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Advanced Semiconductor Engineering, Inc. (ASX)

Q2 2006 Earnings Conference Call

August 1, 2006, 8:00 am ET

Executives

Joseph Tung - Director, Chief Financial Officer and Vice President

Analysts

Meddy Huseeny - USA

Seu Ng - Hong Kong

Andy Heung - Taipei

Grenad Sharma - Hong Kong

Frank Wang - Taiwan

Crystal Lee from Taipei

Roxy Wong - Hong Kong

Ivon Goh - Japan

Presentation

Operator

Good day everyone and welcome to the ASE Conference Call. [Operator Instructions]. And I would like to hand the call over to Mr. Joseph Tung and I will be standing by for the Q&A session, please go ahead, thank you.

Joseph Tung - Director, Chief Financial Officer and Vice President

Good morning and good evening everyone. Thank you for attending ASE’s Q2 2006 Earnings Release Conference Call. Before I begin, let me bring your attention to the presentation will be on webcast and this will be available on www.aseglobal.com under Investor Relations, Event Calendar section.

Okay, let me start, now before I report our financial results for Q2 I would like to update you with some recent developments. On June 27 we reached a final settlement with NIE insurance for the fire damage incurred to our Chung Li plant on May 1 2005. The final settlement amount after subtracting the deductibles of the total insure loss as provided for under the insurance policy is NT$8.068 billion. The NIE Co. insurance already paid an interim payment of NT$2.3 billion last October and therefore will pay ASE a final payment of NT$5,768 million scheduled around mid-August. With the settlement being finalized the amount as a recovery and is the associated cost being determined and other customer vendor compensation related expense has being provided for, we are able to partially reverse the fire related loss previously recognized and turning our non-operating item to be a non-operating income of NT$3.2 billion comparing to a non-operating expense of NT603 billion last quarter.

Secondly, 14 we announced the signing of a joint venture agreement with Powerchip Semiconductor to form Power ASE Technology in Taiwan. Power ASE will focus on memory IC related assembly and test services. The initial capital of Power ASE will be US$50 million and ASE will have 60% of the ownership. The new company will lease approximately 6,800 sq meters of production space in ASE’s Gyeonggi campus as scheduled to start mass production in Q4.

Now to our Q2 financial results. If you would turn to page 3. Well, first look at the Q2 sequential comparison. Q2 consolidated revenue grew 5.8% from previous quarter to NT$26.3 billion with increased revenue gross profit was 13% to NT$7.5 billion and operating profit was 16% to reach NT$5.4 billion. With the reverse fire loss as mentioned total non operating item amounted to an income of NT$3.2 billion. Pretax income therefore amounted to NT$8.5 billion. Net income after tax and minority interest grew to NT$7.3 billion after recognizing tax of NT$435 million and minority interest just went off NT$838 million. EPS for the quarter was NT$1.58.

Comparing to previous quarter, grew 5%, cash revenue grow 11% and marginal assembly revenue drop 15% mainly as a result of discontinuing camera module business in our China operation. Separately material revenue grew 10% in line with the extended assembly operation and also increased direct sales. Utilization rate of both assembly and tests stayed high at around 90% and the ASP remained stable. In terms of profit margin, gross margin improved of 26.7% to 28.5%. Such improvement came largely from lower depreciation and labor cost as a percentage of revenue which dropped from 15.1% and 14.4% to 14.3% and 13.9% respectively. Also depreciation expense plus machine rental NT$3.74 billion a quarter. Material cost stayed flat at around 31% of revenue.

