Greetings, and welcome to ChipMOS TECHNOLOGIES Third Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Pasquale with Investor Relations. Please go ahead.

Thank you, Operator. Welcome everyone to ChipMOS' third quarter of 2018 results conference call. Joining us today from the company are Mr. S.J. Cheng, Chairman and President; and Ms. Silvia Su, Vice President of Finance and Accounting and Management Center. S.J. will review business highlights and provide color on the operating environment. Silvia will then review the company's key financial results. We're also joined on the call today by Mr. Lafair Cho, Senior Executive Vice President and COO; Mr. Jesse Huang, Spokesperson and Vice President of New Product Development Management Center and Strategy and Investor Relations. All company executives will participate in the Q&A session after management's formal remarks. If you've not yet received a copy of today's results release, please e-mail Global IR Partners at imos@globalirpartners.com, or you can get a copy of the release off of ChipMOS' website at www.chipmos.com. As with prior quarter's, we hosted a call in Mandarin after the close of the Taiwan Stock Market a few hours ago. This is part of the company's ongoing efforts to broaden investor and analyst following in the domestic Asian market, given the full Taiwan listing. The prepared comments management will cover here are the same as those covered on the earlier call. The second call is intended to give the company's English-speaking investors the same opportunity to both hear directly from management and to ask questions pertaining to results and the operating environment. With that said, we must also make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 as amended and Section 21E of the U.S. Securities Exchange Act of 1934 as amended. Such forward looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward looking statements. Further information regarding these risks, uncertainties and other factors is included in the company's most recent annual report on Form 20-F, filed with the U.S. Securities and Exchange Commission and in the company's other filings with the SEC. At this time, I'd like to now turn the call over to the company's Chairman and President, Mr. S.J. Cheng. Please go ahead, sir.

Yes. Thank you, David. Welcome, everyone to our third quarter of 2018 conference call. Hopefully, you all have time to review our earnings release. The key for us this quarter was delivery, revenue growth and the rebound in our gross margins. We remain on the solid growth path. For ChipMOS, we have businesses in selected and other area of the semiconductor supply chain. We continue to have high utilization rate. Our key market has healthy demand and our balance sheet remains strong. We actually had to add additional capacity to meet the demand level we are seeing, and we finalized our capital reduction in October. This is direct return capital to shareholder and is designed to increase shareholder value with higher earnings per share leverage. Highlight from this quarter including; First, we achieved revenue growth of 11.4% in Q3 compared to Q2. We are very pleased with the double digit revenue growth. This reflects our effort on building customer relationship by delivering higher value and excellent quality. We improved gross margin to 19.5% from 16.4% in Q2. This is more in line with our normal corporate level. We benefit in Q3 from higher revenue and higher ASP led by product mix and our DDIC price increasing. Third, our DDIC price increasing in May was well timed. We continue to benefit from growth in our DDIC and good bumping product revenue and margin. We are seeing further strong demand from the higher penetration of TDDI, and with TDDI requirement, almost 3x the testing time of DDIC, there is further growth potential as we expand the business. Fourth, we completed our 2018 capital reduction plan and separate dividends in October. This resulted in shareholder receiving a cash dividend of TWD 0.3 per common share and a distribution of TWD 1.5 per common…

Thank you, S.J. All dollar amounts cited in our presentation are in U.S. dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rate of TWD 30.46 against US$1 as of September 28, 2018. All the figures were prepared in accordance with Taiwan-International Financial Reporting Standards. For the third quarter of 2018, total revenue was US$164.3 million. Net earnings for the third quarter of 2018 were $0.37 per basic ADS compared to $0.10 per basic ADS for Q2 of 2018. This represent net profit of US$14.4 million and $0.02 per basic common share compared to net profit of US$4.1 million and $0.005 per basic common share in the second quarter of 2018. Our operating expenses in Q3 were US$12 million or 7.3% of our Q3 revenue. This is down from US$12.7 million or 8.6% of our revenue in Q2 of 2018. Income tax expense for Q3 was US$4.1 million. On the segment basis, revenue breakdown of third quarter was 24.5% in testing; 24.3% in assembly; 32.6% in LCD driver business; and 18.6% in bumping. We invested US$32.8 million on CapEx in Q3. The breakdown was 46.1% for testing; 6.4% for assembly; 39.6% for LCD driver; and 7.9% for bumping capacities. We are making careful investment with customer minimal balance agreement to reduce potential risks. Depreciation and amortization expenses were US$28.2 million or approximately 17.2% of revenue in third quarter. EBITDA for Q3 was US$49.1 million or 29.9% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating profit. As of September 30, 2018, our balance of cash and cash equivalent was US$199.2 million. Overall, free cash flow in Q3 was US$11.5 million, which was calculated by adding depreciation, amortization, interest income, together with operating profit…

