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ChipMOS Technologies (Bermuda) Ltd. (IMOS)

Q2 2009 Earnings Call

August 19, 2009 7:00 pm ET

Executives

David Pasquale - Global IR Partners

SJ Cheng - Chairman and CEO

SK Chen - CFO

Analysts

Brian Grad - DLS Capital Management

Operator

Welcome to the second quarter 2009 Earnings Call. (Operator Instructions)

It is now my pleasure to introduce your host, David Pasquale of the Global IR Partners (sic).

David Pasquale

Welcome everyone to ChipMOS's second quarter 2009 results conference call. Joining us from the company today are S.J. Cheng, Chairman and CEO; and S.K. Chen, Chief Financial Officer. S.J. will review highlights from the quarter and then provide ChipMOS's business outlook. S.K. will then review the company's key performance metrics and the financial results. We'll then have time for any questions.

If you have not received a copy of today's results release, please email Global IR Partners at imos@globalirpartners.com, or you can get a copy of the release off of ChipMOS's website at www.chipmos.com.

Before we begin, we must make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of the Section 27A of the US Securities Exchange Act of 1933, as amended, and the Section 21E of the US Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Further information regarding these risks, uncertainties and other factors is included in the company's most recent Annual Report on Form 20-F filed with the US Securities and Exchange Commission, and in the company's other filings with the SEC.

Let me now turn the call over to Mr. S.J. Cheng.

S.J. Cheng

Welcome everyone to our 2009 second quarter conference call. Hopefully, you all had time to review our earnings release. Our Q2 revenue was $89.5 million, up 29% from Q1, '09, but down 39% from the same period last year.

Our business experienced significant quarter-over-quarter growth, in line with the broader Q2 recovery in semiconductor industry. We think that growth of business in LCD driver was stronger with continuous weakness in DRAM and flash. Under US-GAAP gross margin was negative 34.2% in the second quarter compared to negative 52.6% in the previous quarter. The gross margin improvement is due to an improvement in capacity utilization rate.

As just noted, we saw a stronger LCD driver business with a rebound of the historical low season in the previous two quarters. We benefit from the demand pick-up in US, China and emerging markets. As a result our LCD revenue in Q2 had around 143% quarter-over-quarter growth and accounted for around 25% of total revenue in Q2 up from around 13% in Q1.

Our mixed signal business grew around 107 quarter-over-quarter in Q2, representing an uptick in demand in the LCD and semiconductor supply chain and the benefit of sales effort in customer bases expansion. Our mixed signal business accounted for around 14% of our total revenue in Q2, up from around 9% in Q1.

In DRAM volume and pricing still remains far behind what we had seen from other products in the semiconductor industry and were behind historical (inaudible). A bright spot in the quarter was the improvement from mixed-DRAM an increase based on delivery business with ProMOS.

Revenue in our flash business declined around 29% in Q2 compared to Q1. This is due to the ongoing impact of the loss of contract business from Spansion, starting from mid of February. We saw some improvement in other flash making market, including our low-flash business with some Taiwan customers.

Looking into the third quarter, we expect that our LCD driver and mixed signal business would continue to improve after the significant growth in Q2. Visibility from customer order has improved and (inaudible) through the end of Q3 in our DRAM business. We are also seeing a more favorable pricing environment in LCD driver backend service in Q3.

In DRAM, the overall market situation in the third quarter is much better than we faced in Q4 '08 and Q1 '09 timeframe. However, we expect the recoveries in the DRAM market were reaming challenging, and will depend on the consolidation activity among DRAM makers and the scale of the capacity investment by then.

We will continue to cross monitor the market and adjust our business if necessary. Our current target is to improve memory capacity utilization by increased business from mixed-signal customers and expand the customer basis of overall DRAM product at the same time.

With regard to our flash business, we still maintained cash on delivery business term we've mentioned in Q3 besides that we expected to see the change of flash revenue contribution by increasing the business of other decreasing customer and by introducing of new customer.

