Good day, ladies and gentlemen, and welcome to the Amkor Technology Fourth Quarter and Full Year 2015 Earnings Conference Call. My name is Ranya, and I will be your conference facilitator today. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to Greg Johnson, Senior Director of Finance and Investor Relations. Mr. Johnson, please go ahead. .

Thank you, Ranya, and good afternoon, everyone. Joining me today are Steve Kelley, our President and Chief Executive Officer; and Joanne Solomon, our Chief Financial Officer..

Our earnings press release was filed with the SEC this afternoon and is available on our website. During this conference call, we will use non-GAAP financial measures, and you can find the reconciliation to the U.S. GAAP equivalent at our website..

We will also make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it. Of course, actual results could be different.

Please refer to our press release and other SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations..

Please note that the financial results discussed today are preliminary, and final data will be included in our Form 10-K..

And now, I would like to turn the call over to Steve. .

Good afternoon, and thanks for joining the call. Today, I'll review our 2015 performance, our 2016 priorities and our first quarter forecast.

First, however, I'd like to note that we have successfully completed our acquisition of J-Devices, which establishes Amkor as the leading OSAT for automotive ICs, with roughly $750 million in annual automotive revenue. In addition, this combination increases our scale and will boost our cash flow and EBITDA performance. .

Looking back, 2015 was a challenging year for the industry and for Amkor. General economic conditions and the lack of compelling new mobile products constrained overall demand.

The high-end smartphone market was a particular issue for us in 2015, in part, due to lackluster market conditions, and in part, because of changes in the supply chain, which impacted one of our major customers. .

We closed 2015 with a fourth quarter that met our gross profit guidance, helped by favorable exchange rates and cost reduction initiatives. Faced with uncertain market conditions, we started taking action early in 2015 to control cost and spending. This allowed us to generate positive free cash flow for 2015, despite a year-on-year revenue decline.

We reduced CapEx 40% year-on-year, excluding spending on K5, and we controlled operating expenses. .

In 2015, we made good progress in many of our strategic focus areas. Advanced system and package products, the Greater China market and the automotive sector were all bright spots for the company. Our advanced SiP business grew 16% year-on-year to roughly $725 million, driven by the space constraints and performance needs of mobile devices.

In addition, advanced SiPs are gaining traction in memory and automotive applications. .

We define advanced SiPs as multicomponent, multifunction products in an IC package that require high-precision assembly technologies, which leverage Amkor's strengths..

Greater China revenues grew 20% in 2015. We established a dedicated Greater China business unit, upgraded our regional sales and customer service teams, and significantly expanded the number of accounts we engage within the region. Automotive revenue grew 10% in 2015 and will account for more than 20% of Amkor's 2016 revenue.

Amkor is a good choice for automotive customers who demand high quality and long-term stability. .

Now let's turn to our expectations and priorities for 2016. The J-Devices acquisition will drive top line growth for Amkor in 2016. Operationally, our integration with J-Devices has been underway for quite some time. We're aligned on many fronts, including sales, operations and R&D. We'll accelerate the consolidate-and-fill plan at J-Devices this year.

Execution of this plan will lower our fixed cost in Japan, enhancing our profitability from 2017 forward..

In Greater China, we expect to see significant revenue growth in 2016. To support this effort, we are expanding our Shanghai factory by nearly 50%, bringing total cleanroom space to roughly 600,000 square feet.

Our Shanghai factory serves international and local customers, providing wafer-level packaging, wafer bumping, advanced SiP and test services, and probably one of the first OSATs to offer 12-inch bumping in China, with production ramping this quarter and next.

In 2016, we expect to make capital investments of approximately $650 million, including $170 million to complete the construction of K5, our new R&D and manufacturing facility in South Korea. We plan to ramp K5 in 2017 and will time our capacity investments to match customer demand.

Until K5 opens, we'll use our existing development lines to perfect and cost reduce Amkor's advanced fan-out technologies, including SWIFT and SLIM. .

For the first quarter, we expect revenues to be up 21% sequentially and up 9% year-on-year. Our midpoint guidance of $810 million includes legacy Amkor revenues of $625 million and J-Devices revenues of $185 million..

I believe that Q1 will be the trough quarter for 2016 and that the market will strengthen over the course of the year. In the meantime, we will continue to take advantage of open capacity to accelerate development programs, qualify new products and improve efficiency..

There are many industry trends working in Amkor's favor that will accelerate our growth moving forward. First, we are benefiting from increased semiconductor M&A activity. As customers get larger, they typically prefer to work with larger, more capable OSATs.

In addition, OSAT consolidation trends favor Amkor as customers seek to rebalance their business to avoid relying too heavily on any single supplier..

Second, the pace of package-level integration is picking up, and this is where Amkor adds the most value. The growth in our advanced SiP business directly reflects our success in this area. .

Third, our efforts to develop relationships with customers in Greater China are bearing fruit. We will grow faster than the market as we gain share in the region. .

