AMKR 2023Q4

Good day, ladies and gentlemen, and welcome to the Amkor Technology Fourth Quarter and Full Year 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 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 Jue, Head of Investor Relations. Ms. Jue, please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's Fourth Quarter and Full Year 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-K. And now I would like to turn the call over to Giel.

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. After a strong third quarter, Amkor delivered a solid fourth-quarter performance with revenue of $1.75 billion and EPS of $0.48, both at or above the high end of guidance. For the full year 2023, revenue of $6.5 billion was down 8% from the prior year, better than the double-digit semiconductor market decline. Weak macroeconomic conditions, excess inventory, and growing geopolitical tensions made 2023 a challenging year for Amkor, but several highlights also made it an exciting year. We celebrated our 55th anniversary and our 25th anniversary as a U.S.-listed public company. We had a grand opening of our new Vietnam factory, and we announced our plan for an advanced packaging and test facility in the United States. In this challenging business environment, Amkor elevated its leadership position by maintaining focus on its three strategic pillars. Our technology leadership in advanced packaging enabled us to gain market share in premium-tier smartphones and grow in 2.5D technology for AI products and in ADAS and power solutions for automotive. Our continued investments in a global manufacturing footprint offer our customers a secure and reliable semiconductor manufacturing supply chain. And our engagements in the secular growth markets strengthened by longstanding partnerships with lead customers in key markets like AI, high-performance computing, and automotive. Now let me review the dynamics in each of our end-markets. Revenue in our communication markets increased 4% for the full year 2023, setting a new annual record. This record was achieved despite overall smartphone units declining for the second year in a row. Market share gains within the iOS ecosystem drove this increase by utilizing our advanced SiP technology. Amkor holds a leading position throughout premium-tier smartphones built on our technology expertise and our proven track record as a trusted partner for co-developing innovative solutions and delivering operational excellence. For 2024, we expect a modest low-single-digit increase in phone units, with further improvement in the Android supply chain during the year. Revenue in our automotive and industrial business declined 4% for full year 2023. Advanced packaging revenue increased 6% year-on-year, driven by ADAS and industrial applications. We continue to see growth in high-power silicon carbide solutions for electric vehicles, utilizing our unique package capability in our Japan factory. Our qualified manufacturing lines in multiple geographies, such as Korea, Japan, and Portugal, as well as our broad technology portfolio ranging from advanced packaging to wire bond and power, are important differentiators. In 2023, we continued to invest in capacity and capability in this market, specifically for silicon carbide in our Japan and Portugal factories. Revenue from the computing end market decreased 11% year-on-year. The robust demand for leading-edge advanced packaging supporting AI and HPC applications partly offset the declines in PC and storage applications. Amkor leads the OSAT supply chain in 2.5D technology for AI devices, integrating high-bandwidth memory and ASIC on interposers, combined with module attach on substrates. To support the strong demand for AI devices, we doubled capacity exiting 2023, and with our planned investments coming online in the second quarter of 2024, we will have more than tripled our capacity compared to the second quarter of 2023. We expect the 2.5D demand will continue to increase in 2024, and we plan to support our customers in line with market growth. The consumer end market declined by 38% for the full year. Multiple headwinds including reduced consumer spending, excess inventory, and product changeovers in the IoT wearable market drove the decline. Within consumer, we support a broad portfolio of solutions for IoT wearables, as well as traditional consumer products. We are engaged in the next-generation products with our lead customers that will ramp production in the course of 2024. During the fourth quarter, our manufacturing organization focused on optimizing capacity for 2.5D technology in Korea and qualifying advanced SiP and memory technology in Vietnam. Geopolitical dynamics continue to impact the semiconductor supply chain. Globally, our customers are evaluating their supply-chain strategies to reduce risk and to secure a resilient and cost-effective manufacturing base. Amkor's broad geographic footprint is a key differentiator and positions us uniquely to support our customers and benefit from this shift in global supply chains. In Asia, we recently opened our new Vietnam manufacturing campus. In Japan, we are expanding R&D and manufacturing capability to offer a secure supply chain for automotive semiconductors, including silicon carbide. In Europe, we are partnering with lead customers and foundries to support a seamless European automotive supply chain with investments in technology for MEMS, wafer-level fan-out, flip chip, and silicon carbide powered devices in our Portugal factory. In the U.S., with the support of major customers and partners, we recently announced our plans to build an advanced packaging and test facility in Arizona. We are in discussion with the CHIPS Program Office on funding and continue to work on establishing a facility to provide high-volume, leading-edge technologies to support critical markets such as high-performance computing, automotive, and communications. Now let me turn to our first-quarter outlook. We expect the first quarter to be impacted by two main factors. First, after a record 2023, we expect a more than seasonal decline in our iOS-related business. Secondly, we observed continued weakness in the automotive and industrial end market due to inventory corrections, specifically for microcontrollers and ADAS applications. We expect first-quarter revenue of $1.35 billion. This represents a year-on-year decline of 8%. For the full year of 2024, we foresee the first half of the year to remain muted but anticipate a strong second-half recovery with growth higher than typical seasonality. Second-half accelerated growth is supported by additional 2.5D capacity coming online mid-year, a meaningful ramp of a new consumer wearable program, and further rebalancing of inventories within Android, automotive, memory, and PCs. We believe that the secular growth drivers for the semiconductor industry remain in place. And with our leading technology portfolio, scale, and global footprints, we are confident to accelerate as the industry exits the current cycle. With that, I will now turn the call over to Megan to provide more detailed financial information.

