Oct 28, 2013
Executives
Greg Johnson - Senior Director, Investor Relations and Corporate Communications Stephen Kelley - President and Chief Executive Officer Joanne Solomon - Executive Vice President and Chief Financial Officer
Analysts
Chad Dillard - Deutsche Bank Terence Whalen - Citigroup Farhan Ahmed - Credit Suisse David Duley - Steelhead Securities Jairam Nathan - Sidoti & Company Girish Sankar - Bank of America Merrill Lynch Berneth Kinate - Hutchin Hill Suji De Silva - Topeka
Operator
Hello and welcome to the Amkor Technology Third Quarter 2013 Earnings Conference Call. My name is Saul, and I will be the operator for today’s call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
This conference call is being recorded today, Monday, October 28, and will run for up to one hour. I would now like to turn the conference to our host, Mr.
Greg Johnson, Senior Director of Investor Relations and Corporate Communications. Mr.
Johnson, please go ahead.
Greg Johnson
Thank you, Saul and good afternoon everyone. With me here today are Steve Kelley, our President and Chief Executive Officer and Joanne Solomon, our Chief Financial Officer.
Before we begin, let me remind everyone that there will be forward-looking statements made during the course of this conference call. These statements represent the current view of Amkor management.
Actual results could vary materially from such statements. Prior to this conference call, Amkor’s third quarter 2013 earnings release was filed with the SEC on Form 8-K.
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. With that, I will turn the call over to Steve.
Stephen Kelley
Thank you, Greg. Good afternoon everyone.
On today’s call, I will discuss our third quarter performance, the status of several key initiatives and our fourth quarter expectations. After Joanne reviews our financial performance in more detail, we will open up the call for questions.
My primary focus is driving revenue growth and improved financial performance for Amkor. We saw both in the third quarter.
Sales were up 10% year-over-year and 3% sequentially, excluding the Power Discretes business, which was not included in our guidance. Third quarter sales were consistent with the midpoint of our expectations.
Increased Test and Wirebond revenues more than offset the decrease in advanced packing revenue caused by the high-end smartphones slowdown. We are seeing particular strength in the NAND Flash where revenues doubled year-over-year, and grew more than 25% sequentially.
Gross margins also improved in the quarter. We reduced unit cost in the Wirebond business through improved utilization, incremental cost reductions and lower gold wire cost.
These improvements in the Wirebond business drove overall third quarter gross margin to 19.7%, excluding patent litigation charges. Amkor leads the industry in developing a commercializing cost affective advanced packing technologies.
These technologies provide increased value to our customers for typically generating gross margins above the corporate average. Our advanced packing technologies include specialized technologies such as fine pitch copper pillar bump, which is a key enabling technology for Thru Silicon Via implementation.
In addition, we perform wafer storage and final test services. The first key to success in the advanced packing and test area is to generate reasonably quick returns on investments made for driver customers.
The other important factor is to cultivate second wave customers who could utilize the assets left behind when driver customers migrate to the next platform. Many of those second wave customers in the mobile communication space are fabless companies located in Taiwan and China, not a traditional area of focus for Amkor.
We are working hard to change that situation. We have a solid foundation for growth including three factories in Taiwan and a very large factory in Shanghai.
We lead the industry in wafer level and flip chip technology, and we have installed the most capacity in those areas. So, we are well positioned to gain share as Taiwan and China-based fabless companies move to more advanced packaged platforms.
To improve our regional focus, we are expanding our Taiwan and China-based sales, technical support, and service teams. We want our customer facing organizations in Taiwan and China to be on par with the organizations we have built in the U.S., Europe, and Japan.
Our Taiwan and China sales leader and industry veteran now reports directly to the Head of Amkor’s Worldwide Sales Group. We are seeing some early signs of success with four recent wins in the smartphone space, which will ramp to volume in the first half of 2014.
We recently hired [Endrim Tam] (ph) as the new leader of our mainstream products business unit. Endrim is responsible for the Wirebond businesses and reports directly to me.
He and his team working with our factory managers and sales force will grow and improve the Wirebond business. They will leverage Amkor’s cost structure, strong technology base, solid customer relationships, and long-term commitment to the business.
We offer a compelling value proposition for a number of customers, including those selling into the automotive, hi-rel analog and industrial markets. We will reach out to new customers in addition to growing our business with current customers.
Through our purchase of Toshiba’s Malaysia factory, we entered the Power Discrete business in the third quarter. The integration is going well and customer interest is strong.
We have a multi-year supply agreement with Toshiba and our focused on securing business with other customers. The acquisition has been immediately accretive to earnings.
J-Devices, our 60%-owned joint venture in Japan, is currently generating run rate revenues of just under $1 billion per year. Although we treat J-Devices as an investment today, we expect to begin consolidating their results in 2016 when we have the option to increase our equity interest to 80%.
In the meantime, we will work closely with the J-Devices team in a number of areas, including joint purchasing programs and joint technology development. J-Devices has a very strong automotive business and a competitive cost base.
