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Amkor Technology, Inc. (NASDAQ:AMKR)

Morgan Stanley Technology, Media & Telecom Conference Call

February 28, 2013 1:15 PM ET

Executives

Joanne Solomon – SVP and CFO

Greg Johnson – Senior Director, Corporate Communications

Analysts

Vidya Adala – Morgan Stanley

Vidya Adala – Morgan Stanley

My name is Vidya Adala, and I work with Joe Moore and the Sammy’s team at Morgan Stanley. We’re very pleased to have Joanne Solomon, CFO of Amkor and Greg Johnson, also from Amkor.

Today this morning, before we get started, let me just do a legal disclosure thing that I have to, please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or they are available at the registration desk.

So, with that, thank you very much for your time. Maybe a good place to start is, if you’d give us a three to five minute overview of Amkor for those of who are not familiar with the story.

Joanne Solomon

Absolutely, and just to start off with our version as the legal disclosures as well, we’re not updating guidance today. Please tend that there is forward-looking comments, please refer to our SEC filings for risks Thursday with forward-looking. So, now we can finally get started.

Amkor historically has been the – one of the leaders in the outsource assembly and testing, where we distinguish ourselves is on the advance technology side. We have been in the industry later on technology and it’s where we want to continue to position ourselves as that leader.

Where we go as the company, as is with the strong base of technology, we position ourselves with the right customers and in the right markets. And when you look at the trends today, as we described what are the right markets, we are seeing a lot of really strong growth in the mobile communication phase. About 50% of our revenues is in supported communications and then the rest of the exposure is in support of consumer, as well as networking computing and then other which tends to the auto and industrial.

We’re from an OSAT industry perspective, we’re included in the tier 1 OSAT players, it’s an industry dominated by four players. But we’re not the largest, we have a Taiwanese competitor that’s larger than us. We do have the largest share with respect to the advance technology. So that’s something that we want to make sure we continue to pursue.

As more and more, semi-conductor company, it continued to shed their back-end assets and adopt more of an asset like strategy, we feel like we’re very well positioned to capture growth and that’s part of the investment we made recently with increasing our ownership and J devices. And we’re going to talk a little bit more about that.

From a financial perspective, we are – we’re investing significant money over last year and this year in pursuit of our growth strategy. And we do feel like those investments are starting to pay off. We have a strong balance sheet, we do have debt as of the end of the year, 2012 was $1.5 billion. We do feel like that we can carry that debt as well as some of the incremental debt that we expect to increase here because of the strong guidance in the business.

And with that, I can open up for questions.

Vidya Adala – Morgan Stanley

Absolutely.

Question-and-Answer Session

Vidya Adala – Morgan Stanley

So, let’s talk about some of these segments that you’re targeting at. I’m sure, the violet side, the communication side is the most interesting from a growth perspective. So, talk to us about what’s your mix of things like smartphones and tablets and that given your advance technology position, is it all that. And what’s your outlook for this year, for that segment?

Joanne Solomon

Yeah, so – it’s – communications right now represents about 50% of our revenues, for Q4 it was closer to 60% of our revenues. When we look at what are the major trends within the mobile communication space driving it, about 85% of it goes into smartphones and tablets. So, we’re up – we have one customer that’s over 10% and that’s the Qualcomm.

We also lost in 2011 practice instrument was over 10%, so there are certain added the mobile side and more into the embedded technologies. So we remain well positioned with Qualcomm and the other players better staying in the communication space. And we see growth broadly within this. So, it’s not just based in those processors but at the connectivity, it’s the microphone, it’s the memory stack as well that we’re well positioned in.

Vidya Adala – Morgan Stanley

Then consumptions broadly in the market about smartphones and the growth profile changing and slowing down somewhat. What sort of visibility do you have in terms of your design, do you have few levels of visibility, what type of visibility do you have?

