艾克爾 (AMKR) 2003 Q3 法說會逐字稿

Welcome to the Amkor third quarter 2003 earnings release conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Monday, October 27, 2003.

I would now like to turn the conference over to Chairman Kim.

Chairman, please go ahead sir.

Thank you.

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 Kennneth 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 third quarter financial target and returned the Corporation to bottom-line profitability following the extended industry downturn.

Over the past two years, we have realigned our organization to cope with the difficult challenges created by the downturn and the growth opportunities that are now present in the upturn.

We believe the semiconductor industry is poised for 2 or more years of (indiscernible) growth, and that during this period, the outsourcing trend will accelerate.

We have positioned Amkor capitalize on the business opportunities that should develop as the economy strengthens and as IT suppliers increasingly rely on specialists like Amkor to deliver advanced packaging and test applications.

We have positioned Amkor to return to previous peak revenue and gross margin levels in 2004.

Kennneth Joyce will now review our financial results.

Thank you.

Before we discuss our financial results, I would 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 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.

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

Prior results have been restated to reflect this sale.

Third quarter revenue exceeded our expectations, as customer demand continued to strengthen during the quarter.

This demand was particularly strong in products that support the cell phone market.

Total unit shipments in the third quarter were just shy of our peak in Q3 2000.

Of course, in 2000 we did not have factories in Japan, Taiwan or China, so we have a bigger operational footprint today which gives us the capacity to assemble and test more ICs than we did in 2000.

Substrate costs have stabilized at the higher price levels set last quarter; however, we have significantly enhanced our supply base and do not foresee any substrate availability as an ongoing issue.

The sequential improvement in our gross margin during 2003 principally reflects higher utilization of assembly and test assets, line consolidation activities and ongoing factory and material cost control initiatives.

We also continued to see expansion in our operating margin.

Third quarter SG&A expenses remained flat with the second quarter, and thus, we realized nice operating leverage from the increase in revenue.

Last week, we amended the covenants under our secured bank credit facility to permit a higher level of capital expenditures and to provide greater flexibility in repaying outstanding debt.

During the quarter, we accelerated purchases of fine pitch wire bonders, high-speed testers and other advanced equipment to support strengthening customer demand.

So far this year, we have purchased in the open market around $30 million of our outstanding 9.25 percent senior notes, which mature in 2008.

During Q3, we recognized approximately $2 million in premium cost in connection with these purchases.

We will continue to evaluate market conditions and opportunistically make additional open market purchases of these notes.

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

Revenue should be up between 5 and 8 percent sequentially.

Gross margin should be around 25 percent.

We expect fourth quarter net income in the range of 7 to 10 cents per share.

Now, I'll turn the call over to John Boruch for some additional comments.

Thank you ken.

On our last call we expressed optimism that the (indiscernible) fab sector was primed for recovery.

This is becoming more and more evident. (indiscernible) present continuously during the quarter. many of our customers (indiscernible) their forecasts, and forecasts in general have been building.

We are seeing increased evidence of a technology transition under way that is driving the need for more advanced packaging and driving some (indiscernible) companies to outsource more of their packaging requirements.

We continue to make excellent progress growing our business in China, Korea, Japan and Taiwan.

Our year-over-year revenue growth in each of these regions should exceed the overall semiconductor industry growth.

Recent alliances with test partners in China and Taiwan enable us to provide our customers with turnkey assembly test capability while optimizing our capital investment.

Our factories in Korea and the Philippines continue to expand capacity to support the strong demand for advanced packages, including (indiscernible) BGA, stack CSP and system in-package.

We also are beginning to see increased asset utilization in many of our traditional packages.

Our test business, especially strip tests and RF tests, are strengthening, and we are expanding capacity on selected platforms.

Our highly diversified customer base is an ongoing strength for Amkor.

Excluding the joint venture with Toshiba, all other customers were less than five percent of third quarter revenue.

Our top 25 customers comprised only 76 percent of revenue for the first nine months.

