艾克爾 (AMKR) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Amkor second 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. (Caller Instructions).

As a reminder, this conference is being recorded today, Monday, July 28th, 2003.

I would now like to turn the conference over to Mr. James Kim, Chairman and Chief Executive Officer.

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 Chief Operating Officer and Ken Joyce, Chief Financial Officer.

I will make some brief remarks, Ken will discuss our operating results and then John will have some closing comments.

We achieved our second quarter financial targets despite the business disruption caused by the Japan earthquakes and despite the impact of SARS on Asian electronics industry.

The outsourcing trend has driven our company's growth for the past 35 years.

By maintaining our industry leadership and providing innovative package and test technologies, we will encourage our customers to outsource more.

We believe this is creating opportunities for Amkor to achieve sustainable and profitable growth.

We are especially heartened by strong growth potential in Japan.

We expect to approach or exceed breakeven in the third quarter and believe that the [initial] continues to grow in the fourth quarter.

Looking ahead into 2004, improving economic conditions and strengthening semiconductor demand should create a platform for strong growth for Amkor.

Ken Joyce will now review our financial results.

Thank you, Jim.

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 on form 8-K 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 web cast of today's conference call can be accessed through our investor relations section of our website at Amkor.com.

I would like to remind everyone that in the first quarter of 2003, we sold our wafer fabrication service business.

Accordingly, prior year results have been restated to reflect this sale.

Our second quarter revenue of 378 million was up 10 percent sequentially and 8 percent year-over-year.

It should be noted that in 2002 our second quarter revenue rose 21 percent sequentially, so the bar was set pretty high for the year-over-year comparisons.

Second quarter revenue was impacted modestly by a temporary disruption in wafer fab supply due to the Japan earthquake, which affected not only our joint venture partner Toshiba, but also other customers who have wafer fabs in the affected area.

We also believe that SARS had a general impact on customer demand in the second quarter, although the extent of the impact is difficult to quantify.

We believe that the residual effects of SARS on the electronics supply chain may linger into the third quarter.

Gross margin rose to 19.6 percent in the second quarter from 13.6 percent in the first quarter, reflecting ongoing factory cost reduction initiatives, line consolidation activities, factory expense control and higher utilization of our assembly and test assets.

Our cash balance was 346 million at June 30, compared to 351 million at March 31st and 162 million at June 30 of last year.

Short-term debt was 49 million, the bulk of which is renewable working capital lines of credit to support our Japan and Taiwan operations.

Our liquidity position is actually quite solid.

During the second quarter, we made important progress aligning Amkor's capital structure to support the next phase of our growth strategy.

We entered into a new secured bank credit facility on more favorable terms.

We also refinanced 425 million in senior notes, extending the maturity from 2006 to 2013 while reducing the interest rate from 9-1/4 percent to 7-3/4 percent.

Taken together, these actions have significantly strengthened our financial liquidity.

In addition, we received board approval to purchase up to 150 million of the 9-1/4 percent senior notes due in 2008; and to date, we have purchased 7 million of these notes in the open market.

In anticipation of continued growth, our second quarter capital expenditures were $68 million.

During the quarter, we stepped up order and delivery activity for fine pitch wire bonders, high-speed testers and other advanced equipment.

This equipment is being deployed across all of our geographic locations.

Our capital budget for 2003 remains $150 million.

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

Revenue for the third quarter should be up between 8-10 percent sequentially.

Gross margin should be in the range of 21-24 percent; and we expect third quarter bottom line to be breakeven, give or take two cents against the breakeven.

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

Thank you, Ken.

In our last call, we talked about the increase in business activity in the semiconductor industry as we expressed optimism that our sector was primed for recovery.

We believe that is the case.

This has strengthened during the quarter and, in fact, with upside opportunities that could not be fulfilled because of supply chain primarily (indiscernible) supply, was not ready to respond to the rapid increase in forecast.