Considering overall market situation and customer bookings, we currently expected high a single-digit percentage revenue growth for the third quarter as compared to the second quarter due to the increased utilization rate and higher ASP for LCD driver business.

Turning to the gross margin, we currently expected gross margin on the consolidated basis for the third quarter of 2009 to be in the range of around negative 25% to negative 32%.The gross margin continue to be impact by lower utilization of DRAM final testing capacity.

Before turning the call over to SK, let me also point out that after two quarter of cash outflow, we achieved $5.8 million of positive free cash flow from operations in Q2. As part of our ongoing efforts, we will continue to carry out cost reduction, extension, and maintain a conservative capital expenditure approach.

Overall, our business situation continues to improve and that we continue to manage and adjust inline with the market change.

Let me now turn the call over to SK to deliver second quarter financial results.

S.K.Chen

Thank you, S.J. All dollar amount cited in our presentation are in US dollars. We have provided both, US dollars and NT dollars in our press release. The following numbers are based on the exchange rate of NT$32.77 against to US$1.00 as of June 30, 2009.

S.J has just reviewed our revenue and margins. Non-GAAP adjusted net loss for the second quarter of 2009 was $36.1 million, or $0.46 per basic common shares compared to net loss of $59.7 million, or $0.72 per basic common shares in the first quarter of 2009.

Under non-GAAP measures, our operating expense in Q2 was $8.2 million, or approximately 9.2% of revenue. Non operating expense was $2.1 million, income tax benefit in Q2 was $2.7 million.

On the segment basis, the second quarter's revenue breakdown was 22% of in final testings, 18% in wafer sort, 35% in assembly, 25% in LCD driver IC business. Total capacity utilization was around 52% for the quarter, compared to 40% in the first quarter. The capacity utilizations under segment basis was 42% for testing, 59% for assembly, and 58% for LCD driver IC including bumping.

CapEx for the quarter was $8.3 million under conservative CapEx policy. The breakdown of CapEx for the second quarter was 64% for testing, 31% for assembly, and 5% for LCD driver IC capacities. Depreciation and amortization expense were $50.9 million, or approximately 56.9% of revenue in the second quarter as compared to $51.2 million in the first quarter.

EBITDA for second quarter was $14.2 million, or 15.9% of revenue. EBITDA was calculated as earning before income taxes, foreign currency gain or loss, net interest expenses, depreciation and amortization expenses and special charges. While EBITDA is not defined by accepted accounting principles, it is commonly used to measure a company's ability to service debt.

Total cash, cash equivalents was $157 million as of the end of the quarter, compared to $191 million for the previous quarter. Our total short-term debt was $188 million in the second quarter as compared to $286 million at the end of the first quarter. Long-term debt increased to $377 million from $291 million in the first quarter due to the loan extensions.

Our accounts receivable day sales outstanding in the second quarter was 50 days, compared to 55 days in the first quarter. Inventory turnover days were 18 days in the second quarter as compared to 23 days through the first quarters.

Operator, that concludes our formal remarks, we can now take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Brian Grad with DLS Capital Management. Please go ahead.

Brian Grad - DLS Capital Management

It looks like its getting a little better, and that's mildly optimistic about that. Can you talk to me a little bit about we're seeing DRAM pricing generally firmer across the board in the last quarter, how come you guys aren't more optimistic about the DRAM market at this moment?

S.K. Chen

I think here's that what we observed from the monitor, first one is the demands on DDR 2 firm up a little bit just because the surprise shortages in DDR 3 products, so that has bring up the price, the average price for the DDR 2 popped and they're also encouraging to our customers; promotion and purchase that produce more powers and also the market demand assembly and testing services from us. The second thing is the demands, the end-user demand in the market is really, really coming back a little bit and especially for the Christmas holidays. The orders are coming in and it helps to increase the demand in the DRAM area. As you know that, 20 [companies] notebook and notebook makers, they try to introduce the CULV versions of products. They demand either the DDR3 or DDR2 memories. But the supply on DDR3 is limited, so they all turn to DDR2 for cost reductions and it helps the market a little bit.