Looking ahead, semiconductor industry analysts are forecasting 20 to 25 percent revenue growth for 2004.

We believe the outsourcing trend is accelerating, and therefore, Amkor should be positioned to grow at a faster rate than the semi industry.

We are excited about our growth prospects and we're preparing our factories and our entire organization for a strong market in 2004.

Operator, we will now open this call to questions.

(OPERATOR INSTRUCTIONS).

Timothy Arcuri (ph), Deutsche Bank.

I have two questions.

Number one, John, I remember last quarter we talked about there was a one timer.

I believe because of the earthquake there was kind of flat to $10 million that would have happened in the quarter that didn't.

So if you normalize for that, you were up about 9 percent, sequentially.

Am I correct in kind of a normal Q3 being up between 10 and 15, so maybe we were at the lower end of it in Q3?

Is that kind of the right way to think about it?

I think the earthquake in Japan was just (indiscernible) lost business that's gone.

In this market you either service the business immediately or go someplace else, so that business was not going to come to us after the fact.

So I think (indiscernible) your assumptions there.

I think it was a pretty normal quarter.

Can you comment a little bit on pricing?

Pricing is still kind of down between one and three percent per quarter.

What's the outlook going forward on pricing in Q4, and also as we move into next year?

The pricing environment actually has been very favorable.

Part of that is attributable to mix, but this quarter we are down one percent.

And we would think as we go forward, we are going to probably be in the range of somewhere of 1 to 3 percent.

Let me add one thing to that.

Our expectation as we go through the fourth quarter and 2004 is that supply will continue to tighten up, utilization is going to go up into the 90 percent range and that pricing will firm up as we go forward.

That's our current assumption.

Eric Gomberg, Thomas Weisel Partners.

Could you talk a little bit more about utilization, how that's spread by different types of products?

On leading edge -- 5 (indiscernible) bonders; fine placement (indiscernible) bonders; our MLF (ph) packages and chip scale packages -- we basically (inaudible) running at 100 percent expanded capacity -- it's almost as fast as we can -- through mid Q2 and all of Q3.

So that's running 100 percent or more as we speak. (indiscernible) in Q4, and we will see what happens as we go forward.

On the legacy packages, that's also growing.

It's nowhere near 100 percent, obviously; the mix is all over the place.

Some are probably in the 40 percent and some are in the 80 percent, but we started to see this quarter the reemergence of the legacy packages moving forward.

So I think that will happen as we go through 2004.

Talk about -- the press release mentioned strengthening forecasts could end up offsetting some of the typical seasonality.

I'm wondering, as far as end-market product sales, do you have any reason to believe that products won't peak in the December quarter and then come down in Q1?

What do you attribute the strength in Q1, was that just the greater demand for advanced packaging?

I can't pretend to predict the end-markets very well.

What we do know is that a lot of our product mix is seasonal, in that they are kind of consumer item.

Even cell phones are sometimes seasonal.

But there's probably seasonality in the end-markets, as there normally is.

But what's happening is technology is moving forward so that the amount of (indiscernible) being put into these applications keep growing and growing quarter by quarter.

So we think that will override the seasonality.

Plus world GDP and the U.S. economy are strengthening, so that's an underlying tide that may float us up, going forward.

John Pitzer, Credit Suisse First Boston.

This is actually Brian Chin (ph) for John Pitzer.

A couple of questions the.

The first one, John, you may have talked about this I think.

I may have missed it in the call.

The substrate pricing and availability, how much of an impact was that, I guess, in 3Q and kind of going forward?

I know things are a little bit tight in the supply chain.

Substrates were -- supply was a problem for us in Q2, as we talked about.

They were much less of a problem in Q3.

I think as we go forward, as we qualify new vendors and get customers qualified and a bunch of new vendors, it will be even less of a problem in Q4.

So the supply problems are mostly behind us.

Pricing did go up in Q2 and it has not come down in Q3, and I don't expect it's going to come down in Q4 either.

But at least it's not going up at this point in time.

