艾克爾 (AMKR) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology, Inc.

third quarter earnings conference call.

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

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

(OPERATOR INSTRUCTIONS) This conference call is being recorded today, Wednesday, November 7, 2007, and will run for only one hour.

I would now like to turn the conference over to Mr.

James Kim, CEO and Chairman .

Please go ahead,

Thank you.

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 statement made during the course of this conference call represent the current view of management.

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

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

In the third quarter of 2005, I spoke about our commitment to a process of transforming and [becoming] to a company capable of achieving sustainable profitability and generating levels of free cash flow sufficient to meet our debt obligation and to fund future growth opportunities.

As we review our third quarter 2007 results, I believe that we have made solid progress toward achieving those objectives.

We have now achieved eight consecutive quarters of profitability and positive free cash flow and have reduced our total debt by $308 million over the same period of time--period time.

Throughout this process, we have worked closely with our customers, suppliers, and the technology partners to optimize and (inaudible - heavily accented language) in the semiconductor supply chain and provide the highest level of service and value to our customers.

As we move forward, we will remain focused on exercising financial discipline in the way we manage our business and capital investments.

Our commitment to fiscal responsibility should not be viewed as complacency, however.

Because of our improved cash flow and the liquidity position, we now have greater flexibility to respond to new market opportunities as well as the ups and downs of our product cycles.

We are prepared to support future growth through prudent investment in leading technology and to fund the future capacity expansion, customer projects, and other initiatives that meet our long-term objectives.

Third quarter 2007 sales reflected a seasonal build across our product lines in support of a broad array of applications in consumer, wireless, gaming, networking, and computer markets.

During the third quarter, all of our (inaudible - heavily accented language) packaging and test capacity remain tight.

As a result, the price in the environment continue to be fairly stable, in general, our factories worldwide remained at high levels of utilization in Q3.

That being said, we do have unused space in our factories, particularly in China, that can support additional growth opportunities.

In closing, our decision making at Amkor is for customer's long-term success, not short-term results that are often short lived.

We are pleased with the overall progress we have made since 2005 towards our goal of achieving sustainable profitability, positive free cash flow, and the responsible growth (inaudible - heavily accented language) spending.

We remain committed to our strategy and we believe we are on the right path for building stockholder value.

Ken Joyce will now review our third quarter operating performance.

Ken?

Thank you, Jim.

Third quarter net sales of $689 million were up 5.6% sequentially from $652 million for the second quarter of 2007 and in line with our prior guidance of sales up 4% to 7% from the second quarter.

Third quarter net income was $61 million or $0.30 per diluted share.

Our third quarter GAAP earnings of $0.30 per diluted share includes an after-tax gain of $1.7 million, attributable to an earnout provision associated with the sale of Amkor's specialty test operations in October 2005, and an income tax benefit of $5.1 million from the release of a valuation allowance established at certain international operations.

Excluding these benefits, EPS was still at the higher end of our prior EPS guidance of $0.23 to $0.28 per diluted share.

During the third quarter 2007, unit shipments increased 7.6% sequentially, to 2.3 billion units, with higher unit volumes across most of our product lines.

Both wire bond and flip chip assembly contributed to the improved sales during the quarter.

Test revenues in the third quarter also increased sequentially from $69 million to $73 million, or 6% over the second quarter, but remained constant at approximately 11% of total net sales.

As Jim mentioned earlier, the overall pricing environment was generally stable during the third quarter, however, over a period of time, pricing does become more challenging as packages tight and mature.

In the third quarter, we did experience some price reductions on select package types as we shared the benefits of our ongoing value engineering efforts with our customers, and to a lesser extent, from competitive pressures.

Gross margin in the third quarter of 2007 was 24.7%, down slightly from 24.8% in the second quarter of 2007 and 24.9% in the third quarter of 2006.

The slight decline in our gross margin for the third quarter of 2007 reflects a number of factors, including capacity utilization, product mix, materials cost, and the pricing environment.

Selling, general and administrative expenses in Q3 were up approximately $2 million, reflecting higher expenses associated with our global ERP implementation project and increased legal costs.

As we look forward to Q4, we expect SG&A expenses to increase slightly, primarily in connection with the ongoing consulting fees for the ERP project.

