Amkor Technology's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: Amkor Technology, (AMKR)

Amkor Technology, Inc. (NASDAQ:AMKR)

Q1 2014 Earnings Conference Call

April 28, 2014 17:00 ET

Executives

Greg Johnson - Senior Director, Investor Relations and Corporate Communications

Steve Kelley - President, CEO

Joanne Solomon - CFO, EVP

Gil Tily - EVP, CAO, General Counsel, Corporate Secretary

Analysts

Randy Abrams - Credit Suisse

Chad Dillard - Deutsche Bank

Suji De Silva - Topeka Capital Markets

Eric Rubel - Stifel, Nicolaus

Ana Goshko - Bank of America

Atif Malik - Citigroup

Jairam Nathan - Sidoti & Company

Jeff Harlib - Barclays Capital

Operator

Good day, ladies and gentlemen. And welcome to the Amkor Technology First Quarter 2014 Earnings Conference Call. My name is Cohen, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded today.

I would now like to turn the call over to Greg Johnson, Senior Director of Investor Relations and Corporate Communications. Mr. Johnson, please go ahead.

Greg Johnson

Thank you, Cohen, and good afternoon, everyone. Joining me today are Steve Kelley, our President and Chief Executive Officer; and Joanne Solomon, our Chief Financial Officer.

Our earnings press release was filed with the SEC this afternoon and it is available on our website. During this conference call, we will use non-GAAP financial measures and you can find the reconciliation to the U.S. GAAP equivalent in our Web site.

We will also make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it. Of course actual results could be different, please refer to our press release and other SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations. Please note, that the financial results discussed today are preliminary and final data will be included in our Form 10-Q.

With that, let me hand it over to Steve.

Steve Kelley

Good afternoon. Thanks for joining the call today.

Our outlook for 2014 has improved significantly. Customer forecast have strengthened and our growth initiatives are gaining traction. We have seen increased demand for wafer level and other advance packaging where Amkor is a leader. We are preparing for a strong third quarter when a number of flagship mobile devices with high Amkor content will be launched to market.

In the first quarter, we generated revenues of $696 million near the high-end of our guidance. We benefited from incremental demand in the mobile device market and ramped a fingerprint sensor product to high volume.

Our increased revenues drove first quarter gross margin and earnings above our guidance range. We expect sequential revenue growth of nearly 10% in Q2 with improved gross margin and earnings. For the full year, we expect Amkor revenues to grow faster than the overall semiconductor market. Many customers are migrating quickly to wafer level packaging because it is a cost effective way to meet the very thin requirements of today's smartphones and tablets.

Customer preferences for wafer level and other advance packages work in Amkor's favor. We invested early in these technologies are well down the learning curve. The automotive market is also an important part of our business and a key element of our growth plan. We like the stability and potential of the automotive business. It's a natural fit for Amkor given our emphasis on quality, execution and manufacturing stability.

We expect to combine automotive revenues of Amkor and J-Devices to exceed $750 million this year. As a reminder, Amkor owns a 60% stake in J-Devices, the largest OSAT in Japan. We intend to increase our stake to 80% in 2016 at which time we will fully consolidate J-Devices results into the Amkor P&L. Today, from a reporting stand point we treat J-Devices has an investment.

In our other major markets, computing, consumer and networking, we expect to see steady year-over-year growth. Our sales and marketing teams are focused on broadening our customer base as well as deepening our engagements with current customers. These efforts are helping us stimulate revenue growth across the portfolio.

Our power discrete business secured production commitments from two new major customers in Q1. This is an important milestone which demonstrates our ability to compete in this space, in particular our ability to reduce manufacturing costs, achieve high-quality levels and execute on commitments were keys for winning these details. Other potential customers are working with our engineering and quality teams could evaluate and qualify our power discrete factory in Malaysia.

J-Devices is making excellent progress with their consolidate-and-fill strategy delivering solid results in the first calendar quarter of 2014. J-Devices outlook for the coming fiscal year is good where the revenue forecast of just under $1 billion and improved gross margins. The alignment and collaboration between Amkor and J-Devices continues to strengthen. We are working together in key R&D projects, currently visiting customers and sharing best practices.

