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ChipMOS Technologies (Bermuda) Ltd (NASDAQ:IMOS)

2Q 2013 Results - Earnings Call Transcript

August 15, 2013 8:00 AM ET

Executives

David Pasquale - Global IR Partners, IR

S.J. Cheng - Chairman and CEO

S.K. Chen - Chief Financial Officer

Analysts

Timothy Arcuri - Cowen Capital

Richard Shannon - Craig-Hallum

Brian Grad - DLS Capital Management

Operator

Greetings and welcome to the ChipMOS Bermuda's second quarter 2013 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host David Pasquale of Global IR Partners. Thank you sir, you may begin.

David Pasquale

Thank you, operator. Welcome everyone to ChipMOS' second quarter 2013 results conference call. Joining us today from the company are Mr. S.J. Cheng, Chairman and Chief Executive Officer; and Mr. S.K. Chen, Chief Financial Officer.

S.J. will review highlights from the quarter and then provide ChipMOS' business outlook, S.K. will then review the company's key financial results. We will then have time for any questions.

If you have not yet 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' website, 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 Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the 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 U.S. Securities and Exchange Commission, and in the company's other filings with the SEC.

At this time, I would like to now turn the call over to Mr. S.J. Cheng. Please go ahead, sir.

S.J. Cheng

Yeah, thank you, David. Welcome everyone to our second quarter 2013 conference call. This was another strong quarter for us our result was in line with guidance. Outside of ChipMOS, industry comments have created a lot of noise in the market, while the OSAT companies reporting, at what outlook may be. It is worth nothing for those new to ChipMOS or the OSAT outside sector.

Thus OSAT companies performed to grow very differently based on the end market broachers, this is compound by customer-based serves we any given market.

CapEx spending and tightening of (Inaudible) further compounds the impact of both the upside and the downside. So with ChipMOS we had continued to outperform most of our peers. This is due to decision made a few years back, and as certainly do we continue to execute on.

We made strategic decision to give out our LCD driver business, we reduce exposure in the commodity [wise size] and we are (Inaudible) the four customers we sought had defendable market positions. Those customers have continued to grow and we have mutual benefits from our relationships.

Our second quarter results, represented the same of our strategy, this also (Inaudible) continued conversation as we move through the second half. We'll be giving more details in a minute.

Our Board of Directors have approved an increase in our CapEx budget for 2013, demand is so strong in our LCD driver business. Thus we need to put in CapEx by about 6 months for 2014. This will allow us to support our customers growth program and capital end markets.

With that as background, Q2 revenue was US$164.9 million up about 12% compared to Q1, Q2 gross margins on a consolidated basis was 15.4% this comparing to the 13.9% in Q1. As we benefit from a favorable mix and partially offset by the decline in the price of [gold].

Margin is always a key focus for us (Inaudible) of the company, we always try to improve margins and [retry] our customer program and CapEx statistics.

In terms of the products segments, revenue from our LCD driver IC business was up about 18% in Q2 compared to Q1. Winning our LCD driver IC business, our chip-on-film, so called COF revenue increase about 21% and our chip-on-glass, so called COG revenue increased by about 13%, revenue from our bumping business was up over 10% compared to Q1, 13

Revenue from our [bronze] business was up 23% in Q2 compared to Q1, driving by the assembly of MEMS product. The year [CON] revenue was flat in Q2 compared to Q1.

Finally, revenue from our (Inaudible) business was up almost business was up almost 7% compared to Q1 '13, let me now turn to our Q3 outlook. As I mentioned at the start of the call there have been a lot noise in the OSAT sector in terms of outlook and the level of the confidence.

In our case, we remain very optimistic in our outlook this is due to our end market exposure and our diverse customer base in our key markets. We are aligned with customers thus are growing and aligned with the right market. This is seen in our company's quarterly growth and in focus we are getting from customers.

For the current Q3 we are seeing improving activity in our customers and expect continued success in building share in our target markets. We currently expect revenue growth about 2% to 3% compared to Q2 we expect revenue from our LCD driver business including bumping to remain strong with the growth of 5% to 8% in Q3 comparing to Q2.

Our assembly business is currently expected to grow 14% to 16% in Q3 compared to Q2 as we expected revenue from our (Inaudible) business to be flat to down in Q3 compared to Q2.

