艾克爾 (AMKR) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Amkor first quarter 2004 earnings release conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mr. John Boruch, Vice Chairman.

Please go ahead, sir.

Thanks.

Thank you for joining us today.

This is John Boruch, Vice Chairman of Amkor.

With me today are Bruce Freyman, President and Chief Operating Officer, and Ken Joyce, Chief Financial Officer.

I will make some brief comments, Ken will discuss our operating results and than Bruce will have some closing comments.

Our first quarter revenue came in slightly below expectations, we are pleased to achieve sequential revenue growth.

In contrast, in what is normally a seasonally downed first quarter.

Increase in Q1 revenue and a continued growth in our customer's forecast indicates that we are experiencing a broad-based industry recovery.

The industry recovery along with acceleration in out sourcing of assembly and tests representing Amkor with significant opportunities to expand our customer partnerships, strengthen our operational capabilities and increase our market share.

It is our intention to fully capitalize on these opportunities.

Ken Joyce will now review our financial results.

Thank you, John.

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 in Form-8K prior to this conference call and our other filings with the SEC.

For information on risk factors that could cause the actual results to differ material 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.

Revenue increased each month during the quarter.

However, March was softer than expected.

We believe Q1 sales were impacted by supply limitations at the wafer foundries and absorption of excess inventory in the wireless and computing markets.

That said, March revenue tracked at an annual rate north of $2b.

Our 1.8 billion-unit volume in the first quarter is a record for Amkor.

First quarter gross margin was negatively impacted by higher material costs for sub straights, lead frames and gold wire.

Looking ahead, our ongoing investment in growth initiatives including our new building in Taiwan will increase depreciation, labor, and factory overhead expenses as we continue to expand production space, add equipment and increase factory work force in advance of what we expect to be a strong second half.

These factors will constrain gross margin and cash flow this year.

Although, we expect margins and cash flow to increase in the second half of 2004.

We presently expect gross margins in the 26% to 28% range in the second half of the year.

Pursuing our growth initiatives will modestly impact our costs over the near term, but we believe these actions will yield the greatest long-term benefits for Amkor and our shareholders.

ASP erosion of 3% in Q1 was in the normal range, but slightly higher than the past few quarters, and a little higher than we expected due primarily to a shift in our product mix.

At various times last year we were on production allocation for several package families.

During the fourth quarter of 2003, we accelerated our capital expenditure program to get ahead of demand and thus avoid having to go on allocation in 2004.

In the first quarter, we ended up spending $171 million, or $29 million less than forecast, as the demand for advance packages softened a bit in Q1.

We anticipate continued growth through 2004 and we continue to build capacity in both advanced and traditional packages including micro lead frame, stack chip, chip scale VGA, flip chip, camera modules, TSOT, SOIC and strip tests.

First quarter operating margin was impacted by $5 million in legal costs in connection with mold compound litigation, and we anticipate this level of legal costs will continue through the balance of 2004.

Going forward, we would expect SG&A to rise at a lower rate than the rate of sales growth.

In April, we sold 10.1 million shares of ASI for approximately $50 million resulting in an after-tax gain of around $20 million or $0.11 per share, which will be recorded in the second quarter of 2004.

These funds will be used to support our growth initiatives.

With this sale, our investment in ASI has been reduced to 4.6 million shares, or 4% of the company.

Looking forward, here is a recap of our second quarter guidance contained in our earnings release.

Revenue should be up between 5% and 8% sequentially.

Gross margin should be around 24%.

We would expect second quarter net income in the range of 17 cents to $0.22 per share, which includes a net gain of 11 cents per share from the sale of the ASI stock.

Because we are now reporting taxable income in jurisdictions for which there are tax benefits available, commencing in the first quarter of 2004, Amkor will report quarterly net income tax expense utilizing an effective annual tax rate of 11%.

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

Bruce?

Thanks, Ken.

We're confident that 2004 will be a very good year for us.

Our customer forecast suggests that business will be strong in Q2 and Q3.

Our legacy package business was very strong in the quarter with units up 20% sequentially.

This reflects strong, underlying demand for legacy products and high utilization rates at IDM's and it suggests that the IDM's are generally not investing in additional capacity.

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

We're seeing considerable interests in several new products, such as camera modules, stack chip packages, flip chip and system and package where we enjoy a solid, competitive advantage.

Our design activity is very strong and this is a good leading indicator of business activity.

Amkor's quarterly revenue generating capacity was approximately $650 million at March 31st, 2004 and will grow through the year as we add equipment and build our factory space.

