Amkor Technology, Inc. (AMKR)

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Amkor Technology, Inc (AMKR)

Q3 2010 Earnings Call Transcript

November 4, 2010 5:00 pm ET


Ken Joyce – President and CEO

Joanne Solomon – EVP and CFO


Satya Kumar – Credit Suisse

C.J. Muse – Barclays Capital

Peter Kim – Deutsche Bank

Wenge Yang – Citi

Eric Reubel – MTR Securities

Jake Kennedy – Morgan Stanley



Good day, ladies and gentlemen, and welcome to the third quarter 2010 Amkor Technology Inc. earnings conference call. My name is Alicia and I will be the conference moderator for today’s call. At this time all participants will be in a listen-only mode. Following the presentation, the conference call will be opened for questions. This conference call is being recorded today, Thursday, November 4, 2010 and will 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 this course of the 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 third quarter 2010 earnings release was filed with the SEC and 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. Please go ahead, sir.

Ken Joyce

Thank you, and good afternoon, everyone. With me today is Joanne Solomon, our Chief Financial Officer. Today I will talk about the third quarter performance and the associated business drivers and our expectations for the fourth quarter. Joanne will then discuss our financial results in more detail and finally we will open up the call for your questions.

To begin, our 794 million of revenues is our highest quarterly sales ever and given our expectations for the fourth quarter, we are well on our way to record net sales of 2.9 billion for the full year. We delivered growth in all end markets and across all package families.

Sales were up in every sector, communications, consumer, computing, networking and industrial. We saw notable strength in ball grid array packages, reflecting the demand from the gaming, computing and networking spaces. Chip scale packaging and test services also saw healthy increases.

Moving on, gross margin was 24% in the third quarter. Although, this is on par with the second quarter, it is below expectations. Gross margin pressure in the quarter was primarily driven by two factors.

First, strong consumer demand for gaming and TVs drove higher than expected ball grid array package sales. PGA packages have higher material content. So, while we are happy this area is strong for us, the shift in mix did put downward pressure on gross margins.

Second, we saw lead frame and wire bond chip scale customers servicing their consumer electronics space, adjust their levels of demand. As a result, capacity utilization for these package families came in lower than anticipated which also compressed our gross margin.

On more positive note, we continue to deliver strong returns on our investment and generate positive free cash flow. I’m pleased to say, that based on our expectations for the fourth quarter, 2010 will be our fifth consecutive year of positive free cash flow results. In the third quarter, we generated 42 million in free cash flow, while continuing to investigate in our business.

Now, looking ahead to the fourth quarter, demand in the communication market continues to be solid. That said, we see seasonal softness in demand for gaming and lower demand forecast by some of our customers in the consumer electronics and networking areas.

Based on current customer forecast and some uncertainty surrounding demand in consumer electronic supply chain, we anticipate a decline in net sales of between 5% and 10% in Q4. We expect our gross margin to be in the range of 22% to 24%.

To wrap up my remarks, I must mention that we have the most talented and dedicated team in the industry. Across the entire enterprise, our team is keenly focused on our customers and achieving world-class status with respect to innovation, quality, delivery, cost and performance. And at the same time, the team is also driving sustainable performance improvement for Amkor. Our products and engineering expertise are well positioned to take advantage of the industry’s growth drives as we go forward.

With that, I will turn the call over to Joanne.

Joanne Solomon

Thank you, Ken, and good afternoon everyone. To start, I will review our investing and capital spending activities. We spent $171 million on capital additions in the third quarter with significant investments in new capacity for communication, advanced technology initiatives and expanded facilities.

We did spend roughly $25 million less than we had anticipated. The delivery dates for some equipment rolled into the fourth quarter and we also slowed down our investment plans for certain equipment in response to our expectations for the fourth quarter.

So as we finish out the year, we expect to spend around $75 million in the fourth quarter. For the full year, this would result in a total of around $480 million or capital intensity of 16%. And as we discussed last quarter, we still expect about 60% to be for packaging, 20% for tests and 20% for infrastructure and R&D.

Moving on to the income statement, net sales grew 6% in the third quarter with ball grid array packages delivering the strongest performance. Unit shipments grew 5% to 2.9 billion units principally driven by lead frame packaging service.

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