Amkor Technology, Inc. (NASDAQ:AMKR) Q4 2012 Earnings Call February 13, 2013 5:00 PM ET
Kenneth Joyce - President and Chief Executive Officer
Joanne Solomon - Executive Vice President and Chief Financial Officer
Chad Dillard - Deutsche Bank
Jeff Harlib - Barclays
Good afternoon, ladies and gentlemen, and welcome to the fourth quarter and full year 2012 Amkor Technology, Inc. earnings conference call. (Operator Instructions)
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 fourth quarter and full year 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.
Thank you, George, and good afternoon, everyone. With me today is Joanne Solomon, our Chief Financial Officer. Today, I will talk about our fourth quarter and full year 2012 results and guidance for the first quarter of 2013. Joanne will then discuss our financial performance in more detail, and finally, we will open up the call for your questions.
To begin, we are pleased with our fourth quarter results and improvements over the prior quarters of 2012, and the fourth quarter of 2011. Bolstered by solid sales growth in mobile communications, fourth quarter sales of $723 million, gross margin of 18%, and earnings per share of $0.13, were all at the higher end of our expectation. Additionally, fourth quarter sales were up 4% from $695 million in the third quarter and up 6% from $684 million in the fourth quarter of 2011.
Our investments in support of the communications end-market are really paying off and continue to gain momentum. Driven by notable strength in smartphones and tablets, our fourth quarter communications revenue set a new record and represented 58% of our total sale. In our other end-markets we saw a seasonal decline in gaming and a general softening in demand due to the uncertain macroeconomic environment.
For the full year 2012, our communications revenue grew 12%. That said, total sales declined slightly, as the strength in communications was offset by softness in the other end-market. Our home electronics and gaming businesses were lower than the levels we have seen in the past few years due to in-sourcing by some of our IDM customers and softness in our wirebond business.
Technology leadership and innovation is one of the cornerstones of our success and a key element of our business strategy. We have been investing significant resources in support of the newest and most advanced interconnect technologies for mobile communications packages and the sophisticated probe and final test equipment required for these devices. As a result of this strategy, Amkor has the largest share of the flip chip and wafer level packaging market in the OSAT industry.
For the full year 2012, our flip chip and wafer level packaging sales grew $127 million or 12% compared to 2011, and represented nearly 50% of our packaging sales. We spent $533 million on capital additions for the full year. Our spending was focused primarily on packaging equipment and advanced test platforms in support of 28 nanometer chip set, NAND memory, power management, and connectivity applications, and research and development projects.
Looking ahead to the first quarter of 2013, we are seeing seasonal demand patterns with revenues expected to be down 5% to 11% from the fourth quarter of 2012. Although mobile communications revenues are expected to be down from the record levels in the fourth quarter, they should still be well ahead of the first quarter 2012.
First quarter gross margin is expected to be in range of 14% to 17%. We operate in a capital intensive business, and the amount and timing of our capital spending is driven primarily by the specific demand presented by our customers. Naturally, this demand is influenced by many factors and can be fluid over time, increasing or decreasing from today's expectations.
With that in mind, we are currently planning capital additions of around $125 million for the first quarter and around $450 million for the full year 2013, primarily to support growth opportunities we see in mobile communication. We are also planning an additional $150 million in capital spending for the acquisition of land and commencement of construction relating to our previously announced new factory and R&D center in South Korea. This investment will strengthen our competitive position over the long- term as the industry-leader providing advanced technology and help ensure our future growth.
Last month, we exercised our option to increase our ownership interest in J-Devices Corporation, a joint venture amongst Amkor, Toshiba Corporation, and the original investors in J-Devices. J-Devices provides semiconductor packaging and test services and is the largest independent OSAT company in Japan.
The Japanese semiconductor industry is moving to a more fab-like model. J-Devices acquired certain packing and test operations from Fujitsu in 2012 and recently announced that it has signed an MOU with Renesas for the acquisition of the semiconductor backend production business of three Renesas facilities in Japan.
We believe that the strong relationship between our two companies will create substantial value for Japan-based semiconductor companies and our stockholders.
In closing, we are well positioned to take advantage of this significant long term-growth opportunities in mobile communications. We are investing in the right packaging and test technology for the right customers and in the right markets. We believe that all these planned investments can help to drive profitable growth, enhance our technology leadership and provide solid returns.
And with that, I'll now turn the call over to Joanne.
Thank you, Ken and good afternoon everyone. To begin, our fourth quarter revenues increased 4% sequentially to $723 million. Solid sales growth in mobile communication drove favorable results in several areas. Chip scale package sales grew 30%, test sales were up 16% and other packaging services, which includes wafer bumping increased 6% all due to our strong position in communication.