We believe that measuring capacity utilization as strictly a function of wire bond usage has limited value in helping understand our revenue generating capability.

An increasing part of the value in our business goes beyond the basic wire bonding of die into a traditional package.

As we do more volume and system and package, flip chip, camera modules, memory cards, DLP and even chip stacking, we believe that concept that revenue-generating capacity will be more appropriate to understanding Amkor's business and revenue potential.

We anticipate continued growth through 2004 on most of our leading-edge packages, including micro lead frame, stacked packages, chip scale VGA, system end package, flip chip and camera modules as these products gain broader adoption.

Because the IDM's have not been invested in most of these advanced packaging technologies, Amkor's available market should expand at a faster rate than the overall Semiconductor industry.

As these products become a larger part of our business later in 2004 and in '05, they should help enrich our mix.

Our test business continues to strengthen.

We tested a record number of devices in the first quarter, and we are expanding capacity on selected tester platforms.

Due to rapid growth in our Taiwan and China business, we are expanding our operational footprint in these important markets.

In March, we acquired a 354,000 square foot building near the Sinchu science park in Taiwan, which will be equipped in '04 and '05.

During the last two years, we experienced approximately 50% year-over-year growth in Taiwan.

Our new Taiwan factory will support what we expect to be continued strong growth in this market.

As noted earlier, this factory will constraint profitability in the near term but should enable us to significantly expand our ability to support our Taiwan customers and grow our presence in this important market.

In response to strong demand for China-based assembly, we are in the process of equipping the second of two 75,000 square foot buildings that make up our C1 factory in Shanghai.

Over the last four quarters, our China business has grown more than five fold and we expect to exit 2004 at an annual run rate in excess of $100 million.

The next few years will be a period of exceptional promise for Amkor, and as John said earlier, we intend to capitalize on exciting growth opportunities.

We believe this strategy will yield long-term benefits to Amkor and our shareholders.

Operator, we'll open this call to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]

The first question comes from John Pitzer.

State your company name followed by your question.

Credit Suisse First Boston.

First Ken, help us understand how depreciation scale is up in Q2?

And then secondly, when you look at revenue guidance in Q2 of 5-8%, given that you guys missed the revenue guidance for Q1, what are you seeing in Q2 that gives you a higher level of confidence in the bottom's up forecast?

Thanks.

Let me address the depreciation question for you first.

Actually, you'll notice that the depreciation was down absolutely in Q1 versus Q4.

We went from 54 to 52 million.

We see that scaling up to the range of around 57 million in Q2 of this year.

The reason for the slight decrease, or the principal driver of the decrease in this quarter was in connection with our buyout in minority interest in Awata (ph) and we had adjustment on depreciation for the assets that were acquired there so it would be in the range of 57 for Q2.

How does that scale on the back half of the year?

I think it will go up around three million per quarter based on what we're looking at right now.

John, this is Bruce Freyman, on the second part of your question as to how we can be confident about our guidance for Q2 having missed Q1 on the sales side, you know, obviously, we use our customers' six-month forecast as the main indicator or the main driver for our guidance for the street.

What we saw in Q1 was that there was some burn off of excess inventory from Q4 that we built in Q4 for companies that provided the wireless space and also the computing space.

What we have seen is already in this quarter, we have seen that a lot of those businesses have come back, so we're confident that the advance packages will sell as we think they'll sell.

They were a little weak in Q1.

Weaker than we had forecasted, but based on where we're at right now, we're pretty confident of the 5-8%.

Bruce, when you look at monthly revenue in April was that sequentially up over March?

We don't report on that John.

Thank you.

Next question comes from Pierre Maccagno.

State your company name followed by the question.

Needham & Company.

Hi, John and Ken and Bruce.

I had a question on the weakness in wireless.

Can you add some color to this because, you know, wireless overall is quite strong, and is this specific to Amkor, or is this something that you see industrywide weakness?

Actually, it was weaker than we had forecasted.

If you seen the notes from people like Ericsson and Motorola and Samsung, some of the end users had good quarters.

I think what Amkor experienced was a weakness from a few select customers in our advance package area, so in areas like Chip array, VGA and our MLF where we put a lot of capacity in place in Q4 and Q1 to get ahead, those are the packages we have been on allocation on during most of 2003.

The forecasts, particularly in March, for those advanced packages didn't really materialize, so they were better than, you know, obviously, we had a better than historical first quarter, but a little bit lighter on the advance packages than we had forecasted, so getting back to my answer to John Pitzer, going forward, we see that already in Q2, those packages have picked up as well as our flip chip business continues to grow nicely and business in other areas, camera modules is also growing, so we feel good about the guidance.

