艾克爾 (AMKR) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology, Inc.

second quarter 2008 earnings conference call.

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

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

This conference call is being recorded today, Tuesday, August 5th, 2008 and will run for up to one hour.

Before we begin this call, Amkor would like to remind you that there will be forward-looking statements made during the course of this conference call.

These statements represent the current view of Amkor management and actual results could vary materially from such statements.

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

The earnings release, together with Amkor's other SEC filings, contain information on risk factors, uncertainties, and assumptions that 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.

Thank you.

And good afternoon.

This is James Kim.

With me today are Ken Joyce, our President and Chief Operating Officer; and Joanne Solomon, our Chief Financial Officer.

During the second quarter, our net sales decreased $9 million or 1% sequentially, and overall unit shipments were down 3% compared to the first quarter of 2008, which was a record first quarter.

We saw unit and sales increases for FlipChip and 3D packaging as our advanced technology packages have become an increasingly important component of our mix of packaging services.

This growth was more than offset by a decline in units and sales of leadframe packages.

As we look ahead, we are cautious about softness in the consumer market and global economic uncertainty.

For the third quarter of 2008, we expect revenues to grow sequentially by 4% to 6%, which is below the level of historical seasonality due to the uncertainty around current consumer demand.

We believe we are well-positioned to respond to changing markets with our improved balance sheet and through our continued focus on technology, key customer relationships, most competitive manufacturing, and financial discipline.

I would like to now turn the call over to Ken Joyce.

As you know, Ken was appointed President of Amkor in May, and also serves as Chief Operating Officer.

Everyone at Amkor has great confidence in Ken and I am pleased to welcome him back to our earnings call in this new role.

Ken?

Thank you, Jim.

During my first few months at President and COO, I've made a concerted effort to meet with each of our major customers and many other leaders in the semiconductor industry to understand their needs.

Many of our customer relationships were tested during the second quarter by production disruptions we experienced as a result of our ERP implementation in the Philippines.

May was a particularly challenging month for us as we lost the equivalent of almost 10 days of production capacity.

We worked closely with our customers to prioritize loadings and ultimately regained their confidence.

Although our normal production capabilities have since been restored, we underperformed our second quarter plan in the Philippines by approximately $19 million.

Based on what I have learned while working through the implementation issues, I believe our sales could have been $10 million to $15 million higher if we did not have the ERP disruption.

During the quarter, the results across our end markets were mixed, with pockets of strengths and weakness.

Overall, we saw sequential growth in the communications market driven by increased demand for handsets.

In the consumer markets, we saw strength in digital TV and digital set-top boxes, offset by weakness in legacy gaming and other consumer products.

With regard to our pricing environment, we face challenges every day.

Although our overall pricing was generally stable during the second quarter, we are seeing increasing pressure, particularly for legacy semiconductor packages.

We continue to differentiate ourselves based on technology and quality to help stem some of the pricing pressure.

For legacy semiconductor packages, it becomes very important that we drive down our costs, to match any pricing reductions.

I'll now turn the call over to Joanne Solomon to review our second quarter results.

Joanne?

Thank you, Ken.

Gross margin for the second quarter was 23%, down from 25% in the first quarter of 2008 and 25% in the second quarter of 2007, reflecting the impact of lower than expected sales and an overall product mix of packages with higher material costs.

Approximately $5 million of the sequential decline in gross profit is attributed to the $9 million reduction in second quarter sales as compared to the first quarter.

Materials as a percentage of revenues increased to 39% for the second quarter from 37% for the first quarter.

This increase in material cost in part reflects an increase in purchase versus consigned FlipChip substrates.

Looking forward to the third quarter, we expect margins to be between 23% and 24%, which includes incremental severance costs estimated to be $10 million associated with the announced reductions in force.

Starting in the fourth quarter, we expect to realize $3 million in quarterly cost savings from these headcount reductions.