Brian Grad - DLS Capital Management

Is that a lower margin product for you, the DDR2 versus DDR3?

S.K. Chen

We can do both of this products and we can do all kind of memories. It is fine with us. But you know, the most of our customers they are focused now on DDR2.

Brian Grad - DLS Capital Management

Could you walk through something for me, I was try to reconcile this when I was looking through the statements here. It looks like your total debt went up by 7 million long-term and short-term. Your net debt went up 37 million because cash was down by 34 million. I couldn't understand, how you spent 34 million in cash, if you were 5.8 million of EBITDA positive or free cash positive. Your debt went up, but your cash went down. I couldn't reconcile those numbers. Can you walk me through, how we get there? What happened to the cash?

S.K. Chen

The total debt of the company at the end of the Q2 is 565, long-term and short-term, and by the end of Q1 it's 575, so the debt went down 8 million from Q1 to Q2.

Brian Grad - DLS Capital Management

I must have had a bad starting number then, because I had it, as going up by 7 million.

S.K. Chen

No, actually it's going down. Going down by 12 million and in our case although it came down from 205 million, that's 191 to 157.

Brian Grad - DLS Capital Management

Debt came down 8 million, so you repaid it. If 8 million of the cash went to debt repayment, what happened to the next 26 million? I noticed that was AR was up by 19 million and your accounts payable were up 4.8, that explains another 15.

S.K. Chen

No, we paid down a little bit of trading debt, the [LoC], the letter of credit.

Brian Grad - DLS Capital Management

Letter of credit pay down. Where does that show up in the line item, is that under short-term or, what line item would that be reduced from?

S.K. Chen

Excuse me?

Brian Grad - DLS Capital Management

What line item would that be reduced from? Would that be out of short-term debt or would be out of...

S.K. Chen

It is short term. Is that the way we shut the long facility with our [auditors] most of them are long terms. We also extended some of the shorter debt, but for the trading debt that we have to pay it down, since that debt incurred in maybe three months ago or six months ago.

Brian Grad - DLS Capital Management

Right. We've got an amortization schedule, right, if they pay down so much per quarter.

S.K. Chen

Right.

Brian Grad - DLS Capital Management

Right. Where do you guys stand on the converts at this point if you bought? Were anymore traded in the market that you get if we were able to buy any factory as hybrid is still holding onto these things like?

S.K. Chen

We didn't know we try to buy the capital debt, but we didn't success through that, but we initially talked with the bondholders and we are aiming to have some restructuring with the bondholders recently.

Brian Grad - DLS Capital Management

So are you talking about some type of an exchange offer that extends maturity, pay more coupon and you lower the strike price something like that? Or is it going to go straight debt? I mean, I know I am asking a question that you probably can't answer because there are talks of private with those guys, but is it something along those lines?

S.K. Chen

We have pretty constructive discussions on how to restructure that, but the discussions are still ongoing and we didn't enter into any definitive agreements right now. So there is no conclusion yet, and I am sorry I couldn't disclose though the term or any conditions that we have been discussed.

Brian Grad - DLS Capital Management

Why not just paid them off at par?

S.K. Chen

I think that's beyond my capability to answer your questions on that, but I think that we were tried to keep the company's shareholders interest. I will do our best to keep our shareholders' interest in that perspective.

Brian Grad - DLS Capital Management

As you know, we don't want to issue more stock, I mean that's crazy down here at this kind of prices. I think it's just a bad idea. I'd like to see pay these bonds off at par and just move on. Do you still have assets that you can borrow against or are you completely tapped out on borrowing?

S.K. Chen

I am sorry. Would you repeat again your question?

