艾克爾 (AMKR) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Amkor first quarter earnings conference call.

At this time, all participants are in a listen only mode.

Following today's presentation, instructions will be given for the question-and-answer session.

If anyone needs assistance at any time during the conference, please press the star followed by the zero.

As a reminder, this conference is being recorded today, Tuesday, April 29, 2003.

I will turn the conference over to Jim Kim, Chairman and CEO of Amkor.

Thank you for joining us today.

I am James Kim, Chairman and Chief Executive Officer of Amkor.

With me today are John Boruch, President and COO, and Ken Joyce, Executive VP and CFO.

I will make some brief remarks.

Ken will discuss our operating results, and then John will have some closing comments.

Over the past two years, we have accelerated our efforts to petition profitable growth within the confines of sluggish macro economic environment.

While we have more to achieve, we have already accomplished a great deal.

During the first quarter, we successfully completed the sale of our wafer fabrication service division for $62m, and we sold an additional $7m ASI shares.

Over the past six months, we have reduced our ownership interest in ASI from 42% to 16%.

The current value of our investment in ASI at March 31st was $50m, and we intend to monetize the remainder of our investment.

We are maintaining our industry leadership by investing in research and development to create a new package and test solutions that enhance our portfolio.

We have a forecast of capital expenditures on developing innovative package and test technology to enable new generation applications.

We are expanding production capacity to support a broad range of growth opportunities at a pace consistent with the customer demand.

We are making excellent progress in improving the efficiency of our manufacturing to bring cost down even as unit volume increases.

Ken Joyce will now review our financial results.

Before we discuss our financial results, I'd like to remind you that any forward-looking statements made during the course of this conference call represent the current view of management.

We refer you to today's press release which was filed with the SEC form 8K prior to this conference call, and our other filings with the SEC.

For information on risk factors that could cause the actual results to differ materially from our current expectations.

A webcast of today's conference call can be accessed through our investors relations section at our website at www.amkor.com/IR.

As Jim mentioned, during the quarter we sold the wafer fabrication business for $62m.

The Q1 operating results for that line of business have been reflected as a line item under the discontinued operation section of the income statement.

The net gain of $52m on the sale of that business is reflected on a second line in discontinued operations section of the statement.

Prior year results have been restated to reclassify the operating results of that business to facilitate comparability with the current quarter's income statement.

January 1, 2003 Amkor owned 26.7 million shares of [inaudible] semiconductor for 21.6%.

Historically, we accounted for this investment on the equity method.

And recognized our proportional share of ASI's net income and losses on a quarterly basis.

During the first quarter, our share of ASI's net loss was $3.6m as reflected on the line item equity and loss of investees.

On March 24th we sold 7 million shares of ASI to a financial institution bringing our ownership down to 16%.

Simultaneous with the sale, we purchased a non-deliverable call option indexed to the ASI share price to limit or downside exposure and provide potential upside when the investment bank sells the ASI shares into the market.

In view of the sale of our wafer fabrication service business and reduction in owner ownership of ASI as of March 24th, we will no longer account for this investment under the equity method.

With respect to continuing operations, our assembly and test revenue of $343m was down 8% sequentially and up 19% year over year.

First quarter revenue reflected a typical seasonal decline and was actually a little better than expected.

Gross margin rose to 13.6% from a negative 6.8% in the year ago period.

We've come a long way from our performance this time last year through the combined impact of reduced levels of depreciation, lower material costs, ongoing factory cost reduction initiatives, and SG&A expense control, and higher utilization of assembly and test assets supporting the growth in our advanced package revenues.

During the quarter, the company recorded a $4.2m tax benefit from continuing operations.

This reflects foreign tax expense of $3.3m, net of a $7.5m current tax benefit related to the loss from continuing operations.

This $7.5m tax benefit is offset by $7.5m of current tax expenses discontinued operations.

Our cash balance increased to $351m at March 31st, compared to $311m at December 31st.

The increase in cash reflects positive cash flow from operations, together with the remaining $14m due from ASI in connection with the sale of our wafer fabrication services businesses, plus the proceeds from the sale of 7 million shares of ASI.

I'm pleased to note that our cash position that is doubled from $175m on the balance sheet at March 31st of last year.