Is it weakness from advance packages or otherwise the strength was there?

Is that what it is?

Actually, you're sequentially, in terms of revenue for communications, you're down, correct?

That's correct, and most of it was due to the higher ASP advanced packages.

OK.

Thank you, sir.

Next question comes from Brett Hodess.

State your company name followed by your question.

On the gross margin a bit, is the depreciation or the mix the bigger impact on the gross margin, or are they about equal in the flat margin outlook at this point?

It wasn't so much the depreciation in the current quarter.

A lot was attributable to the mix, and we did experience material cost increases in the quarter, which significantly impacted margins.

The second question, you talked about continuing to expand on test side and with percent of the tests now, where do you think that might go?

Is the other business going to grow at a rate where they will stay in that range, or do you think that could trend up to the teens by year-end?

This is Bruce.

I would imagine it will close the year above 9%.

Exactly what the percentage is, I don't know, but the test business is absolutely on a comparative basis growing faster than the assembly business.

Thank you.

Our next question comes from Ted Parmigiani.

Lehman Brothers.

Couple of more questions more on the gross margin.

Can you talk about the benefit from the joint venture closing?

What was the actual benefit on that?

Approximately, it wasn't a benefit.

It was a reduction in the depreciation of approximately $4 million.

OK, so that was unforeseen, and therefore, you know, having that taken out, you're depreciation would have been in line with what you were saying in guidance for Q1, which was up four million?

That's correct.

So the new equipment's in.

You have capacity for the advanced packages.

Some of those customers that use advance packages were weak in March but have come back.

Are material costs really going up that much?

I mean because at the same time, ASPs have come down.

Are those two related?

It just seems like this is inconsistent with what, you know, is, you know, -- well, certainly with what we started out with going into the quarter and certainly with what we're hearing right now, you know, ASP pressure is something that we haven't really heard about for last couple of quarters and now you gays are down 3% again.

What's your forecast for the year here, I guess?

On ASP pressure, when you look at it on a ASP per pin basis, I think the 3%, which has been bigger than -- was larger than where we have been in previous couple quarters, it was related to a change in mix, so we sold record numbers of low-end units where the ASP per pin is at a lower cost.

It's not necessarily -- it depends on what package we're talking about, but it's not necessarily a lower margin.

In this case Ted, the ASP pressure is not from giving out lower quotes.

There's been no change in the pace of that.

Rather, it's really reflects that we've got -- there was a huge demand for low-end packages and so, in fact, on standard legacy products like SOIC, TSSOP, PDIP, PLCC, we were on allocation and are still on allocation on many of those products, so that's really where the ASP reduction this quarter came from.

Thank you.

Our next question comes from Bill Ong.

Please state your company name followed by your question.

Sure, Amtech Research.

What do you expect see as growth rates for Q2, Q3 and Q4?

Given the construction restraints, have you negatively impacted customers with share loss concerns?

Quickly, what's the tax rate expectation for 2005?

Can you repeat the first question?

Sure.

What type of seasonal quality growth rates do you expect for the next several quarters?

I want to get a sense of quarter-to-quarter top-line growth rates, and also the production constraints.

Did you negatively impact the customers?

OK.

Let me take the first two and then Ken can talk about the tax.

On seasonal quarterly growth rates, you know, we just are projecting that next quarter will be up 5% to 8%.

You can go back and look at the historical numbers.

We're not predicting a number for Q3 and Q4 other than to say that we have set -- said it a couple time on these calls that we will be north of $2b, and we said the March run rate was north of $2b, so that's all we're guiding, and then as far as production constraints, we really, you know, cycle times on some equipment, on some testers has gone out and that has caused us some small problems, but at this point, we really don't have production constraints, and that's why we're looking forward to a good second half of the year?

With respect to the income tax rate, our current estimated effective annual tax rate would be 11% and we would anticipate that that would be the same for 2005 at this point in time.

OK, thanks.

Thank you.

Our next question comes from Ali Irani.

Please state your company name followed by your question.

CIBC World Markets.

It seem your depreciation schedule is not ramping up that fast given your spending level and you're digesting some of the older Capex.

Why look at your leverage and guidance ahead?

Which strikes me is this quarter and again next quarter, your SG&A and R&D expenses may be ramping faster than some of us may have modeled.