Brian Grad - DLS Capital Management

Do you still have unencumbered assets that you can borrow against to pay these bonds off or are all your assets being pledged against your bank lines?

S.K. Chen

The unencumbered assets is in the operating subsidiaries since that we are now doing the restructure with the bank creditors, so we couldn't use those unencumbered assets to get the new funding from the markets right now. So we invest in something else. So this is a little bit complicated, but we couldn't say more about that. We would at least know we have some conclusions on that and certainly we should out a press release to let you know.

Brian Grad - DLS Capital Management

How far along do you think you are, I mean are you getting close to some conclusion with that or is it?

S.K. Chen

Yes. We said that we can conclude this subject as soon as possible.

Brian Grad - DLS Capital Management

In terms of receivables, are you seeing any more distress from Spansion or ProMOS or Powerchip, I know you're requiring COD? Has there been any write-off of any of those inventories? Have you been able to monetize all of that inventory that you took as collateral?

S.K. Chen

In that perspective, I would expect that I think our decision with customers to become better and better since that ProMOS [relied] repayment schedules to us for their account receivables and wafer from us. So part of our account receivable has been paid down and as such being repaid. Spansion, we have previously in our discussion with Spansion and probably you know that the Spansion is trying to emerge from the bankruptcy petitions. So in that perspective, we may reverse somewhat to our better, as we can confirm about that.

Brian Grad - DLS Capital Management

That would be a non-cash reversal, just as it was a non-cash?

S.K. Chen

Right.

Brian Grad - DLS Capital Management

How much Spansion inventory is till being held on the books that can be monetized to cash?

S.K. Chen

You mean on ChipMOS bubble [as mentioned books]?

Brian Grad - DLS Capital Management

Do you have some of their inventory right? You see some of their inventory as collateral against what they owed you, right? You took a write-down, how much of that inventory still exists and will some of that potentially reversed into real cash?

S.K. Chen

I don't really think so. Since that even though we took some steps on the tooling and wafers, but currently we have to state based on the Chapter 11 filing, after they filed the Chapter 11 petitions that we have to state for any actions. So I think that we couldn't make any comments on that until we get the court orders or the court makes any decisions on their (inaudible) or reorganizations trend?

Brian Grad - DLS Capital Management

How much exposure do you still have to ProMOS then?

S.K. Chen

ProMOS is just around $14 million to $15 million.

Brian Grad - DLS Capital Management

So of that could come back as cash?

S.K. Chen

Yes.

Operator

(Operator Instructions)

Our next question is from the line of [Scott Bichons] with [Katherine Holdings].

Unidentified Analyst

I have a couple of questions here. Is the buyback still in place?

S.K. Chen

I'm sorry. You mean.

Unidentified Analyst

Is the buyback still in place from sale in?

S.K. Chen

Yes. It's still in place. It is still valid.

Unidentified Analyst

It's still valid. Is it being exercised daily as a certain percentage of sales?

S.K. Chen

Yes. It yes this is daily exercised.

Unidentified Analyst

It's done daily. Okay. How much capital is needed to upgrade from DDR2 to DDR3 for testing, and how much capacity of DDR3 do we have now?

S.J. Cheng

To answer your question from assembly viewpoint all the equipments can handle both, DDR2 and DDR3 with very limited tooling investment. Testing-wise, all the existing capacity can test both, DDR2 and DDR3 in functional, but regarding to the speed we need to have some high-speed testing investment for DDR3.

Unidentified Analyst

About how much would it be to bring our equipment up to speed? What would the cost be involved?

S.J. Cheng

This will be the new equipment.

Unidentified Analyst

That would be brand new equipment.

S.J. Cheng

Yes.

Unidentified Analyst

At what point in time do you feel that would be necessary, that we would have to buy new equipment?

