Amkor Technology, Inc. (AMKR) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2013 Amkor Technology, Inc. Earnings Conference Call. My name is Lily and I will be your 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 opened for questions. This conference call is being recorded today, Thursday, April 25, and we’ll 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. Actual results could vary materially from such statements. Prior to this conference call, Amkor’s first quarter 2013 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.

Thank you, Lily, and good afternoon, everyone. With me today is Joanne Solomon, our Chief Financial Officer. Today, I’ll talk about our first quarter 2013 results and the guidance for the second quarter. Joanne will then discuss our financial performance in more detail, and finally, we’ll open up the call for your questions. To begin, we are pleased with our first quarter results driven by a strong performance in mobile communications, our sales of $688 million, gross margin of 17%, and earnings per share of $0.07, were all at the high end of our expectations. Our investments in the advanced technology and production capacity and support of the fast growing markets for smartphones and tablets are paying off. As we see notable improvements in our results over the first quarter of 2012. Mobile communications is a strategic focus for us and our communications revenue grew around $90 million or 30% over the first quarter of 2012 and represented 59% of our total sales in the first quarter. Demand for smartphones and tablets, continues to grow at a really healthy pace. A number of our major customers have fee penetration in these devices. And we package and test many of the different chips used in them. To give a sense of the mix of technologies involved, our communication sales for the most recent 12 months are comprised of about 60% flip-chip and wafer level processing, 25% wire bonds and 15% test. While our position in communications is very strong, we have seen some softness on our other end markets, compared with the first quarter of 2012, sales and support of consumer electronics were down driven by weakness in home electronics market and lower levels of demand for our gaming business. Our computing sales were also down year-over-year, as some of the…

Thank you, Ken and good afternoon everyone. Beginning this quarter, we have reporting packaging sales in two categories, wirebond services has one category and flip chip and wafer-level processing services as the other. To provide historical perspective, annual and quarterly results for 2011 and 2012 by the new category are posted on our website. Moving on to our results. First quarter sales of $688 million were 5% increase over the first quarter of 2012. Flip chip and wafer-level packaging sales grew 27% and test sales were up 28% driven by our strong position in mobile communication. Much of this growth came from sales of 28-nanometer chipsets and power management and connectivity applications. We are seeing strong sales and supportive NAND memory. However overall wirebond sales decline 17% due to the consumer electronics and computing end market as Ken mentioned. Gross margin of 17% was an improvement of 70 basis points over the first quarter of 2012. Leverage from higher sales drove the improvement. Although this is partially offset by competition expense and unfavorable foreign exchange rate movements. Our operating expenses of $74 million were up from $70 million in the fourth quarter of 2012. The sequential increase includes higher compensation expense, due to the restoration of incentive compensation for 2013 and higher professional fees. We expect operating expenses to be around $80 million in the second quarter of 2013 with the increase due to deal cost for the possible major factory acquisition. Our effective tax rate in the first quarter was 23%. For the second quarter and for the full year 2013, we expect an effective tax rate of around 20%. As Ken mentioned in his remarks, we have number of strategic investments in the pipeline for 2013. First, we’ve just completed our acquisition of an additional 30% equity in…

Thank you, Ms. Solomon. (Operator Instructions). Our first question comes from the line of Vishal Shah with Deutsche Bank. Please go ahead. Chad Dillard – Deutsche Bank: Hi, this is Chad Dillard online for Vishal. Thank you for taking my question. Could you talk about how you see the utilization trending as they look towards the back-half of the year?

Yeah, we expect to see utilization continued to improve at the end of the back-half in the year. We’re seeing strong utilization of our flip chip assets and we’re seeing improving utilization of our wire bond assets. Test is linked very heavily in support of communications and we’re seeing strong impacts from a test perspective. Chad Dillard – Deutsche Bank: Got it. And also given the pullback in gold price, can you talk about how your gross margin should be impacted over back-half of the year?

Yeah, it’s clearly a tailwind that will benefit as we commented in the back-half of the year, this goal stays at these prices and doesn’t go back up or if it does down further. We do operate with some level of gold inventory, so it will take a bit to burn that off, but I do expect it to be a small positive, I don’t expect it to move the needle that much. Chad Dillard – Deutsche Bank: Great. Thank you.

Our next question comes from the line of (inaudible). Please go ahead.

