艾克爾 (AMKR) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology, Incorporated, fourth quarter earning conference call.

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

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

This conference is being recorded today, Friday, February 13th, 2008, and will run only for one hour.

Before we begin the call, Amkor would like to remind you that any forward-looking statements made during the course of this conference call represent the current view of Amkor Technology.

Prior to this call, Amkor's fourth quarter earnings release was filed with the SEC on Form 8K.

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

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

James Kim, CEO and Chairman.

Please go ahead, sir.

Thank you, and good afternoon.

This is James Kim.

With me today is: Joanne Solomon, our Chief Financial Officer, and Ken Joyce, our new Chief Operating Officer.

Our strong fourth quarter performance demonstrates that our business model is working.

Looking forward, our strategy is intact.

We continue to leverage our product mix, leverage the development of packaging technologies, maintain a disciplined approach to capital spending, and proper execution at the factory.

Our cash flow and liquidity position provides with us a greater flexibility to respond to new growth opportunities as well as any potential downside adjustment in the semiconductor industry or general economy.

We are prepared to prudently invest in the support of our customer's needs for leading edge packaging and test solutions.

We are expanding our wafer bumping capacity, and continue to invest in the flip chip, 3D packaging and test.

We expect the first quarter sales to be near the peak levels we saw for the third quarter of 2007.

However, in view of record sales in the fourth quarter of 2007, we expect the first quarter 2008 sales to be down 7% to 9%, which is generally in line with the seasonal expectations.

During the fourth quarter, industry packaging and test capacity remain tight, and our unit demand was up 4.2%.

While unit demand has a fluctuated from period to period, there has been a historical upward trend, which has driven our growth and that of the semiconductor industry.

The semiconductor industry cycles have been increasingly correlated with the movements of the worldwide GDP.

The [worldwide] consumer spending has had a greater influence on the semiconductor cycles.

While uncertain economic times may interrupt our growth, we will continue to pursue growth opportunities in areas where we have competitive advantage and solid return on investment.

Joanne Solomon will now review our fourth quarter operating performance.

Joanne?

Thank you, Jim.

We exceeded both our sales and profitability targets in the fourth quarter of 2007 with stronger than expected demand for both our packaging and test services from some of our largest customers, primarily in support of high-end wireless communications, computing and gaming applications.

Our gross margins were over 200 basis points better than expected, and EPS was $0.16 above the high end of our guidance.

The majority of the unexpected demand was driven by the strength of our advanced technologies, including flip chip, 3D packaging and test.

Fourth quarter net sales increased 8.4% sequentially while unit shipments increased 4.2%.

Unit volumes were higher across most of our product lines.

Fourth quarter 2007 sales reflect the benefits of the shift in our product mix and the increasing importance of our advanced packaging technologies.

Pricing was generally stable during the fourth quarter.

However, prices for packaging and tests generally declined over time.

We continue to experience some price reductions on select package types, as we shared the benefits of our ongoing value engineering efforts with our customers.

Gross margin in the first quarter of 2007 was 27.2%.

The improvement reflects the operating leverage of higher revenues and the enriched product mix.

Net interest expense for 2007 decreased $31 million from 2006, reflecting the results of our ongoing debt reduction efforts and selective refinancing of high-cost debt in prior periods.

At the end of this week, we'll repay $88 million of senior notes and repay approximately $64 million of maturing debt held by our subsidiaries throughout 2008.

Total debt at the end of 2007 was $1.8 billion, down from -- down $241 million from the prior year.

Our cash balance at the end of 2007 was $410 million.

Effective income tax rate for 2007 was 5.4%, and we anticipate an effective tax rate of approximately 10% for 2008.

This increase is primarily attributable to the full utilization of net operating loss carry forwards and tax credit carry forwards in Taiwan.

We generated $367 million of free cash flow in 2007.

This is an increase of $159 million from 2006.

Although we currently expect to be free cash flow positive for the first quarter of 2008, we expect free cash flow will be significantly decreased sequentially, reflecting the higher levels of capital additions in the fourth quarter of 2007, which are paid in the first quarter of 2008, and the lower levels of revenues.

Here is a recap of our first quarter 2008 guidance contained in our earnings release.

