Amkor Technology, Inc. (AMKR) Q2 2013 Earnings Report, Transcript and Summary

Hello and welcome to the Amkor Technology's Second Quarter 2013 Earnings Conference Call. My name is Lily and I will be your operator for today’s call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. This conference call is being recorded today, Monday, July 29, and will run for up to one hour. I would now like to turn the call over to Greg Johnson, Senior Director of Investor Relations and Corporate Communications. Mr. Johnson, please go ahead.

Thank you, Lily and good afternoon everyone. With me here today are Steve Kelley, our President and Chief Executive Officer and Joanne Solomon, our Chief Financial Officer. Before we begin, let me remind everyone 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 second 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. With that, I will turn the call over to Steve.

Thanks Greg. Good afternoon everyone. I’m pleased to be with you today on my first call as President and CEO of Amkor Technology. On today’s call, I will discuss my initial impressions of Amkor as well as Amkor’s priorities moving forward. I will then cover our second quarter performance and third quarter expectations. After Joanne discusses our financial performance in more detail, we will open up the call for your questions. First, I would like to say a few words about why I chose to join Amkor. I was an Amkor customer for many years. As a customer, I was impressed by Amkor’s technology, its execution and its attention to detail. Many of the customers I visited over the past three months have expressed similar thoughts about the company. So when I received a call regarding the Amkor’s CEO job, I was quick to express interest. Over the course of many meetings with Amkor’s Board of Directors and particularly with Executive Chairman, Jim Kim, it became apparent that there was a good match between my skills and experience and the challenges at Amkor. Since joining the company in May, I have been working closely with the management team and with our customers to assess the Amkor’s business and operations. Overall, I believe Amkor is well-positioned. We are investing in the right technologies and in the right end markets. I’m very optimistic about our long-term prospects for revenue growth and improved profitability. Clearly, Amkor’s financial performance needs to improve. Although, there have been some gains in the first half of this year, revenues and profits over the last several years have been relative flat. Our capital intensity and debt have increased due to heavy investments in advance technology. Although, these investments have constrained cash flow, they are fueling our success in…

Thank you, Steve and good afternoon everyone. To begin, second quarter sales of $746 million increased more than 8% over the second quarter of 2012. Flip chip and wafer-level packaging sales grew 24% and test sales were up 31% driven by our strong position in mobile communication. Wirebond sales were down 9% due to decline in the consumer electronics and computing end markets, partially offset by strength in NAND memory and automotive products. The declines in consumer electronics were in part due to the decreased sales from gaming. Our packaging for the CPU and GTU gaming chips largely ended in 2012. We continue to package and test other peripheral devices for gaming consoles and our 2013 revenues have reset to this new run rate. In the computing end market, our 2012 sales benefited from incremental demand from customers whose supply chains were disrupted by the flooding in Thailand. Gross margin of 18.5% was an improvement of 110 basis points over our adjusted gross margin in the second quarter of 2012. Leverage from higher sales drove improvement. Our operating expenses of $80 million were up from $74 million in the first quarter and consistent with our expectations. The sequential increase includes costs and expenses related to the cost of our Malaysia factory acquisition and to our CEO’s succession. We expect operating expenses to be around $18 million in the third quarter as we anticipate incurring some additional costs for the Malaysia transaction. Our equity pick-up for J-Devices was $1 million in the second quarter. During the second quarter, we increased our ownership interest in J-Devices from 30% to 60% and J-Devices completed its acquisition of three packaging and test factory from Renesas. J-Devices have lower customer demand during the quarter as well as increased cost related to these acquisitions and ongoing…

Thank you, ma’am. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Vishal Shah with Deutsche Bank. Please go ahead sir.

Hi, this Chad Dillard online for Vishal. I just wanted to get a little bit more clarity into your guidance for the third quarter. I know you don’t break out individually for the (inaudible). But, if you can, just give any detail on your thoughts on outlook that would be helpful?

With respect to the guidance for the third quarter and the end market, we are taking a close look at the mobile communication space and understanding the inventory correction. Mobile communications continues to be a big part of our results and would continue to be a big part of results for Q3. We are seeing some modest improvement in consumer and computing as a result of some design wins and some seasonal improvement. But it’s sequentially and expected to decline at communications but will still be the biggest piece of a pie.

