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ChipMOS Technologies (Bermuda) Ltd. (NASDAQ:IMOS)

Q3 2013 Earnings Conference Call

November 18, 2013 08:00 AM ET

Executives

David Pasquale - Global IR Partners

S.J. Cheng - CEO

S.K. Chen - CFO

Analysts

Timothy Arcuri - Cowen Capital

Richard Shannon - Craig-Hallum

Brian Grad - DLS Capital Management

Scott Bishins - Caffeine Holdings LLC

Shaun Hunter - Hunter Trading

Operator

Greetings and welcome to the ChipMOS Third Quarter 2013 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 and welcome everyone to ChipMOS’ third quarter 2013 results conference call. Joining us from the Company today 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 third quarter 2013 conference call. We appreciate your continuous support. We embark on the very important strategy several quarters back. We understood the importance at this time to have secured the Company’s future and to have increased evaluation and return for shareholders. Few of the keys to our strategy were customer and market diversification kept that focus and efficiency as share leasing on Taiwan TSC. This will be progressed for our team; we have clearly rise to the challenge.

The benefit of successful effort are clearly seen in the result for both the third quarter and the first nine months of 2013. Most relatively, we exited Q3 with the growth margin at 22.2%, the highest level since Q4 2007 and net income for the first nine months of 2013 more than doubled to $1.31 per diluted share, compared to $0.50 in the year ago period. This impressive growth in profitability was a shift on the regularly unchanged revenue labor demonstrated our focus on profitability.

The other story for us in Q3 was our continued ability to drive higher utilization of our assembly, bumping, and LCD driver capacity, and successful ongoing operating cost reduction initiated in our assembly and bumping segments. Taken together, we’re very pleased with our results for the quarter and our position in the Q4. In terms of some additional color, our revenue increased 3.5% in Q3 2013, which was in line with our prior year’s guidance with a sequential growth of 2% to 6%.

Our utilization rate increased to 81% from 79% in Q2 ’13 and 75% in Q1 ’13. Importantly, our gross margin exceeded the high end of our Q3 ’13 guidance of 16% to 20%, reaching 22.2% in Q3 ’13 from 15.4% Q2 ’13 and 13.9% in Q1 ’13. In terms of product segment, revenue from our product business was up 7.7%, which was our strongest segment with the most of the growth from [indiscernible] product.

Our bumping revenue was up 5.5% compared to Q3 ’13. Revenue from our LCD driver IC business was up about 1.9% in Q3. Even revenue was up 2.6% in Q3 compared with Q2. Finally, revenue from our mixed-signal business was spread and our SRAM business decreased 5.5% compare to Q3 ’13.

Let me now turn to our Q4 outlook. Overall we remain confident in our business strategy and growth perspective. But do we expect to see the impact of typical seasonality in Q4 '13 on both, our larger and small panel LCD business, along with the inventory adjustments at some customers. We currently expect Q4 revenues to decrease around 4% to 8% compared to Q3. We will expect this to be followed by a reduction of growth in the first quarter 2014. We expect the steady gross margin of consolidated basis to be in a range of around 16% to 20%.

Our 2013 fiscal year CapEx budget is estimated to be about $122 million. As noted on our Q2 call, giving our Board approval to improving CapEx by about six months from fiscal year 2014 into the second half of 2013 in support of our growth opportunity.

Before turning the call to S.K., let me take a few minutes for business update. Firstly we completed the sales of $180 million outstanding commercial of ChipMOS Taiwan on October 3, 2013. This is one of the largest steps in our effort to ensure success in establishing eligibility for listing on the TSE.

As we have discussed on the prior call, to list these shares ChipMOS Bermuda was required to reduce its ownership interest in ChipMOS Taiwan from 83.4% to 70% or less. In aggregate our sales reduced Company's ownership in ChipMOS Taiwan to about $523.4 million commercial, represented about 62.1% of outstanding shares of ChipMOS Taiwan. This generated in a net proceed to ChipMOS Bermuda of $119.3 million. Management and Board have not committed to a special yield of the proceeds this time. We are evaluating option to determine the credit cost of Asia as we continue to streamline our ownership structure, meet our working capital need and continue with the actual listing process.