A key first quarter win for J-Devices was Renaissance Electronics' decision to transfer most of its Singapore production to J-Devices factory. This plan will boost J-Devices revenue and factory utilization beginning in 2016. Most of the transferred business will be for automotive microcontroller customers.

We are also making good progress in new marketing and sales initiatives design to leverage our existing assembly and test capacity. The most prominent of these initiatives is a push to expand our business with fabless companies in China and Taiwan. In the first quarter, we gave a number of design wins and began ramping a smartphone win to high volume production.

We continued to broaden our customer base in the region and are adding marketing, sales, application and customer service personnel including some engineers who we based directly on customers.

We are raising our expectations for full year 2014 capital expenditures to $575 million plus or minus. Nearly all of the incremental investment will be for advanced package capacity and leading-edge testers. The demand for this capacity is spread across many customers, which reduces our investment risk. We believe that these investments are the foundation for a long-term growth.

In closing, I would like to note that Amkor recently received Intel's Preferred Quality Supplier award. We are proud to be one of just 18 suppliers Intel recognized for outstanding performance in 2013.

Joanne will now provide more detailed financial information.

Joanne Solomon

Thank you, Steve, and good afternoon everyone. Overall, Q1 was a solid quarter and better than our expectation. First quarter sales of $696 million were up 1% from a year ago and saw a significant improvement in our mainstream wire bond products business particularly for memory and discrete products.

Advanced product sales were off due to the temporary pause in the mobile communications market. Our gross margin improved 180 basis points and earnings per share increased 29% over the first quarter of 2013. The increase in gross margin was primarily due to the improved capacity utilization and lower cost of goods sold. With gross margin at 18.5% in our trough quarter, this is strong evidence that our profitability improvement initiatives are gaining traction. We expect to deliver gross margin of nearly 20% for the second quarter.

We made substantial progress with our research and development efforts for next generation 2.5D and 3D packaging technology. We are working closely with our customers to develop cost effective pre-edge packages.

Operating expenses in the quarter were $83 million. This is up from $76 million in the fourth quarter principally from our R&D activity in connection with the ramp of 20-nanometer production and other technology initiatives as well as higher compensation cost.

For the rest of 2014, we expect operating expenses to be about $85 million a quarter. Our effective tax rate in the first quarter was 24%. With our improved outlook for the year, we expect to benefit more significantly from our tax holiday jurisdiction. For the full year 2014, we now expect an effective tax rate of around 22%.

Our equity pick-up from our 60% ownership in J-Devices in the first quarter was flat with the fourth quarter and up $6 million versus the prior year quarter. Q2 is their seasonally slowest quarter and we expect our equity pick-up will step down as well. We see their contribution to our earnings accelerating in the second half as they continue executing on our consolidate-and-fill strategy and from the expected benefit on the settlement of a take-or-pay contract likely in the third quarter.

At March 31, we had total debt of $1.7 billion and our debt to EBITDA was 2.5x. Our liquidity is solid with $629 million in cash and $440 million in available revolving credit line and undrawn secured term loan. In April, we reduced our debt by $116 million and improved our leverage.

The remaining $56 million of our convertible debt was converted by the holders into 90 million shares of our common stock. As a reminder, this has no impact on our diluted EPS since the convert has historically been accounted for on an as converted basis. Also in April, we prepaid $60 million of foreign debt.

With that we will now open the call up for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Randy Abrams with Credit Suisse. Please go ahead.

Randy Abrams - Credit Suisse

Yes. Hi. Good morning. The first question, I just wanted to see, I think relative to a few months ago, your prior plan was probably to at least track in line with the industry. And I think now your shifting to view to outgrow the market. Could you maybe talk about the swing factors over last few months to give you a more confidence to actually outgrow the industry now?

Steve Kelley

Randy, couple of things. Our major market is in mobile communications, the mobile device market in particular. And we have seen some things in that market that give us more confidence. We are seeing good progress in the 20-nanometer side. That technology appears to be hitting all the yield, benchmarks that we expected to hit in the first half of this year. So we have higher confidence in the ramp in Q3 and Q4.