Yeah, hi guys. Thanks for taking my question. I just want to kind of dig a little bit into your CapEx spending. Clearly, you’re spending in given the strength you’re seeing in wireless. Could you provide some context for where you’re seeing this growth coming from? Is it one or two IDMs or is it one or two – tied to one or two particular OEMs or is it more broad based? And how much – you’re spending about 500 million on CapEx this year. I think you had said probably in the last call, CapEx is going to be at similar levels for next year as well. What kind of quarterly revenue run rate do you think you will be able in a position to support given all this CapEx spend?

(Inaudible), this is Ken Joyce. Thank you for the question. It’s really the participation in the communications segment of the business process really very broad based across those IDMs and fabulous companies that supply into various aspects. We are virtually in many different chips in both the smartphones and the tablets whether that’s everything from that processors, the baseband, the MEMS microphone, the power management. You can go right down the line. So we are really participates very broadly of those the IDM side and the other. With respect to the CapEx, once again we are investing to support these opportunities which are very broad base. I don’t want to speak exactly to a specific revenue title – revenue number that’s going to produce obviously increase based on the mix of the packages that are in there. But it’s full support, good healthy growth and profitability going forward if we see it.

And in the past and this is probably five – probably each year what you have seen the backend industry kind of spend aggressively on CapEx and then use, some of the revenue doesn’t materialize and you guys put a lot of procedures in place to see that there is a lot of tie back to the and/or visibility to the revenue. How do you see that, as any of that change or in other words do you have greater degree of visibility beyond your one in terms of how sustainable this revenue would be?

Well, the important thing is how fungible is the equipment that you have. We have a lot of fungible equipment set. A lot of the technologies that are being used in the smartphones and tablets are the advance technology. So flip chip, the wafer level CSP and they could be used to support number of different applications aside from the communications market so I think we are protected there.

Great. And then I have one more question on the gaming side. It used to be a pretty important revenue source for you guys. Obviously you have seen some weakness over that last couple of quarters. Do you think that’s more end market related or are you seeing some kind of shared impact? And again specifically the reason I am asking this question is recently AMD is being talking about a lot of design wins in the gaming side. How does that impact do you guys in the long run?

The end markets are changing if there is a migration from some of the boxes on to the other platforms such as those, onto the main screen computers or onto the smartphones and things of that nature that part of it. The second part is exactly what you alluded to. AMD has had a very good win in all three of the major game platform whether it’s Playstation or the Xbox or Nintendo, they’ve all shipped it towards AMD away from Sony and Toshiba and Microsoft or IBM. So they’ve shifted away.

Now I mean are you – AMD is being heard, does most of their packaging in-house, so that probably is not a positive thing from your perspective, right?

That’s correct.

All right. Thanks. That’s all I had.

Our next question comes from the line of (inaudible). Please go ahead.

Hi guys, congratulations on a great quarter. One of the things I wanted to kind of touch on with – during this call is, one of the more published things out there right now is about Apples move from TSMC, sorry from Samsung TSMC and as we all know TSMC does not have its own backend really advanced packaging backend capability. And you know just kind of looking at how you guys are increasing your CapEx and commenting about it as revenue opportunity coming in the second half and more of in 2014. Is it fair to assume that all those equal? The opportunity from Apple should come to Tier 1 players.

I don’t think we are really going to comment on what Apple is doing with their supply chain, quite frankly.

Got you. But I mean if you were hypothetically speaking things where to go to TSMC and they’ve run – I mean clearly don’t have the packaging distinct capacity there, you know, there has to be someone that’s going to do it, right?

Of course. And we’d be happy to participate and I think that we would be one of the leading candidates for that.

Got it. And is there – how would I think about the revenue opportunity coming out of there?

think it’s a little premature. As I said we can’t comment. It’s obviously very substantial. I mean this is a company in smartphones and the tablets we participate strongly in both of those areas. So we see a very large opportunity. You’d see what’s going on with the current supplier Samsung.

Right. Perfect. Those were really my questions. Congrats again.

Thank you.

(Operator Instructions) Our next question comes from the line of David Foropoulos with UNUM. Please go ahead, sir. David Foropoulos – UNUM: Thank you. I had a couple of questions on the balance sheet with short uptick in CapEx and the other deals that are going on. Do you have a – just kind of have a leverage sealing that you are looking at. Can you walk through that? I know the convertible is going to be retired in the stock, but can you talk through that please?