We expect first quarter sales to be down 7% to 9% sequentially from the fourth quarter of 2007.

We expect gross margins in the range of 24% to 25%, and we expect net income per share to be in the range of $0.25 to $0.29 per diluted share.

Nicole, we will now open this call for questions.

Operator?

Yes.

Thank you.

Our first question comes from the line of Chris Blansett.

Please state your company followed by your question.

JPMorgan.

Thanks, guys.

Appreciate the question.

I remember speaking to Ken in the past year, based on the expectations, he indicated that the margins would probably peak out in the mid 20%.

Obviously you're above that.

What has changed since that time frame, and should we potentially look at better peak margins going forward?

Well, Chris, thanks for the question.

It's always hard to call what a peak is.

So clearly, we're guiding Q1 revenues to be down seasonally.

So our gross margin expectations will come down as well.

But we are targeting higher gross margin levels for the future.

Product mix, revenue volumes, the pricing environment all contribute to gross margin fluctuations.

If we look at the rest of -- if we look at 2007 as a percentage of revenues, materials was about 38%, direct labor was about 16%, and depreciation was about 8%, and the other costs was 13%.

If we continue our prudent investment strategy, depreciation will be kept in check.

The benefit of spreading the costs over a larger revenue base will benefit our gross margin.

So continued favorable quarters like Q4 '07 will definitely yield opportunities for further growth expansion.

Chris, this is Jim.

I'd like to add there again.

A really important part is utilization.

With a fixed investment, at given time, when the customer demand increases or loading increases, obviously our margin will improve.

Right.

The secret is how we do that every quarter.

Kind of along those lines if you assume your product mix stays constant, do you have a peak of revenue you can generate today?

Can you give us a number on that or an idea?

I would say we could get up probably today of a capacity of $760 million, something like that, maybe even higher, if everything is perfectly done.

Thank you.

Our next question comes from the line of Timothy Arcuri.

Please state your company, followed by your question.

Citi.

Thanks.

Joanne, what do you think that the variability is going to be on gross margin as revenues scales down here?

Certainly in Q1 -- I guess I'm looking even beyond Q1.

If you -- I kind of go back to my year over year unit analysis.

If you look at it in Q2, and if revenues were down again in Q2, and they were down, say, a material number, say 5% to 10%, what sort of variability will there be on the margin line?

Most of our fixed -- most of our costs tend to be fixed except for materials, and as I said, materials is about 38% of our -- as a percentage of revenues.

So on the downside, labor, utilities, depreciation tend to all be fixed.

So on the downside, you do see decrements to gross margin, higher than we experienced going on the upside.

And as Jim said, with respect to depreciation, assuming we continue on investing prudently, and assuming we get good utilizations, then there that's where we get the benefit in the operating leverage.

Okay.

So I guess -- so if I specifically look at the first quarter of '07, that was the second quarter of two straight quarters in revenue, and about $650 million, you were doing about 22.5% gross margin.

Is there any reason to believe that the margin -- if you had the same volume of revenue in June that, the margins would be much different than that, or is it is the same sort of cost structure now as it was then?

The cost structure is always involving.

As you said, you have to make some pretty big assumptions to the mix.

To the extent we continue to add capacity, that does increase our overhead.

So, while I would start with that Q2 level, you would have to add in our CapEx spending for the year.

Thank you.

Our next question comes from the line of Peter Kim.

Please state your company, followed by your question.

Hi.

Deutsche Bank.

Thanks for taking my question.

First I wanted to talk about capital intensity.

In the past you've talked about capital intensity being no more than 12% to 13% max.

And now the range seems to have expanded between 11% and 14%.

Has there been a material change in your view with regard to capital intensity in the recent past?

Not really.

Except as I say, as we go into the bumping area, which is the extension of the wafer foundry, investment is becoming more likely a step -- like a lump instead of dive under, where you can have a fractional increase.

That's why -- I think that's the reason why we have to expand -- if we're going to expand in the bumping area, I think that percentage may slightly increase.

That's the only reason The rest are fairly variable.

So if you -- today as you look out over the next few quarters into 2008, do you -- has your view of demand for flip chip capacity changed?

Well, market is demanding.