Can you take us through why and where that is happening and what you see for the balance of the year, please?

Ali this is Ken Joyce.

It's a good question, and with respect to the R&D first, I think we indicated on our last call that we did expect and we planned for about a 40% increase in R&D spending this year, which are additional programs that we've implemented in our R&D to enhance our programs.

We started up a new R&D facility in our Japan operations.

That's part of it.

With respect to the SG&A, I think we've had -- we've been right in line with our estimates with one exception, and as we've noted earlier, and this is the legal cost in connection with the mole com pound (ph) litigation that we're involved with.

It was approximately $5 million in the first quarter.

It was $5 million in the fourth quarter of last year.

That is much higher than we historically have run.

Run litigation cost is usually around 1 million a quarter.

Based on our discussions with counsel, we foresee these increased costs running throughout the balance of the year.

With the growth of the business in addition to that, you would have other increases in SG&A, some small hiring and other costs that go up as you get through the year, but not certainly at a rate far below the rate of increase of sales.

Sounds like it's the legal issues and when I look backing out your depreciation from your cost of goods, your materials and labor portion in the first quarter seem to be well ahead of my expectations and sharply higher sequentially as a percentage of revenues despite better top-line volume.

You mentioned in your press release that the cost of materials and other supplies had gone up.

What do you have right now in your outlook and should we expect these basically inflationary costs in your supplies to remain in place for the balance of the year?

It's hard to say what's going to happen with materials.

The price of precious metals and petroleum-based products, such address epoxy mold compound.

They have gone up somewhat.

It's hard to say what's going to happen in the future on that.

Some of it on the laminate side of things is related to the mix that we had during the first quarter, but we are mitigating some of these price hikes address the year goes on by switching to lower cost suppliers.

That's certainly a move that we've been moving toward for the last several quarters with the printed circuit boards that we purchased, and we're also looking to do that also on a lead frame, and so, you know, I think we have it modeled into our estimates for the quarters ahead and don't expect that it will change much.

Thank you.

Our next question comes from Satya Chillara.

Please go ahead with your question.

Hi, guys.

Bruce, on the point of material costs, are you not passing on the costs to your customers at this point, substrates and lead frames and so on?

Typically, you guys do that, so what are you doing there?

We have implemented gold adders so obviously the price of gold has gone up quite a bit in the last several quarters so we have implemented gold adders almost across the board.

In some of our packages where we're on allocation, we've been able to increase some prices, but it's not -- it's not material, and then as far as the packages where we're not on allocation, due to competitive pressures, we don't feel it's the right time to try to pass on price increases that we get from the materials side.

So it's something that we're going to keep looking at, and we absolutely review it every week, and we'll be able to update you on that on the next earnings call.

So in terms of Q1, your consumer business went up about 12, 12.5%.

Do you expect in Q2 to have the same effect and thereby the ASP per pin also, again, going down in Q2?

Is that the reason the gross margin, again, at 24% kind of levels, we're still trying to understand your units went up 9% and last Q1, you were down minus 6%, and you know, still, you know, the depreciation is benign, and still, I think there's some where some disconnect in terms of gross margin decline here, and so what we're trying to understand is what is the rationale for Q2 gross margin guidance?

The rationale is on the ASPs, I expect that we'll see --we'll be in the normal range in terms of ASPs, 2% to 4%.

Very difficult for us to look in April here and figure out what the mix is going to be by the end of the quarter, but the base -- the main reason for gross margins for our guidance on gross margins is that our labor costs have gone up.

We have invested ahead of the curve to meet the demand of what we think is going to be an exceptionally strong second half.

We've got six-month forecasts that are out to October now, so we've got a pretty good view of what our customers are seeing.

We understand, you know, where are those parts coming from, are they legacy parts?

Are they advanced parts?

And so it just looks, you know, we are very bullish on the second half, and we're getting ready and those costs of laying in that capacity ahead of time and getting people trained ahead of time is reflected in our gross margin guidance.

Thank you.

Our next question comes from Ben Pang.

Please state your company name followed by your question.

JP Morgan.

I want to follow up a little bit on the legacy mix, and you know, your outlook.

You mention just now that you have a six-month outlook and you think that advanced products are going to increase in the mix.

Is that correct?

I think advance products as a percentage of the total will increase as the year goes by.

So, did the 1Q mix surprise you guys?

You mentioned you had a lot of leading edge capacity, which hasn't been taken up and the ASP was because of the mix.

Did that 1Q mix surprise you guy guys?

Yeah, very much.

What would change over the next six months?

