Greg Johnson - Senior Director of Finance and IR Steve Kelley - President & CEO Megan Faust - CFO.

Randy Abrams - Credit Suisse Sidney Ho - Deutsche Bank Atif Malik - Citigroup.

Good day, ladies and gentlemen and welcome to the Amkor Technology Third Quarter Earnings Conference Call. My name is Andrea and I will be your conference facilitator today. At this time all participants are in a listen only mode. After the speakers' remarks we will conduct a question-and-answer session. As a reminder this conference is being recorded.

I would now like to turn the call over to Greg Johnson, Vice President of Finance and Investor Relation. Mr. Johnson, please go ahead..

Thank you, Andrea, and good afternoon, everyone. Joining me today are Steve Kelley, our President and Chief Executive Officer; and Megan Faust, our new Chief Financial Officer. Our earnings press release was filed with the SEC this afternoon and is available on our Web site.

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 Web site. These non-GAAP measures include combining J-Devices financial results for certain periods prior to their consolidation.

We will also make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it and statements about the impact of the earth quakes in Japan. 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-Q.

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

Good afternoon, and thanks for joining the call. Today, I'll discuss our third quarter results and our fourth quarter outlook. In addition, I'll provide an update on some of our key growth initiatives. First, however, I'd like to welcome Megan Faust our new CFO. Megan knows Amkor well, having served as our Corporate Controller for the past six years.

She is a CPA and spent 10 years at KPMG before joining at Amkor. Megan will discuss our financial performance and answer your questions during our call today. In the third quarter, we generated revenue at the high end of our guidance. We saw notable strength in smartphones across multiple tiers.

Sales in automotive, Greater China, and advanced SiP were all up sequentially reflecting the continued success of our growth initiatives. Our 18% sequential revenue growth drove gross margin and profitability to the high end of our guidance. Earnings-per-share increased $0.23 sequentially and doubled year-on-year.

In addition, we generated $106 million in free cash flow in the quarter. Mobile communications revenue grew $100 million sequentially. The majority of this growth came from the iOS ecosystem where we are able to leverage our expertise in advanced SiP, MEMS, and other technologies. We also saw gains in the Android ecosystem particularly in China.

Our advanced SiP business grew 45% sequentially and contributed over 20% of total revenue. We saw particular strength in RF and PA modules, as well as in fingerprint and other sensors. Laminate-based advanced SiP's are the preferred modular form factor for mobile and automotive applications.

They require high precision assembly technology, a core competence of Amkor. Most of these laminate-based advanced SiP’s are built at our K4 manufacturing plant in Gwangju Korea. In Greater China, the Amkor revenue grew 25% sequentially.

This growth came primarily from new customers who value our combination of advanced technology, quality, execution, and service. Increased business in this important region is driving better factory utilization and broadening our participation in multiple tiers of the mobile device market.

Our Shanghai factory is well-positioned to service both local and international customers. It is Amkor's second largest factory by revenue and offers a wide variety of advanced packaging and test services including wafer probe, 8 and 12-inch wafer bumping, wafer level packaging, and advanced SiP.

Last quarter, we completed an expansion of this factory boosting clean room space by nearly 45% to roughly 625,000 square feet. A portion of our expanded Shanghai factory houses Qualcomm's new test center which began operations this month.

This new test center will combine Amkor's extensive test experience and clean room facilities with Qualcomm's industry-leading product development and test capabilities. We're excited to work together with Qualcomm in this new operation.

And our expanded relationship is a natural extension of the long history of close cooperation between our two companies. The co-location of the test center in our Shanghai factory may also help us to capture greater share of Qualcomm's packaging business. Automotive accounted for 24% of our third quarter revenue.

On a combined basis, third quarter automotive revenue of $260 million was up 35% year-on-year and up 17% sequentially. J-Devices performed well in the third quarter showing healthy growth in both revenue and profitability. Our plan to reduce our overall factory footprint in Japan, part of our consolidated and fill strategy, is on schedule.

Consolidation activity should be largely completed by the end of 2017. I'd like to close my third quarter commentary with a few words about our power discrete business, which we established in July 2013 with the purchase of Toshiba Semiconductors' Malaysia factory.

The acquisition was a cost-effective way to expand our participation in the automotive and industrial markets. We achieved a significant financial milestone in the third quarter when our cumulative EBITDA from the power discrete business surpassed our invested capital including acquisition costs.

We accomplished this 36-month payback by aggressively reducing costs while maintaining good service levels. This has been a successful tuck-in acquisition for Amkor. We look forward to growing the business in 2017 by ramping new customers to high volume. Moving now to our fourth quarter outlook.

