Advanced Semiconductor's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Advanced Semiconductor (ASX)

Advanced Semiconductor Engineering Inc. (NYSE:ASX)

Q1 2014 Results Earnings Conference Call

April 25, 2014 8:00 AM ET

Executives

Joseph Tung - Chief Financial Officer

Analysts

Szeho Ng - BNP Paribas

Tse-Yong Yao - HSBC

Gokul Hariharan - JPMC

Operator

Welcome. And thank you for standing by. At this time all participants are in a listen-only mode. Questions can be raise at the end of the presentation. (Operator Instructions)

Today’s call is being recorded and if you have any objections, you may disconnect at this time. And now I'll turn the meeting over to your host, Mr. Joseph Tung. Sir, you may begin.

Joseph Tung

Thank you. Good morning and good evening, everyone. Thank you for attending ASE First Quarter 2014 Earnings Release Conference Call. Please turn to page one. Here on page one is the Safe Harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to high degrees of risks and our actual results may differ materially from those forward-looking statements.

As anticipated, we saw a typical seasonal Q1. For the most part smart devices which have driven electronic industry took their customary breather. However, we did see some small upside orders related to mobile devices going into China. This helped nudge our revenue slightly ahead of where we had expected them to end up. Our SiP technology-related products saw seasonal softness as expected.

During Q1, we saw continued progress in our dealings with the Gaoxiong city government to reopen the nickel plating pumping line in our K7 factory. Most recently today, we have been given approval to start trial run.

This is a notable step forward towards resumption of production. However, final approval for the full resumption of work is still in process. This trial run should take about a week or two to get started. Even though full operations have not been re-commissioned, we have mitigated much of the impact to our customers.

Let’s get into the detail for the first quarter. Page two, quarter-over-quarter consolidated P&L. Generally, we believe comparing our seasonally down first quarter with the previous fourth quarter isn’t particularly meaningful. So we will keep these comments really brief.

On a fully consolidated basis, the company delivered EPS for the first quarter of NT$0.44 versus NT$0.66 in Q4. In Q1 on a consolidated basis, we saw our IC packaging, test and EMS businesses declined 7%, 7% and 25%, respectively, our direct materials business increased by 4%. This was the result of typical first quarter seasonality.

Our consolidated gross margins declined 0.6 percentage points to 18.9%. Margins ended ahead of our expectations, primarily because of changes in product mix and loading patterns, generating incremental cost savings in raw materials, labor and depreciation.

Gross profit declined to NT$10.3 billion. Our operating margins declined to 9.3% from 10.8% with operating profit finishing at NT$5.1 billion. Pre-tax profit was NT4.3 billion. Net income for the first quarter was NT$3.4 billion with net margin dropping to 6.3%.

Page three, you can see the quarterly results on a year-over-year basis here, notably most of the improvement are from a higher gross margin product mix, dropping to the operating and net margin levels.

You should note that revenues have increased 14% with gross profit margins increasing from 17.2% to 18.9%. Operating profit has increased 41% with operating margins increasing 1.8 percentage points from 7.5% to 9.3%. Net income increased 54% when comparing Q1 with the same period last year. Net margins increased from 4.6% to 6.3%.

Page four, IC ATM P&L. Let's take a closer look at the results of our IC ATM business. Please note that inter-company revenues including the SiP technology business performed by our IC packing business unit on behalf of our EMS business unit are eliminated during consolidation.

Our IC ATM revenue declined seasonally during the first quarter to NT$34.4 billion. Revenues from our IC packaging and test businesses declined 10% and 7%, respectively. Meanwhile, revenues from our Direct Materials business increased 4%.

Packing revenue did experience some level of impact from the Gaoxiong K7 nickel plating line shutdown. Without such shutdown we believe the packing revenues would have declined closer to 5%. NT dollar depreciation had a 1.37% favorable impact on revenue and a 0.77 % favorable impact to gross margins.

For Q1, our gross profit declined to NT$8.2 billion from NT$10.4 billion, while our gross margins declined by 3.6 percentage points. The gross margin decline was the result of lower revenue within our semi fixed cost structure and in particular related to labor, depreciation and utility expenses.

Labor expense stayed flat at NT$6.6 billion. However, as a percentage of revenue labor increased 1.9 percentage points from 17.4% to 19.3%. Depreciation expense stayed flat at NT$5.6 billion. However as a percentage of revenue, depreciation increased 1.4 percentage points from 14.9% to 16.3%.

