ASX 日月光半导体

Joseph Tung, Director, Chief Financial Officer and Vice President

Good morning and good evening everyone. Thank you for attending ASE’s Q1 2006 Earnings Release Conference Call. For access of the presentation materials, please go to our website www.aseglobal.com where you can find the hyperlink to our presentation. Let me start, as we turn to page 3, which will show you the sequential comparative of our performance in quarter one. To start, we had a much stronger than normal Q1 as our consolidated revenue of NT$24.8 million dropped only 6% sequentially, compared to a normal seasonal drop of 10-15%. In fact, in US dollar terms, revenue only declined 2.6%. If we take out the negative impact on revenue from continuing (inaudible) businesses in China, our main business actually stayed flat of last quarter. Despite a minor revenue decline, we will continue to see efficiency and improvement in stress and cost management. Q1 margins further improved as gross profit went up 1% to reach NT$6.6 billion, and operating profits grew 10% to NT$4.7 billion. Netting our non-operating expenses of NT$602 million, pre-tax income is monitored to NT$1.4 billion. Net income after tax and minority interest grew to NT$3.2 billion, after recognizing tax of NT$18 million and minority interest adjustment of NT$426 million. EPS for the quarter was NT$0.69, up from $0.65 a quarter ago. On a sequential basis, assembly revenue dropped 5%. Tax revenue dropped 3%, while marginal assembly revenues dropped 28%. Separately, material revenue dropped 17%; largely as a result of the discontinuing of our lead (inaudible) operation at the end of Q4. Substrate revenue came down 8% due to normal seasonality. Utilization rate of both assembly and test were above 90% and ASP remains stable in the quarter. In terms of profit margins, gross margins improved from 24.8% a quarter ago to 26.7%. Looking at respective costs of goods sold, material costs dropped from 32.6% to 31.1% as a result of savings from better purchase management and improved material gross margin. Labor costs stayed flat, but as a percentage of sales went up from 13.5% to 14.4%, due to lower revenue. We continued to have tight control over CapEx – total depreciation and amortization expense. Machine rental dropped to NT$3.7 billion from NT$3.8 billion a quarter ago, while as a percentage of revenue it inched up from 14.7% to 15.1%. Operating expenses went down from 8.7% of revenue to 7.9%, largely as a result of lower R&D expenses as goodwill amortization for a new ROC GAAP. R&D expenses came down from 2.9% of revenue to 2.6% and SG&A came down from 5.7% of sales to 5.3%. Operating margin consequently improved from 16% a quarter ago to 19%. Non-operating expenses came down NT$350 million dollars from last quarter, due to FX loss of NT$105 million (inaudible) operation shut down costs of NT$153 million and higher inventory adjustment booked in the previous quarter. Net interest expense came down to NT$359 million from NT$389 million a quarter ago, due to lowered interest bearing debt outstanding. The long term investment gain of NT$61 million consists of NT$61 of investment income from the US side, NT$8 million loss from Hung Ching, and NT$8 million gain from Hung Ching Kwan. Again, we have stopped goodwill amortization from minority owned affiliates for new ROC GAAP requirements. EBITDA for the quarter was NT$8 billion, up from NT$7.5 billion a quarter ago. EBITDA margin improved to 32% from 30% Please move to page 4. Comparing to the same period of last year, consolidated revenue went up 39% with assembly test and module each growing by 40%, 39% (inaudible) respectively. Gross margin improved from 10.2% to 26.7%, due to increased volume and favorable pricing adjustments. Operating profit turned from negative NT$211 million to NT$4.7 billion, with operating margin improving from negative 1.2% to 19%. Net income turned from negative NT$128 million to NT$3.2 billion doing a tremendous turn around of our operations. Moving on to page 5 – this chart shows the revenue and gross profit trends in the last 5 quarters. As shown, in 2005 gross revenue and gross margin have been expanding on the sequential basis, which Q3 and Q4 posting the strongest momentum. Since the 2nd quarter of 2005, we have been taking various initiatives in ramping up our business model, aiming at driving up our profit margin. We have so far successfully implemented these initiatives and therefore are seeing continual margin improvement; even going into Q1 when revenues actually had a seasonal decline. On page 6 – please take a look at our packaging business. Revenue in the 1st quarter dropped to 5% but gross margin further improved to 24%. Such margin improvement came from better material management and efficiency, both on an assembly process level and material manufacturing level. Utilization in the quarter was above 90% with limited capacity additions. Q1 CapEx of USD$23 million was for both wirebonding and bumping of flip chip package capacity in our (inaudible). We currently have 6,326 wirebonders, down 40 units from last quarter. Looking at the revenue breakdown in Q1 – revenue from advanced substrated and (inaudible) packages accounted for 89% of total packaging revenue down from 90% in last quarter. Bumping plus flip chip