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Amkor Technology Inc. (NASDAQ:AMKR)

Credit Suisse Group Technology Conference

November 30, 2011 16:30 pm ET

Executives

Joanne Solomon – Chief Financial Officer, EVP

Michael Lamble – EVP of Product Management and Worldwide Sales

Analysts

Satya Kumar – Credit Suisse

Joanne Solomon

Thank you everyone for joining us today. We certainly appreciate when people come to our neck of the woods. We're actually headquartered in Chandler, Arizona, which is just south of here, so you helped us keep our operating costs lower by attending today. So we appreciate that, you’re welcome.

Just before we start off, we’re not updating our guidance today, it’s as of the date given. Any forward-looking comments please also refer to the risks associated with forward-looking comments in our SEC filings. We will have a couple of minutes of general remarks and then we will open up to questions from Satya Kumar and also from the floor. And with me today is Mike Lamble, our EVP of Product Management and Worldwide Sales, and I’m the Chief Financial Officer. So, I (indiscernible) you can take the …

Satya Kumar – Credit Suisse

Okay, thanks, Joanne. I was going to ask you how Q4 is tracking. So I guess you already answered.

Joanne Solomon

I guess, [Jeffrey] answered it.

Satya Kumar – Credit Suisse

But just if I sort of look that, the different moving parts in your business, I guess, you guys have 50% exposure to comps and 25% to consumer and the rest was split equally between PCs and other stuff. Most of the semi-companies that have been presenting here, I guess seven really sounded extremely good or bad, I guess, for Q4, Q1. But the front-end equipment companies have sounded a lot better.

I was wondering if you could just remind us as to the trends that you were seeing in Q4 relative to the different segments, which is embedded in your guidance which was down I think 9% or so which is – perhaps you can talk about that?

Joanne Solomon

Yeah, absolutely. So, with respect to where we’re seeing the strength its not all bad and its not all good. We’re seeing strength in communications and when we talk about communications, we include smartphones and tablets. Those are areas that remained strong for us.

We also have a dominant market share position in gaming. And gaming was very strong for us in Q3 and its very seasonal and that season ended a little bit earlier than it did last year, so gaming season ended with Q3 and so that’s what in part drove a sub-seasonal guidance in Q4 with our guidance being down 5% to 12% for Q4.

Looking into 2012, we expect to see continued strength on communications against smartphones and tablets.

Satya Kumar – Credit Suisse

I guess like normally Q1 is seasonally slow, right? And Q4 is seasonally strong, so this time around Q4 it was well below seasonal, down 9%, which is not that far away from what the other sub-cons have been saying. But given that you’re seeing the seasonal weakness in gaming a bit earlier, does that sort of set up easier compares for you all those being equal for Q1?

Joanne Solomon

Yeah, I’d agree with that. Its with seasonal cyclical correction happening in Q4, it does set up for an easier comparison in Q1. Our expectation is we will continue to see the growth with the smartphones and tablets players and it will all take – we will have to see further along in the year, how the demand recovers in the other areas. But it does set up a – a better comp, an easier comp.

Satya Kumar – Credit Suisse

Right. And I guess relative to your exposure to PCs, which is about 15% or so given the issues that are surrounding the hard disk drive space, can you remind us as to what your exposure is within the PC segment to with different parts and how this Thailand issue should be affecting you?

Joanne Solomon

Yeah, you know with respect to our exposure to PCs, we are mostly on the peripheral side. So, it does include some exposure to hard disk drives, printers, and the other peripherals coming off of the PCs. With respect to Thailand, as – where its going to – there are some upsides that are coming out of Thailand as people are looking for alternative sources of supply and then there is some areas where the supply chain is interrupted because of pieces and parts not coming out of Thailand. So net-net, it maybe incrementally positive, but not that significant to us.

We didn’t see the same level of supply chain disruption as we did last March with the Japanese disaster. So, its – we’re not expecting a significant impact, positive or negative from Thailand at this point.

Satya Kumar – Credit Suisse

Like the downside you might see from your PC exposure gets offset by extra business you get because your competitors have capacity there?

Joanne Solomon

That’s probably the case is that its net-net and maybe incrementally positive, but not significantly so.

