艾克爾 (AMKR) 2008 Q3 法說會逐字稿

Welcome to the Amkor Technology, Inc.

third 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 open for questions.

This conference call is being recorded today, Wednesday, October 29th of 2008.

It will run 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 third quarter's earnings release was filed with the SEC on file 8K.

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

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.

On Monday we received a ruling from the arbitration panel in the dispute regarding our license agreement with Tessera.

As previously disclosed the panel found that most of the packages accused by Tessera are not subject to the patent royalty provisions of the license.

The panel has ordered that the damages experts for the parties calculate the amount of cash royalties due for infringing packages from March 20 -- 2002 through March 2008 using percentages set by the panel on product family by family basis for sales with a US [nexis] subject to certain upsets.

The final amount will be determined by the panel following submission of the expert reports.

We have estimated that accruals and unpaid royalties inclusive of interest through September 30th, 2008 was $49 million or $0.22 per share and these amounts have been reflected in our financial results reported today.

The panel also denied Tessera's request to terminate the license.

We remain a licensee under the agreement with the rights and the benefits of a licensee and ongoing obligations to pay royalties for cover the product.

Excluding the Tessera charge our third quarter results were in line with our high end guidance and reflect strong performance in a challenging economic environment.

Our business mirrors the trends in the worldwide semiconductor industry generally and is affected particularly by levels of consumer spending and global GDP.

The 4% sequential growth in our revenue for the third quarter was below historical seasonal levels, as customers manage their inventories in response to softer demand and the concerns about a weakening economy.

The weakness in consumer spending continues to spread globally.

Many of our customers remain negative on the near term outlook and they continue to reduce their forecast with us and their levels of inventory in preparation for challenging times ahead.

The current uncertainties about the global economic conditions make it very difficult for our customers and us to accurately forecast and plan future business activities.

Base on current customer forecast, we expect our fourth quarter revenues to decline 14% -- 15% to 20% from the third quarter of 2008.

Our strategy in the current market environment is consistent with our track record for the past three years.

We will remain focused on cash flow generation, reduce costs and control capital spending, make prudent investment in technology in close collaboration with our customers and sustain a disciplined approach to pricing.

We have demonstrated the soundness of our strategy over the last three years and indeed it remains intact as we prepare for more turbulent times ahead.

Having said that, we will intensify our efforts to reduce our costs and eliminate our capital expenditures, we continue to focus on improving the efficiency our factory operations and administrative functions.

In fact, in anticipation of possible slow down and as part of our continuing course reduction network we have been introducing our work force at substantially all of our factory locations.

Through September 30th, 2008 we have reduced our head count by over 700 employees and expect to save $4 million a quarter respectively.

We have reduced the scale of our footprint by disclosing of unneeded real estate and existing unneeded lease space and combining operations in several locations.

In the near term the capital expenditures will be focused technology advancement and post reduction programs.

Any investment with respect to capacity expansion will be specific customer requirement and focus on area such as wafer level packaging in support of the ongoing migration of the semiconductor from wirebond to the flip chip technology.

With respect to pricing, we will continue to work closely with our customers and suppliers to eliminate cost from the supply chain.

We do not believe it is prudent to reduce price in a weakening economy just to gain market share or clear the factories.

While the current outlook is negative for the demand for semiconductors, we expect that these times will also have some opportunities.

We will continue to focus our investment in key packaging and test technology for advanced semiconductors where we believe we can add value and by fairly compensated in the supply chain.

Overall market capacity assembly and test may also be reduced at some [IDMs may accelerate plans to share more of their less profitable back end assets and as smaller undercapitalized other players may begin to exit.

We are preparing the organization to not only weather the storm, but also to become stronger when demand and the global consumer recover.

I will now turn the call over to Ken Joyce, our President and Chief Operating Officer.

Thank you, Jim.

During the third quarter our net sales increased $29 million or 4% sequentially with unit shipments at a record 2.5 billion units, up 18% compared to the second quarter of 2008.

We saw units and revenue increases in every one of our package segments with good recovery in our leadframe business.

Growth in our 3D and flip chip packaging business was also solid in the third quarter as we saw continued strength in many wireless and gaming applications.

For the fourth quarter, we expect broad based weakness among the services we perform and the end markets we support.

Close customer collaboration has been a very important element of our strategy to ensure we keep pace with technology advancements and the changing and more demanding environment of advanced semiconductor devices.

Our strategic customer relationships has also been critical to facilitate our more disciplined approach to capital spending.

10 years ago many would have characterized Amkor's business model as overflow capacity at times when IT demand exceeded capabilities, which in turn would illicit concern when IT demands weakened.

Today Amkor's business is much different.

More than half of our customers are fabless and fabless high C companies who do not have the capability to bring in house their packaging and test needs when volumes decrease.

Additionally many of our IDM customers have significantly down sized and specialized their packaging and test capability in favor of the outsource service provider model.

