ASE Technology Holding Q3 2025: AI Growth Surges Amid Margin Pressures

ASE Technology Holding delivered a surprise beat in Q3 2025, reporting NT$168.6 billion in revenue (up 5.3% YoY) and NT$10.9 billion net income, with EPS of NT$2.50 versus a forecast of NT$0.132 according to earnings call data. The ATM segment, responsible for nearly half the revenue, driving growth with 16.9% YoY sales expansion and a strong 22.6% gross margin, a key improvement capping off a period of margin pressure across the business.

This margin strength in ATM was directly linked to surging demand for AI chip packaging and testing services, which outpaced broader industry headwinds. While the EMS segment also posted revenue growth of 17.4% sequentially, it could not overcome a 0.2 percentage point margin contraction. The company's overall gross margin rose to 17.1%, though executives noted persistent foreign exchange headwinds that may test future profitability.

Looking ahead, management projects modest 1-2% sequential revenue growth for Q4 2025, signaling cautious optimism despite the strong quarter. While the AI demand surge has proven resilient, the upcoming discussion will examine how substrate shortages and broader macroeconomic factors could challenge this momentum and the sustainability of these elevated margins.

AI Chip Expansion Mechanics: P&L Impact & Cost Pressures

Strong packaging operations drove most of ASE Technology Holding's Q3 2025 revenue growth, with ATM segment revenue comprising 47% of total sales. This exposure makes the company particularly sensitive to material cost inflation, which directly impacts roughly 49% of its top line. Operating expenses also rose year-over-year, pressured by increased investments needed to scale advanced packaging capacity for AI chips. Despite these input cost pressures and higher R&D spending, gross margins surprisingly improved to 17.1% in Q3 2025, providing some cushion against margin compression.

Capital expenditures reflected this strategic push, totaling US$779 million in Q3 2025, primarily directed toward expanding advanced packaging capabilities. The company plans to add US$1 billion to its 2025 CapEx spend, aiming to generate at least US$1 billion in additional advanced packaging revenue in 2026. While this aggressive investment targets significant market share gains in the high-growth AI/HPC segment, it simultaneously pressures near-term cash flow. Management projects at least 20% annual growth in packaging/testing revenue and expects the advanced segment to contribute US$1.6 billion by year-end, with Q4 revenue growth projected at 1-2% sequentially and gross margins improving 0.7-1%. Risks include substrate shortages and macroeconomic pressures impacting both input costs and demand.

Margin Pressure & Liquidity Guardrails

ASE's EMS business faces margin headwinds despite AI-driven growth in other segments. The EMS division saw revenue plunge 8.4% year-over-year in Q3 2025, while its gross margin slipped 0.2 percentage points. This decline coincided with persistent foreign exchange volatility that eroded profitability across operations. While the ATM segment's 22.6% gross margin and strong AI chip demand provide stability, the EMS weakness creates execution risks that could widen if demand normalization stalls.

The company's robust liquidity position offers a buffer against these pressures. ASE maintains NT$344.7 billion in unused credit lines, providing flexibility to navigate margin compression. However, this reserve sits alongside aggressive capital spending. The firm has escalated 2025 capex to over US$6 billion, prioritizing advanced packaging capacity for AI/HPC chips. This investment strategy creates vulnerability if 2026 revenue guidance slips, as the scale of spending requires sustained demand to justify. The combination of margin contraction in one core segment and heavy capital deployment demands careful financial management to avoid liquidity strain.

AI Momentum vs. Margin Dilemma

ASE Technology Holding's explosive Q3 performance underscores the accelerating power of its AI bet. The company's net profit jumped 45% quarter-over-quarter, fueled significantly by a 48% surge in advanced packaging and testing services – the core technologies serving artificial intelligence and high-performance computing demand. This AI-driven segment achieved staggering momentum, driving the strong quarterly results. The company now targets US$1.6 billion in advanced segment revenue by year-end, a clear milestone reflecting its strategic focus. This substantial revenue target, with advanced packaging making up 65% of that segment, represents a major upside catalyst for future valuation.

Looking ahead, guidance and incremental targets provide clearer valuation anchors. Management projects Q4 revenue growth of just 1-2% quarter-over-quarter, a notable slowdown from the rapid pace earlier in the year. Crucially, the company reiterated its ambitious longer-term goal of generating over US$1 billion in advanced packaging and testing revenue combined by 2026. Achieving this 2026 target would significantly boost the overall revenue mix and likely bolster margins, representing a critical milestone for sustained growth.

However, the path to sustaining this growth faces tangible friction. Margin pressure looms large. While gross margin is expected to improve modestly by 0.7-1% in Q4, the company faces significant headwinds. Intense competitive pricing in the testing arena could squeeze margins further. Added to this is the substantial cost inflation ASE faces for materials and energy required to expand its advanced manufacturing capacity.

. The US$1 billion capex increase announced for 2025, bringing total spending to over US$6 billion, underscores the scale of investment needed to meet demand. These cost pressures and competitive dynamics create a genuine margin compression risk that could offset some of the revenue growth benefits from the AI surge.