We also have higher confidence in our share percentage mobile communication going through the second half of this year. We have better visibility into the sockets we've won. The second aspect for our revision is on the mainstream product line. We had a strong first quarter mainstream products we may expect to maintain that level of strength for the remainder of this year.

Randy Abrams - Credit Suisse

Okay, great. And for the J-Devices, I think you mentioned second half a few things happened. If you could elaborate a bit on the take-or-pay settlement and growth driver. I think first second half and maybe a first view by 2016 as you consolidate it. I think your target you mentioned to get to about $1 billion sales. If you could talk about potential, or at least an early cut on what margins and profit contribution would be, or at least an early target for that a couple years out once you start consolidating that?

Steve Kelley

Hey Randy, let me take that question. So let's talk about the plan first for J-Devices. We expect J-Devices to deliver roughly $900 million to $1 billion of revenue this coming fiscal year. So that fiscal year starts April 1 and ends March 30th. And we're expecting margins to trend upward, so I won't give you specific numbers but we expect a significant increase in margins this year and also the year following. Let me tell you why, I think that's going to happen. There is a basic reason and that J-Devices is exactly filling that consolidate-and-fill strategy where they are reducing their footprint over time and bringing more business in that fill that footprint.

But the second part of the strategy is really focus on automotive. So if you take a look at their business plan, in the past fiscal year, they were about 45% automotive revenue. As we exit the next fiscal year, their revenue will be about 60% to 65% automotive. That's very sticky revenue and we are confident that's going to continue to grow, certainly an area of strength in Japan.

Your second question was with regards to the take-or-pay. As you may recall, J-Devices purchased a number of factories over the past two years. One of the customers they purchase factories from agreed to basically chew up their revenue and their profit on the yearly basis and that's where that – that's where that payment is going to come from. We think it's going to happen in Q3, there is a potential to make it probably in to this quarter but we're not going to forecast it yet.

Randy Abrams - Credit Suisse

Okay, great. And last question for now, on the recent industry trend, it seems a little more discussion on the fan-out wafer level packaging where we had TSMC announce, or give more details on, info and stats on their call talked a bit more on EWLB. If you could maybe talk if you're seeing more customer interest in that area, where a scenario you want to invest in and how Amkor would be positioned if that were to take off? And maybe some of the applications that may adopt this fan-out wafer level packaging?

Steve Kelley

Yes, I'd be happy to make a comment on that. First, we just make a comment on wafer-level packaging. We're seeing a tremendous uptake in wafer-level packaging. And that's generally for the smaller pack, just not for applications processors and basebands but for everything else that goes in to a phone. So what's driving that is a desire for very thin packages, that's being driven by smartphones and by software applications.

We have a lot of things in the R&D shop. Lot of projects where we're focused on this very issue, number of different approaches to it including wafer-level fan-out, but also other approaches. So I think as I look at what's being talked by TSMC and others, we're all are trying to keep the same objective, that is to deliver a highly reliable, very thin device to customers at a reasonable price. And our history with TSMC is that we work together in a partnership fashion. One example is our copper pillar bump technology which we licensed to TSMC last January. So I anticipate moving forward that TSMC will develop their fan-out technology, we'll continue developing our technologies but we'll work together to optimize cost and availability for the customer base.

Randy Abrams - Credit Suisse

Okay, great. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Chad Dillard with Deutsche Bank. Please go ahead. Mr. Dillard, your line is open.

Chad Dillard - Deutsche Bank

Hi. Can you hear me?

Joanne Solomon

Yes.

Chad Dillard - Deutsche Bank

Okay. Hey, thanks for taking my question and congratulations on the great quarter. Just first question, just given that you've guided the CapEx up to $575 million, do you still expect to remain free cash flow positive in 2014? And how should we think about the linearity between the third and fourth quarters? And how does the incremental CapEx break out between advanced packaging and testers?

Joanne Solomon

Sure. I can take that question. We do expect these free cash flow positive for 2014 with the strength of the business in the second half and supporting mobile communication that will throw out some good cash flows that will offset the CapEx. As far as linearity goes, we are obviously with the peak quarter expected in Q3, most of the CapEx is heading in. In Q2 and in Q3, we do have CapEx because into Q4 that begins this set-up 2014.

