Amkor Technology, Inc. (AMKR) Q3 2008 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Amkor Technology, Inc. third quarter 2008 earnings conference call. (Operator Instructions). Before we begin this call, Amkor would like to remind that there will be forward-looking statements made during the course of this conference call. These statements represent the current view of Amkor management and actual results could vary materially from such statements. Prior to this conference call, Amkor’s third quarter earnings release was filed with the SEC on form 8K. The earnings release together with Amkor’s other SEC filings contain information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from Amkor’s current expectations. I would now like to turn the conference over to Mr. James Kim, CEO and Chairman. Please go ahead.

Thank you and good afternoon. This is James Kim. With me today are Ken Joyce, our President and Chief Operating Officer and Joanne Solomon, our Chief Financial Officer. On Monday, we received the ruling from the arbitration panel in the dispute regarding our license to agreement with Tessera. As previously disclosed, the panel found that most of the packages accused by Tessera are not subject to the patent royalty provisions of the license. The panel has ordered that the damages experts for the parties calculate the amount of past royalties die for infringing packages from March 20, 2002 through March 2008 using percentages set by the panel on product family by family basis for sales with a U.S. nexus subject to certain offsets. The final amount will be determined by the panel following submission of the expert reports. We have estimated that accrued and unpaid royalties inclusive of interest through September 30, 2008 was $49 million or $0.22 per share and these amounts have been reflected in our financial results reported today. The panel also denied Tessera’s request to terminate the license. We remain a licensee under the agreement with rights and the benefits of a licensee and ongoing obligations to pay royalties for covered products. Excluding the Tessera charge, our third quarter results were in line with our higher than guidance and reflect strong performance in challenging economic environment. Our business mirrors the trends in the worldwide semiconductor industry, generally and is affected particularly by levels of consumer spending and the global GDP. The 4% sequential growth in our revenue for the third quarter was below historical seasonal levels as customer managed their inventories in response to softer demand and the concerns about a weakening economy. The weakness in consumer spending continues to spread globally. Many of our customers remain negative on the near-term outlook and they continue to reduce their forecast through that and their levels of inventory in preparation for challenging times ahead. The current uncertainties about the global economic condition make it very difficult for our customers and us to accurately forecast and plan future business activities. Based on current customer forecasts, we expect our fourth quarter revenues to decline 15% to 20% from the third quarter of 2008. Our strategy in the current market environment is consistent with our track record for the past three years. We will remain focused on cash flow generation, reduce costs and control capital spending, make prudent investment in technology in close collaboration with our customers and sustain a disciplined approach to pricing. We have demonstrated soundness of our strategy over the last three years and indeed, it remains intact as we prepare for more turbulent times ahead. Having said that, we will intensify our efforts to reduce our costs and limit our capital expenditures. We continue to focus on improving the efficiency of our factory operations and administrative functions. In fact, in anticipation of a possible slow down and as part of our continuing cost-reduction effort, we have been reducing our workforce at substantially all of our factory locations. Through September 30, 2008, we have reduced our headcount by over 700 employees and expect to save $4 million a quarter prospectively. We have reduced the scale of our footprint by disposing of unneeded real estate and existing unneeded lease space and combining operations in several locations. In the near-term our capital expenditures will be forecast on technology advancements and cost reduction programs. Any investment with respect to capacity expansion will be driven by specific customer requirements and focused on areas such as Wafer Level packaging in support of the ongoing migration of the semiconductor from wire bond to the flip chip technologies. With respect to pricing, we will continue to work closely with our customers and suppliers to eliminate cost from the supply chain. We do not believe it is prudent to reduce price in a weakening economy just to gain market share or fill the factory. While the current outlook is negative for the demand for semiconductors, we expect that these times will also have some opportunities. We will continue to focus our investment in key packaging and test technology for advance semiconductors where we believe we can add value and by fairly compensating in the supply chain. Overall market capacity for assembly and tests may also be reduced as some IDM’s may accelerate plans to shed more of their less profitable backend assets and as the smaller under capitalize all of the players may begin to edit it. We are preparing the organization to not only weather the storm, but also to become stronger when demand and global consumers recover. I will now turn the call over to Ken Joyce, our President and Chief Operating Officer.