That's what's happening in the substrate area.

(indiscernible) do you anticipates maybe some shift in the mix possibly in 4Q, and a different mix in 2004?

Looking at your guidance for 4Q, if you take revenue at the high end up 8 percent, gross margins 25 percent -- that looks like about 38 percent incremental gross margin, a little bit down from what you've done the past couple of quarters.

Is that a function of more capacity coming on as you make more capital expenditure purchases, or is that also something related to mix?

It's a little bit of both.

This is Kennneth Joyce.

It is -- the mix is playing a significant part there.

And yes, you would be bringing on new equipment, new investments.

So your depreciation would go up.

(indiscernible), WR Hambrecht.

On the gross margin question, John just mentioned the legacy business is improving.

Wouldn't that basically mitigate the gross margin line item there?

Basically you are guiding only to 25 percent, and yet you are guiding to (indiscernible) percent growth.

So can you go a little deeper into that?

I would love to say that we can go up 5 or 6 percent a quarter, but unfortunately that's not the business that we operate in.

As the sales have increased, obviously, in terms of percentage that -- the gross margin is not going to increase as quickly.

That being said, we are investing in new equipment to support these newer lines, which it has the impact of increasing depreciation.

With respect to the traditional lines, that would have the impact of bumping the margins a little higher.

But we still haven't really seen that come on real strong yet.

We still have a good amount of capacity.

In terms of the CAPEX that you spent in Q3 for the whole year, can you give us a breakdown between assembly and test?

(indiscernible) this year, almost everything was for assembly, leading-edge packages (indiscernible) and things like that.

As we come through third quarter and coming out into the fourth quarter, we'll spend more of that (indiscernible) a test as we go forward.

But I would say somewhere in the 15 percent range of our total spend this year will be in test.

Probably next year it will be more like 20 or 25 percent.

Ali Irani (ph), CIBC World Markets.

Following up on that thought, I was hoping you could reiterate your budget for calendar '03, CAPEX budget?

And give us an idea of whether at this point you've made any preliminary plans for calendar year '04?

Further, I'm hoping you can give us an idea of where specifically in test segments you are seeing success in bundling in particular, with your assembly business?

On the capital expenditures for 2003, we are looking a little bit north of 200 million this year.

We thought that Q4 would slow down but it has not, so we are going to keep the pedal to the metal there.

And as we go through 2004, it's still not totally firm yet, but we would estimate somewhere between 200 and 300 million dollars would be our expenditures for 2004.

I might add that we've amended our covenants to provide for that, too, under our existing secured crediting facility.

The test area is a very mixed bag.

A lot of (indiscernible) for us.

It depends where (indiscernible) picking up market share, we don't talk about specific market wins for the most part.

But they are all leading-edge for the most part, testers, and I guess I could just say that the mixed signal is the strongest at this point in time.

So we are looking at RF as a major (indiscernible) area, and we're also -- we've been talking about cracking into the graphics market, so we are buying some testers that can service that kind of market also going forward.

We are certainly buying lots of testers that are not expensive at this point in time for our strip test effort.

That effort is at all-time highs and growing very rapidly.

So that's an area of strength.

That's all I can think of for right now.

Brett Hodess (ph), Merrill Lynch.

A couple of questions.

First, I just wanted to go back to the seasonality into the first quarter.

I didn't quite get it.

So you're thinking that the good trends on technology and whatnot will offset partially the seasonality, but probably not the whole seasonality?

It's too early to tell yet.

Typically there is a quite significant seasonal impact because of the way we are structured for the quarter and the fabs shutting down at the end of the year and things like that, and Chinese new year, etc.

This year it looks like seasonality will be much less -- much less of an impact on us, because of the underlying strength.

I don't want to quantify that yet, but we are looking at much less impact for seasonality.

Do you have a feeling for how much of the incremental business is coming from IDMs that might be increasing their outsourcing right now, John?

Yes, a lot of it is.

The fab (indiscernible) are also growing.

