艾克爾 (AMKR) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Amkor Technology's first quarter earnings conference call.

During today's presentation all parties will be in listen-only mode.

Following the presentation, the conference will be open for questions.

Please limit your questions to one question and a follow-up question.

(OPERATOR INSTRUCTIONS) This conference is being recorded Tuesday, May 1st, 2007.

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

Please go ahead, sir.

Good afternoon.

This is James Kim, Chairman and Chief Executive Officer of Amkor Technology.

With me today is Ken Joyce, Chief Financial Officer.

Before we begin this call, 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.

Prior to this conference call, our first quarter earnings release was filed with the SEC on Form 8-K.

The earnings release, together with our other SEC filings contain information on risk factors that could cause actual results to differ materially from our current expectations.

I am satisfied with our first quarter results, which were consistent with our overall expectations.

Our performance reflected normal seasonal slowness, coupled with inventory correction at our customers.

To keep things in perspective, Amkor achieved six consecutive quarters of strong growth from Q2 of 2005 to Q3 of 2006.

During the past two quarters we have seen a pause in our growth.

Following this pause, I expect to see modest growth for the rest of 2007, although there is not sufficient visibility from our customers who need to quantify our second half growth outlook.

What I can say with confidence is that our business is increasingly tied towards GDP.

And that global economy is reasonably strong.

In addition, our business is also increasingly influenced by consumer spending, even our communications segment is driven by more consumer phases of cell phones than by corporate spending.

So effectively, a large majority of our business is consumer-oriented.

As global consumer spending trends strengthen, our business should benefit.

Our FlipChip business unit continued to achieve healthy growth, even during the seasonally slow first quarter.

We have developed a geographically broad-based production platform with the wafer bumping, wafer probe, FlipChip assembly and final test capabilities in several countries, and we are complementing these production capabilities with industry-leading technology.

We are supporting a wide range of high performance applications in several growth markets.

Over the past two years we have consistently and deliberately executed on a focused set of corporate strategies designed to enable Amkor to sustain our profitability and generate free cash flow.

We have consistently achieved high level of operating performance, including the past two quarters of seasonal and inventory correction.

Our focus now is to extend this track record, continue to validate our operating model and increase our profitability.

Last quarter I highlighted several key management objectives that are driving Amkor and I would like to reiterate these goals.

We intend to maintain our technology and product leadership in key market segments with our tier 1 customers and technology partners.

We intend to maintain a focused vision strategy that recognizes our existing operational strengths and technology leadership and that positions Amkor to profitably support growth applications.

We will continue to drive operational effectiveness so that we can optimize asset productivity and achieve higher returns on assets.

Notwithstanding our commitment to financial discipline, I want to emphasize that we will continue to prudently invest in strategic growth technology and capacity.

Our technology leadership is a key differentiator that allows Amkor to provide packaging and test solutions for advanced silicon.

I am committed to ensuring that we remain the solution provider of choice for advanced applications.

Ken Joyce will review our first quarter operating performance.

Ken?

Thank you, Jim.

As Jim noted earlier, first quarter results of operations were in line with our expectations.

First quarter [2000] net sales increased $6 million or 1% over the first quarter of 2006.

Throughout the past year and over the past eighteen months, we have been focused on enhancing our product mix, while also exercising pricing discipline.

The success of this strategy is evident in the fact that the year-over-year first quarter sales rose 1% despite a nearly 10% decline in unit shipments.

On a sequential basis, sales were down 5% from Q4 2006 on lower unit volumes across most of our product lines, with notable exceptions for FlipChip and modules.

The lower unit volumes in Q1 were due to the anticipated seasonal declines and to a lesser extent, customer inventory corrections during the quarter.

Q1 gross margin of 22.6% was down from 24% in the first quarter of 2006 and 25.3% in the fourth quarter of 2006.

Looking year-over-year, $9 million in factory wage increases and $3 million of increased factory overhead costs, including costs associated with expansion in China and Singapore, more than offset the benefit of reductions in our global factory workforce.

On a sequential basis, the decline in gross margin from Q4 of 2006 principally reflected the impact of our operating leverage on lower sales volumes, coupled with growth in packages with a higher material content.

