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Advanced Semiconductor Engineering Inc. Pins Modest Guidance on Smartphone Delays

By Anders Bylund - May 1, 2017 at 10:17AM

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The chip packaging veteran's customers are running into inventory gluts in China and delayed phone designs everywhere.

Semiconductor packaging and testing expert Advanced Semiconductor Engineering ( ASX 5.88% ) reported first-quarter results early Friday morning. Here's what investors need to know about this business update.

ASE's first-quarter results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$2.13 billion

$1.89 billion

13%

Net income

$82 million

$117 million

(30%)

Unadjusted earnings per ADR (diluted)

$0.047

$0.060

(22%)

Data source: Advanced Semiconductor Engineering.

What happened with ASE this quarter?

ASE's revenues rose 7% year over year in local currency. Currency exchange effects added another 6% growth in U.S. dollar terms.

  • The company reported solid year-over-year sales growth in the three largest of its five business segments. Electronic manufacturing services led the way with 19% higher sales in local currency, followed by 6% gains in the testing and packaging divisions.
  • Bottom-line earnings fell despite strong sales growth, mainly due to a $127 million non-cash charge to account for valuation changes in ASE's financial assets and liabilities.
  • The pending merger with industry rival Siliconware Precision Industries (NASDAQ: SPIL) moved closer to completion this quarter. In April, China's Ministry of Commerce formally accepted the merger contract with no objections. The companies hope to close this deal "as soon as possible," awaiting a final rubber stamp from the U.S. Federal Trade Commission.

Management provided guidance for the next quarter in sweeping terms:

  • For electronic manufacturing services, the "business should be similar to the average of 2Q16 and 3Q16 levels." That would work out to segment revenue near $850 million and gross margins for that segment in the 10% range, down from $974 million and 10.6% in the first quarter.
  • Together, the remaining four segments should deliver results similar to the first quarter. That's $1.3 billion in combined segment sales at a gross margin of roughly 23%.
  • Total sales growth based on these targets would work out to approximately 6% in local currencies, and gross profit margins are holding steady in general.
Man holding a microchip in tweezers.

Image source: Getty Images.

What management had to say

In a conference call with analysts, company representative Ken Hsiang offered an overview of how the semiconductor industry is shaping up around ASE right now. According to a transcript from Seeking Alpha, Hsiang said:

We believe that some of our customers are actively controlling component inventory related to smartphones in China. This seems to indicate that the China smartphone market is taking sometime to digest inventory, after showing surprising resilience during 2016.

Further, we also have noted that some end products have adjusted their launch timing not matching their previous generations launch times. Some of these times are off by weeks, some by potentially months. We believe these product launch shifts have created timing shifts in various smartphone manufacturing cycles.

Looking ahead

Positioned at the center of the semiconductor manufacturing process flow, ASE can be a useful barometer for the state of the chip industry and other markets. Hsiang's comments point to delayed smartphone designs in China and elsewhere, but the sales growth curve remains strong despite that caveat.

That being said, the Siliconware merger is inching close to the finish line, here, and ASX can't wait to get its hands on those predictably positive cash flows.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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