What we see in our patterns is the (indiscernible) are growing pretty similar to the IDMs, but much of the IDM growth is in all the new packages.

We see the IDMs still filling up their (indiscernible) factories with the older products.

Mehdi Hosseini, SoundView Technology.

I have a couple of questions.

In regards to your revenue mix, it seems like the consumer end market declined by 9 or 10 percent.

Could you elaborate as to why it happened and how would you expect to recover in the fourth quarter?

And I have two other follow up questions.

I've talked about consumer.

The first time I talked about (indiscernible) talking about a real broad definition of consumer, including those things that people buy that you may not consider consumer items at (indiscernible) time at Christmas time, etc.

So, in the consumer definition published data, that's your typical consumer and what we've seen is the typical fall off from Japanese customers of that market going down, as we come out of this year.

Sure.

And as you get a higher mix of packaging business from IDMs, are they locking in a long-term supply agreement and kind of guaranteeing minimum volume?

And if so, to what extent would that put pressure on ASPs?

There are very little guarantees in this business, whether you have a contract or not -- okay?

So let's forget about contracts and guarantees.

We don't want to kid anybody -- that's what happens.

For the IDMs, what is happening, what we're convinced of is that many of them were not put in place -- the leading-edge packages, they don't have the technology or they don't have the desire.

They are all looking -- not all, but the majority are looking for asset like strategies or asset list strategies, and that's going to carry us forward.

We do not believe that they're going to put in place a lot of (inaudible) capacity.

Ted Parmesani, Lehman Brothers.

I guess this question is for Jim or Ken.

Given your return to profitability now and your expectation for what would be higher levels of free cash flow, I was hoping you could provide us with a roadmap, if you will, with respect to how you plan to delever your balance sheet through 2004, if possible?

As well as what you believe to be Amkor's ideal capital structure over the longer-term for us to kind of think about here?

That's a good question.

Deleveraging is very much on our mind, and we're cognizant of the benefits of delevering the balance sheet.

And we're committed to that.

We hold $200 million of 10.5 senior subordinated notes due in May of '09.

These notes are callable at 105.25 in May of '04.

Market conditions permitting, we would plan to issue some equity to raise sufficient funds to retire these notes.

In addition to that, our Board has already given us approval to use $150 million of our existing cash to opportunistically purchase a portion of the 9.25 senior notes due in '08 in the open market.

As of September, 30 here, we've purchased and retired 30 million of this issue.

As you are also aware, at any time we can accelerate prepayment of our $170 million term loan, which is part of our secured lending facility.

But we really don't see that as the best alternative at this time.

And in addition to that, as a result of our recent amendment to our secured lending facility covenants, we could raise equity to call a portion of our 500 million in convertible debts should we so choose.

So we have a lot of options open to us.

We are clearly going to be pursuing some of those.

We've committed to it.

With respect to your second question about optimal capital structure whatever -- we can all put our pencil to the paper and probably come up with an amount, but it would seem to me that we would have to (indiscernible) we have 1.8 billion in outstanding debt.

We probably have to bring that down to around $1 billion and you would be in the range or slightly less, and you would be in the range of what we would consider to be an optimal capital structure for Amkor.

A quick question here on your (indiscernible) is that the 48 million on your -- I guess it's long-term assets here?

That's substantially all of it, yes.

There's 44 million of it -- is from the (inaudible).

Jessy Pigo (ph), Piper Jaffray.

Can you give us an idea of the momentum in your graphics and flash programs?

And have any of the calls moved into (technical difficulty) production?

Graphics and flash you said?

Yes.

Okay.

Yes, in graphics we make (indiscernible) we have business; others just beginning in that area.

In the area of flip chip where we are expecting some market gains.

That opportunity has not yet come about.

We've qualified several customers.

We think that 2004 will be a big transition year, at least from all things we see right now, and that the graphics area will move to flip chip and that will give Amkor a big opportunity to make some market gains there.

In the area of flash, it's a very, very fast growing market.