Regarding the substrate (ph) supply issue, we have taken significant action to increase our substrate vendor base and corresponding substrate supply.

We do not anticipate the availability of substrates to be a major problem going forward.

We believe there is a technology transition underway that is driving the need for more advanced packaging and driving semiconductor companies to outsource more of their packaging requirements.

While the (indiscernible) industry conditions remain highly competitive, we believe that company (ph) are becoming more careful in the way they allocate their assembly and test resources.

We think the days of unbridled expansion are over, at least for awhile.

We expect the pace of the industry recovery to be moderate with normal return to the seasonal normal patterns (ph).

That should make for a stable manufacturing environment which will have positive implications for capacity utilizations and pricing.

We are very pleased with our progress in Japan where the semiconductor industry is primed for acceleration of outsourcing.

Amkor has by far the largest share of OSET (ph) market in Japan, and we continue to penetrate the major IC suppliers.

This year, our business with Japanese IC companies outside of Toshiba joint venture should grow more than 30%.

The Taiwan business is on track to grow more than 40 percent this year with expanded capacity and channel production lines to accommodate business growth.

We're also qualifying several chipset and graphic suppliers using Flip Chip technology and anticipate meaningful business in these markets in 2004.

One year ago, our Taiwan operations were unprofitable.

Today, we're in the black.

Our business in China continues to grow.

We are adding test capacity and continue to build relationships with the emerging foundries.

Our goal in China is to broaden our technology base and to scale in proportion to viable business opportunities.

Our cash revenues grew nicely this quarter and should continue to improve as both IBM and fabless customers become more comfortable with outsourcing tests.

We're looking to establish test alliances in both China and Taiwan as a way of providing turnkey assembly and test capability while managing the business risks associated with building such capacity.

Our highly diversified customer base is an ongoing (indiscernible) for Amkor.

As we did a joint venture with Toshiba, no single customer was more than 4 percent (indiscernible) revenue.

Our top 10 customers accounted for 46 percent of first-half revenue and our top 25 customers comprised only 76 percent.

Their experienced and strong growth in micro lead frame (ph), chip array, Stacked CSP, (indiscernible) packaged RF test and strip test.

These are leading the recovery in our business and provide Amkor with an exceptional array of advanced packaging and test technologies.

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

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

We remain committed to achieving profitable and sustainable growth.

Operator, we will now open this call to questions.

(Caller Instructions).

Our first question comes from Eric Gomberg, Thomas Weisel Partners.

Nice quarter.

Could you talk about what the pricing environment looks like right now?

Yes, this is John.

Pricing we think will remain competitive for the rest of this year and we expect, going forward, our normal 2-4 percent declines in ASPs, which we account for in our forecast.

So we would typify the current situation as being in the normal range.

It is true across all packaged types?

Well, yes.

I think for the most part, it is a pretty stable environment.

The legacy packages, the over packages -- a lot of that was shaken up a year ago or so.

We continue to come down the learning curve with the pricing curve and some of our new alliance as usual, which kind of results as is normal 2-4 percent per quarter kind of reduction; but manufacturing efficiencies kind of keep pace with that.

So until supply ties up a little bit more, we think we will be in this range of very moderate erosion as we go forward.

Our next question comes from Shekhar Pramanick with Prudential.

Hi, good afternoon.

A couple questions for Ken.

Ken, what was the pro forma?

Also, what are the incremental margins and what kind of gross margins are you expecting for some of the Japanese business where you're seeing growth?

And then I have one for John.

Well, let's get back to the pro forma.

We did 31 cents EPS loss, if you subtract out the 19 cents relative to the refinancing activities, the debt retirement, you would have a 12-cent loss.

And the next question?

The incremental margins from here on?

The incremental margins going forward.

As we said before, pretty much our model is our breakeven is around 400 million in revenue per quarter.

At that rate gross, margin is around 21%.

If we kick it up in the range of 450 million per quarter, the margins will be more in a range of 25 to 27%.

