Good day, ladies and gentlemen, and welcome to the Amkor Technology fourth quarter and full year 2014 earnings conference call. My name is Saeed, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. 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, Saeed, and good afternoon, everyone. Joining me today are Steve Kelley, our President and Chief Executive Officer; and Joanne Solomon, our Chief Financial Officer. Our earnings press release was filed with the SEC this afternoon and is available on our website. During this conference call, we will use non-GAAP financial measures and you can find the reconciliation to the U.S. GAAP equivalent at our website. We will also make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it. Of course, actual results could be different. Please refer to our press release and other SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations. Please note, that the financial results discussed today are preliminary and final data will be included in our Form 10-K. And now, I would like to turn the call over to Steve.

Good afternoon, and thanks for joining the call. Today I'll discuss Amkor's fourth quarter results, our 2014 performance, our 2015 priorities and our first quarter forecast. Fourth quarter revenues of $853 million came in much stronger than we expected. These stronger revenues drove gross margin to 23% after adjusting for litigation settlement. This was our best quarterly gross margin performance since 2010. Our sales into the mobile communications market grew 13% in the fourth quarter, driven by strength in the iOS ecosystem. Sales into most other end-markets were also better than expected. Our 2014 financial objectives were to drive meaningful year-on-year revenue and earnings growth. I think that we made good progress against those objectives with revenue growth of 6%, adjusted gross margin improvement of 130 basis points and adjusted EPS growth of 60%. Revenue grew steadily over the course of 2014 from roughly $700 million in Q1 to over $850 million in Q4. We have now delivered meaningful growth in revenues and profitability for two years in a row. Over a two-year horizon, our revenue is up 13%, adjusted gross margin is up 300 basis points and adjusted earnings per share have doubled. We continued to expand our participation in the smartphone and tablet market. In addition to increased apps process from baseband revenue, we grew our business in NAND flash, power management, RF and MEMS products. Some of our notable advanced product ramps in 2014 included a major 20-nanometer apps processor, a leading-edge power amplifier module and a 15-nanometer memory product. All three of our advanced product manufacturing hubs, Korea, China and Taiwan, have been quite busy this year. Our three-country footprint for advanced products allows customers to choose Amkor factories, which best fit their supply chain needs. We also ramped new technologies in our mainstream business, including…

Thank you, Steve, and good afternoon, everyone. We delivered a very strong fourth quarter with record net sales of $853 million, non-GAAP gross margin increased 410 basis points and non-GAAP earnings per share grew 90% sequentially. These results demonstrate our ability to deliver meaningful margin and earnings expansion from improved utilization. In January, we reached a comprehensive settlement of our litigation with Tessera. We agreed to pay a total of $155 million in 16 equal quarterly installments over the next four years. In Q4, we recorded an incremental pre-tax charge of $87 million, which is net of the prior accruals, and net of $18 million that will be accreted to interest expense over the next four years. Operating expenses in the quarter were $80 million, which was up slightly from $78 million in the third quarter. For the first quarter 2015, we expect operating expenses to remain around $80 million. Our earnings benefited from a $6 million favorable impact from foreign currency translation. Our effective tax rate for the year was 25%, and we expect it to also be around 25% for the first quarter and full year 2015. In January, we increased our ownership in J-Devices to 66%. We acquired an additional 6% ownership from Toshiba for $13 million. We expect to increase our ownership to 80% by 2016 and anticipate spending around $45 million for additional 14% ownership. We generated EBITDA of $815 million this year, adjusted to exclude the settlement charge. This was up $160 million or nearly 25% from 2013. J-Devices generated $145 million of EBITDA from their 2014 record revenues. So together, Amkor and J-Devices produced over $950 million of EBITDA this year. And finally, at December 31, we had total debt of $1.5 billion and our debt-to-EBITDA was 1.9x, excluding the settlement charge. Our liquidity is solid with $450 million in cash and $485 million in available credit lines and undrawn secured term loan. With that, we'll now open the call up for your questions.

