Amkor Technology - Q3 2022

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Amkor Technology Third Quarter 2022 Earnings Conference Call.

Speaker 1

My name is Diego, and I will

Speaker 0

be your conference facilitator today. At this time, all participants are in a listen only mode. After the speakers' 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 Ju, Head of Investor Relations.

Ms. Ju, please go ahead.

Speaker 2

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's Q3 2022 earnings conference call. Joining me today are Achal Rutin, 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 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. And now I would like to turn the call over to Hill.

Speaker 3

Thanks, Jennifer. Good afternoon, everyone, and thank you for joining the call today. Amcor delivered excellent results in the 3rd quarter, Reaching a record quarterly revenue of $2,100,000,000 and EPS of $1.24 All end markets achieved new records, driving revenue up 24% year on year. Sequentially, revenue was up 38%, which reflects growth and a successful recovery of our Shanghai factory. While the industry is facing near term macroeconomic headwinds As market forecasts have weakened in some areas, demand for our advanced packaging technology remains strong And momentum strengthened during the Q3.

Growth in Advanced Packaging came in at 33% year on year, close to 80% of our business in the Q3. EMCOR continues executing on its strategy to leverage a leadership position In Advanced Packaging and its broad geographical footprint to capitalize on the industry megatrends of 5 gs, IoT, Automotive and High Performance Computing. Now let me review the dynamics in each end markets. Our communication business experienced significant growth in the 3rd quarter, driven by high volume ramps supporting the launch of premium tier 5 gs smart Communications revenue for the quarter increased 76% sequentially and 35% year on year. Although overall smartphone units are projected to be down this year, 5 gs units continue to proliferate.

Premium Tier 5 gs Phones are rich in silicon content and ongoing innovations continue to add functionality. Amkor supports a wide range of applications in multiple package formats throughout the phone, including devices for audio and power management, MEMS sensors, NAND memory and apps processors and modems In package and package technology. In addition, advanced system and package technology is deployed for RF devices, Display controllers and camera applications. With our advanced SIT platform for heterogeneous integration, we enable continuous innovation in form EMCOR's high volume manufacturing capability together with its broad technology portfolio are key enablers for growing our footprint in premium peer smartphones. Revenue within the consumer end market increased 31% sequentially and 14% year on year supported by new IT wearable product ramps.

We observe a trend of further miniaturization Together with lead customers, we further innovate our advanced SAP assembly and PES platform to incorporate these new requirements. We believe the IoT Wearables segments will continue to diversify and grow. To support future customer demands, We are expanding our footprint to Vietnam, which is expected to start high volume manufacturing in late 2023. Revenue within the automotive and industrial markets grew 6% sequentially and 13% year on year. We observe continued improvements in material lead times and anticipate a more balanced supply chain by the end of this year.

Market reports project Automotive Electronics to grow at mid teens CAGR over the next few years. EMCOR's 40 plus years of automotive experience, together with our advanced packaging leadership, global footprint and trusted partnership with leading automotive customers positions us well to capture growth from the acceleration of semiconductor content in cars. EMCOR works closely with LEAP customers both to develop innovative technologies and to support changes in geographical manufacturing footprints. We are expanding our capacity and technology portfolio for automotive solutions, notably in our factories In Europe and Japan, in support of regional supply chains for critical automotive semiconductors. Revenue from the computing end market increased 12% sequentially and 22% year on year.

Although the PC market is soft, we observe opportunities for growth driven by continued de verticalization And the growing adoption of an outsourced manufacturing supply chain. New fabless entrants and OEMs with in house silicon design, Together with the introduction of an ARM based architecture for PCs, laptops and tablets are expected to drive future growth. Furthermore, the introduction of AI and anticipated upgrades of data centers and networks require advanced year on year to a record $266,000,000 We have invested in broadening the scale and capability of our test services To our global factory footprint, multistage testing has become more important with the increasing complexity and cost of assembled products. Customers value our turnkey service to ensure quality, reliability and reduce cycle time. In the Q3, our manufacturing organization demonstrated great flexibility to ramp our Shanghai factory back to full capacity after the COVID lockdown in Q2 and to manage a record ramp in output from our Korea factory, supporting new products For premium tier smartphones and IoT wearable devices.

