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Advanced Semiconductor Engineering (NYSE:ASX)

Q3 2006 Earnings Call

October 30, 2006

Executives:

Joseph Tung - Director, Chief Financial Officer and Vice President

Analysts:

Dan Hailer(?)

William Dong – UBS Warburg

Unidentified Analyst

(Eric Rubel?)

(Danau Lu?)

Frank Wang

(Chicher Gurpal?)

(Derou Volra?)

Presentation

Operator

Good day everyone and welcome to the ASE Conference Call. Operator Instructions. I would now like to turn the call over to your speaker, Mr. Joseph Tung. Thank you, sir, you may begin.

Joseph Tung - Director, Chief Financial Officer and Vice President

Thank you. Good morning and good evening everyone. Thank you for attending ASE’s Q3 2006 Earnings Release Conference Call. Before I start to report our financial results for Q3, let me give you a brief update on recent developments. Basically, on August 1, we completed the carve out of our materials operation in Chung Li, to a newly formed subsidiary, ASE Electronics. Total assets for the new company is NT$5.7 billion, with net worth of NT$3 billion. The carve out is to better align our management responsibility for the materials operation, under the group. All right. Now let me start our Q3 financial results.

Please turn to page three where you can find our 2006 Q3 sequential comparison. Our Q3 consolidated revenue grew reached a historical high of NT$26.7 billion, which went up slightly by 2% from the previous quarter. Gross profit grew 10% to NT$8.3 billion and operating profit grew 12% to reach NT$6.1 billion. After deducting total non-operating expenses of NT$581 million, pre-tax income amounted to NT$5.5 billion. Net income dropped 43% from the previous quarter to NT$4.2 billion, after recognizing tax of NT$751 million, a minority interest adjustment of NT$607 million.

However, if excluding the fire loss recovery recognized in Q2, our net income actually grew 28% sequentially. EPS for the quarter was NT$0.91 while YTD EPS amounted to NT$3.18. Sequentially, assembly and test revenue both grew 2% while material revenue grew 8% as a result of increased sales supply ratio.

Utilization rate of both assembly and tests stayed high at around 90% while assembly ASP dropped slightly and test ASP stayed flat. In terms of profit margin, gross margin improved from 28.5% a quarter ago to 31%. Such improvement came largely from lower material costs as a percentage of sales from 31% to 28.5%, given the lower price of outsourced material, improved internal material production yield and higher sales supply ratio.

Depreciation in labor costs as a percentage of revenues stayed flat, at 14.2% and 13.6% respectively. Total depreciation expense plus machine rental increased slightly from NT$3.74 billion a quarter ago to NT$3.8 billion given additional capex. Total operating expense inched up by NT$101 million in the quarter, given higher bonus and professional fees paid in the quarter. As a percentage of sales, operating expense went up from 7.8% to 8.1%. R&D and selling stayed flat at 2.5% and 1.3% of sales, while G&A went up to 4.3%.

With the expanded gross margin, operating margin further improved to 22.9%, up from 20.7% a quarter ago. Q3 total non-operating expense was NT$581 million, of which net interest expense came down from NT$338 million to NT$303 million due to lower loans outstanding and higher interest earned on cash balances. Foreign exchange loss was NT$89 million in the quarter, due to appreciating US dollar denominated liabilities.

Long term investment gain of NT$219 million consists of NT$88 million of investment income from USI, NT$4 million loss from Hung Ching construction and NT$1 million loss from Hung Ching Kwan and NT$135 million income from other investments. EBITDA for the quarter was NT$9.5 billion, up from NT$8.3 billion a quarter ago as a result of improved profitability. EBITDA margin improved from 31.5% a quarter ago to 35.6%.

Please turn to page four, looking at Q3 YoverY comparison. Compared to the same period last year, consolidated revenue went up 22% with assembly test and material each growing by 19%, 32% and 59% respectively. Gross margin improved from 18.7% to 31%, due to increased volume and improved operational efficiency. Operating profit grew from NT$1.9 billion to NT$6.1 billion, with operating margin improving 9% to 23%. Net income grew 163% from NT$1.6 billion a year ago to NT$4.2 billion in the current quarter. EPS also grew 160% from $0.35 to $0.91 in the quarter.