Ball Grid Array package sales declined 23% due to seasonal patterns in gaming and consumer electronics. Our leadframe package sales were down 15% from a general softening in demand due to the uncertain macroeconomic environment.
Gross margin of 18%, with an improvement of 160 basis points over last quarter, leverage from higher sales drove the improvement, although, this is partially offset by the impact of unfavorable foreign exchange rate movement.
Our operating expenses of $70 million were up from $63 million in the third quarter. The sequential increase includes the restriction charge at one of our manufacturing operation as well as higher professional fees. We expect operating expenses to be around $75 million in the first quarter of 2013. Our other expense of $25 million was up from $22 million in the third quarter. This sequential increase includes higher interest expense due to our increased debt levels and costs for the early retirement of debt.
Our effective tax rate in the fourth quarter was 26% and 23% for the full year 2012. For the first quarter, we expect an effective tax rate of around 28%. As for the full year 2013, we expect an effective tax rate of around 22%.
As Ken mentioned, we have exercised our option to increase our ownership interest in J-Devices. We will purchase newly issued shares for approximately $75 million and our percentage ownership of J-Devices were increased from 30% to 60%. The transaction is expected to close in March 2013, and we expect to use cash on hand or borrowings under existing facilities to fund the purchase price.
To give you a sense of their scale, fourth quarter 2012 revenues for the combined J-Devices and backend operation acquired from Fujitsu were around $200 million. As with many joint ventures, the governance provisions applicable to J-Devices restrict our ability, even after pinning majority ownership to cause J-Devices to take certain actions without the consent of the other investors.
Accordingly, we will continue to account for our investment in J-Devices using the equity method of accounting and continuing to record our pro rata share of their earning and income statement.
Moving on to our liquidity and capital structure. At December 31, we had $413 million in cash, total debt of $1.5 billion and net debt of $1.1 billion. During the quarter, we entered into a $100 million term loan facility. We expect to drawn this facility in 2013 to support our planned investments this year and the exercise of the J-Devices option.
Turning to our new factory in R&D center in South Korea, in February we acquired the land for $100 million. From our cash perspective, we paid $10 million in February and we expect to pay around $40 million in the third quarter of 2013 and around $50 in the fourth quarter of 2013.
We anticipate that construction should commence through the end of this year, and we may spend $50 million in 2013 for construction. And we expect to spend a total of around $300 million for the construction of facility over the next several years.
We believe our liquidity is down. Our next debt maturity is April 2014, and is our $250 million convertible note. This instrument is well in the money and we expect that it will be converted into equity rather than paid at maturity. In light of our potential investments in 2013 and 2014 for this and other projects, we are exploring some additional credit lines, possibly an amount of $300 million or so, which would provide additional funding for us if needed.
In summary, as Ken discussed we believed our investments can help drive profitable growth, enhance our technology leadership and provide solid returns. With that we will now open the call up for your questions.
(Operator Instructions) Our first question comes from the line of Vishal Shah with Deutsche Bank.
Chad Dillard - Deutsche Bank
This is Chad Dillard in line for Vishal Shah. First off could you talk a little bit about key opportunities that you see with J-Devices?
Yes. We're really very happy with this opportunity. As we said that J-Devices is the largest independent OSAT in Japan. They were formed several years ago, as a join venture between Toshiba and Amkor and the original investors of J-Devices to handle the outsourcing of Toshiba's backend, the system LSI.
In 2012 they worked with Fujitsu who was outsourcing their backend operation. And more recently, as I said, they've announced that they are working on acquiring some factories from Renesas, and as they outsource some of those. So it's a very exciting opportunity for Amkor to participate in the expansion of our business in Japan.
We've had a long standing relationship in Japan. The J-Devices is doing roughly as Joanne, indicated roughly $200 million per quarter, and will be increasing in size, we believe as they go forward, the products that they serve are mainly in consumer electronics, industrial, and automotive and a lot of wirebond products.
So we've been focused over the past number of years on the advanced technologies. This allows us also to participate significantly in the more mainstream or legacy products also. So it's a real growth opportunity for us. Real strong cash flow with rather minimal capital investment, so we're real pleased with this opportunity.
Chad Dillard - Deutsche Bank
And can you talk a little bit about your competitive environment and where you see the greatest opportunities for share gains or penetration for this year?
Of course, we are the market leaders in flip chip and advanced technologies. We believe we're well positioned there. We, in the legacy and the in wirebond product, we're little bit more challenged, but clearly the other area that we're really well positioned is in mobile communication. So clearly the right market with the right customers as we say, it continues to grow and we have the advance technologies to support that. So it's been a critical part of our growth strategy moving forward and gives us a very strong position to differentiate on technology and a very strong competitive advantage against our competitors. So we're very comfortable in that place where we are.
