Amkor Technology - Q2 2023

Transcript

Operator (participant)

Good 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 the speaker's remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Jue, Head of Investor Relations. Miss Jue, please go ahead.

Jennifer Jue (VP of Investor Relations)

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's second quarter 2023 earnings conference call. Joining me today are Giel Rutten, our Chief Executive Officer, 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.S. GAAP equivalent on our website.

We will make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it. Of course, actual results could differ. Please refer to our press release and SEC filings for information on risk factors, uncertainties, and exceptions that could cause actual results to differ materially from these expectations. Please note that the financial results discussed today are preliminary, and final data will be included in our Form 10-Q. Now I would like to turn the call over to Giel.

Giel Rutten (President and CEO)

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. Amkor delivered second quarter performance in line with our expectations, with revenue of $1.46 billion and EPS of $0.26. Demand for advanced packaging increased in the second quarter, notably demand for consumer wearable products and for high-performance computing devices. For the first half of 2023, revenue of $2.9 billion was down 6% versus the first half of 2022, better than the semiconductor industry estimated decline of over 20% in that same period.

Overall business continues to be dampened by challenging macroeconomic conditions, high inventory, and weak end market demand. With our technology leadership and broad geographic footprint, Amkor is outperforming the industry and is well-positioned to capitalize on industry mega trends that we expect to propel growth beyond the current cycle.

Now, let me review the dynamics in each of our end markets. Revenue from our communications end market decreased 11% sequentially and increased 7% year-on-year. Inventory consumption is taking longer than anticipated 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, and we expect semiconductor content to continue to increase to support new features and functionality. This, combined with our continued investment 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 2023, revenue from the automotive and industrial end market increased 5% compared to the first half of 2022, with advanced packaging revenue up 30%. In the second quarter, revenue from conventional automotive and industrial applications softened due to inventory control by certain customers. In the quarter, ADAS and electrification applications remained resilient at record quarterly revenue levels. Despite near-term variability, semiconductor content per car is expected to continue to increase, driven by the proliferation of ADAS, electrification, infotainment, and telematics.

Amkor is the leading automotive OSAT and has multiple decades of experience meeting the stringent requirements of the automotive industry. Our qualified manufacturing lines in multiple geographies, such as Korea, Japan, and Portugal, and our broad technology portfolio, ranging from advanced packaging, wire bond, and power, are important differentiators to our customers.

Revenue from the computing end market 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 the sequential growth. As a technology leader, Amkor is enabling the OSAT supply chain with the deployment of 2.5D heterogeneous integration technology, integrating high-bandwidth memory and ASIC on interposer, combined with module attach on substrates.

In the computing market, we support leading customers in all areas of data centers and networks, ranging from CPUs, GPUs, memory, and AI accelerators to routers and switches. We continue to invest in the high-performance computing market, both in capacity and technology, to support customers with innovative solutions for next-generation devices. Revenue from the consumer end market increased 33% sequentially, decreased 27% year-on-year.

Advanced SiP for wearable devices increased from a trough in the first quarter, as we observed first signs of inventory reductions. Consumer IoT devices require miniaturization at high levels of integration into small form factors. These IoT devices are increasingly incorporating wireless connectivity, sensors, and devices for data protection, combined with ultra-low power requirements. Achieving the form factor and power profile requires advanced system and package solutions.

Although we observe multiple near-term headwinds impacting the consumer market, including product life cycle changeovers, reduced consumer demand, and excess inventory, we expect that beyond the current industry cycle, our system and package expertise positions us well for growth. In the first half of 2023, our manufacturing organization continued to demonstrate operational excellence across our factories, focusing on quality and supply reliability, while diligently managing costs at lower capacity utilization. Geopolitical dynamics continue to impact the semiconductor supply chain.

Amkor is uniquely positioned to support our customers with reliable and cost-effective manufacturing across a geographically diversified manufacturing footprint. 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. In the U.S., we continue to be actively engaged in discussions with customers, partners, and economic development agencies to establish a U.S. manufacturing facility.

Now let me turn to our third quarter outlook. We expect performance to improve from the first half, with revenue of $1.775 billion 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.