In part, this change is due to the increasing technological complexities of today's packages and the related requirements for value added and technologically sophisticated packaging and test solutions offered by Amkor.

Our ability to full fill our customers' needs around advanced packaging and test solutions is evident with respect to our 3D and flip chip package solutions which grew 50% for the third quarter compared to a year ago.

Today unlike 20 years ago, we are better positioned to weather the difficult times on a high level of less elastic demand.

During the third quarter we experienced price declines of approximately 1% to 2% from the second quarter.

The reduction in overall average selling prices during the third quarter was overwhelmingly due to product mix.

In analyzing our third quarter results it is important to note the significant recovery of our leadframe business in the third quarter resulted in an overall unit growth far outpacing revenue growth.

We expect to face increasing pricing pressure in the current challenging market environment.

However, as Jim noted we do not believe it makes sense to cut prices just to increase our market share or fill the factories.

We plan to have a customer focused disciplined pricing strategy as we look forward and ahead.

I will now turn the call over to Joanne Solomon, our CFO.

Joanne?

Thank you, Ken.

We have made significant steps to improve our cash flow and liquidity and strengthen our balance sheet which is especially crucial in the current market environment.

Since the beginning of 2006 we have generated over $700 million in free cash flow.

During that time, we have reduced total debt by over $500 million.

We ended the quarter with $444 million in cash and total debt of just over $1.6 billion.

Other than $55 million annually of amortizing debt, we have no significant debt maturity until 2011.

While the near term outlook for the semiconductor industry has continued to weaken our financial position and liquidity remain sound.

Growth margin for the third quarter was 19%, down from 23% in the second quarter of 2008 and down from 25% in the third quarter of 2007.

Included in our cost of sales and gross margin for the quarter were $10 million in charges relating to previously announced reductions in work force as well as an estimate of $45 million for accrued and unpaid royalties owed to Tessera.

The $45 million charge for Tessera reduced our gross margin by six percentage points.

The record volume of unit shipments through our factories and the resulting high capacity utilization rates contributed to our gross margin.

Selling, general and administrative expenses for the third quarter were $60 million, decreasing from $67 million in the second quarter of 2008 and $64 million in the third quarter of 2007.

The sequential decrease of approximately $7 million is attributed to significantly lower legal fees and travel costs.

Third quarter net income included a foreign currency gain of $23 million principally due to the depreciation of the Korean won and resulting remeasurement of Amkor's Korean employee benefit plan liability.

We accrued approximately $4 million as an estimate of interest owed to Tessera for unpaid royalties.

Our effective income tax rate for the third quarter was 32% which is substantially higher than typical as a result of the accrual for Tessera royalties having little tax benefit.

The effective income tax rate also reflects the recording of a valuation allowance of approximately $8 million offsetting certain foreign deferred tax assets.

We anticipate the effective tax rate for the full year 2008 will be approximately 13%.

Given the current industry condition, and a weakening outlook for the fourth quarter and 2009, we continue to rationalize our capital additions especially with respect to water bond and test investments.

We expect fourth quarter capital expenditures to be approximately $45 million tracking to 13% of revenue with overall capital intensity for the full year 2008 tracking to 13% of revenues.

We expect to manage our business at lower levels of capital intensity during 2009.

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

Sales are expected to be down 15% to 20% from the third quarter of 2008.

Gross margin is expected to be between 18% and 21%.

Net income will be in the range of $0.03 to $0.12 per diluted share.

Operator, we will now open this call for questions.

Thank you.

And ladies and gentlemen, at this time we will begin the question and answer session.

(OPERATOR INSTRUCTIONS) Please ask one question and one follow-up.

Thank you.

Our first question comes from the line of Bill Ong with American Technology Research.

Please go ahead.

Good afternoon.

Could you provide some sensitivity analysis on what type of break even we can expect?

I know there are a lot of variables, but maybe just a general sense and the rationale behind that Q1 will probably be seasonally down.

Want to get a sense of whether or not you are going to losses and if you are, are you going to take any actions to reduce costs to prevent that from happening?

Thanks, Bill.

With respect to a break even calculation, if you look at break even on an operating income basis, we would estimate that our break even point is between about $525 million to $550 million in revenues.

That is on an operating income basis.

As you said, there are a lot of assumptions that go into that with respect to mix and pricing and the like.

At those levels we would see gross margins of about 16% to 17%.

But again that is all subject to a lot of different estimates and that does vary from quarter to quarter.

And with respect to the outlook for next year other than saying it is uncertain, I have no comments with respect to that.

Actually, more if you think you are going to have losses are you taking any actions to be in front of that?

Any type of discretionary costs that you can take out to minimize that from happening?

Bill, this is Ken Joyce.

How are you today?

Doing good.

Thank you.

Let me respond to that a little bit.

I think we are a little bit ahead in this area.

We have been rationalizing our factories as we have indicated in the call.