Thank you, Jim. During the third quarter, our net sales increased $29 million or 4% sequentially with unit shipments at a record 2.5 billion units, up 18% compared to the second quarter of 2008. We saw unit and revenue increases in every one of our packaged segments with good recovery in our lead frame business. Growth in our 3D and flip chip packaging business was also solid in the third quarter as we saw continued strength in many wireless and gaming applications. For the fourth quarter, we expect broad base weakness among the services we perform and the end markets we support. Close customer collaboration has been a very important element of our strategy to ensure we keep pace with technology advancements and the changing and more demanding environments that advance semiconductor devices. Our strategic customer relationships have also been critical to facilitate our more disciplined approach to capital spending. Ten years ago, many would have characterized Amkor’s business model as overflow capacity at times when IT demand exceed internal capabilities, which in turn, would elicit concern when IT demands weaken. Today, Amkor’s business is much different. More than half of our customers are fabless and fab-lite IT companies who do not have the capability to bring in-house their packaging and test needs when volume decreased. Additionally, many of our IDM customers have significantly downsized and specialized their packaging and test capability in favor of the outsource service provider model. In part, this change is due to the increasing technological complexities of today’s advanced packages and the related requirements for value-added and technologically sophisticated packaging and test solutions offered by Amkor. Our ability to fulfill our customers’ needs around advance packaging and test solutions is evident with respect our 3D and flip chip packaging solutions, which grew 50% for the third quarter compared to a year ago. Today, unlike ten years ago, we are better positioned to weather the difficult times on a high level of less elastic demand. During the third quarter, we experienced price declines of approximately 1% to 2% from the second quarter. The reduction in overall average selling prices during the third quarter was overwhelmingly due to product mix. In analyzing our third quarter results it is important to note the significant recovery of our lead frame business in the third quarter, resulting in an overall unit growth far out pacing revenue growth. We expect to face increasing pricing pressure in the current challenging market environment. However, as Jim noted, we do not believe it makes sense to cut prices just to increase our market share or fill the factories and we plan to have a customer-focused, disciplined pricing strategy as we look forward and ahead. I will now turn the call over to Joanne Solomon, our CFO, Joanne

Thank you, Ken. We have made significant steps to improve our cash flow and liquidity and strengthen our balance sheet, which is especially crucial in the current market environment. Since the beginning of 2006, we have generated over $700 million in free cash flow. During that time, we have reduced total debt by over $500 million and we ended the quarter with $444 million in cash and kept total debt of just over $1.6 million. Other than $55 million annually of amortizing debt, we have not significant debt majority until 2011. While the near-term outlook for the semiconductor industry has continued to weaken, our financial position and liquidity remain sound. Gross margin for the third quarter was 19%, down from 23% in the second quarter of 2008 and down from 25% in the third quarter of 2007. Included in our cost of sales and gross margin for the quarter were $10 million in charges relating to previously announced reduction from workforce as well as an estimate of $45 million for accrued and unpaid royalties owed to Tessera. The $45 million charge for Tessera reduced our gross margin by 6 percentage points. The record volume of unit shipments through our factories and the resulting high capacity utilization rates contributed to our gross margin. Selling, general and administrative expenses for the third quarter were $60 million, decreasing from $67 million in the second quarter of 2008 and $64 million in the third quarter of 2007. The sequential decrease of approximately $7 million is attributed to significantly lower legal fees and travel costs. Third quarter net income included a foreign currency gain of $23 million principally due to the depreciation of the Korean Won and resulting re-measurement of Amkor’s Korean employee benefit plan liability. We also accrued approximately $4 million as an estimate of interest owed to Tessera for unpaid royalties. Our effective income tax rate for the third quarter was 32%, which is substantially higher than typical as a result of the accrual for Tessera royalties, having little tax benefit. The effective income tax rate also reflects the recording of evaluation allowance of approximately $8 million, offsetting certain foreign differed tax assets. We anticipate the effective tax rate for the full year 2008 will be approximately 13%. Given the current industry conditions and a weakening outlook for the fourth quarter and 2009, we continue to rationalize our capital additions, especially with respect to bond and test investments. We expect fourth quarter capital expenditures to be approximately $45 million with overall capital intensity for the full year 2008 tracking to 13% of revenues. We expect to manage our business at lower levels of capital intensity during 2009. Here’s a recap of fourth quarter 2008 guidance contained in our earnings release. Sales are expected to be down 15% to 20% from the third quarter of 2008. Gross margin is expected to be between 18% and 21%. Net income will be in the range of $0.03 to $0.12 per diluted share. Operator, we will now open this call for questions.

Thank you and ladies and gentlemen, at this time we will begin the question/answer session. (Operator Instructions). Thank you. Our first question comes from the line of Bill Ong with American Technology Research.

Hi, good afternoon. Can you provide some sensitivity analysis on what type of break-even we can expect? I know there’s a lot of variables, but maybe just a general sense. And the rationale behind that is that Q1 is going to be probably seasonally down, just want to get a sense of whether or not you’ll go into losses and if you are, are you going to plan to take any action to reduce cost to prevent that from happening?

Thanks, Bill. With respect to a break-even calculation, if you look at break-even on an operating income basis, we would estimate that our break-even point is between about 525 to 550 million in revenues, again, that‘s on an operating income basis. And as you said, there’s a lot of assumptions that go into that with respect to mix and pricing and the like. At those levels, we would see gross margins of about 16% to 17%, but again, that’s all subject to a lot of different estimates and that does vary from quarter to quarter. And with respect to the outlook for next year other than saying it’s uncertain. I have no comments with respect to that.

Well, actually more if you think you’re going to the losses, are you going to take any action to be in front of that? That’s why I want more—to just behind that. Any type of discretionary costs that you can take out to minimize that from happening?

Bill, this is Ken Joyce. How are you today?

Yeah, I’m good, thank you.

