AMKR 2023Q3

Good day, ladies and gentlemen, and welcome to the Amkor Technology Third 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 speakers' remarks, we will conduct the 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 third 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 US 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. And now, I'll turn the call over to Giel.

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. Amkor delivered solid results in the third quarter with both revenue and profitability at the high end of guidance. Revenue of $1.82 billion was up 25% sequentially, driven by the growth in advanced packaging, supporting the launch of premium tier smartphones. Year-to-date, revenue of $4.8 billion was down 8% versus prior year, reflecting strong outperformance compared to an estimated semiconductor industry decline of over 15% in that same period. Although we observe improvements in certain areas like smartphones and PCs, overall macroeconomic conditions continue to dampen end market demand and inventory levels remain elevated in some markets. Looking forward, we remain confident that the secular growth drivers for the industry remain in place and that Amkor is well positioned to outperform the industry with our strategic focus on advanced packaging and our broad geographic footprint. Now let me review the dynamics in each of our end markets. Revenue within our communication end market has remained strong throughout this industry cycle, despite overall smartphone units projected to decline for the second year in a row. Third quarter revenue set a new record, crossing the $1 billion mark with a sequential growth of 69% and a year-on-year growth of 3%. 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. Our advanced packaging technology supports a wide range of applications and functionality throughout the phone. With our advanced SiP technology for heterogeneous integration, we enable continuous innovation in form factor, functionality and performance. Devices supporting 5G connectivity, RF, camera applications, touch and display controllers, memory and sensors, utilize advanced SiP technology, which drove the communication revenue to new record levels. Amkor’s broad technology portfolio, scale and focus on operational excellence are key drivers for further growing our footprint in premium tier smartphones. Overall, revenue from the automotive and industrial end market was flat sequentially as well as year-to-date. But year-to-date revenue for advanced packaging in this market is up 15% versus the same period last year. Although we have observed some near-term variability in certain applications with ongoing inventory control measures by certain customers, we expect that the trend of increasing semiconductor content per car will continue. Advanced driver assistance systems generate growth in multiple applications, from cameras and high-performance processors to sensors like radar and LiDAR. Growth in the EV segment is leading innovation in electrification, especially with the introduction of wide band gap materials like silicon carbide and gallium nitride. These materials enable improvements in power efficiency and charging infrastructure. As the leading automotive OSAT, we are strategically expanding our capacity and technology base for automotive solutions, notably in our factories in Europe, Japan and Korea, in support of regional supply chains for critical automotive semiconductors. In these regions, we have built a pipeline for future growth by partnering with lead customers for new applications utilizing advanced technology portfolio. Mixed near-term dynamics impacted our revenue in the computing end market, resulting in a sequential decline of 14%. Strong demand for leading edge advanced packaging technology supporting high-performance computing devices for AI and other data center applications was offset by product lifecycle changeovers and excess inventory corrections in more mature computing segments. Amkor is leading the OSAT supply chain with a deployment of 2.5D technologies, integrating high bandwidth memory and ASIC on interposer, combined with module attach on substrates. To support the strong demand now and in the future, we are optimizing line utilization and expect capacity to double by the end of the year. And with our planned investments coming online by Q2 next year, we will have more than tripled our capacity compared to the second quarter of this year. Amkor is well positioned to capitalize on opportunities in the computing market with our broad advanced packaging portfolio and established relationship with lead customers and foundries. Revenue within the consumer end market remains stable sequentially. The headwinds impacting this market continue to dampen demand. Reduced consumer spending, excess inventory, and product lifecycle changeovers in the IoT wearable market are still holding back a full recovery. Beyond this cycle, we expect the IoT wearable market will diversify and grow, and we are expanding capacity and investing in our advanced SiP technology to drive manufacturing scale and innovation. We are engaged with multiple customers across a diverse set of products ranging from audio devices, smartwatches, and the emerging AR VR experience. Within our new Vietnam location, we are qualifying new advanced SiP consumer products that we expect to ramp to high volume in the second half of 2024. In the third quarter, our manufacturing organization demonstrated operational excellence and supply reliability to support the significant advanced packaging ramp within premium tier smartphones. Geopolitical dynamics continue to impact the semiconductor supply chain. With our broad geographic footprint across multiple countries in Asia and in Europe, Amkor is uniquely positioned to support our customers with reliable and cost-effective manufacturing. We are actively working with our customers on programs that will support diversifying and de-risking their supply chains. In the US, we are progressing our discussions to establish an advanced packaging and test facility. We have submitted our pre-application for CHIPS funding and are actively working with customers and partners on long-term commitments to secure a US manufacturing supply chain. On October 11th, we held a grand opening ceremony for our Vietnam manufacturing site. The new campus further diversifies and strengthens our broad geographic footprint. And qualifications of new programs is progressing for advanced SiP and memory technology. Vietnam is an attractive location for our customers. We believe that the evolving local semiconductor ecosystem coupled with Amkor’s advanced packaging, scale and expertise, will deliver a cost-effective and reliable manufacturing location. Now let me turn to the fourth quarter outlook. With the ongoing uncertainties in the market, we are observing several customers taking a prudent position on inventory to close out the year. With this backdrop, we are expecting the fourth quarter to be softer and seasonal, with revenue of $1.675 billion at the midpoint of guidance. Although it is taking longer than anticipated to recover from this industry cycle, we believe that the secular growth drivers for the semiconductor industry remain in place. And with our leading technology portfolio, scale, and global footprint, Amkor is poised to accelerate as the market recovers. With that, I will now turn the call over to Megan to provide more detailed financial information.