All operating expense items stayed flat in the quarter with R&D, selling and general administration each representing 2.5%, 1.3% and 4.1% of sales. Total operating expenses went slightly down by 7.9% of revenue to 7.8%, while in absolute amount NT$103 billion. With expanded gross margin and slightly improved all tax percentage, operating margin pass the 20% to 20.7% in the quarter up from 18.9% a quarter ago. With reverse file off, miscellaneous expense including interest expense and certain inventory and equipment adjustment included. We have non-operating income of NT$3.2 billion comparing to non-opt expense of NT$603 million a quarter ago. Net interest expense came down from NT$359 million to NT$338 million due to lowered long outstanding and higher interest earn on cash balance. The long-term investment gain of NT$8 consists of NT$66 of investment income from the USI, NT$18 million income from Hung Ching construction and NT$1 million lose from Hung Ching Kwan. EBITDA for the quarter was NT$88.3 billion, up from $8 billion a quarter ago.

EBITDA margin stays flat at 31.4%. Please move to page 4. we have the year and year comparison comparing to the same period of last year, consolidated revenue went up 46% with assembly test and module each grew by 47%, 52% re-module revenue on the other hand decline 14% as we suspended the camera module business. Gross margin improved from 11.4% to 28.5%, due to increased volume and improve operational efficiency. Operating profit turned from negative NT$175 million with NT$5.4 billion with operating margin improving from negative 1% and currently 20.7%, grew from a loss of NT$9 billion which included of $8.7 to a positive 7.3 billion this quarter. Page 5 and 6 are sequential comparison on the half year basis which are self-explanatory I will move directly to page 7. Page 7 this chart shows the revenue and gross profit trend in the last six quarter as shown. Q2 revenue was just slightly below the 2005 Q4 peak but achieve expanded margin both at the growth operating level showing improving operational efficiency and better cost control. Margin continue to shrink on 4.4% in Q2 last year to currently 7.8 going forward we continue to expand sequential revenue growth and margin improvement with more focus on the later.

Page 8 on IC packaging operations revenue in Q2 grew 5% and gross margin further improve from previous quarters 0.4% to 26% when compare to Q4 last year our revenue was slightly lower, gross margin improved significantly to 21% to 26%. Such improvement came largely from lower to material cost as the percentage of revenue given product mix change and improved material purchase control process efficiency improvement and a higher percentage of consigned material. Utilization in the quarter remained at close to capacity addition. Q2 CapEx of $49 million was for both wire bonding and bumping and flip chip packaging capacity in our (inaudible). We currently have 6,517 wire bonders up 191 units from last quarter. Page 9. Looking at our package revenue breakdown. In Q2 revenue from a bend substrate and lead frame base packages accounted for 89% of total packaging revenue. Bumping plus flip chip packaging accounted for 15% of total assembly revenue down from 16% a quarter ago given higher percentage of flip chip substrate being consigned by customers.

We currently have 70K 8-inch bumping capacity running at full capacity, and 16K 12-inch bumping running at around 65%. Page 10. Looking at our testing operations, test revenue grew 11% from last quarter primarily due to higher volume while ASP remains stable. Gross margin moved up from 38.7% to 43% reflecting a higher revenue impact on margin. While revenue grew NT577 million, gross profit grew NT466 million in the quarter which is the 81% fall through. Test CapEx amounts to $58 million in the quarter mainly0 to support increased test requirement in communications. Test utilization rate in Q2 was around 90% blended. During Q2 we added 60 new testers while we retired 51 testers, making tester count 1,314 units up 9 units from previous quarter. Looking at test revenue breakdown on page 11, 76% was of final test and 5% was of engineering test. While wafer accounted for 19% of total. Page 12. Our module assembly operations. Q2 module revenue declined 15% from last quarter were largely due to discontinued module basis in China. We are currently redoing the module operation in Shanghai to decide the suitable capacity to maintain and switching as much of the access to packaging. Minor write down is expected. Module assembly operation gross margin dropped slightly from 17.7% to 17.1% in Q2 largely due to loss incurred in China.

We turn to page 13 on material operations Q2 material revenue went up 10% faster than assembly revenue due to expended direct sales. However, gross margin went down from 25.5% quarter ago to 24.2% due to higher manufacturing overheads. CapEx for the quarter was US $22 million and for installing capacity in July which is schedule for mass production in October timeframe as for standard PBGA substrate we are continuing the expansion plant in Shanghai to at least double the standard PBGA substrate output by end of the year.