Please turn to page five, looking at year to September sequential comparison. Our YTD revenue grew 35% to NT$77.9 billion. Gross margin and operating margin both show substantial improvement from 13.8% and 2.7% to 28.8% and 20.9% respectively. Year to September net income was NT$14.7 million, with EPS of NT$3.18. EBITDA also grew significantly from NT$12.3 billion to NT$25.7 billion with EBITDA margins improved from 21.3% to 33.1%.

On page six, if you look at the consolidated revenue and margin trends, this chart shows the revenue and gross profit trend in the last seven quarters as shown. Q3 revenue was just slightly above the 2005 Q4 peak, but gross margin jumped from 24.8% to 31%, showing significantly improved operational efficiency and cost control.

Operating expense as a percentage of revenue also shrank from 8.7% in Q4 last year to currently 8.1%, showing better expense control as well. Operating margins improved substantially from 16.1% to 22.9%.

Page seven, looking at our IC packaging operation individually, assembly revenue in Q2 grew 2% and gross margin further improved from previous quarters 0.3% to the current quarter’s 25.4%. Such margin improvement came largely from lower material cost as a percentage of revenue given product mix change, lower material costs and a higher percentage of consigned material. Utilization in the quarter remained at close to 90% with some capacity addition.

Q3 capex of US$47 million was primarily for both wire bonding and flip chip packaging capacity in our (Guao Chung?) and Chung Li sites. We currently have 6,544 wire bonders, up 27 units from last quarter. We also currently have 80,000 8-inchwafer bumping capacity, running at 85%, 15,000 12-inch bumping capacity running at around 50%.

In Q4, we are expecting these assembly revenues to decline by mid single digits and therefore should see gross margins come down to around the 24% level. Minimum capex is required for Q4 or even into Q1 next year.

Page eight, package revenue breakdown. In Q3 revenue from our bend substrate and lead frame base packages accounted for 84% of our total packaging revenue. Bumping plus flip chip packaging stayed flat at around 14% of our total assembly revenue.

Page nine, looking at testing operations. Test revenue also grew 2% from last quarter primarily due to higher volume while ASP remains stable. Gross margin moved up from 43% to 44% reflecting the high marginal contribution of incremental test revenue. Test capex amounts to US$28 million in the quarter, mainly for selectively buying out end of lease testers to maintain capacity. The test utilization rate in Q3 was also around 90% blended. During Q3 we added 43 new testers while we retired 61 testers, making total tester count 1,295 units, down 18 units from previous quarter.

Q4 test revenue is also expected to drop from Q3 by low double digits. Given its higher operating leverage, impact on gross margins should be much higher and we are therefore estimating a 6-7% drop in gross margins, same as assembly. We are expecting limited capex for Q4 which mainly will be for buying out end of lease testers as well.

Page 10, looking at test revenue breakdown, the breakdown is very similar to Q2. Our final test represents about 76% of our test revenue, 19% being wafer sort and the other 5% from engineering test.

Page 11, our material operations. Q3 material revenue went up 8%, faster than assembly revenues due to extended sales supply ratio which is currently at around 42%, up from 37% a quarter ago. However, gross margins went down from 24.2% a quarter ago to 23.5% due to added rental expenses for leasing factory space from ASE Inc after the carve out.

Capex for the quarter was US$16 million, mainly for installing flip chip capacity of 1 million units a month in Chung Li by year end, down from the originally planned 3 million units. Mass production is expected in Q1 next year, and the 3 million unit capacity will be installed by the end of Q1 next year or early in Q2. As for standard PBGA substrate, we are holding our current capacity of 52 million units per month until year end, down from our originally planned 64 million units. The slow-down in material capacity ramp up is in line with the current soft market conditions. Q4 revenue should be at the same level as Q3, with gross margin also at similar levels as Q3.

Page 12, looking at selected items from our balance sheet, our cash and cash equivalent increased to NT $8 billion to NT$30.4 billion, largely due to collection of the insurance claim and improved internal cash flow. Interest bearing debt decreased from NT$50 billion a quarter ago, to NT$47 billion. With the above, the leveraged ratio improved from 0.41 to 0.23 in the quarter. Current ratio on the other hand dropped slightly form 1.71 to 1.66 as we begin to pay down long term debts. Q3 EBITDA improved further from NT$8.3 billion last quarter to NT$9.5 billion with EBITDA margin improving from 31.5% to 35.6%. As we continue to expect strong cash flow momentum in Q4 2006 we will continue to use internal cash flow to pay down our debts. Currently we have plans to reduce our interest bearing debt by another US$250 million to US$300 million in Q4.