Thank you, Giel, and good afternoon, everyone. Fourth-quarter revenue of $1.75 billion was down 4% sequentially. This was slightly softer than historical seasonality and was driven by customer inventory control, particularly within the automotive and industrial and computing end markets. Although revenue declined sequentially, gross margin for the fourth quarter improved 40 basis points to 15.9%, as a result of continued disciplined cost management. Fourth-quarter gross profit was $279 million. Operating expenses for this quarter came in as expected at $120 million, and include onboarding costs to prepare our new Vietnam facility for high-volume manufacturing later this year. Operating income was $159 million, and operating income margin remained flat sequentially at 9.1%. Net income for the fourth quarter was $118 million, resulting in EPS of $0.48. Fourth-quarter EBITDA was $326 million and EBITDA margin was 18.6%. Now let's turn to our full-year 2023 performance. Revenue of $6.5 billion was down 8% year-on-year. While a down year, this is an outperformance compared to the semiconductor industry. Gross margin for the year was 14.5%, and gross profit was $943 million. During times of lower utilization, it is critical to manage our manufacturing costs to preserve profitability. Our disciplined approach resulted in a 10% reduction in both labor and other manufacturing costs. Net income for the year was $360 million, resulting in EPS of $1.46. EBITDA was $1.13 billion, and EBITDA margin was 17.4%. CapEx for 2023 was $749 million and 11.5% capital intensity. We reduced our equipment spend by approximately 45% from 2022, while continuing to invest in our global manufacturing footprint by completing construction of our new Vietnam facility. Our financial performance showed great resilience in 2023. We achieved a record free cash flow of $534 million reflecting efficient operations. Our financial strength allows us to continue to invest in our future growth, both in technology development to support leading-edge advanced packaging solutions, as well as our manufacturing footprint. Our geographically diversified portfolio of factories has proven to be a key differentiator in supporting regionalization of supply chains. We ended the year with $1.6 billion of cash and short-term investments and total liquidity of $2.3 billion. Our total debt as of the end of the year is $1.2 billion, and our debt-to-EBITDA ratio is 1.1 times. Moving on to our first-quarter outlook, we expect Q1 revenue of around $1.35 billion, representing a year-on-year decline of 8%. With the continued industry cycle and Q1 being the seasonally lowest quarter, profitability will be constrained given underutilization. And we expect gross margin to be between 11.5% and 14%. We expect Q1 operating expenses of around $130 million, which includes an annual reset of employee compensation levels as well as cost to support the onboarding of our new Vietnam factory. We anticipate a higher level of operating expense in the first half of 2024 until we begin high-volume manufacturing in Vietnam, projected for the second half of this year. We expect our full-year effective tax rate to be around 18%. First-quarter net income is expected to be between $8 million and $48 million, resulting in EPS of $0.03 to $0.19. Our CapEx forecast for 2024 is around $750 million. Our investments will focus on key advanced packaging technology solutions, specifically 2.5D in the computing market and advanced SiP supporting the consumer market, as well as the expansion of certain factories. We recently announced our plans to build an advanced packaging and test facility in the United States. We are in the early planning stages and do not expect a material CapEx spend for this project in 2024. We have a target to be ready for high-volume manufacturing in approximately two to three years. We are excited to see the technology advancements in the industry and believe the secular growth drivers are intact. Amkor is a technology leader with decades of experience. Our culture of operational excellence coupled with the broadest geographic footprint of all OSATs positions us well to support the world's leading semiconductor companies. With that, we will now open the call up for your questions.