Satya Kumar – Credit Suisse

Okay. I think one news that came out today was Toshiba announcing that they’re going to consolidate their front-end manufacturing, I forgot what it was, they were trying to consolidate some of the manufacturing activities in Korea, in Japan. I know you were in talks to buy some of their back-end operations. How does the consolidation in Japan play into that, and can you talk a bit about that?

Joanne Solomon

I can make some more generic comments as opposed to specific comments with respect to their front-end strategy. Toshiba is a very strong customer of ours, its one that since 2000 we’ve been partnering more and more with. We support them in their efforts to go asset-light and from time-to-time we require assets from them. In support of that, they continue to outsource more and more off island. So it’s there is a very positive trend coming from our relationship with Toshiba.

As Toshiba broadened how they view the semiconductor supply chain, we’re there to support them. As you mentioned, we had a – we had previously announced a potential acquisition of back-end facility in Malaysia and supported discrete. Toshiba has discrete manufacturing in both Thailand as well as in Malaysia. Their Thai factory was disrupted and with that disruption they made the decision to put the deal with us on hold. So, we will see when that comes back.

Satya Kumar – Credit Suisse

Okay. I think one of the issues that investors have had relative to your story this year has been gross margins and a lot of factors are playing into the declining gross margins from last year to this year. One of which has been the decline in utilization rates partly because of the cycle, but partly also because of the mix shift away from wirebonding to Flip Chip. So, lets take those issues one at a time, specifically relating to wirebonders. Where are utilization rates right now and what is your strategy outside of what happens in the cycle to try and improve asset utilizations in the wirebonder business?

Joanne Solomon

Yeah, with respect to our gross margins its definitely been a challenging year from 2010 to 2011. We saw a 700 basis point drop in our gross margin profitability. And as you said about half of that is driven off the utilization issues and principally on the migration from wirebond to Flip Chip, coupled with the cycle. The opportunities we have to improve that utilization, I’d highlight three principal ones. One, we’re starting to gain share with respect to memory on the NAND side and we’ll go through an asset redeployment process, it will take some incremental investment and that will help utilize some fixed costs that we have in China. So that will improve both utilization and our gross margin.

Second, I’d highlight we’re starting to see more and more interest amongst our customers in migration to copper. So that will continue to help utilize some of the existing assets, it will take some level of incremental investment and that it will also help gross margin. And we continue to pursue other wirebond opportunities and utilize those assets.

Stepping apart from utilizing the assets, we have to stay focused on rationalizing our cost structure inline with the demand we have. We started doing some of that with respect to the Philippines and there are some other geographies like Japan and China where we’re challenged with respect to gross margins and we’ve programs that we’re working on and I think solidify – that will also improve gross margin.

Satya Kumar – Credit Suisse

And where are utilizations now on …?

Joanne Solomon

Utilizations right now on the wirebond assets, are in the 70s in contrast to Flip Chip, which are in the 80s overall. Flip Chip is both Flip Chip CSP, which is virtually full. And then that Flip Chip BGA, the large body size, where they’re in support of gaming and networking, we’re seeing some open utilizations of balancing between the two Flip Chip and the ….

Satya Kumar – Credit Suisse

The utilization that you quoted was in Q3 or that’s what you expect for Q4?

Joanne Solomon

That is for Q3 utilization.

Satya Kumar – Credit Suisse

Right.

Joanne Solomon

Q4 we’re – the decline that we’re seeing that we are expecting to see is more broadly impacting this wirebond assets …

Satya Kumar – Credit Suisse

Right.

Joanne Solomon

… and as well as Flip Chip BGA.

Satya Kumar – Credit Suisse

Okay. So, I guess, like I’m sort of optimistic at some point, hopefully the macro cooperates, there is some – hopefully some level of inventory burn that’s happening in the semi-industry that’s probably depressing your wirebond asset utilization so that maybe it starts helping in Q2 at some point next year. But relative to copper, if I look at how much wirebonder capacity you might have maybe between 10,000 and 15,000 bonders and you look at ASE and SPIL combined, they may have about 20,0000.

End of 2010, those companies had virtually no assets on copper like you, yourselves, and I believe at the end of this year they’re converted to 50% copper, I guess end of 2009, in two years. Now your copper conversion is, I’m assuming significantly lag to your competitors in Taiwan. And – so how do you sort of see your copper migration over the next year, and has that slower sort of conversion to copper had any role to play in terms of your asset utilization rates related to market share?

