艾克爾 (AMKR) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Amkor Fourth Quarter 2003 Earnings Release.

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

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

If anyone needs assistance at anytime during the conference please press the "*" followed by the "0".

As a reminder, this conference is being recorded today, Wednesday, January 28, 2004.

I would now like to turn the conference over to James Kim, Chairman of Amkor Technologies.

Please go ahead.

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, Vice Chairman;

Bruce Freyman, 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 Bruce will have closing comments.

Earlier this month, we announced that John Boruch has been named Vice Chairman and Bruce Freyman was promoted to President and Chief Operating Officer.

In his role, John will support me in developing and overseeing the strategic initiatives that will enable Amkor to reach the $3-5b revenue level.

Bruce will manage Amkor's day-to-day operations.

We achieved our fourth quarter financial targets and have entered the 2004 with a considerable business momentum.

Indeed, it is not often that we anticipate a sequentially stronger first quarter.

We believe the market for outsource assembly and test is poised to expand at a remarkable rate.

However, it is up to companies like Amkor to take the steps necessary to accommodate that growth.

Over the past two years, we have worked hard to position Amkor to capitalize on these growth opportunities.

We have fine-tuned our operations, strengthened our management team, enhanced our balance sheet, and extended our business development efforts.

We entered 2004 with the following primary goals.

Number one, to achieve above industry growth and exceed the previous peak revenue levels; two, enhance our capital structure and delever the balance sheet; three, increase our operational footprint in Taiwan and China; number four, capitalize on several key packaging and test technologies, including MicroLeadFrame, test packages, flip chip, camera modules and strip test.

All of which are core competencies of Amkor.

We believe 2004 presents exceptional growth opportunities for Amkor.

As I stated in our earnings release, I believe we are in an excellent position to exceed $2b revenue in 2004.

Ken Joyce will now review our financial results.

Thank you Jim.

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, represents the current view of management.

We will 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 can 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 System.

Prior results have been restated to reflect this sale.

Fourth quarter revenue came in at the high end of expectations, as customer demand remained strong during the quarter.

We have continued to benefit from broad-based demand for advanced packages that support wireless and consumer electronics application.

Our $1.6b unit volume in the fourth quarter is a record for Amkor, exceeding our peak in Q3, 2000 by nearly 200m units.

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.

The ASP environment remains favorable; for all 2003, ASPs declined around 6% on a per pin basis, which is well below the normal range because we expect a similar pricing environment for 2004.

We reached our Q4 target growth margin of 25% for 2003.

At various times during 2003 we were on production allocation for several package families.

In response to strong customer demand, we increased our capital expenditures in Q4 and are accelerating equipment purchases in Q1 of 2004 to accommodate continued strong demand.

Our goal is to bring in enough equipment to get ahead of demand and thus avoid having to go on allocation in 2004.

Investment and capital expenditures together with the associated increase in depreciation and overhead expenses will have a slight negative impact on gross margins and cash flow in Q1, however, we expect both gross margin and cash flow to build later in the year as this new equipment is utilized.

Fourth quarter G&A expenses were $3m greater than in the third quarter, principally reflecting increased legal expenses in connection with our mold compound litigation.

We will continue to incur related legal expenses until this litigation is resolved.

However, we expect the dollar amount will be either flat or will decline in Q1.

We remain confident of our legal position in this matter.

We expect SG&A expenses to increase modestly during 2004 but certainly at a pace that is well below our revenue growth rate.

During Q4 of 2003, we examined and verified the balance of our capitalized deferred debt issuance cost, which resulted in a $1.6m reduction in interest expense in Q4.

In 2003, we made significant progress in improving our capital structure.

We simplified our bank facility to better reflect Amkor's improving fundamentals.

We decreased interest rates and lengthened the maturity profile of our long-term debt.

We have raised a modest amount of equity and applied the proceeds to pay down debt.

As indicated in our press release we will realize approximately 15m in annualized interest savings from our debt reduction and refinancing activities in 2003.

We will seek additional opportunities during 2004 to further reduce debt and interest expense. hereHere is a recap of first quarter 2004 guidance contained in our earnings release.

Revenues should be up to between 2 and 4% sequentially; gross margin should be around 24%.

We expect fourth quarter net income in the range of 8-11 cents per share.

Now I will turn the call over to Bruce Freyman for some additional comments.

Thanks Ken.

It's a pleasure to join this call as Amkor's new President and Chief Operating Officer.

I look forward to working with John and Jim to strengthen Amkor's leadership position as the industry's premier source of advanced IC packaging technology.

Q4 was a great quarter for us.

Our performance in 2003 and outlook for 2004 are confirmations of the technology and capacity bets that we placed during the downturn.

Our six-month forecast increased consistently during the quarter across a broad range of device technologies and end markets.

We are seeing strong demand from our leading-edge packages as well as our legacy products.

The legacy products are filling up due to the very high utilizations that we now see within the IDM's factories.

