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Executives

Ken Joyce – President and Chief Executive Officer

Joanne Solomon – Chief Financial Officer

Analysts

Farhan Rizvi – Credit Suisse

Wenge Yang – Citi Financial

Amkor Technology, Inc. (AMKR) Q1 2012 Earnings Call April 26, 2012 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2012 Amkor Technology Earnings Conference Call. My name is Camille, and I’ll be your conference operator for today’s call. At this time all participants will be in a listen-only mode. Following the presentation, the conference call will be opened for questions. This conference call is being recorded today, Thursday, April 26, 2012, and will run for up to one hour.

Before we begin this call, Amkor would like to remind you that there will be forward-looking statements made during the course of this conference call. These statements represent the current view of Amkor management. Actual results could vary materially from such statements.

Prior to this conference call, Amkor’s first quarter 2012 earnings release was filed with the SEC on Form 8-K. The earnings release together with Amkor’s other SEC filings contain information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from Amkor’s current expectations.

I would now like to turn the conference over to Mr. Ken Joyce, Amkor’s President and Chief Executive Officer. Please go ahead, sir.

Ken Joyce

Thank you Camille, and good afternoon everyone. With me today is Joanne Solomon, our Chief Financial Officer.

Today I’ll talk about our first quarter 2012 results and guidance for the second quarter. Joanne will then discuss our financial performance in more detail and finally we will open up the call for your questions.

To begin, first quarter sales of $655 million, gross margin of 16% and earnings per share of $0.06 were all at the high end of our expectation. Our strong position in wireless communications continues to drive our business and we saw notable improvement in out text services segment. We also benefited from additional leadframe packaging business from some of our customers whose supply chains were disrupted by the flooding in Thailand during the fourth quarter of 2011.

From an end market perspective wireless communications, gaming and other consumer electronics and networking were seasonably down from the fourth quarter of 2011. Computing grew mainly due to the additional leadframe business I just mentioned.

Looking ahead to second quarter of 2012, our revenues are expected to be in the range of $670 million to $700 million were up 2% to 7% from the first quarter. Second quarter gross margin is expected to be in the range of 16% to 18%. Wireless communications is a key strength for us, although our growth in the second quarter appears to be muted due to some softness in demand fine pitch copper pillar Flip Chip applications and the current shortage in available 28 nanometer capacity to meet the strong demand for these Chips.

Our growth in the second quarter should also benefit from a modest seasonal increase in gaming. However, our gaming business for the second quarter in full year 2012 is expected to be lower than the levels we have seen in the past few years due to insourcing by some IBM customers and the overall softness in the gaming box and peripherals market.

We expect solid growth for wireless communications in the second half of 2012, as consumer demand continues build and a supply of 28 nanometer wafers improved. Several of our major customers has fell into smartphone’s and tablets has substantially increased their demand forecast with us.

To support these exciting new opportunities to grow our business, we are increasing our estimate of 2012 capital expenditures to around $550 million. Test services will be a particular focus this year as we expect to invest about 45% of our total capital editions in new test capacity. This additional spending is a bit as expected to help improve profitability.

The main drivers of our incremental spending and increase focus on test services are 28 nanometer chip sets, power management and connectivity applications and NAND memory. As part of our efforts to support power management and connectivity applications we’re also expanding our wafer level CSP capacity.

Our leading customers are well positioned to take advantage of the explosive growth in smartphone’s and tablet. Our strategies have closely collaborating with our customers, meeting their capacity requirements and delivering the technology solutions that enabled the advanced functions in these sophisticated devices are clearly aligned with this trend.

We operate in the capital intensive business and the timing of our capital spending is driven by the specific demand presented by our customers. This year we are seeing significant opportunities that may only begin to generate additional revenue in the third and fourth quarter and beyond.

It is important that we invest with our customers during this critical window of opportunity so that we can achieve our long-term strategic objectives for growth and profitability.

If customer demand and the incremental capital additions is currently forecasted we maybe modestly free cash flow negative for the year, but to be clear our liquidity and balance sheet remains strong.

In closing, we are well positioned to take advantage of the significant growth opportunities and wireless communications. And we believe our planned investments can help drive profitable growth, enhance our technology leadership and provide excellent return.

With that, I’ll now turn the call over to Joanne.

Joanne Solomon

Thank you, Ken, and good afternoon everyone. To begin, our first quarter revenue is declined 4% sequentially to $655 million. We saw the expected seasonal decline in demand for our packaging services which drove our chip sale package sales down 10% and our ball grid array packages down 8%. The business we gained helping from customers and the supply chain are disrupted by the flooding in Thailand drove our leadframe package sales up 7%. And finally, our test services were up 6% due to growth in our NAND memory business.