Operating expenses for the second quarter were $73 million, decreasing from $79 million in the first quarter and flat as compared to the second quarter of 2007.

Included in operating expenses for the second quarter 2008 was a $10 million gain from the sale of a real estate transaction.

Selling, general, and administrative expenses for the second quarter were $67 million, increasing from $65 million in the first quarter and $62 million in the second quarter of 2007.

The sequential increase is largely attributed to the incremental costs incurred in connection with the ERP implementation and subsequent stabilization.

Research and Development costs for the second quarter were 2% of revenues, which is consistent with the first quarter.

Given the uncertain global economic environment Jim referred to, we continue to rationalize our capital additions, especially with respect to investments in wire bond and test.

Where appropriate for the past two quarters, we have delayed certain capital projects and reduced their scope.

We believe our overall capital intensity is tracking to approximately 14% of revenues for 2008, driven in part by the higher capital intensity and demand for wafer level processing.

There is a recap of our third quarter 2008 guidance contained in our earnings release.

Sales up 4% to 6% from the second quarter of 2008, gross margin between 23% and 24%.

Net income in the range of $0.24 to $0.28 per diluted share.

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

Thank you, ma'am.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, you will be allowed one question followed by a followup question.

One moment, please.

Our first question is from Bill Ong.

Please state your company name followed by your question.

Yes, good afternoon.

From American Technology Research.

Can you just talk about the inventory levels among your different end market segments, how much is in die bank, backlog visibility, just a general sense of what's taking place in the quarter versus a year ago?

Bill, as far as the inventories in the supply chain, we are seeing some building in certain areas, clearly in the wireless.

As far as the die bank inventories, once again, I think we talked in the past -- that's not a statistic that's been really meaningful to us.

It's not something that we track on a regular basis.

The die banks -- not all of our customers as you know maintain die banks, so it's not a statistic that we track.

Okay.

Thank you very much.

Thank you.

Our next question is from Timothy Arcuri.

Please state your company name followed by your question.

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

Couple things from me.

I guess first off, how much of the $10 million to $15 million that you think slipped out of Q2 due to the ERP issue is being recaptured in Q3?

I don't know with respect to the $10 million to $15 million but I would estimate somewhere in the range of $5 million.

It's very hard to tell, but that would be my target.

Okay.

Okay.

I guess the reason I'm asking is if the ERP issue had not impacted Q2 revenues, would you say your guidance for Q3 probably would have been about $5 million to $10 million lower than the $725 midpoint that you're guiding today?

I think where we're at, Bill, our numbers are -- we're at $691 million for the quarter, and as we told you, we missed by $10 million or $15 million and I think you'll have to do your own calculation.

Okay.

Great.

And then on the pricing environment, it sounds like it's been pretty stable for you guys.

Obviously, your largest rival in Taiwan reported numbers earlier this morning, and it sounded like they were talking about a bit worse pricing environment than you guys are.

Can you comment I guess first on what you expect ASPs to do here through the back half of the year and maybe why your outlook is a bit better than what your Taiwanese rivals are saying?

I think as I said in conference call comments earlier, we are experiencing pricing pressure especially with respect to the legacy semiconductor packages, and that would be late Vframe and laminate products.

When we look at pricing for any one customer, it's the total portfolio of services that we offer.

So you have pricing all of the time.

I would not say that we are not experiencing pricing pressure.

I think we are.

I think we're managing it well, though.

Okay.

Great.

And then last thing from me, I guess on the margins, it looks like there's about a 50% to 60% drop through to the gross margin line here in recent quarters.

How should we be thinking about this going forward with the headcount reduction you're announcing today?

Or is most of this just offsetting some of the pricing pressure I guess that you're seeing on the raw material side?

I think a lot of what we saw on the gross margin side was part due to the lower revenue levels that we experienced in the second quarter.

As we see those revenue levels coming up, we'll get better utilization of our assets.