We expect the fourth quarter revenues will be up 54% year-on-year but down 5% sequentially. Demand is solid in nearly all end markets. iOS ecosystem demand is particularly good. We're maintaining our 2016 capital spending plan at roughly $650 million, including $170 million for construction of K5, our new R&D and manufacturing facility in South Korea.

Based on our Q4 guidance, we expect 2016 revenues to be approximately $3.9 billion. This represents a $1 billion increase over 2015, driven primarily by the successful consolidation of J-Devices. We expect full-year gross margin to be approximately 17.5%, an increase of 100 basis points year-on-year.

Earnings per share are expected to be $0.54, more than double our 2015 performance. Megan will now provide some more detailed financial information..

Thank you, Steve and good afternoon everyone. Our third quarter revenue of nearly $1.1 billion was up 18% sequentially. Revenue for advanced products increased 22%, driven by notable strength in smartphones and growth in Greater China and advanced SiP.

Our revenue for mainstream products increased 16%, driven primarily by growth in automotive and consumer electronics. Our gross margin of 19.7% was at the high end of guidance due to strong sequential revenue growth. Excluding J-Devices, third quarter revenue was the second best performance in Amkor's history behind only the fourth quarter of 2014.

In addition, our fixed manufacturing costs, which consist of labor, depreciation, and factory overhead helped steady. This discipline allowed us to deliver a third quarter gross margin consistent with our performance in the second half of 2014.

In the third quarter we incurred $3 million of incremental earthquake cost that reduced gross margin by 30 basis points. In the fourth quarter, we expect to receive insurance payments of ¥3 billion or about $30 million. Including these payments, we anticipate that the net impact of the Japan earthquakes on our full year 2016 results will be minimal.

Operating expenses in the third quarter were $100 million. For the fourth quarter we expect operating expenses to be around $105 million. The increase is driven by facilities related cost. We are exercising discipline and continue to control cost and spending.

On a combined basis with J-Devices operating expenses have been steady for the past several years. Interest expense in the third quarter was $23 million and we expect it to remain around this level in the fourth quarter. We expect our effective tax rate to be about 30% for both Q4 and the full year.

On a combined basis, Amkor and J-Device generated approximately $740 million of adjusted EBITDA over the past 12 months. At September 30, we had total debt of $1.6 billion, and debt to combined adjusted EBITDA of 2.1 times. Our liquidity is solid with $550 million in cash and $300 million in available undrawn loans.

We generated over $100 million in free cash flow for Q3 and we expect to be free cash flow positive for the full year. With our strong cash position bolstered by free cash flow, we anticipate using cash on hand to pay down around $50 million of debt in the fourth quarter.

Our full year 2016 capital expenditures forecast of around $650 million remains unchanged. With that, we will now open the call up for your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Randy Abrams with Credit Suisse. Your line is open..

Thank you and good results. My first question, and maybe welcome, Megan, but it's a couple on the balance sheet and CapEx.

And I was curious in the initial view on CapEx into next year, factoring in the K5 now largely complete, and I think the follow-up is on the free cash flow where you're starting to generate some - and looks like with K5 complete, you may continue that.

So the priorities for some of the cash flow if you start turning free cash flow positive in terms of if there's opportunities to deleverage a bit or any other priorities on the CapEx?.

Yes Randy let me make a comment about the CapEx then I'll turn over to Megan to talk about the free cash flow. In the last earnings call, I guided to roughly $500 million in expected CapEx for 2017. I still feel good about that number, $500 million plus or minus.

I think the one potential pivot point next year could be a faster adoption potentially for wafer level packaging particularly our SWIFT packaging. So if that demand starts to materialize before 2018, we would have to probably pull some investment forward into K5. But right now I still forget about the $500 million..

And then Randy with your question about free cash flow, yes it looks like we will continue to have free cash flow moving forward and as historically has been our practice, we will primarily invest that or look at the needs for the business and then of course we would opportunistically look at ways that we may be able to manage our cost of debt..

Okay, thank you. And the second question, I wanted to ask on the test operation with Qualcomm that you're starting up in China, and maybe talk about the model for test.

If there's a change in the economics running the facility, or leasing the space, versus the traditional way they did test? And if this is something you expect unique to one customer or if there's a business model change you may see change the way test is done at some other customers?.