Our capital budget for 2003 has been raised to $150m.

Over the past several months, we have stepped up order and delivery activity for fine-pitch wire bonders and high-speed testers in support of our customers' forecast.

We expect to take delivery of several hundred fine-pitch bonders during the next few quarters, and we are deploying this equipment across many of our factory locations.

Our new $200m secured credit facilities replaces our prior $197m facility and provides enhanced liquidity and more relaxed structure.

We are pleased with the institutional response on this transaction and believe the more favorable terms and conditions associated with this credit facility represent a strong vote of confidence from our lenders.

With the completion of this new credit facility early in the second quarter, the current portion of long-term debt has been reduced to less than $22m in amortizing debt, plus around $32m outstanding under working capital line of credit with our Japanese operation.

Here is a recap of the second quarter guidance contained in our earnings release.

Revenue should be up around 10% sequentially.

Gross margin should be around 19%.

We expect a net loss of around 12 cents per share.

With historically achievable growth rates and subject to pricing and product mix, the company should reach bottom line profitability during the second half of this year.

Now I will turn the call over to John Boruch for some additional comments.

Thank you, Ken.

In our last call we said the semiconductor industry pause would extend through the first quarter of 2003.

We are now seeing signs that this is activity that is increasing.

It remains to be seen how sustainable this activity is and whether our industry is poised for a series of periodic pauses and recoveries.

During the 2002, the first quarter of this year, we made excellent progress in several key business initiatives.

The results of this progress are evident in our improving financial performance, the program wins we are securing with our existing customers in Europe, Japan, North America, and Taiwan, and our success in penetrating new customers in new end markets.

In Taiwan we are expanding production capacity with Texas Instruments with TI's plans to grow the company's DLP business at a pace greater than the overall rapid growth in the projection display market.

We are also qualifying several chip set and graphic suppliers using Flip Chip technology.

In Japan, we are solidifying our position as a leading outsource assembly house and winning additional programs with an array of major IC companies.

In China, we are expanding our operational footprint and are solidifying our relationships with the emerging foundries.

Our goal in China is to broaden our technology base and build scale, but at a prudent pace in proportion to viable business opportunities.

We consider our highly diversified customer base to be an ongoing strength for Amkor.

After Toshiba, no single customer was more than 5% of the first quarter revenue.

Our top ten customers accounted for 46% of first quarter revenue, and our top 25 customers comprised only 73%.

As we move through 2003, we expect continued growth in MLF, chipper ray, blue chip, and stack CSP, system-on-package, and strip test.

We believe Amkor's geographic diversification, strong technology and portfolio and broad customer base allow us to stay at the leading edge at the outsourcing trend.

We continue to forge ahead on driving operational efficiencies without compromising our manufacturing and marketing capabilities.

We remain committed to achieving profitable and sustainable growth.

Before we open this call to questions, let me just note that, to your knowledge, none of our employees have been affected by the SARS illness, and none of our manufacturing operations have reported any supply chain disruptions or other impacts from the SARS outbreak.

We will open the call for questions.

We will begin the question-and-answer If you have a question please press the star followed by the one on your push button phone.

If you elect to decline, press the star followed by the two.

You will hear a three-tone prompt acknowledging your question and the questions will be polled in the order they are received.

In the interest of time, please limit your questions to one question and a follow-up.

If you have additional questions, please rekey by pressing star 1.

Our first question comes from John Pitzer with Credit Suisse First Boston.

In the first quarter could you break the revenue down and how that might change going into June?

And then secondly, on the margin line you are seeing a nice progress March to June.

What's volume versus mix.

And Ken, when you hit break even, what sort of gross margin assumption do you have?

Thanks.

Ken, do you do you want to go with the gross margin one first?

Sure.

Well, gross margins, rather than attributable to any one product is more attributable to the level of utilization.

And we've been increasing that as we go forward, and we see increased capacity utilization going forward in the quarter.

Our break-even gross margin would be if we assume -- the break-even revenue would be in the range of $400m if one assumes, you know, a constant product mix and a linear pricing, and the rest -- and the margins in there would be around 21%.

Okay.