Joanne Solomon

So, our visibility is at the semi-conductor level. So, obviously with our major semi-conductor players we get both very short-term forecast as well as longer range forecast. And then we do have some relationship that with the OEM providers as well, so we do try to do our own level of triangulation between what it is we’re hearing from our customer, what we’re hearing from their customers. And then also down from the external side of it.

So, with respect to, we feel like we have good visibility on longer range trends, mid range trends, with respect to how solid is our forecast and it’s clearly the best three months out that we have strong visibility because you’re buying materials in like to support that demand.

When started at six months out, it’s good. And then, then with respect to the second half or a year, we certainly have an opinion with respect to where communications are going to be, I mean, do you see that as the major growth driver for this year. So that is what we expect to see from a growth trend.

Vidya Adala – Morgan Stanley

So, from a logistical standpoint, how often do these projections given to you, how often do these get revised, is it a monthly thing, a quarterly thing or is it pretty much on the fly, how does that work?

Joanne Solomon

So, it does get revised regularly, there is the other interactions between us and our major competitors. I wouldn’t say that there is large swings, I mean, there is adjustments along in the way. Those adjustments are important to control our inventory levels which controls our cost to carry. But from a large swing perspective, they tend to only happen with respect to actual events like last year it was the 20-nanometer supply issues we had. So that created some swings in the forecast.

In the end, when we look at what it was the long range forecast was at the beginning of the year for the effect that customers in the end of the year, it seemed like it was – it was pretty darn closed, it just wasn’t remotely the seasonality expected as the demand it was, so that was a typical, so that was an adjustment that happened to us in 2012.

Vidya Adala – Morgan Stanley

Sure. I wanted to spend some time on the Flip Chip Technology because advance technologies is where you’re undisputedly the leader right now. So, a bit, at a basic level, but how does the Flip Chip vary from the wire bond. And what is your position in that, can you help us understand what your market share in that is, or how does that work?

Joanne Solomon

So, from Flip Chip versus wire bond, as you start looking at packaging technologies and as the wafer itself evolve. It provides a toolset in which to solve things like form factors, the shrinking size, the tighter pitches, the higher demand from thermal and feed. So there are solutions that are well suited to have Flip Chip technology. If wire bond were, it tends to be a lower cost solution but there are more solutions that have to be had, from a Flip Chip. So, it’s about the interconnections and how do you create the interconnection on the wafer to ultimately connect to a substrate or the end device.

And because Flip Chip covers, can cover the face of the chip rather than just wire bond which is the perimeter. It creates the value proposition both from a speed perspective. There is also lower cost Flip Chip solutions like wafer level processing where you’re building the chip on the wafer itself without connecting it to a substrate.

So, from not being the technologist and being the CFO, there are some of the things that we see as the advantages to migrating to Flip Chip. And now when you start talking about stacking where you’re combining both the logic and the memory or you’re stacking through logic shifts in the combination, then you’re really spending yourself to creating a client pitch, pitch of copper pillar, where you start to connect pillars that that really sets up the stacking as well.

Vidya Adala – Morgan Stanley

So, when you try to make this migration, given the performance advantage, performance/several other advantages. Are you able to get a premium for this product from your customers?

Joanne Solomon

Yeah, so typically with the advanced technologies and the semi-conductor leaders in the space better, leading the nodes. They understand that we have to invest capital and R&D resources to meet their needs. So, you do capture a premium. In the end which becomes critical, because that first grade is what has to pay for the assets, so we tend to operate with the two to four year payback.

And but our profitability and returns, then go to – well, how well do you utilize those assets after they’ve moved on. So, it’s the second generation, it’s just as important as the first generation. And no longer you can keep those assets and use the higher returns and profits we have.

Some assets like the way for profit inside and support a wafer level processing, they can go as high as 10-year life. We depreciate our test assets over five years from a gap perspective and are assembling assets over seven years. But some of the assets was well beyond their useful life.

Vidya Adala – Morgan Stanley

Absolutely. What about competition, what is competition doing on the Flip Chip side and if you could speak towards your approximate market share is in this particular technology?