Great. And then also just with 3D NAND coming down the plank then also since that how are you positioned to take advantage of some of these transitions with potential change in packaging architecture?

Yes. This is Steve. I will take that question. I think we are actually very well-positioned. If you take a look at our market share in advanced packaging, we are number one and we continue to invest heavily in advance packaging in a couple of different ways. The first what we do is, we invest heavily on R&D, we work closely with the leading customers picking the mobile communication space to design cost effective packaging. The second way we do is, we invest in advance packaging and test capacity. So we are basically building upon our learnings already. So, we are well down the curve in advance packaging and I think we are leading the way as the industry transitions to 2.5 and 3D technologies.

Thanks. If I could squeeze one more in. I know it’s a little bit early but maybe you could provide some of your initial thoughts on your outlook for 2014 from a revenue perspective as well as CapEx perspective if you can?

I can’t give you specific guidance on 2014 but I can give you some general thoughts. I think mobile communications will continue to drive our business both on the top line as well as from an investment standpoint. So my expectation is that we’ll continue to invest heavily in new packaging technology and capacity as well as in new test platforms. So these investments are critical to our growth and they’re necessary to engage with key customers in the mobile communications segment. So that’s where I think we’re going. I think sales will grow significantly next year because I think mobile communications will after a short hiccup here is back to its growth curve and I think Amkor should benefit quite a lot from that mobile communications growth.

Thank you.

Our next question comes from the line of Suji De Silva with Topeka. Please go ahead sir.

Hi, guys thanks for taking the question. First of all, Steve, you talked about on the expanding share some customers have where you have low share today. Can you specify what end markets (inaudible) those customers might be in? Help us understand that.

Yes. They are in a variety of geographies but I think I’ve talked to some already in the U.S. where for various reasons we don’t have much penetration today. There are also number of companies in Asia where we haven’t focused in the past. So I think with the investments we’ve made particularly in the mobile communications space we have the opportunity to engage with more customers today and we’ve even focused more on the second wave of customers so that we can ensure that our capacity utilized for many years.

Okay, great. And then with the J-Devices increasing share – on the share, can you talk about the demand trends in Japan, do you think near term softness that might impact your results or is that something that the demand environment is relatively stable out there?

Well, I think the demand environment is relatively soft in Japan. I think there are a lot of companies that are undergoing restructuring they’re changing their strategic priorities. So J-Devices is essentially a rollup play. They purchased a number of assembly and test factories from Toshiba, Fujitsu and Renesas. And to drive more profitability J-Devices needs to bring supply and demand into balance. And so they’re looking at ways to bring more demand into their factories and also reducing their fixed cost. If I look at some bright spots in the Japan area one bright spot that we participate in is in the NAND Flash business the memory business with Toshiba. So that business seems to be very robust obviously a lot of penetration into the cell phone market, the smartphone market as well as in (inaudible).

Okay. Maybe the last question for Joanne. Can you talk about the utilization by the different package types to the trends there? Thanks.

Yes. When we look at our utilization number in our press release we get some aggregate numbers for packaging and test and packaging. We said for the quarter it’s at 85% and test is at 81%. When you look – when you break it down further between advanced technologies and then some of the more matured technologies, we tend to run at higher utilization levels on the packaging side than we do in some of the more mature areas. We’re seeing some improvement in the more mature areas as we continue to do better in things like automotive that’s helping and drives utilization. When we look at on the advance side we’ve made very heavy investments in support of mobile communications with the inventory correction late in June we started to see some capacity opening up on the advance.

Okay. Thanks.

Our next question comes from the line of John Pitzer with Credit Suisse. Please go ahead.

Hi, this is Farhan Ahmad asking question on behalf of John. Can you talk about the CapEx split between the flip chip and wirebonding this year?

Yes. So when I look at the CapEx breakout of the $450 million. The majority is that will go into packaging about 55%, test is about 30% and facilities and infrastructure is 15%. Test was higher last year at 40% of the total spend because we saw some of the test migrations from one platform to the other in our leading mobile communications customer.