And, John, regarding the end market profile, in Q1, as our press release stated, our communication was largest of 40% of the revenue, computer 25%, consumer 20% and and industrial, et cetera, 15%.

Consumer is strong because of our strong position in MLF, stack packages and system-on-package, and chip ray, this chip-sides PGA.

We excel in these areas, so our communications is growing dramatically.

For the Q2, what will happen, we believe, is the depressed consumer industry will come back, therefore we will start to grow in Q2 leading to accelerating growth we believe in Q3 as we enter the Christmas season buildup.

Are you saying most of the growth coming out of consumer and Q2 are all segments or consumers just growing faster.

I think communication will also grow.

Wireless is especially strong.

And I think we have a good shot at growing the computer segment of our business if we are successful in penetrating the graphics and chip set market in Taiwan.

Thanks.

Great, guys, nice quarter.

Next question with Ted [inaudible] from Lehman Brothers.

Good afternoon, gentlemen, I guess the short sellers won't be getting a lot of sleep tonight.

We hope not.

Having said that, on a more serious note, I had a question relating to Japan.

John, seems to me, based on some of the news we have been getting from our team in Japan, like the U.S.

IC companies and the strategic partnerships, we have been seeing alliances formed in relatively recent time here, that the same kind of thing is happening in Japan with some of the large IDMs.

You kind of alluded to that.

And in particular, you know, most recently, we are hearing about Sony and Toshiba.

And given that, you know, you guys already have a very strong relationship with Toshiba could you kind of give us insights regarding what that could mean in terms of the 300-millimeter wafer plants they're putting up there and how you may participate in that alliance, as well as what you're hearing from the Japanese IDMs in terms of what they're keeping in Japan versus going to China ... again how you may partake in that.

And then a follow-up for Ken.

Let me segment it.

First on the Japan markets, you see the same data we do.

In general, the people are saying the market is not that robust - hence the economy is not that robust, but the Japanese seem testify a lot of confidence in their ability to compete in the consumer area.

Their view is that the consumer area, all this hand-held digi-gagdets play to their strength.

So, our strong position in Japan should help us going forward.

Most of that stuff requires new packages and technology and that's where we are seeing growth in Japan.

The Japanese IDMs, which are most of the companies there are not investing hardly in any new technology in the back end.

They're going to put their money in 200 millimeter whenever they're ready.

They're going to do more alliances, I'm sure with other fab foundries as they go forward, so that's good for us.

Spend your money on the front end, and let us do the back end for you.

In regards to getting off the Island in Japan for outsourcing, our competitors have been beating that drum in Japan for a long time.

They've been slow to react, but quicker recently.

I can't predict how fast they'll move.

They'll go as much as possible in Japan, but I think economics will prevail over the long term.

We'll see what happens there.

It will be good for us and our competition also when that happens.

And, Ken, kind of on the same topic here with respect to Toshiba, the 40% JV interest that Toshiba currently has, you stated something has about that in the 10-K you just filed.

I guess you were just reiterating the fact that you will be having the option to buy a portion of that steak-out in the next year.

Can you walk us through the details on that and what sort of cash outlay as well.

Sure.

When we entered the arrangement with the Toshiba Watake[ph], it was a three year JV where, initially, we acquired 60% and they were a 40% owner and it also had a five-year supply contract.

So at the end of this year we're coming up to the end of the three-year JV period where we have the option and the intent also to acquire the remaining 40% of the JV.

The way that is structured is there is a min and a max payment that could be due, and it was based on achieving certain cost savings during the contract which we've exceeded.

So we're going to come in on the low end of the payment.

We anticipate right now, based on certain calculations that we've done, that we'll be acquiring the remaining 40% for approximately $15m, and that should be paid out, as you indicate, at the end of this year or the beginning of the first quarter of next year.

Great.

Thanks a lot.

Our next question comes from John McManus its from Needham & Company.

Go ahead, sir.

Will you comment on the ramp of MLS, and what kind of capacity you have, and some idea of whether you're on the schedule there to exit the year at the 1 million-rate that you had thought before.

Yeah, MLS has proven to be a very successful package.

We have capacity for $14m, $15m per week, measuring weekly output.

We suspect it will go to around $20m by year end.

So we'll be producing well over at a half a billion units per year.