First quarter 2007 SG&A expenses were reduced by a $3 million gain on disposition of real property used for administrative purposes.

Including this gain, Q1 [2000] SG&A expenses were up $2.5 million over the year ago quarter and were essentially flat with the fourth quarter of 2006.

We anticipate an effective tax rate of 6.7% for the entire year 2007.

However, income tax rate was 10.5% for Q1 2007 due to several discreet taxable items in foreign jurisdictions for which benefits were not available.

Capital additions totaled $55 million in the first quarter of 2007.

Our continued focus on improving overall asset productivity allowed us to moderate our capital additions in Q1.

We are budgeting $70 million in capital additions for Q2, and continue to budget between $250 million and $300 million for the full year 2007.

Of course, we are monitoring business conditions and we're prepared to adjust these figures if warranted.

I am pleased to note that we achieved positive free cash flow for the past six quarters, and given our current view of business conditions, we expect this trend will continue throughout 2007.

This accomplishment reflects several factors, including capital investment and pricing discipline, the ongoing enrichment of our product mix, lower interest expense, and improvements in our operational effectiveness.

We continue to take actions to address our capital structure and reduce ongoing interest expense.

In March we retired the remaining $142 million of 5% convertible debt at maturity.

In April, we refinanced a $300 million term loan due 2010 with a seven-year amortizing loan due 2014.

The new loan accrues interest at a rate that is approximately 325 basis points lower than the old loan.

So taken together, the retirement of the 5% converts and the refinancing of the $300 million term loan will result in interest savings of approximately $13 million for the remainder of 2007.

As previously announced, in connection with the refinancing of the $300 million term loan, we will record a charge in the second quarter with no tax effect of $16 million, reflecting $9 million in prepayment fees, and $7 million in write-off of unamortized deferred debt issuance cost.

This change equates to approximately $0.08 per share after tax.

Here is a recap of our second quarter 2007 guidance contained in our earnings release.

We anticipate that sales will be up 3% to 4% from the first quarter of 2007.

We anticipate gross margin of around 23% and net income -- or earnings per share should be in the range of $0.13 to $0.16 per diluted share, which includes charges of $0.08 per share associated with the April 2007 financing.

Operator, we will now open this call to questions.

(OPERATOR INSTRUCTIONS) Timothy Arcuri, Citigroup.

A couple things.

First of all, can you talk about the pricing environment?

If I listen to your key competitor over in Taiwan, they were talking about pricing actually declining in June and declining again in September, which is a little bit odd if we're in the middle of a big sustained up turn.

So I am wondering what your view is on pricing, and then I had a follow-up.

Thanks.

This is Jim.

I haven't really -- we have not really seen any significant price erosion.

Actually, it is fairly stable.

Obviously, if you look in our results, it is hard to see that because ASP really doesn't have a meaning unless you compare to apples-to-apples, very difficult to see the ASP erosion per se, because if you look at it, our units were actually increased -- I mean, decreased, I am sorry.

But overall our revenue in fact was up a little bit or depends on how you look at it.

So overall, I have to say it is a stable environment.

And we don't really see any major erosion in ASP at the moment.

Okay, Jim.

Thanks.

Maybe just one quick follow-up.

Jim, if I look at chip inventories and I look globally, we're at arguably record levels of inventory today.

We are building inventory in excess of 30% year-over-year at the chip level.

And yet the consensus is expecting a kind of a normal seasonal second half for you.

So I guess what's your view when you talk to your customers of the inventory situation?

It seems like in Q1, the inventories went up, not down.

So it seems like there could be some residual effect here on your ability to grow revenue in the back half of the year.

Thanks.

Again, talking to our customers, we -- again, it is all over the place.

Really, some customers say inventory has significantly corrected.

Some still see some remnants of inventory.

But overall, I think there is a trend compared to demand, the relationship-wise is stable.

Really, that's the way I like to express.

And as I stated in our press release and in this -- earlier in my conference call reading, that I really believe as long as the world economy, even though U.S.

economy is slow, no question, but world economy is still supposed to be about 4%, even say some 4.5%.

If that's the case, we should see some modest growth in second half.

