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Operator

Welcome to the ASE conference call held by Mr. Joseph Tung. (Operator Instructions) I would like to hand this call over now to Mr. Tung and I will be standing by for the Q&A. You may begin. Thank you.

Joseph Tung

Thank you. Good morning and good evening, everyone. Thank you for attending ASE's Q1 2007 earnings release conference call. This presentation is being webcast. Please go to our website, aseglobal.com, where you can find the webcast presentation. Before I begin, let me report to you that on April 17th, the consortium led by the Carlyle Group has informed the company of the withdrawal of its potential offer for 100% of company shares, citing the lack of support from the evaluation committee. As such, we are resuming our regular earning release conference call. Also, I would like to report to you that in January of this year, ASE had officially acquired 100% ownership of GAPT and has included its performance into our consolidated reports. Now, let’s start the presentation. Please turn to page three where you can see the Q1 sequential comparison. We continued to experience a tough quarter in Q1 as our consolidated revenue came down 7% sequentially to NT21.1 billion, due to across-the-board volume decline and seasonal factors. Gross profit went down -- sorry, technical difficulty. Gross profit went down 22% sequentially to NT5 billion, and operating slid 34% to reach NT2.8 billion. After deducting total operating expenses of NT501 million, pretax income amounted to NT2.3 billion.

Operator

(Operator Instructions) We have a question from [Sheilas Jaitly]. Go ahead, please.

Sheilas Jaitly

This is [Sheilas Jaitly] from [Numera]. My question would be firstly, if I could get a breakdown of your CapEx, full year CapEx of $350 million, $400 million, as to what proportion is going for Power-ASE and what proportion is going for substrate?

Joseph Tung

Out of the $350 million that is currently budgeted, we are expecting to spend about $140 million in assembly, another $140 million for test, and then $70 million for materials to ramp up basically the PBGA substrate capacity. In terms of Power-ASE, our DRAM operation, we are anticipating for full year about $150 million CapEx. The breakdown between assembly and test will be $100 million for assembly -- I’m sorry, $100 million for test and $50 million for assembly.

Sheilas Jaitly

Because during fourth quarter, you were rather conservative -- correct me if I’m wrong -- as far as your material expansion is concerned, particularly the substrate capacity. Firstly, what has prompted the change as to why you are expanding? Secondly, where do you see the demand coming and what proportion of this capacity is going to be used actively?

Joseph Tung

I think the overall demand in the second-half will have much stronger momentum than we are seeing at the present time. Actually, judging from our customer forecasts, in 2007 we are actually expecting sequential growth on a quarterly basis and are comfortable in projecting double-digit growth in the next two quarters, with Q2 revenue growing at a low-teens percentage. I think we are also looking at fairly good pick-up in terms of our material direct sales, aside from the overall growth in our current volume as well.

Sheilas Jaitly

Finally, if you could also help me understand, the materials gross margin you said fell from 23% to 18.3%. What proportion of this decline could be accounted for you’re your utilization dip and what proportion would be for your price declines, ASP declines?

Joseph Tung

Well, in the quarter, for center PBGA we are looking at -- you are talking about material, right?

Sheilas Jaitly

Yes.

Joseph Tung

The material ASP drop is about 8% to 10%, depending on the different devices.

Sheilas Jaitly

When you are saying the material, you are referring just to the PBGA or is that something else? Are we talking about --

Joseph Tung

-- standard PBGA.

Sheilas Jaitly

Standard PBGA ASP decline is 8% to 10%, so pretty much all the margin decline can be accounted for this.

Joseph Tung

Yes, pretty much.

Sheilas Jaitly

Okay, sure. I have some more questions. I will queue up again. Thanks.

Operator

We have a question from Tim Curry. Go ahead, please.

Bryan Lee

Hi, this is actually Bryan Lee calling in for Tim. I had a few quick things. First, on the guidance for Q2, can you help me maybe clarify; how much of that is being driven -- and I am talking about the revenue guidance -- how much of that is being driven by GAPT and Power-ASE? I guess what I am asking is how much -- was GAPT and Power-ASE both fully consolidated for the entire March quarter? Is this an organic 10% to 12% revenue guidance for Q2?