Chad Dillard - Deutsche Bank
And, lastly, how should I think about your utilization rates, if you think about it between the first half and the second half of the year?
When you look at our typical patterns, the second half tends to be better utilized than the first half. Q1 tends to be the trough with growing to the second quarter, but the first half tends to be not as strong as the second half.
Our next question is from the line of Jeff Harlib with Barclays.
Jeff Harlib - Barclays
Just maybe with J-Devices, can you just talk about how the margins look? I mean, that's my main question, how do their margins compare to Amkor's margins and do you expect any required investment from Amkor?
With respect to J-Devices as Ken, mentioned in his prepared remark they are continuing to be transforming as a corporation. As we own them for the first three years here with principally the predecessor operations that supported mainly Toshiba. Just in December, they did the acquisition of several factories from Fujitsu. So they are basically doubling in size in December and to the extent that the transaction is contemplated with Renesas closest, then they'll take a next incremental step.
As Ken mentioned, it is wirebond product. Wirebond product, it tends to operate at a lower gross margin percent. I would say that while we haven't fully comprehended with the fully-emerged operation is over the long-term, but I would describe it as in the teens, mid-to-high teens. At this point, as I mentioned in my prepared remarks, we're not going to consolidate J-Devices. So you will only see us continuing to pick up the equity pick up. So it will be accretive to earnings but, you won't see the revenue growth or any other potential compression in gross margin.
Jeff Harlib - Barclays
And just with your growth in smartphones and tablets, can you talk in terms of the capacity it's being added to that. Is it different than some of your other products and markets in terms of capital intensity? And do you have design wins to be comfortable that revenues are going to continue to accelerate in that segment?
I can start off with the capital intensity comment. With respect to mobile phones we have strong attach to test. So there is a higher level of capital intensity, in serving the mobile communications market. And we have several chips that are heading into a smartphone. So base band apps processor, a memory stack, some of the MEMS devices for the microphone. And we're seeing things that would be on the flip chip CSP side, which would be a conventional package as well as the Wafer Level CSP, which is lower pin count and maybe for connectivity and alike.
So we were deep into the phone. But because of the higher test attach, because of some of the wafer level processing investment you see a higher capital intensity. That said, some of these areas actually have lower labor intensity, so we are swapping some of the cost with the differing mix.
Jeff Harlib - Barclays
And, just lastly, any comments on what you're seeing in the pricing environment, either in specific areas or generally?
As you well know in the OSAT space, pricing is always very competitive and we're always in discussions with our customers on price reduction. That being said, the pricing environment certainly more robust in the advance technologies and lot of this advanced technologies are being used in mobile communication. So compete really very well in that space. The pricing is more competitive in the commodity and the mature market but we believe we compete there very well also.
Our next question is from the line of (David Foropoulos) with UNUM Corporation.
I just had a couple of questions. This is obviously a significant year of capital intensity and capital investments. As you move through the year into 2014, should we get back to normal type levels? Can you talk through any of that please?
So with respect to 2013, we're investing about $400 million of CapEx. The way that CapEx breaks out is about 50% packaging, 30% tax, and 20% R&D and some of the other manufacturing areas. So that's the $450 million. We also acquired $100 million of land on top of that, and we'll start construction, make a construction deposit about $50 million. So all in that's about $600 million this year.
With respect to the construction to build the facility in Korea that's going to run us about $300 million, of which I said we will spend about $50 million this year. So in 2014, we're going to have $250 million for the building. With respect to the normal CapEx to support our business, this year's capital intensity at the $450 million range is probably an appropriate level for the business as we continue to grow. But obviously, that's all going to be dependent on where demand is and if there is any kind of correction or further growth.
And you also have the $75 million investment in Japan too, so it's kind of $675 million all in, right?
And then, so the next year with the $250 million going into the building and construction, it seems like you'll probably be north of $600 million again, I would think, all else equal?
Without giving specific guidance with respect to 2014, if you assume, relatively flat CapEx, then your number would be in the neighborhood.
And one other questioned. I don't know what type of line of sight, but there's a lot of chatter about inventory or lack of inventory in the supply chain. Can you guys give us any color where you see that, is it lean or is it spotty, can you help us out there?
All the view that we have right now is that when we talk with our customers it's our view that the inventories are rather lean at this point in time.
Is that at the end-user level or is that at your semiconductor customers or both?
I believe it's both from what I'm hearing.
There are no further questions. I'll turn the call back to Ken Joyce for closing remarks.
Well I'd like to thank everyone for participating in our call here today.
Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay, it will be available for the next 24 hours by dialing 303-590-3030 or 1-800-406-7325 with the access code of 4584487. We thank you for your participation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!