[Operator Instructions] Our first question comes from Randy Abrams of Credit Suisse.

I wanted to ask actually on the outlook, first on the mainstream products, where that part pulled back a bit, just outlook if you see start of a recovery for that business and just some actions to fill some of the capacity on the mainstream products? And for the advanced packaging or more in the mobile business, you mentioned one of your priorities as far as filling that capacity and having good demand at both high-end and in low cost packages. Could you talk about your view on the foundry structure, if some of the APs move to 16 versus 14, if that affects your allocation? And if it eventually adopts info on some of the advance packaging, if you could participate on some of those opportunities at the high-end?

Randy, I'll try to address your questions in order. First on the mainstream side of the business, this is the wirebond part of our business, and I think that it's three different areas. We have traditional wirebond business, which is centered up in the Philippines, and that business is driven by automotive, by industrial, by MEMS, by consumer, and in a lot of different markets in networking. And I think what we'll see there is continued steady growth. I think Q4 we saw a bit of a step back, but I think we'll see year-on-year growth in that area for Amkor. On the advanced side, you wanted to talk about the foundry structure in 16 versus 14. The way I'd address that question is, first to take a look at what happened in 2014. And I think the most important fact there was that Amkor performed very well at 20-nanometer. So we assembled and tested number of products there for leading customers, and fairly met or exceeded their yield throughput capacity targets. So I think we're very well-positioned going into the next generation, whether its 16-nanometer, 15-nanometer, 14-nanometer, I think we have the equipment in place, we're down the learning curve and we have the engineering expertise to pull it off.

And if I could ask a follow-up, the second question on gross margins. For fourth quarter, for the upside in gross margin excluding the Tessera, if you could go through what drove it, if that was the product mix from the mobile products and advance products? And for your outlook for margin into 2015, where you'd see kind of high season margins progressing, if kind of similar levels to what we achieved last year or what kind of the range for what you could expect as we go back to our peak season?

Randy, I think for the fourth quarter, the primary driver for the improved gross margin was just better sales, better utilization for our existing capacity. We're a high fixed-cost company, so when we drive higher sales, we have good fall through. Mix also impacted it, but to a much lesser extent. As I look to 2015, we definitely foresee an improvement gross margin year-on-year. So if we look back, the last two years '13 and '14, we showed steady improvement gross margin and I perceive the same outcome in 2015.

Our next question comes from Suji De Silva from Topeka.

In terms of meeting the upside you guys had, did you have any challenges on the capacity side for the advanced products this quarter?

No, we didn't, because we were ready to handle an upside. So despite our forecasting ability from the financial side, our factories are ready, and we didn't really overstress the factories in Q4.

And then on the mainstream side, you talked about the weakness there a little bit. Can you talk about the competitive landscape versus some of the guys in Asia? And whether pricing is a factor there to get business there? Or how well-positioned you are for that competitive push going forward?

On the mainstream business, I'm going to complete the thought I articulated earlier in the call, but there are three parts. The Philippines, we have our memory business in China, and then we have a discrete business in Malaysia. So I think price is competitive in all three areas. Most of our leverage today is in volume, so the key in our mainstream business is to really fill our existing capacity. If we could do that, we could generate better gross margin. There's not a whole lot of price leverage.

And last question on mainstream versus advanced, do you expect that mix, Steve, to stay around 50-50?

I think looking at the outlook for 2015 and where our upsides are, I would hope that we could move the advanced products a little faster than mainstream. But I think 50-50 is not a bad place to start.

Our next question comes from David Duley from Steelhead.

I think it was asked earlier, but I just wanted to ask it in a slightly different way. Once you have a seasonal improvement in your business sometime in the middle of the year, would you expect to be able to exceed this gross margin that you just threw up in the fourth quarter?