S.J. Cheng

It depends on the customers' requirements. Currently we use DDR2's function with some engineering, but we still can [pair] them relatively to DDR3. Once the volume gets bigger we definitely need to increase the production efficiency.

Unidentified Analyst

Do you feel we're going to be hindered by not having that, as DDR3 becomes more important in the marketplace?

S.J. Cheng

Yes, DDR3's volume and percentage will continue to increase in the market.

Unidentified Analyst

So, at what point do you think that we would need to have much more capital investment into DDR3 testing?

S.J. Cheng

Maybe next year.

Unidentified Analyst

So, you don't think this year still would be a drag on it. We would be okay for this year with what we have?

S.J. Cheng

Yes, exactly.

Unidentified Analyst

Let's see here. Did you receive the releases from the other banks for not foreclosing or applying any penalties on the new debt payment schedule?

S.K. Chen

No.

Unidentified Analyst

I noticed that you've changed the short-term debt to long-term debt and I was just wondering was that all approved as it is on the balance sheet?

S.K. Chen

Actually, in the mid of April we successfully obtained approval from the loan repayment schedule from bank creditors. This loan amount is over 50% of our subsidiary, ChipMOS Taiwan total outstanding loans. So the repayment schedule is going to be reduced around 77% of ChipMOS cash need for loan repayment in 2009. And since the approval is in April, so the related loan repayment extension agreement will be effective to be active in full by end of third quarter of 2009. So we believe that the loan repayment schedule extension significantly improve our cash position and with this our net current reliability.

Unidentified Analyst

I see there on the balance sheet now, I was just wondering has that been well approved by all of the banks which are on the balance sheet or are we still looking for approvals?

S.K.Chen

The bank has approved that.

Unidentified Analyst

Okay.

S.K.Chen

This is why we can make changes on the balance sheet.

Unidentified Analyst

So the only restructuring that has not been done on long-term debt is the convertible bonds?

S.K.Chen

It has been down long-term debt. I think that we issued out the press release and talking about this seems that the long restructuring has been approved and all the necessary agreement has been signed with the Taiwanese bank auditors. So we changed the balance sheets according to that in Q2.

Unidentified Analyst

So everything has been approved and because in your April 15 release you were still looking for I guess still less than 50% of the outstanding debt to still not want to either apply penalties or foreclose?

S.K.Chen

No, I think that's the action as a group, so all of the bank, Taiwanese bank auditor, they agreed to support the company.

Unidentified Analyst

So in other words all the long-term debt has been approved for the new payment schedule?

S.K.Chen

Long-term and short-term debt bank auditors.

Unidentified Analyst

So, the only debt that has not been addressed at this point is the convertible bonds as far as any kind of -- we have no outcome yet from the convertible bonds, that's the only debt, all the other debt has been now I guess been approved for new pay out.

S.K.Chen

Right.

Unidentified Analyst

With Spansion coming out bankruptcy hopefully in the fourth quarter, we will ChipMOS resume sales with them as usual.

S.K.Chen

Yes, certainly we maintain the cash on delivery business term with Spansions. And we will maintain, I think that we are seeking to maintain our long-term relationships by that.

Unidentified Analyst

Do you think that our relationships with Spansion could get back to where it was before they went into bankruptcy or is this something that we are not going to be looking to do that even though they are coming out of bankruptcy, we are not going to be looking to increase our sales with Spansion.

S.K.Chen

It will be good to resume to where we were before the bankruptcy petitions. I think that we love to see that but it depends how their business going.

S.J. Cheng

This is S.J., let me answer your question. The current business model with Spansion, since Spansion is now like a – their revenue, after the Chapter 11, they do the some business strategy change. They tend to be useful probably the more products. So, their revenue reduced significantly, but their position is getting better. And currently we're working with Spansion. The percentage of total allocation, were not reduced but the volume is reduced. And we will maintain the same business relationship in the future in getting more [currency] working together.