With their recent acquisition of assembly and test factories from Fujitsu and Renesas, J-Devices is executing a consolidate and fill strategy which will improve their possibility. Looking ahead to the fourth quarter, our sales are expected to be slightly down sequentially.
Although we will benefit from a full quarter of results from our Power Discrete business. We anticipate seasonal declines in the consumer and computing markets.
We expect that our sales into the high-end smartphone and tablet market will be flat to slightly up quarter-on-quarter. Fourth quarter gross margin is expected to be in the range of 17% to 20%.
We anticipate earnings per share to be between $0.08 and $0.19. We are on track to meet our new 2013 capital additions target of roughly $450 million.
As I discussed last quarter, we established this lower target in response to changes in the high-end smartphone market. We recently completed a comprehensive review of our manufacturing capacity and concluded that our current manufacturing footprint will be sufficient into 2016.
Therefore, we have decided to begin construction of K5, our (inaudible) -based factory and R&D center in the fourth quarter of 2014. This is one year later than the plan I’ve discussed in my last conference call.
Construction work will continue into 2015 and early 2016. This new construction schedule will improve our 2014 free cash flow outlook.
Looking at our performance year-on-year, assuming that we achieved the midpoint of our fourth quarter guidance, 2013 revenues would be nearly $3 billion, an increase of more than 7% year-on-year and an all-time record for Amkor. Gross margin excluding patent litigation charges in both years would be 18.4%, an increase of 120 basis points year-on-year, and earnings per share would be $0.50, a 11% increase over 2012, again excluding patent litigation charges.
With that, I will turn the call over to Joanne.
Joanne Solomon
Thank you, Steve, and good afternoon everyone. To begin, third quarter sales of $768 million increased 10% over the third quarter of 2012.
Flip chip and wafer-level packaging sales grew 3% year-over-year, and test sales were up 42% year-over-year. Strong growth in mobile communications was partially offset by softness in consumer electronics.
Wirebond sales increased 9% year-over-year driven by NAND memory and our recently completed Power Discrete acquisition. The year-over-year declines in consumer electronics were in part due to decreased sales from gaming.
Our packaging for the CPU and GPU gaming chip largely ended in 2012. Our 2013 revenues have reset to this new run rate.
Looking sequentially, sales grew 3%, Wirebond sales and Test revenues were each up 14% due to NAND memory and our Power Discrete acquisition. Flip chip and wafer-level processing sales decreased 10% due to the slowdown in mobile communications.
Gross margin of 18.4% includes 130 basis points impact due to the litigation accrual. Excluding this item, gross margin of 19.7% was an improvement of nearly 300 basis points from the third quarter of 2012.
Growth in wafer-level processing, NAND memory, and Test businesses primarily drove the improvement in gross margin. Looking sequentially, the improvement in gross margin was driven by increased utilization, efficiency improvement, and lower gold wire cost in our Wirebond business.
Our operating expenses of $83 million were up from $80 million in the second quarter. We expect operating expenses to remain at this level for the fourth quarter.
Our effective tax rate in the third quarter was 32% driven by a $5 million charge for discrete tax items. For the full year 2013, we expect an effective tax rate at around 10%, primarily reflecting the benefit of favorable discrete items we’ve recognized in the second quarter.
Our capital additions were $97 million in the third quarter and around $70 million remains to be spent in the fourth quarter. Also in the fourth quarter, we’ll make the final payment of around $50 million for the purchase of the land for our new factory and R&D center in Korea.
Moving on to our liquidity and capital structure, at September 30, we had $591 million in cash and total debt of $1.7 billion. We have $555 million in available revolving credit lines and undrawn secured term loans.
We anticipate drawing less than $25 million under these facilities in the fourth quarter. In summary, as Steve discussed, 2013 is shaping up as a solid year of improvement in our financial performance with significant growth in revenues, gross margin, and earnings per share.
With that, we'll now open up the call for your questions. Operator, Saul.
Question
and
Operator
We will now begin the question-and-answer session. (Operator Instructions).
Our first question comes from the line of Vishal from Deutsche Bank.
Chad Dillard
Hi, this is Chad Dillard on line for Vishal, thanks for taking my question. Can you provide us with an update on your share and your end-markets, Wirebond, flip chip, test, and how you see those end-markets developing in 2014 versus 2013?
Deutsche Bank
Hi, this is Chad Dillard on line for Vishal, thanks for taking my question. Can you provide us with an update on your share and your end-markets, Wirebond, flip chip, test, and how you see those end-markets developing in 2014 versus 2013?
Stephen Kelley
Yes Chad, to provide you a little color over our market share I think is your question, right?
Chad Dillard
Right.
Deutsche Bank
Right.
Stephen Kelley
Yes, so we do track market share on a quarterly basis, on a yearly basis, and we typically find the best way to look at this is looking at the last trailing 12 months and see if there're any significant movements. Right now, we believe overall we're holding market share.