Page 13 looking our capex versus our EBITDA, as expected Q3 capex dropped from US$132 million in Q2 to US$91 million in Q3, of which US$47 million was for assembly, US$28 million for test and another US$16 million for materials. In Q2, we revised down our full year capex budget to US$350 million. We are tentatively maintaining this capex number, although the final number may be lower than budgeted as we see softer demand in Q4, which requires less capex.

Page 14, our top ten customer lists, as you can see our top five customers accounted for 28% of our revenue and top 10 accounted for 44%. No customer accounted for over 10% of our revenue.

Page 15, looking at market segment exposure, in terms of segment performance of communication as expected has the strongest momentum in Q3 climbing from 36% of revenue to 38%. Consumer and auto also went up from 38% to 40%, while computing went down from 25% to 21% in Q3. In Q4, we expect the reverse, we expect computing to go up somewhat, communication to stay flat and consumer to come down as a percentage of total revenues.

Finally let me give you a brief guidance on Q4. Judging from our forecast, we are expecting Q4 to have a revenue decline by mid to high single digits. This decline is due to both the overall industry situation as well as some of the customer specific issues that we are encountering right now. The decline is pretty much in line with our upstream (inaudible), with the decline of revenue we are expecting our gross profit margin to come down a bit to around 28% to 29% in Q4. Going into Q1 next year, we are expecting a stronger than seasonal quarter, basically from the forecast that we are getting at this point, we are actually expecting a flattish Q1 in 2007. With that, I would like to conclude my presentation and open the floor for questions. Thank you.

Question-and-Answer Session

Operator

Operator instructions. Your first question comes from (Dan Hailer?).

Q – (Dan Hailer?)

A couple of questions, first on your pay down of your debt. That’s pretty significant, I’m wondering if you’d give some guidance as to what you think your interest expense will be for 2007 as a result of these pay downs?

A - Joseph Tung

I think the net interest expense will be around NT$250 million per quarter.

Q – (Dan Hailer?)

Starting in Q1 2007?

A - Joseph Tung

Yes, Q1 2007.

Q – (Dan Hailer?)

Does that trend down from there? For the whole year?

A - Joseph Tung

I would think so, yes. I think even going into Q2, the first half of next year, we will have a pretty strong cash flow given the limits of capex that we are budgeting for now.

Q – (Dan Hailer?)

Do you have a debt equity ratio and target in mind, where you plan to take your debt?

A - Joseph Tung

I think in Q4, by the end of the year, I think I would drop that to about 0.18.

Q – (Dan Hailer?)

Then the implications on looking at your record margins and returns for your cash flow, they’re pretty significant on 2007. Are you starting to think more in terms of the excess cash and how that will play out for potential dividends and other strategies?

A - Joseph Tung

I think for sure, next year’s dividend pay out will have a much higher percentage to be paid out in cash rather than stocks. In terms of how much will be cash and how much will be stocks, it’s up to the board to decide. I cannot comment at this point. I think it’s pretty sure that the percentage will be much higher than last year’s 10%.

Q – (Dan Hailer?)

Finally, your capex to sales ratio is also significantly declining, right? What do you think you can sustain your ratio to be on a through the cycle basis?

A - Joseph Tung

The utilization rate in Q4 is going to drop, assembly to around 85%, and test to be close to 80%. That gives us actually quite some room for ramp up going into the first half of next year. The overall capex, although we’re still in the budget cycle, at this point I’m expecting pretty much the same level of capex as this year for next year.

Operator

The next question comes from William Dong, your line is open.

Q – William Dong – UBS Warburg

Two quick questions. One is for the DRAM JV, can you provide a quick update? What do you think the revenue contribution might be as a percentage of sales for next year?

A - Joseph Tung

Right now things are moving along on schedule and basically we are in the phase of installing capacity. Right now we have 24 bonders and two testers being installed. By the end of the year we will have up to 48 bonders and four testers. The mass production will be limited. In fact, we are only expecting about US$1.5 million revenue by December, which is still on a trial run basis. In terms of overall revenue for next year, I would think it should roughly be around 3% of overall.