Well, there was -- there definitely was some inventory, overbuild with some of our customers on the wireless side and on the PC side so, I think from our standpoint, that's been well documented.

We go back to these guys as soon as they missed one week of die shipments and start asking them what's going on, so we feel very comfortable for the explanation of why the advanced packages were soft for us in Q1, and then on the legacy side.

It's actually a great story for Amkor and the OSAT industry in that there's no more visual proof that the IDMs are not investing in new capacity than the fact that, you know, these guys have not expanded the capacity on these standard legacy products, so right now, the reason we're on allocation on the legacy products is that the likes of Ti and FT and Motorola and all the IDMs in Europe and Japan as well as America have pretty much stopped investing in these older packages and in a lot of cases, the IDMs haven't invested anything in the new packages, so --.

Does that translate into better asps even for those lagging technologies or the ability to pass on the material costs of the legacy notes?

I think over the long term that's what's going to happen, so the upsurge in late Q4 and then all through Q1 on the legacy products, doesn't allow us to pass along the price increases, but certainly, we're in a situation and we're monitoring it very closely where demand outstripped supply, so we don't see these big IDMs investing.

We think that we've got a good thing going in the legacy products.

Many of them are at very good margins, and certainly that would be the only place where we would invest any money in legacy products is where we see superior margins, but back to another point you made is that as the year goes on, our forecast certainly indicates that the advance products will sell more.

As I said in April, we're already starting to see a pickup of sales of the advanced product, system in package, stack die, chip array, so that all bodes well for this quarter and the second half of the year.

Thank you.

Our next question comes from Stephen O' Rourke.

Please state your company name followed by your question.

Hi, Piper Jaffray.

Just a couple of questions.

Any changes to your Capex forecast on the year?

No, I think our Capex forecast is, as you know, we spent 171 in Q1.

Our estimate is 125 to 150, so, that would put us in the 300 range.

We previously said 3 to 500 for the year.

So it would depend on where the business is.

If it's as strong as we believe it is in the second half, we believe that's still a good number.

And you talk about capacity constraints at the foundries.

Do you have any indication or thoughts on what revenue could have been had you not seen more pronounced capacity constraints in foundries?

There was definitely --that was the reason given to us by several customers.

It's hard to estimate what the impact was.

It was certainly material, certainly significant to us.

You know, probably a bigger deal was inventory burn off, but this is an area that we have been monitoring closely.

We believe that the foundries will increase capacity during Q2 of about 5% quarter-over-quarter.

That's what our channel checks indicate, and then as far as that having an impact on Q2, you know, that's certainly something that we're concerned about, but you also need to --everyone needs to understand that the vast majority of our revenues come from the IDMs so about 65% right now of our revenues come from IDMs that have their own fabs.

Just along those lines, you have the new acquisition in Taiwan which you will trying to bring up and if we have capacity constraints at the foundries, should we expect a significant jump potentially in revenue or upside in the second half of the year as a result of simply the foundries ramping capacity and this facility coming on board with some market share gains.

How well positioned are you for that?

Absolutely.

That's a big part of our strategy for being in Taiwan is that we wanted to attack the high volume graphics and chip set market and so if you look at who we're qualifying in ATI, one of the largest graphic manufacturers on flip chip right now.

We're in production for in video on graphics in flip chips.

So, a lot of that work will be done in Taiwan, and we continue to penetrate a lot of the biggest fabulous customers over there in Taiwan.

Media tech was in our top 10 last career.

They'll be in our top ten again this year.

So, you know, for the last three years, for the last two years, we have grown our Taiwan business 50% year-on-year.

We expect this year will be close to 50%, so just a super place for us to be.

Thank you.

Our next question comes from Jesse Pichelle (ph).

Please state your company name followed by your question.

Hi, Jesse Pichelle from Piper Jaffray again.

Was your weakness in wireless due to the change in pin?

I would not say so.

It's the customers -- the biggest customer that did not support the forecast were U.S. based.

OK.

Could you talk about any customers above 5% of those in the quarter?

I believe during the quarter, only Toshiba was above 5%, and then we had several customers that came in at, say, just under 5.

Thank you, our next question comes from Shekhar Pramanick.

Please go ahead state your company name followed by your question.

Hi good morning.

Couple of questions.

On the Capex front, you know, you're going to spend anywhere between 300 to 500m, and of course you're seeing the topside bigger revenue growth.

Will you be spending more on the assembly and packaging, and then I have one more?

No, in absolute terms, we won't be spending more on tests.