That's my observation.

Satya Kumar, Credit Suisse.

Thank you for taking the question.

This is (inaudible) for Satya Kumar.

I have a quick question regarding your debt.

Similar to what you accomplished in Q1, are there any other opportunities to refinance your debt further?

This is Ken, Satya.

We continue to monitor our capital structure.

One of the items we're currently looking at is that there is $22 million approximately of senior subordinated notes, 10.5% coupon, they're callable in May.

That's something we're looking at.

And there are other opportunities, and we'll continue to look at those.

Okay.

Thank you.

Hey, this is Satya.

Sorry, I jumped on.

A quick question.

I notice that the industry is spending CapEx to revenues fairly disciplined manner and you're talking about pricing being stable.

When I look at your Q2 revenue guidance, it's a little lighter than most of the other sub-cons.

They are guiding to slightly higher numbers?

Could you explain the discrepancy between you guys and what the rest of the industry might be seeing out there?

Thank you.

I am glad you asked that question because I am sure many of you have the same question.

Every company's guidance reflects their specific dynamics and their respective customers and their product mix.

I noticed ASE's guidance also reflects one recent acquisition and then two joint ventures, and they started with low points of Q1.

Relatively speaking, their Q1 was worse than I expected.

So having Q2 to be 10%, 12% is a reasonable expectation.

On the other hand, our case I think I have to be very careful how to explain this to you, but this is a season where our two high volume devices are undergoing product generational changes.

I cannot review each customer or each product, but one of them -- two very high runners are like that, which you will have -- drive lower revenue from these customers in Q2.

But we're going to recover from that as each quarter goes by.

But we are especially impacted in Q2 on that.

Sundar Varadarajan, Deutsche Bank.

A couple of questions.

Talking about your inventory level, seems like you worked down your inventory in the Q1.

Going forward, given your guidance, do you think that inventories kind of stay flat for you guys from -- at these levels?

Or do you expect to build some inventory as you go into the -- exit the second quarter?

Well, again, as I said, we don't know really what our customers each inventories are.

All we know is that within our next three months look, our customers are telling us their inventories are working off.

Our inventories, Sundar, are also down in line with our sales in the first quarter.

Our sales -- .

Oh, you're talking our inventories.

Yes.

Okay, I'm sorry.

Our sales were down about 5%, and our inventories are down about 6% on a gross basis before reserves.

As we -- and so that's much in line.

And I think as we go forward, we would see a modest increase in line with the modest increase in revenues.

And talking about capacity utilization, given your guidance, where do you think you will be for Q2?

Again, utilization, definition is always murky, as you know.

But we still think about 75% to 80% area.

That's what we expect.

Again, if everything matches perfectly, of course, could be much higher.

Chris Blansett, JPMorgan.

Thanks for taking my call.

I had a couple quick housekeeping questions first.

In your SG&A guidance for the second quarter, was your slightly up estimate excluding the $3 million real estate sale, or including that?

It would include it.

In other words, if you take the SG&A -- so there is no confusion, the SG&A on the face of the financial statement is $63 million.

We'll be up projected slightly maybe $64 million.

Okay.

So it is ex -- okay.

I just want to make sure we're in agreement.

And then the second thing is given the restructuring on the debt side, what kind of debt payment are you expecting for the second quarter in total?

It is not that much, no.

It would be -- the amortizing loan I don't think is due, but let me get that here.

I have it.

Chris, do you mean interest or principle?

He is off already.

Pardon me?

Chris, are you there?

He is off already.

Hello.

I am here.

Okay.

Can I get back to you on that, Chris?

Sure.

And then I just had a couple other quick ones.

Wondered a kind of color of how demand trended throughout the quarter?

And in general as you head into the second quarter, which devices are strong and which devices are weaker?

Oh, I think it is all still well balanced.

Again, as I mentioned, most of the cases would be consumer into the factories where -- wireless is still a little bit weak.

But the other sectors are fairly -- consumer sector is fairly still stable in my opinion.

Yes, that is the way it goes.

Let me just -- .

Again, as I said, consumer sector is strong, but wireless is a little

Chris, on that indebtedness, we're showing about $21 million payments out in the second quarter.