I think when you look at it quarter-to-quarter, we did take a hit because we don’t participate very heavily in the mid range or low-end of the cell phone market and the smartphone market. But I think as we look forward over the next two quarters, you'll see that we'll actually gain share in all likelihood, so I think moving forward our objective is to just gain share in all areas, but right now I think we're holding our share.
Chad Dillard
And I know it may be a little bit too early, but could you talk a little bit more about your CapEx plans for 2014 against the backdrop of postponing the facility until the end of the year, just if you could compare what it's going to look like versus this year?
Deutsche Bank
And I know it may be a little bit too early, but could you talk a little bit more about your CapEx plans for 2014 against the backdrop of postponing the facility until the end of the year, just if you could compare what it's going to look like versus this year?
Stephen Kelley
If you take a look at our capital spending for the past four years, we typically spend somewhere in the range of $450 to $500 million a year new capital additions, that's excluding spending on new facilities such as K5. I think for purposes of this call, we could assume we'll be in the same range for 2014.
Our intent is the key to spend, to maintain and improve our leadership in the high technology areas of the business. That requires us to spend in both assembly as well as in test, to keep up with the needs of our mobile communications customers.
We also have the intent to make better use of our existing platforms, so we have a substantial effort underway to increase the usage of our current test platforms in particular.
Operator
Our next question comes from the line of Terence Whalen with Citigroup.
Terence Whalen
So this question has to do with a comment that you made Steve about increasing the strength of the field force in China and Taiwan in order to win additional business in that area. My question is, can you talk a little bit qualitatively how that's going?
I think you have highlighted that in your comments, I just wanted to understand fundamentally how you're thinking about metrics and measuring that? And then the follow-on to that question is, let's say revenue grows 10% next year, what would OpEx grow given that you have to allocate additional resources there?
Thank you.
Citigroup
So this question has to do with a comment that you made Steve about increasing the strength of the field force in China and Taiwan in order to win additional business in that area. My question is, can you talk a little bit qualitatively how that's going?
I think you have highlighted that in your comments, I just wanted to understand fundamentally how you're thinking about metrics and measuring that? And then the follow-on to that question is, let's say revenue grows 10% next year, what would OpEx grow given that you have to allocate additional resources there?
Thank you.
Stephen Kelley
So, I'll talk about the plan in Taiwan and China, then I’ll turn the OpEx question over to Joanne. So how is it going?
So just to recap, I think we've done a lot of the hard work already in Taiwan and China. We have three plants in Taiwan, a large factory in Shanghai, we have a lot of boots on the ground in those two areas.
What we haven't done in the past is really invest in our customer facing organization, but that really encompasses three areas, one is sales, the second is customer service, and the third is technical support. But we've basically empowered our manager in that region to hire as many people as he needs, and we're already in the process of hiring technical talent.
We’re basically looking for package designers who can be embedded with the customer as well as package designers who will work at the Amkor facilities, and we're looking for basically a higher level of support, support that's equivalent to what we currently provide to our customers in the U.S., Japan, and Europe. So we have a pretty good standard to measure it by and you asked me for measurement tool, we're going to be measuring that against our existing support that we currently have in the other regions.
Joanne Solomon
On the operating expense front, obviously every year we start off trying to figure out how to do more with less, so we'll look to drive down operating expenses in other areas. As a reminder, this year we had some expenses for some acquisitions that obviously hit us mostly in Q2.
We have some litigation expenses that are hitting us this year as well. So we'll look to hopefully maintain overall operating expenses at this level.
Overtime, I do expect R&D expenses to continue to go up, and hopefully we can control SG&A to where we’re today.
Terence Whalen
My second question, my final question is you have kind of alluded a couple times I think in your prepared comments to processing the challenge of the high-end smartphone inventory correction. Just wanted to understand obviously you see different layers of demand, whether it be near-term orders or forecast and you see that elements in the different levels of horizon.
I was trying to understand how you are thinking about that going forward. Whether you have seen stability there, whether you have seen any increases in how do you think that will develop heading into first half '14 based on just in general the smartphone inventory correction that you're experiencing?
Thank you.
Citigroup
My second question, my final question is you have kind of alluded a couple times I think in your prepared comments to processing the challenge of the high-end smartphone inventory correction. Just wanted to understand obviously you see different layers of demand, whether it be near-term orders or forecast and you see that elements in the different levels of horizon.
I was trying to understand how you are thinking about that going forward. Whether you have seen stability there, whether you have seen any increases in how do you think that will develop heading into first half '14 based on just in general the smartphone inventory correction that you're experiencing?
Thank you.
Stephen Kelley
Sure let me make a couple of comments there. We saw the correction in June of this year, and so we made an adjustment there to our Q3 and Q4 plan in June.
And quite frankly we haven't seen any major adjustments since that time. So the short answer to your question is I believe that the situation stabilized in the July timeframe.
