David Pasquale - IR, Global IR Partners S.J. Cheng - Chairman & CEO S.K. Chen - CFO.

Tim Arcuri - Cowen and Company Richard Shannon - Craig Hallum Eric Gomberg - Dane Capital.

Welcome to the ChipMOS First Quarter 2016 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, David Pasquale from Global IR Partners. Please go ahead..

Thank you, operator. Welcome, everyone, to ChipMOS' 2016 first quarter results conference call. Joining us today from the Company are Mr. S.J. Cheng, Chairman and Chief Executive Officer and Mr. S.K. Chen, Chief Financial Officer. SJ will review highlights from the first quarter 2016 and then provide ChipMOS's second quarter business outlook.

SK will then review the Company's key financial results. We will then have time for any questions. If you have not yet received a copy of today's results release, please email Global IR Partners at imos@globalirpartners.com or you can get a copy of the press release off of ChipMOS's website www.chipmos.com.

We have also uploaded an updated corporate overview under the corporation's website. Before we begin today's prepared remarks and Q&A, we must make a disclaimer regarding forward-looking statements. During this call, management may make forward-looking statements within the meaning of Section 27A of the U.S.

Securities Act of 1933, as amended and Section 21E of the U.S. Securities Exchange Act of 1934, as amended.

Such forward-looking statements involve known and unknown risks and uncertainties and other factors which may cause the actual performance, financial condition or results of operations of the Company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements.

Further information regarding these risks, uncertainties and other factors is included in the Company's most recent annual report on Form 20-F, filed with the U.S. Securities and Exchange Commission and in the Company's other filings with the U.S. SEC. At this time, I would like to now turn the call over to Mr. S.J. Cheng. Please go ahead, sir..

Yes. Thank you, David. Welcome, everyone, to our 2016 first quarter conference call. Hopefully, you all had time to review our earnings release. We're going to keep our comments short to allow more time for your questions. First quarter revenue and gross margin were in line with expectations in the traditionally seasonally weaker quarter.

Our utilization rate ticked lower to 63%. This reflects the seasonality and fluctuating and floating certain customers that were impacted by weakening in the market they serve. We expect Q1 to present a trough point for 2016 quarterly revenue and our overall capacity utilization levels.

The key here is lower Q1 level is a factor of seasonality and not due to the share loss of competition. SK will review our finances. I would just like to note that we continued to deliver a healthy gross margin at 19.3% in the first quarter of 2016. We're pleased with the level of slightly lower Q1 revenue level.

We keep a healthy gross margin level as part of the higher margin segment mix, manufacturing efficiency and our steady expense management. On the mix side, our leadership in the LCD drivers provides some relief, as we continue to capture LCD driver assembly and testing revenue.

In terms of performance by product segment in Q1 2016, revenue of product assembly and testing service for LCD driver decreased 6% on a dollar basis in the Q1 2016 compared to Q4 2015, representing about 27% of our Q1 sales.

Reflecting macro demand trend, revenue from driver for large panel increased 5% on a dollar basis, while the revenue from our small panel driver decreased about 22% compared to Q4 2015. The small panel segment continues to be impacted by weakness in smartphones and inventory digestion by the channel.

Our bumping business decreased just under 9% in Q1 2016 compared to the previous quarter, representing about 14% of our Q1 revenue. Revenue in our DRAM business increased 5% in Q1 2016 on a dollar basis compared to the Q4 2015. This represents about 35% of our Q1 revenue.

Our SRAM business decreased 13% in Q1 2016 compared to Q4 2015, representing just over 2% of revenue in Q1. Flash revenues, including mask ROM, were more spread, representing just over 14% of our Q1 revenue. Mixed-signal product increased 21% compared to Q4 2015, contributing nearly 8% revenue in Q1 2016.

Another bright spot was our wafer level CSP business which increased 72% in Q1 2016 compared to Q4 2015. Let me now turn to our business outlook. We accounted in our outlook based on the market position and customer feedback. We expect more of this growth in Q2 with a pickup as we move into the second half of this half of this year.

For example, we expect benefit from the channel inventory review related to the broader 4K2K TV market starting in Q2 and the new product cycle in smartphones later in this year. Overall, we're optimistic about our prospects moving forward based on the customer demand requirements, growth initiatives and expected improvement in the metal market.