Thank you, Giel, and good afternoon, everyone. Third quarter revenue of $1.82 billion was up 25% sequentially, primarily driven by advanced packaging, supporting the launch of premium tier smartphones. We achieved a notable highlight with communications growing to a quarterly record of over $1 billion. Given the increase in utilization and leverage in our financial model, our EPS more than doubled sequentially to $0.54. For the first three quarters of this year, Amkor's revenue is down 8% compared to 2022. Amkor's market share gains in communications, together with its diversified end market landscape and strategic focus on advanced packaging is mitigating cyclical variability and providing the resilience needed to perform better than the industry. Gross margin for the third quarter was 15.5%, and gross profit increased over 50% sequentially to $283 million. With effective cost discipline, manufacturing costs, defined as cost of goods sold less materials, only increased 3% sequentially, allowing for significant flow through to gross profit. Optimizing utilization is the key variable to improving profitability. Operating expenses for the third quarter came in as expected at $116 million. Operating income more than doubled sequentially to $167 million, and operating margin expanded nearly 400 basis points to 9.1%. Net income for the third quarter was $133 million, resulting in EPS of $0.54. Third quarter EBITDA was $333 million and EBITDA margin was 18.3%. 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 third quarter is $1.1 billion and our debt to EBITDA ratio is 0.9 times. Amkor has exercised cost and CapEx discipline during this cycle, and our strong balance sheet demonstrates financial strength. We continued to invest strategically in our global manufacturing footprint during the industry cycle, and we completed our new Vietnam factory on schedule. This state-of-the-art factory will support advanced packaging growth, offer our customers an alternative to diversify their global supply chain, and provide for capacity expansion when we exit the current cycle. Moving on to our fourth quarter outlook, we expect Q4 revenue to be $1.675 billion at the midpoint of guidance. We observe customers taking a cautious approach in Q4 to control inventory. Although we see improvement in some areas, overall macroeconomic conditions continue to dampen end market demand. We expect gross margin to be between 14% and 16%. We expect operating expenses to increase to around $120 million as we start to onboard our new Vietnam factory. We expect our full-year effective tax rate to be around 17%. Fourth quarter net income is expected to be between $80 million and $120 million, resulting in EPS of $0.32 to $0.49. Our full-year CapEx target remains at $750 million. We have chosen to continue to invest strategically through this cycle to expand our global manufacturing footprint and strengthen our technology leadership position in advanced packaging to build foundations for future growth. Amkor recently celebrated its 55th anniversary and 25th year as a public company by ringing the NASDAQ closing bell. We are proud of our rich history and what we have accomplished over the past five decades. Our scale and leadership position in the OSAT market allows us to bring enabling technology to the world's leading semiconductor company. With that, we will now open the call up for your question.

Thank you. We will now conduct our question-and-answer session. Our first question comes from Tom Diffely with D.A. Davidson. Please state your question.