Our gross margin for the first quarter of 16% was flat with the fourth quarter and at the high end of our guidance. As part of our continuing efforts to rational our cost structure we completed a voluntary retirement program in Japan during the first quarter and recorded a restructuring charge of $7 million or about $0.03 per diluted share. $5 million of this charge which recorded in cost to sales and $2 million in selling general and administrative expenses, helping to all service impact were labor savings from our 2011 and first quarter 2012 cost reduction activities and a decline in our severance obligations in Korea.

Our operating expenses of $71 million were up from $68 million in the fourth quarter. The sequential increase was mainly driven by the Japan restructuring cost recorded in SG&A. We expect operating expenses to be around $70 million in the second quarter.

Our effective tax rate of 22% for the first quarter was higher than expected, due to larger losses in Japan where we maintain a full valuation allowance. The larger losses were driven by the restructuring charges. Due to favorable discrete items we expect an effective tax rate of around zero for the second quarter. For the full year we expect an effective tax rate of around 12%.

Our board of directors previously authorized $300 million for the repurchase of our common stock of which a $167 million remains under the program. During the first quarter, we purchased one million shares for $4.5 million.

The timing, manner, price, and any amount of any future repurchases will be determined at our discretion. Purchases under the plan will of course depend upon a variety of factors, including economic and market conditions, to cash need and investment opportunities for the business and price. An increase in our receivables coupled with our first quarter capital expenditures resulted in negative free cash flow in the first quarter.

We ended the quarter with the cash balance of $381 million, total debt of $1.4 billion and net debt of $974 million. And our liquidity in balance sheet remains strong.

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

Question-and-Answer Session

Operator

[Operator instructions] Our first question comes from the line of Satya Kumar with Credit Suisse. Please go ahead.

Farhan Rizvi – Credit Suisse

Hi, this is Farhan calling for Satya. Thanks for taking the question, I wanted to find out why the Taiwan foundry is like guiding up like 15% to 22% and still is up close to 10% first, second quarter and Amkor is only guiding 5% up. So can you just talk about like why the growth that you’re seeing why is different from what’s been seeing back from your peers?

Ken Joyce

Yes. We are seeing some softness in the demand for some of our fine pitch Flip Chip copper pillar applications from some of our customers. And also there has been the demand for 28 nanometer has certainly exceeded the available supply and that has reduced fast and slowness in our demand.

Farhan Rizvi – Credit Suisse

Okay. So you mentioned the flip chip soft net, is that something that you feel because of competitive reasons where customers that shifted to another supplier or anything it’s just seasonal of it?

Ken Joyce

No, we’ve seem some softness in the second quarter but we expect a very strong rebound in the second half of the year for those packages. So it’s a temporary slow down in demand from some of our customers for that particular package.

Farhan Rizvi – Credit Suisse

Got it. Can you talk about your utilization rate on the testing and packing side?

Joanne Solomon

Yeah for the first quarter utilization on the packaging side was in the low 70s, tax was in high 70s and our expectations for the second quarter is, is that we’ll see packaging start begin to grow to the high 70, we do expect it has to the low 80s. So we’re seeing some of the seasonable recovery that you would expect in the second quarter.

Farhan Rizvi – Credit Suisse

So there seems to be like a switch like normally for past few quarters of your utilization on the packaging sides were little higher than on the testing side and now you’re also guiding to a very aggressive CapEx from the test bite, so I just want to understand like what’s going on, why – what’s leading to like higher utilization on the test side and also like what specifically is driving such high increases on the test side as well?

Joanne Solomon

Yeah for going back to Q4 our packaging utilization was in the low 70s as well as the past. We’re starting to see stronger growth in the test services that we offer in supportive of NAND memory and our fabulous customers and smartphone’s and tablets. And as we increase our investment in wafer levels CSP and support of the communications phase we’re doing more protesting. So we’re seeing more investments and we’re seeing investments that are paying off that that’s what driving the higher utilization in test. With respect to packaging we have a diverse customer base and end markets that feed into that, so there are some areas that are very highly utilized like on, in support of the communications area although as Ken mentioned, fine pitch with chip copper pillar is adjusting in the second quarter.

Farhan Rizvi – Credit Suisse

Got it. And in terms of your test capacity editions if you can provide some color on like how much is going towards logic side and how much is the memory in terms of your CapEx?