Based on our current outlook, we expect revenue for the second quarter of 2016 to increase in the lower single digits as compared to the first quarter of 2016. We expect gross margin on a consolidated basis to be in the range of about 17% to 21% for the second quarter of 2016.

Let me take a minute to touch on a few of other major initiatives before turning the call over to SK. First, we continue to make progress in the proposed merger of ChipMOS Taiwan and ChipMOS Bermuda. We have already received a consent letter from the Bermuda regulator on the proposed merger. We filed a prospectus with the U.S.

Security and Exchange Commission early in Q1 and the file amendment on April 18. We're hopeful that we can hold a shareholder vote early Q3 2016 with a target growth rate on track for later in Q3 2016. As we explained in the past, the reasons for the merger are very compelling from a cost, tax and operations point.

Merging ChipMOS Taiwan and Bermuda is the last step in the corporate streamline we started a few years back. In addition to cost savings to the Company, we think common structure will make it easier for analysts and investors to follow ChipMOS. This is directly in line with our goals of raising awareness of our business and building shareholder value.

So while we do not have any specific date for closure, we're making steady progress on our proposed merger. And while we cannot guarantee any outcome, we remain positive. Secondly, we're regularly asked about a buyback at both the Taiwan and the Bermuda level. Shareholders view our stock as undervalued.

Our Board and management team have agreed and thus has strong drive rate [ph] on a regular basis. In line with this, our Board of Directors authorized a new repurchasing program for 15 million shares of ChipMOS Taiwan from the open market in Taiwan within a period of May 13 to July 12, 2016.

This follows the Q1 2015 repurchasing of $14.7 million of ChipMOS Taiwan shares. We're moving forward with the Taiwan repurchasing program because we have more [indiscernible] ability to do so. In theory, repurchasing at the Taiwan level will have a positive impact on the valuation at Bermuda level.

We have listened to the shareholders' request to launch a repurchasing. At Bermuda level we have not been able to do so because of the window observed in the last -- in the past which is less favorable than at ChipMOS Taiwan. ChipMOS Bermuda has normally observed its open window after results are issued for the first quarter.

With regard to this quarter, our legal counsel advised us to hold off from doing any such repurchasing activity in order not to complicate the process of the proposed merger while the U.S. SEC is reviewing our prospectus. Third, we have talked about brand expansion in China.

This remains a rapidly expanding market led by China's desire to insource technology and capacity to build up all areas of each domestic China semiconductor chain. [Indiscernible] that China imports a higher dollar content value of semiconductor than all year [ph].

The need for the capacity is a higher priority for the country, with so much in industry moving into China. Our expansion there remains central to our long term success. If you have not already seen our corporate presentation, I would encourage you to review it. It is on our website.

In the presentation we outline the capacity needs we see in China for ChipMOS and the revenue and margin potential.

Based on what we know today and market forecast, we see our Shanghai operation moving from about $40 million in revenue with a negative 7.7% gross margin in 2016 to $180 million in revenue with a positive 17% margin in 2017 and revenue roughly of $190 million in 2018 with a 21.7% gross margin.

Given the importance of the opportunity, we're taking a two-pronged approach. We continue to work through the regulatory approval process related to Tsinghua Unigroup proposed investment in ChipMOS Taiwan Like our proposed merger of ChipMOS Bermuda and Taiwan, we do not confirm the regulatory approval process outcome.

We're however optimistic that we will be able to move through and move forward and work through the regulatory process. As you know, we already received an overwhelming positive vote by shareholders of ChipMOS Taiwan in favor of both investments.

In the event of a delay in the approval process, we're putting in place a Plan B, our strong balance sheet will enable us to move forward in the near term. If we need to do a sale -- to finance our operation in China is [indiscernible]. The opportunity is too big to risk falling behind.

Our branding will be in line with the joint venture structure we originally thought we would do in China when we started talking this last year.

In order to give us a regular and required resource, our Board of Directors authorized ChipMOS Taiwan to enter a TWD13.2 billion which is about $410.2 million, syndicated loan agreement to refinance our existing credit facility of [indiscernible] and to provide additional working capital for general corporate purposes.

