Amkor Technology, Inc. (AMKR) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2012 Amkor Technology Incorporated Earnings Conference Call. My name is Douglas and I’ll be the conference operator for today’s call. At this time, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, Thursday, October 25, 2012, and 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’s management. Actual results could vary materially from such statements. Prior to this conference call, Amkor’s third quarter 2012 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 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. Ken Joyce, Amkor’s President and Chief Executive Officer. Please go ahead.

Thank you Douglas and good afternoon everyone. With me today is Joanne Solomon, our Chief Financial Officer. Today, I will talk about our third quarter 2012 results and guidance for the fourth quarter. Joanne will then discuss our financial performance in more detail and finally we’ll open up the call for your questions. To begin, third quarter sales of $695 million were up 1% from the second quarter. Solid demand for wireless communications in both packaging and test was the key driver of our business in the third quarter. Lower than anticipated supply of 28-nanometer wafers in the early part of the quarter and the overall weakness in the semiconductor market and general economy constrained our growth. Wireless communications is a key strategic focus for us accounting for 44% of our revenue this quarter. Demand for smartphones and tablets continues to grow at a healthy pace and a number of our major customers have deep penetration in these devices. We package and test many of the different chips used in these devices including the applications processor, digital baseband, memory, audio processor, integrated connectivity, power management, MEMS sensors and other functions. Sales and support of consumer electronics grew sequentially in the third quarter driven by a seasonal increase in gaming; although in sourcing by an IDM customer, and some softness in the gaming box market, contributed to lower growth levels than previous years. Accounting for 24% of our business, the consumer electronics end markets spans devices as varied as gaming consoles, television, set-top boxes, portable media and digital cameras. Some of the chips we handle for these devices include the CPU, GPU, memory, video controller, integrated connectivity and MEMS sensors. Capital additions were $173 million during the third quarter, primarily in support of customers in smartphones and tablets. We accelerated the…

Thank you, Ken and good afternoon everyone. To begin, our second quarter revenues increased to 1% sequentially to $695 million. We saw the excessive seasonal increase in gaming and some growth in networking which drove our ball grid array package sales up 9%. Our chip scale packages sales declined 4% due a slow down and demand for wafer bond array packages. Our leadframe packages declined 3% as the business we gained following the flooding in Thailand returned to normal level. And finally, our test services grew 5% driven by wireless communications. Gross margins up 17% were consistent with our adjusted gross margin last quarter. The declining utilization and higher depreciation cost caused some modest compression. Our operating expenses of $63 million were down from $67 million in the second quarter. The sequential decline was primarily due our reduction in compensation expense during the period. We expect operating expenses to be around $65 million in the fourth quarter. Other expense of $22 million was down from $25 million in the second quarter. In the second quarter, we accrued $4 million of interest expense for an arbitration loss contingency. Our affected tax rate of 30% in the third quarter was higher than anticipated due to a discreet tax charge of $3 million for an accrual of an uncertain tax to this end in the foreign jurisdiction Comparing sequentially in the second quarter we recognized the discreet tax benefit of $4 million for the release of the tax service that was in prior year, and for the full year we expect an effective tax rate of around 20%. Moving on to our liquidity and capital structure; at September 30 we had cash in the amount of $549 million, total debt of $1.6 billion and net debt of $1.1 billion. During the quarter, we took advantage of favorable conditions in the capital markets to successfully complete a debt refinancing transaction. We issued $300 million of new senior notes which are due in 2022 and bear interest at 6.38% and we used approximately $225 million of the net proceeds to repay debt of which $58 million was paid prior to September 30 and a $157 million was paid in October. This new 10 year note extent of maturity and mitigate future refinancing and liquidity risk. In summary as Ken discussed we are well positioned to take advantage of the significant growth opportunities in wireless communications and we believe our investments can help drive profitable growth, enhance our technology leadership and provide solid returns. With that we will now open up the call to your questions. Operator?

(Operator Instructions). Our first question comes from the line of Satya Kumar with Credit Suisse.

Hi this is Farhan asking the question on behalf of Satya. I wanted to probe a little bit on your guidance for next quarter, can you provide some color on what the different strengths you expect in the different packaging types.