On page 14 taking a look at our balance sheet our cash and cash equivalent increased to NT $5.2 billion to an NT$22.4 billion. Interest baring debt increased slightly from $50 to $250 billion with the above leverage ratio improved from 0.56 to 0.41 current ratio improved from 1.63 to 1.71 Q2 EBITDA improved further from $8 billion last quarter to NT$8.3 billion with EBITDA margin of 31.4%. As we expect strong cash flow momentum in Q3 ‘06 as well, we will continue to use internal cash flow to pay down our debts. Thirdly we have planned to reduce our interbrain debt by US $250 to $300 million by yearend.

Page 15 looking our CapEx our capital expenditure versus EBITDA for the past six quarters we have been enable to generate free cash flow as our CapEx rate significantly lower than EBITDA as expected Q2 CapEx increased to US $132 million and for the whole year we are lowering our CapEx budget from previously US $400 to US$350 million. Of course, the adjusted number is still subject to change based on market conditions.

Page 16 our top ten customers in Q2 the top ten customers are in alphabetical order ATI Cambridge, rescale, Intel, Microsoft, NEC Forcom , RFMD, STN, and DER. The top five accounted for 29% of our revenue and top ten accounted for 46%. No customer accounted for over 10%.

Page 17 looking on market segment exposure in terms of segment performance of communication as expected has the strongest momentum in Q2 climbing from 34% of revenue to 36%. Consumer and auto group 1% to 38% while computing went down from 28% to 25%. At this point we are expecting Q3 break down to look very similar to Q2 without any significant changes. Finally let me give a guidance for 2006 Q3. judging from our customer broadcast we continue to expect sequential revenue growth on a quarterly basis in second half with Q3 to grow a low single digit percentage.

We continue to improve our cost structure and upgrading efficiency, we expect gross margin to go up further slightly to around 29% Q3. as I mentioned earlier on, the three sectors are likely to continue its scoring momentum without much change. Therefore we will continue to focus on margin expansions whether they are revenue growth as such improving operational efficiency in cost structure controlling CapEx spending and ramping of our material operations will be the key focused areas. In terms of full year CapEx we have revised our budget down to US $350 million from previously US $400 million. Of the US $350 million US $110 millions will be for assembly, US $100 million for tests, and another $110 million for material and also we have budgeted dollar for the investment in the new JV that we are forming ASE Power and such investment will be used for installing the initial capacity schedule to start mass production by year end. With that I will like to open the call for questions, thank you.

Question-and-Answer-Session

Operator

At this time we will open the call for questions. [Operator Instructions]. Our first question will be coming from Meddy Huseeny from the US, please go ahead with your question.

Meddy Huseeny - USA

Thank you for taking my call. I have a couple of questions first regarding your guidance in different market, how would you characterize communication in particular and how would you breakdown this for the -- between wireless and wireline, and consumer game console versus the rest of the consumer end market and then regarding your revenue guidance of the lowest single digit, if I were to go back to three months ago when we were hearing guidance of Q2 byfoundry it appears that (inaudible) were relatively more by the business prospect in the second half and now hearing your guidance up on the lower single digits, it seems that that delta in optimism between foundries have kind of closed down. If you could elaborate on what has changed over the past few months and if you could help us understand, thank you.

Joseph Tung

Okay, in terms of our guidance for the next quarter between the three different segment occur. I think judging from the quarter that we have , we continue to believe that the communication will do relatively better than the other two sectors. We understand that there is some inventory in to in the communication sector as well but those are mainly in the lower end product well our focus is very personal in the wireless we have very little exposure in the wire line segment also in the wireless sector we are focused on the high end products such as 3G and wcdma and therefore the softness in segment doesn’t affect those that much, we are not in to the effective as the savior as the other players. In terms of consumer the gamebox as we understand it, the XBox is going through a product change by the end of Q3 and moving in to Q4. and therefore the overall visibility in that particular part of part of business is quite week at this point. We don’t have a very good weed on Q4 and therefore the overall forecast on that on the consumer side is relatively weaker.