Geopolitical dynamics and COVID related disruptions continue to impact the semiconductor supply chain. Globally, our customers are evaluating their supply chain strategies to reduce risk and secure sustainable and cost effective manufacturing basis. We are working closely with our to adapt to these changing requirements. In Asia, our factory project in Vietnam is progressing as planned, And we are expanding in R and D and manufacturing capability in Japan to offer a secure supply chain for automotive, semiconductors and sensors. In Europe, we are investing in technology and capacity and are partnering with lead customers in our Portugal factory in support of a European automotive supply chain.

In the U. S, we see more interest from customers following the passage of the Chips and Science Act. We believe Amkor's broad geographical footprint is a key differentiator and positions us uniquely to support Our customers and benefit from these shifting global supply chain trends. While the U. S.

Export controls announced in early October are not focused on OSAT Operations, we expect regionalization trends may accelerate in response to these new U. S. Export controls. Now let me turn to our 4th quarter revenue outlook. After our record Q3, we expect Q4 revenue of $1,850,000,000 at the midpoint of guidance.

This would represent a year on year increase of 7%. The higher than seasonal Q4 sequential decline of 11% is primarily due to 3 factors. First, customers accelerating builds in the 3rd quarter taking advantage of better material availability in selected areas. 2nd, an impact of recently issued U. S.

Export controls estimated in the low single digits percent of And finally, softening in some areas of the market, reflecting inventory corrections by certain customers. 2nd half revenue is expected to increase 16% over prior year second half, with all end markets contributing to the growth. We expect that our strong position in advanced packaging and deep relationship with leading customers will moderate volatility throughout these near term macroeconomic events. Megan will now provide more detailed financial information.

Speaker 4

Thank you, Hill, and good afternoon, everyone. Amcor achieved record performance in the 3rd quarter, reaching 2 new milestones. 1, revenue crossed the $2,000,000,000 mark at $2,100,000,000 And 2, EPS is over $1 at 1 point Our outstanding top line and bottom line results are due to our leadership position in advanced packaging technology and Quality execution on high volume ramps of new products. Demand was better than expected, primarily due to strength in the communications market, supporting new launches of premium tier smartphones utilizing our advanced SiP technology and material availability allowing for upsides supporting customer demand. With Expanding content and market share gains, the communications market grew more than 30% over prior year Q3.

Gross margin for the Q3 was over 20%, the highest Q3 performance in over a decade, supported by high utilization across our factory footprint. We also set a new quarterly record for gross profit in Q3 at $421,000,000 Operating expenses came in lower than expected at $102,000,000 primarily due to timing of new product introductions, lower labor costs and favorable foreign currency rates. Operational excellence contributed to robust profitability and record quarterly operating income of $319,000,000 for the 3rd quarter. Operating income margin for the quarter was 15.3%. Q3 income tax expense came in lower than expected due to foreign currency exchange rate movements and a discrete income tax benefit related to changes in the valuation of certain deferred tax assets.

Net income for the quarter was $306,000,000 resulting in EPS of $1.24 both of which are new all time quarterly records. Q3 EBITDA was $481,000,000 and EBITDA margin was 23.1%. Overall, we are very pleased with our Q3 performance, including quarterly revenue records in all of our end markets. Our balance sheet remains solid and allows us to invest in advanced packaging technology to capitalize on the long term growth catalysts of 5 gs, IoT, Automotive and High Performance Computing. We ended Quarter with $932,000,000 of cash and short term investments and total liquidity of $1,600,000,000 Our total debt as of the end of the 3rd quarter is $1,100,000,000 and our debt to EBITDA ratio is 0.7 Slow down.