And finally, we will leverage our strengths in automotive to drive further sales growth. .

to grow our revenue, and by growing revenue, improve our profitability. We will increase our share and will fully utilize our factories. We will continue to invest where necessary, offering full support to our customers. Joanne will now provide more detail on financial information. .

Thank you, Steve, and good afternoon, everyone. On December 30, we increased our ownership of J-Devices to 100% and gained control of the company. Amkor's 2015 balance sheet reflects the consolidation of J-Devices, and the operating results of J-Devices will be consolidated beginning in 2016.

We paid $105 million for the additional 34% ownership interest. We invested a total of $202 million to acquire 100% of J-Devices. At year-end, J-Devices cash was $128 million and total debt was only $56 million. Amkor generated adjusted EBITDA of $689 million in 2015. On a combined basis, Amkor and J-Devices generated $773 million of adjusted EBITDA.

At December 31, we had total debt of $1.6 billion. Debt to adjusted EBITDA was 2.3x, and was 2.1x including J-Devices EBITDA. Our liquidity is solid with over $520 million in cash and $20 million in available undrawn loans..

In 2015 and into 2016, we are tightly controlling CapEx and working capital, in line with the decreased demand environment. For 2015, we generated $40 million in free cash flow. Amkor's GAAP financial results for the fourth quarter included accounting charges related to the increase in our ownership interest in J-Devices.

These items include a gain of $16 million related to the step-up to fair value of our previous investments in J-Devices and a noncash loss of $30 million relating to the release of the cumulative foreign currency translation adjustment account for net loss of $14 million. .

Amkor's fourth quarter gross profit was at the midpoint of our guidance despite slightly softer-than-expected revenue, largely due to favorable foreign exchange rates and cost control. For the full year, operating expenses were down $17 million, a 5% reduction on lower professional fees and reduced incentive compensation.

Operating expenses in the fourth quarter were $81 million, and for the first quarter 2016, we expect operating expenses to be around $95 million. The increase over the 2015 run rate is due to the addition of J-Devices operating expenses to our total.

Interest expense in the fourth quarter was $18 million, and we expect it to remain around this level in the first quarter of 2016. And finally, we expect our effective tax rate for the full year 2016 will be around 35%. .

With that, we'll now open the call up to your questions.

Operator?.

[Operator Instructions] And our first question comes from the line of Randy Abrams from Crédit Suisse. .

My first question, I wanted to ask on the SiP business. I think the first time you've quantified, and $725 million brings it at about 25% of sales. Could you talk about what applications are in there? Like what's the biggest components of that SiP that you're doing now? And if you could kind of give your initial take.

Last year, it sounds like it grew double digit. The type of growth you're seeing continuing in that business. .

Yes, Randy. Let me give you a little background on the SiP business. We've been in the SiP business for roughly 15 years. It used to be called MCM and modules, and eventually migrated to SiP. So where we're dividing advanced SiP is basically putting multiple electronic components, multiple functionality into a single IC package.

So we went back and took a look at which products we're shipping that met that definition. And among the products are our FM front-end modules.

We have memory stacks with ASIC controller chips, intelligent sensors, and really, a variety of SiPs for smartphone applications and tablet applications, which combine different types of die in a single package. .

Okay. And maybe kind of the growth you're seeing in that type of business, or how you've seen it the last couple of years. And what kind of growth -- like if you see a lot of growth continuing for that. .

Yes. I think I see a lot of growth here because as people seek to reduce the size and improve the performance of their products, the best way to do that is to move the die closer together, essentially, into a package. So it doesn't make sense to integrate the die on a wafer, then Amkor can help them integrate that into a package.

So we're seeing 2 camps. 1 camp is the applications that require both space savings as well as performance, and then the other camp are high-performance applications which are seeking the higher speed and lower power consumption, typical of these type of advanced SiPs. .

Great. Okay. And my second question, I want to ask about the -- China. I guess, 2 fronts. You were seeing some M&A where Chinese have been more aggressive on acquiring either IDM or traditional OSATs. So I want to see the way this -- kind of your view on competition, or if there's been some spillover after their acquisitions.

And you're expanding quite a bit of capacity in Shanghai, it looks like. So I guess, your expectations also for the China business, for growth from that business and contribution from Greater China. .

Yes. We have very high expectations for the business in China. This is a business where we, classically, has not -- we have not focused in China over the years. The past 2 years have been different and we're seeing the effect in our revenue line.

But China, the China customers are -- many of them are looking not just to China for growth, but also to export markets. So they're looking for a reliable source of advanced packaging, and preferably one that has substantial assets in China.

So with our factory in Shanghai, I think that factory is acknowledged as the most advanced OSAT factory in China today. We've got 8-inch bump capacity and bringing on 12-inch, as we speak. So we could do just about anything in that facility that Chinese customers need.

In addition, those Chinese customers are looking at our facilities in Korea and in Taiwan. So we offer them geographic diversity, but also a team of Chinese-speaking application engineers and salespeople to develop that business. .

Okay. And If I could ask on the CapEx, to drill a little more into the $650 million guidance. Like how much you're allocating to this China, to the K5, I think you disclosed.