Demand is increasing at -- I'll use the words -- exponential way.

So we have to prepare, and I think market was quite surprised at the strength of demand in the market.

Everything is allocation at this time.

Our next question comes from the line of Satya Kumar.

Please state your company followed by your question.

Yes.

Thanks.

Credit Suisse.

Good results here, guys.

In terms of panels, you guys are seeing relative to your competition in Taiwan.

You're almost out performing them 10 percentage points between Q4 and Q1.

Has there been any improvement in the last few weeks in the business in terms of the guidance for Q4 -- Q1?

And do you think that you're taking some share in terms of what you're doing in the next -- last couple of quarters?

I don't think it has anything with the share.

I really think overall the market has been steady.

If you look at the last two years, Q1 has always been so much lower.

But this year, we have a much higher level.

That's the only difference.

But that's true of everyone, I believe.

Okay.

Okay.

In Q4 last year, you guys did $746 million, and I think, Kim, you mentioned your run right now is $750 million.

Were you earning basically peak utilization rate and packaging basically last quarter?

We --

What was your utilization rate?

Well, it depends on what you mean by really capacity.

We were running at 86, 88%.

89%.

89%.

That's pretty full.

Always under special circumstances, you can get up higher than that.

But we are running pretty full unless everything is perfectly aligned.

Okay.

Let me correct that.

Jim was right.

We're 86% utilization.

86% utilization in Q4.

So on a year over year basis from Q4 last year to Q4 this year, for -- if I take just the midpoint of your CapEx and knowing it's a bit more [first] operated, how much can you grow your unit capacity by from Q4 to Q4?

You're talking this year?

Yes, this year, from Q4 2007 to Q4 2008, what kind of unit expansion capacity can we get?

The whole thing about units is, we could do a lot of units, and it's a big number, whereas we would rather do less units of our advanced technologies, like our stacked -- our stacked TCP, our PoP, our flip chip, and there are a lot less units, but it's clearly a lot better business for us.

I mean, if you look at our results -- our units, we did okay on units, but we did better on top-line revenues.

So there really is -- while unit are very important to us and we're driven by units --

The mix is very important.

Mix in terms of a greater --

And as you do the bumping -- remember we start talking about wafers now, how many wafers we are doing.

Okay.

(OPERATOR INSTRUCTIONS) Our next question is from the line of Tom Diffely.

Please go ahead with your question, but please state your company name first.

Yes.

Merrill Lynch.

Thank you.

Getting back to the mix, you noted there was strength in the high-end wireless computing and gaming markets.

What's your view for those three markets in the first quarter and then for the balance of '08?

Fourth quarter is still strong.

In fact, we are seeing nondegradation other than the normal seasonal downturn.

Again, year as a whole, very difficult to give you a projection.

As you know, it all depends on the world economy, as I stated, but all of the numbers indicate the world economy is going to be somewhere between the 3.5% to 4% area, which isn't bad actually.

It's now 4.5%, but I think we're going to continue to see the gross.

Yes.

Well the strength you saw in the fourth quarter, was that new customers, or was that just growth in existing customers?

Same customer base.

Okay.

And then kind of an accounting question here.

When you look at the repayment you're going to make over the next couple of quarters, what do you expect the impact will be on the interest expense line, and where do you see that into the year?

So based on the current interest rates, and some of our debt is variable, I'm assuming the current debt levels, we expect net interest expense for 2008 will be approximately $18 million lower than 2007.

So again, that reflects the $88 million repayment at the end of this week and the $64 million of amortizing debt of the subsidiaries.

We will certainly always opportunistically look at open market debt repurchases from time to time as one of the possible uses of our cash, and that would bring that number down as well.

Our next question is from the line of Bill Ong.

Please state your company followed by your question.

Sure.

AmTech Research.

And congratulations.

Nice quarter.

On your CapEx guidance of 11% to 14% revenue, do you have an internal absolute dollar that you have in mind, or the 11% to 14%, it just depends on how the revenue falls out?

And maybe take it another way, if your revenues are better than your internal forecast, would your CapEx be closer to 11% of sales or closer toward the 14% of sales?

Okay.

So the reason why we switched to a percentage for capital intensity is because CapEx decisions are so tied to what the future business is.