Let me respond to that a little bit. I think we’re a little bit ahead in this area. We’ve been rationalizing our factories, as we’ve indicated in the call. We’ve downsized. We consolidated some of our factory operations. We continue to look at our corporate expenses. We’ve been focusing on asset productivity measures and I think that’s been reflected in our improved performance. That being said, should things continue to soften, there are additional measures to be taken and I think they would be much along the lines of what we’ve done so far.

This is Jim. All that depends, again, what the outlook beyond. We don’t any actions for one quarter. You have to understand our type of business. We have a very broad asset base and even labor sometimes are fixed in some way. However, if a lot of economies are predicting that this recession may be different from some other times and so we have to be conscious of the changes occurring in the market and if current financial instability gets stabilized, and worldwide recession doesn’t occur the way may people fear, so there are many, many variables that are going to affect what we’re going to be doing. Obviously, we adopt some of the extreme views of economist who think this may be a long-term one. I’ll be the very first one to take very severe action, but we have already started, as you know, last conference call we had, I already told you we are reducing workforce. We already seen what’s coming and we are already reducing our own SG&A to various expenses you are going to see we are cutting. So, I’m very comfortable with the plans that we have in place.

Thank you very much.

Thank you. Our next question comes from the line of Chris Blansett with JP Morgan. Please go ahead.

Hi, thank you. The $49 million charge or $45 million charge taken toward Tessera, is that something that’s been dictated by the arbitration panel or is that your estimate of what you think you need to write down at this time?

That’s absolutely Amkor’s estimate. What the tribunal provided us, was a prescription on how the final settlement amount needs to be calculated. They left it up to Tessera and Amkor’s experts to get together, do the calculation, and see how closely we agree. And to the extent that there’s any disputes after that then that would go back to the tribunal as well.

So I guess in the coming quarter are you expecting to get a final number calculated between yourself and Tessera.

Amkor and Tessera have until November 17. We have until the 17th to respond back to the tribunal. So Amkor and Tessera will be getting together to see how close our numbers are to each other. And it may be the first quarter before we have a final verdict.

And then just a couple quick ones here. One your guidance for the fourth quarter, this is GAAP guidance. Are there any expectations of any, I guess, more like one time charges that will be taken next quarter that might give you a different pro forma number?

It’s definitely GAAP guidance. Each quarter has its own unique elements. We did increase our guidance to reflect an ongoing royalty rate with respect to Tessera. But it is reflective of GAAP. We didn’t forecast any foreign currency gains or losses with respect to the translation of Korean One. That won’t impact our guidance either positively or negatively.

And then one last quick one. You know one of peers, SPIL, reported earlier. And their fourth quarter guidance is not down as far as yours. Could you just maybe describe the differences in either your customer product profile that would have such a disparate—or a big difference between your guidance ranges.

You’re talking first quarter or fourth quarter?

Fourth quarter guidance. I mean I think they only got it down 8 – 13 and yours is more than that.

I think that’s more to do with the product customer base or product mix. I think SPIL has a history, they have been more PC related. And PC has been more stable than other consumer sectors. I think that’s the primary reason. There’s nothing more than that. And on the other hand, remember, they also have DM revenues. So we’re not familiar with that area of business.

Thank you. Our next question comes from Sartya Kumar with Credit Suisse.

Hi this is Ris Monrique (ph) for Sartya. You know for the what percentage of your cost is foreign based, if you could provide any color on that. That would be pretty helpful.

Absolutely. For Ex is obviously a very complicated area. Just starting at the top of the income statement, when we look at the revenue dollars. About 75% of our services are provided through our factories in the Philippines and Korea. And we rely as much as possible on natural hedges. Most of our revenues are in U.S. dollars. So we are not subject to too much variability with respect to currency on the top line. Our largest FX exposure in the income statement is a short Korean won and Philippine peso position. And that’s principally driven by laborer and utilities. That’s a little bit different from the FX gain and loss line item that we see on the income statement. And that’s really just a translation of largely an employee benefit liability. Looking at the quarter, our gross margins were benefitted by the depreciation of the Korean won and the Philippine peso by about $10 million. There’s some other Asian currencies that contributed to that 10 million, but the peso and the won were the primary drivers.

When I look at your (inaudible), that’s 15 or 20%. Can you quantitatively indicate how each of your end segments are tracking related to this? Is one segment slower than this? And is the relative strength in any of them.

With respect to the end markets exposures in our fourth quarters, that 15-20% is fairly broad based amongst our customers and amongst the end market segments. It is largely driven off of—or almost entirely driven off of the weakness of the consumer, the global consumer, that is. Even when you look at wireless, that’s very dependent on consumer spend.

Let me warn you, by the way. You know, again we are talking with our customers and it really is changing almost week to week or even day to day. So in this kind of climate I really think predicting range itself is dangerous. But we are really using customer’s input as a basis for doing it. But as you’re well aware, most of our customers very well aware of this inventory issue. So they are controlling their inventory level. That’s why we see almost daily the changes occurring. So my hope is at the end of the day, it may be better than what we are saying. But that’s the part that I don’t think even our customers are really aware, but the final demand is going to be. That’s the challenge that all of us are facing at the moment.

