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

Q1 2014 Earnings Conference Call

May 14, 2014 8:00 AM ET

Executives

David Pasquale – IR

S.J. Cheng – CEO

S.K. Chen – CFO

Analysts

Timothy Arcuri – Cowen Capital

Jerry Su – Credit Suisse

Richard Shannon – Craig-Hallum

Brian Grad – DLS Capital Management

Shaun Hunter – Hunter Trading

Operator

Greetings and welcome to the ChipMOS First Quarter 2014 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.

I would now like to turn the conference over to Mr. David Pasquale of Global IR Partners. Thank you Mr. Pasquale, you may begin.

David Pasquale

Thank you, operator and welcome everyone to ChipMOS’ first quarter 2014 results conference call. Joining us today from the Company are Mr. S.J. Cheng, Chairman and Chief Executive Officer; and Mr. S.K. Chen, Chief Financial Officer. S.J. will review highlights from the quarter and then provide ChipMOS’ business outlook. S.K. will then review the company's key financial results. We will then have time for your 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 first quarter 2014 conference call. Hopefully, you all have time to review our earnings release. The main takeaway from our Q1 was momentum from Q4 continue into 2014. Q1 is normally a seasonal lower quarter for us.

That was not the case this year. Revenue was up in our LCD driver IC business and our DRAM business on the results. Q1 revenues come in at $163.8 million. This was at a higher end of our guidance for the quarter.

Gross margins for the quarter was 19.8%, up from 19% in Q4 2013. Market continues to be penetrated from better programming and higher price in the year. We continue strength our ability of our strategic capacity ends in Q4.

This move is allowing us to support the expected customer demand. We are also able to pursue attractive new opportunities. So the bottom-line is our CapEx strategy remains conservative. We are not spending ahead of demand but rather investing in support our qualified demand.

There has been no change to our roadmap and we look for the CapEx to be less than $80 million for the full year of 2014 compared to $119 for the full year 2013. In terms of other segments, revenues from our DRAM business was up about 16% in Q1 2014 compared to Q4 2013 to 32.6% of our Q1 revenues.

Our products business including Mosel and ProMOS products decreased about 19% in Q1 2014 versus Q4 reflecting the broader market. Revenues from our LCD driver IC including pumping business was about 2% higher in Q1 2014 versus Q4 2013 to 43.5% of Q1 revenues.

Our mixed-signal business was up 1.1% in Q1 2014 compared to Q4 2013 at 6.0% of Q1 revenues. Our Wafer Level Chip business was up quite significantly with growth almost 19% in Q1 2014 sequentially to 1.4% of Q1 revenues.

Finally, revenue from our SRAM was up about 5% in Q1 versus Q4 to 2.7% of Q1 revenues.

Let me now turn to our Q2 outlook. We remain optimistic and confident in our business outlook based on current customer indications and a broader market scenario. On top of the revenue growth, we are hopeful on driving higher utilization of our overall capacity in assembly, testing, pumping and LCD driver business.

Our successful ongoing operation cost reductions initiated in our assembly and pumping segments is also expected to penetrate our gross margins as we move through 2014.

Overall, we expect revenue in Q2 to be up around 8% to 10% as compared to the first quarter of 2014. We expect to achieve additional improvement in gross margin at the earlier with the target future gross margin rate of around 21% to 24%.

Before I turn the call to the S.K., let me take a minute to update our financial status. We generated about 46.6 million in cash from operations. And in Q1 with just over $404 million in cash and cash equivalents, our total debt was reduced by another 44.5 million to 203.5 million. We further improve our net debt to equity ratio to minus 44% as of March 31, 2014.

Finally, I am pleased to report that we completed another important step forward by listing on Taiwan subsidiary on Taiwan Stock Exchange.

This is an excellent strategic opportunity to better realize in the value of our company based on valuation of similar companies in our sector. On April 11, 2014, shares of our subsidiary ChipMOS Taiwan commensurate on the TWSE under Stock Ticker 8150.

This was also significantly for ChipMOS as it allows to being attributing our local presence and developing relationships with investors and key financial analysts in the local Taiwan market.