Thank you. We will now begin our question-and-answer session. Our first question comes from Craig Ellis with B. Riley Securities. Please go ahead with your question.

Yeah. Thanks so much for taking the question. And Giel and Megan, congratulations on calendar '23's year of accomplishment. The first thing I wanted to do is just follow up on some of the communications comments regarding the above seasonal first-quarter decline. So, I think a lot of us have seen data points that the Android market is starting to recover; obviously, the iOS market faces significant calendar 1Q seasonality every year. Can you just go into a little bit more detail on what some of the puts and takes are inside of that segment and help us understand what's leading to the above seasonal decline?

Hello, Craig. Let me begin by addressing that, and later, Megan can provide additional details. In the first quarter, we are witnessing a few dynamics. Initially, this quarter follows a record-setting 2023, including a strong fourth quarter. We are observing a seasonal correction in the first quarter that is greater than usual, though it aligns with what we experienced in 2023. When looking at both iOS and Android, revenue from both systems has declined. Android's performance is consistent with expectations, with a slight increase in Q4, but there is still a decline in Q1. The iOS sector is experiencing a more significant seasonal correction. Several factors are contributing to this elevated seasonal decline in iOS. Primarily, we had ramped up production in Q4 for specific system-in-package programs, which is now being adjusted in Q1. Additionally, we are seeing some forecast adjustments in system-in-package programs due to product mix and improvements in operational yields on existing products. Overall, this leads to a more pronounced correction for communication in the first quarter.

That's very helpful, Giel. If I could move on and ask a longer-term question on the broader business, encouraging to hear the team's view for the second half of 2024 being above seasonal. But in light of what we're hearing from some analog bellwethers about murky visibility in areas like auto and industrial. Can you just list the three or four things that are giving you confidence that the second half can be above seasonal? And are you saying that your businesses across the different end markets will be out of the cyclical correction by then? Thank you.

Certainly. To address your first question, the corrections we are witnessing in the industrial and automotive sectors began in Q4 and are expected to extend into Q1. We anticipate that these corrections, particularly within the microcontroller segments of both markets, will persist through the first quarter and into the second quarter. However, discussions with our key customers indicate that we should see a more balanced inventory situation as we approach the second half of the year. With this balanced inventory, we expect to see a recovery in these sectors. It's important to note that we are not impacted by some of the more commoditized markets; our exposure in the wire bond and lead frame business is primarily focused on automotive microcontrollers.

