AMKR 2022Q2

Good day, ladies and gentlemen, and welcome to the Amkor Technology Second Quarter 2022 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 second quarter 2022 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 other 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 Giel.

Thanks, Jennifer. Good afternoon, everyone. And thank you for joining the call today. Amkor delivered record second quarter revenue of $1.5 billion and EPS of $0.51. Demand for advanced packaging remained strong and drove our revenue in the automotive and industrial market to 16% year-on-year growth and then new records. Revenue increased 14% year-on-year in the first half, and advanced packaging grew 18%, despite the COVID-19 lockdown in our Shanghai factory. While the industry is facing market economic headwinds and market forecasts have weakened in some areas, we continue to see robust demand for our services, notably for advanced packaging. Amkor's strategic focus and leadership position in advanced packaging enable us to leverage the growth catalyst in 5G premium smartphones, automotive electronics, high performance computing, and IoT. Now let me review the dynamics in our end markets. In the first half of this year, our communication business grew 10% compared to the first half of last year. Although overall forecast for smartphone units have weakened to a mid single-digit year-on-year decline, 5G unit volume is expected to grow and reach an estimated 50% penetration this year, up from around 5% in 2021. Semiconductor content for premium tier 5G phones continues to increase. And with our leading position in this market, we expect further growth through this transition to 5G. The density and size advantages of our proven package on package technology for high-end processes and modems and the SiP technology for integration of RF sensors and display components positions us well to capture this growth. Solid performance in the automotive and industrial market drove first half growth of 16% versus last year. Although material constraints throughout the automotive supply chain persist, we observe improvement in lead times and anticipate a more balanced supply chain by the end of this year. We expect the automotive semiconductor markets to outgrow the overall industry. Every semiconductor content per car is expected to increase 50% by 2025 from around $500 in 2020 up to $750 per car in 2025. Market forecast shows mid-teens CAGR over the next several years, driven by adoption of ADAS, electrification, infotainment, and telematics. These new and expanding features require the use of advanced packaging to obtain the required performance, quality and reliability needed in the automotive industry. As the leading automotive OSET with a global manufacturing footprint and advanced packaging solutions throughout the vehicle, we are well-positioned to profit from this market growth. Amkor's 40-plus year track record as a trusted partner for leading automotive customers has built a solid foundation to enable technology innovations and to support a reliable automotive supply chain. Continued strong momentum in the computing market drove revenue for the first half up by 27% compared to the first half of 2021. This robust growth was driven by data centers, infrastructure and PCs. In data centers, the introduction of AI is driving investments in high-performance computing, utilizing advanced packaging technology. We see similar technology requirements in wire and wireless infrastructure markets, notably in support of 5G infrastructure. Although the PC market is softening, the trend to arm-based PC architectures opens new business opportunities for Amkor. Besides the technology shift in the PC market, we observe a continued trend towards an outsourced semiconductor supply chain, with the big data producing companies taking an active role in developing key semiconductors for hyperscale data centers. These companies tend to utilize a fully outsourced supply chain and are partnering with foundries and OSET like Amkor to accelerate innovation. With our broad advanced packaging portfolio and established relationships with leading customers and foundries, we are well-positioned to capitalize on opportunities in these growing computing applications and we continue to invest in advanced technology and manufacturing scale for this market. Our consumer business increased 8% in the first half supported by strength in traditional consumer products and a broad portfolio in IoT wearables. Our advanced SiP assembly and test platform offers a complete turnkey solution for the IT wearable market by enabling high levels of integration in a single SiP module with a small form factor. IoT wearables continue to be an important driver for growth. Although we expect that this emerging product category is more prone to quarterly variability due to supply constraints and varying product life cycles. With an advancing digital economy and increased proliferation of connected wearable devices, Amkor has the technology, scale and expertise to support this trend. We continue to invest in our test business to broaden the scope, scale and capability of our test services. With increasing complexity and cost of our assembled products, multi-stage testing becomes an important part of our test portfolio. Amkor offers customers a broad range of test solutions from wafer probe and final test to system-level test to ensure quality and reliability of the final product. Our ability to support full turnkey services from wafer fab to final product shipment reduces cycle time and customer resources to manage each individual service. Our global manufacturing organization continued to demonstrate Amkor's commitment to operational excellence in support of our customers. Our QualityFIRST program is widely deployed in the organization and close collaboration with our supply chain partners further improves supply reliability. In the supply chain, we observe improvements in lead times of substrates, lead frames and components, and we expect a more balanced supply chain towards the end of the year. The mandated COVID-19 lockdown of our Shanghai factory requires the utmost flexibility of the team to return to normal output levels in the second quarter. Our team was focused on supporting our people and keeping them safe, while closely cooperating with local government and customers to minimize the impact. Now, let me turn to our third quarter revenue outlook. Although market forecasts have weakened in some areas, we are expecting a strong third quarter with revenue of $1.93 billion at the midpoint of our guidance. This would represent a sequential increase of 28% and a year-on-year increase of 15%. We expect solid demand across all end markets, especially driven by new product ramps in support of 5G premium tier phone models and the continued strength in computing, automotive and consumer markets.

