Amkor Technology Q2 2023 Earnings Call Transcript

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July 31, 2023

There are 6 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the Amkor Technology Second Quarter 2023 Earnings Conference Call. My name is Diego, and I will be your conference facilitator today. At this time, all participants are in a listen only mode. After As a reminder, this conference is being recorded. I would now like to turn the call over to call, Jennifer Zhu, Head of Investor Relations.

Operator

Ms. Zhu, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's 2nd call. Joining me today are Hill Rutten, our Chief Executive Officer call and Megan Faust, our Chief Financial Officer. Our earnings press release was filed with the SEC this afternoon and is available on the Investor Relations page of our website, along with the presentation slides that accompany today's call. During this presentation, we will use non GAAP financial measures, and you can find the reconciliation to the U.

Speaker 1

S. GAAP equivalent on our website. We will make forward looking statements about our expectations for Amkor's and answer session. We will now begin the call to call. Please refer to our press release and SEC filings for information on risk factors, uncertainties and exceptions call that could cause actual results to differ materially from these expectations.

Speaker 1

Please note that the financial results discussed today are preliminary call and final data will be included in our Form 10 Q. And now I would like to turn the call over to Hill.

Speaker 2

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. Amkor delivered 2nd quarter performance in line with our expectations with revenue of $1,460,000,000 and EPS of $0.26 Demand for advanced packaging increased in the 2nd quarter, call, notably demand for consumer wearable products and for high performance computing devices. For the first half of twenty twenty three, call. Revenue of $2,900,000,000 was down 6% versus the first half of twenty twenty two, better than the semiconductor industry estimated decline of over 20% in that same period.

Speaker 2

Overall business continues to be dampened call by challenging macroeconomic conditions, high inventory and weak end market demand. With our technology leadership and broad geographic footprint, call. Amcor is outperforming the industry and is well positioned to capitalize on industry megatrends that we expect to propel growth beyond the current cycle. Call. Now let me review the dynamics in each of our end markets.

Speaker 2

Revenue from our communications end market decreased 11% sequentially and increased 7% year on year. Inventory consumption is taking longer than anticipated call due to weaker end market demand, especially in the Android supply chain. Smartphone units declined around 10% in 2022 and are expected to decline a further 5% this year. We have a leadership position in advanced packaging throughout premium tier smartphones, call, and we expect semiconductor content to continue to increase to support new features and functionality. Call.

Speaker 2

This combined with our continued investments in technology in close cooperation with key customers positions us well to outperform the market and to accelerate when the industry exits the current cycle. In the first half of twenty twenty three, call. Revenue from the automotive and industrial end market increased 5% compared to the first half of twenty twenty two, with advanced packaging revenue up 30%. In the 2nd quarter, revenue from conventional automotive and industrial applications softened due to inventory control by certain customers. In the quarter, ADAS and electrification applications remains resilient at record quarterly revenue levels.

Speaker 2

Despite near term variability, semiconductor The content per car is expected to continue to increase driven by the proliferation of ADAS, electrification, infotainment and telematics. Call. EMCOR is the leading automotive OSAT and has multiple decades of experience meeting the stringent requirements of the automotive industry. Call. Our qualified manufacturing lines in multiple geographies such as Korea, Japan and Portugal call.

Speaker 2

And our broad technology portfolio ranging from advanced packaging, wirebond and power are important differentiators to our customers. Call. Revenue from the computing end markets represents 20% of total revenue and increased 15% sequentially and 5% year on year. Increasing demand for leading edge advanced packaging Supporting high performance computing devices for AI applications led to the sequential growth. As a technology leader, EMCODE is enabling the OSAT supply chain with the deployment of 2.5D heterogeneous integration technology, call.

Speaker 2

Integrating high bandwidth memory and ASIC on interposers combined with module attach on substrates. Call. In the computing market, we support leading customers in all areas of data centers and networks ranging from CPUs, call. We continue to invest call in the high performance computing markets both in capacities and technologies to support customers with innovative solutions for next generation devices. Revenue from the consumer end market increased 33% sequentially, call decreased 27% year on year.