Q – William Dong – UBS Warburg

My second question is on the pricing environment. I know during today’s earlier conference you talked about the pricing models, some very small models with pricing coming down. Is the substrate side becoming worse than expected?

A - Joseph Tung

In Q4, I think the overall pricing – we are seeing some pressure on both assembly and material, whereas test and ASP, we are aggressively defending our prices by not adding too much capacity. Assembly we’re expecting another 1% to 3% drop on ASP. The material price drop will be more severe. At this point, we’re looking at anywhere from 5% - 6%. Let me correct my earlier statement. I think the memory revenue should account for about a little over 5% of our revenue for next year.

Operator

Your next question is from (inaudible), your line is open.

Q – (Unidentified Analyst)

You made an inventory provision adjustment in Q3. I just want to know what these inventories were?

A - Joseph Tung

The adjustment value?

Q – (Unidentified Analyst)

No, I just want to know what these inventories were.

A - Joseph Tung

These were just some obsolete materials that we had.

Q – (Unidentified Analyst)

Should we expect something similar for Q4?

A - Joseph Tung

Not really. I think we’re pretty much done with the material – if there’s any it will be in material.

Q – (Unidentified Analyst)

What is the FX assumption behind your guidance for Q4?

A - Joseph Tung

We are actually budgeting for 32.65.

Operator

The next question comes from Eric Rubel(?), your line is open.

Q – Eric Rubel(?)

Could you quantify the impact you’re seeing if you were to bounce between the slow down we’ve seen in analog and the PC weakness which has been reported in the market among your customers? Which one is affecting you more right now? Can you talk a little bit about the PC weakness related to any slowdown in motherboards you might be seeing?

A - Joseph Tung

First of all, we don’t have that much exposure in analog, but in terms of PC we’re seeing that in Q3 the overall PC situation isn’t that bad. What impacted us is really the market share movement among various players in the field. Some of our major customers are losing market share and therefore have some impact on our revenue. We’re seeing that movement yet to be settled in Q4 so if anything else, we should have a much clearer picture than Q1 next year in terms of PC. Overall, I think PC is stabilizing and unfortunately the launch of Vista didn’t really fuel the growth of the PC sector in Q4 yet. We’re seeing some pick up in Q1. In terms of communication, mostly in handsets, we are actually seeing inventory adjustments still going in until the end of the year or early Q1. That’s part of the reason why we’re saying in Q4 we’re actually seeing PC exposure as a percentage of our overall revenue. It should pick up somewhat at the expense of communication. In terms of consumer, we are being impacted mostly on the game box sector where we have our customer going into a product generation change so the first generation product will be pretty much ramped out in the November-December timeframe. We should see volume of second generation products start to ramp up in Q1 next year. In Q4 we’ll see PC being stable, consumer drop – sorry, PC to come up a bit, consumer drop and communications stay pretty much flat.

Q – Eric Rubel(?)

Thanks for that detailed review of the market. If I can just sort of summarize, there are some customer-specific market share shifts affecting you in Q3 and handset inventory is the bigger driver in looking into the next quarter?

A - Joseph Tung

Yes. I think all those things will be adjusted in Q1. That’s part of the reason why we’re saying we’re expecting Q1 to be a strong Q1 for us.

Q – Eric Rubel(?)

Right, that guidance was definitely good. If I recall, you said assembly utilization remains very high – 90% I think is what you qualified?

A - Joseph Tung

In Q3?

Q – Eric Rubel(?)

Right.

A - Joseph Tung

It will drop somewhat to about 85, close to 85% in Q4.

Q – Eric Rubel(?)

How is the facility running now with utilization in the 90%, or maybe 90% plus range? Is that a level you feel confident with, one that you could look to reach next year again?

A - Joseph Tung

Yes. I think 90% utilization has something to do with our OEE as well. That’s the effective usage of our machine. That has been improving steadily over the past eight to nine months. Right now, when we say 90% utilization, it could be 85% after the productivity improvement. I don’t know if you understand what I’m saying here.

Q – Eric Rubel(?)

I’m not sure what the OEE is, but maybe we can talk about that later.

A - Joseph Tung

On the same piece of machinery, the productivity is now higher. For the same amount of time we’re using those machines, the output is higher. Right now we’re seeing 90% utilization rates but if we consider the OEE or the real productivity of those machines, the real utilization can be 85%. That means we have more buffer for us to ramp up.

Q – Eric Rubel(?)

