ASX

Business Context and Reporting Period

Company: Advanced Semiconductor Engineering, Inc. (ASE)

Filing Type: Form 6-K (Report of Foreign Private Issuer)

Reporting Period: Second Quarter 2003 (Ended June 30, 2003)

Business Overview: ASE is a leading independent provider of semiconductor packaging and testing services. The company operates globally with facilities in Taiwan, Korea, Hong Kong, Singapore, Malaysia, and the United States. The quarter was characterized by seasonally slow IT industry conditions and the impact of the SARS outbreak in Asia, yet the company reported growth driven by balanced end-sector exposure and increased outsourcing by major IDM customers.

Key Financial Metrics

Note: All financial figures are in New Taiwan Dollars (NT$) unless specified otherwise. Figures are unaudited.

Material Changes vs. Prior Periods

• Revenue Growth: Net revenues increased 18% year-over-year (YoY) and 10% sequentially. Packaging revenues grew 18% YoY, while testing revenues grew 15% YoY.
• Profitability Turnaround: The company returned to profitability with NT$360 million in net income, a significant improvement from a net loss of NT$348 million in 1Q03 and a profit of NT$74 million in 2Q02.
• Margin Expansion: Gross margin improved to 15% from 13% in the prior quarter, driven by increased internal sourcing of packaging materials. Testing gross margin surged to 19% from 6% in 2Q02.
• Cost Management: Cost of revenues as a percentage of net revenues decreased to 85% from 87% in 1Q03. Interest expense declined to NT$385 million due to lower interest rates from refinancing and reduced debt levels.
• Non-Operating Items: A significant one-time loss of NT$355 million was recorded on the disposal of treasury shares by a subsidiary. Additionally, NT$511 million in interest revenue was recognized from the redemption of convertible bonds.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expressed confidence in the second half of 2003 and 2004, citing increasing demand for leading-edge packaging and testing services. Key growth drivers identified include:

• System-in-Package (SiP): Identified as a "new sweet spot" with significant progress in capitalizing on sector growth.
• Customer Diversification: Reduced reliance on single customers; the top 5 customers accounted for 34% of revenue (down from 40% in 1Q03).
• Technology: Successful internal development of electroplated wafer bumping technology and qualification for TSMC's 0.13-micron process.

Risks and Contingencies

• Forward-Looking Statements: The filing includes a Safe Harbor notice stating that actual results may differ due to competitive pressures, technology integration risks, international business risks, and foreign currency fluctuations.
• Customer Concentration: While improving, the top 10 customers still contributed 51% of revenues.
• Market Conditions: The company noted the impact of the SARS outbreak and seasonal weakness in the IT industry, though these were mitigated by balanced sector exposure.

Investor Verification Checklist

• Debt Structure: Verify the terms of the US$150 million syndication loan used to refinance convertible bonds and the impact on future interest obligations.
• One-Time Items: Assess the sustainability of earnings by excluding the NT$355 million loss on treasury share disposal and the NT$511 million interest revenue from bond redemption.
• Cash Flow vs. CapEx: Monitor the relationship between the US$94 million quarterly capital expenditure and operating cash flow to ensure liquidity remains sufficient for expansion.
• Customer Concentration: Track the trend of revenue concentration among the top 5 and top 10 customers to evaluate dependency risks.
• Margin Sustainability: Confirm if the improved gross margins (15% overall, 19% in testing) are sustainable given the competitive nature of the semiconductor industry.