Joseph Tung

That is correct. Both Power-ASE and GAPT are fully consolidated in the first quarter, and therefore the low-teens percentage growth in the second quarter is fully organic.

Bryan Lee

Okay, fair enough. Can you talk about what you are seeing in terms of I guess the pricing environment through the early part of the June quarter here? Are you guys having to be anymore price aggressive, given the general slow-down in overall unit demand relative to some of the year-over-year compares? Maybe if you could also comment on how you expect pricing to trend through year-end relative to the environment we saw last year, where obviously we had a few consecutive quarters of price increases. Any color there would be helpful.

Joseph Tung

In general, we are holding on to our prices. Of course, in response to the market conditions, selective there are some price cuts to some selective customers, but in general I think for both assembly and test, we had about 2% to 3% price drop on average on this assembly and test. Going forward, I think we will continue to hold on to our prices as much as we can, which we think the pricing pressure should start to be relived going into the third quarter, where as I mentioned earlier on, we are expecting a much stronger momentum in the second-half of this year.

Bryan Lee

On the price cut to selective customers, is it pretty broad-based or any particular end market or application group that saw the biggest cut?

Joseph Tung

No, it is really on the selective customers.

Operator

We have a question from [Medi Hossini]. Go ahead, please.

Medi Hossini

Thanks for taking my call. I have a couple of questions. First, Joseph, when you look into your cost structure, specifically for breaking down test and assembly, where do you see your margins -- where do you see targeted margin? In other words, at what level should we see a peaking in your margin for test and assembly? Number two question has to do with your customers or types of customer that are driving the sequential revenue growth in Q2. Is that broad-based or limited to a few customers? The last final question has to do with one of your large customers, Via, I think they are losing some momentum and to that extent, what are the things that you are doing to upset some of the share loss at that particular customer? Thank you.

Joseph Tung

Okay, on the first question, as I mentioned, volume really has the greatest impact on our overall margin and since we had two consecutive quarters having our revenue of volume come down, of course it has a pretty significant impact on our gross margin as well as operating margin. Going forward, I think in quarter 2, as I mentioned, we will have low-teens percentage growth. We are expecting our overall gross profit margin to come back to around the 25% level, and I also said that the second-half will have much stronger momentum. We are shooting for our overall gross profit margin to climb back to around 30% by late third quarter or fourth quarter in the year.

Medi Hossini

Historically, your test operation has peaked around 45% gross margin, so would the 30% or so consolidated gross margin, does that include a peaking in test margin?

Joseph Tung

I don’t know if it is peaking but I think what we have in mind is when we reach 30% gross margin, that pretty much represents about 25% for assembly, about 40% for test, and roughly 23% to 25% for material.

Medi Hossini

And the total customers that are driving up revenue in Q2, and to what extent, what are the things you are doing --

Joseph Tung

I think the growth of revenue is pretty much across the board, although if you break it into different segments, I think PC and consumer, as I mentioned, will have stronger momentum than communications. I.E., if we are growing let’s say 12% than the PC and consumer growth rate will be higher than that, and the communication will be maybe half of the growth rate of PC and consumer.

Medi Hossini

Okay, and about one of your largest customers that is in the PC segment?

Joseph Tung

Excuse me?

Medi Hossini

To what extent, what are the things that you are doing to offset some of the market share loss at one of your PC-related customers, specifically Via? If you are seeing the PC momentum stronger than communications, is that primarily driven by graphics? Or is there any new customer that is helping offset Via’s share loss?

Joseph Tung

Basically, in the existing customers of ours, including Via, we are seeing pretty good up-tick in the second quarter already. That would drive the overall PC exposure up for us. In terms of grabbing new customers, I would say instead of doing that we are trying to grab new business or new devices coming on stream. Therefore, we have a pretty extensive alignment plan with the key customers of ours, anticipating their new devices to come out and we will grab the most share of those new businesses.

Operator

We have a question from David [Dooley]. Go ahead, please.

David Dooley

Yes, a couple of questions from me; just a clarification -- did you say your gross margins in total were going to go from like 21% to 25% as your gross margins improve across the board? That is the corporate gross margin target?

Joseph Tung

Yes.