We said last call and it stayed about the same.

We said 20 to 25% of equipment revenues go to tests and the other 75 to 80 go to assembly.

OK.

Lastly on the Taiwan facility, you know, you mentioned graphics is a focus, but are you also going to go after the given the DM manufacturers are going to more BGA like package?

Do you want to attack that market, as well?

Yeah.

So that's we've got active programs with power chip and others in Taiwan on the BGA package for DDR2, so we're not in the Dram test business, and so if we can go get, capture the assembly business without having to invest in Dram testers, then it's very interesting.

So we think that's going to be a good play for us, and we're developing that business right now.

Thank you.

Our next question comes from Mark Fitzgerald.

State your company name followed by your question.

On the material cost increases here going forward, you commented that you thought by shifting to other vendors, you could sort of dodge some of those.

I'm curious, given the kind of global price increases that we're seeing for all of these basic commodities, how switching vendors really is an advantage.

Well, it's certainly an advantage on printed circuit boards and that's got to do with yields and a lot of other things, you know, process costs, and so certainly, global price increases impact everybody, but for printer circuit boards, that's a strategy that we employed starting at about second quarter last year, and it's been very effective for us, and so, in fact, there's still some cost reduction to be realized will by moving higher percentage of our business to these guys and then on the, like on copper prices, for instance, that have risen quite a bit, the amount of, we have fought off those material increases to a large extent, but it's an issue for us going forward so we have to monitor it.

Continue to use the lowest cost suppliers where we can, but like I said before, I think we have got that modeled adequately into, you know, into our numbers going forward.

Can I ask, what is the percentage of materials cost as the cost of goods at this point?

As a percentage of sales, it's about 38%.

Thank you.

Our next question comes from Eric Gomberg.

State your company name followed by your question.

Good afternoon, gentlemen.

The question on the substrate costs, going back to fourth quarter, some constraints on the substrate side left you not getting as much capacity.

Was there any question of getting enough substrate, or was it a question of cost?

No.

The issue in fourth quarter last year was we didn't have enough capacity on-line, assembly equipment capacity in our factory, so at that time, supply was tight, but we left virtually no money on the table on substrates, so lead times had stretched out a little bit.

Actually, by Q4, they were already starting to come back and now, the lead times have continued to go down as people have brought on more printed circuit board capacity in the industry.

Thanks for that clarification.

Can you give me a sense of how quickly flip chip is going to ramp this year, and what percentage of the substrate costs increases relate to growing flip chip?

I don't know the answer for how much the flip chip costs contributed to materials going up, but flip chip is ramping nicely for us.

Like I said, we are in production in video, which they're just starting to their conversion from wire bonded graphics parts to flip chip graphics parts, so very exciting.

Can't comment on what the projection for a specific product is at this time other than to say, you know, that's been flip chip is an area we have made an investment.

It's one of the reasons our R&D budget has gone up this year.

We have got virtually everyone that's either producing flip chip devices or planning on producing flip chip devices as our customer, so we think we have a very, very good position there.

Thank you.

Our next question comes from David Bitterman.

State your company name followed by your question.

Pardon me, Mr. Bitterman.

I'm sorry.

Can you guys give us a sense of balance sheet and I know you guys probably expect to be a moderate user of cash over the course of the year, but any sense as to where, you know, leverage by year end and cash position should end up?

Well, the leverage really depends on where things go as far as the market activities.

You're absolutely right that in the short term, these activities are going to be a use of cash, so our cash at March is 345m.

Even without any external financing, we think it would still be north of 200m at year-end using our current projections.

OK.

Is there a threshold that you guys have in terms of whether it's a debt-to-cap measure or debt-to-EBITDA measure?

I mean where do you sort of put your foot down in the leverage, you know, as it gets to a higher level than you deem appropriate?

Well, we've always taken the position and we would like to de-lever the company somewhat and bring down the financial leverage in the model, and we're still committed to that.

Once again, we have to look at what growth opportunities present themselves as we go forward and we'll make that assessment as we go forward.

Thank you, our next question comes from Sundar Varadarajan Go ahead with the company name followed by the question.

Yeah.

This Sundar Varadarajan, Merrill Lynch.

Just have a follow-up to the previous question.

One of the things the market was expecting that you are going to take, you know, the call dependent high percent bonds potentially with an equity issue given where the stock is trading now, that seems less of a reality this year.

Could you kind of talk about, you know, what your plans are overall, you know, as far as leverage is concerned.

How are you going to go about reducing total debt on the balance sheet?

