Issue



Subcontractor Update: Strong Growth in Revenue and Profit Margin


01/01/2006







BY JEFFREY C. DEMMIN

Heightened efficiency and numerous strategic moves of major assembly and test subcontractors indicate that these companies are navigating the industry’s ups and downs well.

ASE, Amkor, SPIL, and STATS ChipPAC all reported solid revenue growth in the third quarter of 2005, with improved earnings and significantly better gross margins.

ASE, the largest subcontractor, had a strong third quarter in 2005; continuing its rebound from the fire at its Chungli, Taiwan plant in May of 2005. After suffering more sluggish growth in the second quarter, they’re leading major competitors with a 16.3% increase in revenue to $698.1 million (Figure 1).


Figure 1. Quarterly revenue trends at the four largest assembly and test subcontractors.
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ASE also returned to profitability with earnings of $49.6 million, or $0.06 per share. Jason Chang, chairman and CEO, attributes this to adjusting the pricing structure to better align with the tightened industry capacity and increased material cost. ASE sold its camera module assembly operation in Penang, Malaysia to Flextronics, and reduced its employee base to 29,000, after reaching a level over 34,000 at the end of 2004. The number of wire bonders at ASE continues to increase even while the headcount shrinks, indicating an improvement in efficiency.

Amkor’s revenue grew 12.3% to $549.6 million in Q3, and saw a reduction in red ink, shrinking its loss for the quarter by over 60% to $0.11 per share. The quarterly report from Amkor was similar to ASE’s, with Amkor chairman and CEO James Kim reporting price adjustments to address recent increases in raw material cost. Corporate moves to help its bottom line included the closure of Semisys, a Korean subsidiary that makes molds and other equipment, the sale of its specialty test operation in Wichita, Kansas, and a reduction in headcount. The utilization rate at Amkor is a healthy 86%, and revenue growth of 6 to 8% in Q4 is expected to be limited by capacity, rather than customer demand. The bottom line projected for next quarter covers a range centered on break-even ($0.02 to -$0.02 per share).

SPIL reported many good things for the third quarter of 2005. Revenue growth was the best among leading subcontractors, with a 21.5% increase compared to Q2 2005, and 32% growth compared to Q3 2004. The company’s gross margin also led the pack at a healthy 22.8% (Table 1). SPIL reported 100% utilization of its assembly capability during the quarter, with all of its manufacturing capability being used all the time. In Q3, of the $75 million SPIL spent on equipment, 43% was on test equipment, even though test accounts for only 9% of its revenue. The number of wirebonders is up over 10% this quarter, and along with a 9% increase in headcount, is another growth indicator.


Table 1. Revenue, revenue growth, and gross margin trends at the four largest assembly and test subcontractors.
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STATS ChipPAC also reported a strong Q3, with 14% revenue growth to $301 million. This gave the company its highest revenue quarter ever, including the sum of STATS and ChipPAC revenue before the companies merged. Quarterly losses were driven down to just $1 million. Tan Lay Koon, president and CEO, STATS ChipPAC, forecasted optimism, projecting 14 to 18% revenue growth with a return to profitability in Q4. Like his counterparts at ASE and Amkor, he cited pricing among the positive factors in Q3.

The largest packaging and test subcontractors appear to be currently moving in unison. The summary in Table 1 shows quarterly revenue growth between 12 to 21%, and gross margin gains in 2005 are also similar. Amkor and STATS ChipPAC’s numbers are virtually identical. The Taiwan-based suppliers (ASE and SPIL) are still in the lead, but the gap is closing.

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JEFFREY C. DEMMIN, director of advanced programs, may be contacted at Tessera Technologies Inc., 3099 Orchard Dr., San Jose, CA 95134; 408/383-3691; E-mail: jdemmin@tessera.com.