packaging accounted for 16% of total assembly revenue, down from 18.6% a quarter ago. On bumping, we currently have 70K 8-inch bumping capacity running at 90%, and 16K 12-inch bumping running at around 60%. Page 8, we look at test operations. Test revenue went down 3% from last quarter, primarily due to less volume, while ASP remains stable. Gross margin moved down slightly from 40% to over 39%, reflecting the lower revenue impact on margins. Out test strategy continues to be feeding capacity type for higher utilization and improving chargeable hours for testers and, therefore, minimizing CapEx. Test CapEx in the quarter are (inaudible) to US $14 million; mainly to support increased test requirement in the communications sector. Test utilization rate in Q1 was around 90% blended. During Q1 we have total of 1,305 testers. On page 9, looking at test revenue breakdown - 77% was for final tests, 4% was on engineering tests, and wafers accounted for 19% of total. On page 10, look at our module business. Q1 module revenue declined 28% from last quarter, due to a diminishing electronics business in our Shanghai facility. We are currently reviewing the marginal operation in Shanghai to decide the suitable capacity to maintain, and are switching much of the excess to packaging. Minor write downs, if any, are expected. Gross margin declined slightly from 18.3% to 17.7% in Q1, given lower business volume. On page 11, looking at our material operation – we have been aggressively ramping up our substrate operation in Shanghai and by December, 2005, volume from the Shanghai factory reached 20KK; close to two times of the loss capacity (inaudible). Q1 revenue came down 8%, due to lower demand for targeting operation. However, gross margin improved slightly due to improved yield. Aside from supply and 37% of our own use, we are also aggressively developing direct sales opportunities. Direct sales in Q2 are expected to account for 25% of total material revenues. CapEx in the quarter was US $25 million, mainly for installing flip chip capacity of 3 million units a month in (inaudible), which is scheduled for mass production of 1 million units a month in the September time frame. As for standard PBGA substrate, we are continually expanding our plant in Shanghai which will at least double the standard PBGA substrate output by the end of the year. Page 12, our balance sheet. Looking at the balance sheet, our cash and cash equivalent decreased NT$461 million to NT$17.2 billion. Interest-bearing debt decreased NT$3.2 billion to NT$50.2 billion. Accounts payable for materials and property combined was reduced by NT$2.6 billion. With the above repayment and reduction of our accounts payable, our leverage rate should improve from .65 to .56. Current rate should improve from 1.53 to 1.63. Q1 EBITDA improved further from NT$7.5 billion last quarter to NT$8 billion, with an EBITDA margin of 32%. As we expect strong casual momentum in Q2 as well, we will continue to use internal cash flow to pay down debt and further reduce non-operating expense. Page 13, our CapEx in Q1. As expected, Q1 CapEx dropped to US $67 million due to minimal expansion requirements. Of a total US $67 million dollars, US $25 million was for assembly, $14 million for tests, $25 million for materials, and $3 million for module. At this moment, we are budgeting a higher CapEx for the year to around $400 million dollars anticipating the more significant ramp up in the second half of the year. Page 14, looking at our customer list. Our top five customers accounted for 29% of our total revenue and the top 10% accounted for 46%. No customer accounted for more than 10% of our revenue. In terms of IBM and FAS split, 42% of our revenue came from (inaudible) and 69% came from (inaudible). On page 15, looking at the market segment exposure. You can see from the chart that there isn’t that much movement in our segment breakdown. The only changes are that communications dropped slightly from 35% of total to 34%, while automotive came up from 36% to 37%. On page 16. Let me talk about the prospects for the whole year as well as in the 2nd quarter. Given the exception of a good 1st quarter and with the continuing strong momentum in consumer and communication, and with PC to pick up its pace in the second half, we are very confident in expecting a strong 2006. Coming off an exceptional 1st quarter, we expect Q2 to continue to grow but at a milder pace; while Q3 and Q4 to post much stronger growth momentum. At this point, we anticipate Q2 revenue to grow by low single to mid single digits on a sequential basis, judging from our customer forecast. In terms of sector exposure, PC will continue its softness in the 2nd quarter as the sector goes through generation shifts. Consumer and wireless on the other hand, will maintain their strong momentum and with the low single to mid single digit revenue growth; we are expecting our profit margins to further improve slightly in the quarter. CapEx of US $100 million dollars is budgeted for Q2; with 50% designated for materials and the remaining 50% for assembly and tests. As I pointed out earlier on, full year CapEx is now being revised up from $350 million to US $400 million. With that I will conclude my presentation and we’ll open the call for questions - operator.