To date, we are pleased with the progress we are making in upgrading our business processes and IT systems worldwide.

This investment, among other benefits, is allowing us to provide our customers dynamic earning capabilities they demand from their key suppliers.

Net interest expense in the third quarter of 2007 decreased $1.8 million sequentially, reflecting the results of our ongoing debt reduction efforts and selective refinancing of high-cost debt in prior periods.

The income tax rate was 1.9% for the third quarter of 2007 and we anticipate an effective rate of approximately 8% for the year.

The lower income tax rate reflects recognition of a $5.1 million income tax benefit from release of a valuation allowance previously established at a certain international operation.

The income tax rates also include the utilization of foreign net operating loss carry forwards and tax holidays in certain of our foreign jurisdictions.

At September 30, 2007, Amkor had U.S.

net operating losses available for carry forward totaling $345 million, expiring through 2027, and $48 million of non-U.S.

operating losses available for carry forward, expiring through 2012.

Capital additions totaled $78 million in the third quarter and $193 million for the first nine months.

To date in 2007, the largest portion of our capital investment, 35%, has been in support of strong sales of wire bond products.

We are currently targeting the full-year 2000 capital additions in the range of $285 million to $300 million.

During the first nine months of 2007, we generated $414 million of cash from operations.

Of this amount, $160 million was reinvested in capital additions.

Of the remaining $254 million in free cash flow, $202 million was used to pay down debt with the remainder used to increase existing cash resources.

We ended the third quarter with a cash balance of $335 million.

We have currently earmarked $88 million of existing cash resources to pay off the remaining stub of 9.25% senior notes at maturity on February 15, 2008.

We also have foreign debt repayment obligations of approximately $55 million per year through 2010.

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

Sales up slightly from the third quarter of 2007, gross margin in the range of 24% to 25%, net income in the range of $0.25 to $0.30 per diluted share.

Operator, we will now open this call for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

And our first question comes from Timothy Arcuri with Citigroup.

Please go ahead.

Hey, guys, this is actually Brian Lee calling in for Tim.

Just had a few things.

Number one, Jim, I think you said that you saw about a $35 million to $40 million shortfall in revenues due to timing on some flip chip businesses at some customers, namely PC and graphics guys in Q2, and that you expected some of that to come back in Q3, so how much of that did you actually see come back and kind of what's left to come back?

I think you're referring to module business,micro-EMS.

I don't think--I don't recall saying that in the switch area.

Yes, I think you're right.

Micro-EMS is the one that approval customers where we design into it, but they haven't selected that as--oh it didn't do very well so we're not able to get that module business.

Actually, that's what our revenue would have been reasonably strong growth, but we haven't seen it this year.

That's true.

So that situation, we're not remedied until probably late 2008 or early in 2009.

Okay, so--

We're working on those designs at the moment, however, but the new design will not start until probably in the late fourth quarter or early 2009.

Okay.

So maybe I misunderstood, but I thought you had said last call that you were expecting some of that--some of the inventory-related stuff to kind of spill back into Q3.

I don't believe so.

I may have said Q4, but if I have said it, it could be wrong, it has to be 2008.

It will come back late 2008 Q4 or 2009.

Okay, that's helpful.

And then I guess as a follow-up, some of your peers have been talking about higher CapEx next year and raising overall capital intensity and right now you guys are close to about 10% CapEx to sale.

Can you give us a sense for how you're thinking about CapEx in '08 and if we can expect your capital intensity to move back towards a more normalized low to mid-teens level, similar to what your peers have suggested?

Okay, if you listen to our press release--read my press release as well as our conference call, I have clearly stated what our goals are, however, I also made it clear that the current cash position and the improved balance sheet and so on we are capable of meeting any challenge that may come.

If there is a demand, we'll meet those, however, I know our competitors are calling for some higher numbers, but that's highly speculative in my opinion, therefore, I like to stick by what I have said.

If market increase beyond our expectation, then we'll be prepared to make that challenge--meet the challenge.

Okay.

Thanks, Jim.

Thank you.

Our next question comes from Bill Ong with American Technology Research.

Please go ahead.

Yes, I have a technology trend question.