We are also pleased to see increasing order activity from customers supplying high ASP packages to the networking sector.

Because the IDMs made minimal investments in advanced packaging technology during the downturn, we anticipate continued growth through 2004 on most of our leading-edge packages including MicroLeadFrame [inaudible] Stacked packages, chip scale VGA , systems-in-package, flip chip, and camera modules.

This should lead to a better than average product mix as these products become a larger part of our business.

Our leadership position combined with the lack of IDM investment positions Amkor to compete for a much greater share of the available market in these strategically important package technologies.

Our workhorse factories in Korea and the Philippines continue to expand capacities to support the strong demand for advanced and legacy packages.

Our factories in Taiwan and China are growing rapidly and profitably and are achieving revenue growth rates that far outstrip the industry average.

We have recently completely the buyout of our joint venture factory with Toshiba and look for continuing growth from Amkor, Japan.

Our test business especially strip test continues to strengthen and we are expanding capacity on selected high-end tester platforms.

The Next few years will be a period of exceptional promise for Amkor.

We are very encouraged with the strength of our Q1 forecast.

A strong Q1 always presages a good year for semis and a great year for Amkor.

We have an abundance of growth opportunities in 2004 and believe we are taking appropriate actions to capitalize on them.

Operator, we'll now open this call for questions.

Thank you sir.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session.

If you have a question, please press the "*" followed by the "1" on your telephone keypad.

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Our first question today comes from Ted Parmigiani with Lehman Brothers.

Please go ahead.

Thank you, good afternoon.

I'll take my question and a follow up here.

First Ken, on the depreciation expense ramp could you give us some color on that, at least where the starting point is and how that should go through the year, as well as what kind of gross margin or incremental gross margin, you would expect given the firm ASP environment and what, you know, I think everyone would agree is a much better environment in terms of visibility?

And then on the follow up, in terms -- you talked about exceeding your record revenue levels in the past.

Taking that into consideration, if that goal is hit and it looks like you are on track to do that, what kind of range of de-levering in terms of total debt could you guys provide us today?

Thanks.

Ted I think, you know, a number of questions here, let me start off with the depreciation in the gross margin.

As you know, we are not a linear business, the depreciation is a little bit lumpy.

And as a result of capacity that was put in place, we increased our CAPEX in Q4 and we're going to increase it significantly in Q1 and depreciation in Q1 could increase by approximately $3-4m during the quarter.

As far as and that plus some additional overhead costs could also contribute to the margins being slightly lower in Q1.

As we go through the year with the investment that we are making in Q1, we believe that the margin profile will go back and exceed 25% and as we exit the year, we will be certainly in the high 20’s.

It could be in the 30's depending on the product mix.

And I believe that's the -- it's the first question here.

Right.

With respect to the delevering activities, as Jim has indicated on numerous occasions, we are committed to delevering the balance sheet.

We have not set an exact target amount.

I think part of that is dependent upon market forces.

We have indicated that an attractive opportunity for us, for example is the $200m of senior notes 10.5% coupon due in '09 they are callable in May.

We have indicated before and we are still committed that if the market forces are attractive and we are able to do it, we would like to refinance that with equity.

We are looking at other opportunities as we get through the year and will keep you so advised [inaudible] .

Alright.

Thanks.

Your next comes from John Pitzer with Credit Suisse First Boston.

Please go ahead.

Yeah Ken the first question here.

Can you just tell us what the CAPEX was in the fourth quarter what you expect it to be in the first quarter, as well all of 2004?

And then my follow-up question, the guidance of better than seasonal for Q1, can you help me get a sense of which end markets are driving that guidance, and are you getting any ASP increases in Q1, that's helping you grow revenue as well?

Thank you.

Well the CAPEX of Q4 was 82m, for Q1 we are estimating approximately 200m.

For the year, we've used an estimate of 300-500, but once again that depends on where the market goes, it will be lumpy, so it won’t be linear in that respect.

With respect to the ASPs;

Bruce, would you like to comment.

Yes.

John, your second question was -- this is Bruce Freyman and John your second question was regarding end markets.

So we have felt very, very bullish ever since the start of the fourth quarter when we saw our 6 month forecast increasing initially over a high-end advanced packages like chip scale packing, camera modules, memory modules, system and package, flip chip; but as the fourth quarter progressed what we saw was a very, very broad-based surge in demand across both the advanced packages, as well as the legacy products and so in fact we are -- have from time-to-time during the fourth quarter and even into the first quarter been on allocation on advanced packages, as well as legacy packages.

So, that portends a very good pricing environment in legacy packages where we've been beaten down on price.

I would imagine that we will be able to go back and generate a higher average ASP for those product families.

But you know, we've talked about in the press release that we were at 90% utilization for the quarter for the fourth quarter, and we think that on the leading-edge packages it will be a challenge for us for the rest of the year to stay ahead of customer demand.

Our next question comes from Satya Chillara from WR Hambrecht.

Please go ahead.

