ASE's Q3 2025: Contradictions Emerge on Capacity and Revenue Growth, Gross Margins, AI Testing Market Share, and LEAP Revenue Contributions

Date of Call: None provided

Financials Results

• Revenue: $168.6 billion, up 12% sequentially and 5% year-over-year (17% seq / 14% YoY on a USD basis)
• EPS: Fully diluted EPS $2.41; basic EPS $2.50 (no YOY comparison provided)
• Gross Margin: 17.1%, up 0.1 percentage points sequentially and up 0.6 percentage points year-over-year; FX estimated to have reduced gross margin by ~1.4 p.p. sequentially and ~2.4 p.p. annually
• Operating Margin: 7.8%, up 1.0 percentage point sequentially and up 0.6 percentage points year-over-year (operating profit $13.2 billion, +$3.0B seq / +$1.7B YoY)

Guidance:

• Consolidated Q4 (NT$): revenue +1% to +2% QoQ; gross margin +70–100 bps QoQ; operating margin +70–100 bps QoQ.
• ATM Q4 (NT$): revenue +3% to +5% QoQ; ATM gross margin +100–150 bps QoQ.
• EMS Q4 (NT$): revenue flat to slightly down QoQ; EMS operating margin similar to Q4 2024.
• ATM 2025 full-year: expected to exceed target and grow >20% YoY in USD; leading-edge revenue on track for $1.6B in 2025.
• Full-year CapEx to rise by a few hundred million USD to support wafer probing, capacity ramps and new initiatives.

Business Commentary:

• Revenue and Profitability Surge:
• ASE Technology reported consolidated net revenues of $168.6 billion for Q3 2025, representing a 12% sequential increase and 5% year-over-year growth.
• The increase was primarily driven by higher loading in the ATM business, offset in part by foreign exchange impacts.

• Operating profit increased by $3 billion sequentially and $1.7 billion year-on-year, with an operating margin of 7.8%.

• Advanced Packaging and Testing Growth:

• The ATM business reported record revenues of $100.3 billion, up 8% sequentially and 17% annually.
• The test business growth outpaced the assembly business, growing 11% sequentially and 30% annually.

• This was attributed to strong demand for chip probe testing and higher utilization of packaging and testing lines.

• Foreign Exchange Impact:

• The NT dollar moved from an average exchange rate of 31.2 to 29.7 NTD per US dollar during the quarter, strengthening by 4.6%.
• Simplistically, the company estimated a 0.3% negative impact to margins for every percentage point appreciation of the NT dollar relative to the US dollar.

• This led to foreign exchange impacts on margins of 1.4% and 2.4% for the holding company and ATM levels, respectively.

• Leading-Edge and AI Demand:

• ASE Technology is on track to reach $1.6 billion in leading-edge revenue this year, with expectations to exceed their full-year target.
• The company continues to see strong momentum in AI and HPC-related business, driven by high demand for capable chips and hardware.
• Despite geopolitical uncertainties, the growth in test business compensated for packaging shortfalls, ensuring the $1.6 billion mark is attained.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record ATM revenues, consolidated revenue growth (12% seq, 5% YoY), on-track LEAP/leading-edge progress (target $1.6B in 2025 and >$1B incremental in 2026) and explicit guidance for margin and revenue improvements in Q4 and continued CapEx to support momentum.

Q&A:

• Question from Gokul Hariharan (JPMorgan): Could you give more color on LEAP revenue progress vs the $1.6B target, indications for next year, CapEx cadence, and whether LEAP is margin-accretive now or will be once it reaches a certain run rate?
  Response: On track to hit $1.6B in 2025; very confident of >$1B additional LEAP revenue in 2026; will continue heavy lead‑edge CapEx; LEAP will be margin- and return-accretive as it scales.

• Question from Gokul Hariharan (JPMorgan): Any update on pricing dynamics for LEAP, flip chip and bumping—should investors expect pricing increases next year?
  Response: Pricing remains resilient and stable overall; company will set appropriate pricing structures case-by-case but gave no specifics.

• Question from Charlie Chan (Morgan Stanley): What's the update on potential U.S. operations—are you building there to support foundry partners and how do you view competition like M-Core?
  Response: Engaged in customer-invited discussions about U.S. investments but no decision yet; any move must make economic sense given infrastructure and cost considerations.

• Question from Charlie Chan (Morgan Stanley): Confidence level and update on final-test (tester) market share, given aggressive competition?
  Response: Aggressively expanding test capacity with a focus on wafer probing; expect meaningful final-test revenue in the later part of next year as next‑gen AI chips ramp.

• Question from Bruce Liu (Goldman Sachs): For the incremental ~ $1B leading-edge revenue next year, how much is packaging vs testing—will packaging pick up?
  Response: This year's leading-edge increase was roughly $650M packaging and $350M test; test currently has stronger momentum and next-year composition remains uncertain.

• Question from Bruce Liu (Goldman Sachs): Strategy on U.S. supply chain presence given foundry/customer moves—do you need U.S. dual supply chains?
  Response: Will only pursue U.S. investments that provide acceptable returns; high local infrastructure and cost make it challenging to assume profitability without clear pricing/infrastructure support.

• Question from Laura Chen (Citigroup Inc.): How should we think about gross-margin outlook into next year given utilization, LEAP momentum, and higher depreciation/CapEx?
  Response: Excluding FX, margins are back near structural (Q3 adjusted ~26.8%); at constant FX expect >27% in Q4; once utilization exceeds ~70% structural margins should return and ATM should be in structural margin range in 2026.