If you look at the foundries, they've been seeing a slower ramp at the leading edge, so as a result, they've been spending the CapEx a lot more modestly in recent years.

So can you characterize the sub-con industry, this cycle versus prior cycles, what changes in the packaging trends are you seeing in recent years that's influencing your CapEx as well as the business?

Well, as you know, we are concentrating some new areas, such as flip chip area and bumping area, which are require some heavy investment.

Which we already started two years ago, in fact, and we are seeing the results of that.

Some areas are definitely tight, not only tight, we are in allocation.

So those are the kinds of step function kind of investment we have to make, but other than that, really, leading-edge technology like (inaudible - heavily accented language) area certainly to meet our 60 nano and so on require much more fine pitch kind of technology, but industries are meeting those challenge.

Yesterday there was an IBM conference there.

They tried to discuss 32 nano and so on, but these are really future technology which we have tried to understand this so we can prepare for it, but that includes materials, everything.

So in a way the technology progress hasn't changed much in this cycle versus prior cycles for your sub-cons?

Some very gradual change, evolutionary change, not drastic change.

Okay, great, and then my last question is, could you explain the increased legal cost?

Anything behind that, and what type of tax rate should we look at for 2008?

Ken will answer that.

The legal cost, Bill, are principally in-line with the--some of the litigation we're involved with arbitration with Tessera is the principal contributor this year.

As far as the tax rate goes, we would be looking at a blended rate of around 12% for next year, 2008.

Great.

Thank you very much.

Thank you.

Our next question comes from Satya Kumar with Credit Suisse.

Please go ahead.

Hi, this is [Vince Vollarey] for Satya Kumar.

In your [peer] you mention about pricing pressure experienced in (inaudible - heavily accented language) packages during the quarter.

Can you give more color if these packages were in any specific end markets?

Well, I don't want to point to detail, but it is in old packages mostly, (inaudible - heavily accented language) package.

Okay, and if I look back, your highest gross margin was in the range of 27% to 28% and based on your guidance for fourth quarter, it looks like you'll be in the 24% to 25% for three quarters in a row, so at current run rates, do you expect to reach the prior like 27% gross margin levels?

At 20-what percent?

The 27%, 28% was back in 2000, I think was when we hit the 28%, but that being said, one of the key determinants, obviously, for ours is utilization.

Utilization is running very high right now, but also a major contributor to gross margin is the product mix.

So depending on where the product mix is and how materials come into play with that product mix, that could have a big impact on gross margin.

Okay.

Thank you.

Thank you.

Our next question comes from Chris Blansett with JPMorgan.

Please go ahead.

Hi guys, thanks.

So where we are kind of along those lines of gross margin, I think you said you're at 83% during the quarter, how high can you go until you're effectively maxed out and what kind of gross margin leverage would you get at those levels?

That's highly speculative.

We certainly would like to shoot for higher than that.

It's going to be a step-by-step approach.

We have internal goal we'll try to reach higher than what we are doing, but I think it's very speculative to give you any numbers at this time.

Do you have some sort of margin given the mix today, if you were at 85 or 86, what kind of margins you would expect?

Well, I think we gave our guidance for the quarter is 24% to 25% and I think that is once again mix dependent.

We're at 83% utilization right now, Chris, so if it went to 85%, I wouldn't see that margin change as substantially.

Okay, and then when you look at your results over the past three quarters compared to your Taiwanese peers, your revenue growth has definitely underperformed them and I'm trying to understand, is there some market share loss going on here, is this just the affects of the loss of the module business, what is it?

Well, obviously, our loss of that module business definitely affected it.

That would have given us extra few percentage point of our revenue increase and that could also include our cash flow and all that kind of thing, but again, remember Taiwanese companies that I know of, that are competitors are--they bought the DRAM business, but as you were aware, we have been staying away from DRAM market.

We do participate in Flash market, but not in DRAM market.

Because DRAM market is very challenging, unless you're in Taiwan, probably, living with a day-to-day basis, very difficult company--business to tackle, but they-- so we're not going to be going in there, therefore, you have to--DRAM market is a large market in our wholesale market.

So we are literally not participating in that part of the market.

All right.

Then one last thing for me.