The other thing that impacted us was that shift in materials.

We had the packages that have higher material content, principally FlipChip, we had a real shift between those customers that consigned the substrates to us as opposed to those that we purchased.

While we get a benefit for those that we purchased, that does put pressure on the margins.

Also, for the second quarter, we did have a smaller reduction in force in Korea, so there was a charge in there.

That was about $2 million.

So after you take the mix of all those events, that's how you get up to the higher levels of margins that we're forecasting for Q3, especially when you start to add back any of the additional severance.

That's a long way of saying by the fourth quarter we should get a benefit of reductions in [force] of about $3 million.

And I guess it's fair to assume that most of that if not all of that $3 million is really coming out of COGS and very little on OpEx?

There is some piece of it that's OpEx.

I would assume that the majority of it is COGS.

The majority is COGS, I would say [75/25].

I guess ex severance charges, would you expect OpEx to trend up, or will it be down in 3Q and 4Q?

With respect to operating expenses, I see SG&A staying flat to these levels.

I see R&D remaining to track to the 2% level for Q3.

And then -- that's how I see operating expenses.

Okay.

Thanks, guys.

Thank you.

Our next question is from Satya Kumar.

Pleat state your company name followed by your question.

This is [Vis Wallery] for Satya calling for Credit Suisse.

Thank you for my question.

You mentioned ERP impact resulted in revenues lower by $10 million to $15 million.

If we just consider the ERP should things happen, your revenues would be about $706 million, which would still be lower than what you had previously guided, which was about $707 million to $721 million.

Can you reconcile why that is the case?

Well, we obviously we saw some softness versus what our projection was when we gave our guidance.

That would be the reflection of a softening in demand reflection of what's going on in the -- generally in the consumer markets worldwide.

Okay.

And then you're guiding revenues up 4% to 6%, but your gross margin guidance is flat to up 100 bips.

Can you just talk about the pricing pressure that you're seeing or what the reason for 100 bips increase in gross margins?

Why shouldn't gross margins go back to previous levels?

Again, consistent with the earlier answer, the pressure on the gross margins is largely because there's a severance charge included, that 23% to 24%.

If you add back that severance charge we'd be at a higher level, and then there is a shift in consigned versus purchased materials and I think Ken has already spoken about pricing pressures.

One last for me.

Your R&D spending is up about 50% in the last two quarters.

So fiscal fourth quarters is about 10.7%.

Right now it's about 15.1%.

So can you talk about the increase in R&D and you mentioned that it's going to be 2% for the next quarter, but if the dollar level going to be the same going forward?

The dollar level is the same going forward.

For the first quarter, we had some investments in R&D infrastructure.

We had previously announced that our operation -- our wafer bumping operation in North Carolina was starting to wind down operations and be more dedicated exclusively to R&D.

So there is a real lift in R&D expenses because of the depreciation, and then on top of that we continue to invest in technology.

So as you see growth in our revenues, you're also going to see [slower] growth in R&D as well because we're investing for the future.

Okay.

Thanks a lot.

Thank you.

Our next question is from the line of Christopher Blansett.

Please state your company name followed by your question.

JPMorgan.

Looking out to the general product mix change going from the second to the third quarter, what are you guys expecting there?

Chris, the pattern's been really strong and I don't know if Ken is going to want to add something as well, but the pattern has been really strong.

We continue to see great adoption of FlipChip and 3D packaging.

So I would expect those areas are going to be the same areas that we'll be talking about growth in the third quarter as well.

Okay.

And then in general, although I know your CapEx is still low versus historical terms or trends, but why move to the upper end of your long-term goal here?

Why not kind of keep it light in light of the poor macro outlook and the subseasonal demand we're seeing in the second half?

As Joanne was saying, we're seeing good demand for FlipChip in connection with the FlipChip, a lot of them has wafer bump and wafer level processing services.

And the capital investment is a little bit longer and certainly more expensive than traditional packaging.