We downsized, we've consolidated some of our factory operations.

We continue to look at our corporate expenses.

We have been focusing on asset productivity measures and I think that's been reflected in our improved performance.

That being said, should things continue to soften, there are additional measures to be taken and I think they would be much along the lines of what we have done so far.

This is Jim.

All of that depends again what the outlook beyond.

We don't take any actions for one quarter.

You have to understand, our type of business we have a very broad asset base and even labor sometimes are fixed in some way.

However, a lot of economies are predicting that this recession may be different than some other time.

And so we have to be very conscious of the changes occurring in the market and if current financial instability gets stabilized and the worldwide recession doesn't occur the way many people fear.

There are many, many variables that will affect what we will be doing.

Obviously through -- we adopt some of the extreme view of the economy mist who may think this is a long-term one, I would be the first one to take very severe action.

But we have already started.

Last conference call we had I told you we already reducing work force.

We already see what is coming and we are already reducing our own SG&A to various expenses, you will see we are cutting.

So I'm very comfortable with the plans we have in place.

Thank you very much.

Thank you.

Our next question comes from the line of Chris Blansett with JPMorgan.

Please go ahead.

Hi.

Thank you.

The $49 million charge -- or $45 million charge taking towards Tessera is that something that has been dictated by the arbitration panel or is that your estimate of what you think you need to write down at this time?

That's absolutely Amkor's estimate.

What the tribunal provided us was a prescription on how the final settlement amount should be calculated.

They left it up to Tessera and Amkor's experts to get together, do the calculation and see how closely we agree and to the extent that there is any disputes after that, that will go back to the tribunal as well.

So in the coming quarter are you expecting to get a final number between yourself and Tessera.

So Amkor and Tessera have until November 17th to respond back to the tribunal, so Amkor and Tessera will be getting together to see how close our numbers are to each other and then it may be the first quarter before we have a final verdict.

And then just a couple quick ones here, on your guidance for the fourth quarter, this is GAAP guidance are there any expectations of anymore one time charges that will be taken next quarter that might give you a different pro forma number?

It's definitely GAAP guidance.

Each quarter has its own unique element.

We did increase our guidance to reflect an ongoing royalty rate with respect to Tessera and -- but it is reflective of GAAP.

We didn't exclude -- we didn't forecast any foreign currency gains or losses with respect to the translation of the Korean won, so that will impact our guidance either positively or negatively.

And then one last quick one.

One of your peers, Bill reported earlier their fourth quarter guidance as not as down as far as yours.

Could you maybe describe your differences in the customer profile that would have such a disparent -- a big difference between your guidance ranges?

Your talking fourth quarter or first quarter?

Fourth quarter, they only got it down to 8% to 13% and yours is more than that.

I think that has to do more with the customer base or product mix.

I think still more PC related and PC has been more stable than other consumer factors.

I think that's the primary reason.

There is nothing more than that.

On the other hand, remember, they also have deal [emphasis] we are not familiar with that area of business.

Thank you.

Thank you.

Our next question comes from the line of Satya Kumar with Credit Suisse.

Please go ahead.

This is [Vis Manori] for Satya.

For the FX what percentage of your cost is one base if you can provide any color for that and that would be pretty helpful.

Okay.

Absolutely.

FX is obviously a very complicated area.

When you look at the top of the income statement, we look at the revenue dollars, about 75% of our services are provided through our factories in the Philippines and Korea and we reply as much as possible on natural hedges.

Most of our income is -- most of our revenues are in US dollars, so we are not subject to too much variability with respect to currency on the top line.

Our largest FX exposure in the income statement is the short Korean Won and Philippine peso position and that's principally driven by labor and utilities, and that's a little bit different than the FX gain and loss line item that we see on the income statement that is really just a translation of largely an employee benefit liability.

Looking at the quarter our gross margins were benefited by the depreciation of the Korean won and the Philippine peso by about $10 million.

There are some other Asian currencies that contributed to that $10, but the peso and the won were the primary drivers.

Okay.

That's helpful.

When I look at your weakness that is 15% to 20%, could you quantitatively indicate how each segment is trending towards this or is one segment slower than this and you have a little strength in any of them?

With the end market exposures in our fourth quarter that 15% to 20% is fairly broad based among our customers and the end market segments.

It is largely driven off of -- or almost entirely driven off the consumer, the global consumer that is.

Even when you look at wireless, that is very dependent on consumer spend.

Let me warn you -- by the way, again we are talking with our customers and it is really changing week to week or even day-to-day sometimes.

So in this kind of a climate, I think predicting range itself is dangerous.

We are really using customers' input as a basis for doing it.

As you are well aware, most of our customers are very well aware of this inventory situation.

They are controlling their inventory to a level and that's why we see almost daily the changes occurring.

My hope is at the end of the day we may be better than what we are saying.

That is a pot I don't think even our customers are really aware what the final demand is going to be.

