ChipMOS Technologies' (IMOS) CEO Shih-Jye Cheng on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: ChipMOS TECHNOLOGIES (IMOS)

ChipMOS Technologies Ltd. (NASDAQ:IMOS)

Q2 2014 Earnings Conference Call

August 12, 2014 7:00 PM

Executives

David Pasquale – Global Investor Relations Partners

Shih-Jye Cheng – Chairman and Chief Executive Officer

Shou-Kang Chen – Chief Financial Officer and Director

Analysts

Timothy Arcuri – Cowen & Co. LLC

Richard Shannon – Craig-Hallum Capital Group LLC

Brian Grad – DLS Capital Management LLC

Charlie Chan – Morgan Stanley

Jerry Su – Credit Suisse

Timothy Arcuri – Cowen and Company LLC

Joe Locke – ABR Investment Strategy

Operator

Greetings and welcome to the ChipMOS Second Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A 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 your host, Mr. David Pasquale with Global IR Partners. Thank you, sir. You may begin.

David Pasquale

Thank you, operator. Welcome everyone to ChipMOS’ second 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 or the other release that were issued after the market close, 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.

Let me now turn the call over to Mr. S.J. Cheng. Please go ahead, sir.

Shih-Jye Cheng

Yes, thank you, David. Welcome everyone to our second quarter 2014 conference call. Hopefully, you all had time to review our earnings release. We have now several important developments on top of our Q2 results which we will also cover on this call. The takeaway from ChipMOS this quarter is that our business was strong and remains strong end of Q3. We expect that revenue and gross margin will grow in Q3 over Q2.

Overall, the demand we are seeing is diversified among existing and new customers. We do not have a customer transaction issues in any one market and demand remains robust in our memory business. Our LCD driver business is getting stronger. Therefore, we saw inventory adjustment in Q3 for LCD driver, but we do not expect it to be back. Demand for smartphone application and tablet remains healthy. So as of now, we continue to feel business is good. We have always taken better conservative approach to capacity addition.

We will continue to take a conservative approach. We are not adding capacity in the hope of getting business. We are adding capacity where we have customer demand. Based on continuous high customer demand level, our goal to raise our CapEx budget for 2014, this will allow for the near term additional capacity within our existing facility, acknowledging all the operations we did. We are also improving option to accommodate high capacity level over the long term, this including the potential additional of new facility, giving customers growth expectation. Any such measure will be incremental to the new US$110 million fiscal year 2014 CapEx budget.

Let me now take a few minutes to talk about our Q2. We are pleased that our Q2 revenue came in at US$181.2 million, representing 8.5% growth compared to Q1 2014. This was in line with our guidance of 8% to 12% growth. Gross margin for the second quarter was 23.6%, this was at higher end of our guidance of 21% to 24%, and higher than the 19.8% we posted in Q1 2014.

Margin continues to benefit from product mix and higher better yields. We generated about US$89.7 million in cash from operation, ending Q2 with just over US$453.9 million in cash and cash equivalents. Our total debt was US$208.1 million. We further improved our net debt to equity ratio to minus 51.8% as of June 30, 2014.

In terms of the business segment, revenue from our DRAM business was up about 14% in Q2 2014, compared to Q1 2014, and that was about 34% of total Q2 revenue. Our memory business in second quarter was stronger due to the customer capacity reallocation. Our Flash business including the Mask ROM product increased about 19% in Q2 vs Q1, contributing about 17% of our total Q2 revenue.

Revenue from our LCD driver IC business including bumping was about 2.7% higher in Q2 vs Q1. LCDD driver represented about 41.2% of our total Q2 revenue compared to 43.5% in Q1. Our Mixed-Signal business decreased 2.9% in Q2 compared to Q1 and represented 5.4% of total Q2 revenue. Finally, revenue from our SRAM business increased 6.2% in Q2 vs Q1 and represented 2.6% of total Q2 revenue.

Let me now turn to our Q3 outlook. We remain optimistic and confident in our business outlook based on the current customer indication and the broader market health. Overall, we expect revenue in Q3 could be up about 3% to 7% as compared to second quarter of 2014. We expect to see our Q3 gross margin continue to grow and that be in the range of about 23% to 26% on the consolidated basis.