One more question on housekeeping, you mentioned a number of 8-inch and 12-inch wafers you had available for bumping. Can you repeat those and give me a sense of what the sequential increase was for the quarter and where you think you could be in Q1 next year?

A - Joseph Tung

Right now, we have an 8-inch equivalent capacity of about 80,000 wafers a month. For that we’re running at around 80-85%. We also have for 12-inch wafers, a capacity of 15,000 wafers a month. For that we are running at around 50%. Actually, the utilization is actually lower than Q2. In Q2 we were practically running at close to full capacity for 8-inch and about 65% for 12-inch. We’re actually seeing utilization drop somewhat in Q3. Q4, I think we should be at a pretty similar level, if not dropping slightly because of the game box business that’s being run off in the quarter.

Operator

The next question comes from (Danau Lu?), your line is open.

Q – Danau Lu(?)

How do you recognize revenues from this DRAM JV?

A - Joseph Tung

On a consolidated basis we will recognize 100% of the revenue and in terms of earnings from the operation, we will recognize the part excluding minority interest, which is 40%.

Q – Danau Lu(?)

Will this be part of the other revenues or do you have a new line?

A - Joseph Tung

No, that will be considered a part of assembly and test revenue. The other revenue that we see on the table is really the direct sales of our material, in ‘other sales’.

Q – Danau Lu(?)

When you talk about your capex, does that include the capex for the DRAM JV?

A - Joseph Tung

No.

Q – Danau Lu(?)

So the asset of the DRAM JV is not on your balance sheet?

A - Joseph Tung

It will be, but now it’s still very minimal. Eventually it will be counted as part of the balance sheet, when we consolidate everything.

Q – Danau Lu(?)

So right now the capex guidance right now is at $350 million?

A - Joseph Tung

Yes. That’s for ASE’s operation, not including Power ASE yet.

Q – Danau Lu(?)

So the 350 does not include Power ASE? Not the DRAM JV?

A - Joseph Tung

Not yet, no, for better comparison. If we look at the numbers, the capex that Power ASE will be spending this year is only about $20 million.

Q – Danau Lu(?)

Only 20? I thought you were spending $30 million in the second half? Maybe I’m… Okay, so $20 million for DRAM.

A - Joseph Tung

For DRAM, yes.

Q – Danau Lu(?)

Can you just reiterate your capex plan for this year? In different segments?

A - Joseph Tung

I think it’s a pretty even split, roughly 120 for assembly and test each, and then another $110 million, over $110 million for material.

Q – Danau Lu(?)

And then another $20 million for the DRAM JV but that’s not included in the 350?

A - Joseph Tung

No.

Operator

The next question comes from Frank Wang. Your line is open.

Q – Frank Wang

I have two questions. The first one, just a point of clarification, in Q3 the revenue grew by about 2% but if we look at raw materials in absolute dollar terms, it actually went down by roughly about 6% compared to the prior quarter. Could you please elaborate a little bit more on that?

A - Joseph Tung

That’s a result of different factors. One is the price of our outsource material, the material that we buy from outside. It’s actually lower in the quarter. Also in terms of sales supply ratio, we’ve raised it from 37% a quarter ago to 42%. Also, I think in terms of (inaudible), since we have some yield improvement on the material as well. The part that we manufacture ourselves. All those will have a positive impact on the raw material costs. That’s the reason why our material content dropped from about 31% to 28.5% in the quarter.

Q – Frank Wang

That raw materials percentage, would that continue to come down in Q4?

A - Joseph Tung

I think it would be at a similar level for Q4.

Q – Frank Wang

My second question is a housekeeping item. Could you please tell us the operating lease expense for the testers for the quarter?

A - Joseph Tung

I believe it’s about NT$480 million for the quarter.

Operator

The next question comes from (Chicher Gurpal?). Your line is open.

Q - (Chicher Gurpal?)

A couple of questions. First on the last generation change that you mentioned in the consumer game console segment. Should I interpret this as there is an inventory build up for older generation products which are being rubbed down and hence the temporary thing? There’s nothing really specific in terms of market share gains or losses going on?

A - Joseph Tung

No, not really on the game box. Not so much on the market share movements. Merely the customer is going through a generation change in terms of their product. The new start will be brought to a very, very low level for the first generation product. We’re expecting them to start initial production of generation two from November but with a very small volume. Real volume will only come in Q1 next year.