We will continue our discussion in our next Board meeting on November 21st. We will update the market when we reach the conclusion to our discussion. Importantly we remain on track to satisfy all eligibility requirements for listing ChipMOS Taiwan on to the TSE, with the target of the second quarter of 2014. Secondly we previously discussed technology license dispute with Tessera. Under the agreement ChipMOS Taiwan agreed to pay Tessera $1.38 million including 20% withholding tax, on all [indiscernible] in the current pending law suit.

Tessera has agreed to irrevocably, unconditionally, fully and forever release the discharge and committed not to sue ChipMOS Taiwan, it’s 100% owned subsidiary, ChipMOS USA, and it’s past, present and for future affiliates. This will result in accounting reversal of US$625,000 from the previous taken. We agreed to have a situation reserved, but we did not want it to become the largest depression and are happy to avoid [indiscernible] dedication.

Let me now turn the call over to S.K. to review the third quarter financial results. S.K., go ahead.

S.K. Chen

Thank you S.J. Totals amounted starting in our presentations are in U.S. dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on exchange rates of NT$29.56 against $1 as of September 30, 2013. But S.J has just reviewed our revenue and margin; I will provide details on the rest of our Q3 results.

Net income for the third quarter of 2013 was $15 million and $0.51 per basic and $0.49 per diluted common shares compared to net income of $12.1 million and $0.42 per basic and $.041 per diluted common shares in the second quarter of 2013.

Our operating expenses in Q3 decreased to $11.8 million compared to $14.3 million in Q2. This mainly came from a decrease of $2.1 million in other operating expenses, which include a $2 million provision repair for cash [indiscernible] in Q2. Other income in Q3 was $1.4 million and non-operating expenses in Q3 were $3 million, which was mainly from foreign exchange loss of $2.1 million. Income tax expenses in Q3 were decreased to $5.4 million.

On the segment basis Q3’s revenue per dollar was 22% in testing, 33% in assembly, 25% in LCD Driver IC business and 20% in bumping. Total capacity at the year-end was 81% for the third quarter 2013 compared to 79% for the second quarter of 2013. The capacity utilization on a segment basis was 63% for testing, 85% for assembly, 83% for LCD Driver IC and 93% for bumping. Capacity for Q3 was $34.7 million, which was $8.6 million higher than our second quarter.

The breakdown of CapEx for the third quarter was 7% for testing, 23% for assembly, 50% for LCD Driver IC and 20% for bumping capacity. As always, we are looking to further increase equipment utilization levels; further improve factory efficiencies and continuing our cost reduction programs. We continue to successfully balance the need to have the right capacity online to support customer demand and expected program ramps.

Depreciation and amortization expenses were $26.3 million or approximately 15.2% of revenue in the third quarter. This is a reduction of $2.6 million from Q2 2013. EBITDA for Q3 was $54.2 million or 31.3% of revenue. EBITDA was calculated as earnings before income and taxes. Foreign currency gain or loss net interest expenses depreciation and amortization expenses and special charges. While EBITDA is not defined by Generally Accepted Accounting Principle, we believe it is a useful way to measure our financial strength.

We generated $8.5 million of free cash flow in Q3, which is calculated by adding depreciation, amortization, interest income together with operating income and then subtracting CapEx, non-controlling interest expenses and income tax expenses from the firm. We remain committed to meeting our financial goals, which included disciplined CapEx spending and generating positive cash flow.

We ended quarter with the balance of cash and cash equivalents of $432 million, compared to $375.1 million at the end of Q2. This does not fully reflect the $119.3 million in net proceeds from our recent share sales as they noted. This will be updated when we report our Q4 results.

Our total short term debt including, current portions of long term debt was $138 million at the end of the third quarter, as compared to $130.5 million at the end of second quarter 2013. We repaid the current portions of our long term debt of $37.2 million in Q3 2013. An increase of $8 million in short term debt, primarily came from the certifications of the current portions of our long term loan and the increase of our short term loans denominated in U.S. dollars for foreign currency hedging purposes, which was $3.8 million and $3.7 million, respectively.