Speaker 2

Advanced SiP for wearable devices increased from a trough in the Q1 as we observed first signs of inventory reductions. Consumer IoT devices require miniaturization at high levels of integration call into small form factors. These IoT devices are increasingly incorporating wireless connectivity, call. Sensors and devices for data protection combined with ultra low power requirements. Achieving the form factor impacting the consumer markets, including product life cycle changeovers, reduced consumer demand and excess inventories, We expect that beyond the current industry cycle, our system and package expertise positions us well for growth.

Speaker 2

Call. In the first half of twenty twenty three, our manufacturing organization continued to demonstrate operational excellence across our factories, call focusing on quality and supply reliabilities, while diligently managing cost at lower capacity utilization. Call. Geopolitical dynamics continue to impact the semiconductor supply chain. EMCOR is uniquely positioned to support our customers with reliable and cost effective manufacturing across the geographically diversified manufacturing footprint.

Speaker 2

Call. Investments in our new Vietnam factory continue as planned with the goal to be production ready late this year. We have established silicon carbide capabilities in Japan and are expanding these capabilities to multiple other factories, including Portugal. We are also expanding our wafer processing advanced flip chip and test technology in Portugal in close cooperation with foundry partners to support a Seamless European Semiconductor Supply Chain. In Korea, we are expanding capacity for 2.5D technology in support of customers ramping devices for AI applications.

Speaker 2

In the U. S, we continue to be actively engaged in discussions call. Thank you, Steve. Our first question comes from the line of John Franzrebrenberg with the company's Chief Financial Officer of call. Now let me turn to our Q3 outlook.

Speaker 2

We expect performance to improve from the first half with revenue of $1,775,000,000 at the midpoint of guidance. This represents sequential growth of 22% driven by advanced packaging in support of the full launch of premium tier smartphones. With that, I will now turn the call over to Megan to provide more detailed financial information.

Speaker 3

Thank you, Hill, and good afternoon, everyone. Call. 2nd quarter revenue of $1,460,000,000 was flat compared to the Q1, with increases in consumer and computing call, offset by declines in Communications and Auto and Industrial. Amcor's technology leadership call and strong market position are mitigating cyclical variability and providing the resilience needed to exceed industry growth. Call.

Speaker 3

First half twenty twenty three revenue was down 6% compared to the first half of twenty twenty two. Call. This reflects strong outperformance compared to the semiconductor industry, which is estimated to have call declined over 20% during the same period. Gross margin for the 2nd quarter was 12.8% call and gross profit was $187,000,000 We have continued to focus on cost discipline during the cycle, call, which is essential to preserve profitability. Sequentially, we reduced manufacturing cost by another $10,000,000 call.

Speaker 3

The manufacturing teams are carefully balancing current and future needs, and we have maintained the structure required call to support the anticipated increase in demand in the second half of twenty twenty three. Call. Operating expenses for the Q2 were lower than expected at $111,000,000 due to lower incentive compensation as well as other cost control initiatives. Operating income was $76,000,000 and operating income margin for the quarter was 5.2%. Net income for the quarter was $64,000,000 call, resulting in EPS of $0.26 This represents a more than 40% improvement in bottom line profitability compared to Q1.

Speaker 3

Approximately half of the increase is in operating income, while the other half is due to favorable call, foreign currency balance sheet remeasurement, lower net interest expense and lower taxes. Call. 2nd quarter EBITDA was $245,000,000 and EBITDA margin was 16.9%. Call. We ended the quarter with $1,200,000,000 of cash and short term investments and our total liquidity was $1,900,000,000 call.

Speaker 3

Our total debt as of the end of the second quarter is $1,100,000,000 and our debt to EBITDA ratio is 0.8 times. Call. Amkor's cost and CapEx discipline during this cycle has resulted in continued financial strength call as demonstrated by our strong balance sheet. This allows us to continue to invest through this cycle to enable future growth with lead customers. Moving on to our Q3 outlook, we expect Q3 revenue to be $1,775,000,000 at the midpoint of guidance, representing sequential growth of 22%.

Speaker 3

Call. The strong ramp into Q3 is primarily due to the introduction of new premium tier smartphones. Call. We expect gross margin to be between 13.5% 15.5%. We expect call.