We have the financial strength to continue to expand our global footprint in response to customer demand. Construction on our new facility in Vietnam is progressing as planned, and we expect to be ready in late 2023 to support high volume manufacturing for lead customers. Vietnam is a strategic long term investment for Amkor as it will offer our customers an opportunity to diversify their global supply chain. Moving on to our 4th quarter outlook. We are expecting Q4 revenue between $1,800,000,000 $1,900,000,000 representing year on year growth of 7% and contributing to full year growth of around 15%, well above the semi industry growth estimates for 2022 of mid single digits.

Gross margin is expected to be between 16% and 18%. We expect operating Assuming continued strength in the U. S. Dollar, We expect our full year effective tax rate to be around 10% before discrete tax items. 4th quarter net income is expected to be between $150,000,000 $195,000,000 resulting in EPS of $0.60 to $0.80 Considering our 4th quarter guide, Our second half twenty twenty two estimated performance results in revenue growth of 16% and EPS expansion of around 20% compared to the prior year second half.

Our forecast for capital expenditures for the year is projected at $900,000,000 about 5% lower than the previous target. The update is due to timing of payment terms and delays in equipment delivery. Our plan to support long term growth is unchanged given the secular trends in the market. To strengthen our advanced packaging leadership position, Our investments are focused on increasing capacity and capability within technologies such as advanced SiP, flip chip, wafer level and test as well as associated investments in quality and factory automation. We are also selectively expanding our facilities in response to customer demand.

Our global footprint is a key differentiator for us and provide support for the development of regional supply chain. We see strong interest in Japan and Europe, which are attractive to many customers for introduction and ramp up of new technologies, notably for the automotive market. Looking ahead to 2023, we are monitoring macroeconomic uncertainty and working closely with our customers to manage changes in the demand environment. We are confident in our long term outlook as we do not see a change in the growth catalysts for Advanced Packaging in which Amcor maintains a leadership position. With that, we will now open the call up for your questions.

Operator?

Speaker 0

Thank you. And at this time, we will be conducting our question and answer session. Our first question comes from Randy Abrams with Credit Suisse. Please state your question.

Speaker 5

Hi. Thank you and good set of results. I wanted to ask just the first question on the Q3. You mentioned, I think, the better materials, which helped you Chip Moore, could you go through a couple of other factors? One just the impact of the China recovery or benefit from China recovery And how much of a headwind is that high base from Q3 to Q4 that you shipped some additional product in a catch And also how much of a factor are you seeing early builds this year for some of the key premium smartphones?

So it's a bit of a shift in seasonality earlier.

Speaker 3

Hi, Randy. This is Hjal. Let me start answering this question just to make sure that I understand well. So you're asking about the impact of the China recovery On the share bills in the 3rd quarter, correct Randy? Yes, that's right.

And then also

Speaker 5

the impact if you saw any Earlier shift of seasonality with the component availability where the premium you may have billed a bit earlier, So that might be affecting the Q4 compare?

Speaker 3

Yes. Let me start with the last part of your question, Shnevich earlier builds or the accelerated builds in the Q3 because of material availability, You saw that most notably in the communications segment, both on the iOS as well as on the Android side, Randy, and the availability was broadly, it was both components as well as some other materials, but that's made customers decide to pre build, also giving some other supply chain uncertainties later in the year. With respect to the China recoveries and the impact of the 3rd quarter, I mean, when we look to the Quarter on quarter improvement of revenue, Then we see about 25% of that being attributed to the recovery of our ATC factories And the rest is growth. So 70% 75% is growth, 25% is due to recovery.

Speaker 5

Hey, Gabe. There's still a good number on the core business. For the forward look on 4th quarter, If you could give a view just on the different applications, how you're seeing the trends by application? And then initial view For 2023 at this stage, like how you see your own business and how do you see the industry And the context with that just as we go into early part of the year, there's some calling for a Kind of cyclical correction downturns, if there's an additional view how you see Q1 versus seasonal?

Speaker 3

Well, let me start with the first part. I think that's the quarter on quarter revenue change. And then per application, we don't guide per application, but I can give you some high level impacts. I mean, The two segments where we see the most prominent changes are in communication And consumer outbound computing are less impacted than the quarter on quarter, and that's generally what we see. No.