Before turning call to S.K. allow me to take a minute to update our business and financial status. In terms of the business exposure, we expect DRAM business momentum will continue in the second-half of 2014. Demand in our LCD driver business softened slightly entering June, which resulted in a lower utilization rate of our LCD driver capacity and also impacted our revenue in the second quarter. However, we expect demand in the LCD driver business will improve led by market penetration growth in UHD TV also called 2K/4K TV in the near future.

We remain one of top two largest OSAT provider in the LCD driver business and continue to supplement our capacity and capabilities where possible to support our existing customers and new opportunities. Overall, we maintain a very positive near-term outlook from increased customer demand levels and recent development of strategic opportunities. We are raising our continued positive demand expectations and a stronger balance sheet. Our board had declared a cash dividend of US$0.14 per share. This represents our third annual dividend. Our dividend declaration is consistent with the company's capital allocation strategy and is a direct reflection of the company's financial strength.

We continue to execute on our existing business, invest in the long-term strategy growth opportunities, and building the shareholder value. We also announced today an agreement to repurchasing partial ordinary shares from SPIL. Our board has approved the repurchasing of 1 million shares or 3.3% ownership of ChipMOS from SPIL. SPIL continue to hold just over 1.2 million shares, or 4.2% of ChipMOS and that about 132.8 million shares or 15.4% of ChipMOS Taiwan. The repurchasing of the share is expected to be consummated before September 30, 2014.

This is another strategy move in line with our ongoing effort to strength our ownership structure and then to increase our shareholder value. We have had repurchasing agreement in the past, but they were not able to reach the large scale impact of share repurchase. In line with those ongoing efforts, we successfully listing our subsidiary ChipMOS Taiwan on to the Taiwan Stock Exchange on April 11, 2014.

While we are not able to provide a timetable for the next step is given the sensitivity and fluidity of the situation, we will update the market as material events occur. Finally, we announced today that ChipMOS Taiwan had signed an agreement to acquire 19% of JMC Electric Corporation known as Sumiko Electronics Taiwan Corporation, which is 100% owned by Chang Wah Electromaterial. This is a non-material, all cash transaction. We expect it to close before the end of August, 2014.

This is a financial strategy, relative low risk investment with considerable offset financial and strategic potentials. We are pleased to partner with CWE of this strategic opportunity.

Our LCD driver business has undergone rapid growth and remains a key driver of our company's improvement in profitability and success. In the past, we have not provided COF tape to our LCD driver assembly service, our customer typically consign COF tape to us. This strategic investment will further strength our position in providing service to our customers in LCD driver segment.

Given the market growth expectation for Ultra High Definition or UHD TV demand, new customer face supply constraint, then we will be able to help alleviate the material shortages. This strategy is in line with our business strategy, profitability target and ongoing effort to expand our differentiated end market exposure and customer alignment with our target markets.

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

Shou-Kang Chen

Thank you, S.J. 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 rate of NT$29.87 against US$1 as of June 30, 2014. As S.J. has just reviewed our revenue and margin, I will provide details on the rest of our Q2 results.

Net income for the second quarter of 2014 was US$5.7 million and US$0.19 per basic and US$0.19 per diluted common shares compared to the net income of US$11.1 million and US$0.37 per basic and US$0.36 per diluted common shares in the first quarter of 2014.

Our operating expenses in Q2 were increased to US$15.9 million, or 8.8% of our Q2 revenue compared to US$13 million, or 7.8% of revenue in Q1. The slight increase is related to support of our higher revenue level and the accrual of salary increases.

Other income in Q2 was US$1.4 million and non-operating expenses in Q2 was US$4.4 million. Income tax provision for Q2 was US$8.5 million compared to US$8.7 million in Q1. The non-controlling interests for Q2 increased to US$9.6 million from US$4.8 million in Q1.

On the segment basis, Q2’s revenue breakdown was 24% in testing, 35% in assembly, 22% in LCD Driver IC business, and 19% in bumping. Total capacity utilization was 77% for the second quarter 2014 compared to 77% for the first quarter of 2014.

Our Q2 testing capacity utilization increased to 75% from 69% in Q1. Assembly capacity utilization was at 76%, approximately 70% expansion. LCD Driver IC capacity was strong in at 73% utilization in Q2, 85% for bumping after 11% expansions.