That is a challenge that we, all of us are facing at the moment.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Tim Arcuri with Citigroup.

Please go ahead.

Hi, guys.

This is Brian Lee calling in for Tim.

Congratulations on a strong quarter.

Couple things from me.

Sorry I jumped on late.

So I apologize if this has been asked, but can you comment on where break even is currently and how we should be modeling that going forward given the head count reductions and other cost cutting efforts?

Yes, sure, Brian.

We did cover a little bit earlier and the break even point on an operating income basis is between $525 million and $550 million.

At those levels that would suggest a gross margin of about 16% and 17% and there is a lot of assumptions that go into that as you know and it does have a tendency to shift around.

Okay.

That's helpful.

And then I guess more big picture.

Last time the industry -- IT units were down on a year-over-year basis which it looks like we are now in and will be through mid year next year, your revenue is contracted by about half from the peak.

My question is, is there anything structurally different this time around that you wouldn't see that kind of reduction this time around?

As we mentioned before, units are very driven to mix.

And as Ken mentioned on our prepared remarks when you look at our stack packaging and our flip chip packaging that had revenue growth by 50%.

Our units didn't clearly grow by 50%.

There is something that is fundamentally different.

It is the shift in mix.

By the way, Brian, this is Jim.

You guys keep saying about the units decreasing.

As you know up to -- if you look at Q3, up to Q3 actually units in the semiconductor has been up.

I don't know where the numbers are coming from, and frankly I don't remember last time that peak -- I have to go look at it down by 50% in units.

I really don't know.

We will go look into that.

I agree with you, Jim.

We are going off of SIA data and through -- like you said the end of Q3 you are still up for a year-over-year basis.

But it looks like for the next couple quarters, based on how you trend the units, it will trend down.

Units are meaningless in our business, in my opinion.

Okay.

Fair enough.

And then I guess one more thing from me and I will go away.

If I look at the mix here, package units were up quite a bit but revenues were only up 4% sequentially.

To me it looks like the first time in several quarters where your ASPs have been down a meaningful amount.

Is it fair to conclude that you are having to cut prices here to maintain share?

I know you are saying that's not the case.

Maybe you can help me understand why those two pieces seem to be moving in such vastly different amounts.

Again, I think you are missing the point.

Our unit has the meaning when you talk about product mix.

We clearly stated to some of the leadframe low cost, low material intensive ones has increased significantly to catch up from Q2.

I really don't think we can talk about ASP as a guide for any kind of a measurement.

I think I would give a little clarification there.

The overall average ASP would be down.

But it is, as Jim said, It is mixed base.

We had a large increase in the jelly bean units with the lower ASPs.

It is very much mix driven as opposed to price driven in the decrease.

Even within the lower ASP segment, you are basically saying that ASPs did not change too much quarter-over-quarter?

I think overall ASPs were down 1% to 2%.

Thank you.

Our next question comes from the line of Peter Kim with Deutsche Bank.

Please go ahead.

Hi, thanks for taking my questions.

I wanted to backtrack a little bit about the ASPs you talked about prudent ASP policy going forward.

Have you walked away from business because the ASP was too low?

No, we haven't had that -- I don't think we had that experience.

Again, it doesn't mean there is no intense pressure in the market.

We do have a constant discussion going on, but I don't think we necessarily have lost any business in my recollection.

I was just trying to reconcile the difference between your guidance versus your peer group guidance.

And I thought maybe there was some implications from the ASP policy that you have adapted.

No, I don't think -- if the implication is we are losing market share because of our pricing, I don't think that's the case.

I think this is very broad based demand driven not pricing from our perspective.

Okay.

What is the ongoing royalty impact that you expect from this arbitration settlement?

That is a number that we did estimate.

It is a little bit hard to calculate at this point, but it is about about a couple million dollars a quarter.

So as your capacity increases in the flip chip mix do you expect this royalty impact to decrease, would that be a fair statement?

Yes, that would be a fair statement.

Okay.

Two last quick ones, one, restructuring charges going forward, are you done with your restructuring, do you anticipate restructuring charges in Q4?

I would expect to anticipate further restructuring charges going forward.

It is something that we will actively monitor with respect to -- as Jim mentioned, we will have to keep an eye on the future outlook on how deep we need to cut and when do we need to cut.

That is currently not included in your guidance.

It is very little in our guidance.

We have a factory, we had some operations in North Carolina that we made the decision to exit the manufacturing operation side.

We are still maintaining an R&D presence.

We will have some restructuring charges and they are included in the guidance so far.

Okay.

And lastly, the OpEx going forward, what is your expectation for OpEx?

So OpEx, clearly we are hopeful that we can continue them on a downward trajectory I believe them to be just about flat for 4Q.

We will see some uptick for legal costs as we have the final settlement discussion -- the final tribunal activities and we are increasing our activities with respect to IT infrastructure investments here in the US.

