Steve Kelley - President & CEO Megan Faust - Corporate Vice President & CFO.

Randy Abrams - Credit Suisse Ana Goshko - Bank of America Merrill Lynch Sidney Ho - Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Amkor Technology First Quarter Earnings Conference Call. My name is Grace 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 and instructions will be host that time.

As a reminder, this conference call is being recorded. Joining us today are Steve Kelley, our Chief Executive Officer; and Megan Faust, our Chief Financial Officer. Amkor's earning's press release was filed with the SEC this afternoon and is available on the website.

During this conference call management will use non-GAAP financial measures and you can find in reconciliation to the US GAAP equivalent on the Amkor website. Amkor will also make forward-looking statements about their expectations for future performance based on the environment as they currently see it. Of course, actual results can be different.

Please refer to our press release and the 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.

I would now like to turn the call over to Chief Executive Officer, Steve Kelley..

Good afternoon, thanks for joining the call. Today I'll review our first quarter performance and our second quarter forecast. In addition, I'll discuss how our strategic initiatives and acquisitions are driving balanced growth for Amkor. Year-on-year on first quarter revenue was up 14%. This is a significant jump and a good start to the year.

On a sequential basis, revenues was down 11% after a very strong fourth quarter. Nearly all of the sequential decline was due to a slowdown in the high end smartphone market. This is a normal seasonal pattern in the high end smartphone space and was fully anticipated in our first quarter guidance.

In other markets including automotive, industrial, computing and consumer we experienced healthy demand in the first quarter. We expect the second quarter to look much like the first quarter. Our midpoint revenue guidance of $1.03 billion is roughly flat sequentially and up 2% year-on-year.

In the communications market, second quarter revenues will be flat to slightly down sequentially due to continued weakness in high end smartphones. Some of that weakness will be offset by increased demand in the low and mid-tier android market. In our other end markets, we see solid demand in the second quarter.

Component lead times are relatively long and distributor inventories are relatively low. This robust demand environment is good for Amkor and for many of our customers. Looking to the second half, we expect the general semiconductor market to remain strong. The worldwide economy is growing at its fastest rate since 2011.

For the IMS recent update, the world economy grew by 3.8% in 2017, is expected to grow 3.9% in both 2018 and 2019. Electronic content is also growing, also a wide variety of applications. We expect the high end smartphone production will increase in the second half to support the launch of multiple new flagship phones.

Now I'll step back and discuss our balanced growth objective as well as the key initiatives and acquisitions which support that objective. Balanced revenue growth remains our overriding objective for simple reason. As a high fixed cost technology company, the only way to improve our financial performance over the long-term is to grow revenue.

The balanced part of the objective has manifested itself in two ways. First, we've moved to generate a higher percentage of our revenue in more stable markets such as automotive. This reduces our reliance on the more dynamic communication segment.

Second, we've gone deeper and broader in each of our served markets reducing our reliance on any one customer, product or application. We believe that our balanced growth approach is leading two sustainable gains in factor utilization and financial performance. It also produces better results in trough quarters as demonstrated in the first quarter.

Our automotive growth initiative has been an important part of our balanced growth strategy. Four years ago, automotive accounted for roughly 11% of Amkor's total revenue. Today it accounts for more than 25%. Over the same time period revenue from the communications market moved from 56% of total revenue to 44%.

Our greater China growth initiative has been key to broadening our participation in the communications market. We are now positioned better in the mid and lower tiers of the market while remaining very strong in the high end.

This will benefit us in Q2, since we expect an increase in mid and low tier demand to partially offset weakness in the high end. And finally our advanced SiP initiative has been critical to our success in the communications, automotive and computing markets. Amkor's advanced SiP technology toolkit in capacity will be careless for future growth.

Moving forward, we will continue to focus on these key growth initiatives. Now I would like to touch on recent acquisitions and how they support our growth. Our acquisitions of J-Devices doubled Amkor's sales into the automotive market. It strengthened our competence in automotive assembly and test.

And allows us to better support both Japanese and non-Japanese automotive customers. Our acquisition of NANIUM, world class wafer-level fan out technology in capacity to Amkor. The NANIUM technology complements Amkor's wafer-level CSP technology in capacity.

In addition, having a factory in Portugal has increased partnership opportunities with European customers. And finally our acquisition of power discrete factory in Malaysia increased our participation in the automotive, industrial and computing markets.

The power discrete market is growing steadily and we have source of stable revenue growth for Amkor. In short, we see plenty of opportunities for Amkor to grow in the coming years. We're bullish on the semiconductor market overall.

The trends and artificial intelligence, IoT, high performance computing, automotive, storage and other markets bode well for the sector. The trend towards [indiscernible] is very positive for Amkor. Since our advanced SiP toolkit enables customers to integrate its package level at a reasonable cost with high yields and excellent reliability.

And finally the trends towards consolidation in our customer base is also a positive, since bigger customers prefer to deal with bigger, more capable OSAT's such as Amkor. Ultimately, we grow because customers choose to do business with us.