Yes, I would think so, because I think for the year, we're going to be better in 2015 than 2014. And I think when we hit our peak in the second half of this year I think it's fair to assume that we can meet or exceed our Q4 gross margin.

And just a little bit more color about the CapEx investments next year, typically you might provide us with kind of a summary perspective of how the CapEx might be broken out. But I'm more interested in maybe you giving us your view on as far as the advanced packaging area, will you guys be making significant investments in the fan out type processes or help us understand inside the advanced packaging area, besides wafer bump and chip scale packaging or whatever you like to classify it. What are the key areas of investments?

Sure. I'd like to make a comment there. Just to review, our current plan is to spend $600 million in capital spending in 2015, $150 million of that for K5, and $450 million to expand capacity and for other purposes. Last year, we spent just over $680 million for capital projects. So it was a peak year. This year we could afford to spend a little less and depend more in some of the capacity we installed last year. That said, we still see demand outstripping supply in a wafer level CSP area, so we continue to invest there. We invest in the wafer level fan out technologies. We have our own technologies that we're developing, which we think offer very good cost to the customers. And I think we'll also invest more on advanced flip chip. The last area that we're investing quite a bit in is our system and package area, where we're focused on RF modules in particular. So we're showing significant growth in that business in 2015.

So just as a clarification that's similar to what we hear from ASC, they call their SiP business system in a package. So you're kind of moving into that area where you're producing WiFi modules what not?

We've actually been in the SiP business for 15 years. We just didn't talk about it a whole lot. The way to think about SiP is that we're just moving more and more off the circuit board into a package. So whether it's multiple die, passive components, you name it, we're trying to put into a smaller area for the customer. And one word for that is SiP and other is module, but we've been using them more or less interchangeably.

Our next question comes from Jairam Nathan from Sidoti.

Just first on gross margins. Just looking at your first quarter guidance, revenue is up 6% year-over-year, but kind of the gross margin seem to be down, is there any mix issues you expect or what's behind that?

So I wouldn't characterize it as mix as much as, say the drop from Q4 to Q1 compared to Q4 of 2013 to Q1 of 2014. So the fixed cost that we added the second half of the year are what's being under absorbed in Q1, moving to the lower gross margin guide.

And more longer-term, you kind of starting this year with, I would guess, two headwinds in the sense. One is Qualcomm losing some business on Samsung side and the potential for Apple going to Samsung, away from TSMC. Now, if these things pan out, can you talk about something that can offset these changes at big customers?

Yes, let me just address both of your issues. We generally don't talk about particular customers, but I will address them in general. And I think in this case with the Qualcomm issue is fairly public now. They talked about it in their earnings call. And yes, the loss of that particular socket certainly affected our first half business plan. But what we're seeing is Qualcomm is doing very well with that particular Snapdragon 810 product for the number of different customers. And number of the customers have come out publicly in the past two weeks and endorsed the product. And we expect that business to come [ph] roaring back in the second half of this year. But Qualcomm is our biggest customer. We are their biggest OSAT supplier, and we work closely with them on a number of technology developments across the spectrum from the ultra low-tier to the premium-tier. The other question was regarding Apple foundry strategy, and I'd like to speak generally about what's going on in the industry. And the clear trend is that most of our customers buy wafers from foundries and they send those wafers to OSATs for assembly and test. That's because that model offers the most flexibility, more competitive cost base, and less risk, so it's a tried and true approach and it works. We've executed very well at 20-nanometers for multiple customers, so I really think no matter, which way Apple goes, we're well-positioned with the Apple ecosystem, right. I think we have good share and we'll maintain share moving into 2015.

And lastly, with regard to your Chinese fabless companies, do you have a target for sales in 2015? I know you said you doubled it in 2014.

Yes, our aim in 2015 is to grow the China Taiwan business by about 65% to 70%. My hope is that we could double it again. So that's the challenge I've given to the sales team, but will be built into a plan is about 65% to 70% growth year-on-year.

Our next question comes from [indiscernible] from Deutsche Bank.