Sure Randy. I think it’s a multidimensional deal, I think the obvious advantage of having the test center co-located with the assembly centers, obviously their cycle time advantages of doing that. The location in China also helps Qualcomm - increases their China content and brings them closer to their customers in China.

From an economic model standpoint, it's about a wash for Amkor if you look at test only. We end up not passing on depreciation charges because Qualcomm owns the testers but we do have some management fees and greater volume that offset most of the loss of that deprecation recoupment..

Okay, thank you. The last question I wanted to ask, just on the Galaxy Note recall, where you've traditionally had a lot of content to both of the flagship models.

Just trying to see if there's any disruption in order rates, or if you're seeing it balance out with other customers? And the follow-on is you're guiding a little bit of seasonality after a strong third quarter, but if there's anything from that factor or you're seeing a slowdown in some parts of the business in the fourth quarter?.

Sure. So first let me address the Note 7, and I'll talk about Q4 in general. So I think the Note 7, I was fairly worried when I heard about that myself, but after our analysis was complete, what we figured out was that the net impact to us was going to be between $3 million and $5 million for the quarter and that was factored into our guide.

And the way we came to that number as we looked at the absolute impact of the Note 7 cancelation, and then we looked at the offset by increased short term demand for other high end phones, where we also have good contents.

So most of the replacements for the Note 7 we already have very good content, so we're basically exchanging one set of revenue for another set of revenue. So, $3 million to $5 million is the answer for Q4 impact of the Note 7 discontinuance.

If I take a look at the Q4, I would say I'm pretty bullish on Q4, if we look at our factories today, they are humming along at a very high rate right now. I think Q3 we saw the build up for the launch of the latest iPhone and we're seeing continued strong demand there but obviously you always see the biggest demand in the first quarter of the build.

If I look across the business, the only place where I see small seasonal declines would be in consumer and networking. I have done a check of channel inventories, and right now, we believe that the channel inventories are on balance.

The feedback that I have is that those inventories went down significantly in Q3 and what that means for the industry I think is we should finish strong in 2016..

Okay great. Thanks a lot, Steve and Megan..

Thank you. Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open..

Well thanks for taking my questions. So just to follow-up to Randy's question, can you talk about the dollar content per phone between iOS, the high end Android in China? And related to that, you guys have done a really good job increasing the content per phone, especially in the iOS ecosystem.

Can you talk about how much headroom do you have, especially when SWIFT is ready, and in the past you've said 2018, but it sounds like it may happen in 2017..

Yes let me just make sure I understand your question Sidney. You're asking me to try to do a comparison between our content in the iOS ecosystem versus Samsung ecosystem and I will comment on that, okay in China.

So as we take a look at the Note 7 versus its substitutes which include the iPhone and other phones from Samsung what you will find is that the content is pretty similar. So I think our best content is in iOS and we still have strong content in the Samsung phones through our cooperation with Qualcomm in particular.

So that is why, we didn't see as great impact on revenue in Q4 from the Note 7 discontinuance as I feared originally. If I take a look at China, we do surprisingly well in China but it's through a combination of business that served from international vendors and it is also business from local vendors.

We have a lot of upside locally, so we've made some initial progress in China and particularly in the fingerprint sensor area, but also in the baseband area and the Apps processor area. So we're working hard there, we think there is fair amount of upside in China for Amkor..

Great. And then my follow-up question is similar questions, but on the automotive side.

What's the dollar content for you per car today, and what is the potential opportunity looking forward?.

Sidney, I don't really have a great number for you on dollar content per car but what I can do is comment on the general trend. Automotive is growing quite rapidly for us right now it's 25% of our business.

If you look at our run rate in Q3, it was over $250 million, so that means we are running at $1 billion run rate, I really forecasted that to happen about two years from now. So we are seeing two things happen, obviously the content in the automobile is going up tremendously.

So lot of new sensors and new microcontrollers and communications products in particular. The second thing that is happening is we’re seeing a lot of leverage based on our existing capabilities not only in Japan but also in our factories in Korea, in the Philippines where we have been doing automotive business for many years.

So we’re qualified within our customer base and also qualified within our customers, customers base. So, I think on a pretty good position to continued to growing our revenue..

Okay, if I can get a last question. Q1 if you look at Q1 seasonality, it's typically down 8% for you on a standalone basis. Do you have enough visibility today to tell how we should think about Q1? And I think we don't have a history of how J-Devices' seasonality is.

Just want to get a sense of seasonality on J-Devices on a standalone basis, or if you prefer a blended basis of your new seasonality, per se?.