So Craig, just to build on your second part of the question, as far as what gives us confidence for that higher-than-average second-half growth, we are going to have incremental capacity online to support the 2.5D business. So we're anticipating further growth there as well as ramping a consumer IoT product in the second half. Those are two other factors, coupled with Giel's comments. As far as our anticipation that we'll probably start to see further inventory balancing within memory and PC. And just to kind of give some context on the shape of 2024, we're expecting the second half could be as strong or stronger than 2022. So back in our peak 2022 growth year, the second half had 30% growth over the first half. And given the dynamics, we're seeing with the muted first half, we see the second half could be as strong or stronger.

That's a really helpful color. If I could sneak in one more. Appreciated the additional disclosure in the press release regarding cost of sales breakout with respect to gross margin and how we get to levels over the last couple of quarters and last couple of years. Megan, is that a disclosure plan to continue to provide? And as we think about those inputs, any change to how we think about the revenue upside and downside fall-through versus prior plus and minus 40% commentary. Thank you.

Sure. We expect to continue the disclosures we've included in our press release going forward. I would also say there has been no change in our expectations for a generally incremental flow-through of around 40%. Looking at the full year of 2023, this was slightly higher even in a down year. We faced pressure from increasing material costs, which affected the flow-through. However, there was still a significant reduction in manufacturing costs, which we consider as cost of goods sold, excluding materials, which fell by 6.6% despite an 8% decline in revenue. For Q1, we observed a strong flow-through of less than 40% on declining revenue, reflecting our disciplined cost management.

Thank you. And our next question comes from Randy Abrams with UBS. Please state your question.

Thank you for the question. I wanted to follow up on Craig's previous inquiry regarding the second half of the year. Specifically, I'm interested in the second quarter, as it seems that communications are coming in below seasonal averages. Do you anticipate that this trend will continue into the second quarter, or do you expect to see an improvement? Also, could you clarify what a typical second quarter looks like in terms of performance, and if you expect any seasonal recovery following a lower first quarter?

Okay, Randy. Let me try to give some color on these elements. First of all, related to the second-half communication business, there were identifiable reasons for higher-than-seasonal correction in the first quarter. We expect that our overall position in the market is strong. We have a very strong product pipeline and deep engagements with lead customers. So in the second half of this year, the new phone range is coming online there. We expect an above-average growth rate because we also see that the Android market will continue to recover in the course of this year. So overall, we are very confident with the second half of this year ramp for communications.

Randy, just as a reminder, our typical seasonality in the second quarter can range from flat to low single digits. It is pretty difficult to provide that level of precision for Q2. At this time, we are not offering guidance for the second quarter, which is why we discussed the shape of the first half and second half.

It seems to be still conservative considering the automotive industry, and typically we see the flagship in the second half, indicating it's more weighted toward that period. Regarding the CapEx, it appears to be at similar levels and remains less capital-intensive than in the past. The equipment ramped up quite a bit in 2023. How is the distribution between equipment and construction? Are ongoing projects in Vietnam or other locations continuing, or does the focus remain on equipment growth within the $750 million mix?

Yeah, that's a good observation, Randy. So for this year, CapEx spend, we see a shift from the initial profile that we have in 2023 with a large part of our CapEx related to facilities. Let's say, building our Vietnam factory. In 2024, it will be reversed. We will significantly increase our CapEx for equipment and reduce the CapEx for buildings and facilities. So in the second half, our CapEx will increase for equipment about 50% on a year-on-year basis, based on opportunities that we see in the market. Megan, any details?

Yeah. Randy, so hopefully that explains that the equipment portion of our CapEx spend is going to increase to approximately 50% in 2024. We do have some facility expansions that are more localized to Portugal as well as Taiwan and also planning to expand the Vietnam and an additional module. But generally, the shift, as Giel mentioned, will move more towards machinery and equipment, that will primarily be focused on advanced packaging. As we've mentioned, our 2.5D capacity coming online mid-year, as well as advanced SiP.