Hi guys, two questions.

First of all Bruce, can you comment on the Japan factory now that it's totally Amkor.

The gross margin from the Japan factory is that, you know when you did the deal it was cost plus, since then, you know what kind of gross margins are you able to see, that is above or below corporate average and any comments on China and Taiwan factory, please.

Yeah we do not break out the profitability by factories, but what I can say is that we anticipate, -- we know that coming out of the joint venture that we will be at least status quo if not better from where we have been during the joint venture, and as we get more and more third party business in there, which is becoming an increasingly bigger proportion of our revenue stream from that factory, the gross margins will go up nicely.

So, you know, the great thing about our Japan business is we are serving the absolute leading-edge of the consumer product revolution that's happening in Japan, and for the most part, the Japanese IDMs because of their financial situations during this downturn have not invested in any of these advanced packages, so just a great market for us going forward.

Can I go for a follow-up?

Our next question comes from Timothy Arcuri with Deutsche Bank.

Please go ahead.

Hi guys actually I have two questions; number one, Ken can you talk a little bit about, how long it will take to get back on the, kind of the cost structure path that we've talked about before?

In other words, I think you've talked about being, -- you are having gross margins in the kind of 27-30% range, once you get the $500m top-line, how long will it take you to get back on that sort of a curve, now that you are going to spend more money in Q1?

With the money that we are spending in Q1, margin should be above 25% in Q2 and we should start to trend higher as we go out through Q3 and 4.

So we should be back into the high 28-29-30% range somewhere between Q3 and 4 of this year.

Okay and Ken what kind of revenue does that assume?

It would be north of $2b.

Okay.

So actually you are going to be at the high end of what your previous cost structure was even though you have to spend more money right now?

I am sorry, not the high end, the low end, I meant?

I am sorry I missed what you said there?

Ken you talked about 27% gross margins at the $500m a quarter level?

Yeah.

I think that's still is close to where we were at.

Okay.

Right.

It sounds like from what Ken said you can do a little bit better than that actually.

Right?

We can.

Yes.

Okay, great and then, you know, I guess just as a follow up, unless my numbers are wrong, looking back in '98 through 2000, capacity utilization was never quite this tight and I am wondering what's different this time versus what happened back then?

You know, how did things change so quickly if you can kind of look back to the last four quarters and you know, kind of give us a view?

Well, I think that -- this is Bruce.

I think that we have been very conservative up until now, up until the fourth quarter; in terms of our CAPEX spending we are really watching -- watching our balance sheet and making sure that the upturn was really here.

Our Six month forecast is probably the best barometer in the semiconductor industry for telling us where the industry is going and what segments are going?

So, you know, this time we just waited to pull the trigger and so capacity tightened up particularly on legacy products that may be during the last upturn we would have gotten ahead of [sooner], but where the pricing environment was and our relatively conservative position last year, we just figured that we would wait until the fourth quarter to really pull the trigger on capital spending and it is looking like those bets were well founded.

Our next question comes from Mehdi Hosseini with SoundView Technology Group.

Please go ahead.

Yes, one question and one follow up.

You talked about broad-base pickup in demand.

I looked at your revenue mix the communication end market was flat, computing was up, and also consumer, how is that picture going to look like in Q1?

I think that's a very difficult one to call.

You know the only one that I have a very good handle on is that the consumer market is seasonally down, so PlayStation 2 and Xboxes and you know we've already passed the Christmas season.

So historically that always happens.

We are seeing it now, but you know in terms of -- it is exceedingly broad based.

I think in previous calls John Boruch talked about how more [abundant] the networking business was and Datacom business was and you know even those things are showing signs of life.

So we just going to have to wait and see how the quarter goes, but we are very, very encouraged by the fact that this recovery is not hinging on just wireless growth or PC growth, it's really a combination of all the businesses that we serve.

When you look at your 2b plus revenues that you are targeting for 2004.

Can you help me understand what percentage of it is organic and what percentage is coming from increased outsourcing?

It's -- I don't know, I wish I had that crystal ball, but, you know, we don't know and you know what I can say is that just if you break it down between IDMs and fabless, you know they have both grown considerably during the fourth quarter and what we would expect what typically happens in an upturn is that the IDM's factories are very highly utilized like they are right now and then what we will see is a big surge of all kinds of products from the IDMs.

So we're seeing that Q4 into Q1 and expect that that will go on for the rest of the year.

Our next question comes from Brett Hodess with Merrill Lynch.

Please go ahead.

Yeah, I was wondering if you could talk about, you know, some of the programs you talked about earlier such as strip tests and some of the other new offerings you have.

How important is that right now in this environment?

Is demand just so strong from the different segments or are you able to gain share as you institute some of these lower cost manufacturing techniques, is that going to give you some extra leverage as well?

It's a good question.

In almost all of these new products segments that we discussed, Amkor is the leader in them whether it be chip scale packaging or Stacked Chip scale packaging or MicroLeadFrame or strip test.