Could you comment a little bit there on the pricing?

Is that firm?

Yeah.

I think it's very high performance for what it does, cost effective package.

The pricing certainly as volume goes up that does come down, but we think that package will produce nice margin and nice revenue for us as we go forward for the next several years.

That market probably will grow to two or three or four-billion units per year over the next two or three years.

As you increase the Cap Ex there both for the year and the second quarter, could you talk a little bit about how you protect yourself on the tester side by getting revenue there which would justify this investment.

Well, as we've said for quite awhile, we are quite cautious when it comes to making tester investments.

We want to make sure each investment passes ourpayback hurdle and risk hurdles also, which are pretty high.

We have been playing the chess strategy differently than our competitors.

We are buying high-end testers that we're sure will be used in at least the next 3 to 5 years in mass production.

Other testers, we're getting our customers to consign as we speak.

We have two larger customers transfertheir test operations to our factories.

So that's all consignment.

And then we're also using a third party independent test houses around the world.

In our view, when there's idle capacity anywhere, we don't have an NIH point of view.

If it's available and we're going to strike a deal with the third-party test houses where the customer wins and we get the assembly business, we're doing a number of deals like that.

So we have a three-prong strategy, and we don't believe the test will be a barrier for Amkor.

We're going to execute and keep on going.

Our next question from Timothy Arcuri with Deutsche Bank.

Can you talk about die bank inventories.

Were they up sequentially or were they flat?

Die bank's paying normal levels for a while now.

We don't think our customers are getting ahead of the curve on the wafer starts.

They're pretty much in sync with what the end market looks like.

You don't think there's die bank build even in Taiwan at all.

Could be, but we don't see it in our factories.

Okay, great.

One for Ken, quickly.

This is a difficult question to answer, understandably, but the guidance implies kind of a mid to high 60% incremental gross margin in Q2.

Is this kind of the sweet spot of the model?

Or if we assume that September is kind of also in line with seasonal patterns, could we see a similar incremental growth margin or is this a sweet spot of the model right now.

No we could see a nice increase in gross margin, obviously depends on where the revenue goes.

Because once again it's total capacity utilization of all of our equipment that determines where the margin goes.

We have a high degree of operating leverage in there, and dependent on where those revenues come down, that will tell you the margins.

The margins could increase quite nicely in the third quarter.

So you think in another 10% growth quarter in September, you could post a similar incremental gross margin.

That's quite possible, yes.

Thanks, Ken.

Our next question comes from Ali Irani with CIBC World Markets.

I was hoping you could talk a little about your stack die and how that's going in the quarter.

And secondly, given some of the front end foundries now have solid visibility late in the quarter, I wonder whether your visibility now is extending midway through the September quarter, and if you could comment on that and especially the mix within.

Okay.

On the stack die, I think stack die is going very, very fast for us, and I believe the whole back end.

Our customers, and the market have adopted that technology.

In lieu of maybe going to System-on-chip, this is another version of the System-in-Package conclusion.

But we are seeing tremendous activity in stack die of 2, 3, 4, up to 5, and beyond, kind of, all kind of technologies mixing, very cleverly done.

It's interesting, test problems it presents to the whole industry, but they're being resolved.

So if you are an expert in stack ditech knowledge and stack die design, which is required, then you can be very competitive going forward.

It's a hot market.

And we don't see any let up in that activity.

As far as visibility onward, we gave guidance for Q2.

But, you know, basically, our customers are still reluctant to give us, you know, that real bullish look into the future.

They don't know.

We can't tell you any more than they're telling you in other than maybe a little more visibility in the last year or two in the relatively short term, but the longer term - nobody's talking much now.

One update on average selling prices and mix in the current quarter to the 8% decline could you break that down by units and blended ASB, and your outlook going into the second quarter.

The AST went down about 1% for the quarter, which is well within the normal historical range.

The revenue went down minus 8% and units were down about 7%.

That sounds stronger than the typical trend.

Could be.

But I would call this a typical Q1 at this part of the cycle, you know.

And in terms of your Q2 guidance, where do you see the 10% being driven by roughly units versus ASP.

We think ASP would be slightly negative so it's kind of a growing parallel.

Yes, I'd agree with that.