We haven't talked much about our individual programs yet.

That's not a flip chip solution, it's a fact chip and other things.

And we're doing very, very well right now as a number of flash customers -- because of our fixed scale packaging technology -- and we're engaged with basically almost everybody who builds flash out there.

Not everybody, but most of the flash companies as I speak.

Building on the stacked issue, how do you feel about your positioning in the stacked (indiscernible) above three die stacks?

Do you notice any change in the competitive landscape, above 3 (indiscernible).

From what we can tell, we think we are doing the best job out there.

Above a Q dye stack, including above 3 dye stacked; and most of our stacked business has been in that leading-edge (indiscernible) area, and that's looking very very strong as we go forward here.

I do believe that positioning will allow us to go back and pick up some market share on the older technologies, which we missed out on last year or two years ago.

So all I can tell you is we are doing very well on the leading edge stacked technology products.

Steven Paleo (ph), Morgan Stanley.

It's actually Bill Lu (ph).

A couple of questions.

First of all, if I try to interpret your guidance, it seems pretty bullish to me.

Is that just a result of the industry recovering or are you seeing some share gains as well?

If you are seeing share gains, can you comment on where you are seeing that, both geographically and by end-market applications?

I think the market is going after semiconductors. (indiscernible) are going up faster than dollars, as you know, for the silicon market.

But for us, the big gain is the technology changes.

The change in the form construction, adapting more and more of our leading-edge technology products.

And we're well positioned to service that.

Memory cards, camera phones -- all of this -- (indiscernible) stack chips, flash stack, etc. -- all of these things require the products that Amkor sells.

So we are (indiscernible) market share.

If you look at our competitors, you may not (indiscernible) are competitors, because where it's coming from is that 75 percent of the world's market that we are not servicing, and that's always been our market.

Our target has always been to gain market share from the IDMs, because that's where the big market is, and hopefully gain from our competitors, too.

But that's secondary.

The primary thing is the world market because it so huge, and we are doing that.

One other question, if I listen to the conference calls of your suppliers like (indiscernible), they've talked about themselves being capacity constrained and not able to ship equipment as fast as the customers want.

Is that a problem for you guys at all?

No. (indiscernible) they have been quite responsive to our needs.

We have been purchasing equipment on an as we need basis, on a month to month, quarter to quarter basis -- not getting too far in front of the demand curve.

The man who fashioned (indiscernible) so we gave a little up probably here over the last quarter or two, but you can't optimize everything or maximize everything.

So it hasn't been a problem so far and we'll see what happens next year.

Eric Reubel (ph), (indiscernible).

Ken, a couple of questions if I could on your outlook for working capital?

And also, there has been discussion of ratcheting down of the incremental gross margin over the past couple of quarters.

How should we be looking at that as you plan to get to your gross margin target over '04?

Let's take the working capital first.

Of course, as the demand grows, there is a need for working capital to finance the increasing receivables and inventories, both of which were up in the current period.

With respect to the incremental gross margin, as we've talked about in the past, when we get in the range of $2 billion or 500 million a quarter, we are anticipating margins of -- in the range of let's say 27 to 30 percent, depending upon mix.

So they are between where we are at right now and if you annualize that number out, and the difference between where we would be at $2 billion.

The margins in terms of absolute dollars are going to grow quite substantially, and that will drop through and you will see operating leverage because the G&A won't be going up that significantly.

So operating income is going to increase percentage terms, much faster than gross profit percentage as we go forward.

Jeff Harib (ph), Lehman Brothers.

Could you talk about where you think you will be on capacity utilization in Q4?

And also, looking at revenues, positioning the Company for about 2 billion of revenues in '04.

What does that assume for your assumed growth in the semiconductor industry?

And if you can also talk about geographically, how much you see Japan contributing to that; maybe an update on Japan and some of the other customers you're going with there?

Utilization -- the math for Q4 says if we're up 5 to 8 percent -- they are running at 80 percent now -- and ASPs are kind of (indiscernible) that our utilization is going to go up to that 85 to 90 percent range for Q4.