Thank you, Giel and good afternoon, everyone. Amkor delivered strong financial results with record second quarter revenue of $1.5 billion and solid bottom line EPS of $0.51. Factory utilization, excluding Shanghai, remained high with revenue exceeding historical seasonal levels. First half revenue increased 14% versus first half 2021, a strong start to the year. All of our end markets are also showing robust first half growth, with most growing double-digits compared to the prior year. Our technology leadership position and focused execution drove first half revenue for advanced products up 18%, representing approximately 70% of our business. Our Shanghai factory returned to normal output levels late in the second half of the quarter. Regulatory approval to resume production was received later than expected, and therefore, the revenue impact for the second quarter was more than we estimated in May. We worked closely with our customers to mitigate the impact. In addition, upside demand, notably for advanced SiP, supporting the communications and consumer end markets, resulted in Q2 revenue within 1% of our midpoint. Gross margin for the second quarter was 16.6%, primarily due to underutilization of our Shanghai factory and related incremental costs. Operating expenses for the quarter were less than expected at $106 million, benefiting from lower labor costs, favorable foreign currency movements and timing of new product introductions. Operating income margin for the quarter was 9.5%. Net income for the quarter was $125 million, resulting in EPS of $0.51. First half EPS of $1.20 is 20% higher than the first half of last year. Q2 EBITDA was $302 million and EBITDA margin was 20%. Our balance sheet is solid. We ended the quarter with $1.1 billion of cash and short-term investments, and total liquidity of $1.8 billion. Our total debt as of the end of the second quarter is $1.1 billion, and our debt to EBITDA ratio is 0.8 times. Moving onto our third quarter outlook. We see continued solid demand into the third quarter, specifically in the communications market due to the launch of premium tier smartphones. We are expecting Q3 revenue between $1.88 billion and $1.98 billion. This represents a 28% sequential increase and a 15% year-over-year increase at the midpoint of guidance. Gross margin is expected to be between 19% and 21%, demonstrating the leverage in the financial model and an ability to execute a quick return to strong profitability. We expect Q3 operating expenses of around $110 million. We expect our full year effective tax rate to be around 15%. Q3 net income is expected to be between $200 million and $250 million, resulting in EPS of $0.82 to $1.02. Our forecast for capital expenditures for the year remains at $950 million to support broad-based long-term demand and the expansion of our global factory footprint to Vietnam. All year 2022 is tracking to be another record year, with double-digit growth expected for revenue, operating income, and EPS. All end markets are expected to set new annual records. We are monitoring macroeconomic and industry dynamics and the potential impact on near-term demand in the overall semi industry. We do not see a change in the secular trends and growth catalysts for advanced packaging, and we remain confident in our long-term outlook. Amkor holds a leading position in advanced packaging, and we expect that strategic focus to continue to drive long-term growth.

Thank you. We will now begin our question-and-answer session. Our first question comes from Randy Abrams with Credit Suisse. Please go ahead with your question.

Thank you, good morning and good evening. I would like to ask about the Shanghai operations, which resumed later than expected. Can you discuss the impact on the second quarter? Additionally, for the shipments, do you anticipate any of them will extend into the third quarter, with some potentially continuing into the fourth quarter? Please elaborate on how that affected revenue flow.