Over the course of 50 years, we developed a loyal customer base because we were stable and reliable manufacturing partner with excellent technology. Moving forward, we're dedicated to delivering the best bundle of technology and service, execution and quality, that bundle differentiates and facilitates our growth.

Megan will now provide more detail on financial information..

Thank you, Steve and good afternoon, everyone. As a reminder in Q1, 2018 we changed our revenue recognition accounting in accordance towards the new required US GAAP standard. The change in revenue recognition does not have a meaningful impact on our financial results. All prior periods have been adjusted to the new standard, so they're comparable.

A table showing new adjustments to the previously repeated period is included on our website. Today I will review our first quarter results, share some historical financial data demonstrating the positive effects of our balanced growth strategy and provide some comments about our second quarter expectations.

Our financial results for Q1, 2018 are in line with guidance. We delivered record first quarter revenues of $1.03 billion up 14% year-on-year. Operating margins, net incomes and EBITDA all showed solid gains year-on-year.

Profitability improved due to our healthy growth in sales, despite an unfavorable foreign currency impact of 120 basis points compared to Q1, 2017. Because we operate with high fixed costs, revenue growth is the key to our success.

Our balanced growth strategy both organically and through select acquisition has substantially improved our financial performance over the past three years. The following are some key metrics that help us understand these trends. Annual sales have increased from $2.9 billion in 2015 to $4.2 billion in 2017, a CAGR of over 20%.

Earnings per share have increased from $0.22 per share in 2015 to $1.10 per share in 2017. We have increased our annual EBITDA to nearly $1 billion in 2017 from $669 in 2015. With the increase in EBITDA, our debt-to-EBITDA ratio has significantly improved from 2.4 times in 2015 to just 1.3 times as of March 2018.

We've exercised CapEx discipline, reducing our capital intensity from 19% in 2015 to 13% in 2017 while still significantly growing the business over the same period. As a result, we have successfully generated annual positive free cash flow since 2015 and expect to be free cash flow positive again in 2018 for the fourth consecutive year.

All of these favorable trends have had a positive impact on our financial health. In 2017, we redeemed $200 million of high interest senior notes. This produced a pre-tax annual interest savings of $13 million. At the end of Q1, 2018 we had nearly $500 million in cash and around $300 million in available undrawn loan.

As of March 31, we had total debt of $1.3 billion down from $1.6 billion at the end of 2015. We have improved our net debt position from over $1 billion in 2015 to around $750 million at the end of 2017. Over the past few years, we've also taken steps to manage our cost structure.

During 2017, we completed a multi-year factory consolidation plan in Japan to reduce our factory footprint from 11 plants to six. In Korea, we closed and sold our K1 factory, which resulted in a pre-tax gain of over $100 million in 2017. We transitioned more of the K1 business to other Amkor factories.

These factory consolidation efforts improve our utilization and enhance profitability. Moving to our second quarter expectation, revenues are expected to be around $1.03 billion. We expect second quarter gross margin to be between 14% and 16%. Our full year 2018 forecast for capital expenditures is unchanged at around $600 million.

Operating expenses are expected to be around $120 million for the second quarter. R&D expense includes labor, depreciation and other costs associated with K5. As we bring lines up to production some of these costs transition to cost of goods sold. For now we expect our 2018 full year effective tax rate to be around 25%.

Note however that we continue to evaluate our provisional estimates of the complex provision of the new US Tax Reform Act and these estimates could change as we refine our analysis and apply any new guidance on this law. With that, we will now open the call up for your questions.

Operator?.

[Operator Instructions] and our first question comes from Randy Abrams with Credit Suisse. Your line is now open..

I wanted to ask the question on, it was a good first quarter but for second quarter outlook. Where it looks now a little bit below the traditional seasonal where you start to get some pick up.

Could you I guess just clarify if it's some exclusively related to high end smartphone and the follow-up to that is just with that view, do you expect that maybe a little bit of softness on that smartphone market to effect the second half or potentially draw it below seasonal or flip side coming off lower base in component draw down it, it could see a pickup and I'm curious how you're looking at second half and then also have it, the second quarter revision or what drove the revision?.

Yes, Randy. So second quarter we split it into two parts one is, high end smartphones and the other is everything else. We look at everything else. We are very happy with the level of demand. In the general market place, we see now eight straight quarters including Q2 of very healthy demand.

So we think that business is in good shape and as I mentioned, in the general market I think in general demand is somewhat ahead of supply, so that's very good for Amkor and many of our customers.

In the high end smartphone market there was a obviously a large build and the latter part of 2017 and I think the industry including Amkor is working off some of that inventory, but we expect the second half to be pretty strong, for two reason.

One is, we think the general market is going stay strong based on everything we see in the marketplace and secondly, we know there are number of flagship phones that will be launched in the second half, which will drive I think a strong demand for ICs and Amkor services..

Okay. Great and you talked on the, there was just like some bottlenecks in the supply chain such as some of the passive components and there's a been a bit of talk also on equipment lead times maybe a little bit longer for certain tools.