Okay thank you.

Thank you our next question comes from the line of Timothy Arcuri with Citigroup. Please go ahead.

Hi guys this is Brian Leif calling in for Tim. Congratulations on a strong quarter. A couple things from me, sorry I jumped on late. So I apologize if this has been asked. But can you comment on where break even is currently and how we should be modeling that going forward given the head count reductions and other cost cutting efforts.

Sure Brian. We did cover it a little bit earlier. The break even point on operating income basis is between 525 million and 550 million. At those levels that would suggest a gross margin of about 16 to 17%. And there’s a lot of assumptions that go into that, as you know. And it does have a tendency to shift around.

That’s helpful. And then I guess more picture. Last time, the industry, IC units were down on a year-and-year over basis, which it looks like we’re now in and will be through mid-year next year. Your revenue’s contracted by about half from the peak. So I guess my question is, is there anything structurally different that would keep you guys from seeing that big a decline this time around?

As we mentioned before units are very driven to mix. And as Ken mentioned on his prepared remarks, when you look at our stack packaging and our flip chip packaging, that had revenue growth of 50%. Our units clearly didn’t grow by 50%. So there is something that’s fundamentally different. It’s the shift in mix.

By the way, Brian, this is Jim. You guys keep saying about units decreasing. But as you know, if you look at the Q3, up to Q3, actually units in the semiconductor has been up. So I don’t know where the numbers are coming from. And frankly, I don’t remember last time that peak to trough, I have to go and look it, down by 50% in units. I really don’t know. So we will go look into that.

Yes, sure. I agree with you Jim. We’re going off of SIA data. Through, like you said, through the end of Q3 you’re still up on a year-over-year basis. But it looks for the next couple of quarters, you know based on how you project the units, it looks like it will trend down.

The units are meaningless in our business, in my opinion.

Fair enough. I guess one more thing from me and I’ll go away. As I look at the mix here, you know package units were up quite a bit but revenues were only up 4% sequentially. So to me this looks like the first time in several quarters were your ASPs have been down a meaningful amount. So is it fair to conclude you’re having to cut prices here to maintain share. I know you’re saying that that’s not the case. But maybe you can help me understand why those two pieces seems to be moving in such vastly differing amounts.

Again, I think you’re missing the point. Our unit really has a meaning when you talk about product mix. I think we clearly stated some of the different low cost, low material intensive one has increased significantly to catch up, probably, from Q2. So I really don’t think we can talk about ASP as a guide for any kind of measurement.

I think I’d give a little clarification there is that the overall, average, ASP would be down. But it is, as Jim, said, it’s mixed base. It’s because we had a large increase in what we’ll call the jelly bean units with the lower ASPs. It’s very much a mixture as opposed to price driven in the decrease.

So even, within, I guess the lower ASP segment, you’re basically saying that ASPs did not change too much quarter over quarter?

As we said, I think ASPs overall were down about 1-2%.

Okay. Thanks guys.

Thank you the next question comes from the line of Peter Kim with Deutsche Bank. Please go ahead.

Hi, thanks for taking my questions. I just want to backtrack a little bit about the ASPs. We talked about the ASP policy going forward. Have you walked away from business because the ASP was too low?

No, we haven’t had that. I don’t think we have that experience. Again, it doesn’t mean there is no intent, especially in the market. We are having a constant discussion going on, but I don’t think we necessarily have lost anything to my recollection.

Alright . I was just trying to reconcile the difference between your guidance versus your peer group guidance and I thought maybe there were some occasions from the ASP policy that you have adapted.

No, I don’t think that we’re losing; if the implication is that we’re losing market share because of our pricing, I don’t think that’s the case. I think this is very broad based demand driven, not pricing from our perspective.

Okay. What is the ongoing royalty impact that you expect from this arbitration settlement?

You know, that is a number that we did estimate. It’s a little bit hard to calculate it at this point, but it’s about a couple million dollars a quarter.

So, as your capacity increases in the flip chip mix, do you expect this royalty impact to decrease? Would that be a fair statement?

That would be a fair statement.

Okay. Two live quick ones. One, restructuring charges going forward, are you done with your restructuring or do you anticipate restructuring charges in Q4?

I would expect to anticipate further restructuring charges going forward. It’s something that we’ll actively monitor. We, with respect to as you mentioned, we’ll have to keep an eye out on the future outlook on how deep we need to cut and when do we need to cut.

That’s currently not included in your guidance?

There’s very little included in the guidance. We have a factory, we had some operations in North Carolina that we made the decision to exit the manufacturing operation side and maintain an R&D presence, but we will have some restructuring charges and they are included in the guidance so far.

Okay. And lastly, the OpEx going forward, what’s your expectation for OpEx?

To OpEx, clearly we’re hopeful that we can continue them on a downward trajectory. I believe them to be just about flat for 4Q. We’re going to see a little bit of an uptake with respect to some legal costs as we have the final settlement discussion, or the final tribunal activities. And we are increasing our activities with respect to IT infrastructure investments here in the U.S. Offsetting that would be some of the savings at the factory level, as well as to modern manufacturing and corporate costs.