And between the packaging like how is the split between advanced packaging and wirebonding?

We do have some investment in the wirebond front. I’ll highlight two areas with respect to wirebond. As Steve mentioned we’re doing extremely well in the memory space so we are seeing some investments in support of the stack packaging that’s heading into memory. So there is some wirebond spend there. There is also some spending in the more mainstream leadframe packages to drive cost reductions as we’ve been to wider strip sizes and some copper wirebonds migration. So I would say the majority of the spend if you consider the memory packages are very complicated and advanced is setting into advanced.

Okay. And then in terms of your units if I look at like the units for wirebonding they were up quite a bit. And then on the flip chip side, I notice like that seems to be like significant decline in ASPs just like if I look at the revenue growth and your unit growth your unit growth is much higher. So can you just talk about like what’s driving those changes like on wirebonding the sequential growth is very strong if I look historically it’s not being as strong in any of the prior products?

Yes. So there has been on the advanced side there has been a product shift mix that’s going on. We’re seeing a lot more adoption of the wafer-level on CSP packages. And so that has -- it’s very high units and in comparison that’s what’s driving down the ASP on the advanced side. So we’re just doing great on that side heading into mobile communications and the wafer-level processing side. So that’s shifting around ASP a bit. On the wirebond side, we’re seeing strong unit growth for memory and we’re also seeing strong unit growth on the leadframes side supporting automotive.

Got it. That’s all I have. Thank you.

Our next question comes from the line of Terence Whalen with Citigroup. Please go ahead. Terence Whalen – Citigroup: Hi, thanks for taking the question and also congratulations and welcome to Stephen. The first question that I had was regarding the wirebond market. It’s obviously an area where you have participated a little less than you have liked and/or having efforts to sort of recall back some market share in that market. Joanne, I think you alluded to automotive and memory being some conduits to do that and to reestablish yourself from your former position with wirebonding. Can you just provide us a higher level on understanding of where you are and sort of what inning you are in terms of the regaining progress in that market, what initiatives you have specifically and what timeframe we can expect for you to really feel like you’re in a firmer place in wirebond? Thanks.

Yes. This is Steve. Let me give few comments about wirebonds. We started a program last year so basically to do a better job of filling our lines our matured lines mainly which were in the Philippines. That effort is starting to bear fruit. We still got ways to go. So I think when you look at wirebond it’s all about utilization right, if there are certain limits there isn’t too much pricing power in the wirebond market there are too many competitors. So that being said that means you need to get more efficient and for us that that largely boils down to capacity and making sure we utilize that capacity. So we’re working on bringing business into the Philippines factories that it’s foundational right it doesn’t vary to the same degree as the mobile communications market for instance. So we’re looking at automotive, we’re looking at industrial applications, we’re looking at smaller customers and larger customers to help us build a nice base there so we can count on good times and bad. Terence Whalen – Citigroup: Okay, thanks. And then Stephen my follow up then is in terms of the timing of how the quarter developed, I think that you had alluded earlier to seeing sort of a late June mobile inventory correction. Can you just help us understand a little bit more context of that sort of maybe the timing of when you began to first see softness develop for the magnitude and how things have played into July perhaps as well? Thanks.

Yes, I’d be happy too. So what we saw basically was that our largest mobile communications customers began to adjust their forecast in June. And that’s spurred us to reconfirm our forecast with the rest of the mobile communications customer base. So the results of that survey together with some couple of a judgment resulted in this flat forecast we have for Q3. Now as Joanne mentioned, the reductions in the communications demand will partially offset by increases in other areas in particular computing and consumer. So that’s where we’re at. We have already installed equipments to support a higher Q3 forecast in the advanced areas so we do have upside capacity available should the smartphone market pick up more quickly than we currently forecast this quarter.

Okay.

I’ll tell you what we’re doing now. Yes, maybe one more comment. I think it’s important that Amkor is going full speed ahead even in a slow quarter. It basically offers us an opportunity to accelerate our new product builds for customers and we have extra capacity to deal with new products, we’re accelerating cost reduction programs and we’re aggressively addressing efficiency issues. So we’re staying pretty busy and we’re taking advantage of the temporary slowdown in demand.