Chad Dillard - Deutsche Bank

Great. And then, how is the breakout between advance and test?

Joanne Solomon

On the break-out of CapEx, we look at it more on the churn key basis now, I would say 50% of the CapEx is heading into our advanced product, 30% is heading into mainstream which does include our advanced stats packages for memory, and then 10% for R&D and 10% for infrastructure and other.

Chad Dillard - Deutsche Bank

Great. And then can you give us a sense of where utilization levels are for flip chip as well as wirebonded? I know you had mentioned in the previous quarter they had been a little bit low. But maybe you can just give us some color on how to think about that against your gross margins guiding to about the low 20%s in the back half of this year?

Joanne Solomon

Okay. I can start the comment to give color on utilization. We're seeing really good utilization on our wirebond front. We see steady improvement throughout the year and I would describe it very seasonally. On the advanced side as we hit the pause on mobile communications here in Q1, they're clearly at a trough. We see some build up in Q2 but it's definitely more second half loaded with a much stronger Q3 and Q4.

Chad Dillard - Deutsche Bank

Great. Thank you very much.

Operator

Thank you. And our next question comes from the line of Suji De Silva with Topeka Capital Markets. Please go ahead.

Suji De Silva - Topeka Capital Markets

Yes. Thanks. Nice job on the quarter guys. In terms of the advanced packaging, it seems like the pricing there came up sequentially the first time in several quarters. Can you just talk about the dynamics there and what the expected pricing trend as you see this growth improvement would be going forward?

Steve Kelley

Yes. I'll make a comment there. I think in general, pricing our business is always pretty competitive. The difference with advanced product is typically they demand a high level of capital investment both on the assembly and the test side. So there are only few companies they can invest to that degree and Amkor is one of them.

And the other characteristics of these advanced products is they're typically are short life cycle product. I think all of us look at the economics of these deals in a similar way where we need to ensure that we achieve some payback in a reasonable amount of time. So I think that probably keeps a lid on price reduction to a certain extent.

Suji De Silva - Topeka Capital Markets

Okay. Thanks Steve. And then Joanne, you said OpEx I think would be flat sequentially next couple of quarters. Can you sustain that level of leverage versus what kind of OpEx growth will you expect longer term versus revenue as you scale the business?

Joanne Solomon

First, so in my prepared remarks, I mentioned $85 million on average for the quarter. I do see the pattern being higher in here in Q2 and then beginning to taper again in Q3 and Q4. We did see a pop up in operating expenses driven by R&D with the pace of heading into the second half on 20-nanometers that was an increase as we hit high volume production that will begin to tapper down.

Moving forward, OpEx will scale with the business so I do expect R&D will move up higher as we continue show growth in the advanced product. So, we'll keep a balance for it.

Suji De Silva - Topeka Capital Markets

Okay, great. And then lastly, what's the gross margin differential between advanced products and mainstream, roughly? Just to understand, because if the mix improves in advanced, I'd imagine your gross margin could continue to trend higher, if that's what you expect. Thanks.

Steve Kelley

Yes. We don't typically give a specifics on that but your assumption is correct, may be advanced products generate higher margins than the mainstream products.

Suji De Silva - Topeka Capital Markets

Okay. Thanks guys.

Operator

Thank you. And our next question comes from the line of Eric Rubel with Stifel, Nicolaus. Please go ahead.

Eric Rubel - Stifel, Nicolaus

Hey guys, good afternoon. And thanks for taking my question. Steve or Joanne, I wanted to ask a question about the two new designs that you had in power discrete. Could you give a little bit more color on those designs?

And then if you could talk more broadly about analog mixed-signal strategically. If I think about your facility infrastructure, I think about it as being historically more optimized for higher volume designs. How are you adapting your facility infrastructure to possibly be more well-suited for low volume packages? I know historically you may not have wanted to swap designs frequently.

Have things changed, and how aggressive do you think you can be in the mixed-signal market? Thanks.