Bill Ong, American Technology Research.

Congratulations.

Just a solid execution over the past year or so.

So just a little more color on the consumer electronics.

You did mention that it is strong, it's driving your business.

Can you give -- at least give a qualitative breakdown between maybe game consoles versus MP3 or display or Blue Tooth?

Just a sense of what's really driving the strength in the first half?

Again, game -- we participate in all the games, essentially, in our Xbox PlayStation 2 and 3, as well as Wii, and we participate in all of them, and they're all strong.

In fact, there are additional increases coming.

Anything else within that segment?

What else can we tell you about?

We don't break down any specific components, other than we participate in all of them.

And they are strong by the way, they are all increasing.

Okay.

Thank you.

Dave Egan, Lehman Brothers.

I guess could you run through one more time your comment on the OpEx?

You were saying that we should expect the SG&A to be about $64 million?

Yes.

Okay.

And then in terms of -- could you explain a little bit more or just give some color on what you think the net interest expense is going to be?

The interest expense should be -- the net interest expense here should be dropping down to around $32 million a quarter over the next couple of -- hold on.

Interest expense should be down like $32 million in the second quarter, and pretty much hold there over the 32 and one-third and probably a little bit less in the fourth.

Okay.

And that's net of the interest income on your cash balance, right?

That's correct, which is comparable to the $36 million or $37 million you're looking at this quarter.

Perfect.

Okay.

And then your -- the share count that you're looking at?

I think that's going to stay pretty much the same for right now, and that's in the $205 million range.

206, I think.

Peter Kim, Deutsche Bank.

I noticed that over the past year or so, your mix of laminate packages have been increasing pretty notably, and I was under the impression that as laminates would increase, your test would increase as well.

But test has lagged a little bit.

I was wondering what's your outlook relative to -- with regards to test as a percentage of your total revenue going forward?

I think test percentage may have gone up by 1% more.

In other words, test has been fairly strong by the way.

Right.

But it has -- your laminates has basically increased about 10%.

But test is also from about -- went from 10% to 11%.

That's a 10% increase.

Okay.

And then if I have a quick follow-up.

With regards to your CapEx outlook, what percent -- could you give us an idea about what your CapEx is going to be spent on?

What percentage in test, and what percentage in FlipChip?

Well, test is roughly 20%, I believe.

And the rest is -- and assembly is about 55%, and the other 25% is for the infrastructure and IT area.

But test, among the assembly area, not necessarily it's for the all capacity.

But a lot of them is for productivity increase, and also I don't have the breakdown for the FlipChip per se, but FlipChip will be roughly about 15%, 17% of our investment, yes.

Eric Reubel, Miller Tabak Roberts.

Thanks for taking my question.

Ken, if I can ask you on the incremental gross margin, looking at sort of the -- and during your prepared comments you talked a little bit about the extra charges that were included in COGS, the $9 million, and an additional $3 million for factory wages and costs.

If I look at incremental margin for the first quarter, it was ramped down a little slower than I would have thought given the revenue decline.

And then looking into the second quarter, if I model out the revenue growth and the margin, it looks like the drop is around 32%.

Can you help me understand if there is any change here that I should be looking at going forward?

Once again, in the first quarter we actually had a decrease in revenue.

So you have the -- let's say at a contribution margin of 60%, you lose part of that.

Obviously, the materials would be purchased, dropping down about $19 million off of the $32 million decrease in sales.

And then the increased higher material costs -- shift to a higher material cost products.

So I think that your incremental gross margin that you're talking about as you move forward into Q2 of, you're saying 32%, I would say somewhere 35% to 40% is correct.

Also that depends on the product mix.

It does.

Q1 we had the more marginal business, which was more material intensive.

It does.

Okay.

And if I can ask another question on the mix of FlipChip, you talked about last quarter being positively impacted by the percentage of consigned versus unconsigned business.

How do you expect to see that play out in the second quarter?

We think that's staying about the same for right now, although the trend has been that the customers are requesting us to buy more and more.

We're going to have to see how that plays out, but I think that's the answer.

Yes.

Yes.

Tom Diffely, Merrill Lynch.