Meddy Huseeny - USA

Is that, change is that driven by a market demand or just change it in the supply chain for Microsoft?

Joseph Tung

It’s really that as far as we know it’s really due to the change of this product they all get coming up with the upgraded version.

Meddy Huseeny - USA

Sure.

Joseph Tung

And on the pc side we even in Q2 the results was actually even much worse than we were expecting in Q2 particularly when Intel, and AMD started it’s price drop that really had a quite a bit of impact on some of our customers in the chipset areas and going into Q3 we don’t see a significant uptake until may be late September, but second half as a whole we are not exactly that bearish on that pc either because we believe that the seasonality will continue to have some seasonality impact on the in the pc sector although we feel the, and all the seasonality seems to be far more leaner this year than before in past years. If we go back to Q1 you can see that typically we have very slow Q1 but this time around, this year we only our revenue only dropped about 3% so it was normally high Q1. And then going to second half we were excepting you know, based on this historical experience we tend to see a 40:60 split between first and second half but now it seems that the changes are much more leaner. We believe that this could be because of the changed or consumer spending behavior. It used to be that the get back to school or the Christmas sales season its really the peak of everything people have started into buying spree, but now I think with the much shorter life cycle of all the major mainstream products such as cell phones, TVs the buying patterns seems to be changing into a much more linear fashion. And therefore, I think the second half -– I don’t think we would see another 33% jump from first half as we saw last year. So I think there is a structural change in the market.

Meddy Huseeny - USA

Sure thank you I’ll come back with a follow up question.

Joseph Tung

All right thank you.

Operator

Did that conclude your question sir? Thank you. Our next question will be coming from Seu Ng from Hong Kong, please go ahead.

Seu Ng - Hong Kong

Hi good evening - Joseph, a good quarter. Couple of questions I’ll start with your rate of bumping, can you talk about the capacity expansion plans for the rest of the year?

Joseph Tung

I think we are keeping this slide for the time being right now as you know the 12-inch is not full yet with about 65% utilization. Although the 8-inch is running a full capacity the products can be done in both 8 or 12-inch capacity so we can have some capacity sharing among the two.

Seu Ng - Hong Kong

Uh-huh, I see and for the 12-inch bumping is now running at 65% utilization, can you talk about (inaudible)?

Joseph Tung

On the growth level is very close to breakeven now.

Seu Ng - Hong Kong

I see. Okay and then one last question, for your Q3 guidance what is the products assumption to hire?

Joseph Tung

That is the, excuse me.

Seu Ng - Hong Kong

Yeah exchange rate.

Joseph Tung

32.8.

Seu Ng - Hong Kong

Okay all right thank you very much.

Joseph Tung

Thank you.

Operator

Thank you, this does conclude your question, sir?

Seu Ng - Hong Kong

Yeah.

Operator

Thank you very much. Our next question will be coming from Andy Heung from Taipei, please go ahead.

Andy Heung - Taipei

Hi Joseph, good evening, I have a question about your CapEx because you revised your CapEx particularly in packaging also for materials, I just want to get more color about what kind of packaging equipment you are going to install and that is for what segment, thank you.

Joseph Tung

For packaging is really for flip chip as well as for wirebonding and that’s really across the board.

Andy Heung - Taipei

And also for IC testing, I saw you also revised up the percentage around 33%, so what kind of testers you are going to increase I mean for what kind of segment.

Joseph Tung

It’s really for a lot of the upgrades, i.e., from the catalyst and 93 to double density from single density to double density I think for the test CapEx we’re still putting a very tight control over additional capacity what we have been investing in so far is really for our capability upgrade. Material side as I said mentioned earlier on we will continue our expansion in Shanghai basically doubling the capacity from about 22 million units a month at the end of last year to 40 million units a month and also we will have a smaller expansion as well in our Gyeonggi factory, and in our Goushung factory for this (inaudible) to bring it up from 12 million units to about 16 million units. And we are installing some of the capacity for flip chip substrates. Initial plan is to expel up to 3 million units among capacity but it really depends on how fast we can come out of the learning curve to decide at the end of the year what exactly -- what exactly the capacity we will be installing.