And if we get up in the 500 million, which would be a $2 billion range, we would be in the 29, 30 or in the low 30s.

Our next question comes from Ted Parmigiani (ph.), Lehman Brothers.

Good afternoon.

Sticking to the gross margin question there and breakeven, how much ASP erosion are you assuming with those kind of levels, Ken?

So 400 million -- you're obviously assuming something like 3 percent erosion for this quarter?

That is correct.

You know what I'm saying, because we've heard these breakeven numbers before.

And even at 8 percent, you would be close to 410 off the number you just printed.

So is there something -- is this really more a question of where the sector is at a level of utilization, versus where Amkor may specifically be, given the fact that as long as there is underutilization among any of your at least the top four guys in the space, there is going to be continued pricing pressure through competition and defense and offense, I guess?

Utilization is thoroughly important in determining where our margins are, Ted, but also equally important is the mix.

In this case here, you can have the increasing units and decreasing ASPs; but the mix also plays a part in that, in terms of -- sometimes we have some high-volume, lower ASP mixed in there that would also impact that.

How much of your margin guidance -- let me rephrase it another way.

You have a 21-24% range.

What impact is the substrate situation playing on this, and how long do you think that is going to play out?

We can't give you an exact number on that, because it could actually be a competitive disadvantage with (indiscernible) would not want to disclose.

I do not think it is so much the cost of the substrate as having the availability to service our customers.

I think what you're referring to is that there was, and I think John can speak to that a little bit better, certain pressures in getting substrate to service our customers during the quarter; and we made every effort to make sure that we could do that.

I think definitely the era of quickly eroding substrate prices is behind us.

We see a firming up of those prices.

We had to in the second quarter pay a little bit more for some accelerated supply; but we have quickly brought up new vendors and our inability to go bring up these new vendors, which are lower costs, etc., and control the mix and do some other things with our vendors and our customers will determine future cost impact of the substrate, the potential shortage, which we think is no longer really a shortage.

So we had a temporary blip there.

We think most of that is behind us, if not all, and the margin impact going forward for the next several quarters should be minimal.

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

I was hoping that you could break down for us this past quarter's revenue gains and its contribution by unit growth versus ASPs, specifically in the historicals.

And also, if you could comment for us on the wafer banks and how you see those at Amkor at the present moment?

With respect to the units, our assembly units shipments were up 16 percent from Q1.

And as we said earlier, the ASPs were down around 3 percent during the quarter.

Again, the ASP, our calculation is based on volatile leads number, I believe (indiscernible) of shipped (indiscernible) normalize it and take out the mix equation on the ASP side.

So you cannot do the straight math formula, units and dollars and come up with that ASP.

On the wafer die support, die banks, not much has changed over the quarter, so it's pretty much in the normal range.

How many weeks of wafer bank, if you could give us a general sense your customers are holding now.

Well, you know, a lot of them hold zero I don’t want to mislead you and some of them might hold up to a three or four-month supply, depending on what their business model looks like.

So we don't look at it as a meaningful indices (ph) so you can discuss of recent supply of wafer (inaudible) because it does not mean much (inaudible).

Basically it is based on what customers want to do.

They keep wafers in their own factories or they keep it in our factories, and we don't know what they have in their factories.

Our next question comes from John McManus (ph.), Needham & Company.

Have you seen any increased utilization of some of the older plants here and the end of the second quarter going into the third quarter?

Older plants -- you mean our customer's factory or our older product lines?

Your older product lines.

No.

We see a little bit, but there is still a lot of capacity remaining to be sold out as we believe the IDMs when they sell up here (ph) maybe later this year or sometime next year, as they fill up, we don't believe there is much commitment on their part to buy that older capacity and continue with that strategy.

So we think that will [pour over], at least our customers have told us that, told us to be ready for big increase in demand whenever their current batches are full.

So if that is still some way out in the future for us.