So we thought that that was actually a fairer representation.

We used to put out there an absolute dollar target that we would manage to, but that didn't really give us the adaptiveness that we needed to be flexible to the market.

So we are -- it does -- it does go to revenues.

Obviously if we're having a gangbuster year, it will be closer to 11%.

If things were tighter in 2008, it will be closer to the 14%.

And that is one of the reason why that range is wider.

Well, let me add something.

Again, remember, two and a half years ago, so Amkor had a terrible balance sheet, and we were in a lot of financial difficulty.

So we needed a much tighter financial discipline at the time.

But CapEx, we gave you a number, because that's all we can afford.

But now, that as I stated, we have considerably improved our balance sheet and our needs for customers needs are increasing.

So I'm sending a new message.

That is, I am willing to now look over the revenue, that we will be more -- I wouldn't say aggressive, but more constrained, but still within the percentage of our revenue increase, we're going to increase the dollar percent.

Okay.

Great.

Thanks for the clarification.

Thank you.

Our next question comes from the line of Dave Egan.

Please state your company, followed by your question.

Yes.

It's Lehman Brothers.

So could you talk a little bit about the product mix?

If we look at the disclosure you gave today, which was a little different than before -- and thank you for that.

It's helpful.

It looks like your traditional leadframe business was down considerably for the year.

Your laminate business was kind of flattish, a little bit of growth.

Flip chip grew considerably, and then tests grew at an okay level.

Is that correct?

And then how do you see that going forward?

And then in terms of those packaged segments or business opportunities, and how do you see that evolving to affect your revenue growth in 2008?

Essentially I think product mixwise, I think the way you described it will continue.

I believe the leadframe will be under pressure, but relatively speaking other areas are going to continue to grow.

And more and more, we have a turnkey business as we go to the flip chip areas and bumping.

So probably test portion could increase by a little bit.

Yes.

The only thing I would add to that is, is I would expect that we would see some more growth coming out of that laminate, the wirebond laminate.

There were some specific things in there with respect to modules and others that dampen the growth that we did actually experience in laminates, and like Jim said, leadframes, part of that is our older legacy leadframe product are running their course to the end of life, and for those legacy products, we look to redeploy those assets to drive the efficiencies, but it's really a game of trying to generate as much cash flow, and keep the [margins] intact while the business ships the new technologies.

Just one follow-up to what you said there.

You said that laminate experienced some slower growth due to some modules.

Are you referring to earlier in the first half of the year, that you had talked about losing a design at one of your wireless customers?

And that that is as we look on a year over year basis, that will no longer be on your numbers and perhaps will come back in 2008?

Yes, that is accurate.

So if you look at that wirebond laminates line, it increased only 4%.

If you normalize it for that module business that we talked about in the first half of the year, and some other specific things as we migrated a product line from one factory to another, that number would have been more like an 8% growth.

The marginal business I think maybe has given not a threat to date.

It's really coming back will be 2009 because of a design cycle time.

Right.

We will see something in the fourth quarter, but most likely, most of the new designs will come in 2009.

Thank you.

Our next question comes from the line of Timothy Arcuri with Citi.

Please go ahead.

Hi.

I just had a quick follow-up.

Joanne, what do you think that net interest expense will be in March?

In March?

Let's consult my trusty notes.

Around $29 million.

Okay.

That's the quarter of March, not just the month of March.

Right.

Okay.

And then I guess, Jim, as I -- if you look year over year at your units and you look year over year at the revenue, they both grew about 9%.

So it looks like maybe there's some -- there's some offset -- mix is basically offsetting some pricing pressure in your legacy business.

So do you think, going forward, that through '08 and into '09, do you expect the kind of a similar dynamic where the revenue should grow in line with the units with the mix basically offsetting the legacy pricing pressure?

I think you're correct.

I think that's the way I see it.

Yes.

Okay.

Thanks.

Thank you.

Our next question comes from the line of Jeff Harlib with Lehman Brothers.

Please state your question.

Hi.

I was wondering if you can talk about your deployment of free cash flow this year with respect to debt reduction versus acquisitions, other internal growth opportunities, etc.?

We always look at our uses of cash as a waterfall.