And so Stephen maybe just to kind of understand that point a little bit more clearly. Are customers still reducing forecast or have been stabilized or have you seen any improvement from sort of lower run rates earlier in July?

I could tell you at this point it seems that’s stabilized. I think once it rippled through the system from a couple large end customers which seems to be an even field for the past couple of weeks.

Okay. And then my last question was just to understand the copper pillar market a little bit more clearly. What’s the total opportunity there and how do you feel like your position versus couple of your competitors when will copper pillars, when will they surpass the size and maybe the (charter pumping) market?

Yes, it’s a great question. I think copper pillar is a very important technology particularly for the mobile space for tablets and for cell phones. And Amkor is leading there right we invented it basically. We’ve installed it and ramping in, in three different geographies. So we have the most capacity, we have the highest share in the copper pillar market and I think you’ll see over the next two years that it basically takes over as the dominant technology for smartphones and tablets.

Okay. And so maybe just to understand that a little bit better, as customers begin to release designs and sort of new or nodes of technology like 20-nanometer planer and 60-nanometer since that are you pretty confident that those types of chips will be using copper pillar there?

Yes. In fact that’s really their only choice in most cases. I mean the big advantage for copper pillar is you could squeeze more bumps into the same amount of space. And the geometries of 20-nanometers and below demand that copper pillar approach we can get there with conventional technology at least you can there easily.

And so what will your share be, do you think of that market as it develops next year will it be similar to your current share in wafer-level packaging or will you see a higher market share in that market?

I would hope that market share at least what we have today if not better it’s very difficult to predict that.

Okay, fantastic. Thank you so much.

Thank you. (Operator Instructions) Our next question comes from the line of Jeff Harlib with Barclays. Please go ahead.

Hi. Could you just update us on the pricing environment for advanced and leadframe packaging, are you seeing any pressure or is that pretty stable?

Okay. Can I make two comments, I’ll make a comment on wirebond part and then I’ll make a comment on the advanced part.

Okay.

I think in the wirebond area there is a lot of competition and that’s why it’s most margin challenge part for our business it’s just a fact of life. And so we’re focusing on the quality service and keeping our lines full to move our margin up there. I think the advanced packaging and test side is more interesting. What makes that part of the business different is you need a lot of money to play there. So that essentially limits the number of competitors. You also need very good engineers and operations people which narrows the field even more. So basically it limits other competitors, I would say that pricing is competitive but rationale in this part of the market. Because a lot of the focus for the players in the top-end of the market is on return on investment like the pay back time. Because these are major investments that Amkor is making and (inaudible) competitors are making.

Okay. That’s helpful. And just maybe just an update on 2014 CapEx related to the K5 facility I know you said you are spending $140 million this year what it looks like in 2014 and when it should be completed. And then also the cost of the Malaysian acquisition that you expect to close on?

Why don't I had a capital part of it and I will turn the Malaysian commentary over to Joanne. But, on the K5 factory, we are still in the planning phase on that project and so I will be able to tell you more in our next conference call. But, we need to do more work there to understand exactly how we are going to build that factory that complex. So we are in that process today.

On the Malaysian acquisition with respect to the acquisition it is a stock deal. It’s going to be around $60 million to $65 million. It is subject to a purchase price adjustment and then we also expect to enter into licensing arrangement as well.

Okay. And just lastly, do you have exposure or meaningful exposure to the Chinese handset companies given, the expected growth in emerging markets and their position?

I think that’s been an area of weakness for us quite frankly in the past. But, I can tell you over the past six to nine months we have focused more intently on the area. So, we have some wins in that area with some of those customers. But, I would classify the Chinese and Taiwan mobile communications I see vendors as an area of opportunity for Amkor.

Great. Thank you.

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

Hi, thank you for taking my question. Actually piggybacking on the previous question, there has been a lot in the press that kind of the low end side of the smartphone market is growing pretty well. And just wondering if that’s what you are seeing as well and also what kind of exposure you have to that versus sort of the high end side of the smartphone market?