Joanne Solomon

Yeah. Our competitors, the OSAT industries are very healthy industry. And it’s concentrated from a tier 1 perspective. So they make up about 50% of the deals that share. Below the tier-1 or some tier-2 wires like J devices as example, I would group them in the tier 2 as well. And then below that there are some niche players that come and go based off of subsidies they may receive or niches that they develop. So it is more fragmented beyond the top four.

When I look at the top four, very healthy competition, they’re strong companies, they have strong technology as well. And they are in Flip Chip space also. from a market share perspective I would say amongst the top four about with 35%.

Greg Johnson

We’re about 35% of the top four.

Joanne Solomon

So, we feel well positioned to even maintain that as we go forward. There are as more and more companies are adopting Flip Chip Technologies, we do see that the pie is getting bigger. And we feel well positioned to maintain our share in this space.

Vidya Adala – Morgan Stanley

And just for context, what does that market share look like on an assembly basis for example, just to get a better context?

Joanne Solomon

Yeah, so about 50% of our packaging is on Flip Chip 50% is wire bond. They – those at this point I think ACN still are larger than us on a wire bond in the wire bond space and then we’re larger than flagship pack. So, we’re – I don’t have the share percentage right now but we’re – as we have a smaller share with respect to our bond at this time. And that’s pre to acquisition of J devices.

Vidya Adala – Morgan Stanley

Right.

Joanne Solomon

When we look at J devices, right now as we go up to 60%, we – because of minority shareholder rights in this – in the joint venture, we won’t be able to consolidate J devices results, so we’ll continue to take out – provide a share, part of our EPS. They have a strong exposure on the wire bond side, with respect to the Japanese. So, even though I say we have not the leading share in the wire bond perspective on a combined basis after the acquisition, it will be very competitive again. So, we’ll continue to benefit from trends on that side as well, just maybe not as directly.

Vidya Adala – Morgan Stanley

Yeah. So, before I shift to J devices, just one question on Flip Chip for you. Have you – what are your expectations in terms of year on year growth for this business even if you can’t put exact numbers to it. And order of money to do it?

Joanne Solomon

Yeah, so there is – when I look at Flip Chip, I would break it down into a Flip Chip CSP package which is the smaller size package, that’s largely heading into communication, that’s about 80% of our Flip Chip CSP’s heading into communication.

We also have a larger body size chip, Flip Chip DGA, and that’s used in cases where form factor is not critical. So things like – set top boxes, other consumer devices, game console. So we expect to see strong growth in the communication side, on the flip Chip CSP side.

On the Flip Chip BGA side we do expect some deceleration there so we do see that as an offset to the growth we’re seeing on the Flip Chip CSP side. Part of that is coming from – we have – there is some integrated device manufacturing, some investor companies have competing back end capabilities and some of that demand started to shift to them in 2012 and we expect that trend to continue in 2013 also. Gaining still an important trend, it’s just gaining is being done more broadly on several devices at this point.

Vidya Adala – Morgan Stanley

Absolutely. So, let’s talk about J devices.

Joanne Solomon

Yeah.

Vidya Adala – Morgan Stanley

So, it looks like there is a lot of things going on in the Japanese market overall. And so, talk us through your thinking about increasing your share and the timing and maybe even – how do you plan to finance it?

Joanne Solomon

Yeah, there is definitely a lot going on in Japan. There is a tremendous turmoil, tremendous volatility and several semi-conductor companies that are going through significant levels of rationalization. We think that creates a lot of opportunities from an outsourced assembly and touch perspective. J devices has been – from the beginning it was founded as acquiring some of the factory and assets to sheet a semi-conductor. They’ve done a really good job integrating those factories.