CapEx for Q2 was US$26.6 million compared to US$19.1 million for our first quarter. The breakdown of CapEx for the second quarter was 39% for testing, 23% for assembly, 9% for LCD Driver IC, and 29% for bumping capacity.

Depreciation and amortization expenses were US$24.4 million, or approximately 13.5% of revenue in the second quarter. This is slightly lower than our first quarter numbers. EBITDA for Q2 was US$52.6 million, or 29% of revenue. EBITDA was calculated as earnings before income taxes, foreign currency gains 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.

The free cash flow in Q2 was US$7.4 million, which was calculated by adding depreciation, amortization, interest income together with operating income and then subtracting CapEx, non-controlling interest expenses, 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 flows.

As S. J. noted, we ended Q2 with the strong balance of cash and cash equivalents of US$453.9 million, compared to US$412 million at the end of Q1 as of June 30, 2014, we further increased our net cash position to US$245.8 million.

Our total short-term debt including current portions of long-term debt was US$109.1 million at the end of the second quarter 2014, as compared to $108 million at the end of the first quarter 2014.

Long-term debt decreased to $99 million at the end of the second quarter as compared to $99.4 million at the end of the first quarter. As part of our ongoing efforts in maintaining an excellent financial position, we remain committed to further reducing our debt level and working to enhance shareholders’ value.

Our account receivable days sales outstanding in Q2 was 71 days compared to 75 days in Q1. Inventory turns were 34 days in the second quarter, which was same as the first quarter. Foreign exchange reflected a loss of US$4 million in Q2, compared to the end of US$4.7 million in Q1, which impacted our earnings by $0.13 per basic shares.

Our interest expense was $1.1 million in the second quarter as compared to $1.3 million in the first quarter. On July 2, 2014, we put in place a NT$10 billion credit facility with favorable terms to refinance our existing long-term debt and maintain a financial flexibility in support of general corporate purposes.

This type of favorable opportunity is the direct result of our consistent financial performance and strong balance sheet. We remain focused on smart growth and being a reliable partner for quality, critical OSAT services, and executing our long-term capacity roadmap, in order to deliver consistent financial results, with further improvement to our balance sheet and shareholder value

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Timothy Arcuri with Cowen and Company. Your line is now open. You may proceed with your question.

Timothy Arcuri – Cowen & Co. LLC

Thanks a lot, guys. Great quarter. S.K., I have a question about your expanding capacity into what could be a seasonally slow period once you get into Q4. So, I think, maybe some people might come out of this being a bit concern about what your margin outlook would be into Q4 as all this new capacity comes online. So can you give us a sense of what the margin outlook would be for December if December was sort of a normal seasonal quarter, where revenues were down, say, in mid-single-digit?

Shih-Jye Cheng

This is S.J., let me – I will tell your question. The reason why we increased our CapEx is literally we continue to see strong requirement from customer side. First one is for LCD driver capacity. I think that product mix changed dramatically, so they need a longer-term impact in order to support the assembly high generation rate, that’s our first one. And we're seeing the customer forecast till the end of this year, so this is a pretty strong side.

And the second one is since LCD TV 2K/4K getting stronger and penetration rates higher than our expectations. So we also need to prepare some sort of LCD TV chipset total capacity, we also believe we have second major investment. Some major investment is assembly capacity. We continue to see both commodity, DRAM, and niche DRAM and other market capacity increase a lot. So those are three major investments for us. And we give a guidance for 23% to 26% gross margin at Q3, so based on the current customer forecast, we see it very positive in the Q4 time payroll.

Shou-Kang Chen

Okay, but, Tim, this is S.J., I think, in our estimation that Q3, Q4's gross margins would be sustainable.

Timothy Arcuri – Cowen & Co. LLC

Okay, great, S.K., thanks for that. And then can you give us, S.K., some idea of what gross margins were by product line by the, LCD driver and all the different product lines, can you breakdown gross margin for us?

Shou-Kang Chen

Yes, in Q2 our margin from final test which is around 25%. And the margin from (inaudible) seems that equivalent has been fully depreciated, so the margin is higher than 30%. And the assembly margin is around 20 LCD Driver ICs, the margins dropped down a little bit just because of the efficiency become soft in June, which is – which was roughly 21%, 22% in Q2. And the bump – the bumping margin is around 18%, 19% levels.