And so I would characterize the market as somewhat sluggish, but it's not down, the fact we expect to be flat quarter-on-quarter, perhaps slightly up. We're exposed in multiple areas to the smartphone market, not just the apps processor but we also manufacture memory, the power management, MEMS products and a variety of analog and micro-controllers that go into smartphone and tablet platforms.
So we have got a pretty good penetration in the high-end of the smartphone market. We expect some point in 2014 things will get better again and the market will resume the growth rate that we saw in the first half of 2013.
Operator
Our next question comes from the line of John Pitzer with Credit Suisse.
Farhan Ahmed
Hi this is Farhan asking a question on behalf of John. My first question is regarding the leading edge capacity.
Like Amkor has always been a leader in leading edge packaging and there is a 20 nanometer ramp next year and it seems like you are starting first quarter of next year this seems to be a ramp on 20 nanometer that foundries are indicating. I was just wondering like relative to packaging have any of the 20 nanometer decisions been made yet and how should we think about your share on 20 nanometer packaging next year?
Credit Suisse
Hi this is Farhan asking a question on behalf of John. My first question is regarding the leading edge capacity.
Like Amkor has always been a leader in leading edge packaging and there is a 20 nanometer ramp next year and it seems like you are starting first quarter of next year this seems to be a ramp on 20 nanometer that foundries are indicating. I was just wondering like relative to packaging have any of the 20 nanometer decisions been made yet and how should we think about your share on 20 nanometer packaging next year?
Stephen Kelley
Yes, so on 20 nanometers we are working on that and we have been working on that for some months now and we're very happy with the progress so far, we’re seeing good yields, engineering lots and qualification lots that are passing first time through our line. So I think we're in good shape on 20 nanometer, and this is really a direct result of the investments we made over the years in this advanced technology, both in the assembling and the test side.
Moving forward, I would expect to have as good a share that we have had in the recent past in 20 nanometers as we have in 28 which is pretty healthy. But we're also trying to do a little better, so our internal objective is to move our share higher but our expectation is to at least maintain what we have.
Farhan Ahmed
And then in regards to CapEx for your K5 facility you are pushing out, I just want to understand is there some change in demand that you are seeing from your customer. Was it something that -- how are things different now versus when you had plan which is causing you to push out the CapEx.
Is one of your customers indicating that they are not going to do the business that they were previously planning with you?
Credit Suisse
And then in regards to CapEx for your K5 facility you are pushing out, I just want to understand is there some change in demand that you are seeing from your customer. Was it something that -- how are things different now versus when you had plan which is causing you to push out the CapEx.
Is one of your customers indicating that they are not going to do the business that they were previously planning with you?
Steve Kelley
I think the biggest issue here is that, it's not an issue it's actually a good thing. And we have been able to make significant improvements over the past year in our own efficiency, in our current bumping locations and our current assembly and test locations.
So the output has improved significantly. And we’re able to basically transfer learnings around the Company in a pretty efficient way.
So our internal capacity is lot greater than we thought it would be a year ago. So looking at that as well as the demand picture in the smartphone area in particular it just seemed prudent at this point to move the construction schedule out one year.
Now if it proves that we are too conservative we do have the ability to start that construction earlier. As Joanne mentioned we have purchased the land and when we say go, we can get started.
Farhan Ahmed
Could you also provide like utilization rates on your test and packaging. I didn't see that on the press release and I was just wondering like what the utilization rates were on this quarter?
Credit Suisse
Could you also provide like utilization rates on your test and packaging. I didn't see that on the press release and I was just wondering like what the utilization rates were on this quarter?
Joanne Solomon
Yes as part of these initiatives we're really working very closely on the shot forward (ph) to really challenge what our current capacity is. As we go through this reassessment of capacity those utilization numbers we start to have some challenges with respect to consistency between period-to-period.
I would say from a like-for-like basis, the packaging was in the 80s, low 80s as well as test was. The Wirebond assets were actually fairly well utilized led by the NAND memory, as well as some of the strength in the mainstream that we saw, and we had some open capacity as you could expect on the flip chip on the advanced side principally going into the smartphones.
We have strong attach to test with NANDs, so a lot of those test assets were well utilized and supported NAND less so in support of the smartphones.
Farhan Ahmed
And then I am also trying to understand like you had a very strong growth in your Wirebond business. If you could help us like breakout the Discretes portion or give us a sense of how much of the revenue growth was coming from Discretes or the Toshiba business that you acquired in Malaysia that would help us reconcile like what your -- of core growth was for the Wirebond versus what you grew like inorganically?
Credit Suisse
And then I am also trying to understand like you had a very strong growth in your Wirebond business. If you could help us like breakout the Discretes portion or give us a sense of how much of the revenue growth was coming from Discretes or the Toshiba business that you acquired in Malaysia that would help us reconcile like what your -- of core growth was for the Wirebond versus what you grew like inorganically?