And so our goal is certainly to continue to take market share where it makes sense.

But in some areas like MLF which is just an absolute exploding business for us, and where we have very good intellectual property.

Our goal there is to just try and stay ahead of demand.

We estimate that we supply 60% of all the world's MLF demand right now.

So certainly what we look at all these things from a market share standpoint, but in some of these products we are looking at them just to try to meet the -- to try and stay ahead of the demand curve.

Excellent.

Thank you.

Our next question comes from Shekhar Pramanick with Prudential Securities.

Please go ahead.

Hi.

Good afternoon, a couple of questions.

Given, you know you are doing -- you did quite a big CAPEX in Q4 and doing quite a big CAPEX in Q1, are you -- will you be signing up somebody large in terms of an outsourcing basis?

Is that what’s driving it?

Or is it more that -- with on the PT side and some of this new products transitions, there is a whole bunch of new chips sets that are coming?

A question for Ken, given the, you know, CAPEX is quite strongly up, what you think the '04 [inaudible] number is?

So on your first question is whether we are signing up someone new, the answer is, we have got certain focused customers where we need to get more market share from them, so we have done very well in the graphics and chip set part of the business, but really the main answer to your question is that we just see broad based demand for outsourced assembly and test services.

Are you also going to go into DDR3 memory CSPs?

So we are -- as the DRAM packages moved to laminate there is increased opportunity for us to get into that business.

So when the DRAMs were almost strictly packaged in TSOPs or a LeadFrame kind of package typically the DRAM producers would do that internally.

As DDR2 and DDR3 move to laminate base packages it's a tremendous opportunity for us to participate, and in fact we are already participating in that business in our Taiwan facility.

Thank you.

Our next question comes from --

With respect to the depreciation of it is probably in the range of 250-275 depending on the where the CAPEX comes out in that range, as we talked about earlier.

And our next question comes from Ben Pang with J.P. Morgan.

Please go ahead.

Hi a couple of questions.

The first one is, do you guys have any -- are you guys are still under any debt covenants that prevents you from putting your CAPEX to a 500m level?

And the second question is, can you make some comments on the relative growth rate in terms of outsourcing by region in Taiwan versus Japan, and the reason I ask is that it seems like the Japanese chip makers are increasing CAPEX, and so I'm wondering if you are starting to see the IDMs actually increase your capacity in Japan?

Thanks a lot.

I'll answer the first question, with respect to the financial covenants we've been working very closely with our banks.

There is a CAPEX -- annual CAPEX limit in there that's the greater of 50% of EBITDA limited to $350m or $250m.

The other thing is we've been working closely with our banks, and to the extent that we need any flexibility there, we are confident that we will be able to achieve that.

Yeah on your question on growth rate of outsourcing in Japan versus Taiwan.

You know Taiwan there is virtually - it is virtually a 100% outsourced, so virtually every company in Taiwan is a design company so by definition they are a fabless company.

So obviously as their business continues to grow and it is growing nicely, we saw a 50% growth last year in our Taiwan operation, expect probably another 50% growth in that operation this year.

But Taiwan is doing very well for us, and then in terms of Japan my take on it, and from our discussions with several of the top manufacturers there most of the investment is going into the front-end.

Some selective investments made in the back-end, but for the most part it's just, -- it's a great opportunity for us in Japan, we expect it will be that way for the -- at least the next 5 years.

Our next question comes from Eric Gomberg with Thomas Weisel Partners.

Please go ahead.

Hi, guys.

A question -- the $300-500m in potential CAPEX this year; at the high-end what would the $500m do in terms of the type of revenues you could do on a quarterly basis?

Well as we indicated it would be north of $2b, but the capacity we would give you is probably $600m in a quarter.

Okay, at this point, how far out are the customers booking on your leading edge equipment?

You know I am just kind of wondering if as the $200m in Q1 CAPEX comes in, if you already have that kind of spoken for with customer commitment?

Yeah absolutely, so Eric we've got 6 month forecast, and we've looked at those very carefully gone back and questioned the customers that have really up-sided forecasts from Q4, and you know, in no way would we have, -- would we be estimating $200m in CAPEX for Q1 unless it had already been substantiated by our forecast.

So you have the bookings there to support that?

Right we have and I think as we've talked about before, we have forecasts as opposed to hard backlog.

But our forecasts are pretty, pretty accurate over our thirty year history.

And can I just ask Ken one thing, could you talk about how operating expenses are likely to ramp as revenues ramp this year?

Operating in terms of the SG&A or operating as part of the factory, Eric?

No, operating SG&A and R&D.

Okay, R&D, we are going to increase this year.

We've increased our budget by about 40% actually in terms of what we are going to do for R&D.

We've made a commitment to increase those expenditures.

With respect to SG&A, I think you will see some modest increase as revenues increase but we can assure you that the increase will be well, well below the rate of growth in sales.

Okay.

Great.