Megan Faust (EVP, CFO and Treasurer)

Thank you, Giel, and good afternoon, everyone. Second quarter revenue of $1.46 billion was flat compared to the first quarter, with increases in consumer and computing, offset by declines in communications and auto and industrial. Amkor's technology leadership and strong market position are mitigating cyclical variability and providing the resilience needed to exceed industry growth. First half 2023 revenue was down 6% compared to the first half of 2022.

This reflects strong outperformance compared to the semiconductor industry, which is estimated to have declined over 20% during the same period. Gross margin for the second quarter was 12.8%, and gross profit was $187 million. We have continued to focus on cost discipline during the cycle, which is essential to preserve profitability. Sequentially, we reduced manufacturing cost by another $10 million.

The manufacturing teams are carefully balancing current and future needs, and we have maintained the structure required to support the anticipated increase in demand in the second half of 2023. Operating expenses for the second quarter were lower than expected, at $111 million, due to lower incentive compensation as well as other cost control initiatives.

Operating income was $76 million, and operating income margin for the quarter was 5.2%. Net income for the quarter was $64 million, resulting in EPS of $0.26. This represents a more than 40% improvement in bottom-line profitability compared to Q1. Approximately half of the increase is in operating income, while the other half is due to favorable foreign currency balance sheet remeasurement, lower net interest expense, and lower taxes.

Second quarter EBITDA was $245 million, and EBITDA margin was 16.9%. We ended the quarter with $1.2 billion of cash and short-term investments, and our total liquidity was $1.9 billion. Our total debt as of the end of the second quarter is $1.1 billion, and our debt-to-EBITDA ratio is 0.8x. Amkor's cost and CapEx discipline during this cycle has resulted in continued financial strength, 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 third quarter outlook, we expect Q3 revenue to be $1.775 billion at the midpoint of guidance, representing sequential growth of 22%. The strong ramp into Q3 is primarily due to the introduction of new premium-tier smartphones. We expect gross margin to be between 13.5% and 15.5%. We expect Q3 operating expenses of around $115 million. We expect our full-year effective tax rate to be around 17%.

Third quarter net income is expected to be between $90 million and $130 million, resulting in EPS of $0.36-$0.53. We are fine-tuning our full-year CapEx target, reducing it by $50 million to $750 million. This is 17% lower than 2022. We are continuing to invest in strengthening our global manufacturing footprint and our advanced packaging technology. Amkor has 55 years of experience in the semiconductor industry and has successfully navigated through many industry cycles.

Over the past several years, we have transformed our operational performance and balance sheet to a position of financial strength. Our strong financial position enables our technology leadership and diverse geographic footprint, allowing us to perform significantly better than previous cycles and to capitalize on the industry megatrends, which we expect to drive accelerated growth as we exit the cycle. With that, we will now open the call up for your questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number two, if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Randy Abrams with Credit Suisse. Please state your question.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Hey, yes, thank you. I just want to ask my first couple questions about the financial outlook first. For the second half outlook, you had mentioned on the third quarter, the growth from the seasonal smartphone. I think first, just within that, do you see a normal profile or any change to timing for this year for that smartphone ramp? Then for other applications, if you could go through a few of the other areas, how you're seeing auto, industrial, compute, consumer trending, and an initial view for fourth quarter, if you expect continued growth.

Giel Rutten (President and CEO)

Okay. Hi, Randy. Let me try to answer that here. Let's first focus on the communication market and your question, whether we go back to a normal seasonal pattern in the second half of the year. If we take the two ecosystems, the iOS ecosystem, we see there a normal pattern. You know, it's clear the volumes that are going to be shipped are in line with previous years, and we see a ramp in multiple devices supporting that phone ramp.

For the Android ecosystem, we, we still see weakness in the second half of the year, specifically because it takes a longer time to replenish or to, to build down the existing inventory, both with respect to end products, as with respect to inventory in the supply chain. 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.