Utility expense was also flat at NT$1.3 billion. However as a percentage of revenue, utility expense increased 0.4 percentage points from 3.5% to 3.9%. Total operating expenses declined by NT$265 million to NT$4 billion. However, operating expenses as a percentage of revenue increased to 11.7% from 11.3% a quarter ago.

Lower operating expenses were primarily driven by lower labor, R&D and other SG&A expenses. As a result, operating margins declined to 12.3% from 16.2%. Operating profit in Q1 declined seasonally to NT$4.2 billion from NT$6.2 billion in the previous quarter. Net margins decreased to 10% from 13.7%.

Page 5, IC ATM Q1 on a year-over-year basis. On a year-over-year basis, revenues from our IC ATM business grew 10% from a year ago quarter. Gross profit increased from NT$6.2 billion to NT$8.2 billion representing a 32% increase from a year ago. Gross margins improved 4.1 percentage points to 24% from 19.9%.

Other percentage of revenue, this was principally as a result of lower raw material and depreciation expenses offset slightly by higher labor expenses. Raw material cost improved principally the result of lower gold wire expenses to higher copper wire adoption, lower raw material product mix and lower gold wire prices.

Depreciation expenses as a percentage of revenues improved principally as a result of better machinery utilization and efficiency. Operating profit increased from NT$2.7 billion to NT$4.2 billion, a 58% improvement.

Operating margins climbed 3.8 percentage points from 8.5% to 12.3%. Operating margin increased primarily as a result of improved gross margins offset slightly by higher labor within our operating expenses.

Page 6, operating -- packaging operations. On a more detailed view of our packaging operations, packaging revenue decreased 10.2% quarter-over-quarter in Q1 to NT$27.8 billion. Our packaging gross margin decreased 3.6 percentage points to 21.6%.

Margin declines are principally a result of seasonally lower revenue within a semi fixed expense structure. As a percentage of revenue increases, labor and depreciation expenses accounted for the majority of the packaging margin decline. Labor expenses declined NT$34 million as a percentage of revenue increased 1.8 percentage points.

Depreciation and amortization expense declined by NT$41 million, however, as a percentage of revenue increased by 1.2 percentage points. Remainder of margin decreases comprised of, as a percentage of revenue, small increases in raw materials, maintenance and utility costs.

During the quarter, capital expenditures for our packaging operations amounted to US$65 million. During the quarter -- of which, US$12 million was used for wafer bumping and flip-chip packaging equipment. US$51 million was used for common equipment including SiP and US$2 million for wirebond specific purposes.

During the quarter, we added 31 wire bonders and retired 348. We exited the quarter with a total of 15,375 wirebonders in operation. 8-inch and 12-inch bumping capacity remained unchanged at 95,000 and 50,000 wafers respectively.

Page 7. Within our packaging business, our Advanced Packaging including SiP declined to 27% while our IC wirebonding business increased to 64% of our overall packaging business. We believe this to be a temporary shift in product mix related to the seasonal nature of our Advanced Packaging and SiP related products.

Page 8, test operations. Our test revenues decreased by 7.1% sequentially down to NT$5.8 billion in Q1. Gross margins for our test business declined 4.2 percentage points from 36.5% to 32.3%. The decline in gross margins was principally the result of lower revenues within a semi cost structure.

In particular, lower expenses -- labor expenses increased modestly by NT$46 million. However, as a percentage of revenue, labor expenses increased 2.4 percentage points. Labor -- I’m sorry. Depreciation expenses declined slightly by NT$10 million. However, as a percentage of revenues, depreciation increased by 1.6 percentage points.

Our testing utilization rate declined to the low to mid 70s. CapEx for the test business was US$27 million in Q1. We added 104 and retired 66 testers during the quarter. At the end of Q1, our total tester counts stood at 3,155 testers.

Page 9, our material business, in Q1, revenue from our material business stayed flat at NT$2.1 billion. NT$779 million was from sales to external customers, representing an increase of 4%.

Our internal self-sufficiency rate increased slightly from 29% to 30%, 29% to 30%. Gross margins declined 1.2 percentage points to 16.7% during the first quarter, down from 17.9%. Gross margins within our interconnect business decreased primarily as a result of lower margin product mix.