Timothy Arcuri – Cowen & Co. LLC

Okay, great. And then just last question for me, can you help us think just sort of bigger picture, you're talking for the first time about potentially going out and building a new facility next year. And I'm just wondering how to think about what the CapEx requirements might be for that? Can you sort of give us some parameters around that? Thanks.

Shih-Jye Cheng

Tim, this is S.J., I think currently with the new CapEx investments, our facility was fully occupied. So for the – we are looking for the new facility, which can be our next three to five years expansion and business requirements. So we are right now looking for the existing secondhand buildings which can speed up our (inaudible) basis, and also can save the investment total month. We still set a target to the industry as we discussed. Our CapEx will be around 15% among annual total revenue. So management thinks they are trial basis to meeting our capacity measurement under this kind of percentage in order to maintain our financial strength balance.

Timothy Arcuri – Cowen & Co. LLC

Awesome, guys. Thank you so much.

Shih-Jye Cheng

Thank you.

Operator

Thank you. Our next question is coming from the line of Richard Shannon with Craig-Hallum. Your line is now open. You may proceed with your question.

Richard Shannon – Craig-Hallum Capital Group LLC

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

Shih-Jye Cheng

Very good. How are you?

Shou-Kang Chen

Very good.

Richard Shannon – Craig-Hallum Capital Group LLC

I'm doing well, thank you. Let me just open that last question maybe just to make sure I understand your meaning here, so I kind of run through some numbers for next year and think about what CapEx might be with some probably normal revenue growth. It seems like you might be expecting CapEx on the order of, say, $100 million to $510 million for next year, is that kind of a good starting point?

Shih-Jye Cheng

Yes (inaudible) maybe 10%.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay. Okay, fair enough, good. It looks this year – wanted to delve into your – in terms of business on the memory side, which sound pretty good, I missed the number actually, first, I missed the numbers for percentage coming from memory total, and if you can split up in DRAM and Flash in total, S.K., that would be great. Then I follow on that with another question.

Shou-Kang Chen

The DRAMs revenue contributions in Q2, there was 34%, as follow 55%, roughly 55% of the revenue of this DRAM revenue came from their niche DRAM. And for us, revenue contribution is roughly 15%, 17% of our total sales.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay. Okay, and it sounds like you are adding capacity at least in part for DRAM testing here, is this coming from – largely from your existing large customer or other ones, or can you characterize where that growth is coming from?

Shih-Jye Cheng

Yes, Rich, we've done in last fall DRAM testing capacity. We have fully utilized our existing DRAM testing capacity. The main we invest is assembly capacity.

Richard Shannon – Craig-Hallum Capital Group LLC

Assembly, okay.

Shih-Jye Cheng

Yes, that’s the reason we can continue to improve our gross margin.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay. Okay, fair enough. Then let’s hear on free cash flow, S.K., give us some kind of goals for this year and seems like based on your CapEx, it’s probably going to come down. Can you give us your current update on free cash flow expectations for this year?

Shou-Kang Chen

Free cash flow will around to US$45 million to US$50 million for the year 2014.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay. Fair enough. That sounds all right, and then what would the depreciation, amortization number look like for this year as well?

Shou-Kang Chen

Number will be around US$98 million, US$100 million per year.

Richard Shannon – Craig-Hallum Capital Group LLC

Per year, okay. Okay, fair enough. So maybe just a couple of other quick numbers questions, S.K., if you could update us on how we should be thinking about the – how to model for both your tax rate and for your non-controlling stake in the second-half of the year, that'd be helpful?

Shou-Kang Chen

Yes, we actually – we spread around the tax rate – tax expenses in Q2 and reduced a little bit as we told you last time. The total tax expenses will continue to be around US$35 million for the whole year 2014, based on our estimations. And US$8.5 million for Q2, we expect it around US$6 million for Q3. It would be around US$11 million for Q4.

Richard Shannon – Craig-Hallum Capital Group LLC

I'm sorry, S.K., what was that last number, I did miss that one?

Shou-Kang Chen

US$11 million for Q4.

Richard Shannon – Craig-Hallum Capital Group LLC

US$11 million?

Shou-Kang Chen

Yes, US$11 million, yes.

Richard Shannon – Craig-Hallum Capital Group LLC

US$11 million. Okay. And how about the non-controlling stake as well?