Steve Kelley

Okay, sure. Good question. Let me talk about power discrete first. We acquired Toshiba's Malaysia facility back in August of last year. And so these design wins – these major design wins that we earned in Q1 were pretty significant because they basically our first third-party customers.

So to validate our ability to be competitive in the power discrete market, this is not a big OSAT market today. Most of the players in this market are vertically integrated. So both of the customers that we won – their designs in Q1, they are both highly vertically integrated companies. We reached a point where they don't necessarily want to invest incrementally for the assembly and test capacity. So basically validates our business model.

I think moving forward you will see further announcements where we are bringing customers into that facility. So I'm very happy that this is happening validates the purchase.

Eric Rubel - Stifel, Nicolaus

Terrific. Thanks. And…

Steve Kelley

And…

Eric Rubel - Stifel, Nicolaus

Sorry, did you have more Steve?

Steve Kelley

Well, I wanted to ask you the second part of your question; I want to answer that one. On the analog-mixed signal part?

Eric Rubel - Stifel, Nicolaus

Yes.

Steve Kelley

Yes. I think on the analog-mixed signal area, no matter who you deal with whether it's a large customer or small customer, there is a lot of variety, okay. And so that's just – that's a pre-condition for doing business in that area.

Our number one facility for that is in the Philippines and so that's our number one wire bond facility it's also our automotive center of excellence. I think the challenge has primarily been on the sale side as supposed to the factory side. We just introducing ourselves to new customers and also reintroducing ourselves to customers we used to deal with – just about over time.

So I think a lot of this is just a matter of us going in and working with new customers going deep with existing customers to fill our lines particularly in the Philippines.

Eric Rubel - Stifel, Nicolaus

That's good color. Thanks. Joanne quick question, you repurchased some debt in the quarter, could you talk a little bit about how you are thinking about the capital structure there?

Joanne Solomon

Okay. So in April there were two debt transactions that took us down in our leverage, right now we are at $1.5 billion. The remaining $56 million of our convert, the holders converted into shares. And then we did repay some of our foreign debt in Korea. How we are looking at the capital structure these days, it fits with the strategies around sales growth and profitability, we with the higher level of profitability our EBITDA is going up. So our debt-to-EBITDA continues to improve. So we feel very comfortable with our leverage.

Over time, we do want to bring down our debt. And we do have a senior note that has its first call date coming up here. And we'll actively monitor the markets to see if there is a transaction that makes sense to reduce our cost of debt. So feel very comfortable with the level that we have today. Over time we expect to reduce and our maturities are in good shape.

Eric Rubel - Stifel, Nicolaus

Is there a leverage target that you have in mind, or is that something you think about?

Joanne Solomon

I like to see it get closer to the two times EBITDA level and sustain it there.

Eric Rubel - Stifel, Nicolaus

Okay. Thank you very much.

Joanne Solomon

Thank you.

Operator

Thank you. And our next question comes from the line of Ana Goshko with Bank of America. Please go ahead.

Ana Goshko - Bank of America

Hi. Thanks very much. If you wouldn't mind reminding us or me at least, on the J-Devices, the potential to buy in the additional 20% stake, how will that valuation be determined in 2016?

Joanne Solomon

Okay. There is a pre-determined option calculation formula. It's a combination of an EBITDA multiple as well as based of its net assets of the company.

Ana Goshko - Bank of America

Okay. So order of magnitude, do you have a sense of what that could run in terms of the cash?

Joanne Solomon

We don't have an estimate right now.

Ana Goshko - Bank of America

Okay. And then how is, J-Devices capitalized, now is there any debt that you would be consolidating at the time that you consolidate it?

Joanne Solomon

They do have some debt, it's very well capitalized, it's about $100 million in debt.

Ana Goshko - Bank of America

Okay. And that's something that you would just consolidate on your books or would you need to refinance it, do you think?

Joanne Solomon

A lot of it tends to be short-term, the closer we get to it, we will have to figure out whether need to refinance it, it had to be of the consolidation.

Ana Goshko - Bank of America

Okay. Thanks. And then if I could also ask for an update on the arbitration with Tessera? I think there's a low-end estimate of $60 million of total payments there, and about $20 million had been made the last I had gotten updated. So I'm wondering if there are any additional payments or any kind of update on the outlook.