Operator

At this time we will open the floor for questions. If you would like to ask a question, please slowly press star 1 on your telephone keypads and should you wish to cancel your question, you may press the hash or pound key. The first question will be coming from Timothy Arcuri, Citigroup Global Markets

Timothy Arcuri, Citigroup Global Markets

Hi. Actually, I have two things. Number one, I am wondering given the build up inventory occurring at a number of your different customers, is your guidance for June the same as it might have been 3 or 4 weeks ago? That’s my first question.

Joseph Tung, Director, Chief Financial Officer and Vice President

In June…?

Timothy Arcuri, Citigroup Global Markets

Yes, so your sequential guidance for the June quarter - is it the same as it would have been had you given it 3 to 4 weeks ago?

Joseph Tung, Director, Chief Financial Officer and Vice President

Yes, pretty much so, but I think in the 2nd quarter we will see a gradual step up pattern with April being the lowest month and then gradually moving up throughout the quarter. And for the whole quarter we are looking at low single digits to mid single digits top line growth. I think the much stronger momentum was hard to build from Q3 when PC start to pick up it’s pace.

Timothy Arcuri, Citigroup Global Markets

Just for some historical view, during prior cycles when you’ve seen a build up of your customers at inventory levels, how has that manifested itself in your forecast? Do they, is there some sort of leading indicator that you get or do your customers just cut the forecast and that’s when you find out?

Joseph Tung, Director, Chief Financial Officer and Vice President

I think we will have a few just by looking at how the flow of this is coming into our factory. At this point, we are not actually seeing a very serious inventory piled up as far as our customers are concerned, but maybe it is just a very selective few customers. Maybe in the PC sector we’ll have a heftier inventory than the other. While in communications, the consumer may think the inventories are being kept at a very lean level.

Timothy Arcuri, Citigroup Global Markets

So you see no change in your wafer bank inventories?

Joseph Tung, Director, Chief Financial Officer and Vice President

Not so much, no.

Operator

Next question is coming Manny Hudseney, USA

Manny Hudseney, USA

Thanks for taking my question. Just as a follow-up to the previous question. Can you help me understand what dibanks are… how they change Q4 into Q1 and how would it change or your expectation from Q1 into Q2? And, also with the increased CapEx, to what extent would you expect test CapEx to change and would it be front end loaded first half more than second half or is it going to be more linear throughout the year?

Joseph Tung, Director, Chief Financial Officer and Vice President

To answer your CapEx question first, I think, first of all, we are raising the CapEx budget to $400 million up $50 million from before and the distribution will be $125 million to (inaudible), up from $100 million dollars before. Then, $75 to test up from $50, whereas CapEx budget for materials remains $200 million dollars. And the pattern will be more or less back end loaded, I think. But starting from Q2 we will start to pick up our pace on CapEx. As I mentioned, we are now looking at around a little over $100 million dollars for the quarter and the rest will be spending in the second half of the year. The first part of your question was?