Speaker 3

Q3 operating expenses of around $115,000,000 We expect our full year effective call. Tax rate to be around 17%. 3rd quarter net income is expected to be between $90,000,000 $130,000,000 call, resulting in EPS of $0.36 to $0.53 We are fine tuning our full year CapEx target, call, reducing it by $50,000,000 to $750,000,000 This is 17% lower than 2022. Call. We are continuing to invest in strengthening our global manufacturing footprint and our advanced packaging technology.

Speaker 3

Call. Amkor has 55 years of experience in the semiconductor industry and has successfully navigated through many industry cycles. Call. Over the past several years, we have transformed our operational performance and balance sheet call to a position of financial strength. Our strong financial position enables our technology leadership call and diverse geographic footprint, allowing us to perform significantly better than previous cycles call and to capitalize on the industry megatrends, which we expect to drive accelerated growth as we exit the cycle.

Speaker 3

Call. With that, we will now open the call up for your questions. Operator?

Operator

Thank you. Call. Our first question comes from Randy Abrams with Credit Suisse.

Speaker 4

Call. Yes, thank you. I want to ask my first couple of questions about the financial outlook first. For the call. 2nd half outlook, you had mentioned on the Q3 the growth from the seasonal smartphone.

Speaker 4

I think first just call. Within that, do you see a normal profile or any change to timing for this year for that smartphone ramp? And then for other applications, So if you could go through a few of the other areas, how you're seeing auto, industrial, compute, consumer trending call. And an initial view for Q4, if you expect continued growth.

Speaker 2

Call. Okay. Hi, Randy. Let me share let me try to answer that here. Let's first focus on the communication market call.

Speaker 2

And your question whether we go back to a normal seasonal pattern in the second half of the year. Call. Now if we take the 2 ecosystems, the iOS ecosystem, we see there a normal pattern. Call? It's clear the volumes that are going to be shipped are in line with previous years call.

Speaker 2

And we see a ramp in multiple devices supporting that phone ramp. On the other hand, for the Android ecosystem, call. We still see weakness in the second half of the year, specifically because it takes a longer time to replenish or call. To build down the existing inventories, both with respect to end products as with respect to inventory in the supply chain. Call.

Speaker 2

So for the full market, not a full return to normal seasonality. With respect to the latter part of the year, we See some first signs that the seasonal pattern on a quarterly basis gets back to a normal seasonal pattern. Call. Then with respect to the other markets, we saw a bit of inventory corrections in our second quarter call. And we expect the automotive market in general to stay resilient for the latter part of the year.

Speaker 2

We have multiple new products in the pipeline, specifically when it comes to applications like ADAS, call. Electrification, I think these markets will continue to be strong and we expect that call. These corrections for inventory will be temporarily in this second quarter. Call? So for the other markets, specifically on the computing markets, a little bit give and take in the Q3, because there we call.

Speaker 2

We see some customers phasing some products out and phasing in new products. But overall, We believe that for the remaining part of the year, we see a good, let's say, basis for a strong business in the second half of the year. Call. Does that answer your question, Randy?

Speaker 4

Call. Yes. Eric, actually, maybe just a follow-up. The 4th quarter, I think you mentioned on comps, I guess, just overall, because it's a good sequential ramp up of 2nd quarter. Call.

Speaker 4

But Q4, I think, can swing either way depending the year. But how do you see the profile coming up because there's a correction early this year, If you expect to continue to improve?

Speaker 2

Yes. Well, I mean, the Android side is still a little bit uncertain, Randy, certainly in the latter part of the year. Call. On the other hand, we see first signs in the later part of the year, in Q4, to go back to normal seasonality. And as you mentioned before, call.

Speaker 2

It can be up a little bit. It can be down a little bit. I think that's what we currently the view that we currently have is call. That's what we are expecting.

Speaker 4

Okay. That's helpful. And the profitability leverage call. For the margins, are there inflationary costs that you're dealing with or mix shift to system Even package with higher material content. I'm just curious on the margins, whereas some years, you can get a pickup, I A bit more, but I want to see if there's any factors impacting segment progress.

Speaker 4

Okay.

Speaker 2

Yes, I guess Megan can comment to that, Randy.