Shou-Kang Chen

Non-controlling interests well – which is about roughly the same amount, will be around US$37 million or US$38 million for the whole year 2014, US$9.6 million for Q2, will be around US$30 million Q3, and around US$10 million for Q4.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay. All right, fair enough. Thank you for those numbers and last question for me. I'll jump on the line. You talked about the potential for at least what I refer to as your share collapse. And you said, you didn’t give any much of an update there. Is it something that's going to be discussed by the board in any point soon? And assuming that, that does get the approval, how long would it take for you to go through that whole process?

Shou-Kang Chen

We've been asked many times and obviously issues are at this point of time so we are not able to provide any guidance or any information on this issues, since that we considered this as premature – at this moment its pre-mature to discuss these issues. I'm sorry, that we have nothing to share with you on these issues but we will continue to work in – I think that we will continue to working on the best benefits for our shareholders.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay. Fair enough. That's all the questions from me, guys. Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line of Mr. Brian Grad with DLS. Your line is now open. You may proceed with your question.

Brian Grad – DLS Capital Management LLC

Guys, great quarter. All the news I see at, it was good. I'm happy to see that you're buying back some of that stock from SPIL. I think that's a great move. What is your current cash position in Bermuda, as of the end of the quarter?

Shou-Kang Chen

At the end of the quarter, I would say as of end of June since that after we receive the dividends from ChipMOS Taiwan. The cash position for ChipMOS Bermuda currently is about US$103 million.

Brian Grad – DLS Capital Management LLC

Plus, does that also include the free cash flow that was generated in the quarter?

Shou-Kang Chen

Free cash flow – actually the free cash flow generated for the quarter is – many in our subsidiary, ChipMOS Taiwan entirely.

Brian Grad – DLS Capital Management LLC

Got it, okay. Okay. A couple of things, regarding the expansion that you talked about, you're looking for another building. I mean, I think if I remember right, you bought a building last year for about US$10 million. Any reason why that can't be used at this point to install that capacity?

Shou-Kang Chen

Yes, it was two years ago. And we bought the buildings in the south of Taiwan. So we are now using roughly 20%, 30% of that building space. And right now, we're talking about, we now adding buildings just in the north of Taiwan, since all of our facilities in north of Taiwan especially in Hsinchu area is being fully utilized. So we can see that in that for our further expansions for the testings of the products and also the bumping operations, we probably would need some more space here in Hsinchu area.

Brian Grad – DLS Capital Management LLC

I thought that that building was across the street from your current building.

Shou-Kang Chen

Right, that's in Tainan and in the south of Taiwan.

Brian Grad – DLS Capital Management LLC

Okay. It's in the Tainan, okay. I think it was a couple of days ago, I saw the ProMOS 12-inch fab is up for sale and some of your customers are possibly looking at it. I saw Toshiba, Micron.

Shou-Kang Chen

TSMC.

Brian Grad – DLS Capital Management LLC

Globalfoundries, yes, TSMC, Globalfoundries. TSMC might be in the running for that. Does that have any impact on you, how are you positioned to benefit on from that?

Shih-Jye Cheng

Not any impact for us. And I think that the more our customer increase in the (inaudible) in Taiwan, that will be more favorable to us.

Shou-Kang Chen

Yes, the ProMOS fab is based in Taichung which is about 100 kilometers away from our Hsinchu fab. And we…

Brian Grad – DLS Capital Management LLC

With the synergy, they're depending on who buys it, right?

Shou-Kang Chen

Yes, I think that we love to see that our customers that could use this facility that will be – potentially will be our value here to us.

Brian Grad – DLS Capital Management LLC

Okay. Guys, it's a great quarter. You're doing all the right stuff and we look forward to your continued good operational metrics and also look forward to whatever you can do in the future to increase value for shareholders. Thanks.

Shih-Jye Cheng

Sure again.

Shou-Kang Chen

Thank you.

Shih-Jye Cheng

Grad, we come to see operator again. You can see line out, the operator getting back there, as I speak to our (inaudible), then you have a more clear picture of us – our long-term business ongoing.

Brian Grad – DLS Capital Management LLC

Yes, you're doing great.

Operator

Thank you. Thank you. Ladies and gentlemen, our next question is coming from the line of Charlie Chan with Morgan Stanley. Your line is now open. You may proceed with your question.