That's great. Regarding advanced packaging, I understand you plan to triple capacity by midyear. I'm interested in whether you're seeing any signs of needing to increase capacity further. Once that capacity is added, the lead times are quite lengthy. Do you anticipate any requirements for additional ramp-up beyond that tripling, or do you believe we're approaching demand levels and starting to stabilize?

Yeah. No, we have a fairly strong product pipeline and project pipeline for 2.5D, diversifying our customer base, but also our service portfolio going into the year. So we expect after the tripling of capacity that will come online by the end of the second quarter, that we will continue to invest in line with market demand. And like we normally do, we have all the elements in place to ramp up where needed and as needed without being too specific here at this point in time.

Thank you. Our next question comes from Ben Reitzes with Melius Research. Please state your question.

Hi, thanks. Giel and Megan, if the second half of the year performs like 2022, is there anything that could prevent you from achieving similar gross margins as that period in the second half of 2022 this year, assuming the performance is similar? Thank you.

Well, Ben, let me hand that question to Megan. Making one remark on that, I mean, I would say the fundamentals are still in place to get back to that level. Our profitability and gross margins are very much determined by the utilization of our lines. We're currently running at the utilization level, let's say, below 65%. With business coming online, we expect that could go back to 2022 levels when we were running at 85% utilization levels. But now, let me hand over to Megan to give her view.

Yeah. Hi, Ben. So as far as the second half ramp, we would expect to have our financial model of incremental flow through to gross margin and possibly expect a better flow through given we've been really tightening up during this cycle. So as far as Giel mentioned, it will depend on how the utilization progresses in that second half. I wouldn't expect that we would be at the same levels of utilization in the second half of '24 compared to the second half of '22.

Okay. I got it. I'm sorry to make you repeat it. Is there any update on your CHIPS Act pre-application and potential application? I recall you mentioning that you wouldn't invest heavily in the announced facility, but is there a likelihood of receiving news about how the CHIPS Act could assist with the domestic supply chain in the U.S.?

Yes. To address the second part of your question, we are making significant progress on the U.S. facility. We are specifically refining the factory design, coordinating with our customers on loading and technology needs, and collaborating with contractors to develop the building schedule. There is definitely ongoing activity in terms of execution. Regarding the CHIPS applications, we are advancing following the pre-application phase. We are in the process of finalizing the application and maintaining regular communication with the CHIPS representatives on a weekly or bi-weekly basis. Therefore, we anticipate submitting the full application soon.

Thank you. And our next question comes from Tom Diffely with D.A. Davidson. Please state your question.

Yes. Good afternoon, and thank you for taking my question. Giel, maybe first, when you look at 2024 below seasonal first half, above seasonal second half, where does that kind of leave the view for the full year on a year-over-year basis at this point?

Well, Tom, that is not so easy to answer because there's certainly in the first half, and Megan already alluded to that. We see still significant uncertainties. We don't guide for the second quarter, for example, but the second half of the year we clearly see significant opportunities for further ramp-up. Megan already gave them. We have 2.5D capacity coming online with a full pipeline of products. Also, there we have a new customer for the share-on-wafer portfolio. We have a meaningful ramp for new IoT wearable programs in the second half, and we definitely expect that Android, memory, PC, and automotive will be back on stream in the second half of this year. So to quantify that and to give a full-year outlook, I mean, in general, we are confident with our product portfolio and customer engagements that we should, let's say, grow with or above the market.

Okay. That's helpful. And then when you look at what's driving the weakness in the first quarter between iOS and the automotive inventory, did anything change over the last month or two? Anything gotten worse or is this kind of the view you've had for a little bit here coming into the new year?

I mean, at the end of the year, in general, I think that's the end of the first ramp-up in the iOS system; you generally see that stock is taken on the performance. So there are always some corrections. So the corrections may be a little bit higher than normal seasonality. But I already indicated earlier that it's not in the same order of magnitude as in the first quarter of 2023. So nothing extraordinary from our perspective.