Speaker 3

Call. Hi, Randy. Yes, so for the Q3 profitability with the increase of 22%, call. We're looking at about 170 basis points of gross margin expansion. So that is lower than what our typical guideline would be for incremental call.

Speaker 3

However, the primary reason for that is a product mix shift to the higher material content products. Call. So as we mentioned, the driver for the Q3 increase is communications and advanced SiP is one of the biggest technologies call supporting that in for the premium tier smartphone launches. And so with that higher proportion call. We have a very strong position of advanced SiP and other advanced products.

Speaker 3

That's what's contributing to, I would say, a higher material content. Call. We can also use a proof point that Advanced SIP for Q2 was even up 12% year over year. Call. So that's the primary reason.

Speaker 3

There is some seasonal increase in electricity and pricing in Q3. Call. In addition to the higher volume, we do have the summer rates, which together we usually see in Q3 on average an increase of 10%. Call. So while the gross margin is important, just wanted to also focus on the full picture, because gross margin is compressed, call.

Speaker 3

As you know by that material content increase, however, you will see significant increase in the gross profit dollars call. We are now actively pursuing a strong quarter of $1,000,000,000 in the quarter. We are now call for Q3 is growing over 70% sequentially.

Speaker 4

Great. Thanks for the additional color. Call. And for the COOS opportunity or maybe broadly on AI, if you could discuss a bit more call. The processing or capability you can provide and how do you see the revenue opportunity?

Speaker 4

And is there a lead time where call. If you get orders that may come in a bit later, are you or do you have capability to ramp up? So if you could just talk a little more on call? What you're seeing and what capability you can provide to that market?

Speaker 2

Yes, that's a good point, Randy. Let me try to comment to that. I mean, Amkor is engaged in 2.5D technologies for multiple devices, multiple customers already for several years. Call. Currently, we see driven by the adoption of AIs that AI algorithms call.

Speaker 2

Drive the latest silicon technology nodes and that adoption then is creating a significant increase call. In 2.5D volumes. So we have certain capacity installed base. Call? Going into next year, we're going to ramp that up.

Speaker 2

Actually, our current plan is to triple our current volume call. For 2.5 Ds going into next year, we do end to end processing. So we have a full turnkey call. So both the high bandwidth memories and as you see on interposers and then call. On substrate parts combined, we have a pipeline with multiple customers and we expect call.

Speaker 2

That with the adoption of AI in data centers that this technology will become a more broadly adopted

Speaker 4

call. And for the tripling into next year, If you could give a sense like percent contribution and how the profitability is profitability or return call. And just the other follow-up I had is that you are actually reducing overall CapEx. So with the call. CapEx, is there incremental CapEx that you have this year or next year for this investment?

Speaker 4

And then Gary, you're cutting for a few questions.

Speaker 2

Yes. I mean, let me start commenting with respect To the profitability, I mean the profitability like in many other areas for the company is very much dependent on our utilization. Call. If we take the value add, then we see that the number of process steps for 2.5 D call is well above average of our normal process flow. So in that sense, the value add revenue as well as the value add Margins that we generate there is above average.

Speaker 2

Then when it comes to the investment level, Yes. I think there are some incremental investments for this year and also next year. We have to keep in mind that the investments that we're making in this Technology is what we call fungible. So the equipment can be applied for multiple technology domains. Call.

Speaker 2

It's 2.5 each, but a lot of the technology also related to bumping technology and next generation call. Technology areas that we're launching. But yes, we're investing in that incremental capacity this year and also next year. Call. Overall for EMCOR, given the bit muted second half when it comes to normal seasonality, we decreased our CapEx spending call.

Speaker 2

€50,000,000 versus our earlier target of €800,000,000 We brought it back to €750,000,000 call. But within that bucket, we are still able to manage that increase.

Speaker 4

Great. Thanks a lot, Johan. Thanks, Megan.

Operator

Call. Call. Our next question comes from Tom Diffely with D. A. Davidson.

Operator

Please state

Speaker 4

your question.

Speaker 5

Call. Yes. Good afternoon. Thank you for taking my question. So Megan, first, just going back to the incremental gross margin question.