Can you talk a little about your test opportunities over time?

And are you seeing customers more eager to put out their test part of the business and before it was mainly just an assembly business?

Yes.

We have more testing requiring that the customers do want us to get into more test area and a lot of turnkey business, of course, becoming more test involved.

That is a trend, it appears to be.

So longer-term, what do you think that means to both margins and capital spending, then?

Well, that's the dilemma.

In other words, if you try to consent too much in test, CapEx has to increase.

But as you know, we are really careful with the test area because of a change in designs and requirements in a short period of time.

So it is -- that's the area we are really sharing risk kind of model is working with the customer.

In many cases, they're consigned where they take the risk along with us.

So I expect to continue to invest heavily in the test.

As you know, our CapEx-wise I told you we invest in 20% of our CapEx, even though total our business-wise test is still about 10%, 12% area.

Right.

Okay.

So over the next few quarters, the 20% in capital spending, does that not reflect, then, the testers that your customers are buying and consigning to you, then?

That's the part we're buying, but there are again, consignments by customers also.

Right.

Okay.

Thank you.

Mark Bachman, Pacific Crest Securities.

Can you give us a little bit more color on what the increase in direct factory admin expenses were in Q1 and what they are in Q2?

The factory costs were up around $3 million year-over-year, and they were up slightly in Q1 also, on a sequential basis.

That's bringing on the new factories as a big part of that in Singapore and China, and that's several million dollars that we're talking about.

And are these ongoing costs, then?

They are going to be ongoing for a bit until we build sufficient revenue to cover those costs to the factories that we're ramping up.

And then you also mentioned litigation [instances] in there.

What litigation instances are you still spending on, and what is the kind of run rate for those on Q1 and Q2?

Total litigation costs over the last couple quarters has been several million dollars per quarter.

When I say that, around $3 million.

We're starting to ramp up, as you're aware.

We are in litigation with [Tesera] right now in arbitration.

And that's moving ahead at a pretty quick pace, so there is some costs there.

There is some other litigation ongoing that in the normal course of business over and above that.

[Paul Hooper], Citigroup.

It is actually [Josephine Shen] from Citigroup.

Thanks for taking my call.

What do you guys think about the increased level of private equity interest in the sector?

And I am not asking for any company specific comments, which I don't expect you guys to speculate.

But just comparing where the sector used to be just about a year ago versus now, I think we're definitely seeing more private equity interest on the back end.

And I just wanted to get your thoughts on what you think has changed, and just whatever comments you can make there?

Well, again, we're all aware that hosting started last year with the [ASC] with the [Carlisle].

Other than public information, I don't have any specific information.

But it tells you when you're undervalued, I think public equity people are interested.

So that's the only comment I make.

And obviously (inaudible), a major funder there tries to own -- I understand attempt to even they extended the period to acquire more shares.

So I think overall, as long as the stock does not --- price does not reflect the fair value, then there may be an opportunity for the private equity people to come in.

But I don't know anything more than that at the moment.

Thank you.

[Peter Plot], CenterPoint Capital.

A quick question for you.

A number of your peers have come out with I guess an outlook which was a lot more optimistic in terms of the demand in inventory environment over the second half or the back half of the year.

Your outlook looks a bit more cautious.

So I was wondering if there was any potential upside in terms of guidance that you might be able to give for the second half?

Or you're comfortable with your forecasts obviously.

But do you think there is some upside given the demand in inventory environment that we're currently experiencing and the more positive outlook by your peers?

I understand that an apples-to-apples comparison is difficult given the different and various industries that you operate in.

This is Jim, again.

I think I answered that question earlier when asked about a similar question.

I responded by saying, case of ASE, their Q1 was collectively speaking, surprisingly lower than us, and compared to last year Q1 same period for us, sequentially also.

I believe their specific tool that their own customer relationship and there are specific dynamics involved, but their second quarter obviously they came with a 10%, 12% guidance, because they're starting from a lower level, plus they had some recent acquisitions and two new joint ventures.

I am sure those things add up.

And then also special to us, Amkor specific, this is only Amkor specific, there are two high volume devices undergoing the product generation changes.