Ken Joyce

Well the CapEx is going to be combined for both logic and memory and in support of 28 nanometer chip sets and were also Joanne indicated we’re increasing our wafer level CSP so we’re buying some probe equipment for there to.

Farhan Rizvi – Credit Suisse

Got it. One last question in terms of your Cowarts like you had some, recently you announced some licensing of your technology for a Japanese provider. Can you talk about like what was that about and how does that benefit?

Ken Joyce

Yeah SHINKO took a license to our TMV Through Mold Via Technology and with that there was an upfront payment and there will be an on going royalty that we’ll receive for them and they can use our, they can use our technology there for Through Mold Via and the trademark that we have there.

Farhan Rizvi – Credit Suisse

And how much was this onetime benefit and was quite, was it a significant demand and regarded in your revenues?

Joanne Solomon

Yeah, sir our licensing revenues generally run around $2 to $3 million of quarter.

Farhan Rizvi – Credit Suisse

Okay. Yeah that’s all I have. Thank you.

Joanne Solomon

Okay, thank you.

Operator

Thank you and our next question is from the line of Vishal Shah with Deutsche Bank. Please go ahead.

Unidentified Analyst

Hi this is Che Dora [ph] on for Vishal and thank you for taking my question. So given the role out in NAND packaging has been a focus for you to improve capacity utilization and gross margin I’m just curious to get your view on how the increasingly negative outlook for memory has effected your utilization entirely especially since you’re planning to target out gross margin 20% ending on 2012?

Joanne Solomon

Yeah I mean overall when I look at our SysAD Speeds packaging and supportive NAND we do expect it to be well utilized and so it’s a ramp in line so we’re keeping the ramp in line with the demand we’re seeing so we don’t expect an adverse impact on our gross margins, we’re sort of digesting as much as we can. We’re well positioned with the major memory players, which are very well positioned on the devices that are selling right now. So we feel good right now, we don’t expect it to be a drive on gross margins for the second half.

Unidentified Analyst

Okay, great. Thank you, and then also you mentioned you have $25 million target in terms of labor cost reduction, I was just kind of curious about where you are on the roadmap and how much where you have to go to it before you realize that?

Joanne Solomon

Yeah I think, things are looking really good, the majority of that was coming out of the restructuring activities in Japan. There is multiple problems to that program what was the volunteer retirement program, what was the elimination of subcontractors and then right sizing some of the compensation practices. So we’re on track a lot of the actions we needed to take we have taken so we feel good about that $25 million savings initiatives we had, with respect to because we’re seeing strong second half growth when you look at labor overall from all our factories we’ll have some off set of increases in labor to support the higher level on demand.

Unidentified Analyst

Okay great, thank you.

Operator

[Operator Instructions] Our next question is from the line of Wenge Yang with Citigroup. Please go ahead.

Wenge Yang – Citi Financial

Hi, thank you for taking my questions. First regarding the outlook for the second half clearly the foundry guys are much more positive and raising CapEx to meet the capacity demand. What is your view for the back end in the second half?

Ken Joyce

Once again we see very strong demand pattern, so we’re very optimistic for the second half, we’re looking for good solid growth and we are putting new equipments in the capacity in place to support that demand.

Wenge Yang – Citi Financial

Well another way to ask is this is compared to last quarter’s earnings incrementally your view on the second half, is that improving or pretty much the same?

Ken Joyce

No, the earnings would definitely be improving.

Wenge Yang – Citi Financial

Okay, okay. So Joanne, based on that last time you commented that if the revenue it pick up in the second half you should see gross margins to return above 20% level and so with another quarter and some of the puts and takes what’s your current beyond the gross margin in the second half and what are some of the elements that driving up or down?

Joanne Solomon

Yeah I mean, as you said ultimately it will depend on demand but we do expect Q3 and Q4 gross margins to be in the 20s. The utilization is a big driver and that comes from demand and the demand patterns with respect to smartphone’s and tablets which are wireless broadly it supports both our packaging our test assets. We’re making good progress with respect to filling our wire bond, leadframe assets so on some of the areas that were challenged for us last year we do expect that to being to close and that shouldn’t be a drag on our gross margins.

As Ken mentioned, gaming is one of the areas that we’ll watch them to see how much the declining demand could potentially be ultimately offset it by wireless infrastructure but things are in good shape and we do expect that gross margins particularly in Q4 to be back in the 20s.