Yeah, absolutely. So from goals that we operate here, we do strive to keep our debt-to-EBITDA below three times. As we just say we have to convert that coming up here. So some of the increasing in leverageable get offset by the reduction of the leverage when that converts, that’s mean, converts into equity, but that’s from our goals we try to operate. As Ken and I mentioned in our script, we have a lot of strategic initiatives coming out. It’s a very significant cash outlay that we are also seeing great improvements in both growth and profitability. So we are expecting increase cash flow here as well. So we think that the leverage is in line with the cash flows that we’re generating. David Foropoulos – UNUM: On a convertible is that – do you guys have the option of how you want to retire that?

We don’t. It’s a conventionable – it’s a conventional converts so that maturity as a whole first of all helps that decision. David Foropoulos – UNUM: Okay. Okay. And – but it’s obvious that’s should go in mind. Okay. That makes sense. The Toshiba deals is that come with the presumably comes with the supply agreement, can you give I know its maybe premature, but can you give any color on that, is that merchant operation now is that primarily Toshiba products and can you give us some color?

Yeah. I can give you some color that as you said since it is an – there is some limitation in which I can share. Over the path Amkor as well J-Devices have done a series of transaction with J-D and I would expect with Toshiba and already excited transaction we look similar to what we’ve done in the past where it’s an acquisition of a factory by Amkor or J-D as it release the history followed by the supply agreement. The factory that we’re looking at is Toshiba captive factory, its predominately in power discrete. So it’s a very sizeable operation in Toshiba. It’s a leader in the power discrete area, which is a real nice fit for us because it’s a product line expansion of our existing wirebond business. David Foropoulos – UNUM: And one last question, with Intel, I don’t know if this overlaps for you guys, that come in the merchant market a little bit here, I don’t know the extended overlaps for you guys, is that any kind of competitor threat right now the way you’re looking at it?

Although, we compete well with all of the foundries quite frankly and so we’re yes to be seen how they’re going to play, but it’s not just a threat, it’s also an opportunity. We do a very nice job. Intel is a good customers of ours and I think in the advanced packaging side, especially in the mobile space that could be some opportunity in the future. So it’s both a threat and an opportunity. David Foropoulos – UNUM: Right. Thank you.

Our next question comes from the line of Ana Goshko with Bank of America Merrill Lynch. Please go ahead. Ana Goshko – Bank of America Merrill Lynch: Hi. Thanks very much for taking my question. I just have a couple of more on liquidity. So, I’m looking back at my notes from the last quarter and I think you said for 2014 and that you expect another 250 million on the spent for the development of the facility in Korea, in addition to any kind of ongoing CapEx. And I just wanted to confirm that still the expectation?

Yes. That is the current expectation and we think to improve the land and build this challenge is going to be about $300 million plus the land as a 100. We think that total 400 and 150 will be spent this year and then 250 million next year when the building becoming operational in sometime in 2015. So with any construction project just dies our estimates and the timing of in a shift. Ana Goshko – Bank of America Merrill Lynch: Okay. And then, thanks. And then with the increase in capital additions, expectations for 2013, is that a pull forward of what you are expecting in ‘14 or is it really incremental?

You know, its – the way we operates the business, I would say, its one year versus the next. So, in some respect that is a pull forward, because you’re reaching higher capacity than you would have expected in this current year. Do not sense it’s a pull forward. But as relates to the demand and we think it, its demand partially help to stick here, but it setting up for 2014 for long means one. Ana Goshko – Bank of America Merrill Lynch: Okay. Can you just trying to help add up all the cash uses potentially for 2013 and ‘14. So, in addition to JCOM and Toshiba, which would this year and on the South Korea spend and on the CapEx in the next year, any such there are arbitration payment would also be this year?

That would be my expectation. It’s an ongoing litigation. It’s in progress. Please refer to our 10-Q for the latest update as we file this year in the come weeks. But my expectation is that this time we have another payment it would be some this year. We incurred 56 million as a reasonable estimate of the low end of the range out which we paid 20 million so far. Ana Goshko – Bank of America Merrill Lynch: Okay. And then next year maybe about 700 for CapEx and the South Korea build and then potential some more for JCOM?

When you’re saying JCOM, I think that J-Devices... Ana Goshko – Bank of America Merrill Lynch: I mean, J-Devices...

So J-Devices is – it is an equity investment. They are standalone company and we do not include their capital expenditures in ours. They are funded from their own resources. Ana Goshko – Bank of America Merrill Lynch: So, I was referring to potentially taking in additional piece of the equity?