Hi, Randy. Good morning. Good afternoon. Let me start answering that question. For the Shanghai operation, Megan already indicated that the impact was slightly higher than we expected. And in our guidance, we indicated a number. We don't want to go further in specifics here. When it comes to the recovery of that business, part of that will be recovered in the third quarter. Part of it, we recovered by utilizing our global manufacturing footprint. We have a strong partnership with our customers that we support out of the factory in Shanghai. We have long-term agreements in place, so we expect that the majority of that business will be recovered later in the year.

Okay. Great. So, yeah, so it sounds like it's mostly third, but could some of it could continue into fourth quarter.

Correct.

If I could ask about the foundries and some of the backend companies indicating a potential correction in the fourth quarter and the first half of next year. It seems that your markets are quite strong, but are you expecting any slowdown, or do you anticipate that this strength will continue through the end of the year? Also, do you believe the first quarter will return to a more typical seasonal trend while considering some of the macroeconomic factors?

Well, Randy, guiding into the first quarter will be very difficult. That's what we normally don't do. With respect to this year, we expect a strong second half of this year. As indicated, third quarter will be strong and also we expect a solid fourth quarter. We see macroeconomic headwinds evolving into the first half of next year. Although we also see still a more balanced supply chain than the key growth drivers in the markets that we're supporting, be it 5G, automotive, electronics, high performance computing, and IoT. In our view, the fundamentals will continue to stay in place. There may be some corrections in some segments, but overall, I believe the foundation for the semiconductor industry and the growth drivers are still very strong going into next year.

Right. Good. And for the, like, you've seen a strong mix toward advanced packaging and highlighted that as a driver. For the mainstream business, how have you seen the wire bond where I think traditionally you've had more of an automotive industrial footprint there versus some of the OSETs that are a little more leveraged to consumer and see more correction? How do you see your utilization holding in? And are you seeing any rising level of competition from some of your peers facing a bit more under utilization?

Yes, for our wire bond and lead frame business, we will maintain our factory utilization levels for most of the year, similar to our advanced packaging operations. We have long-term agreements with our customers and a strong position in the automotive sector. In the wire bond segment, we are particularly seeing growth driven by automotive microcontrollers. While there are some inventory corrections in Japan, we anticipate ongoing strength in this business as we move into the fourth quarter and into next year. We may face increased competition in periods of high demand. The markets we serve in the wire bond and lead frame segments make it challenging for customers to switch providers. Given our long-term agreements, we believe we are in a strong position, and we do not focus on the commodity aspect of this business, which minimizes our risk.

Okay. I just had two other questions I wanted to ask. One about the gross margin, which might be more for Megan. It appeared that in the second quarter, variable material costs increased a few points as a percentage of sales. Was that change primarily due to SiP mix, or were there other factors such as higher material costs or higher substrate costs?

Hi, Randy.

Well, I think, Megan can answer that.

Yeah. So, Randy, with respect to the material content increasing in the second quarter, really two factors with the Shanghai impact that factory tended to have a lower material content than our average. And so that contributed to part of it. And the other is, as you've mentioned, the increase in advanced SiP for the quarter. The increase is not related to specifically increasing material costs, as we are able to pass that through to our customers.

Okay. And a follow-up on that with balance supply chain, does that include the high-end substrate like that? There's been talk of multi-year shortness in some of the high-end, but does it look like with some of the shifts in the PC market by next year and some of the efforts you're making, you'll be kind of in balance, or do you see constraints there continuing on?

Yes, specifically regarding high-end substrate materials, that's a valid point, Randy. We are experiencing a continued shortage of ABF substrates heading into next year, particularly for the computing market and certain segments of the automotive market. While there are improvements in the supply chain for the lower-end substrates, ABF substrates will remain in short supply, despite additional capacity becoming available. We anticipate that some of the capacity in the PC market may be reallocated to other segments. Therefore, corrections in the PC market could provide some relief in other areas.

Okay. Regarding the chips act and the recent actions by Congress, I'd like to know how you're approaching expansion. You've shown interest in expanding capacities in the U.S. Additionally, how do you see this affecting your financials, particularly in terms of capital expenditures and research and development, as well as potential benefits from tax credits related to your investments?