Manny Hudseney, USA

The first part of the question had to do with dibanks – if you could help me understand how it changed from Q4 into Q1 and your expectation for Q2.

Joseph Tung, Director, Chief Financial Officer and Vice President

Actually there wasn’t that much change in the dibank situation. If you look at our revenue Q4 to Q1 taking out the (inaudible) dollar appreciation impact and also the discontinuation of our camera module business in Shanghai, which was from Flectronics, being taken out. The net change in the assembly and test revenue has not really dropped that much; about 26%, 27% only. And considering the less working days in the 1st quarter, the output that we had in the 1st quarter is phenomenal in any 1st quarter. Though the dibank situation we are not seeing any real pile up so to speak in the dibank – we are still looking at anything from a week to two weeks at a normal level.

Manny Hudseney, USA

Let me rephrase my question, some people are comparing 2006, the first half of 2006 to 2004 where inventories were built up and then (inaudible) fell off. What is your view regarding the current customer order and relative to inventory and how do you compare this year to 2004?

Joseph Tung, Director, Chief Financial Officer and Vice President

Well, 2004 I think people were expecting that the sky was the limit in terms of growth. The cycle…I’ve seen cycle no longer exists. I think at this time around the whole industry is much more rationalized and that is part of the reason why all the sub accounts are very cautious in terms of capacity (inaudible). I think it is a very different scenario from last time around. There was too much excess capacity in 2004 but not at this point in time.

Operator

Next question will be coming from David Lily, USA

David Lily, USA

Nice quarter – I was wondering given that you upped the CapEx a little bit if you might just remind us what you think the overall industry growth will be and how that might translate into your growth this year and then could you just clarify, I am sorry, I was trying to write furiously, you talked about substrate capacity additions like millions of units per month, could you just review the flip chip and BTA substrate capacity additions so I can write those down? Thanks.

Joseph Tung, Director, Chief Financial Officer and Vice President

I think if the industry estimate is anywhere correct, I think everybody is expecting about 9-10% industry growth for the year. We typically grow 2-2 ½ times the industry average. I think we, this year around, we are looking at a bottom heavy normal pattern for the year. Whatever we are doing now and what we are budgeting in terms of CapEx, is really important in the second half ramp up. I think that is also being just from the customer forecast that we are getting. We will prepare ourselves for the ramp up and of course the CapEx number, the (inaudible) number is always a moving target depending on the overall market situation. In terms of substrate capacity, in terms of standard PBTA, right now we are only supplying with the existing capacity that we have. We are only supplying about 37% of our own means and we believe that once we of course like to bring that ratio up as much as possible so I think there is plenty room for us to ramp up our internal capacity.

David Lily, USA

And you have just given us some metrics about what you added; could you just give me those again?

Joseph Tung, Director, Chief Financial Officer and Vice President

In terms of (inaudible) and capacity, right now we are at 36 million units and in Q2 there won’t be that much added. But in Q3 we’ll move it up to about 48 million units and then eventually to about 60 million units by the end of the year. To be more or less in line with our internal use requirements as well as developing the direct sales part of the business. Which right now we have about 20% of materials being in the direct sales mode and our plan is to grow that part of the business to about 30% of our overall material revenue by year end. In terms of flip chip capacity, right now we have a million units capacity installed and we are in the phase of having customer qualifications and we are targeting to have mass production by September time frame. The plan is to install up to 3 million units capacity by year end and we will do it gradually throughout the year.

David Lily, USA

Thank you and did you mention how many wirebonders that you added in the 1st quarter and why don’t you give us a target for how much it might add for the year to the port what about 20% or 25% growth whatever number it might add up to be.

Joseph Tung, Director, Chief Financial Officer and Vice President

We currently have about 6,036 wirebonders and in the 1st quarter we are higher (inaudible) bonders but added 50 new bonders. Then we had a reduction of 40 units in our bonders. In terms of our actual number of bonders that we will be adding, I don’t have the numbers off hand. But, in quarter 2 we are looking at about 30-50 units being shipped in and I think in quarter 3 we’ll start to add more bonders at that point.