Long term debt increased to 143.5 million at the end of the third quarter as compared to 184.3 million at the end of the second quarter. As of September 30, 2013, we further increased our net cash position to 150.5 million and improved our net debt to equity ratio to minus 33.3% compared to minus 14.1% at the end of Q2 2013 as part of our ongoing efforts in maintaining actual financial position we will remain committed to further reducing our debt level and looking to enhance shareholders values. On October 30, 2013 we pay a cash dividends of $0.14 per share to all common shareholders of record at the calls of distance of October 15, 2013.

The dividend program is a direction reflection of company’s financial strength and confidence in our growth prospects. This represents another step in our ongoing effort to build shareholders value as we continue to execute on how to finish and improve profitability and outperform the industry due to our differentiated and market exposure and customer alignment within our target market.

Our account receivable day sales outstanding in Q3 was 76 days compared to 75 days in Q2. Inventory returns were 36 days in the third quarter as compared to 37 days in the second quarter. Our interest expense was $1.4 million in the third quarter as compared to $1.6 million in the second quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions). Thank you, our first question is coming from the line of Timothy Arcuri with Cowen Capital. Please proceed with your questions.

Timothy Arcuri - Cowen Capital

Actually, I jumped on just bit late. But can you give us an update on back plans toward the Thailand share and then I had a follow up question for OpEx.

S.J. Cheng

Regarding to the [indiscernible] I think we would fairly discuss with our Board and to know the schedules and how to do deal with these transactions and we explained to the market that we have this deals down before end of this year and this is our schedule.

Timothy Arcuri - Cowen Capital

Can you also give us an update on non-controlling interest for Q4 December?

S.J. Cheng

For the non-control interest, our estimation that there will be around 60 million and the income tax provisions that we estimated for Q4 will be around 3 million.

Operator

The next question is coming from the line of Richard Shannon with Craig-Hallum. Please proceed with your question.

Richard Shannon - Craig-Hallum

Few question, first of all the third quarter results, your gross margins were frankly very good and based on my calculations on utilizations, looks like you had some sort of positive mix going on. I wonder if you could help us out because it seems like it’s going to be lot more than just utilization that help improved to 22.2 that you just reported, can you help us out there.

S.J. Cheng

[Indiscernible] to give you more color first one is, we continuously increase our operating efficiency to generate more output at and [indiscernible], so that’s the first one. The second one is, we do some adjustments see if we had high utilization rate, we allocated more to the high margin product.

Richard Shannon - Craig-Hallum

Was there any special customer mix in there or can you give us any flavor of why that is because its mix here is pretty substantial, it appears to me.

S.J. Cheng

The main contribution comes from [indiscernible] business that’s a margin higher than commodity. And the other one is in the pumping area who has reached higher utilization rate and we also break through some engineer product mix to further save in a material cost.

Richard Shannon - Craig-Hallum

Looking at your fourth quarter guidance, top line sales guided down fall can you give us an idea of relative growth which in your major categories just assembling in LCD and general, please.

S.J. Cheng

LCD driver business, the major reduction for revenue is pricing from [indiscernible] and second one is [indiscernible] the rate of it has proportionally reduced.

Richard Shannon - Craig-Hallum

You also made a comment that you’re confident you’ll see growth in the first quarter in LCD is that based on bookings you’re seeing or can you give us a better understanding what gives you that confidence.

S.J. Cheng

Regarding to the LCD driver business [indiscernible] so we thought with some impact -- based on the customer input and 2K, 4K TV are from market. We are [indiscernible] we can color redemption driving from first quarter 2014.

Richard Shannon - Craig-Hallum

Okay, fair enough. And the last question for me guys, I will follow up previous question on the potential repurchasing of the shares from ThaiLin, what -- I assume that this has been a discussion at the Board level already is there any push back to implementing such an ideas or any legal other restrictions that would prevent you from doing that or can you give us a sense of the discussion to-date and why that wouldn’t have been done already?