We feel that we run the best ship somewhere in the mid low-90 percent, where we can keep good service and optimize our margins.

So that would be our target as we go through 2004.

What was the other question on the 2 billion?

The other question was on the 2 billion, what are you assuming for semiconductor industry growth?

And also, just some discussion of geographically where you see that growth?

And an update on Japan, some of the customers you're adding there; growth opportunities there?

The semi growth -- the range is all over the place and they all haven't come out yet.

But somewhere in the 15 to 20 percent range, which is a pretty good but not great growth rate for the semi market.

The semi market goes 25, (indiscernible) could do better.

Tim Fox, SG Cowen.

A couple of questions on your emerging markets and the opportunities there, following up on the previous question.

John, I think you mentioned something about China, Japan, etc., outgrowing the rest of the industry.

Could you provide a little more color around those comments?

And for '03 -- and if you care to venture, on '04, what percentage of revenues could come from your emerging market opportunities?

On the (indiscernible) markets -- China, you know we've had quite a small operation there, so we would hope to grow much much faster than the semi market in China.

We've got both the local markets with the semi fabs coming up there (indiscernible) other ones.

We're beginning to penetrate them.

And then we have the international market, which needs to be in China for various reasons, so China should grow very well for us for the next four or five years and beyond.

In Taiwan, again, we've got a small footprint relative to our competition.

And Taiwan should certainly outpace the semi market for us the next few years, for sure.

And then of course Japan, has been a focus market for us and we've been making big penetrations there.

That's been certainly out growing the semi market, as we go forward.

By the way, we've let them (indiscernible) major operation in the backyard. (indiscernible) and some very strong, emerging, established companies are coming on.

It's proven to be a nice market for us, as we go forward.

John McManus, Needham & Co.

Could you comment on the camera module and image sensing market?

Are you gaining share there, and what is the -- what are you doing there to gain share in this market, which appears to be exploding?

The market certainly is exploding.

We've had all kind of opportunities.

We have had pretty much of a meat shoe type offering for the last year or so.

And we've pretty much -- we haven't made big inroads in penetrating that market, as far as market share although we have been growing nicely but maintaining our private market share.

But going forward, we think we have some very interesting solutions that the customers are going to need and (indiscernible) qualified them.

So our outlook for 2004 for Karen (indiscernible) growth is pretty large -- okay?

So we're quite excited about that, and that market, as you know, is very robust.

So as far as imaging sensors, we have pretty much focused now on the camera module business, and think that's our highest margin opportunity in 2004 anyway.

Could you comment on whether you saw the wireless demand greater in October than you saw in September?

The answer is yes.

Do you think that that may continue pretty much through November?

The answer is yes.

Lynn Payne (ph), J.P. Morgan.

Could you comment a little bit on the outsourcing from the IDMs, in terms of either by region or by product?

And kind of, what's really driving that?

What are your strengths versus your competitors?

The second question is, in terms of the additional spending that you are doing, can you give me an idea of how the capacity is going to come online in terms of planning.

Okay.

On the IDMs, (indiscernible) it's a pretty mixed bag.

Europeans are outsourcing more but they are still going through a lot of their production internally, but they are outsourcing most of the new stuff and we are doing that.

That's also true with the rest of the companies around the world.

The key to understanding outsourcing right now is the new technology.

It's (indiscernible) stacked chip and (indiscernible) BGA kind of parts of (indiscernible) package.

The flip chip, 300 ml -- all (indiscernible) bonding, all those things require new technology, good engineering etc.

And let me tell you, the way the (indiscernible) turned the last three years, our customer base at the IDMs have pretty much laid off a lot of their capability for packaging, not considering it a core competence and they are relying on us to do that for them, so we can't disappoint them (indiscernible) and we don't intend to.

So that's the big thing going forward.

And that's true for all markets.

As far as our plant capacity for next year, equipment deliveries are still short, so we are going to buy equipment on an as-needed basis.