We expect to sign a new agreement with the syndicate of Taiwan Bank on May 16 2016. In summary, we feel very good about our business outlook and progress on our corporate trend.

We're in a position to benefit from steady growth and the existing breadth of customers with improvements through the year as market improvement and inventory is reviewed in China. We remain fully on track in our merger proposal and the expansion in China.

We appreciate shareholders taking time today to be on our update call and appreciate your ongoing support. Let me turn the call over to SK to review the first quarter financial results. SK, go ahead. .

Thank you, SJ. All dollar amounts stated in our presentation are in U.S. dollars. We have provided both U.S. dollars and NT dollars in our press release. The following numbers are based on the exchange rate of TWD32.18 against $1 as of March 31, 2016.

As SJ reviewed our revenue and margin, I will provide details on the rest of our first quarter 2016 results. Net income for the first quarter of 2016 was $2.9 million and $0.11 for basic and $0.10 for diluted common shares, compared to net incomes of $2 million and $0.08 per basic and $0.07 per diluted common share in the fourth quarter of 2015.

Our net income of Q1 2016 was negatively impacted by $5.3 million foreign exchange loss compared to a gain of $0.2 million in Q4 2015. Foreign exchange loss probably came around unrealized U.S. dollar position on our book.

Our operating expense in Q1 was $13.4 million or 9.1% of our Q1 revenue, compared to $15.7 million or 10.6% of our revenue in Q4 2015. We're targeting for operating expense to be approximately 8% to 11% of revenues in the second quarter of 2016. Other operating income in Q1 was $1.1 million and non-operating expense in Q1 was $5.7 million.

Income tax provision for Q1 was $3.3 million, compared to $9.3 million in Q4 2015. The non-controlling interest for the first quarter of 2016 was $4.1 million, as compared to $3.1 million in Q4 2015. On a segment basis, Q1 revenues were down 24% in testing, 35% in assembly, 27% in LCD driver IC business and 14% in bumping services.

Total capacity utilization was 63% for the first quarter of 2016, compared to 65% for the fourth quarter of 2015. Our Q1 testing capacity utilization was 60%, as compared to 61% of Q4 2015. Assembly capacity utilization was running at 57% in Q1, as compared to 60% in Q4 2015.

LCD driver IC capacity was running at 76% utilization in Q1, as compared to 75% in Q4 2015 and 59% utilization for bumping capacity in Q1. We spent $35 million on CapEx in Q1, compared to $30.3 million for our fourth quarter 2015.

The breakdown of CapEx for the first quarter was 15% for testing, 12% for assembly capacity, 58% for LCD driver IC and 14% for bumping capacity. We expect CapEx spending to be approximately $36 million in the second quarter of 2016, with 134% in CapEx for the full year 2016.

Of the full-year amount, approximately $53 million will be for China LCD driver IC capacity additions. We have been asked about the need to add CapEx, given the low utilization rate. In reality, the lower utilization rate is the near term function of seasonality.

87% of our driver assembly and testing capacity for the high-margin LCD TV business is being utilized. Demand in this area will only increase further, as the market continues to move to focus back [ph]. This will require a significant increase in LCD driver contents of about two to three times the current number of drivers.

As a result it is imperative that we continue to add the right capacity to support our customers today in order to maintain market share tomorrow and to solidify our position in China, rapidly expanding margins. Depreciation and amortization expenses were $25.2 million or approximately 17.2% of revenues in the first quarter.

This was slightly higher compared to the fourth quarter of 2015. The increase of Q1 was due to capacity investment in Q4 2015. We expect depreciation and amortization expenses for the second quarter of 2016 to be approximately $26 million, with higher capacity in the first half of 2016 accounting for the quarter-to quarter increase.

EBITDA for Q1 was $41.2 million or 28.1% of revenue. EBITDA was calculated by adding depreciation and amortization together with operating. We entered Q1 with a strong balance of cash and cash equivalents of $411.9 million compared to $376.9 million at the end of Q4 2015.

As of March 31, 2016, we maintained our net cash position at $131.9 million which resulted in a net debt to equity ratio of minus 32.8%. This is after we investment $35 million on CapEx and after we repurchased shares of $14.7 million in ChipMOS Taiwan in Q1.