• Question from Laura Chen (Citigroup Inc.): Update on ASE's own Focus/full-process advanced packaging progress and customer engagement?
  Response: Focus/full-process development is progressing with multiple customer engagements; meaningful full-process revenue expected in the later part of next year and will contribute to the $1B uplift.

• Question from Sunny Lin (UBS Investment Bank): How is mainstream/traditional packaging recovery shaping up and are current utilization rates a good base for 2026?
  Response: Mainstream is recovering better than expected—bump/flip‑chip near full, wire-bond improving—and contributed to outperforming ATM growth (>20% this year).

• Question from Sunny Lin (UBS Investment Bank): Should we expect ICATM gross-margin recovery to accelerate over the coming quarters as mainstream improves, LEAP accelerates and FX stabilizes?
  Response: Trend is toward margin improvement as LEAP scales, but the exact pace is uncertain due to FX and other moving parts.

• Question from Felix Pan (KGI): Can you quantify the CP-test TAM or the percent of bond/test demand tied to foundry partner outsourcing?
  Response: ASE cannot quantify that TAM—foundry partners hold the detailed outsourcing plans and sizing.

• Question from Felix Pan (KGI): Are you seeing direct engagement from your customers' customers (i.e., upstream visibility) that would change demand patterns?
  Response: Maintain routine, close dialogue with direct customers and foundry partners who inform ASE about end-customer expectations, enabling coordinated capacity/technology planning.

• Question from Gokul Hariharan (JPMorgan): Progress on full‑stack Focus / COWOS-like processes and will they diversify applications beyond AI accelerators; plus will CapEx remain elevated?
  Response: Investing in full-process Focus and engaging multiple customers; expect meaningful revenues late next year across AI accelerators and other applications; leading-edge CapEx will remain heavy though exact 2026 machinery CapEx awaits budgeting.

• Question from Charlie Chan (Morgan Stanley): Concern about substrate (glass) shortages—how will ASE help customers secure supply and will cost increases be passed through?
  Response: No service disruptions seen to date; as a dominant player ASE will leverage relationships to secure materials and will set suitable pricing to address any material cost changes.

• Question from Bruce Liu (Goldman Sachs): What is the current CapEx-to-revenue relationship and timing—should investors expect more than $1B incremental revenue from current investment levels?
  Response: Historically a roughly 1:1 CapEx-to-annual-revenue relationship for core businesses still appears to hold, but there are timing lags; company is confident of at least $1B new leading-edge revenue next year while continuing to gather additional data.

Contradiction Point 1

Capacity and Revenue Growth Expectations

It involves changes in the company's expectations for capacity availability and revenue growth, which are critical for investors to understand the company's future performance.

Can you provide details on LEAP revenues this year? What is the current progress relative to the $1.6 billion additional revenue guidance? - Gokul Hariharan(JPMorgan Chase & Co.)

2025Q3: We are on track to reach our $1.6 billion mark for this year with strong momentum in AI and HPC-related business. - Joseph Tung(CFO)

Why hasn't ASE raised its $1 billion advanced packaging revenue guidance, given TSMC's AI-driven revision? - Charlie Chan(Morgan Stanley)

2025Q2: Our confidence in increasing the revenue by $1 billion is still strong. - Tien Yu Wu(COO)

Contradiction Point 2

Gross Margin Outlook

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

Can you explain the gross margin outlook and the impact of increased CapEx? - Laura Chen(Citigroup Inc.)

2025Q3: If we exclude foreign exchange impact, we have returned to structural margins. Further improvements are expected as capacity ramps up. - Joseph Tung(CFO)

How will gross margins reach mid- to high 20s next year with current currency levels? - Gokul Hariharan(JPMorgan)

2025Q2: Q3 gross margins are expected around 75%, with full-year guidance in the mid-70s. - Joseph Tung(CFO)

Contradiction Point 3

AI Testing Market Share and Revenue Expectations

It involves differing perspectives on the expansion of AI testing market share and revenue contributions, impacting investor expectations and strategic planning.

Can you provide more details on this year's LEAP revenues and how they compare to the $1.6 billion additional revenue guidance? What is the margin contribution from LEAP-related business? - Gokul Hariharan (JPMorgan Chase & Co.)

2025Q3: We are on track to reach our $1.6 billion mark for this year with strong momentum in AI and HPC-related business. - Joseph Tung(CFO)

Is the AI test market share increase primarily due to the dominant GPU platform this year’s second half? Can you explain the economic return framework for test investments? - Gokul Hariharan (JPMorgan)

2025Q1: We're aggressive in test investments, aiming to expand market share. Test business grew from 16% to 18%, targeting 20% by year-end. - Joseph Tung(CFO)

Contradiction Point 4

LEAP Revenue and Margin Contribution

It involves changes in financial forecasts, specifically regarding the additional revenue and margin contribution expected from LEAP-related business, which are critical indicators for investors.

What details can you provide about LEAP revenues this year? What progress are we tracking against the $1.6 billion additional revenue guidance? What is the margin contribution from the LEAP business? - Gokul Hariharan(JPMorgan Chase & Co.)

2025Q3: We are on track to reach our $1.6 billion mark for this year with strong momentum in AI and HPC-related business. Revenue mix was impacted by geopolitical uncertainties, but replenished by growth in the test business. We are confident of another billion dollar increase in 2026. LEAP will be margin and return accretive as our capacity increases. - Joseph Tung(CFO)

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2024Q4: Three-quarters of the $1 billion additional revenue will be from packaging, while 25% will be from advanced testing. - Joseph Tung(CFO)