Could you give us an idea of, well, could you give us -- what your corporate utilization rate assumption is in your revenue guidance?

If you are at 70 percent, what do you anticipate there would be, say, in the third quarter?

It would probably be in the range of around 75%.

Our next question comes from John Pitzer (ph), Credit Suisse First Boston.

Good afternoon, guys.

A couple question here.

First, can you help quantify on a dollar term, what the impact out of the Japanese earthquake was for this quarter?

And are you recapturing all that revenue in the calendar third quarter?

And then secondly, you look at the mix of the business by the end markets, second quarter saw great growth on the consumer side.

I was wondering if you could give us some guidance by end market, where you see the growth going in the third quarter?

Thanks.

As we published, the earthquake impact of Toshiba and the surrounding fabs was going to be in the 5-$10 million range; and we believe the best to our calculations, 'is kind of in the range it was.

Over and above that which we didn't, but our customers talked (indiscernible) a lot.

We thought definitely that was a SARS impact as the quarter developed.

We certainly saw the cell phone market rollover on us, pause for a while.

And basically, our conclusion what we've seen out there in talking to our customers and some of their customers is that, as we all know, there was a big (indiscernible) of demand temporarily in Asia and those affected countries.

And whether that demand is going to pop up as a double hit in Q3 to 4, who knows; but we certainly think it will go back to normalcy, and we're seeing that being reflected now in our forecast.

John, to play devil's advocate a bit, given the SARS impact, the cell phone impact, the Japan impact, why not better growth sequentially going into Q3?

Well, we'll see.

We are not the ones who are going to predict what the SARS impact was.

Was their inventory (indiscernible) SARS scare, how deep was their demand eroded, and will it come back, is it totally gone from the shopping malls of Asia?

I don't know.

If we looked at what our customers are forecasting for the third quarter, it is not robust.

It's very cautious.

Their visibility seems to be still cloudy, ours is better.

So anyway, our numbers, we're giving you our best guess right now; and, of course, we were hopeful that maybe there are some good things out there.

We will see.

But the important thing is we definitely see the fourth quarter to be strong.

Fourth quarter has held up.

Our next question comes from Timothy Arcurry (ph.), Deutsche Bank.

Mr. Arcurry you may go ahead.

Hi, guys.

Following onto what John was asking, I want to get at lab more some of these one-timers in the quarter and what kind of the apples-to-apples guidance is.

You quantified what the impact from the earthquake was, but can you quantify a little bit what the impact to the shortages of substrate supply was?

So what could you have done were you able to get all of the substrates that you would have needed?

We looked at that -- that is really a hard one to estimate.

I don't want to take a stab at it; but it is certainly was some upside that we missed out on, and I don't know where it went (indiscernible) competition maybe just extended out, I'm not sure.

So if you kind of normalize it, your guidance really is up more kind of 5 percent if you look at it on an apples-to-apples basis?

So, should we expect that business to come back in Q4; or is this business that is just gone because of the market, because of the weakness in the second half of the year?

What you're saying is because we should have shipped more because of the earthquake, etc., if you estimate what that might have been and think about current guidance, then you got a 5 percent growth for the quarter, okay.

I'm trying to rephrase his question so (MULTIPLE SPEAKERS).

Off of some of these one timers in Q2.

So I'm wondering if we see some of these things that might have come back in Q3, instead come back in Q4?

That might be what we're looking at right now.

Our next question comes from Satya Chillara with WR Hambrecht.

Good afternoon, guys.

John, you talked about the stronger Q4.

Can you able to quantify that for us?

No, not yet.

It's still too early.

We still have three months to go before we have to do that.

Our view here is that we were going to have a strong quarter in Q4 or a growing quarter in Q4.

That would signify to us that the semi industry might be looking at a pretty good 2004.

It's kind of historically been our Q, not 100% of the time, but a lot of the time.

So we are encouraged by the fact that that quarter is going to be a growth quarter for us, at least at this point in time, leading to maybe a pretty good 2004.