Joanne Solomon
Yes absolutely. So, our Wirebond sales in total for Q3 was $351 million, of which memory was 31 and compared to $308 million lot in Q2 was Wirebond.
Farhan Ahmed
But in terms of organic…
Credit Suisse
But in terms of organic…
Joanne Solomon
Sorry I made mistake, so 31 is Discretes.
Farhan Ahmed
Okay, got it.
Credit Suisse
Okay, got it.
Joanne Solomon
Sorry 31 is Discretes, total Wirebond including Discretes is 351 for Q3, 308 for Q2 2013.
Farhan Ahmed
And it seems like NAND was also a very big driver of growth for you. Approximately how much of your revenues like even ballpark would be great are coming from NAND so that we can think about the business?
Credit Suisse
And it seems like NAND was also a very big driver of growth for you. Approximately how much of your revenues like even ballpark would be great are coming from NAND so that we can think about the business?
Joanne Solomon
Yes, our memory exposure is about 100 million.
Operator
Our next question comes from the line of David Duley with Steelhead Securities.
David Duley
…could you help us understand what the impact of the pickup in revenue is from the Toshiba acquisition or help us understand what the guidance is apples-to-apples, however you’d like to break it down?
Steelhead Securities
…could you help us understand what the impact of the pickup in revenue is from the Toshiba acquisition or help us understand what the guidance is apples-to-apples, however you’d like to break it down?
Joanne Solomon
Okay, that’s very similar to the question we just had. So Discretes, which was the acquisition from Toshiba is $31 million for Q3.
For Q4 we expect it to be about $39 million for Q4, some level of seasonal correction and starting to see some of the cost savings impacting the price. So that would be the apples-to-apples Q3 to Q4.
David Duley
So, then the revenue guidance for the quarter I think it’s probably better than normal seasonally when you -- because this isn’t that big of a change. Why is the revenue guidance Q4 I guess better than seasonal or maybe I am doing the math wrong?
Steelhead Securities
So, then the revenue guidance for the quarter I think it’s probably better than normal seasonally when you -- because this isn’t that big of a change. Why is the revenue guidance Q4 I guess better than seasonal or maybe I am doing the math wrong?
Joanne Solomon
It’s about seasonal. So just to go ahead and do the math, Q3 without Discretes is $737 million and at the midpoint without Discretes it would be about $715 million, so down just about 2%.
That tends to -- when we haven’t had a real typical Q4, but when we did our calculations we normalized out some of the 28 nanometer RAM some of the movement in gaming which suggested that over the last three years Q4 on average is down 2%. So our decline in revenues once you back out Discretes feels very seasonal.
David Duley
Final question from me is on the gross margin front. Gross margins were up sequentially without the litigation reserve and your communication business percentage was down.
Could you just talk about the dynamics there?
Steelhead Securities
Final question from me is on the gross margin front. Gross margins were up sequentially without the litigation reserve and your communication business percentage was down.
Could you just talk about the dynamics there?
Joanne Solomon
Yes so it was a very positive quarter from a gross margin perspective especially when you start adding back the discrete charge for the litigation. What was the drivers for this?
Lot of positive news is on the mainstream side. We started to see a lot better utilization on the Wirebond front than we’ve seen in many quarters, which while overall Wirebond is lower than the corporate average movements up from the margins associated with the Wirebond it has a favorable impact on our gross margin, so better utilization.
We started to see positive results from some of our cost initiatives getting on larger strip going through our machines which means that we’ll get more units going through each of the machines which helps again on initiative of getting more capacity out of our installed base. And then we did have the benefit of the lower gold prices this quarter compared to the last quarter.
Operator
Our next question comes from the line of Jairam Nathan with Sidoti.
Jairam Nathan
The first question was on, you mentioned some new business wins I just wanted to, let’s see if you could give some more details and whether it’s a new customer or a new program with the same customer?
Sidoti & Company
The first question was on, you mentioned some new business wins I just wanted to, let’s see if you could give some more details and whether it’s a new customer or a new program with the same customer?
Stephen Kelley
Okay, so are you referring to the wins in Taiwan and China?
Jairam Nathan
Yes.
Sidoti & Company
Yes.
Stephen Kelley
Yes so those were new customers for Amkor. And I can't give you their names, but I could tell you when you think of top-six fabless Taiwan and China companies, they are in that grouping, and we have more in the pipeline.
So we have some interesting technology to offer to these companies. We installed this technology really years ago.
And so we are down the learning curve from a technology standpoint and we are also down the cost curve. So what we are finding is, our quotations are very, very competitive.
So I think if we build up our service organization, we have all the other pieces in place to be successful here.
Jairam Nathan
And as far as the Toshiba business, how did the gross margins on that business compare to your existing legacy businesses and was that one of the reasons -- was that a factor in improvement in gross margins?
Sidoti & Company
And as far as the Toshiba business, how did the gross margins on that business compare to your existing legacy businesses and was that one of the reasons -- was that a factor in improvement in gross margins?