Our preference is always to invest first into the business, and then we'll set aside any contingencies that we need to set aside, and then address our capital structure.

I don't know if you're asking about specific guidance with respect to free cash flow for the year?

No.

I think it's more just what -- would you look at some acquisition opportunities that you see in certain related areas, assembly tests, or other investments that you haven't talked about.

You have talked in recent quarters about maybe looking a little more at internal growth and growth.

Yes.

Internal growth is always easier than acquisitions.

Acquisitions brings a whole host of problems with it.

But clearly, from time to time, we do evaluate acquisitions.

But there's -- it is our policy not to comment on any rumors and speculations.

Not that I've heard of any, but --

Okay.

And your current level of leverage, I assume that's a level you're comfortable with?

Is that --

It is a level I'm comfortable with.

Our reputation is being highly levered, it is getting to be a little dated.

We are a highly levered company, but not overly so.

We always talk to different investors and investment bankers about what's optimal capital structure, and we run our own capital pricing models.

It's hard to say what's optimal, because you have to make so many assumptions with respect to volatility, and I think we're getting to the level, especially when you consider that $290 million in convert, that we're at or near optimal.

That's on a net debt basis.

So net debt basis, I'd still like to -- no.

Again, this is internally we are continuing to have discussions, because the way we were a couple years ago, I like to get where net debt of $700 million or so would be ideal.

Our next question comes from the line of Dave Egan with Lehman Brothers.

Please go ahead, sir.

Yes.

One follow-up, guys.

There was an earlier question that was kind of suggesting that your Q2 revenues were going to be down.

Could you talk a little bit about how you see the second quarter in overall 2008?

Do you think that you will actually see growth in 2008, say at the 5% level -- 5% to 10%?

I remember someone did say something about the lower two, too.

I don't know who said it, but really we're not giving any guidance to Q2.

But historically speaking, you have to look at historically, Q2 is not a bad quarter.

Last year, however, we had the Q2 flat with the Q1 or slightly up maybe.

I don't expect any downside, frankly.

Beyond that I don't think I can give you any guidance.

That's fine.

Thank you.

Our next question comes from the line of Robert Hopper.

Please state your company followed by your question.

Hey.

UBS.

I've got a couple questions.

First one, I just want to go back to what Jeff asked before.

In terms of acquisitions, when you look at the -- your liquidity, just thinking about instead of acquisitions of other competitors, what about other opportunities out there for you to expand your capacities at 86%, by acquiring some customer facilities?

Maybe you could just talk about what the opportunity and sort of how you differentiate between those opportunities versus acquisitions of other companies, and if those opportunities actually exist in this market?

Again, remember, we tried to go to a leading edge area, product area, which requires new investment, and today whole marketing is in allocation.

There isn't that liquidity.

As far as I know, there has not been.

In the other product area, we have a terrible interest in looking at it.

That's not where we are.

Our strategy is to go to leading edge technologies, leading-edge advanced packaging.

Okay.

If the price is right and we need the equipment, it's no different than buying used equipment.

It's really not -- it's not an acquisition of an ongoing business.

Right.

But it doesn't sound like the direction that you plan to have from the technology perspective.

We evaluate all investment opportunities.

So if a customer contacted us tomorrow and if it's compelling and at the right price, we'll certainly run the right numbers.

(OPERATOR INSTRUCTIONS) And it looks like we have a follow-up question from Robert Hopper with UBS.

It's not just you guys.

I've been having a problem getting cut off from conference calls lately.

Just on your restricted payment basket, if you could sort of give me an idea with what within your bonds are the most restrictive basket at this point in time, the potential bond or equity buy-backs?

So with respect to our baskets for restricted payments, the most restricted one we have is the one we're about to pay off at the end of this week.

Once that is passed, we do have restrictive payment baskets, and it's probably in excess of $200 million, so it's not all that restrictive.

Okay.

And then, last one.

Just -- I'd be remiss not to ask this one, but on Oleg, he was a -- I guess in the eyes of a lot of people is a key leader of the change that took place.

Can you guys comment on the departure, and just where the business stands from where he's left it, where you guys are from a, I guess, a bench perspective, management?

Well, I'd love to comment.