Operator

Our next question will be coming from Seu Ng, BNB Hong Kong

Seu Ng, BNB Hong Kong

Hi good evening, Joseph, congratulations on a great quarter – two questions and number one, what is the FX assumption underlined your revenue guidance for same quarter?

Joseph Tung, Director, Chief Financial Officer and Vice President

For the 2nd Quarter?

Seu Ng, BNB Hong Kong

Yes…

Joseph Tung, Director, Chief Financial Officer and Vice President

It will be 31.5.

Seu Ng, BNB Hong Kong

I see, ok and the same question, right now what is the current installed flip chip packaging capacity and the capacity ramp up rates for the rest of the year?

Joseph Tung, Director, Chief Financial Officer and Vice President

You mean targeting capacity?

Seu Ng, BNB Hong Kong

Flip chip packaging…

Joseph Tung, Director, Chief Financial Officer and Vice President

I will need to update myself on that.

Seu Ng, BNB Hong Kong

No problem. And then the last question – roughly speaking what percentage of your flip chip package is done on a substrate on consignment basis?

Joseph Tung, Director, Chief Financial Officer and Vice President

Right now it is still up 20-30%.

Seu Ng, BNB Hong Kong

Do you expect that number to go up for the rest of the year right?

Joseph Tung, Director, Chief Financial Officer and Vice President

Yes…

Seu Ng, BNB Hong Kong

Any rough number you can give me?

Joseph Tung, Director, Chief Financial Officer and Vice President

No, not at this point.

Operator

Our next question will be coming from Grenad Sharma, Taiwan

Grenad Sharma, Taiwan

Hi, good afternoon Joseph and good quarter. I have a couple of questions. The first one is basically could you give us some ASP trend of your product on 2nd quarter and probably (inaudible) prices and how it is going to effect you on the 2nd quarter?

Joseph Tung, Director, Chief Financial Officer and Vice President

I’ve checked with our own operational (inaudible) and 1st and 2nd quarter the pricing will remain stable. Of course, selectively there are customers looking for price negotiation but so far we have been defending our prices very nicely. Especially on the test side, I think now we are keeping our capacity very tight; and therefore, there is less pressing pressure. In terms of substrate, same situation with the substrate prices – we don’t see significant pressure on the substrate prices either.

Grenad Sharma, Taiwan

So gold prices going up, how do you handle that gold price and current levels?

Joseph Tung, Director, Chief Financial Officer and Vice Pr

Excuse me?

Grenad Sharma, Taiwan

Gold prices?

Joseph Tung, Director, Chief Financial Officer and Vice President

Gold prices – you mean material prices?

Grenad Sharma, Taiwan

Material prices, yes.

Joseph Tung, Director, Chief Financial Officer and Vice President

Yes, of course there is going to be some pressure on it and not just gold prices but also on the fuel prices going up and copper prices going up as well. So what we are trying to build now is to some how better manage that through efficiency improvements as well as our better management on our purchase. For instance, we are consolidating some of the raw materials that we use to fewer vendors so that we can have a bulk purchase discount and this actually, this effort actually has been going on for the past nine months and we are starting to see the positive results of that, which is very evident in the 1st quarter. Our revenue came down by the margin as we improved.

Grenad Sharma, Taiwan

And I think sometime in the last conference call you did mention about you are trying to get some of the testers from your customer on consignment basis. Currently, could you give us some idea, how many of your testers are consignment basis at this point?

Joseph Tung, Director, Chief Financial Officer and Vice President

Roughly about 10-15% - some of the testers are from (inaudible) vendors and some of the testers actually come from our customers.

Grenad Sharma, Taiwan

10-15% - and that amount is not included in your CapEx, I guess.

Joseph Tung, Director, Chief Financial Officer and Vice President

No, it is not.

Grenad Sharma, Taiwan

But is it included in your tester count?

Joseph Tung, Director, Chief Financial Officer and Vice President

Yes, it is.

Grenad Sharma, Taiwan

And going forward how much of the testers are you going to get it from 2nd quarter on the consignment basis or it will remain about 10-15% or lower down?

Joseph Tung, Director, Chief Financial Officer and Vice President

That will be depending on the negotiations with our customers and vendors. I don’t have targeted numbers.