Our next question comes from Tim Fox with S.G. Cowen.

Please go ahead.

Thank you.

Good afternoon.

First question, I guess, for Bruce.

Is there any concern at all giving your [certificate] ramp in CAPEX in the first quarter that you will be able to get the supplies on the equipment side from your vendors?

And I guess as you go throughout the year any concerns at all that you'll be put on allocations from -- the K&S’s of the world?

Yeah, it is a good question Tim.

You know we saw this thing turn it up.

We got very, very bullish starting in October and we have placed equipment -- in either play slots or given hard PO’S to take care of our next six months' forecast.

One of the nice things about our industry probably better than or a little bit easier on us then our front-end; our front bretherenbrethren is that we can see how the forecast moves up or starts to move down and we can push out that CAPEX.

So you know, right now it's all signs are a go and we have not been on allocation yet.

And I think our procurement people have done a super job with the suppliers.

And the suppliers might have had maybe difficulty delivering their stated lead times in November, December because the upturn kind of caught them by surprise.

Those guys are laying in the capacities required to certainly service our requirements.

Okay great.

Second question, K&S mentioned on their call last week, that they, I am sort of paraphrasing here, that they saw for the first time in three years some IDM customers coming back.

Are you seeing in any of your discussions out there with your IDMs, similar to the question earlier about Japan where they are starting to actually increase your backend capacity and get a little concerned about the 90% utilization across the OSAT industry?

Yeah, Tim, that's an area that we monitor very carefully, obviously we don't want to go lay and duplicate capacity for the IDMs that they are internalizing.

And so we have seen some signals that the IDMs are putting in a very, very modest amount of capacity, but what we hear from the equipment suppliers whether be on tester assembly is that it's very, very modest increments of capacity and that most of the sales are going to the OSAT industry players as opposed to the IDMs.

So, you know we are very encouraged that this is a major transition from what we saw in '99 and 2000 where companies like Amkor and some of our competitors were laying in the exact same capacity that the IDMs were putting in place.

You know, during this cycle because the IDMs have not invested in the new technologies, you know, really we're playing for the whole tam of the industry as opposed to just the 25% overflow that historically we’ve played for.

Thank you.

Our next question comes from Steve O'Rourke with Piper Jaffray.

Please go ahead.

Hi, good afternoon.

Regarding your planned capacity expansions, how much could acquisition of customer packaging and test assets contribute in Q1 or in '04?

Could you please repeat.

That was very difficult to understand.

Sure.

Regarding your planned capacity expansion, how much could acquisition of customer packaging and test assets contribute in Q1 or, in '04.

That is will you be spending to buy customer assets and putting them into production at your lines?

No there is -- none of that's comprehended in the numbers that we put forth today.

Fair enough.

You highlight expansion in Taiwan and China in your remarks;

I mean is this a renewed urgency in Taiwan and China?

Has your outlook or competitive position changed?

No, you know actually Taiwan and China are at least on a pure percentage basis, are the biggest -- are the largest growing factories that we've got.

So I stated previously that Taiwan grew for us approximately 50% last year.

We anticipate it will grow another 50% this year, so that's far exceeding the industry averages.

And then in China, China went from a Greenfield startup facility approximately 2.5 years ago.

This year we are estimating it will do somewhere approximately about $100m and so we are going to be investing as appropriately in China.

We see that as our fastest growing factory over the next 5 years.

Do you see your competitive position, as having improved there at all recently?

No I think in Taiwan it's just a fact that, you know, we are the obvious second source for a whole bunch of customers and so we've done a good job for our customers.

We have really improved our customer service; we've improved the quality of our operation there.

We have been able to hire a lot of talented people in Taiwan and you know the customers are really getting very comfortable with us.

So I anticipate for the foreseeable future Taiwan will be a major growth engine for us.

Thank you.

Our next question comes from Bill Ong with American Technology.

Please go ahead.

Yes, are you seeing greater capacity constraint on the assembly side or on the test side?

And what's your proportional spending between test and assembly?

Thanks.

We see, you know, on the leading edge platforms, we see capacity constraints on mixed signal testers; we see capacity constraints.

Last year, we spent about 15% of our CAPEX on test, this year there is a big demand; more and more of our customers are asking Amkor to test for them, and so we estimate that around 20% of our total CAPEX budget this year will go for tests.

Great.

Thanks.

Our next question comes James Groom (ph.) with Morgan Stanley.

Please go ahead.

Good afternoon.

Two quick questions; one is more for Ken, could you just really walk us through what you see working capital trends through the year in terms of inventories, DSOs and your days payable?

And then a more broader question I guess last year you announced the JV or products, DLP packaging from TI, and where do you stand in that, and if you could talk a little bit about other opportunities in that arena?

With respect to the working capital question, the DSOs have actually pushed out a little bit and as our customer mix moves more to an Asian base with customers in Taiwan, and Japan, and China.

The payment terms over there are normally 90 days as opposed to 30 days here in the US, so as you have more of that shift you do have a little push out.