Charlie Chan – Morgan Stanley

Hi, S.J., S.K., and how are you? Can you hear me okay?

Shih-Jye Cheng

Doing good, Charlie.

Charlie Chan – Morgan Stanley

Okay. Thank you. So, yes, there are two housekeeping questions. So I think that you also reported your 8150 financial result. Can we discuss 8150 results online?

Shih-Jye Cheng

Yes, I can so – probably we'll complicate the information here. So regarding the 8150's financial information I prefer to discuss separately. Not in this conference call. I'm sorry.

Charlie Chan – Morgan Stanley

Okay. Maybe not accurate numbers, but just some directional questions, so first of all why there is some low sales in second quarter you said Forex exchange loss or other losses?

Shou-Kang Chen

Sorry. The foreign exchange is for US$4 million. We record it US$4 million loss in Q2. And since you know that Taiwan NT dollars depreciated a little bit in Q3, so I think we – the common strategy is to take the (inaudible) across. So, what we're trying to do is to increase a little bit of our U.S. dollar liquidity then we can stabilize or limit it to our fluctuations of this foreign exchange gain or loss.

Charlie Chan – Morgan Stanley

Okay. And then second question is regarding your effective tax rate in the second quarter, because you seem to be around that 35% on the 8150, so even you consider the tax on the distributed earnings, the effective tax rate seems to be very high. So any other one-time tax expense in Q2, or any other reasons?

Shou-Kang Chen

The tax rate increase – basically is, as we saw it in tax that we pay our dividends.

Charlie Chan – Morgan Stanley

Okay. Okay, so – okay, got it. And so, and the second part of my question are more regarding your strategy, so first of all, can you explain the rationale behind the repurchased of the SPIL stake, it doesn’t mean any change of your strategic partnership was at the SPIL?

Shih-Jye Cheng

This is S.J., let me answer your question. SPIL had a board meeting to discuss. They had a financial arrangement and so they are going to dispose some IMOS shares and that was in the August 7. And (inaudible) we have sufficient cash on hand in order to stabilize and also maintain the market status, so we negotiate with SPIL and finally, our board on support this approach. So we're buying the SPIL 1 million shares and the detail formula we are going to announce in a few minutes. And this will not impact long-term relationship between ChipMOS and SPIL.

With the relationship we have with SPIL and our product roadmap is aligned, we don’t have too much conflict. So (inaudible) and this is a finance arrangement from SPIL and on the record to answer your question, beyond that by the relation of the future company is to (inaudible).

Charlie Chan – Morgan Stanley

Okay, got it. It’s very clear. So my last question is regarding your investment in COS substrate business. So compared to your key competitors to ChipMOS, they have their use of business 100% is kind of vertical integration. So compared to this ratio what is the pros and cons by only in a minority share in this business? And also, it seems like your company has actually there vertical integration. They bundle sale their substrate with their COF series. So that means some ASP erosion and some margin pressure. So going forward are we going to bundle so your COF and this substrate material and if that’s the case what does it mean to your ASP in the margin trend?

Shih-Jye Cheng

Okay. So answer your questions, first of all, I just give you an example. In (inaudible) assembly, normally all assembly house purchasing and prepare substrate and de-frame to the customer. And by the – regarding to the LCD driver, COF all the tape is consigned by customer. So we don’t count any revenue on it. We just do the bounding, wafer testing, and assembly PE that’s existing business model.

And the reason that why we invest for COF tech material is all Japanese material supplier already get out of the business. The major supplier is from Korea, Taiwan, and since our major competitor already had supply chain for COF material. So all the customer also request ChipMOS can provide the total of second choice instead of only one supplier, so that’s the main reason that we cooperate with – we invest for CWE, invest in that our customer had two supplier choice. And we're looking our existing model and based on the current supply strategy and demand supply, our customer feel very comfortable, we can provide one more choice for them.

And under the current business mode, we don’t have any change at all. We don’t see any pressure from our customers, and we don’t see any ASP impact for us. So this investment total amount is very correct to the US$6 million, so we take around 19% of their all their shares. So with that held in, in cash customer for your supply constraint issue then we can held there to some this kind of problem. So currently our customer is happy with this approach.