Alright , thank you.

Thank you. Our next question comes from the line of C.J. Muse with Barclay’s. Please go ahead. C.J. Muse - Barclay’s : Yes, good afternoon, thank you for taking my question. First, just a point of clarification. In terms of the EPS guide, are you banking in restructuring costs and/or FX gains from the depreciating wand in the number?

So, the restructuring charges that we have banked in the fourth quarter are very, very minimal at this point, so there are no material restructuring charges in the fourth quarter. With respect to the FX gains, we do not include any forecasted translations, gains, on the remeasurement of, let’s say, the Korean severance liability. So, on our income statement, whereas this quarter we have $23 million, we have not included any kind of forecast of gain or loss with respect to the translation. C.J. Muse - Barclay’s : Okay, great. And I guess also an important clarification, on the 525 to 550 operating cash flow to break even, just to confirm, that includes all the cuts that you’ve made through today in that number?

That’s an accurate statement. C.J. Muse - Barclay’s : Okay. Alright , I guess my first real question. You know, given the uncertainty right now, how are you going to, I guess, plan CapEx investments in the first half of 2009 with a desire, I think to stay free cash flow positive? So can you talk a little bit about the ins and outs of how you are going to make decisions around that, particularly given that the very poor visibility you have today?

Well, historically if you go back I think 2002, I believe, our CapEx was below $100 million. C.J. Muse - Barclay’s : It was?

Yes. Now I ensure that we have many meetings on this with my management team and our CapEx will be very tied to our customers needs. Without it, I don’t think we’re going to spend a dime. That’s our basic principle. Now, so other than wear and tear, and as you know, in our asset base, there are certain minimums that you must do. As Joanne mentioned, IT areas, we need to continue, this is the time we need to continue to invest in that infrastructure for the better communication with the customers and data collection and so on. So those are the minimum amounts we will be spending. And, as you are well aware, that there are major technological changes taking place, therefore we need to continue to watch that and our customers that demand there, we are going to continue to invest in that area. C.J. Muse - Barclay’s : Can you share with us what your maintenance CapEx looks like and what a bare minimum investment would look like for the leading edge technology?

Well, you have a couple of questions together, I think. If you say bare minimum investment, probably you need to spend at least $50 million in my opinion. But, in addition to that, what you need to spend for advanced technologies the customers demand just depends on the market and on our customer commitment. Without it, we can delay investments, you know we have a lot of options. C.J. Muse - Barclay’s : Very helpful, thank you.

Thank you. Our next question comes from the line of Sandor Verdaraham with Deutsche Bank. Please go ahead. Sandor Verdaraham – Deutsche Bank: Yes, hi. Just kind of wanted to follow-up a little bit more on the aspect of free cash flow here. First, you expect to be free cash flow positive in Q4 based on your guidance for revenue and CapEx. And, secondly, I just want to know from a CapEx perspective, I think you guys separate from, your CapEx was $92 million this quarter, yet in the Capital Statement it kind of looks like it was $126 million because it was paid on payables. When you talk about 40 million of CapEx for next quarter, you know is that including any potential reduction in the tables that’s sitting on your balance sheet? Or is it just the gross number?

So the 45 million we talked about is on the addition side, so there is clearly, there are some tables from the third quarter, additions that were shipped to us in the third quarter that we’ll have to pay for in the fourth quarter. So the tax paid CapEx would be higher than the $45 million that we talked about. Sandor Verdaraham – Deutsche Bank: Yes, but then you still expect to be free capital positive for Q4?

Yes. Yes, we do. Sandor Verdaraham – Deutsche Bank: And in terms of the timing of the Tessera payment, do you have any sense for when that might go out?

Not really. You know, we’re expecting that sometime in mid-Q1 that it’ll be finalized, so sometime after that. Sandor Verdaraham – Deutsche Bank: And how comfortable are you that that number, ultimate number, is not going to be that much different from the $49 million that you’ve accrued so far between the principle payment and interest?

It’s clearly an estimate and it would be subjective to change. Sandor Verdaraham – Deutsche Bank: And, again, one more question on the ASP front. Your next quarter, I don’t know if you went over this, what kind of ASP declines are you assuming in the fourth quarter, and what’s the margin impact, ongoing margin impact, from Tessera. I thought you kind of mentioned $2 million, is that kind of banked into starting Q4?

Well, I’ll take the first one, Sandor. This is Ken Ong. On the pricing, we have built in our normal 1% to 2% a quarter is what we see. There is a challenge on pricing right now, but the way we look at that is price reductions are driven by our ability to reduce costs, and we constantly work with our customers to value engineer packages and reduce those costs. That being said, Ted’s experience has shown that simply reducing prices to fill the factories doesn’t work, and that’s not a sound strategy, it’s not something that we’re going to be pursuing. So in this environment, I think the 1% to 2% is fine. Sandor Verdaraham – Deutsche Bank: And, finally, on the, Jim, you mentioned that this weakness might provide some opportunities for you guys and when you say opportunities, are you looking at potential acquisitions, and how do you kind of balance out the impact in terms of the purchase price on an acquisition versus what the current state of the capital markets are in terms of liquidity and access to capital markets? Can you kind of elaborate a little bit more on what your thoughts might be in terms of that area of growth?