You have likely already seen several additional analysts’ long coverage including Credit Suisse and TRSA. This is just a latest trend in structural opportunities we identified to better position ChipMOS and to build added shareholder value.

Given our business and financial strength, we will continue to evaluate and pursue additional opportunities where they may exist to further streamline our corporate structure to the benefit of our company and our shareholders.

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

S.K. Chen

Thank you S.J. Good morning everyone. All total amounts started 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$30.45 against USS$1 as of March 31, 2014. As S.J has just reviewed our revenue and margin; I will provide details on the rest of our Q1 results.

Net income for the first quarter of 2014 was $10.9 million and $0.37 per basic and $0.36 per diluted common shares compared to the net income of $5.6 million and $0.19 per basic and $0.18 per diluted common shares in the fourth quarter of 2013. There were a few variables in Q1 that negatively impacted results.

Our Q1 net income was negatively impacted by the additional tax accruals for shares sales. The impact of the additional tax accrual is estimated to be 1.3 million or $0.05 per basic shares in Q1 2014. We expect this will not repeat in subsequent quarters.

Our operating expenses in Q1 were reduced to $18 – I’m sorry – to $12.8 million compared to $13.5 million in Q4, a increase of 0.3 million in R&D expenses and an increase of 0.1 million in sales and marketing were offset by a 1.1 million decrease in administrative and general and other operating expenses as compared to the fourth quarter of 2013.

Other income in Q1 was $0.6 million and non-operating income in Q1 was $3.9 million, including $0.4 million interest income and $4.6 million foreign exchange gain. Income tax expense in Q1 decreased to $8.5 million, this included additional tax of $4.5 million on end of shares sales by ThaiLin.

On the segment basis Q1’s revenue breakdown was 23% in testing, 34% in assembly, 24% in LCD Driver IC business and 19% in pumping. Total capacity at the year-end was 77% for the first quarter 2014 compared to 76% for the fourth quarter of 2013.

The capacity utilization on a segment basis was 69% for testing, 77% for assembly, 75% for LCD Driver IC and 90% for pumping. CapEx for Q1 was $18.7 million, which was $21.7 million lower than our fourth quarter.

The breakdown of CapEx for the first quarter was 34% for testing, 29% for assembly, 9% for LCD Driver IC and 28% for pumping capacity.

Depreciation and amortization expenses were $24.6 million or approximately 15% of revenue in the first quarter. This is flat compared to the fourth quarter. EBITDA for Q1 was $44.8 million or 27.4 million of revenue.

EBITDA was calculated as earnings before income 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 Principles, we believe it is a helpful way to measure our financial strength.

Our free cash flow in Q1 was $12 million which was calculated by adding depreciation, amortization, interest income together with operating income and then subtracting CapEx, non-controlling interest expenses and income tax expenses and dividends from the firm. We remain committed to meeting our financial goals, which included disciplined CapEx spending and generating positive cash flow.

As S. J. noted, we ended Q1 with the balance of cash and cash equivalents of $404.2 million, compared to $439.2 million at the end of Q4 as of March 31, 2014 which further increased our net cash position to $200.7 million.

Our total short-term debt including, current portions of long-term debt was $106 million at the end of the first quarter 2014, as compared to $120.3 million at the end of fourth quarter 2013.

Long-term debt decreased to $97.5 million at the end of the first quarter as compared to $127.7 million at the end of the fourth quarter. In total, we reduced our debt position to $44.5 million in Q1, 2014. As part of our ongoing efforts in maintaining excellent financial position we remain committed to further reducing our debt level and working to enhance shareholders’ value.

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 value.

Our account receivable days sales outstanding in Q1 was 75 days compared to 77 days in Q4. Inventory turns were 34 days in the first quarter as compared to 35 days in the fourth quarter 2013. Our interest expense was $1.2 million in the first quarter as compared to $1.3 million in the fourth quarter 2013.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Timothy Arcuri with Cowen. Please go ahead with your question.

Timothy Arcuri – Cowen Capital

Thanks a lot. Thank you, S.J. and S.K. Couple things, first of all, S.K. could you give us a sense of what gross margins were by segment and maybe what’s your outlook is for gross margin by segment for the June quarter?

