Advanced Semiconductor Engineering Is Pumping Up Profits

By Anders Bylund Markets Fool.com

Advanced Semiconductor Engineering (NYSE: ASX) reported fourth-quarter results in the very early hours of last Thursday. The Taiwan-based maker of semiconductor testing and packaging tools, better known as ASE or the ASE Group, delivered solid revenue growth and stronger profit margins across the board.

Continue Reading Below

Here's how ASE's fourth quarter played out.

ASE's fourth-quarter results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$2.44 billion

$2.24 billion

8.9%

Net income

$252 million

$145 million

74%

GAAP EPS (per diluted ADS)

$0.136

$0.092

48%

Data source: ASE (PDF), using currency exchange rates for each period as presented by the company. One American depositary share represents five shares of the underlying ASE stock on the Taiwan exchange.

What happened with ASE this quarter?

Continue Reading Below

ASE's order mix is moving in a more profitable direction.

  • Sales in the high-margin packaging and testing divisions increased by roughly 15% each, year over year. Gross margins on this side of ASE's operations landed at 26.8%.
  • The segment accounting for ASE's electronic manufacturing services saw sales slipping 11% lower instead. Here, gross margins stopped at 10.4%.
  • Overall, fourth-quarter gross margins widened from 17.7% to 19.9%. Operating margins increased from 9% to 10.5%.

Management provided the following outlook for the first quarter of fiscal year 2017:

  • Sales in the chip testing and packaging operations should be comparable to their revenues from the second quarter of 2016, or approximately $1.19 billion.
  • Gross margins for the same operations should be roughly 24.8%, also in line with the second quarter of 2016.

Image source: Getty Images.

What management had to say

ASE is working up a less capital-intensive method for packaging chips, which could unlock further margin improvements this year.

"In 2017, we believe we will be able to make significant inroads into developing the next generation of cost-effective packaging," said ASE's CFO, Joseph Tung, on the fourth-quarter earnings call with analysts. "We will also continue to follow through with the successes of writing our system-in-package business model. We believe our technology and our capability to scale provides material value in differentiation to our customer's products."

Looking ahead

ASE's pending merger with rival Siliconware Precision Industries (NASDAQ: SPIL) is still chugging its way through regulatory reviews in China and America. The companies are still planning to close the deal by the end of 2017, but had no new information about a more specific timeline at this point.

As a reminder, if and when the deal closes, Siliconware investors will be given a cash payment of approximately $8.70 per ADS while ASE shareholders take full ownership of the combined entity. Both businesses would continue to operate as before, using their existing brand names and assets, until further notice.

The merger is an attempt to achieve tighter pricing controls and greater economies of scale for both of the proposed partners. Until the agreement receives its final John Hancocks of regulatory approval, the larger ASE remains an interesting and value-priced play on a healthy semiconductor sector at large, while Siliconware investors must weigh the risks of failing the regulatory process against a 13% return if it is completed.

10 stocks we like better than Advanced Semiconductor Engineering
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Advanced Semiconductor Engineering wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.