First of all, I think it’s really our policy in the past not to really speculate something like that frankly. But as a company we have always a guard to look out if there’s an opportunity, it’s foolish not to review it. And that’s the time we’re going to look at the new investment versus purchase of existing assets or capacity and what that impact may have on our business. So by the way, opportunities are always there. There are many, many kind of approaches there, but we have yet to really come to anything that we can take any action at this time. And that also has to be combined with our cash positions and markets and as you’re well aware today probably, even if a good deals around, finding money may be more difficult than other times. So all those factors have to concert to make any decision.

The only other aspect is the type of things that are most attractive to us are with respect to an IDM transaction, let’s say, it did seem like a supply agreement. So I guess then a best case scenario wouldn’t have a whole lot of upfront payment.

And Joanne, just one more follow-up for you, you talked about the slight uptick in legal expenses. Is that pretty much associated with the Tessera litigation issues and could you quantify that? And would that be more one time or do you expect that to be like an ongoing recurring expense over the next few quarters?

It’s funny because I had this conversation with our general counsel. There’s no linearity with respect to legal fees. It comes in peaks and valleys and I wouldn’t even begin to describe legal fees as one time. You look at our history. Legal fees come and go and it’s part of a cost of being a U.S. company. So I wouldn’t describe them as one-time. I don’t expect them to be all that significant in the fourth quarter. It’s just with respect to OpEx guidance. I would’ve said slack on SG&A but we may have a little bit of an uptick.

Okay, thank you.

Thank you. Your next question comes from the line of Jeff Hartley (ph) with Barclays Capital. Please go ahead.

Hi, just back on the CapEx, I’m just wondering, you talked about it somewhat, but is there a certain either percentage of sales or minimum dollar amount that you think, maybe a range, that would be needed in a down revenue environment to maintain your facilities and invest in new technologies. I mean would it be under 10% of revenue?

I think that’s a good number to follow. I think capital intensity, that’s a number (inaudible). I think 10% would be a good number and we tried to be a more single digit if we can, yes.

Okay, and then with some of the commodity lead frame business that potentially could go in-house to customers, can you just talk about if you’ve started to see that and how much of your approximately 29% wire bound lead frame could be subject to that in terms of the product.

Well lead frame is the older and the more challenged product. The pricing is a challenging environment. Some of it could be pulled in-house, but that being said, we don’t think that it’s accelerating any at any point in this time. Although there is challenging pricing in that particular area of the business.

Okay, last question, just with your big liquidity cushion, any thinking of potentially buying bonds in the open market or other uses of cash to improve the balance sheet?

Yes, liquidity is certainly a priority for the company and we didn’t have a visibility with respect to the Tessera payment until a couple days ago. So we clearly evaluate what our liquidity needs are between today and 2011, our next maturity. There is going to be a lot of demand on our cash going forward. We talked a little bit on the call about whether there’s be some opportunity to make some investments here or there. They’re all part of the things we would consider.

Okay, thank you.

Thanks, your next question comes from the line of Eric Ruebell with MTR securities. Please go ahead.

Good afternoon. Thanks for taking my questions. Joanne, a couple of clarifications if I could. What were materials as a percentage of revenues in the quarter? You called out For Ex of $23 million of gain. Was that 10 million in cogs included inside that For Ex gain and what was capacity utilization in the quarter?

Okay, taking them one at a time, it’s $23 million is not in cost of goods sold. That appears as a separate line item on our income statement below gross margin. The 10 million I talked about is embedded in that cost of goods sold number.

Okay.

With respect to materials as a percentage, materials is about 38% of net revenue, which is roughly flat compared to the last quarter. Last quarter was about 39.

And capacity utilization overall…

Capacity utilization, so yes, in our press release we had capacity utilization of 86%. Packaging utilization tends to be higher than that. So that’s both flip chip as well as wire bond and capacity utilization tend to track lower than that.

Okay, great and I have some questions on working capital looking ahead. It looks like you did pretty well in the quarter with the velocity of the revenue line turning down? Do you think that you can do better on receivables? Do you think we could see DSOs with something like a 40 day handle and what’s sort of your outlook for working capital in Q4?

You know we try really hard to sustain our current level of tax conversion. It is definitely challenging out there. Some people are having liquidity issues. None of our customers so far, but we are mindful of the issue. I don’t expect DSOs to come down. We’re concerned that DSOs may go up, so we’re actively monitoring the health of all our customers and making sure that those payment turns don’t get stretched out. The flip side is we also want to make sure that our suppliers stay healthy as well.

One last question if I can, you mentioned that you had a really strong recovery in the lead frame part of the business in Q3. Can you give some color about how your thinking about mix in Q4?

Well, Eric this is Ken. I think that once again we’re seeing softening across all of our product lines that will impact the mix a little bit. But that being said, throughout the year we’ve continued to see continuing growth in our leading edge packages and in our flip chip and wafer level packaging we expect that to continue. There will be probably some softening in the lead frame packages as we move into Q4.