Q - (Chicher Gurpal?)

And your market share for the new generation is the same as it was for the existing generation?

A - Joseph Tung

So far, yes, but I wouldn’t be surprised if the customer actually looked for a second source just to balance off the risk.

Q - (Chicher Gurpal?)

Moving on to your substrate operations, if I recall at one point you had targeted to achieve a self-sufficient ratio of about 60%. Firstly am I correct, and secondly does that still stand? When you expect to reach that by?

A - Joseph Tung

The sales supply ratio?

Q - (Chicher Gurpal?)

Yes, the supply efficiency ratio of substrates.

A - Joseph Tung

Really depending on the overall pricing environment of material, the strategy that we have is really only to build those that have decent margin with reasonable return. If it’s not the case then we would rather go outside.

Q - (Chicher Gurpal?)

Right now, the thinking is that you would rather go outside given the way prices are falling?

A - Joseph Tung

Yes.

Q - (Chicher Gurpal?)

In terms of 2007, what is the kind of capex you’re allocating towards your substrate division?

A - Joseph Tung

I would think it would be very similar to this year.

Q - (Chicher Gurpal?)

$110 million?

A - Joseph Tung

$110 million to $120 million.

Operator

The next question comes from (Derou Volra?). Your line is open.

Q – Derou Volra(?)

I saw that you mentioned that basically your capex for next year would be similar to this year, which is about $350 million.

A - Joseph Tung

I qualified that by saying we’re in the budget cycle.

Q – Derou Volra(?)

But you did say that it’s about nearly the same, right? My question is more on how do you think that will generate in terms of revenue? Does the ratio of 1:1 still hold?

A - Joseph Tung

Pretty much, yes.

Q – Derou Volra(?)

So for next year, you’re not looking for much growth, you’re just looking for what, 10-12% growth?

A - Joseph Tung

Yes and no, because like I said, we still have some buffer capacity.

Q – Derou Volra(?)

Is there a way in which you can increase that conversion ratio of your capex versus revenue next year? If that can be improved in some way, and if that is possible, then how can that be done?

A - Joseph Tung

I would tend to say yes, particularly on the material side, because there is still room for improvement on the yield. We have been steadily improving our yield on the standard PBGA from about the 82% to 83% level in the first half of the year to the 85% or 86% level in Q3. We’re expecting that to improve to 88% by year end and go over 90% some time next year. If that is the case, then yes, the conversion rate will be somewhat higher.

Q – Derou Volra(?)

The second one is more of a housekeeping one, the taxes seem to be much higher this time around. I’m wondering why, and what should we model for Q4 and next year?

A - Joseph Tung

I’ll answer the second question first, for Q4 we could expect a similar level of tax in terms of percentage of revenue. The reason why the second half tax is higher is because it’s a little bit complicated to explain. In Q1 and Q2, the accumulated… Because we have a lot of tax credit and also have lots carried forward from last year because of the fire, the taxable income accumulated in Q1 and Q2 is smaller, but going into Q3 as we recognize some of the loss reversal and also have a strong Q3 in terms of profitability, the taxable income becomes higher. Plus in 2006, the government started to implement the so-called ‘minimum tax’ of 10%. In the past, most of our tax could be offset by our tax credit, but now there’s a limit on how much we can offset those taxes. At a minimum, we need to pay at least 10%.

Q – Derou Volra(?)

Would 10% be your number for 2007?

A - Joseph Tung

I would tend to think slightly higher, because 10% is what we have here. In other sites, there are still some taxes to be paid. We’re more or less on a 10% - it’s reasonable.

Operator

We have a follow up from Dan Hailer(?).

Q – (Dan Hailer?)

A quick follow up on your comment on the computer sector. You had initially mentioned that some of the weakness you saw was due to some market share shifts in your customer base and your optimism on Q1. Do you think that’s related to those market share dynamics coming back, is that one of the drivers behind the first quarter?

A - Joseph Tung

Yes, but more so on the launch of Vista. We should see some ramp up in Q1, which we were originally hoping to happen in Q4.

Q – (Dan Hailer?)

Are you finding other opportunities to take share back in other areas if one large customer is particularly weak? Are there other opportunities out there?

A - Joseph Tung

We certainly worked very hard on that.

Q – (Dan Hailer?)