When you look at your fourth quarter CapEx and maybe even your '08 CapEx, this is going to be more packaging and assembly focused, test focused, or yet to be determined?

No, it's packaging and assembly.

Test has been running historically for the last year about 25% of our business, and it probably will continue, I would think in 2008, right in that line.

All right.

Thanks, guys.

Thank you.

Next question comes from David Egan with Lehman Brothers.

Please go ahead.

Hi, guys.

Thanks for taking my question.

Could you talk a little bit about the outlook, why--well, actually, first of all, if you could clarify, when you say that the revenue's going to be slightly up for the quarter, what kind of number would that be, would that be like 690, 700 million?

We wouldn't put an exact number on it and I think that's why we said slightly.

It would be in the low single digits.

Okay.

Low single digits, perfect.

And then, so as the years progress, things have slowed down.

What do you--how do you--what do you attribute the cause of that?

What do you mean by slow down?

I thought we done very well from second quarter to Q3.

In fact, we had--this year, if you look back, probably we'll do that in January conference, but 2007 could have been really not too bad if we hadn't lost that three modules that we could have won, unfortunately, they didn't go through, but that could have--if we had that business, probably you guys wouldn't be asking that question.

Also, when you say slow down, remember again, compared to our competitors, we do not participate in the large part of the business they are participating, and also, PC market as you know, Taiwanese are very active in PC market, we are less so.

So those are the difference of the--but on the other hand we are very strong in gaming market, consumer market, and so on.

Let me say it this way.

In the fourth quarter, you're guiding slightly up in the low single digits, which is a fairly, probably less than normal seasonality for the fourth quarter.

That's not true.

Normally, if you go back historical sense, Q4 is somewhat lower than Q3 or flat, that's the normal.

In fact, whenever Q4--in the past, anyway, remember, it doesn't repeat always, whenever Q4 is higher than Q3, normally the following year is strong, but I'm not going to make the statement, because we don't really know.

Okay, well based upon how you see things, now, do you see that the first quarter would show normal seasonality with the decline of, say, mid-single digits?

How do you think that the year might begin next year?

That's a pure speculation at this time.

We really don't know how the--especially what the seasonal sense of the holiday season, revenue, sales are going to be, especially in the electronics area.

That's going to influence--I do know our customer's inventories are very low.

Semiconductor industry has a low inventory, but we don't know their customer's inventory level, how their demand is going to be.

That's going to dictate--that's going to dictate, but all we hear, is even the U.S.

maybe slowing down, rest of the world is still humming.

So we have to wait and see how it's going to play.

Okay, thank you.

One last question.

In terms of the linearity of this quarter, how was the month of October compared to September and how do you think that November will be compared to October?

October was better than September, and we expect the November to held.

The question mark is always in December.

Okay.

Thank you very much.

Appreciate it.

Thank you.

Our next question comes from Peter Kim with Deutsche Bank.

Please go ahead.

Hi, thanks for taking my questions.

So when I look at your CapEx forecast for next quarter, it suggests that you're going to spend a pretty big chunk of your CapEx for the year in Q4.

Should I read into that as being that the end of Q4 and Q1, the seasonality is going to be better than normal, or what is the reason that the CapEx is particularly high in next quarter?

Well, that CapEx is largely, Peter, to service the first half of what we're seeing in 2008.

So it doesn't necessarily indicate that Q4 is going to be stronger.

It also is--reflects somewhat a change in the mix of the business that we see.

So once again, what we see, what business we see, we still see some good strength in 2008 in the first half and we see a change in some of our mix.

Some of that mix is more advanced product related, which is more capital intensive, so we'll have to put some money in there.

Okay, and then if you give us a status update about the arbitration, I understand that you guys are involved in that right now.

I was wondering if you have an idea about how long this is going to go on, what your expectations are?

Yes, Tessera it will be fully explained, and I would refer you to our SEC filing which we hope to file in the next day here in 10-Q, and you'll get a complete update that's been fully vetted with our legal department, but that being said, the Tessera arbitration is scheduled to go in March of 2008.

We've been told that there will be no postponements of that.

So we're looking forward to it We believe meritorious defenses and we're ready.

Okay.

Thank you so much.

Thank you.

Our next question comes from Mark Bachman, Pacific Crest Securities.