Oleg has been great team player, but Oleg has received a tremendous offer from his new company that he just felt he couldn't turn down.

He's a young man.

We have parted amicably and certainly wish him very well.

I have great confidence, however, in Ken as a new COOm and believe that we have very talented indeed management team here at Amkor.

I have a lot of confidence in our team.

Thank you.

Our next question comes from the line of Dave Egan with Lehman Brothers.

Please go ahead.

Just a question about OpEx.

In the fourth quarter, if I had remembered correctly, you had guided to maybe $65 million to $66 million or something like that, and you came at $62 million.

So that, I believe, is lower than what was talked about on the call.

Could you just explain what happened there?

And then perhaps more importantly, how should we think about OpEx, both R&D and SG&A for 2008?

Thanks, Dave.

Yes.

SG&A for the fourth quarter was down slightly, I guess about $2 million sequentially.

We do expect that that trend will reverse for the first quarter of 2008 SG&A.

We were expecting SG&A to be about 5% higher, and that's going to reflect our ongoing global [ERP] implementation and increased legal costs.

For the balance of the year, SG&A will continue to be impacted by both of those elements.

So I would expect SG&A to be at a higher level for 2008 than 2007.

Okay.

Can you give us an idea of what we're talking about here?

I mean, if we modeled $65 million, $66 million, would that be a fair number?

So, as I just said, I mean, if you could start with doing 5% up from Q4 to Q1 and then keep it at that level.

Okay.

Flattish across the year, then, from there?

Yes.

Yes.

That's an okay.

Okay.

And then R&D, is that $10 million to $11 million a fair number, or should we just pick it up a little to $12 million just to be conservative?

How are you thinking about this?

,R&D is driven by specific opportunities.

So I would -- I would trigger it off of revenues and track that way.

Well, I think the level is about right, isn't it?

Thank you.

Our next question comes from the line of Jackie Kemeny.

Please go ahead.

Hi.

It's Jake Kemeny at Morgan Stanley.

I just wanted to get back to the comment about the ideal level of net debt.

I think currently the net debt is roughly at $1.5 billion.

So to get to $700 million, is there, like, a time frame that you'd be looking to get there?

And would you consider doing any share repurchases along the way, considering that the free cash flow of the company has gotten extremely stable in the last several quarters?

I think it's premature for me to really answer that.

I want to get there first, really.

So we are internally debating.

We did discuss at the border level about that suggestion, but I feel a lot more comfortable in this environment to look into our capital structure to more reducing debt.

But who knows?

We shall wait and see.

I really think our consistent [profile] really matter at this point in time.

But to get that net debt level down to $700 million is -- do you anticipate building cash, or are you going to actively work on reducing debt, and over what kind of time frame is that $700 million level --

That's really more of a CFO function than what is the -- you have to look at the interest rate, how the market is.

If we see very huge discounts in the market, obviously we're going to aggressively pursue that.

But as we look at the balance sheet, and I haven't seen ours discounted that much.

Our yield is attractive, but for us, I'd rather keep the cash.

Yes.

I mean, from our perspective, I mean, clearly Jim and I debate about what the right level of net debt, and he certainly sets my goals very high, and we do our very best to get those.

Our goal is we're hopeful that we drive the business into a position where those converts convert, and that's not a use of cash from the company, and if we get there, then we can have more money to invest back into the business or further address the capital structure.

Yes.

Out of $290 million, convert $100 million, I am taking responsibility, so I know it's going to be done.

The other $190 million, I think, as we continue to perform, I think the stock prices will be there to -- will be converted.

I mean, it's 2013, isn't it?

Or '11 or something.

2011.

I'm sorry.

So I think ample time for them to convert.

So I really don't look at that as a debt myself.

Patrick Wong.

Please state your company, followed by your question.

The question has been answered.

Thank you.

Okay, Patrick.

Thank you.

And at this time we have no more questions.

Thank you for participating in our conference call.

We look forward to speaking with you again.

Thank you.

Ladies and gentlemen, this concludes the Amkor Technology, Incorporated, fourth quarter earnings conference call.

To listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 with pass code 11109 -- excuse me, 11105972.

ACT would like to thank you for your participation, and you may now disconnect.