David Dooley

I noticed the CapEx in test was $43 million and typically your CapEx consolidates your subsidiary, so I am just curious; is this $43 million, is that a reflection that your subsidiary is now spending more money on test than the $10 million or $15 million that it thought spend, or is this you guys spending it on Power-ASE?

Joseph Tung

That is spending on Power-ASE mostly, ramping up the operation there.

David Dooley

Great, I just wanted to clarify that. Thank you. A couple of final things from me. What will it take, and I am assuming it is the graphics guys but maybe you can answer it just so I understand, for the utilization rates in the wafer bump lines to improve, what is the key end market that that needs to come from? And could you just remind us, I think you said utilization rates at 8-inch and 12-inch. Could you just give us those numbers again?

Joseph Tung

For 8-inch, we are about 80%, and for 12-inch, we are about 65%.

David Dooley

What will it take to get utilization rates, particularly on the 12-inch lines, back up to levels where you will start to spend money again? Which end market?

Joseph Tung

I think it comes from basically flip chip business that we have. Unfortunately in the first quarter, the flip chip business really came down quite a bit, dropping from 13% of total assembly revenue to 9%. Part of the reason is one particular PC customer, we saw some volume drop, and as well as the game console business. So to bring the utilization rate up, I think we need to go back to these customers and get the loading up.

David Dooley

Two final things from me is; given the way you are talking about sequential growth in the second quarter and third quarter and where you ended up in the first quarter, can you grow overall revenues for the year in your opinion? And then maybe just a little commentary about the March quarter results. Things did move around quite a bit in the PC and the consumer and automotive areas, as far as percentage changes of revenue. I was just wondering if you could give us some commentary there.

Joseph Tung

To answer your latter question, I think first of all both in the PC as well as consumer segment, in the game console area we have our major customer going through product generation change, and therefore the previous product volume has brought to the very minimum. We are expecting that to resume its momentum probably in the third quarter. However, in the second quarter we do see some comeback in the original version of that particular product ramping up to make up for the delay of the new product introduction. On the PC side, we also had one particular customer, because we are insisting on our pricing, we did see some market share loss from that particular customer and that pretty much caused the overall drop in the PC and also consumer. For PC also, the overall softness did have some impact on some of our chipset and graphics customers.

David Dooley

And then the question about growth for the year?

Joseph Tung

Well, for whole year, we are -- not a guidance but we are still trying very hard or shooting for a double-digit growth, or over 10% growth.

Operator

We have a question from [Seho Ing]. Go ahead, please.

Seho Ing

Hi, Joseph, two questions; can you talk about if the business at Power-ASE is all on turnkey basis, that means do you both testing and assembly?

Joseph Tung

We do. It is all turnkey basis.

Seho Ing

Any chance to see new different customers to come in some time this year? That means any customer of parts and --

Joseph Tung

Well, we are certainly trying very hard to bring in new customers but at this point, I think we are focusing on ramping up Powerchip’s business. So far, for the whole year, at least for the revenue part of it, we are not budgeting any meaningful number from other customers, although that does not mean we will try very hard to expand the customer base there.

Seho Ing

I see. Any chance to do NAND flash, apart from DRAM?

Joseph Tung

We are looking into that but so far, as I said, we are still at the early stage in DVR2, so we are pretty much focusing on ramping that operation up at this point.

Seho Ing

I see. Okay, thank you very much.

Operator

We have a follow-up question from Sheilas Jaitly. Go ahead, please. Sir, do you have a question?

Sheilas Jaitly

Hello? Sorry. I wanted to ask about this Power-ASE -- capacity, where is it now and where do you expect it by the end of the year?

Joseph Tung

In April, we are shipping about 19 million units. By year end capacity, we are shooting for 35 million units by year end.

Sheilas Jaitly

19 million units and -- so it is not in terms of number of [inaudible], it is more in terms of units, or 512 megabyte equivalent?

Joseph Tung

Yes.

Sheilas Jaitly

What proportion of your revenue Power-ASE is likely to account for in 2Q, and the same number if you can give me for GAPT, and where do you expect it by the end of the year?

Joseph Tung

In Q1, the two put together has about 8% total, and we are expecting to in Q2, that should grow to -- hold on a second, let me take a look.

Operator

We have a question from Jason Filler.

Jason Filler

Yes, can you hear me? Hello?