Please go ahead.

Hey, Ken.

I want to finish up on Tessera here.

So you said March 2008, can you give us an idea of the dollar value that is being litigated then for the past royalties?

I believe the amount is disclosed--I don't have the 10-Q in front of me, but I believe it's around $115 million in damages that they've asserted in back royalties.

Okay, and have you earmarked or reserved any of your cash balance in case the litigation doesn't go in your favor?

We have not because the accounting literature, as you know, as far as booking a loss accrual or contingency is it must be estimatable and probable, we clearly don't think it's probable.

We would also disagree with the amount of damages that they've claimed--that's their damages that they're claiming.

So we don't have anything reserved for that in particular.

Once again, litigation is litigation.

I can give you no certitude, but in working with our counsel, we believe we have very, very strong meritorious defenses against Tessera.

Okay.

Sorry if I missed this already, but did you happen to mention what you might spend in CapEx in 2008?

We did not, but our capital intensity ratio, if you look for this year, has been running about 10% to 11% of sales.

It could go a little higher than that, but no more than 12% or 13%.

Okay and then--so my final question then, how can I get more comfortable with your cash position relative to this lawsuit that is outstanding?

Your debt repayment next year of $88 million, and then a pretty sizable CapEx budget then again for next year?

Well, let's talk about that for a minute.

For the last two years, for 2006, 2007, we've generated EBITDA of over $600 million.

I pay 650 over that in each of the last two years.

We've had free cash flow of over--and when I say free cash flow, that's cash from operations less your CapEx payments in excess of $250 million per year.

We have a cash balance right now of $335 million, and with the cash balance of $335 million, we've earmarked $88 million, as we say.

Based on our projections, as we look forward, we think that we're going to continue to be cash flow positive, we're managing in that direction, and over and above that, we have an unused line of credit of over $100 million that's available, if we had to draw on that, but I'm in no way--you can never give any certitude with litigation, but I'm going to tell you again, we believe we have meritorious defenses against Tessera.

Perfect.

Thanks so much.

Thank you.

Next question comes from Tom Diffely with Merrill Lynch.

Please go ahead.

Yes, good afternoon, a couple quick questions here.

Earlier, you mentioned there were competitive pressures.

Can you give a little more color as to where you see those?

Is it by product or by end market or just specific competitors?

I don't think it would be end markets, because a lot of these products can be used in different end markets, but I think as Jim had indicated to a little earlier, it would have been in more of our traditional lead frame products where we're seeing the most price pressures right now.

Although there are some price pressures in other areas as well.

Okay, and then the tax rate, you said it was going to go up to about 12% next year.

What's driving that if you have all the NOLs and you're quite profitable this year?

We are taxable in a number of jurisdictions as we've returned to profitability.

So you do have certain foreign jurisdictions where we don't have tax benefits available and that's what gives the overall blended rate.

Okay, but it seems like you would have had that affect this year as well, though?

Well, we did.

We had some taxes, but we're using up a lot of the foreign NOLs.

Okay.

All right, and then just one last question on CapEx.

Previously you talked about certain customers consigning equipment to you.

Has that actually happened or where's that?

We're not pursuing that very strongly this year.

That was for 2006.

That was because of our financial situations, we requested the customers to help us that particular period of time.

At the moment, I don't think we have many left, do you?

We have some consigned equipment.

We do have some consigned equipment, but especially in test area.

Okay.

Thank you.

Thank you.

Our next question is a follow-up from Chris Blansett with JPMorgan.

Please go ahead.

Yes, I'm looking at your interest expense for the fourth quarter and then as we look into '08, could you give us some guidance, Ken, on how that should trend?

Yes, I think that interest expense is going to continue to go down.

I would anticipate in Q4--I would say in the range of--hold on one second here and I can take a look for you.

I would say we're going to be about $31 million in Q4 and then as we go forward, our total interest expense this year is probably going to be in the range of around $131 million net interest expense and we would expect that to come down by approximately $8 million to $10 million, because as you're aware in February, we're paying off the $88 million of senior notes, they're 9.25%, so you should be coming down by that amount.

Plus there will be some other amortizing debt of about $55 million we're paying down, so between that and we're paying down some resolving debt.

