AMKR

Amkor Technology, Inc. (AMKR)

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Amkor Technology, Inc. (AMKR)

Q3 2011 Earnings Call

October 27, 2011 05:00 PM ET

Executives

Kenneth Joyce – President and CEO

Joanne Solomon – CFO

Analysts

Wenge Yang – Citigroup

Eric Reubel – MTR Securities

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2011 Amkor Technology Earnings Conference Call. My name is Camille, and I’ll be your conference operator for today’s call. (Operator Instructions) Following the presentation, the conference will be opened for questions. This conference call is being recorded today, Thursday, October 27, 2011, and will run for up to one hour.

Before we begin this conference call, Amkor would like to remind you that there will be forward-looking statements made during the course of this conference. These statements represent current view of Amkor management. Actual results could vary materially from such statements.

Prior to the conference call, Amkor’s third quarter 2011 earnings release was filed with the SEC 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, Camille, and good afternoon, everyone. With me today is Joanne Solomon, our Chief Financial Officer.

Today I’ll talk about third quarter results, some steps we are taking to mitigate the challenges to profitability that we’ve been experiencing in 2011 and guidance for the fourth quarter. Joanne will then discuss our financial performance in more detail and finally we’ll open up the call for your questions.

To begin, third quarter sales of $740 million were close to the midpoint of our guidance while gross margin of 17% and earnings per share of $0.11 were at the low end. Sequentially sales were up 8% driven by solid demand in communications, particularly for smartphones and tablets, and the seasonal increase in the consumer area led by our strong position in gaming.

Turning to our other end markets, networking and computing held steady and we saw a slight decline in automotive and industrial as some customers adjusted inventory levels in the face of an uncertain demand environment.

Our gross margins have been under pressure throughout 2011 with the principle contributors being unfavorable foreign exchange rates, higher gold prices and pockets of underutilized capacity. The accelerated migration of gold wire bond products to flip chip has opened up wire bond capacity faster than we’ve been able to redeploy these assets. And this has been one of the primary contributors to our 2011 utilization gap.

We are committed to addressing these challenges to profitability and are currently focused on rationalizing our cost structure and improving utilization. These efforts are already underway and during the third quarter we implemented an 8% reduction in force in our Philippines manufacturing operation. We expect to improve our labor cost by about $2 million on a quarterly basis through this action.

We are also looking at other areas for improving our cost structure, including further alignment of our work force with customer demand, investing in operating efficiency initiatives in our factories and achieving greater cost savings on material and equipment through our continued focus on supply chain management.

Although the shift of packages out of wire bond and into flip chip has led to some gaps in utilization of our wire bond assets, this migration is a positive story overall from a revenue and return perspective. This quarter about 40% of our revenues came from flip chip applications, up from about 30% in Q3 of last year. And Amkor has the largest share of flip chip market in the OSAT industry. Our flip chip packages generally both a better margin and a higher return than our wire bond packages.

In addition, we are working on a number of initiatives to improve the utilization of our wire bond assets. Our efforts include ramping NAND memory production in our China facility, promoting the adoption of our copper wire bond solutions, and increasing penetration of IDMs as they pursue asset-light business strategies.

Looking ahead to the fourth quarter, we expect sales to decline between 5% and 12% from the third quarter. Based on the current level of demand for smartphones and tablets, our wireless communications business is expected to remain strong. However we see a general softening in demand in other areas, driven by the uncertain macro-economic environment coupled with the seasonal decline in gaming.

As I mentioned earlier, we continue to see solid demand and high returns from our newest and most advanced interconnect technologies for wireless communications packages and for flip chip packaging overall. To support this demand and to meet the capacity requirements of our leading customers, we spent $123 million on capital additions in the third quarter and we are currently planning additions of $100 million to $125 million for the fourth quarter for a total of $425 million to $450 million for the full year. These investments primarily support smartphones and tablets, leadframe efficiency improvements through high-density matrix packaging and research and development initiatives including next generation interconnect technology such as wafer level fan out and Through Silicon Via.

Fourth quarter gross margin is expected to be in the range of 15% to 18% as we expect to see some margin pressure from lower utilization commensurate with the decline in revenues. Our gross margin guidance does not include any additional restructuring charges. That said, we are evaluating adjustments in our cost structure in light of our current demand expectations.

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