What about the capacity (indiscernible) issued in Q3 out of the second half?

How is that trending?

In Q2, you have 70% (indiscernible).

We're up to the mid 70s or so in Q3, and then (indiscernible) the year around 80% or so; and that is a very comfortable nice areas to be in, 80-85% utilization rate, where we can service customers and make decent margins, I hope that happens.

Our next question comes from Brett Hodess, Merrill Lynch.

Just a follow-on on the utilization,.

Could you talk about the utilization at the very leading edge?

Obviously, Cap ex budget is not changing, but accelerating the quarterly spend level a bit.

Could you run into tightness on the leading edge that might impact your sales growth?

Yes.

We have some lines that are the leading edge that are very, very fast going and are running about 110 percent of utilization right now, or trying to.

But I would typify some of our (indiscernible) lines running close to capacity.

And we're adding it as we go forward into Q3.

As you saw, we had a pretty big Cap ex number which we spent in Q2 and that is all in anticipation of continued growth in Q3 and 4.

So all good staff.

Are the lead times on the equipment short enough that you can meet your needs as you grow just ahead here?

Yes.

Right now, we can process things pretty fast.

We think the lead times are in a very close range, one, two, three months and we can expand (ph) for that.

Our next question comes from Clark Westmont (ph), Smith Barney.

Hi, guys.

One of my questions has been answered, but if you could give us I think your revenue concentration for your top 10 and top 25 customers.

I think you've done that in the past, and then I have a follow-up.

: Revenue concentration.

Top 25 was 76% (ph) and top 10 was 46%.

Great.

Also could you update us on the TI business that you have, including the DLP packaging?

We will not speak our customers demands.

We've made announcement at with TI (ph) that we're in the DLP packaging business for them, and that has been growing -- that is all I can do is tell you right now.

Eric Ruble (ph), Miller Tayback Roberts.

Great quarter, guys.

John, in the past, you've talked about in the early part of the up cycle, receiving a greater proportion of IDM outsourcing.

And I was just wondering -- you talked about that IDM capacity filling up towards the end of the year.

Is that still sort of in the range that you were looking at a couple of quarters ago?

Yes.

We thought there was a reasonable chance that the IDMs (ph) because they were running at 85-90% earlier this year, utilization rates.

And I am hoping, not predicting, hoping that as we get out of this year none of them will (indiscernible) on the older packages, and they will start to beginning to outsource a lot more than they had been.

We will see, but we're ready for them.

And a number of them have told us to get ready; so we are ready, and we will see what comes out.

Do you have any more color on Japan?

You mentioned that you can see that business grow by 30% this year, are you starting to see more customers use the facility there that you are in joint venture --- that was the goal was to get other customers.

We fully expect as we go out of the joint venture into next year about a third of that batch will be used for other customers besides the Toshiba Iwate fabs there.

So we have a very successful program underway, lots of qualifications.

We have got up various new lines, we're thinking about bringing up some more.

We see a lot of need in Japan for the leading edge technologies that we offer and the Japanese would like to have that close to home.

So we are accommodating some of those requirements.

Our next question comes from Sunar Vanrijam (ph), Merrill Lynch & Co.

Just a couple questions here.

Could you talk about what the status is as far as the citizen earn out payment (ph) is concerned?

You had withheld it, and I'm not sure where you stand with that rate now.

And number two, when you acquired the remaining 30% of Toshiba I understand you go from a cost plus (ph) to a market rate pricing.

Even where you stand now, what does that do to your gross margins for that part of the business?

There's two parts here.

The Citizen, we do have a payment of $12 million that's due to Citizen.

There is a dispute currently over some of the IP that was transferred to Amkor.

When that dispute is resolved, then that payment will be made.

Hopefully, we'd know it by the end of the year, something in that timeframe.

So that is the first question.