Our interest should be down from--it'll be down to around, I'd say, in the area of about $110 million from $131 million this year.

Thanks a lot, that's actually very helpful, and then one last thing, when you look at your fourth quarter CapEx, how do you decide, these are more long-term strategic spends, I guess, is what you're looking at for the fourth quarter.

Are these tied to specific customers, are these tied to specific technologies?

Tied to the technology as well as customers, yes.

Our business and product groups have meetings on a weekly basis, actually, to monitor and they work with the sales force in the factories, monitoring what projects that we're going to invest in and as you're aware, there's always more projects than money available.

We have set return criteria and we're measuring to that, but it requires an ongoing review of both your product business units, working with your factories, working with the sales force to evaluate which customers you're going to serve, but I can say right now that we have the cash available and we've made the commitment that we have not turned down any customer projects that meet our return objectives.

All right.

Thanks a lot, guys.

Appreciate it.

Thank you.

Our next question comes from Sundar Varadarajan with Deutsche Bank.

Please go ahead.

Yes, thanks, guys.

Going back to this CapEx spend and investing in select customer products and so on, could you kind of elaborate a little bit more in terms of what kinds of return criteria you're kind of looking at in terms of both near-term and short--and long-term impacts, and also how do acquisition fall in the mix?

Two years ago you did the IBM transaction, which has worked out pretty nicely for you guys.

Are there more of those in store, could you give us a little bit more color in those areas as well?

Sure, we can.

On the CapEx, we're using as one of--we do a number of different metrics, but probably the overall guiding metric for us is ROGFA, which is return on gross fixed assets, and we look for a cash return in the area of around 40%, that would equate to about a two and a half year payback.

That's a target, you don't always hit it, in some cases you do, some you don't, but that's the target that we've been using.

As far as your question on acquisitions and corporate development, we have an active team that's always looking at opportunities and we're prepared, and quite frankly, as Jim had said in his opening remarks, we're well positioned we believe, from an operational standpoint, talent standpoint, financial resource and liquidity standpoint to take advantage of that, but we're going to do it in a very thoughtful, methodical manner.

We're not buying sales to just to buy the topline.

We're going to be driven by growth that's profitable growth.

And then just one follow-up here.

As you look at your financial flexibility, you guys knew what worked very well two years ago, so clearly you don't want to go anywhere close to that kind of scenario.

So as you weigh these different opportunities, what kind of minimum liquidity would you want to maintain in terms of cash on the balance sheet, as you kind of look at these opportunities and figure out where you need to invest and keeping the long-term and short-term kind of perspective in mind?

Well, let me answer.

I'm sure Ken has the answer, but as far as I know, where the minimum cash balance we require is probably about 120 to 150 million, but remember we also revolver of $100 million that are always available, but having said that, I think I know where you're driving at.

If the opportunity arrives where we need to consider more than our current cash balance, doesn't mean we cannot do it.

With our current situation, I'm sure we have enough credibility established to finance it if we have to do it, but again, it has to meet very strict financial goal that we have set.

It's going to be well-designed, otherwise we will not touch it.

So I think again, I would like to assure everyone we're not going to, again, go out, try to spend CapEx or any other--we're going to be very strictly displaying the management of cash.

Thank you.

Thank you.

Our next question comes from Eric Reubel with MTR Securities.

Please go ahead.

Gentleman, thanks for taking my call.

Ken or Jim, you guys mentioned some capacity availability in China and you also referenced that those facilities also have the ability to provide some growth.

Are you taking any direct steps to kind of serve the local China market, and how much of a driver could that be for 2008?

When you say China market, China itself, still, there are a few foundry (inaudible - heavily accented language) and so on.

Obviously, we deal with them, but I don't--right now, their market is not that clearly defined.

And especially low-end lead (inaudible - heavily accented language) packages and so on where we are not--I don't think we really can participate that market to compete against second and third tier companies.

Fair enough.

We are doing--everybody has conception that we go in China for low-cost serving China.

That isn't it.

We are really going there for quality labor with our technology and we're going through the advanced packaging.

We don't talk too much about Japan.

Could you give us an update on how the Toshiba relationship is going and are there any opportunities to really get extra growth out of that in 2008?

In Japan, you have to separate two.