I have a follow-up.

Well, we absolutely agree that we have talked about de levering, and that's certainly an attractive opportunity to call the senior subs and 10.5% coupon and bring that down, bring the interest expense down.

We would do that.

We'd like to do it with equity, but not equity at any cost, and we don't think this is the right price to do that.

We'll continue to look at opportunities, to look at our capital structure and see where the market goes.

We'll see how we perform in terms of cash generation from our operations as far as the strength of the business that we see in the second quarter, and we're going to continually monitor it going forward is the answer.

But again, you know, you have seen in the interim given how things have shaken out that your absolute levels of debt are going up between now and the end of the year?

I don't see that at the current time, no.

Thank you.

Our next question comes from Gary Mackerson.

State your company name followed by your question.

Fire League Research.

Is most of your wireless business foundry?

No, I think it's pretty evenly split so we have, we have great wireless business from the likes of Infineon, ST, TI, and then on the Fabless side, Silicon labs and others, so it's pretty well spread out.

So within wireless, how would you break out the impact just within wireless alone between production constraints and inventory burn off?

I would say the bigger impact in the wireless space was the inventory burn off.

We talked about how we are on allocation for much of Q4 on package leading-edge, packages between MLF and Stack chip, and those are the kinds of things that go into cell phones, and those are some of the areas where we got ahead in terms of putting in excess capacity or putting in capacity to get ahead of the demand and those were areas where we saw some softness in Q1, and I should say softness relative to what we had forecasted.

You know, the business is still looking very, very healthy for us.

Thank you.

Our next question comes from John Lopes.

State your company name followed by your question.

Hi.

Minor Capital, I hope you can just talked around this, but expectation on the year for the type line is unchanged.

There's no change on the depreciation, yet the high end of prior gross margin guidance was 30% and the current is 28.

So, can you clarify why you have reduced that expectation for the year?

Thanks.

I think what we said on the last call was someone asked the question could you get 30%, and we said yes, depending on what the mix would be of products and if we looked at the mix of products now and we look at the costs that we're incurring to ramp up our operations, some of the investments that we're making in Taiwan, in other areas of the business, are going to generate long-term benefits for the company, so we think -- you know, they're the right long-term decisions to make, and that will impact the margins in the near term slightly.

Thank you.

Our next question comes from Ralph Tenebroso State your company name followed by your question.

Pardon me.

Our next question comes from Parchut Raul (ph) With a follow-up.

Go ahead with your question.

Hi, Ken.

You guys talk about legacy product increasing 20% sequentially.

If I remember correctly in 2000, you guys did a lot of matrix conversion, these became appreciated and there's a lot of gross margin leverage here.

In what respect does the legacy product business help you in terms of gross margins?

I'm trying to understand in going forward with IDM's not investing, how is that going to help new improving the gross margin share?

I think that gross margins, it's on the legacy products, some of the products have excellent gross margins, so certainly north of 25% and some of them even north of 30%, so those are the areas that we're focusing on and like we said, that as time goes on, depending on the competitive pressures in the business, we may be able to actually have some pricing power there, and you know, certainly be on allocation on those products is a good thing for us, and it's something that we'll contribute to the margins to lifting the margins assuming that we stay at 100% capacity.

Right, second question.

You guys changed the depreciation schedule from 4 to 7 years and taken a lot of assessment impairment charges a couple of years back.

You know, if I look at your previous cycle or in 2000 versus now, how is this helping your gross margins?

I'm trying to, again, reconcile, you know, the product mix to the depreciation and so on, so how would you look at that?

I don't think that there is much of a current benefit.

The depreciation in there is the, those impairments, I believe were back in 2001, so most of those benefits of the depreciation change would have worked a way through in 2002 and 2003, so what you're seeing is pretty much the depreciation related to the current asset profile.

I don't think there's any significant benefit at this time from those changes.

Thank you.

Our next question comes from Vikram Bandari (ph).

Please state your company name followed by your question.

This is Vikram Bandari with GSE Partners.

A couple of questions, guys.

Could you please break out your debt into various pieces, perhaps given your latest sort of debt schedule?

And then I have a couple questions after that, as well.

Well, if you -- let me get a hold of the table.

So you want us to look at the debt?

If you could please provide the various pieces of the amount.

Hold on one minute.

I will get a copy of the schedule.

Can I ask my follow-up question in the meantime?

Yeah, go ahead.

It appears that your pricing power -- should I conclude from the comments earlier, your ASP performance and the mix is more or less flat?