[Operator Instructions] Our first question is from Jerry Su with Credit Suisse. Please proceed with your question.

A few questions for me. I think first one, could you give us more color about long term agreements you have entered with your customers? I think more about how you structured that and then for both utilization and now also on the pricing side. And then on the second one, I noticed on the third quarter CapEx spending, it seems like that still or for the first nine months of this year, you have spent some CapEx on the testing side. Can you elaborate a little more what other equipments and what other are going to be used for the testing because I believe that your testing tools for LCD drive should be categorized under the LCD segment rather than the testing? And then the last thing, could Silvia give us a little bit color about the depreciation in 2018 and also 2019?

Yes. Thank you, Jerry. First of all, regarding to the utilization rate contract guarantees. Since this year, TDDI booming is starting from Q2 of this year. And after that, the testing time is much longer than the traditional DDIC is about 3x. So it means that we need to invest huge testing capacity in order to meet customer requirements. So by doing so, we are going to reduce our investment risk because the CapEx amount is huge. So we have agreement with the customer. Many design house for LCD driver, some is focused on the mobile application, some is focused on the TDDI and then some is focused on the new full screen phone. So the period is around 3 years and they guarantee the minimum utilization rate for certain amount. So if they are not reach those utilization rates, they will pay us the minimal charge. But this can cover our equipment depreciation overhead and also the manpower. That can reduce our investment risks. In the meanwhile, they also can secure their capacity they need because right now, the equipment lead time is pretty long, and we need to release order and deliver capacity. And in a short period or time frame, they assigned, the customer assigned engineering and production people staying on production line to help us improve the efficiency. So that's the reason we have some commitments. Q4 will be better than Q3 due to the new capacity added and also efficiency improved. And also we increased the DDIC pricing starting from October. And to answer your second question regarding CapEx investment mainly for tester program and also and the other one is fine pitch COF in the middle and end o it. And regarding to our side, LCD driver. We also invest some memory wafer testing equipment for some automobile requirement. That's also under the contract protection. And I will let Silvia to answer your last question regarding the depreciation of 2018 and 2019.

So regarding the depreciation, as you know that the Q3, the depreciation is around US$28 million in the quarter. And in Q4 I think it will increase a little bit in the range around 28 to 29. And in 2018, I think the depreciation will increase greatly. But I think the quarter will be in the range US$20 million to US$22 million - US$30 million to US$32 million per quarter. Sorry.

US$30 million to US$32 million per quarter. Just one follow-up with S.J. regarding the long-term agreements. Can you help us understand how the pricing works under these agreements?

Pricing is the other existing price as a reference.

So it could go up or down based on end market demand?

I prefer it go up. Yes.

And then one more question on the mixed-signal because you haven't touch on the mixed-signal growth outlook in the fourth quarter and perhaps also in 2019.

Regarding the mixed-signal, we had one major customer who hold the market share and whose product is very unique niche. Their progress on the smartphone and e-commerce and their market share is pretty good, and they're seeing a much stronger demand in 2000 -- second half of 2018 and also continue to increase in 2019. Because the more camera quality increase in the smartphone, more component they need. So that's where we invest more capacity for them.

[Operator Instructions]

Actually we have some presubmitted questions from investors, I'm going to ask, operator. So the first question is what was Micron's percentage of revenue in Q3 2018? And what are the company's expectations going into Q4 '18 and then also for next year?

Yes. This is S.J. Since Mr. Jesse Huang is our new spokesperson, he also is the key contact with those customers. Actually, we don't say specific to the individual customer, but we would like to share some information with you. That's commodity customer in U.S. So Jesse, why don't you take that question?