While EBITDA and net debt to [Technical Difficulty] are not defined by generally accepted accounting principles, we believe that they are helpful to investors -- indicators to measure our financial strength.

Our total short term debt, including the current portions of long term debt, was 81 -- $87.1 million at the end of first quarter 2016, as compared to $83.8 million at the end of the fourth quarter 2015. Long term debt was $192.9 million at the end of the first quarter, as compared to $154.9 million at the end of fourth quarter 2015.

Our accounts receivable days sales outstanding in Q1 was 73 days compared to 75 days in Q4 2015. Inventory turns were 41 days in Q1 compared to 40 days in Q4 2015. Our net interest expense in Q1 was $0.6 million which was slightly higher as compared to $0.4 million for the fourth quarter of 2015. Operator, that concludes our formal remarks.

We can now take questions. .

[Operator Instructions]. Our first question comes from Tim Arcuri from Cowen and Company..

A couple of things for me.

I know last call, you guys gave some guidance for 2016 for the full year, I think SKU were saying that you know, revenue would be flat to up low singles this year and to get there, you would need, it seems like maybe 163 million and 164 million per quarter sort of on average to get to that number which is a pretty fair bit from here, where you are in June.

So can you just comment on what the full year revenue outlook looks like, do you think that you could still do up low singles and also on gross margin, you had said 16 to 20 for the year which looks actually pretty low relative to where you are during the first half. So if you can comment on those two things. Thanks..

This is S.J. to answer your question. We still maintain our previous target for 2016 revenue without any change. And the first half, the Q1, we had -- this will be ahead of our target and due to the majority coming in from low forecast order.

And the second half, we currently some weakness but based on the customer feedback and our new product discussion of [indiscernible] for the second half revenue can meet our annual goal. The margin for this year, I think we're going to be ramping up our Shanghai operation, before, we restated only scale, as I just described in the script.

We're planning to focus to kind of minor gross margin in 2016 and the margin will be improved starting from 2017 after we restated on this scale. I hope this can help to explain your question..

I guess just on the point of China, so can you help us maybe think about how to model that because you are talking about an incremental $80 million in revenue next year and sort of I think it comes to 29% to 30% incremental gross margin drop on that revenue next year.

Is that all incremental revenue or does that cannibalize some of your current revenue?.

It's a little bit from both. Our current revenue from Shanghai ran a majority company from memory and low base fees, low price, represent a revenue for parts and a new measure coming from LCD driver and mems..

Okay, so I guess, S.J. is that all going to be incremental revenue or will that cannibalize some of what is being done in Taiwan..

Actually, the first 10% will be moved from Taiwan in order to speed up the qualification process. The rest of the increase will be a new investment. .

Okay and then just lastly, S.K.

can you give us some breakdown of gross margin by segment from LCD assembly and tests?.

Okay, for the testing the gross margin is around 22% and I'm sorry, the final test is about 22 and the wafer testing is about to 35%, assembly is around 15% and LCD driver IC revenue is about 27% and we have seen negative bump in margins in the first quarter which is about minus 7%..

Our next question comes from Richard Shannon from Craig Hallum..

I think I'm going to follow up on the last answer about gross margins by segment. You mentioned bumping margins negative, I don’t remember the exact utilization you mentioned, I thought it was somewhere in the 50% to 60% range.

What kind of utilization does it require to get to positive or even more normal one or whether there is some temporary yield issues here. Can you give us a sense of what is making it negative and how you get it up to a more appropriate level. .

Richard, let me confirm your question. It is somehow from bumping, currently for the bumping, it is -- actually last year, the utilization rate is pretty high because both large panel and the small panel driver give a high utilization rate.

As far as below the large panel driver continues to increase and the fixed income also is increasing because of the focus to LCD kind of getting more aggressive than with previous expectation, but smartphone is weaker than our expectation. So that caused our bumping utilization rate slow. So that is the first one.

And the second one is the gold price fluctuation. That is the major contributor for bumping. The gross margin is negative and to answer your question, how can we prevent and review our capacity. We have very aggressive planning during to introduce that LCD driver, bumping business to fully utilize our existing capacity.

Which is including the wafer level CFC, you can see we have a very good progress in the Q1 that is coming from smart audio device. And also e-commerce, power management and also fingerprint sensor. Right now, it is in the qualification and engineering stage.