Let me share the answer here, and then maybe Megan can provide more details on the tax incentives. First of all, we're very happy that the chips act was approved. We see this as an important milestone in supporting the U.S. supply chain. Amkor is uniquely positioned to support that. For a while now, we have been evaluating the best scenarios to engage in an expanding U.S. supply chain. We are working with different partners and direct customers in the supply chain to determine the best way to support the local supply chain. We see this as an opportunity, although the specifics of how the financials will work out are still to be decided. Megan, can you address the tax incentive part?

Yeah. Sure. So, Randy, it's just too early to tell what that tax incentive that's included, how that would impact Amkor specifically. So, we're monitoring that and to the extent we have updates, we'll include that in our upcoming guidance.

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

Yes. Good afternoon. And thank you for taking my questions. First question is revolving around capital spending. Sounds like you're on plan here for 950 this year. I'm curious what the linear it is of adding the capacity through this year and when you see the impact of this on the balance sheet.

Okay, let me start off. I think our capital expenditure plan is still aimed at 950 million for the year. It's important to note that 100 million of that 950 is allocated for our new facility in Vietnam. We expect a significant increase in activity in the second half of the year. A considerable portion of the capacity set aside for equipment expansion is already becoming available for the ramp up in the third and fourth quarters, which will impact the balance sheet. I'm not sure about the accounting specifics, but Megan might be able to provide more details, likely in the latter half of this year.

Yeah. Sure. Tom, I can add to that. I would say Q3 is the peak adding to the balance sheet as far as supporting the Q3 surge. But Giel mentioned it's going to be second half weighted specifically as it relates to our Vietnam activities. Those are going to be mainly concentrated in the fourth quarter.

Okay. Great. Very helpful. And just in general, is there a rule of thumb where dollar CapEx gives you a dollar per year revenue or $0.50 per year revenue? Or how do you view capital spending on a holistic basis?

Megan, can you answer that question?

Yeah. Tom, no specific rule of thumb at this point. I think it's tricky given the different dynamics specifically with material content changes to be able to have kind of a guideline for the capital spend.

Okay. And then final capital spending question, how fungible is the capacity between the different end markets?

Tom, let me try to answer that question. Fungibility for Amkor is very important, and we invested significantly over the last couple of years to assure that the capacity that we install is fungible. Not everything is, of course, fungible. If we take test equipment, which is a large part of our investment, generally we buy industry standard platforms, and they are fungible between business with customers. When it comes to assembly equipment, of course, in the specific technology areas, the capacity is fungible. So, if we talk about SiP and SiP lines, these pieces of equipment are fungible. If we talk about flip chip, these are fungible and wafer-level packaging is also fungible across markets. So, there are generally some dedications with respect to technology areas.

Okay. No, very helpful. And then, moving over to the end markets, a lot of the companies out there are seeing some softness in consumer and mobility. You guys are not seeing that. And I'm curious, when you look at the strength in the third quarter, do you think that disparity is driven by share gains in your part? Or is it just the complexity of the chips this year around such that it drives revenue growth, even if the units aren't growing that high?

Let me start by commenting on the consumer market. Our position in the consumer market is focused on wearable IoT devices as well as the traditional consumer market. We specifically see strong growth in the wearable categories in the second half of this year. This gives us confidence for further growth. As for the mobility market, I am not entirely sure. Can you provide an example of where you are seeing weakness in the mobility market, such as in automotive?

Yeah. I think it was more driven by the softness in unit growth from advanced handsets, more than anything else.

Yes. I think on the mobility market, if you talk about the smartphone market, indeed, I think on a global volume basis, we expect a mid single-digit decline now. Amkor is very much positioned towards the higher end premium tier smartphones. There is still strength in that market, specifically when we talk about the transition into 5G premium tier smartphones. So although the overall market is declining, we see the 5G unit volume increasing because last year, there was about 35% of the market was 5G. This year it is expected to be 50%. So, there's an increase in 5G and the premium tier market continues to stay strong on a global basis. So, with our position in that premium tier segment of the market, we see continued strength.