A lot of the strength we expect to see in the fourth quarter is on the communication side. As has been discussed in our script in the press release the supply of 28-nanometer has been slow, but things had improved throughout Q3 and things were strong as of September. So we expect that trend to continue into the fourth quarter. So we are seeing growth in support of wireless communications into the fourth quarter and we do expect that that will potentially at the midpoint be offset by weakness in other areas. There is normal sequential decline for gaming that happens in the fourth quarter, but broadly the macro is impacting the general demand on the other side on pieces other than the communications.

Another question I had was on 20-nanometer. Seems like the SMC indicated this morning that it’s seeing a lot of demand from its customer on 20-nanometer and also on 16-nanometer and that 16-nanometer might start ramping at the end of next year. So I just wanted to hear your thoughts on what trends you are seeing on leading 20-nanometer and 16-nanometer and is Amkor engaged in any of those developments as well on packaging.

Yes, we closely collaborate with all of our customers and we are working with them on the lower nodes, but right now the focus for us has been on the 28, but clearly the lower nodes were also working ahead of programs in place but the main focus for us right now is on 28-nanometer.

Our next question is from the line of Terence Whalen with Citigroup. Please go ahead.

Hi, it's (inaudible) for Terence. Can you guys talk about on the wireless communications side, and how many customers is the current ramp kind of spread over and how should we handicap the risk of over capacity as you and others are simultaneously adding a 28-nanometer capacity?

Well, it depends on the customers that you serve. In the wireless space, on the handsets and the tablets, you have different players and the two dominant players who are out there are doing extremely well. So if you are supplying in to that base, you're going to do well. Qualcomm and Texas Instruments are two of our largest customers, and we believe they are doing well supporting in to that, and we have many of other customers that support in to that supply chain. They are the less dominant OEMs that haven't done as well on both the handsets and the tablets sides, and to those that are supplying in to there, there are some headwinds. But I don't believe right now that there is really any build up on the (inaudible) such that I can see on excess capacity. We're all running pretty strong in support of our customers. I know we are and I believe our competition is. But I don't believe there is much excess capacity in support of the communications applications at all.

Now, on the PC side there is growing concern that the weakness you are seeing in the PC market could be structural than cyclical. Can you talk about in terms of PC what percentage of your sales are PC driven and again the risk of excess (inaudible) capacity on that side if the PC demand remains weak in to next year?

PC is rather a small part of our portfolio overall and Joanne you may have that percentage on the end market.

11%.

So 11% on the end market thank you. And we are mostly into the peripherals we do not do DRAM packaging some of our competitors do that. So we wouldn’t feel that impact of the computing. We do supply into customers that supply into hard disk drives and other peripherals. We are seeing some softness there as they are also. So I think we are rather small player in the computing, but what we do see and where we do play we are seeing some softness there. Let’s hear another part of that question.

Yeah, the question on kind of a partnering with founders like [SMC]. On their call this morning [SMC] talked about in case if Apple moves its [Astros] business from Samsung to it’s (inaudible) they will be looking with [OSAPS] on package and package kind of applications there. Can you talk about any discussions any dialogue that you are having with [SMC] and kind of helping them out on that front?

We have excellent relationships with TSMC, our global foundry, UMC all of the major foundries Intel, Samsung even in that to the extent that they play. We can’t speak to any specific customer, but I can tell you that we work with them on all their leading edge products there. We are really well positioned as far as the communication space goes and the foundries know that.

Okay. And last one for Joanne. On the capital intensity or the CapEx fragment due next year, how should we think about capital sending for next year beyond the $500 million allocate for this year?

With respect to next year, we are suddenly monitoring the macro environment and where the demand is and we are understanding the growth coming from communication. So at this time, we don’t have the specific guide with respect to CapEx for next year. but looking back over the last three years, our capital intensity has been higher than typical and our capital intensity has been ranging the 16% to 18% and each of those years had fairly significant and isolated areas that we are investing in. As example, this year our test investment has typically represented 20% of our spend and this year it represents 40% of our CapEx spend. So we do expect some of that will moderate. So when you look at historically, we have been at 16% to 18%. If we start to assume levels of growth a more normal level of capital intensity will be more like 14% or 15% capital intensity.

Our next question is from the line of Vishal Shah with Deutsche Bank. Please go ahead.