Steve Kelley

Ana for this question, I would like to defer to Gil Tily, our General Counsel.

Gil Tily

Hi, Ana. This is Gil Tily, happy to answer your question. We expect the arbitration panel will issue an award probably some time during this second quarter and we estimate that the award will be around $113 million in royalty plus interest. However, I want to make it clear that the issuance of the award is not the end of the case. Because any arbitration award must next be confirmed by the court and we plan to challenge confirmation of the award.

So let me kind of walk through the pieces and comments. Most of the claimed royalties relate to Amkor's alleged use of a single U.S. patent and to the period following termination of the license agreement. Last year, we initiated a proceeding with the Patent and Trademark Office challenging the validity of that patent and we were very gratified when the U.S. PTO agreed to institute formal review proceedings.

In doing so, the PTO determined that there is a reasonable likelihood that we will be prevail with respect to at least one of those patent claims being challenged and that proceeding is going forward in May.

We also have pending in action in California challenging the panel's authority to award post-termination royalties. A favorable outcome may help us significantly reduce an award. And based on recent developments, we've reduced our estimate of the possible range of royalties due to be from a minimum of $11 million to $113 million net of the amounts we paid previously in 2012. This is down from our estimated range of net from last quarter or from $43 million to $116 million.

As a reminder, our accrual for these royalties was $43 million at December 31. And we have determined not to change our accrual due to the inherent uncertainty of the outcome. So with that, I would commend you to our SEC filings, which has a lot more detail on that.

Ana Goshko - Bank of America

Okay. Thanks very much. Very fulsome answer.

Gil Tily

Yes.

Ana Goshko - Bank of America

Yes. Okay. So when this ruling comes out in second quarter, there would be no immediate cash payments because it sounds like you're still will be pursuing various avenues, is that the takeaway?

Steve Kelley

That's correct.

Ana Goshko - Bank of America

Okay, great. And then Joanne, finally I wanted to ask, on the pay-down in Korea, on the prepayment, why did you decide to pay that down because I would have thought with the bonds being callable you might have gotten better NPV of value for taking on a higher cost debt?

Joanne Solomon

Yes. The decision to pay-down the Korean debt as opposed to paying down any of the U.S. debt that was based off where the cash was in the portfolio. So we had some excess cash that is building up in Korea and it was our nearest term maturity so that's why we went after that debt instead of the senior debt.

Ana Goshko - Bank of America

Okay. Got it. Okay. Thank you very much.

Joanne Solomon

Thank you.

Operator

Thank you. And our next question comes from the line of Atif Malik with Citigroup. Please go ahead.

Atif Malik - Citigroup

Hi. Thanks for taking my question. Steve and Joanne, good job on the quarter and the strong guide. Steve, I believe in your prepared remarks you mentioned you expect a strong Q3. I wanted to get some color on that. If I look at your seasonality for the last three years, it's around 4%. And with the share gains you've had and the fingerprint sensor and the 20-nanometer foundry opportunity nearing on that seasonality, is it safe to expect your Q3 to be above seasonal?

Steve Kelley

Yes. I think you should definitely expect Q3 to be above seasonal. The simple reason that we are going to see some major phone and tablet launches in that quarter. So as we look at our business, I think on the mainstream side, we still look at a seasonal model, but on the mobile device side of the business, advanced product side of the business we're typically more tied to the launch of these flagship platforms.

Atif Malik - Citigroup

Great. And Joanne, at $850 million revenue level, is it possible for you to kind of provide a range for gross margin. I understand it's a function of the mix?

Joanne Solomon

Yes. I would expect that $800 million, we would be in the low 20s.

Atif Malik - Citigroup

Okay. And one last one, can you comment if there were any 10% of sales customers in the reported quarter?

Joanne Solomon

So as far as 10% customers, we had two customers that were greater than 10% last year and I expect that to be the case this year as well, same two.

Atif Malik - Citigroup

Thanks.

Operator

Thank you. And our next question comes from the line of Jairam Nathan with Sidoti & Company. Please go ahead.