Overall, we expect the mid to results in a further improvement in gross margin on the consolidated basis we are guiding to be in the range of about 15% to 20%. We're very pleased to see the continuing improvement in our gross margins. As such, (Inaudible) the revenue of facility we're pursuing in our ongoing cost control.

Finally, giving [stress] in our LCD driver business, our goal is to improve the increase in our fiscal year 2013 CapEx budget. This is after the CapEx for Q2 came in at 6 million lower than our guidance and US$26 million compared for guidance US$32 million.

Given our Board approval, we're pulling in CapEx by about six months from 2014 in to the second half of 2013. This means our fiscal year 2013 CapEx budget will move up to above US$128 million from above US$100 million prior guidance for the year. The strategic decision to increase our CapEx now is due to the strong customer demand and end productive requirements in (Inaudible) new HDTV (Inaudible), 4K/2K TV, smartphone and tablet PC.

We need to start preparing additional capacity as much as six months earlier than planned. By doing so, we allow our competitors new growth opportunities. We're seeing in our higher margin LCD driver testing market from both existing and new customers, and while the majority of our investments will support (Inaudible) the LCD driver testing side, we will also allocate some of the cash hike to (Inaudible) for us assembly supporting tuning and [bump in].

So we are clearly encouraged by throughout demand from customers. We expect to see continued growth of capacity use is lead by new applications in the mobile consumer space, many of which require longer testing time. Our goal remains putting a capacity increase needed to support our customer growth program in our targeted end market. But carefully benefit, so as not to put in too much capacity. This strategy is helping us to build a longer relationship to increase our margin and to out growth the overall industry.

This takeaway is we are not spending ahead of demand (Inaudible), rather we are very good under investing in higher growth, higher margin opportunity. High growth specific customer programs, we are building a capacity we need and not building more than we need, and equally important we continue to very closely monitor free cash flow, debt reduction and other long term business (Inaudible).

Finally we previously announced that our goal is to authorize the new program up to US$7.5 million for common share repurchasing, accordingly a US$7.5 million of repurchasing program and into (Inaudible) and around 82,000 (Inaudible) commercial repurchasing as of today. Let me now turn the call over to S.K. to review the second quarter financial result, S.K. go ahead.

S.K. Chen

Thank you, S.J. All dollars amount starting our business starts in U.S. dollars putting up variety post U.S. dollars and (Inaudible) in our press release. The following numbers are based on the (Inaudible) on NT$39.96 against the US$1 as of June 28, 2013. As S.J. has just reviewed our revenue and margins; I will provide details on the rest of our Q2 results.

Net income for the second quarter of 2013 was 12 million and US$0.41 per basic common shares, and US$0.40 per diluted common shares, compared to net income of 12.1 million and US$0.42 per basic common shares and US$0.41 per diluted common shares in the third quarter of 2013. Our operating expense in Q2 was 14.1 million compared to 9.6 million in Q1, which included an additional 2 million of royalty accrued in other operating expense and an increase of 1.6 million of G&A expenses mainly from professional fee and employee [conversations].

In our cost of goods sold, we accrue approximately additional 1.3 million of inventory loss due to a decline in the price of gold. We also incurred approximately 0.8 million in additional expenses on valuations of employees, stock options and shares appreciating rights, given the increase in the price of our common share. Other income in Q2 was 9.2 million, which included 2.5 million of gains on equipment and scrap materials disposal, 2.2 million of allowance reversal for top four receivables, and 4.1 million of reversal of royalty fees.

Now operating income in Q2 was 0.5 million, including foreign exchange gains of 1.6 million and net interest expense of 1.3 million. Income tax expenses in Q2 was increased to 6.4 million which included 2.3 without impact for the dividend distributing from ChipMOS Taiwan to ChipMOS Bermuda. As amended Q2's revenue [went] downward 24% in testing, 32% in assembly, 25% in LCD driver IC business, and 19% in Bumping business.

Total capacity utilizing was 79% for the second quarter of 2013 compared to 75% for the first quarter of 2013. The capacity utilization (Inaudible) towards 54% for testing, 79% for assembly, 88% for LCD driver IC, and 87% for Bumping. As S.J. noted CapEx for Q2 was US$26 million, which is US$6 million in our prior second quarter balance of US$32 million. The [put] down of CapEx for the second quarter was 10% for testing, 16% for assembly, 62% LCD driver IC and 12% for Bumping capacity. As always we are working to further increase the equipment utilization levels to further improve [equity] efficiency and continuing our cost reduction programs.