Okay, great, thank you.

Your next question comes from the line of Mike Lanier with AIG. Please go ahead.

Hi, excuse me. Is it fair to say that you exited the quarter on a down-beat as opposed to kind of level throughout the quarter?

If you’re asking if the revenue was linear, no it wasn’t. No, it did trend down throughout the quarter. That’s correct.

And how do you characterize the visibility you have? We’re already a month into the quarter. How far forward does the order book let you see right now?

We have rolling six month forecasts from our customers and they update those, some on a daily basis, some on a weekly. We prefer to look at it weekly. So we get weekly movements up and down.

But I mean clearly at the end of, you may have a six month forecast, but at the end of June, you didn’t expect the fourth quarter to be like this. Is it –

I mean we have some visibility with respect to the accuracy of the customer forecast. We have seen a downward negative adjustment to those forecasts.

They’re dynamic forecasts. They’re not static. That’s for sure.

Sure, right, I’m just saying is it realistically four to six weeks that the orders are firm versus forecast?

A time like this when the market is weak, my person experience has been in times like this when business is going down, it’s very difficult to really predict. That’s all I can tell you. And even I know last week numbers changed. So that’s why we gave you a wide range this time. Normally we try to do it in a two to three point different, but this time we gave 15 to 20 because our visibility is so poor.

Well then on the in sourcing topic that Jeff brought up, if a customer that you are acting as sling as part of your relationship, how much notice do they have to give you when they’ve decided to take some back in?

It varies, but we have ongoing business relationships with frequent contact with our customers and so obviously they try to give us as much notice as they can.

So you’re saying it might be contractual but in the real world it could be much shorter than the contractual understanding.

That’s correct, yes.

Alright, well, third quarter looked good.

Yes.

It was good, yes, thank you.

It kind of gets lost in our…

That was nice to hear. Operator Thank you. Our next question comes from the line of Ross Strello with RBC Wealth Management. Please go ahead.

Yes, hi Ken, how are you?

Good Ross, how are you?

Okay, so what percentage of your revenue actually used the package from Tessera?

That actually is—

I can give a crack at it and then you can add in. So there’s only so much that we can talk about Tessera at this point. It is with respect to our wire bond packages and it’s a portion of those wire bond packages. When you look at the charge that we took, that kind of gives you a little bit of an idea of materiality and that was spread over six-and-a-half years. So it’s a piece.

Okay, with their patents then, is that something that will eventually be obsoleted?

Well those patents will expire at some point in time, yes.

Okay, but I mean the other technologies that replace it is kind of what I was thinking about.

Yes, so this isn’t really the way we see Tessera and the outgoing royalties. This isn’t really significant for us. What became a little significant was that there was a lump sum of back royalties. So going forward, Tessera’s not that significant of an issue for us.

Okay, very good. So in your opinion, what is the inventory situation like throughout the supply chain right now in the semi-conductor industry?

I think the inventories are really very low. I think many of our customers have been reducing their inventories in anticipation of a slowdown. So I think that the inventories for our customers and our customers’ customers inventories appear to be very low in the distribution network.

I think especially we noticed the last two or three weeks, there has been significant effort to reduce inventory on the customer’s end. However, again, remember inventory is relative to demand. So if demand comes down faster, then inventory will increase again. So I don’t think we can talk about level of inventory as any significance at this time. Really, future demand will dictate whether we have access to inventory or not. And if we don’t, then truly I won’t be surprised. That’s the key. In other words, what is the final demand going to be for the product that manufacturers going to make using the semiconductor product? It’s anybody’s guess right now.

Exactly, exactly, thank you. And then the final one, are you tempted to buy some stock at this price?

You know we are not allowed to answer any questions about that.

Is that personally or?

Company stock buyback.

Yes, I answered a call a little bit earlier with respect to demands on our cash. Jim mentioned in prepared remarks, we’re very focused on free cash flow. We’re very focused on liquidity. There are demands for our cash along the way. We’ll evaluate all investment opportunities and with respect to debt in stock, we’ll evaluate that as well.

Fair enough, thank you very much.

Thanks Ross.

Thank you. Your next question comes from the line of Tom Shandell (ph) with Friedman Investment Advisors. Please go ahead.

Hi, good afternoon. I’d just like to ask a couple of questions on the balance sheet and related to the Tessera accrual. That item, does it show up in the accrued liabilities line item on the balance sheet.

Yes, that would be in accrued expenses.

Okay, and I guess following up on that, you don’t know when it’s going to get paid but obviously if we wanted to forecast working capital, we should back that out of accrued liabilities to try and come up with our ratios and any kind of model.

Yes, the payment is sometime early 2009 is the best I can guess.

Okay, fair enough, and just looking at the payment dates for your bonds, you made the comment before that in the fourth quarter you expect to be free cash flow positive and I gather that reflects the fact that it seems like you have a couple of coupon payments that do come up in the fourth quarter.

Yes, we deduct interest paid in deriving free cash flow.