Yes. Good afternoon. Thank you for the questions. First, I was curious if you could just compare a year ago fourth quarter to this upcoming fourth quarter by end markets to tell us where the relative 10% to 15% year-over-year weakness is.

Thanks, Tom, for the question. I can best refer to Megan to answer that. Megan, can you take this?

Sure. Hi, Tom. So just to give you some color on end market dynamics for what we're seeing in Q4. With respect to communications, while we are showing a sequential decline off of a record Q3, that communications now we're anticipating will be pretty much flat to the prior year Q4, so I would say holding very strong. And just a reminder, communications is, depending upon the quarter, can be 40% to 50% of our business. As it relates to the other markets, automotive, what we're expecting for Q4, well, that is expected to be down year-over-year. When we also look at the full year, we are still continuing to see an increase in advanced packaging. So I think that's the notable aspect with respect to automotive, that despite some of that near-term softness in automotive we are continuing to see strength in the advanced. From a computing perspective that's had some mixed dynamics with respect to Q4, again, down year-over-year. We are seeing for the full year strong in the data center and infrastructure. Where we really saw the most notable year-over-year was in the memory and storage component. And then last, consumer, that had the most significant year-over-year decline. That's two factors. One, that is being impacted, I would say, the most by the macroeconomic conditions, but also timing with respect to product lifecycle changeovers.

Okay, that's very helpful. So when you look at computing and consumer to the softer segments, how close do you think we're getting to a bottom here in terms of customers rationalizing their inventory levels.

Let me address that, Tom. Starting with computing, as Megan noted, we see two clear trends. First, in the data center and high-performance computing, particularly with AI products using over 2.5D technology, we're seeing significant growth each quarter, and we anticipate this trend to continue, benefiting our overall computing business. As for the rest of the computing market, it's hard to determine if we’re at the bottom yet, but we currently notice slight inventory corrections. However, we're optimistic about the overall computing segment for next year. In the consumer market, factors such as end-market demand and the recovery of the China market, along with macroeconomic conditions, play a significant role, making predictions challenging. The market remains quite uncertain, but with signs of improving consumer demand, we believe recovery is on the horizon. Inventory levels in the consumer sector are being addressed—though not perfectly balanced yet, they are definitely improving as we approach year-end, setting a solid foundation for growth next year.

Great. It sounded like from earlier comments that even though there's ebbs and flows in each of these markets, you continue to invest capital expansion to the high ends of each of these markets, is that correct?

Yes, that's correct, Tom. In the computing segment, we view it as a long-term growth market for Amkor. We have a strong position in differentiating technologies, such as 2.5D, and we have a roadmap for future technologies. Our customer portfolio is robust, so we will continue to invest in that technology as well as in capacity. Regarding consumer markets, specifically driven by consumer wearables, we plan to launch next-generation wearable products in our Vietnam factory next year, which we believe will provide a solid foundation for further growth.

Okay. And maybe just quickly on that wearables market, is that going to be new business for you or is that just the evolution from the prior generation to the new generation that you've done?

That specific product we're talking about is new, it's a new generation and it's also a new business for us. Business that we didn't have in 2023 and that we will have in 2024.

Great, And then, sorry to take too much of your time, but the capacity expansion in 2.5D, it sounds like that business is currently under a pretty heavy ramp, but it's not till the second quarter of 2024, where it gets to kind of 3 times of last year's level.

Yes. I mean, that's a continuous ramp in that line. Of course, we have existing capacity there Tom and by debottlenecking that capacity and optimization of the utilization of the line we are able to double capacity and outputs by the end of this year already, and then by further investments of incremental equipment, we share further plan to in total triple our capacity towards the second quarter of 2024.

Okay. And then when you look at the CapEx for the year, it sounds like you're maintaining the $750 million, but did the location of that spent change? Are you spending more on computing and less on other markets?

Not really, Tom. You have to keep in mind that in that CapEx for this year, a significant part of that CapEx was allocated for our Vietnam facility. On the CapEx allocated for equipment and equipment expansion, I think that we already allocated and that is as planned.

Great. Well, I appreciate your time today. Thank you for the questions.

Thank you.

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

Yes, thank you. The first question actually is following up on Tom's questions on the applications. I may have missed it, but could you discuss for auto, industrial, and mainstream just the outlook for those applications to continue the correction or start to show signs of life on more of the mainstream and mature auto and industrial products?