Offsetting that would be some of the savings at the factory levels as well as some other manufacturing and corporate costs.

Thank you.

Thank you.

Our next question comes from the line of CJ Muse with Barclay's.

Please go ahead.

Thank you for taking my question.

First, just a point of clarification, in terms of the EPS guide are you baking in restructuring costs and/or FX gains from the depreciating one in that number?

The restructuring charges we had in the fourth quarter are very, very minimal at this point so there are no material restructuring charges in the fourth quarter.

With respect to the FX gains we did not include any forecasted translation gains on the reading measurement of the Korean severance liability.

On our income statement whereas this quarter we have $23 million, we have not included any kind of forecast of a gain or loss with respect to the translation.

Okay.

Great.

And I guess also a point of clarification on the $525 million to $550 million operating cash flow break even, just to confirm, that includes all the cuts that you have made through today in that number?

That is an accurate statement.

Okay.

Alright.

My first real question, given the uncertainty right now, how are you going to plan CapEx investments in the first half of 2009 with a desire, I think, to stay free cash flow positive?

Can you talk a little bit about the ins and outs of how you will make decisions around that particularly given the very poor visibility you have today?

Historically if you go back to 2002, I believe, our CapEx was below $100 million.

It was.

Yes.

Now, I'm sure that -- we have had many meetings on this with my management team and our CapEx would be very tied to what customers need.

Without it, I don't think we will spend a dime.

That's our basic principle.

Now so there's wear and tear, and with our asset base there are certain minimums that you must do and plus what Joanne mentioned, IT areas we need to continue -- this is a time we need to continue to invest in the infrastructure for the better communication with the customers and data collection and so on.

So those are the minimum amounts we will be spending.

And as you are well aware, there are major technological changes taking place.

Therefore, we need to continue to watch for that, and as our customers demand there, we will continue to invest in that area.

Can you share with us what your maintenance CapEx looks like and what a bare minimum investment would look like for the leading edge technology?

Well, you have a couple questions there together I think.

You said bare minimum investments, probably with our size probably need to spend at least $50 million in my opinion, but in addition to that what you need to spend for advanced technologies that the customer demands, it depends on the market demands and our customer commitment and demand.

Without that you can delay investments.

We have a lot of options.

Very helpful.

Thank you.

Thank you.

Our next question comes from the line of Sundar Varadarajan with Deutsche Bank.

Please go ahead.

Hi.

Just wanted to follow-up a little more on the aspect of free cash flow here.

First, do you expect to be free cash flow positive based on Q4 based on your guidance for revenue and CapEx?

And secondly, I just want to know from a CapEx perspective, I think you guys separate from -- your CapEx was $92 million, yet in the cash flow statement it kind of looks like it was $126 million because of the pay down of payables.

You talk about $40 million of CapEx from next quarter.

Is that including any potential reduction in the payables that is sitting on your balance sheet or is it just the gross number?

So the $45 million that we talked about is on the addition side.

So there is clearly -- there are some payables from the third quarter additions that were shipped to us in the third quarter that we will have to pay for in the fourth quarter.

So the cash paid CapEx would be higher than the $45 million that we talked about.

But then do you still expect to be free cash flow positive in Q4?

Yes, yes, we do.

In terms of timing of the Tessera payment, do you have a sense of when that might go out?

Not really.

We are expecting that some time in Q1 that it will be finalized, so some time after that.

How comfortable are you that that ultimate number will be different from the $49 million that you have accrued so far between the principal payment and interest?

It is clearly an estimate and it would be subject to change.

And again, one more question on the ASP front.

Your next quarter guidance, what kind of ASP response are you assuming in the fourth quarter and what is the margin impact -- ongoing margin impact from Tessera?

I think you mentioned $2 million.

Is that baked into starting with Q4?

I will take the first one, Sundar.

This is Ken.

On the pricing, we have built in our normal 1% to 2% a quarter is what we see.

There is a challenge on pricing right now, but the way we look at that is price reductions are driven by our ability to reduce costs, and we constantly work with our customers to value engineer packages and reduce those costs.

That being said, past experiences have shown that simply reducing prices to fill the factories doesn't work.

That's not a sound strategy.

It is not something that we will be pursuing.

In this environment, I think the 1% to 2% is fine.

And finally, on the -- Jim, you mentioned that this weakness might provide some opportunities for you guys.

When you say opportunities, are you looking at potential acquisitions and how do you kind of balance out the impact in terms of the purchase price on an acquisition versus what the current state of the capital markets are in terms of liquidity and access to capital markets?

Could you kind of elaborate a little more on what your thoughts might be on that area of growth?

First of all, I think it is our policy in the past not to really speculate something like that, frankly.

But as a company we are always on guard to look out if there is an opportunity, it is foolish not to review it, and that's the time we will look at the new investment versus purchase of existing assets or capacity and what that impact may have on our business.