We're going to get out in front of the demand curve a little more, get a little more aggressive than we have been in the last couple of quarters.

And this year we got in front of that demand curve, but the demand curve is very hard to predict.

If the market really surges, we probably won't enough out there quick enough, but we will see what happens.

One follow up on that. (indiscernible) mixture towards some of these, I guess, higher order technologies -- does that increase the percentage of CAPEX that you need to use, and can you characterize that in some way?

I sure can.

Our models all say it diminishes.

You get more revenue from a dollar invested going forward than we have in the past for packaging, because we have a greater material content and greater intellectual property content in those packages.

So we think the ASPs will be going up as a mix, and therefore, each dollar spent will drive greater revenue.

James Groom (ph), Morgan Stanley.

Ken, the first question is for you.

Working capital.

Is there ability to improve that?

It seems like that was sort of a use of cash this quarter, should we expect in the fourth quarter were down improved DSOs, can you talk to that?

The DSOs we can talk to.

It's becoming a difficult issue.

As we've expanded overseas, we have operations in Japan, we have operations in China where the normal payment terms are 90 days.

In addition to that, we're seeing a secular change here in the West, where there has been tremendous pressure from our customers for extended terms.

So that has caused DSOs to be pushed out somewhat.

With respect to inventory, as you know we buy pretty much to service a specific customer forecast, and we have certain guarantees to back those inventories up.

But know, as the business grows there will be a need for working capital and we'll have to address the other side of the equation, which is how we deal with our vendors going forward.

The second question is -- one, have you been able to source employees, or have any shortage of employees in China as you grow that business?

And more importantly, the last few quarters you talked about big opportunities -- maybe IDM selling a business?

Are there big opportunities today for Amkor, in terms of winning business from IDM's?

On China, (indiscernible) no problem hiring people.

I think we are beginning to see some people shortages first will be in Taiwan.

And we along with our competitors in Taiwan will see some difficulties probably if the market is robust next year.

That's usually the case.

They've changed some of the laws there about importing labor, etc. (indiscernible) they them back, we'll see.

That's the first place we will see some shortage (indiscernible) (technical difficulty) in the Philippines -- okay?

On the IDM's selling their factories -- yes, I think the IDM's -- a lot of them now have sorted through their future business models and where they want to go with their companies.

And a lot of them are saying, I really don't need all these manufacturing sites.

And we've seen (indiscernible) kind of acceleration of interest.

But those are hard deals to put together and we will see what happens, but there are opportunities out there, I can tell you.

Tom Bergstron (ph), Morgan Stanley.

You are on a speaker phone, please lift the handset.

We are unable to hear you.

John Lopez, (indiscernible) Capital.

I actually have three quick numbers questions, if I can.

The first one -- if your expectation turns out to be right for the first quarter, should we expect gross margins to trend flat with whatever you're able to do in the fourth quarter?

That would be a fair assumption, yes.

Can you talk a little about OPEX sequentially, and just a way to think about it in 2004, either as a percent of sales or in actual dollars?

Our CAPEX is definitely not linear, it would vary with the volume.

And a lot of times we are putting it in place before the volumes actually materialize.

As John had indicated, it could be somewhere between 250 to 300 million depending on how robust the market is.

We will be putting that in place earlier in the year if the business continues at the pace that it's coming right now.

I apologize.

Actually, I meant operating expenses, not capital expenditures.

The operating expenditures are probably going to in the short-term remain flat.

There could be a slight increase, but very little.

Timothy (indiscernible) with Deutsche Bank.

This is actually Dan Berenbaum (indiscernible) for Tim.

One of the things we noted, there were two quick clarifications.

I wanted to follow up on the consumer question, the drop of about 10 percent.

We didn't quite understand the elaboration due to the seasonality in Japan, could you give us more details on that?

I don't know how much I can give you, (indiscernible) game modules, etc.

So we did understand that correctly then?

Yes, a lot of game modules.

And a lot of our customers, both in Japan and outside of Japan, service that.