Okay. Great. It’s good to hear. For my final question regarding the automotive sector, could you elaborate on the primary near-term driver? Is it primarily driven by the increasing number of chips in traditional cars, or is the growth more influenced by the expanding EV market? Additionally, which of these segments do you believe will be the more significant long-term driver?

Yes. That's a good point. I mean, we see driver for growth specifically this year on the automotive, the car unit volume this year. There's a digit increase so that drives growth. And on top of that, we see the penetration of features like driver assistance features, like ADAS, telematics, digital displays, proliferating deeper into that market. So, the semiconductor content per car is significantly increasing, and we are expecting that to continue. And this goes for both EVs, as well as combustion engine cars. On the EV side, there's an incremental semiconductor content that's increasing, and that relates to the electrical control of the transmission. So, there's a lot of, for example, power electronics there, power modules that increase transition from Silicon into Silicon carbide into Silicon nitride. We also see that as a good driver for Amkor. We hold a very strong position in the Silicon carbide assembly and test market. So, we believe that on the EV side our incremental growth drivers on top of the electrification of that I mentioned before are across the board for the automotive market. Does that answer your question, Tom?

Yeah. No, absolutely. And thank you both for your time today.

Thank you. Our next question comes from Charles Shi with Needham and Company. Please state your question.

Hi. Good afternoon Giel, Megan. Thank you for allowing me to ask a question. Giel, I want to go back to your comment about automotive semiconductor content per car. You talked about 50% growth of content, I believe you said 2025 or 2026, from 2020. Wanna try to ask you to help us, how to reconcile your comment with what STMicroelectronics said back in May. They basically said in 2022, they are seeing automotive semiconductor TAM expanded 50%, but compared to 2019 level, but the auto production, as you also know that 2022 is not so different from 2019. So, obviously, their number seems to be a lot more aggressive than yours. And how do I reconcile the two views here? Maybe both of you are right, but I would like to hear your thought. Thank you.

Good point, Charles. Good afternoon. I cannot comment on behalf of ST. We use different sources here. We talk about the average semiconductor content per car, which is projected to increase from $500 in 2020 to $750 in 2025. I cannot speak to the ST aspect. It may relate to the transition from combustion engine cars to electric vehicles. We are seeing some acceleration, particularly in the European market, where the share of EVs in the overall automotive market is growing. This certainly contributes significantly to the semiconductor content on the power component side. So that could be one factor, but I cannot provide further details on that, Charles.

Thank you. Maybe a second question, maybe this is also my final question. What do you see in terms of the pricing environment today? I think you appear in Taiwan, sort of commented, at least for the mainstream packaging side, pricing has been stable so far this year quarter-over-quarter, but obviously there's inflation and you got to pass down some of the input cost. But what's the pricing outlook, as you see going to Q3 and Q4? Thank you.

Yeah. Pricing, that's an important point. I mean, first of all, your comment on inflation, so far this year, we work closely with our customer base to include inflation in our prices. So, to increase prices where needed to make sure that our increasing cost is covered. Secondly, with respect to the second half of the year, we don't see an increased pricing environment or a deteriorating pricing environment. We have several long-term agreements in place with customers and customers don't want to renegotiate these agreements. So, so far I see a stable pricing environment in the businesses that we support.

Thank you.

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

Thank you. Before closing the call, I would like to recap our key messages. Amkor delivered solid first half results, with overall revenue up 14% year-on-year and advanced packaging revenue up 18% year-on-year. We expect third quarter revenue of $1.93 billion, reflecting another quarter of strong year-on-year growth of around 15%. Demand for our technology and services remains robust, driven by our leadership position in advanced packaging supporting 5G, automotive, high performance computing and IoT. Although, we observe microeconomic headwinds and some weaker market forecast in some segments, we believe the long-term growth drivers for the semiconductor industry remain in place. And we are confident that our strategic focus and leadership position in key semiconductor markets will continue to drive future growth. I would like to close with a special thank you to our Shanghai factory team. For the difficult conditions they worked diligently through the mandated factory lockdown and enabled a successful return to normal output levels by the end of the second quarter. Thank you for joining the call today.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.