Speaker 5

I always assume that there wasn't a big difference in the margin structure between your low end products and your high end products. It was much more of a factor call. So I'm curious, you talked about the slightly lower incremental margins for the out quarter. Is that because call. Your items like consumer or some of the lower end stuff are still at fairly poor utilization rates?

Speaker 3

Hi, Tom. Call. Yes. So really what we're looking at for Q3 is there are still significant underutilization among call. So our target utilization for Q3 is still going to be sub 70% call compared to let's say Q3 last year, which we were on in the aggregate about 85%.

Speaker 3

So that is what's call. Causing part of that profitability strain is continued underutilization during this cycle.

Speaker 5

Call. Okay. And what's the most recent trend in that? Is it still going down? Is it starting to recover?

Speaker 3

Q2, we saw a call. A slight decrease in utilization compared to Q1 and then seeing a nice increase as I mentioned to sub-seventy percent in Q3. Call. So we do think that that's hit the bottom.

Speaker 5

Okay, great. And then I think you made a comment earlier that your interest expense was going down. I wonder if you Could

Speaker 4

you add a little more color

Speaker 3

around that? Yes, Tom. So really that's a function of combined net interest expense has decreased. We've actually We've seen quite a nice increase in our interest income on our cash and investment balances.

Speaker 5

Call. Okay. And then on the silicon carbide, you mentioned you talked about Spanning from Japan, maybe into Portugal, what does that require? Does that require additional equipment for you or is it just process know how? How do you expand that to different locations?

Speaker 2

Call. Hi, Tom. Let me comment to that. Yes, I think for silicon carbides, call. There are 2 flavors to our silicon carbide manufacturing services.

Speaker 2

1 is discrete devices call. And the other is silicon carbide module power modules. So the technology that we're transferring from Japan into Portugal It's actually twofold, both technology areas. And it requires indeed incremental investments in specific call. Equipment and specific technology.

Speaker 2

So of course, the technology we transfer, we transfer people that go on-site call. And that transfer that technology to a different factory. There we have standard procedures in place how to do it. And for the capacity installation, we have dedicated Equipment that we purchase and that we install, silicon carbide in general, both on the The accrete side as well as on the module side is a growing area, not only in automotive, but also in the overall energy transition. Call.

Speaker 2

We see silicon nitride and silicon carbide as definitely a growing business area for Amcor.

Speaker 5

Okay. Are you seeing a pretty nice shift from discretes to the modules?

Speaker 2

Yes. Although Both flavors will coexist for a significant time, but modules is definitely the future. And these modules, they come in multiple shapes and forms from fairly miniaturized form factors to Fairly large packaged modules.

Speaker 5

Great. And then final question, when you look at your compute segment, call. How concentrated are the customers there? And how big an impact could the doubling of a customer inside of that call. Space B for your overall business?

Speaker 2

It's a good question, Tom. Call. I mean, customer concentration in the compute segment, specifically in the deployment of AI call. Applications and Algorithms is fairly concentrated. Call.

Speaker 2

I would say, I think it's fair to say that there is broad public knowledge on call. Who are the players there? We have a product pipeline and a customer pipeline that would cater for, I would say, all the key players.

Speaker 3

Call. I think Tom just to offer another data point as far as the contribution, we're starting from a fairly low base. Call. So with respect to our Q2 performance, this would amount to, I would say, mid single digits of our Compute segment.

Speaker 5

Call. Okay. Well, thank you very much. I appreciate your time today.

Speaker 2

Thanks, Tom.

Operator

Call. Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Hill for closing remarks.

Speaker 2

Call. Okay. Thank you. Let me recap the key messages. Amcor delivered 2nd quarter results in line with our expectations with revenue of $1,460,000,000 and EPS of $0.26 call.

Speaker 2

We are expecting 3rd quarter performance to improve significantly with revenue of $1,775,000,000 at the midpoint of guidance, with 22% sequential increase. We are confident that the secular growth drivers in the industry remain in place call and will drive growth beyond the current cycle. With our leadership in advanced packaging, our broad geographic footprint call and exposure to industry megatrend, we are poised to outperform the semiconductor market and accelerate out of this cycle. Thank you for joining the call today.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference

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Amkor Technology Q2 2023
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