So -- by the way, opportunities are always there.

There are many, many kinds of approaches there.

We haven't come to anything that we can take any action at this time.

That also has to be combined with our cash positions and markets, and as you are well aware today, probably even if a good deal is around, finding money may be more difficult than other times.

So all those factors have to be considered to make any decisions.

The only other aspect -- the type of things that are most attractive to us are with respect to an [IEM] transaction, let's say, like a supply agreement in a best case scenario wouldn't have a whole lot of up front cash payment.

And Joanne, just one more follow-up for you.

You talked about a slight uptick in legal expenses, is that pretty much associated with the Tessera litigation issues?

And could you quantify that, and would that be more one time or an ongoing recurring expense over the next few quarters?

Yes.

It is funny because I had this conversation with our General Counsel.

There is no linearity with respect to legal fees.

It comes in peaks and valleys and I wouldn't begin to describe legal fees as one time.

You look at our history, legal fees come and go and it is part of the cost of being a US company.

So I wouldn't describe them as one time.

I don't expect them to be all that significant in the fourth quarter.

It is just with respect to OpEx guidance, I would have said flat on an SG&A, but we may have a little bit of an uptick.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Jeff Harlib with Barclay's Capital.

Please go ahead.

Hi.

Just back on the CapEx.

I was just wondering if you can -- you talked about it somewhat, but is there a certain percentage of sales or minimum dollar amount that you think, maybe a range that would be needed in a down revenue environment to maintain your facilities and invest in new technologies?

Would it be under 10% of revenues?

I think that's a good number to follow.

I think capital intensity as a number -- we start using.

I think 10% would be a good number and we will try to be more in single digit if we can.

Okay.

And then with some of the commodity leadframe business that could potentially go inhouse with certain customers.

Can you talk about how much you see how much of your 29% wire bound leadframe would be subject to that in terms of the product?

Leadframe is the older and the more challenged products.

The pricing is a challenging environment.

Some of it could be pulled inhouse.

That being said, we don't think that it is accelerating at any point at this time although there is challenging pricing in that particular area of the business.

Okay.

Last question, any -- with your bit liquidity cushion, any thinking of potentially buying bonds in the open market or other uses of cash to improve the balance sheet?

Yes.

Liquidity is certainly a priority for the company.

And we didn't have visibility with respect to the Tessera payment until a couple of days ago.

We clearly evaluate what our liquidity needs are between today and 2011, our next maturity.

There will be a lot of demands on our cash going forward, we talked a little bit about on the call about whether there would be some opportunities to make some investments here and there.

They are all part of the things we would consider.

Thank you.

Thank you.

Our next question comes from the line of [Eric Rubel] with MTR Securities.

Please go ahead.

Good afternoon.

Thanks for taking my questions.

Joanne, a couple of clarifications if I could, what were materials as a percentage of revenue in the quarter?

You called out 4X of $23 million of gain, was that $10 million in cogs inside that 4X gain and what was capacity utilization in the quarter?

Okay.

Taking them one at a time.

The $23 million is not in cost of goods sold, that appears as a separate line item in our income statement above -- a separate line item on our income statement below gross margins.

The $10 million I talked about is imbedded in that cost of goods sold number.

With respect to materials as a percentage, it is -- materials is about 38% of net revenues which is roughly flat player to last quarter.

Last quarter was about 39%.

And capacity utilization --

Capacity utilization.

In our press release, we had capacity utilization of 86%.

Packaging utilization tends to be up higher than that.

That's both flip chip as well as wirebond and test utilization tends to trend lower than that.

I have some questions on working capital looking ahead.

It looks like you did pretty well in the quarter with the velocity of the revenue line turning down do you think you can do better on receivables?

Do you think we can see DSOs with something like a 40 day handle?

And what is your outlook for working capital in Q4?

We try really hard to sustain our current level of cash conversion.

It is definitely challenging out there.

Some people are having liquidity issues.

None of our customers so far, but we are mindful of the issue.

I don't expect DSOs to come down.

We are concerned that DSOs may go up.

We are actively monitoring the health of the all of our customers and making sure that those payment terms don't get stretched out.

The flip side is, we also want to make sure our suppliers stay healthy as well.

One last question, if I can, you mentioned that you had a really strong recovery in the leadframe part of the business in Q3.

Can you give some color about how you are thinking about mix in Q4?

Well, Eric, this is Ken.

I think that once again we are seeing softening across all of our product lines that will impact the mix a little bit.

But that being said, throughout the year we have continued to see continuing growth in our leading edge packages, in our flip chip and wafer level packaging.

We expect that to continue.

There will be some -- probably some softening in the leadframe packages as we move into Q4.

Okay.

Great.

Thank you.

Thank you.

Next question comes from the line of Mike Lanier with AIG.

Please go ahead.

Hi.

Excuse me.