Yes, good question, Randy. Now let me try to give some color and then Megan later on give a little bit more detail here. In the automotive, we're clearly monitoring our position in advanced products in automotive because the emerging applications like ADAS, infotainment, in-car networking are all supported by advanced silicon in combination with advanced packaging. So there we see continued growth, I mean year-to-date growth in automotive advanced packaging was around 15% year-on-year. So that's a good signal that will continue to grow. On the more mature part of the automotive market, we clearly see that customers are very prudent on keeping inventory or maintaining inventory at an elevated level, certainly going into the end part of this year and we saw some corrections in specific areas. In our view, it's not that the inventory is extremely elevated, but it was more a prudent correction towards the end of the year. And we believe that going into next year, I think the overall supply chain for automotive is pretty much in balance.

Good. On the margins, I'm curious on the incremental fourth quarter, actually the sales are pulling back. It looks like the margin is holding up a bit again. Is there a mixed change just relative to other parts of the business or I think some of the efficiency measures on the non-material costs that held in third quarter, just if anything, relatively supporting the margin to hold up in fourth quarter.

Okay. Thanks, Randy. Megan can take that.

Yes, hi Randy. For Q4, even with a slight decline, the margin remains stable within our financial model, perhaps even slightly better. There's a change in product mix, but it's not significant. Additionally, there’s some benefit from currency fluctuations, but overall, our cost management is strong, and we are keeping manufacturing costs down despite the revenue drop.

To follow up on CapEx, I'm curious just how it ends the year for your overall CapEx and then the initial take for next year with the advanced capacity expansions if there will be much left. And for other investment areas in SiP, how do you see the CapEx for next year as well?

Okay, Megan.

Yes. Hi, Randy. So, from a CapEx perspective, now that we have our Q4 guide, you can see we've really maintained that low teens capital intensity approach. As a reminder, and Giel mentioned that significant portion of 2023 was dedicated to construction. So we did pull back significantly on the equipment and capability. As far as 2024 goes, it's too early for us to give a guide on 2024 CapEx. We would, as we have now continued to focus on the advanced packaging elements of our investment. And I would say just as a guideline, we would anticipate that we wouldn't go outside of our rule of thumb of low teens' capital intensity.

I want to follow up on the high-performance computing, expecting it to ramp up to double and possibly triple by the middle of next year. I have two questions. First, what are the profitability and returns for this advanced business? Second, with the foundry also doubling its capacity, how do you view the assurance and momentum once we reach a triple capacity? Are there trends in customer activity that suggest continued growth for this business?

Yes, Randy. I think we feel fairly comfortable that we can utilize the capacity that we bring in place. I mean, there we work with customers as well as with, for example, parties in the supply chain that provide elements like interposers to make sure that we have demand and supply lined up. I mean, there is also a broadening of our customer base in that technology. So we're fairly confident that into 2024, we can fill that capacity.

And the returns are typically higher for advanced projects due to their capital intensity. How do you view the return on investment and profitability? Is it still in the ramp-up phase and taking time to achieve scale? And is it becoming accretive as you progress?

Yes. I mean, we already have a capacity in place since 2017. So we're now in the third generation of products where we provide an end-to-end solution. So that means both population of the interposer, as well as the unsubstantiated part. If we invest in that technology, the majority of that equipment is fungible with a standard bumping line, so the utilization can be warranted. And even if there are swings on the 2.5D side, we believe that since the fungibility of the equipment, we can utilize that with a very solid return on investment in the individual equipment. So it is broadly fungible and you could label it as investment in wafer level capacities in a broader sense of the word.

And one final question on it. The interposer is all been silicon, but the industry is looking at trying to find a bit less expensive or different options. Do you see much interest in activity for redistribution interposer? And would that be a value shift or opportunity? And are you investing toward that if you're seeing that trend?

We are noticing a shift from silicon interposers to RDL level interposers. We are collaborating with several customers on initial pilot production for this technology. Overall, the industry tends to be conservative. As interposer-based technologies mature, achieving high yield levels is crucial, particularly because high bandwidth memory and expensive silicon require these high yields, which involves a significant learning curve. On the positive side, RDL-based technology is on the rise and we are making preparations for it. Moreover, the capacity we currently have is largely interchangeable between RDL and interposer-based technology.