So that's what's responsible for that increase.

I guess on those -- along those lines, then, things like pure test equipment purchases and wire bonders in the second half will be pretty much minimal or negligible?

I wouldn't say -- they'd be at the level we've been going along.

There's no significant increases there once again in the wafer level processing area.

One last one.

Joanne, looking at the -- stripping out -- do you have a pro forma gross margin range you're willing to give out, or do you just want us to do the math?

I would prefer you do the math.

I think we've given you the pieces at this point.

Thank you.

Thank you.

Our next question is from Peter Kim.

Please state your company name followed by your question.

Hi, Deutsche Bank.

Thanks for taking my question.

I was wondering, you talked a little earlier about the consignments mix increasing where your customers are providing consignment, thereby inflating your revenue numbers but impacting your gross margin.

I was wondering if your outlook for that mix shift being more permanent or increasing or decreasing, if you could characterize that?

Absolutely.

Historically we were running at about a 50/50 split between consigned and purchased.

For the second quarter, it went more to a 25% consigned versus 75% purchased.

And the reason for the shift is we ramped up several new customers that prefer that we purchase substrates for them.

I expect for the third quarter that we'll be somewhere between those two.

I think that's the range of possibilities that we're seeing.

Okay.

And then I wanted to just step back on the CapEx question from earlier.

You said that you're still looking to invest about 14% of your revenues and your competitors are investing somewhat less than that in my calculation.

And I was wondering, if you look at this investment, do you expect to realize an improvement in gross margin as a result?

Is that something you think we should model in going forward from these increased investment levels?

Some of the CapEx is definitely attributed to cost savings initiatives.

I wouldn't expect to see much in the way of margin improvement until 2009.

And with respect to margin pressures of the capital investments that Ken was talking about, about 30% of that investment is based on wafer level packaging that we won't really see the demand for it until 2009.

But we also won't see the depreciation expense until 2009 as well.

One last thing about legal costs.

Your OpEx was higher this quarter in Q2.

You attributed that to increase in legal costs, considering that your arbitration with Tessera was finalized in that quarter.

I guess that's normal.

But going forward, you would expect that legal costs would come down, and therefore your SG&A would come down a little bit.

Can you explain why your SG&A -- you expect it to stay at the current levels?

Absolutely.

You're right, we do expect legal costs to come down in the third quarter.

But we're beginning to advance our next phase of our IT modernization project.

So we are expecting some increased consulting costs in the third quarter.

So that would offset some of the savings that we're seeing from reduced legal costs.

Thank you.

Thank you.

Our next question is from C.J.

Muse.

Please state your company name followed by your question.

Yes, with Lehman Brothers.

Thank you for taking my question.

I guess first question here is on the gross margin side.

I guess looking beyond Q3, and as you see the positive mix shift to FlipChip and other advanced packaging, how should we think about that trend exiting 2008 and going into 2009?

It's hard for me to say because it's so dependent on the mix of customers.

We did see some of our larger confined materials customers have lower levels of demand for the second quarter, but we fully expect those to come back in the third quarter.

So I do believe that the 25% consigned material level will increase somewhere higher, and how it ultimately falls out we're going to have to wait and see.

Okay.

And then in terms of end markets, in your prepared remarks you talk about cautious on the consumer and the global economy.

Are there other end markets that you serve where you're seeing weakness?

And I guess what kind of visibility do you have?

Does that extend through the calendar year or is that just into weakness for Q3?

Well, as we look at the overall end markets, as we say, we do see uncertainty in the consumer area.

In the area of communications, particularly in wireless, we've seen actually pockets of strengths and weaknesses.

During the quarter for us actually mobile handsets were really very strong.

So we're seeing that.

There's pockets of strength in the computing area.

So overall, that's what we're looking at for the next quarter out, anyway.

Great.

Thank you.

Thank you.