Is it fair to say that you exited the quarter on a down beat as opposed to kind of level throughout the quarter?

If you are asking if the revenue was linear, it wasn't.

It did trend down throughout the quarter.

That's correct.

And how do you characterize the visibility you have?

We are already a month into the quarter.

How far forward does the order book let you see right now?

We have rolling six months forecasts from our customers and they update those, some on a daily basis and some on a weekly.

We prefer to look at it weekly.

So we get weekly movements up and down.

Clearly, at the end -- you may have a six month forecast, but at the end of June you didn't expect this number -- the fourth quarter to be like this.

Mike, visibility is -- we have the visibility, with respect to the accuracy of our customer forecast, we have seen a downward -- a negative adjustment to those forecasts.

They are dynamic forecasts.

They're not static, that's for sure.

Sure.

Right.

I'm just saying, is it realistically four to six weeks the orders are firm versus forecast?

At times like this when the market is weak, really my personal experience with this business has been in times like this when business is going down, it is very difficult to really predict.

That's all I can tell you and even I know even last week numbers changed.

So that's why we gave you wide range this time.

Normally we try to do a two or three point difference.

This time we do 15% to 20% because we just -- visibility is so poor.

Then on the insourcing topic that Jeff brought up, how much notice, if a customer that you are acting in a swing capacity, how much notice do they have to give you when they decide to take some back in?

It varies.

We have ongoing business relationships with frequent contact with our customers.

So obviously they try to give us as much notice as they can.

You are saying that it might be contractual, but in the real world it could be shorter than the contractual understanding.

That's correct, yes.

Alright.

Third quarter looked good.

Was good, yes.

It kind of gets lost.

Thanks for recognizing it.

Thank you.

Our next question comes from the line of [Ross Strello] are RBC Wealth Management.

Please go ahead.

Hi, Ken, how are you?

Okay.

So what percentage of your products are actually of your revenue actually use the package from Tessera?

That's -- actually it's --

Let me give a crack at it and then you can add.

There is only so much we can talk about Tessera at this point.

It is with respect to our wirebond packages and it is a portion of those wirebond packages.

When you look at the charge that we took, that kind of gives you a little bit of an idea of materiality.

That was spread over six and a half years, so it is a piece.

Okay.

So is that some type of a -- with their patents, is that something that will eventually be obsolete?

Those patents will expire at some point in time, yes.

The other technologies that replace it is what I'm talking about.

This is not -- really we see Tessera, it is not really significant for us.

What became a little significant was that there was a lump sum of back royalties.

So going forward, this isn't -- Tessera isn't that significant of an issue for us.

Okay.

Very good.

So in your opinion what is the inventory situation like throughout the supply chain right now in the semiconductor industry?

I think the inventories are really very low.

I think that many of our customers have been reducing their inventories in anticipation of a slow down.

I think the inventories for our customers and customers' customers inventories appear to be very low in the distribution network.

I think especially in the last two or three weeks, there has been significant effort to reduce inventory on the customers' end.

However again, remember, inventory is relative to demand.

If demand comes down faster, then inventory will increase again.

I don't think we can really talk about level of inventory with any significance at this time.

Future demand will dictate whether we have excess inventory or not, and if we don't, then Q1 we will be surprise.

That is the key.

In other words, what is the final demand going to be for the product that they -- manufacturer will make using the semiconductor product.

It is anybody's guess right now.

Exactly.

Exactly.

Thank you.

Then the final one, are you temped to buy some stock at this price?

You know we are not allowed to answer any question --

Is that personally --

A company stock buy back.

I answered the call a little bit earlier with respect to the demands on our cash.

As Jim mentioned in his prepared remarks, we are very focused on free cash flow, we are very focused on liquidity.

There are demands for our cash along the way and we will evaluate all investment opportunities with respect to debt and stock, we will evaluate that as well.

Fair enough.

Thank you very much.

Thanks, Ross.

Thank you, next question comes from the line of Tom [Shandel] with [Friedman] Investment Advisors.

Hi.

Good afternoon.

I would like to ask a couple of questions on the balance sheet and related to the Tessera accrual.

That item, does it show up in the accrued liabilities line item on the balance sheet?

Yes, that would be in accrued expenses.

Okay.

And I guess following up on that, you don't know when it will get paid, but obviously -- if we wanted to forecast working capital, we should back that out of accrued liabilities to try and come up with our ratios and any kind of model?

Yes, the payment is some time early 2009 is the best I can guess.

Okay.

Fair enough.

And just looking at the payment dates for your bonds, you made the comment before that in the fourth quarter you expect to be free cash flow positive, and I gather that reflects the fact that it seems like you have a couple of coupon payments that do come up in the fourth quarter.

Yes, we will deduct interest paid in deriving that free cash flow.

Okay.

So obviously it is hard to forecast '09.

You gave us your ideas about the fourth quarter of '08 and you also gave us a break even revenue level for the operating income level.