For your business, I'm curious if you're seeing impact on deliveries just from some of these constraints and also if there is any areas of tightness where you're having to increase CapEx or if you feel like in this broad based markets, you have with the J-device networks in your other fabs you have good capacity to meet that demand..

Yes, you may have noticed, we spend a lot in CapEx in Q1 and that was largely due to equipment we installed in the last four months of 2017. So we run into quite a few bottlenecks in Q3 of last year.

Particularly in our advanced product lines and so we decided to go ahead and make some incremental investments there, so that we're better equipped to handle the surge, this year. Beyond that, I think we see isolated bottlenecks, some MOCC [ph] issues here and there, we see bottlenecks but we've been tapping them I think fairly successfully.

So we don't believe any of the bottlenecks to-date have hindered our revenue..

Okay and last question is, a lot of discussion in the market about the crypto currency in block chain. If you could give a flavor maybe how much contribution you think that's bringing to the business and then also how you're seeing the order patterns in sustainability or continued strength of that business..

Yes so in cryptocurrency and blockchain we're engaged with some of the top mining ASIC customers. We did an upsurge in demand in the past three or four months and I could tell you, we have rather limited exposure. Our exposure as a percentage of total revenue is in low single digits.

So we see this as opportunistic business but also strategic in the sense that many of these mining ASIC customers are also working on ASICs and other chips for artificial intelligence, so we think it's important to be there at the beginning in those applications.

So we think a lot of the business we're doing with the, the miners will transition to AI type applications moving forward..

Okay, if I can squeeze in one more just on the China business, where you talked about some pick up.

If you think maybe a framework because you also have penetration or shared gain where you've been kind of improving from a lower base, could you maybe give a per sector how much do you see the China business growing and maybe how you're seeing the China android market after the slower year last year?.

Yes what we saw in China Randy is that, the smartphone market was somewhat muted through most of Q1 and then we saw a pick up start in March and that's continuing obviously through Q2, so we're seeing quite a bit activity in that ecosystem.

Some of it within the greater China fabless customer base, but also some of that demand is benefitting other customers that we have in North America and Europe. So I think it's offsetting to a certain extent some of the softness we saw in high end over the past month and looking forward..

Okay, great. Thanks a lot..

Thank you. [Operator Instructions] and our next question comes from Ana Goshko with Bank of America Merrill Lynch. Your line is now open..

You touched on it but I was looking at the higher CapEx spend in the quarter and looked sort of a little out of trend I'd say, so could you just explain more what that was for and [indiscernible] if it was rollover spending from last year. So we really think about the guidance for this year's CapEx being down year-over-year..

Yes, let me just review the CapEx. I think first you're right it's primarily a spill over from last year. Our budget for this year is $600 million for CapEx in 2018 and reaffirming that budget. We knew going into this year that a lot of it will be front end loaded based on the equipment we installed late in 2017.

Also as a matter of perspective we spent $550 million in 2017, so $600 million in 2018 we're in the same neighborhood so not a big increase in CapEx..

Okay, thank you. And then I apologize if I missed it.

Did you provide guidance for what we should expect for the OpEx in second quarter?.

Yes Ana, we provided OpEx guidance of $120 million for Q2..

Okay, sorry. Wasn't sure if I heard that or not. Okay well thank you very much..

Thank you. And our next question comes from Sidney Ho with Deutsche Bank. Your line is now open..

Just a follow-up on the couple questions earlier. I want to understand the snap back that you're expecting for the communications market in the second half.

Do you expect the second half communications business dollar wise to be similar to second half of last year? Or do you think it's still going to be lower because last year was kind of overbuild situation? Do you have that sensibility this time?.

Sidney it's hard to say precisely, what the dollar surge will be. But what we can do is look at the past years and typically when you have multiple flagships phones coming out, that's a good thing for Amkor. So every year since 2013 our content in those advance platforms has increased.

So we think if our customers and our customers, customers build the same amount of phones that they did last year, we should see a similar surge if not better than what we saw last year..

Okay, maybe a question for Megan. You talked about the OpEx being $120 million for Q2, but you also talked about some of the cost moving from R&D as production increases at the K5.

Is that happening now and are you still expecting OpEx to somehow go back to this $105 million level and how quickly will that happen?.

Yes Sidney, yes we have started to move some of our OpEx that is related to K5 into cost that happened starting in Q1, and we have that built into our guidance for Q2 that's happening over the course of moving production lines into COGS.

It will not complete, we don't believe by the end of 2018 based on our forecast of the K5 production schedule, but I will affirm that when we have finished completing that, we do expect normal quarterly OpEx to be at $105 million..

Okay, thank you very much..

Thank you..

Okay, this ends our Q&A. I will now turn the call back to Steve for his closing remarks..

I'd like to just recap our key messages. First quarter revenues were up $125 million year-on-year, we're very pleased with the 14% increase. Secondly, our second quarter revenues will be roughly flat sequentially and up 2% year-on-year. And finally looking to the second half, we expect the general semiconductor market to remain strong.

We also expect that high end smartphone will increase to support the launch of multiple new flagship phones. Thank you for joining the call today..

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