Andy Heung - Taipei

Thank you.

Operator

Did that conclude your question, sir?

Andy Heung - Taipei

Yes, thank you very much.

Operator

Our next question will be coming from Grenad Sharma from Hong Kong, please go ahead.

Grenad Sharma - Hong Kong

Good afternoon, Joseph, I have couple of questions. First one is I guess -- could you give us your CapEx plan for Q3?

Joseph Tung

CapEx for Q3 is around $80 million to $90 million.

Grenad Sharma - Hong Kong

And that is more or less, so it’s already ordered I guess all those equipment?

Joseph Tung

Part -- well 50% only.

Grenad Sharma - Hong Kong

Okay. And you have increased testing CapEX if I remember in last conference call I think you had a lot of testers coming from – as a consignment basis, is there any changes on that particular equations like say consignment, do you have gone for non-consignment testers now?

Joseph Tung

Well partly about a third of the testers that we operate are either under consignment or on the leasing, also for the variables kind of arrangement. So I think we will still keep this ratio as we said earlier most of the test decisions that we had in Q2 and going to second half by mostly for operating. So in terms of the capacity we’ll likely – we’ll not increase that much. But I think going forward regarding your question we still like keep it roughly about a third of the testers under the kind of arrangement.

Grenad Sharma - Hong Kong

Okay. On the material side I think you have cut down the CapEx quite a bit but if whatever the guidance you have given on the output wise there is no difference from the previous guidance.

Joseph Tung

Excuse me.

Grenad Sharma - Hong Kong

From the output, say from Shanghai you were saying that it’s going up above by 40 million by end of this year but if – but on material side from $200 million CapEx you are cutting down CapEx quite sharply, probably $110 million?

Joseph Tung

Yeah we are cutting it because as I mentioned we plan to install up to 3 million units flip chip substrate in Gyeonggi. Now we are taking the more conservative approach on that but we need to see how we can put in by end of the year. So as I mentioned earlier on, at this point we are revising the CapEx budget down a bit but is still subject to market changes.

Grenad Sharma - Hong Kong

Got it. So on the – the reduction on the flip chip side is because you are thinking lower demand or you have some production problem out there?

Joseph Tung

I don’t we have any production problem, just I think currently the demand is not as strong and so we want to make sure that the process and everything is in place and in fact we have already deliver some samples to our customers for qualification. So before they really become materialized we just want to hold for a while.

Grenad Sharma - Hong Kong

And what's the substrate lead time for PBGA and flip chips at this point?

Joseph Tung

It’s roughly about four weeks.

Grenad Sharma - Hong Kong

Four weeks for flip chips or PBGA?

Joseph Tung

Well, PBGA.

Grenad Sharma - Hong Kong

And for flip chips?

Joseph Tung

It’s about probably longer maybe about six weeks.

Grenad Sharma - Hong Kong

Yeah, my last question is on your -- what is your plan in expanding China for assembly capacity or either test capacity?

Joseph Tung

We are -- we continue to review the situation there and I think the good news is the government has already on the policy level opened up for -- telling these companies to fully invest in China in assembly and desk, but we are -- we still want to find out more about the details when they comes to actual application and I think the investment can be in the form of setting up a green field factory or in the form of acquiring a established operation there in China. We are looking at both alternatives. Hopefully, you know, in the short of period of time we will be able to formulate file for application to start something there.

Grenad Sharma - Hong Kong

Okay, thank you.

Joseph Tung

Thank you.

Operator

Thank you, is that conclude your question sir?

Grenad Sharma - Hong Kong

Yes.

Operator

Thank you very much. Our next question will be coming from Mr. Frank Wang from Taiwan, please go ahead, sir.