S.K. Chen

Okay, the gross margins for 2013 operations is about 24% and the gross margin for 2014 operations is about 16% and the gross margin for LCD driver IC assembly test is about 20% and about 19.5% is for Pumping operations.

Timothy Arcuri – Cowen Capital

Right, and relative to June. S.K., how do you think those numbers will change in June and where is the biggest increase, so you are guiding margins up, where is that increase coming from, from a segment point of view?

S.K. Chen

Okay, in three quarters, we will see an increase of the gross margin at the testing area since there are the capacity utilization will be much higher at the wafer testing operations. So they might go to above 25% and the assembly operations – the gross margin of assembly operations will be around 22%, 23% levels and pumping and LCD driver IC’s margins will go to roughly 21%, 22% levels.

Timothy Arcuri – Cowen Capital

Great, S.K., Thank you for that. Can you also give us a sense of what do you think non-controlling interest will be for June and maybe if you can even look at into September?

S.K. Chen

Non-controlled interest for Q2 should be around $10 million to $10.5 million and in the September quarter it would be around $13 million to $13.5 million.

Timothy Arcuri – Cowen Capital

Okay, and S.K., can you update is in terms of how much cash is being held at Bermuda?

S.K. Chen

Right now, the cash returned by Bermuda is around $85 million.

Timothy Arcuri – Cowen Capital

$85 million, okay and then last question from me, can you talk a little bit about the process to collapse the share structure? Is the path to get there going to be that you would probably issue an ADR and then you would basically do a cash and ADR exchange with the Bermuda shareholders and if that's the path, what has to happen to get at there? Thanks.

S.K. Chen

This is a very complicate process and I believe that since that there is a lot of discussions and many investors should have been mention this that whether or not it is present that we did too much Bermuda, Taiwan parties, exchanging markets. But right now, we haven’t made any decision on this issue at this point.

So we don’t particularly discuss this issue and it’s pre-mature I think so we make any pre-mature forward-looking statements. So, I am sorry that, right now, overall we didn’t made any decisions on this issue and at an appropriate time we may look into this multiple exchange issues and we will update to the markets when we have any decisions to go ahead with this project. I am sorry.

Timothy Arcuri – Cowen Capital

Okay, no worries. All right, guys. Thank you.

Operator

Our next question is from the line of Jerry Su of Credit Suisse, please proceed with your question.

Jerry Su – Credit Suisse

Hi, good evening. S.J., S.K. I have two questions here. First probably goes to S.J. I noticed that the pumping utilization in Q1 is already at 90% and I believe that in Q2 that will continue to increase.

So could you help us understand what is your strategy or plan regarding the pumping CapEx or capacity expansion in the – because based on my understanding, all my modeling utilization was at the peak 100% in this quarter. What should we expect on your pumping capacity for the second half of this year?

S.J. Cheng

Thank you, Jerry, it’s a very good question. Currently, our capacity is around 130,000 wafers per month based on a range and a tonnage combination. And we are going through above on that capacity investment to increase our output and also through the engineering effort to further reduce our cycle time. So we are going to reach around 165,000 wafers a month.

The majority increase will be the range. And we see them at a high generation rate. So you can compare with pumping wise the CapEx we are not increased much and output will be continuing to increase. So that will further improve our gross margin in pumping area.

Jerry Su – Credit Suisse

Okay, got it. And the second question is on the LCD driver IC side, I noticed that, I think S.K. mentioned that driver IC gross margin in the first quarter around somewhere around 20%.

If you compare that to the historical or seasonality on last quarter’s margin, I think it’s up around two percentage points. Can you help us understand what is the reason for low gross margin at the driver IC packaging testing business?

S.J. Cheng

Yes, actually, right now, we see very strong requirements, starting, especially starting from Q2. The Q1 the lower gross margin is coming to utilization rate is almost – now increased the margin, that’s the first one and second one is, the revenue coming from electricity and testing maybe coming from Q1 sales.

And once that predominantly changes we would see the better gross margin improvement in this area.

Jerry Su – Credit Suisse

So, I think you said that TV demand is – it seems that in the second half of every year, TV demand is more strong but that means that, we will ship more COS in second half and then gross margin will go back to a 25%, 30% level?

S.J. Cheng

Exactly, yes.