Unidentified Analyst

Let's see, I have one other question here. I saw a press release by Powerchip, I think it was yesterday or the day before that they're going to be doubling their production. I was just wondering would we be seeing more production from Powerchip as they are doubling their production.

S.J. Cheng

Not only in Powerchip, you know, like I said, right under DDR2 content prices over $1.5, that's above Taiwan DDR makers case cost, so they are more eager to produce more in order to improve their take [order proposition]. Recently, the premium price continues to maintain stable going forward. Their ARPU will be continuously increasing. That's the first one. The second one is in a long while, since back-to-school and electricity consumption rate is getting improved, compared with Q1 and Q2. So consumption rate also improved. Those are the two scenarios to encourage all the DDR makers pumping more or more wafer, so I think we must get benefit on it.

Unidentified Analyst

I guess, also now then my last question is with Taiwan memory, I know last time we run the conference call, you didn't feel they would be probably going forward, but I guess with their press release a month ago, I guess they are definitely going forward and I guess they were in the process of doing some kind of joint venture with ProMOS. Will our relationship with TMC be any different now with ProMOS being going probably under their umbrella?

S.J. Cheng

Actually, I think, yes, TMC right now the picture, I cannot make comments because day and night always change, and the related issue ChipMOS with the current customer, we don't see any change.

Unidentified Analyst

With ProMOS?

S.J. Cheng

Yes.

Unidentified Analyst

You feel our relationship with ProMOS is still intact?

S.J. Cheng

Yes.

Unidentified Analyst

That's all I have.

S.J. Cheng

We in the business with ProMOS continuously increase because their ARPU is continuing to increase.

Unidentified Analyst

Okay. Well thank you very much and hopefully we will continue, it seems like we're on the right path here and let just hope that a business starts to pick up and pricing fix up also.

Operator

(Operator Instructions). Our next question is from the line of Brian Grad. Please go ahead.

Brian Grad - DLS Capital Management

Regards to the share buyback, how many shares did you buyback last quarter?

S.K. Chen

Share buyback for the Chairman is around, up to now it's around 338,000 shares and for ThaiLin it's about 2.02 million shares.

Brian Grad - DLS Capital Management

How many was that for the quarter about it? Another million something like that in a quarter?

S.K. Chen

For Q2 ThaiLin has bought around 500,000 or 600,000 shares; and for [SA] it's about 110,000 shares.

Brian Grad - DLS Capital Management

Was the issue with GE finally resolved or are they still holding out on you in terms of their leasing?

S.K. Chen

Okay. We try to negotiate with the equipment that saw that strategy that just say in order to improve our cash position and reduce our current liabilities, but the negotiations that are going on there have been no assurance that our negotiation with the equipment (inaudible) will have a satisfactory or favorable outcomes, but I think we would do our best effort to negotiate extent. No conclusions yet.

Brian Grad - DLS Capital Management

So, are they the ones that are holding out or is it just difficult to get their attention?

S.J. Cheng

One of two points, they are quite insist and we are working on that. It takes time for all the parties to please down on the issues.

Brian Grad - DLS Capital Management

Well, I can see you take the banks nearly as long as taking [GE] to get off?

S.J. Cheng

Yes. Since they are out of Taiwan, I think that most of the parties that involved are out of Taiwan. So they actually just followed the international practice, so it's much more as complicated as we expected.

Brian Grad - DLS Capital Management

This is in relations to Scott's previous question, what was the run rate with Spansion before they went into bankruptcy?

S.K. Chen

The run rate with Spansion is based on [single pay] contract. So it's around 80% to 85% for those equivalent we had a contract. That's before bankruptcy and after [US] depends on their business only. You will receive around 40% to 45%.

Brian Grad - DLS Capital Management

I think that's it for me. Thank you.

Operator

(Operator Instructions)

S.J. Cheng

If no further questions, thank you everybody to join our Q2 conference call. Thank you very much. Bye, bye.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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