Our next question comes from Satya Chillara[ph] with WR Hambrecht.

Good quarter.

John, if you could talk about Q1 assembly and test regulation.

Normally I see the numbers around 60 for Q1, could you break them down separately.

Well, let me comment on that.

On the utilization, we're going to start reminding those who have interest in us to be careful how to use that.

As we go forward, what's moving ahead of the strong growth is the leading edge technology capacities, okay?

So, for those, we're running hand to mouth or 90% plus typically, because that's how we managed our business as far as our investment strategies.

So we're investing on those in a month-to-month, week-to-week basis as we see the business change.

We can do that so, far, because the response time from the equipment vendors has been quite good.

At some point, that will be a problem for us, but right now, it's okay.

So when we say 60%, for some of our product lines it's probably 30% or 40% on the old commodity lines.

The lines that our IEM customers source in-house.

And on the leading edge, it's running 90% to 100%.

So be careful with those numbers.

So 60%.

And assembly test, we don't break out the test because it is very confusing because there is customer-specific, technology-specific, and we don't want our investors being misled somehow, so we did rather not confuse anybody and use one big capacity pie, if you will.

For Q2, where do you see the whole utilization going up.

Well, again, we're going to make some investments in Q2.

It's all going to be on the leading edge stuff.

We assume we're going to sell most of that out, again.

So I'd guess up 10% revenue, we'll be up 5% or more in utilization.

Okay.

Maybe let me ask the question a different way, John.

Test attach rate, basically what portion of the units were tested in Q1 and what do you see for Q2.

Well, test was 8% of our revenue, Q1, okay.

Okay.

In terms of traditional lead frame, it has been trending up since Q4.

Does it mean the big IDMs who pulled in back in 2001 are they coming back right now?

Is it a good indicator that we should be looking at?

How do you see that?

No, I think the growth we see here is very shallow.

It is improving, but very, very shallow.

We think our IDM customers still have capacity under utilized there.

It will reach maximum, we think, at that point in time.

It will go outsource all the rest, which will be a big, big mouthful for us in the back end to swallow.

I don't know when it's going to happen, but it will happen eventually.

So right now we see slow growth in the commodity products, and we're hoping that over the next several quarters that will come back, but we don't see it yet.

Thank you our next question comes from Medhi Hosseini with SoundView Technology Group.

Please go ahead, sir.

Yes, I have two questions.

If you could elaborate on the Wireless sector, if you see growth from wireless handset or wireless LAN.

And if you could elaborate on new customers, what percentage of revenue by new customers that you signed up in the March quarter?

Thank you.

On the wireless handsets or LAN both, okay, because of our package focusing technology, we see both.

Now, I can't tell you if the market improved, I can just tell you what our data says.

Our data says that business for us was quite strong relative to the seasonal down quarter.

So that's all I can tell you there.

And I think we've got a strong position because of our technology.

And then on our new customers, we don't break it out on a quarter to quarter basis by new customers.

Could you just elaborate some of the new customers have you been able to add to your list?

Well, we talked about, I will reiterate, that we've had our focus on three areas which we have not penetrated very deeply and that is the non-Intel chip set business, and that is the graphics business and total worldwide, and that is the CDMA cell phone platform, those are the three areas we focused on.

And we're making progress.

I'd like to see more progress, but we'll see how it comes.

Those are all to be played out over the next year.

We'll see if we're successful or not.

Thank you.

The next question is from John Pitzer from Credit Suisse First Boston, go ahead.

I'm curious as to whether or not you can help us frame what you think industry growth rate is going to be this year given the fact we've already had a pretty strong recovery in units.

Are you guys looking for the normalized 8% to 12% growth rate for the semi unit in the industry?

And help us understand where you're are opportunities to grow above that and what kind of growth rate should we look for above industry growth right for you guys.

We're not experts, so I will just give you our view.

Our view is that in the customer area, it's still very competitive out there, so we think it's going to be hard for them to extract ASPs without offering our performance to whatever chips they're selling.

So -- but they've given up a lot of the ASP, already, historically.

So our model says that revenue and units will kind of go together in 2003.

John, is that sort of around the 8% to 12% level for the --

Yeah, you've got forecast for the semi industry, and you you pick your own, somewhere between 8% and 15% between who you are.