Charlie Chan – Morgan Stanley

Okay, so your customers are happy, so do you think that they will translate into a market share gain anytime soon, do you have – can you give us some guidance regarding your potential market share increasing this year in the business?

Shih-Jye Cheng

Actually, right answer, based on the calculation the ChipMOS taking all market share around 50%, and ChipMOS taking around 30% to 35%. I think this kind of the market shares are healthy, so we will continue to maintain our market position. We don’t want to invest too much to overcapacity and since we continue to get more and more location for our customer side, so we will maintain our market position out there.

Charlie Chan – Morgan Stanley

Okay. Thanks a lot. We'll get back to the queue.

Shih-Jye Cheng

Thank you.

Shou-Kang Chen

Thank you.

Operator

Thank you. Our next question is coming from the line of Jerry Su with Credit Suisse. Your line is now open. You may proceed with your question.

Jerry Su – Credit Suisse

Good morning, S.J. and S.K., just two questions from my side. First question is that you guided our revenue to grow 3% to 7% sequentially. And could you give us more detail on the momentum of your online business line, such as DRAM, LCD driver, as such, what's the outlook in Q3? That’s the first question.

Second question is certainly a follow-up on this side investment into tape company. If you look at your competitor, they've been suffering from not only your issue or your competitor issue, so the tape business is running at operating loss. I don’t know, could you give us an update on what is the current status of the Chang Wah entity and how are the technology positioned compared with the other peers? Thank you.

Shih-Jye Cheng

Jerry, just to answer your question regarding to the history increase, many coming from assembly and final test and also called bumping. In LCDD – LCD driver also increased a little bit. So all our products Q3 segment increased proportionately that’s the first question to answer you about the Q3.

And regarding the Chang Wah, we take a look, take Chang Wah, they had two projects, one is advanced COF. That’s for less than 80 microns pich [ph] application. The other one is for COF tape that’s for 22 to 28 microns pich. So to invest for Chang Wah for two purpose, not only for LCD driver business, but also for next generation, the rest is packaging and material supply. So Chang Wah now looking for working with ChipMOS for LCD driver also is our next material founder for next generation assembly technology. Does that answer your question?

Jerry Su – Credit Suisse

Yes. Just one follow-up, you mentioned that there is a two portion, one is traditional COF, the other is advanced next-generation material. May I know what kind of application or package was this, being used?

Shih-Jye Cheng

(inaudible) in packaging.

Shou-Kang Chen

It's a flexible substrate material.

Jerry Su – Credit Suisse

Okay. So it’s not – it should be more related to your conventional assembly or mixed-signal business?

Shih-Jye Cheng

Yes, will be much more like PTA type of products.

Jerry Su – Credit Suisse

Okay, great, got it. Okay, thank you. That’s all my question.

Shih-Jye Cheng

Thank you.

Operator

Thank you. Our next question is coming from the line of Timothy Arcuri with Cowen and Company. Your line is now open. You may proceed with your question.

Timothy Arcuri – Cowen and Company LLC

Sorry. Just one quick follow-up, S.K., can you give us customers in the quarter?

Shou-Kang Chen

Okay. Number one, in the first-half, I think in the first-half 2014, the number one is Novatek around 19%. Number two is Micron, so around 15%, 16% of our total sales. And Winbond take the third position around 9.8% revenue contributions. And ISSI, Himax, they are the fourth and fifth, their combined contribution is 6.9% and 6.6% respectively. This is our top five customers.

And we are pleased that to see that Samsung has now become our top 10 customers in – starting from Q2.

Timothy Arcuri – Cowen and Company LLC

Okay, guys. Thank you so much.

Operator

Thank you. Our next question is coming from the line of Joe Locke with ABR. Your line is now open. You may proceed with your question.

Joe Locke – ABR Investment Strategy

Yes, just following up on the earlier comments made on gross margin. If Q4 gross margins are looking stable and Q3 is already quite at higher – we've seen very solid margins in Q3. Should we be looking for gross margins to maintain in this range looking into next January or early December, can you give a little guidance for that?

And then also just another question, on the memory side, have there been any new customers added in this quarter or any prospective new customers on the memory side as well, that you can tell us about?