And just to give some color, Tom, on automotive specifically, what we experienced in Q4, I would say, the order of magnitude is what we're seeing kind of going into Q1. So we haven't seen anything, I would say, recently that suggested it's deeper; we saw this coming in Q4.

Yeah.

Okay. Megan, could you provide a few more specifics on what led to the cost savings and management you mentioned earlier?

Sure. So as far as our approach to cost management, especially in times of temporary declines that we're experiencing now, it's very much ensuring that we don't structurally change such that we're not able to support significant ramps, whether that's seasonal ramps or coming out of this cycle where we want to be ready to capture that future growth. So the types of programs centered around our labor cost are very intentional as far as monitoring overtime and ensuring in certain locations where appropriate, we can extend furloughs to manage that cost. On the other manufacturing costs, there is strict work happening in areas such as energy usage, as well as monitoring repairs, maintenance, and supplies, such that we're being very prudent without sacrificing quality.

Okay. Thanks. Maybe just the last question. Are you guys getting at the atmospheric river coming your way or is that not a…

Okay, look, we're holding. We don't have any windows here, so we can't look outside, but thanks for the warning.

Thank you. Our next question comes from Craig Ellis with B. Riley Securities. Please state your question.

Yes. Thank you very much for taking the follow-up question. I just wanted to try to connect some dots and clarify a few comments that I heard so repeatedly there were comments on expecting strength later this year as 2.5D capacity opens up, and I'm interpreting that as more server GPU-related. And then, Giel, I think you mentioned that part of the expectation for the back half of the year is more of a recovery in PCs. And so I really wanted to dig into the PC comment. Is that PC comment something that you see as being driven more cyclically, which is what we've seen in much of the market, or is it really something related to more AI-automated PCs that have been discussed for the last couple of quarters by folks like Dell and others, that might have different packaging types that would stretch capabilities and needs into the 2.5D realm? Any clarification there would be appreciated.

We anticipate a recovery in the second half of the year on the PC front, particularly impacting Amkor, mainly for ARM-based PCs and peripheral devices for x86-based PCs. There's also a memory aspect to this. We recognize several components that we package, assemble, and test for PCs, but the most significant change will likely be in ARM-based PCs.

Got it. Makes sense. Thank you.

Thank you. And our next question comes from Joe Moore with Morgan Stanley. Please state your question.

Great. Thank you. In terms of the HPC AI part of the business, I know there were some news recently that there might be a third supplier of the advanced packaging there. Can you just talk about whether that has any impact on you? And just, is there a market share assumption that's kind of underlying your expectations there?

Hi, Joe. Regarding the market, I believe we are experiencing an imbalance where demand exceeds capacity, with various players introducing additional capacity. I am not sure which new source you are referencing, but I can confirm that our customer base for 2.5D packaging is expanding. We expect two more customers to begin ramping up by the end of this year. Additionally, in the second quarter, we will start our on-substrate business with a new customer, which is expected to contribute significantly to our revenue in the latter half of the year. Many factors will drive growth during this period. It is a dynamic landscape, but there seems to be a general agreement that demand and supply will remain unbalanced for an extended timeframe.

Great. Thank you very much.

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.

Okay. Well, let me recap the key messages here. After a strong third quarter, Amkor delivered solid fourth-quarter performance with revenue of $1.75 billion, above the high-end of guidance. For full-year 2023, we met a cyclical downturn; Amkor outperformed the semiconductor industry. For the full year of 2024, we foresee the first half of the year to be muted but anticipate a strong second half with growth higher than typical seasonality, driven by expanding AI engagements, a new consumer wearable program, and further rebalancing of inventory within Android, automotive, memory, and PCs. Amkor has continued to elevate its leadership position by executing on its three strategic pillars: advancing our technology leadership, expanding our broad geographic footprint, and strengthening engagements with lead customers in growth markets. Thank you for joining the call today.

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