With respect to the other markets, you know, we saw a bit of inventory corrections in our second quarter for automotive, and we expect the automotive market, in general, to stay resilient for the latter part of the year. We have multiple new products in the pipeline, specifically when it comes to applications like ADAS, electrification. I think these these markets will continue to be strong, and we expect that the corrections for inventory will be temporarily temporary in the in the in the second quarter.

For the other markets, specifically on the computing markets, a little bit give and take in the third quarter, because there we see some some customers phasing some products out and phasing in new products. 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. Does that answer your question, Randy?

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Yeah, or actually, maybe just about the fourth quarter. I think you mentioned on comms, I guess, just overall, because it's a good sequential ramp off of second quarter. Fourth quarter, I think, can swing either way, depending on the year. How do you see the profile, coming off? Because there's a correction early this year, if you expect-

Giel Rutten (President and CEO)

Yeah.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Any improvement.

Giel Rutten (President and CEO)

Well, I mean, the Android side is still a little bit uncertain, Randy, certainly in the latter part of the year. On the other end, we see first signs, in the later part of the year, in the fourth quarter, to go back to normal seasonality. As you mentioned before, it can be up a little bit, it can be down a little bit. I think that's what we currently, with the view that we currently have, is, that's what we are expecting.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Okay. No, that's helpful. The profitability leverage for the margins, are there inflationary costs that you're dealing with, or mix shift to System in Package with higher material content? Just curious on the margins, where some years, you can get a pickup, I, I think, a bit more, but want to see if there's any factors impacting segment-

Giel Rutten (President and CEO)

Okay.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

gross.

Giel Rutten (President and CEO)

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

Megan Faust (EVP, CFO and Treasurer)

Hi, Randy. For the Q3 profitability with the increase of 22%, we're looking at about 170 basis points of gross margin expansion. That is lower than what our typical guideline would be for incremental flow through. However, the primary reason for that is a product mix shift to the higher material content products. As we mentioned, the driver for the Q3 increase is communications, advanced SiP is one of the biggest technologies supporting that, for the premium tier smartphone launches.

With that higher proportion of advanced SiP and other advanced products, that's what's contributing to, I would say, a higher material content. We can also use a proof point that advanced SiP for Q2 was even up 12% year-over-year. That's the primary reason. There is some seasonal increase in electricity and pricing in Q3. 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%.

While the gross margin is important, just wanted to also focus on, you know, the full picture, because gross margin is compressed, as you know, by that material content increase. However, you will see significant increase in the gross profit dollars, growing much faster than revenue, as well as operating income, the bottom-line EPS for Q3 is growing over 70% sequentially.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Okay, great. Yeah, thanks, thanks for the additional color. For the CoWoS opportunity, or maybe broadly on AI, if you could discuss a bit more the processing or capability you can provide, and how do you see the revenue opportunity? Is there a lead time where if you get orders, it may come in a bit later or do you have capability to ramp up? If you could just talk a little more on what you're seeing and what capability you can provide to that market.

Giel Rutten (President and CEO)

Yeah, 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. Currently, we see, driven by the adoption of AI, that AI algorithms drive the latest silicon technology nodes, and that adoption then is creating a significant increase in 2.5D volumes. We have a certain capacity install base. Going into next year, we're going to ramp that up. Actually, our current plan is to triple our current volume for 2.5D going into next year. We do end-to-end processing, we have a full turnkey process flow.

Both, the, the, high-bandwidth memory, and ASIC on interposer, and then the, on substrate parts combined. You know, we have a, a pipeline with multiple customers, and we expect that with the adoption of AI in data centers, that this technology will become a, a more broadly adopted, assembly technologies going forward.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

For the tripling, into next year, if you could give a sense, like percent contribution and how the profitability is, profitability or return is versus the corporate average. Just the other follow up add is, you are actually reducing overall CapEx. Would the CapEx? Is there incremental CapEx that you have this year or next year for this investment?

Giel Rutten (President and CEO)

Mm-hmm.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Where you're cutting? Are a few questions that you have.

Giel Rutten (President and CEO)

Yeah. 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. If you take the value add, then we see that the number of process steps for 2.5D 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.

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. It's 2.5D, but a lot of the technology also related to bumping technology and next generation technology areas that we're launching.