Frank Wang - Taiwan

Hi, good evening Joseph. The first question, can you talk about the game console revenue contribution for the Q2 and what do you expect that to be in the Q4?

Joseph Tung

In the Q2 game console revenue is about a mid single digit of 5% to 6% of sale and for Q3 I think the -- it would be perhaps south.

Frank Wang - Taiwan

Okay and the for the (inaudible) business -- for the portion that you sell externally today, how much of that is DDR2(ph)?

Joseph Tung

That I would need to comeback to you. I don’t have the numbers up here.

Frank Wang - Taiwan

Sure, and also for the -- on the wireless you talked about earlier can you quantify how much of your wireless exposure is in the low end today?

Joseph Tung

No, its difficult to quantify but I think the -- yeah, I always think most of our exposures is on the higher end. This I mean, a lot of time we actually don’t know -- just judging from the packet in a tested -- we think that most of the exposure we had on wireless --

Unidentified Company Participant

I think the lower end will be 15% top.

Frank Wang - Taiwan

Right, and we are having a very profitable year, what's your -- in terms of cash dividend and employee bonus for 2006?

Joseph Tung

We’ll make a decision when the time comes.

Frank Wang - Taiwan

Okay, thanks.

Frank Wang - Taiwan

-- up to 7%, they probably can be for employee bonus, and we will decide how much in terms of dividend how much will be cash and how much will be in the form of stock dividend.

Unidentified Company Participant

If any will be would be positive on controlling or share base.

Frank Wang - Taiwan

Right, thanks.

Joseph Tung

Thank you.

Operator

Thank you, sir, did that that conclude your question?

Frank Wang - Taiwan

Thank you.

Operator

Thank you, very much just a follow-up question from Mr. Meedy Haseeny from the US please go ahead.

Meddy Haseeny - USA

Yes, I want to revisit the gross margin instead of the Q3 gross margin kind of the up a little bit help to understand how would you differentiate that gross margin from assembly and number two what is going to be the primary driver in this gross margin expansion from Q2 to Q3?

Joseph Tung

Assembly margin in the quarter was like 26% of 4% a quarter ago, and tax was up from 38.7% to 43% in the Q2. I think there is still boom for us to improve our gross profit margin both from the material side of it, as we continue to increase our all supply ratio that will have a positive impact to the overall margin and also as we continue to improve our yield on the material side that will improve the material margin and then get into the improvement of our overall margin. On the depreciation, I think we are feeling that very flat and with the although a small growth but there is still some top lines we have more volume that goes always, those factors will all help the gross margin that we have.

Operator

Does that answer your question sir?

Meddy Haseeny - USA

Hello? Can you hear me?

Joseph Tung

Yeah.

Meddy Haseeny - USA

Sorry, it seems like most of the gross margin improvement is going to happen outside of further test, is that correct? From Q2 to Q3?

Joseph Tung

From Q2 to Q3 I will agree that most of the margin improvement will come from assembly of material.

Meddy Haseeny - USA

Okay. Thank you.

Joseph Tung

Thank you.

Operator

Thank you, sir our next question will be coming from Ms. Crystal Lee from Taipei, please go ahead.

Crystal Lee from Taipei

Hi, good evening. I have some questions, first of all if we take ratio to youryour guidance on Q3 growth, can we at the second half versus the first, probably we only see a very low single, low or double digit like low teens of second half versus first half that growth, if that is the case and also if the second question is it will impact $1 to gain $1 in terms of or probably a little bit more on the $1 revenue, in net cash wise, how do we look at '07 year on year close, are we having a very -- growth we see over a 20% year on year growth. Are we going to see the same growth in the next year, and the third question is, if we compare with the other competitor we seem like to see their margin as actualy like stealing? Do we think that its nature of the assembly business and testing business, is there any ceiling in terms of the gross margin?