S.K. Chen

Yes we are scheduling that meeting our mandatory first couple of days later and so far so good things are really pretty good for us. We do need to evaluate all pick up and process. So we are going to update on market while we got a conclusion in the mandatory passing November 31st please give us some couple of days.

Operator

(Operator Instructions) Our next question is coming from the line of Brian Grad with DLS Capital Management. Please proceed with your question.

Brian Grad - DLS Capital Management

Can you tell me S.K. how much cash is in Bermuda today after the issuance of the new shares?

S.K. Chen

As of today twenty crores one hundred and fifty million U.S. dollars.

Brian Grad - DLS Capital Management

150, 1, 5, 0?

S.K. Chen

1, 5, 0 that is for Bermuda alone.

Brian Grad - DLS Capital Management

And that is inclusive of the dividend and everything that was paid so that is sort of where we sit right now.

S.K. Chen

Yes.

Brian Grad - DLS Capital Management

Do you guys expect there to be any new analyst picking up the stock in the next couple of months?

S.K. Chen

Yes, yes we plan to do so. We will do buyback yes repurchase share from the market.

Brian Grad - DLS Capital Management

Lastly I know ThaiLin has been buying back some of their own shares what is kind of the game plan with the whole process of rolling up ThaiLin ultimately and can they continue to buy back shares and if you guys get 51% or more of the stock what happens at that point?

S.J. Cheng

This is Cheng to answer your question say this is right now we don’t have adequate picture about it so we don’t want to mislead a market so how that occurs to dividends we cannot talk about.

Operator

(Operator Instructions) Our next question is coming from the line of Scott Bishins with Caffeine Holdings LLC. Please proceed with your question.

Scott Bishins - Caffeine Holdings LLC

One quick question I have about the $7.5 million buy back that we have in place have we executed that or is that still in process?

S.J. Cheng

We are still in process and we didn’t buy much of the shares in Q3 so we didn’t put much time down this issue. And we I think in upcoming Board meetings we will discuss the issue again and I think currently the south surprise is here very cheap so I think that we will discuss and take some actions.

Scott Bishins - Caffeine Holdings LLC

One last question I -- when you said S.J. that we are going to -- we should have the filing and the listing complete by I guess second quarter of next year does that mean that you are going to file the application prior to the end of this year, for the six month waiting period with that be something that we should believe it could happen?

S.J. Cheng

We still are targeting to submit our fillings before end of this month. So we feel on track and we feel on schedule.

Operator

Thank you the next question is coming from the line of Shaun Hunter with Hunter Trading. Please proceed with your question.

Shaun Hunter - Hunter Trading

I do have to ask one question I think a lot of people on the call are wondering Scott asked about the current status of the $7.5 million buy back and I guess the response was we are talking about this on -- I wanted to ask what exactly is there to talk about because I mean with everything great you have done every time we have the buy backs there seem to be problems actually executing on. And I watch other companies out there buying back their stock they will hand over the stock if they think a lot of people they will hear very low.

And I just want to know what is the holdback I mean when it has been approved what is stopping you from buying stocks at these levels? And perhaps you can use an outsized source to do it so that it is a legal question it gets done so can you tell me what exactly is keeping you from buying back when you have been approved buyback in place? Thank you.

S.J. Cheng

For this buyback programs we -- to be honest we put a cap on the buyback programs so the execution is a little bit slow as you expected. But I believe that right now that we prepare the company for listings and is almost reached to the point to submit our listing applications and ChipMOS Bermuda has sufficient cash on hand so it is about time for us to make decision to go further steps. So I think for including our planning and company’s study just relate out couple of years ago is just about time for us to take some actions and we will let you know the -- when we make the decisions I think they just give us [indiscernible] time maybe two or three weeks then we will let you know then how we layout our strategies in going forward in the near future. I am sorry but I couldn’t give you a very clear commitment or indications at the moment.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the floor back to management for any concluding comments.

S.J. Cheng

Thank you everybody to join our Q3 conference call. Thank you very much. Bye-bye, have a nice day.

Operator

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

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