So, at this point we went up – we went up 30% from 2015, we have an option to pull in about another 5.7% potentially so that would not be in 2015 and by the time it closes it’s more like 2016. Ana Goshko – Bank of America Merrill Lynch: Okay. Got it. So net of...

I’m hoping that I maybe off a year but the payment maybe 2015, the payment will be 2015. Ana Goshko – Bank of America Merrill Lynch: So the net of all of this is, do you believe that the $300 million incremental facilities that you just entered into is really adequate to cover all the potential spending needs in ‘13 and ‘14?

We’ll see how the year progress but I think it will be adequate depending on we made to bring in couple of other lines just to have the borrowings in the right jurisdiction but ultimately the amount that draw under each facility would be based on what the liquidity need would be? Ana Goshko – Bank of America Merrill Lynch: Okay. And then what about share buyback?

On a share buyback our Board of directors approved 300 million. We bought in 210 million so far, so we have 90 million left to go. We haven’t bought anything back in the last two quarters so at this point it is – it hasn’t been priority of ours. Ana Goshko – Bank of America Merrill Lynch: Okay. Thanks very much.

Our next question comes from the line of Jake Kemeny with Morgan Stanley. Please go ahead. Jake Kemeny – Morgan Stanley: Hi. Thanks for taking question. Joanne, I just wanted to circle back a little bit on the capital spending and just kind of. Is the thought process that you guys are comfortable burning cash in 2013 because you have access to these other credit lines? But you are also fully intent on growing and so the EBIDA should grow as well and therefore when you look at leverage, leverage is going to stay when this kind of two to three times zone, is that how you guys are taking of balancing?

That’s certainly how we see it. These investments are meant to drive growth especially as it relates to the equity and the investments any business acquisition that’s driving immediate cash flow. With respect to the K5 construction that the facility in South Korea. Obviously that piece of it it’s a little bit longer term basis. So that’s investing further down in the future. But we do expect our EBITDA to grow here. So we do expect to operate within some more leverage term at this point especially in light of that converts. Jake Kemeny – Morgan Stanley: Okay. And the funding sources lately have largely come over at Korea maybe secured by asset in Korea. Is that kind of the game plan going forward if you should be more than this $300 million you would likely to see and borrow overseas at the Korean banks?

We just did a high yield instrument last year. So I wouldn’t say it’s more exclusive to our foreign debt. We’re very open to any attractive sources of capital. So I wouldn’t say it’s to the exclusion of any other source. Jake Kemeny – Morgan Stanley: Okay. And then on the smartphone and tablet opportunity, it sounds very attractive and sounds like you guys are executing very nicely on that. How much of that would you ascribe to kind of a rising tide, lifting all boats and it’s just a very strong end market for a lot of folks, and how much would ascribe to it particularly as it relates to Amkor’s Technology and taking market share from others in this space?

I think we’re performing really very well here in terms of the market share. We clearly, I mean if you look at the data in terms of the advanced technologies on Flip Chip, on Wafer Bump that goes along with that and with wafer levels CST in those areas. We clearly reach the fact both in technology in terms of units that have been packaged. So we’re really well positioned. We do enjoy the ride as you say as the market grows and the trends and the data that we see coming out of the research houses and what we hear from our customers who we collaborate with very closely, all those trends indicate that the trend of growth should continue at least into the next five years, both in the smartphones and tablets. So we’re really well positioned technology and in terms of production capacity. So we are well placed to take advantage of that market right now. Jake Kemeny – Morgan Stanley: Do you have any estimates as to what your market share is in that specific segment?

I don’t have a market share number, because market share depends on how you measure it. It’s just overall the – I’m sorry I don’t have that number. I couldn’t share with you right now. Jake Kemeny – Morgan Stanley: Okay.

One other things that maybe helpful for you Jake is to understand that it’s not just one or two customers or one or two devices within in the front. Our penetration in smartphones and tables is numerous customers and numerous semiconductor chips within each of those devices. And it takes a lot of technology and lot of effort by the team here to make sure we stay on the ride and to make sure we stay really well positioned to capitalize on it. Jake Kemeny – Morgan Stanley: What would you ascribe your competitive advantage, is that your manufacturing technology, is that the capacity have in place, is it relationship, what would you ascribe, what makes you different from the others?