Page 10, our EMS operations, revenues for our EMS business declined seasonally to NT$21.4 billion from $28.4 billion, down 25%. Overall, EMS gross profit margins increased to 9.6%, up from 7.7% a quarter ago.

Higher gross margins are principally as a result of lower SiP and Wi-Fi module products within our EMS businesses product mix. Despite the decline in revenues, gross profit declined just by 6% or NT$132 million, ending at NT$2.1 billion.

Page 11, EMS market segment mix, the change here is primarily driven by the seasonal downturn in SiP products and Wi-Fi module products. This change should quickly reverse in the next few quarters.

Page 12, for our balance sheet this quarter, our cash and cash equivalents, current financial assets declined to NT$48.9 billion from NT$50.2 billion in the previous quarter.

In Q1, we paid down a NT$11.2 billion of short-term interest bearing debt. As such for the quarter, our interest bearing debt declined to NT$89.6 billion from NT$100.8 billion in the prior quarter. We still have NT$126.8 billion in unused credit lines.

Page 13, capital equipment expenditures, in Q1, our CapEx was US$116 million. NT$65 million was used for packaging, $27 million for testing, $16 million for EMS and $8 million for interconnect materials.

EBITDA for the first quarter amounted to US$377 million. Our outlook for 2014 continues to improve. Given upside revisions for advanced packaging and probable projects wins within our SiP business, we believe our capital equipment spending should increase US$200 million to US$250 million from our previous estimates. Our investment spending for the year should principally continue to focus on our advanced packaging and SiP businesses.

Page 14 shows our IC ATM market segment exposure. The decline in communications product segment relates to the seasonal slowdown of smart devices. We believe the shift was likely to be of a temporary nature again.

Finally, Page 15, our second quarter 2014 guidance, our outlook for the year continues to improve its certain key projects and product wins take shape. Further joint efforts with key technology partners should continue to take shape during the year. The product positioning of our SiP business with such collaborations enable our system level customers and customers to be, to develop the next-generation of electronics.

Looking forward to Q2, we see our IC ATM revenues approaching Q4 levels. But we do not expect our SiP business to ramp during the second quarter. As such, the composition of Q2 IC ATM revenues will be somewhat different than that of Q4, with SiP business revenues being a much smaller portion of revenues for Q2.

For EMS business, we should continue to see low levels of Wi-Fi modules in SiP business. We believe that our Q2 EMS revenue should be flat to slightly down when compared with Q1.

Consolidated gross margins for the group should meet or exceed Q4 levels and be in excess of 24%. And as mentioned earlier, we expect capital expenditures for the full year to increase by $200 million to $250 million. Such increase is necessitated by project wins for advanced packaging and SiP technology-related business.

With this, I conclude my presentation and would like to open the floor for questions. Operator?

Operator

I'm here, I'm here. Hello?

Joseph Tung

Yes.

Unidentified Participant

Yeah.

Joseph Tung

We're opening the floor to questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) Our first question comes from Szeho Ng. Sir, your line is open. You may now ask your questions.

Szeho Ng - BNP Paribas

Okay. Thanks. Good evening, gentlemen. First question regarding your testing CapEx in Q1. You expect only NT$27 million, but somehow you had 104 testers during the quarter? Just want to know, how the math work out?

Joseph Tung

The testers that we add all 80, sometimes there are rack and stacks, sometimes there are various types of testers.

Szeho Ng - BNP Paribas

But if I work it out semester, average price per tester is actually quite low? Is it some of them are on consignment basis or leasing terms?

Joseph Tung

Yeah. Some of them are consigned, but again, the testers that we had all ATE.

Szeho Ng - BNP Paribas

Okay. All right. And therefore the fan-out business? Is it possible for you to quantify the revenue contribution for the time being and how you could kept that part of business going forward?

Joseph Tung

Did you say fan-out?

Szeho Ng - BNP Paribas

Yes. fan-out, yeah.

Joseph Tung

So far we don't have any meaningful numbers coming out of fan-out business and I think, yeah, we're in the process of developing of different type of technology or solutions. And we do not expect this two have a meaningful number maybe two quarters down the road.

Szeho Ng - BNP Paribas

Okay. And then you are capable on both 8-inch and 12-inch?

Joseph Tung

Right now the capacity we have is mostly 8-inch.