Shih-Jye Cheng

Yeah, regarding the gross margin, we already given guidance for 23% to 26% and Q4 based on our current business forecast, I think we still can sustain those gross margin range, that's to answer your first question. And regarding to the memory side, our customer base right now is pretty stable both in Niche and Commodity DRAM. And we're working pretty hard in the increase our bet in the NAND Flash area, so our customer base will not be changed at all.

Joe Locke – ABR Investment Strategy

Just back to the gross margin, I got that in Q4. I'm wondering looking into next year into 2015, given that your gross margins came up a lot and looks like that's sustainable into Q4, can you expect that you can comment and if you can't that's fine? Do you see gross margin maintaining in that range into 2015?

Shih-Jye Cheng

I think 2015 is really too early to say, but based on the current product mix and customer bases, we have strong confidence level. We continue to enhance our efficiency and also to offset price (inaudible) we try to maintain those high range gross margin for the 2015.

Joe Locke – ABR Investment Strategy

Right, and then just on the DNAND side, I know you guys are working to expand your customer base. When do you think we might see a little more progress? Is that something we might see in the back-half of this year or is that something that may happen more next year?

Shih-Jye Cheng

Actually we don't have too much CapEx this year, and once the picture is clear so we are going to propose for the next year.

Joe Locke – ABR Investment Strategy

Great. All right, thanks a lot. I appreciate it.

Shih-Jye Cheng

Thank you.

Operator

Thank you. Our next question is coming from the line of (inaudible). Your line is now open. You may proceed with your question.

Unidentified Analyst

Hey, guys. Thank you very much for your time. Just want to follow-up on Tim and Joe's questions. So, gross margins, it sounds like you're initially, fairly positive, you can generally sustain these levels towards the end of the year. So call it 24%, 25%, which is pretty healthy, just given that you have some high fixed cost in your business and also based on your ramping of CapEx little bit more, you're pulling capacity. It sounds like you're little more bullish. So if gross margins and I guess, in a sense utilization are stable-ish in Q4 and you're adding a little bit of capacity, is that (inaudible) telling us, you think revenues will be flat up in Q4?

Shih-Jye Cheng

Actually, typical to the level in Q4, little bit so compared to the Q3. But this year, I think that Q4, we will try to maintain a (inaudible) that will be great for us. But right now it's still too early to say.

Unidentified Analyst

Okay. But initially it sounds like it didn't – the customer order book suggests that Q4 could be flat.

Shih-Jye Cheng

Liquidity is pretty positive.

Unidentified Analyst

Okay, great. Thank you very much.

Shou-Kang Chen

Thank you.

Operator

Thank you. Our next question is coming from the line of Charlie Chan with Morgan Stanley. Your line is now open. You may proceed with your question.

Charlie Chan – Morgan Stanley

Thanks for taking our question again. So I want to follow up your customer mix. You just mentioned that Samsung has become your top 10 customer and it seems like your bumping capacity expansion, part of it is because of this customer. So my question is that, we know that Samsung that have in-house bumping capacity, at least they have 8-inch bumping capacity. So long term how are you going to manage the risk that Samsung may move back their bumping business to in-house?

Shih-Jye Cheng

This is S.J. I think we are the contractor provider. So we provide the capacity and quality and service to our customer. And customer always lay in all strategy, that's beyond our concern. So that's beyond our concern, it's cost, quality and delivery. And we don't want to spend too much time to spend individual customer's decision.

Charlie Chan – Morgan Stanley

Yes, so may we know how big Samsung accounting for your 12-inch bumping today? And if they just move out what were you going to do with this spare capacity?

Shih-Jye Cheng

Yes, to answer your question, currently our capacity for bumping which is including 8-inch and 12-inch total is around 150,000 wafers a month, these are reasonably very close to the 85% to 90%. So we had a lot of customer base to feed up all the capacity. So we don’t worry about individual customer's account strategy.

Charlie Chan – Morgan Stanley

Okay. Okay, got you. Thank you.

Operator

Thank you. (Operator Instructions) Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to our management team for any closing remarks.

Shih-Jye Cheng

Yes, thank you everyone who joined our Q2 conference call. Thank you very much. Bye-bye.

Shou-Kang Chen

Thank you. Bye-bye.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful evening.

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ChipMOS (NASDAQ:IMOS): Q2 EPS of $0.19 Revenue of $181.2M (+9.6% Y/Y) Shares -1.01% AH.