Analyst Conference Summary

conference date: July 31, 2012 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2012 (Q2, second quarter)

Forward-looking statements

Overview: Revenues up sequentially, but EPS down.

Basic data (GAAP) :

Revenues were $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter.

Net income was $7.6 million, down 40% sequentially from $12.6 million but up from negative $20.3 million year-earlier.

EPS (earnings per share) were $0.09, down 40% sequentially from $0.15 but up from negative $0.26 year-earlier.

Guidance:

Q3 revenue between $340 and $360 million. GAAP EPS $0.08 to $0.16 and non-GAAP EPS $0.16 to $0.24.

Conference Highlights:

The second quarter was within expectations, with the sequential revenue increase due to seasonality. Margins were lower than expected because of reduced demand for advanced printed circuit board technologies and higher labor costs in China.

Non-GAAP numbers: net income $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS $0.17. EBITDA was $42.3 million, down sequentially from $46.4 million and down from $64.2 million year-earlier. Gross margin was 16.7%.

"We are beginning to receive orders in our Asia Pacific segment for new handheld products." This include high-density (HDI) products that should result in margin improvements.

23% of Asian revenue was due to HDI, a decline from 26% in Q1 as handheld device PCB demand dropped.

Cash and equivalents balance ended at $248.5 million, up $25 million sequentially from $223.8 million. Cash flow from operations $39 million. $33 million capital expenditures. $20.2 million depreciation. $299.9 million net debt.

Aerospace/defense represented 16% of total revenue. Solid commercial sales. Sees a steady Q3.

Cellular Phones represented 12% of total revenue. Increased in quarter, expects to increase again in Q3.

Computing, storage and peripherals were 21% of total revenue. Down sequentially on touchpad PCB demand. Expects to ramp in Q3.

Medical and industrial were 9% of total revenue. Sales up sequentially, and expected sequentially stable in Q3.

Networking and communications was 32% of total revenue. Saw some improvement, but uneven by customers, with China weak. Expects weakness in this market in Q3.

Other was 10% of total revenue. Increased demand for wireless substrate boards for mobile devices.

Top five customers: Apple, Cisco, Ericsson, Huawei, and IBM. Accounted for 25% of sales.

By region: Asia-Pacific $195.6 million, North America $132.3 million.

Cost of goods sold was $272.7 million, leaving a gross profit of $54.7 million. Operating expenses of $36.6 million included: $9.0 million selling and marketing; $23.5 million general and administrative; and $4.1 million amortization of intangibles. Leaving operating income of $18.1 million. Interest and other expense was $6.5 million. Income tax $4.0 million.

Expanding capacity for HDI in Asia.

Q&A:

Touchpad tablet decline? We don't believe we lost market share. There are macro environment issues. There is also a gap before introduction of new devices.

September margin headwinds? Asia will do well in Q3 with new HDI products. North America will drag in Q3 due to telecom infrastructure drop off. This is all advanced technology, so it negatively impacts margins.

Cost cutting in North America? It is not quite a short term issue, it is midterm. We are controlling overtime and granting some furloughs. We've been doing this for four or five weeks. In Asia, in contrast, we are getting ready to ramp up HDI.

Q4 in Asia? Touchpad business will continue to grow into Q4. We have two e-reader product introductions, one Q3 and one Q4. Some HDI is spreading outside the handheld device market. Current customers continue to increase complexity and layer count.

We expect modest materials cost declines during the remainder of the year. But utilization and HDI mix are the big margin factors.

Capital expense? About $30 million in Q3 and $40 million in Q4. 75% to 80% of that is for HDI. It has been expensive but it has helped us with customers and it should be much less heavy in 2013.

We have two other large customers ZTE and Juniper. Their dropping out of the top five reflects the telecom downturn.

We believe the ramp is still in place for commercial e-reader products. We don't see any flattening of that.

June book to bill in Asia was 1.04. In July we hit 1.38.

Wage pressure going forward? Big increase was in Q2 when we implemented the 60 hour work week limit as well as the annual wage increase. Going forward increases will be due to new hiring until next year's wage increase.

Advanced HDI competition, capacity? We have looked at the question of over-capacity. Our competitors invested more quickly than we expected. Our position with our customers is solid, now it is how well customers are serviced. It is not just cap ex driven, but also expertise driven. Only top-tier players are in HDI. More and more products are moving to advanced HDI and is shifting from 10 to 12 layers. So there is still a lot of opportunity ahead.

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