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Headquartered in Taiwan, ASE Test, Ltd. (ASTSF) is the world's largest independent provider of semiconductor testing services. Semiconductor manufacturing is divided into front-end and back-end main processes. The relatively more complex front-end process involves the actual fabrication or formation of multiple copies of a semiconductor device on a cylindrical shaped piece of material (usually silicon-based) called a wafer. A wafer prober then moves the wafer so that each die's (IC device) electrical contact points are properly aligned with the probe card's pins, facilitating the parametric or functional testing of the device. Parametric testing is done both during and at the completion of the device fabrication process. Functional testing, completed after final construction, determines whether the device meets performance specifications (wafer sorting). Following the wafer sort, the wafer is cut into individual die. Electrical leads are then attached to the surface of each die, during the wirebonding process, which is followed by packaging within an environmentally protective encasement. The purpose of the die package is to protect the semiconductor device from environmental elements and secure the electrical contact bonding area while permitting the electrical leads to protrude. In addition, the encasement acts as a medium through which thermal energy or heat is dissipated from the die. A final test is then conducted on the chip. Wafer probers are used in wafer sorting applications roughly 85% of the time, while the rest are used in parametric testing. Thus, most of the testing is done in the back-end of the fabrication process. Each probe card is custom-built for each specific wafer, as well as for the test equipment that accepts the probe card's electronic information. Functionally, this test equipment increases the efficiency of the manufacturing process through the detection and removal of defective semiconductor devices prior to final assembly. ASTSF offers the complete set of back-end processing services including front-end design verification testing, wafer sorting, packaging of the die forming the chip, final testing of the chip and drop shipping to designated end customers.

The traditional IDM (integrated device manufacturer) semiconductor company designs, manufactures, packages and tests each of its products internally. However, there is a growing industry trend toward outsourcing portions of the process, which is especially pronounced among smaller companies in the United States. These small fabless semiconductor companies have transitioned into semiconductor engineering design firms producing specialized products or devices that target a particular application or market, and outsourcing the production, packaging and testing to other specialized firms. Research firm Gartner Dataquest projects that the outsourced semiconductor testing market will grow at a compound annual growth rate (CAGR) of 20.6%, to a $5.6 billion market, and the outsourced semiconductor packaging market will grow at a CAGR of 18.8%, to a $19.2 billion market in 2008. ASE Test is one such firm, attempting to capitalize on this trend within the testing and packaging industries. ASE Test reports along these same two segments, testing and packaging, along with a specialized packaging sub-segment, module assembly. The need for separate reporting of the module assembly came from Agilent's large camera assembly contract. In 2004, the revenue contribution for testing was 55% (up 33.5% from 2003), IC packaging 14% (up 4.8%) and module assembly 31% (up 262.2%).

The testing segment is primarily focused on logic chips, including digital high-performance as well as analog and mixed-signal semiconductors, which accounted for 98% of 2004 testing segment revenues. Memory testing services (low-margin, lower cost) made up the remaining 2%. Testing services include final test logic, which accounted for 61% of 2004 testing revenue (up 16.5% from 2003), wafer sorting 31% (up 98.7%), front-end engineering prototype testing 5% (up 14.9%), final testing memory 2% (up 54.6%) and hardware 1% (down 6.2%). ICs have become increasingly complex and more application specific, as more functionality is packed into a chip. This fact has driven test costs higher, as more sophisticated and costly testing equipment is required, in addition to more sophisticated software, to control the process and tools. Strategically, ASTSF focuses on the high-end sub-segment of the testing services market, which characteristically has high margins and high average selling prices (ASPs).

ASTSF assembly service offers a wide range of semiconductor packaging options that are focused on surface-mount technology (SMT). The company reports revenue along six different packaging technologies, but consolidated the presentation into two segments advanced substrate & leadframe and traditional leadfame packages. The advanced substrate & leadframe packages product portfolio includes ball grid array (BGA), quad flat (QFD) and thin quad flat packages (TQFD). The traditional leadframe packages include legacy technologies such as plastic leaded chip carrier (PLCC), plastic dual in-line package (PDIP) and various small outline memory packages (SOP, TSOP and SOJ). The advanced substrate & leadframe segment generated 63% of IC packaging revenue in 2004 (down 0.8% from 2003), while the traditional leadframe segment accounted for 37% (up 15.9%). The system in package (SIP) segment is now separately reported as the module assembly unit.

The company has manufacturing and testing facilities in Hong Kong, Taiwan, Malaysia, Singapore, South Korea, Silicon Valley, CA and Austin, TX. ASE Test primarily uses a direct sales staff, which is supplemented with sales agents from Gardex International. The current quarter's 10 largest customers include Agilent, Altera, ATI, Atmel, Flextronics, Legerity, Marvell, Philips, Qualcomm and Via. The top five customers contribute approximately 40% of sales. Agilent was the only 10% customer in 2004. Approximately 69% of the company's 2004 revenue was generated in North America, 25% came from Asia and the remaining 6% from Europe.

ASE Test is capitalizing on the outsourcing trend within the semiconductor test and assembly markets. These markets are expected to grow almost 20% per year through 2008. As testing tools and related software become more complex and expensive, firms are increasingly electing to outsource the task to specialists, such as ASE Test. In effect, customers are preserving capital that can be invested or redeployed into other corporate focus areas. ASTSF has a very large scale of operations, which permits the high fixed costs of the equipment to be spread or absorbed over a greater number of units from multiple customers, thus lowering the cost to test. Additionally, the test equipment can be used for ICs from many different industries, which diversifies the industry-specific risk. ASE Test's facilities are located near many of the pure-play independent foundries in the Far East, the rest being located near IDMs in the United States. Furthermore, the company has a strategic relationship with Taiwan Semiconductor Manufacturing (TSMC), the largest foundry in the world. ASE Test continues to focus on the higher-margin areas of both testing and packaging.

Gross margin for the testing operations during 2Q07 was 36%, down from 45% in 2Q06 and up from 26% in 1Q07. As compared to 2Q06, the decrease in gross margin was primarily due to lower testing volumes. As compared to 1Q07, the increase in gross margin was primarily due to an increase in testing volume and a slight increase in ASP. This ASP increase was primarily a result of a shift in product mix towards testing more complicated devices.

The Company spent $10.6 million on testing equipment in 2Q07. A total of 50 testers were added through purchase, lease and/or consignment, and 32 testers were disposed of. At the end of the period, the Company had a total of 777 testers, of which 286 testers were either leased or consigned.

Gross margin for packaging in 2Q07 was 19%, up from 17% in 2Q06 and up from 16% in 1Q07. The gross margin increase was primarily the result of a shift in product mix towards more advanced packages. The Company spent $1.1 million on packaging equipment in 2Q07. We ended the quarter with 402 wirebonders, which represents an increase of 20 wirebonders from 1Q07.

The Company sold its camera module assembly operations in Penang, Malaysia to Flextronics in early October 2005 for $18.7 million, which covers the book value of the equipment and inventory transferred to Flextronics, plus an acquisition premium that reflects certain intangibles. As agreed with Flextronics, the Company did not invoice Flextronics for the normal selling price of the camera modules shipped during the month of September 2005. Instead, Flextronics reimbursed the Company the actual costs incurred in the assembly of camera modules during this period. As a result, the Company did not recognize revenues from the assembly of camera modules shipped to Flextronics in September.


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