Hey, this is (inaudible) calling in for Vishal. Thank you for taking my question. Could you talk about any type of margin personally you are seeing as you pursuing more business on the test or wafer level packaging side, thank you?

With respect to margin pressure a lot of it has to do in our business model on the scale you reach and as Ken mentioned in his prepared remarks, we are really well positioned on both the flip chip side as well as on wafer level processing side and we are broadly positioned. There are several chips that in support of Smartphones and tablets that are migrating to wafer levels CSP. We have a broad set of customer base, so given the higher level of utilization we are actually seeing good gross margins. So we don't see it as a negative to margin. We actually see it as a positive to margin and what's great about the way wafer level CSP side is it fits really well with our turnkey test offering. So you do a lot more the probe to the assembly side of it. So it’s a strong attach and the more services we provide the more value add we capture.

And then as you look towards 2013, can you talk about the areas of your business where you see the greatest risk of under or out performance?

Well, clearly we think as we move into 2013, it’s a little early with the uncertain economic conditions but one thing we can say is we are really well positioned in the communication space and we believe that that's going to continue into 2013 and beyond, that Smartphones and tablets were really, really in strong position there. So we see that and as far as some of the other markets I think with the uncertainty we are seeing here in Q4, it’s a little premature to talk as to how they are going to perform.

Got it and just going back to the test business, can you just elaborate on where your growth targets are? What type of share you hope to gain in that area?

You know with respect to test, test has been about 10% of our revenue because the mix of our customers are starting to migrate more towards turnkey, and it’s again mostly in support of communication side. We don't have a specific target but I could see it getting into the mid-to-low teens.

Thank you. (Operator Instructions). Our next question is from the line of Tom (inaudible) Research and Management. Please go ahead.

Actually I have two questions. The first question is could you talk about the linearity in the quarter and whether I guess the end of the quarter was any different from beginning. And then the second question is in the wireless space specifically. Are you seeing any demand softness at all, or is the main issue still the 28 nanometer supply?

With respect to the linearity of the third quarter, we saw the end of the quarter being much stronger than the early part of the quarter especially with respect to the wireless side of it. And remind me the second part of the question.

And I guess in the wireless space specifically are you seeing any demand softness. I'm guessing that's probably not the case but just trying to understand if anything has changed because obviously you've been pretty bullish on the particular segment. It looks like that hasn't changed but I just wanted to confirm if that is the case?

Yeah, heading into the fourth quarter that is based of (inaudible) of strength in the wireless space.

And I guess maybe one more question, just more broadly speaking. What are you seeing from your competitors, are you seeing any price competition, are you seeing them getting more aggressive in any specific segment, any insights there would be useful?

Well, pricing in our business is always very competitive. On the high end packages where the utilization is very high for us and our competitors in the communication stage as the pricing is pretty stable. It's when you get into the mainstream and a legacy product, commodity product, as markets start to soften as we’re seeing, you can see very difficult price competition. I think that’s an overview to Joanne, I don’t know if you have any comments or answer that color?

No, that’s right. I think, we as the market share leader in the flip chip and wafer level processing side. We compete very favorably on that side. They also compete in that space. Some of our competitors have seen doing better on the wire bond side and it's a competitive industry that we compete very favorably. We certainly have a level of technology leadership in the industry. There are some Tier-2 players that are trying to penetrate into a more of a Tier-1 space but let me think Tier-1 will continue to dominate.

And I guess one last question. So it looks like as far as communications are concerned, you are pretty happy with that piece of the business. It looks like it's ramping up. I guess notwithstanding some of 28 nanometer issues but could you maybe spend just a minute and talk about your other three or four major segments, consumer, computing networking. Just give a sense of what the major trends that you are seeing right now? Thank you.

Well, during the quarter, our other segments performed pretty well other than computing. Computing was down somewhat first during the quarter but our auto and industrial sector was up slightly and our networking was up slightly. The two that we just talked about upfront, the reason we're so excited with communications that's about 48% of our business right now. Consumer electronics which we talked about which includes gaming as around 24. So, there is about, not quite 70% of your business. The others that we’ve talked about is computing (inaudible), the auto and industrial and networking showing some improvement. So we were pleased with that performance during the quarter.

And at this time, there are no further questions in the queue. I would like to turn the call back over for closing remarks.

Well, we would like to thank everyone for joining us on the call today and participating in our call. Thank you.