Yes, we're investing in that incremental capacity this year and also next year. Overall, for Amkor, you know, given the bit muted second half when it comes to normal seasonality, we decreased our CapEx spending $50 million versus our earlier target of $800 million. We brought it back to $750 million, within that bucket, we are still able to manage that increase.

Randy Abrams (Head of Asia Technology Research and Semiconductors Securities Research)

Great. Thanks a lot, Giel. Thanks, Megan.

Operator (participant)

Thank you. Just a reminder, to ask a question, press star one on your telephone keypad. Our next question comes from Tom Diffley with D.A. Davidson. Please state your question.

Tom Diffely (Director and Senior Research Analyst)

Yes, good afternoon. Thank you for taking my question. Megan, first, just going back to the incremental gross margin question. I always assumed 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 of utilization at the different stages. I'm curious, you know, you talked about the slightly lower incremental margins for that quarter. Is that because, you know, items like consumer or some of the lower-end stuff are still at fairly poor utilization rates?

Megan Faust (EVP, CFO and Treasurer)

Hi, Tom. Yeah, really what we're looking at for Q3 is there are still significant underutilization amongst other product lines. Our target utilization for Q3 is still gonna be, you know, sub 70% compared to, let's say, Q3 last year, which we were on in the aggregate, about 85%. That is what's causing, you know, part of that profitability strain, is continued underutilization during this cycle.

Tom Diffely (Director and Senior Research Analyst)

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

Megan Faust (EVP, CFO and Treasurer)

Q2, we saw a slight decrease in utilization compared to Q1, and then seeing a nice increase, as I mentioned, to sub 70 in Q3. We do think that that's the hit the bottom.

Tom Diffely (Director and Senior Research Analyst)

Okay, great. I think you made a comment earlier that your interest expense was going down. I wonder if you could just add a little more color around that.

Megan Faust (EVP, CFO and Treasurer)

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

Tom Diffely (Director and Senior Research Analyst)

Okay. Then, on the Silicon Carbide, you mentioned, you talked about expanding 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?

Giel Rutten (President and CEO)

Hi, Tom. Let me comment to that. Yes, I think for, for Silicon Carbide, there are two flavors to our Silicon Carbide manufacturing services. One is discrete devices, and the other is Silicon Carbide module, power modules. The technology that we're transferring from Japan into Portugal is actually twofold, both technology areas, and it requires, indeed, incremental investments in specific equipment, and specific technology.

Of course, the technology we transfer, we transfer people that go on site 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 discrete side as well as on the module side, is a growing area, not only in automotive but also in the overall energy transition. We see silicon nitride and Silicon Carbide as definitely a growing business area for Amkor.

Tom Diffely (Director and Senior Research Analyst)

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

Giel Rutten (President and CEO)

Yes, although, both flavors will coexist for, for, a significant time. 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.

Tom Diffely (Director and Senior Research Analyst)

Great. Final question: When you look at your compute segment, how concentrated are the customers there, and how big an impact could, you know, the doubling of a customer inside of that space be for your overall business?

Giel Rutten (President and CEO)

That's a good question, Tom. I mean, customer concentration in the compute segment, specifically in the deployment of AI applications and algorithms is fairly concentrated. I would say, you know, I think it's fair to say that there is broad public knowledge on 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.

Megan Faust (EVP, CFO and Treasurer)

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

Tom Diffely (Director and Senior Research Analyst)

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

Giel Rutten (President and CEO)

Thanks, Tom.

Operator (participant)

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

Giel Rutten (President and CEO)

Okay, thank you. Let me recap the key messages. Amkor delivered second quarter results in line with our expectations, with revenue of $1.46 billion and EPS of $0.26. We are expecting third quarter performance to improve significantly, with revenue of $1.775 billion at the midpoint of guidance, a 22% sequential increase. We are confident that the secular growth drivers in the industry remain in place and will drive growth beyond the current cycle.

With our leadership in advanced packaging, our broad geographic footprint, 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 (participant)

Thank you. Ladies and gentlemen, this concludes today's conference call.