Going into and this is from Q2, Q3 into Q4. Going into Q1, I mean, we don't guide Q1, I mean, there are multiple uncertainties still, and we're working closely with customers to understand their forecast and forecast changes. We watch also closely what the market is doing. So we don't share guidance yet in for Q1. Megan, do you have anything to add with respect to the quarter on quarter specifics?

Speaker 4

Hi, Randy. It's Megan. So I think Hill covered the color on the end markets well. And with respect to your question about 2023, Q1, as Hill mentioned, we're monitoring. We would say though for the full year 'twenty three, we would expect To continue to outgrow the semi market, I think you see that well for 'twenty two.

And then and the reason for that is our Position in support of advanced packaging where those needs are more diversified and we are less exposed in some of the areas of weakness.

Speaker 5

That's helpful. One follow-up question just on the gross margin. The sales delivered Quite a bit of upside. We still have good gross margin on historical perspective. But just to leverage, given the sales strength, I'm curious on the gross margin because also in Q4 with sales coming down, There's a few point lower gross margin.

Like traditionally at that revenue level, you could be a few points higher. So if there's mix impact or other factors Affecting the gross margin, we're just did fall a little bit short on the leverage.

Speaker 4

Sure. So with respect to Q3, we did have an increase in material content between Q2 and Q3. That product mix Change is what's causing, I would say, a more mild gross margin percentage. However, we did have very robust profitability with records Throughout gross profit dollars, operating income dollars and EPS for Q3. As it relates to the change for Q4, that sequential change between Q3 and Q4 having a decline in gross margin percentage is Truly around the reduction in utilization, that incremental margin is around 45%, which is what we typically guide with our financial model.

So there is no change in our structural costs. And I would also point to the full second half Given the significant outperformance in Q3 followed by more than seasonal decline in Q4 with some of those Accelerated builds mix shifting, the profit levels are expanding on a second half view compared to the prior year second half. So even with gross margin percentage decline, gross profit dollars, operating income dollars and even bottom line EPS is expanding around 20 And again, that's even with significant increase in the product mix shift to advanced SIP.

Speaker 5

That's helpful. Actually, sorry, I'll ask one maybe one two part follow-up. Just one clarification, the SIP, if you can give a framework how this year Looks like it will track relative to last year, because I think that's some of your mix impact. And then the other question I wanted to ask was on the CapEx. It sounds like a tool delay, just the nature of it because supply chain is improving a bit, Just where the delay is?

And then if there's initial view on the capital intensity for next year, if we should think with the push out, it would be that capital intensity plus $50,000,000 or you'll take into account business environment, so it might be actually a little bit of a lower capital intensity into next year.

Speaker 3

Okay. Let me start, Randy, with the I mean, SAP, certainly in the Q3, had significant growth also coming from Last quarter, no, we see year on year changes, let's say, close Close to 50% when it comes to year on year changes in our full SIP advanced SIP portfolio. So significant change, of which the change in both communication as well as consumer was We're driving the larger part of this growth. With respect to the capital intensity, is that answering your question, Randy?

Speaker 5

Yes, sorry. Yes, that is helpful. That close to 50% growth. So that explains a bit on the mix for the margin. And then the capital intensity, I guess, Megan

Speaker 4

Yes, sure. So Randy, the update to our guide of reducing $900,000,000 It's really around as we're fine tuning timing of payments and equipment delivery. As it relates Looking forward, we would still use a rule of thumb of 13% or so capital intensity. We will have our spend for Vietnam included in that. And of course, we'll take into account any sort of changes in the environment.

But at this time, I would say the rule of thumb of 13% is a good mark.

Speaker 0

Our next question comes from Hans Chung with D. A. Davidson. Please state your question.

Speaker 1

Hi. Thank you for taking my questions. So first, I want to touch base on the 4Q. I know you come in the China, there's some impact on China, the export restrict that I remember that's lowtomissingledig percent impact. And then should we think about that Just the average level going to 'twenty three, we will continue to see that kind of impact next year?