Joseph Tung

That’s a -- that’s a very tough question, ceiling of gross margin. I think margin that you really depending on how much we can improve on operating efficiency. Then I believe that there is still room for improvement like I got mentioned early on, material is one big factor that better we do on material margin the better we overall margin that we will have, and material wise that subject to improvement on the yield in improve -- increase of our self supply ratio, where that the higher the supplier ratio than more margin we get to keep instead of paying it to outside vendors.

Crystal Lee from Taipei

Okay, if you get a material provider their gross margin the -- right now looking and around the 35% to 40%, is that will be how much you will be contribute into a transfer into your gross margin in the assembly side, how much the maximum you can get?

Joseph Tung

Well, a typical package, substrate based package will have substrate representing 40% of the revenue. So if you have a 10% of this in on the margin that means 4% to assembly and the 4% to the overall.

Crystal Lee from Taipei

Okay, and the other questions on the first half verus second half, how are you going to see over double digit growth?

Joseph Tung

We will try very hard, but I think at this point the first half and second half we are aiming at about 10%.

Crystal Lee from Taipei

Aiming around 10%, thank you. And the other question is, I remember we saw previously early of this year -- end of the last year we thinks like a we are going to have to think a double digit year over year, is it still the goal with ASE is going to continue to grow in that way?

Joseph Tung

You mean to the --

Crystal Lee from Taipei

Yeah, next year and the year 2008?

Joseph Tung

Really yes.

Crystal Lee from Taipei

Okay, so it’s a double digit in the meetings or in like this year we have over 20s?

Joseph Tung

Lets stick to the double digit first.

Crystal Lee from Taipei

Okay, thank you.

Joseph Tung

Thank you

Operator

Thank you, did that conclude your question, ma'am?

Crystal Lee from Taipei

Yes, thank you very much.

Operator

Our next question will be coming from Roxy Wong from Hong Kong, please go ahead.

Roxy Wong - Hong Kong

Hi, my question is regarding your guidance, and during last quarter sort of expected certainly kind of sequential growth in the double digit range, now is in the single digit range, could you share with us what -- which segment see a decline in terms of order flow which lead to a much lower growth rate going to Q3?

Joseph Tung

Well that is still PC, as I mentioned earlier on even Q2 the performance was even more disappointing than we were expecting and that seems to be moving into Q3 as well. Although there are some micro changes that impact on our PC segment as far as we are concerned, but I think it’s like the AMD-ATI merger that should help our Taiwanese chip set companies, customers a bit. We continue to believe that the seasonal factor will have some impact although to a lesser degree than before, we believe that if vista launch doesn’t get further delay, then Q4 we should see some product build to prepare for the launch of vista. So all these put together we are not saying that PC is –- there is still going to be some momentum been build, but probably not in Q3, most probably Q4. But, you know, coming back whether this more linear type of market movement, what kind of impact on those, I think its really a positive development if you know turns out to be true because that will make it much more easier for us to plan our capacity. In the past years when the second half is 60% of the whole year if we plan our capacity to the max it’s very easy for us to have a very, very poor first half and if that pattern change to snooze them out and then –- then it will be a much better situation for us to be in when we do our capacity planning. Further, I think we have you know from last we have been changing our business model, changing our business focus really from revenue growth to profit growth and with a more stable environment it will actually be easier for us to put our focus on profit expansion which we have been achieving so far and we believe there is still room for further improvement and that’s where we will be focusing on.

Roxy Wong - Hong Kong

If that’s the case, you are expecting PC to recover going to Q4 then?

Joseph Tung

Well, I’m not saying it will recover. I’m saying, if there is uptake due to seasonal factor, due to vista, due to AMD and ATI merger, we will start to see those taking effects more likely in Q4.

Roxy Wong - Hong Kong

Are you worry –- do you worry about the -- after the merger as more graphics becoming integrated part of the micro processor you will get less business from the graphics?