Our next question is from Sundar Varadarajan.

Please state your company name followed by your question.

Yes, Deutsche Bank.

Just a few questions.

Wanted to start off with the ERP.

You had issues at Philippines.

Just wanted to see if you're completely behind that and secondly how many more regions do you still have left in terms of the ERP implementation?

And how confident are you that we may not see a repeat of what happened at Philippines in some of these other locations where you still have the ERP implementation remaining?

It's Ken, how are you?

Good, and you?

Good, thank you.

With respect to the ERP systems, we are continuing to modernize our systems -- our factories in Korea, and the Philippines, Taiwan, and Singapore they've already migrated to our new ERP environment.

Just prior to going into the Philippines this year, last year we had a very, very successful implementation in Korea, which is 50% of our operations.

These are really very complex systems.

We planned for these and we do the best we can.

But we feel confident that we've learned some lessons here from some of the issues that we faced in the Philippines.

We're prepared to move forward as we migrate to our other systems.

So you said Korea and Singapore are both done or -- ?

Korea is done.

The Philippines are done.

Taiwan and Singapore are done.

We have to do the corporate interfaces here in the United States.

Okay.

Turning to a couple other questions.

You talked about weakness in consumer, yet when I look at the end market seems like computing is being pretty weak especially on a year over year basis both in Q1 and Q2, yet from an end market perspective and volume perspective, the PC desktop market seems to be holding up pretty nicely.

Can you tell us what's going on with respect to your computing business as far as your end market's concerned and why we might be seeing that softness?

I think the computing is principally attributable to a major IDM.

It's one customer.

We don't really give out customer names.

That's the principal reason for the decrease between Q2 of '07 and Q2 of '08.

So it's one major IDM whose programs vary from time to time in the computing area and that was the major shift in those two quarters.

And finally on the capacity utilization front, I saw that in the third quarter you're down to 73% from 80% in Q1.

And when you look at Q2, what kind of utilization levels do you expect to have in Q2?

And any color on why your Q2 utilization dipped?

You're looking for utilization in Q3?

Yes.

It's not something we've tended to forecast in the past.

I mean, it's clearly going to be higher than where we were at the 73%.

When I look at that 73% utilization number, that was really affected by the ERP disruption issues and the lower levels of demand that we saw for the second quarter.

Okay.

That should all recover and we'll be back over the 80% level.

And finally, on the CapEx front and -- you seem to have a firm number for Q3 and you've guided to the higher end of the previous range at 14% of revenue for Q4.

How much flexibility do you have to get those numbers lower if as the quarter progresses you see things slowing down even further?

We have plenty of flexibility.

I think we've demonstrated that over the years and clearly over the last couple quarters.

This quarter, as you recall, we guided up $140 million.

We came in around $122 million.

That didn't happen by accident.

We ratcheted down based on what we saw in demand, and we're going to do the same.

We're closely monitoring what's going on.

The demand and capacity available and we'll adjust accordingly, but we can flex relatively quickly.

Thank you.

Thank you.

Our next question is from the line of Rob [Strallo].

Please state your company name followed by your question.

RBC Wealth Management.

Hi, Ken, how you doing?

Good, Rob, how are you?

Great, great.

How many people are actually involved in the workforce reduction?

It's a fluid number at this point.

We've announced the programs and some of the affected jurisdictions.

We're estimating it will be north of 600.

Okay.

And with you going into a stronger time of the year with your guidance up 4% to 6% on revenues, why are you doing the workforce reduction now?

This is Jim.

This was planned at the beginning of the year, was part of our plan to increase our productivity and it's going to be a continuing effort for the future.

It's not just a one-time thing.

But right now, we had delayed a little bit due to the ERP issue that slipped in.

Overall, this has been well planned at the beginning of the year.

Okay.

Great.

That's the answer I was looking for.

It's all involved with productivity.

Absolutely.

Okay.

And then one final question.