A lot of that is leading-edge packaging.

And that as typical, as usual, has gone down hard as we (indiscernible) the year.

It looks like (indiscernible) than others, but thank goodness there are a lot of other strong markets to take its place as we go into 2004.

Next question on test revenues.

We kind of know that test revenues are at historic highs, or near historic highs.

What have you done to get that, is it just because you have capacity in place?

Or are you doing something to take market share there?

A couple of three or four things.

Number one, we certainly added some capacity this year.

Two, we've (indiscernible) up some of our older testers as we go on through the year.

And that's been very hopeful for the P&L.

We have some more room to go, but we have been quite surprised that those little testers have been utilized now, and looks like it will be in 2004.

Three, we started some partnerships and alliances with third party test partners, and some of that test revenue comes through our P&L.

And four, we had (indiscernible) in transferring whole cash floors from customers into our factories, where they have shut down their operations here and there, and we've transferred all those testers to our factories.

They are (indiscernible) so it takes no CAPEX.

But here again, we get the revenue from that activity.

John Pitzer, Credit Suisse First Boston.

It's Brian Chin again for John.

I've got a couple of quick follow-up questions.

The first one is just, can you quantify again what the trend in depreciation would be, and maybe Q4 and then 1Q?

(indiscernible) is going to be, probably -- I don't have that number right in front of me here.

About 55 million per quarter.

That's Q4, not Q1?

Yes.

Quickly, the tax rate guidance in 4Q and '04.

The guidance for taxes is it's in the range of 3 to $5 million, and that's basically for foreign taxes for which there are no credits available.

Mehdi Hosseini, SoundView Technology.

I just wanted to get some clarification.

On the third quarter results, what's the pro forma earnings?

Is it three cents or four cents?

Which quarter are we speaking to now?

The just reported quarter.

We don't speak to pro forma earnings, as you know.

If we were to back out the onetime adjustments --?

You can make your own calculations on pro forma earnings.

Unfortunately, we can't speak to those anymore.

What about taxes going forward?

Would your effective tax rate be less than historical, once you start earning?

Yes, it would be.

But where we are right now is as you are aware, last year we had to put up a 100 percent valuation allowance against our deferred tax asset.

And as a result of that, you have to have at least 6 quarters of consistent earnings before you can start to book those tax assets again.

So in the short-term, the only thing you are going to be seeing running through the provision will be tax expense related to foreign operations, for which there aren't benefits available.

And to make that more concise, is probably Japan.

Because we have tax benefits in Korea.

We have a tax holiday here, we have a tax holiday in the Philippines.

So it's pretty much the Japanese operations where we do not have those tax holidays.

(indiscernible), WR Hambrecht.

The 5 to 8 percent guidance that you gave for Q4, I'm just trying to understand (indiscernible).

Is this the unit shipment that's driving the growth, or richer product mix?

Can you give us some color on that?

What kind of unit shipment growth are you expecting?

We are expecting in that range, in that range.

John, in terms of China and Taiwan factories, are they black right now?

What's the status (indiscernible) they get in black?

Number one is operating (indiscernible) positive, so in China, it's right around breakeven.

(indiscernible), Equity Value Ventures.

How large a customer was Toshiba in the quarter?

They were -- obviously, they were our largest customer, and they represented approximately -- one minute here -- about 13 percent.

13 percent?

I think at the last, perhaps the last conference call, there was a guidance or a number thrown out of 400 million in revenues from Japan.

Was that an '04 number?

(indiscernible) in the range of what we will do in '03.

And how would that grow in '04?

It will grow.

We often don't give market share percentages.

It will grow.

At this time we have no further question.

I would like to turn the conference back over to management for its closing comments.

That's it.

I want to thank everybody for being on the call.

We'll talk to you next quarter.

Ladies and gentlemen, that concludes the Amkor third quarter 2003 earnings release conference.

If you would like to listen to a replay of today's conference, you may dial 303-590-3000, with pass code 550705#.