Joanne Solomon

So, with respect to our Taiwanese competitors they had an early jump with respect to the copper wirebond migration. Typically how it works in the OSAT spaces is, is with any new technology there’ll be a principal customer that’s interested in adopting with ASE that was largely the likes of the MediaTek. So they had a catalyst in which to develop a technology, not just similar to how we ramp Fine Pitch Copper Pillar with Texas Instruments.

So from their exposure to MediaTek, they rolled out to other customers. SPIL also had a similar trend with respect to the Taiwanese. And now you’re starting to see a greater adoption of the U.S., European and Japanese customers. To just give you a feel for magnitude, my expectation is, is that ASE, they talked about their wire – their copper bond capacity used by U.S., European and Japanese is around 90 million or so. For Q4 our expectation is we would be somewhere around 20 million. So its still – we’re still much smaller than they are on, where it is that we play, but we do for 2012 expect to close that gap as we’re starting to see more and more interest with our customers, both on the lead frame side as well on the laminate side, it even shows more of the advanced wirebonding.

Our strategy with respect to how we support copper, it’s a dual strategy of both [kidding] existing bonders as well as augmenting with new. So, my expectation is, is for 2012 they will both still be larger than us significantly because they were basic customers, but you’ll start to see some growth for us on the copper side.

Satya Kumar – Credit Suisse

Okay. I guess part of the reason also that we touched upon, why you’ve seen the lower utilization as the conversion to Flip Chip, and is it fair to say that your customers has converted faster to Flip Chip compared to your competitors customers in Taiwan, and you’re sort of taking the medicine early in terms of having the lower utilization in wirebond now and investing in Flip Chip and those companies might see in the next couple of years?

Joanne Solomon

Yeah. So I just recall, the second half of your question was, do I believe that the open utilization that we’re seeing on our wirebond is that driven by their cost? We don’t believe that it was a loss of share because when you go on a customer-by-customer basis with our customers it wasn’t that we couldn’t service them from a copper perspective. So we don’t believe that, that led to the utilization issues. We think it’s mostly just driven by the macro and the added wirebond capacity as the migration of the likes Qualcomm and TI.

With respect to the Flip Chip migration to give you a feel, on the significance of Flip Chip for Amkor, we’re 1.5 times the size of ASE on Flip Chip. So they’re the largest OSATs, but with respect to just the Flip Chip area, we’re 1.5 times bigger than they’re using the Q3 numbers.

So, I think where we stand and we’re doing really good is with respect to support of the communications guys, in support of gaming, and in support of networking. So we've a broader exposure to Flip Chip. I think with respect to our Taiwanese competitors they have some exposure on the communication side on Flip Chip, but its up to us to leverage our lead in areas like Fine Pitch, Flip Chip Copper Pillar and the scale that we built on TI and drive broader adoption with other customers in 2012 and expect that to be (indiscernible).

Satya Kumar – Credit Suisse

Yeah, I want to touchup on that a bit, but do you think that their customers would actually go faster to Flip Chip and therefore they’ll also have the secular underutilization of wirebonder’s in the next couple of years and or …?

Joanne Solomon

I think wirebonder overall units will continue to go up, but revenue dollars may not, just because of the ASP reduction as you migrate to copper. If their customer starts to migrate more and more to Flip Chip, which we believe longer term Flip Chip will make up a bigger percentage, then that does continue to put pressure on the wirebond side.

Satya Kumar – Credit Suisse

Right. So, I guess on the Flip Chip CSP Copper Micropillar, which I guess is the most interesting part of what you might have for next year. Can you talk a little bit about what the Copper Micropillar solution is, and I guess, as you go to – as other chip companies start migrating more to 40 nanometer, 28 nanometer, how you’re thinking about potential share gains in Flip Chip for 2012?

Michael Lamble

With regards to Flip Chip Copper Pillar, it provides a high density smaller footprint solution primarily for smartphones. We’ve a lot of traction with a number of other customers, particularly in the base band part of the business. But the traction won't occur until, I mean, significant traction won't occur until mid 2013. Does that answer your question?

Satya Kumar – Credit Suisse

Yeah. So, I guess, like the current customer base is, is that because the new customers aren’t going to that technology or is it …?