Grenad Sharma, Taiwan

And if you think probably some of your customers are not willing to put enough tester on a consignment basis, your CapEx may go up from current number again?

Joseph Tung, Director, Chief Financial Officer and Vice President

It is possible but I think at this stage our advised CapEx (inaudible).

Grenad Sharma, Taiwan

Last one is the lead time of the substrate and I guess the substrate prices are falling and how do you think it will grow amidst whether your materials divisions will be effected because of that?

Joseph Tung, Director, Chief Financial Officer and Vice President

Our what will be affected, I am sorry?

Grenad Sharma, Taiwan

Since, I think, some of the substrate prices are falling a bit, are your material divisions going to get affected going forward? What the margins will be so far on the material divisions?

Joseph Tung, Director, Chief Financial Officer and Vice President

Well I think at this point the major driver for margin improvement as far the materials are concerned, is really on the yield. Right now we are running at about 80-85% and there is definitely more room for improvement of the yield. If we can continue to do so that will more than offset the pricing erosion of the materials. And as I mentioned, we are actually not seeing that much pressure on the substrate prices now.

Operator

Our next question, a follow-up question, will be coming from Meddy Haseeny, (country not specified)

Meddy Haseeny

Yes, I joined the conference call late, I apologize if I am repeating a question. Regarding your guidance of low to mid single digits, how is it different between assembly and tests? And the second follow-up question has to do with – is there any additional outsourcing agreement that you would expect to materialize going forward? I am not expecting specific customer names, but if you could just qualitatively talk around it. There is some speculation that you may get increased chip business outside of your existing customer’s lists. If you could elaborate on those two, I would appreciate it.

Joseph Tung, Director, Chief Financial Officer and Vice President

In terms of the respective growth, I think the test part will stand firmer than assembly. In terms of any other business initiatives, I think we are on a constant lookout on any possible opportunities involving our existing customers. There is nothing concrete at this point for me to report, but like I said, we are constantly reviewing any possibility there is with existing customers to set up something aiming at getting more business. On top of that, we also are working very aggressively in getting some designing in some of the upcoming business, some in the chipset area as well.

Meddy Haseeny

And those businesses, if it materializes it is not going to be in the immediate future. It is going to be in the second half or early 2007? Is that a fair assumption?

Joseph Tung, Director, Chief Financial Officer and Vice President

That is correct.

Meddy Haseeny

And just one more follow-up. When you said the test growth is higher than assembly; does that mean that it could actually grow about 5% on a sequential basis?

Joseph Tung, Director, Chief Financial Officer and Vice Presi

I would refer that to Freddy tomorrow. I think, well I don’t think you are far off.

Operator

Our next question will be coming from Andrew Wigs, USA

Andrew Wigs, USA

Hi good evening, a question on test in Q1 – I see that final test actually declined as a percentage of revenues or total test while away for certain engineering inquiry. Is there any dynamic at play or any rational for why that occurred?

Joseph Tung, Director, Chief Financial Officer and Vice President

I don’t see any obvious changes, I think it is just different business mix quarter-to-quarter.

Andrew Wigs, USA

Does that infer that that should flip flop or converge in Q2?

Joseph Tung, Director, Chief Financial Officer and Vice President

I think in the 1st quarter the wafer probes did have stronger momentum that is more in line with the (inaudible) foundry. But, I think going to 2nd quarter the two sectors should be moving in sync.

Andrew Wigs, USA

Ok – so gross margin was 39% in Q1 end tasks. What is your expectation for gross margin in Q2 just for the test segment?

Joseph Tung, Director, Chief Financial Officer and Vice President

I think there should be slight improvements.

Andrew Wigs, USA

Meaning, low 40’s?

Joseph Tung, Director, Chief Financial Officer and Vice President

That’s not slight though?

Andrew Wigs, USA

Another question on some of the testers and the packaging equipment you disposing of. Where are those going right now; the 92 wirebonders and the 35 testers that were disposed of?

Joseph Tung, Director, Chief Financial Officer and Vice President

Well those were just old fully depreciated testers or bonders that we have written off.

Andrew Wigs, USA

Ok, so you still have them, they are just fully depreciated?