They just in the fourth quarter closed a transaction with Fujitsu and they’re acquiring additional factories from Fujitsu. So, from a market share side, Toshiba and Fujitsu are from JD’s perspective are relatively equal in size. They’ve announced another transaction, expected to close this year with Renesas, so there are three major semi-conductor players that their point in the share. So, it’s still a large addressable market, there can be some margin as to whether this is with the growing market or it’s a declining market, but it’s still a large addressable market.

So, from our perspective, we had an option to acquire this 30% interest. And when we looked at how much of a cost has increased or issued from 30% to 60%. It really sells at the right price, at the right valuation that which could capture real strong returns both island as well as off island. So, as Toshiba, Fujitsu, Renesas want to also offshore some of their demand, we’re well positioned to capture that and import factories whether it can still came through China or Korea or like.

Vidya Adala – Morgan Stanley

Finance…

Joanne Solomon

Finance is the other piece of the question. So, the option is about $75 million. When I look at financing that $75 million, we do have some existing lines of credit, exist in Korea. So, it’s not going to be directly financed from that $100 million line, we do expect to draw on that line to find capital investment in Korea which will free up some other liquidity that we would be able to finance the option.

Vidya Adala – Morgan Stanley

Got it. What does this mean to your balance sheet overall, like you mentioned, like we were discussing earlier, leverage is a part of the overall and costs, still when you think about your ratios etcetera. Is there a target for you and how do you see that progressing over the next 12 to 24 months?

Joanne Solomon

Yeah, so when we – when we pursue organic growth, it’s – we’ve been very good at maintaining our existing leverage and providing for some level of reduction. As we start to pursue in inorganic growth strategy with J devices, that does – that decreased the need to increase leverage. And then when also we’re undertaking a major factory initiative in Korea with a new factory location right by the China airport, right outside of store, that’s going to create another liquidity stress.

So, to acquire the land which is going to happen here in 2013, it’s about $100 million, we’ll have about another $15 million of construction cost in 2013. And then beyond that it would take about another $250 million to construct the factory. So, it’s significant cash outlay that we – that ultimately the cost will be defrayed by the different tax incentives we get to pursue that investment as well as it will give us an opportunity – many years from now to potentially consolidate from the four locations back down to two but to do that that takes a lot of time.

With respect to semi-conductor, moving a semi-conductor customer is difficult and a very prolonged process to go through the qualification. So, with all that being said, that could potentially stress our liquidity also in 2014. And to make sure that that’s not the case on our last earnings call, we did talk about putting up potentially, incrementally another $300 million of available lines of credit that if for some reason our liquidity becomes stressed that we could draw on that without slowing up the construction of that facility.

Vidya Adala – Morgan Stanley

Is this new facility targeted at – this is like end markets or customers?

Joanne Solomon

Korea represents 50% of our sales. It is what we have excellent engineering talents throughout Asia, it is our center of excellence from a technology perspective, it’s where we have a lot of our R&D resources, it’s where a lot of our intense packaging is done today. So, we would be quoted that as well. So, whether it’s looking beyond the high end or even on the low end, we’ll probably be like some wafer processing also. But it would focus almost exclusively on a Flip Chip technology.

Vidya Adala – Morgan Stanley

Right. So, I had some investment type questions for you but I just wanted to see if anyone has any questions from the audience.

Unidentified Analyst

So, couple of questions, I think on J devices. As you kind of see your company evolving I believe you said 50% Flip Chip to 50% wire bonds. In three or four years, how should we think about that or what might the percentages look like. And then, on top of that are there any technological issues or things that we have to think about in the next 18 months or so, kind of coming at, you mean, there is a lot of going on in the industry right. How do you feel about some of the ships perhaps as well?

Joanne Solomon

So, looking forward, I do see prior to J devices, I would have guessed that the trend is absolutely to continue to see Flip Chip grow, and to see less reliance on the wire bond. We still use a lot of wire bond with respect to our memory stacking. So, I do inspect as that area – it continues to grow, maintain some level of the wire bond share.