Michael Lamble

Well, they’re not going to – we’ve a base customer that adopted it, they went all in.

Satya Kumar – Credit Suisse

Right.

Michael Lamble

Those other customers, they’re interested in the technology and their different stages, but they’re not all in yet. It’s a big thing for them to convert. So I think as to say, significant traction with other customers won’t occur till mid 2013.

Satya Kumar – Credit Suisse

Okay.

Michael Lamble

But I expect, by this time next year we’ll probably have six major names in the industry qualified.

Satya Kumar – Credit Suisse

And is there like a way to think about the competitive standpoint – from a competitive standpoint, do your competitors have something similar to that and where do you think you stand relative to your competition on …?

Michael Lamble

Well, I think in a way, we’re to Copper Pillar like ASE was to Copper Wire. They had a great base customer in MediaTek and grew a lot of volume and they weren’t so sourced, but primarily SPIL and ASE supported MediaTek and that ramp in Copper wire. Our base customers TI, we’re self sourced. So we have quite a lead in terms of not only technology, but size and scale and know-how learning’s. So I’d say at this stage we’re a good, hard to tell exactly, six months to a year ahead, but it’s not a technology that they cannot adopt. We’re just further ahead.

Satya Kumar – Credit Suisse

Okay. I guess looking even further ahead, there is TSV; you guys have been investing in that. Is TSV contributing any meaningful revenue, I guess not at the moment. When should we think about TSV being more relevant?

Michael Lamble

So TSV will become relevant, it depends – it’s relative. What do you mean by relevant?

Satya Kumar – Credit Suisse

So I’m thinking like 5% revenues or something.

Michael Lamble

5% of revenues, I think you’re looking more in the 2014 timeframe, maybe 2015 to get to that type of number. We’re driving TSV with Xilinx. Xilinx is our key partner on TSV. They are the leader in TSV today. I don’t – I’m not sure what they’ve said publicly, but we will produce most of those units that go into production in 2013. I think it’s around 1000, somewhere in that magnitude. So, it’s at least 2015 before we talk about meaningful revenue dollars.

Satya Kumar – Credit Suisse

Joanne, I guess from a CapEx standpoint, TSV has been part of the reason for your CapEx, not the biggest reason obviously. Is there an opportunity for you to perhaps lower the TSV CapEx, I mean – can you talk a little bit about that?

Joanne Solomon

I’d say, with respect to TSV and setting up the relevance, and – it’s such a new technology and part of our core competency is staying relevant on the advanced, but that has been our long-term competitive advantage is being the leader on the advanced side.

So, what that means is as TSV and the supply chain matures around TSV and as we work through the technology challenges, this is taking a long lead time before it gets to high volume manufacturing. Well, we produced parts in 2011 and 2012 on TSV, it won’t be to this – to a scale point until as Mike said 2014 or so.

With respect to capital intensity, because it’s a fab-like process, to develop that technology it took some R&D investments. So that is an investment that we began to make in 2010 and into 2011. So, as we look to commercialize the technology over the years, it’s going to take very little incremental CapEx now for 2012 and 2013 to support TSV. In fact the units that Mike was talking about that we’re producing into – in manufacturing, we’re utilizing the R&D assets at this point to get those units out.

Michael Lamble

And if you look at the assets that aren’t fungible in TSV, today, I’d guess our investment in totally non-fungible assets dedicated to TSV are probably investing the $20 million range, something like that. TSV, we’re leveraging very highly the Copper Pillar, so our huge investment in Copper Pillar.

Satya Kumar – Credit Suisse

And I think you’ve some interesting data on the mix of CapEx that you’ve had so far this year. I guess Flip Chip is 35%, 40% of the CapEx and you’ve the test in wirebond, which are sort of steady at minimum levels. So outside of TSV, is there an opportunity to lower the bump CapEx is that – that’s also fairly lumpy?

Joanne Solomon

Yeah, with respect to our expectation of capital intensity and where we’ve been investing, you’re right. We’ve – in support of the communication guys ramping on Fine Pitch Copper Pillar, in support of TI and more broadly in support of players like Qualcomm, that’s taken a lot of our CapEx dollars. But on the assembly, the test side and there is also some level of bump investment to support Flip Chip.