The second on the Toshiba -- there is a residual payment, there's a min and a max, and our current outlook is that it will be around $15 million to buy out the remaining 40% interest in Toshiba.

You are absolutely right that we go from plus-plus to market based.

And we think it is going to have a positive impact on margins because we're going to bringing in third-party business also, which is going to allow us to increase some of the margins over the cost plus that we enjoy right now with the Toshiba business.

Thanks.

Our next question comes from Mehdi Hosseini, with Soundview Technology.

Most of my questions have been answered, but I just need some clarification.

John, you talked about a moderate recovery.

And (indiscernible) the semiconductor industry, which grew at a rate of 5-8%, to what extent would you expect this industry to grow going into 2004?

And then we talk about increased outsourcing by IDMs, and you're talking about increased utilization there.

What is it going to take?

Is it going to be a step function where we wake up one day and everybody's going to start increasing outsourcing, or are you going to see a trend and Japan is going to outsource more and then followed by Europe?

If you could add additional comments, I'd appreciate it.

I think basically, the trend is already there.

I could count on less than two handfuls, the number of customers of ours who are going to remain firmly planted in the back end manufacturing business, you know, Intel and a few others.

But for the most part, most of the IDMs, such as the Motorola and the Agilents and the IBM's, etc., are going to ask that like or no assets (ph) (indiscernible) fabless area, and that has already been spoken to.

So the trend is already established.

It's irreversible in my opinion.

I think at some point, some of these companies still have factories that have a little bit of capacity left.

When they are still up (ph).

I think the OSAT (ph) industry and Amkor we will see a big inflection point.

Some sign that 2004, my best guess is where we will see the semi industry will have one curve of growth and for a few years, as this outsourcing trend really kicks in, it will modulate eventually, obviously; but for a few years, you're going to see us significantly outgrow the semi industry for a couple of years here.

Thank you.

Our next question comes from Stanford Mishawaka (ph) with CitiGroup.

Hi, thank you.

A couple questions.

The first one is -- regarding the bond buyback allowance that you got from your board, what are the general terms on it specifically?

Is there any expiration date, and do you have any comment on how you're going to implement it?

We're going to do that as we have had Stanford, and that's we're going to continue to monitor the market and be opportunistic and go in there and buy it.

Obviously, I don't want to say on this phone call what our target price is, but we're going to go and we are evaluating the various NTB levels of which you get the best value, and that is where we will make the purchases.

Is there an expiration on how long you are allowed -- this is open for?

No.

The second question is -- in general, what is the acquisition appetite for you guys?

Are there competitors or IDM assets, that type of thing?

We have our eyes open.

We look for good deals to acquire business from our customers, which may require an asset (indiscernible).

Some of these may not, so we're very open to that.

As far as competitors, is there are any compelling deals that come our way and they're totally accretive, we would certainly be open to them.

Our next question comes from Jeff Harley (ph), with Lehman Brothers.

A few questions.

Can you talk about end market demand trends in Q2 and what you're seeing in Q3 from the various markets?

And also, Japan, how much did that grow in '03 and it should account for about how much of your revenues?

Okay.

Let's go to Japan first.

Japan kind of the Toshiba joint venture, we're talking about $400 million; so we're talking about roughly 25 percent of our revenue is Japan-based activity in 2003.

So a substantial increase over the last couple of years.

The businesses that looks good with the profile less the growth (ph) in Q2 and Q3.

Because of our high-tech profile and of our new packages, most of our growth has been in the leading edge packages.

Stacked Chip shipment package, the Flip Chip in test (ph) solutions (indiscernible).

So I would say that 80% to 90% of our growth was fueled by leading edge kind of activity helping us.

So even though the cell phone market didn't grow that much, our activity in the cell phone based activity grew nicely.

We think that will continue in Q3.

We're not counting on any big PC pickup in Q3; but, hopefully, maybe it will be out there and surprise us all.

And then we are looking for consumer activity to raise, typically as it does in Q3, and that's pretty much been forecasted by our customers.