One is our own factory, which service we bought from Toshiba and has a relationship and the other is serving Japanese market as a whole, and the Toshiba factory is doing well.

Again, we don't make kind of margin we like to see, but still never lost the money, so always positive cash flow.

On the other hand, the relationship with Toshiba in other area, not that we're not making there, we're making China or Korea or Philippines, the business is still booming.

Toshiba relationship is excellent, and not only--other Japanese company like Sony and so on, a strong relationship and we expect to continue to grow in that area.

Okay, thank you.

Thank you.

The next question comes from David Phipps with Citi.

Please go ahead.

Thanks for taking my question.

Most of them have been answered, but have you repurchased any debt securities during the quarter?

We have not.

Okay, any intentions to do so?

We would love to.

We continue to monitor it, but right now the yields at maturity, we think we get a better return investing in our business than we do buying back the debt.

That being said, if that yield goes the other way, we'll be in there.

Okay, thank you.

Next question comes from Ryder Campbell with Barkleys.

Please go ahead.

Hi, thanks.

Most of my questions have been answered as well, but I do have another one that's kind of a little bit bigger, more broader industry-esque question.

Looking at your business, and you guys have clearly been focusing on cash generation and debt reduction--it's in clear contrast to another trend that we see, such as deals from private equity firms, whether they get done or not, with some of your competitors, a new deal with the UTAC acquisition where people are essentially expressing views that they think that the market has stabilized to an extent that you can lever up very substantially, it seems to be kind of a direct contradiction to the direction you guys are taking.

I wanted to, I guess, just get your overall view on how you guys look at that, perhaps what you think about what somebody like that is doing versus what you're doing, I guess I'm just looking for a little bit of color.

We wouldn't want--do you want to handle that, Jim?

Yes, environment again changing, the market--I've been living long enough to see many changes happening.

Opportunity comes, we look at it.

Every opportunity comes, we have opportunity to review, always there, something on the table.

Having said that, however, again, like you said, we are committed to achieving our objective.

Then on the other hand, we do love to see them lever up, because that's less money they'll have for CapEx and that bodes well for us in the industry.

Okay, fair enough.

Thanks.

Our next question comes from Paula [Tincoll] with Deutsche Bank.

Please go ahead.

Hi.

Just one follow-up, I think to Sundar's questions on potential acquisitions.

Is there--and the last question as well.

Is there a maximum leverage that you would like to stay with in some sort of area, and maybe you can give an outlook on short and long-term--[multiple speakers]

I thought we already (inaudible - heavily accented language) on leverage.

But say for instance you saw a great opportunity, how--could you give some sort of idea of how much you would consider increasing your leverage?

We should look at it case by case, if there's something I can recover in one year, I'm sure we'll look at it right away.

Really, you have to be very specific case to decide each case, and the long-term impact on the Company, balance sheet, and earnings and so on.

I just don't think it's appropriate for me to speculate on this one.

Thank you.

Thank you.

Our next question comes from Guy Baron with Credit Suisse.

Please go ahead.

Hi, there, just a couple quick questions.

I actually had some answered, but clarification on I guess a similar topic.

First on acquisitions, what's your level of tolerance for taking on an acquisition or buying an asset which could potentially require some more sort of restructuring or turnaround work or maybe more specifically, could be dilutive short-term?

Well, we're not turnaround artists, so I don't think that that's something that would meet our acquisition criteria.

So we're not interested in turnarounds, but that being said, it's highly speculative, as Jim said.

We do look at these, but it has to be taken--the acquisition has to be taken as a whole, not just the amount of leverage that it generates.

And then again on the same kind of topic of leverage, maybe asked another way, what is the right level of leverage for this business, in other words, what's the equilibrium that you look to get back to, even if it did spike on a particular acquisition short-term?

Well, given the volume of business that we're doing right now for a $3 billion company and if you look at the cash flows that we're generating, I think if you went in and did optimal capital structure, and we've had different banks advise us on this and they're far more expert than we are, it's somewhere between $800 million to $1 billion is the optimal capital structure, the optimal leverage that you want to have in there.

Okay.

All right, and then from a free cash perspective, what's your level of commitment to that, again were you to need to invest in CapEx short-term and it resulted in negative--?