What's the targeted growth rate above industry growth rate given the excelerating outsourcing trends.

If you look at historical data we're somewhere between 5 and more.

We can says, you know, 5% above that, that would be nice.

All right, thanks, guys.

Our next question comes from Eric Rubel (ph) with Murlow, Tabach,[ph] Roberts.

Go ahead, sir.

Good quarter.

John, you've mentioned it a couple of times with the chip set business in Taiwan.

Would you elaborate a little bit on the Texas Instruments programs and possibly some of the qualifications for the graphics you're going into right now?

Well, on the TI business, yeah, we are TI's other back end attaching source for their DLP products projected for the projection industry and, hopefully, later on, for the high-definition TV.

And, so, we thought that was a very exciting market and, so, we're partnering with TI and we're building capacity for them in Taiwan, and that's been growing nicely for us.

It will depend on the final market growth and TI's growth how well we do eventually, but it's been kind of nice and is kind of exciting now.

Is that business trend on a gross margin basis higher than the corporate average or a unit?

TI could be listening.

I don't want to say anything positive or negative.

We're losing money, if they're listening

On the graphic chip sets, any other advance in the Taiwan operation to break into that market.

You know who they are, they're Envida and ATI[ph], the primary players.

You know, other new ones coming up.

So we're trying to be a value to all of them.

And how successful is going to be on how well they

accept our Flip Chip technology because most of the activity is going to be in flip chip as we go over the next several years.

The next question comes from Shekhar Pramanick with Prudential Securities.

Given the leading end utilization rates are very, very high, is a lot of the growth you are seeing in the business, is that coming more from a leading edge, or is it pretty much spread across, meaning do you need to really go on the Cap Ex keep spending to be groaning strongly.

Lot of the growth is in high end and, you know, not all of the capacity we need to support that is new because you know we have mold presses and saws, et cetera, et cetera, that are very generic.

But typically, though, we need to buy the high-end wire bonders and eye bonders to support that leading edge because the old equipment doesn't support that.

And we'll have to buy 300-millimeter whatever, you know, as we go forward, as that capacity picks up in the foundry industry.

And with various pieces of back end equipment specific to MLS for Chip Array.

But, let's say half of the capacity we have in house can be applied, roughly speaking, to new growth.

Okay.

So there is a chance that, you know, even if the business gets really better, there will be the some amount of capacity which may never get filled?

Well, history has said that's not true.

My guess is that's not true that, eventually we'll -be at that place where everything will be humming out there.

And that's a signal to the next downturn.

Ask the question again later on.

Question for Ken.

You kind of mentioned that there was, you know, clearly some benefit on the depreciations because of the depreciation schedule change going from four years to seven years.

Yes.

What is the benefit.

And secondly, you know, given last two years, you have Cap Ex more than $100m run rate, and still today you're spending more -- you know, depreciation is still running $200m run rate.

When do you see that catch come back where truly the depreciation goes down.

The depreciation -- well let's go to the first question first.

We actually made two depreciation changes last year, we did some impairment in the second quarter, which took effect in the third quarter.

It's about 400 basis points at gross margin.

And then if you look at the -- we then changed from certain assembly assets from four to seven years about another 400, so about 800 basis points in terms of gross margin.

As far as where the depreciation is right now, we're running in the range of $58m to $60ma quarter or of Cap Ex expenditures for 2000, if you recall, were $480m, 2001 they were around $159m, went to $100m.

So I don't see any significant uptick in that.

This year we're budgeting $150m.

So if you move into the second half of the year you'll see a slight increase in depreciation, but nothing significant.

Okay, great.

Are you depreciating anything at four years now, even the testers.

No, testers are at five years.

Okay.

Thank you.

Our next question is from Eric Gomberg from Thomas Weisel Partners.

Can you talk about what you're seeing from major IDMs in strategic outsourcing, what the conversations are like right now.

You know, it's selective.

I think it's pretty well, for this cycle, identify which ones are going to keep embracing their in-house strategies.

People like Fairchild and ST Micro, et cetera, Dell, Intel, they're going to do substantial amounts of their capacity in-house.