We believe that we've been effectively been able to balance that off on the other side of the balance sheet with the same type of arrangements with our vendors in this countries.

So overall it's somewhat in balance.

That being said with the growth that we are seeing right now that there is some investment that is causing an increase in working capital, both in terms of the increased receivables and increased levels of inventory to service the strong demand that we see. [Bruce] you can take DLP question.

James on your question about DLP if you listened to the TI earnings announcement recently, you will have seen that TI's DLP business is doing great.

As TI's only outsourced partner for the manufacturer of these digital light engines for TVs and conference room projectors.

Amkor, you know it is really a great example of an IDM, like TI which historically has kept a vast majority of their packaging and test business internal.

It is a great example of TI, trusting Amkor, with what is really their crowned jewels.

So that business is expanding nicely for us in Taiwan.

We've had several phases of expansion for TI and expect that business to continue to grow.

Thank you.

Our next question comes from Glen Yeung with Smith Barney, please go ahead.

This is [Karen Ling], I had a question on the substrate market, can you talk about what you are seeing in terms of pricing and availability, and whether you would expect that to impact margins going forward?

Karen, as we talked about during our second quarter conference call in 2003 substrate prices did go up as a couple of the suppliers got out of the business.

That situation has now stabilized.

Amkor has qualified and brought on a number of lower cost suppliers in countries like Malaysia and Taiwan, and so availability is not an issue, pricing if anything as we transfer a larger percentage of our substrate procurement to these lower price suppliers, what we should see is an improvement in margins.

And then a question on the SG&A; can you talk about what you -- that to be at the $500m revenue level?

I am sorry I had difficulty hearing the question.

Can you talk about what SG&A would look like at around the $500m revenue level?

Well, in terms of ...

On a dollar basis or as a percentage of sales.

Percentage of sales, probably in the range of I'd say 9%.

Thank you.

Our next question comes from Jeff Harib (ph.) with [inaudible].

Please go ahead.

Yes can you talk about the, -- what your revenue contribution is annually typically for CAPEX you spend, and how you see your capacity utilization in the first and second quarters based on your spending plans?

The first question on the capital spend, could you repeat that again please.

Yes, the typical annual revenue contribution you get for dollar spending on capital.

We usually get about one in a dollar and a quarter for every dollar of investment, something in that range.

Okay.

And then on the utilization into Q1 and Q2 based on your spending plans?

Yes, so we are very comfortable in fact probably the optimum profit model is for us to be between 90-95%, and so we are comfortable there and based on our forecast we expect that's where we will operate.

Even early in the year when you order equipment, it sounds like in advance so lead times don't stretch too much?

We think that into the second quarter we will certainly be in the 90-95%.

And it could very well be that's where we are during the first quarter.

Okay, great and just on Jim's comment on growing the Company to a $3-5b revenue company, is there anything else contemplated beyond your traditional assembly test business, in getting to that level other expansions?

No, same business. we got out of (inaudible) business.

We are going to stick to our business.

Okay.

Thank you.

Our next question comes from Lance Bytanza (ph.) with Concordia Advisor (ph.).

Please go ahead.

Hi.

Thank you.

I’d just like to better understand the economics around the CAPEX spend in the first quarter the $200m?

I know parts of this have come up at different points in the Q&A here, but could you tell me how much incremental revenue capacity that 200m is going to buy you?

In what quarter do you expect it to come online and given the pace of technological change how long you expect that capacity to last?

Well.

There are a lot questions built into that one question, but probably for the 200m investment you are going to get somewhere in the range around 300m in revenue.

The depreciable lives on our assembly assets is 7 years.

So say that capacity is certainly going to be used in the business over a 7 year period.

I am sorry that 300m per year or 300m per --?

Per year, yeah.

Per year, 300m per year for 7 years.

So I understand the depreciation schedule but so we really think that the capacity that we are adding today is going to be giving the same kind of revenue contribution 7 years from now?

Well I think it is hard to predict what the ASP erosion is going to be or hopefully appreciation in that period.

But you know what we are investing and what we invested in during all of Q3 and Q4 was leading edge technology.

The highest end wire bonders, testers invested in, chip scale packaging that's going into every digital consumer product.

So, yeah, I think 7 years is certainly no stretch on what the useful lives are.

And it’s anyone call on, you know, what the revenue levels will be in 7 years.

And then the last part of that question was just the -- if you spend the money this quarter does the capacity get turned on next quarter or what kind of lag is there?

In fact, you know, it's in some of these lines where we are on allocations.

I mean it is literally -- it hits the floor and within one week it's producing revenue.

So you know that’s why I say this is not a program that we've embarked on our aggressive CAPEX spending here.

It is not a program we've embarked on hoping for the future.

It is a program we've embarked upon because we've got the forecast to support that.

Got you, okay, thank you.

Our next question comes from Justine Fischer (ph.) with Goldman Sachs.