We continue to successfully balance the need to have the right capacity online to support customer demand and effective program rent. Depreciation and amortization expenses were 28.5 million or approximately 17.3% of revenues in the second quarter. It is a reduction of 2 million from Q1 2013. EBITDA for Q2 was 49 million or 29.7% of revenues. EBITDA margin was calculated as earnings before income taxes, foreign currency gain or loss, net interest expenses, depreciation and amortization expenses and special charges. But EBITDA is not defined by General Accepted Accounting Principles. We believe it is a helpful way to measure our financial strengths.

We generated 13 million of free cash flow in Q2, which was calculated by adding depreciation, amortization, interest income together with operating income and subtracting CapEx, (Inaudible) interest, interest expenses and income tax expense from the sum. We remain committed to meeting our financial goals which include disciplined CapEx spending and generating positive cash flow.

We ended the quarter with the balance of cash and cash equivalents of 370.1 million compared to 283.2 million at the end of Q1. Our ability to maintain a healthy balance sheet has allowed us the ability to support customer seeing the program that will drive our goals in allowing us to continue paying down our debt. This is critical but due to our new business [segment] that we have been able to develop our area that allow and also critical in giving customers competency up and down cycles, indecisions, having a strong balance sheet gives us the ability to get more favorable returns from our supply chain corners than we would otherwise.

(Inaudible) short-term debt including current portions of long-term debt was US$128.8 million at the end of second quarter 2013 as compared to US$90.6 million at the end of the first quarter.

In the second quarter, we partially drilled down credit lines denominated in U.S. dollars aiming to deploy hedge positions to offset currency volatility which resulted in an increased of our short-term debt.

Long-term debt was the US$181.9 million at the end of second quarter compared to US$185.7 million at the end of the first quarter. As of June 30, 2013; we further increased our net cash position to US$59.4 million, and improved our net debt-to-equity ratio to -14.1% compared to -1.7% at the March 31, 2013.

As part of our ongoing efforts in maintaining excellent financial positions, we remained committed to further reduce our debt levels. Our strong cash positions also allow us to enhance shareholder values going forward through efforts like our share repurchases program; we also founded a cash dividend program last year.

Our accounts receivable days sales outstanding in Q2 was 75 days as compared to 82 days in Q1. Inventory returns were 37 days in the second quarter as compared to 41 days in the first quarter. Our interest expense was US$1.6 million in the second quarter as compared to US$1.7 million in the first quarter.

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

Question-and-Answer session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Tim Arcuri with Cowen Capital. Please proceed with your question.

Timothy Arcuri - Cowen Capital

First of all, S.K. can you give us some sense of what gross margin will look like by segment in Q3?

S.K. Chen

In Q2 or Q3?

Timothy Arcuri - Cowen Capital

In the Q3, September.

S.K. Chen

In September, the gross margins for the third should be around 20% to 21% and for the assembly should be around of 12% to 13%, drive IC is 31% and the (Inaudible) should be 16%, 17%.

Timothy Arcuri - Cowen Capital

Great okay thanks for that. And can you give us a sense of what the 10% customers were in June? Thanks.

S.K. Chen

10% customers in June, [Novatech] is number one close to 20%, micron is number two 15.02% the revenue contributions and the third one is (Inaudible) 8.3% and that’s been 10%, we only have two customers which is more than 10% revenue contribution in June quarter.

Timothy Arcuri - Cowen Capital

Great, and then just last thing from me. Can you give us a sense on the update related to the timing of the offering, should we expect that in the next couple of weeks or what’s your set there? Thanks so much.

S.K. Chen

Right now is actually we involved in the legal process so we couldn’t provide the details stages or timings on this but I was sure of that we actually maintained the [10] schedules for our distinct applications, as we mentioned before that this will be in November of this year, that we will submit all applications. And right now we are working on these the reductions so that [power] specimens and working on the bigger company to make the list in requirements.

Operator

Our next question comes from the line of Richard Shannon with Craig-Hallum. Please proceed with the question.

Richard Shannon - Craig-Hallum

Hey, S.J. and S.K. how are you doing?