Although each one of them said during the next upturn they're going to try to outsource more on the upper side.

We'll see if this capacity is available to them.

Then other ones like Motorola, you know, talk about asset light, and they've shrunk their capability to build at the back end, Agilent, a number of other ones.

The Japanese have been doing much more outsourcing through the next several years.

So the only a handful of the big IDMs, a few of the specialized commodity companies [inaudible] will continuing building their own parts internal because the risks are lower and the Cap Ex requirements are not that great, and the value of the back end relative to their total ASP is very, very high, so they want to manage their own destiny.

But all the rest, we believe, will be basically outsourced as we go forward.

Okay.

Could you talk little bit about your China facility?

I think you had mentioned last quarter that you thought it could get to break even or so around the second or maybe the third quarter this year, how that's progressing and if SARS has had any impact there.

First of all, SARS has had no impact.

On China, I just want to tell our investors and analysts that it's very strategic for us, it's a very small operation, okay?

We have 150,000 square feet there.

It's not nearly full yet.

At some point in time, it will grow very fast.

But right now, we've target that capacity for cell phone high-end packages, so we have a few high-end packages in that country.

That capacity -- the run rates, capacity are growing pretty well right now.

We expect that before this year is up we'll certainly break even, maybe as early as the third quarter.

So, you know, it will grow, but it's still small.

Thank you.

Our next question comes from Jeff Hartlett [ph] with Credit Suisse First Boston First Boston.

Good afternoon.

I wonder if you could talk about the deleveraging goals this year given the additional cash from the bank facility and turning free cash flow, as well as any other potential methods of deleveraging.

Yes, this is Ken Joyce, Jeff, how you doing?

Great.

Actually as you've indicated, with our new bank agreement, we do have the opportunity to pay down some senior notes should we so choose to do so, and we are very focused on deleveraging.

We're going to be opportunistic.

We're looking at different ways of doing that, whether that's some type of a swap, of a new high-yield issue to take out the old, that's a possibility.

If there are opportunities with equity, we'll look at equity, too.

So we're very focused on deleveraging, a lot of opportunities, and we're looking at them constantly.

We're committed to deleveraging, and we're going to make some moves.

Great, thank you.

Next question comes from Lance Pertanza [ph] with Concordia[ph] Advisors.

Please go ahead.

Returning briefly to the subject of gross margin, and I know some of this has been covered but you mentioned the improvement in the quarter came from a number of sources including lower material costs and higher utilization, and so forth.

And I did hear that the 800 basis points or so that came from the depreciation, but is it possible to quantify how much of the improvement came from the other sources?

It is.

I mean, we broke it down in just general -- what do you mean, in general categories like in materials?

We're not going to break it done in components.

Lower material costs versus higher utilization would be perfect.

Lower material costs?

Well, it's really hard to break that down, to be honest with you.

I really couldn't give you that information now on the phone call.

Okay.

Was the it correct, though, to say that 800 basis points was associated with the changes in the depreciation.

It's roughly $30mper quarter in terms of absolute dollars may be a better way to state it than basis points.

Okay.

Thank you.

Our next question is from Bill Lu from Morgan Stanley.

Good quarter.

John, going back to the chip set in graphic processor business in Taiwan, if I understand it correctly most of that stuff is still done with wire bonders and only the very leading edges is on Flip Chip, so is your application when these chips are converted to Flip Chip, or is the strategy attacking the leading edge first and putting the same customers to your wire bonding strategy in the future.

I think we are attacking it with the Flip Chip technology.

We think we're one of the best in the world offering a wide variety of Flip Chip solutions.

So rather than having to go head to head with [inaudible] and ASE in Taiwan, that has a major portion in that market and very low ASPs, we want to go and use technologies and hopefully make some money as we enter the market.

What would you estimate as your technology lead in the Flip Chip area compared to the Taiwan.

We have the broadest array of customers and technologies.

Some of our competitors have come up lately, the market has been looking good, but we have been in business for four or five years.

I believe it is the most activity.

Taiwanese, coming up strong, being forced by the local boundaries there to produce.

Well, can you quantify for me what the price premium is on the Flip Chip -- you know chip versus wire bonded one.

Say again?

The price premium on Flip Chip right now versus wire bonding.