Joseph Tung, Director, Chief Financial Officer and Vice President

No, those (inaudible)…

Andrew Wigs, USA

Okay, so they are no longer in production – they are not in production anywhere else?

Joseph Tung, Director, Chief Financial Officer and Vice President

No, they are not.

Andrew Wigs, USA

Okay. Last question, could you quantify your game console business in Q1 and then how you expect that to be as a percentage of revenues as we move through the year, Q2, Q3, and Q4?

Joseph Tung, Director, Chief Financial Officer and Vice President

Games console is roughly about 4-5% of our revenues in Q1. I think it should be up in Q2, but I don’t think that we are in a position to disclose percentages.

Andrew Wigs, USA

I mean is this near the peak to what it is going to represent as a percentage of revenues?

Joseph Tung, Director, Chief Financial Officer and Vice President

No, this is actually lower than the contribution in Q4.

Andrew Wigs, USA

But, I meant in terms of the rest of the year… do you think that Q4 will ultimately be the peak or do you think that game console could represent a bigger part than it did in Q4 as we go on through the remainder of this year?

Joseph Tung, Director, Chief Financial Officer and Vice President

Well I think in Q3 and Q4, as I had mentioned earlier on, the 2nd half we would be much stronger growth momentum. I think at this point, game console should stay at around 4-5% of the total.

Operator

Our next question will be coming Mr. Daniel Zu, Toronto

Daniel Zu, Toronto

I have two questions.–The first one is, you mentioned the company will continue to pay down the debt, so what do you expect? How much more debt you will retire by the end of the year? The second one is, you mentioned that in Q2, 2005 company took initiative to improve performance and everything - gross margins, operating margins - has greatly improved. So going forward for Q2 and the rest of the year, do you expect the current trends for the margin improvements to continue? If you look at and compare 2006 Q1 verses 2005 Q4 the major improvements, I say it is from (inaudible) operations. Do you expect (inaudible) operations gross margin continue to improve?

Joseph Tung, Director, Chief Financial Officer and Vice President

Yes, I think there is certainly still room for improvement in terms of margins. I think it can come from various directions. One is, of course, we will continue our effort in better managing our costs as well as our expenses. As you can see from the 1st quarter, the operating expenses actually came down from above 9% a quarter ago to 8%, less than 8%. We will continue to work on that. On the console (inaudible) side, I think better ramp up and better yield on the material operation will continue to make a positive contribution to the margin expansion. As I mentioned earlier on, the yield is still at 80-85% and there is still room for improvement. With the expanded capacity as well as improved yield, the margin on that part will continue to improve. I think also on the test business, there is also room for improvement. I think one of the positives of our test operation is that the additional, the new testers that we are adding our old are commanding a higher than average gross margin and as we continue to ramp up, I think the margin improvement on the test side will continue. So for everything together, I think there is going to be continuous margin improvement just from the operation point of view and also, of course, as we ramp up our revenue, that will help the margin as well.

Daniel Zu, Toronto

Ok, thank you, and back to the first question – how much more debt are you expected to retire?

Joseph Tung, Director, Chief Financial Officer and Vice President

Right now, I think in the 2nd quarter, we have already paid, the 4th and 1st quarters; we have already paid down about over $200 million dollars worth of debt. Going forward as we continue to have generous free cash flow, I am expecting another $200-300 million dollar pay down.

Operator

Once again, that is star one for questions and the hash or pound key to cancel your questions.

Joseph Tung, Director, Chief Financial Officer and Vice Pr

Ok – there are no more questions. Let me sum up this conference call. I think we had an exceptional 1st quarter so we are very confident that we are hitting off for a very good year. Although we are coming off from a very strong 1st quarter, the 2nd quarter as well will be a mild one, but we will continue to see margin improvements and we will see much stronger growth momentum starting from second half and that is one the reasons why we are revising our budget on CapEx anticipating the revenue growth going forward. We will continue to strive on reducing our cost and expenses. We will continue to improve our margins. Thank you very much for attending today’s conference call and this will be repeated on our website. Thank you very much. Copyright policy: : THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. : THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.