S.J. Cheng

(Inaudible)

Richard Shannon - Craig-Hallum

Excellent. Well very nice results again and looks like you had some good momentum in the LCD side of your business. I would like to ask a couple of questions on your new CapEx outlook especially for LCD here. S.J. in your prepared comments you said that you are investing prudently and not investing too far ahead of demand. Is there any sense of contracts or agreements in place that you have the customers to back sell this capacity and can you give us any sense and certainty of that?

S.J. Cheng

Yeah. Richard to answer your question like recently seems our customer switching that product to the higher performance wide especially for high resolution TV and smartphone. As those kinds of IC need a longer testing pad I compare with the existing product. And as so we do need a longer testing pad to serve the same to sell to the customers. So that's a major reason we increased CapEx to add testing equipment and those capacity already for customer.

Richard Shannon - Craig-Hallum

Okay. You referenced potentially gaining some new customers with this CapEx any more detail on that, and perhaps by large screen or small screen or anything along those lines we would be great to hear about?

S.J. Cheng

We think to say so it's product for [testing] product segment, both majority coming from the larger screen. And also small screen is a smartphone, so both. And also one of the new applications we had a other customers they use the same LCD driver solutions for the finger print (Inaudible) so that’s also nimble capacity product.

Richard Shannon - Craig-Hallum

Okay. Fair enough. And then what’s this increasing investment here is this you expect to gain share or is this just kind of investing to keep up with the market in any way?

S.J. Cheng

I think we will maintain allocation percentage for our existing customers. And also gain the product is switching.

S Richard Shannon - Craig-Hallum

Okay. And then just one last question on this topic S.J. is it you said you talked about it being a pull in CapEx so does this suggest that CapEx for 2014 will marginally downward by the same amount you are raising this year or how can you give us a sense of how that will trend?

S.J. Cheng

Yeah as you just, we are very focused on pursuing higher margin revenue opportunity in our key market areas. So we are not providing the interest for 2014 CapEx at this moment but we can assume you we will remain conservative in our CapEx spending. And we don’t have any intention of spending ahead of the demand. So by putting CapEx by about six months we are able to take advantage of existing company opportunities in our higher margin LCD driver spend.

And we expect to see continuous growth on capacity use is [made] by new application in the mobile consumer space. because many of them require longer testing time. So based on the current requirements, the CapEx we invest six months earlier in 2013 fully talked about customer already and by 2014 we cannot talk right now but we will keep updating in the Q3 conference call.

Unidentified Analyst

Okay, that’s fair enough and a couple more questions for me and I'll jump in the line, guys. The follow up on the previous questions regarding the Taiwan listing update. As you've gone through the process over the last quarter, are there any significant roadblocks that have come up here?

It sounds like generally confirming the timeframe by which you expect to complete the process in the second quarter next year were there any road blocks that have popped up and then also getting the stake of ChipMOS Taiwan below 70%, any more clear sense of the timing of that?

S.J. Cheng

Yes, as S.K mentioned, a [recourse] a couple million [recourse], I think they have legal [problems]. So we cannot, very limited in providing update on potential timings, but we can tell you is so far so good. They are under the right tracks and as our previous occasions.

Unidentified Analyst

Okay, that’s great and just one last question for me. It sounds like you're really improving your business in NAND Flash. Can you give us a sense of percentage of sales for that? Where it could go maybe in a few quarters and then I think you talked about the assembly business growing substantially in the third quarter as a significant portion of that coming from NAND?

S.J. Cheng

Yes. I think maybe your next question is how about the [Micro] one, okay that, let me take this opportunity to answer your question also including the Micro’s one. We continue a very stable relationship with [Micro]. As you know, we helped to support [Micro] and commodity and several (Inaudible) assembly but we also recently been spreading into NAND Flash opportunity.

And we make a small CapEx investment to supporting that growth, that means with that investment (Inaudible) and hamper our capacity into the NAND. And recent comments of [Micro] indicate that as a portion of the testing in the assembly (Inaudible) after Micro consolidation of (Inaudible) would not be shipped this is being due to the avoid any disruption.

So in summary, we continue have a stable relationship with our customers and we expand our relationships. So we have increased our revenue of opportunity maintaining our durability, (Inaudible) of new NAND Flash revenue effect by a small CapEx investment.