Wenge Yang – Citi Financial

That’s helpful. Regarding the CapEx and you made a decision last quarter to lower your CapEx to improve your free cash flows. And then, a quarter later you changed the direction to actually increase your CapEx. Can you walk us through what makes you to do this change and obviously you have the benefit to gain more market share, but on the other side you definitely suffer from the free cash flows and your cash position. So with pros and cons, what prompt you to actually make the decision to increase CapEx instead of maybe walk away from some of the business?

Ken Joyce

Well since our February earnings call, we’ve had some – we’ve seen very strong demand increases from several of our most important customers in the wireless communications area in support of smart phones and tablets. It’s just an opportunity that we would not want to pay us on in terms of our long-term objectives of profitability and growth. And these are really strong opportunities with our tier-1 customers and we have to be there to support them and we are. So we had to make a change in direction in terms of, are we going to investment to support that demand and for us the interest clearly yes.

Wenge Yang – Citi Financial

Okay. Understand. And so based on the plan – current plan, most of those CapEx will be spent in first half to getting towards the capacity in second half. Is that your current plan? And so you mentioned testing as a specific area of investment on a packaging side, what’s the area you’re going to invest with the increased CapEx?

Joanne Solomon

Yeah so the split between the first half and the second half as a reminder Q1 CapEx was $125 million and our guide for Q2 was $200 million. So $325 million of the $550 million is the first half, Q3 will be another high level of capital expenditures. The split between assembling, between packaging and cash is about 40% packing, 45% cash and the remaining 15% is general manufacturing support facilities in R&D.

The investments in packaging, Ken in his prepared remarks mentioned, investments in power management and connectivity that’s on the look and count wafer level CSP. So we are making investments in wafer level CSP. A lot of those chips are the right along chips to be abs processor that were seeing on the high end. So that is taking up some of the packaging investments we invest for on the memory side and we continued to make some investments in the end to boaster some of the existing capacity, and then we are investing for advanced wire bonding and also copper wire bonding. So those are the principle packaging investments and on the tester side as Ken mentioned we’re investing both for final test and pro and on the final test side we both see for logic as well as memory.

Wenge Yang – Citi Financial

Okay. One of the previous caller asked the question of value transition and testing utilization still at mid 80 percentage points in Q2. So with still some capacity to last why we need to invest to add more testers?

Joanne Solomon

Yeah it’s always the type of testers and the type of test platforms. The investments and tests that we’re making today are in support of the 28 nanometer chip sets. So those are on the PS 1600 and as well as some advanced memory testers, so that testers sits apart from that we don’t currently have as well as on the prober side we’re seeing a lot more in the way of pro business as we expand our wafer level CSP. With respect to the existing assets, they’re well utilized, there are some pockets where we could always do better. With respect to us compared to still, it’s really hard for me to comment too much about their utilization, I know they have some greater exposure to fabulous companies historically so maybe that’s why their utilizations will higher but I’m just guessing.

Wenge Yang – Citi Financial

Okay. Last question is regarding ASP, could you comment what’s the ASP trend in the quarter?

Joanne Solomon

With respect to ASP on a like-for-like basis you’re down only about 1%. If you look at the pricing environment overall in areas where we’re seeing capacity constraints and tight capacity heading into the second half like in support of wireless communications, pricing is very stable. On the commodity side the [inaudible] business operates in a very competitive pricing environment, so as we’re starting to see capacity from up somewhat on the commodity side things are starting to temper.

Wenge Yang – Citi Financial

Okay. So it’s relatively stable. I just want to add one more if I can, obviously in the front end foundries had a serious shortage in terms of leading edge capacities, just on a check in the back end is there any capacity issues particularly in some other advanced packaging capabilities that are matching to the mobile demand.

Ken Joyce

No, no we – we have adequate capacity, it’s really the, it’s the supplies really of the – on the wafer side.

Joanne Solomon

Yeah on the CapEx side we’ve secured this blogs on the assembling test equipment we need and has schedule deliveries and we have no concerns with our ability to ramp up to meet the demand when we start getting a higher input of the 28 nanometer chip.

Wenge Yang – Citi Financial

Great, thank you.

Operator

Thank you. And there are no further questions at this time. I would now like to the turn the call back over to Mr. Joyce for closing remarks.

Kenneth Joyce

Well, we thank everyone for their participation in the call today.

Joanne Solomon

Good day.

Operator

Ladies and gentlemen, that concludes the first quarter 2012 Amkor Technology earnings conference call. If you’d like to listen to a replay of today’s conference, please dial 1303-590-3030 or 1800-406-7325 with the access code of 4532650. Thank you for your participation. You may now disconnect.

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