I’m a bit surprised by the computer sector comments. Clearly there seems to be some chipset challenges as well, as Intel seems to be taking share in chipset. Will you be able to secure – is any of the strength driven by any new business or is it existing customers?

A - Joseph Tung

All the other customers are a customer as well. In terms of how much multi share we can gain from each and every customer, that really depends on how competitive we can be. I want to say one thing, which is that we are now putting return on margin way ahead of revenue growth. If we do see some business opportunity, but the pricing does not justify it, we will let it go.

Q – (Dan Hailer?)

As you have a good view of the wireless space, a good chunk of your business has been wireless with a couple of key components – one is the base band side and the bluetooth side I guess has been an area of particular weakness. What are the dynamics there? Are you seeing certain large customers weak and some customers strong? Are you seeing a variance in the pattern? Are you seeing a kind of broad weakness? Some of the upstream comments have been that it’s been fairly mixed between individual customers. That’s the commentary so far, so I’m wondering from your customer base standpoint, what are you seeing?

A - Joseph Tung

I think the bluetooth is the most apparent. There is some market share shift among different players. Of course one of our major customers is losing market share somewhat and that will certainly have some impact on us. From what we know, the loss market share given to the other potential customer, I’m pretty confident that by Q1, we should be able to pick it up.

Operator

We have a follow up from (Eric Rubel?).

Q - (Eric Rubel?)

A follow up that’s similar to the previous question, in wireless there’s been kind of a well communicated mix shift to the low end of handsets. I was wondering if you could speak to, as you’re seeing things right now, the slow down – is it more in relation to components, sort of an over exuberance for the components that would go into higher end handsets, so you’re seeing maybe a build versus a problem of sell through in the channel?

A - Joseph Tung

We’re seeing this inventory adjustment pretty widespread. I’m not sure which does better than the other.

Q - (Eric Rubel?)

Could you have a view to whether or not it’s a build in semiconductor components for wireless, or if it’s an actual slowdown in sell through of finished handsets? Like a build up of finished handsets?

A - Joseph Tung

I don’t really know, I’m sorry.

Operator

Currently there are no questions. If you’d like to ask a question, please press star-one. We have a follow up from (Derou Volra?), your line is open.

Q - (Derou Volra?)

Could you remind me, you did put out a target once about how much your operating expenses would be left in a year or a year and a half’s time. I realize to date about 8% of your revenue is operating expenses, what is your target?

A - Joseph Tung

I thought I’d get away from this one. I was saying that hopefully by the end of the year we should see 7.5% operating expense ratio. Apparently we didn’t do that and Q3 inched up a bit, largely because of the salary increase that we had in Q3 and also the additional professional fee that we paid to the lawyers and accountants. But in Q4, hopefully we can bring this back to below 8%, although we are expecting revenue to drop quite a bit in the quarter. Right now, I think for Q4, looking at about 8% seems to be a reasonable number.

Q - (Derou Volra?)

What I’m interested in more in the longer term is you have done a great job in terms of rationalizing your costs in 2006, and I was trying to figure out how much more room there is in 2007, so if it’s going to be mostly operating-related, do you think a lower ratio is possible by the end of 2007?

A - Joseph Tung

That’s certainly the goal, yes. We’ll continue to drive our expense down, at least in terms of percentage of revenue. In the longer-term goal, we’re hoping we can reach 6.5% first and then we’ll go from there. If there are no further questions, let me sum up our results for the quarter. We had a phenomenal Q3 in terms of profit margins as well as cash flow and although we’re expecting a softer quarter in Q4, I think our strategy remains the same. We want to better protect our margins and returns instead of just chasing for market share gain. There are businesses that we decided not to pursue because of the low pricing. In terms of overall expansion, I think particularly on the materials side, we are delaying our expansion for Q2, but I think that is a very rational decision given the market conditions that we are facing today. We would rather do things right, by not doing the right thing at the wrong time. In terms of the overall financial condition, we will continue to leverage on our internal cash flow to further pay down our debts so we can have an even more healthy balance sheet. We are expecting a much stronger than normal Q1 2007, given the forecast we were given and also the changes in the industry itself. All in all, we’re going to have a close year with very strong earning momentum and we will strive to continue that momentum going forward. Thank you very much for listening in. I’ll see you next quarter. Thank you.

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Source: Advanced Semiconductor Engineering Q3 2006 Earnings Call Transcript
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