And until that process takes place, we're going to see some slower growth on those products.

But once they come back, we're going to come back to a more normal level of revenue.

And so respect to your second half question, yes, Q2 growth we are only a 3% to 4% guidance we gave you.

But I think second half, I believe there will be modest growth resuming.

Dave Egan, Lehman Brothers.

It doesn't follow to what you just talked about.

In terms of the return of the demand for those devices, should we be thinking that that would -- that that would start impacting your revenues starting in September?

I know one of the design changes may come back in Q1 next year.

That much, it takes that long to generate changes.

Really, it is a design change of the product.

So it is up to our customer, but we're working with them in those changes, and these are two high runners, they're replacing some other products and so on.

However you expect, again, I have no way to quantify, I told you early earlier.

But as long as the consumer sector spending is stable -- continues to grow second half, I expect to have second half to recover part of it.

Okay.

Great.

And one other question here.

In terms of the gross margin, you talked about the materials were increasing as a percentage of the COGS because of a change in the mix.

Yes.

That makes sense.

Just wanted to follow-up and make sure, some of your peers, and then also some of the vendors who sell substrates and materials, are talking about that the pricing of materials has declined.

Have you seen that, and is that something that we should be expecting in your numbers?

Yes.

Some substrates areas, the supply and demand balance is now becoming to favor to us.

How long, I don't know.

But that's the case (inaudible).

But more important part, by the way, coming from product mix.

I really think as we go more to the margin kind of products in wireless area in the future, I think you're going to see our margins are lower of course.

So we have to educate you people when that happens significant way.

But so far, it isn't enough to affect our goal in achieving the gross margin area.

Our substrate prices are definitely some areas it is softening.

And pricing is somewhat a function of that.

So where the increases go to our customer, the decreases generally also accrete principally to the customer.

Chris Blansett, JPMorgan.

I guess to kind of clarify what people have been trying to get around, if you tried to strip out the effects of these high-volume products that are in a low in the second quarter, do you have some sort of organic quarter over quarter growth rate that would quantify the effects -- the negative effects of those?

Let me put it this way, if we had those two high runners running, we probably had additional $20 million, $24 million revenue.

Okay.

That makes sense.

And then the last thing is how and when -- when will you determine if you're going to pay off the next $22 million in debt?

How do you determine that?

We're working on that, and we're having a meeting with our Board on May 7th, and we'll discuss it there.

Then last one is, you under spent your CapEx for the quarter.

Is there any reason why or just -- ?

We increased our asset productivity for one thing.

And again, business environment.

We just -- there is no need for it.

That's why we didn't invest.

I told you we still running at 75%.

When there is no need for it, we're not going to invest.

That's the difference.

In the past, based on demand, we went out and bought in our capacity and new equipment and so on.

Now we are concentrating on efficiency of equipment.

How do we increase our productivity, and rather than capacity per se, or new development areas, such as FlipChip.

We don't shy from.

We aggressively invest in those areas.

Eric Reubel, Miller Tabak Roberts.

Just a couple follow-ups.

The additional OpEx expense related to the litigation with Tesera, can you frame expectations around how many more quarters that could -- when do you see this winding up?

Is it in '07?

We're scheduled to go to arbitration, the arbitration hearing is scheduled for October, but that could be pushed out.

You know how it is with litigation, Eric.

And if I could follow-up, I think you addressed this, but I missed it.

If you could clarify for me the customer financed CapEx, could you -- and the impact on the balance sheet.

Could you tell us what the increases were year-over-year, if there were any?

There weren't.

There are actually a decrease.

There has been less activity in the customer advance payment.

But that being said, we still have on our balance sheet approximately $39 million, I believe it is, in total liabilities to customers.

Great.

Thank you.

Mark Bachman, Pacific Crest Securities.

You just started to answer my follow-up question there.

On the -- the reason I was asking you about the SG&A was I wanted to know as a dollar figure, if we look out into the future, is there a way that we can start to model those indirect factory costs and these litigation costs coming down?

Do you feel comfortable at all talking about that?

I think what we're going to do for right now over the short-term through 2007, because we're evaluating our various SG&A programs at this time, we're going to say that we're essentially flat for the balance of the year.