And then within the equipment portion, the priorities for investment for equipment, say, between assembly or test or some other things like SLIM, SWIFT, and then implications for depreciation in 2016?.

Let me start the answer, and I'll turn the rest of the answer over to Joanne. But we guided to $650 million in CapEx spending for 2016, roughly $170 million of that will be for the completion of K5 construction.

If I take a look at the $650 million a different way, of the $650 million, $350 million is for infrastructure spending, including K5 and the completion of our China facility and IT and R&D. The other $300 million is for classic capacity expansion and capability expansion. .

On the depreciation side, since a lot of the incremental CapEx is associated with the building with a very long life, it won't have much of an impact. We expect depreciation for 2016 at those CapEx levels to be right around $500 million, $550 million when you include SG&A -- with included SG&A.

The uptick from the prior year is entirely driven by the acquisition of J-Devices and not from the CapEx side. .

Okay. Okay, great. And tax rate, I guess, stays 35%.

Like, is there a potential for that to come down over time?.

I think there is a potential for it to come down over time. Right now, we have some losses in jurisdictions where we benefit from a tax holiday, and as profitability in those regions recover, I would expect that tax rate over time to gravitate back down towards the 25% to 30% range. .

[Operator Instructions] And our next question comes from the line of Sidney Ho from Deutsche Bank. .

A couple of [indiscernible]. First of all, on the communication business. [indiscernible] you previously talked about, [indiscernible] for Q4, it sounds like 10% quarter-over-quarter. You previously talked about the 3 main buckets within the smartphone, comm smartphone business, which is Cupertino, Android and China.

Can you remind us what's the relative size of your revenue and the content per phone for each of these 3 buckets today? And then 2015 was obviously a tough comp for you, as Steve mentioned in his prepared remarks.

How confident are you that the comms business will grow this year? And if you can give some color on each of the 3 buckets, that would be great. .

Yes. So it's good question. I can't break it down by dollar value. But what I could comment on are the trends in those 3 ecosystems. I think today, we're strongest in the Cupertino ecosystem. If you take a look at our content in those phones, it's pretty high.

We also have a presence in the Samsung ecosystem, which is actually getting a lot better this year. We have much better content in the upcoming Galaxy launch than we did last year at this time, so that's a positive point for us. In the China ecosystem, this is where we have the most potential for growth. And so that's where a lot of our focus is.

But I think the trend is definitely very positive there. So to summarize, I think in Cupertino, we'll be probably flat from a content standpoint, maybe slightly down. But we'll be up in Samsung and Greater China moving throughout 2016. .

Okay, great. And my second question is, can you talk about the inventory situation in the channel and at the customers? The past month we heard from a few analog companies that seem to point to inventory kind of returning somewhat to normal levels.

Now that we are almost 1.5 months into the quarter, I wonder if things have gone better or worse, especially given the macro volatility. And if you can give some color by end market and regions, that would be great. .

Yes. I have a lot of talks with customers as well. I'm hearing similar things where -- and I look at the reports from distribution and I think inventory is well under control. So I think right now, we're in a situation where many customers are a little skittish about demand, they're keeping low inventories.

But when they see the demand start to pick up, then we'll see a lot of orders flow in. I think it's a typical, I guess, mid-cycle behavior that we're seeing today. But I have hopes that the general market will improve this year. And looking at past semiconductor cycles, when it improves, it improves fairly quickly. .

Okay. If I can squeeze one more in. In the past, you have talked about J-Devices can grow margins by themselves through continued rightsizing of the factory footprint.

Can you give us some idea, the timeline of those actions and how does K5 fit into this [indiscernible]?.

Yes. So for J-Devices, our plan is to consolidate and fill. And what that means is, we'll reduce the factory footprint over time and then bring more business in to fill the remaining factories. So that really started last year, but it will be accelerated this year.

So we anticipate reducing the fixed cost significantly over the course of this year into 2017 and enhancing profitability. We're also able to in-source some major business from Renesas after they closed their Singapore facility, which produced automotive microcontrollers. Much of that load is being moved into J-Devices factories in Japan.

So we're looking at other actions like that to optimize the loading at our J-Devices factories. .

Any chance you can kind of quantify what that means to the EBITDA margins? I think J-Devices was like 13% last year. .

That's right. On a gross margin basis, they were at 13% in 2015. As a mainstream factory, we are -- we've always targeted that they could get to the 15% area. So that would be the target for our improvement on the J-Devices side. .

Okay. Thanks very much Sidney. There are no more questions, so that ends the Q&A portion of the call. I will now turn the call back to Steve for his closing remarks. .

Yes. I'd like to recap our key messages. First, we achieved our Q4 gross profit target. Secondly, we will grow revenues roughly 21% sequentially in Q1. Third, our key growth initiatives gained significant traction in 2015. And finally, a number of long-term trends in the industry favor Amkor. Thank you very much for joining us today on the call. .

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now all disconnect. Everyone, have a great day..