We saw a nice pickup in the consumer business from Q1, (indiscernible) it was so low.

The reason for our Q1 quarter being down was primarily consumer business, and it came back to some extent in Q2.

It will come back to a larger extent in Q3 and for the first couple of months in Q4.

So that is the profile.

And computing?

Computing has been pretty static for us most of the year, and we're still forecasting it to be pretty static, and maybe we will pleasantly surprised in the second half.

Our next question comes from Robert Maire with Semiconductor Equipment.com.

Hi.

Could you update us as to your status of your facility in China, and perhaps share there and where you see things in the near-term?

We have some lease space in China, been there for a year and a half or so.

Recently it has been growing nicely, but it's been from a very small base.

I want to remind you that there's still -- less than 5% of our revenue is in China.

We do have big plans over the next five years or so for that activity base.

We are actually looking for places to expand into right now because our lead space has limited capability as we go forward that would last us certainly through this year and part of next year.

But you're talking about new spacing has to be planned out 18 (ph) months out.

We focused on leading-edge cell phone packages, and that has been successful for us and growing nicely.

And now we are looking to gauge what the boundaries need from us to support their output.

And so we're dealing with the FMICs and with Grace (ph) and the rest of the foundry there trying to understand as best we can what they need to service their customers and we will put those products in place with them as we go forward.

And some of that requires lower lead stuff, which we're putting in place right now.

Can you give us a guess as to your market share there and pricing in that market?

John N. Boruch =: There is -- I think the local market is quite confusing and quite small.

Basically, when you talk about the China market, often shift that, etc., 90-95% of it is for normal fabless and IDM customers from a normal base.

So all we're doing is building parts for them that we built elsewhere in the past.

It is not necessarily for the Chinese customers; but some of that is certainly for Chinese and consumption, but we're not quite sure how much.

Our next question comes from James Crome (ph), Morgan Stanley.

Good afternoon.

Two questions.

One is -- what are you seeing in terms of equipment pricing, so is it going up as you're ordering more, and maybe it seems like your competitors are ordering more equipment.

And two, this is directed at Ken -- could you walk us through kind of working capital?

It looks like that was a big contributor to your cash flow from operations.

Was there anything unusual in the quarter, and should we expect the trends established in the first quarter to last for the balance of the year?

I don't think you want the equipment pricing (ph).

No, we haven't seen any increases or (indiscernible) change in equipment pricing.

It has been very competitive out there for our equipment suppliers for the last two or three years, and it remains competitive.

So we feel pretty stable.

With respect to the working capital changes, we have had some needs for funds obviously in the financing receivables going forward as sales have built and that has been offset by payables somewhat.

And the other thing is that there has been an increase there in the current period with some of the (ph) receivables coming out of long-term into the current, which is about $17 million.

Other than that, there isn't a real significant change there.

Real quickly, was there any further payments?

Are we all set with the assets sale to on the -- ?

No, we still have 20 million shares of ASI (ph) which the current market value is roughly $80 million.

And at due (ph) time as we announced in the past, we will continue to monetize that, not (ph) affecting the market.

Our next question comes from Shekhar Pramanick with Prudential.

Hi, good afternoon.

Two more questions.

John, did you say that given 80% of your revenue growth, most of the revenue growth was going to come from leading edge -- should we mean that saying that you have to keep spending the Cap ex at a pretty high clip to fund the growth, or did I understand it wrong?

We still have unbalanced capacity needs.

In other words, we may meet to fund the leading edge, we may have the whole back end; but have to buy five pitch wire bonders, or for fact (ph), we will have the back end capacity.

But we have to find placement by bonders because you know the (indiscernible) bonder doesn't work.

So it's more -- we're still getting leverage for our investments well above historical numbers; but, yes, we still have to make an investments to achieve that revenue because it is leading edge since we're buying parts of the (indiscernible) capacity as we go forward.