Certainly. Let me just provide some general commentary obviously we can guide specifically for Q1 yet but, I think the best place to start is with J-Devices now roughly 60% of our revenue in Q1 will be tied to non mobilized markets such as automotive, industrial, PC consumer and networking.

So we don’t see any major demand swings in those non-mobile device markets swings up or down and we also don't see significant inventory build up today. So I think that that foundation we have of non-mobile device business should hold up very well in Q1. So the wildcard is the mobile device business that's the other 40% of our business in Q1.

And if you take a look at the ecosystems, I think from a seasonal standpoint we expect iOS and Samsung ecosystem to be at a steady state run rates. So I'm not worried of any major launches in Q1 so it won't be as robust as second half but it should be okay.

We expect those ecosystems from iOS and Samsung ecosystem's to start to really room in Q2 and Q3 with the launch of our major new platforms. The other ecosystem is the one sort of interest in Q1 that’s the China ecosystem. We expect that will be stronger in the first quarter and will offset some of the weakness, we expect from iOS and Samsung..

Okay, great. Thank you very much..

[Operator Instructions] Our next question comes from the line of Atif Malik with Citigroup. Your line is open..

Hi, thanks for taking my question. First question, Megan, so the guidance includes the $30 million insurance from the earthquake.

Can you talk about the gross margins without that contribution, on a normalized basis, for the fourth quarter?.

Sure, happy to do that. So normalizing for the $30 million in insurance proceeds that we're expecting, we would anticipate a gross margin of around 19%..

Okay. And then how do you think about gross margins longer term? In the past, you've talked about maybe doing 25% gross margins at $1.5 billion revenue levels.

Just wanted to see if you still feel confident about hitting those numbers?.

Yes, I will make a comment here, I think that one right track, I think if you look at our gross margin in the second half of 2016 it's right around on 20%. So, I think once we get to point were factors are reasonably full, we can get to 20% to 25% gross margins and that's where we aim to be over the medium to long term.

It's a incremental process and so there is a quite a bit of work been done to improve our efficiency and to improve our ability to accept more business. And I think we did a good job there in the second half of this year. We'll continue that approach in the coming years..

Steve, another one for you. Can you just talk about what's your differentiation on the fan out wafer level packaging, TSMC is starting to ramp production in the fourth quarter, and we have another large foundry in the lead.

So as we look at all those other foundries trying to rollout this new technology, how should we think about your differentiation, or if you can talk about your costs versus your peers?.

Yes, may be first I’ll talk about the current situation and then I’ll talk about our plans. Obviously TSMC has gone in and their major investment in high density fan out which they call info and we’re actually very happy about that because they have been able to create this as the mainstream technology.

And what we’re seeing is that even though this is a one customer technology today with TSMC, we're seeing demand start to percolate at other customers so they're seeing us in the marketplace and they want something similar. So that sets the table very nicely for our technology which is called SWIFT again the same form factor as TSMC's info.

And what we're going to play there is really trying to appeal to more than just a high end market but also the mid range market. And we’re doing that by reducing cost and maximizing yields. We were working on this SWIFT technology for at least last three or four years and this would be the first technology we installed into K5.

One of the keys in this technology has to have a very clean environment. We believe K5 our new facility in South Korea is it's not the cleanest - among the cleanest environment in the backend. It's a Class 100 facility and we think it’s ideal for producing this type of product.

The other leverage we have here is that, I think we’re well suited to dealing with dye from many different foundries. I think wafer foundries tend to prefer to build with their own dye and we’re used to gathering dye from various suppliers and packing them up.

So, I think between our optimization of cost and yield and our ability to handle dye from multiple foundries we have a good value proposition. Okay. And the other question was more generally wafer level fan out because of low density wafer level fan out this is typically single dye fan out.

One advantage that we see with the wafer based technology again some TSMCs in wafers as their base and so are - is this technology is very flexible, it uses equipment that's basically off the shelf and it leverages the installed base.

So when I say flexible, the equipment we're using to build the swift products is also used to build low density of fan out products and wafer level CSP. So when demand decreases one area we could fill that capacity with demand from a different area. So we think that’s a basic advantage of the wafer based approach with just much more flexibility. .

Okay, thanks very much Atif. There are no more questions so that ends the Q&A. I would now like to turn the call back to Steve for his closing remarks..

I'd like to recap our three key messages. First we completed the strong third quarter with revenue and gross margin at the high end of our guidance. Second our fourth quarter outlook is solid and finally we are making important gains in our focus areas including events SiP, automotive, Greater China and J-Devices. Thank you for joining the call today..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..