So once we're successful in introduce new customer into it, that will be penetrating to our gross margin and utilization rate without any further big CapEx event..

A quick question on CapEx, I think last quarter's call, you had talked about with your capacity increases in China and Shanghai, just to be planning for about $200 million of total CapEx. Do you have a little bit more CapEx planned for Shanghai this quarter than the last year.

Is the total still remain unchanged or it is more shifting into 2016 or is there an increased level of CapEx you are expecting to spend there..

The major investment will happen in 2017 and 2018. Because as I mentioned, the 2016, we start to move the existing equipment around 10% to China and that fulfills possible side change in order to show the full qualification process and also planning the pattern in the new hire employee in China.

And it depends on the qualification status so we're going to increase the new capacity will be Q4 this year. So mainly coming from 2017. And since you know that our new panel capacity continues to be available in China and so we're pushed by our customer to establish the new capacity as early as possible. .

Next question, you commented about the small panel being down a fair amount in the first quarter, I think you said 22% if I caught the number right. What is implied for that number in the second quarter and I noticed you made a comment about -- you don’t believe that you lost any share.

It seems like the smartphone market at least in China has started to improve a little bit.

I'm wondering if your guidance suggest that and if not, why not and what gives you the confidence that you haven't lost share?.

Yes, actually, the total assembly and testing still maintain the same because not many companies from the large panel and the testing time increasing so the driver bumping are getting more due to the higher resolution TV. So we’re investing we will continue to keep growth as usual. The only impact mainly coming from the bumping business.

That is for the small panel one because small panel just through the bumping and wafer testing and site cut so we can move the testing capacity to large panel and use other products if you have the idle capacity for small panel bumping. .

One last quick question from me and I will jump out of the line.

In terms of the process for approving the merger, how comfortable are you with the timeframe that you set out? How much -- I know you don’t have full control of that but I just want to get a sense of you know, the risk of that timeframe slipping at all from the timeframes you just mentioned..

We don’t control the timeframe, right now, actually the SEC spend two more weeks to review our amendment and the newly filed 20F, the annual report that we made on April 18.

And so based on our legal counsel feedback, the SEC staff will give us their second round of comments or -- by the end of this week, maybe Friday this week we will have their further input and this is to for the mergers process, we're waiting for SEC to further comment..

[Operator Instructions]. Our next question comes from Eric Gomberg from Dane Capital..

So, take out the FX, a nice quarter.

So a couple of things, just on China, are you dependent on the Tsinghua Unigroup going forward for you to have the confidence in the revenue that you are talking about for next year or is that something completely separate and what gives you confidence because you suggested in your opening remarks to look at the presentation and I am, if nothing else grows, you are growing 10% a year over the next two years simply because of China with really significant incremental gross margins so I was just wondering what level of confidence you have in that growth and to what extent the customers are kind of locked in..

Eric, this is S.J. to answer your question, the China investment, right now is [indiscernible] financial to do so. So schedule-wise, there are not any delay. We follow our original plan to do so. And this will be separate with the Tsinghua private placement. If the Tsinghua private placement, not mostly further delay.

We will maintain our investment trend based on the customer forecast. But with Tsinghua unit group private placement, that will be much easier for us to expect our China market share. .

But in terms of the numbers you have laid out in your presentation, you don’t intend to put numbers in there, you don’t feel good about them and do you have customer commitments, have you won business that specifically points to the revenue projections you have put here.

What gives you the confidence that these numbers are achievable and then I have one other follow up. .

Yes, Eric, to answer your question, the total capacity will increase for the next three years, represent almost around 45% of existing capacity in Taiwan. So it means every year, we increase 15% in China. So this is easy healthy and consolidated incremental percentages based on previous experience.

But compared with the total panel output in China, our capacity increase still cannot meet the requirement. .

Just to understand that you have customers that have specifically answered this. .

Our customers push us to do so and we have very low commitment from our customer side..

Okay and then just one other question.