Please go ahead.

Hi, I have two questions, the first relates to CAPEX the very novel topic of CAPEX.

Are you intending to fund the CAPEX from cash-on-hand and if so what sort of cash flow metrics are you incorporating in order to be able to do so through the year?

And the second relates to the 10.5 sub-notes that you referred to earlier.

I know you said that you'd like to take them on using equity when they become callable in May, but would you also consider debt re-financing or is your priorities for taking those out equity?

Well, the first question with respect to how we would fund, we are going to have -- we have our cash on hand.

The cash flow that we are going to be generating from operations which we believe is strong based on our forecast along with any potential monies that we may decide to raise in the capital markets opportunistically.

With respect to the 200m of senior subs right now, it looks to us as though we would like to do that with equity.

But as you know market conditions change and we will look at that as we go forward.

Thanks.

Can I just follow up quickly on --?

Yes.

Okay, would you consider if you are talking about accessing the capital markets to fund CAPEX.

Would you do that with debt or are you --?

I won't say we won't.

I think we would look at debt and [inaudible] equity, it depends on where the markets are at any point in time.

Okay, thank you.

Our next question is a follow-up question from John Pitzer.

Please go ahead.

Yeah, guys.

Help me understand to the extent that certain packaging types for an allocation in Q4.

Do you think you missed out on some revenue opportunity in Q4.

Can you help me quantify that?

And that should be viewed as lost market share or do you think that will reemerge in the Q1 guidance?

No, think that we absolutely left some money on the table there and --.

Could you quantify that Bruce?

No, no, I don't have that number right now, but you know it was substantial and it's what we see is that, that side whether we lost market share or not I don't -- I am not sure, but what I am sure of is that that demand, whether it is the same demand or different demand is rolled over into Q1 and beyond.

So you know, for the new packages it's just -- it's very hard for us and for the industry to stay ahead and the reason is because of this transition from the IDMs, you know, doing 75% of the world's packaging to all of a sudden on this leading edge stuff because of the downturn and other factors.

Suddenly the OSAT industry is playing for almost a 100% of the world demand.

And then Bruce a follow up.

Can you talk about pricing for all of '03?

What did ASPs do in the fourth quarter, and I guess what do you anticipate them to do in the first quarter?

We experienced about 1% erosion in Q4 which is a very favorable environment as you know.

We anticipate that going forward quite frankly as we look out into Q1.

And Ken, the typical price decline is about 2-3% per quarter, or can you help me understand that?

That's correct John.

And you typically match that with cost savings, right?

We do, absolutely we have built in an ongoing model where Bruce and his teams are constantly reengineering the products to try to take costs out and obviously we monitor all the other costs of the company to do that.

Great.

Thanks guys.

Our next question is a follow up question from Ted Parmigiani.

Please go ahead.

Yeah.

Great Bruce I was wondering if you could give us an update on Amkor, China you know, with respect to, you know, kind of a growth profile that you could be seeing there versus corporate average?

You know from a revenue standpoint this year, has the factory passed the breakeven status, you have new technology like Flip Chip running in there, you know, just some color on what the activity looks like over there.

Yeah.

Sure.

So the growth profile is -- the percentage is -- on a percentage level is far -- it is far exceeding any of other factories.

One, is that it is an exciting place to be, and like I said, we will do somewhere in the neighborhood of $100m there this year, -- very good from by Amkor and industry standards from going from a Greenfield in 2.5 years to you know, say 3.5 years to achieve $100m.

So that's very good in terms of what packages we are doing there is an awful lot of flash packaging, and base stand processor packaging for cellphonescell phones, for major IDMs, European and US firms, we are in qualification with firms from Taiwan and Japan, as well.

These are primarily CSP packages.

We are now putting stacked packaging in that factory.

Ultimately, we will have camera modules, flip chip, MicroLeadFrames, so you know some of our competitors have gone in there and gone for kind of a low end strategy, and what we see is a whole bunch of our multinational customers, as well as an emerging group of local customers are asking us more for the leading-edge package technologies.

So, we are very, very excited and that is where we will spend most of our money, or we will spend a considerable amount of money over the next 5 years.

And just a follow-up.

And one other thing, we did exceed the breakeven in Q4, we were profitable in China.

Oh!

Terrific.

And then just to follow-up on substrate question earlier.

The comfort you have with respect to supply and pricing, do you think that's universal throughout the sector or do you think it is more specific to the fact that, you know, you are the second largest guy in that area, that would be in terms of needs of that supply?

Yeah, you really got to it break it down into the subcomponents, so just to talk about substrates in general, things are okay.

You know the area where the industry went on allocation last year was on plastic VGA substrates in particular, you know, and so that area we've shored that up through capacity agreements with suppliers and bringing on new suppliers and lower cost suppliers.

And that's one area but then in other area which is where all the suppliers want to play is on chip-scale packaging, so the -- that's a very competitive area.