Okay, so obviously it’s hard to forecast ’09 and you gave us your ideas about the fourth quarter of ’08 and you also gave us a break-even revenue level for the operating income level. But based on your comments about CapEx and based on a relatively fixed capital structure, if one were to forecast out into the future these kinds of gross margins that you threw out and revenues and your expected CapEx, would you expect—and including working capital investment—would you expect, if things stayed at this level, for you to be free cash flow positive in ’09?

Clearly a priority of ours is to stay free cash flow positive. We’re managing for cash generation. With respect to inter-quarter, between quarters, there is a potential that a quarter could not be free cash flow positive. But our goal, with respect to 2009, is to maintain and to be free cash flow positive. The break-even numbers obviously isn’t a forecast of where we think 2009 is going to be. So we hope it’s certainly not that bad.

Right, right and just to be clear, the break-even was operating income, which deferred appreciation—

I’m sorry. I should have let you finish your question. It is operating income and that is after depreciation.

Okay, great. I appreciate it.

Thank you. Our next question comes from the line of Robert Goch with MAK Capital. Please go ahead.

Hi, thanks for taking my question. Just on the break-even level when you said that it takes into account the cost-savings measures, is that the two-day cost-saving measures or are you sort of annualizing that or run rating those cost-saving measures on the break-even?

The way we calculate the break-even is it’s based on MAK quarter’s results so it isn’t a trailing 12 months. And also it would take into consideration the cost-savings that have been done so far.

Right, just on the bad debt expense in the quarter or expense in the quarter or expectations—

(Operator Instructions) Please continue.

I’m sorry. There was a beep on my phone. I was asking a question. You mentioned your customers and the issues they’re facing. I was wondering what the bad debt expense was for the quarter in terms of—

Bad debt expense for us historically has been extremely material. Thankfully we include some of the top semiconductor companies amongst our customers. So when you think of our top 25 represents 75% of our revenues and they’re all good quality companies. We feel good about that. There are some smaller customers that we do watch and in an environment that Jim and Ken talked about cost-cutting every dollar’s precious, especially every dollar that’s cash. So it’s something we’re mindful of. We don’t expect bad debt expense to increase materially but we want to make sure that we don’t leave any value on the table.

Okay, thank you very much.

Thank you. Our next question comes from the line of Robbie Hassan (ph) with FBR Group. Please go ahead.

Hi, good afternoon. I have one question. The number 45 million, is that your number or is it the number that the judges told you to pay.

That was after, what I call, Robbie, it is Amkor’s estimate. And the process that we have to go through from here is that by November 17th, our experts and their experts will get together and determine what aspects we agree on, figure out if there’s any aspects we disagree on, and then go back to the tribunal and they will make the final assessment. So our estimate is subject to change.

Okay, and when do you think that final judgment is going to be?

Again, we expect sometime in the fourth or the first quarter.

And you still expect that to be divided in six, seven years?

No, the six to seven years comment, I don’t know if you’re referring to a comment I made. Sorry, so I think I understand the question. It’s the award itself is from March 2002 to March 2008. So that’s a six-and-a-half year period. We’ll have to start paying Tessera a royalty for Q2, Q3, Q4 and ongoing as we go forward. We’re a current licensee of the Tessera technology so we’ll commence paying royalties.

And so it’s going to be divided over time, right?

Nothing’s divided over time. We’ll have to pay it when there’s a judgment, we’ll have to pay the total amount.

Okay, that’s all I have. Thanks.

Great, thank you.

(Operator Instructions) One moment please. And we do have a question coming from the line of Shawn Park (ph) with Ice Canyon. Please go ahead.

Hi Joanne, thanks for taking my call. Just a clarification, you just said that the payment was through March ’08 so between March and now, how have you been accounting for the royalties that are due to Tessera?

Now that we have the interim order, we took that interim order and estimated what we owe Tessera for Q2 and Q3. We have not paid them that but we have accrued that in our Q3 results.

Okay and that accrual is different and is on top of the 45 that you’re talking about?

No, that includes it. So that 45 is not just the award amount. That also includes amounts for Q2 and Q3.

Okay, so it’s actually March of ’02 while you mentioned that the decision was based on March ’02 to March ’08, it’s really longer than that then?

So the award period is March ’02 to March ’08. That is the award period. So our books and records are through September 30 so we had to accrue what we owed for Q2 and Q3. And that’s the number that we disclosed in that paragraph and it’s inclusive of Q2, Q3, and out.

Okay, and is there anything that you can do within your own product mix or how you manufacture that could even reduce the potential 2 million a quarter down, now that you’re aware that anything related to this patent will result in additional royalty payments that you weren’t aware of before?

It’s just not a material issue for us. It’s just not a material issue for us. We’ll take a look at any ongoing impacts as we move forward.

Okay thanks.

Thank you. And management, there are no further questions, so I’ll turn it back to you for closing comments.

Thank you very much and again thank you for listening to us.

Thank you. Ladies and gentlemen, that will conclude the Amkor Technology Inc.’s third quarter 2008 earnings conference call. We thank you for your participation today. (Operator Instructions) Have a nice day.