Stephen Kelley
Yes I will make a comment here, and then Joanne may add a few words. What I think, we have opportunity to make decent gross margin in Taiwan and China just as good as we do in other regions of the world.
I think a lot of it is how you view the business and how you view your assets. But I am confident that we can engage heavily in this area and continue to improve our margins.
Joanne Solomon
And your question was it specific to the Toshiba acquisition and the Discretes business, or?
Jairam Nathan
Yes.
Sidoti & Company
Yes.
Joanne Solomon
So, with respect to the Power Discretes business, you can think of those gross margins very similar to our mainstream business. It is very similar to our wafer and packaged technology.
So it’s in the low teens. On our last call we talked about net margin contribution from this acquisition was going to be about 5%.
In the initial years as we run through some of the purchase accounting associated with it, it may be closer to our corporate average of 4%, and just one thing for everybody on the call to understand is that we broadly serviced Toshiba. So Toshiba is one of our NAND memory customers as well.
So with respect to Toshiba margins overall they are what you would expect across a very diverse portfolio.
Jairam Nathan
And my last call’s question sticking to gross margins here, your guidance for the fourth quarter of 17 to 20, is that variable be primarily on volume. And you already did close to 20% with flip chip advanced packaging revenues, not doing well, so how should we think about that if they are [indiscernible]?
Sidoti & Company
And my last call’s question sticking to gross margins here, your guidance for the fourth quarter of 17 to 20, is that variable be primarily on volume. And you already did close to 20% with flip chip advanced packaging revenues, not doing well, so how should we think about that if they are [indiscernible]?
Joanne Solomon
That’s a great question. With respect to the gross margin guide for Q4, that is based on the expected decline in the legacy business prior to the acquisition.
So we talked about that Q3 we are at 737 without the acquisition, we are expected to be down at the midpoint to 715. So there is a decline, with the decline in revenues that would impact our gross margin.
When you start considering that our guide does include the acquisition, the Discretes business, because we had talked about it being in the low teens, we will average down our corporate gross margins as well, so that it’s about 50 basis points compression on the gross margins. So hopefully that put just a little bit about how we -- at the midpoint we would be at a 18.5% gross margin compared to 18.5 this quarter, but which obviously includes the litigation accrual.
Operator
Our next question comes from the line of Girish Sankar from Bank of America Merrill Lynch.
Girish Sankar
I have a couple of them. Either Steve or Joanne, off your Wirebonded installed base, what percentage is copper Wirebonded today?
Bank of America Merrill Lynch
I have a couple of them. Either Steve or Joanne, off your Wirebonded installed base, what percentage is copper Wirebonded today?
Joanne Solomon
With respect to copper wire, a lot of their, all the advanced copper Wirebonders are capable of doing both gold and copper, and we with respect to gold versus copper where all by far gold is still the predominant piece of what we do. And copper is about 20% of our Wirebond revenues.
Girish Sankar
This is the Wirebond revenue. What about -- is there a way to quantify it in terms of capacity, or is that a close enough proxy?
Bank of America Merrill Lynch
This is the Wirebond revenue. What about -- is there a way to quantify it in terms of capacity, or is that a close enough proxy?
Joanne Solomon
From significant trends, I wouldn’t highlight copper overseeing a significant trend for us.
Girish Sankar
And then I had a follow-up question on your litigation, because you guys said that you’ve book (ph) marked about $60 million to $115 million, just kind of curious. I am guessing this is regards to the Telstra arbitration.
How much have you paid them so far? How much has been year-marked in total for this litigation?
Bank of America Merrill Lynch
And then I had a follow-up question on your litigation, because you guys said that you’ve book (ph) marked about $60 million to $115 million, just kind of curious. I am guessing this is regards to the Telstra arbitration.
How much have you paid them so far? How much has been year-marked in total for this litigation?
Joanne Solomon
So we did increase our reserve to $60 million which represents the low-end of the range and as you said, as was indicated in our press release, the range of potential loss was narrowed to $60 million to $115 million. Of that 60, to-date we have paid about $20 million in connection with this arbitration and as far as year-marking from a liquidity standpoint, I feel comfortable with that even at the highest end of the range, we’re covered from I suppose our tax as well as -- and available credit lines.
Girish Sankar
And then can I ask as a follow-up question on this, I mean to the extent that you can answer this, your press release said that there was new interim order from the arbitration panel in October, so is it fair to read that the new interim order in October was more in favor of Telstra versus you guys or am I reading into it too much?
Bank of America Merrill Lynch
And then can I ask as a follow-up question on this, I mean to the extent that you can answer this, your press release said that there was new interim order from the arbitration panel in October, so is it fair to read that the new interim order in October was more in favor of Telstra versus you guys or am I reading into it too much?
Joanne Solomon
I don’t know how you are reading that, I think you’re reading a little bit into it. How I would characterize it, is that the range narrows, both the high-end as well as the low-end, so both ends of the range narrow.