On your raw materials with what's happening in the metals -- all of the raw materials costs right now, how would you describe your inventories compared to normal?

Are they around normal?

Do you have a lot of inventory?

Are you fairly lean?

Where do you stand there?

I feel like our inventory levels are at a very normal place.

We do obviously carry some gold inventory, but our inventory levels are at a very consistent level.

Okay.

Great.

That's all for me.

Thank you.

All right, Rob, thanks.

Thank you.

Our next question is from the line of Eric Reubel.

Please state your company name followed by your question.

Miller Tabak Roberts.

Thanks for taking my questions.

Most of them have been answered.

Just if I could turn to sort of the capacity utilization one more time on the FlipChip side.

If you take utilization in the quarter at 73% and a lot of that affected by the Philippines, I would imply from that that FlipChip utilization was a lot higher and if I think about the way you add capacity for FlipChip, you do that in step functional ways rather than just adding wire bonders.

Could you comment at all on the FlipChip utilization?

Is that much higher?

FlipChip, the 73% is overall utilization, Eric, and you're right on target.

The FlipChip packaging utilization would be higher than that.

Tied into the FlipChip is -- when we had that, we try to get total overall turnkey services, which requires the bump, the probe, and the FlipChip packaging and final test.

We don't always get that, but that's what we target to do.

So that would change the profile of overall utilization, increase test utilization, increases the packaging and also wafer bumps.

You're right on target.

FlipChip is a higher than the 70% overall utilization number.

Very good.

Then just one last question at the leading edge on the R&D side.

Are you seeing any adoption of any silicon VIA technologies and could you comment on any customers that are kind of putting that into adoption?

We have.

I mean, it's talked about a good deal.

We do have our R&D teams focused on that.

We have -- our wafer level processing R&D team have addressed that.

I know Joanne was talking about earlier about our increased R&D expenditures.

We do have a team that's spending some money looking at that, talking with our customers, talking with the foundries around the world.

That's a very hot subject and our R&D people are looking at it.

One last question, if you could frame my expectations around when Tessera could wind up?

The final oral arguments were held on June 10th, as you probably know.

There is no schedule.

We do expect a decision sometime in the third quarter.

Okay.

Thank you.

Thanks, Eric.

Thank you.

We have a follow-up question from Christopher Blansett.

Please state your company name followed by your question.

Along the lines of some housekeeping, did you give a depreciation in the quarter?

And then just going forward over the next few quarters, your interest expenses, should we expect any changes?

On the depreciation expense, in total the second quarter depreciation grew by $3.5 million.

That includes the amortization side as well as depreciation that's included in SG&A and R&D.

So the total was $77 million.

We expect that to increase probably another couple million for the third quarter.

With respect to depreciation included in cost of goods sold, it tends to run to -- run around the 8% of revenue.

With respect to net interest expense, we would expect it to continue at the same levels and we're still expecting overall for 2008 for net interest expense to be down about $20 million.

All right.

And then one quick one on the ForEx.

Is there anyway you can internally estimate what your ForEx expectations are for the out quarter, just to give us a reference?

We take a look at it.

There's obviously two components of ForEx.

There's the piece that hits our operating results (inaudible) gross margins and SG&A and that's principally the short Korean won and Philippine peso position with respect to labor and utilities.

We also have been seeing tremendous swings because of the translation of the long-term employee severance liability.

That's what drove the additional $12 million that we saw this quarter.

We do feel like that that may reverse in the next quarter, but we're not currency traders.

We do look to some banks with respect to how they forecast the Korean won and we know where the Korean won is currently trading and we would expect maybe at this point a loss of $4.5 million.

But that could turn.

All right.

Thank you.

Appreciate it.

(OPERATOR INSTRUCTIONS)

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 Inc.

second quarter 2008 earnings conference call.

If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 followed by passcode 11116655.

ACT would like to thank you for your participation.

You may now disconnect.