our technology leadership so that whenever there is a new opportunity, we will have the first mover advantage, whenever there is a customer switch, partnership switches, we will be best positioned to capture that opportunity as well so to mitigate the whatever impact it could may or may not have. So we’re just trying to put things in the right state of mind at this point.

So, whatever we are saying now is really still very, very uncertain. But just — so hopefully, things can come back to normal and in a fairly short of time and then we’ll go back to a normal growth pattern again.

Randy Abrams — Credit Suisse — Analyst

Okay. And is it possible to say what percent of revenue either in IC ATM or percent of consolidated?

Joseph Tung — Director and Chief Financial Officer

Whatever we are referring to is basically on the ATM side.

Randy Abrams — Credit Suisse — Analyst

No, the contribution, like what percent customer that was just…

Joseph Tung — Director and Chief Financial Officer

Well, we don’t comment on that.

Randy Abrams — Credit Suisse — Analyst

Okay. And just the last question I want to ask. To clarify, because I think you’re guiding similar level for ATM is about 160 basis point. NT dollar, I think, based on moving maybe 2%, 3%, is probably about half of that. You mentioned utility costs, I’m curious if anything else in terms of material. I don’t think you have much gold, but there has been a huge increase. So, if there is any other material cost or product mix or pricing. Just — I just want to understand all the factors, if any others.

Joseph Tung — Director and Chief Financial Officer

Okay. Aside from the NT dollar appreciation, there could be some — utility is also one factor and there could be some product or even business mix changes that will all have some impact on the margin. I think it’s an overall consideration that we put in to look at our — on our third quarter margin.

Randy Abrams — Credit Suisse — Analyst

Okay. To clarify, you have no real gold exposure anymore or is there anything to that, any sensitivity anymore?

Joseph Tung — Director and Chief Financial Officer

Gold?

Kenneth Hsiang — Chief Executive Officer, ISE Labs and ISE Shanghai

Yeah.

Joseph Tung — Director and Chief Financial Officer

Okay. It’s very, very minimum.

Randy Abrams — Credit Suisse — Analyst

Okay, great. Okay. No, thanks. That’s all my questions. Thank you.

Joseph Tung — Director and Chief Financial Officer

Okay, thank you very much for attending the conference call. I think to summarize, we had a strong first half. We’ll continue to see business momentum going into the second half, particularly in our SiP business as well as our EMS business. ATM, while there could be some more uncertainties in front of us, we we’re doing everything we can to try to face this challenge and we remain very, very optimistic about the overall business momentum going forward. Thank you very much.

Kenneth Hsiang — Chief Executive Officer, ISE Labs and ISE Shanghai

See you next quarter.

Duration: 70 minutes

Call participants:

Kenneth Hsiang — Chief Executive Officer, ISE Labs and ISE Shanghai

Joseph Tung — Director and Chief Financial Officer

Randy Abrams — Credit Suisse — Analyst

Gokul Hariharan — JPMorgan — Analyst

Roland Shu — Citigroup — Analyst

Bruce Lu — Goldman Sachs — Analyst

Sebastian Hou — CLSA — Analyst

Rick Hsu — Daiwa — Analyst

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