Okay. Great. Thanks Giel and Megan.

Thank you.

Our next question comes from Steve Barger with KeyBank Capital Markets. Please state your question.

Hey, thanks. I'm not as familiar with Amkor, so I appreciate you letting me ask a question. And I'm not looking for near-term guidance, like meaning, this quarter of 2024, but can you talk about how you see longer-term growth rates for advanced packaging, individually across your smartphone exposure, your automotive business and then maybe AI?

Yeah, let me try to give you a bit of color there, Steve. I mean, we believe that the markets that we're serving and catering for, specifically for advanced packaging, will grow at an above average rate if we compare that to regular semiconductor growth rates expected. A couple of key drivers there. For Amkor specifically, I think if we take our core strategic pillars, it is diversification of our supply chain where we support customers with semiconductor supply chains in jurisdictions where they like to be, like for example in Europe supporting the European automotive industry or in Japan or now for example in Vietnam where we offer customers an alternative supply chain vis-a-vis their China manufacturing. That will continue. We believe that Amkor is better positioned than the industry there and that will drive incremental growth. There's also growth in advanced packaging because the growth drivers in the industry, be it 5G or 6G, automotive, IoT or high performance computing, all that growth will be supported by advanced packaging. And there we are positioned as a leader. We're engaged with the leaders in that industry, and we believe that will drive growth going forward. And an additional element there is that the relative outsource potential of the industry volumes is increasing. So where companies in the past, for example, in automotive to a large extent were vertically integrated, we see that for advanced packaging, more and more outsourcing takes place, both on the silicon side, as well as on the packaging side. So increased outsourcing, solid geopolitical footprints, and that combined with engaged in the lead segments of the market will drive growth for Amkor.

I appreciate that detail. And just to follow up, I think people expect very high growth rates for advanced packaging around AI for obvious reasons. But will packaging content gains in smartphone and auto result in growth rates that can match that, or how would you rank those kind of relative to each other?

In the high-end sector of smartphones, particularly in the premium tier, we continue to witness considerable innovation. While you mentioned AI adoption in data centers, it's also important to highlight that we anticipate similar advancements in edge devices like smartphones, leading to enhanced AI functionalities. This will pave the way for a new generation of application processors, which will further drive advancements in packaging technology. As a result, there will be a positive ripple effect on edge devices such as smartphones.

And same question for auto, do you expect that the content gains there will drive significantly above average growth relative to the semi cycle itself?

Yes, I mean we believe that automotive actually from our analysis and that's also referring to industry data, is that the automotive semiconductor market is the fastest growing market going forward in the next couple of years. We're well positioned there and if you take applications like ADAS, in-car networking, connectivity that drives crowds and not only on the processing side but also on the sensor side for example. And that helps the automotive market moving forward. And on top of that, we see a proliferation of these features from, let's say, high-end part of the automotive market into the more mainstream mid-segment and low segment of the market, because multiple of these features are becoming mandatory to be deployed in the car industry.

That's great and just one last one for me. When you talk about an AI-enabled smartphone or an edge smartphone, what's the timing of something like that? Is that 2024, 2025, 2026?

I can only refer to the recent announcement of the largest smartphone chip company in the US. You will see that the next generation of high-end processors already includes an AI core in their devices. We expect this functionality to enter smartphones around 2024 to 2025.

That's great. Thanks very much for the time.

Okay. Thanks, Steve.

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

Let me recap the key messages. We delivered solid third quarter results at the high end of guidance with revenue growing 25% sequentially to $1.82 billion and EPS more than doubling to $0.54. We are expecting fourth quarter revenue of $1.675 billion at the midpoint of guidance. Through this cycle, Amkor continued to invest in a diversified, large-scale manufacturing base to support, secure and reliable global semiconductor supply chain. In August, Amkor had the opportunity to ring the NASDAQ closing bell in celebration of the company's legacy and success. We celebrated two significant milestones, our 55th anniversary and our 25th anniversary as a publicly traded company. With our leadership in advanced packaging, our broad geographic footprint, and diversified exposure to industry mega trends, we are poised to outperform the semiconductor market and accelerate out of this cycle. Thank you for joining the call today.

Thank you. We conclude today's conference. All parties may now disconnect. Have a good day. Thank you.