Szeho Ng - BNP Paribas

Okay. All right. But next year would you be ready for 12-inch?

Joseph Tung

We're certainly developing that solutions and we will have the appropriate capacity installed.

Szeho Ng - BNP Paribas

Okay. All right. Thank you very much and great quarter.

Joseph Tung

Thank you.

Operator

Thank you. And the next question comes from Tse-Yong Yao of HSBC. Sir, your line is open. You may now ask your question.

Tse-Yong Yao - HSBC

Hi. Thanks. I want to -- I was hoping to get a little bit more color on the CapEx plan where you intend on spending it. I believe in the afternoon session that you mentioned around NT$700 million for SiP related wirebonding?

Joseph Tung

So we said NT$700 to NT$750 for packaging, including some of the -- including for the advanced packaging and including bumping flip-chip, as well as SiP.

Tse-Yong Yao - HSBC

And…

Joseph Tung

We now have another $100 million to $150 million for test and the rest for the substrate EMS.

Tse-Yong Yao - HSBC

Okay. So the $700 million, could we get a sense for how much, how that’s broken down between wirebond and advanced packaging?

Joseph Tung

I think bulk of it will be advanced packaging. I think wirebonding will be relatively small portion of it.

Tse-Yong Yao - HSBC

Advanced packaging specifically flip-chip prices…

Joseph Tung

In bumping and also SiP.

Tse-Yong Yao - HSBC

Okay.

Operator

(Operator Instructions) As of right now sir, there are no more questions raised. There is one from Gokul Hariharan of JPMC. Sir your line is open. You may now ask your question.

Gokul Hariharan - JPMC

Hi, congrats on the good quarter and thanks for taking my question. Just wanted to ask about first of all on the further progress that you have seen in the SiP business. Have you broadened out into new product categories in addition to the sensor business that you won last year. Could we talk about how the SiP business is panning out, given that I think in the one call you mentioned that it could have close to 20% of revenues coming from this product category. Can you talk about that a bit and I have a follow-up question after that?

Joseph Tung

I think, what we have been forecasted now for second half is mostly the existing products that we are building for customers. Although we are having engagement on some other products as well but we will -- I think we will take another quarter or so before we can have more -- better visibility on these projects.

Gokul Hariharan - JPMC

Okay. Thank you. Second question I had is some of your competitors seem to be building a lot of wafer level packaging capacity especially the one from Singapore seems to be building a lot of wafer level packaging capacity over the last one and a half years. And your approach seems to be a bit different. Could you talk about what is happening here and how you think the market is going to evolve? And those would probably bring in -- I think you did comment about the foundry competition potentially coming in the next couple of years, could you probably bring in that perspective as well as how that dictates your investment decisions into allocating CapEx into areas like SiP rather than say wafer level packaging.

Joseph Tung

Well, of course, we will look at all different solutions and look at how the market is developing. And we will prepare the necessary technology as well as the capacity as we go along. In terms of wafer level packaging, I think, we do a lot of that already. And I think -- but in terms of technology, I think the -- I will believe the trend is really going through SiP and some of the so called wafer level packaging will also be used on those different devices. And it will be a part of the overall solution that we provide to our customers. I think, all in all, I think the strategy here is really to look at -- continue to look at the market development and prepare for the technology as well as capacity as we stay fit.

Gokul Hariharan - JPMC

Okay. Understood, understood. And yeah, thank you. Thank you for taking my question.

Joseph Tung

Thank you.

Operator

As of right now sir, there are no more questions raised.

Joseph Tung

Okay. We give everybody another 30 seconds.

Operator

Okay. (Operator Instructions)

Joseph Tung

Okay. If there is no more questions then we wrap up the session. I think we had a better than expected first quarter, particularly on the overall IC at ATM business. And also on the EMS side, the drop -- the seasonal drop is smaller than what we’re expecting.

Going into second quarter and also into the second half of the year, we believe that we will continue to see sequential growth on a monthly and on quarterly basis, both on the organic part of the business as well as winning more or expanding our SiP business going forward. And with this year, we remain optimistic at this point and we will continue to focus our effort on not only building business but also continue to -- from all aspects to improve our margins. Thank you very much for today and we’ll see you next quarter.

Operator

Thank you all for participating. You may now disconnect.

Joseph Tung

Thank you.

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