Joseph Tung

Until without the merger that seems to be the trend, right, and that’s why we need to have some in-house know our technology in terms of chip or SLC. And that’s actually part of the reason why we now only have some capacity still in the memory but also entering this JB with Powerchip so that we can have a better handle on the technology front in terms of chip and SLC going forward and then anticipate that. And on ATI or AMD in particular, both are our customers, long-term customers. None of them have any back ends so whether those will continue to be done by ATI or eventually by AMD it will still remain to be our customer and we have all the confidence that we’ll continue that business with them.

Roxy Wong - Hong Kong

What other product are you making for AMD right now?

Joseph Tung

Just that.

Roxy Wong - Hong Kong

Thank you.

Joseph Tung

Thank you.

Operator

Than you, sir, does that conclude your question?

Roxy Wong - Hong Kong

Yes.

Operator

Thank you very much. [Operation instruction]. Our next question will be coming from Ivon Goh from Japan, please go ahead.

Ivon Goh - Japan

Hi good evening, Joseph, I have just one question. Can you perhaps talk about your expected capacity utilization in Q3 across your various factories and capabilities, thank you?

Joseph Tung

I think both for assembly and test we’ll maintain at about 90%, staying around the same with Q2.

Ivon Goh - Japan

Thank you.

Joseph Tung

Thank you.

Operator

Thank you, sir, and does that conclude your question?

Ivon Goh - Japan

Yes, it does.

Operator

Thank you very much. Our next question will be coming from Grenad Sharma from Hong Kong, please go ahead.

Grenad Sharma - Hong Kong

Thank you. I have a follow up question. First one is basically on the pricing environment, could you give us some idea like how the pricing environment is looking at for Q3 and potentially Q4 especially on the high end packages like flip-hip BGA and high end BGA?

Joseph Tung

Well, I think as a whole (inaudible) price should be more or less stable although on selective basis there are few customers that we may need top reduce our price a bit. On average I think we can look at about 2% maybe, in Q3. There seems to be a bit more pricing pressure on the material but we think that we can offset a lot of it by continuously improving our yield going forward.

Grenad Sharma - Hong Kong

Okay, and even on the assembly side on the low end packages, have you seen any pricing pressure or pricing pressure on the low end -- or low lead count package pretty much flat?

Joseph Tung

Well it doesn’t really impact us that much, if there is a price offer although we have not actually seen that because we have very, very limited exposure we have only about 5-6% in that segment.

Grenad Sharma - Hong Kong

Okay. And what is the visibility you have now beyond Q3 ‘06?

Joseph Tung

Well, as I mentioned we have -- we do have six months rolling forecast from our customer and that will lead us to end of the year in Q4 and as I mentioned we are seeing sequential growth on a quarterly basis. So there is still going to be some growth in Q4 over Q3.

Grenad Sharma - Hong Kong

And Q4 growth you are expecting from the computer segment or you are also expecting from the communications as well?

Joseph Tung

I think both, it’s really consumer that we have lots of our visibility going through Q4.

Grenad Sharma - Hong Kong

Okay, thank you.

Joseph Tung

Thank you.

Operator

Thank you, very much sir. [Operator instructions].

Joseph Tung

Okay, if there is no further question let me sum up today’s presentation, I think in basic very good second quarter both on the revenue growth as well as on the margin expansion. We are confident that in the second half we will continue to see sequential growth on the top line although not as traumatic as we have been seeing in previous years, but this more leaner type of movement is actually beneficial to us, it will be better for us to manage our capacity. We will continue to put on focus on margin expansion, where we believe that we have still room for improvement both on the gross margin as well as operating margin levels. This is the area that we will be focusing on. Our expansion in the material will continue, we will continue to ramp up our operation in Shanghai in particular, China investment. We will continue to review the better timing and the better project for us to make an application to the authority hopefully we can have a something going on in China as soon as possible. Thank you and have a pleasant evening or morning, I will see you next time in next quarter. Thank you.

Operator

Thank you, and that concludes today's conference call. On behalf of ASE, we would like to thank everyone for participating in today's conference. All lines may disconnect now, and good day to you all. Thank you.

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Source: Advanced Semiconductor Engineering Q2 2006 Earnings Conference Call Transcript (ASX)
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