Good day, ladies and gentlemen, and welcome to the Amkor Technology Second Quarter 2018 Earnings Conference Call. My name is Haley, 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 is being recorded. I would now like to turn the call over to Chris Chaney, Vice President, Investor Relations. Mr. Chaney, please go ahead.

Thank you, Haley. Good afternoon, everyone, and thank you for joining us for Amkor's Second Quarter 2018 Earnings Conference Call. Joining me today are Steve Kelley, our Chief Executive Officer; and Megan Faust, our Chief Financial Officer. Our earnings press release was filed with the SEC this afternoon and is available on our website. During this call, we will use non-GAAP financial measures, and you can find the reconciliation to the U.S. GAAP equivalent on 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-Q. And now, I would like to turn the call over to Steve.

Good afternoon, and thanks for joining the call. Today, I'll review our second quarter results and third quarter expectations. I'll also discuss current market conditions and provide some additional color for two of our faster-growing areas, advanced SiP, as well as MEMS and sensors. First, I'd like to note that we had a very strong first half of 2018, with 10% year-on-year revenue growth. In the second quarter, our revenues were up 4% sequentially and 6% year-on-year. This was a record second quarter for Amkor and our 10th consecutive quarter of year-on-year revenue growth. We experienced sequential growth across all end markets. Our strongest market was communications, where we benefited from incremental demand from iOS ecosystem customers. From a technology perspective, much of the revenue growth came from advanced system-in-package, or SiP, which was up 14% sequentially and 38% year-on-year. We partnered with our customers in this area, utilizing our technology to squeeze as much functionality as possible into a very small space. It's not uncommon for Amkor advanced SiPs to combine more than 100 electrical elements, including multiple ICs into a single package. Smartphones, the ultimate space-constrained, high-performance products drive advanced SiP volume today. Within today's high-end smartphones, these advanced SiPs perform an array of functions, including signal processing, data storage, communications and sensing. Advanced SiP products are also found in smart watches and vehicles. Production yield is extremely important in this business due to the high value of each module. Amkor achieves very high yield performance through a combination of precision assembly technologies, advanced material handling systems, a focus on quality and, most of all, strong engineering capability. Advanced SiP is less capital intensive than wafer-level packaging. The other big technology used in space-constrained applications. In last year, advanced SiP products generated over $800 million in revenue for…

Thank you, Steve. And good afternoon, everyone. Today, I will review our second quarter results, share some comments regarding our recent debt refinancing and provide our third quarter outlook. Second quarter 2018 revenue came in at the high end of guidance, driven by strong demand from smartphone customers. Net income and EPS exceeded expectations. As Steve mentioned earlier, our Q2 mobile communications business included significant sales of advanced SiP. Our preferred SiP business model is based on consignment of the high-value silicon, particularly ICs, by the customers. For strategic reasons, we chose in this smartphone cycle to engage in a couple of high-volume SiP program, where we agreed to purchase high-value silicon. The value-added margin dollars and cash flow associated with these strategic SiP programs are attractive. And the business is capital efficient, using equipment that is typically fungible with other packaging applications. However, the higher material content constrained our gross margin percentage in Q2 and is expected to have a similar effect in the third quarter. EBITDA in Q2 was over $200 million, a healthy increase of nearly 20% sequentially. First half EBITDA was also up 6% year-over-year after adjusting for the sale of K1 in Q2 2017. Net income and earnings per share grew significantly from the first quarter due to increased sales. We also benefited from a $7 million foreign currency gain related to the re-measurement of our balance sheet liabilities denominated in foreign currencies. Moving on to our capital structure. We are pleased with our recent financing activities. Earlier this month, we entered into a new 5 year term loan for approximately $230 million. We plan to use the proceeds to redeem all of the outstanding $200 million of fixed and 6 5/8% [ph] senior notes due in 2021. The new term loan bears interest at…

Thank you. [Operator Instructions] And our first question comes from Randy Abrams of Credit Suisse. Your line is open.

Yes, hi. Thank you. The first question I wanted to ask on the guidance. You're guiding about 7% growth, which is about in line with your peer in Taiwan. I'm curious so it's - how much of that is factoring in the SiP? And the factor for that in prior year's third quarter saw a bit higher seasonality. So if you could give a flavor for what's happening the rest of the business, like picking up that SiP, but if you're seeing any softness in other parts of the business?

Yes, Randy, just speaking in general, we divide the market into two parts: smartphone and general market. In the general market, we're seeing continued strength, but really no growth quarter-on-quarter. That particular part of the business has been strong for many quarters in a row now. What's driving the growth in Q3 is basically the iOS ecosystem, which includes advanced SiP. We're not seeing any growth out of the Android ecosystem, either in China or in the Samsung ecosystem.

Okay. If you could give a flavor, I guess, for the advanced SiP maybe as a percent of revenue or absolute in second half, the run rate maybe the type of projects that you're taking on that are having you pass on some of the material cost?

Okay, Randy. So looking at SiP, we disclosed that our full year 2017 SiP was over $800 million. So we expect to grow that in 2018. I think you were specifically asking for that amount for the second half. So we wouldn't disclose the second half now.

Okay. If I could ask, I guess, the margin model, traditionally in peak season, it would reach close to 19%, 20%. It might be this year a different mix without the Android and auto contribution in SiP. But I guess, could you go through the factors for difference versus prior peak season margins? And maybe you kind of in the future if you're kind of looking what you expect now as SiP grows, will you expect kind of peak leverage to reach for the gross margin line?

Yes, Randy, just as a reminder, in the second half of last year, we did operate roughly 20% gross margin, if you take out the restructuring charges we had in Japan. Now obviously, this year, we're not reaching that level. And in the second half it's largely because of the strategic advanced SiP projects that we took on. What we expect, though, is in 2019 that our material percentage will revert to the mean and that our sales will continue to grow as they have in the past few years. Therefore, we're expecting substantial margin expansion next year and certainly in the second half of next year when we see the seasonal strength.

Okay. And last question I wanted to ask just on the - kind of where you're sitting for overall capacity, if any areas of constraints or if, I guess, on the flip side, if you're comfortable with capacity, how you see the overall kind of CapEx levels, if this is kind of current run rate the expected kind of continue and also looking toward next year?

Okay. I think this is the time when we do run it through some constraints because of the intensity of builds we're taking in advanced products. So we are seeing constraints in some of the advanced lines, such as flip chip BGA, and we're definitely using the capacity we have in our bumping lines and in our advanced SiP factory. So the utilization should be fairly healthy this quarter. In the mainstream side, we also see continued good business. So utilization rates are good. Our factory in the Philippines, which is our mainstream factory. Our CapEx level this year, we projected $600 million, which is a $50 million increase over 2017. We're still confident the $600 million is the number for 2018. We haven't looked at next year yet from a CapEx standpoint, but I don't anticipate any major changes up or down for 2019.

Okay. Great. Thanks a lot Steve, Megan.

Thank you. [Operator Instructions] I'm showing no further questions.

All right, Haley. Thank you, ladies and gentlemen. This will conclude our Q&A session. And now, I'd like to turn the call back over to Steve for some final closing remarks.

Thanks, Chris. I'd like to read recap our key messages. First, our second quarter revenues were up $40 million or 4% sequentially. In the first half of 2018, our revenue grew 10% year-on-year. Second, we expect our third quarter revenues to be up around 7% sequentially, due primarily to seasonal strength in communications. And finally, we see continued strength in the general semiconductor market through the third quarter. Thank you for joining the call today.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.