Question for Ken, if I can sneak it in.

In Japan, the kind of gross margins you're getting, is that you're getting pretty much corporate average or below or if you can give any color?

They are below average right now because it is on a cost-plus contract.

But they will tend to increase as we bring in third-party business into that facility, which we've been doing this year and will accelerate as we come out of the contract.

The business we're bringing in is at a higher margin than the JB.

Our next question comes from Ted Parmigiani, Lehman Brothers.

Two quick follow-ups here.

On the Japan the facility, where is utilization there currently and how much room do you have to expand as it seems like you're expecting business to expand there over '03 and '04?

It is a real mixed bag, there.

There are a lot of lead frame and (technical difficulty) we have our new product we just brought in.

I don't have those numbers at my fingertips right now.

Okay and just on the Q4 optimism you've shared with us today, it seems like that is a little bit different in terms of having optimism for business beyond 80 days, at least in the recent quarters in which you have talked about the outlook.

Is there something particular maybe by next or maybe a potential long-term agreement or something that gives you that kind of optimism so far out, relatively speaking?

I think primarily it's coming from our customers and their commitment to us.

We did a six-month forecast; and we look at the profile and the mix of that forecast with customers and kind of products and how many is priced (ph) are single sourced or at least double sourced maybe at the most and where we have a competitive advantage and where we have IT and in the right technology with the right customers, the right relationships, we were saying, it is looking pretty good.

That's kind of what we're saying right now.

Our next question comes from Timothy Arcurry (ph) with Deutsche Bank.

I had a quick follow-up.

First of all, Ken, for you.

How should we treat taxes the next few quarters here?

We are looking at taxes of about 3 million per quarter, and what that represents is tax expense for foreign entities where there aren't benefits available.

In addition to that, we made a note in this press release -- it is not included in our guidance -- we will probably recognize a tax benefit in the third quarter.

We're in the process of evaluating that.

What that represents is it is tax benefits related to tax accruals for our pre-IPO period that the certain statute of limitations may expire and we would recognize a benefit.

If we did that, it would probably be in the range of $10-$15 million in Q3.

Other than that, you should have the 3 million per quarter.

Thanks, and if I can sneak one more quick one in.

You said I believe it was last quarter, you talked about the breakeven target for revenue coming down to kind of 375 to $400 million by Q4, so that suggests that there is some cost to be taken out of the cost structure.

Is that still the plan, or are you kind of happy with where things are right now?

We're kind of ramping up a little bit as business has picked up.

We've kind of stabilized somewhat, so the breakeven is right in the 400 range.

Our next question is from Satya Chillara with WR Hambrecht.

A couple of questions.

In Q3 particularly, are we looking at volume growth in the range of 16% (indiscernible), or is it the product mix that is driving revenue growth in Q3?

Qualitatively, if you can comment -- ?

Right now, our assumption is that we don't have much fixed change, and that it's qualitative.

We're looking at roughly -- if we have a 10% growth and the 3% price erosion, we've got a 13 percent unit growth, kind of the math we're working pretty close to this time.

But we can be (indiscernible).

If mix does change (indiscernible), it could be richer, and therefore, the entities don't erode on the average, or we could get a lot of ADA (ph) and (indiscernible) business that we weren't planning on, and that could quickly (technical difficulty) the mix in the other

The next question, John, is the Cap ex that you spent so far -- $85 million -- can you give us a split by assembly and test?

How much did you spend on assembly and how much on test and going forward, remaining $65 million -- where do you plan to spend?

I'll just give you the year, roughly.

We still have a budget of 150 million for the year, and I would say at or around 30-40 million will be for test, okay?

Gentleman, at this time, I show we have no further questions.

Please continue with any closing comments you would like to make.

I want to thank everybody for being on the call and look forward to a good quarter and continue on.

Thank you very much.

Ladies and gentlemen, this concludes the Amkor second quarter earnings conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by an access code 540790.