Girish Sankar
And what it -- I am sorry what was the range before?
Bank of America Merrill Lynch
And what it -- I am sorry what was the range before?
Joanne Solomon
We have disclosure in our 10-Q, so I would refer to our 10-Q we are about to file, the updated 10-Q at the end of the week, so it’s fully disclosed there.
Operator
Our next question comes from the line Suji De Silva with Topeka. Mr.
De Silva? Check your lines if you have been self muted.
Suji?
Joanne Solomon
Operator, why don’t we take the next caller and then may be Suji can re-pool?
Operator
Okay. Our next question comes from the line of Berneth Kinate with Hutchin Hill.
Berneth Kinate
I think it was -- my question is sort of more related to like a big picture free cash flow for ’14, you obviously move CapEx around a little bit and you’re sort of seeing the ramp in 29 nanometer so and in ’14, how do you think about free cash flow, are you going to be sort of breakeven or positive or still kind of the negative side?
Hutchin Hill
I think it was -- my question is sort of more related to like a big picture free cash flow for ’14, you obviously move CapEx around a little bit and you’re sort of seeing the ramp in 29 nanometer so and in ’14, how do you think about free cash flow, are you going to be sort of breakeven or positive or still kind of the negative side?
Joanne Solomon
So with respect to free cash flow for ’14 as Steve had mentioned that while we haven’t finalized our CapEx plan for 2014 that if you assume it’s in a similar range as this year and our prior spending. And then you give consideration to the delay in the K5 timing, with some of the construction happening in Q4.
I do expect that will be free cash flow positive in 2014, so that is our current expectation as that we would be positive in 2014, which is different from a quarter ago when we thought we wouldn’t be free cash flow positive until 2015.
Berneth Kinate
And sort of more again big picture, there has obviously been a little bit of talk on consolidation in the space, lot of players in the market, how are you guys thinking about that?
Hutchin Hill
And sort of more again big picture, there has obviously been a little bit of talk on consolidation in the space, lot of players in the market, how are you guys thinking about that?
Stephen Kelley
I will make a comment here. I think, we’ll continue to do or at least evaluate plug-in opportunities, and just as a reminder J-Devices our joint venture in Japan is a great way for Amkor to solidify its position in the Japanese market, so that’s a geographic plug-in opportunity for us.
The Toshiba acquisition in Malaysia, it’s a great way for us to expand our team, moving into a new market we’ve never addressed Power Discretes, so we will continue to look for opportunities like that but they are more plug-in in nature. I think as you look at the larger opportunities of combining OSATs becomes a little more difficult because typically our largest customers like to allocate their business amongst a number of different OSAT providers, so one plus one doesn’t always equal two when it comes to merging OSAT suppliers.
Operator
Our next question is a follow-up of question from David Duley with Steelhead Securities.
David Duley
Just curiosity, it sounds like your flip chip and wafer bump utilization rates are below the 80% range of your other businesses, so I am kind of curious why you would need to spend money there in 2014 and therefore it seems like your CapEx number that you’re talking about seems high, could you just talk about that a little bit?
Steelhead Securities
Just curiosity, it sounds like your flip chip and wafer bump utilization rates are below the 80% range of your other businesses, so I am kind of curious why you would need to spend money there in 2014 and therefore it seems like your CapEx number that you’re talking about seems high, could you just talk about that a little bit?
Stephen Kelley
Yes, I’ll be happy to -- so the good news is we are ready for the upturn as we built this capacity in Q2 in anticipation with the upturn in Q3, so you’re right we’ve got empty capacity so it’s sitting there, but there is some more good news, we noted that basically accelerate our new production introduction program, so the number NPI loss went up significantly over 10% quarter-and-quarter. So Q2 to Q3 the number of NPI loss we processed went up by 10% and the cycle time went down by 12%.
So this is always the silver lining when demand goes down for a quarter or two to try and take advantage of it. I think what you’ll see next year is a year that maybe back-end loaded, we’re engaged in a number of leading edge programs that will begin to kick in towards the middle of next year, and some of these programs require us to purchase assembly and test equipment which we don’t currently have on hand.
So that’s what’s going to drive spending in the advanced area.
David Duley
Did you have any 10% customers during the quarter or thus far this year?
Steelhead Securities
Did you have any 10% customers during the quarter or thus far this year?
Joanne Solomon
When you refer back to our 10-K, we did have one customer over 10% which was well common (ph) and they continue to be.
David Duley
And just a final clarification for me and I’m sorry if you have talked about this previously. When look at your footprint for wafer bump business you don’t manufacture your substrate so there is some sort of pass through revenue impact on your gross margins.
Could you give us what that, a good shot at what that impact might be?
Steelhead Securities
And just a final clarification for me and I’m sorry if you have talked about this previously. When look at your footprint for wafer bump business you don’t manufacture your substrate so there is some sort of pass through revenue impact on your gross margins.
Could you give us what that, a good shot at what that impact might be?