Joseph Tung

Yes.

Jason Filler

Yes, just a clarification. For the double-digit growth target or budget for the year, how much of that is organic versus acquisition related?

Joseph Tung

Excuse me, I’m sorry?

Jason Filler

For the double-digit annual growth target, how much of that is organic versus acquisition-related?

Joseph Tung

It is all organic.

Jason Filler

It is all organic. Could you talk a little bit about overall market share and trends in the first quarter, and what the targets imply in terms of share gains?

Joseph Tung

Market share gain -- you mean customer wise, or --

Jason Filler

Overall market share gain in terms of package test and assembly.

Joseph Tung

I do not have that. I need to get back to you on that.

Jason Filler

Okay, but generally speaking, do your forecasts contemplate static share or incremental share gains, generally speaking? Are you looking for industry growth predominantly in your budget or is it share gains?

Joseph Tung

We are looking at maybe mid-single digit industry growth and we typically grow two times of that.

Jason Filler

Okay, but you are talking about broad semis, not necessarily a package and test? Are you looking for package and test to grow in excess of the broad semi growth rate, or are you saying that you expect to grow in excess of the package and test growth rate?

Joseph Tung

Well, I think for this year we are pretty much looking at in line with the overall industry growth, but particularly for the [OSAC] industry.

Jason Filler

So you see [OSAC] growing kind of low-teens?

Joseph Tung

That is the historical pattern. When the industry grows 5%, 6%, that means about 10%, 11% for the [OSAC] growth.

Jason Filler

Thank you.

Joseph Tung

Coming back to the previous question, in quarter one, we have 8% revenue coming from GAPT and Power-ASE. We are expecting that to grow to about 9% in quarter two. By the end of the year, I think it is around 12%.

Sheilas Jaitly

Thank you for that. Also, could I get a sense of the margins on Power-ASE, because these margins I understand are in the range of 38%. What are the sustainable levels?

Joseph Tung

For the whole year, we are confident that we can keep the gross margin above the 30% level.

Sheilas Jaitly

In the packaging plus testing business, is it? For the whole Power-ASE?

Joseph Tung

Yes.

Sheilas Jaitly

Okay, and this Powerchip did have two or three of its major partners in the back-end already, so when you set up this Power-ASE, is it gaining some market share from the existing players or is it all new business on 12-inch?

Joseph Tung

It is primarily incremental business that they are giving out. I think the growth driver going forward will be the new 12-inch fabs that they are set up in, particularly in the middle part of Taiwan.

Sheilas Jaitly

One last question on Power-ASE, because I see that two-thirds of your CapEx is going in for testing, and particularly for Powerchip, given that they have massive exposure to the spot market in the times like these when the ASPs are falling, the proportion of untested chip and partially tested chips like that increases, so testing time is something which is extremely volatile. How do you expect and what are your plans like to have that number stable?

Joseph Tung

Well, we pretty much want to align with our partner, because remember Powerchip is our 40% partner in the [NSJD], so I think the alignment can be very close, closely monitored and planned out. Of course, if the volatility becomes too big, we will be a bit more conservative on investing into test. If it is necessary, we will even outsource some of the tests to some other vendors with the existing capacity. It really depends on how closely we can work with our partner aligning our capacity.

Sheilas Jaitly

Thank you, and just one very last question on substrates. What proportion of your substrate capacity is going to be taken by Power-ASE? How much will it be actively using?

Joseph Tung

At this point, I think it is less than 10%.

Sheilas Jaitly

Less than 10%?

Joseph Tung

Yes.

Sheilas Jaitly

Thank you very much.

Operator

We have a question from Ivan Goh. Go ahead, please.

Ivan Goh

A couple of questions here. First of all, can you make some commentary about the pricing trends in the second quarter?

Joseph Tung

As I said, we are holding on to our prices. I would like to say quarter two to be stable pricing for us, but having said that, I think selectively there will still be some price negotiations with some of our customers. Exactly how much the pricing adjustment will be, I think that remains to be seen, how successful we can negotiate. But in terms of material, I think there will be some price drop, around 3% to 5% in the quarter.

Ivan Goh

Can you make some commentary about given your guidance of a low-teens percentage revenue increase for test assembly, as well as for the whole business, what kind of utilization are you expecting in the second quarter for all these parts of your business?