It’s both. I’ll say this in terms of R&D. We continue to outspend our competition I believe. If you look the numbers and R&D that we spend over the last couple of years, we put lot of money, not just in the R&D expense on the P&L, but in terms of the capital equipment and development but something that’s been a key strategy of the Amkor is to lead on the leading edge that we clearly benefit from that. We will also over the last few year have seen this increased CapEx spend. A lot of it was to position us all throughout this chips in these packages. So it’s both technology and scope and scale and we also have the diversified geographic footprint with operations in Korea, the Philippines, Japan, Taiwan, so we are really well positioned and now possibly with Toshiba in Malaysia. Jake Kemeny – Morgan Stanley: Okay, thanks. Just one last one from me. There is a lot of folks shipping the credit size that is recovering company for very long and we have seen period of invested capital spending and cash burn as Ken, mentioned earlier. How much of your CapEx is essentially discretionary like if you did see things kind of slowing down, how much of it could you kind of pull back on?

So, with respect to the CapEx, we do have some flexibility in starting to cancel orders and push our orders and things like that, to manage liquidity and the downturn. And you saw us do a lot of that at the end of 2008 into 2009 most recently. And so, we do have some ability to just because we announced our plan of around 525 plus the 150 that we can ultimately control our own destiny to the extent that we need to enter to a cash preservation mode. So we do have that flexibility. With respect to customers and customer advance payments, I would not say that that’s any kind of material trend. From time to time, if it’s a very specific piece of equipment, we do have our customers consigning the equipment to us, especially if it’s of a single purpose and we can’t really deploy it for other customers. Jake Kemeny – Morgan Stanley: Great. Thanks very much, good luck.

Thank you, Jake.

Our next question comes from the line of Arun Seshadri with Credit Suisse. Please go ahead. Arun Seshadri – Credit Suisse: Hi, thanks for taking my questions, most have been answered. A couple of quick ones. First, I just wanted to get a sense for sort of operating leverage here as we go forward. In terms of the, sort of the percentage of incremental revenue that you dropped through the gross profit line, it looks like it sort of just inside the 40% here. Is that sort of a fair level of operating leverage with respect going forward beyond the second quarter as well?

Yeah, I think that’s a fair estimate, Arun. Arun Seshadri – Credit Suisse: Okay, great. And then, and as far as normal seasonality, I mean, obviously it’s little – it’s not that straight forward to tell beyond second quarter but how do you – how would you characterize your expectations for the balance of the year from second quarter to third quarter speed estimates you’re expecting a fairly sharp ramp in Q3 and Q4. Any color you can shed on what is normal and what would be considered normal seasonality?

Yeah, I don’t want to give you the sense that I’m giving any guidance. But when you look towards the year-over-year trends, I think that starts to setup some expectations for the second half of the year. As far as normal seasonality goes, the historical trends I think have Q3 up 7%, 7% to 8%. Arun Seshadri – Credit Suisse: Okay, that’s helpful. And then, like a slightly higher sort of OpEx spent in Q2, again going forward, Q3 and Q4, should we expect sort of a similar OpEx, the percent of revenue, is that the right way to think about it?

Because there is a hefty amount of deal costs and that we are expecting to hit us in Q2, I do expect OpEx to start to come back down. Again, the other variable is the time you have any litigation expenses that somewhere in the 75% to 80% range is where we’ve been operating. Arun Seshadri – Credit Suisse: Great. Last question for you is, obviously you’ve spent – you are embarking a fairly significant CapEx spend program. Maybe, you could comment also a little bit on pricing pressure and sort of how you’re seeing it develop, especially since everyone seems to be spending, just to comment on pricing? Thank you.

Yeah, with respect to pricing, I mean, we operate in a very price competitive environment. And so, that always put us, put pressure on us to ensure we’re investing for cost reduction and competing very favorably and lowering cost to manufacture. I would say pricing remains very healthy on the advanced technologies, on the more legacy commodity stuff, it tends to be very, more competitive which puts the pressure on making sure you’re investing ultra high density leadframes and (inaudible) injection and the light nature that you can operate in return even in that competitive environment. And I think that’s how the Tier-1 players, they’re distinguishing themselves from the Tier-2 players to actually be able to dominate that market as well. Arun Seshadri – Credit Suisse: I appreciate the comments, nice quarter. Thanks guys.

Great, thank you.

(Operator Instructions). Mr. Joyce, there are no further questions at the queue. Please continue with any closing remarks you may have.

Well, thank you Lily. And we thank everyone for their participation on our call today.