It is an area where actually the ASPs are going down, and so in a tight demand environment we can expect that we will see improving margins on those packages, -- the CSP packages as substrate prices go down over the year.

Great thanks.

Our next question comes from Satya Chillara.

Please go ahead.

Hi guys.

Bruce particularly the $200m CAPEX that you talked about, obviously some lost opportunities in Q4 because of the capacity constraints; can I get some detail how much are you spending on assembly, and how much are you spending on test, specifically on Q1?

You know I guess all we can say is that, you know, it's about 20% will be on tests and 80% will be on assembly that's the profile that I would expect that we would see for the rest of the year.

Okay in terms of the unit growth assumption for 2004, if the industry is growing at a 10% kind of unit CAGR, what kind of unit growth are you seeing for 2004 to make your $2b and above kind of targets?

You know, so for 2003 we did $1.6b, we've said on this call that we're going to do in excess of $2b, so that's a 25% growth, and you know so you just do figure -- just do the math right and it's something -- we think the volumes will be 20-25% up or more over 2003.

Okay thanks.

Our next question is follow-up question from Timothy Arcuri.

Please go ahead sir.

Hi guys.

You know, all of you talk about being on allocation and you know, you are at 90% capacity utilization and yet ASPs were down 1%.

If I look back earlier this year, say in Q1 you were at 60% capacity utilization then and pricing was also down 1% sequentially.

You know I know that pricing in this business is never great, but can you help me understand why maybe pricing wasn't a little better given that you were at 90% utilization and you are on allocation relative to earlier this year when it, you know, still went down 1%?

I think, you know, part of that can be explained by the mix and part of it is that, you know, we are finally on the legacy products, we are getting to the point where we have started filling those things up.

And so it portends a very good year for us.

We'll have -- we will have some pricing power there and we'll be able to pass along adders (ph) and you know, one of the areas that we've already talked to our customers about is passing on the rising price of gold to our customers.

So that's shows that the industry is -- our industry is really strengthening and that the suppliers are starting to have some modicum of pricing power.

Our next question comes from Mehdi Hosseini.

Please go ahead.

Yes Bruce.

You were talking about the increased demand for CSP packages, why ASPs are coming down.

I also looked at your R&D and forecast.

If I heard it correctly, R&Ds for 2004 is going to be up 40%.

Does that suggest that you are going to try to get in some of the IP businesses or opportunities in the CSP packages particularly with companies like Ciera offers and would that offer an acquisition opportunity down the road?

One clarification, I might have misconstrued what you said but when I talked about ASPs on chip scale packages, I was talking about the printed circuit boards that we use to make them.

And so we see that the prices, or the cost of that material will go down and our ASPs will be stable for CSP packages just because there is a supply and demand issue.

And so we actually -- we think the margins will go up on our CSP package.

It is very, very important, it is an area where we are spending a lot of money on CAPEX.

So that is just important to note.

And then in terms of R&D, we just see many, many of our customers are -- the reason we are raising R&D expenditures is that many of our customers have de-emphasized or in fact laid off their packaging staff.

And so more and more customers are putting their key programs with us and we are co-developing System in Package and multiple stacked die.

I think we did a press release where we talked about putting four active devices and being in production for four active devices this year.

That will continue to go on.

So that's where we are in R&D; that's why the R&D budget is going up.

And then you know your last comment on acquisitions.

You know, we just have to wait and see how that goes, you know, we are always in discussions with people over on various topics and we just have to wait and see how the year develops.

Thank you.

Our final question today comes from Shekhar Pramanick.

Please go ahead sir.

Hi, again a little explanation on my previous question is -- it sounds like you are already doing DDR2 packages for at least the Taiwanese local DRAM manufacturers.

Are you doing the testing also or do you think this is just a start and maybe given the DRAM packages are going to CSP, might be even going to the sort of the big DRM major customers might give you the packaging as well.

Yeah, we have studiously avoided going into the DRAM business particularly the test business.

Just given the costs and the ups and downs in that market.

So that's a market that typically the big DRAM manufacturers have done internally.

And so we have no plans to get into the testing end of it.

With the exception that we have a very, very exciting opportunity where people have combined base band or DSP processors with mobile DRAM for cell phone and PDA applications.

So that's an area where we are expanding we are increasing our expertise in a major way in DRAM, but it is aimed at a very, very specific segment of our business where Amkor is the clear market leader.

But you were definitely going to DR2 packaging side right with the CSP?

That's right.

Okay.

Thank you.

But not the test.

Not the test.

Thanks.

That's right.

At this time we have no further questions, I would like to turn the conference over to management for closing comments.

Please go ahead.

I Want to thank everybody for attending the call.

We look forward to having a great Q1 and a super 2004.

Thank you.

Ladies and gentlemen that does conclude the Amkor fourth quarter 2003 earnings release.

If you would like to listen to a replay of today's conference, you may dial 303-590-3000 with pass code 561042#.

Thank you again for your participation in today's conference and you may now disconnect.