But that being said, as Jim said, we increase -- we expect an increase in revenue.

So as a percentage of sales, we would expect SG&A to be coming down through the balance of the year.

Okay.

But specifically, those two things we should probably keep them pretty flat for the time being?

I think that's a fair assumption, yes.

R&D about $40 million this year you think is what you're budgeting?

That's correct.

$41 million maybe, yes.

Okay.

And then Jim, for you.

Those two big projects that you have running out there, can you give some color around those?

Does one of them have to do with a gaming platform and the other one probably in the computing sector?

Well, again, we do not wish to discuss any specific, but your guess is as good as mine at the moment.

(OPERATOR INSTRUCTIONS) Jake Kemeny, Morgan Stanley.

Jim, you kind of answered my question on your view of CapEx and how that's changed.

So I will try to ask another one which is, based on the guidance you've given us, it seems like you're going to generate a decent amount of free cash flow this year, that's including working capital and CapEx.

And I was wondering if you've earmarked anything in particular to do with any excess cash that you'll be generating?

Again, that's not my specialty, it's Ken's area.

But first thing is we have to meet the $88 million coming in February of 2008.

That's the remaining of the $400 million senior notes we had.

And as you know, $22 million now we can call it without any penalty, so most likely that will be taken care of.

So I really think we're going to generate a fair amount of cash, and I am sure I'm going to get a lot of calls how to use their money, so I know about that.

I think important thing is how we continue to generate free cash flow about $75 million a quarter.

That's the key, I think, and we're going to continue to give attention to that part.

I guess if I could just go back on the CapEx, what has changed now versus many years ago, when sometimes the CapEx got a little bit ahead of where demand really was?

How do you balance that so that you don't spend too much, and that you don't actually spend too little and lose your competitive advantage?

What has fundamentally changed in terms of your visibility in your decision making?

Again, not to finger point anybody, that's not the purpose.

Before that I think we were in an environment of growing annually at 15%, 20%.

And then since the last 2000 bubble and whatever the downturn in 2003 on up, remember 2003 and '04 we also going back to all the habit of again expanding.

That's why everybody went out and spent a lot of money in capacity.

We learned hard way, that is our semiconductor growth rate has changed from 17%, 20% kind of growth to single-digit.

And now everybody kind of agrees, semiconductor is not going to grow at the single-digit or high or middle single-digit.

Therefore I think our sector is also adjusting accordingly.

That's the discipline we are introducing and after 2005 1Q, everybody was at the low teens in margins, everybody got a wake up call.

I think that's the way I like to explain, and everybody getting smarter.

We learning from our mistakes in the past.

Timothy Arcuri, Citigroup.

If I ran a scenario about you that in 2008, if you grew revenue but all the revenue growth came from FlipChip, would your gross margin be higher or lower than what it is going to be in 2007?

Gross margin percentage?

Yes.

It would be lower.

Okay.

So FlipChip as it ramps is dilutive to the gross margin, correct?

If you assume that your are buying the substrates, not on a consigned basis.

Right now it is about 50% purchase, 50% consigned.

By the way, Tim, you know FlipChip compasses a broad area, from bumping through order turn -- wafer level to FlipChip assembly itself and test.

So again, which part we're going to -- but most likely, FlipChip is going to be talked in terms of a turnkey basis.

I think our model shows not necessarily our margin is going to be lower, by the way.

Again, it is still -- it's just the beginning.

We have to learn how the customer our relationship will work it out.

If they consigned the materials more, what kind of formula we're going to use and will change in my opinion.

And whether it is going to be more wafer level concentrate or is the bumping -- heavy in the bumping or whether we're going to be more concentrated on tests.

All of this will change the margins.

I think it is pretty much hard to say if necessary we're going to go down.

In fact, my model shows, by the way, our guide shows me it is going to grow.

All right.

Okay.

Thanks.

Thank you.

At this time we have no further questions in queue.

I would like to turn the conference back to management for any concluding comments.

Please go ahead.

Thank you for participating in our conference call.

We look forward to speaking with you again.

Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude Amkor Technology's first quarter earnings conference.

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