No, on a mix-adjusted basis, it was down.

On a mixed adjusted basis, it was down.

Just the ASP per pin has gone down, which is our revenue divide by the total number of pins that we shipped.

And the mix was skewed toward the legacy products, which just have a lower ASP per pin.

It doesn't necessarily suggest that they have a lower margin.

Right, right.

Do you feel that your pricing power is slightly less than the rest of the service space.

If so, could you discuss why would that be -- would that be because there's still a lot of capacity at the IDM's that you're sort of competing with, or is there something else, like competitors or anything else?

Yes.

Certainly on the products where the industry is out of capacity, that's the area where Amkor and others have the most pricing power.

So it's only been, say, two or three months that we've been on allocation on a lot of these legacy products and as I indicated before, I think that if it continues for another month or two, we will have pricing power and we'll be able to pass along some price increases.

Thank you.

Our next question is a follow-up from Mr. Mackinle.

Please go ahead with your followup

Yes.

I still have difficulty to understanding this issue with the inventory program or the inventory overview in wireless and PC.

Maybe if you could explain that a little bit more because, I mean, the demand was so strong in this industry and I don't quite understand and then I have a follow-up, too.

So, what I tried to indicate is that that this was for a few of our large customers, and these guys overbuilt.

Maybe it was overbuilt in certain devices that we had large market share, but, you know, we are very confident of our analysis that that's what happened on these leading-edge products, so that's all I can tell you.

That's as much detail as I can shed on it.

Would you say that's an industrywide issue, or was this more specific to those customers that you have?

I would guess that based on the results I saw coming out of the phone industry, which were very strong other than Nokia that it probably was more customer specific and more of an issue for us perhaps than the semi industry as a whole.

Thank you.

Our next question is a follow-up from Mr. Pierre Maccagno.

Please go ahead with your follow up.

Yeah, just a follow-up on the guidance, revenue guidance 5% to 8%.

Two questions on that.

One what's the embedded ASP assumption in that?

And also, is that an organic --outlook on organic growth?

And if so, are there other sources of, let's say, new revenue or inorganic, let's say, potential here in this quarter that we can see to the top line?

The 5% to 8% is all-organic and the ASP assumption is our standard 2 to 4, and as far as inorganic, or income from -- revenue from other sources, that, you know, we don't comment on other deals.

Thank you.

Our next question we due to time constraints.

We have time for one more question.

Our final question is a follow-up from Mr. Pitzer.

Please go ahead with your follow-up.

Yeah guys, thanks.

A couple of questions.

First what percentages of wafer right now are coming from foundries versus IDMs?

You talked about the growth of foundry capacity?

Are you worried about Idm capacity constraining top-line growth?

And then the second question is, I'm kind of curious because kind of the historical pattern you guys have had is you know, you have four quarters of customer sort of beating the bottom's up forecast and then when customers start to miss the bottom's up forecast, that typically marks the beginning of the end, and I'm kind of curious in your nonpublic history, have you had sort of situations where customers started to miss the bottom's up forecast, and that was just a one-quarter phenomenon?

Thanks.

You know again, I think this thing was pretty specific on why we missed the revenue guidance, and you know, specific to the advance packages, the legacy packages was like a dream come true for us.

So, you know, in fact, a couple of our customers that are in the low enologic business, they suggested to me during visits that the first thing before a very broad-based industry upturn and they said they have seen this for the last 25 years is first, the standard linear and logic parts come back and so that's what's going into the legacy products, and so, in fact, we preferred that from -- I heard that personally from a couple of the highest level people at a couple of the big IDMs.

So, that's very encouraging for us.

On your issue about supply constraint because of the fabs, you know, most of the IDMs that I've talked to, they're talking about being at 90% and 95%, but there's some room there in terms of fab capacity, and we probably, you know, 35% of our business comes from fabless people, but some of the IDMs get their wafers from foundries, as well, and so you might estimate 40% of all of our wafers come from the foundries.

John, Bruce here, and I have a lot less history with the company, I will answer the cycle question.

The first quarter seems to be the most difficult to predict because the carryover from Christmas holidays and the slow chart and the Chinese new years and the fabs shutting down, and historically, as I recall, there can be a miss, slight miss in the first quarter and that has not signaled a weakening in the market, OK.

In our misses in other quarters, it can be a signal.

In the first quarter, you discard that and look for the second quarter as your barometer for the year.

Gentlemen, this concludes the question and answer session.

Please continue.

OK there are no further questions, thank you.