So for our commodity DRAM, I think for this quarter is in mid-single-digit of revenue, and it was about where it was in Q2. Based on our discussion, we think there may be some room for growth in Q4 with increased volume projection. For the full year 2018, we are likely to come out in the mid- to high single-digit of the revenue and high single digit of 2019 revenue.

Thank you, Jesse. And the next question was what is the reason that gross margin came in up in Q3 from Q2 at 19.5%?

First one is due to our utilization rate increasing. That's the first one. And second one is, we increased the pricing for DDIC starting from May, and we raised the price again in October time frame. And we also had some capacity adding in the production lines. And we also see in this a strong benefit in Q4 this year. So that's the reason that we're seeing actually based on the current situation, gross margin will be further improved in Q4. And next year situation, since our TDDI and LCD driver will maintain the growing path. We also invest a lot of capacity under the contract protection to reduce our investment risk and also secure our order. So DDIC will continue to increase. And the other one is we also got extra allocation from commodity DRAM and also NAND flash area which do not need too much capacity investment, CapEx investment. So that will be further improved our 2019 gross margin.

Then we just got another question sent in. It said could your commodity DRAM come back to the same level as it was operating at before?

I think that for the past several years, we do a lot of effort to find other customers to fill up the vacancy. So once capacity be fully utilized, we don't want to expand the capacity. So it means our total capacity utilization rate will go back to previous level. But commodity DRAM business revenue increased percentage will not go back to the original number.

Right. And the next question was with regard to the penetration ratio of TDDI, could you give some specific numbers around that? And then also what your expectation is.

Yes. Actually, the TDDI revenue occupy our DDIC that we're seeing this sign, starting from Q2 this year. Just to share with you, the TDDI revenue occupy total LCD driver business around 14% to 15% in Q2 this year, and increase to higher than 20% in Q3. And Q4 will be nearing 25%. And based on the current capacity we add in 2019, that will be -- go back -- that will be at least to penetration there, around 30% to 35%.

And then is there any risk that you see with capacity increasing?

For currently, I'm pretty confident, compared with other investment because we're adding the capacity, and we have signed minimal utilization rate agreement 3 years with our customers. So it means customer can secure their capacity to support their growth, and we can fully utilize our equipment to reduce our investment risk. So management are pretty comfortable. In this period in this three years, so I think it's good enough to reduce our investment risk also can meet our company's growing rate.

And then there's one that just came on with regard on the memory side that, what is the company's outlook of the memory business in Q4 2018 and in 2019?

Well, for 2018, in Q4 side, I think we can keep rate because we've got extra allocation from commodity program, and we see some other memory areas so can keep rate. And regarding next year, since we already got the extra allocation so the next year memory will keep on increasing.

And then with regard to DDIC, as your entering into Q4 and looking ahead, into next year, there's been a lot of talk in the market. So overall, what is your outlook for DDIC?

Well, for DDIC, I think there are more and more application will go from DDIC to TDDI. Because with the TDDI chip, they can enhance the panel's performance, that's first one. And since their specific design also can help the panel maker reduce the panel layer. So means further reduce their panel total cost. So even TDDI is more expensive than DDIC, but compared with the total performance and cost reduction, it still -- panel maker can enjoy the best benefit for total cost-effective solution.

And then one that came in around the capital reduction was with regard to the capital reduction, does that mean the company is signaling it will not be making any further investments over the near term?

No. We will continue to invest as we have done in the past on a prudent basis in support of our customers and to drive long-term revenue and profit growth. We will continue to cautiously invest in growth area like TDDI and 12-inch COF assembly. Where capacity is expected to remain tight during the Q4 in 2018 and 2019. So actually, the purpose of the 2018 capital reduction plan is to better maximize the company's capital structure in support of our business and growth and to reward shareholders through the return of capital and increased return on investments.

So that was the last of the questions that have been pre-submitted. So I'm going to turn it back to you guys for any closing comments. S.J?

Thank you. If no further question, appreciate you joining our Q3 conference call. And our Q3 results, we delivered both in revenue growth and also rebound in our gross margin, and we will continue to see the product improvement in Q4. And we are very optimistic for next year 2019 due to the strong demand in TDDI and also the extra allocation for our memory side. So thank you very much. Thank you. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.