And overall this is partly positioned for us because we are continue to with our given share a spend the NAND Flash revenue, why not needed to make larger CapEx commitment and (Inaudible) we provided NAND Flash assembly also for some (Inaudible) company in Asia.

Unidentified Analyst

Okay. Great guys that all from me I will jump at line thank you.

Operator

Our next question comes from the line of Brian Grad with DLS Capital. Please proceed with your question.

Brian Grad - DLS Capital Management

Hi another excellent quarter. S.K. I wanted to ask you real quickly, you reported earlier in the quarter that there was an US$8 million payment made to [Free Scale], how does that impact the income statement and revenue and where do we see that going through here?

S.K. Chen

Okay, we tend our US$8 million and this is a record in the two months. In the other operating incomes, we have the reversals of the royalty of US$4.1 million. But again we accrued another US$2 million for the royalties for the Tessera case. So overall for the company we have 2.1 million reversal of the royalties into the (Inaudible). Other operating incomes we have 4.1 million reversals and in the other operating sense we have 2 million accruals, so the operating income we have roughly 2.1 million increase - in this operating income we have US$2.1 million increase on this case.

Unidentified Analyst

Okay, and (Inaudible) scale so that’s out of the question. What is ended up with the results from Tessera?

S.K. Chen

Tessera case is still ongoing and actually from to time in it has been about the mediations, but we didn’t come to a solid discussion with them on this issues.

Unidentified Analyst

Okay, and there are already expense accrued for that?

S.K. Chen

Yes, we have 2 million accrual for this case.

Unidentified Analyst

Okay. One last thing S.J. mentioned you bought around 83,000 shares of stock. Why the slow pace of buybacks, I mean the stock has come down a lot in the last month and a half, just had a nice run in the last couple of days because we got a significant new investor. Why the slow pace of buyback?

S.K. Chen

We actually have limited the buyback amount per say, and we said in (Inaudible) organisms and mechanism for this. So the purpose of this buyback is to enhance shareholders value. So we have this program enter with 18 products which add value initiative. So we don't buy the share apparently from a market, we just try to generate more profit for our shareholders.

Unidentified Analyst

Okay, it was a small program, shouldn’t we be more aggressive in buying the stock back, it’s very cheap

S.K. Chen

I think your message is very clear for us. We will remain active in the market for the rest of the purchase and we may go to our Board to review the program to see how can we stay more active in the market.

Operator

Our next question comes from the line of (Inaudible) with Credit Suisse. Please proceed with your question.

Unidentified Analyst

Hi good evening, S.J., S.K. congratulation on good quarter. Two questions on the LCD side, just want to be clear that S.J. has mentioned that your new capacity or new CapEx spending will be for testing only or you are also be adding more capacity on COG, COF packaging or bumping? That’s the first question. Second question is that could S.J. give more color on the growth driver for the LCD business in third quarter, is that coming from smartphone related or is mainly coming from larger size TV? Thank you.

S.J. Cheng

Yeah [Jerry] to answer your question, majority of the CapEx are going to invest in the industry test does take a majority of it, and we also prepare some letting and the (Inaudible) machines thus for both COF and COG and (Inaudible) supporting including for their process assembly and for LCD driver business for the two next quarters. For existing customers we are trying to maintain our allocation percentage right now and trying to get a more allocation in the market and we also get some new customers via the new application, they can apply for our existing COF capacity The product is finger print sensor not (Inaudible) for new cellphone, smartphone and some mobile and security products and we also get some customers who go (Inaudible) application. Jerry, did I answer your question?

Unidentified Analyst

Okay, so I think what you mentioned is that you are gaining share across the board and then but on end multi-demand can you help us understand that for the third quarter, what the strongest gross product? Is it for smartphone or it's from our largest site given a TV or IT monitors?

S.J. Cheng

Yes, actually coming, the major one is still coming is from 2K, 4K TV. As you may know, the new UHD TV, 2K, the driver quantity is two times and 4K the driver quantity is four times. That’s what driver wise and I think right now I think market clearly has some noise about the inventory assessments but based on our capital of 4K, this deal has very solid [competence] on our guidance.

Operator

(Operator Instructions) It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

S.J. Cheng

Thank you, everybody for joining our Q2 conference call. Thank you very much. Bye, bye.

S.K. Chen

Thank you. Have a nice day.

Operator

And ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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