Jerry Su – Credit Suisse

Okay, thank you. And last question is that I think after the listing, definitely you get more attention of local market and press has reported that there is some business link for Japanese on M Flash and also you have more flash opportunities. Can you help us or give us an update on this business, because I think these are probably more related on testing for the sake of your gross margin? Thank you.

S.J. Cheng

Yes, and Jerry, regarding to the NAND Flash, it’s our company strategy. We are going to expand our exposure in that area. So we are continuing to expose not only in Japan markets, the worldwide. And that's our plan to increase our panel test utilization rate, the first one.

And regarding to the NOR product area, we see a very good requirement from the NOR product sector effective in the Q2 area. That will further help to increase our capacity utilization rate and also further help for increasing our gross margin in Q2.

Jerry Su – Credit Suisse

Okay, thank you. That's all my questions.

S.J. Cheng

Thank you.

Operator

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

Richard Shannon – Craig-Hallum

Hi, S.J. and S.K., how are you guys doing?

S.J. Cheng

Really good.

Richard Shannon – Craig-Hallum

Thanks for taking my questions. I have a few of them. First of all, I apologize I got on the call a bit late, so I may have missed on your comments I hope you are not repeating, but, just on the LCD side of your business, looking for some very strong growth here.

To what extent is it coming from the smaller screen versus the larger ones? And also, I think we talked few months ago about an emerging competition coming from Korea, is that anymore of an issue than it was, maybe looking like six months ago?

S.J. Cheng

Yes, regarding the LCD driver, we just mentioned it. I think this – the first quarter is higher than Q4 last year. That’s (inaudible) and starting from Q2, we see a requirement getting stronger and stronger, especially for CRS area. So that will help us to continue to increase our utilization rate and also increase the margin rate.

Regarding the Korean side, currently, we maintain a very healthy location and focus from our customers there. So we don’t see any noise from Korea side.

Richard Shannon – Craig-Hallum

Okay, fair enough and my second question regarding in terms of your corporate structure collapse. I heard your response to your last question about not having any decisions you got.

Is there a timeframe by which you expect to have a Board discussion on that, can we expect to hear something in the quarter about that topic or is that kind of an indeterminate schedule of when you might do something?

S.J. Cheng

Yes, Richard, I really appreciate you bring this question again. Since before April 11, all the management team we are focused on this to have an IPO. And fortunately, we are successful on listing our subsidiary ChipMOS Taiwan in the Taiwan TWSE.

And after that we are going to give all that information from the market from all different shareholders, including IMOS, and 8150 and ThaiLin. And after that, we also want to see the setting record in both markets and then we will come out – a proposal in further discussions with our Board to see which is the best alternative scenario for all the shareholders and also food for the company.

So, right now, we continue to receive a lot of input from the management, from the shareholders, and we are continuing to approach some – and shareholder in order to get more output study requests and requirements.

Also that we are going to kind of discuss in the coming Board Meeting, May and also maybe in August timeframe. And in this process is evolved a lot of different entities and shareholders and also different legal compliance. So we can activate an executive scheduler right now, but we are on the right track.

Richard Shannon – Craig-Hallum

Okay, and I appreciate you given the full details S.J. S.K. maybe a couple of quick question for me to finish up here. How should we look at your overall corporate tax rate going forward here and then what are your expectations for free cash flow this year?

S.K. Chen

The cash flow – the free cash flow generated from operations in 2014 will be around $70 million to $75 million. And as we can shift our CapEx at – to below $80 million for the year. I guess, free cash flow is around $75 million.

Richard Shannon – Craig-Hallum

Okay, and your expected tax rate for this year or I guess the remaining quarters of the year S.K.?

S.K. Chen

Tax rate for the whole year would be around 29% and the tax expenses was – in my model is – my estimate depicts expenses will go up to around $9.5 million for Q2 and that’s because of we must accrue some of the recurring tax and it will come down a little bit to $6 million to $6.5 million in Q3 and that will go up a little bit around $10 million in Q4, that’s because we must accrue the part of the tax additional tax of probably against the earnings for the year 2014.

Richard Shannon – Craig-Hallum

Okay, appreciate the detail guys. That’s all the questions from me. I’ll jump in the line. Thank you.