Joanne Solomon
Yes sure when you, you are right, we do not manufacture our own substrates. I think the best way to look at it is in the press release in the selective operating table we do breakout our cost of sales between material, labor and other manufacturing and materials runs for the quarter with 39% and that’s as a percent of revenue.
David Duley
And so that represents the vast majority of that is the substrate pass through?
Steelhead Securities
And so that represents the vast majority of that is the substrate pass through?
Joanne Solomon
That’s right, that’s the most significant cost.
Operator
Our next question comes from the line of Terence Whalen with Citigroup.
Terence Whalen
I have actually two follow-ups. The first is a very simple one.
What’s your expectation for memory packing going forward to next couple of quarters, obviously it’s only had [indiscernible] part of this quarter just wanted to understand what was impounded in the time going forward [indiscernible]?
Citigroup
I have actually two follow-ups. The first is a very simple one.
What’s your expectation for memory packing going forward to next couple of quarters, obviously it’s only had [indiscernible] part of this quarter just wanted to understand what was impounded in the time going forward [indiscernible]?
Joanne Solomon
The second half of your question was breaking up. So, I think the answer was over the next couple of quarters what’s the expectations for memory?
We do expect 4Q to be up modestly. With respect to Q1, Q1 overall tends to be a trough quarter for us.
So, I don’t have any separate color with respect to memory for Q1.
Terence Whalen
And then my second question that I have is a very high level question and that is as the high-end smartphone market comes under price pressure and as potentially architecture is going to more integration level and application processors, I want to understand what the implication is for your business in that sort of a scenario in terms of to the available market?
Citigroup
And then my second question that I have is a very high level question and that is as the high-end smartphone market comes under price pressure and as potentially architecture is going to more integration level and application processors, I want to understand what the implication is for your business in that sort of a scenario in terms of to the available market?
Stephen Kelley
Yes so I’ll make a comment there. I think we are already dealing with customers who have accomplished that integration level and mainly Qualcomm they are leading in the industry and we are working very closely with them as a technology partner in assembly and test.
So, I think speaking more broadly what this means is there’ll be a greater push towards 2.5D and 3D technology over the next couple of years. So the important thing to realize is Amkor has been developing the enabling technologies for many years, I’ve mentioned earlier about this fine pitch copper pillar.
That’s really key to this whole TSB approach which you can implement at both the 2.5D and 3D level. So, we have all the parts, the tricky part right now is meeting the cost targets of high volumes, smartphone and tablet manufactures.
So, we’re working very closely there to try to element all the cost we can and to make these solutions feasible.
Operator
(Operator Instructions) Our next question comes from the line of Suji De Silva with Topeka.
Suji De Silva
So first question is on gross margin I apologize if you’ve already covered this but should we think about the target kind of longer term Joanne being more of a range or is it something that’s going to trend upwards through the cycles as you are able to enact the improvements you’re trying to do?
Topeka
So first question is on gross margin I apologize if you’ve already covered this but should we think about the target kind of longer term Joanne being more of a range or is it something that’s going to trend upwards through the cycles as you are able to enact the improvements you’re trying to do?
Stephen Kelley
And before Joanne come in, so let me just make a comment.
Suji De Silva
Interesting.
Topeka
Interesting.
Stephen Kelley
My objective is to get us into the 20s and keep us there from a gross margin standpoint. So that we’d be able to stay there for the peak periods and trough periods so that requires two things, requires us to continue to build and improve our Wirebond business, and also forces us to continue to grow and invest in the advanced packing and test business.
So, we’ll improve the mix but we will also make sure that our legacy business is healthy.
Joanne Solomon
Over this the only thing I would add is over the short run when you look to Q1 and Q2, Q1 tends to be our trough and you start to build back Q2 so some of the margin improvements as to when will you see more sustained margin improvements start to come in the second half of 2014.
Suji De Silva
And then also on the Wirebond business, can you talk about in the 2014 timeframe do you expect to be a share gainer there, can you just talk about the competitive environment in the context of that question?
Topeka
And then also on the Wirebond business, can you talk about in the 2014 timeframe do you expect to be a share gainer there, can you just talk about the competitive environment in the context of that question?
Stephen Kelley
Yes. It’s very difficult to predict.
I think the Wirebond market will undergo some changes next year. I think looking particularly into the Taiwan and China region many of the customers who are using Wirebond technologies to bring ICs to market for smartphones and tablets will begin to transition to wafer-level technologies and to flip chip technologies.
So I think some of the market may disappear next year. So I think through a combination of our efforts to gain share and some decrease in some of the smartphone Wirebond demand that we'll actually gain share in Wirebond next year.
Greg Johnson
Okay, thanks very much Suji. There are no further questions, so this completes our call.
We would like to thank all of you for joining us this afternoon and have a good day.
Operator
Ladies and gentlemen, this concludes Amkor's third quarter conference call. Thank you for your participation.
You may now disconnect.