For revenue, for first quarter your historical five year average is down somewhere around 6% and you're guiding down 13%. How much of that, I think you talked a little bit about being a strong quarter, but how much of that do you think is a pull-in to Q4 and how much is the incremental weakness from, say, the Chinese OEMs given what MediaTek guidance earlier today?

If you look historically, Q1 is seasonally a slow quarter for us and the rest of the industry. And the reason why you see such a dramatic decrease from Q4 to Q1 is really the strength of Q4. The iOS ecosystem had an unprecedented quarter from a number of phones shipped. I think Tim Cook here is an all-time record for Apple and we benefited from that as well as other suppliers. The other, I think we benefited from in Q4 was that our share in that ecosystem was higher than we forecasted, which is good news. So I think if you take a look on quarter-to-quarter, it's somewhat misleading, because of the strength of Q4.

Well, should we think about Q2, you should be seeing a snap back off of a tougher comp?

I think you'll see Q2 up over Q1, you'll Q3 over Q2, and Q4 it's too early to call.

In terms of switching to gross margins, obviously very impressive gross margin Q4, and if you look at the mainstream products, revenue is down 3%, unit is down about 15%. Can you help us understand how much of a margin tailwind, when you can get the mainstream capacity to fully utilize, whatever that level is, as defined?

So I can add some color. So the mainstream does generally operate below the corporate average. So it does provide some headwinds when it's strong to compressed, but it's still great from a return perspective and great from a cash flow perspective. But the trends of how do we get margins to hit the targets in Q3 and Q4 next year is going to be strong utilization in both advanced, strong utilization in mainstream.

Now, I can squeeze in one more in the gross margin. I guess, just based on the midpoint of your guidance for Q1, it would suggest incremental gross margin somewhere around 50%. Is that the right way to think about your margins when revenue is starting to grow for the rest of the year or there is some mix -- I understand there is probably some mix related issue there as well?

I think generally speaking, we do average about a 40% incremental gross margin. Clearly for Q4, you saw incremental margin well ahead of the 40%, but as a general rule of thumb, the 40% to 50% is a decent incremental margin. From a wet stick somewhat variable, materials is by far the only real true variable cost we have, a lot of our labor depreciation and other cost manufacturing are all fixed. Materials is running around 36%.

Your next question comes from Atif Malik from Citi.

Could you talk about your packaging and testing mix exiting this year? Should we be thinking something different from 85/15 split? And if you can also talk about the profitability, the gross margins of each of the segments?

So we've been running just about 85/15, and I think that's a good expectation for 2015 as well. As we do more wafer-level processing, we're getting strong attached approach. So that over time potentially could give a little bit of less to test. Attached being more capital-intensive operates at gross margin ahead of corporate average.

And then with respect to your guidance, I recall last year in the September quarter you saw a weak Android sales on the fingerprint sensor opportunity, so I understand Q4 high mark because of iOS success, but as we look into the guide for the March quarter, I mean how do we feel comfortable that, that the guide is derisked for any platform ramp with the Android system in the March quarter?

Yes. I think we're making pretty good progress. If I take a look at where we're positioned in the Android ecosystem, we've got a reasonable starting position, but we won quite a few new designs in the second half of last year. So I expect our market share to grow this year in Android, and we'll benefit from that, I think starting March of this year.

That's all we have for Q&A today. So that ends the call. I would like to turn it back to Steve for his closing remarks. End of Q&A

Now, we'd just like to recap our key messages. First, Q4 was a very good quarter for Amkor with record revenues and improved profitability. For the full year, we grew revenues 6%. We doubled sales to customers in China, Taiwan, and we grew automotive revenues 25%. We delivered 20% gross margin and a 60% increase in EPS, after adjusting for litigation settlement. We expect to grow revenues and profitability in 2015. And our technology leadership position is paying dividends, enabling us to offer cost-effective, package-level integration choices to our customers. Thank you for joining us today.