We’re bringing on J devices I think we’re going to have a higher percentage of Flip Chips, of wire bond. So, it’s just hard thing to speculate five years from now where the ratio is going to be. I think they’re both really important trends and you can return have strong returns in both areas. So, even on the wire bond side, yes, it’s more commodity, yes, it’s about cost reduction and improving manufacturing capabilities. And there is more competitive pressures on our front.

But if you keep in step, because of lower capital intensity, you can maintain strong cash flows, and you can – because of the lower top line intensity. So, it’s a positive business model. So, I do see that continuing, so we’re not trying to intentionally shrink on the wire bond side, if anything we’re committed to some level of recapture of share on the wire bond side.

With respect to emerging technology trends, there continues to be a lot of investment in the areas of stacking and stacked technology. And that’s an area we feel we’re – we continue to be really well position. We commercialize the platform technology called fine touch copper pillars. So these are – that the space in between, the pitch between the pillars are so tight that it’s really enabling technology, I think look forward with stacking. So, that’s an area where we think that’s a technology evolution is in our favor that we can continue to enable the stacking of chips.

We had in 2012, there is a seasonality which heavily impacted by 20 nanometers. I don’t expect anything like that here in 2013. I think all the 20 nanometer issues has run its course and it’s very much in tables knows that it’s going from our perspective.

Vidya Adala – Morgan Stanley

So, I had one question on the test side. There has been a lot of progression in the Taiwanese market that you people trying to get into the debt market. We’ve also heard Hybrid talk about Deca Tech and they’re talking about this more and more now. What are your views on this, you – how are you positioned as well as how do you plan to take on more competition?

Joanne Solomon

Yeah, so with respect to tests, we’re seeing as larger percentage of our revenues are very self communication it tends to be dominated by lot of established companies. So we’re seeing stronger turnkey services. So we’re doing more and more tests. Those on the front side of probing as well as the back side on final test. The reason we’re really well positioned to capture to benefit from those trends.

Higher test to pass is going to drive higher capital intensity which is what you the investors and other constituents ask from us in 2012 as they are starting to ask more into the test space.

From a competitive perspective and 5% Deca, there are on the way for level processing side. We continue to invest in technologies and support our wafer level processing we have today. Large share of that business so, we feel like we can keep pace with our competition.

Vidya Adala – Morgan Stanley

So, that’s just going to be – actually given the time probably my final question to you is, where are you spending all of your R&D dollars, again, speaking to the emerging technology question. But if you think about broad bucket, so what are the top buckets for you in terms of R&D?

Joanne Solomon

So, we invest a lot in the stacking technologies. So with respect through Silicon B as a technology as well as continuing to proliferate our copper pillar, of advantage copper pillar as the technology to enable stacking. So I think that’s probably the single largest place that we’re investing dollars.

It’s taken a lot of capital investment as well. Typically, in the past, we were able to do a lot of this R&D on the manufacturing line, but because more of our assembly technology is at the wafer level – we’re doing – we’re having to have more dedicated R&D systems facilities to derive higher capital intensity.

So, on the advance side, it’s very much in support of three, silicon DNA and other stack technologies. We also continue to invest in wafer level processing on the – for some of the lower income. So, that’s both stand in and stand out technologies, as in area of investment. And then we always invest for cost reduction as well, luring the cost to manufacture is critical to our business model and staying competitive over the product life cycle.

Vidya Adala – Morgan Stanley

Are these investments more supportive of specific end markets like communications you mentioned probably uses more of it. But are there specific other end markets that you can target because of these investments?

Joanne Solomon

Yeah, so with communications clearly, networking as well and the field programmable guys and some of the consumer space. Gaining itself through a lot of technology so I have no doubt there is going to be other consumer products and other Chip and support of consumer products that will be a taker of technology as well.

Vidya Adala – Morgan Stanley

Okay, so with that we’re out of time. So, Joanne and Greg, thank you very much for your time today.

Joanne Solomon

Thank you.

Greg Johnson

Thank you.

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