Amkor Technology, Inc. (AMKR)
Q2 2011 Earnings Call
July 27, 2011 5:00 pm ET
Kenneth Joyce – President, Chief Executive Officer
Joanne Solomon – Executive Vice President, Chief Financial Officer
Sirhan – Credit Suisse
Wayne Ying - Citigroup
Jake Kemeny – Morgan Stanley
Raj David - Citigroup
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Before we begin this conference call, Amkor would like to remind you that there will be forward-looking statements made during this conference. These statements represent the current view of Amkor management. Actual results could vary materially from such statements. Prior to this conference call Amkor’s first quarter 2011 earnings release was filed with the SEC on Form 8K. 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 expectation. I would now like to turn the conference over Mr. Ken Joyce, Amkor’s President and Chief Executive Officer, please go ahead sir.
Thank you, Alicia, and good afternoon everyone. With me today is Joanne Solomon, our Chief Financial Officer. To begin, Q2 sales of $688 million and gross margin of 19% were at the higher end of our expectations. We achieved strong results in the face of extraordinary supply chain challenges due to the tragic earthquake in Japan. Our global workforce did an outstanding job of working closely with our customers and supply chain partners to resolve these supply issues. We did, however, experience some material shortages. In addition, the wafer shortages initially experienced by our Iwate, Japan factory have been resolved, and this factory is fully operational. Overall, the negative impact on our Q2 sales due to uncertainties in the electronics industry supply chain was less than half of the $50 million estimate given when we gave our Q2 financial guidance back in April.
In addition, Q2 sales growth was constrained by greater than expected weakness in demand for wireless [base band] chips by a single OEM. Looking beyond these two items, demand for communications and consumer electronics applications was solid. We also saw some improvement in networking, where we have been experiencing some softness in demand the past few quarters. Although gross margin of 19% for Q2 was at the higher end of our guidance, we experienced significant margin pressure from unfavorable foreign exchange rate movement, higher gold prices, and lower utilization of certain assets support consumer applications, networking, and the isolated weakness in communications I just mentioned.
We continue to exercise discipline in our pricing policy in this challenging environment, where rising raw material costs and manufacturing costs and temporary pockets of excess capacity are pressuring gross margins and profitability. We also remain focused on increasing efficiency and cost effectiveness as an organization. However, it’s important to maintain a rational pricing environment in order to promote a healthy supply chain. Looking ahead to Q3, we expect sales growth to be consistent with our typical seasonal patterns. Strong demand for communications and a seasonal increase in gaming is expected to drive sequential revenue growth of 5% to 12%. In support of this growth, and to meet the capacity requirements of our leading customers, we are currently planning capital additions of approximately $225 million for the second half of 2011, and $425 million for the full year.
Much of our capacity spending this year is in support of our newest and most advanced interconnect technology for wireless communications, including flip-chip CSP packages, flip-chip stacked CSP, and fine pitch copper pillar flip-chip. Our sales of these packages have more than doubled in the first half of 2011, compared to the same period in 2010. To continue driving technology leadership and innovation, our capital spending in the second half of the year includes approximately $25 million for research and development initiatives to support next generation inter-connect technology such as wafer level thin out, and true silicone [via].
We’re also investing in wire bond access to support the migration of gold wire bonding into copper. Q3 gross margin is expected to be in the range of 17% to 20%. We anticipate that unfavorable foreign currency rates and rising gold prices will continue to put pressure on our gross margins in Q3. We also see some areas of excess capacity if global consumer spending remains muted in the face of an uncertain macro-economic environment. In closing, we are seeing solid demand for our packaged inter-connect technologies, and strength across many of our end markets as we move into the second half.
The migration to flip-chip and copper wire bonded packages is accelerating. As the price of gold continues to rise, we are actively engaged with our customers to try to transition to these technology platforms. Over the past few quarters, we have been investing in capacity to support this business. As a result, Amkor’s well positioned to meet the needs of our customers in 2011 and beyond, and with that; I’ll now turn the call over to Joanne.
Thank you Ken, and good afternoon everyone. Our Q1 sales of $688 million were up 3% sequentially, and were at the higher end of our expectations. Our chip-scale packages were down 9% due to weakness in wireless base band chips as Ken discussed. Ball grid array and lead frame packages and test services all grew more than 10% each. Our sales to integrated device manufacturers, or IDM customers, grew 45% in Q2, essentially flat with Q1. We anticipate that the revenue split between our IDM and our fabless customers will remain around 50/50 for Q3 2011. The pricing environment remains stable, with very little price erosion this quarter.