Jairam Nathan - Sidoti & Company

Hi. Thanks for taking my question. Just kind of sticking to the gross margin, I had a couple questions. You mentioned the volume as well as some cost of goods sold reductions. Can you kind of – was it gold related, or were there any more efficiencies that came along the way?

Joanne Solomon

A lot of the – some of the cost savings was on the gold side. We were – we did benefit from the lower gold prices this year as compared to last year. When I look at the principal drivers in wire gross margin starts to – beginning to outperform. And it's largely on the utilization of our mainstream assets. And particularly the strength that we are having on the memory side, we built significant scale in China and those assets are beginning to be very well utilized. So that's the drivers on the gross margin.

Jairam Nathan - Sidoti & Company

Okay. And can you compare J-Devices margins to Amkor to just to give us an idea of how we should think about that?

Steve Kelley

I will make a comment here. If I look at J-Devices margins, their business is primarily in the wire bond side, so the – I think its best to compare them with our mainstream business. In J-Devices margins are as good or better as Amkor's margin in this part of the business for this year 2014.

So as they increase their percentage of sales into the automotive market, we expect to see continued improvement in the gross margin side for J-Devices.

Jairam Nathan - Sidoti & Company

Okay. And just one more on the power discrete, can you just give me – what is the contribution this quarter?

Joanne Solomon

So on the power discrete business it runs about $40 million a quarter, we do expect to see growth in the second half has to be two new wins begin to ramp.

Jairam Nathan - Sidoti & Company

Thank you. That's all I had.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Jeff Harlib with Barclays Capital. Please go ahead.

Jeff Harlib - Barclays Capital

Hi, good afternoon. Can you just update us on where things stand on the plans for K5 facility, the cost of that and the timing? And just also a little bit on capital intensity of the business with the additional growth in mobility and communications?

Steve Kelley

Yes. Let me say a few words about K5 then I will turn over to Joanne to talk about capital intensity in general. Our current plan for K5 is that we will begin to start construction later this year. And then the bulk of construction will happen in 2015 and then we will finish it up in the first quarter of 2016. So that's the schedule.

As I look at the capital expenses associated with that plan, right now, we have about $35 million built into our 2014 capital budget. And then we have got somewhere between $220 million and $250 million in our 2015 capital budget earmark for K5.

Joanne Solomon

On the capital intensity front, we have been running in the high teens over the last several years with the start-up construction here of K5 in 2014 it's about – as Steve mentioned $30 million this year. What's driving up our capital intensity as a lot to do with the advanced products as we start to invest more on more on wafer-level CSP, it's a very capital intensive process. It's also turnkey so it has cap attached with it. So that's why you are seeing some of our capital intensity go higher.

Jeff Harlib - Barclays Capital

Okay. That's helpful. And you commented that you expect steady growth in some of your other markets, some of which had struggled last year. So can you just talk a little bit about some of those other consumer, networking, computing markets? Is it that the market is getting better, or are you getting new design wins in certain areas?

Steve Kelley

Combination of things. I would say there is two primary factors would be that – we are getting new design wins. Again, this effort to penetrate new customers and to go deeper existing customers is paying off primarily in that – in those three spaces, consumer, computing and networking.

The second part is, the packages are getting more expensive in some of those areas. As they try to integrate more and more into single package that actually increases the content for Amkor.

Jeff Harlib - Barclays Capital

Okay. Thank you.

Joanne Solomon

Thank you, Jeff.

Greg Johnson

Okay. Thanks Jeff. There are no more questions so this ends our Q&A. I will now turn the call back to Steve for his closing remarks.

Steve Kelley

Thanks Greg. I would like to recap our key messages. First quarter revenues were up at the high-end of our guidance, gross margin and earnings were above guidance. We expect second quarter revenues to be up roughly 10%. We are optimistic about the second half due to the launch of flagship mobile devices with high Amkor content.

And finally, we are making good progress and achieving our primary corporate objective, growing revenue. These higher revenues are driving sustainable earnings growth. And thank you for joining us in the call today.

Operator

Ladies and gentlemen, this concludes the Amkor Technology's first quarter 2014 earnings conference call. Thank you for your participation. You may now disconnect.

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