I understand you can't do a ChipMOS buyback or it would be complicated because of the hope for a share collapse and I'm pleased you are doing the 81.50, but I'm curious, a the board level, because I'm sure you have heard this from shareholders for a long time, you have a very, very low cost of capital and you can borrow at below 2%, you are in excellent operational management team and I'm pleased you are buying back 15 million shares and you did that last quarter but why not do 100 million shares? What is the conversation that goes on at the board level that you wouldn’t do something more significant, you just said business has troughed, it looks like, potentially calculated growth in China over the next few years, you have a share collapse that should be accretive, you have net cash, I realize what happened in 2008 and 2009, that is not your fault, the market was what it was, but why not be more aggressive than the 15 million and I'm happy about the 15 million but why not bigger? What is the mindset of your board of directors?.

Actually, we have other discussion among our board and since you know, the business side, I think I just explained that we did a back and forth discussion with our legal counsel. So for the first quarter, they are pretty high risk because they don’t have a window and the second quarter season right now, pretty close during the [indiscernible].

So if we have to do a buyback in the -- with that time, that will create complication and so they don’t recommend we do so.

And to answer your question, yes, we have some balances and right now, I even feel the stock market is not good and we will see a buyback at a regular basis and the total amount that we're trying to do as much as we can but based on the current situation, this is 15 million is not really enough, we complete our buyback and then we will launch another one.

I hope this can answer your question..

[Operator Instructions]. Our next question comes from [indiscernible] from TIAA-CREF.

I just have two quick clarifications. I'm sorry if I missed the first one but I'm looking at the press release you put out in April 8 and I think at the time you said that you expected to grow margins for Q1 to be above the high end of the guidance that you provided.

So above 17% to 21% and you just reported 19.3% So was there something lost in translation there? I just want to clarify? And then secondly, following up on Tim's question earlier and I know you are maintaining the forecast of low to mid-single digit growth this year, but besides telling us you are excited about new products and such, I need more confidence to understand how you are going to get there because based on the guidance you provided for the second quarter which is a bit below seasonality but below -- you need some pretty decent second half growth, half and half to achieve that.

The TV market is not that great, I understand [indiscernible] does drive content upgrades but I guess we just need more confidence that you are going to achieve that. Anything that you can give us would be much appreciated. Thank you..

Normally, we give the guidance based on the cash flow forecast and our capacity utilization rate and new product introduction. The Q1, both revenue and gross margin are even higher than our guidance. That is mainly coming from the customer rush order. That is not including in our original forecast, especially after the Chinese New Year.

So that closes our Q1 gross margin and higher end. [Indiscernible] conservative number, this is the real market generation.

And then Q2, some of the even the utilization is still not finished yet and although smartphone sales is not good but as I explained before, we already have a new product in the production and try to fill out the capacity which we already invested right now.

Based on our feedback from our customers, the market situation, we still continue to see be very optimistic for 2k 4k penetration rate. In the second half and the product segment mainly contribute for LCD driver, TV and also the niche memory and also can benefit from this 4k 2k TV and the new applications.

So we have some product including the smartphone, our audio chip and finger print sensor and some main product. So that will contribute to our second half. So we have committed to maintain our original target but as you know, the market always change and any updates, we will -- real time feedback to the market. .

And then just to follow up in on your gross margin outlook, like you mentioned earlier, you are maintaining the full year target of 16% to 20% within the first half year, you are already operating at 19% and if you are going to grow, in the second half like you expect, presumably your utilization will improve as well.

So that would suggest that your gross margins, if anything would be flat to up in the second half. so I don’t see how you won’t be at the very least, at the high end, if not above that 16% to 20% range for the year. Is there something I am missing. .

No, as I previously explained to you, the previously, we view that conservative growth margin, I don’t think that’s obviously based on the forecast because we're ramping our Shanghai operation.

And in the ramping up space, based in our recent economic scale, yes and also the utilization will be lower because the cost of [indiscernible] monetization is enhanced. So that is the reason we give our gross margin that is conservative.

But as you know, the first half of gross margin is higher than our hindsight, while in the second half, we're starting ramping the Shanghai operation based on the current market situation, I think we can reach our gross margin in hindsight..

Thank you. At this time, we have no further questions. I will turn the call back over to our speakers for closing comments. I will turn the call back over to our speakers for closing comments..

Thank you, everybody who joined our Q1 conference call. Thank you very much. Bye, bye..

Thank you. This does conclude today's teleconference, you may disconnect your lines at this time. Thank you for your participation..