So, because there is such a significant transition from wirebond to Flip Chip, it took a lot of investment dollars in 2010 and 2011, and our expectations for CapEx in 2012 is that they’ll start to see it moderated more. Historically, we’ve talked about our capital intensity running between 10% and 14%, and for the last two years we’ve been running over the 14%.So I think you’ll start to see for 2012 that we can leverage the investments that we’ve made and keep capital intensity for 2012 at the lower end of that range.

Satya Kumar – Credit Suisse

And just to clarify, the reason why you’ve been running it above the range is not because you were investing in wirebond …

Joanne Solomon

That’s right.

Satya Kumar – Credit Suisse

… because you’re having this lumpy investments in TSV bumping as well as you needed investments in TSV?

Joanne Solomon

That’s right. That’s correct.

Satya Kumar – Credit Suisse

Okay. So, if I have like, sort of, okay semi-year, next year, let’s call it, next semi – I think semi came up with an estimate of 2% or 3% for 2012. Is there an opportunity to lower the dollar CapEx opportunity – CapEx spend for in the 2012?

Joanne Solomon

Yeah, I think on a – not just on the percentage basis, but on an absolute dollar basis, I’d expect capital expenditures to be less than – in 2012 as compared to 2011. That said, if things start to turn and demand looks more robust and there is the right opportunity, then we will adjust accordingly.

Satya Kumar – Credit Suisse

What type of growth rates should we expect for the CSP market? What is that being growing for you and how will that look like for the next year, two years?

Joanne Solomon

If I just look at the top two players and how much we grew in 2011, I mean, it was in excess of 20% for each of them. So I think there is some growth trajectory with how we support CSP probably, but I think at a much – a more modest – moderate level.

Michael Lamble

Yeah, much more – much less. We had to put in a lot of infrastructure, 2011, adding incremental capacity it’s not nearly as capital intensive.

Satya Kumar – Credit Suisse

So as we look into 2012, Q4 is obviously at pretty low margins, low utilization rates, if I get a little bit of a recovery in bond utilizations, gets a little bit of CapEx decline, you should start generating quite a fair bit of free cash flow, your EBITDA levels are still very good, where is Q4 EBITDA levels?

Joanne Solomon

Looking at it – let me just speak to Q3 EBITDA, just to give you a feel. Our Q3 EBITDA for the quarter was $134 million. So, with the – our expectation is being down 5% to 12%, that would bring that level down. But you’re right, in that – this business does generate a lot of EBITDA and as we moderate our CapEx and assuming we get some improvement with respect to gross margin, some recovery in demand or even if it stay similar, we’d generate higher levels of free cash flow than we did even this year, which was an okay year from a free cash flow perspective, lower than we’ve seen in – over the last several, but it’s still okay.

Satya Kumar – Credit Suisse

Great. So I guess like if I – what are the potential planned users for the cash for next year? You’ve been somewhat aggressive on your buyback recently, do you feel the balance sheet – it is like how you want to see it?

Joanne Solomon

Yeah. With respect to our debt levels, I’d like to see us continue to bring down the debt levels. We didn’t make the decision to start stock buyback program, $150 million in total when we gave our guidance we were about halfway spent. So with respect to the free cash flow next year, we’ll look to invest back in the business, bring down the debt levels and hopefully that’s where we’re at.

Satya Kumar – Credit Suisse

Okay. And one last question before I finish up, do you have any thoughts on the announcements from TSMC and Cypress? I think Cypress talked about Deca wafer-level packaging and I think I forget the name TSMC had for its high-end packaging. Is there more competition at the very high-end packaging? What does that mean to your Flip Chip CSP business?

Joanne Solomon

Yeah. So, I’d say that they’re both competitive threats to varying degree that we take all competitive threats seriously. With respect to TSMC, they’ve expressed interest in having a greater piece of the supply chain on Through Silicon Via. And with – how it ultimately shapes out we feel like we’re well positioned and that there is a market share for us with respect to Through Silicon Via. And we’ll continue to develop it and – but be mindful of the threat from TSMC on the Through Silicon Via side of it.

With respect to Deca, we’re – we will watch it and as we get more transparency as to where it is that they’re gaining traction with our customers, we’ll have to address that.

Satya Kumar – Credit Suisse

All right, thanks a lot, Joanne.

Joanne Solomon

Okay. Thank you, Satya.

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