Joseph Tung

I think for assembly it will range from 80% to 85%, and for test it will go to about 75%.

Ivan Goh

Finally, a housekeeping question; what was the utilization in the fourth quarter for test and assembly?

Joseph Tung

First quarter?

Ivan Goh

Fourth quarter -- Q4 last year.

Joseph Tung

Quarter four I think was about 85% assembly, about 75% for test.

Ivan Goh

Thank you very much.

Operator

We have a question from John [Shue]. Go ahead, please.

John Shue

A housekeeping question; would you give me the utilization rate in the first quarter ’07 in the wirebounding and testing? Also, the ASP trend in 4Q06 and 1Q07? Thanks.

Joseph Tung

In Q1, assembly was around 75%, test around 70%.

John Shue

How about ASP? In 4Q06 it is down. How many percent down?

Joseph Tung

4Q we had very, very minimum price erosion.

John Shue

How about 1Q07?

Joseph Tung

1Q assembly and test across the board, about 2% to 3%, on average.

John Shue

Thank you. The last question is, sorry, I missed the early part of the presentation. Would you give me the guidance on the tax rate in the second quarter and for the whole year ’07?

Joseph Tung

The tax rate?

John Shue

Yes, effective tax rate, yes.

Joseph Tung

We are looking at around 12%.

John Shue

And the second quarter?

Joseph Tung

Second quarter --

John Shue

Or even for whole year ’07.

Joseph Tung

That is for the whole year.

John Shue

Okay, thanks. Thank you very much.

Operator

(Operator Instructions) We have a question from [Dhura Bora]. Go ahead, please.

Dhura Bora

Just a question on your costs. You mentioned that your gross margin can go up to about 30% towards the end when utilization rates improve. Given what I see in terms of the cost that you are saving on the material side, especially particularly the substrate, because substrate costs as a percentage of your packaging revenue has come off quite dramatically. Would it be fair to say that your margins for the same utilization rate, even on the packaging business now, should be better than before? And hence your overall margin should be better than the 30% that you saw last year?

Joseph Tung

We will certainly shoot for that. The supply rate did not really go down that much. Actually, in fourth quarter or third quarter it was about 44%. Right now we are supplying 42%, so that did not really change that much.

Dhura Bora

Yes, but the substrate pricing has come off quite a bit, right? So I am assuming that you are getting some of it, unless you are passing everything on to the customer?

Joseph Tung

Oh, okay. I think the assembly margin that we are talking about is excluding the margin that we are getting from substrate, so separate from that.

Dhura Bora

Okay, and on your op-ex side, what would be your guidance, given that you said first quarter the operating expenses were higher because of bonuses and fees that you paid on some professional services? How would you look at the op-ex for the rest of the year?

Joseph Tung

The target is to, like I mentioned in previous conference calls, we were targeting about 8%. I think that is the first that we want to achieve as soon as possible. Hopefully, in the second quarter we can get much closer to that target.

Dhura Bora

Okay, so you are expecting the second quarter to be closer to 8%?

Joseph Tung

That is what we are fighting for.

Dhura Bora

Thank you.

Operator

We have no further questions in the queue. Do you have any closing remarks?

Joseph Tung

Yes, let me summarize what we have discussed today. I think we had a very tough quarter in quarter one. Things will start to pick up in the second quarter and going into a much stronger second-half, so the whole year, we still expect to have some growth and are shooting for a decent, healthy growth rate on the top line. Also, we are at this point holding on to our prices and hopefully we can weather through this tough period and go into a stronger second-half. With that, we should be able to improve our margins and hopefully bring it back to above 30% by the end of the year. CapEx wise, we are still keeping a very close watch on our overall CapEx. For the whole year, we are expecting about $350 million. Of course, that is a dynamic number that we will continue to adjust according to the market condition. All-in-all, we remain optimistic about the whole year and we still believe that our strategy is a strong one. Going forward, our focus will be continuing to ramp up, we will be looking at our margin very closely and continue to ramp up DRAM operations, material, as well as our China operation. With that, I would like to end the session. Thank you.

Operator

That concludes today’s conference call. We would like to thank you all for your participation. All lines may disconnect at this time. Thank you.