But based on your comments about CapEx and based on a relatively fixed capital structure, if one were to just forecast out into the future these kinds of gross margins that you through out and revenues and your expected CapEx, would you expect -- and including working capital investment, would you expect if things stayed at this level for things to stay positive in '09?

Clearly a priority of ours is to stay free cash flow positive.

We are managing forward cash generation.

With respect to intra quarter, between quarters there is potential that a quarter could not be free cash flow positive.

But our goal with respect to 2009 is to maintain and to be free cash positive.

The break even numbers obviously is just a forecast of where we think 2009 is going to be.

So we hope it is certainly not that bad, but --

Right, right.

And just to be clear, the break even was operating income which was after depreciation?

I'm sorry.

I should have let you finish your question.

It is operating income and that is after depreciation.

Okay.

Great.

I appreciate it.

Thank you, our next question comes from the line of Robert Goch with [Mac Capital].

Please go ahead.

Hi.

Thanks for taking my question.

Just on the break even level when you said that take into account the cost savings measures, is that the to date cost savings measures, are you sort of analyzing that or run rating that cost analyzing measures on the break even?

The way we calculate the break even, it is based on that quarter's results that isn't trailing 12 months at all.

It would take into consideration the cost savings that have been done so far.

Just on the bad debt expense in the quarter or expectations -- (OPERATOR INSTRUCTIONS) Please continue.

I'm sorry.

There was a beep on my phone.

I was asking a question.

You mentioned your customers and the issues they were facing.

I was wondering what the bad debt expense was for the quarter.

Bad debt expense for us historically has been at extremely immaterial.

It's -- thankfully we include some of the top semiconductor companies amongst our customers.

When you think of our top 25 represent 75% of our revenues and they are all good quality companies.

We feel good about that.

There are some smaller customers we do watch and in the environment Jim and Ken talked about cost cutting, every dollar is precious, especially every dollar that is cash.

It is something we are mindful of.

We don't expect bad debt expense to increase materially.

We want to make sure we don't leave any value on the table.

Okay.

Thank you very much.

Thank you.

Our next question comes from [Raffe Hassan] with [FBR Group].

Please go ahead.

Hi, good afternoon.

I had one question.

This number $45 million, is it your number or the is it the number that the judge told you to pay?

That was asked earlier on the call, Raffe.

It is Amkor's estimate and the process that we have to go through from here is by November 17th our experts and their experts will get together and determine what aspects we agree on, figure out if there are aspects we disagree on and then go back to the tribunal and they will make the final assessment.

So our estimate is subject to change.

And when do you think that final judgment is going to be?

Again, we expect some time in the fourth or first quarter.

You still expect that to be divided in six or seven years?

No, the six or seven years comment -- I don't know if you are referring to a comment I made -- sorry, I think I understand the question is, the award itself is from March 2002 to March 2008.

That's a six and a half year period.

We will have to start paying Tessera royalties for Q2, Q3, Q4 and ongoing as we go forward.

We are a current licensee of the Tessera technology.

So we will commence paying royalties.

So it's going to be divided over time, right?

Nothing is divided over time.

When there is a judgment, we will have to pay the total amount.

Okay.

Okay.

That's all I have.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) One moment, please.

And we do have a question coming from the line of [Shawn Park] with Ice Canyon.

Please go ahead.

Hi, Joanne.

Thanks for taking my call.

Just a clarification, you just said that the payment was through March '08.

So between March and now, have you -- how have you been accounting for the royalties that are due to Tessera?

So for -- now that we have the verdict, we took that -- sorry, now that we have the interim order.

We took that interim order and estimated what we owe Tessera for Q2 and Q3.

We have not paid them that, but we have accrued that in our Q3 results.

Okay.

And that accrual is different and is on top of the $45 million you are talking about?

No it is inclusive.

The $45 million is not just the award amount.

That also includes amounts for Q2 and Q3.

Okay.

So it is actually March '02, while you mentioned the decision was based on March '02 through March '08 it is really longer than that then.

So the award period is March '02 through March '08.

That is the award period.

Our books and records were through September 30th.

So we had to accrue what we owed for Q2 and Q3.

And the number that we proposed is inclusive of the Q2 and Q3.

Okay.

And is there anything you can do within our own product mix or how you manufacture that could even reduce the potential $2 million a quarter down, now that you are aware that anything related to this patent will result in additional royalty payments that you weren't aware of before?

It is not a material issue for us.

It is just not a material issue for us.

We will take a look at any ongoing impact as we move forward.

Okay.

Thanks.

Thank you.

And management, there are no further questions.

I will turn it back to you for closing comments.

Thank you very much.

And again, thank you for listening to us.

Thank you.

Ladies and gentlemen, that will conclude the Amkor Technology Inc.

third quarter 2008 earnings conference call.

We thank you for your participation today, and at this time you may disconnect.

Have a nice day.