Price on Flip Chip -- well, I don't know exactly the percent.

The biggest difference is in the substrate cost, and I would guess that that substrate costs three times as the standard PBGA on the average.

So when customers make that change, they know that they're sacrificing cost for performance.

But I think you know that, you know, Intel has all their Flip Chip or almost all their Flip Chip capacity now in -- I mean chip set capacity in Flip Chip because speed requirements, et cetera, and I believe that the Taiwanese will have to have follow suit over time.

Thank you.

Our next question comes from Ramesh Misra with Smith Barney.

Go ahead.

Good afternoon, good quarter.

I had a question on units.

Based upon the SIA data that came out early this week, units in Q1 are down 1% and your units are down 7%.

Can you help me resolve that discrepancy?

Yeah, our units are down as our revenue because in seasonality, what happens to us almost every first quarter is January is quite -- is very slow start because the fabs are shut down in the holidays, this year for two weeks.

Secondly, in February, we're into the Chinese New Year or the end of January, and that cuts down the number of building days.

So there are structural issues with the first quarter.

Then March normally is a pretty good month which it was this year.

That's typical.

What happens to our customers is they ship out of inventory to distribution so their units don't go down as much as our do at the manufacturing sites.

Got it.

So, then, going forward, do you expect to outperform the rest of the overall industry?

We think so.

Okay.

Thanks very much.

The next question from Satya Chillara with WR Hambrecht.

Please go ahead sir.

One of you talked about Q3 range in 10% to 15% of revenue growth.

I know you commented a little on Q3, but in general if you look at the six-month forecast, how does it look, basically, that, is that an improvement over Q2 or any comments there.

No, we just don't want to comment on the third quarter yet.

You know, our second quarter is historically up from our first and our third is historically up from the second.

Then we see a pause in the fourth quarter.

There's no reason to think that won't happen again this year.

We'll see.

John, you talk about utilization being high on the advanced packages, like MLF [inaudible].

Does that mean you're facing some capacity issues or how should we get into that?

Well, all that means is we're buying new capacity on an ongoing basis.

We're buying wore bonders and other things support what we see as growth in the second quarter on these new packages.

So all you can read into that is, hey, we're spending money.

We didn't spend much in the first quarter, but we're anticipating spending a lot more in the second quarter.

Great.

Thank you.

Our next question comes from Bill Lu with Morgan Stanley.

Please go ahead.

Ken, given the capital spending plan, can you talk about what the capacity is going to be versus, say at the end of '02?

We're -- we're having a little difficulty hearing you.

Can you repeat that.

Yeah I'm asking about capacity in addition to L3.

Yes.

Could you quantify that?

Dollar-wise?

No, overall capacity.

Well, we've got a huge capacity, and it's very difficult to talk about.

I don't know what response to give you.

Sales go up 10%.

Well, let's say we buy half that new.

I don't know.

It's a very difficult question to reply to.

Yeah, okay.

You know, very difficult.

Yeah.

And, John, you talked earlier about how your customers are giving you testers on consignment on your test floor.

Are these standard testers or are they made by your customers, the proprietary in-house testers.

I wouldn't say they're proprietary.

I would say they're particular to whatever technology that customer is using, and may not be, you know, a workhorse tester in the industry.

And for most part, they're older testers, because these customers have had these test scores in the USA and Europe for many years.

So it's a collection of all kind of testers they're going to ship to our factory so that they put assembly and test together, they lower their cost and improve their second times, and they thought this was a good time for them to do that while things are kind of slow.

Okay.

Thank you.

Our next question comes from Bob Staglosa with Palisades Capital.

Please go ahead, sir.

Just a reiteration of the revenue guidance for second quarter.

You were somewhat muddled when you said that before.

We're having difficulty hearing you.

Could you speak up, please?

Sure.

Just I wanted to ask about the revenue guidance for the second quarter again because you were a little bit garbled on this end when you said that.

Our guidance was, we expect a 10% increase in revenue quarter to quarter.

Thanks.

At this time we have no further questions.

I'd like to turn the conference back over to management for closing comments.

All right.

Thank you, everybody, for being on the conference call.

We look forward to a good quarter and hope to talk to you again in July.

Bye-bye.