Speaker 3

Hans, hi, this is Hugh. Let me Try to answer that. We were still evaluating how that further develops. This is a judgment of So our the impact of the Q4 and the measures, the new measures of the restrictions are just being announced. We don't know whether we can recover this, but definitely in the Q4, it's a low single digit impact.

And There is an expectation that either it will continue at that level or we are able to recover that when it shifts that same business Yes, so to other customers.

Speaker 1

I see. And then regarding the inventory correction, How would you characterize the inventory level in the supply chain or at your customers? When do you think That correction could end. When do you think we can see the pattern, is that Q2, Q1 or even Later second

Speaker 3

half. Yes. That's a good question, Hans. We see the inventory and the industry being different in different parts of the market. If you take, for example, the automotive market, Then the larger part of that market, we see inventories still being slightly below the target level of some of the customers.

So it was characterized by that low. While in, for example, the communication markets, we see specifically inventory pockets In the low and mid range of Android smartphones, and that will take In our expectation, still 1 quarter, maybe 1 to 2 quarters to build to that inventory down. Now if we take the computing market, then in the PC market, we see similar trends that there is an inventory At the midrange to lower end PCs, we also expect that, that will, let's say, normalize towards Yes. The Q2 of 2023, all the parts of the compute markets that Cater for the data center and networking part of that market, you see inventories at the normal level. Now the consumer part of the market, we also see some inventory in some pockets.

But on the for example, on the IoT wearable market, Where we saw significant increase quarter on quarter from the second to the third quarter, we don't believe that there is a huge inventory buildup. So we see there a normal Sorry. So in summary, I think inventory is different in different segments of the market, but the Buckets in the market with high inventory, we expect that to normalize towards the Q2 of 2023.

Speaker 1

Got it. That's helpful. So, what are the utilization right now and then how is that trending? Yes, I suppose that trending down in Q4 and then just kind of curious like how what's the current utilization rate And then when do you think that could flatten out?

Speaker 3

Yes. Let me make some more comments on the utilization rates. I mean, we don't report that specifically, But some indications in the Q3, we were running at maximum utilization. There were Limited pockets, a bit slight underutilization, and that was specifically in our Japan factories. The remaining factories were running at full utilization.

Going into the Q4, we still see a high utilization rate, Some fallback in our Korea factories with respect to a correction in the communication markets In the consumer market, but the remaining factories will stay at very high utilization.

Speaker 1

Great. And then and I think last one. So as we are in the downturn of the industry cycle, So I was wondering like how variable are the cost structure in both COGS and OpEx?

Speaker 3

Can I leave that to Megan? Megan, the question is about the cost structure going forward when there is a Life correction in the industry.

Speaker 4

Yes, sure, Hans. So from our financial model, what you would Back on the behavior related to down cycles is typically we've Shared a 40% to 50% incremental margin and that's how you can measure the behavior of our fixed cost Structure with changes in revenue, that's what's playing out here in Q4. With respect to OpEx, OpEx is fairly Has been fairly well controlled even in the face of very significant revenue increases. So I would anticipate there would only be mild changes in OpEx associated with potentially lower employee compensation as it relates To a downturn cycle.

Speaker 0

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 3

Thank you. Let me recap the key messages. Amkor delivered record 3rd quarter results with revenue of 24% year on year growth and EPS of $1.24 Advanced Packaging revenue increased 33% year on year to around 80% of total quarterly revenue. We expect 4th quarter revenue of $1,850,000,000 resulting in a second half growth of 16% compared to second half twenty twenty one. M cost continues to execute on its 3 strategic pillars of leveraging our advanced packaging technology leadership, focusing on industry makeup trends and strengthening our broad geographical footprint.

Although we observe macroeconomic headwinds and weakened market forecasts in some areas, we believe the long term growth drivers For the semiconductor industry remain in place, and we are confident our strategic focus and leadership position in key semiconductor markets We'll continue to drive future growth. Thank you for joining the call today.

Speaker 0

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.