Sounds like you have some idea.

Let me know, privately.

All we can do is that we do know that our CapEx intensity has to be somewhere in the area of, we said, 10% to, I would think no more than 15% under circumstances that we can see.

Based on that and whatever you model in as the product mix and margins, that's about where you'll come out for your cash flow generation.

Okay, great.

Thank you.

Thank you.

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And our next question is a follow-up from Timothy Arcuri with Citigroup.

Hi guys.

Sorry, I jumped on a bit late.

Jim, I know that you didn't make any comments about next year, but if you graph year-over-year chip units and you look at when they're going to peak, it looks like units are going to peak probably in Q4 and in every cycle in history, that's been a pretty big headwind for your revenue trends kind of in the six-month period after that, so I guess I'm wondering, is there something that maybe in '08 would be different this time from a customer perspective.

Is there like one particular customer that underspent this year that you think would overspend next year that would cause you to buck that trend?

Because it's pretty consistent going back about seven, eight years?

Tim, you raised this issue a year ago too, I recall.

You were very good at the unit--analysis of units and I always follow that, because of your ability--in fact, I presented at the board yesterday, look back way back to 1991 and looked at it and I came with the same conclusion.

Our business character has changed very drastically from '90's to about '96, then '97, '98 there was a downturn and then spikes in '99 and there was bubbles in 2000 and 2001 was a sharp drop, and I think 2002 to kind of 2003, 2004 we kind of whether we're going back to the early '90's or not, but as we all know it never happened that way, and there are many reasons for in my opinion.

One really is all these questions you asking, were the economies changing?

I will tell you, emerging economies are taking up more than 50% of the world GDP now, therefore I don't think we all know yet what it's going to be like until that economic model is fairly understand, and even, really, look at all this emerging economy, 1990s we had the financial crisis in Asia, they didn't have a dollar in their reserves.

Today, look at all these countries have huge reserve of U.S.

dollars.

No economist at the moment understand what the implication of that is.

So until we fully understand the rest of the world economy and all the liquidity or financial dollar holdings and so on, I don't think any economist can predict what it's going to be, other than consumer spending, if you look at the consumer side, semiconductor is becoming very pervasive in all the things that we are living everyday, therefore, demand for semiconductor is going to continue to grow.

That's the certainty, that's why--you're argument, I'm not agreeing or disagreeing with you.

Maybe (inaudible - heavily accented language) is the pick, but on the other hand, who thought this year that cell phones are going to increase by another 10%?

Last year, people say, it's 1 billion, went up another 10%.

PC went up another 10%, and pieces of the market went up 20%, so I really think we have to look at that model to make a decision.

I don't think I can answer your question on that, other than--

Okay.

I hope you can extend and then write something then I will read it.

Sure, sure, I do.

Just, kind of from a customer perspective, I guess when you look at '07 versus '08, was there--maybe you can point to a microprocessor customer, maybe?

I'm just wondering was there one customer that maybe--or some industry dynamic that will be better next year than it was this year relative to maybe a microprocessor customer that kind of missed a design spin this year that could kind of come on next year that could help you buck that trend?

Again, I don't know about competitors or what market as a whole, but our case, definitely we are getting closer to several more customers in our wireless area, as a partnering and a gaining area, but these are all growing areas, as you're well aware.

So that's what's going to drive.

Plus, as I told you earlier, whether next year it's going to come back or not, some of these margins that we're doing now that we understood our failure experience from the last year, we are improving ourselves and we already are talking to several customers, six, seven customers where this could bring significant increase in revenue, potential is there, but again I cannot promise it's going to be 2008 necessarily or 2000--it's going to begin 2009, but those are the areas I see unit growth significant.

Great.

And that's where our technology is strong.

Remember, our technology, we know how to do this kind of thing now as an EMS company, not the other way from us to go to that direction.

Great.

Okay, Jim.

Thanks a lot.

Thank you, and gentleman, I'm showing there are no further questions.

I'll turn it back to you for closing remarks.

Thank you for participation in our conference call.

We look forward to speaking with you again.

Thank you.

Thank you.

Ladies and gentlemen, that will conclude today's teleconference.

We do thank you again and at this time, you may disconnect.