S.K. Chen

Thank you.

Operator

Thank you. (Operator Instructions) The next question is from the line of Brian Grad of DLS Capital. Please go ahead with your question.

Brian Grad – DLS Capital Management

Way to go, guys, another awesome quarter and another awesome set of guidance. You guys are doing an excellent job of managing the company and creating value for everyone.

I just have one quick question. Can you give us a little more granularity on customer sizing and also on new customer engagements where we are going to see some of that new business going forward?

S.J. Cheng

Yes, Brian, to answer your question, currently, we in a couple of market segments, in commodity-driven area, we see a very healthy and very stable growth. And in the mid-stream area we also see a very strong growth with our existing concepts. So this area we don’t have any new accounts in DRAM side.

Regarding to the products area, our existing content in NOR product area booming a lot and just had a fewer new – problem in China. And regarding the demand, we focus more exposure in that area and regarding the LCD driver, pretty stable and good quarterly growth with the customers.

And we just have Wafer Level Chip and a new mixed-signal area, we continue to see the requirement from the customers side. But most of that is in according to various states now having – maybe booming in the second half of this year.

Brian Grad – DLS Capital Management

Okay and what is your top-10 customers are what percentage of your business?

S.J. Cheng

Novatek remains the number one customer for the company, revenue contribution 19.3%. Micron remains the second, revenue contribution is 14.9%, Winbond the third, 9.1%, Himax, number four, 7.6%, ISSI the number fifth, 6.9%, Fiti Tech is number six, ESMT, number seven, Macronix, number eight, Raydium, number nine, Zentel is number ten.

Brian Grad – DLS Capital Management

Okay, so that’s, 33, 43…

S.J. Cheng

Yes, 13 customers contribute 78% of our total sales.

Brian Grad – DLS Capital Management

Okay, very good. Much appreciated, thank you.

Operator

(Operator Instructions) Next question is from the line of Joe Lai with ABR. Please go ahead with your question.

Joe Lai – ABR

Hi guys. Just want to do a follow-up on the cash question at the IMOS bubble. You mentioned it’s about $85 million right now. Now, is that likely to go up in Q2 or Q3 because of the dividend payment and where do you think that might be sort of at the end of Q2 and ending Q3?

S.K. Chen

To answer your question, currently, we had a cash position in IMOS is $85 million and we are going to…

S.J. Cheng

Declare dividends.

S.K. Chen

And after we got the ChipMOS Taiwan shareholders meeting approval that will be around June 12. So after that, after the approval, then we will, pay some cash dividend (Inaudible) return to – pay the cash dividend to the IMOS side. So the cash position will continue to increase.

S.J. Cheng

My estimation is that, in early Q3 we will receive dividends from ChipMOS Taiwan – then ChipMOS Bermuda we will receive dividends – dividend up from ChipMOS Taiwan and the amount will be around $15 million. So, after that, there will be, the cash position returned by ChipMOS Bermuda will be $100 million U.S. dollars.

Joe Lai – ABR

Great, thank you so much. That's all my questions.

S.J. Cheng

Thank you.

S.K. Chen

Thank you.

Operator

The next question is from the line of Shawn Hunter of Hunter Trading. Please go ahead with your question.

Shawn Hunter – Hunter Trading

S.J., S.K., great job, great quarter, one quick question. I went back and look to the last conference call, and S.J. you had stated you are going to be aggressive on share repurchases and dividends and in my view, you pointed out today about the IMOS shares trading under $22 and being accretive, I was wondering your thoughts and what the company is going to do in the future concerning buybacks?

S.J. Cheng

Yes, we have a partnered program with a company before November last year and at the time, we decided to purchase shares from – by ChipMOS Bermuda then our U.S. consults arrived that we must cancel that purchase program.

So, right now, there is no purchase program with –that’s put in place with the company and we need to discuss with our board to get their approval to be able to set up a new buyback program. So, we will need to communicate with our board on this issue. It’s a great question.

Operator

Thank you. We have reached our final question and I’d like to turn the floor back to management for closing comments.

S.J. Cheng

Thank you everyone to join our first quarter conference call. Thank you. Bye-bye.

S.K. Chen

Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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