I think that if you look at where we sell into it’s mostly into the mid-tier and high-end of the market, right? Those are our customers that’s where they selling too primarily. But, our customer is also moving low-end so we are participating with them as they move into that part of the market. So, I would say we are not real exposed today but we expect being more exposed to that market in the coming 12 months.

Got it. And then, I mean maybe drilling more into that I mean its that also why you are seeing the slowdown in some of your smartphone exposure this part quarter because that the high-end side is underperforming or is that just something that we are hearing?

There is a lot of chatter. But, I have seen a lot of commentary that the entire smartphone market is slowing down a little bit not just the high-end part. I think markets are going to get ahead of themselves at the end. You go through these minor inventory corrections and then you get back on track again. I believe both the high-end and the other tiers in the smartphone market are driven by applications, right? New applications that offer people reason to go buy a new phone. And they are also driven by normal upgrade cycles, right? Most people in the developed world are still buying new phones every two years because there are subsidized plans. And that hasn’t changed.

So then what is it in your view or maybe some time that your customers have expressed that you do these surveys, what is it that’s causing this temporary inventory correction right now?

Well, I’m just speculating, right. I’m not a market expert but I will say that there has been a lack of features in the past month and hopefully with new phones that are coming out in the fall that situation will change.

Got it. And then just one last thing, I know last quarter you didn’t really want to elaborate on the Apple opportunity was shipped to TSMC, so now that it will become more publicized, do you have any more color on sort of what that might do for your industry?

I can make a few comments. So the first, just like we are a leader in the mobile communications market and it is our biggest end market and getting bigger for us next year in 2015. I expect to grow our share of the mobile communications market in each of the next three years. And I can’t comment specifically about Apple, while I can’t do that, I can’t say that generally speaking I’m very pleased with our wins and with our progress in the mobile communication space.

Okay. I mean but, okay. And then just one more thing, with the Apple shift happening, if it does happen, what do you, mean do you expect that to soak up some of the excess capacity and maybe help from a pricing or you think there is capacity coming online to accommodate that (move anyway)?

I can’t really offer too much more commentary on the Apple and we don’t know what Apple intends to do.

Okay. Thank you very much.

Sure.

Our next question comes from the line of Eric Rubel with Stifel. Please go ahead.

Hey, good afternoon. And thanks for taking my question. Steve, one quick question for you. You talked about building a stable foundation of industrial and automotive customers for the Philippines, part of the leadframe operations and you guys are doing a fantastic job on advanced absolutely. But, in order for the margins to really excel across the enterprise, the leadframe is a critical driver for that. And question about building that stable portfolio of customers, is not tied to the deeper penetration you are making in Japan and how should we be thinking about timing for that to rollout?

Yes. I think your question is really focused on our profitability and margins right because wirebond is certainly a part of that. I think that probably the most important thing to keep in mind is product mix, right. So, I think what you will find is that our product mix will continue to skew towards advanced packaging and test. Right now, you look at our sales in Q2 close to 60% of our business is in advanced packaging and test. Both of which average our performance – our gross margin performance.

Right.

And it will continue to get bigger. But, if you look at the mature lines, yes, it’s a consolidation strategy, we are trying to fill Philippines. We are using J-Devices to help the Japanese customers build a cost effective supply chain within the country of Japan. And I think, we can make money in both operations in the Philippines and in Japan through J-Devices. But again, it’s a capacity utilization equation, you need to bring supply and demand into balance to keep it there.

Great. And then just a quick follow-up for you Joanne on the credit line thing you outlined. Can you just go through the $550 million of available capacity or correct me to make sure I heard that correctly? Thanks.

Yes. That’s right. So it’s $555 million. We have about $225 million of revolving credit facilities of which $150 million is the U.S. line. The balance is about $330 million of undrawn secured term loans largely in Korea. Those lines are there to help support the investments in 2014, the construction of K5 and capital equipment.

Okay. Thank you.

Thank you.

(Operator Instructions) Mr. Kelley, there are no further questions at this time. Please continue with your closing remarks.

I just want to thank everybody who participated on the call today. I look forward to talking with you again in three months.